Toussaint v. Care.com Inc.

490 F.Supp.3d 341

Lesedi TOUSSAINT, individually and on behalf of all other similarly situated, Plaintiff,

v.CARE.COM INC., Sheila Lirio Marcelo, and Michael Echenberg, Defendants.

No. 19-cv-10628-DJC

United States District Court, D. Massachusetts.

Filed September 25, 2020

Jeffrey C. Block, Jacob A. Walker, Block & Leviton LLP, Boston, MA, for Plaintiff.

Andrew S. Dulberg, Megan E. Barriger, John J. Butts, William H. Paine, Wilmer Cutler Pickering Hale and Dorr LLP, Boston, MA, Michael J. Bayer, Care.com, Waltham, MA, for Defendants.

MEMORANDUM AND ORDER

CASPER, United States District Judge

I. Introduction

Plaintiff Lesedi Toussaint, on behalf of a proposed class under Fed. R. Civ. P. 23 (collectively, "Plaintiffs"), sues Defendants Care.com, Inc. ("Care"), Care's founder and former Chief Executive Officer ("CEO") Shelia Lirio Marcelo ("Marcelo") and Care's former Chief Financial Officer ("CFO") Michael Echenberg ("Echenberg") (collectively, "Defendants") alleging securities fraud in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 ("Exchange Act") and Securities and Exchange Commission ("SEC") Rule 10b-5 ("Rule 10b-5") during the period between May 23, 2016 and April 2, 2019 ("the class period"). D. 19. Defendants have moved to dismiss the amended complaint, D. 23. For the reasons discussed below, the Court ALLOWS Defendants’ motion to dismiss.

II. Factual Background

The following factual allegations are taken from the operative pleading, the amended complaint, D. 19, and the Court accepts them as true for the purposes of resolving the Defendants’ motion to dismiss.

Plaintiffs are investors who purchased common stock of Care during the class period. D. 19 ¶¶ 1, 27. Care describes itself as "the world's largest online marketplace for finding and managing family care." D. 19 ¶¶ 2 (quoting Care's 2018 Form 10-K).¹ Defendants Marcelo and Echenberg were the CEO and CFO, respectively, during the class period. D. 19 ¶¶ 29, 30. They both signed the 2016, 2017 and 2018 Form 10-K and Form 10-Q reports cited in the amended complaint. Id.

The crux of Plaintiffs’ Rule 10b-5 claim against all Defendants (Count I) and their Section 20(a) claim against Marcelo and Echenberg (Count II), is that Defendants made material, false or misleading statements and omissions about the screening they did of care providers listed on their website and how such processes differentiated them from their competitors. D. 19 ¶ 4. Since Defendants only challenge that Plaintiffs have failed to allege plausibly any material false or misleading statements or that the Defendants made them with the requisite scienter, the Court's summary focused on the allegations relating to same.

A. Defendants’ Allegedly False and Misleading Statements

As safety was part of Care's purported edge over its competitors, Plaintiffs allege that Defendants made several false and/or misleading statements pertaining to its screening process for care providers on its website. On the first day of the class period, May 23, 2016, Marcelo and Echenberg both presented at a JP Morgan Media, Technology and Telecom Conference. D. 25-14. There, Marcelo state that Care has "about 7 million caregivers that we have vetted and provide that breadth and access to families" and that the company continues "to invest [in safety] and it has been the baseline product from day one, [we have] invested in background checking that include[s] national criminal record [and] sexual offender registry." D. 19 ¶¶ 3, 40; D. 25-14. Plaintiffs contend that this statement was materially misleading because Care did not vet all of its 7 million caregivers, particularly when its website included unvetted day care centers. D. 19 ¶¶ 41, 80. Defendants made statements in the class period about the screening of caregivers (which, along with families, were called "members") listed on its website. D. 19 ¶¶ 47, 70-72.² Consistently, in its 2016, 2017 and 2018 Form 10-K reports (filed on March 9, 2017, February 27, 2018 and March 7, 2019, respectively), Defendants explained that Care engaged in "proactive screening of certain member information against various databases and other sources for criminal or other inappropriate activity [and] the use of technology to help identify and prevent inappropriate activity through its platform and a safety center that provides resources and information designed to help families and caregivers make more informed hiring and job selection decisions." D. 19 ¶¶ 4, 70-73. Plaintiffs contend that these statements by Defendants during the class period were false and misleading because they "create[ed] the impression that all job listings were subject to pre-screenings, including criminal background checks when, in fact, Care.com performed criminal background checks and prescreening for caregivers only when a customer paid an extra fee" for same, D. 19 ¶ 5, and Care "undertook no screening or vetting of any of [the] day care centers [that it listed on its site] of any kind." D. 19 ¶ 6. That is, a reasonable investor could have been misled to believe that Care did more screening than it did.

