Silverman v. Motorola, Inc. et al

Filing 382

MEMORANDUM Opinion and Order Signed by the Honorable Amy J. St. Eve on 7/25/2011:Mailed notice(kef, )

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
ERIC SILVERMAN, On Behalf of Himself
and All Others Similarly Situated,
Plaintiffs,
v.
MOTOROLA, INC., et al.,
Defendants.

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No. 07 C 4507
Hon. Amy J. St. Eve

MEMORANDUM OPINION AND ORDER
AMY J. ST. EVE, District Court 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.

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The Second Amended Complaint also named as Defendants Padmasree Warrior,
Gregory Brown, and Daniel Moloney. (R. 276.) The Court entered a stipulation and order of
voluntary dismissal of all claims against Warrior on November 16, 2010. (R. 348.) On March
15, 2011, it dismissed with prejudice all claims against Brown and Moloney. (R. 360.)

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

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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 (1986). In determining summary-judgment motions, “facts must be

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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 (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 (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 (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, 131 S. Ct. 2296, 2301 n.3 (quoting Stoneridge Inv. Partners, L.L.C. v.
Scientific-Atlanta, Inc., 552 U.S. 148, 157 (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, 131 S. Ct. 1309, 1318 (2011) (quoting TSC Indus., Inc. v. Northway, Inc., 426 U.S.
438, 449 (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.,

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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 (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. 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., 131 S. Ct. 2179, 2183 (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 expectations, new industry-specific or firm-specific facts,
conditions, or other events. If one of those factors were responsible for the loss or part of it, a

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plaintiff would not be able to prove loss causation to that extent. This is true even if the investor
purchased the stock at a distorted price, and thereby presumptively relied on the
misrepresentation reflected in that price.” Id. (quoting Dura Pharms., Inc. v. Broudo, 544 U.S.
336, 342 (2005)).
Finally, Section 20(a) of the 1934 Act provides that “[e]very person who, directly or
indirectly, controls any person liable under any provision of this title or of any rule or regulation
thereunder shall also be liable jointly and severally with and to the same extent as such
controlled person[.]” 15 U.S.C. § 78t(a). The Seventh Circuit has observed that, “to state a
claim under § 20(a), a plaintiff must first adequately plead a primary violation of securities
laws,” such as “a violation of § 10(b) and Rule 10b-5.” Pugh v. Tribune Co., 521 F.3d 686, 693
(7th Cir. 2008).
I.

There Is a Genuine Dispute Whether Defendants’ Statements About the 3G Phones
Were False or Misleading
Plaintiffs allege that Defendants made a number of misrepresentations and omissions that

artificially inflated the market price of Motorola’s securities during the Class Period. (R. 276 at
81.) Defendants move for summary judgment on the ground that there is no evidence that their
alleged misrepresentations were in fact false when made. (R. 366-1 at 12-14.) Each supposed
misrepresentation, they submit, effectively conveyed the same point: Motorola’s 3G phones
would reach the market in Q4 2006. (Id. at 12.) In their view, the undisputed evidence reveals
that, at the time of each challenged representation or omission, Motorola expected a Q4 2006
release for those phones. (Id.) Defendants specifically observe that “Mobile Devices staff
reports prepared for Mr. Garriques each week reflected an expected October or November ship
date for the initial release of each new 3G phone contemporaneous with the alleged
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misstatements[.]” (Id.)
According to Defendants, the uncontroverted evidence supported the truthfulness of the
July 19, 2006, challenged statements that “product launches . . . are on track” and that the
“UMTS and HSDPA roadmap for the second half of this year . . . is quite on track.” (Id. at 13.)
They contend that a July 18, 2006, report stated an expected shipment date for Volans (Maxx) of
October 18, 2006, and a date for Izar Global (xx) of October 20, 2006. (Id.) Similarly, they
argue that there is no genuine dispute as to the accuracy of the July 25, 2006, statements:
“UMTS/HSDPA devices that we’re launching into Q4”; “We have three additional launches in
the second half of this year that are teed up”; and “we’re bringing five new products into the
Christmas selling season.” (Id.) Defendants observe that a July 26, 2006, report provided for
expected shipment dates for Volans (Maxx) of October 18, 2006, for Izar Global (xx) of October
20, 2006, for V1100 (Rocket) of October 19, 2006, for M702iS (Izar Japan) of October 20, 2006,
and for M702iG (Scorpius) of October 8, 2006. (Id.)
There is no dispute, in Defendants’ view, that the September 6, 2006, representation that
“we’ve got some good products coming out for the Q4 rush . . . [T]he MAX and the XX will ship
in Q4. So, I was told that all our products are going to ship” was accurate when made. (Id.)
Defendants point out that a report of the same day provided expected shipment dates of
November 6, 2006, for both Volans (Maxx) and Izar Global (xx). (Id.) Finally, Defendants
point out that an October 17, 2006, report, which provided expected shipment dates of November
6, 2006, for both Volans (Maxx) and Izar Global (xx) reveals as true the challenged statements
on October 17, 2006, that “I expect these [RIZR, MAXX, XX, and GSM MOTOFONE] to be
October and early to mid- November shipments, making sure that we hit that all-important fill

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the channel for the holiday season” and “[t]he big products for us—XX, MAXX, RIZR and the
two versions of MOTOFONE—I . . . and don’t feel supply-constrained ramping those up in
Q4.”2 (Id.)
In light of the preceding showing, Plaintiffs “must set forth specific facts showing that
there is a genuine issue for trial.” Anderson, 477 U.S. at 255. According to Defendants, the
challenged statements provide only that Motorola would make its 3G phones available for sale in
Q4 2006. (R. 366-1 at 12.) Plaintiffs dispute that reading, pointing out that the alleged
misrepresentations—which include statements to the effect that “[t]hese are their flagship
products for the second half of the year” and that the products “are running on a Freescale
[Argon] platform”— convey “far more” than what Defendants suggest. (R. 374 at 20-21.)
Instead—Plaintiffs submit—by these statements Defendants indicated that “the 3G phones were
approved and highly anticipated by Motorola’s customers (‘flagship products’ for ‘lead
operators’) and that they would be ramped up and delivered (‘launching into’) in time for the
holiday selling season.” (Id. at 20.)
The Court agrees with Plaintiffs that, construed in the light most favorable to them, the
alleged misrepresentations do more than simply state that Motorola’s 3G phones would reach the
market in Q4 2006. The challenged statements include: “product launches . . . are on track”;
“we’re bringing five new products into the Christmas selling season”; “three additional launches
in the second half of this year . . . are teed up”; “we’ve got some good products coming out for

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Separately, Defendants observe that the 3G phones that are the subject of Plaintiffs’
allegations in fact had “first ship acceptance date[s]” in Q4 2006. (Id.) They do acknowledge,
however, that the law considers the truth of a statement at the time it was made. (Id. (citing
Pommer v. Medtest Corp., 961 F.2d 620, 625 (7th Cir. 1992).)
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the Q4 rush”; “making sure that we hit that all-important fill the channel for the holiday season”;
“[t]he big products for us . . . I . . . don’t feel supply-constrained ramping those up in Q4”;
“[t]hese are their flagship products; and the “UMTS and HSDPA roadmap for the second half of
this year . . . is quite on track.” (R. 366-1 at 13; R. 374 at 20-24.) A reasonable jury could
construe them as misleading investors into believing that Motorola would be ready to introduce
its 3G phones en masse—that is, on a commercial scale sufficient to satisfy consumer
demand—in time for “the holiday season” and “Q4 rush.” See Loudermile v. Best Pallet Co.,
636 F.3d 312, 314 (7th Cir. 2011) (“When ruling on a motion for summary judgment, the party
opposing the motion gets the benefit of all facts that a reasonable jury might find.”). In support
of this reading, Plaintiffs point to Motorola’s earnings conference call on April 18, 2006, at
which Motorola’s CEO, Zander, announced that there is “lots to come also in the second half
[of] 2006” and “our new strategy is to announce products when we can ship them. But stay
tuned, we’ve got a lot coming. . . . I think the second half is also going to be a great product
launch.” (R. 377-89 at 88) (emphasis added.)
This evidence reveals a genuine dispute whether Defendants’ alleged misrepresentations
and omissions conveyed information beyond the limited fact that Motorola would launch some
number of its new 3G phones in Q4 2006. Furthermore, as the Court now explains, Plaintiffs
have introduced sufficient evidence to create a genuine dispute as to the truthfulness of those
statements.
With respect to the July 19, 2006, Q2 Motorola Earnings Conference Call and the July
25, 2006, Financial Analyst Meeting, Plaintiffs point to contemporaneous evidence of significant
delays within Motorola. (R. 374 at 21.) There is no dispute that, “[a]s of mid-July, the ArgonLV

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was suffering from development issues that ‘smelled like’ an all-layer change, or a change in
silicon, which was considered critical and would automatically delay the program by six
months.” (R. 379 at 37.) Nor is there a dispute that, as of July 20, 2006, Motorola had yet to
find the root cause of the problem.3 (Id. at 38.)
On July 11, 2006, Harry Almeida of Motorola’s 3G Program Management wrote that an
Executive Waiver was required for the November 22, 2006, SA (shipping date) for the Izar 3G
phone for Cingular “[d]ue to the deviation from the 75% confidence SA date[.]” (R. 377-20 at
78.) Indeed, the revised 75% confidence SA was 84 days after the desired date of November 22,
2006. (Id. at 79-80.) Furthermore, and as both parties agree, the Monte Carlo analysis that
Motorola conducted on July 12, 2006, confirmed that less than a 1% chance existed that
Motorola would deliver Izar to Cingular by November 22, 2006.4 (R. 376 at 22; R. 379 at 38.)

