City of Warren Police and Fire Retirement System v. Zebra Technologies Corporation et al
Filing
90
MEMORANDUM Opinion and Order: For the reasons stated in the attached memorandum opinion and order, Defendants Zebra Technologies Corporation, Anders Gustafsson, and Michael C. Smiley's Motion to Dismiss (Dkt. No. 69) is granted. Enter Memorandum Opinion and Order. Civil case terminated. Signed by the Honorable Harry D. Leinenweber on 10/16/2020:Mailed notice(maf)
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
CITY OF WARREN POLICE AND
FIRE RETIREMENT SYSTEM,
Individually and on Behalf of
All Others Similarly
Situated,
Case No. 19 C 5782
Plaintiff,
Judge Harry D. Leinenweber
v.
ZEBRA TECHNOLOGIES
CORPORATION, ANDERS
GUSTAFSSON, and MICHAEL C.
SMILEY,
Defendants.
MEMORANDUM OPINION AND ORDER
For the reasons stated herein, Defendants Zebra Technologies
Corporation, Anders Gustafsson, and Michael C. Smiley’s Motion to
Dismiss (Dkt. No. 69) is granted.
I. BACKGROUND
On April 15, 2014, Zebra Technologies Corporation (“Zebra”)
announced that it had agreed to acquire the enterprise business of
Motorola Solutions, Inc. (“Motorola”). (Second Am. Compl. (“SAC”)
¶ 37, Dkt. No. 65.) Both companies are involved in what is known
as “the internet of things.” This concept is described as a network
of physical objects that are embedded with technologies for the
purpose of connecting and exchanging data with other physical
objects over the internet. It includes systems of interrelated
computing devices with the ability to transfer data over a network
without human interaction. The pre-acquisition business of Zebra
involved
asset
intelligence
and
tracking
though
the
use
of
barcodes, imagers, and radio frequency identification readers.
(Id. ¶ 33.) The business acquired from Motorola consisted of
enterprise visibility and mobility which involved mobile computing
and data capture, e.g., the ability to provide a customer with
knowledge of its products such as the quantity and their location.
(Id.)
A. The Complaint
The Plaintiff, the City of Warren Police and Fire Retirement
System, allegedly purchased Zebra common stock during the proposed
class period of November 4, 2014, to November 9, 2015. (Id. ¶ 21.)
The individual Defendants are senior officers that led Zebra during
the
class
period.
Collectively
with
Zebra,
the
individual
Defendants are referred to as Defendant or Defendants. According
to the Complaint, the SEC report filed by Zebra for the acquisition
stated that the purchase price was $3.45 billion in cash and
acknowledged that Zebra was acquiring a company significantly
larger than itself, i.e., Zebra had 2,600 employees and $1 billion
in revenues while Motorola had 4,500 employees and $2.5 billion in
revenues.
(Id.
¶
39.)
In
a
conference
call
announcing
the
acquisition, Zebra said that it expected earnings per share to
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increase during the first year and return on invested capital to
exceed the cost of the acquisition in three years. (Id. ¶ 38.) On
a November 4, 2014, earnings call after the completion of the
acquisition,
Zebra
stated
that
it
expected
cost
synergies
resulting from the acquisition would amount to $150 million. (Id.
¶ 44.)
Unfortunately, according to the Complaint, the integration of
Motorola enterprise into Zebra was met with numerous problems.
(Id. ¶ 47.) Specifically, Zebra struggled to extract the relevant
data from the Motorola enterprise system and integrate that data
into the Zebra system. (Id.) For example, the sales organizations
of
the
two
compensation
companies
which
were
made
very
the
different
integration
in
more
systems
costly
and
than
originally thought. (Id. ¶ 52.) Thus, on November 10, 2015, a year
after the completion of the acquisition, Zebra announced that the
complexity of the two systems was greater than it had anticipated
and that it expected the cost to complete the overall integration
would be approximately $180 million to $200 million through 2017.
(Id. ¶ 71.)
Moreover, according to the Complaint, on August 11, 2015,
Zebra announced that it had missed its previously issued gross
margin guidance for the second quarter of 2015. (Id. ¶ 112.) The
guidance issued on May 13, 2015, was 45.5% to 46,5%. (Id. ¶ 64.)
