Alibaba's Class Action Lawsuit: Implications for Future Legislation on Big Tech Accountability

Alibaba Group, established in 1999 and led by Jack Ma, a former English teacher from Hangzhou, China, is now a major holding company of six major business groups, most dealing with e-commerce, artificial intelligence, digital media, and entertainment groups. They are currently one of the largest and most successful companies worldwide and generate significant revenue and growth in profitability and stock value internationally [1]. In 2020, initial complaints were filed against Alibaba Group, Jack Ma, and two of Alibaba’s executives, Daniel Zhang and Maggie Wu, by Alibaba shareholders. The shareholders claimed they suffered significant financial losses as a result of misleading statements made by the company. The investors are represented by Glancy Prongay & Murray LLP. 

The plaintiff’s primary complaints in this case are about Alibaba Group's misleading statements, particularly regarding the potential success of Ant Group’s, one of their fintech affiliates, planned $34.5 billion IPO and how it presented the IPO’s potential success to investors. Moreover, the complaints stated that Alibaba Group made misleading statements about monopolistic practices in its e-commerce business, specifically Alibaba’s claim that merchants on its platform were not forced to sell exclusively on Alibaba. The Plaintiffs found this to be misleading. Plaintiff’s allege that during the Class Period, established as a period when anyone who purchased or otherwise acquired Alibaba American Depositary Shares (“ADSs”) between July 9, 2020 and December 23, two hundred defendants violated the federal securities laws and Alibaba’s antitrust risk and exclusivity practices that artificially increased the stock price and eventually caused financial loss to the Class [2]. 

In a regulatory filing on October 25th, 2024, Alibaba stated that they denied any fault or liability, yet they entered into the agreement to “avoid the cost and disruption of further litigation” [3]. Therefore, they agreed to pay the $433.5 million to settle their class action lawsuit. The court proceedings have been taking place in the Manhattan Federal Court, which refers to the United States District Court for the Southern District of New York (SDNY), one of the most prominent and influential federal courts in the United States. Their final settlement hearing is currently set for March 27, 2025 at 10:00 a.m. to determine whether the court will approve of the proposed class action settlement. 

This class action lawsuit, if approved by the New York federal court, will be significant, as it will be one of the largest securities class action settlements in U.S. history, and the proposed payment to settle, $433.5 million dollars, would be among the 50 largest class action settlements since the Private Securities Litigation Reform Act that was passed in 1995 which was aimed at reducing excessive and unfaithful securities class action lawsuits, particularly those made with the intent of large companies seeking quick settlements. 

Due to the fact that there have previously been excessive and untruthful class action lawsuits brought against companies similar to Alibaba, with the primary gain of companies settling to avoid drawn out lawsuits, there are many legal standards that the Plaintiffs in this case had to meet in order to even file an initial complaint. Firstly, in order to sue under Section 10(b), where Plaintiffs sued in the Alibaba Group case, Plaintiffs must have “at least dealt in the security to which the prospectus, representation, or omission relates." Section 10(b) is part of the SEC Act of 1934, which makes it unlawful for any person or entity to use any manipulative or deceptive device or contrivance in connection with the purchase or sale of securities [4]. 

Furthermore, in Blue Chip Stamps v. Manor Drug Stores, the U.S. Supreme Court established the purchaser-seller rule, which limits standing to sue under Section 10(b) to those who have purchased or sold the securities about which fraudulent misstatements were made [5]. This principle was reaffirmed in Menora Mivtachim Ins. Ltd. v. Frutarom Indus. Ltd., which emphasized that Section 10(b) standing is based on whether the plaintiff transacted in the specific securities related to the misstatement, not on the relationship between companies [6]. Moreover, In Frutarom, the Second Circuit held that stockholders of one company, in this case Alibaba, cannot sue based on misstatements about another company, Ant, in this case, whose securities they did not buy or sell. This rule applies even if the two companies are highly related, such as Alibaba and Ant, as standing is tied to the purchase or sale of the affected securities.   

Plaintiffs in this case assert claims against Alibaba and Ma for alleged misstatements in Ant Group’s pre-IPO disclosures. However, Plaintiffs did not purchase or sell Ant securities, only Alibaba’s, and thus they lack standing to sue based on misstatements related to Ant. The court granted the defendants' motion to dismiss the Ant-related claims, citing Frutarom as controlling authority, as well as the requirement for fraud claims to meet heightened pleading standards under the Federal Rule of Civil Procedure 9(b), commonly referred to as FRCP 9(b), which details pleading requirements for fraud claims in civil litigation in federal courts, designed to ensure that allegations of fraud are sufficiently detailed and specific, reducing the risk of meritless claims being filed. They also cited the Private Securities Litigation Reform Act of 1995, commonly known as PSLRA [7]. The PSLRA, enacted in 1995,  addresses concerns about abusive securities class action lawsuits, particularly those related to fraud claims against public companies. The PSLRA amended the FRCP 9(b) to impose even stricter pleading standards for securities fraud claims, once again aiming to reduce frivolous lawsuits, curb excessive settlements, and establish more stringent requirements for plaintiffs bringing securities fraud cases.

As a result, Plaintiffs’ claims against Ma and Alibaba for misstatements about Ant’s IPO were dismissed, a win for the defendants. However, the court denied the motion Alibaba filed to dismiss claims related to other issues, such as Exclusivity Practices, which most likely led to Alibaba planning to settle the lawsuit for $433.5 million dollars.

This settlement, if approved by the Court, could impact future legislation by strengthening antitrust and anti-monopoly regulations and laws, as well as helping establish a global coordination on antitrust. It could also help refine and regulate market dominance in this digital age, seeing as Alibaba operates across many markets, mainly the U.S., southeast Asia, and Europe, which could lead to international cooperation on regulating big tech companies like Alibaba, which could result in curbing monopolistic behavior. Moreover, this case could serve as an example to future big tech companies in reminding them that there will be stronger oversight of digital finance in the future, which could push governments to introduce new regulations on digital finance, done through licensing systems or payment processors with an emphasis on consumer protection and data security. Socially, this could impact the public’s relationship and view of companies similar to Alibaba, that have large private enterprises which play a significant role in the political and economic landscape. In regulating these companies and providing more protection for consumers, future investors would feel more secure in their purchases, leading to a growing public and legislative pressure to impose stricter ethical standards on tech firms.

Sources:

1. Alibaba,https://www.alibabagroup.com/en-US/about-alibaba 
2. IN RE: ALIBABA GROUP HOLDING LTD. SECURITIES LITIGATION, 1:20-cv-09568, CourtListener.com
3. Isaiah Portiz, Alibaba to Pay $433 Million to Settle Antitrust Investor Suit, Bloomberg Law, (Oct. 25, 2024), https://www.bloomberglaw.com/bloomberglawnews/litigation/XAB6VJLS000000?bna_news_filter=litigation#jcite
4. Securities Exchange Act of 1934, P.L. 117–328, § 10(b), Enacted December 29, 2022, (1934).
5. Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S. Ct. (1917).
6. Menora Mivtachim Ins. Ltd. v. Frutarom Indus. Ltd., No. 21-1076 (2d Cir. 2022). 
7. Private Securities Litigation Reform Act, Pub. L. No. 104-67 (1995).