Epstein v. Itron, Inc.

• Citation: 993 F.Supp. 1314
• Decision Date: 22 January 1998
• Docket Number: No. CS-97-214-RHW.,CS-97-214-RHW.
• Parties: Mark G. EPSTEIN, on his own behalf and on behalf of all others similarly situated, Plaintiff, v. ITRON, INC., and Johnny M. Humphreys, Defendants.
• Court: U.S. District Court — District of Washington

993 F.Supp. 1314

Mark G. EPSTEIN, on his own behalf and on behalf of all others similarly situated, Plaintiff, v. ITRON, INC., and Johnny M. Humphreys, Defendants.

No. CS-97-214-RHW.

United States District Court, E.D. Washington.

January 22, 1998.

COPYRIGHT MATERIAL OMITTED

John Randall Layman, Spokane, WA, Carl A. Taylor Lopez, Seattle, WA, Steven J. Toll and Matthew James Ide, Seattle, WA, Joseph J. Tobacco, Jr., San Francisco, CA, for Plaintiff.

Barry M. Kaplan, Seattle, WA, for Defendant.

ORDER DENYING MOTION TO DISMISS

WHALEY, District Judge.

Before the Court is Defendants' Motion to Dismiss (Ct.Rec.17). A hearing was held on Defendants' motion on October 27, 1997. Joseph Tabacco, Matthew Ide, and John Layman appeared on behalf of Plaintiff. Barry Kaplan appeared on behalf of Defendants.

Defendants contend that Plaintiff's Complaint, which alleges violations of the Securities Exchange Act of 1934, fails to state a claim on which relief can be granted. Specifically, Defendants argue Plaintiff has failed to comply with the heightened pleading standard that was enacted as part of the Private Securities Litigation Reform Act of 1995. As is discussed more fully below, this order denies Defendants' motion because Plaintiff has alleged with particularity sufficient facts to create a strong inference that, at a minimum, Defendants recklessly issued materially misleading statements.

I. SUMMARY OF FACTS

The following summary is drawn from Plaintiff's Complaint, the factual allegations of which must be accepted as true for purposes of this motion.

Defendants are Itron, Inc. ("Itron"), a Washington corporation, and Johnny M. Humphreys ("Humphreys"), Itron's president, chief executive officer ("CEO"), and director since 1987. Humphreys also owns more than 260,000 shares of Itron's stock, which is publicly traded on the NASDAQ market. Plaintiff is Mark G. Epstein ("Plaintiff"), owner of 100 shares of Itron's stock.

Itron develops and sells systems that automatically collect data from utility meters ("AMR systems"). These systems are designed to reduce the costs associated with collecting data from utility meters located at or near the utility customers' sites, which for the most part are residences spread throughout large urban and rural areas.

Itron's AMR systems are based on Itron's Enco der/Receiver/Transmitter ("ERT") modules. ERTs are installed on utility meters and use high-frequency radio signals to transmit meter data to nearby receivers. Itron's ERTs transmit their signals to one of three types of receivers: hand-held receivers ("OMR"), receivers mounted in vehicles ("Mobile AMR"), and networks of fixed receivers ("Fixed Network AMR"). In the Fixed Network AMR, receivers placed in fixed locations retrieve data from the ERTs in the receivers' area and forward the information to the utility or another entity that provides meter reading services. Because of utility industry demand for the enhanced meter reading economies and functions that a fixed network allows, development of a viable fixed network system is essential to the survival of companies that provide AMR systems.

Plaintiff alleges that Itron's ERTs have two unalterable characteristics that make them a technologically infeasible basis for a fixed network AMR system. First, ERTs transmit at an extremely low power point because of inherent limitations in the batteries that power them and related system longevity concerns. While this power point is sufficient to support reliable OMR and Mobile AMR systems, it is too low to broadcast data as frequently or reliably as is necessary in a fixed network environment. Second, ERTs send data only after being awakened by a radio signal sent by a receiver, a practice known as "polling." This practice is incompatible with a fixed network environment because polling causes multiple ERTs to respond simultaneously to each wake-up signal, thereby causing interference among data transmissions and loss of data.

Plaintiff also alleges that Itron and Humphreys have known since at least 1993 that a Fixed Network AMR based on ERTs was not technologically feasible. In support of this conclusion, Plaintiff asserts it is reasonable to infer that Itron and its key officers would be aware of the technological capabilities of their core products. Plaintiff also points to a 1993 marketing brochure that was distributed by Itron to select customers in an effort to promote its Mobile AMR system. That brochure discussed in detail the technological difficulties associated with reading ERTs and concluded:

After considering all the things that affect readability, you can see it is not possible to simply stick a stationary receiving antenna up in the air and expect to read all meters within a range of a half-mile, one-tenth of a mile, or any other distance, for that matter.