On August 11, 2015, Zebra announced its second quarter gross margin
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came in at 44.2%. The gross margin miss was 160 basis points, or
1.6% below that of the previous quarter. (Id. ¶¶ 66–67.) However,
the three other guidance metrics, net sales, non GAPP earnings per
share, and adjusted EBITDA, had been met. (Id.) Zebra’s explanation
for the shortfall was “purchase accounting and one-time accounting
adjustments”
relating
to
the
acquisition
of
the
Motorola
enterprise. (Id.)
The announcement of the failure to achieve the gross margin
guidance for the 2015 second quarter resulted in an immediate 24%
drop in Zebra share price. (Id. ¶ 68.) The announcement that Zebra
would need to spend between $180 and $200 million to complete the
integration resulted in the share price dropping 8% further. (Id.
¶¶ 71–73.) It is these share price drops that form the basis for
this putative securities fraud class action. The Plaintiff seeks
to bring this action on behalf of a putative class of purchasers
of Zebra common stock who purchased shares between the dates of
November
4,
2014,
the
date
the
acquisition
was
closed,
and
November 9, 2015, the date Zebra disclosed that it would need to
spend upwards of $200 million to complete the integration.
As stated in the Complaint, while Zebra emphasized to the
market the significant cost synergies that were to be obtained
through the acquisition and assured investors the integration of
the two entities was “progressing as planned,” it was experiencing
substantial problems with integration during the class period.
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(Id. ¶¶ 95–96.) The Defendants continued their rhetoric even as
the
company
was
experiencing
problems
internally.
Anonymous
confidential former employees described the process as having
“many
challenges”
and
that
parts
were
“brutal.”
(Id.
¶
50.)
According to the Complaint, many of the problems experienced were
the result of understaffing, which led to the hiring of additional
personnel at increased cost, as well as the continuing obligation
to pay Motorola for contractual services. (Id. ¶¶ 51 & 53.)
B. The Motion to Dismiss
Defendants have filed a Motion to Dismiss based on three
contentions. First, Defendants claim they advised the market at
the time of the acquisition that integration would be difficult
and the benefits to be gained required Defendants to not “stub
[their]
toe”
while
pursuing
the
integration.(11/4/2014
Zebra
Earnings Call at 12, Mot., Ex. 2, Dkt. No. 71-2.) Defendants next
contend that Plaintiff has failed to allege any present tense
statement that was either false or misleading and that the many of
the
statements
relied
upon
by
Plaintiff
were
forward-looking
statements that are protected by the safe harbor provision of the
Private
Securities
Litigation
Reform
Act
(“PSLRA”).
Finally,
Defendants argue that Plaintiff does not plead a “strong inference
of scienter” with regard to any of the alleged false statements or
omissions as required by the PSLRA.
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II. DISCUSSION
The Complaint challenges two general categories of alleged
misstatements by Defendants: present tense statements concerning
the status of integration, and forward-looking statements relating
to anticipated cost synergies from the acquisition and the gross
margin guidance for the second quarter of 2015.
To state a Rule 10 b-5 claim for securities fraud, a plaintiff
must allege: (1) a material misrepresentation, or omission by a
defendant,
(2)
misrepresentation
scienter,
or
(3)
omission
and
a
connection
the
purchase
between
or
sale
the
of
a
security; (4) reliance upon the misrepresentation or omission; (5)
economic loss; and (6) loss causation. Cornielsen v. Infinium
Capital Mgmt., LLC, 916 F.3d 589, 598 (7th Cir. 2019). The fraud
claim must satisfy not only Rule 9(b)’s particularity standard,
but also the requirement of Section 21D(b)(2) that securities fraud
complaints must “state with particularity facts giving rise to a
strong inference that they acted with the required state of mind.”
15 USC § 78u-4(b)(2)(A). The required state of mind refers to the
element of scienter, and, in the PSLRA context, means “an intent
to deceive, demonstrated by knowledge of the statement’s falsity
or reckless disregard of a substantial risk of the statement is
false.” Higginbotham v. Baxter Int'l, Inc., 495 F.3d 753, 756 (7th
Cir. 2007). The PSLRA also requires that any complaint alleging a
material misrepresentation or omission must also “specify each
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statement alleged to have been misleading” and “the reason or
reasons why the statement is misleading.” 15 USC § 78u-4(b)(1);
Cornielsen, 916 F.3d at 599. A complaint that fails to do so shall
be dismissed. 15 USC § 78u-4(b)(3)(A).
