As I monitored the coronavirus-related securities litigation as it has been filed since March 2020, I had observed that the cases generally fell into one of three categories: cases involving companies that had experienced a coronavirus outbreak in their facilities; companies that had claimed that they would be able to profit from the pandemic; and companies whose operations or finances were disrupted by the pandemic. Over the last several weeks, I have observed a new coronavirus-related variant, a fourth category of cases involving companies that had prospered at the outset because of pandemic restrictions, but whose fortunes ebbed as pandemic restrictions eased. Now, two more of these “fourth category” variant cases have been filed, one involving Docusign and one involving Chegg, as detailed below.
DocuSign is a cloud-based software service that allows user to automate agreement and documentation processes. According to the recently filed securities suit, at the outset of the pandemic, the company had issued warnings that the coronavirus outbreak could disrupt its business and affect its results. However, by the time of its first quarter 2020 earning call in June 2020, the company was reporting that as a result of the work-from-home shift, it was experiencing increased demand for its services, noting further that the surge in demand “bodes well” for future sales, asserting further “we don’t anticipate customers returning to paper or “manual-based processes.”
In subsequent releases, the company similarly disclosed “COVID-accelerated demand” and commented that “we don’t see trends that things are going to return to the way they looked and trended pre-COVID.” Disclosure statements in this same vein continued through the balance of 2020 and into 2021.
However, on December 2, 2021, the company had an earnings call to release its third quarter 2021 results. In the call, the company announced that it expected growth for the fourth quarter 2022 would be lower than expected. Among other things, company executives commented that the growth boost from COVID-19 had deteriorated earlier than expected. Among other things, the executives said that while demand had remained strong in the first half of 2021, “through Q3 and into the second half of the year, we saw demand slow and the urgency of customers’ buying patterns temper.” The environment, the executives said, “shifted more quickly than we anticipated,” adding the comment that “we always expected there to be a reduction of that really heightened COVID buying, which drove our growth.” According to the securities suit complaint, the company’s share price fell 42% on this news and on the news of the company’s reduced earnings guidance.
On December 22, 2021, a plaintiff shareholder filed a securities class action lawsuit in the Eastern District of New York against the company and certain of its directors and officers. A copy of the complaint can be found here. The complaint purports to be filed on behalf of a class of investors who purchased the company’s securities during the period March 27, 2020 (the date of the company’s first earnings release after the initial coronavirus outbreak) and December 2, 2021 (the date of the third quarter 2021 earnings call).
The complaint alleges that during the class period, the defendants misrepresented that: “(1) the impact of the COVID-19 pandemic on DocuSIgn’s business was positive, not negative; (2) DocuSign misrepresented the role that the Covid-19 pandemic had on its growth; (3) DocuSign downplayed the impact that a ‘return to normal’ would have on the Company’s growth and business; and (4) as a result, Defendants’ public statements were materially false and/or misleading at all relevant times.”
The plaintiff alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint seeks to recover damages on behalf of the plaintiff class.
On December 22, 2021, a plaintiff shareholder filed a separate securities class action lawsuit in the Northern District of California against Chegg, Inc. and certain of its directors and officers. Chegg is a provide of online tutoring and research services and other educational resources. The complaint purports to be filed on behalf of a class of investors who purchased Chegg’s securities between May 5, 2020 and November 1, 2021. A copy of the complaint against Chegg can be found here.
The complaint alleges that when the COVID-19 outbreak hit in early 2020, demand for Chegg’s products and services “accelerated significantly.” Chegg claimed, the complaint alleges, that its increases in subscribers and revenue was “due to the strength of its business model and the Company leaders’ business acumen.” Chegg claimed that these factors and the company’s “strong brand and momentum” would allow the company to continue to grow.”
In fact, the complaint alleges, the defendants knew that Chegg’s increase in subscribers and revenue “was a temporary effect of the COVID-19 pandemic that resulted in remote education for the vast majority of U.S. students.” Defendants were “also aware that the platform was helping students cheat on their exams.” Once the pandemic restrictions eased and schools and universities implement protocols to eliminate cheating, “students predictably stopped subscribing to the program.” The complaint alleges “Chegg had no basis to believe that the extraordinary, but temporary growth trends would continue, but failed to adequately inform investors.” While the company’s share price was elevated by these temporary factors, the complaint alleges, insiders sold significant amounts of their personal holdings in company stock.
In a November 1, 2021 investor call, in which the company released its results for the first quarter of its fiscal year, the company “stunned investors” with fewer-than-expected enrollments and did not provide 2022 guidance. The complaint alleges that in the earnings call, the company’s CEO “admitted that defendants were aware of the slowdown in September 2021.” According to the complaint, the company’s share price declined nearly 50% on this news.
The plaintiff alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Act of 1934. The complaint seeks to recover damages on behalf of the class.
By my count, with the addition of these two latest securities suit filings, there have now been 42 coronavirus-related securities class action lawsuits filed since the initial COVID-19-related outbreak in March 2020. Of these 42 total pandemic-related suits, 18 were filed in 2021.
And just like the pandemic itself, the pandemic-related litigation has developed its own variants as time has gone by and as conditions have changed. As I noted at the outset of this post, through most of the last 20-plus months, the pandemic litigation had fallen into one of three basic categories. The first of the “fourth category” lawsuits, filed against The Honest Company, was filed in September 2021. (Again, the fourth category cases involve companies whose fortunes rose with the pandemic restrictions at the outset, but whose fortunes then ebbed as lockdowns eased and other conditions changed.)
Since the lawsuit against The Honest Company was filed in September, there have a total of seven coronavirus-related securities lawsuits filed (inclusive of the suit against The Honest Company,) of which only one fell into the previously established three categories of types of cases. All of the remaining six cases involve the “fourth category” type of cases. Like the Omicron variant with respect to the spread of the pandemic, the “fourth category” variant has taken over with respect to the spread of the pandemic-related litigation.
What is interesting to me is that, here we are more than 20 months past the initial outbreak, and coronavirus-related filings are still going strong. Indeed, of the 18 coronavirus-related securities suits filed in 2021, six have been filed just since November 1, 2021. Clearly, the pandemic-related litigation wave, like the pandemic itself, has legs that none of us anticipated at the outset.
Signs are that this securities litigation phenomenon will continue well into 2022. Indeed, as the evolving circumstances of the pandemic continue to evolve and as new variants appear, the likelihood is that we will see further variants of the pandemic-related litigation in the future.