McGovney v. Aerohive Networks, Inc., Case No. 18-CV-00435-LHK

• Decision Date: 05 February 2019
• Docket Number: Case No. 18-CV-00435-LHK
• Parties: Jacob MCGOVNEY, et al., Plaintiffs, v. AEROHIVE NETWORKS, INC., et al., Defendants.
• Court: U.S. District Court — Northern District of California

367 F.Supp.3d 1038

Jacob MCGOVNEY, et al., Plaintiffs,

v.AEROHIVE NETWORKS, INC., et al., Defendants.

Case No. 18-CV-00435-LHK

United States District Court, N.D. California, San Jose Division.

Signed February 5, 2019

Laurence Matthew Rosen, The Rosen Law Firm, P.A., Jennifer Pafiti, Pomerantz LLP, Los Angeles, CA, Jeremy A. Lieberman, Michele S. Carino, Pro Hac Vice, J. Alexander Hood, II, Pro Hac Vice, Pomerantz LLP, New York, NY, Omar Jafri, Pro Hac Vice, Pomerantz LLP, Chicago, IL, Rosemary M. Rivas, Levi & Korsinsky LLP, San Francisco, CA, for Plaintiffs.

John Charles Roberts, Jr., Pro Hac Vice, Wilson Sonsini Goodrich & Rosati A Professional Corporation, Seattle, WA, Keith E. Eggleton, Rodney Grant Strickland, Jr., Ryan Scott Wolf, Wilson Sonsini Goodrich & Rosati A Professional Corporation, Palo Alto, CA, for Defendants.

ORDER GRANTING MOTION TO DISMISS WITHOUT PREJUDICE

Re: Dkt. No. 47

LUCY H. KOH, United States District Judge

Lead Plaintiff Andrew Moreau ("Plaintiff"), individually and on behalf of all other persons similarly situated, alleges that Defendants Aerohive Networks, Inc. ("Aerohive"), David K. Flynn, and John Ritchie (collectively, "Defendants") violated federal securities laws. Before the Court is Defendants' motion to dismiss. ECF No. 47 ("Mot."). Having considered the parties' briefing, the relevant law, and the record in this case, the Court GRANTS Defendants' motion to dismiss without prejudice.

I. BACKGROUND

A. Factual Background

1. The Parties

Lead Plaintiff Andrew Moreau "purchased Aerohive common shares" and was allegedly damaged by misrepresentations and omissions made by Defendants. ECF No. 44, Consolidated Amended Class Action Complaint ("Compl.") ¶¶ 17–18, 23. Lead Plaintiff seeks to represent a putative class of "all persons other than Defendants who purchased or otherwise acquired Aerohive common shares between November 1, 2017 and January 16, 2018, both dates inclusive (the "Class Period")." Id. ¶ 1.

Defendant Aerohive is a California corporation that is headquartered in Milpitas, California. Id. ¶ 24. Aerohive's common stock trades on the New York Stock Exchange under the symbol "HIVE." Id. Defendant David K. Flynn ("Flynn") has served as Aerohive's Chief Execute Officer ("CEO") since July 2007, as its President since November 2007, and as its Chairman since July 2013. Id. ¶ 25. Defendant John Ritchie ("Ritchie") has served as Aerohive's Chief Financial Officer ("CFO") and Senior Vice President since September 2015, and as Aerohive's Chief Operating Officer ("COO") since February 2017. Id. ¶ 26. Flynn and Ritchie are collectively referred to by Plaintiffs as the "Individual Defendants."

2. Aerohive's Business

According to Plaintiffs, "Aerohive has designed and developed a cloud networking platform and portfolio of products that enable customers to manage their network systems and to collect and analyze data from users." Id. ¶ 2. The Company's products include hardware, such as routers and switches, network management and data collection applications, and maintenance and support services. Id. ¶ 29. Aerohive has sold to over 30,000 end-user customers (organizations holding licenses to products and/or software subscriptions or services). Id. "Aerohive services the healthcare, education, manufacturing, distribution, and retail industries throughout the United States, Europe, the Middle East, and Asia." Id.

Aerohive reaches most of its end-user customer base through "channel partners," who are authorized to resell, distribute, and service Aerohive's technology platform. Id. ¶ 30. These channel partners are supported by Aerohive's sales organization, which is comprised of regional sales offices and inside sales teams. Id.

By the end of 2016, roughly 40 percent of Aerohive's total revenues came from the education sector, especially through a government-funded program known as E-Rate, which provides subsidies to allow educational institutions to purchase technology. Id. ¶ 31.

3. Challenges Facing Aerohive in 2016

Aerohive has had historically promising year-over-year increases in revenue from 2013 to 2016. Id. ¶ 32. Despite this, Aerohive has never achieved profitability. Id. ¶¶ 3, 32. By the end of 2016, Aerohive faced increasing pressure to prove it was a "real player in the industry" and to "maintain the value of its common stock." Id. ¶¶ 4, 32. According to Plaintiffs, however, Aerohive faced several "obstacles," including uncertainties surrounding the E-Rate program, which historically generated nearly 40 percent of Aerohive's revenues. Id. ¶¶ 3, 33. In addition, Aerohive launched the next generation of its cloud networking platform, HiveManager NG, which, due to delays in product updates, had created what Aerohive called "elongated sales cycles" while customers waited for features and capabilities to be added. Id. ¶¶ 3, 33.

