The United States District Court for the Northern District of California sustained a securities fraud complaint alleging that the defendants, a software company and its executives, had defrauded investors by failing to disclose that the company had systematically restructured contracts with its customers for the purpose of accelerating revenue recognition. The defendant company, Epocrates, Inc., developed applications that, in part, allowed pharmaceutical companies to advertise to doctors. The plaintiffs, seeking to represent a class of investors who had purchased Epocrates stock after an initial public offering, alleged that Epocrates had used fraudulent measures to appear more profitable. Specifically, Epocrates would charge pharmaceutical companies for the right to communicate with Epocrates’ subscribers through, inter alia, “DocAlerts,” short messages that Epocrates would disseminate to its subscribing health professionals. It was alleged that Epocrates, relying on “use-it-or-lose-it” provisions in the contracts, would prematurely cancel these contracts with the pharmaceutical companies in an effort to recognize revenue in time for its quarterly financial report, and then restructure the contracts with the pharmaceutical companies post-cancellation. The District Court held that these actions sufficiently established a cognizable basis for a federal securities fraud cause of action, and that at the pleading stage, it was immaterial whether contract restructuring itself was illegal or constituted fraud. Additionally, the District Court determined that the complaint sufficiently alleged that the defendants possessed the requisite knowledge and intent to mislead investors when they reworked the contracts. In reaching this conclusion, the District Court cited the complaint’s allegations of the detailed involvement of Epocrates’ chief executive officer and chief financial officer and the urgency with which they dealt with the restructuring by reviewing every contract to establish which could be restructured and accelerated.

Police and Fire Retirement System of Detroit v. Rosemary Crane, No. 13-CV-009450-VC (N.D. Cal. Mar. 13, 2015)