Opinion ID: 3048173
Heading Depth: 3
Heading Rank: 1

Heading: Background on MIVA

Text: MIVA is an Internet commerce company that provides “pay-per-click” advertising services. (Compl. ¶ 2). MIVA places advertisements for online sellers on the websites of numerous entities with whom MIVA contracts (called MIVA’s “distribution partners” or “affiliates”). The advertisers pay MIVA each time an Internet user “clicks” on their ad. MIVA then shares a portion of that revenue with its network of distribution partners -- the websites that first generated the click. MIVA contracts with the advertisers on a keyword-targeted, bid-forposition, pay-per-click basis. (Id. ¶ 23). Keyword-targeted advertising allows advertisers to reach a targeted audience: the advertisement appears on the user’s computer screen only if a user types a particular keyword or keyword phrase into a search box on a website of one of MIVA’s distribution partners. (Id. ¶ 23 n.6 (and materials cited therein)). Bid-for-position means that the advertisers bid against each other for ad placement. (Id. ¶ 23 n.4). The highest bidder for a particular 4 keyword receives the first-place advertisement position with respect to that keyword, and the other advertisers for that keyword are listed in descending bid order. (Id.) Pay-per-click means that an advertiser only pays when an Internet user clicks on its ad and gets transferred to its website. (Id. ¶ 23 n.5). These clicks are supposed to be highly qualified leads likely to convert into a sale, since the user intentionally clicked on the ad and, therefore, presumably has some interest in the advertised product. (Id.) Not surprisingly, it’s very important to MIVA to generate high-quality Internet traffic for its advertisers. MIVA’s revenue is determined by the price that advertisers bid for a click on their ads and the number of clicks MIVA can generate on those ads. (Id. ¶ 28). The price an advertiser is willing to bid depends on the advertisement’s conversion rate, i.e., the rate at which the seller’s advertising expenditure translates into additional sales income. (Id.) The greater the sales conversion rate, the more the advertiser is willing to bid on a particular keyword. (Id. ¶¶ 25-26, 28). Conversely, the more advertiser-paid clicks that fail to translate into income for the advertiser -- in other words, the lower the conversion rate -- the lower the price that advertisers are willing to bid. (Id. ¶¶ 4, 28). Therefore, it is essential to MIVA’s success that the clicks it directs to its 5 advertisers have a high conversion rate, that is, that they frequently translate into actual sales. (Id. ¶¶ 25-26). B. The Plaintiffs’ Allegations of Click Fraud Within MIVA’s Network “Click fraud” generally refers to the practice of clicking on an Internet advertisement for the sole purpose of forcing the advertiser to pay for the click. (Id. ¶ 43). Because advertisers only pay when someone clicks through to their website, artificial clicks can be very costly to advertisers. (Id.) Click fraud includes the use of illicit practices such as spyware, browser hijacking software, and other “bots” or “non-human traffic.”3 (Id. ¶¶ 43-44). Such practices result in lower sales conversion rates for advertisers because the leads are false -- they do not come from actual buyers interested in purchasing the advertised products. (Id. ¶ 26). Because lower conversion rates lead to lower advertiser bids and thus to decreased revenue, ensuring the quality of its distribution partners and eliminating improper Internet traffic are extremely important for a pay-per-click company such as MIVA. 3 According to the Plaintiffs’ Complaint, “spyware” is software that sabotages a computer’s operation for the benefit of a third party. (Compl. ¶ 43 n.11). “Browser hijacking” occurs when someone “hijacks” the Internet browser of an unknowing computer user and automatically directs the user to unsolicited advertisements, thereby creating a click (or revenue event) for MIVA and the distribution partner. (Id. ¶ 45). “Bots” or “spiders” are computer programs that search the Internet for revenue opportunities and then click on those opportunities. (Id. ¶ 44). “Non-human traffic” creates the appearance that human users are clicking on an advertisement, when in fact, no human prospective customer is viewing the ad. (Id. ¶ 46). 6 According to the Plaintiffs’ allegations, in or around 2003, two of MIVA’s top revenue-generating distribution partners (“Saveli” and “Dmitri”) -- who together generated almost one-third of MIVA’s revenue during 2003, 2004, and 2005, and represented about 36 percent of MIVA’s click revenue (id. ¶¶ 40-41) -- began using click fraud to generate revenue. Saveli and Dmitri’s click fraud included the use of spyware, browser hijacking software, and other non-human traffic. (Id. ¶ 43). According to a former Business Development Manager at MIVA, Saveli and Dmitri were “turn and burn guys” who focused primarily on driving in a lot of traffic, regardless of its quality. (Id. ¶ 39). This low-quality traffic caused advertisers to lower their advertising bids, decreasing Company revenue. A former MIVA Account Manager described the result as “serious, serious bid deflation.” (Id. ¶ 29). Due to MIVA’s low-quality distribution partners,4 the Company’s revenueper-click rate dropped from $0.20-$0.21 in early 2003 to $0.12 by June 2005. (Id. ¶ 33). This decrease in revenue had a domino effect, driving away high-quality distribution partners who shared in MIVA’s decreasing revenue and thus sought more competitive returns from alternative pay-per-click companies. (Id. ¶ 34). As 4 Although Saveli and Dmitri generated the most bad-quality traffic, the Plaintiffs allege that MIVA’s click fraud problems extended to other distribution partners in MIVA’s network as well. (Compl. ¶ 37). 