Asay v. Pinduoduo

20-1423
Asay v. Pinduoduo

UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT

SUMMARY ORDER
RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A SUMMARY
ORDER FILED ON OR AFTER JANUARY 1, 2007, IS PERMITTED AND IS GOVERNED BY FEDERAL RULE OF
APPELLATE PROCEDURE 32.1 AND THIS COURT=S LOCAL RULE 32.1.1. WHEN CITING A SUMMARY ORDER
IN A DOCUMENT FILED WITH THIS COURT, A PARTY MUST CITE EITHER THE FEDERAL APPENDIX OR AN
ELECTRONIC DATABASE (WITH THE NOTATION “SUMMARY ORDER”). A PARTY CITING TO A SUMMARY
ORDER MUST SERVE A COPY OF IT ON ANY PARTY NOT REPRESENTED BY COUNSEL.

At a stated term of the United States Court of Appeals for the Second Circuit, held at
the Thurgood Marshall United States Courthouse, 40 Foley Square, in the City of New York,
on the 31st day of August, two thousand twenty-one.

PRESENT:
BARRINGTON D. PARKER,
GERARD E. LYNCH,
JOSEPH F. BIANCO,
Circuit Judges.
_____________________________________

Kerry Asay, Johan Johan,

Plaintiffs-Appellants,

Jiaxiang Wei, individually and on behalf of all others similarly situated,

Plaintiffs,

Yoen Hung, individually and on behalf of all others similarly situated,

Consolidated Plaintiff,

v. 20-1423

Pinduoduo Inc., Zheng Huan, Lei Chen, Zhenwei Zheng, Junyun Xiao,
Haifeng Lin,

Defendants-Appellees,

Tian Xu, Zhen Zhang, Nanpeng Shen, Jianming Yu,
 Defendants. ∗
_____________________________________

FOR PLAINTIFFS-APPELLANTS: STEPHEN J. ODDO, Robbins LLP, San Diego, CA
(Gregory E. Del Gaizo, Robbins LLP, San
Diego, CA; Ex Kano S. Sams II, Glancy
Prongay & Murray LLP, Los Angeles, CA;
Laurence Rosen, Phillip Kim, Jonathan Horne,
The Rosen Law Firm, P.A., New York, NY, on
the brief).

FOR DEFENDANTS-APPELLEES: ROBERT A. FUMERTON (Scott D. Musoff, New
York, NY, Chi Tsun Steve Kwow, Hong Kong,
on the brief), Skadden, Arps, Slate, Meagher &
Flom LLP, New York, NY.

Appeal from a judgment of the United States District Court for the Southern District of

New York (Castel, J.).

UPON DUE CONSIDERATION, IT IS HEREBY ORDERED, ADJUDGED, AND

DECREED that the judgment of the district court is AFFIRMED.

Plaintiffs-Appellants Kerry Asay and Johan Johan (“Plaintiffs”) appeal from the March 30,

2020 Order and Opinion and March 31, 2020 judgment of the United States District Court for the

Southern District of New York (Castel, J.), dismissing their federal securities claims pursuant to

Rule 12(b)(6) of the Federal Rules of Civil Procedure. Defendant-Appellee Pinduoduo, Inc.

(“Pinduoduo” or the “the Company”) is a Chinese company that operates an e-commerce platform

selling consumer products, and the individual defendants-appellees are certain of its executives. 1

∗
The Clerk of Court is respectfully directed to amend the caption as above.
1
Only Pinduoduo (and not its named executives) entered an appearance in the district court proceedings.
Defendants-Appellees Zheng Huang, Lei Chen, Zhenwei Zheng, Junyun Xiao, and Haifeng Lin were served
pursuant to the Hague Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil
or Commercial Matters, Nov. 15, 1965, [1969] 20 U.S.T. 361, T.I.A.S. No. 6638 (“Hague Convention”)
after the district court granted the motion to dismiss, and join Pinduoduo’s brief on appeal.