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Defendants contend that this evidence is insufficient to create a genuine dispute that
precludes summary judgment in their favor because the record establishes that “the Argon
chipset, like all new chipsets, exhibited development issues that had to be overcome” and
“Defendants were confident that the Argon chipset would be ready to be used in products
shipping by the end of 2006.” (R. 379 at 38.) The Court disagrees. Construed in the light most
favorable to Plaintiffs, the fact that the ArgonLV chipset suffered serious development issues
gives rise to a reasonable inference that Defendants’ representations or omissions concerning the
status of the company’s new 3G phones were false or misleading. See Smeigh v. Johns Manville,
Inc., -- F.3d --, 2011 WL 2555819, at *4 (7th Cir. June 29, 2011) (observing that, in reviewing a
motion for summary judgment, courts construe all “reasonable inferences in the light most
favorable to the non-moving party”).
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Defendants argue that the Izar NA represented “only one variant of the Izar phone and
was only intended for one operator, Cingular.” (R. 379 at 37.) As a result, Defendants submit,
evidence of a delay in the Izar NA does create a triable issue of fact. (Id.) They also contend
that “Plaintiffs have offered no evidence demonstrating that Defendants made any public
statements that all variants of the announced Argon-based 3G phones would be delivered to all
operators by the 2006 holiday seasons.” (Id.) Both of these arguments fail to account for the
fact that the Court, in entertaining Defendants’ motion for summary judgment, must construe all
evidence in the light most favorable to Plaintiffs. A reasonable jury could understand that the
challenged statements in July and October 2006 indicated that Motorola was on track to release a
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The parties also agree that, between July 19 and July 25, 2006, Motorola performed an additional
Monte Carlo analysis of the Izar Global status, which concluded that less than a 1% probability
existed that the company would meet an October 19, 2006, “controlled launch.” (R. 379 at 40.)
Plaintiffs next direct the Court to a set of Motorola documents, entitled “Mobile Devices
Business, Garriques Staff,” showing that the “Volana (Europe) - RAZR V6,” Rocket - V1100,”
and “Izar Global (Europe/Asia) - V3s” programs, which had SA dates in 2006 of October 18, 19,
and 20, respectively, were status red as of July 26, 2006. (R. 377-86 at 36, 60.) According to
those documents, “blue” means “program delivered,” “green” represents “on track,” “yellow”
means “issues but recoverable,” and “status red” means “not recoverable without change to
program.” (Id. at 71-74.) Although Defendants point to evidence that “Motorola would
typically make changes to its programs . . . in order to achieve SA dates,” such that status red on
a project did not necessarily mean that the company would miss its target shipping date,
construed in the light most favorable to Plaintiffs, the evidence of the Volana, Rocket, and Izar
Global projects’ being status red close in time to the alleged July 2006 representations calls those
representations’ truthfulness and/or non-misleading nature into question.
Plaintiffs point to further evidence that runs counter to the July 2006 statements that the
“UMTS and HSDPA roadmap for the second half of this year . . . is quite on track” and that
Motorola’s 3G phones “are teed up underneath embargoes with some of our lead operators in the
world. These are their flagship products for the second half of the year.” In late July 2006,

full line of 3G phones in commercial volumes in 4Q 2006. Evidence of significant delays as to
the IZAR NA is relevant and, combined with the other evidence introduced by Plaintiffs, creates
a genuine dispute sufficient to foreclose summary judgment to Defendants on the truthfulness or
nonmisleading nature of their challenged representations and omissions.
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Cingular was “very concerned about [Motorola’s] continued quality challenges and [its] limited
3G portfolio. . . [and] also told [it] that these two issues will have an impact to [sic] Motorola’s
share in 1st Half ‘07.” (R. 377-24 at 4.)
Combined, the evidence relied upon by Plaintiffs creates a genuine dispute as to whether
Defendants’ July 2006 statements were truthful and not misleading. Although the evidence
marshaled by Defendants may well enable it to launch an effective defense at trial, in light of the
evidence introduced by Plaintiffs, a reasonable jury could find in favor in the latter’s favor.
The same is true of the allegedly untruthful representations made at Motorola’s 3Q 2006
earnings conference call on October 17, 2006. The press-release package that Motorola made
available prior to the call provided that “MOTORAZR xx [is] on track and ramping for UMTS”
and “MOTORAZR maxx on track and ramping for HSDPA[.]” (R. 377-46 at 3-8.) At the
conference call itself, Zander stated that, “[a]s we look ahead to Q4 this year and fiscal 2007, we
feel optimistic about our competitive position in our key businesses. With our new portfolio of
mobile devices shipping in volume this quarter[.]” (R. 366-5 at 17.) He noted that “Europe was
a little bit of a challenge in the quarter, largely due to 3G” (id. at 19), but immediately continued:
“Having said that, RAZR continues as the top seller in western Europe. To drive 3G momentum
in Q4, we’re launching, of course, our RAZRXX and RAZRMAXX.” (Id.) He further
commented: “Coming this quarter, the XX for UMTS and RAZRMAXX for HSDPA. Speaking
of those, the XX is designed for #GE and UMTS. . . This will be shipping this quarter. Also a
great, I think, exciting, really exciting product is our MAXX. It is ramping for HSDPA. Both of
these products, as I said earlier, will be shipping this quarter and should be a definite boost,
especially in the European market.” (Id. at 20.)

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Subsequently, an analyst posed the following question to Garriques: “Ron . . . you don’t
seem to have nearly the focus on 3G devices as does, say, Nokia or Samsung. You have been
bearish on it in the past. What do you need to see before you get more bullish here? Is it going
to be higher data ARPUs at the carriers at greater 3G coverage? Are you looking for a strong
uptick in 3G phone sales from others before you kind of plough into it with both legs?” (Id. at
22.) Garriques responded:
Thanks for the question, Ed. I think the predominant—when you think 3G,
meaning specifically UMTS, for us, this quarter is about a platform change. We
took our previous platform, which we built kind of V3x on, and now have
transitioned to what we call [ArgonLV] from Freescale. With new products like
XX and MAXX, I do believe this platform in this quarter gets us a very
competitive set of products out in the marketplace. I have been relatively bearish
about the size of the UMTS market in 2006. I think that’s kind of the way it
played out. I am more bullish on 2007. I’m also more bullish on our 2007
roadmap, consistent with that stronger market.
(Id.).
Subsequently, in response to an analyst question, Zander stated that “we do think this
quarter is going to be, with all our new products shipping, a good one for Mobile Devices.” (Id.
at 24.) Garriques then commented: “The big products for us—XX, MAXX, RIZR and the two
versions of the MOTOFONE—I feel very good, and don’t feel supply-constrained ramping those
up in Q4.” (Id.)
Another analyst later asked: “So . . . looking at the product lineup you have coming with
the RIZR, the MAXX, the XX and two versions of the MOTOFONE, are these going to be late
quarter introductions, similar to the KRZR last quarter? Or do you expect these to be in
meaningful volume perhaps before that November Thanksgiving Weekend holiday sales
season?” (Id. at 25.) Garriques responded: “Across the board, with the exception of the CDMA
MOTOFONE, I expect these to be October and early to mid-November shipments, making sure
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that we hit that all-important fill the channel for the holiday season. Great thanks to [John
Sipola] and Terry Vega on the CDMA MOTOFONE. That’s something that we really didn’t
have . . . targeted until Q1 of next year. With a lot of great work and a lot of great platforming,
they were able to pull that into this year. So that one’s kind of an end-of-the-year piece, but the
rest of them are all solid and ready for the holiday season.” (Id.)
Plaintiffs have introduced more-than-sufficient evidence to establish the existence of a
genuine dispute whether the representations made by Zander and Garriques at the October 17,
2006, earnings conference call were false or misleading.
The parties agree that the Izar NA for Cingular had, by August 28, 2006, “suffered ‘7 Sev
1s [most severe problems or showstoppers], 80 Sev 2s and approx[imately] 100 Sev 3s.’” (R.
379 at 42.) A Monte Carlo analysis of the same week determined that there was less than a 1%
chance that the Izar program would hit its target date. (Id.)
Plaintiffs also point to an August, 25, 2006 email from one Motorola employee to another
stating that “DoCoMo is now predicting that the service in [sic] will be February for Scorpius
and March for Izar . . ., which will be a complete disaster (no 2006 business, launching 702
when our competition launches 703 anti-Razr missile.)” (R. 377-32 at 18.) The parties also
agree that, in late August 2006, “Freescale acknowledged that due to design and developmental
problems with the Argon chipsets, ‘Volcans was shut down this week, and we are impacting
IZAR as well.’” (R. 379 at 43-44.) In addition, Plaintiffs point to an August 30, 2006, email
from Motorola’s Chief Quality Officer, Rey More, to Joe Coletta, bearing the subject title
“IZAR,” that states: “This is worse than I thought possible.” (R. 377-21 at 57.)
Plaintiffs point to evidence that Motorola in September 2006 continued to encounter

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problems, including a September 11, 2006, email from Curtis Mroz, an electrical engineer for
Motorola, providing that “[w]e have a serious show stopper in the qualification of the ArgonLV
POP with respect to Warpage.” (R. 377-21 at 78.) A September 20, 2006, email, bearing the
subject line “IZAR Hardware Changes,” from Jeffrey Howard to Michelle Freeman at Cingular
Wireless stated that, “Motorola reviewed these HW [hardware] changes in detail yesterday . . . .
They have stated that the changes are to improve manufacturing yields. . . . If they don’t deliver
until 11/2 then this means that we will have to test through the month of November
(Thanksgiving week . . . will be understaffed due to vacations). Earliest TA in my opinion will
be the first week in December. This means an in-store date of Mid-December best case.” (R.
377-22 at 2.) Plaintiffs also proffer a Freescale October 1, 2006, email, which stated:
According to Mike Hader [identified by Plaintiffs as Senior Director on
Motorola’s 3G program] this is the most severe issue they have ever faced this
late into a program. MDB released a new s/w load Wednesday to their test sights
around the world. This caused several phones (Izar Global / IZAR NA and
Volans) to go into a panic mode every 10-15 minutes then lock up. After a day of
this all field testing was stopped pending a solution. A temporary work around
was put in place Saturday morning but this causes the phone to draw 15% more
power. This is not a production solution. MDB has already missed a field testing
deadline with Cingular, and are desperate to get an extension. Mike . . . said if its
[sic] not fixed asap Cingular will refuse phones in Q4 which would be a disaster. .
. . They are suspecting this has something to do with the CCM module in the
Argon LV chip. It is unknown if this is chip related or s/w related.
(R. 377-35 at 55.) In addition, a Motorola report of October 9, 2006, indicated that delivery
dates for all new 3G handsets were flagged red, which according to the report meant “not
recoverable.” (R. 377-25 at 11.) Plaintiffs also proffer an internal Motorola email of October
17, 2006, entitled “status of 3G platform (Volans, Izar, Rocket) - no improvements.” (R. 377-20
at 16.) That email provided that “[t]odays [sic] situation . . . is causing huge doubts within
Vodafone about launching these devices in time for Xmas 06.” (Id.)
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Defendants vigorously dispute the import of this evidence, which they argue to be of
more limited relevance than Plaintiffs maintain. (R. 366-1; R. 378; R. 379.) They also contend
that their representations at the October 17, 2006, earnings conference call were entirely truthful.
(Id.) Although the evidence introduced at trial may vindicate them in this respect, Defendants
are not entitled to summary judgment in light of Plaintiffs’ showing that there is a genuine
dispute as to a number of material facts. It will be for the jury to resolve the dispute.
II.

