2 UNITED STATES DISTRICT COURT FOR THE...

Case 8:11-cv-01404-AG-RNB Document 110 Filed 05/08/13 of 34 Page ID #:2560

1

2

3

4

5

6

7

UNITED STATES DISTRICT COURT

8

FOR THE CENTRAL DISTRICT OF CALIFORNIA

9

10

RICHARD GAMMEL, Individually CASE NO. SACV 11-1404 AG(RNBx)

and on Behalf of All Others Similarly 11

Situated, ORDER GRANTING IN PART AND

12

DENYING IN PART MOTION TO Plaintiff, DISMISS

13 v.

14

15

HEWLETT-PACKARD COMPANY, et al.

16

17

Defendants.

18

19 Lead Plaintiffs Arkansas Teacher Retirement System, Union Asset Management Holding

20 AG, Labourers’ Pension Fund of Central and Eastern Canada, and the LIUNA National Pension

21 Fund and LIUNA Staff & Affiliates Pension Fund (together, “Plaintiffs”) filed this securities

22 fraud class action against Defendants Hewlett Packard Company (“HP”), Leo Apotheker, and R.

23 Todd Bradley (together, “Defendants”). In August 2012, the Court issued an order (the “August

24 Order”) granting Defendants’ Motion to Dismiss Plaintiffs’ first amended complaint (“FAC”).

25 Gammel v. Hewlett-Packard Co. , SACV 11-1404 AG RNBX, 2012 WL 5945089 (C.D. Cal.

26 Aug. 29, 2012). Plaintiffs filed a second amended complaint (“SAC”). Before the Court is

27

28


1

Defendants’ Motion to Dismiss Plaintiffs’ SAC (the “Motion”). The Motion is GRANTED in

2

part and DENIED in part.

3

4

I BACKGROUND

5

6

The following facts are taken from Plaintiffs’ SAC, and as it must for purposes of this

7

I Motion, the Court assumes them to be true.

8

HP is one of the world’s largest information technology companies and the world’s

9

leading vendor of personal computers (“PCs”) and printers. (SAC ¶¶ 2, 3.) Apotheker served as

10

HP’s President and Chief Executive Officer from November 2010 until his termination in

11

September 2011. (Id. ¶ 25.) Bradley has been the Executive Vice President of HP’s largest

12

business segment, the Personal Systems Group (“PSG”), since 2005. ( Id. ¶¶ 26.) Plaintiffs

13

purchased HP common stock during the proposed Class Period – February 9 to August 18, 2011

14 – and suffered losses due to Defendants’ alleged securities law violations. ( Id. ¶¶ 20-23.)

15

This lawsuit arises out of HP’s failed strategy to develop an “ecosystem” of integrated

16

mobile computing devices – including PCs, printers, smartphones, and tablets – running on an

17 operating system known as “webOS.”

18

As Plaintiffs allege in their SAC, HP’s hardware products have traditionally run on

19

Microsoft’s ubiquitous Windows operating system. ( Id. ¶ 4.) By contrast, hardware products

20

made by HP’s competitors, like Apple and Google, run on non-Windows operating systems. ( Id.

21

¶ 4.) In July 2010, for $1.2 billion, HP bought Palm, Inc. (“Palm”) – maker of the once-popular

22

PalmPilot handheld computing device – and exclusive rights to Palm’s WebOS operating

23

system. (Id. ¶ 5.)

24

“With webOS,” say Plaintiffs, “HP would, for the first time, gain the ability to control

25

both its hardware and software. WebOS would be the key ‘building block’ in HP’s strategy to

26

not only enter and compete successfully in the smartphone and tablet markets, but also to create

27 a broader and unified ‘ecosystem’ of devices connected through the ‘cloud’ by WebOS.” ( Id. ¶

28

6.) Thus, “[l]ike Apple, HP would offer its customers a unified user experience across a range of

2


1

elegant devices, with webOS ultimately supporting and connecting the user’s smartphone, tablet,

2

PC and printer in a fully integrated and flexible ensemble of devices.” ( Id. ¶ 8.)

3

But while Defendants were publicly touting that HP “would expand the webOS

4

ecosystem of devices and introduce ‘millions’ of webOS-enabled PCs and printers” within two

5 years, Plaintiffs allege that things were very different behind the scenes. ( Id. ¶ 6.) According to

6

Plaintiffs, “no resources were available during the Class Period for PCs or printers” because

7

“HP’s webOS software team was stretched to capacity trying to ready the problematic TouchPad

8

for launch” in summer 2011. ( Id. ¶¶ 10-11, 60.) Meanwhile, HP’s development of WebOS PCs

9

and printers never progressed beyond the “concepting” stage. ( Id. ¶¶ 10-11.)

10

Plaintiffs allege that the WebOS house of cards came crashing down on August 18, 2011,

11

when “HP abruptly reversed course and announced that it was shutting down all of its webOS

12

hardware operations.” (Id. ¶ 12.) HP’s stock dropped six percent that day and an additional 20

13

percent on August 19, 2011, resulting in a $16 billion loss in shareholder value. ( Id. ¶ 13.)

14

Apotheker was fired less than a month later, and in December 2011, after writing off more than

15

$3 billion in webOS-related costs, HP “contribut[ed] webOS to the public as ‘open-source’

16

software.” (Id. ¶ 14.)

17

Based on these allegations and others, Plaintiffs assert claims against Defendants under

18

§§ 10(b) and 20(a) and Rule 10b-5 of the Securities and Exchange Act of 1934 (“Exchange

19

Act”). 15 U.S.C. §§ 78j(b), 78t(a); 17 C.F.R. § 240.10b-5.

20

21

PRELIMINARY MATTERS

22

23

To support their Motion, Defendants ask the Court to take judicial notice of 15 items, or

24

consider them under the doctrine of incorporation by reference. (Defendants’ Request for

25

Judicial Notice and for Incorporation of Documents by Reference (“RJN”), Dkt. No. 97;

26

Defendant’s Supplemental Request for Judicial Notice (“SRJN”), Dkt. No. 102.) Specifically,

27

Defendants ask the Court to consider Items 1-7: (1) a March 14, 2011 HP press release; (2) a

28

July 11, 2011 HP press release; (3) excerpts of HP’s Form 10-Q for the fiscal quarter that ended

3


1

January 31, 2011; (4) excerpts of HP’s Form 10-Q for the fiscal quarter that ended April 30,

2

2011; (5) excerpts of HP’s Form 10-K for the fiscal year that ended on October 31, 2010; (6) the

3

SEC Form 4 for Bradley, filed with the SEC on March 8, 2011; and (7) an April 4, 2011 email

4

from Justin Manus to employees in HP’s Imaging and Printing (“IPG”) division. (RJN.)

5

Defendants also ask the Court to consider Items 8-15, which the Court previously

6

considered because Plaintiffs referred to them in their FAC: (8) a transcript of HP’s February 22,

7

2011 Earnings Call; (9) a transcript of HP’s March 14, 2011 Summit Press Conference; (10) a

8

transcript of HP’s March 14, 2011 Strategy Summit; (11) a transcript of HP’s May 17, 2011

9

Earnings Call; (12) a June 1, 2011 All Things Digital article titled “HP CEO Leo Apotheker Says

10

He Won’t Ship TouchPad Till It’s Perfect”; (13) a transcript of HP’s August 18, 2011 Earnings

11

Call; (14) excerpts from HP’s December 14, 2011 Form 10-K; (15) an August 19, 2011 All

12

Things Digital article titled “With HP’s Raising of the World’s Biggest White Flag, Will Jon

13

Rubinstein and Todd Bradley Surrender too?” (the “August 19, 2011 Article”); and (16) the

14

defendants’ request for judicial notice and related filings in In re Rigel Pharmaceuticals

15

Securities Litigation , No. 09-cv-00546 (N.D. Cal). (RJN; SRJN.)

16

Plaintiffs object to the Court’s consideration of five of the items. (Lead Plaintiffs’

17

Response and Partial Objection to Defendants’ Request for Judicial Notice and for Incorporation

18

of Documents by Reference (“RJN Response”), Dkt. No. 99.)

19

Under Federal Rule of Evidence 201, “[a] judicially noticed fact must be one not subject

20

to reasonable dispute in that it is either (1) generally known within the territorial

21

jurisdiction of the trial court or (2) capable of accurate and ready determination by resort

22

to sources whose accuracy cannot reasonably be questioned.” Fed. R. Evid. 201. Courts

23

may take judicial notice of “ undisputed matters of public record,” but generally may not

24

take judicial notice of “ disputed facts stated in public records.” Lee v. City of Los

25

Angeles , 250 F.3d 668, 690 (9th Cir. 2001) (emphasis in original). Facts subject to

26

judicial notice may be considered on a motion to dismiss. Mullis v. U.S. Bankr. Ct. , 828

27

F.2d 1385, 1388 (9th Cir. 1987).

28

4


1

Although often conflated, the doctrine of incorporation by reference is distinct from

2

judicial notice. “That doctrine permits a district court to consider documents ‘whose

3

contents are alleged in a complaint and whose authenticity no party questions, but which

4

are not physically attached to the . . . pleadings.’” In re Silicon Graphics Sec.

5

Litig. , 183 F.3d 970, 986 (9th Cir. 1999) (quoting Branch v. Tunnell , 13 F.3d 449, 454

6

(9th Cir. 1994)).

