On February 4, 2022, Judge Yvonne Gonzalez Rogers of the United States District Court for the Northern District of California granted in part and denied in part a motion for class certification in a putative class action against a multinational consumer electronics, software, and online services company (the “Company”) and two of its executives alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”). In re Apple Inc. Securities Litigation
, No. 4:19-cv-2033-TGR (N.D. Cal. Feb. 4, 2022). Plaintiff, who sought to represent purchasers of the Company’s publicly traded securities, alleged that in late 2018, the Company made misrepresentations about the state of its business in China, the Company’s most important growth market at the time, which caused the Company’s stock price to fall. After granting in part and denying in part a motion to dismiss the amended complaint in a decision covered here
, the Court granted class certification except as to the inclusion of option holders in the class, finding that the option holders’ damages could not be calculated on a classwide basis with the remaining stockholders.
Plaintiff alleged that the Company, primarily through its CEO, made material misrepresentations about the state of the Company’s business in China, its most important market, despite being aware of facts allegedly inconsistent with the statements. Specifically, plaintiff alleged that, on a November 1, 2018 investor and analyst conference call, the CEO stated that the Company’s “business in China was very strong last quarter,” despite allegedly knowing several conflicting facts, including that U.S.-China trade tensions were negatively impacting sales and demand for the Company’s flagship product, that the Company had already begun experiencing lower traffic in its China-based retail stores, and that the Company was reducing orders from its largest suppliers and ramping down manufacturing of its flagship product ahead of the holiday season. Following the alleged misrepresentations, several public reports emerged in November and December that allegedly indicated that the Company was halting production and implementing certain “fire drill” responses to poor sales in the region. On January 2, 2019, the Company preannounced its first earnings shortfall in over 15 years, citing, among other things, the significant revenue shortfall that it experienced in China. Following this disclosure, the Company’s stock price dropped from $157.92 per share on January 2 to $142.19 per share on January 3.
Although most of the initial complaint’s allegations were stripped away at the motion to dismiss stage, the Court found two of the allegations pertaining to misstatements made by the Company’s CEO were sufficiently pled. In particular, plaintiff moved to certify a putative class defined as all persons and entities who purchased or otherwise acquired the Company’s publicly traded securities from November 2, 2018 through January 2, 2019, and who suffered damages as a result of the Company’s alleged Exchange Act violations. In opposing class certification, defendants argued that (1) plaintiff is not an adequate class representative; (2) evidence rebuts the presumption of classwide reliance; (3) even if a class were to be certified, it should not include option holders; and (4) the proposed damages model includes damages that did not result from the alleged wrongdoing. The Court rejected all but defendant’s third argument.
In arguing against plaintiff’s adequacy as class representative, defendants pointed to numerous alleged errors plaintiff made (and corrected) in its class certification filing regarding its stock trading history and alleged losses. In response, plaintiff contended that some of the errors were clerical mistakes by counsel and submitted that its records supported the remaining information related to losses. The Court held that, absent evidence of bad faith or intent to deceive, plaintiff’s “careless” but “minor” errors did not rise to a level that would preclude a finding of adequacy. Moreover, the Court held that defendants had not shown that plaintiff and its counsel “have conflicts or that plaintiff will not prosecute the action vigorously.” Accordingly, the Court held plaintiff to be an adequate class representative.
The Court next considered the issue of predominance of common questions, focusing initially on the reliance element of Section 10(b). The Court addressed whether all of the class members could invoke the Basic
rebuttable presumption of reliance that would allow the members to substitute reliance on the Company’s stock price for actual reliance on the Company’s false statement, so long as the Company’s stock traded in an efficient market. Finding that defendants failed to rebut the Basic
presumption by breaking the causal link between the January 2, 2019 disclosure and the negative stock price impact, the Court held that predominance was met with respect to reliance.
Finally, the Court addressed predominance with respect to damages. Plaintiff proposed the “out-of-pocket” damages methodology, which measures the difference “between the amount of stock price inflation at purchase and the amount of inflation in the stock price at sale or, if held, at the end of the Class Period[.]” While defendants argued that the methodology could not be used for the proposed class, the Court disagreed, holding that plaintiff “proposed a standard method of calculating damages that is consistent with this theory of liability and can be applied classwide.”
The Court did, however, agree with defendants that plaintiff’s proposed damages model did not provide any method for calculating alleged damages of the Company’s options holders, and that plaintiff had not adequately explained how the options holders’ damages could be calculated as part of the class damages. Specifically, the Court held that “given the varying characteristics of the 2,282 distinct . . . options that were available for trading during the relevant period, [plaintiff] offers nothing in either of his reports to satisfy the Court that individualized issues pertaining to damages to option holders will not predominate.” The Court therefore granted class certification in part but denied without prejudice class certification as it related to option holders, noting that “[s]hould plaintiff re-seek certification with respect to [option holders], it would behoove plaintiff to address the concerns not only pertaining to its ability to calculate classwide damages but also the issues raised by defendants regarding market efficiency for purposes of invoking the Basic
assumption of reliance.”