There Is a Genuine Dispute Whether the 3G Phones Were Material to Investors or
to Motorola’s Financial Results
In order to succeed on a Section 10(b) claim, Plaintiffs “must show that the defendant

made a statement that was ‘misleading as to a material fact.’” Matrixx Initiatives, 131 S. Ct. at
1318 (quoting Basic, Inc. v. Levinson, 426 U.S. 224, 238 (1988)). 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.’” Id. (quoting TSC Indus., 426 U.S. at 449); see also Searls v.
Glasser, 64 F.3d 1061, 1065-66 (7th Cir. 1995). Materiality is usually a question for the jury.
See, e.g., Wehrenberg v. Fed. Signal Corp., No. 06-CV-487, 2008 WL 2787438, at *6 (N.D. Ill.
Apr. 29, 2008) (“[S]ummary judgment is appropriate on the issue of materiality only if the
information in question is ‘so obviously important or so obviously unimportant to an investor[]
that reasonable minds cannot differ on the questions.’”) (collecting cases); see also Gebhardt v.
ConAgra Foods, Inc., 335 F.3d 824, 829 (8th Cir. 2003) (“Ordinarily, materiality is a question of
fact for the jury[.]”); Searls, 64 F.3d at 1066 (observing that the determination of whether a
statement is material “is a highly fact-dependent analysis”); In re Metris Cos., Inc. Secs. Litig.,
428 F. Supp. 2d 1004, 1010 (D. Minn. 2006) (“Materiality is typically a question of fact for a
16

jury.”).
Defendants claim that they are entitled to summary judgment because their alleged
misstatements were relevant neither to investors nor to Motorola’s Q4 2006 financial results. (R.
362-1 at 14-16.) In this respect, they make a number of unavailing arguments why there is no
genuine dispute that the challenged representations were immaterial. They submit that their
alleged misstatements amounted to nothing more than representations that the new 3G phones
were “on track,” which they were. (R. 362-2 at 14-15.) For reasons explained above, this
argument fails at the summary-judgment juncture.
Defendants’ second argument is that “Motorola’s executives expressly informed the
market . . . that Motorola was ‘bearish’ on the 3G market in 2006.” (Id. at 15.) Defendants
submit that “[t]hese statements are the opposite of any indication to the market that Motorola
expected the new 3G phones to be material to its financial performance during the Class Period.”
(Id.) This argument fails for a number of reasons. As an initial matter, by “Motorola’s
executives,” Defendants in fact refer only to Garriques, who throughout the period from late
2005 to October 2006 indicated that he was not exuberant about the 3G market. (R. 366-2 at 35, 12.) More significantly, however, none of the cited remarks provided, let alone suggested,
that the 3G market would be immaterial to Motorola’s financial performance in 2006.
Garriques’s comments only concerned the impact of 3G on the industry as a whole, as distinct
from on Motorola. (Id.) This interpretation is evident from Garriques’s comments, and indeed is
unavoidable when the Court construes those comments, as it must, in the light most favorable to
Plaintiffs. Furthermore, the one remark that Garriques seemed to direct specifically at Motorola
hardly supports Defendants’ claim that 3G phones were immaterial to the company in 2006.

17

Garriques stated: “When I am looking to the market going forward, September, October,
November, December, I believe that across the board there is [sic] going to be lots of different
devices, 2.5G, 2.75G, 3G, all doing well in the marketplace. I think it is good to have a foothold
in this. I do not believe it is unbelievably material for the second half of this year in order to be
successful in the marketplace.” (Id. at 5.) His assertion that 3G is not going to be “unbelievably
material” is not synonymous with a statement that 3G was going to be immaterial to Motorola’s
financial performance.
Next, Defendants submit that Motorola’s new 3G phones were immaterial to Motorola’s
internal forecasts, which indicated that those phones would constitute only 2.2% of the Mobile
Devices overall unit sales and 3.2% of the overall segment gross margin. (R. 362-2 at 15-16.)
Such percentages, Defendants submit, are immaterial as a matter of law. (Id. at 16.) The
problem with this position, however, is that the expert report of D. Paul Regan squarely
contradicts it, thus creating a genuine dispute requiring trial. (R. 377-50 at 7, 9-12.) Consistent
with Regan’s analysis, Plaintiffs point out that, in making this argument, Defendants “look at
only the internal forecasts and estimates that were generated in 2006 after it had become
increasingly clear that the new phones were not ‘on track’ for the holiday selling season[.]” (R.
374 at 18 n.11) (emphasis omitted.)
Finally, Plaintiffs have introduced considerable evidence of the materiality of 3G to
Motorola and hence to its investors. They refer to various statements of Defendants to the effect
that the 3G phones are “flagship products” for “some of our lead operators in the world,” that
they would be “shipping in volume” and “hit that all-important . . . channel for the holiday
season,” which would “be a definite boost, especially in the European market.” (R. 374 at 14-

18

15.) Plaintiffs point to documents in which Motorola acknowledges the concerns of its
customer, Cingular, as well as the importance of the 3G phones to Defendant company, and the
negative financial repercussions of delays in developing the same. (Id. at 15-17.) In addition,
Plaintiffs observe that analyst and investor inquiries about Motorola’s 3G portfolio induced the
alleged misstatements, which demonstrates the materiality of the company’s 3G phones. (Id. at
18-19.)
Furthermore, Plaintiffs point to Garriques’s July 8, 2006, email to Mike Hickey, a Senior
Vice President in Europe, that “3G has lost 365 M dollars since beginning of the year! We must
stop the bleeding!” (R. 377-47 at 2.) On the same day, Garriques wrote to Zander and
Devonshire that “As you can see the monster issue is the 1 year slip on Freescale
UMTS/HSDPA. We have lost 365 M ytd.” (R. 377-39 at 30.) Philip Gilchrist, Garriques’s lead
platform engineer, sent an email to the effect that “[t]he considerable consequences will be our
stock price sinking because we are losing our ass on 3G products. Nothing we can do to FSL
will change that.” (R. 377-21 at 71.)
Defendants cannot prevail, therefore, on their argument that the undisputed evidence
entitles them to summary judgment on account of the alleged misrepresentations’ purported
immateriality.
III.

The Evidence Does Not Entitle Defendants to Summary Judgment Regarding the
Intellectual-Property Transactions Either for Lack of Scienter or on the Ground
that Motorola’s Disclosures Were Not Misleading
Defendants submit that the law entitles them to summary judgment on Plaintiffs’ claim

that they violated Section 10(b) of the Exchange Act and Rule 10b-5 by entering into, and not
disclosing, two IP-licensing transactions in September 2006. (R. 362-2 at 17-27.) Defendants

19

present two distinct arguments why summary judgment is appropriate in their favor on this
claim: First, the undisputed evidence reveals that they followed a “robust process” in
determining the proper accounting and disclosure for the IP transactions, which negates any
reasonable inference of scienter. (Id. at 17.) Second, the evidence establishes beyond genuine
dispute that Motorola’s disclosures were not misleading. (Id.) Neither of these arguments is
convincing, and so the Court declines to grant Defendants summary judgment on this basis.
A.

There Is Sufficient Evidence of Defendants’ Scienter to Support a Jury
Verdict in Plaintiffs’ Favor

Liability under Section 10(b) and Rule 10b-5 “requires proof of the defendant’s
‘scienter,’ which is to say proof that [the defendant] either knew the statement was false or was
reckless in disregarding a substantial risk that it was false.” Makor Issues & Rights, Ltd. v.
Tellabs, Inc., 513 F.3d 702, 704 (7th Cir. 2008). See generally Tellabs, Inc. v. Makor Issues &
Rights, Ltd., 551 U.S. 308 (2007). The Seventh Circuit has recognized that a “popular definition
of recklessness in this context is ‘an extreme departure from the standards of ordinary care . . . to
the extent that the danger was either known to the defendant or so obvious that the defendant
must have been aware of it.” Id. (citation omitted.)
According to Plaintiffs, Defendants “knew” that the Freescale and Qualcomm
transactions required appropriate disclosure, and “accounting rules required separate disclosure
concerning the 3Q06 IP licensing transactions in the Company’s, [sic] October 17, 2006 Form 8K earnings press release, as well as the 3Q06 financial statements and management discussion
and analysis . . . section in the Company’s November 2, 2006 Form 10-Q.” (R. 276 at 61, 66,
71.) Plaintiffs contend that Defendants failed to follow Generally Accepted Accounting
Procedures (“GAAP”). (Id.)
20

In moving for summary judgment, Defendants argue that “[t]he process followed by
Motorola to determine whether and how to disclose the IP Transactions and the Mobile Devices
segment’s Q3 2006 intellectual property revenue demonstrates good faith and the lack of
scienter, even if reasonable people could disagree about whether Motorola’s revenue recognition
was correct or its disclosures sufficient.” (R. 362-2 at 17-18.) They point to evidence that (1)
Motorola relied on a “Corporate Disclosure Committee” (which would determine whether
disclosures were required for a particular period), (2) the Audit and Legal Committee of
Motorola’s Board of Directors (which would approve Forms 10-Q and 10-K), and (3) KPMG
(which reviewed draft disclosures and observed the Corporate Disclosure Committee’s process).
(Id. at 18; R. 375 at 49-50.) The record, Defendants submit, establishes that Motorola followed
this process in its Form 10-Q for Q3 2006 and in its Form 10-K for the year ended December 31,
2006. (R. 362-2 at 19-20.) Arguing that it was not reckless for them to rely on this process,
Defendants submit that, “[a]t most, Plaintiffs are left with a factual dispute about whether
disclosure of the IP Transactions was consistent with GAAP[,]” and point out that a failure to
comply with GAAP does not create a genuine dispute as to scienter. (Id. at 20-21.) Defendants
contend that this undisputed evidence reveals that Plaintiffs cannot prove scienter for either the
disclosures of, or accounting for, the IP transactions. (Id. at 21-22.)
These arguments fail. First, and as a general matter, determinations as to a lack of
scienter are typically—though not categorically— inappropriate at the summary-judgment stage.
See P.H. Glatfelter Co. v. Voith, Inc., 784 F.2d 770, 774 (7th Cir. 1986) (“[R]esolution by
summary judgment of the issues raised by an allegation of fraud is often difficult or
impossible.”) (quotation omitted); Provenz v. Miller, 102 F.3d 1478, 1489 (9th Cir. 1996)

21

(“Generally, scienter should not be resolved by summary judgment.”) (emphasis in original);
Wechsler v. Steinberg, 733 F.2d 1054, 1058-59 (2d Cir. 1984) (concluding with respect to
scienter in a Section 10(b) action that “[i]ssues of motive and intent are usually inappropriate for
disposition on summary judgment”). Cf. Secs. & Exch. Comm’n v. Lyttle, 538 F.3d 601, 603
(7th Cir. 2008) (“Even where a party’s subjective beliefs are critical to liability, it is not always
true that the case cannot be decided on summary judgment[.]”). The Court could grant
Defendants summary judgment on this ground only “if no reasonable jury could conclude that
the requisite scienter exists[.]” In re Miller Indus., Inc., 120 F. Supp. 2d 1371, 1383 (N.D. Ga.
2000).
Second, Defendants’ contention that the law entitles them to summary judgment on
account of their lack of scienter effectively amounts to an argument of good-faith reliance.5 (R.
366-1 at 17-22.) Their reliance on Motorola’s accounting and reporting mechanisms,
Defendants submit, negated any possible intent or recklessness on their part. (Id.) If Defendants
knew that (or were reckless as to whether) Motorola’s disclosure or accounting was false or
misleading, however, then the fact that the company employed substantial processes aimed at
ensuring accurate accounting would not establish that Defendants lacked scienter. See United
States v. Erickson, 601 F.2d 296, 305 (7th Cir.), cert. denied, 444 U.S. 979 (1979) (“If a