7

8

I 1. UNOPPOSED ITEMS

9

10

The Court first considers requests for judicial notice that were unopposed. Plaintiffs do

11

not object to the Court considering Items 1-4, and 8-13. (RJN Response, at 2:3-13.) The SAC

12

references or quotes Items 1, 2, 4, and 8-13 and Plaintiffs do not question their authenticity.

13

(See, e.g. , SAC ¶¶ 150-53, 155-67, 170-72, 174-77, 183-86, 189-91.) The Court therefore

14

considers the contents of Items 1, 2, 4, and 8-13 under the incorporation by reference doctrine,

15

but not for the truth of the matters they assert. See generally Maiman v. Talbott , 2010 U.S. Dist.

16

LEXIS 142712 (C.D. Cal. Aug. 9, 2010).

17

18

I 2. OPPOSED ITEMS

19

20

The Court next considers requests for judicial notice that were opposed.

21

Plaintiffs first oppose Defendants’ request for judicial notice and consideration of Items 5

22

and 14, excerpts of Form 10-Ks filed by HP in December 2010 and December 2011. Plaintiffs

23

say consideration of these items are inappropriate because they were filed before and after the

24

class period. Plaintiffs do not otherwise dispute that judicial notice of these items are

25

appropriate. Setting aside the question of whether these items are relevant, the Court finds that

26

they are appropriate for judicial notice. See, e.g. , In re Hansen Natural Corp. Sec. Litig. , 527 F.

27

Supp. 2d 1142, 1149 n.2 (C.D. Cal. 2007) (considering Form 10-Ks filed outside the class period

28

because they contained potentially relevant risk disclosures); In re Netflix, Inc. Sec. Litig. , No.

5


1

C04-2978, 2005 WL 1562858, at *5 (N.D. Cal. June 28, 2005) (same); Dreiling v. Am. Exp. Co. ,

2

458 F.3d 942, 947 n.2 (9th Cir. 2006) (approving judicial notice of an SEC filing). The Court

3

therefore takes judicial notice of Items 5 and 14, but not for the truth of what they assert.

4

Plaintiffs next oppose Defendants’ request for judicial notice and consideration of Item 6,

5

Bradley’s March 8, 2011 Form 4, which shows Bradley exercised HP stock options. This was

6

not referenced in the SAC, so it may not be considered under the incorporation by reference

7

doctrine. The Court finds that it is also not appropriate for judicial notice for the reasons

8

explained at length in the Court’s decision in Maiman v. Talbott , 2010 U.S. Dist. LEXIS 142712

9

(C.D. Cal. Aug. 9, 2010). The cases Defendants cite are either distinguishable or unpersuasive.

10

See, e.g. , In re Rigel Pharm. Inc. Sec. Litig ., No. 09-cv-00546, 2010 WL 8816155, at *1 n.1

11

(N.D. Cal. Aug. 24, 2010) (taking judicial notice of 17 documents, including a Form 4s that

12

showed no stock sales, in a footnote without analysis); In re Rigel Pharm. Inc. Sec. Litig. , 697

13

F.3d 869, 884-85 (9th Cir. 2012) (discussing fact that defendants did not sell stock, apparently

14

based on evidence at trial court, but without discussing issue of judicial notice; holding that lack

15

of stock sales was inconsistent with plaintiff’s theory that defendants committed fraud to

16

increase value of stock options); Allison v. Brooktree Corp. , 999 F. Supp. 1342, 1352 (S.D. Cal

17

1998) (plaintiff alleged defendants committed fraud “in order to sell stock and to cash-out their

18

options in a later acquisition”).

19

Plaintiffs next oppose Defendants’ request for consideration of Item 7, an April 4, 2011

20

email from HP employee Justin Manus to other HP employees in the IPG division (the “April

21

2011 Email”). Defendants say this email is the one paraphrased by CW10 and CW13 in the

22

SAC. (SAC ¶¶ 91, 93.) Plaintiffs argue the Court should not consider the April 2011 Email

23

because this is only appropriate “where the authenticity of the documents is not in question.”

24

(RJN Response, at 17 (quoting Mata v. Citimortgage, Inc. , CV 10-9167 DSF (PLAx), 2012 WL

25

1075699, at *1 (C.D. Cal. Mar. 8, 2012).) Because there is a question about the authenticity of

26

this document and because it is not generally known within this Court’s territorial jurisdiction or

27

“capable of accurate and ready determination” based on sources of unquestionable accuracy, the

28

Court refuses to judicially notice it. Fed. R. Evid. 201.

6


1

Plaintiffs next oppose Defendants’ request for judicial notice and consideration of Item

2

15, the August 19, 2011 Article, which reports that Bradley did not learn of HP’s decision to

3

discontinue webOS until mid-August 2011. Because the FAC referenced the August 19, 2011

4

Article, the Court previously considered it under the incorporation by reference doctrine. The

5

SAC deletes any reference to the August 2011 Article. Defendants say Plaintiffs “carefully

6

omitted” the reference because the August 2011 Article “also raises inferences tending to negate

7

any scienter on the part of Mr. Bradley.” (Defendants’ Reply in Support of their Request for

8

Judicial Notice, Dkt. No. 101, at 8:24-25.) Specifically, the article states that “Bradley did not

9

learn of the decision to discontinue webOS until August 14, 2011–long after his last challenged

10

statement.” (Motion, at 42:28-43:1.)

11

Courts may consider allegations in previous complaints “in determining the plausibility of

12

the current pleadings,” Fasugbe v. Willms , CIV 2:10-2320 WBS, 2011 WL 2119128 (E.D. Cal.

13

May 26, 2011) (emphasis in original), and “as part of [the Court’s] ‘context-specific’ inquiry

14

based on its judicial experience and common sense . . . as required under Iqbal,” Cole v.

15

Sunnyvale , C-08-05017 RMW, 2010 WL 532428 (N.D. Cal. Feb. 9, 2010); see also Stanislaus

16

Food Products Co. v. USS-POSCO Indus. , 782 F. Supp. 2d 1059, 1075 (E.D. Cal. 2011)

17

(considering allegations of first amended complaint in evaluating plausibility of allegations in

18

second amended complaint). Plaintiffs rely on the principle established in Forsyth v. Humana,

19

Inc. , 114 F.3d 1467, 1474 (9th Cir. 1997), that an “amended complaint supersedes the original,

20

the latter being treated thereafter as non-existent,” but Defendants point out that Forsyth was

21

recently overruled by the Ninth Circuit in Lacey v. Maricopa Cnty. , 693 F.3d 896, 925-28 (9th

22

Cir. 2012). Because amendment of the pleadings does not bar consideration of the August 2011

23

Article, the Court considers whether it is appropriate for judicial notice. The August 2011

24

Article became part of the public record when the Court previously considered it, so in that sense

25

it is part of the public record. But its lodging in the record of this case does not make the article

26

itself a “source[] whose accuracy cannot reasonably be questioned.” Fed. R. Evid. 201. The

27

Court therefore refuses to take judicial notice of the August 2011 Article.

28

7


1

Lastly, Plaintiffs object to Defendants’ request for judicial notice of the parties’ request

2

for judicial notice and related filings in In re Rigel Pharm. Sec. Litig. , No. 09-cv-00546 (N.D.

3

Cal). Plaintiffs oppose. Because these are court filings, the Court may take judicial notice of

4

them, but not for the truth of the facts they assert. See Lee , 250 F.3d at 690.

5

6

I LEGAL STANDARD

7

8

A court should dismiss a complaint when its allegations fail to state a claim upon which

9

relief can be granted. Fed. R. Civ. P. 12(b)(6). A complaint need only include “a short and plain

10

statement of the claim showing that the pleader is entitled to relief.” Fed. R. Civ. P. 8(a)(2).

11

“‘[D]etailed factual allegations’ are not required.” Ashcroft v. Iqbal , 556 U.S. 662, 678 (2009)

12

(citing Bell Atl. Corp. v. Twombly , 550 U.S. 554, 555 (2007) (stating that “a complaint attacked

13

by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations”)). The Court

14

must accept as true all factual allegations in the complaint and must draw all reasonable

15

inferences from those allegations, construing the complaint in the light most favorable to the

16

plaintiff. Pollard v. Geo Group, Inc. , 607 F.3d 583, 585 n.3 (9th Cir. 2010).

