Silverman v. Motorola, Inc.

• Decision Date: 25 July 2011
• Docket Number: No. 07 C 4507.,07 C 4507.
• Citation: 798 F.Supp.2d 954
• Parties: Eric SILVERMAN, On Behalf of Himself and All Others Similarly Situated, Plaintiffs, v. MOTOROLA, INC., et al., Defendants.
• Court: U.S. District Court — Northern District of Illinois

798 F.Supp.2d 954

Eric SILVERMAN, On Behalf of Himself and All Others Similarly Situated, Plaintiffs,

v.MOTOROLA, INC., et al., Defendants.

No. 07 C 4507.

United States District Court, N.D. Illinois, Eastern Division.

July 25, 2011.

David A. Rosenfeld, Joseph Russello, Coughlin Stoia Geller Rudman & Robbins LLP, Melville, NY, Ivy T. Ngo, Jennifer L. Gmitro, Michael J. Dowd, Samuel H. Rudman, Susan G. Taylor, Tor Gronborg, Trig Randall Smith, Robbins Geller Rudman & Dowd LLP, Matthew P. Montgomery, Coughlin Stoia Geller Rudman & Robbins LLP, San Diego, CA, Lori Ann Fanning, Marvin Alan Miller, Miller Law LLC, Chicago, IL, James E. Barz, Robbins Geller Rudman & Dowd LLP, Naperville, IL, for Plaintiffs.

Erin K. Lynch, J. Timothy Eaton, Michael P. Sheehan, Shefsky & Froelich Ltd., David K. Cole, Kim Ann Leffert, Mayer Brown LLC, Matthew E. Van Tine, Lori Ann Fanning, Marvin Alan Miller, Miller Law LLC, John Joseph Barber, Tabet Divito Rothstein, Chicago, IL, James W. Thomas, Jr., John C. Massaro, M. Sean Laane, Stephen M. Sacks, Arnold & Porter LLP, Jerry A. Isenberg, Joseph I. Goldstein, Murphy & McGonigle, Washington, DC, D. Seamus Kaskela, Schiffrin Barroway Topaz & Kessler LLP, Radnor, PA, Deborah R. Gross, Law Offices Of Bernard M. Gross, P.C., Philadelphia, PA, Richard A. Maniskas, Glancy Binkow & Goldberg LLP, Los Angeles, CA, for Defendants.

MEMORANDUM OPINION AND ORDER

AMY J. ST. EVE, District Judge:

Plaintiffs have filed a purported class-action lawsuit against Defendants Motorola, Inc. (“Motorola”); Motorola's Board Chairman and CEO, Edward J. Zander (“Zander”); Motorola's Executive Vice President and Chief Financial Officer, David W. Devonshire (“Devonshire”); Motorola's Executive Vice President and President of Motorola's Mobile Devices division, Ronald G. Garriques (“Garriques”); and Motorola's Executive Vice President and Chief Strategy Officer, Richard N. Nottenburg (“Nottenburg”).¹ (R. 276.) Defendants have moved for summary judgment, arguing that there is no genuine dispute as to any material fact, and that they are entitled to judgment as a matter of law. (R. 366.) For reasons explained below, the Court denies Defendants' motion.

BACKGROUND

Plaintiffs allege that Motorola and certain of its directors and officers violated the Securities and Exchange Act of 1934, 15 U.S.C. §§ 78a et seq. (“Section 10(b)” and “Section 20(a)”) and SEC Rule 10b–5, 17 C.F.R. § 240.10b–5 (“Rule 10b–5”). (R. 276.) They seek recovery on behalf of all persons who purchased or otherwise acquired Motorola's publicly traded securities from July 19, 2006, through January 4, 2007. ( Id.) The Court certified a class of those who purchased publicly traded securities of Motorola during this period. (R. 140.)

Motorola has three primary business segments: Mobile Devices, Networks and Enterprise, and Connected Home Solutions. ( Id.; R. 327 at 7.) The Second Amended Complaint (“the Complaint”) alleges that Motorola and its officers engaged in a fraudulent scheme with respect to the Mobile Devices business segment. (R. 276 at 3.) According to the Complaint, the Mobile Devices segment relied on its vendor, Freescale Semiconductor, Inc. (“Freescale”), for the production of integrated circuits for use in the segment's 3G handsets. ( Id.) Plaintiffs contend that Freescale repeatedly failed to deliver commercially viable circuits to Motorola on a timely basis, which had “disastrous” consequences. ( Id. at 4) Specifically, those failures allegedly resulted in Motorola's being unable, three times, to deliver a 3G handset for introduction in the North American market during the first three quarters of 2006. ( Id.) The Complaint provides that these problems threatened Motorola's ability consistently to deliver double-digit operating earnings, as the company's competitors, Nokia and Samsung, had already introduced 3G handsets by May 2006. ( Id.)