5

Importantly, Plaintiffs do not rely on a purported GAAP violation alone to reveal a
genuine dispute as to whether Defendants acted with the requisite scienter. The law is well
established that such a violation does not suffice to create a genuine dispute as to scienter. See,
e.g., Norfolk Cnty. Ret. Sys. v. Ustian, No. 07-CV-7014, at *13 (N.D. Ill. July 28, 2009) (“GAAS
and GAAP violations alone are not enough to compel an inference of scienter[.]”); see also Ruth
v. AON Corp., No. 04-CV-6835, 2008 WL 656069, at *7 (N.D. Ill. Mar. 7, 2008) (“Although
allegations of GAAP violations, standing alone, are insufficient to raise a strong inference of
scienter, GAAP violations may support the inference when coupled with additional
circumstances[.]”).
22

company officer knows that the financial statements are false or misleading and yet proceeds to
file them, the willingness of an accountant to give an unqualified opinion with respect to them
does not negate the existence of the requisite intent or establish good faith reliance.”); Aldridge
v. A.T. Cross Corp., 284 F.3d 72, 83 (1st Cir. 2002) (“[T]he fact that the defendants published
statements when they knew facts suggesting the statements were inaccurate or misleadingly
complete is classic evidence of scienter.”); see also In re Vivendi Universal, S.A. Secs. Litig., -F. Supp. 2d --, 2011 WL 590915, at *25 (S.D.N.Y. Feb. 17, 2011) (“Vivendi argues that it was
the Kingdom of Morocco, not Vivendi, that insisted that the agreement to purchase the additional
16% not be disclosed, as if to suggest that this fact, if true, would negate a finding of scienter.
But if Hannezo and Messier knew that it would be materially misleading not to disclose the
agreement and went along with a cover-up anyway, or acted recklessly in making statements that
failed to disclose that agreement, the fact that they did so at somebody else’s bequest would not
negate their own scienter.”).
Furthermore, even if there were no genuine dispute that Defendants relied on Motorola’s
accounting and reporting mechanisms, it is not clear that such a fact would dispose of the
question of scienter. The weight of authority suggests that evidence of reliance is merely
relevant to the question whether a defendant acted with the requisite scienter. See, e.g., Secs &
Exch. Comm’n v. McNamee, 481 F.3d 451, 455 (7th Cir. 2007) (“[A]dvice of counsel may show
that a person lacked a culpable intent[.]”) (emphasis added); Howard v. Secs. & Exch. Comm’n,
376 F.3d 1136, 1147 (D.C. Cir. 2004) (“[R]eliance on the advice of counsel need not be a formal
defense; it is simply evidence of good faith, a relevant consideration in evaluating a defendant’s
scienter.”); Markowski v. Secs. & Exch. Comm’n, 34 F.3d 99, 104-05 (2d Cir. 1994)

23

(“Markowski’s reliance upon advice of his counsel is misplaced. To invoke this principle,
Markowski has to show that he made complete disclosure to counsel, sought advice as to the
legality of his conduct, received advice that his conduct was legal, and relied on that advice in
good faith. Even where these prerequisites are satisfied, such reliance is not a complete defense,
but only one factor for consideration.”) (internal citations omitted); Secs. & Exch. Comm’n v.
Huff, 758 F.2d 459, 467 (9th Cir. 1985); cf. Provenz, 102 F.3d at 1491 (distinguishing a case in
which the court had found insufficient evidence to raise a reasonable inference of scienter on the
ground that the defendants had “provided unrebutted evidence showing that their accountants
had full knowledge of the disputed transactions. Here, there is evidence suggesting defendants
failed to disclose material information to their accountant. If it is true that defendants withheld
material information from their accountants, defendants will not be able to rely on their
accountant’s advise as proof of good faith”) (emphasis omitted) (internal citations omitted);
Secs. & Exch. Comm’n v. Johnson, 174 Fed App’x 111, 114-15 (3d Cir. 2006).
Regardless, Plaintiffs have introduced evidence that creates a genuine dispute whether
Motorola’s accounting and reporting processes had occasion meaningfully to scrutinize the IP
transactions. (R. 374 at 1.) Motorola’s chief accounting officer, Laurel Meissner, testified that
she was not aware of anyone who took the position that the company should disclose the two IP
deals to investors in light of the fact that half of the Mobile Device’s earnings for the quarter
were related to the same. (R. 377-53 at 164.) She further testified that she did not think that
anyone on the disclosure committee considered disclosing the dollar amount of the IP
transactions. (Id. at 168.) The parties dispute the extent to which KPMG—an external
auditor—was involved in auditing the relevant financial statements. (R. 379 at 60-61.)

24

Thus, evidence that Defendants relied on Motorola processes does not foreclose a
reasonable jury finding that Defendants acted intentionally or recklessly to mislead investors in
disclosing and accounting for the IP transactions. Defendants’ sole argument why they are
entitled to summary judgment—namely that the “process followed by Motorola in determining
how to account for the IP Transactions . . . and how to disclose the related revenue to the public
believes any suggestion of recklessness”—therefore fails. (R. 378 at 10-12.)
Third, Plaintiffs have introduced sufficient evidence to establish a genuine dispute as to
Defendants’ scienter, which necessitates trial and precludes summary judgment. In this respect,
Plaintiffs seek to rely on evidence that Defendants engaged in knowing and reckless conduct and
had the motive and opportunity to mislead investors. (R. 374 at 34-38.)
Regarding motive, Plaintiffs submit that Motorola faced a “massive earnings gap as a
result of the massive ‘bleeding’ of earnings caused by delays to the Argon-based 3G handsets.”
(R. 374 at 36.) This shortfall, Plaintiffs contend, “motivated [Defendants] to mislead investors in
order to obfuscate delays and development problems with Motorola’s new 3G handsets and meet
expectations for the Company’s and Mobile Devices’ earnings.” (Id.)
Construed in the light most favorable to Plaintiffs, the evidence reveals that Motorola
knew that there would be a shortfall in Q3 2006, thus evidencing a motive for Defendants to
increase revenue to meet earnings expectations.6 Garriques testified in his deposition that the

6

Defendants contest the relevance of this evidence, submitting that some of the cited
statements do not in fact relate to Motorola’s Argon-based handsets. (R. 379 at 30-31.) While
the jury may ultimately vindicate Defendants’ explanation of the evidence in this respect, it is
nevertheless true that, at the summary-judge stage, the Court must construe all evidence in the
nonmoving parties’ favor. Plaintiffs’ proffered evidence, construed in its entirety and in their
favor, creates a genuine dispute.
25

Qualcomm deal “was a component of making our Q3 financial plan,” which “the team wanted to
be able to make[.]” (R. 377-52 at 125.) He testified that the Qualcomm and Freescale deals
were “important” and “significant” in making the plan, and that collectively “they had significant
impact on the Q3 earnings.” (Id. at 126-27.) Indeed, there is no dispute that the “3Q06 QCOM
and FSL arrangements accounted for 48.6% of Mobile Devices’ reported 3Q06 earnings of $819
million[,]” and that those “agreements accounted for 41.3% of Motorola’s reported consolidated
earnings of $968 million.” (R. 379 at 56.) Nor is there a dispute that total IP licensing increased
by $371 million, or 317.6%, over the prior quarter, 2Q06. (Id.) Consistent with this, the parties
are in accord that “Mobile Devices’ financial personnel internally characterized [these IPlicensing transactions] as ‘Mega Deals,’” which were the only such deals that Motorola entered
into in 2006. (Id. at 57.) The parties also agree that, prior to Motorola’s publishing its 3Q06
Form 10-Q, KPMG reported to the company’s audit and legal committee that the Freescale and
Qualcomm IP-licensing deals were “significant/unusual transactions.” (Id. at 56-57.)
Further, Plaintiffs direct the Court to a May 3, 2006, email from Garriques to the effect
that “[i]f we have upside, I would not lose the UMTS business. I think we are dead if we do with
these guys. I also think we will not get our Platorm [sic] in. And we will never get back in.”
(R. 377-39 at 3-4.) On July 20, 2006, Garriques responded to an email congratulating him on
“the fantastic results [that] . . . MDB recorded sales of $7.14B, up 46 YoY” by writing: “You
guys helped a lot. If it were not for you our number would have been below 11.2 and we would
have gotten a lot of questions.” (R. 377-47 at 4.) On the basis of considered analysis, D. Paul
Regan’s expert report opines that “Motorola’s Mobile devices business did not meet
management’s plan and was forecasted to suffer material operating earnings losses during Q3

26

2006 and Q4 2006.” (R. 377-50 at 7-12.)7
This evidence would support a reasonable jury verdict that motive met opportunity when
Motorola entered into the Qualcomm and Freescale IP-licensing deals. Viewing this and the
preceding evidence in the light most favorable to Plaintiffs, there is a genuine dispute whether
Defendants had the requisite scienter in their role in approving, and accounting for, the IP
transactions.
In addition to submitting evidence that Defendants had the motive and opportunity to
mislead investors by entering into the Freescale and Qualcomm IP transactions, Plaintiffs also
submit that “the evidence of Defendants’ knowing and reckless conduct . . . compels denial of
summary judgment.” (R. 374 at 36.) Plaintiffs are less than forthcoming, however, in describing
just what this evidence is and why it is probative of scienter. The only evidence that Plaintiffs
point to in support of this assertion is that Defendants knew of, and were involved in approving,
the Freescale and Qualcomm IP-licensing deals. (Id. at 35-36.) That Defendants were involved