But experience has shown that when procedures are used that take into consideration the factors that affect meter readability, it is possible to establish a reliable, economical [mobile] procedure with which to read all meters in an area.

Attachment to Defendants' Reply Brief at 3. Plaintiff also points to a Form 10-K filed by Itron with the Securities and Exchange Commission ("SEC") in March, 1997. In that Form 10-K, Itron discussed its fiscal year ending on December 31, 1996 and acknowledged that it had experienced delays in meeting the performance milestones set in a January 1996 contract that called for the installation of a Fixed Network AMR system on behalf of Duquesne Light Company. Specifically, the Form 10-K stated:

The Company has experienced delays in performing its obligations under the Duquesne Contract. These delays relate primarily to the development of certain advanced meter reading functions and the software needed to complete these functions....

Complaint at 32.

Humphreys and other Itron officers made a number of public statements between September 11, 1995 and October 22, 1996 ("the class period").¹ These statements concerned a variety of matters relevant to Itron's success in implementing its Fixed Network AMR system, including: 1) the performance and capabilities of Itron's Fixed Network ARM system and equipment; 2) the capabilities of Itron's ERT modules; 3) the ERT modules' ability to integrate into a fixed network; 4) the status of Itron's performance under major customer contracts; and 5) the customer levels of satisfaction and dissatisfaction with Itron's products, services and capabilities. Each of these statements was either false or materially misleading, Plaintiff alleges, because the statements failed to divulge the seriousness of the technological problems Itron was experiencing in attempting to create a fixed network system based on ERTs. Itron made these statements, according to Plaintiff, because it realized that its continued economic success depended on its ability to convince its current and potential customers that it would be able to successfully incorporate its core product into the emerging fixed network environment. In essence, Plaintiff alleges Defendants made these statements in an effort to buy time while it searched for a technological "fix" for the problems described in the 1993 marketing brochure. During this same period, Itron's common stock dropped from $60 to $15 per share.

Based on the foregoing allegations, inter alia, Plaintiff's Complaint contends that Itron and Humphrey's have violated §§ 10(b) and 20(a) of the Securities Exchange Act of 1934 ("1934 Act"), as well as SEC Rule 10b-5.²

II. DISCUSSION

Defendants contend that Plaintiff's Complaint should be dismissed pursuant to Fed. R.Civ.P. 12(b)(6) because it does not satisfy the heightened pleading standard for securities fraud claims that was enacted as part of the Private Securities Litigation Reform Act of 1995 ("PSLRA"), Pub.L. No. 104-67, 109 Stat. 743 (1995). Specifically, Defendants allege the Complaint fails to satisfy the requirement that it state "with particularity" facts that give rise to a "strong inference" that they made the alleged false and misleading statements with the type of state of mind required for a valid securities fraud claim. See id. at § 21(D)(b)(2) (codified at 15 U.S.C. § 78u-4(b)(2)). See also Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193, 96 S.Ct. 1375 47 L.Ed.2d 668 (1976) (scienter is a required element of § 10(b) and Rule 10b-5 claims). The parties agree this requirement applies to Plaintiff's causes of action and that Plaintiff's Complaint otherwise states a claim on which relief may be granted.³

A. THE PSLRA's PLEADING STANDARD

Plaintiff's Complaint is reviewed under a more stringent standard of review than is usually applied to Fed.R.Civ.P. 12(b)(6) motions to dismiss. Normally, a complaint may be dismissed for failure to state a claim only if "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957); see also Smith v. Jackson, 84 F.3d 1213, 1217 (9th Cir.1996) (same). This liberal approach to alleging facts sufficient to state a claim is replaced by more stringent requirements when, as here, the basis for the motion to dismiss is a challenge to the sufficiency of a complaint's allegations relevant to the state of mind element of a securities fraud claim for monetary damages. Under the controlling standard enacted by the PSLRA,

the complaint shall, with respect to each act or omission alleged to violate this chapter, state with particularity facts giving rise to a strong inference that defendant acted with the required state of mind.

15 U.S.C. § 78u-4(b)(2). If a plaintiff fails to comply with this provision, the complaint must be dismissed. Id. § 78u-4(b)(3).

On its face, § 78u-4(b)(2) imposes two additional pleading requirements for securities fraud claims: 1) pleading "with particularity;" and 2) pleading a sufficient quantum of facts (i.e., enough to...