As a result, Plaintiffs submit, Motorola suffered an earnings “gap” that grew to over $1.1 billion in July 2006. (R. 276 at 4–5.) Further, despite knowing that it was highly unlikely that the 3G handsets would contribute to earnings in 4Q 2006, Defendants “continued to assure analysts and investors that the 3G product portfolio was ‘on track’ and that Mobile Devices would deliver record, double-digit operating earnings during 3Q06 and 4Q06 based on increased market share for handset sales, including the purportedly forthcoming high-tier 3G devices.” ( Id. at 5.) The Complaint further provides that, “[r]ather than disclose the truth about the collapse of Motorola's earning potential ..., defendants persisted in their fraudulent conduct and covered-up the Company's resulting earnings gap.” ( Id. at 6.) Specifically, it avers that Defendants “executed two highly unusual, 98.7% profit, intellectual property ... licensing transactions valued at $440.0 million for the purpose of obfuscating the fact that the Company's 3G portfolio was in tatters and was materially affecting Motorola's handset margins and financial results.” ( Id.)

Defendants filed a motion for summary judgment on March 25, 2011. (R. 366.) They argue that the undisputed facts reveal that (1) their statements about Motorola's new 3G phones were truthful and not misleading; (2) they did not act with scienter; (3) their disclosures concerning intellectual-property revenue were not materially misleading; and (4) Plaintiffs cannot carry their burden of establishing loss causation. (R. 366–1 at passim.)

LEGAL STANDARD

Summary judgment is appropriate when “the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a). A genuine dispute as to a material fact exists if “the evidence is such that a reasonable jury could return a verdict for the nonmoving party.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). In determining summary judgment motions, “facts must be viewed in the light most favorable to the nonmoving party only if there is a ‘genuine’ dispute as to those facts.” Scott v. Harris, 550 U.S. 372, 380, 127 S.Ct. 1769, 167 L.Ed.2d 686 (2007). The party seeking summary judgment has the burden of establishing the lack of any genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). After “a properly supported motion for summary judgment is made, the adverse party ‘must set forth specific facts showing that there is a genuine issue for trial.” Anderson, 477 U.S. at 255, 106 S.Ct. 2505 (quotation omitted). “The party opposing summary judgment ... bears the burden of coming forward with properly supported arguments or evidence to show the existence of a genuine issue of material fact.” Treadwell v. Office of Ill. Sec'y of State, 455 F.3d 778, 781 (7th Cir.2006) (citations omitted).

ANALYSIS

The elements of a private action under Rule 10b–5 are “(1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation.” Janus Capital Grp., Inc. v. First Derivative Traders, ––– U.S. ––––, 131 S.Ct. 2296, 2301 n. 3, 180 L.Ed.2d 166 (quoting Stoneridge Inv. Partners, L.L.C. v. Scientific–Atlanta, Inc., 552 U.S. 148, 157, 128 S.Ct. 761, 169 L.Ed.2d 627 (2008)).

The “materiality requirement is satisfied when there is ‘a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.' ” Matrixx Initiatives, Inc. v. Siracusano, –––U.S. ––––, 131 S.Ct. 1309, 1318, 179 L.Ed.2d 398 (2011) (quoting TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449, 96 S.Ct. 2126, 48 L.Ed.2d 757 (1976)). Furthermore, a misrepresentation must be false when made. See ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 105 (2d Cir.2007); Shushany v. Allwaste, Inc., 992 F.2d 517, 524 (5th Cir.1993); Pommer v. Medtest Corp., 961 F.2d 620, 623 (7th Cir.1992); In re NeoPharm, Inc. Secs. Litig., 705 F.Supp.2d 946, 966 (N.D.Ill.2010).

“Scienter” refers to “a mental state embracing intent to deceive, manipulate, or defraud.” Id. (quoting Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193–94, & n. 12, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976)). The Supreme Court has also explained that “[r]eliance by the plaintiff upon the defendant's deceptive acts is an essential element of the § 10(b) private cause of action. It ensures that, for liability to arise, the ‘requisite causal connection between a defendant's misrepresentation and a plaintiff's injury’ exists as a predicate for liability.” Stoneridge Inv., 552 U.S. at 159, 128 S.Ct. 761. A rebuttable presumption of reliance exists under the fraud-on-the-market doctrine, whereby “reliance is presumed when the statements at issue become public. The public information is reflected in the market price of the security. Then it can be assumed that an investor who buys or sells stock at the market price relies upon the statement.” Id.

The Supreme Court recently explained that the loss-causation requirement means that “the defendant's deceptive conduct caused the investors' claimed economic loss.” Erica P. John Fund, Inc. v. Halliburton Co., ––– U.S. ––––, 131 S.Ct. 2179, 2183, 180 L.Ed.2d 24 (2011). To satisfy this requirement, a plaintiff must “show that a misrepresentation that affected the integrity of the market price also caused a subsequent economic loss.” Id. at 2186 (emphasis in original). “[T]he fact that a stock's ‘price on the date of the purchase was inflated because of a misrepresentation’ does not necessarily mean that the misstatement is the cause of a later decline in value.... [T]he drop could instead be the result of other intervening causes, such as ‘changed economic circumstances, changed investor...