7

According to Plaintiffs, evidence of insider trading also supports an inference of
scienter. This argument applies only to Garriques, as Zander made no trades during the Class
Period and Devonshire made only a single trade on July 27, 2006, which was several weeks
before the challenged IP transactions. (R. 366-2 at 25; R. 375 at 58.) On August 9, 2006,
Garriques exercised 172,644 options and then sold the acquired shares and, on October 23, 2006,
Garriques exercised 55,800 options, which he then sold. (R. 375 at 59-61.) Defendants argue
that this is not evidence of scienter because Plaintiffs have failed to introduce evidence showing
that Garriques’ sales of shares were out of line with his prior practice of selling shares when they
vested. (R. 378 at 14-15.) The Seventh Circuit has held that “insider trading may be sufficient
circumstantial evidence of scienter” if plaintiffs “show that the sale of stock is “dramatically out
of line with prior trading practices at times calculated to maximize the personal benefit from
undisclosed inside information.” Makor Issues & Rights, Ltd. v. Tellabs, Inc., 437 F.3d 588, 604
(7th Cir. 2006), vacated on other grounds, Tellabs, 551 U.S. at 308. The Court need not
consider whether evidence of Garriques’s alleged insider trading creates a genuine dispute as to
scienter, however, because—for reasons explained below—other evidence proffered by
Plaintiffs reveals a genuine dispute as to Defendants’ scienter with respect to Motorola’s
reporting and accounting of the Qualcomm and Freescale IP-licensing deals.
27

in the IP transactions, however, is distinct from whether they “knew” that Motorola’s disclosure
or accounting of those transactions was false or misleading or whether they were “reckless”as to
whether that disclosure or accounting was false or misleading. Plaintiffs do not explain how one
leads to the other.
Nevertheless, there is a genuine dispute whether Motorola’s October 17, 2006, 3Q06
earnings press release, Defendants’ contemporaneous statements, and Motorola’s Form 10-Q for
3Q06, were false or misleading with respect to their reporting and accounting of the Freescale
and Qualcomm IP-licensing transactions. In other words, a reasonable jury could find that those
statements were false or misleading. In light of evidence that Defendants were variously familiar
with, involved in approving, and involved in the accounting of the relevant IP transactions, as
well as the evidence that Defendants had an opportunity and motive to cover up a shortfall in
3Q06, it is a reasonable inference that Defendants possessed the requisite intent to mislead
investors with respect to Motorola’s subsequent accounting of the IP transactions. See Ault v.
Speicher, 634 F.3d 942, 945 (7th Cir. 2011) (observing that, in ruling upon a motion for
summary judgment, “[t]he facts are viewed in the light most favorable to the non-moving party
and all reasonable inferences are drawn in her favor”).

B.

There Is a Genuine Dispute Whether Motorola’s Disclosures Were
Misleading

Defendants seek summary judgment on the ground that Motorola’s disclosures
concerning the Qualcomm and Freescale IP-licensing transactions were not materially
misleading. (R. 366-1 at 24-26.) There is no dispute that Motorola’s Mobile Devices business
included licensing IP. (R. 375 at 42-43.) The company’s public filings disclosed this fact. (R.

28

362-6 at 138.) Defendants point out that “Motorola’s Q3 2006 earnings press release . . . and its
later Form 10-Q . . . both disclosed that the Mobile Devices segment had higher intellectual
property income during the third quarter[,] . . . [which was] indisputably correct.” (R. 366-1 at
24.) They submit that the disclosure was sufficient to inform a reasonable investor that nonhandset revenue had a significant impact on the Q3 2006 margin for the Mobile Devices
business, and contend that “[b]y performing basic mathematical calculations . . . a reasonable
investor could readily determine that there was almost $400 million in third quarter 2006 Mobile
Device segment revenues attributable to non-handset sales and, accordingly, that the operating
margin for handsets in the third quarter of 2006 was approximately 6%.” (Id. at 24-25.)
Defendants observe that Plaintiffs concede that Motorola securities traded in an efficient market,
which would be capable of performing such mathematical calculations. (Id. at 25-26.) They
also point out that their Q3 2006 earnings release, and other disclosures, revealed “the risk that
intellectual property revenue was variable from period to period—in other words that the
segment’s intellectual property revenue may not repeat.” (Id. at 26.) Finally, Defendants point
to an October 18, 2006, Lehman Brothers report by analyst Jeffrey Kvaal to the effect that
Motorola had “strong,” “increased [intellectual property] royalties” in Q3 2006 and that
Motorola expected “lower [intellectual property] collections” in the fourth quarter, which may
“temper [margin] improvement.” (Id.)
Construed in the light most favorable to Plaintiffs, however, the evidence in the record
precludes summary judgment on the question whether the 3Q 2006 IP-licensing transactions
were materially misleading.

29

First, Jeffrey Kvaal’s deposition testimony belies Defendants’ argument that his October
16, 2006, analyst report revealed that the market understood the role of licensing income on the
Mobile Devices business’s third-quarter margin. Kvall testified in his deposition that, at the time
that he wrote his October 16 report, he did not know that two nonrecurring IP deals had added
$400 million to the company. (R. 377-53 at 37-38.) He explained that he would have wanted to
know this information because “I’m pretty sure that 400 million would have represented a
sizeable percentage of the operating profits in that quarter.” (Id. at 38.) He observed that this
information would have been relevant to his financial modeling and that he would have reported
the same to his investors. (Id.) He explained:
The size of that intellectual property transaction would have been so large as for
us to realize it was not a recurring item. It was non-recurring, and therefore that
would have been [sic] major implications—well, would have had major
implications for their third quarter operating margin because they would have
missed their target by a very wide margin. And that in turn would have led us to
question their operating margin profit in future quarters.
(Id. at 38-39.)
Second, although it is true that Motorola’s 3Q 2006 press release and Form 10-Q for the
same period both disclosed that technology licensing was a partial cause of the company’s
increased earnings, construed in the light most favorable to Plaintiffs, this fact does not establish
that this disclose was not materially misleading. The press release explained the increase in
earnings due to “new product launches, supply chain cost reductions and higher technology and
platform licensing-related income.” (R. 379 at 10-11.) Form 10-Q for 3Q 2006 explained the
increase due to “(i) increased savings from supply chain cost-reduction initiatives, (ii) the 39%
increase in unit shipments, and (iii) increased income from technology and platform licensing.”
(Id. at 15.) Defendants concede that “Motorola’s regular disclosure practice . . . was to identify
30

items that made significant contributions to a segment’s margin in order of importance[.]” (R.
366-1 at 20.) There is, therefore, no dispute that Motorola presented the three factors disclosed
in its press release and Form 10-Q as an ordinal ranking, such that the company presented
technology and platform licensing as the least important of the three disclosed factors.
The evidence, viewed in the light most favorable to Plaintiffs, reveals a genuine dispute
whether this disclosure was materially misleading. The IP-licensing deals accounted for 48.6%
of the Mobile Devices business’s reported 3Q 2006 earnings of $819 million, and represented
41.3% of Motorola’s reported consolidated earnings of $968 million. (R. 379 at 56.)
Defendants do not explain how the Qualcomm and Freescale licensing deals, constituting 48.6%
of the Mobile Devices business’s earnings and 41.3% of the company’s consolidated earnings
for 3Q 2006, could constitute the third-most-significant factor in driving either earnings or
increased earnings. With respect to the former, if IP licensing were only the third-mostsignificant factor, that means that the other two factors each accounted for more than 48.6% of
the Mobile Devices’s business’s earnings, such that the three factors would collectively make up
more than 100%—an impossibility. If referring to an increase in earnings—Motorola’s 3Q 2006
Form 10-Q reported that “operating earnings increased to $819 million . . . compared to
operating earnings of $593 million in the third quarter of 2005” on account of the three named
factors—then it is hardly possible that the $398.1 million in earnings represented by the
Qualcomm and Freescale IP-licensing deals could be the third-largest contributor to the $226
million increase in total earnings ($819 million - $593 million). Defendants effectively
backtrack in reply, noting that, although “Plaintiffs protest that the IP Transactions could not
have had the third-largest impact on margins for the quarter[,] . . . [i]t is undoubtedly correct . . .

31

that the IP Transactions were not the largest margin driver during the quarter.” (R. 378 at 12
n.5.)
Further evidence exists that Motorola’s disclosure as to the IP-licensing transactions was
materially misleading. At the October 17, 2006, earnings conference call, in which Zander,
Devonshire, and Garriques participated, Garriques informed analysts that “IP and platform
licensing this year has grown at the same rate as our sales has [sic] grown.” (R. 362-6 at 27.) In
response to a question for clarification: “the operating margin. 11.9% up from 11.2%—did gross
margin improved [sic] this quarter? Is that what drove it?”, Garriques explained the
improvement on the following grounds:
When you think about the operating earnings expansion in the Mobile Device
business, it really had several parts. The first part it had is we brought out some
pretty exciting products—the KRZR and the KRZR M. We got nice volume in
this quarter, thanks to Stu and the supply chain, and we were able to hit into
multiple regions.
The second thing . . . is we saw very significant cost-downs, as we now
leverage our closer relationship with our operators, the narrowing of the number
of suppliers that we use, as well as the ability to be better about forecasting where
we are going. So you saw nice takedowns.
In addition to that, we—we talked about it at the financial analyst meeting.
We have grown our revenue from licensing of technologies and platforms,
consistent with our revenue growth in the industry from last year to this year. We
are quite tenacious about protecting our IP, about making sure that we collect
value for it. Those three things helped us continue to expand operating earnings
on a year-over-year basis now for eight-plus quarters in a row.
(Id. at 23) (emphasis added). Plaintiffs have introduced evidence that these representations were
false or misleading. They point to an internal Motorola document, entitled “Q3 Autopsy,” which
revealed that IP earnings grew at 198.7% year-over-year and 317.6% quarter-over-quarter
compared to the Mobile Device business’s overall revenue growth of 25.% and -1.5%. (R. 37721 at 4, 25.)

32

Finally, Defendants assert that Motorola’s financial disclosures, construed collectively,
conveyed sufficient information to inform the market that approximately $400 million of the
Mobile Devices business’ revenues in 3Q 2006 were “attributable to non-handset sales[.]” (R.
366-1 at 24-25.) Defendants observe that the company’s earnings releases for 2Q and 3Q 2006
disclosed the Mobile Devices business’s sales, as well as the number of units sold, for each
quarter. (R. 366-1 at 25 n.21.) They also point out that the company’s 10-Q for 3Q 2006
disclosed that the average selling price had decreased by 10% sequentially from 2Q 2006. (Id.)
Even though none of Motorola’s disclosures revealed the average selling price for 2Q 2006,
Defendants submit that a reasonable investor could calculate that figure by dividing the overall
sales by the number of units sold. (Id.) Defendants thus argue that such an investor, having
determined the average selling price for 2Q 2006, would decrease that figure by 10%, multiply
the overall number of units sold in 3Q 2006 by that average selling price, compare that amount
to overall Mobile Devices business sales, and thus discover “that there was approximately $388
million in non-handset sales and then to calculate the approximate handset-only margin.” (Id.)
This argument fails at the summary-judgment stage. In the first place, Defendants
introduce no evidence that any investor or analyst in fact carried out this mathematical
calculation. Nor do they submit any expert testimony to the effect that reasonable investors or
analysts would typically undertake such a computation. More seriously still, Defendants
encounter a significant problem when they suggest that an analyst would be able to calculate the
average selling price by simply dividing the overall sales by the number of units sold, (R. 366-1
at 25 n.21,) because the Mobile Devices business’s overall sales are comprised of more than
sales from handsets. As Motorola’s public filings make clear, the Mobile Devices business also

33

generates revenue from the sale and service of accessory products, as well as royalty and
licensing fees. (R. 379 at 50.) Even putting this infirmity aside, in the absence of any evidence
(as opposed to argument) that investors were capable of conducting, and in fact did conduct, the
relevant calculus, the Court would have to draw an impermissible inference in favor of
Defendants to credit their argument and grant them summary judgment.
In light of the preceding evidence, a reasonable jury could find that Motorola’s 3Q 2006
earnings press release and Form 10-Q did not disclose that non-handset revenue had a significant
impact on the Q3 2006 margin for the Mobile Devices business.
IV.

