Berry v. Valence Technology, Inc., 97-17346

• Decision Date: 29 April 1999
• Docket Number: No. 97-17346,97-17346
• Citation: 175 F.3d 699
• Parties: Fed. Sec. L. Rep. P 90,466, 99 Cal. Daily Op. Serv. 3073, 1999 Daily Journal D.A.R. 3992 James I. BERRY; James Varano; Gregg M. Weiss; Gregg M. Ira, f/b/o Weiss; Peter Garuccio, M.D.; P.C. Pension Plan; Frederick Jewett; Milburn E. Estes; Joseph P. Yonke; Investar Partnership; Eugene Honeyman; Anne Kantor; Murray Goldsmith; Morton Surkin; Florence Surkin; Robert Leimsider; Gilbert Bergelson, on behalf of themselves and all others similarly situated, Plaintiffs-Appellants, v. VALENCE TECHNOLOGY, INC.; Lev Dawson; Calvin L. Reed; Cristine A. Russell; Dale R. Shackle; David M. Butze; William J. Masuda; Carl E. Berg; Alan F. Shugart; Bert C. Roberts, Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 699

175 F.3d 699

Fed. Sec. L. Rep. P 90,466, 99 Cal. Daily Op. Serv. 3073,

1999 Daily Journal D.A.R. 3992

James I. BERRY; James Varano; Gregg M. Weiss; Gregg M.

Ira, f/b/o Weiss; Peter Garuccio, M.D.; P.C. Pension Plan;

Frederick Jewett; Milburn E. Estes; Joseph P. Yonke;

Investar Partnership; Eugene Honeyman; Anne Kantor;

Murray Goldsmith; Morton Surkin; Florence Surkin; Robert

Leimsider; Gilbert Bergelson, on behalf of themselves and all others similarly situated, Plaintiffs-Appellants, v. VALENCE TECHNOLOGY, INC.; Lev Dawson; Calvin L. Reed;

Cristine A. Russell; Dale R. Shackle; David M. Butze;

William J. Masuda; Carl E. Berg; Alan F. Shugart; Bert C.

Roberts, Defendants-Appellees.

No. 97-17346.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Dec. 9, 1998.

Filed April 29, 1999.

Patrick J. Coughlin, Eric A. Isaacson, James A. Caputo, Randi D. Bandman, Henry Rosen, Joseph D. Daley, Leonard B. Simon, Milberg Weiss Bershad Hynes & Lerach, LLP, San Diego, California, Joseph J. Tabacco, Jr., Christopher T. Heffelfinger, Berman, DeValerio, Pease & Tabacco, San Francisco, California, for the plaintiffs-appellants.

Robert P. Feldman, Wilson Sonsini Goodrich & Rosati, Palo Alto, California, for defendants-appellees Valence Technology, Inc., Calvin L. Reed, Dale R. Shackle, and Carl E. Berg.

Tower C. Snow, Jr., Brobeck, Phleger & Harrison, San Francisco, California, for defendant-appellee Lev M. Dawson.

Appeal from the United States District Court for the Northern District of California; James Ware, District Judge, Presiding. D.C. No. C-95-20459 JW (EAI).

Before: BRIGHT, ^* FLETCHER, and THOMPSON, Circuit Judges.

FLETCHER, Circuit Judge:

Plaintiffs, a class of persons who purchased stock in Valence Technology, Inc. (Valence) within a specified 27-month period, sued Valence and several of its officers for securities fraud in violation of section 10(b) of the Securities and Exchange Act of 1934. The district court granted Valence's motion for summary judgment, holding that Plaintiffs' claims were barred by the statute of limitations because Plaintiffs were on "inquiry notice" of the possibility of fraud more than one year before they filed suit. On appeal, Plaintiffs argue that "actual discovery," not inquiry notice, triggers the statute of limitations for claims under section 10(b). Alternatively, Plaintiffs contend the district court erred in holding that an article in the March, 1993 issue of Forbes magazine sufficed to put them on inquiry notice. Plaintiffs also appeal from the district court's earlier dismissal under Rule 12(b)(6) of claims against Valence's former CEO Lev Dawson for alleged fraud occurring after Dawson's resignation as CEO. We have jurisdiction pursuant to 28 U.S.C. § 1291. We reverse the district court's grant of summary judgment on the statute of limitations issue, and affirm its dismissal of the claims against Dawson.

I.

Plaintiffs brought this case as a securities class action on behalf of all persons who purchased stock in Valence between May 7, 1992 and August 10, 1994. Defendants include Valence, Lev Dawson (Valence's founder and first CEO), Calvin Reed (Valence's CEO between 1993 and 1997), Dale Shackle (a scientist and former Valence officer), and Carl Berg (a member of Valence's Board of Directors). ¹ Plaintiffs allege that Valence violated section 10(b) of the Securities and Exchange Act of 1934 (the 1934 Act), see 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, see 17 C.F.R. § 240.10b-5. ²

Valence was founded in 1989 to develop new battery technology. In May, 1992, after announcing that it was developing a new solid electrolyte rechargeable battery, Valence raised $33 million in an initial public offering of its stock. Valence stated that "[u]nlike the liquid electrolyte used in most batteries, the Company's electrolyte is a solid, which reduces weight, volume and safety problems." Valence also claimed that its solid electrolyte batteries were much more powerful for their size, having an "energy density" "significantly exceeding that of batteries currently in use." Moreover, Valence advertised its batteries as having an extended life cycle, with the capacity to be recharged many more times than conventional rechargeable batteries. Valence announced that it was focusing in particular on applying this technology to the commercial manufacture of batteries for use in cellular telephones and laptop computers. In November, 1992, Valence raised $82.8 million in a second public offering. In December, 1992, Valence announced the conclusion of a $100 million contract with Motorola, which was to begin using Valence's batteries in its cellular telephones in 1994.

