Pearlstein v. Blackberry Ltd.

• Decision Date: 13 March 2015
• Docket Number: No. 13–CV–7060 TPG.,13–CV–7060 TPG.
• Citation: 93 F.Supp.3d 233
• Parties: Marvin PEARLSTEIN, Individually and on Behalf of All Others Similarly Situated, Plaintiff, v. BLACKBERRY LIMITED, et al., Defendants.
• Court: U.S. District Court — Southern District of New York

93 F.Supp.3d 233

Marvin PEARLSTEIN, Individually and on Behalf of All Others Similarly Situated, Plaintiff

v.BLACKBERRY LIMITED, et al., Defendants.

No. 13–CV–7060 TPG.

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

Signed March 13, 2015.

Bruce Whitney Dona, Kahn Swick & Foti, LLC, New York, NY, Kim Elaine Miller, Kahn Swick & Foti, LLC, Madisonville, LA, for Plaintiff.

Joel Charles Haims, James Joseph Beha, II, Morrison & Foerster LLP, New York, NY, Dan Edward Marmalefsky, Morrison & Foerster, Los Angeles, CA, Jordan Eth, Morrison & Foerster LLP, San Francisco, CA, for Defendants.

OPINION

THOMAS P. GRIESA, District Judge.

Plaintiffs bring this action against mobile technology manufacturer BlackBerry Limited and its former officers for securities fraud relating to the release of defendants' new BlackBerry 10 operating system and series of smartphones. Plaintiffs allege that defendants attempted to conceal the poor performance of the BlackBerry 10 devices in order to artificially inflate the company's stock price. Defendants move to dismiss the Consolidated Amended Class Action Complaint (“the complaint” or “CAC”). Defendants' motion to dismiss is granted because plaintiffs have failed to plausibly allege that defendants made misrepresentations or omissions of material fact, and have failed to show that defendants acted with scienter.

Factual Allegations

Plaintiffs purchased BlackBerry Limited stock between March 28, 2013 and September 20, 2013 (the “Class Period”). CAC ¶ 1. BlackBerry Limited, formerly Research in Motion Limited, was at one point a leading smartphone manufacturer. CAC ¶ 3. It was one of the first companies to release a mobile device integrating electronic mail and messenger capabilities. CAC ¶ 3. From 2002 through 2007, BlackBerry came to dominate the smartphone market in the United States, accounting for one-third of all smart devices sold. CAC ¶ 4. In 2007, however, competing technology company Apple Inc. introduced the first iPhone, a smartphone offering a fully internet-capable browser. CAC ¶ 5. Over the next several years, BlackBerry lost market share to Apple Inc. and other companies offering technologically superior products. CAC ¶ 5. In an effort to reverse its decline in the smartphone market, BlackBerry began to develop a new series of smartphones running a new operating system, BlackBerry 10. CAC ¶ 8. The BlackBerry Z10 would be an all-touchscreen device, and the Q10 would have a physical keyboard. BlackBerry put all of its resources into the new BlackBerry 10 devices, counting on them to reverse the company's losses and bring a return to profitability. CAC ¶¶ 9–13.

In January of 2013, BlackBerry debuted the new Z10 smartphone in some foreign markets. CAC ¶¶ 15–16. Soon after the debut, a number of foreign news media outlets began reporting that the phone was being sold at a discount in response to poor sales. CAC ¶ 16. BlackBerry released its Z10 smartphones in the United States on March 28, 2013. CAC ¶ 54. That date marks the beginning of the Class Period, which ran until September 20, 2013. CAC ¶ 1. The Z10's domestic performance was poor, leading the devices to be sold at a discount. CAC ¶¶ 19–22. Nevertheless, defendants made a number of positive statements about the devices in their public filings, press releases, and earnings calls. CAC ¶¶ 41–119. The Class Period ended on September 20, 2013, when BlackBerry issued a press release stating that it expected to report a charge against inventory of approximately $930 million, attributable to the Z10 devices. CAC ¶ 116. BlackBerry's stock price fell from $10.52 per share to $8.01 per share by the end of September. CAC ¶ 117.

Plaintiffs allege that during the Class Period defendants made a number of misrepresentations to conceal the poor performance of the BlackBerry 10 smartphones. See CAC ¶¶ 16–19. Plaintiffs further allege that defendants: (1) violated generally accepted accounting principles (“GAAP”); and (2) failed to disclose to the SEC that BlackBerry devices, although shipped, were not being sold through to end customers. CAC ¶ 66, 109. Plaintiffs claim that defendants took these actions, either knowingly or recklessly, in order to “return the Company as a meaningful competitor in the mobile arena” and to ensure that corporate officers would continue in their employment and receive performance-based compensation. CAC ¶¶ 125, 128–132. These actions purportedly increased BlackBerry's stock price and led market analysts to overstate the company's value, causing plaintiffs and other investors to purchase the stocks at inflated prices. CAC ¶¶ 140, 146. Plaintiffs allege that BlackBerry's share price fell once the truth of defendants' fraud came to light, causing them economic losses. CAC ¶ 138.