7 a result, the Plaintiffs allege that the Company increasingly relied on greedy and unscrupulous distribution partners who were focused on only short-term gain. (Id.) By the summer of 2005, an analysis of MIVA’s affiliates revealed that its supposedly extensive and diversified partner network had shrunk, with 95 percent of the Company’s click revenue coming from its top fifty distribution partners -- the top two being Saveli and Dmitri. (Id. ¶ 37). In short, according to the Plaintiffs’ allegations, the Defendants had created a distribution network that was primarily fueled by illicit traffic-generating techniques, and, according to a former MIVA Marketing Manager, was best described as a “house of cards . . . held together by a thread.” (Id.) Although click fraud is deleterious in the long term because it drives away advertisers, it produces short-term revenue gains through increased clicks. The Plaintiffs allege that the click fraud within MIVA’s network enabled the Company to report an uninterrupted string of quarter-by-quarter financial gains. Between 2003 and 2005, the Defendants issued public statements reporting seemingly unstoppable growth stemming from its primary pay-per-click business. (Id. ¶ 2). In fact, prior to February 23, 2005, the Company met or exceeded analyst growth expectations in every single quarter since 2003. (Id.) Perhaps demonstrating the 8 Company’s obsession with meeting Wall Street’s forecasts, these expectations were sometimes met by as little as a penny. (Id.) Therefore, the Plaintiffs allege that despite the bid deflation and declining revenues MIVA was actually experiencing, the Defendants allowed click fraud to continue within its network in order to meet analyst growth expectations at the expense of the Company’s longterm health. (Id. ¶ 9). During 2004 and 2005, state and federal regulators’ scrutiny of click fraud intensified, causing the Defendants to fear that the “hammer” would be coming down on the spyware industry. (Id. ¶¶ 61-62). In an effort to lull investors and advertisers into believing that the Company was proactive and aggressive about policing click fraud, Defendant CEO Pisaris-Henderson claimed during a Company conference call on February 23, 2005 that, in the fourth quarter of 2004, the Company had voluntarily removed distribution partners representing $70,000 in revenue per day because “our focus is to deliver traffic that converts rather than just clicks alone.” (Id. ¶¶ 12, 87, 95). However, according to the Senior Director of Business Development responsible for the oversight and management of all of MIVA’s affiliates, “no traffic was taken off line in the fourth quarter of 2004.” (Id. ¶ 88). This Senior Director also said that the announcement in the February conference call clearly 9 referred to Saveli and Dmitri, who earned a combined average of $70,000 in revenue per day. (Id.) Notably, however, Saveli and Dmitri were not removed from the network. (Id.) This fact was corroborated by a former MIVA Marketing Manager who stated that it was “an open secret within the Company that Dmitri and Saveli were not taken off line in December 2004, and neither was anyone else.” (Id.) On March 16, 2005, in a Form 10-K annual report filed with the Securities and Exchange Commission (“SEC”), the Defendants repeated their claim that in the “fourth quarter of 2004, we ceased displaying advertisements with distribution partners . . . whose traffic did not adequately convert to revenue for our advertisers,” and that “the removal of these distribution partners reduced our average click-through revenue by approximately $70,000 per day.” (Id. ¶ 95). The Company asserted that the removal was in conformity with its “long-stated goal of provided [sic] high quality traffic to our advertisers.” (Id.) (alteration in original). In the same 10-K, the Company also affirmatively asserted that “[w]e do not rely on ‘spyware’ for any purpose and it is not part of our product offerings,” that “[w]e have implemented screening policies and procedures to . . . . detect[] fraudulent click-throughs, which are not billed to our advertisers,” and that “[w]e 10 have developed automated proprietary screening applications and procedures to minimize the effects of . . . fraudulent clicks.” (Id. ¶¶ 89, 91). Before the stock market5 opened on May 5, 2005, the Company issued a press release announcing disappointing first quarter 2005 results and the resignation of Brenda Agius as CFO. (Id. ¶ 102). Later that day, Defendants Craig Pisaris-Henderson, the Company’s CEO, and Phillip Thune, the Company’s COO, revealed to the public that click fraud had indeed been responsible for some of the Company’s revenues, stating in a conference call with analysts and investors that “a couple” of MIVA’s distribution partners had been employing “capabilities . . . to get additional traffic that just simply don’t adhere to our standards.” (Id. ¶ 103) (alteration in original). Within a single day of trading on May 5, 2005, MIVA’s share price plummeted over 21 percent from the previous day, from a closing price of $6.16 on May 4, 2005, to a closing price of $4.83 on May 5, 2005. (Id. ¶ 104). The stock price continued to drop on Friday, May 6, and Monday, May 9, as the market further digested the Company’s click fraud revelations, closing at $4.46 on May 9, 2005. (Hakala Report, at 23 & Ex. C-1). C. Procedural History 5 FindWhat common stock was traded on the Nasdaq Stock Market, under the ticker symbol “FWHT.” (MIVA 10-K, filed March 16, 2005, at 38). The ticker symbol changed to “MIVA” in June 2005, in conjunction with the company name change. (MIVA 8-K, filed June 16, 2005, at 2). 11 The Plaintiffs filed their initial complaint against the Defendants on May 6, 2005, in the United States District Court for the Middle District of Florida. On July 27, 2005, the district court consolidated five lawsuits against FindWhat (by then known as “MIVA”), and appointed the FindWhat Investor Group as lead plaintiff. On January 17, 2006, the Plaintiffs filed their First Amended Consolidated Class Action Complaint (“Complaint”), which is the operative pleading on appeal. Styled as a Rule 23(b)(3)6 class action, the Complaint named MIVA and three individual officers as defendants (CEO Craig Pisaris-Henderson; COO Phillip R. Thune; and former CFO Brenda Agius7), and identified eleven allegedly false or misleading statements made by the Defendants in violation of § 6 Federal Rule of Civil Procedure 23 allows a plaintiff to bring litigation on behalf of a class of persons where: “(1) the class is so numerous that joinder of all members is impracticable; (2) there are questions of law or fact common to the class; (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class; and (4) the representative parties will fairly and adequately protect the interests of the class.” Fed. R. Civ. P. 23(a). Subsection (b)(3) authorizes the court to certify a class if “the court finds that the questions of law or fact common to class members predominate over any questions affecting only individual members, and that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy.” Fed. R. Civ. P. 23(b). 7 Defendant Agius has since been dismissed from the lawsuit in all respects. See In re MIVA, Inc., Sec. Litig., 544 F. Supp. 2d 1310, 1318 (M.D. Fla. 2008). 12 10(b) of the Exchange Act,8 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5.9 (Compl. ¶¶ 134-42). On March 15, 2007, the district court partially granted the Defendants’ motion to dismiss, dismissing as insufficiently pled all claims in the Plaintiffs’ Complaint except those relating to statements made by the Defendants on February 23, 2005 and March 16, 2005. See In re MIVA, Inc., Sec. Litig., 511 F. Supp. 2d 1242 (M.D. Fla. 2007). The district court then certified the class but shortened the class period. See In re MIVA, Inc., Sec. Litig., No. 2:05-cv-201, 2008 WL 681755 (M.D. Fla. Mar. 12, 2008). The Plaintiffs had proposed that the class consist of “all persons or entities who purchased or otherwise acquired the common stock of MIVA between September 3, 2003 and May 4, 2005, inclusive, and who were damaged thereby” (the “Proposed Class Period”). (Compl. ¶ 152). The district court shortened the period to February 23, 2005 through May 4, 2005, inclusive (the “Class Period”), because, pursuant to its prior dismissal order, “the 8 Securities Exchange Act of 1934, § 10(b), 48 Stat. 891 (1934) (codified as amended at 15 U.S.C. § 78j(b)). 9 The Plaintiffs also raised control-persons claims under § 20(a) of the Exchange Act. See 15 U.S.C. § 78t(a). Section 20(a) provides for joint and several liability for “control persons” once a plaintiff has demonstrated a § 10(b) violation. See id. However, no § 20(a) claim can lie without first establishing a successful § 10(b) claim. See Thompson v. RelationServe Media, Inc., 610 F.3d 628, 635-36 (11th Cir. 2010) (“[A] primary violation of the securities law is an essential element of a § 20(a) derivative claim . . . . As the . . . Complaint failed to allege primary liability under § 10(b), there can be no secondary liability under § 20(a).”). Because the district court disposed of the Plaintiffs’ claims entirely on § 10(b) grounds, we only address the Plaintiffs’ § 10(b) claims. 13 earliest statement or omission on which the plaintiffs could base a claim is February 23, 2005.” In re MIVA, 2008 WL 681755, at . In November 2009, the district court, after referring the matter to a magistrate judge, adopted the magistrate judge’s Report and Recommendation and granted final summary judgment in favor of the Defendants on the two remaining misrepresentations, on the grounds that the Plaintiffs had failed to demonstrate triable issues of fact with respect to loss causation and damages. See In re MIVA, Inc., Sec. Litig., No. 2:05-cv-201, 2009 WL 3821146 (M.D. Fla. Nov. 16, 2009). Thereafter, the Plaintiffs timely filed this appeal, challenging both the district court’s dismissal order and the district court’s final order of summary judgment.