Provenz v. Miller, s. 95-15839

• Decision Date: 18 December 1996
• Docket Number: Nos. 95-15839,95-16819,s. 95-15839
• Citation: 102 F.3d 1478
• Parties: 96 Cal. Daily Op. Serv. 9137, 96 Daily Journal D.A.R. 15,131 Diane PROVENZ; Ahikim Eizenberg, Plaintiffs-Appellants, v. Robert C. MILLER; Charles M. Boesenberg; David G. Ludvigson; Stephen R. Bennion; William D. Jobe; MIPS Computer Systems, Inc., Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1478

102 F.3d 1478

96 Cal. Daily Op. Serv. 9137, 96 Daily Journal

D.A.R. 15,131

Diane PROVENZ; Ahikim Eizenberg, Plaintiffs-Appellants, v. Robert C. MILLER; Charles M. Boesenberg; David G Ludvigson; Stephen R. Bennion; William D. Jobe MIPS Computer Systems, Inc., Defendants-Appellees.

Nos. 95-15839, 95-16819.

United States Court of Appeals Ninth Circuit.

Argued and Submitted June 11, 1996.

Original Opinion Sept. 11, 1996.

Amended Dec. 18, 1996.

Jonathan K. Levine, Kaplan, Kilsheimer & Fox, New York City and Patrick J. Coughlin, Milberg, Weiss, Bershad, Hynes & Lerach, San Diego, CA, for plaintiffs-appellants.

Steven M. Schatz, Wilson, Sonsini, Goodrich & Rosati, Palo Alto, CA, for defendants-appellees.

Appeal from the United States District Court for the Northern District of California, Ronald M. Whyte, District Judge, Presiding. D.C. No. CV-92-20159-RMW.

Before: GOODWIN, PREGERSON, and KOZINSKI, Circuit Judges

PREGERSON, Circuit Judge:

Plaintiffs Diane Provenz and Ahikim Eizenberg, on behalf of themselves and all other similarly situated purchasers of stock of MIPS Computer Systems, Inc. (MIPS), appeal the district court's grant of summary judgment in favor of all defendants. Plaintiffs brought this action against MIPS and MIPS' officers and directors, Charles M. Boesenberg, Robert C. Miller, David G. Ludvigson, Stephen R. Bennion, and William D. Jobe, under section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 of the Securities Exchange Commission, 17 C.F.R. § 240.10b-5. The plaintiffs also appeal the district court's order awarding costs to defendants. The district court had jurisdiction under 28 U.S.C. § 1331. We have jurisdiction under 28 U.S.C. § 1291. We affirm in part, reverse in part, and remand.

BACKGROUND

The plaintiffs brought this securities fraud case as a class action. The class period runs from January 31, 1991, through October 9, 1991. Plaintiffs allege that, during the class period, the value of MIPS' stock was artificially inflated because defendants recognized revenue before the revenue was earned and failed to disclose to the market information about MIPS' products and forecasts. At the beginning of the class period, MIPS' stock traded at about $11 a share. At the high end On June 27, 1994, the district court granted defendants' motion for summary judgment. The district court held that there was insufficient evidence of scienter to hold defendants liable for securities fraud. The district court also awarded defendants their costs. This appeal followed.

of the class period, MIPS' stock traded at $20 5/8 a share. On October 10, 1991, the day that plaintiffs allege the fraudulently withheld information about MIPS' business and prospects entered the market, the price of the MIPS' stock declined to about $9 a share.

STANDARD OF REVIEW

A grant of summary judgment is reviewed de novo. Warren v. City of Carlsbad, 58 F.3d 439, 441 (9th Cir.1995), cert. denied, --- U.S. ----, 116 S.Ct. 1261, 134 L.Ed.2d 209 (1996). A court must view the evidence in the light most favorable to the non-moving party and draw any reasonable inferences in the non-moving party's favor. Id. Summary judgment is proper only if no genuine issue of material fact exists and only if the moving party is entitled to judgment as a matter of law. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249, 106 S.Ct. 2505, 2510-11, 91 L.Ed.2d 202 (1986). Where material factual disputes exist, the court must allow a jury to resolve the factual disputes. Chevron Corp. v. Pennzoil Co., 974 F.2d 1156, 1161 (9th Cir.1992).

ANALYSIS

I. Procedural Issues

As a preliminary matter, we must resolve two procedural issues. First, after defendants filed their reply brief but before the hearing, plaintiffs filed a motion to strike the "new" evidence contained in defendants' reply. The plaintiffs also filed a supplemental declaration that rebutted defendants' "new" evidence. The district court denied plaintiffs' motion to strike the defendants' "new" evidence and also refused to consider plaintiffs' supplemental declaration.

