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Western District Of Washington Declines To Dismiss Putative Class Action Against Technology Company
11/04/2025On October 28, 2025, Judge Tiffany M. Cartwright of the United States District Court for the Western District of Washington largely denied motions to dismiss a putative class action asserting claims under the Securities Exchange Act of 1934 against a technology company, certain of its executives, and certain controlling shareholders. State Teachers Ret. Sys. of Ohio v. ZoomInfo Techs. Inc., 2025 WL 3013683 (W.D.Wa. Oct. 28, 2025). Plaintiffs alleged that the company, leading up to its IPO, engaged in aggressive sales practices without doing adequate due diligence on customers’ ability to pay, and subsequently made false and misleading statements that ignored the risk of customer non-payment. The Court held that plaintiffs had adequately alleged misrepresentations and scienter with respect to the company and its executives, but dismissed the claims against the controlling shareholders for failure to allege that they were responsible for the statements in question or otherwise engaged in wrongdoing.
Plaintiffs alleged that defendants made false or misleading statements in press releases, earnings calls, interviews, and SEC form disclosures. These statements fell into several categories, but the Court focused on challenged statements concerning estimates of Remaining Performance Obligations (“RPO”), which is a GAAP metric representing the value of revenue not yet recognized from outstanding contracts. Id. at *8. The Court held that plaintiffs had adequately alleged the falsity of these statements.
The Court rejected defendants’ argument that the estimates were inactionable statements of opinion; rather, the Court determined that plaintiffs had alleged sufficient then-known facts that, if true, would undermine the accuracy of the RPO estimates. Id. at *15. For example, the Court noted that plaintiffs alleged, based on the statements of certain former employees, that the company did not attempt to account for the low collectability of contracts with customers that were signed up without any due diligence effort or up-front payments required. Id. at *16. Further, plaintiffs alleged that, as risky customers failed to pay, the company allowed delinquent accounts to remain on the books for up to a year before being written off. Id. The Court also rejected defendants’ argument that plaintiffs should be required to allege additional detail, including a purported “true” RPO figure; rather, the Court explained that plaintiffs had sufficiently alleged “continued widespread and significant inflation of revenue” and were not required at the pleading stage to engage in further analysis, which the Court also noted was likely to require access to the company’s internal documents. Id. at *17.
The Court further observed that plaintiffs had adequately alleged that the company and two executives were “makers” of the challenged statements regarding RPO estimates within the meaning of Rule 10b-5(b), because those executives signed financial statements containing the estimates. Id. at *18. With respect to a third executive who had not signed the financial statements, the Court concluded that plaintiffs had adequately alleged “scheme” liability under Rule 10b-5(a) and (c), based on allegations from former employees that the executive had been presented with information casting doubt on the RPO estimates but suppressed that information and abandoned due diligence efforts. Id. at *18–19.
Turning to scienter, the Court held that plaintiffs’ allegations, considered holistically, gave rise to a sufficiently strong inference of scienter. Id. at *20. The Court determined that allegations drawn from former employees were sufficiently reliable as they were supported by detail about these confidential witnesses’ positions, responsibilities, and relevant contacts at the company, and how each witness would have known about the allegations. Id. at *22. Further, the Court concluded that several confidential witness allegations supported an inference of scienter, including statements regarding the executives’ personal involvement and comments regarding the sales practices, as well as their receipt of and access to information regarding the risk of nonpayment. Id. The Court also considered Sarbanes-Oxley certifications as “slightly support[ing]” an inference of scienter, noting that such certifications were not sufficient on their own to adequately allege scienter but could be considered as part of “a broader picture.” Id. In addition, the Court further noted that certain statements by the company’s new CFO—made after the alleged class period—supported an inference of scienter because they indicated that the company was previously aware of certain issues regarding write-offs and non-collection. Id. at *25.
The Court further considered the “core operations” theory of scienter, which certain courts have used to infer that facts critical to a company’s “core operations” were known to key officers. The Court determined that the company’s “structure,” together with the executives’ public statements indicating that they closely monitored customer and financial data, supported a finding of scienter. Id. at *23. For example, the Court observed that the company’s subscription model—which was the focus of the alleged aggressive sales practice—was allegedly the company’s “only revenue source.” Id. Moreover, the Court noted that the executives had made various statements indicating that they maintained a “detail-oriented management style,” were tracking various data internally, and “[woke] up every day” thinking about the financial metrics. Id.
The Court, however, declined to consider allegations of supposedly suspicious stock sales, explaining that plaintiffs had not provided trading data from any “control period” against which the Court could compare the allegedly suspicious sales. Id. at *21. In addition, the Court rejected plaintiffs’ argument that one executive’s departure supported an inference of scienter, concluding that the mere fact that it occurred on the same day as a corrective disclose was not enough to suggest it was associated with wrongdoing. Id. at *24.
With respect to the controlling shareholders, however, the Court held that plaintiffs’ allegations were insufficient to show that they were responsible for the challenged statements because plaintiffs alleged no specific facts indicating that the shareholders either made those statements or had control over their content, or that they otherwise had a duty to correct the statements. Id. at *26. The Court also concluded that plaintiffs’ scienter allegations were insufficient as to the controlling shareholders because they were based on supposedly suspicious stock sales but, as with plaintiffs’ similar allegations regarding the individual defendants, plaintiffs did not provide sufficient detail (such as prior trading history) to enable the Court to evaluate those sales in context. Id. at *27. Further, the Court rejected plaintiffs’ argument that the controlling shareholders were “control persons” of the company under Section 20(a) of the Exchange Act. The Court explained that plaintiffs’ allegations of control were conclusory, and the allegation that the shareholders had designated a director to serve on the company’s Board—which was raised only in the motion-to-dismiss briefing, not in the complaint—in any event failed to show involvement in the company’s day-to-day affairs or specific control with respect to the challenged statements. Id. at *28.