17

But the complaint must allege “sufficient factual matter, accepted as true, to ‘state a claim

18

to relief that is plausible on its face.’” Iqbal, 556 U.S. at 678 (quoting Twombly , 550 U.S. at

19

570). “A claim has facial plausibility when the pleaded factual content allows the court to draw

20

the reasonable inference that the defendant is liable for the misconduct alleged.” Id. (citing

21

Twombly , 550 U.S. at 556). A court should not accept “threadbare recitals of a cause of action’s

22

elements, supported by mere conclusory statements,” id. , or “allegations that are merely

23

conclusory, unwarranted deductions of fact, or unreasonable inferences.” Sprewell v. Golden

24

State Warriors, 266 F.3d 979, 988 (9th Cir. 2001). “[A]nalyzing the sufficiency of a complaint’s

25

allegations is a ‘context-specific task that requires the reviewing court to draw on its judicial

26

experience and common sense.’” Sheppard v. David Evans and Associates , 694 F.3d 1045,

27

1051 (9th Cir. Sept. 12, 2012). The Ninth Circuit also addressed post- Iqbal pleading standards

28

in Starr v. Baca, 652 F.3d 1202, 1204 (9th Cir. 2011). The Starr court held that allegations

8


1

“must contain sufficient allegations of underlying facts to give fair notice and to enable the

2

opposing party to defend itself effectively . . . [and] plausibly suggest an entitlement to relief,

3

such that it is not unfair to require the opposing party to be subjected to the expense of discovery

4

and continued litigation.” Id. at 1216; see also Moss v. U.S. Secret Serv. , 10-36152, 2013 WL

5

674059, at *20 (9th Cir. Feb. 26, 2013) (holding that plaintiffs stated a claim because no

6

alternative explanation “render[ed] ‘ implausible ’ the plaintiffs’ claim of viewpoint

7

discrimination”).

8

If the Court decides to dismiss a complaint, it must also decide whether to grant leave to

9

amend. “A district court may deny a plaintiff leave to amend if it determines that allegation of

10

other facts consistent with the challenged pleading could not possibly cure the deficiency . . . or

11

if the plaintiff had several opportunities to amend its complaint and repeatedly failed to cure

12

deficiencies.” Telesaurus VPC, LLC v. Power , 623 F.3d 998, 1003 (9th Cir. 2010) (internal

13

citations omitted); see also Steckman v. Hart Brewing , 143 F.3d 1293, 1298 (9th Cir. 1998)

14

(holding that pleadings may be dismissed without leave to amend if amendment “would be an

15

exercise in futility”).

16

Fraud claims must meet the heightened pleading standard of Federal Rule of Civil

17

Procedure 9(b), which requires enough specificity to give a defendant notice of the particular

18

misconduct to be able to defend against the charge. Bly-Magee v. California, 236 F.3d 1014,

19

1019 (9th Cir. 2001) (internal citations omitted). To satisfy this specificity requirement, “the

20

who, what, when, where, and how” of the misconduct must be alleged. Cooper v. Pickett, 137

21

F.3d 616, 627 (9th Cir. 1997) (internal citation omitted). Thus, factual allegations must include

22

“the time, place, and specific content of the false representations as well as the identities of the

23

parties to the misrepresentations.” Swartz v. KPMG LLP , 476 F.3d 756, 764 (9th Cir. 2007).

24

Beyond Rules 8(a)(2) and 9(b), the Private Securities Litigation Reform Act of 1995

25

(“PSLRA”) imposes heightened pleading requirements. These requirements are discussed more

26

fully in the following analysis.

27

28

9


1

ANALYSIS

2

3

Defendants argue that the Court should dismiss Plaintiffs’ claim for violation of § 10(b)

4

and Rule 10b-5 of the Exchange Act. To state a claim under § 10(b) and Rule 10b-5 of the

5

Exchange Act, a plaintiff must allege “(1) a material misrepresentation or omission of fact, (2)

6

scienter, (3) a connection with the purchase or sale of a security, (4) transaction and loss

7

causation, and (5) economic loss.” In re Daou Sys. Inc. , 411 F.3d 1006, 1014 (9th Cir. 2005)

8

(citing Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 341-42 (2005)). Defendants argue that

9

Plaintiffs’ § 10(b) and Rule 10b-5 claim fails because Plaintiffs do not sufficiently allege falsity

10

or scienter. Before considering these arguments, the Court first identifies and categorizes the

11

misstatements alleged in the SAC.

12

13

I 1. ALLEGED MISSTATEMENTS

14

15

Plaintiffs allege that Defendants made dozens of materially false and misleading

16

statements during the proposed six-month Class Period. Plaintiffs group these alleged

17

misstatements – which fill more than 30 page of the SAC – into the following eleven categories:

18

(1) statements made by Bradley during HP’s February 9, 2011 “WebOS Announcement”; (2)

19

statements made by Apotheker during HP’s February 22, 2011 Earnings Call; (3) statements

20

made by Apotheker and Bradley during HP’s March 14, 2011 Summit; (4) statements made in

21

the March 14, 2011 Summit Press Release; (5) statements made by Apotheker during HP’s May

22

17, 2011 Earnings Call; (6) statements made by Apotheker in an interview with the Wall Street

23

Journal during the June 1, 2011 All Things Digital D9 Conference (the “June 1, 2011

24

Interview”); (7) statements made by Apotheker at the June 2, 2011 Sanford C. Bernstein & Co.

25

Strategic Decisions Conference (the “June 2, 2011 Conference”); (8) statements made in HP’s

26

June 8, 2011 Form 10-Q signed by Apotheker; (9) statements made by Bradley and reported in a

27

July 6, 2011 All Things Digital article (the “July 6, 2011 Article”); (10) statements made by

10

28


1

Bradley in a July 11, 2011 Press Release; and (11) statements made by Bradley during a July 20,

2

2011 Bloomberg News interview (the “July 20, 2011 Interview”).

3

The principal theme in Plaintiffs’ 122-page, 280-paragraph SAC is that Defendants

4

misrepresented HP’s intention to develop PCs and printers running on webOS software.

5

Plaintiffs allege there was no plan of record (“POR”) and “no resources [] available . . . for PCs

6

or printers, given the entire [WebOS division] team’s singular focus on the TouchPad.” (SAC ¶

7

10.) Defendants argue that these allegations are not entirely consistent with other allegations in

8

the SAC. For example, Plaintiffs allege that HP had “a very small group of HP employees (no

9

more than 10) in the San Diego [office] who were brainstorming ways of putting webOS on

10

printers.” (Id. ¶ 72.) And “the PC division (located in Fort Collins, Colorado) had a concepting

11

team that was exploring webOS-enabled PCs.” ( Id. ¶ 71.) But, according to Plaintiffs, these

12

“small exploratory teams . . . could not progress past the ‘concepting’ stage without a POR and

13

the involvement of the webOS group,” which was “told not to accept any calls from the PC or

14

printer groups, and to focus solely on the TouchPad.” ( Id. ¶ 11.)

15

Unlike their FAC, Plaintiffs’ SAC focuses more squarely on their argument that

16

Defendants misrepresented when webOS would be put on PCs and printers. This argument is

17

based primarily on following four alleged misstatements.

18

(1) Bradley’s statements at the February 9, 2011 “WebOS

19

Announcement” that “I’m excited to announce our plans to bring

20

WebOS to the HP device that has the biggest reach of all: the

21

personal computer. So across HP, we have phenomenal people

22

working hard to enhance our customers’ already familiar experience

23

with the PC to add a rich set of applications and services that only

24

WebOS offers, and as we introduce that WebOS to our millions of

25

PC customers later this year . . . . (Id. ¶ 140 (emphasis added).)

26

(2) Bradley’s statement at HP’s March 14, 2011 Summit that “[o]ur goal

27

with web OS and our unique opportunity is really to extend web OS

28

to the broadest range of products available . . . . With this in mind,

11


1

we’ll be extending the ecosystem beyond phones and tablets.

2

Development teams across HP are working to bring web OS and the

3

web OS experience to the Windows PCs. Next year , we’ll migrate

4

tens of millions of web connected printers into the ecosystem. . . .

5

In the figure [sic], across smart phones, TouchPads, PCs, printers,

6

we have the potential to deliver tens if not hundreds of millions of

7

web OS enabled devices annually into a huge installed base. ( Id. ¶

8

158 (emphasis added).)

9

(3) Apotheker’s statement at the March 14, 2011 Summit that

10

“[t]here will be a beta version for web OS running on a browser on

11

PCs available at the end of the year and you will see us putting web

12

OS on the (inaudible) technology on PCs, on Windows PCs I should

13

add, starting from that point onwards. And we hope to reach 100

14

million devices a year.” (Id. ¶ 162 (emphasis added).)

15

(4)

Apotheker’s statement during an interview at the June 2, 2011

16

Conference. (Id. ¶ 179.) During the interview, Apotheker and the

17

analyst discussed “when webOS would be on the Company’s PCs.”

18

(Id. )

19

[Analyst:] “Do you have a date for that? webOS on the

20

PC?”

21

[Apotheker:] “2012. I know there are 12 months in 2012, even in

22

Germany. And then we have — and we are going to put webOS also

23

on printers. So we can create the kind of a platform of about 100

24

million, 110 million devices a year .” (Id. (emphasis added).

25

Having identified and categorized the numerous misstatements alleged in the FAC, the

26

Court must consider whether any of them were knowingly false when made. But before

27

addressing the issues of falsity and scienter, the Court must first determine whether any of the

12

28


1

alleged misstatements are protected by the PSLRA’s safe-harbor or constitute non-actionable

2

puffery.

3

4

I 2. THE PSLRA SAFE HARBOR

5

6

The PSLRA “provides a safe harbor for: [1] identified forward-looking statements with

7

sufficient cautionary language; [2] immaterial statements; and [3] unidentified forward-looking

8

statements . . . lacking sufficient cautionary language where the plaintiff fails to prove actual

9

knowledge that the statement was false or misleading.” In re Cutera Sec. Litig. , 610 F.3d 1103,

10

1113 (9th Cir. 2010) (citing 15 U.S.C. § 78u-5(c)(1)). When forward-looking statements are

11

accompanied by meaningful cautionary language, a “defendant’s state of mind is irrelevant.” Id.

