TV and movie streaming giant Netflix appears to have beaten a lawsuit from investors who claimed Netflix's failure to address account sharing held the company back and cost them big money.
On Nov. 26, U.S. District Judge Jon S. Tigar dismissed the action, saying he did not believe Netflix's comments to investors amid the Covid pandemic period touting potential room for growth in North America were misleading or false, under federal securities law.
The dismissal came with prejudice, meaning the action is closed in federal district court, unless plaintiffs should prevail on appeal.
Robert Prongay
| Glancy Prongay & Murray
The lawsuit dates to 2022, after Netflix announced it had lost 200,000 subscribers across the U.S. and Canada as the countries emerged from the Covid pandemic period. The announcement hammered Netflix stock, which lost $122 per share, or about 35% of its value, on April 20, 2022.
Those stock losses had come after a 21.7% drop in Netflix stock value just four months earlier, when Netflix had announced lackluster revenue results in the fourth quarter of 2021.
In the lawsuit, the investors accused Netflix of misleading the markets and its shareholders about its growth prospects. Particularly, the plaintiffs zeroed in on Netflix's assertions in 2020 that it believed it still had "'a lot of headroom' for growth" and "an ample runway for growth" in the U.S. and Canadian markets.
At that time, Netflix reportedly told investors it held "roughly 60%" market penetration in the North American countries.
However, the plaintiffs assert those projections did not sufficiently account for the phenomenon known as "password sharing," in which Netflix customers allow people who don't live in their households to access Netflix services, often for free, using their account login credentials.
Such account sharing is considered a violation of Netflix's user agreement.
However, the plaintiffs said if Netflix's revenue and growth estimates had accurately accounted for such allegedly illicit sharing, the company's market saturation would have stood at closer to 79%, meaning the company had much less "headroom" for growth than it allegedly reported to investors.
The lawsuit asserted Netflix told investors in 2022 that account sharing, in fact, had limited its growth prospects and contributed to the loss in subscribers announced in April 2022, saying its "relatively high household penetration - when including the large number of households sharing accounts - combined with competition, is creating revenue growth headwinds."
Netflix further reportedly told investors the actual impact of account sharing on its growth projections had been "obscured by our Covid growth" in 2020-2021.
In his ruling, Judge Tigar said the lawsuit falls short of proving Netflix had duped investors with false forward-looking statements.
Rather, Tigar said he believed Netflix's statements in 2020 concerning its growth "headroom" amounted to statements concerning Netflix's current market position.
The judge further noted disclosures by Netflix in its filings with the federal Securities and Exchange Commission "specifically warn about risks associated with the pandemic, competitio, and multi-household usage.
And the judge noted Netflix executives disclosed to investors that, while the company expected to continue adding subscribers in "mature markets," that growth would require the compant to work "harder."
"The Court does not find the representations about market penetration to be false or misleading because these statements clearly referred to paid subscribers," Tigar said. "Absent an explanation that Netflix treated account sharers as equivalent to subscribers in calculating such a figure, reasonable investors 'reading the statements fairly and in context' would not expect that the 'penetrated market' figures would have accounted for anything but paid subscribers."
Statements from Netflix "about a metric involving paid subscribers were not rendered false or misleading just because they did not also explain facts about account sharing," Tigar added.
Plaintiffs have been represented by attorneys Robert V. Prongay, Jason L. Krajcer, Christopher R. Fallon and Pavithra Rajesh, of the firm of Glancy Prongay & Murray, of Los Angeles; and Frank R. Cruz, of Los Angeles.
Netflix has been represented by attorneys Caz Hashemi, Keith E. Eggleton, Diane M. Walters, Fred A. Rowley Jr. and Matthew K. Donohue, of the firm of Wilson Sonsini Goodrich & Rosati, of Palo Alto and Los Angeles.