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Plaintiffs allege that Pinduoduo’s Registration and Prospectus (“Offering Documents”), for its

Initial Public Offering (“IPO”) on July 26, 2018, included material misrepresentations and

omissions related to the Company’s anti-counterfeiting measures and marketing expenses that

violated Sections 11 and 15 of the Securities Act of 1933 (the “Securities Act”), 15 U.S.C. §§ 77k,

77o, and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”),

§§ 78j(b), 78t(a). On appeal, Plaintiffs challenge the district court’s conclusions that these federal

securities claims failed to state a claim because: (1) Pinduoduo had sufficiently warned investors

of the risks related to the sale of counterfeit goods on its platform; (2) the Company did not violate

the securities laws in not disclosing interim financial data related to marketing and advertising

expenses; and (3) to the extent that Plaintiffs’ claims were subject to heightened pleading

standards, they had failed to allege scienter.

We assume the parties’ familiarity with the underlying facts, procedural history, and issues

on appeal, which we reference only as necessary to explain our decision to affirm.

I. Standard of Review

We review the dismissal of claims under Federal Rule of Civil Procedure 12(b)(6) de novo.

Gamm v. Sanderson Farms, Inc., 944 F.3d 455, 462 (2d Cir. 2019). We accept as true “all well-

pleaded factual allegations in the complaint, draw[] all reasonable inferences in favor of the

nonmoving party, and consider[], in addition to the complaint, and written instruments attached,

statements incorporated by reference, and public disclosure documents filed with the SEC.” Id.

(internal citations and quotation marks omitted).

II. Pleading Claims under the Securities Act and the Exchange Act

Section 11 of the Securities Act imposes liability if “any part of the registration statement[]

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. . . contained an untrue statement of a material fact or omitted to state a material fact required to

be stated therein or necessary to make the statements therein not misleading.” 15 U.S.C. § 77k(a).

Section 11 imposes “absolute liability—as opposed to requiring any particular state of mind or

scienter—as long as a plaintiff establishes one of the three bases for liability” under the statute.

In re Synchrony Fin. Sec. Litig., 988 F.3d 157, 172–73 (2d Cir. 2021) (internal quotation marks

omitted). To survive a motion to dismiss, a plaintiff must state a claim “that is plausible on its

face,” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007), that “allows the court to draw the

reasonable inference that the defendant is liable for the misconduct alleged,” Ashcroft v. Iqbal, 556

U.S. 662, 678 (2009). 2

Further, as relevant here, Section 10(b) of the Exchange Act, and Rule 10b-5 promulgated

thereunder, imposes liability against “any person” who “make[s] any untrue statement of a material

fact or . . . omit[s] to state a material fact necessary in order to make the statements made, in the

light of the circumstances under which they were made, not misleading . . . in connection with the

purchase or sale of any security.” 17 C.F.R. § 240.10b-5. Accordingly, Plaintiffs must plead

that Pinduoduo “(1) made misstatements or omissions of material fact; (2) with scienter; (3) in

connection with the purchase or sale of securities; (4) upon which plaintiffs relied; and (5) that

plaintiffs’ reliance was the proximate cause of their injury.” Gamm, 944 F.3d at 463 (quoting In

re IBM Corp. Sec. Litig., 163 F.3d 102, 106 (2d Cir. 1998)). Additionally, because the instant

case is a private securities class action, the Private Securities Litigation Reform Act (“PSLRA”)

and its pleading requirements also apply. See 15 U.S.C. § 78u–4. As such, Plaintiffs must

2
If the claim “sounds in fraud,” however, a heightened pleading standard applies instead. Rombach v.
Chang, 355 F.3d 164, 167 (2d Cir. 2004).

4
“specify the [fraudulent] statements . . . and explain why the statements were fraudulent.”

Abramson v. Newlink Genetics Corp., 965 F.3d 165, 173 (2d Cir. 2020) (internal quotation marks

omitted). Further, to allege scienter under the PSLRA, Plaintiffs must “state with particularity

facts giving rise to a strong inference that the defendant acted with the required state of mind,” 15

U.S.C. § 78u–4(b)(2)(A) – in this case, an “intent to deceive, manipulate, or defraud, . . . or reckless

conduct.” ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 99 n.3 (2d Cir. 2007) (internal

citations and quotation marks omitted).