12

at 1112-13 (quoting Harris v. Ivax Corp. , 182 F.3d 799, 803 (11th Cir. 1999)).

13

In its August Order, the Court held that the following statements were protected by the

14

PSLRA’s safe harbor because they are forward-looking and accompanied by meaningful

15

cautionary language: (1) statements made during the February 22, 2011 Earnings Call; (2)

16

statements during the March 14, 2011 Summit; (3) statements made during the May 17, 2011

17

Earnings Call; and (4) statements in the June 8, 2011 Form 10-Q. The Court finds no reason to

18

change these rulings.

19

Plaintiffs argue the Court should reverse course because these and other “statements

20

touching on HP’s plans and intentions” regarding webOS are not forward-looking. According to

21

Plaintiffs, the statements “were inextricably intertwined with, and dependent upon, statements of

22

presently existing facts that grounded those plans and portrayed them as specific and feasible.”

23

(Opp’n, at 22:12-23:2.) Plaintiffs point to statements in which the speakers used present tense,

24

such as “We believe that we have a great strategy to execute towards our connectivity approach,

25

and we are very excited about our TouchPads coming out in particular in the summer.” (SAC ¶

26

170; Opp’n, at 20:4-6.) When it comes to the PSLRA’s safe harbor, tense is not conclusive. See

27

In re LeapFrog Enters., Inc. Sec. Litig. , 527 F. Supp. 2d 1033, 1046 (N.D. Cal. 2007). As the

28

Court has previously concluded, such statements concerning readiness for future events are

13


1

sufficiently forward-looking to be protected by the PSLRA’s safe harbor, particularly when

2

considering the context of the statements. See In re Wet Seal, Inc. Sec. Litig. , 518 F. Supp. 2d

3

1148, 1167-69 (C.D. Cal. 2007) (statement that the company was “on track to meet estimates

4

and goals” was forward-looking); In re Lockheed Martin Corp. Sec. Litig. , 272 F. Supp. 2d 944,

5

949 (C.D. Cal. 2003) (“[P]redictions of future events [do not] become actionable merely because

6

they happen to have some basis in present facts.”) The Court also is not persuaded to change its

7

conclusion that the statements were accompanied by sufficient cautionary language.

8

Defendants argue that, for reasons explained by the Court in its August Order, the PSLRA

9

also protects the statements in HP’s press releases on March 14, 2011 and July 11, 2011

10

(Declaration of Jennifer Bagosy, Dkt. No. 97, Exh. 1, 2). The Court agrees that these statements

11

are forward-looking and accompanied by sufficient cautionary language that they are protected

12

by the PSLRA’s safe harbor and cannot be used to establish Defendants’ liability under § 10(b)

13

or Rule 10b-5 of the Exchange Act.

14

15

I 3. PUFFERY

16

17

In the August Order, the Court analyzed whether several of Defendants’ alleged

18

misstatements constituted “immaterial, inactionable puffery” and therefore could not support

19

Plaintiffs’ securities fraud claims. “[V]ague, generalized assertions of corporate optimism or

20

statements of ‘mere puffing’ are not actionable material misrepresentations under federal

21

securities laws.” In re Impac Mortg. Holdings, Inc., Sec. Litig. , 554 F. Supp. 2d 1083, 1096

22

(C.D. Cal. 2008) (citing Glen Holly Ent., Inc. v. Tektronix, Inc. , 352 F.3d 367, 379 (9th Cir.

23

2003) (finding no liability under federal securities laws where the alleged misstatements “were

24

generalized, vague and unspecific assertions, constituting mere puffery upon which a reasonable

25

consumer could not rely”) (internal citations omitted)).

26

The “defining question is . . . whether the statement is so ‘exaggerated’ or ‘vague’ that no

27

reasonable investor would rely on it when considering the total mix of available information.”

28

In re Impac, 554 F. Supp. 2d at 1096 (quoting In re Splash Tech. Holdings, Inc., Sec. Litig. , 160

14


1

F. Supp. 2d 1059, 1076 (N.D. Cal. 2001)). Generally, “forward-looking or generalized

2

statements of optimism that are ‘not capable of objective verification’” constitute inactionable

3

puffery. In re Cornerstone Propane Partners, 355 F. Supp. 2d 1069, 1087-88 (N.D. Cal. 2005)

4

(quoting Grossman v. Novell, Inc. , 120 F.3d 1112, 1119 (10th Cir. 1997)).

5

In its August Order, the Court concluded that the following statements were puffery:

6

(1) Apotheker’s statement at the June 1, 2011 Interview that “[t]he one lesson I have learned

7

from this, and I’m driving my engineers crazy with this, is that we will not release a [TouchPad]

8

product that isn’t perfect”; (2) Apotheker’s statement at the June 2, 2011 Conference that

9

“webOS is ready for prime time”; (3) the statements in HP’s July 11, 2011 Press Release, that

10

HP “underscores [its] strategy to provide a seamless, secure, context-aware experience across

11

[its] product portfolio and to deliver innovation at unmatched scale” and will “draw[] on [its]

12

deep executive bench to position the right leaders in the right roles to accelerate the long-term

13

growth of webOS”; and (4) Apotheker’s statement in the July 6, 2011 Article that “[w]e’ve got

14

lots of capabilities that we have to bring to scale. We’ve just got to do it” (together, the “Puffing

15

Statements”). (SAC ¶¶ 177, 178, 181, 187, 189, 190.) But the Court rejected Defendants’

16

contention that statements about the timing for developing webOS PCs and printers were mere

17

puffery. (See, e.g. , id. ¶ 174 (Apotheker’s statements at the June 1, 2011 Conference that

18

“[w]e’ll put webOS on PCs. It will go on every PC that we’ll ship. . . . It will also be on every

19

printer we ship above $100. . . . Add printers and PC and TouchPad, we’re talking 100 to 110

20

million devices a year”).)

21

Defendants argue that the Court should stick with its decision that the Puffing Statements

22

identified in its August Order are not actionable. The Court agrees. The Court also reaffirms

23

that Defendants’ statements about the timing for developing webOS PCs and printers cannot be

24

dismissed as puffery.

25

Defendants also identify several other statements they argue constitute inactionable

26

puffery. (Motion, at 17:26-18:14.) The Court agrees that the following aspirational statements

27

made by Apotheker at the June 2011 Conference are too vague for a reasonable investor to rely

28

on them: statements (1) that Apotheker hopes HP “can disrupt the market” with WebOS; (2) that

15


1

“we are all about WebOS”; (3) that “[i]t’s about the webOS much more than about device A or

2

device B”; and (4) that “we are doing really well on the PSG side of the house [with] webOS.”

3

(SAC ¶¶ 181-82). But Defendants have not convinced the Court that Apotheker’s description of

4

WebOS as “end-to-end” or Bradley’s statements regarding the webOS family of devices and

5

connectivity are so vague or undefined that they constitute mere puffery. ( Id. ¶¶ 176, 192.)

6

7

I 4. FALSITY

8

9

Defendants argue that Plaintiffs fail to adequately allege that Defendants’ statements were

10

false when made. Because many of the misstatements alleged in the SAC are protected by the

11

PSLRA’s safe harbor or are inactionable puffery, only the following are potentially actionable:

12

(1) Bradley’s February 9, 2011 statements, and (2) some of Apotheker and Bradley’s June and

13

July 2011 statements.

14

“The PSLRA has exacting requirements for pleading ‘falsity.’” Metzler Inv., GMBH v.

15

Corinthian Colls., Inc. , 540 F.3d 1049, 1070 (9th Cir. 2008). A complaint must “specify each

16

statement alleged to have been misleading, the reason or reasons why the statement is

17

misleading, and, if an allegation regarding the statement or omission is made on information and

18

belief, the complaint shall state with particularity all facts on which that belief is formed.” Id.

19

(quoting 15 U.S.C. § 78u–4(b)(1)) (emphasis added).

20

“The stricter standard for pleading scienter [under the PSLRA] naturally results in a

21

stricter standard for pleading falsity, because falsity and scienter in private securities fraud cases

22

are generally strongly inferred from the same set of facts.” Daou, 411 F.3d at 1015 (internal

23

citations omitted). “A litany of alleged false statements, unaccompanied by the pleading of

24

specific facts indicating why those statements were false, does not meet this standard.” Metzler ,

25

540 F.3d at 1070; see also Falkowski , 309 F.3d 1123, 1133 (9th Cir. 2002) (“Although the

26

allegations here are voluminous, they do not rise to the level of specificity required under the

27

PSLRA.”).

28

16


1

Because many of Plaintiffs’ allegations come from accounts of confidential witnesses,

2

their “use in satisfying the PSLRA’s standard of particularity must be addressed” before the

3

Court turns to parties’ arguments concerning falsity. Daou, 411 F.3d at 1015-16.

