Ikeda v. Baidu, Inc.

ORDER GRANTING MOTION TO DISMISS WITH LEAVE TO AMEND

Re: Dkt. No. 50

Lead Plaintiff Robert J. Allustiarti, individually and on behalf of all other persons similarly situated ("Plaintiff"), alleges that Defendants Baidu, Inc.; Yanhong Li; and Cheng-Chun Yu (collectively, "Defendants") violated federal securities laws. Before the Court is Baidu's motion to dismiss Plaintiff's Amended Complaint. ECF No. 50. Having considered the parties' submissions, the relevant law, and the record in this case, the Court GRANTS Baidu's motion to dismiss with leave to amend.

I. BACKGROUND

A. Parties

Plaintiff sues Defendant Baidu, Inc. ("Baidu"), which is a Cayman Islands corporation with its headquarters in Beijing, China. ECF No. 41 ("AC") ¶ 25. Since at least 2005, Baidu has

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sponsored American Depositary Shares ("ADSs") that trade on the NASDAQ. Id. ¶ 26.

Plaintiff also sues Defendants Yanhong Li ("Li") and Cheng-Chun Yu ("Yu") (collectively, "the Individual Defendants"). Li is Baidu's Chief Executive Officer and Chairman of Baidu's Board of Directors. Id. ¶ 27. Yu is Baidu's Chief Financial Officer. Id. ¶ 29.

Plaintiff Robert J. Allustiarti purchased Baidu's securities and allegedly suffered damages. Id. ¶ 24.

B. Baidu's Business Model

Baidu is the largest search engine in China and the second largest search engine in the world. Id. ¶ 37. Baidu allows users "to search for and access relevant Chinese language websites, news, images and multimedia files." Id.

Baidu also offers a mobile application, Baidu App, which features "a twin-engine search-plus-feed function." Id. ¶ 39. On Baidu App, users can access Baidu Feed, which "offers users a personalized timeline that passively suggests content based on users' demographics, browsing history, and past online behavior." Id. ¶ 40. Baidu Feed "uses the Company's AI algorithm to recommend content based on the content's quality, evaluating the text of the content to determine whether it is good or bad and surveying comments posted by users to determine whether or not readers like the material." Id. ¶ 40.

"Baidu's app portfolio also includes a multitude of products that allow users to generate and share content in various forms." Id. ¶ 42. "For instance, Baidu Post Bar is a social media platform where users can build online communities by posting text, image, and video content in users' areas of interest and generating discussion groups around cultural trends." Id. "Baidu's Haokan allows users and professional content creators to generate and share short form videos, typically several minutes long, and receive revenue from views." Id. "Baidu's Quanmin allows users to create, edit using special effects, and share minute-long videos," which are distributed "in personalized Feed timelines." Id. Finally, "Baidu's blog platform, Baijiahao, consists of a network of over two million content providers who write articles and share content in various forms, including images,

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graphs, videos, and live broadcasts." Id. ¶ 43.

"Baidu's Search, Feed, and video products, along with Baidu's knowledge and information products and AI businesses, comprise Baidu's Core business segment." Id. ¶ 45. "Baidu derives the majority of its Baidu Core revenue from its online marketing services and as such, the Company's business model is dependent on user engagement." Id. For the 2019 Fiscal Year, more than 72% of Baidu's total revenue was derived from online marketing. Id.

C. Chinese Restrictions on Content

Based on its operations in China, Baidu is subject to regulation by Chinese entities. Id. ¶¶ 5, 51. In May 2011, the Chinese government established the State Internet Information Office (SIIO) "to centralize internet regulations, promote cyberspace security, and supervise online content regulation." Id. ¶ 51. "With respect to content, the SIIO's intended purpose was preventing abusive uses of the internet, like fraud, online pornography, vulgar content, and illegal online marketing schemes." Id. In February 2014, Chinese President Xi Jinping created the Cybersecurity Administration of China ("CAC"), which is "a subordinate organization responsible for establishing internet security." Id.

The Chinese government has promulgated "a series of laws, regulations, and policies . . . to manage online content." Id. ¶ 52. These regulations include the following:

• On June 25, 2016, the CAC "promulgated 'Provisions on the Administration of Internet Information Search Services' banning search providers like Baidu from publishing prohibited content in links, summaries, cached pages, searches, and recommended webpages." Id. ¶ 53. These regulations "placed the onus on the search service providers to perform real-time monitoring to prevent the publication of illegal content, remove it and report it to regulators." Id.

