Apple Computer Securities Litigation, In re

• Decision Date: 25 September 1989
• Docket Number: No. 88-1617,88-1617
• Citation: 886 F.2d 1109
• Parties: Fed. Sec. L. Rep. P 94,714 In re APPLE COMPUTER SECURITIES LITIGATION. William H. SCHNEIDER; Charles Cohn; Jeanne Cohn; Albert J. Whelen, Jr.; and Estelle B. Ellis; Individuals, On Behalf of Themselves and All Others Similarly Situated, Plaintiffs-Appellants, v. John VENNARD; Delbert W. Yocam; Michael Muller; Wilfrid J. Houde; John D. Couch; Gene P. Carter; Kenneth R. Zerbe; Steven P. Jobs; A.C. Markkula, Jr.; John Sculley; Individuals; and Apple Computer Incorporated, a California corporation, Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1109

886 F.2d 1109

Fed. Sec. L. Rep. P 94,714

In re APPLE COMPUTER SECURITIES LITIGATION William H. SCHNEIDER; Charles Cohn; Jeanne Cohn; Albert J. Whelen, Jr.; and Estelle B. Ellis Individuals, On Behalf of Themselves and All Others Similarly Situated Plaintiffs-Appellants, v. John VENNARD; Delbert W. Yocam; Michael Muller; Wilfrid J. Houde; John D. Couch; Gene P. Carter; Kenneth R Zerbe; Steven P. Jobs; A.C. Markkula, Jr.; John Sculley; Individuals; and Apple Computer Incorporated, a California corporation, Defendants-Appellees.

No. 88-1617.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Jan. 13, 1989.

Decided Sept. 25, 1989.

Frederic F. Nagel III, William S. Lerach, and Leonard B. Simon, Milberg Weiss Bershad Specthrie & Lerach, San Diego, Cal., for plaintiffs-appellants.

M. Laurence Popofsky, Douglas M. Schwab, Paul W. Sugarman, Wayne Stephen Braveman, and Christopher M. Patti, Heller, Ehrman, White & McAuliffe, San Francisco, Cal., for defendants-appellees.

Appeal from the United States District Court for the Northern District of California.

Before FARRIS, BOOCHEVER and HALL, Circuit Judges.

FARRIS, Circuit Judge:

This is an appeal from three orders which together granted summary judgment against plaintiffs on all of their claims under the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78a et seq. Plaintiffs allege that Apple Computer Inc. and its top officers misled the market about the capabilities and prospects of a novel office computer and disk-drive system. They claim that they purchased Apple stock in reliance on the artificially high stock price resulting from Apple's misrepresentations, and that they suffered actionable damages when the true facts about the computer became known and Apple's stock price fell by almost 75%. The trial court granted summary judgment on the grounds that each of Apple's alleged misstatements was either immaterial or made without scienter. We affirm in part, reverse in part, and remand.

BACKGROUND

Apple is a publicly-traded company which manufactures computers and computer peripherals. The individual defendants were officers and directors of Apple at the time of the events complained of--November 12, 1982 through September 23, 1983. During the six months immediately preceding this "class period," Apple's common stock traded in a range of between $11 and $30 per share.

In 1982, Apple was readying a computer named "Lisa" and a compatible disk-drive named "Twiggy" for commercial release. Apple's previous successes, most notably the "Apple II," had been in the home computer market. With Lisa, Apple hoped to service the computer needs of medium-size to large corporations. Lisa contained a number of technological innovations which later proved to be commercially viable when incorporated into the "Macintosh" home computer. For example, Lisa pioneered use of the "mouse"--a hand-held device which allows the operator to communicate with the computer without using the keyboard--and "icons"--graphic displays of the computer's functions. However, Lisa and Twiggy themselves proved to be unsuccessful commercially. Apple replaced Twiggy with another disk-drive system before actual sales of Lisa began. Apple discontinued Lisa altogether shortly after the close of the class period.

The named plaintiffs represent a certified class of persons who purchased Apple stock during the class period. They allege that Apple and its top officers made a number of highly positive statements about Lisa and Twiggy during the class period. For example, on November 29, 1982, Apple issued a press release introducing Twiggy, and claiming that "[i]t represents three years of research and development and has undergone extensive testing and design verification during the past year." In a Business Week article published on January 31, 1983, Apple's former Chairman of the Board, Steven P. Jobs, is quoted as stating: "I don't think we will have any problem selling all the Lisas we can build." In a Wall Street Journal article published on April 14, 1983, Jobs is quoted as stating: "Lisa is going to be phenomenally successful in the first year out of the chute." ¹ Plaintiffs attribute volatility in Apple's common stock price to these optimistic statements. Apple's stock price soared during the class period, reaching a high of almost $63 per share, and bottomed out at a bit over $17 per share shortly after the class period when Apple disclosed news of Lisa's disappointing sales.