4

5

4.1 Confidential Witnesses

6

7

Confidential witnesses “relied upon in a complaint should be described . . . with sufficient

8

particularity to support the probability that a person in the position occupied by the source would

9

possess the information alleged.” Id. at 1015-16 (internal citations omitted). To determine

10

whether a confidential witness is sufficiently reliable, courts look to “the level of detail provided

11

by the confidential sources, the corroborative nature of the other facts alleged (including from

12

other sources), the coherence and plausibility of the allegations, the number of sources, the

13

reliability of the sources, and similar indicia.” Zucco Partners, LLC v. Digimarc Corp. , 552

14

F.3d 981, 995 (9th Cir. 2009) (internal citations omitted); see also Daou, 411 F.3d at 1016

15

(holding that plaintiffs “sufficiently met the PSLRA’s requirements for confidential witnesses”

16

by (1) “describing [their] job description and responsibilities”; (2) “provid[ing] the witnesses’

17

exact title”; and (3) identifying “to which . . . executive the witness reported,” among other

18

things).

19

In the August Order, the Court concluded that Plaintiffs had described CW1, CW2, and

20

CW3 with sufficient particularity in the FAC. They have also done so in the SAC. The Court,

21

however, found that there was insufficient indicia of CW4’s reliability in the FAC. Plaintiffs

22

have rectified this deficiency by adding allegations about CW4's supervisors and job duties

23

(SAC ¶ 121), so it is now proper to consider CW4's statements. Plaintiffs’ SAC adds 13 more

24

confidential witnesses. Defendants do not dispute that Plaintiffs have described these additional

25

confidential witnesses with sufficient particularity, but instead contend that the confidential

26

witness’ statements fail to establish falsity and scienter. ( See Motion, at 23:4-19.) The Court

27

has reviewed Plaintiffs’ descriptions of the 13 new confidential witnesses and concludes that

28

they are sufficient to allow the Court to consider the confidential witness’ statements.

17


1

4.2 Whether Plaintiffs Adequately Allege that Bradley’s February 9, 2011

2

Statements Concerning the Timeframe for Putting WebOS on PCs and

3

Printers Were False When Made

4

5

As noted in Section 1, on February 9, 2011, Bradley stated:

6

We have a commitment to extend the WebOS footprint even further

7 as the year progresses , taking WebOS to other connected devices,

8

including printers. . . . [A]cross HP, we have phenomenal people

9

working hard to enhance our customers’ already familiar experience

10

with the PC to add a rich set of applications and services that only

11

WebOS offers, and as we introduce that WebOS to our millions of

12

PC customers later this year , we’ll clearly expand the reach for our

13

developers as well, and we’ll expand it exponentially.

14

(SAC ¶ 140 (emphasis added).) In the August Order, the Court concluded that Plaintiffs had

15

failed to adequately allege that Bradley’s February 2011 statements were false. Plaintiffs have

16

corrected these deficiencies in their SAC. In their FAC, CW1 and CW2 stated that Bradley’s

17

February 2011 statements were false because plans for developing webOS PCs and printers “had

18

not been discussed internally” and “the Company did not know if or when it would be able to put

19

webOS on PCs.” (FAC ¶¶ 64-66 (CW1); see also FAC ¶ 76 (CW2).) The Court found these

20

statements unpersuasive primarily because CW1's and CW2's statements were based on the

21

assumption that, if there had been discussions, they would have known. The allegation that

22

small teams in San Diego and Fort Collins had begun “concepting” discussions on WebOS-

23

based PCs and printers also undermined CW1's and CW2's assertions.

24

While the SAC drops CW2's statement on this subject, the SAC alleviates the problems

25

with CW1's statements by providing the reasons behind CW’s assertions. CW1 explains that

26

CW1 would have known about any WebOS-enabled device that had progressed beyond

27

“concepting” because “ no other team was ‘cutting’ codes for webOS during the Class Period.”

28

(SAC ¶ 68 (emphasis in original).) Other confidential witnesses corroborate CW1's assertion

18


1

that only the WebOS team had access to the WebOS code. For example, CW10, a former

2

Director of Product Delivery Engineering who held two different positions within the WebOS

3

division, stated that “the webOS division maintained only one set of source codes and one

4

operating system for all personnel.” ( Id. ¶ 69.) The purpose of keeping the source code within

5

the WebOS division, according to CW10, was “provid[ing] a ‘coherent story’ for all the

6

developers [across divisions within HP], such that the webOS division could make any necessary

7

adaptations for a particular product.” ( Id. ; see also id. ¶ 73 (CW9, WebOS division employee:

8

“anything related to webOS ‘stayed within the [WebOS division] building’”), ¶ 81 (CW13,

9

employee within IPG: “IPG required the webOS division to provide them with a version of

10

webOS [for printers] because IPG could not have done that without the webOS team’s

11

involvement”). CW1 also describes personal interactions with the Fort Collins team that led

12

CW1 to believe that they were still in the concepting phrase. ( Id. ¶ 71 (describing CW1's

13

attendance at “staff meeting in late winter/early spring 2011 where the PC division presented

14

their concept” and CW1's understanding that the PC division should only be given WebOS

15

codes if they move beyond concepting).)

16

Besides adding more explanation for CW1's opinions, the SAC provides a more solid

17

basis for Plaintiffs’ theory that HP could not have released WebOS PCs and printers by the end

18

of 2011 because these products had never progressed beyond “concepting,” did not have a POR,

19

and did not have sufficient resources to make up that gap. Confidential witnesses explain that

20

“concepting” is the earliest stage of development. ( See Id. ¶¶ 62 (CW1), 64 (CW6).) After the

21

“concepting team” develops the product concept, presents the idea to a high-level manager, and

22

gets approval, that manager asks the Engineering Project Manager to create the official POR,

23

which is sent to the product team to implement. ( Id. ¶¶ 62 (CW1), 64 (CW6).) Confidential

24

witnesses describe the POR as “a commitment to build something; what we intended to sell in

25

stores,” (Id. ¶ 62 (CW1)), the “operational and ‘architectural document’” containing “a timeline

26

as well as budget details and schedules,” (Id. ¶ 63 (CW5)), and “an actual plan of

27

‘implementation’ that would include ‘specs, actual people,’ requirements and specific dates” ( Id.

28

¶67 (CW9)). (See also Id. ¶ 65 (CW 7).)

19


1

As noted, CW1 believed that neither the WebOS division nor other HP divisions,

2

including those in San Diego and Fort Collins, had progressed beyond concepting to obtain a

3

POR for WebOS PCs or printers because this would have required obtaining WebOS codes from

4

the WebOS division. CW1’s belief was also based on CW1's attendance at a presentation by the

5

Fort Collins team that showed only concepting work. ( Id. ¶¶ 68, 71.) Other confidential

6

witnesses from the WebOS division and other departments corroborated CW1's belief that the

7

Fort Collins and San Diego teams were just concepting, that there was no POR for WebOS PCs

8

or printers, and that development was at a very early stage. ( Id. ¶ 70 (CW10, WebOS division),

9

¶ 73 (CW9, WebOS division), 75 (CW12, WebOS division), ¶ 82 (CW6, WebOS division

10

employee who interacted with other HP divisions), ¶ 85 (CW14, regional solution specialist

11

involved in promotion of webOS products), ¶ 86 (CW7, WebOS division), ¶ 87 (CW8, supply

12

chain operator responsible for repair services for printers), ¶ 99 (CW15, WebOS division).)

13

Significantly, the SAC also adds a statement from a former Product Manager (CW13) working

14

in the printer group in San Diego, who described the stage of development for WebOS-enabled

15

printers as concepting. ( Id. ¶¶ 79 (“[T]he printer group had a webOS printer concept and

16

discussions within their division, but that there was ‘never a commitment’ to support the concept

17

from the webOS division.”).)

18

Plaintiffs adequately connect their allegations that WebOS PCs and printers were at the

19

“concepting stage” to their assertion that Bradley’s February 2011 statements were false because

20

HP could not produce these products by the end of 2011. In the SAC, CW10, the Director of

21

Product Delivery Engineering in the WebOS division, stated that “printers (with webOS) . . .

22

would take 2-3 years to produce.” (Id. ¶ 89 (emphasis in original).) Defendants argue this

23

statement is unreliable because in the FAC CW1 stated that “it generally takes at least a year

24

from concept to delivery.” (FAC ¶ 70.) While these statements are arguably inconsistent, it is

25

equally plausible to view CW1's statement as describing a general baseline for development and

26

CW10's statement as a more specific estimate of the development time needed for WebOS

27

printers, which would have to “be adapted to a different form factor and input modality.” (SAC

28

¶ 90.) Although CW10 doesn’t directly estimate the timeline for developing WebOS-enabled

20


1

PCs, statements by confidential witnesses support Plaintiffs’ contention that Bradley’s February

2

2011 statement regarding WebOS PCs was also misleading, given the very early stage of

3

development for such products and the WebOS division’s focus on the TouchPad. For example,

4

CW15, Director of Engineering, webOS System & UI Platform, stated that the WebOS division

5

stopped supporting HP printer and PC divisions “around August 2010" because “all ‘energy’ had

6

to be spent on the TouchPad.” (Id. ¶ 100.) Other confidential witnesses corroborate CW15's

7

assertion that resources were limited due to the focus on getting ready for the TouchPad launch,

8

although it is unclear from their statements whether this focus shift occurred before or after

9

Bradley’s February 2011 statements. ( See, e.g. , ¶¶ 96 (CW12), ¶ 97 (CW9), ¶ 103 (CW5), ¶ 104

10

(CW6), ¶ 105 (CW17).)

