565 F.3d 228 (5th Cir. 2009), 07-30106, Lormand v. US Unwired, Inc.

Docket Nº:07-30106.
Citation:565 F.3d 228
Party Name:Billy LORMAND, Plaintiff-Appellant, v. US UNWIRED, INC.; William L. Henning, Jr.; Robert W. Piper; Jerry E. Vaughn, Defendants-Appellees.
Case Date:April 09, 2009
Court:United States Courts of Appeals, Court of Appeals for the Fifth Circuit
 
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565 F.3d 228 (5th Cir. 2009)

Billy LORMAND, Plaintiff-Appellant,

v.

US UNWIRED, INC.; William L. Henning, Jr.; Robert W. Piper; Jerry E. Vaughn, Defendants-Appellees.

No. 07-30106.

United States Court of Appeals, Fifth Circuit.

April 9, 2009

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Sanford Svetcov (argued), Coughlin, Stoia, Geller, Rudman & Robbins, L.L.P., San Francisco, CA, Douglas Wilens, Coughlin, Stoia, Geller Rudman & Robbins, L.L.P., Boca Raton, FL, for Lormand.

James Richard Swanson, Lance Christian McCardle LorettaGallaher Mince, Fishman, Haygood, Phelps, Walmsley, Willis & Swanson, New Orleans, LA, for US Unwired, Inc., Henning, Piper and Vaughn.

N. Scott Fletcher, Michael C. Holmes (argued), Vinson & Elkins, Houston, TX, William Raley Alford, III, Stanley, Flanagan & Reuter, Thomas More Flanagan, Flanagan Partners, LLP, New Orleans, LA, for Henning, Piper and Vaughn.

Appeal from the United States District Court for the Eastern District of Louisiana.

Before BARKSDALE, DENNIS and SOUTHWICK, Circuit Judges.

DENNIS, Circuit Judge:

The plaintiff brings this putative class action on behalf of persons who allegedly (1) bought the common stock of US Unwired, Inc. (" US Unwired" or " the Company" ) between May 23, 2000 and August 13, 2002, at prices falsely inflated by the defendants' material misrepresentations that violated Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934 and Rule 10b-5; and (2) suffered economic loss when the true facts about the company's operations and programs were publicly disclosed and its stock price declined as a result. The defendants are US Unwired and a number of its executive officers and directors.1 The plaintiff alleges two main fraud claims: (a) a claim regarding defendants' implementation of subprime subscriber programs; and (b) a claim regarding defendants' drastic alteration of the

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relationship between US Unwired and the Sprint network, of which US Unwired is an affiliate. They moved to dismiss the plaintiff's second amended complaint (" SAC" ) on grounds that (1) the alleged misleading statements are not actionable as a matter of law; (2) the facts pleaded do not give rise to a strong inference that the defendants acted with scienter; (3) the complaint fails to allege " loss causation," i.e., a causal connection between the alleged misrepresentations and the stock's subsequent depreciation; and (4) the complaint did not plead with sufficient particularity the factual basis for their allegations of misrepresentation. The district court granted the defendants' motion to dismiss under Rule 12(b)(6) after concluding that (1) some of the alleged misleading statements were not actionable because they are protected by the " safe harbor" provision of the Private Securities Litigation Reform Act (" PSLRA" ), and (2) the plaintiff's SAC fails to sufficiently allege loss causation. Reviewing the defendants' motion to dismiss de novo, we conclude that the plaintiff's SAC adequately pleads the subprime subscriber program claim upon which relief can be granted, but fails to adequately plead loss causation as to his other claim. The district court's decision must be reversed in part and the case remanded for further proceedings.2

1. Factual and Procedural Background

We review de novo a district court's dismissal for failure to state a claim under Rule 12(b)(6). Cuvillier v. Taylor, 503 F.3d 397, 401 (5th Cir.2007). Motions to dismiss under Rule 12(b)(6) " are viewed with disfavor and are rarely granted." Test Masters Educ. Servs., Inc. v. Singh, 428 F.3d 559, 570 (5th Cir.2005). When faced with a Rule 12(b)(6) motion to dismiss a § 10(b) action, courts must, as with any motion to dismiss for failure to plead a claim on which relief can be granted, accept all factual allegations in the complaint as true. Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 127 S.Ct. 2499, 2509, 168 L.Ed.2d 179 (2007) (citing Leatherman v. Tarrant County Narcotics Intelligence and Coordination Unit, 507 U.S. 163, 164, 113 S.Ct. 1160, 122 L.Ed.2d 517 (1993)). We must also draw all reasonable inferences in the plaintiff's favor. See Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 40 L.Ed.2d 90 (1974); Lovick v. Ritemoney, Ltd., 378 F.3d 433, 437 (5th Cir.2004). " [A] complaint ‘ does not need detailed factual allegations,’ but must provide the plaintiff's grounds for entitlement to relief-including factual allegations that when assumed to be true ‘ raise a right to relief above the speculative level.’ " Cuvillier, 503 F.3d at 401 (quoting Bell A. Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 1964-65, 167 L.Ed.2d 929 (2007)).