Plaintiffs claim that Apple's officers recklessly ignored a number of problems with Lisa and Twiggy which tended to undermine their public optimism. First, internal tests conducted by Apple indicated some slowness and unreliability in Twiggy's information-processing capabilities. Second, communications among Apple's insiders revealed concern that Lisa could not be made compatible with the IBM computer products which dominated the office computer market. Third, there was also concern within Apple that independents would not design software for Lisa. Finally, before beginning actual sales, Apple submitted Lisa prototypes for use by potential customers on a trial basis, and for the inspection of industry analysts and the press. As a result of this test-marketing, Apple received generally enthusiastic reports, and built up a backlog of over 10,000 pre-shipment orders. However, the press and many of the targeted customers raised questions about the wisdom of Lisa's proposed $9,995 retail price. In light of these problems, plaintiffs claim that Apple's unqualified optimism was false and misleading, and actionable under Section 10(b) of the Securities Exchange Act and Rule 10b-5 enacted thereunder.

Although plaintiffs allege that Apple did not fairly and adequately inform the market about Lisa's prospects, many of the risks and underlying problems were widely publicized. For example, the same Business Week article which quotes Jobs as stating his belief that Apple would have little trouble selling Lisa also states: "One indication of how uncertain Apple's prospects are is that expert estimates of how many Lisas the company will sell are all over the lot--from 2,000 to 30,000." The article also questions whether independent software writers would support Lisa, and whether the $9,995 price tag was realistic. Similarly the Wall Street Journal article in which Jobs predicts that Lisa will be "phenomenally successful" is entitled "Some Warm Up to Apple's 'Lisa,' but Eventual Success is Uncertain." The article details Apple's difficulties in achieving IBM-compatibility, in attracting independent software suppliers, and in raising consumer interest at $9,995. On the other hand, both articles and many others identified by the parties report positive evaluations of Lisa by many large corporations--a number of which expressed interest in purchasing the machine.

In three separate orders, the trial court granted Apple summary judgment against plaintiffs on their entire case. ² With respect to two of the alleged misstatements, the court held that there was no genuine issue as to scienter. The court held that the remainder of the statements were either not misleading or immaterial as a matter of law, since the information necessary to make the statements not misleading was adequately reported by the press.

On appeal, plaintiffs argue that the trial court misapplied the standard for materiality in a fraud on the market case. They claim that, notwithstanding the press' attention to Lisa's shortcomings, Apple's omissions were material because a reasonable investor would place greater weight on the opinions of corporate insiders. Plaintiffs also argue that evidence of sales of Apple stock during the class period raises a genuine issue as to the defendants' good faith, and evidence that Lisa would be a commercial failure raises a genuine issue as to whether defendants' optimism had a reasonable basis. Finally, plaintiffs argue that the trial court invaded the province of the jury by either ignoring or discrediting the testimony of plaintiffs' expert that Apple's nondisclosures were material and the evidence of volatility in Apple's common stock price.

STANDARD OF REVIEW

A grant of summary judgment is reviewed de novo. See e.g., California Architectural Building Products, Inc. v. Franciscan Ceramics, Inc., 818 F.2d 1466, 1468 (9th Cir.1987), cert. denied, 484 U.S. 1006, 108 S.Ct. 698, 98 L.Ed.2d 650 (1988). We may affirm on any ground supported by the record. Islamic Republic of Iran v. Boeing Co., 771 F.2d 1279, 1288 (9th Cir.1985), cert. dismissed, 479 U.S. 957, 107 S.Ct. 450, 93 L.Ed.2d 397 (1986).

Under Fed.R.Civ.P. 56(c), summary judgment is appropriate where there is "no genuine issue as to any material fact," and the moving party is "entitled to a judgment as a matter of law." This standard "mirrors the standard for a directed verdict under Federal Rules of Civil Procedure 50(a), which is that the trial judge must direct a verdict if, under the governing law there can be but one reasonable conclusion as to the verdict." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250-51, 106 S.Ct. 2505, 2511, 91 L.Ed.2d 202 (1986). "No longer can it be argued that any disagreement about a material issue of fact precludes the use of summary judgment." California Architectural Building Products, 818 F.2d at 1468.

The party moving for summary judgment has the "initial responsibility of informing the district court of the basis for its motion, and identifying those portions" of the record showing the absence of a genuine issue of fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 2552, 91 L.Ed.2d 265 (1986). The burden then shifts to the nonmoving party to present evidence sufficient to support a verdict in its favor on every element of its claim for which it will carry the burden of proof at trial. Id. at 322-23, 106 S.Ct. at 2552-53. "If the [nonmoving party's] evidence is ... not sufficiently...