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IN RE INTERACTIVE NETWORK

November 18, 1996

IN RE INTERACTIVE NETWORK, INC. SECURITIES LITIGATION


The opinion of the court was delivered by: JENSEN

 On October 30, 1996, the Court heard arguments on the TCI defendants' motion to dismiss Count I of the Third Amended Complaint. James E. Tullman appeared on behalf of the plaintiff class, Joshua R. Floum and Vincent L. Johnson appeared on behalf of the TCI defendants, Michele Rose appeared on behalf of the IN defendants. Having considered the arguments of counsel, the papers submitted, the applicable law, and the record in this case, the Court hereby GRANTS the TCI defendants motion to dismiss.

 I. BACKGROUND

 A. Factual Background and Procedural History

 Plaintiffs are the class of all persons who purchased the securities of Interactive Network, Inc ("IN") between May 16, 1994 and March 31, 1995 (the "Class Period"). The defendants can be broken down into two groups. The IN defendants consist of IN, a California-based company which designs, develops, markets and distributes interactive television and entertainment systems; Peter Sealey, at all relevant times the President and C.O.O. of IN; and David B. Lockton, at all relevant times the Chairman of the Board and C.E.O. of IN. The TCI defendants consist of TCI Communications, Inc., the largest cable operator in the United States; Tele-Communications, Inc., its functional equivalent; and Gary Howard, Vice President of TCI Programming and a member of IN's board until January 31, 1995.

 In its Third Amended Complaint (TAC), filed with the Court on June 17, 1996, plaintiffs allege one count of violation of Section 10(b) of the Securities and Exchange Act and Rule 10b-5 promulgated thereunder and one count of violation of Section 20(a) of the Securities and Exchange Act. The allegations stem from IN's attempt to develop an interactive television service which would permit television viewers to play along with their favorite game shows, sporting events, and the like. The plaintiffs allege several series of wrongful acts.

 First, the plaintiffs allege that defendants made false and misleading statements concerning IN's plans to begin a "national roll-out" of its interactive service. TAC at 10: 11-12. The TAC states that beginning in May 1994 the defendants consistently stated that national roll-out would occur during 1994 despite their knowledge of the undisclosed fact that IN was "being adversely impacted by increased cost and flat demand for its products" which made a 1994 roll-out impossible. Id. at 18: 11-13.

 Second, the plaintiffs allege that even after announcing on September 27, 1994 that the roll-out would be delayed, the defendants continued to overstate the imminence of the roll-out. Id. at 18: 25-19: 1. Again, the plaintiffs allege that the defendants were aware of undisclosed adverse facts which would have made a national roll-out impossible. Id. at 21: 3-23.

 Fourth, and generally, the plaintiffs allege that the defendants "conditioned the market into believing that IN was on the verge of great success and profits." Id. at 28: 8-10. Again, the March 31, 1995 announcement is used to rebut the veracity of the claims made by the defendants. Id. at 32: 25-33: 3.

 TCI at all relevant times, owned between 25 percent and 37 percent of the outstanding common stock of IN. Id. at 7: 7-12. Plaintiffs allege that this control gave TCI access to "confidential updates on IN's product development and finances" as well as a seat on IN's board. Id. at 34: 21-23, 35: 20-21. Plaintiffs allege that TCI was fearful that IN's services would be utilized by the phone companies with whom TCI was competing and that in an effort to prevent such efforts, TCI attempted to monopolize IN's attempts to obtain financing. Id. at 36: 14-18.

 On September 3, 1996, the TCI defendants filed a motion to dismiss the section 10(b) count from the complaint. *fn1" The TCI Defendants argue that the TAC fails to state a claim because the plaintiffs have failed to allege that the TCI defendants were responsible for any of the allegedly false and misleading information and because the plaintiff's theory on which they hope to recover, "group published information", is inapplicable to these defendants.

 B. Legal Standard

 Under Federal Rule of Civil Procedure 12(b)(6), a district court must dismiss a complaint if it fails to state a claim upon which relief can be granted. The question presented by a motion to dismiss is not whether a plaintiff will prevail in the action, but whether she is entitled to offer evidence in support of her claim. Scheuer v. Rhodes, 416 U.S. 232, 236, 40 L. Ed. 2d 90, 94 S. Ct. 1683 (1974).

 In answering this question, the Court must assume that plaintiff's allegations are true and must draw all reasonable inferences in plaintiff's favor. Usher v. City of Los Angeles, 828 F.2d 556, 561 (9th Cir. 1987). Even if the face of the pleadings suggests that the chance of recovery is remote, the Court must allow plaintiff to develop her case at this stage of ...


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