Plaintiffs further contend that the misleading nature of these statements was exacerbated by Care's attempts to distinguish itself from its online competitors (e.g., Craigslist) as a safer alternative for providing family care. D. 19 ¶¶ 18, 20. Defendants made statements distinguishing Care from its competitors at various investors presentations by noting Care's trusted brand, quality and safety. D. 19 ¶¶41–46, 48, 50-60. To such audiences, Care emphasized its trust and quality unlike online classifieds that lacked same. D. 19 ¶ 42, 45-46.

Echenberg echoed this sentiment about Care's trust and quality compared to its online competitors. D. 19 ¶¶ 36 n.8, 47; D. 25-16 at 7. On December 5, 2016, Echenberg presented at the UBS Global Media and Communications Conference. Id. In response to a question about how Care would increase its market share against its competitors, Echenberg stated that when one looks to "classified ads and Craigslist, where the quality control isn't necessarily there ... a solution that makes it quick and easy, that wraps it all in a set of guidelines and a set of services that make safety, security, trust and reliability front and center; and that delivers value through the match [between family and caregiver] but then beyond the match as well, that to us is what will separate the winners from the others." D. 19 ¶ 47.

B. The Wall Street Journal Article

Plaintiffs allege that the false and misleading nature of Defendants’ public statements became known on March 8, 2019. On that day, the Wall Street Journal ("the Journal") published an article, "Care.com Puts Onus on Families to Check Caregivers’ Backgrounds—With Sometimes Tragic Outcomes," that reported that Care did preliminary screenings of caregivers, but did not conduct full background checks or verify caregiver credentials. D. 19 ¶ 80; D. 25-21. Regarding day care centers in particular, the Journal noted that Care unilaterally listed day care centers from across the country as providers on its site, did not screen any of the day care centers, and that it had falsely listed day care centers as licensed in hundreds of instances. D. 19 ¶¶ 6-7, 9, 80, 87. As the Journal pointed out, Care "does no vetting of daycare centers listed on its site." D. 19 ¶ 80. The article contrasted Care with several other online services, such as Uber Technologies, Inc. and DoorDash, that did require workers to share their Social Security numbers and pass background checks before being approved for assignments. D. 19 ¶ 82. The article quoted Marcelo who stated that Care had never considered in-depth background checks on all caregivers since doing so would mean raising prices and making them too high for families, that Care is designed for "shared responsibility overall" with families, that families had the option to pay for more screening and that Care was akin to other marketplace platforms like Indeed or LinkedIn, and thus generally did not verify the information posted by users or conduct employment-level background checks. D. 19 ¶ 5; 85-86. Plaintiffs allege that the Journal article laid bare that the only real difference between Care and online classifieds like Craigslist was that Care "offered a service by which its customers could pay for background checks of caregivers whereas Craigslist was transparent in its business practices that it did not undertake any vetting or verification of listings on its website." D. 19 ¶ 60.

C. The Aftermath of the Wall Street Journal Article

In the aftermath of the Journal article, Care publicly announced that they were taking a number of remedial actions. On March 11, 2019, Care issued a response to the Journal article in a Form 8-K report. D. 19 ¶ 10. Care stated that it would change its caregiver screening practices and would "no longer release any applications or permit those caregivers to send messages on the platform until the completion of its preliminary processes." Id. Care noted that it had used "publicly available data to create directory listings for small and medium-sized business[es] that provide childcare services" and "allowed such business to claim ownership over the listings [Care] had created." D. 19 ¶ 11. Care reported that it had now removed all listings that had not been claimed. Id. Care also stated that it had made "more prominent its notice to users that it does not verify the credentials or licensing information of businesses listed on its consumer marketplace." Id. That same day, Care's stock price fell 12.6%. D. 19 ¶ 12.

On March 31, 2019 in a follow up article, the Journal reported that prior to the publication of its March 8, 2019 article, Care, on notice of the pendency of the publication, had removed about 72% of the day care centers, over 46,594 listings, listed on its site, D. 19 ¶¶ 13, 89-90; D. 25-22, the magnitude of which Care did not mention in its public...