The plaintiff's SAC alleges the following facts:3

In the mid-1990s, Sprint Corporation (" Sprint" ), a nationwide telecommunications company, obtained licenses from the Federal Communications Commission (" FCC" ) to establish a wireless communications

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network. Sprint established an " affiliate program" through which it contracted with third-party affiliates to construct networks in designated areas in exchange for the exclusive right to sell Sprint products and services in each area. Sprint offered three types of affiliations (Types I, II, and III) that involved varying levels of Sprint control over the third party affiliate's operations. Type III affiliation granted an affiliate the maximum amount of autonomy and control over its operations and customer base. Types I and II affiliations, in effect, gave Sprint control of an affiliate's customer care, servicing and billing.

In 1998, US Unwired, a Louisiana corporation, contracted with Sprint to become a Type III affiliate, rejecting Type I and II affiliations because US Unwired's management knew US Unwired's success depended on maintaining direct control of operations, billings, revenues, and customer relations. In exchange, Sprint granted US Unwired the exclusive right to provide Sprint products and services to over 500,000 customers in parts of 14 states.

As the complaint details: in 1999, Sprint began to pressure US Unwired to convert to a Type II affiliation by improperly delaying US Unwired's ability to market new services and the latest products, such as Wireless Web technology. Sprint allowed its Type I and II affiliates to market these new services first. As a result, US Unwired, as a Type III affiliate, became out-of-sync with the nationwide marketing of Sprint services and programs. Sprint then demanded that US Unwired pay some $30 million to finance its integration into the Sprint systems. But Sprint offered to waive this fee if US Unwired converted to a Type II affiliate. US Unwired initially elected to remain a Type III affiliate and attempt to negotiate more favorable terms for the cost and scope of its integration with Sprint. US Unwired was determined to retain control over its customer billings and service, which it knew was essential to its business plan. Throughout the negotiations, US Unwired's management internally voiced numerous concerns to its board about Sprint's coercive tactics aimed at forcing US Unwired into a Type II affiliation. For example, in July 2000, Henning wrote to the Board recommending that the Board put the company up for sale rather than transfer its core functions to Sprint as a Type II affiliate. However, each time US Unwired disagreed with Sprint, Sprint threatened to declare that US Unwired had breached its affiliation contract.

According to the complaint, at a March 10, 2000 meeting, Sprint conducted a presentation that effectively informed US Unwired that if US Unwired did not convert into a Type II affiliate, it would face a future of exorbitant fees, threatened contractual breach, and indefinite withholding of products. In a separate instance, US Unwired signaled its desire to operate a Type III affiliate out of Jackson, Mississippi. Sprint wanted a Type II affiliate to service the Jackson market. In an effort to force US Unwired to serve the Jackson market as a Type II affiliate, Sprint threatened to issue a public letter declaring US Unwired in breach of its contract for failing to supply Wireless Web technology to its customers even though Sprint's refusal to supply the technology to US Unwired, unless exorbitant integration fees were paid, was the cause of the failure. Such a public letter would have devastated US Unwired's public offering plans.

On May 23, 2000, US Unwired (after filing its Securities & Exchange Commission (" SEC" ) registration on May 17, 2000) issued 8 million shares of its common stock at the price of $11 per share. US Unwired

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received net proceeds of $80.6 million after an underwriting discount of $6.2 million and expenses of $1.2 million. In the prospectus for the stock offering filed with the SEC (attached as an exhibit to the complaint), US Unwired noted that it planned to use the proceeds to " accelerate the construction" of its network and " for other general corporate purposes." Throughout the class period, US Unwired subsequently conducted several stock offerings to fund its corporate acquisitions.

After protracted negotiations, Sprint and US Unwired still could not agree on the details of the integration plan. In order to force concessions, Sprint stopped all marketing activities for US Unwired. On July 22, 2000, US Unwired informed Sprint that it wanted to remain a Type III affiliate. Sprint refused to accept this decision and threatened to declare US Unwired in breach unless US Unwired fully funded the integration plan.

The complaint asserts that ultimately, in September 2000, US Unwired succumbed to Sprint's coercive economic pressure and abusive tactics, and agreed to become a Type II affiliate, thus giving...

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