The opinion of the court was delivered by: Richard Seeborg United States District Judge
ORDER GRANTING MOTION TO DISMISS SECOND CONSOLIDATED AMENDED CLASS ACTION COMPLAINT
Lead plaintiffs Roberto Cohen and the New Jersey Carpenters Pension Fund and New Jersey Carpenters Annuity Fund bring this putative class action for securities fraud against defendants NVIDIA and its founder and CEO Jen-Hsun Huang. On July 2, 2008, NVIDIA issued a press 21 release disclosing that it was taking a $150 million to $200 million charge against its cost of revenue 22 to cover expenses arising from defective packaging of its semiconductor chip sets. Plaintiffs allege 23 that NVIDIA was aware the problem affected a significant amount of products previously sold to 24 customers including Hewlett-Packard (HP) and Dell and therefore the company should have 25 disclosed the potential losses earlier. Plaintiffs are suing on behalf of all persons who purchased 26
NVIDIA common stock between November 8, 2007 and July 2, 2009 (the "class period"). On October 19, 2010 the Court dismissed plaintiffs' Consolidated Amended Class Action Complaint (CAC) with leave to amend. In re NVIDIA Corp. Secs. Litig., No. 08-CV-04260 RS, 2010 U.S. NO. C 08-04260 RS Dist. LEXIS 114230 (N.D. Cal. Oct. 19, 2010). Plaintiffs subsequently filed a Second Consolidated Amended Class Action Complaint (SCAC). Defendants presently move to dismiss this complaint.
For the reasons stated below, defendants' motion to dismiss the SCAC is granted without leave to amend.
NVIDIA is a semiconductor company that designs and sells graphics processing units (GPUs) and media and communications processors (MCPs). Original equipment manufacturers (OEMs) incorporate these semiconductor chips into computers that they assemble for sale to 9 consumers. The NVIDIA products interact with other components in the computer to enable 10 graphics display and other communications functions. The two products account for approximately 80% of NVIDIA's revenues. As a routine matter, the company discloses to investors that the products carry some inherent risk that they will fail. The company records a quarterly reserve based on historical return rates to offset the estimated cost of product failures.
In manufacturing the GPU and MCP products, the semiconductor chip or "die" is mounted onto a substrate that ultimately is incorporated into a computer's motherboard. The die is connected to the substrate with "bumps" of solder. These bumps are also surrounded with a support material, referred to as underfill or paste.
According to the SCAC, NVIDIA observed problems with its GPUs and MCPs in late 2006.
Some units experienced cracks in the solder bumps when subjected to pressure testing. At that time, NVIDIA was using a "eutectic" solder-a material with relatively low lead content-and a eutectic 21 paste. As a result of that pressure-related problem, NVIDIA switched to a high-lead solder, which 22 was more malleable. It continued to use the same eutectic paste. Plaintiffs contend that the 23 mismatch in thermal properties between these two materials contributed to new problems.
After this switch, plaintiffs allege that NVIDIA's customers, including HP and Dell, began to complain to the company about problems with its chips. According to plaintiffs, HP engineers 26 observed physical damage to NVIDIA's parts, specifically cracking of the solder bumps connecting 27 the die to the substrate (the "material set" problem). By the summer of 2007, HP allegedly had 28 determined that the root cause of the GPU failures was associated with heat cycling. As a result, in November 2007, HP issued a software system update, or Basic Input/Output System (BIOS) update, 2 that was directed toward continuously operating the cooling fans on affected laptops.
On May 22, 2008, NVIDIA disclosed in its quarterly report that it had received customer claims from one of its OEMs for incremental costs due to notebook failures. The company stated 5 that it was unable to estimate the amount of cost that it might incur beyond its normal reserve for 6 product warranty accrual. At that time, it did not record any additional related costs for the quarter.
On July 2, 2008, NVIDIA announced the $150 million to $200 million charge. The stock dropped 31% from its high on July 2 to the opening price on July 3 (from $18.78 to $12.98). Based on these 9 events, plaintiffs initiated this suit for violation of the Securities and Exchange Act of 1934.
