Chapman v. Mueller Water Prods., Inc.

• Decision Date: 11 June 2020
• Docket Number: 19-cv-3260 (LJL)
• Parties: Glen CHAPMAN, Andrea Peterson, and Kevin Kelly, individually and on behalf of all others similarly situated, Plaintiffs, v. MUELLER WATER PRODUCTS, INC., Gregory E. Hyland, J. Scott Hall, Evan L. Hart, and Marietta Edmund Zakas, Defendants.
• Court: U.S. District Court — Southern District of New York

466 F.Supp.3d 382

Glen CHAPMAN, Andrea Peterson, and Kevin Kelly, individually and on behalf of all others similarly situated, Plaintiffs,

v.MUELLER WATER PRODUCTS, INC., Gregory E. Hyland, J. Scott Hall, Evan L. Hart, and Marietta Edmund Zakas, Defendants.

19-cv-3260 (LJL)

United States District Court, S.D. New York.

Signed June 11, 2020

Lesley Frank Portnoy, Glancy Prongay & Murray LLP, Los Angeles, CA, for Plaintiff Glen Chapman.

Jonathan Richard Horne, Laurence Matthew Rosen, Sara Esther Fuks, The Rosen Law Firm, P.A., New York, NY, for Plaintiff Kevin Kelly.

Scott D. Musoff, Jay B. Kasner, Skadden, Arps, Slate, Meagher & Flom LLP, New York, NY, for Defendants.

OPINION & ORDER

LEWIS J. LIMAN, United States District Judge:

Defendants Mueller Water Products, Inc. ("Mueller" or the "Company"), Gregory E. Hyland ("Hyland"), J. Scott Hall ("Hall"), Evan L. Hart ("Hart"), and Marietta Edmunds Zakas ("Zakas") (collectively, "Defendants") move, pursuant to Fed. R. Civ. P. 12(b)(6) and 9(b) to dismiss the Second Amended Complaint ("SAC") against them. See Dkt. No. 57.

For the following reasons, the motion to dismiss is granted.

BACKGROUND

The Court accepts the well-pleaded allegations of the SAC and the documents incorporated therein as true for purposes of the motion to dismiss.¹

A. The Parties

Mueller is a manufacturer and marketer of products used in the transmission, distribution, and measurement of water in North America. SAC ¶ 1. It manufactures and sources a variety of water technology products, including water meters that Mueller sells to municipalities that use these meters to measure water consumption and to bill residential and commercial property owners accordingly. Id. ¶ 3. Mueller's common stock trades on the New York Stock Exchange ("NYSE") under the symbol "MWA." Id. ¶ 37.

Hyland was the President and Chief Executive Officer ("CEO") of Mueller from January 2006 to January 22, 2017. Id. ¶ 38. He passed away on April 12, 2019. See Dkt. No. 34. Hall has been President and CEO of Mueller since January 23, 2017. SAC ¶ 39. Hart was Chief Financial Officer ("CFO") of Mueller from July 2008 to December 31, 2017. Id. ¶ 40. Zakas has been CFO since January 2018. Id. ¶ 41. Hyland, Hall, Hart, and Zakas are collectively referred to as the "Individual Defendants."

Named plaintiffs Andrea Peterson ("Peterson") and Kevin Kelly ("Kelly," and with Peterson, "Plaintiffs") are investors in Mueller common stock. Id. ¶¶ 35-36. The SAC alleges that they had purchased Mueller common stock at artificially inflated prices and suffered losses when the price of the Mueller common stock fell 11% and 6% on April 28, 2018 and August 7, 2018, respectively, after Mueller disclosed it would have to take additional warranty charges on products it had sold. Id. ¶¶ 20-21, 27-28. Plaintiffs sue individually and on behalf of a putative class of persons and entities who purchased Mueller common stock on the NYSE during the period from May 9, 2016 through August 6, 2018, inclusive (the "Class Period"). Id. at 2.

B. Mueller's Business

The allegations of the SAC focus on fixed network advanced metering infrastructure ("AMI") systems that are colloquially referred to as "smart metering" and offer advantages over traditional water metering. Id. ¶¶ 54, 56. Traditional water meters, or automatic meter reading ("AMR") systems, require utility workers to physically travel through service territories to collect meter reading data. Id. ¶¶ 53, 55. Municipalities employing traditional water meters incur labor costs to keep track of water usage. They also risk human error if the utility workers misread the data. AMI systems avoid those costs. The systems operate by gathering data using a network of permanent data collectors or gateway receivers that are always active or listening for the radio transmission from the utilities’ meters. Id. ¶ 54. Thus, with AMI systems, there is no need for utility workers to physically travel through service territories to collect meter reading data. Id. ¶ 55. In addition, AMI systems provide the utilities with more frequent and diverse data from the meters at specified intervals. Id.

