Court Dismisses Securities Class Action Alleging Misrepresentations About "Cannibalization"

A class-action complaint filed against Travelzoo, Inc. (Travelzoo) in the US District Court for the Southern District of New York was recently dismissed. The complaint alleged that Travelzoo made misstatements in its Securities and Exchange Commission filings and press releases about its competition from other companies and potential for growth when it failed to disclose that its recently launched “Local Deals Getaways” business (Getaways) would compete directly with its core travel business.

The court found that the plaintiffs failed to demonstrate that mere existence of “cannibalization”—or internal competition—between Getaways and Travelzoo’s core travel business was material. The court noted that cannibalization does not necessarily lead to an overall loss of revenue for a company, and is not a factual statement about a company that would lead to a drop in the company’s stock price. Because the cannibalization between Getaways and Travelzoo’s core travel business was only a potentially adverse effect, Travelzoo had no duty to disclose it.

In addition, the court found that the plaintiffs failed to adequately plead both scienter and loss causation. While some individual defendants were aware of the potential negative effect of the competition between Getaways and Travelzoo’s core travel business and all individual defendants had access to Travelzoo’s revenue reports, the court found that this alone was insufficient to demonstrate that any individual defendant knew that the cannibalization would negatively impact Travelzoo’s revenue. Finally, the court noted that loss causation was not adequately pled as the facts indicated that the stock decline was due to general market disappointment.

In re Travelzoo Inc. Securities Litigation, 11 Civ. 5531, 11 Civ. 6845 (S.D.N.Y. Mar. 29, 2013).