Plaintiff’s chief complaints are (1) that Defendants falsely
claimed that the acquisition was on track to achieve short-term
substantial savings arising from cost synergies, which was belied
by Defendants missing their second quarter gross margin guidance,
and (2) that Defendants failed to disclose the extent of the
problems arising from integrating the two companies until their
November 10, 2015, disclosure that the integration would require
substantial incremental spending (upwards of $180 million to $200
million) to complete the integration.
Defendants respond that they made clear from the beginning to
the investing public that the integration would be “a significant
undertaking
and
will
require
significant
attention
from
our
management,” and that integration might not be successful or may
“be more costly than presently contemplated.” (2014 Annual Form
10-K
at
22,
Mot.,
Ex.
8,
Dkt.
No.
71-8.)
Furthermore,
the
Defendants argue that the significant cost savings due to synergies
resulting from the acquisition is separate from the one-time costs
arising from the acquisition. The Complaint does not allege that
Zebra failed to achieve the significant cost savings contemplated
at the time of the acquisition. Instead, Plaintiff alleges the
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increased costs expended the savings. Although Defendants admit
this may have happened when the costs spiraled upward during
integration, this does not take away the ultimate value of the
acquisition. The presence of one-time costs, while unfortunate, do
not
make
the
expectation
acquisition
that
the
a
merger
mistake
would
or
belie
result
in
the
underlying
savings
due
to
synergies.
Defendants also argue that the failure to meet the second
quarter gross margin cannot be actionable because of the PSLRA’s
safe harbor provision. If a statement is identified as forwardlooking and is accompanied by meaningful cautionary statements
identifying important factors that could cause actual results to
vary materially from those in the forward-looking statement, it
will
not
support
a
securities
fraud
claim.
15 U.S.C. § 78u-
5(c)(1)(A)(i). Statements of future economic performance include
revenues, income, and earnings forecasts. Id. § 78u-5(i)(1)(A).
To
prove
the
false
and
misleading
nature
of
Zebra’s
statements, Plaintiff relies in part upon information provided by
two anonymous former employees, as well as the actual resulting
costs. The false statements or omissions listed in the Complaint
as occurring during the class periods are contained in paragraphs
82 through 106 of the Second Amended Complaint and are as follows:
We will continue to drive momentum and maximize the
strength of the new Zebra, as we create the most
formidable provider of asset intelligence solutions
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worldwide. At the same time, we are committed to creating
shareholder value through achieving $150 million in cost
synergies. We expect $100 million of these savings to be
realized in operating expenses and $50 million in cost
of goods, as we streamline the purchasing of common
components and rationalized vendors. Our current plan
calls for exiting 2015 with [$50] million to $75 million
in captured synergies on a run-rate basis, with the
remainder achieved the following year. (SAC ¶ 82;
11/4/2014 Earnings Call at 7.)
By the time of closing, we successfully completed a
complex cut-over to the [enterprise resource planning
(“ERP”)] system supporting the enterprise business in a
short amount of time. Our hard work ahead of the close
enabled us to take orders and ship products at volume
from day one. We have already made significant progress
on integrating the enterprise business. (SAC ¶ 84;
11/4/2014 Earnings Call at 7.)
Operating expenses for the third quarter increased 52.2%
primarily due to acquisition and integration costs
related to the acquisition of the Enterprise business of
Motorola Solutions, which was announced in April 2014.
Zebra completed the transaction on October 27, 2014.
(SAC ¶ 86; 3Q2014 Form 10-Q at 27, Mot., Ex. 3, Dkt. No.
71-3.)
We may be unable to effectively integrate the Enterprise
business
into
our
existing
business
after
the
Acquisition. (SAC ¶ 88; 3Q2014 Form 10-Q at 36.)
We cannot assure you that we will be able to integrate
the Enterprise business effectively into the Company.
The integration of the Enterprise business, which is
significantly larger than our existing business, into
our operations will be a significant undertaking and
will require significant attention from our management.