4. Aerohive's 2017 Sales Restructuring

Plaintiffs allege that in or around 2017, Defendants announced a major overhaul of Aerohive's sales organization and sales strategy, which Defendants promised would improve revenues and profitability. Id. ¶ 4. Specifically, Plaintiffs allege that these changes included: (1) installing new sales leadership; (2) "unbundling" Aerohive's product and service offerings; and (3) growing the Company's business with Dell, one of its key strategic partners. Id. The Court provides further details about Plaintiffs' allegations regarding Aerohive's changes in turn.

First, Aerohive hired Ron Gill ("Gill") as Vice President of Americas Sales. Id. ¶ 34. Gill had previously worked for Ruckus, one of Aerohive's competitors. Id. Gill reported to Thomas J. Wilburn ("Wilburn"), then-Senior Vice President of Worldwide Field Operations, "who possessed extensive experience in technology and networking sales and marketing." Id. Aerohive also added Alan Amrod ("Amrod"), another industry veteran, in order to make the organization "faster and more nimble." Id. Under this new structure, Defendant Flynn stated he would "continue to directly manage sales, marketing, and products." Id.

Second, Aerohive announced it would shift away and diversify the customer base from the E-Rate program by "unbundling" Aerohive's product and service offerings. Id. ¶¶ 33, 35. For instance, Aerohive announced a new offering consisting of a lower-priced, entry-level product called "Aerohive Connect," with additional features and upgrades that could be purchased as part of "Aerohive Select," a subscription service that would generate deferred revenues on a going-forward basis. Id. ¶¶ 33, 35.

Third, Defendants placed emphasis on their plan to grow Aerohive's business with Dell. Id. ¶ 5.

5. Defendants' Failing Sales Execution Strategy

Plaintiffs allege that Defendants' sales execution strategy was flawed and that Aerohive concealed these flaws from investors. Id. ¶ 40 ("Contrary to Defendants' statements, and unbeknownst to investors, Defendants' plan to achieve profitability by overhauling the sales organization showed signs of failing almost immediately."). In particular, Plaintiffs allege that Aerohive's strategy resulted in: (1) the departure of sales personnel; (2) failure to implement systems that ensured accuracy and predictability in forecasting sales revenues; (3) failures in the plan to offer the lower-priced product, Aerohive Connect, and then upsell the service subscription package, Aerohive Select; and (4) failures in the development of the partnership with Dell. Id. ¶¶ 41–46. The Court discusses each of Plaintiffs' allegations regarding failures in Aerohive's sales strategy below.

First, Plaintiffs allege that the introduction of new sales leadership resulted in departures of sales personnel beginning in January 2017. Id. ¶ 41. Plaintiffs plead: "[t]he abrupt resignation of Senior Director of Inside Sales Timothy Balistreri and loss of CMO/CSO David Greene, both respected leaders within the sales force, in conjunction with layoffs of existing Aerohive sales representative[s] in favor of VP Ron Gill's hiring of former colleagues from Ruckus, an Aerohive competitor, ultimately hurt morale." Id. In support of this allegation, Plaintiffs rely on information from former Aerohive employees, identified by Plaintiffs as "Confidential Witnesses" ("CW"). One witness, identified as CW1, was a former inside sales representative from October 2016 to July 2017. Id. CW1 stated: "[Gill] laid off four or five of us at the same time, execution style. We came into a room and were sent home for doing exactly what we had been told it was our job to do – we were told ‘focus on [E-Rate],[’] then suddenly it wasn't our focus.... Communication was so terrible at that time that the VP of Sales Operations called my cell phone and said he didn't even know [about the layoffs] until afterward." Id. Another witness, identified as CW2, was a program director who reported directly to Defendant Flynn and General Manager Amrod from June 2015 to September 2017. Id. ¶ 42. According to Plaintiffs, CW2 "confirmed that Gill was too quick to cut E-Rate-experienced sales personnel, who knew the Company's product lines and who were responsible for generating nearly 40 percent of the Company's revenue."Id. CW2 reported that neglecting E-Rate caused Aerohive to lose valuable sources of business, and many E-Rate customers stopped listing Aerohive as a preferred provider as they had in the past. Id. Finally, CW3, an Aerohive territory manager from August 2015 to September 2017, stated that the rate of attrition in the Summer and Fall of 2017 was "unprecedented" and by the end of Fall 2017, the majority of the regional sales managers had been with the Company less than a year and did not understand Aerohive's products well enough to sell them. Id. ¶ 43.

Second, Plaintiffs allege that "Aerohive's failure to implement a system that ensured accuracy and predictability in forecasting sales revenues compounded the employee turnover problem." Id. ¶ 44. CW3 reported that because sales quotas had become unrealistic and there was little...