Although the parties dispute whether the Section 11 claims also should be evaluated under

the heightened pleading standard, we decline to address that issue because, as set forth below,

those claims were properly dismissed by the district court even utilizing the traditional pleading

standard under Federal Rule of Civil Procedure 8(a). The federal securities claims in the

Consolidated Class Action Complaint (the “Complaint”) allege two categories of materially

misleading statements and omissions in the Offering Documents – namely, those regarding

Pinduoduo’s anti-counterfeiting measures and those related to its marketing expenses. We

address each category of allegations in turn.

III. Anti-Counterfeiting Measures

The first category of allegedly misleading statements relates to Pinduoduo’s statements in

the Offering Documents about its anti-counterfeiting measures designed to control the sale of

counterfeit goods on its e-commerce platform. Plaintiffs allege that, although Pinduoduo touted

its “strict” anti-counterfeiting measures in the Offering Documents, the Company did not actually

implement them. Instead, according to Plaintiffs, as the Chinese government increased efforts to

crackdown on the sale of counterfeit goods, Pinduoduo merely paid lip-service to anti-

5
counterfeiting and became “the counterfeiters’ forum of choice.” Appellants’ Br. at 7. For

example, the Complaint alleges that Pinduoduo’s automated system for processing brand

authorization forms was easily manipulated – allowing merchants to sell counterfeit goods for

months or years – and if merchants were ever caught selling counterfeit goods they received only

“meaningless slaps on the wrist.” Joint App’x at 49–50. Moreover, the Complaint alleges that,

unlike its larger competitors Alibaba and JD.com, which had thousands of employees and

volunteers working to combat the sale of counterfeit goods on their platforms, Pinduoduo

employed only seven Quality Control Associates who spot-checked only a fraction of its orders.

Therefore, the question is whether the Offering Documents misrepresented its anti-

counterfeiting efforts. Both below and on appeal Plaintiffs seek to draw a parallel between those

statements by Pinduoduo and statements we found to be misleading in Meyer v. Jinkosolar

Holdings Company regarding the implementation of pollution-abatement measures in China by

the Chinese solar-cell and panel manufacturing company Jinkosolar that were “both present and

substantial” at the time of the offering. 761 F.3d 245, 251 (2d Cir. 2014). Here, Plaintiffs assert

that Pinduoduo’s Offering Documents boasted “strict” anti-counterfeiting measures that were

“plainly failing” at the time of Pinduoduo’s IPO. Appellants’ Br. at 20–21. In other words, they

argue that Pinduoduo provided generic disclosures that, like in Jinkosolar, were insufficient to

account for the materialization of counterfeiting risks, which was inevitable given the number of

counterfeit products being sold on the Pinduoduo platform. We disagree.

Here, unlike in Jinkosolar, the materialized risks were disclosed in the Offering

Documents. In particular, Pinduoduo disclosed that, in January 2018, the Company had been

required by the Chinese government to “strengthen supervision [of its merchants]” for anti-

6
counterfeiting purposes and had nevertheless already been sued in the United States in July 2018

(the same month as the IPO) for trademark-related issues. Joint App’x at 177. The Company

further disclosed that they “have been and may continue to be subject to allegations and lawsuits

claiming that products listed or sold through our platform by third-party merchants are

counterfeit.” Id. at 176. Moreover, with respect to its anti-counterfeiting measures, the Offering

Document noted that, “[a]lthough we have adopted strict measures to protect us . . . these measures

may not always be successful or timely.” Id. at 177 (emphasis added). Thus, Pinduoduo’s

statements “suggest[] caution (rather than confidence) regarding the extent of [their] compliance.”

Singh v. Cigna Corp., 918 F.3d 57, 64 (2d Cir. 2019). Unlike in Jinkosolar, a reasonable investor,

based on the specificity of the contemporaneous examples of anti-counterfeiting failures and risks,

would have understood that Pinduoduo’s anti-counterfeiting measures were not, at the time of the

offering, successfully “prevent[ing] substantial violations of [] Chinese regulations” and

international laws. Jinkosolar, 761 F.3d at 251. Pinduoduo’s statements, particularly those

related to the specific legal and regulatory action taken against them, reflect the Company’s

“uncertainty as to the very possibility of maintaining adequate compliance mechanism[s] in light

of complex and shifting government regulations.” Cigna, 918 F.3d at 64.