The Acquisition, with an approximate enterprise value of
$3.45 billion, is significantly larger than prior
acquisitions we have completed and will significantly
increase the size of our operations, increase our number
of employees and operating facilities and expand our
geographic scope. There can be no assurance that we will
be able to successfully integrate the Enterprise
business, or if such integration is successfully
accomplished, that such integration will not be more
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costly than presently contemplated. There can also be no
assurance that we can successfully manage the combined
business due to our greatly increased size and scope. If
we cannot successfully integrate and manage the
Enterprise business within a reasonable time following
the Acquisition, we may not be able to realize the
potential and anticipated benefits of the acquisition,
which could have a material adverse effect on our
business, financial condition, operating results, cash
flows and growth prospects. (SAC ¶ 88; 3Q2014 Form 10-Q
at 36.)
We may be unable to realize the expected growth
opportunities and cost savings from the Acquisition.
(SAC ¶ 88; 3Q2014 Form 10-Q at 36.)
In connection with the integration of the Enterprise
business into our existing operating structure, we will
seek to realize growth opportunities, along with cost
savings. We currently expect to realize cost savings of
approximately $150 million per year to be fully achieved
by 2017. The anticipated cost savings are based upon
assumptions about our ability to implement integration
measures in a timely fashion and within certain cost
parameters. Our ability to achieve the planned cost
synergies is dependent upon a significant number of
factors, some of which may be beyond our control. For
example, we may be unable to eliminate duplicative costs
in a timely fashion or at all. Our inability to realize
anticipated cost savings, and revenue enhancements from
the acquisition could have a material adverse effect on
our business, financial condition, operating results,
cash flows and growth prospects. (SAC ¶ 88; 3Q2014 Form
10-Q at 36.)
The
Acquisition
could
divert
the
attention
management. (SAC ¶ 88; 3Q2014 Form 10-Q at 36.)
of
If we complete the Acquisition, we will be entering new
lines of business that we lack experience managing.
Similarly,
because
the
Enterprise
business
is
significantly larger than our existing business, we will
be required to manage new and larger lines of business,
and consequently the integration process will require
significant attention from management, which may divert
management’s attention from our existing businesses.
Management may also have difficulty assimilating the
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corporate cultures, maintaining employee morale and
retaining key employees. These diversions, together with
other
difficulties
we
may
have
integrating
the
Enterprise business, could have a material adverse
effect on our business, financial condition, operating
results, cash flows and growth prospects. (SAC ¶ 88;
3Q2014 Form 10-Q at 36.)
The integration is well underway. We actually obviously
closed the transaction a couple weeks ago. One thing we
are really excited about is we turned onto ERP systems
-- is we had to clone what we acquired. And we turned it
on, and it’s functioning really well. I’m going to tell
you that’s not a small feat. But I think that’s another
testimony to the fact that we can execute well. So that’s
working well for us. (SAC ¶ 90; 11/11/2014 Industrial
Conference at 7, Mot., Ex. 4, Dkt. No. 71-4.)
We are moving forward on plan with the integration, and we
remain confident in our ability to achieve $150 million in
cost synergies over two years.
* * *
We are on target to achieve the $150 million in synergies
by the end of 2016, with $50 million to $75 million in
savings this year. (SAC ¶ 93; 3/17/2015 Earnings Call at
7–8, Mot., Ex. 7, Dkt. No. 71-7.)
Since the enterprise acquisition closed on October 27,
we have been very pleased with the progress of our
integration efforts, and the resulting success. Since
day one, we were able to book and ship product in
quantity. Our employees are energized, and despite the
complexities of the transaction, they have remained
focused on serving our customers and partners, and
growing the business. The two businesses are coming
together quickly, with the goal of building an
organization that is uniquely positioned to serve the
visibility needs of partners and customers around the
globe. The integration is progressing as planned. (SAC ¶
95; 3/17/2015 Earnings Call at 5.)
We have already completed the integration of the sales
force under Joe, and we have aligned the right people in
the right roles. (SOC ¶ 97; 3/17/2015 Earnings Call at
5.)
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During the quarter we also made material progress on
achieving our cost-synergy targets, pursuing growth
initiatives and integrating Zebra with the Enterprise
business acquired from Motorola Solutions in October.
(SAC ¶ 100; 5/13/2015 Press Release at 1, Mot., Ex. 9,
Dkt. No. 71-9.)
