The City of Dearborn Heights Act 345 Police & Fire Retirement System has filed a securities class action against Duolingo, alleging the language-learning platform and two senior executives misled investors about the health of its user base. The complaint, lodged on October 7, 2026, in the U.S. District Court for the Western District of Pennsylvania, names Duolingo, CEO and co-founder Luis von Ahn, and former CFO Matthew Skaruppa as defendants. It asserts violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, covering a class period from May 2, 2025, through February 26, 2026.
At the start of the class period, Duolingo reported more than 46 million daily active users (DAUs) on its freemium model, with roughly 10% paying for subscriptions. The complaint alleges that the company deliberately introduced friction for free users—such as unskippable ads, aggressive upselling to pricier tiers, and a shift to lower-quality AI-generated lessons—while publicly touting "sustainable growth." A central element is the April 2025 replacement of the Hearts system with a feature called Energy. Under Hearts, free users could continue using the app if they answered correctly; under Energy, users lost energy with each correct answer, meaning better performance led to faster session exhaustion. The complaint contends the undisclosed goal was to pressure free users into paid subscriptions.
Duolingo's second-quarter 2025 shareholder letter described Energy as "a carrot, not a stick," claiming it enhanced motivation and gamification. On the accompanying earnings call, von Ahn said Energy was boosting DAUs, revenue, and median learning time. The lawsuit alleges these statements were misleading, citing "thousands" of A/B tests that purportedly showed the added friction suppressed user growth. The complaint also highlights an April 28, 2025 internal memo, posted by von Ahn on LinkedIn, announcing a shift to an "AI-first" model and a gradual phase-out of contractors. The backlash was swift: users on TikTok documented deleting the app, often sacrificing long streaks, and by May 17, 2025, Duolingo had entered a "social media blackout," wiping content from its TikTok and Instagram accounts.
DAU growth decelerated from 49% in the first quarter of 2025 to 40% in the second quarter. The complaint alleges von Ahn attributed the slowdown solely to the AI memo, telling investors "that impact is in the past," while concealing the ongoing monetization push and content quality decline as contributing factors. Three disclosures form the backbone of the case. On November 5, 2025, Duolingo reported third-quarter DAU growth of 36% and announced a pivot toward "teaching better," causing the stock to fall 25%, or $66.28 per share, to close at $193.74. Analysts at Goldman Sachs, JPMorgan, and Wells Fargo subsequently downgraded the stock or cut price targets.
On January 12, 2026, the company disclosed Skaruppa's resignation and preliminary fourth-quarter DAU growth of "approximately 30% year over year," sending shares down 8.5%, or $14.92, to $161.74. Finally, on February 26, 2026, Duolingo reported fourth-quarter results and guided to 2026 DAU growth of only 20%, bookings growth of 10% to 12% versus consensus of 20%, and adjusted EBITDA margin of 25% against consensus of 30%. Von Ahn admitted the results "may come as a surprise to some investors" and acknowledged that "the quickest way to increase monetization was basically by adding friction." The stock dropped 14%, or $16.45, to close at $101.
The lawsuit underscores the tension between monetization and user engagement, a challenge familiar to public pension funds that invest in growth-oriented tech names. It also echoes broader concerns about retirement savings confidence amid market volatility. The former CFO had characterized the reprioritization as having "a relatively small financial impact" and being "a change of small proportion," but the complaint argues the consequences for 2026 bookings, revenue, and profitability were material. As the case proceeds, it may serve as a cautionary tale for advisors and investors about the risks of aggressive monetization strategies in consumer platforms.