11

Defendants argue that the confidential witnesses’ assertions about the early development

12

phase of WebOS PCs and printers are too speculative, particularly concerning efforts that might

13

have been happening in different HP divisions. “Tellingly, none of the CWs – not even CW, a

14

printer division employee, or CW6, a PC division employee – states that the PC or printer

15

divisions did not have PORs for webOS PCs or printers.” (Motion, at 24:22-24 (emphasis

16

omitted); see also Motion, at 25:5-8 (referring to confidential witness’ statements about WebOS

17

PCs and printers being in the “concepting” stage as “bald, conclusory” and “vague and

18

unsupported by a basis for personal knowledge”).) The Court agrees that Plaintiffs’ allegations

19

would be stronger if confidential witnesses could definitively say that no POR existed across all

20

of HP’s many divisions and teams, but a witness’ knowledge is understandably limited to his or

21

her own work experiences. Here, as the Court has explained, Plaintiffs have provided an

22

adequate basis for the confidential witness’ conclusion about the development stage of WebOS

23

PCs and printers.

24

Defendants also opine that it is “illogical” to assume that other HP divisions, which were

25

experienced in PC and printer development, would not be working on WebOS PCs and printers.

26

(See Reply at 17:9-18:1). Plaintiffs allege that it is “implausible” to assume that HP would

27

“farm out webOS development to groups that had no prior experience with the operating

28

system” after spending billions of dollars to acquire Palm and hiring its engineers. (Opp’n at

21


1

38:23-24.) On their face, both theories are plausible, but at this stage, the Court is evaluating the

2

plausibility of Plaintiffs’ allegations, and Plaintiffs’ explanation adequately demonstrates the

3

plausibility of inferring that there was no POR for WebOS PCs and printers and that these

4

products were merely in the concepting stage.

5

Aside from the statements of their confidential witnesses, Plaintiffs support falsity with

6

an internal business plan called “Plan V2–Palm GBY FY 11 Operational Plan” (the “V2").

7

(SAC ¶ 83.) CW1 states that “the V2 covered the entire webOS division” but “there was

8

nothing in the V2 for 2011 or 2012 for printers or PCs.” ( Id. ¶ 84.) It is unclear when the V2

9

was created, so it may not have an impact on the falsity of Bradley’s February 2011 statements.

10

And, as Defendants point out, “Plaintiffs [do not] explain why a Palm GBU plan that included

11

‘financial analytics and projections’ would have included revenue for products in development

12

by other HP divisions,” which might be developing WebOS PCs and printers. (Opp’n at 26:5-7

13

(emphasis omitted).) This gives minimal support for Plaintiffs’ falsity allegations.

14

Overall, Plaintiffs’ improved allegations regarding the early development phase of

15

WebOS PCs and printers, the inability of other divisions to develop WebOS PCs and printers

16

without code from the WebOS team, and related allegations are sufficient for Plaintiffs to allege

17

that Bradley’s February 2011 statements were misleading.

18

19

4.3 Whether Plaintiffs Adequately Allege that Apotheker’s June 2, 2011

20

Statements Concerning the Timeframe for Putting WebOS on PCs and

21

Printers Were False When Made

22

23

As noted in Section 1, the SAC alleges that on June 2, 2011 Apotheker gave an interview

24

during the Bernstein Conference. (SAC ¶ 179.) During the interview, Apotheker and the

25

analyst discussed “when webOS would be on the Company’s PCs.” (Id. )

26

[Analyst:] Do you have a date for that? webOS on the

27

PC?

28

22


1

[Apotheker:] 2012. I know there are 12 months in 2012, even in

2

Germany. And then we have — and we are going to put webOS also

3

on printers. So we can create the kind of a platform of about 100

4

million, 110 million devices a year.

5

(Id. (emphasis in original) (the “June 2011 Conference” statement). The Court finds that, at this

6

pleading stage, Plaintiffs have adequately alleged the falsity of this statement.

7

The falsity of this statement is supported by many of the same allegations that support the

8

falsity of Bradley’s February 2011 Statement. For example, the numerous confidential witness

9

statements regarding the very early stage of development for WebOS PCs and printers also

10

indicate the falsity of Apotheker’s promise to develop these products by 2012. In one sense,

11

Plaintiffs have a stronger case that the June 2011 Conference statement was false than that the

12

February 2011 was false. The June 2011 Conference statement was made barely two months

13

before HP announced that it was scrapping the whole WebOS venture. This temporal proximity

14

makes it less likely that, at the time Apotheker made this promise, HP was able to fulfill it. See

15

In re Stratosphere Corp. Sec. Litig. , 1 F. Supp. 2d 1096, 1112 (D. Nev. 1998) (“The shortness of

16

time between later revealed truth and prior statements can be circumstantial evidence that the

17

optimistic statements were false or misleading when made.”). But, in another sense, Plaintiffs

18

have a weaker case for the falsity of the June 2011 Conference Statement than the February 2011

19

statements because the February 2011 Statement promised results within a shorter timeframe.

20

For the reasons described in this section and many of the reasons described in Section 4.2,

21

the Court finds that Plaintiffs have adequately alleged that Apotheker’s statement at the June

22

2011 Conference was false.

23

24

25

26

27

28

23


1

4.4 Whether Plaintiffs Adequately Allege that Bradley and Apotheker’s “Late

2

Class Period” Statements Concerning HP’s Commitment to Developing

3

WebOS-based PCs and Printers

4

5

Plaintiffs’ allegations that Bradley and Apotheker misrepresented their commitment to

6 webOS-based PCs and printers is not limited to the timeframes Bradley and Apotheker gave.

7

Plaintiffs also attack Bradley and Apotheker’s “late class” statements during June and July 2011

8 relating the quantity of webOS PCs and printers they planned to produce and HP’s general

9 readiness and commitment to WebOS PCs and printers. For example, this theme is reflected in

10

the following statements by Apotheker and Bradley in June and July 2011:

11

(1) “We’ll put webOS on PCs. It will go on every PC that we’ll ship.

12 . . . Add printers and PC and TouchPad, we’re talking 100 to 110

13 million devices a year” (Apotheker, interviewed June 1, 2011 at the

14

All Things Digital D9 Conference) (SAC ¶ 174 (emphasis omitted));

15

(2) “I am happy to reconfirm that webOS will be available on PCs, on

16

top of Windows, which creates a whole new market dynamic for

17 webOS. . . . So we can create the kind of a platform of about 100

18 million, 110 million devices a year” (Apotheker, at the “June 2011

19

Conference”) (Id. ¶ 178 (emphasis omitted)); and

20

(3) “[W]e’ve talked about, very publicly, our intention to enable all of

21 our PC users to access their WebOS environment, their applications

22 on their PCs, and we’re the largest PC manufacturer in the world,

23 and we know bringing that volume to our developers will further

24

build out our ecosystem.” (Bradley, quoted in a July 20, 2011

25

Bloomberg News article) (Id. ¶ 192 (emphasis omitted).

26

In these statements, Apotheker and Bradley specifically reaffirmed HP’s commitment to

27 not only put WebOS on PCs and printers, but also to integrate them into a cohesive WebOS

28 platform and produce a large volume of such devices—100 to 110 million annually. ( Id. ¶¶ 174,

24


1 178, 192.) For many of the reasons stated in Sections 4.2 and 4.3, Plaintiffs have adequately

2 alleged that these statements were false when made. As noted in Section 4.2, the temporal

3 proximity between the August 18, 2011 decision to scrap WebOS and the June and July

4 statements, made only 4-11 weeks before HP discontinued WebOS development, also support

5

Plaintiffs’ falsity allegations.

6

7

4.5 Conclusion

8

9

The Court finds that Plaintiffs have adequately alleged the falsity of the statements by

10

Bradley in February 2011, by Apotheker at the June 2011 Conference, by Apotheker during the

11

June 2011 Interview, and by Bradley in the July 2011 Article, to the extent that these statements

12 are not inactionable puffery.

13

14

I 5. SCIENTER

15

16

In their SAC, Plaintiffs’ new falsity allegations overcame the deficiencies the Court

17

identified in the FAC. The same is true of Plaintiffs’ scienter allegations, but only for the

18 remaining June and July statements examined holistically. Plaintiffs’ scienter allegations for the

19

March statements are still inadequate to state a claim under the PSLRA’s heightened pleading

20 standards.

21

Under the PSLRA, a securities fraud complaint “must raise a ‘strong inference’ of

22 scienter – i.e., a strong inference that the defendant acted with an intent to deceive, manipulate,

23 or defraud.” Metzler , 540 F.3d at 1061 (quoting 15 U.S.C. § 78u-4(b)(2)); see also Matrixx

24

Initiatives, Inc. v. Siracusano , 131 S. Ct. 1309, 1324 (2011) (To plead scienter under the

25

PSLRA, “a plaintiff must ‘state with particularity facts giving rise to a strong inference that the

26

defendant acted with the required state of mind.’”) (quoting 15 U.S.C. § 78u-4(b)(2)(A))

27

(emphasis added)).

28

25


1

“[I]n determining whether the pleaded facts give rise to a ‘strong’ inference of scienter,

2

‘the court must take into account plausible opposing inferences,” including inferences

3

“unfavorable to the plaintiffs.” Metzler , 540 F.3d at 1061, 1066 n.10 (quoting Tellabs, Inc. v.