Moreover, to the extent Plaintiffs rely on Pinduoduo’s use of the term “strict” to describe

its anti-counterfeiting measures to establish an actionable misstatement, such vague and

generalized language is a mere statement of non-actionable puffery. See, e.g., In re Synchrony,

988 F.3d at 170 (“Vague positive statements regarding a corporate entity’s risk management

strategy . . . and business practices are too general to cause a reasonable investor to rely upon

them.” (internal quotation marks omitted)); see also In re Alphabet, Inc. Sec. Litig., 1 F.4th 687,

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708 (9th Cir. 2021) (dismissing as puffery, statement made by executives that Google had “very

robust and strong privacy program”).

We also find unpersuasive Plaintiffs’ contention that we should reverse the district court’s

dismissal of their anti-counterfeiting claims on the “entirely separate ground” that “Pinduoduo did

not meaningfully follow the measures it boasted it had implemented.” Appellants’ Br. at 25.

Although Plaintiffs allege that there was a “skeleton crew” of compliance personnel and

purportedly deficient brand authorization process, they are unable to plausibly plead how these

allegations are materially inconsistent with Pinduoduo’s public statements, including that the

Company “ha[s] been and may continue to be subject to allegations and lawsuits claiming

[counterfeit] products” are sold on its platform and that its anti-counterfeiting measures “may not

always be successful or timely,” nor have the Plaintiffs plausibly pled that such statements are

materially misleading. Joint App’x at 176–77. In short, to the extent that the Registration

Statement generally describes measures implemented by Pinduoduo to combat the sale of

counterfeit goods, none of these allegations regarding deficiencies in those measures contradicted

the statements in the Offering Documents or rendered them materially misleading, especially in

view of the disclosures regarding the historical and ongoing problems and risks associated with its

anti-counterfeiting measures.

Accordingly, the district court properly dismissed the claims to the extent they were based

upon statements in the Offering Documents regarding anti-counterfeiting measures.

IV. Marketing Expenses

The second category of allegedly misleading statements relates to Pinduoduo’s statements

regarding its marketing expenses, and its purported failure to disclose interim marketing and

8
expense data from the second quarter of 2018 (“Q2 2018 data”). According to the Complaint,

Pinduoduo relies on its customers recruiting others to its platform to continue to grow and be

profitable. 3 In the Offering Documents, the Company disclosed that it had relied on organic

marketing to grow its user base through “leverag[ing] social networks,” Joint App’x at 173, and

its “innovative ‘team purchase’ model,” id. at 165, which allows customers to coordinate and place

group orders. Pinduoduo further disclosed that its growth and profitability “depends on our

ability to, among other things, increase our number of active buyers.” Id. at 175. Pinduoduo also

noted that its marketing expenses had “increased substantially” beginning in 2016. 4 Id.

Elsewhere in the Offering Documents, Pinduoduo substantiated that statement with financial and

operating data (including marketing costs) going back to 2016. See id. at 166. Additionally,

Pinduoduo stated that they “expect our operating costs and expenses to increase in absolute

amounts in the future due to[] . . . sales and marketing expenses as we continue to expand our

buyer base.” Id. at 175. Despite these disclosures, Plaintiffs assert that, in connection with its

IPO on July 26, 2018, Pinduoduo was legally required to disclose the marketing data from the

second quarter, ending June 30, 2018. In particular, the Complaint alleges that the Offering

Documents were materially misleading in this regard because Pinduoduo “avoided mentioning or

reporting the Q2 financial results in the Registration Statement” and did not “even warn in the

3
Unlike its competitors, Pinduoduo’s business model does not rely on charging merchants a significant
commission on their sales.
4
More specifically, the Company disclosed that expenses had risen from “RMB169.0 million in 2016 to
RMB1,344.6 million (US$214.4 million) in 2017, and increased from RMB73.9 million in the three months
ended March 31, 2017 to RMB1,217.5 million (US$194.1 million) in the three months ended March 31,
2018.” Id.

