In re HP Inc. Securities Litigation

Background

The plaintiffs brought a securities class action against HP Inc. and Dion J. Weisler, Catherine A. Lesjak, Steven J. Fieler, Enrique Lores, and Christoph Schell. They alleged violations of Sections 10(b), 20(a), and 20A of the Securities Exchange Act of 1934, along with Securities and Exchange Commission Rule 10b-5.

The claims concerned HP’s Four Box Model, which HP announced in 2015 to assess supplies revenue using factors including installed base, usage, supplies market share or supplies attach, and supplies pricing. During the alleged class period, February 23, 2017, through October 3, 2019, HP told investors that the model predicted supplies revenue would stabilize. The plaintiffs alleged that HP failed to disclose that the model lacked reliable telemetry data from toner-based printers and instead used inaccurate, stale, or lagging third-party survey data. The amended complaint also relied on HP’s February 27, 2019 statement that it did not have a statistically significant sample from its system telemetry.

Judicial Notice

Both sides asked the court to take judicial notice of documents, including Securities and Exchange Commission filings, meeting and earnings-call transcripts, and an SEC cease-and-desist order. The court granted both requests and took notice of the existence of the exhibits. It did not take judicial notice of the truth of disputed contents and did not rule on the exhibits’ admissibility.

Section 10(b) Claims

The defendants argued that the plaintiffs failed to adequately plead actionable misstatements and scienter, meaning the required state of mind. The court agreed.

First, the court held that the amended complaint did not plead falsity with the required particularity. The plaintiffs argued that HP’s February 27, 2019 statement established that earlier statements about the Four Box Model were false. The court found that the statement said HP had telemetry data, but not a statistically significant amount. It also found that the earlier statements referred generally to trailing data, forward-looking data, and “big data,” rather than stating that the model relied exclusively on telemetry data. The plaintiffs therefore did not explain how the lack of a statistically significant telemetry sample made the earlier statements misleading. The court also noted that the model’s predictions were accurate in 2017 and 2018, which suggested a reasonable basis for relying on it.

The court declined to decide whether any alleged misstatements were protected by the Private Securities Litigation Reform Act’s safe-harbor provision for certain forward-looking statements because the plaintiffs had not adequately pleaded why the statements were misleading.

Second, the court held that the plaintiffs did not plead scienter. The court found insufficient the allegations concerning a confidential witness, management’s alleged access to information about HP’s core operations, the defendants’ statements and conduct, Weisler’s resignation, the timing of the February 2019 statement, and the defendants’ stock sales. The confidential witness had not interacted with the individual defendants or personally attended the relevant briefings, and the complaint did not provide enough detail showing personal knowledge. General access to the Four Box Model did not establish access to all system-telemetry data. The court also found that Weisler’s resignation was attributed in the complaint to a family health matter, that the seven-week gap between the last alleged misstatement and the February 2019 statement was insufficient, and that most stock sales were for tax obligations or made under predetermined trading plans. The complaint did not adequately allege that Lores’s one other identified sale was dramatically out of line with his prior trading.

Sections 20(a) and 20A

The court dismissed the Section 20(a) control-person claims because the plaintiffs had not adequately pleaded an underlying Section 10(b) violation.

Section 20A claims required an independent securities-law violation, trading while possessing material nonpublic information, and contemporaneous trading between the plaintiffs and defendants. The court dismissed the Section 20A claims because the plaintiffs had not adequately pleaded the required independent Section 10(b) violation. Separately, the court held that the plaintiffs adequately pleaded contemporaneous trading based on two alleged transactions: Weisler’s November 6, 2017 stock sale followed by the lead plaintiff’s November 15, 2017 purchase, and Lores’s March 9, 2018 sale and the Iron Workers’ purchase on the same day.

Disposition

Judge Susan Illston granted the defendants’ motion to dismiss the amended complaint with leave to amend. The court also granted the defendants’ request for judicial notice and the plaintiffs’ request for judicial notice. Any amended complaint had to be filed by April 9, 2021. The case management conference was continued to May 7, 2021.