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WebMD, Officials See Dismissal of Suit Over Revenue Forecasts, State of Business

Monday, January 7, 2013

In re WebMD Health Corp. Securities Litigation, S.D.N.Y., No. 11 Civ. 5382 (JFK), 1/2/13

Key Holding: The court tosses out a putative securities fraud class action alleging that WebMD and certain of its officials released revenue forecasts they knew to be inflated, and then let the truth about the alleged state of WebMD’s business trickle out over a series of months.

Next Step: The plaintiffs have 60 days to file an amended complaint curing the pleading defects identified by the court.

The U.S. District Court for the Southern District of New York Jan. 2 dismissed a putative securities fraud class action alleging that WebMD Health Corp. (WBMD) and certain of its officials defrauded investors by releasing revenue forecasts they knew to be inflated, and then by letting the truth about the alleged state of WebMD’s business trickle out over a series of months instead of all at once (In re WebMD Health Corp. Securities Litigation, S.D.N.Y., No. 11 Civ. 5382 (JFK), 1/2/13).

Judge John F. Keenan found that the Private Securities Litigation Reform Act safe harbor protects various statements by the defendants, and that the plaintiffs have failed to adequately plead materiality and scienter.

WebMD provides health information services to consumers and healthcare professionals through public and private internet portals and other means, the court said.

According to the complaint, the court said, with respect to WebMD’s “public portals” business, pharmaceutical companies were taking an increasingly cautious approach to advertising given regulatory uncertainties during the relevant period. Further, pharmaceutical clients allegedly were decreasing or canceling advertising on WebMD’s website because they were dissatisfied with the return on investment. The plaintiffs also asserted that drug companies were curtailing advertising spending in the face of “looming revenue loss, resulting from an estimated $100 million worth of products going off-patent.”

Meanwhile, the plaintiffs asserted that WebMD’s “private portals” business suffered from declining enrollment due to dissatisfaction with WebMD’s services.

The defendants allegedly concealed the effects of these developments so as to complete a private placement of convertible notes and to attempt to sell the company.

Actual Knowledge

The court granted the defendants’ motion to dismiss. Under the statutory safe harbor, the court noted, defendants will not be liable as a matter of law for any forward looking statements if the statements are identified as forward looking and accompanied by meaningful cautionary language; or if the plaintiffs fail to prove that the statement was made with actual knowledge that it was false or misleading.

The court determined that “Plaintiffs have not proven actual knowledge, and so the safe harbor shields Defendants’ from liability.”

Even if the defendants were not protected by the PSLRA safe harbor, the court determined that the “Plaintiffs have not satisfied their burden of pleading misstatements or omissions of a material fact.”

Missing Link

The court further ruled that the plaintiffs have failed to meet their burden as to pleading scienter. In so deciding, the court said that there is a “missing link” between the defendants’ awareness of “potentially adverse business conditions and Plaintiffs’ accusation that the statements and projections were not simply too optimistic but actually false and made with ’an intent to deceive, manipulate, or defraud.’”

The court reasoned that in the “absence of any compelling and specific showing by Plaintiffs, it is far more plausible that Defendants were not deceitful but mistaken.” The more plausible explanation of the defendants’ statements is that “they misread their situation.”

For example, the court said that the defendants “believed that the loss of patent protection for big drugs would not hurt WebMD, since those drugs were not advertised on WebMD all that much.” However, the court responded, the defendants “did not realize that declining revenues would cause pharmaceutical companies to cut advertising across the board.”

The alternative explanation--that the defendants “knew all along how the patent cliff would affect WebMD but hid that information even after revising their guidance downward repeatedly--is not persuasive,” the court wrote. The court found additional allegations as to scienter likewise unavailing.

In other rulings, the court said that “although it is deficient in several other respects,” the complaint “adequately pleads reliance.” The dismissal is without prejudice, and the plaintiffs may file an amended complaint, the court concluded.

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