• "On June 29, 2016, the SIIO and CAC issued 'Regulations on the Management of Mobile Internet Application Information Services,'" which required "that mobile application providers establish content review mechanisms and take measures or suspend or cancel violating accounts," and that "mobile app users' accounts be authenticated using their real identities and mobile phone numbers." Id. ¶ 54.

• "On May 2, 2017, the CAC promulgated the 'Provisions for the Administration of Internet News Information Service[,]' requiring online Chinese news providers" to comply with the Chinese laws and regulations and remove content that did not

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comply. Id. ¶ 55.

• "On August 25, 2017, the CAC issued a set of regulations, entitled 'Provisions on the Administration of Internet Forum Community Service Management[,]' extending the scope of its real-identification requirements to online forums" and requiring that "online forum providers like Baidu . . . monitor for illegal content." Id. ¶ 56.

• "On December 20, 2019, the CAC promulgated 'Provisions on the Ecological Governance of Network Information Content'" which prohibited online content providers from publishing content that spreads obscenity, pornography, gambling, violence, murder, terror, or instigates crime, and from publishing content "that uses exaggerated titles and features content that is inconsistent with the title . . . or is sexually suggestive or provocative." Id. ¶ 57. These regulations "placed the onus for managing content onto the providers." Id.

D. Baidu's Screening of Illegal Content

To review and remove illegal content from its apps and platforms, Baidu allegedly uses a security review and a content review. Id. ¶ 48. "The security review determines whether content can be published." Id. "The quality review decides whether the content can be recommended by the platform or not." Id. For both the security review and the content review, "Baidu employs a dual strategy, utilizing both technological screening and human reviewers." Id.

Plaintiff alleges that "[a]t all relevant times, Baidu lacked adequate managerial staff to enforce review standards and often relied on reviewers' personal judgments." Id. ¶ 49. Plaintiff also alleges that "reviewers' workloads require[d] that they review each article for content within 2 to 10 minutes." Id. "Thus, any slight carelessness by a reviewer can easily cause problems." Id. Plaintiff alleges that, "[w]ith sales quotas looming at the end of each month," "Baidu's content reviewers applied a less rigorous content review standard to advertisements, allowing the publication of ads with questionable content in the interest of making the sale to the customer." Id. According to Plaintiff, "Baidu published these questionable ads late at night to limit the likelihood that Chinese content regulators would find the ads." Id. ¶ 50. In addition, "Baidu's procedure for verifying its users' identities . . . could not adequately detect instances where a publisher registered using a fake name and a video of the person's face associated with the fake name to verify the account," which "allowed publishers to register accounts using fake real-id registrations." Id.

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E. Baidu's History of Investigations and Sanctions by Chinese Regulators

According to Plaintiff, Baidu has a long history of investigations and sanctions by Chinese regulators. Id. ¶¶ 62-74. These investigations and sanctions include the following:

• "In January 2009, for instance, Baidu was subject to 'severe punishment' from the Chinese government for allowing its users to find and access pornography." Id. ¶ 63.

• "Baidu again came under scrutiny for hosting pornographic content on its Baidu Cloud accounts on August 10, 2014 and was yet again instructed to clean up its platforms by Chinese regulators." Id.

• "In March 2015, the Chinese government fined Baidu more than 210,000 yuan or $33,800 USD for uploading obscene pornographic novels on Baidu App and for carrying online publications without the requisite permits." Id.

• "On January 15, 2016, the SIIO summoned Baidu executives for questioning for hosting forums containing pornography and libelous posts, selling advertising to unlicensed hospitals, and hosting and selling the management of its Baidu Post medical forums to private hospitals, who used the forums to peddle their own services." Id. ¶ 64.

• "On May 6, 2016, the Chinese authorities again fined Baidu and suspended the Company's cloud storage services for storing tens of thousands of pornographic videos and selling access to the accounts on e-commerce platforms." Id. ¶ 69.

• In August 2017, the CAC concluded that Baidu hosted content "that contained violence, rumors, obscenity and pornography, and information that harms national security, public safety, and social order." Id.

• "On January 3, 2019, the CAC ordered a one-week suspension for some of Baidu's Search and Feed platforms after finding that they were spreading vulgar content." Id. ¶ 71. "The CAC's January 3, 2019 actions