Plaintiffs Have Introduced Sufficient Evidence of Loss Causation
“To prevail on the merits in a private securities fraud action, investors must demonstrate

that the defendant’s deceptive conduct caused their claimed economic loss.” Erica P. John
Fund, 131 S. Ct. at 2183. To establish the same, a plaintiff must demonstrate that “a
misrepresentation that affected the integrity of the market price also caused a subsequent
economic loss.” Id. at 2186 (emphasis in original). The Supreme Court has explained that a
“higher purchase price will sometimes play a role in bringing about a future loss. It may prove to
be a necessary condition of any such loss, and in that sense one might say that the inflated
purchased price suggests that the misrepresentation . . . ‘touches upon’ a later economic loss.
But, even if that is so, it is insufficient. To ‘touch upon’ a loss is not to cause a loss, and it is the
latter that the law requires.” Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 343 (2005) (emphasis
in original). Instead, a plaintiff must prove proximate causation. Id. at 346. As the Seventh
Circuit has explained, loss causation “attempts to distinguish cases where the misrepresentation
was responsible for the drop in the share’s value from those in which market forces are to

34

blame.” Ray v. Citigroup Global Mkts., Inc., 482 F.3d 991, 995 (7th Cir. 2007).
A.

Plaintiffs Have Introduced Sufficient Evidence to Support a Reasonable Jury
Finding that the Alleged Misstatements Artificially Inflated Motorola’s Stock
Price

Defendants’ expert economist, Dr. Kenneth M. Lehn, has examined the circumstances
surrounding Motorola’s earnings report of July 19, 2006, and Defendants’ allegedly false or
misleading statements of the same day. (R. 366-17 at 107-09.) He observes that Motorola
released its 2Q 2006 earnings at 4 p.m., after the stock market closed. (Id. at 107.) The
company reported earnings of 33 cents per share, “which exceeded the consensus analyst
forecast of $.31 per share.” (Id.) According to Dr. Lehn, the conference call began at 5 p.m.
(Id. at 108.) In the hour between the stock market’s closure at 4 p.m. and just before Motorola’s
conference call began at 5 p.m., Dr. Lehn observes that the company’s stock price had increased
by 7.01% from $19.25 at 4 p.m. to $20.60. (Id.) He also points out that Motorola’s stock price
closed on July 20, 2006, at the same price that it held immediately before the conference call at
which Defendants made the allegedly false or misleading representations. (Id.)
On the basis of Dr. Lehn’s analysis and what they claim to be Plaintiffs’ lack of evidence
to the contrary, Defendants submit that they are entitled to summary judgment because the
alleged misstatements did not inflate Motorola’s stock price. (R. 366-1 at 29.) Defendants
further contend that “Dr. Finnerty has made no attempt to disaggregate the inflationary impact of
the allegedly fraudulent information from the indisputably accurate information introduced to the
market on the same day—notably that the Mobile Devices segment had just announced record
second quarter sales and that Motorola had exceeded consensus estimates for earnings per
share.” (Id. at 29-30.)

35

This argument fails. As Plaintiffs correctly point out, this case concerns omissions to the
effect that Defendants allegedly failed to disclose not only the actual status of Motorola’s new
3G handsets, but the fact and nature of the Qualcomm and Freescale IP-licensing transactions in
3Q 2006. (R. 374 at 47.) The fact that Motorola’s stock price did not increase in value after the
July 19, 2006, conference call is therefore of no moment. Defendants’ statements may have
comported with investors’ expectations, such that the company’s stock price remained
unchanged. The relevant change in stock price occurs when the information is revealed to the
market. See Dura, 544 U.S. at 347 (observing that, to allege loss causation, a complaint must
allow that “share price fell significantly after the truth became known”) (emphasis added);
Lentell v. Merrill Lynch, Inc., 396 F.3d 161, 173 (2d Cir. 2005) (“[T]o establish loss causation, a
plaintiff must allege . . . that the misstatement or omission concealed something from the market
that, when disclosed, negatively affected the value of the security.”) (emphasis added); see also
In re HealthSouth Corp. Sec. Litig., 257 F.R.D. 260, 282 (N.D. Ala. 2009) (“‘[T]he mere
absence of a statistically significant increase in the share price in response to fraudulent
information does not ‘sever the link’ between the material misstatements and the price of the
stock. Rather, price stability may just as likely demonstrate the market consequence of fraud
where the alleged fraudulent statement conveys that the company has met market expectations,
when in fact it has not.’”) (quoting In re Scientific-Atlanta, Inc. Sec. Litig., 571 F. Supp. 2d 1315,
1340-41 (N.D. Ga. 2007)) (emphasis in original).

36

B.

There Is a Genuine Dispute Whether the November 7, 2006, and January 4,
2007, Purported Corrective Disclosures Revealed that the Prior Statements
Were False or Misleading

Defendants next argue that they are entitled to summary judgment because the evidence
does not support a finding that a corrective disclosure occurred. (R. 366-1 at 30-36.) They
contend that the alleged disclosures that took place on November 7, 2006, January 4, 2007, and
March 21, 2007, corrected neither a prior misstatement nor an omission. (Id. at 30.) As a result,
Defendants submit, Plaintiffs cannot prove loss causation. (Id. at 30-36.)
Plaintiffs contest this argument on two grounds. First, they submit that, under Seventh
Circuit law, Defendants must “establish that, as a matter of undisputed fact, the depreciation in
the value of the security could not have resulted from the alleged false statement or omissions”
to prevail on summary judgment. (R. 374 at 43 (quoting Caremark, Inc. v. Coram Healthcare
Corp., 113 F.3d 645, 649-50 (7th Cir. 1997).) They argue that Defendants have failed to satisfy
this burden. (Id. at 43-46.) Second, Plaintiffs contend that, even if Defendants have met their
burden under Caremark, there is more-than-sufficient evidence to create a genuine dispute
whether the November 7, 2006, January 4, 2007, and March 21, 2007, events constituted
corrective disclosures. (Id. at 48-55.)
1.

Caremark Governs the Parties’ Respective Burdens with Respect to
Defendants’ Motion for Summary Judgment on the Ground of Loss
Causation

The parties dispute the relevant law that applies to a motion for summary judgment in a
securities-fraud case on the issue of loss causation. Defendants maintain that the Supreme
Court’s opinion in Dura Pharms., Inc. v. Broudo, 544 U.S. 336 (2005) controls this question,
and requires Plaintiffs to “demonstrate[] a link between the alleged fraud and the decline in

37

Motorola’s stock price[.]” (R. 366-1 at 30, 36.) Dura, Defendants contend, “require[s] the
plaintiffs to provide evidence of the specific decline in stock price attributable to disclosure of
the alleged fraud[.]” (Id. at 36.) Plaintiffs strenuously disagree as to their burden in opposing
summary judgment. (R. 374 at 43.) They submit that Seventh Circuit law is clear to the effect
that parties moving for summary judgment must “establish that, as a matter of undisputed fact,
the depreciation in the value of the security could not have resulted from the alleged false
statement or omission[.]” (Id. (quoting Caremark, 113 F.3d at 649-50.)
It is true, of course, that Dura held that “[a] private plaintiff who claims securities fraud
must prove that the defendant’s fraud caused an economic loss.” Dura, 544 U.S. at 338. This
holding, however, does not alter the well-established law regarding the parties’ respective
burdens at the summary-judgment stage. Defendants, in moving for summary judgment, bear the
initial burden of establishing that the evidence does not support a finding that the allegedly false
or misleading representations or omissions caused the fall in Motorola’s stock price. The
Seventh Circuit made this clear when it observed:
Our holding does not preclude [the defendant] from submitting, at the summary
judgment stage, that [the plaintiff] cannot prove the loss causation that it has
alleged in this complaint. At summary judgment, this burden usually is met by
establishing that the decline in the value of the security is attributable to some
other factor. To defeat [the plaintiff’s] claim at summary judgment, therefore,
[the defendant] would have to establish that, as a matter of undisputed fact, the
depreciation in the value of the notes could not have resulted from the alleged
false statement or omission of the defendant.
Caremark, 113 F.3d at 649-50.
These remarks would be without significance to the present case if the Supreme Court
had superceded Caremark in its subsequent decision in Dura. Yet, it did not do so, and the
Seventh Circuit’s account of the law controls. In Dura, the Supreme Court reversed a Ninth
38

Circuit determination that a private plaintiff in a securities-fraud lawsuit can satisfy the losscausation requirement by alleging and subsequently establishing that the relevant
misrepresentation inflated the price of the security. Dura, 544 U.S. at 338. The Supreme Court
held that plaintiffs “need to prove proximate causation and economic loss[,]” such that the
plaintiffs’ failure to allege that the company’s share price “fell significantly after the truth
became known” rendered their “complaint legally insufficient.” Id. at 346-48 (emphasis in
original). Nothing in the Supreme Court’s opinion addresses the respective burdens faced by
moving and nonmoving parties for summary judgment on the issue of loss causation. Dura
simply holds that, to state a plausible claim for relief and ultimately to prevail at trial, plaintiffs
in fraud-on-the-market cases need to prove loss in the form of a disclosure-specific decline in
share price. Dura, 544 U.S. at 347.
This Court is not alone in concluding that Dura does not change the law in the Seventh
Circuit governing motions for summary judgment in securities-fraud cases on the issue of loss
causation. A court in this district has similarly observed that Dura “did not address what loss
causation requires of a securities fraud plaintiff beyond the pleading stage.” In re Motorola
Secs. Litig., 505 F. Supp. 2d 501, 550 (N.D. Ill. 2007); accord In re Scientific Atlanta, Inc. Secs.
Litig., 754 F. Supp. 2d 1339, 1373 (N.D. Ga. 2010) (“The Court agrees that Dura, which
centered on the adequacy of pleading, did not establish any clear standard with respect to
summary judgment[.]”). Although a number of courts outside of the Seventh Circuit have
adopted a standard contrary to Caremark— see, e.g., In re Williams Secs. Litig.-WCG Subclass,
558 F.3d 1130, 1143 (10th Cir. 2009); In re Vivendi Universal, S.A. Secs. Litig., 605 F. Supp. 2d
586, 604-05 (S.D.N.Y. 2009)—this Court is bound by Seventh Circuit precedent.

