Shankar v. Imperva, Inc.: Motion for Failure to State a Claim Granted with Leave to Amend Complaint Permitted

In Shankar v. Imperva, Inc., No. 14-cv-1680-PJH, 2015 BL 303541 (N.D. Cal. Sept. 17, 2015), the United States District Court for the Northern District of California granted Imperva, Inc.’s (“Imperva”) motion to dismiss for failure to state a claim regarding a class action filed by Viswanath Shankar on behalf of himself and Imperva shareholders (“Plaintiff”).

The complaint alleged violations of Section 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Act”) and Rule 10b-5 thereunder. According to the allegations, Imperva’s stock price declined 44% after the release of 2014 first quarter results, which fell short of the company’s revenue forecast by nearly $6 million. As a result, the Plaintiff alleged Imperva’s CEO and CFO made several false and misleading statements regarding the company’s competitive position, superior technology, and strong financial results, while failing to disclose its loss of business to competitors.

To prove violations of Sections 10(b) and 20(a) of the Act and Rule 10b-5 thereunder, a plaintiff must show: (1) a material misrepresentation or omission in connection with the sale or purchase of a security; (2) scienter; (3) reliance; (4) economic loss; and (5) loss causation. In addressing the issues, the court divided the alleged misleading statements into three separate categories as follows: (1) statements about Imperva’s competitive success; (2) statements about Imperva’s technology; and (3) statements providing revenue guidance for Q1 2014.  

First, the court concluded the statements regarding Imperva’s competitive success were vague, optimistic, and suggestive. Because the Plaintiff failed to allege facts that undermined Imperva’s statements, which were not capable of objective verification, the court held these statements were not actionable under the federal securities laws.

Second, the court held Imperva’s statements regarding its technology could not be considered false or misleading because the Plaintiff failed to offer any explanation for why the statements rendered the company’s technology inferior to competitors. 

Lastly, the court held the statements regarding Imperva’s Q1 2014 revenue guidance were not false or misleading because they qualified for safe harbor as forward-looking statements. To qualify as forward-looking, statements must be identified as such and accompanied by cautionary statements that identify factors potentially leading to materially different results. The court found Imperva’s reference to the risk factors in its 10-Qs, which specifically detailed warnings regarding potential impacts of competition, were sufficient as cautionary statements. 

Accordingly, the court dismissed the Plaintiff’s complaint for failure to state a claim, but permitted leave to amend with respect to the already identified statements regarding Imperva’s competitive success and revenue guidance for Q1 2014. 

Primary materials for this case may be found on the DU Corporate Governance website.