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Registration Statement that its sales and marketing expenses and net loss had soared in Q2 2018.”

Id. at 67–68. We disagree and conclude that the district court correctly held that the interim data

was not material given the disclosures on expenses that had already been made.

It is well settled in the Second Circuit that the test for whether an omission of interim

financial data is material, and therefore violates Section 11 of the Securities Act, is “whether there

is ‘a substantial likelihood that the disclosure of the omitted [information] would have been

viewed by the reasonable investor as having significantly altered the “total mix” of information

made available.’” Stadnick v. Vivint Solar, Inc., 861 F.3d 31, 37 (2d Cir. 2017) (quoting

DeMaria v. Andersen, 318 F.3d 170, 180 (2d Cir. 2003)).

Plaintiffs assert that the reason the Q2 2018 data was material despite the other disclosures

was because, for the first time, Pinduoduo was experiencing an unprecedented increase in

marketing expenses without a corresponding increase in new users. But Pinduoduo clearly

announced that its marketing expenses had been steadily and exponentially increasing since 2016,

and cautioned investors that if it “continue[s] to incur substantial marketing expenses without

being able to achieve the anticipated buyer and merchant growth, [the Company’s] operating

results may be materially and adversely affected.” Joint App’x at 175. Moreover, these

statements were supported by the financial data provided to investors. As the district court

correctly found, an investor could have looked at the data provided and “understood that over the

preceding year, the Company’s marketing expenses had grown by a multiplier of sixteen.”

Special App’x at 19. Similarly, an investor could have calculated per-user acquisition costs (by

dividing marketing expenses in a reporting period by the number of new users in that period) to

show that such costs had already quadrupled in the first quarter of 2018, which reduces the import

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of the information in the second quarter of 2018 that the user acquisition costs had then doubled.

Thus, the Offering Documents clearly disclosed substantial increases in marketing expenses, and

further cautioned investors that such increases could continue into the future and materially and

adversely affect the Company’s operating results.

In sum, given the disclosures regarding the significant increase in marketing costs in prior

reporting periods, the doubling of user acquisition costs in the second quarter of 2018 would not

have significantly altered the “total mix” of information. 5 Accordingly, the district court

properly dismissed Plaintiffs’ claims related to the nondisclosure of the Q2 2018 data. 6

5
Plaintiffs also assert that Pinduoduo had a duty to disclose the interim financial information under Item
303 of Regulation S-K, which requires disclosure of “any known trends . . . or uncertainties that will result
in or that are reasonably likely to result in the registrant’s liquidity increasing or decreasing in any material
way.” 17 C.F.R. § 229.303 (emphasis added). Because we conclude that the disclosure of the Q2 2018
data is not material in the context of Pinduoduo’s offering documents, Item 303 does not provide an
actionable basis for Plaintiffs’ claims. See Stratte-McClure v. Morgan Stanley, 776 F.3d 94, 100 (2d Cir.
2015) (holding an omission “actionable only if it satisfies [ ] materiality requirements” and “all of the other
requirements to sustain an action” under the relevant law).
6
Given that we have concluded that the district court properly dismissed all of the claims because none
of the statements at issue were materially misleading, we need not address the district court’s holding that
Plaintiffs failed to sufficiently allege scienter. Similarly, we need not address Defendants-Appellees’
argument that the claims failed to plausibly allege loss causation.

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 V. Additional Claims

Because we conclude the district court properly dismissed the claims under Section 11 of

the Securities Act and Section 10(b) of the Exchange Act, and the Complaint thus failed to

plausibly allege primary violations of the securities laws, the district court also correctly dismissed

the claims under Section 15 of the Securities Act and Section 20(a) of the Exchange Act. See,

e.g., In re Scholastic Corp. Sec. Litig., 252 F.3d 63, 78 (2d Cir. 2001); Rombach, 355 F.3d at 177–

78.

* * *

We have considered all of Plaintiffs’ remaining arguments and find them to be without

merit. For the foregoing reasons, the judgment of the district court is AFFIRMED.

FOR THE COURT:
Catherine O’Hagan Wolfe, Clerk of Court

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