39

Nevertheless, Defendants argue that the Seventh Circuit’s post-Dura decisions in Ray v.
Citigroup Global Mkts., Inc., 482 F.3d 991 (7th Cir. 2007) and Schleicher v. Wendt, 618 F.3d
679 (7th Cir. 2010) call Caremark into question because they “place the burden of proving loss
causation at the summary judgment stage on Plaintiffs.” (R. 366-1 at 37.) Nothing in Ray
suggests, however, that the Seventh Circuit meant to repudiate its holding in Caremark—indeed,
the court in Ray cited Caremark with approval. Ray, 482 F.3d at 995.
Ray did speak in terms of the evidence, or lack of the same, that Plaintiffs had introduced
on the question of loss causation. E.g., id. at 994-96 (“On appeal, plaintiffs have pointed to
evidence in the record that, they believe, [establishes loss causation]. . . . Plaintiffs similarly
have not introduced enough evidence to go forward on a fraud-on-the-market theory. . . . The
approach that comes closest to satisfying plaintiffs’ burden is the ‘risk-free’ idea.”). This
discussion does not suggest, however, that a plaintiff has the initial burden to introduce evidence
of loss causation to successfully oppose a motion for summary judgment. The Seventh Circuit’s
analysis in Ray is consistent with the well-established principle that a nonmoving party must
introduce evidence of an issue, on which it bears the burden of proof at trial, only after the
moving party has pointed to an absence of supportive evidence in the record. See Celotex, 477
U.S. at 323. Indeed, the Seventh Circuit noted that the defendants in Caremark had introduced
expert evidence that market forces resulted in the loss in stock value, yet “Plaintiffs have offered
nothing to rebut that theory—no expert testimony suggesting that the collapse was caused by the
lack of the fraudulently promised contracts and financing[.]” Ray, 482 F.3d at 995. Dura only
holds that a plaintiff alleging securities fraud has the burden of proof at trial to establish loss
causation. Dura, 544 U.S. at 338, passim. It does not purport to create an exception to the long-

40

established rules governing parties’ respective burdens in bringing, and responding to, a motion
for summary judgment.
Finally, as Defendants concede, Schleicher concerned a plaintiff’s burden at the classcertification stage. (Id. at 37.) Schleicher does not describe a plaintiff’s evidentiary burden as to
loss causation in responding to a defendant’s motion for summary judgment. 618 F.3d at 679,
passim.
Thus, to prevail on the issue of loss causation at summary judgment, Defendants must
demonstrate an absence of evidence that “the depreciation in the value of the notes . . . resulted
from the alleged false statement or omission of the defendant.” Caremark, 113 F.3d at 649-50.
It is only upon such a showing that Plaintiffs must introduce evidence of loss causation sufficient
to establish a genuine dispute as to the same.
2.

Defendants Have Failed to Establish an Absence of Evidence
Supporting a Finding of Loss Causation

Defendants argue that “none of the information disclosed to the market on November 7,
2006, January 4, 2007 or March 21, 2007 demonstrates a link between the alleged fraud and the
decline in Motorola’s stock price[.]” (R. 366-1 at 30.) There are a number of undisputed facts
that make it difficult for Defendants to prevail on this ground. As to each of the alleged
disclosure dates, the parties agree on the following facts:
(1) The negative abnormal return following each alleged disclosure cannot be
explained by general economic conditions, stock-market-wide factors, macroeconomic factors, industry-specific factors, or by disclosures regarding
Motorola’s Networks and Enterprise or Connected Home Solutions business
segments or any other part of Motorola’s business other than Mobile Devices.
(2) The negative abnormal return on each relevant date was due to disclosures
regarding Motorola’s Mobile Devices business.

41

(3) The ensuing negative abnormal return on each relevant date was statistically
significant.
(R. 379 at 68-76.) Notwithstanding these facts, Defendants submit that none of the alleged
disclosures revealed information to the market concerning the allegedly false or misleading
statements or omissions. (R. 366-1 at 30-36.) Plaintiffs have revealed sufficient evidence,
however, to create a genuine dispute as to loss causation.
a.

The November 7, 2006, Alleged Disclosure

On November 7, 2006, Lehman Brothers issued an analyst report on Motorola, entitled
“Change of Price Target” and “Early Challenges in October.” (R. 362-19 at 2-8.) The report
cited a variety of negative factors, which included: “In Europe, our checks suggest new WCDMA handsets from Motorola (RZAR XX and RAZR MAXX) this quarter have not yet
arrived which could suggest our higher end unit estimates may be aggressive.” (Id. at 3.)
According to Defendants, this evidence fails to satisfy the required proof of loss causation under
Dura because the report did not reveal any new information. (R. 366-1 at 31.) In light of the
fact that Zander’s and Garriques’s alleged misrepresentations were only to the effect that the new
3G phones were “on track” “for the second half of the year” and “launching into Q4,”
Defendants argue that the Motorola report disclosed no information inconsistent with those
representations.
This argument ignores the question of scale. As explained above—construed in the light
most favorable to Plaintiffs, and drawing all inferences in their favor—Defendants’ alleged
misrepresentations and omissions would support a reasonable jury finding that investors
understood Defendants’ communications to mean that Motorola was on track to launch its new
3G phones en masse to meet consumer demand in Q4 2006. So construed, there is indeed a jury
42

question whether the November 7 report revealed that Defendants’ representations to that effect
were misleading because the report revealed that “higher end unit estimates may be aggressive.”
(R. 362-19 at 3.) Defendants’ argument that the early-November Lehman report could not have
“corrected” their alleged misrepresentations concerning new 3G phones’ shipment in “midNovember” fails for the same reason. A jury could understand the report to reveal information
calling into question the realism of a mid-November large-scale launch. In this respect,
Plaintiffs point to the deposition testimony of analyst Jeffrey Kvaal that “we had expected to see
[the new W-CDMA models] in the stores by [November 7] and didn’t.” (R. 377-53 at 43.)
Kvaal further testified that “we did not feel that Motorola was on a trajectory to hits its fourthquarter estimates[.]” (Id. at 45.) Thus, construed in the light most favorable to Plaintiffs, the
November 7 report did not simply amount to “[c]onfirmation of information already in the
market[.]” (R. 366-1 at 33.)
Ultimately, Defendants have failed to demonstrate that “the decline in the value of the
security is attributable in total to some other factor.” Caremark, 113 F.3d at 649-50.
b.

The January 4, 2007, Alleged Disclosure

On January 4, 2007, Motorola issued a press release entitled “Motorola Announces
Preliminary Estimates of Fourth Quarter 2006 Results.” (R. 366-5 at 64-65.) The company
announced that the estimated sales and GAAP earnings per share for 4Q 2006 were below earlier
forecasts. (Id. at 64.) The press release explained that “[t]he shortfall in both sales and earnings
occurred in the Mobile Devices segment and is attributed to an unfavorable geographical and
product-tier mix of sales as compared to the company’s internal forecast.” (Id.)

43

Although it explained the earnings shortfall on a variety of factors, a Lehman Brothers
report the next day observed that “Motorola’s new RAZR XX and RAZR MAXX handsets are
just beginning to ramp this quarter.” (R. 377-32 at 3.) A later Lehman report of the same day
identified as one of “the main contributors” to “[w]hat went wrong for Motorola in 4Q”:
“[s]lower than expected ramp of 3G products in Europe: Motorola’s new RAZR XX and RAZR
MAXX handsets are just beginning to ramp this quarter.” (Id. at 9-10.) Also, on January 5,
2007, a Cowen report observed that “weakness in the company’s core North American handset
markets led to a shortfall in both the top and bottom lines in 4Q06 at MOT.” (R. 377-7 at 2.) It
identified “GSM mix shift [and] weak 3G positioning” as “additional headwinds[.]” (Id.) On
the same, RBC Capital Markets issued a report to the effect that Motorola’s quarter was “a goat.”
(Id. at 7.) It observed that “European weakness may be related to a limited WCDMA
offering[.]” (Id.)
Notwithstanding this evidence that Motorola’s January 4 press release indicated that
problems with the company’s new 3G products were at least partially responsible for the lowerthan-forecast sales and earnings, Defendants argue that they are entitled to summary judgment
because “[t]he text of the January 4 press release . . . makes no reference to the new 3G phones
or Motorola’s 3G portfolio more generally” and because it made no reference “to the IP
Transactions or more generally to Motorola’s revenue from intellectual property licensing in Q4
1006 or otherwise.” (R. 366-1 at 33-34.) They further submit that this Court granted summary
judgment in comparable circumstances in another case for failure to satisfy loss causation
“related to near-identical press releases announcing earnings misses.” (Id. at 34 (citing Tellabs,
735 F. Supp. 2d at 908).)

44

The Court disagrees. Plaintiffs have introduced ample evidence to support a reasonable
jury verdict that the January 4 press release disclosed information that Defendants’ statements or
omissions concerning Motorola’s new 3G phones and Defendants’ accounting and reporting of
the Freescale and Qualcomm IP-licensing transactions were false or misleading. Defendants
cannot prevail simply by pointing out that the January 4 disclosure did not speak directly to
either the IP transactions or the new 3G phones. It is well settled that “a disclosure sufficient to
satisfy loss causation can occur in ways other than an announcement that points directly to a
previous representation and proclaims its falsity.” Tellabs, 735 F. Supp. 2d at 906-07 (quoting
Motorola, 505 F. Supp. 2d at 540). Of course, “the standard cannot be so lax that every
announcement of negative news becomes a potential ‘corrective disclosure.’” Motorola, 505 F.
Supp. 2d at 546. For that reason, “an earnings warning, standing alone, is not a ‘corrective
disclosure’ because the resulting share price decline does not necessarily dissipate the particular
price inflation caused by the alleged fraud.” Id. (emphasis in original). Instead, “if a plaintiff
shows . . . that significant aspects of the still-concealed fraud in fact provided the catalyst for an
anticipated failure to meet earnings forecasts, then the share price decline following an earnings
warning might indeed dissipate the fraudulent price inflation; in such circumstances, there is no
good reason why the earnings warning should not serve as a disclosure in which ‘the relevant
truth begins to leak out.” Id.; see also Tellabs, 735 F. Supp. 2d at 908 (“[I]n order to
demonstrate loss causation Plaintiffs must show a ‘link’ between the concealed information and
the motivation to make the disclosure.”).
Although the Court granted summary judgment in Tellabs on the ground of loss
causation, that case is distinguishable. In Tellabs, “[p]laintiffs [had] not pointed to any evidence