We also made meaningful progress on our synergy,
integration, and growth goals. . . . To date, we have
achieved $50 million in cost synergies on an annualized
basis, related to the acquisition. In addition to
completing the sales force consolidation, in order to
present a solid unified approach to the customer, we
have merged several facilities, rationalized part of our
supply chain organization, and achieved cost savings
from reducing the number of services provided under the
transition services agreement with Motorola. This
progress reinforces our confidence in our capacity to
meet or exceed our long-term growth, profit and debt
leverage objectives. (SAC ¶ 102; 5/13/2015 Earnings Call
at 4, Mot., Ex. 10, Dkt. No. 71-10.)
First-quarter EBITDA reflects good progress on our
synergy efforts, and we are close to our goal of
achieving an 18% to 20% EBITDA margin. To date, we have
captured approximately $50 million in run rate savings,
and remain on track to achieve our target of $150 million
of run rate synergies by the end of 2016. In addition,
we believe the potential exists to achieve even more
synergies beyond the two-year time frame. (SAC ¶ 104;
5/13/2015 Earnings Call at 6.)
We expect non-GAAP earnings for the second quarter in
the range of $1 to $1.25. This forecast assumes gross
margin in the range of 45.5% to 46.5%. (SOC ¶ 106;
5/13/2015 Earnings Call at 6.)
The case of Makor Issues & Rights, Ltd v. Tellabs, Inc., 437
F.3d 588 (7th Cir. 2006), vacated and remanded on other grounds,
551 U.S. 308 (2007) is helpful in determining whether any of these
alleged statements can support a securities fraud claim. Tellabs
was a Section 10(b) fraud putative class action that addressed the
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heightened pleading requirements of PSLRA. The Seventh Circuit
noted that PSLRA requires two elements of securities fraud, falsity
and materiality, be pleaded with special particularity, i.e., the
complaint must specify each statement or omission that is false
and why it is so. Where confidential sources are relied upon, they
must be described with sufficient particularity “to support the
probability that a person in the position occupied by the source
would possess the information alleged.” Id. at 596 (citing Novak
v. Kasaks, 216 F.3d 300, 314 (2d Cir. 2000)). Materiality exists
where “an investor would reasonably rely” on the disclosure as one
“reflecting a consequential fact about the company.” Id. However,
statements
that
are
vaguely
aspirational
or
puffery
are
not
material and do not support a securities fraud claim. Id.
In analyzing Zebra’s alleged statements, the Court reviews
whether the statements are in fact misleading and, if so, whether
they are material. Plaintiff first argues Paragraph 82 of the SAC,
which states Zebra was “committed to . . . achieving 150 million
in cost synergies” from the acquisition, is false because Zebra
failed to consider the costs that tended to offset the benefits.
(SAC ¶ 82.) However, the statement does not claim that synergistic
benefits would be achieved without any one-time costs associated
with the acquisition. Moreover, the Complaint does not allege that
no synergistic benefits resulted. A reasonable investor would
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expect many one-time costs associated with a massive acquisition
such as Zebra’s purchase of Motorola.
Plaintiff also claim the alleged statements in Paragraph 84,
which announced that Zebra had completed the “complex cut-over” to
the enterprise resource planning system in a short amount of time
and
had
made
“significant
progress”
towards
integrating
the
enterprise businesses, were misleading and false. (SAC ¶ 84.)
However, Plaintiff’s interpretation of the statements appear to be
out of context with the balance of the paragraph. In context, the
“successfully completed complex cutover of the ERP systems” is
directly tied to Zebra’s ability to “take orders and ship products
at volume from day one.” (Id.) Rather than implying the ERP systems
integration had been totally accomplished, the statement appears
to reference the level of success that enabled Zebra to sell and
ship products
from
“day
one,”
i.e.,
the
date
of
acquisition
closure. (Id.) Plaintiff does not dispute Zebra’s claim that it
was able to sell and ship product, and the quarterly financials
showing product sales volume support this statement.