4

Makor Issues & Rights, Ltd. , 551 U.S. 308, 310 (2007)). “A complaint adequately pleads

5 scienter under the PSLRA ‘only if a reasonable person would deem the inference of scienter

6 cogent and at least as compelling as any opposing inference one could draw from the facts

7 alleged.” Matrixx , 131 S. Ct. at 1324 (citations omitted). But “[t]he inference that the defendant

8 acted with scienter need not be irrefutable, i.e. , of the ‘smoking-gun’ genre, or even the ‘most

9 plausible of competing inferences.’” Tellabs, 551 U.S. at 324 (citations omitted).

10

In pleading scienter, a securities fraud plaintiff “must ‘allege that the defendants made

11

false or misleading statements either intentionally or with deliberate recklessness.’” Siracusano

12 v. Matrixx Initiatives, Inc. , 585 F.3d 1167, 1180 (9th Cir. 2009), aff’d sub nom Matrixx

13

Initiatives, Inc. v. Siracusano , 131 S. Ct. 1309 (2011) (quoting Zucco , 552 F.3d at 991); see also

14

Matrixx , 131 S. Ct. at 1312-13 (“This Court assumes, without deciding, that the scienter

15 requirement may be satisfied by a showing of deliberate recklessness.”). Reckless conduct

16 satisfies the scienter standard “to the extent it reflects some degree of intentional or conscious

17 misconduct.” South Ferry LP, No. 2 v. Killinger , 542 F.3d 776, 782 (9th Cir. 2008) (quoting

18

Silicon Graphics, 183 F.3d at 977). In the scienter context, the Ninth Circuit defines

19 recklessness as

20 a highly unreasonable omission, involving not merely simple, or

21 even inexcusable negligence, but an extreme departure from the

22 standards of ordinary care, and which presents a danger of

23 misleading buyers or sellers that is either known to the defendant or

24

is so obvious that the actor must have been aware of it.

25

Siracusano, 585 F.3d at 1180 (quoting Silicon Graphics, 183 F.3d at 976).

26

On a motion to dismiss, courts “must first ‘determine whether any of the plaintiff’s

27 allegations, standing alone, are sufficient to create a strong inference of scienter.’” Siracusano,

28

585 F.3d at 1180 (quoting Zucco , 552 F.3d at 992). If they do not, the court then conducts a

26


1

holistic review of the complaint’s allegations “to determine whether the insufficient allegations

2 combine to create a strong inference of intentional conduct or deliberate recklessness.” Id.

3

(quoting Zucco , 552 F.3d at 992); accord Matrixx, 131 S. Ct. at 1324 (“In making this

4

determination, the court must review ‘all the allegations holistically.’”) (quoting Tellabs, 551

5

U.S. at 326).

6

Plaintiffs’ allegations in the SAC that Defendants’ misstatements were intentional or

7

deliberately reckless are similar to those made in the FAC: (1) Defendants can be inferred to

8

have known their statements were false because they related to “core operations” and because

9

Defendants were “hands on” managers; (2) the “temporal proximity” between the alleged

10 misstatements and HP’s decision to discontinue webOS development; (3) the magnitude of HP’s

11 webOS write-downs; (4) Apotheker’s termination one month after HP’s decision to discontinue

12 webOS development; and (5) statements by confidential witnesses that WebOS PCs and printers

13

had not progressed beyond the “concepting” stage. (Opp’n, at 39:19-50:11.) The Court

14 considers whether any of these allegations, standing alone, are sufficient to create a strong

15

inference of scienter before examining them holistically.

16

17

5.1 Whether Plaintiffs’ Allegations Concerning the Core Operations Inference

18

Are Sufficient to Establish Scienter

19

20

Plaintiffs first argue that scienter should be inferred because “given the significance of

21 webOS to HP’s PC and printer business . . . it would be patently ‘absurd to suggest’ that the

22

Company’s President and CEO [Apotheker] and Executive Vice President of PSG [Bradley], the

23

division that included Palm and webOS operations, did not know or did not recklessly disregard

24

the truth about when webOS realistically would appear on PCs and printers.” (Opp’n at 42:18-

25

22.) This is Plaintiffs’ strongest argument for inferring scienter, but it not sufficient, standing

26 alone, to satisfy the PSLRA.

27

As the Ninth Circuit explained in South Ferry, 542 F.3d at 785, “[a]llegations regarding

28 management’s role in a corporate structure” and allegations concerning “the importance of the

27


1 corporate information about which management made false or misleading statements” may raise

2 an inference of scienter “when made in conjunction with detailed and specific allegations about

3 management’s exposure to [such] information.” Id. (emphasis added) . The allegations may

4 also satisfy the PSLRA “in rare circumstances where the nature of the relevant fact is of such

5 prominence that it would be ‘absurd’ to suggest that management was without knowledge of the

6 matter.” South Ferry, 542 F.3d at 786; Zucco Partners, 552 F.3d at 1000 (quoting South Ferry).

7

In the August Order, the Court rejected a similar argument by Plaintiffs that Defendants

8 must have known that their statements concerning HP’s commitment to webOS were false

9

because HP’s PC and printing operations were core to the company’s business and Defendants

10

had touted the importance of WebOS. The Court stated: “[I]t does not automatically follow

11

from the ‘core’ nature of HP’s PC and printer businesses or the anticipated volume of webOS

12 sales that each Individual Defendant was immediately aware of developments in HP’s webOS

13 strategy.” Gammel , 2012 WL 5945089, at *19. Plaintiffs have still not presented any direct

14 allegations that Apotheker or Bradley knew or were informed that WebOS PCs and printers were

15 still in the “concepting stage,” that there was no POR for WebOS PCs and printers, or other facts

16

that would have made Apotheker and Bradley aware of the falsity of the alleged misstatements.

17

For example, CW1 states that “[l]eading up to the February 9 Event, CW1 was meeting with

18

Bradley twice a day in preparation to showcase the TouchPad, the Pre3 and the Veer,” but

19

Plaintiffs don’t connect the dots between these conversations regarding the TouchPad, Pre3, and

20

Veer and development of WebOS PCs and printers. (SAC ¶¶ 114, 237.) CW3 and CW4 say

21

that Apotheker and Bradley “held regular Sunday meetings during the Class Period to discuss

22

the webOS product line” (Id. ¶ 239), but they don’t give any “detailed and specific allegations

23 about management’s exposure to information” at these meetings, which could, for example, have

24

been focused on the TouchPad rather than the WebOS PCs and printers. South Ferry, 542 F.3d

25 at 785. Other confidential witnesses give vague third-hand information about what Bradley or

26

Apotheker knew. (See, e.g. , id. ¶ 237 (“[Jon] Rubinstein [the former Palm CEO who joined HP

27 after Palm’s acquisition] notified Bradley that the webOS division would no longer support the

28

28


1

PC and printer divisions but would focus only on the TouchPad”); ¶ 98 (concluding that

2

“Apotheker and Bradley would have received the roadmap” for webOS products).)

3

Plaintiffs also contend that Apotheker knew WebOS PCs and printers would not arrive

4 under his timeline because Plan V2, which “provided the product roadmap, financial analytics

5 and projections for each planned Palm GBU product, including expected release dates” did not

6 project revenue for WebOS PCs and printers for 2011 or the entirety of 2012. (SAC ¶ 83.)

7

CW1 states that he knew Apotheker reviewed the Plan V2 and referenced it during weekend

8 meetings because his boss, the senior vice president of WebOS, had told him so. ( Id. )

9

Defendants point out that CW1's knowledge about Apotheker’s awareness of the Plan V2 is

10

indirect and there is a possibility that revenue projections existed elsewhere within HP. Still, the

11

Plan V2 allegations provide some support and corroboration for the allegations of Plaintiffs’

12 confidential witnesses.

13

The “core operations” inference can also be supported by allegations that defendants were

14

“hands-on” managers. See In re Verifone Holdings, Inc. Sec. Litig. , 704 F.3d 694, 710 (9th Cir.

15

Dec. 21, 2012) (concluding that the fact that defendants were “hands-on managers with respect

16

to operational details and financial statements” supported scienter); In re Diamond Foods, Inc.

17

Sec. Litig. , No. C 11-05386 WHA, 2012 WL 6000923, at *11 (N.D. Cal. Nov. 30, 2012)

18

(mentioning CFO’s “hands-on approach” in scienter analysis). Plaintiffs claim Bradley and

19 especially Apotheker were “deeply engaged in the daily management and progress of webOS.”

20

(Opp’n, at 43:11-12.) For example, on August 18, 2011, Apotheker himself stated in a

21 conference call that “we have been tracking closely the progress of webOS and analyzing its

22 operational performance.” ( Id. ¶ 241.) In June 2011, he stated that he was “driving [his]

23 engineers crazy with” his insistence that HP would “not release a [WebOS] product that isn’t

24 perfect.” (Id. ¶ 239.) As noted, Plaintiffs also allege that Apotheker and Bradley attended

25 regular meetings concerning WebOS, although the content of these meetings is unclear. ( Id. ¶

26

239.) These allegations all support Plaintiffs theory that Apotheker and Bradley were personally

27

involved with WebOS development.

