In re Centurylink Sales Practices & Sec. Litig.

• Decision Date: 30 July 2019
• Docket Number: Civil File No. 18-296 (MJD/KMM),MDL No. 17-2795 (MJD/KMM)
• Citation: 403 F.Supp.3d 712
• Parties: IN RE: CENTURYLINK SALES PRACTICES AND SECURITIES LITIGATION This Document Relates to
• Court: U.S. District Court — District of Minnesota

403 F.Supp.3d 712

IN RE: CENTURYLINK SALES PRACTICES AND SECURITIES LITIGATION This Document Relates to

MDL No. 17-2795 (MJD/KMM)

Civil File No. 18-296 (MJD/KMM)

United States District Court, D. Minnesota.

Signed July 30, 2019

Patrick E. Gibbs, Douglas P. Lobel, David A. Vogel, Sarah M. Lightdale, and Lauren Gerber Lee, Cooley LLP; and William A. McNab and David M. Aafedt, Winthrop & Weinstine, P.A.; Counsel for Defendants CenturyLink, Inc., Glen F. Post, III, R. Stewart Ewing, Jr., David D. Cole, Karen Puckett, Dean J. Douglas, and G. Clay Bailey.

Michael D. Blatchley, John C. Browne, and Michael Mathai, Bernstein Litowitz Berger & Grossmann LLP; Keith S. Dubanevich, Timothy S. DeJong, and Keil M. Mueller, Stoll Berne Lokting & Shlachter P.C.; Special Assistant Attorneys General and Counsel for Lead Plaintiff the State of Oregon by and through the Oregon State Treasurer and the Oregon Public Employee Retirement Board, on behalf of the Oregon Public Employee Retirement Fund, Plaintiff Fernando Vildosola and Lead Counsel for the Class; and Richard A. Lockridge, Gregg M. Fishbein, and Kate M. Baxter-Kauf, Lockridge Grindal Nauen P.L.L.P., Liaison Counsel for Lead Plaintiff the State of Oregon by and through the Oregon State Treasurer and the Oregon Public Employee Retirement Board, on behalf of the Oregon Public Employee Retirement Fund and Plaintiff Fernando Vildosola.

MEMORANDUM OF LAW & ORDER

Michael J. Davis, United States District Court

I. INTRODUCTION

This matter is before the Court on Defendants' Motion to Dismiss under Rule 12(b)(6). [Docket No. 154] The Court heard oral argument on June 7, 2019. For the reasons that follow, the Court denies the motion in its entirety.

II. BACKGROUND

A. Factual Background

The Class Period runs from March 1, 2013 to July 12, 2017. ( [Docket No. 143] Consolidated Securities Class Action Complaint ("Compl.") at 2.)

1. Defendants

a) CenturyLink, Inc.

Defendant CenturyLink, Inc. ("CenturyLink") is the country's third-largest telecommunications company with 50,000 employees and millions of customers. (Gibbs Ex. 4, 2016 CenturyLink Form 10-K at 3; Gibbs Ex. 5, 2017 CenturyLink Form 10-K at 4, 19.) From 2013 through 2017, CenturyLink's annual revenues were approximately $18 billion. (Gibbs Ex. 1, 2013 CenturyLink Form 10-K at 4; Gibbs Ex. 2, 2014 CenturyLink Form 10-K at 3; Gibbs Ex. 3, 2015 CenturyLink Form 10-K at 3; Gibbs Ex. 4, 2016 CenturyLink Form 10-K at 4; Gibbs Ex. 5, 2017 CenturyLink Form 10-K at 5.) During this time, the consumer segment accounted for approximately one-third of CenturyLink's annual revenues. (Gibbs Ex. 1, 2013 CenturyLink Form 10-K at 6; Gibbs Ex. 2, 2014 CenturyLink Form 10-K at 5; Gibbs Ex. 3, 2015 CenturyLink Form 10-K at 5; Gibbs Ex. 4, 2016 CenturyLink Form 10-K at 6; Gibbs Ex. 5, 2017 CenturyLink Form 10-K at 7.)

b) Executive Defendants

At all relevant times, Defendant Glen F. Post, III was the CEO, President, and a director of CenturyLink. (Compl. ¶ 29.)

At all relevant times, Defendant R. Stewart Ewing, Jr. was CenturyLink's CFO and Executive Vice President. (Id. ¶ 30.)

At all relevant times, Defendant David D. Cole was Executive Vice President and Controller of CenturyLink. (Id. ¶ 31.) During the Class Period, he served as CenturyLink's principal accounting officer. (Id. )

From 2009 through October 2014, Defendant Karen Puckett was CenturyLink's Executive Vice President and COO. (Id. ¶ 32.) From November 2014 until she left CenturyLink in August 2015, Puckett served as CenturyLink's President of Global Markets. (Id. ) During the Class Period, Puckett was the highest-ranking executive with direct oversight of the consumer segment sales division. (Id. )

Defendant Dean J. Douglas took over Puckett's role. (Id. ¶ 33.) He began his employment at CenturyLink as President of Sales and Marketing in February 2016, and later became President of Enterprise Markets. (Id. )

During the Class Period, Defendant G. Clay Bailey was CenturyLink's Senior Vice President and Treasurer. (Id. ¶ 34.) During that time, he also served as a spokesperson for CenturyLink, including in investor conference calls and presentations. (Id. ) In 2015, Bailey became Senior Vice President of Operations Transformation. (Id. ) In that role, Bailey oversaw a team devoted to "bringing [ ] a better customer experience" to CenturyLink's customers. (Id. )

