On October 20, 2017, Judge Michael M. Anello of the United States District Court for the Southern District of California denied in part and granted in part a motion to dismiss brought by Qualcomm, Inc. (the “Company”), its CEO, and four directors, in response to a shareholder lawsuit. 3226701 Canada, Inc. v. Qualcomm, Inc., Case No. 15-cv-2678-MMA (WVG) (S.D. Cal. Oct. 20, 2017). Plaintiff alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (“Exchange Act”), as well as violations of SEC Rule 10b-5, in connection with statements made by the Company and its directors regarding one of its microprocessors used in smartphones and other mobile devices. The Court held that plaintiff had adequately pleaded falsity and scienter in connection with some of the alleged statements, but that other statements were not actionable. The Court allowed the claims against the CEO and the Company to proceed, but dismissed the claims against the four directors.

At the heart of plaintiff’s allegations is the Snapdragon 810 (“810”) microprocessor, intended for use in smartphones to “improve power efficiency, processing speeds, and technical capabilities, including the ability to seamlessly connect to 4G/LTE networks.” As part of the design process for the 810, the Company allegedly “identified smartphones in which the 810 would be incorporated so that it could design the processor to match the technological specifications and capabilities of those devices.” The most important device the Company targeted was the Samsung Galaxy S6. According to plaintiff, when the Company began testing the 810, however, it found that the processor experienced severe overheating problems, which were allegedly known to all defendants. The overheating problems were allegedly so pronounced that Samsung ultimately decided to abandon the 810 for the Galaxy S6 phone, opting instead to use its own processor. Plaintiff alleged that during the proposed class period, defendants made several material misstatements to investors regarding the performance of the processor, as well as misstatements concerning the use of the processor in various mobile devices, including the Galaxy S6.

The Court first held that several alleged statements were not actionable because they were not materially false or misleading. In particular, the Court found that phrases such as “Samsung intended to use the 810 in its flagship device,” and “[m]any of the flagship smartphones released next year are expected to be built around Qualcomm® Snapdragon™ 810 processors” were not actionable, because “the statements themselves did not affirmatively lead the market to one conclusion or the other.” Further, the Court found that merely because defendants did not “disabuse Plaintiff, analysts, or journalists of their conclusion that Qualcomm’s 810 would be used in Samsung’s Galaxy S6 does not render the statements actionable.” The Court similarly found that the Company’s other forward-looking statements about the 810—for example, that the 810 remained “on track,” that it was expected to be available in 1H 2015, and that there were no significant technical issues that would cause a delay—were not actionable, because they amounted to “puffery” rather than statements of fact, and because plaintiff failed to allege that defendants knew the expected release date was “insurmountable or particularly significant.” Moreover, with respect to one of the alleged misstatements, the Court noted that plaintiff failed to sufficiently plead loss causation because plaintiff “did not link economic losses to disclosure of the alleged fraud because the . . . disclosure d[id] not reference the 810’s propensity to overheat.” Having found that plaintiff failed to sufficiently plead that the four director defendants made actionable materially false or misleading statements, the Court dismissed the Section 10(b) claims against them with prejudice.

The Court did hold, however, that statements made by the Company and its CEO on January 28, 2015—that the 810 was “performing well,” or “as expected,” and that any concerns were related to “one OEM”—were actionable based on plaintiff’s pleadings. In particular, the Court found that plaintiff had adequately pleaded that these statements were materially false or misleading because news reports prior to January 28, 2015, disclosed that the 810 had heat emission issues and that the launch of at least one mobile device was “forced back . . . because of ‘manufacturing challenges with the . . . 810.’” The Court further found that plaintiff adequately pled scienter, primarily under the “core operations” theory, whereby scienter may be inferred where the facts critical to a business’ core operations or important transactions are known to key company officers. Emphasizing that Samsung accounted for 10% of the Company’s revenues from 2011-2013—and that the 810 was supposed to be the Company’s “Cadillac” processor and was the focus of media scrutiny—the Court found that “for the purpose of this motion, it could arguably be ‘absurd’ to suggest that [the CEO] was not aware of issues relating to the 810’s overheating.” Accordingly, the Court found that the pleadings supported a strong inference of scienter on the part of the CEO, which it imputed to the Company. Noting that defendants did not challenge plaintiff’s loss causation allegations related to the January 28, 2015 statements, and having found that plaintiff sufficiently pled that the January 28, 2015 statements were materially false or misleading and that those statements were made with the requisite scienter, the Court then denied the Company’s and the CEO’s motion to dismiss the securities fraud claims against the Company and its CEO related to the January 28, 2015 statements.

In addition, because defendants relied solely on the lack of a primary violation of Section 10(b) in moving to dismiss plaintiff’s claim under Section 20(a), the Court allowed the Section 20(a) claims to proceed against the Company and its CEO, but dismissed that claim with prejudice as to the four director defendants.

This decision is another example of district courts in the Ninth Circuit finding scienter to be adequately alleged at the pleading stage under the “core operations” theory.

Click here to view 3226701 Canada, Inc. v. Qualcomm, Inc.