The second sentence in Paragraph 84 is clearly puffery. See
Searls v. Glasser, 64 F.3d 1061, 1066 (7th Cir. 1995) (holding
that “promotional phrase[s] used to champion the company but [are]
devoid of substantial information” and “optimistic rhetoric” are
“better described as puffery rather than as material statements of
fact”). “Significant progress” is a subjective description and
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“contains no useful information upon which a reasonable investor
would base a decision to invest.” Id. Similarly, the statements in
Paragraph 90 regarding the Motorola ERP system “functioning really
well” and “working well for us” are puffery, as each merely
reiterates that Zebra was satisfied with the progress which enabled
it to sell and ship product. (SAC ¶ 90.)
The language identified in Paragraphs 95 and 97 contain the
same vague and optimistic rhetoric. In Paragraph 95, the company
stated it was “very pleased” with the progress of integration, the
two companies were coming together “quickly,” and integration was
“progressing as planned.” (SAC ¶ 95.) In Paragraph 97, the company
stated it had “completed the integration of the sales force and
had aligned the right people in the right roles.” (SAC ¶ 97.) These
are subjective assessments and likewise puffery.
Plaintiff next claims Paragraphs 86 and 88 are inaccurate by
omission. In Paragraph 86, Zebra states that “[o]perating expenses
for the third quarter increased 52.2% . . .” (SAC ¶ 86.) This is
merely a factual statement regarding operating expenses in the
third quarter. Plaintiff does not dispute the accuracy of the
statement, likely because the operating expenses did increase.
Plaintiff argues that Zebra did not go far enough and should have
explicitly
forecasted
increased
costs
in
the
future.
The
statement, however, implies neither cost increases nor a lack of
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cost increases in the future, and is therefore not false or
misleading.
Plaintiff’s
argument
regarding
Paragraph
88
is
similarly
styled. The identified statements are from the company’s 2014 Third
Quarter Form 10-Q public filing and warn investors that Zebra “may
be unable to effectively integrate” the two businesses postacquisition. (SAC ¶ 88.) Again, Plaintiff’s contend that the
statements did not warn investors enough instead of pointing to
any factual inaccuracy. The statements appear entirely accurate.
Paragraph 93, containing excerpts from a March 17, 2015,
earnings call, states that Zebra “remained confident in our ability
to achieve 150 million in cost synergies over two years” and that
the company was “on target” to achieve cost savings for 2015. (SAC
¶ 93.) These statements are forward-looking and are subject to the
PSLRA safe harbor provision. In addition, as noted above, the fact
that there are cost synergies resulting from the acquisition does
not appear to be disputed by Plaintiff. Rather, it is Plaintiff’s
position
that
the
synergies
were
offset
by
the
integration
expenses.
Finally, the statements alleged in Paragraphs 100, 102 and
104 are neither false nor misleading. The company states it is
making “material” and “meaningful progress on [their] synergy and
integration goals” and had achieved cost savings. (SAC ¶¶ 100 &
102.) Such statements are clearly not false, and they lack any
- 16 -
objective factual content that could be relied upon by investors.
To the extent that Zebra expressed it would continue with ERP
integration activities beyond the two year target by mentioning a
“potential exists to achieve even more synergies beyond the twoyear time frame,” while perhaps somewhat inconsistent with an
earlier statement concerning completion of ERP integration, was
was not falsely made, nor does Plaintiff dispute its inaccuracy.
(SAC ¶ 104.)
The last statement in contention is Paragraph 106, which
provides gross margin guidance for the second quarter of 2015.
Plaintiff alleges that Zebra’s announcement of gross margins for
the second quarter missed by a total of 160 basis points, or 1.6%.
Defendants excuse the failure by pointing to purchase accounting
adjustments
resulting
from
higher
costs
associated
with
the
rebranding to Zebra products as well as “other costs not expected
to recur.” (2Q2015 Form 10-Q at 30, Mot., Ex. 14, Dkt. No. 71-14.)
These adjustments account for l.l% of the difference between the
expected and actual margin. Zebra also attributed their second
quarter results to the lower margins on Enterprise products as
compared to Zebra products. (11/10/2015 Press Release at 3, Mot.,
Ex. 15, Dkt. No. 71-15.) Since this guidance was a forecast, it
falls within the “safe harbor” provided by the PLRSRA. Asher v.
