Oklahoma Law Enforcement Retirement System v. Telefonaktiebolaget LM Ericsson

Background

This securities class action was brought by Oklahoma Law Enforcement Retirement System and Greater Pennsylvania Carpenters’ Pension Fund on behalf of purchasers or acquirers of Ericsson’s American Depositary Shares during the stated class period. The plaintiffs alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 against Telefonaktiebolaget LM Ericsson and several company executives.

The plaintiffs’ amended complaints concerned alleged loss-leading contracts, underestimated costs in bids for long-term service contracts, delayed recognition of project costs, premature revenue recognition, and related statements or omissions. After the defendants moved to dismiss the second amended complaint under Rules 9(b), 12(b)(2), and 12(b)(6), the court granted the motion on January 10, 2020, and allowed the plaintiffs to amend. The plaintiffs chose not to amend or appeal. On February 12, 2020, the court dismissed the action with prejudice and directed the plaintiffs to submit proposed findings under 15 U.S.C. § 78u-4(c)(1), which requires findings about compliance with Federal Rule of Civil Procedure 11.

Rule 11 standards

Rule 11(b) requires that court filings not be submitted for an improper purpose; that legal claims and defenses be warranted by existing law or by a nonfrivolous argument for changing the law; that factual contentions have evidentiary support or a reasonable basis for further investigation; and that denials of factual contentions be supported by evidence or reasonably based on belief or lack of information. The court explained that a claim is not sanctionable merely because it is a long shot or fails to survive a motion to dismiss. The relevant question is whether the claim had no chance of success and no reasonable argument could be made to extend, modify, or reverse existing law.

Court’s findings

The court found that all legal claims and defenses presented in the lawsuit were nonfrivolous under existing law and that all factual contentions had evidentiary support or were reasonably based on belief or lack of information.

For Rule 11(b)(1), the court found that no party or attorney submitted a filing for an improper purpose, including harassment, unnecessary delay, or needless increases in litigation costs. This finding covered the plaintiffs’ amended complaints, the defendants’ motions to dismiss, and the parties’ briefing.

For Rule 11(b)(2), the court found that the defendants’ arguments supporting dismissal were warranted by law. Although the court had concluded that the second amended complaint did not adequately plead falsity or scienter and therefore did not state an actionable Section 10(b) claim, it found that the plaintiffs and their attorneys had asserted legal claims and arguments warranted by existing law.

For Rule 11(b)(3), the court found that the plaintiffs and their attorneys had made reasonable efforts to investigate, verify, and develop the factual allegations. Those efforts included contacting former Ericsson employees, checking the information received, reviewing company and regulatory filings, using investigators and forensic accountants, and consulting a forensic-accounting expert. The court stated that the allegations were insufficient to state a claim but did not question that the factual contentions had evidentiary support and likely would have obtained additional support through discovery.

The court found Rule 11(b)(4) inapplicable to the defendants’ dismissal motion because the defendants accepted the allegations of the second amended complaint as true for purposes of that motion, as required in the procedural setting.

Disposition

Judge Jesse Furman determined and held that all parties and their attorneys complied with the applicable requirements of Rule 11. The ruling did not impose Rule 11 sanctions. The text identifies the filing as proposed findings, but it also contains a “SO ORDERED” entry dated March 13, 2020.