28

29


1

Plaintiffs’ argument for applying the core operations inference also finds some additional

2 support in Plaintiffs’ improved falsity allegations, which provide more explanation and context

3

for their concepting stage theory. This is because Plaintiffs’ bolstered allegations that the early

4 stage of development was widely known among WebOS division employees increase the

5

likelihood that a manager working with those employees would also be aware that these products

6 were in very early stages of development.

7

While such allegations provide considerably more support for applying the core

8 operations inference than with the FAC, Plaintiffs’ allegations still fall short of showing either

9

“detailed and specific allegations about management’s exposure to information” or facts “of

10 such prominence that it would be ‘absurd’ to suggest management was without knowledge of the

11 matter.” South Ferry, 542 F.3d at 786; Zucco Partners, 552 F.3d at 1000. Thus, the core

12 operations inference, standing alone, is insufficient to allege scienter under the PSLRA.

13

14

5.2 Whether Plaintiffs’ Allegations Concerning the Temporal Proximity of

15

Defendants’ Alleged Misstatements to the Discontinuation of WebOS Are

16

Sufficient to Establish Scienter

17

18

Plaintiffs next argue that the temporal proximity between Defendants’ June and July

19 statements and their decision to discontinue webOS development supports a strong inference of

20 scienter for these late-class statements only. Plaintiffs made this same argument while defending

21

their FAC. The Court found that, while temporal proximity could “bolster” the inference that

22

Defendants’ June and July 2011 statements were intentional, proximity alone was insufficient to

23 establish that Defendants knowingly lied. See Berson v. Applied Signal Tech., Inc. , 527 F.3d

24

982, 988 n.5 (9th Cir. 2008); Ronconi v. Larkin , 253 F.3d 423, 437 (9th Cir. 2001). The

25 allegations in Plaintiffs’ SAC more strongly support an inference of scienter than the allegations

26

in the FAC because the SAC provides a more solid foundation for Plaintiffs’ concepting phase

27

theory, as described in detail in Sections 4.2 and 5.1.

28

30


1

But temporal proximity, standing alone, is still insufficient to establish the required

2

I scienter.

3

4

5.3 Whether Plaintiffs’ Allegations Concerning the Magnitude of HP’s Write-

5

Downs Are Sufficient to Establish Scienter

6

7

Plaintiffs next argue that “[t]he magnitude of HP’s webOS write-downs underscores the

8

importance of webOS to the Company’s operations” and thus supports a strong inference of

9 scienter, “in conjunction with other allegations.” (SAC ¶ 234; Opp’n, at 45:3-5.) Plaintiffs

10 made the same argument while defending their FAC. In the August Order, the Court

11 acknowledged that Courts can consider write-downs in the scienter analysis, but stated that

12 write-downs generally play a minor role. See In re Terayon Comm. Sys. , 2002 WL 989480

13

(N.D. Cal. Mar. 29, 2002) (finding that a 94% write-down in intangible assets was sufficient to

14 establish scienter when combined with insider trading that “could hardly be more suspicious”);

15

Freudenberg v. E*Trade Fin., 712 F. Supp. 2d 170 (S.D. New York 2010) (holding that a large

16 write-off combined with insider stock sales, among other things, was sufficient to establish

17 scienter).

18

Accordingly, the Court again finds that Plaintiffs’ allegations concerning the magnitude

19 of HP’s write-downs, standing alone, are insufficient to establish scienter.

20

21

5.4 Whether Plaintiffs’ Allegations Concerning the Timing of Apotheker’s

22

Termination Are Sufficient to Establish Scienter

23

24

Plaintiffs next argue that Apotheker’s termination, coming just one month after HP

25

discontinued webOS operations, supports a strong inference of scienter. Plaintiffs made the

26 same argument while defending their FAC. In the August Order, the Court rejected this

27 argument, instead siding with other courts that have found that “notable departures are not in

28 and of themselves evidence of scienter.” Gammel, 2012 WL 5945089, at *21 (citing In re

31


1 Cornerstone Propane Partners, L.P., 355 F. Supp. 2d 1069, 1093 (N.D. Cal. 2005)).

2

Accordingly, the Court again finds that Apotheker’s termination does not support scienter.

3

4

5.5 Whether Plaintiffs’ Allegations by Confidential Witness Are Sufficient to

5

Establish Scienter

6

7

Plaintiffs next argue that their allegations by new confidential witnesses support a strong

8

inference of scienter. This argument is largely a repetition of Plaintiffs’ claims that Defendants’

9 statements were false based on the early stage of development for WebOS-based PCs and

10 printers. As the Court noted in Section 5.1, describing the new witness’ effect on the core

11 operations inference, these new allegations provide more circumstantial support for scienter than

12

Plaintiffs had in their FAC. But the usefulness of these statements is also somewhat limited by

13

their lack of specificity and directness when it comes to Apotheker’s and Bradley’s knowledge

14 about WebOS PCs and printers. Thus, the allegations of the confidential witnesses do not,

15 standing alone, support a strong inference of scienter.

16

17

5.6 Whether Plaintiffs’ Allegations as a Whole Are Sufficient to Establish

18

Scienter

19

20

Having decided that none of Plaintiffs’ allegations, in isolation, are sufficient to raise a

21 strong inference of scienter, the Court now reviews “all the allegations holistically,” Matrixx ,

22

131 S. Ct. at 1324, “to determine whether the insufficient allegations combine to create a strong

23

inference of intentional conduct or deliberate recklessness.” Siracusano, 585 F.3d at 1180

24

(quoting Zucco , 552 F.3d at 992). While it is a close question, the Court finds that the

25 allegations concerning the June and July statements, viewed holistically, raise a sufficiently

26

“strong inference” of scienter to satisfy the pleading requirements of the PSLRA. 15 U.S.C. §

27

78u-4(b)(2). The March statements, on the other hand, still do not satisfy this standard.

28

32


1

As noted, Plaintiffs’ improved SAC provides considerably more allegations suggesting

2

that Apotheker and Bradley knew their June and July statements regarding WebOS PCs and

3 printers were false or deliberately reckless. Scienter is also supported by allegations related to

4

the core operations inference, the hands-on management style of Apotheker and Bradley, and the

5

temporal proximity between the June and July statements and HP’s decision to discontinue

6

WebOS development. Together, these allegations persuade the Court that the inference of

7 scienter is “at least as compelling as any opposing inference one could draw from the facts

8 alleged.” Matrixx , 131 S. Ct. at 1324 (citations omitted).

9

According to Defendants, the more likely inference is that Defendants genuinely believed

10

that HP would produce WebOS-based PCs and printers and “that webOS was nothing but a

11

business strategy that ultimately failed” after the unsuccessful TouchPad launch tainted plans for

12

future WebOS products. (Motion, at 48:25-26.) Defendants argue that Plaintiffs have offered

13 no plausible motive for Apotheker and Bradley to mislead investors, in contrast to other

14 securities fraud cases where defendants personally benefitted through insider trading. While it is

15

true that Plaintiffs have not alleged Apotheker and Bradley benefitted personally by making the

16 alleged misstatements, motive is not required to adequately plead scienter, as Defendants

17 acknowledge. See In re Wet Seal, Inc., Sec. Litig. , 518 F. Supp. 2d at 1178-79. In response,

18

Plaintiffs posit that “a senior corporate executive might recklessly misrepresent the Company’s

19 operational affairs to the public while simultaneously hoping for a miraculous turnaround that

20 would eventually cause reality to catch up to their false statements.” (Opp’n, at 50:2-5.) This

21

theory provides much less support for scienter than allegations in other cases that defendants

22 engaged in inside trading or sought other personal benefits. But the theory is also consistent

23 with the themes Plaintiffs have laboriously articulated throughout their 122-page FAC. It is far

24

from implausible that a corporate executive who had spent months building excitement and

25 momentum around important, new technology products might recklessly misrepresent the

26

inability to deliver on those promises.

27

The Court notes that, although the Court determined that it was not appropriate in this

28 case to consider Items 7 and 15, those items would not have changed the decision here because

33


1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

motive is not required and Plaintiffs’ accumulated allegations adequately support scienter. Thus,

Plaintiffs’ allegations, viewed holistically, support a “strong inference that the [Defendants]

acted with the required state of mind” for the June and July statements, but not for the March

statements. Mafrixx , 131 S. Ct. at 1324 (quoting 15 U.S.C. § 78u-4(b)(2)(A)).

I 6. CONCLUSION

The Court has considered the parties’ remaining arguments and finds them unpersuasive.

Plaintiffs’ § 10(a) and Rule 10b-5 claim survives as to the June and July statements, to the extent

described in this Order, but fails as to the other statements. Because Plaintiffs’ § 20(a) claim is

derivative of its § 10(b) and Rule 10b-5 claim, the § 20(a) claim also survives only for the June

and July statements. See Zucco , 552 F.3d at 990 (“Section 20(a) claims may be dismissed

summarily . . . if a plaintiff fails to adequately plead a primary violation of section 10(b).”)

I DISPOSITION

Defendants’ Motion is GRANTED in part and DENIED in part. Plaintiffs may file an

amended pleading within 30 days of this Order if they so choose.

IT IS SO ORDERED.

DATED: May 8, 2013

_______________________________ Andrew J. Guilford

United States District Judge

34

2 UNITED STATES DISTRICT COURT FOR THE...

Documents

Transcript of 2 UNITED STATES DISTRICT COURT FOR THE...