Baxterm, 377 F3d 727, 734 (7th Cir. 2004)(“ The PSLRA does not
require
the
most
helpful
caution;
- 17 -
it
is
enough
to
identify
important
factors
materially
that
from
could
cause
actual
in
the
those
results
to
differ
forward-looking
statement.”)(citations omitted). Since the Court has failed to
find any of the present tense statements made by Defendants to be
fraudulent, Plaintiff cannot use them as evidence that Defendants
knew their guidance was wrong when issued.
More importantly, Plaintiff has failed to demonstrate any
motive that Defendants had to commit fraud. Any indication from
Zebra that the integration was being accomplished painlessly would
be shown to be false by the next financial disclosures of increased
integration expenditures. There is no allegation that any of the
Defendants made any sales or purchases of Zebra shares during the
period in question which, if true, could provide a financial motive
to issue misleading or inaccurate forecasts. See City of Livonia
Employees' Ret. Sys. v. Boeing Co., 711 F.3d 754 (7th Cir. 2013).
In this case, Judge Posner pointed out that there is a difference
between the duty of truthfulness and the duty of candor. He then
noted
that
there
was
no
duty
at
all
of
total
corporate
transparency. Id. at 758–59. Through puffery, it may be that
Defendants described the progress of the integration as rosier
than
was
justified.
However,
nothing
Defendants
said
or
did
amounted to a false statement made with scienter. Without a motive
to defraud, a “strong inference” of the required state of mind is
difficult to make. Id. at 756–57.
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While a lack of motive is not dispositive on the issue of
scienter, the Supreme Court has said that the court must assess
all allegations “holistically.” Tellabs, Inc. v. Makor Issues &
Rights, Ltd., 551 U.S. 308, 326 (2007). Specifically, the Court
must review “all as true and taken collectively,” and ask if a
reasonable person would “deem the inference of scienter to be least
as strong as an opposing inference.” Id. Plaintiff has failed to
so show here.
In summary, Zebra acquired the Motorola enterprise to create
a business entity that would provide large cost synergies through
combining two entities that provided different but complimentary
products
within
the
“internet
of
things.”
Zebra’s
original
announcement optimistically touted the expected benefits to be
derived while warning investors of the significant risks involved,
including nonsuccess or increased costs.
Plaintiff’s
argument
that
Zebra
gave
unjustified
rosy
outlooks is based on its own subjective interpretation of Zebra’s
statements. When Zebra disclosed at the close of the class-period
that integration had been neither as easy nor as cheap as could be
expected
from
the
periodic
statements
of
Zebra
personnel,
Plaintiff claims the public was defrauded. However, as Judge Posner
pointed out in City of Livonia, there is a difference between a
duty of truthfulness and the duty of candor. A rosy outlook, also
known as puffery, does not prove a lack of truthfulness on behalf
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of the Defendants. At most, Defendants showed a lack of candor,
which is insufficient to support a securities fraud case.
Northcoast Research’s November 13, 2015, analysis on Zebra’s
failure to achieve its guidance on its gross margin puts the event
in context:
Shares of Zebra have taken a beating this week as
management continues to confuse investors on the
earnings calls despite putting up respectable numbers in
a
challenging
environment.
We
believe
these
communication issues are weighing on the stock but will
ultimately be corrected.
We reiterate our BUY rating and $115 price target and
suggest investors that have the patience to wait for the
results will be rewarded in the long-run, but the shortterm may be difficult. Those willing to buy now may be
the biggest beneficiaries.
(11/13/2015 Northcoast Research
at 2, Mot., Ex. 17, Dkt. No. 71-
17.) This analysis has been borne out: as of this writing, the
share price is currently trading at approximately four times the
price
at
the
end
of
the
class
period.
NASDAQ,
https://www.nasdaq.com/market-activity/stocks/zbra (last visited
Oct. 15, 2020). These long-term results also demonstrate a lack of
scienter on the part of Defendants.
Because Plaintiff failed to plead material misrepresentations
by Zebra or the individual Defendants, as well as failed to meet
the
heightened
pleading
standards
on
Defendants’
deceive, Plaintiff’s claims may not move forward.
- 20 -
intent
to
IV. CONCLUSION
For the reasons stated herein, Defendants’ Motion to Dismiss
(Dkt. No. 69) is granted as to all Defendants.
IT IS SO ORDERED.
Harry D. Leinenweber, Judge
United States District Court
Dated: 10/16/2020
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