We believe the district court erred in not considering plaintiffs' supplemental declaration. In Marshall v. Gates, 44 F.3d 722, 723-25 (9th Cir.1995), we noted that Fed.R.Civ.P. 56(c) states, in relevant part, that a "party prior to the day of hearing may serve opposing affidavits." Although we interpreted this language as allowing a district court to adopt local rules that set time limits for a non-moving party to follow in opposing a motion for summary judgment, our holding in Marshall does not mean that defendants in this case may submit "new" evidence in their reply without affording plaintiffs an opportunity to respond. Such a result would be unfair.

We agree with the Seventh Circuit, which held that "[w]here new evidence is presented in a reply to a motion for summary judgment, the district court should not consider the new evidence without giving the [non-]movant an opportunity to respond." Black v. TIC Inv. Corp., 900 F.2d 112, 116 (7th Cir.1990). Thus, in resolving this appeal, we have considered both the evidence submitted by defendants in their reply and the evidence submitted by plaintiffs in their supplemental declaration.

As to the second procedural issue we must resolve, plaintiffs contend that the district court abused its discretion in denying plaintiffs' motion for reconsideration that was based on allegedly newly discovered evidence. In their motion, plaintiffs submitted a declaration of a MIPS ex-employee. It appears, however, that plaintiffs learned about this employee well before plaintiffs filed their opposition. In these circumstances, we cannot say that the district court abused its discretion in denying plaintiffs' motion for reconsideration.

II. The Merits

To prevail on their securities fraud claims under section 10(b) and Rule 10b-5, plaintiffs must prove: (1) that defendants made a false statement or failed to disclose information that rendered another statement misleading; (2) that such statement or omission was material; (3) that plaintiffs relied on the statement or omission; and (4) that defendants acted with scienter or an intent to defraud. Monroe v. Hughes, 31 F.3d 772, 776 (9th Cir.1994); In re Apple Computer

Securities Litigation, 886 F.2d 1109, 1113 (9th Cir.1989), cert. denied, 496 U.S. 943, 110 S.Ct. 3229, 110 L.Ed.2d 676 (1990).

A. The Alleged False and Misleading Statements

In a securities fraud case, summary judgment is improper if a plaintiff "shows a genuine issue of fact with regard to a particular statement by the company or its insiders." In re Worlds of Wonder Securities Litigation ("WOW "), 35 F.3d 1407, 1412 (9th Cir.1994) (quotations and citations omitted), cert. denied, --- U.S. ----, 116 S.Ct. 185, 133 L.Ed.2d 123 (1995) and --- U.S. ----, 116 S.Ct. 277, 133 L.Ed.2d 197 (1995). As we have explained, "[l]iability depend[s] on the plaintiffs' success in demonstrating that one of the statements made by the company was actually false or misleading." In Re Convergent Technologies Securities Litigation, 948 F.2d 507, 512 (9th Cir.1991). Thus, to determine whether summary judgment was proper in this case, we must examine each false or misleading statement allegedly made by defendants.

1. Defendant's Income Recognition Practices

Plaintiffs allege that during the class period in question defendants made false statements in MIPS' quarterly income statements when they recognized revenue before it was earned. According to plaintiffs, under Generally Accepted Accounting Principles (GAAP) and MIPS' own policies, defendants could not recognize income until a binding agreement existed, until deliverables ¹ were shipped, and until material contingencies were satisfied. When revenue can be recognized is what is at issue in this case.

Although defendants maintain that during the class period at issue no specific GAAP rules existed governing revenue recognition for technology licensing agreements, defendants do not appear to dispute plaintiffs' contentions that, under GAAP, revenue must be earned before it can be recognized. Defendants concede that, under GAAP, the earnings process must be substantially completed and an exchange must have occurred before revenue can be recognized. MIPS' own policy, which was in existence during the class period, states that "technology revenue is recognized upon the completion of contract requirements."

That contract requirements had to be completed before revenue could be recognized as "earned" makes perfect sense given the way that MIPS and its customers structured their deals and given the fact that intellectual property was involved. The purchase orders that were signed by customers contained various contingencies, including the approval of foreign governments and the receipt of deliverables. In some instances, the terms of the licensing agreements had not yet been negotiated or finalized when customers signed the purchase orders. Although the signed purchase orders stated that the licensing fee was nonrecoverable, normally no money exchanged hands until after customers received the deliverables. As a result, MIPS had a policy of not shipping any deliverables until a binding agreement existed. Finally, the technology that customers purchased was not completed or "taped out" until March 1991. Before that date, and until MIPS' customers received the actual technology, MIPS customers had received nothing they could use.

Defendants, however, contend, and the district court agreed, that the bulk of MIPS' technology was transferred during the sales process. As the district court explained:

The manner by which MIPS recognized revenue appears to have basically been consistent with its own written policy on the subject and GAAP.... The evidence indicates that while in some instances partial deliverables remained unshipped after revenue was recognized, the bulk of the terms of the technology transfers ...