March 2022 Business Litigation Update

Zoom Video Communications, Inc. and its CEO, Eric Yuan, are facing federal securities fraud claims.  Back in April 2019, Zoom stated in its SEC-filed Registration Statement and Prospectus that Zoom offered “robust security capabilities, including end-to-end encryption” for Zoom video meetings.  As CEO, Yuan signed the SEC filing.  Unfortunately, it turns out that statement was just not true.

In April 2020 – one year later – Yuan and the company issued a public apology regarding the statement, acknowledging that Zoom had ”incorrectly” suggested that Zoom meetings had end-to-end encryption, and declaring that Zoom had “fallen short of the community’s – and our own – privacy and security expectations.”

In the wake of Zoom’s acknowledgement, its stock price dropped 8.6%, enough of a decline for disgruntled shareholders to bring a class action lawsuit in federal court in the Northern District of California.

On February 16, 2022, the district court judge overseeing the case denied Zoom’s motion to dismiss and ruled that the lawsuit may go forward, finding that the plaintiffs had alleged enough facts to state a claim against Zoom and Yuan for violation of federal securities laws, including that Yuan had acted either intentionally or with deliberate recklessness when the April 2019 statement was made.

Why is this case important?

First, while we have seen plenty of lawsuits by consumers and businesses regarding cyber-security breaches, this case is different.  The plaintiffs here are not complaining that any of their private information or personal data was improperly disclosed to a third party.  Instead, they are complaining that they lost money when Zoom’s stock price went down.  Nevertheless, the end result may be the same: better cyber-security capabilities that protect individuals’ personal information by companies wanting to avoid expensive litigation.

Second, this case is another example of the trend away from financial fraud securities litigation to what commentators call “event” driven securities litigation.  As noted by attorney Kevin M. LaCroix, an expert in D & O coverage issues:

“[I]t used to be that securities litigation involved financial misrepresentations. But as the number of [financial] restatements has declined in recent years, there have been fewer financial misrepresentation lawsuits. Instead, some securities attorneys have now focused on companies that have experienced a setback in their operation. First comes the event, then comes the securities.”

Lastly, this case highlights the scrutiny that is always applied to a company’s public statements.  That is why it is so critical to ensure that all statements contain factual information and that statements made by executives do not contain information that could come back to haunt them at a later date.

Words matter now more than ever in today’s online world, so be sure yours don’t lead to litigation.