Mueller operates in two business segments, Infrastructure and Technologies. Id. ¶ 48. The Technologies segment offers residential and commercial water metering, water leak detection, and pipe condition assessment products, systems, and services through the Mueller Systems and Echologics businesses. Id. ¶ 49. Mueller Systems, a subsidiary of Mueller, manufactures and sells water metering systems, including both AMI and AMR systems, as well as products and services directly to municipalities and to waterworks distributors. Id. ¶ 50. Its water technology products are manufactured under the Mueller Systems and Hersey brand names. Id. ¶ 52.

The AMI systems became an important part of Mueller's business and growth strategy. In its November 2015 Form 10-K, Mueller described "smart metering" as a "key to the Mueller Technologies business" and stated that its "investments in smart metering have primarily focused on the market for AMI and have been based on our belief that water utilities will transition over time from traditional manual-read meters to automatically read meters." Id. ¶ 56. In a February 2016 investor presentation, annexed to a Form 8-K, Mueller noted that it had "transformed the Company by acquiring or developing new technologies, adjusting portfolio and improving processes," and it celebrated smart metering as having "longer range AMI systems; [a] remote disconnect meter (RDM); leak detection and [a] consumer portal which utilized the existing infrastructure at Mueller Systems national operations center." Id. ¶ 58. In a May 2016 investor presentation, annexed to a Form 8-K, Mueller also touted that it would "expand intelligent water technology offerings" and "enhance advanced metering infrastructure (AMI) system with longer-range communications, capabilities, remote disconnect meter and consumer portal." Id. Mueller represented to investors that it was "focused on growing sales of its higher-margin AMI and leak detection technologies, and on improving operating performance over the course of the year." Id. ¶ 59. As municipalities began to increasingly adopt AMI systems, Plaintiffs allege that Mueller's AMI product sales increased and began to offset declines in AMR product sales. Id. ¶ 62. Water metering products, both AMR and AMI, comprised over 80% of sales in the Mueller Technologies segment from 2015-2017, and AMI products represented nearly 50% of Mueller Technologies’ sales. Id.

C. Allegations of Manufacturing Defects

Plaintiffs allege that Mueller's smart meter systems were plagued with defects and that Mueller was experiencing increasing product failures that eventually required Mueller to increase its warranty expense. Id. ¶ 63. In particular, Plaintiffs allege that the AMI systems sold to the Missouri American Water Company ("MAWC") and to the public authorities in Chillicothe, Missouri and in San Diego and Santee, California were defective, but for varying reasons.

1. Missouri American Water Company

MAWC was one of Mueller's customers and installed Mueller smart meter systems from 2012 to the middle of 2015. Id. ¶ 69; see Dkt. No. 59 ("Musoff Decl."), Ex. J at 5.² According to March 2016 testimony from a Utility Regulatory Auditor of the Missouri Public Service Commission ("PSC"), MAWC had, in early 2015, "detected a serious and widespread issue regarding unusually high levels of premature failure rates associated with approximately 97,000 systems that it ha[d] acquired from Mueller Systems." SAC ¶¶ 66-68. In particular, the defects were related to a "defective magnetic design or problems with other components of the meter" that "resulted in either no recorded water usage or lower than actual usage meter readings." Id. ¶ 69.

As a result, on July 7, 2016, PSC and MAWC opened an investigation into the faulty water meters. See Musoff Decl., Ex. J. The final report on the investigation is dated March 31, 2017, and it states:

Beginning in 2012 until summer 2015, MAWC installed Mueller Systems LLC ("Mueller") water meters that, unknown to MAWC, were potentially defective. Some of the defective meters were quickly identified by Mueller or American Water Works Company Inc. ("AWW") subsidiaries, and quickly addressed. The remaining meters otherwise appeared to function as well as past water meters previously used by AWW subsidiaries and MAWC. However, beginning in August 2015 continuing through December 2015, MAWC, along with other AWW subsidiaries, determined that problems with Mueller water meters were more extensive than first realized, with the meters failing due to several different kinds of defects. All of the defects prevented the meter from accurately reading the amount of water flow passing through the meter. Over the course of August 2015 to December 2015, MAWC replaced 23,833 meters.

Id. at 5.

By August 2015, when MAWC began to become aware of the meter issues, MAWC had purchased approximately 99,500 new meters for use in its service districts. Id. at 5, 8; see id. at 16. As a result of learning of "the possibility that meters were prematurely dying and possibly underregistering," MAWC "made the decision to start a change-out of meters that had a higher potential of being defective." Id. at 8. During the period from September 2015 through December 2015, MAWC removed about 23,833 Mueller water meters it had installed between early 2012 and mid-2015 due to possible imperfections. Id. at 8-9, 16. Some of these meters were on a list of meters with serial numbers identified as having various defective manufacturing designs and components. Id. at 16. Others were not on the defective serial number list but were ones that MAWC had determined had either stopped working or were not recording any water usage at all. Id. MAWC also estimated that it had replaced approximately 22,000 meters primarily during the time period from August 2015 through ...