Bailey, Cole, Douglas, Ewing, Post, and Puckett are collectively known as the "Executive Defendants."

c) Other CenturyLink Management

During the Class Period, CenturyLink operated 18 call centers. (Compl. ¶ 60.) Each call center was managed by a Call Center Director, and each Call Center Director reported to Linda Olsen, CenturyLink's Vice President of Consumer Contact Centers. (Id. ) Olsen reported to Defendant CEO Post. (Id. )

Kathy Victory was CenturyLink's Senior Vice President of Consumer Sales & Care. (Id. ¶ 100.) Kathy Flynn was Vice President of Human Resources. (Id. ¶ 102.)

2. Plaintiffs

Lead Plaintiff the State of Oregon by and through the Oregon State Treasurer and the Oregon Public Employee Retirement Board, on behalf of the Oregon Public Employee Retirement Fund, ("Oregon") operates and oversees public funds for the benefit of retired public employees. (Compl. ¶ 26.) The Oregon Public Employee Retirement Fund is a state pension fund for retired public employees. (Id. ) It had $77 billion in assets under management as of April 30, 2018. (Id. ) Oregon purchased CenturyLink securities during the Class Period. (Id. )

Plaintiff Fernando Alberto Vildosola is trustee for the AUFV Trust U/A/D 02/19/2009. (Id. ¶ 27.) AUFV Trust U/A/D 02/19/2009 purchased CenturyLink's 7.60% Senior Notes due September 15, 2039 during the Class Period. (Id. )

3. Class Period Allegations

According to Plaintiffs, for a number of years, CenturyLink engaged in systemic "cramming" of customer accounts, by adding services to customers' accounts without authorization, deceiving customers about the prices they would be charged, and misquoting prices by failing to disclose that "bundles" included fees for optional services that the customers did not need or authorize. (Compl. ¶¶ 44, 64.) CenturyLink potentially overbilled 3.5 million customers, representing over half of its broadband subscribers and one-third of its 12 million wireline subscribers. (Id. ¶¶ 65, 178.)

CenturyLink imposed unachievable quotas on sales employees (from sales representatives to call center supervisors, managers, and directors) and terminated sales employees who did not meet them. (Compl. ¶¶ 63, 77.) The pressure from these quotas caused customer service employees to engage in widespread cramming. (Id. ) The customer service department employed "retention specialists," who were incentivized to minimize refunds, required to meet sales quotas, and strictly limited in how much they could reimburse customers. (Id. ¶¶ 84-86.) CenturyLink made it difficult for customers to challenge overcharges by deleting call recordings before the customer received the first "real" bill, while requiring customers to prove misquotes. (Id. ¶ 87.)

CenturyLink's cramming practices were documented and monitored by the Executive Defendants through monthly reports detailing thousands of complaints by the FCC, state agencies, and others. (Compl. ¶¶ 96-99, 103.) The reports showed that cramming complaints were "very common and widespread," and Post, Puckett, and Victory complained that the number of complaints was "too high" and thought that the team compiling the data had overstated the numbers. (Id. ¶ 105.) When the team verified the numbers and provided recommendations on how to reduce cramming, the Executive Defendants ignored them because they were not willing to sacrifice revenues. (Id. ¶¶ 105, 107-08.)

During the Class Period, Defendants told investors that CenturyLink's sales practices were aboveboard and represented that it would never "plac[e] or record[ ] an order for our products and services for a customer without that customer's authorization." (Compl. ¶ 151.) Defendants claimed that CenturyLink's revenue growth in its consumer and small business segments was due to its focus on customer needs through its call centers, bundling service packages, and other strategies. (Id. ¶¶ 58-61.) These representations were important to investors because investors were concerned with CenturyLink's ability to generate dependable cash flows in the face of customers abandoning traditional wireline telephone services that were the historical core of CenturyLink's business. (Id. ¶¶ 55-56.) The representations were false because, in fact, CenturyLink's revenues were materially increased by cramming. (Id. ¶¶ 93, 192.) CenturyLink routinely added services to customer accounts without authorization, lied to customers about the prices they would be charged, and systematically misquoted the prices of contracts, particularly by failing to disclose that "bundled" packages included fees for optional services that the customer did not need or authorize. (Id. ¶¶ 63-64, 88-94.) CenturyLink's strategy was to "keep the price point low but add fees." (Id. ¶ 70.) One-third to one-half of CenturyLink customers were overcharged (id. ¶¶ 65, 178), and cramming was happening "all day, every day" "in every state" (id. ¶¶ 89, 96, 105, 107). (See also id. ¶¶ 103, 108 (providing that CenturyLink internally substantiated between 50 and 80% of customer overbilling complaints).)

In 2014, Defendants internally acknowledged that cramming was a problem and attempted to secretly reduce it. (Compl. ¶¶ 109-10.) At that point, over half of all sales employees were being written up each month for failing to meet the monthly sales quota. (Id. ¶ 78.) CenturyLink's human resources team developed a new "behavioral coaching" system that focused less on "metrics" and, instead, judged sales employees on how many customers they helped, whether they resolved all of the customers' issues, and whether they provided good customer service; under this system, supervisors, not sales employees,...