A. Defendants' Alleged Misrepresentations and Omissions.

Plaintiffs allege that during the Class Period defendants issued press releases, made public statements, and filed financial reports misrepresenting the true performance of the BlackBerry 10 devices. These alleged misrepresentations occurred on four dates in the spring and summer of 2013.

1. The March 28, 2013 Financial Form, Press Release, and Earnings Call.

March 28, 2013 plays a central role in the events described in the complaint. On that date, BlackBerry filed its annual report on Form 40–F with the SEC for the 2013 fiscal year. CAC ¶ 41. BlackBerry also issued a press release describing the previous year's performance. CAC ¶¶ 43. Finally, defendant Thorstein Heins (“Heins”), then president and CEO of BlackBerry, participated in an earnings call to discuss the 2013 fiscal year. CAC ¶ 45.

BlackBerry's 40–F annual report described the company's revenue recognition strategy, stating that “The Company recognizes revenue when it is realized or realizable and earned.” CAC ¶ 67. The report also stated, “Successfully transitioning to BlackBerry 10, the Company's next generation BlackBerry platform ... the launch of BlackBerry 10 in January 2013 marked the beginning of the organization's transition to becoming a leading mobile computing organization.” CAC ¶ 41. Finally, the form disclosed that BlackBerry held $603 million in inventory after “including the determination of obsolete or excess inventory....” CAC ¶ 91.

The March 28, 2013 press release announced BlackBerry's fourth quarter and year-end results for the 2013 fiscal year.

The press release quoted Heins as saying, “We have implemented numerous changes at BlackBerry over the past year and those changes have resulted in the Company returning to profitability in the fourth quarter.” CAC ¶ 43. In regard to the BlackBerry 10 devices, Heins said: “Customers love the device and the user experience and our teams ... are now focused on getting those devices into the hands of ... customers.” CAC ¶ 43. The press release also announced revenues from the fourth quarter of $2.7 billion, with 61% of those revenues coming from hardware. CAC ¶ 79.

Finally, defendant Heins participated in an earnings call discussing BlackBerry's performance in the previous fiscal year. CAC ¶ 45. Heins said: “The initial early global demand for the [BlackBerry] 10 has been better than anticipated, and our recent announcement of the largest single purchase order in our history, for 1 million units, is also indicative of a strong initial support and demand.” CAC ¶ 45.

2. The April 12, 2013 Press Release.

On April 11, 2013, a Wall Street Journal blog reported that, according to research and investment firm Detwiler Fenton, customer returns of the BlackBerry Z10 were outnumbering sales, “a phenomenon we have never seen before.” CAC ¶ 48. BlackBerry responded to this blog posting by issuing a “strongly-worded press release.” CAC ¶ 49. The press release quoted defendant Heins as saying “sales of the BlackBerry Z10 are meeting expectations and the data we have collected ... demonstrates that customers are satisfied with their devices .... Return rate statistics show that we are at or below our forecasts ....” CAC ¶ 49. The press release also called upon authorities in Canada and the United States to investigate the “materially false and misleading comments about device return rates.” CAC ¶ 49.

3. The June 28, 2013 Financial Report, Press Release, and Earnings Call.

On June 28, 2013, BlackBerry filed is first quarter earnings release for the 2014 fiscal year. CAC ¶ 70. BlackBerry “disclosed that “[t]he smartphone market remains highly competitive, making it difficult to estimate units, revenue and levels of profitability.” ” CAC ¶ 70. BlackBerry reported that “it had shipped 6.8 million smart phones of which approximately 40% or 2.7 million were BlackBerry 10 devices.” CAC ¶ 77. The report went on to say that BlackBerry held $887 million in inventory after “including the determination of obsolete or excess inventory.” CAC ¶ 93. It also reported an increase in gross margins of $256 million, which it attributed to “to higher average selling prices and related gross margins of BlackBerry 10 devices shipped.” CAC ¶ 99.

The June 28, 2013 financial report was accompanied by a press release announcing BlackBerry's results in the first quarter. CAC ¶ 81. The press release described a 15% increase in revenues from the previous quarter, and showed that 6.8 million BlackBerry smartphones had been shipped. CAC ¶ 81. The press release also disclosed that BlackBerry's gains were “partially offset by an increase in marketing expenditures and sales incentives to support the continued launch of BlackBerry 10 and a reduction in the recovery of income taxes.” CAC ¶ 119.

Defendant Heins then held an earnings call regarding the BlackBerry 10 devices. CAC ¶ 51. Heins stated “The BlackBerry Z10 has been an effective launch product to showcase the renewed and reengineered BlackBerry 10 experience to both consumers and enterprises. Let's remember, one year ago none of these products existed, and today they are just launching, and have been well-received, because of the performance and quality of BlackBerry 10.

It has...