Kipling v. Flex Ltd.

Background

Lead plaintiff National Elevator Industry Pension Fund, a multiemployer pension plan, brought the action individually and for a proposed class of people and entities that purchased Flex Ltd. common stock from January 26, 2017, through October 25, 2018. National Elevator alleged that Flex, Michael M. McNamara, Christopher E. Collier, Michael C. Dennison, and Kevin Kessel violated federal securities laws through statements and omissions concerning Flex’s contract with Nike to manufacture shoes.

The complaint alleged that Flex repeatedly told investors the Nike contract would reach profitability or break even by the end of fiscal year 2018, while manufacturing problems allegedly affected production. The alleged problems included returned shoes, shortages of raw materials, scrapped products, and employees lacking shoe-manufacturing experience. Flex later announced that the contract had not reached profitability and, on October 25, 2018, announced that it would wind down the Nike operations. National Elevator alleged that Flex’s stock price fell 35 percent that day.

The case previously involved an earlier dismissal without prejudice. The court had allowed amendment but required National Elevator to provide more detail connecting the alleged operational problems to the contract’s profitability and to adequately plead the defendants’ required state of mind. National Elevator then filed the amended consolidated class-action complaint at issue here.

Rulings on the Pleading

The court applied Federal Rule of Civil Procedure 12(b)(6), which permits dismissal for failure to state a legally sufficient claim. Because this was a securities-fraud action, the court applied the heightened requirements of Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act. Those rules required National Elevator to identify the allegedly misleading statements, explain specifically why they were false, and plead particular facts supporting the required state of mind.

National Elevator asserted a claim under Section 10(b) of the Securities Exchange Act and Rule 10b-5 against all defendants. The court held that National Elevator failed to adequately plead falsity as to every challenged statement. Regarding the profitability statements, the court held that the seven confidential witnesses described operational difficulties but did not provide particular facts about the prices Nike paid, Flex’s production costs, or other information showing that the profitability projections were false when made. The court also held that several witnesses lacked sufficient reliability or personal knowledge because their accounts relied on vague hearsay, lacked necessary detail, or came from witnesses who had not worked on the Nike project.

As to the other challenged statements, the court held that National Elevator again relied mainly on operational problems that did not necessarily contradict statements about early successes, improved efficiency, factory scaling, or design content. The court separately held that Statement 5 was nonactionable corporate puffery—a vague expression of corporate optimism on which investors ordinarily do not rely. The court therefore granted defendants’ motion to dismiss the Section 10(b) and Rule 10b-5 claim to the extent it challenged Statement 5, Statements 1, 6–8, 11, and 14, and Statements 2–5, 9, 10, 12, and 13.

National Elevator also asserted a Section 20(a) claim against McNamara, Collier, Dennison, and Kessel. Section 20(a) requires a primary violation of federal securities law and control over the primary violator. Because the court found no adequately pleaded primary securities violation, it also granted defendants’ motion to dismiss the Section 20(a) claim.

Other Requests and Disposition

The court granted defendants’ request for judicial notice of public earnings-call transcripts, investor and analyst conference materials, and Securities and Exchange Commission filings. The court considered those materials only to determine what Flex or its employees represented to the market, not for the truth of the facts asserted in those materials.

The court dismissed the amended complaint in its entirety with prejudice. It concluded that further amendment would be futile because the deficiencies had been identified in the prior order and remained in the amended complaint. The court therefore granted defendants’ motion to dismiss the amended consolidated class-action complaint in its entirety with prejudice. Judge Lucy H. Koh signed the order.