On February 15, 1993, the March issue of Forbes magazine published an article about Valence entitled "Story Stock." Although press coverage of Valence had been quite positive up until then, the Forbes article was more skeptical. The headline of the article asked: "What levitates technology companies on Wall Street? Look at the case of Valence Technology and the curious merry-go-round of insiders, underwriters and journalists that keeps its stock spinning." The article claimed that while "the folks at Valence can put on a good show" in demonstrating prototypes of their battery, the investment community remained largely ignorant to "what is really energizing this stock":

[A] triad that includes insiders unloading shares for a price hundreds of times what they paid, an underwriting firm that pulls in fees for helping them do that, and journalists who are only too willing to take at face value the boastful pronouncements of the company's publicity department.

Thus, although Valence's battery "works beautifully in the lab," "[t]he world doesn't know" whether it will "last" or if it can be "made cheaply."

The article took particular aim at Carl Berg, Valence's largest shareholder. It noted his participation in two other Silicon Valley enterprises through which he made large profits even though the companies themselves suffered financially. "The pattern," according to the article, "seems to be [that] ... [o]utside investors may do poorly, but Berg usually gets his money out."

Valence and its officers made several public pronouncements in response to the Forbes article. Lev Dawson, then the CEO of Valence, sent a letter to Forbes that Valence distributed to shareholders, describing the article as "inaccurate." Dawson maintained that Valence's contract with Motorola was a "basic purchase agreement" and not "less than meets the eye" as the Forbes article claimed. Dawson further noted that General Motors' Delco-Remy division "researched our technology prior to entering into a $20 million research and development contract for the development of batteries."

There was a modest press follow-up to the Forbes article. The San Francisco Chronicle published a story on February 27, 1993, reiterating the Forbes article's claim that "there was no reliable evidence that the batteries will work as advertised." Bloomberg Business News, in contrast, reported Dawson's response to the Forbes article in a February 17, 1993 wire story entitled "Valence Chairman Calls Forbes Article 'Inaccurate'." Later press coverage resumed its largely positive tone: September, 1993 stories in Dow Jones Wire Service and The Wall Street Journal reported Valence's announcement that it would deliver the batteries for the Motorola contract in the coming year. Neither story mentioned the Forbes article.

The week after the Forbes article was released, Valence's stock dropped from about $15.00 per share to $12.50 per share on February 23, 1993. It rose back to $15.00 on February 25, however. After fluctuating between $17.75 and $11.50 from early March into September, by September 28 the stock reached $20.00. In December, 1993, Valence completed its third public offering, raising $51.5 million.

On May 3, 1994, Valence announced that it was unable to meet Motorola's specifications, and that it would not be delivering batteries under that contract as planned. On that day, Valence's stock dropped from $9.50 to $5.25. On June 16, 1994, Valence announced that it could not meet Hewlett-Packard's specifications. Valence's stock dropped from $6 to $3.813 on that day. On August 9, 1994, Valence announced that it was abandoning its new battery technology. Valence's stock then dropped from $4.375 to $3.375.

Plaintiffs filed suit on May 3, 1994. After consolidating subsequent complaints and certifying the class, the district court dismissed several of Plaintiffs' claims on Rule 12(b)(6) motions from Valence. In particular, the district court dismissed claims against Dawson relating to alleged misrepresentations made after he stepped down as CEO of Valence on April 30, 1993. Valence subsequently moved for summary judgment. The Special Master to whom the district court had referred the motion recommended granting summary judgment on statute of limitations grounds. The district court adopted that recommendation on November 6, 1997. See In re Valence Tech., Inc. Sec. Litig., 987 F.Supp. 796 (N.D.Cal.1997). This appeal timely followed.

II.

In granting Valence's motion for summary judgment on statute of limitations grounds, the district court held that for actions under section 10(b) of the 1934 Act, the statute of limitations begins to run with the disclosure of "facts that would have caused a reasonable person to suspect the possibility of a misrepresentation or misleading omission." See In re Valence, 987 F.Supp. at 801 (quoting LaSalle v. Medco Research, Inc., 54 F.3d 443, 444 (7th Cir.1995)). This standard is a version of "inquiry notice." Plaintiffs contend that the correct standard is one of actual discovery.

We review a district court's grant of summary judgment de novo. See Margolis v. Ryan, 140 F.3d 850, 852 (9th Cir.1998). Viewing the evidence in the light most favorable to the nonmoving party and drawing all reasonable inferences in...