45

that Tellabs issued the . . . announcements regarding revenue concerns due to the company’s
alleged channel stuffing activities.” Id. at 907. In the present case, beyond the evidence pointed
to above, Plaintiffs have introduced evidence that the IP arrangements and the problems with the
new 3G phones informed Motorola’s reference to “an unfavorable geographical and product-tier
mix of sales.” A January 5, 2007, Lehman Brothers report observed that “Motorola [had]
preannounced a substantial 4Q miss” and explained that “Motorola . . . benefited from a royalty
payment in 3Q06 that we do not believe repeated.” (R. 377-32 at 2-3.) J.P. Morgan observed
that “[w]e calculate handset op. margin cratered roughly 700 bps to 5.2% from a royalty-induced
11.9% in Q3[.]” (R. 377-6 at 15.) At a March 1, 2007, conference call, Motorola’s CEO and
Chairman, Zander, explained that “Q4 to me was the inability to execute and have on the shelves
at Cingular and Europe the kind of 3G products that they require.” (R. 377-47 at 38.) He also
stated: “We were the first in 3G. We just totally messed that up with our designs and lateness
and with our semiconductor partners and got behind the 3G curve.” (Id. at 35-36.) Plaintiffs
also point to Zander’s comments on a conference call on January 19, 2007, to the effect that
“[w]e did not have the products, frankly, in Q4.” (R. 366-5 at 87.) Zander also mentioned on
that call that “some of the newer products that came in shipped—started ramping in the quarter
and we had some mix issues with that. . . . And you get off a little bit on this thing and it can
multiply very quickly. We are now starting to ship 3G products.” (Id. at 88.) Plaintiffs also
direct the Court to an internal Motorola document noting that, “[i]n 2H 06 [OE%] has declined
precipitously (when significant IP deals in Q3 are ‘ignored’).” (R. 377-25 at 13.) That
document also provides that, “[i]n effect, BGM management has effectively ‘hidden’ the
decrease in core profitability[.]” (Id.)

46

Viewed in the manner appropriate to summary judgment, the evidence reveals a genuine
dispute whether January 4, 2007, press release satisfies a showing of loss causation.
c.

The March 21, 2007, Alleged Disclosure

The parties agree that, on March 21, 2007, Motorola issued a press release entitled
“Motorola Announces Revised Guidance for First Quarter and Actions to Improve Profitability
and Shareholder Value” and held a conference call with analysts and investors. (R. 379 at 74.)
The press release disclosed that the company would miss 1Q 2007 revenue and earnings
expectations due to “lower than anticipated sales and operating earnings at the company’s
Mobile Devices business.” (Id.) During the conference call, Zander explained that “about a
month ago there was a change in management in Mobile Devices. After that change it became
apparent that the actions that we outlined in January were not progressing fast enough, if at all.
These included . . . continued delays in some of our newer 3G products.” (R. 362-6 at 121.) He
continued: “our performance in Europe continues to be below expectations because we had a
limited 3G product portfolio. As a result and as you can see in today’s press release, Q1 for
Mobile Devices will be very difficult and disappointing.” (Id.) He further commented that “we
need to get our 3G portfolio and we are starting to ship some products. It does take a while to
ramp up.” (Id. at 125.) In addition, he observed that “UMTS in Europe, especially . . . is . . . a
big source of the profit pools. It’s beginning to happen here in the U.S. And there we just need
more products.” (Id. at 129.)
Defendants argue that the law entitles them to summary judgment because the March 21
press release and ensuing conference call did not introduce any new information concerning the
allegedly false or misleading representations during the class period. (R. 366-1 at 35.) They rely

47

on In re Retek Inc. Secs. Litig., where the U.S. District Court for the District of Minnesota
observed that, “[g]enerally, a re-characterization of previously disclosed news cannot be a
corrective disclosure for loss causation purposes.” 621 F. Supp. 2d 690, 705 (D. Minn. 2009).
They contend that it is undisputed that “the new 3G phones launched in Q4 consistent with what
Mr. Garriques and Mr. Zander had represented” and that, “prior to March 21, Motorola had
disclosed to the market that its 3G sales were slow and its 3G portfolio needed improvement.”
(R. 366-1 at 35.) Defendants also submit that the market knew that Motorola lacked a
competitive 3G portfolio, pointing to a January 19, 2007, CIBC analyst report, which stated that
“we believe the 3G lineup needs to be beefed up beyond the current V3xx and MAXX phones
before much headway can be made in Europe.” (R. 366-19 at 2.)
This argument fails at the summary-judgment stage, where the Court must view all
evidence in the light most favorable to the nonmoving parties. Zander’s March 21, 2007,
comments about Motorola’s new 3G phones made the extent of the company’s problems clear.
The statistically significant decline in Motorola’s share price after the March 21, 2007, press
release and conference call is evidence of new information regarding Motorola’s 3G problems
and creates a genuine dispute. Although it is true that the market already knew of shortcomings
in Motorola’s bringing its new 3G phones to market, there is a genuine dispute whether the
March 21, 2007, disclosure revealed new information as to the extent and seriousness of those
shortcomings. Viewed in the light most favorable to Plaintiffs, the evidence does not compel a
finding that the March 21 press release and conference call merely revealed previously disclosed
information, such that they could not constitute a corrective disclosure sufficient to establish loss
causation. See, e.g., In re Countrywide Fin. Corp. Secs. Litig., 588 F. Supp. 2d 1132, 1172 (C.D.

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Cal. 2008) (“Where, as here, a plaintiff alleges a complex series of misrepresentations and
omissions . . ., it is likely that some information came to the market, but the full extent of the
decline attributable to the misrepresentations and omissions were not priced into the security
until later, more significant disclosures.”); In re Bristol Myers Squibb Co. Secs. Litig., 586 F.
Supp. 2d 148, 165 (S.D.N.Y. 2008) (“It is also clear that a corrective disclosure need not take the
form of a single announcement, but rather, can occur through a series of disclosing events.”).
Furthermore, in arguing that the March 21 press release and conference call did not reveal any
new information about Motorola’s Argon-based 3G phones, Defendants do not point to evidence
to explain the statistically significant stock-price decline. See, e.g., In re Vivendi Universal, S.A.
Secs. Litig., 634 F. Supp. 2d 352, 372 (S.D.N.Y. 2009) (“Defendants also fail to point to any
unaddressed competing causes . . . . While defendants argue that Deutsche Bank transaction was
announced prior to June 21, 2002, and therefore that the market had already absorbed the news,
they can point to no reason why the stock declined. . . . The court concludes that there is a
genuine issue of material fact[.]”).
C.

Defendants Have Submitted Sufficient Evidence Concerning the Amount of
Inflation Specifically Related to the Alleged False or Misleading Statements

Finally, Defendants move for summary judgment on the ground that Plaintiffs have failed
to disaggregate the stock-price decline that the alleged fraud caused from the non-fraud causes of
that harm. (R. 366-1 at 36-40.) They observe that Plaintiffs’ expert, Dr. John D. Finnerty,
contends that Defendants’ allegedly misleading statements were purely responsible for
Motorola’s stock-price decline. (Id. at 38.) Defendants point out, however, that the alleged
corrective disclosures on November 7, 2006, and March 21, 2007, conveyed negative
information unrelated to Motorola’s new 3G phones. (Id. at 39.) They argue, in particular, that
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disclosures concerning the KRZR phone and “modest iDEN recovery” may have had a negative
impact. (Id.) Defendants thus conclude that, “[a]bsent the necessary expert testimony
disaggregating the tangle of factors, Plaintiffs cannot satisfy their loss causation burden.” (Id. at
40.)
There are a number of problems with Defendants’ argument. In the first place, there is a
genuine dispute whether factors beyond the allegedly false or misleading representations caused
Motorola’s stock-price decline. Plaintiffs point out that Defendants failed to introduce evidence
in support of their contention that disclosures regarding KRZR and iDEN bore some
responsibility for the stock-price decline. (R. 374 at 56.) In addition, the parties agree that
“[t]he negative abnormal return on November 7, 2006 was due to disclosures regarding
Motorola’s Mobile Devices business.” (R. 379 at 69.) They also agree that “[t]he negative
abnormal return on November 7, 2006 cannot be explained by industry-specific factors” or
“disclosures regarding Motorola’s Networks and Enterprise or Connected Home Solutions
business segments or any other part of Motorola’s business other than Mobile Devices.” (Id. at
68.) Furthermore, Plaintiffs proffer the expert report of Dr. Finnerty, who in addition to
undertaking an event-study analysis, articulated a reasonable basis for his opinion why the
November 7, 2006, Lehman Brothers report’s discussion of KRZR and iDEN would not “cause a
statistically significant decline in Motorola’s stock price.” (R. 362-16 at 48.) Construed in the
light most favorable to Plaintiffs, the evidence does not support Defendants’ assertion that
“Plaintiff[s] cannot prove the damages resulting from the alleged fraud.” (R. 366-1 at 40.)
More fundamentally, however, Defendants’ argument that the law entitles them to
summary judgment on account of Plaintiffs’ failure to proffer expert testimony disaggregating

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fraud-caused from non-fraud-caused harm is contrary to controlling law. In Caremark, the
Seventh Circuit did not believe that the plaintiff’s claim was “rendered infirm because its alleged
injuries equally could have been caused by factors which [the defendant] did disclose.”
Caremark, 113 F.3d at 649. Defendants cite Ray for its assertion that the plaintiffs’ expert had
“considered only the amount of their damages, not the cause of those damages.” (Id. (quoting
Ray, 482 F.3d at 995).) Yet, Ray did not hold that, to survive a motion for summary judgment, a
defendant must “disaggregate the harm flowing from fraud-related factors from nonfraud-related
factors[.]” (R. 366-1 at 36.) Indeed, Ray characterized “loss causation” as “the fact that the
defendant’s actions had something to do with the drop in value[.]” Id. at 994-95 (emphasis
added). Plaintiffs in this case have introduced considerable evidence that Defendants’ alleged
misrepresentations were a cause of Motorola’s stock-price declines. (R. 376 at 36-39, 41.)
The Court therefore declines to grant Defendants summary judgment on this basis.
V.

Defendants Are Not Entitled to Summary Judgment on Plaintiffs’ Section 20(a)
Claims
Defendants’ last argument is that, “[b]ecause Plaintiffs cannot prevail on their claims

under Section 10(b) against [Zander, Garriques, and Devonshire], summary judgment must also
be granted as to the control person claims.” (R. 366-1 at 40-41.) Because a genuine dispute
precludes summary judgment in favor of Defendants on Plaintiffs’ Section 10(b) claims,
Defendants’ argument as to Plaintiffs’ Section 20(a) claims fails.

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CONCLUSION
For the preceding reasons, Defendants’ motion for summary judgment is denied.
Dated: July 25, 2011
ENTERED

_________________
AMY J. ST. EVE
United States District Court Judge

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