Under Federal Rule of Civil Procedure 8(a)(2), a complaint must present "a short and plain statement of the claim" demonstrating that the plaintiff is entitled to relief. Fed. R. Civ. P. 8(a)(2).
If this standard is not met, the defendant may move to dismiss for failure to state a claim upon
which relief can be granted. Fed. R. Civ. P. 12(b)(6). Under Rule 12(b)(6), dismissal is appropriate 15 if the claimant either does not raise a cognizable legal theory or otherwise fails to allege sufficient facts to support a cognizable claim. Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir. 1988). Thus, while a legally sufficient complaint does not require "detailed factual allegations," it 18 must contain more than "unadorned" assertions of harm or bare legal conclusions without factual 19 support. Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009) (citing Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007)). Furthermore, Federal Rule of Civil Procedure 9(b) requires that "[in] 21 allegations of fraud or mistake, a party must state with particularity the circumstances constituting 22 fraud or mistake." To satisfy the rule, a plaintiff must plead the "who, what, where, when, and how" 23 of the alleged misconduct. Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1106 (9th Cir. 2003). In 24 claims governed by the Private Securities Litigation Reform Act (PSLRA), plaintiffs must meet 25 additional pleading requirements beyond those imposed by the Federal Rules, as elucidated below.
In their first and second claims for relief, plaintiffs aver that NVIDIA and Huang violated section 10(b) of the Securities Exchange Act and Rule 10b-5 promulgated thereunder. Section 10(b) makes it unlawful for "any person . . . [t]o use or employ, in connection with the purchase or sale of 2 any security registered on a national securities exchange . . . any manipulative or deceptive device or 3 contrivance in contravention of such rules and regulations as the Commission may prescribe as 4 necessary or appropriate in the public interest or for the protection of investors." 15 U.S.C. § 78j(b). 5
Rule 10b-5 further provides: "It shall be unlawful for any person . . . [t]o engage in any act, practice, 6 or course of business which operates or would operate as a fraud or deceit upon any person, in 7 connection with the purchase or sale of any security." 17 C.F.R. § 240.10b-5(c). In their third 8 claim, plaintiffs assert that Huang violated section 20(a) of the Exchange Act, which makes certain
In order to maintain a section 20(a) claim, a plaintiff must sufficiently plead an underlying section 10(b) violation. See Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981, 990 (9th Cir. 2009)
A claim for violation of Rule 10b-5 includes five elements: "(1) a material misrepresentation or omission of fact, (2) scienter, (3) a connection with the purchase or sale of a security, (4) transaction and loss causation, and (5) economic loss." Id. (quoting In re Daou Sys., Inc. Secs. 15 plaintiffs must "specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on 18 information and belief . . . state with particularity all facts on which that belief is formed." 15 U.S.C. 78u-4(b)(1). With respect to scienter, the PSLRA requires that a plaintiff must "state with 20 particularity facts giving rise to a strong inference that the defendant acted with the required state of 21 mind." 15 U.S.C. § 78u-4(b)(2). Under the law of this circuit, to state a claim for an alleged 22 violation of section 10(b), a complaint "must allege that the defendants made false or misleading 23 statements either intentionally or with deliberate recklessness." Daou, 411 F.3d 1006, 1015 (9th Cir. 2005) (citing In re Silicon Graphics Secs. Litig., 183 F.3d 970, 974 (9th Cir. 1999)).
"controlling" individuals also liable for violations of section 10(b) and its underlying regulations.*fn1
Litig., 411 F.3d 1006, 1014 (9th Cir. 2005)) (internal quotation marks omitted). Under the PSLRA,
Defendants move to dismiss the section 10(b) claims for failure to plead the elements of a material 2 misrepresentation or omission, scienter, and loss causation.
A. Material Misrepresentation or Omission
Plaintiffs allege that NVIDIA made a number of misleading statements because it knew, but did not disclose, that key customers including HP and Dell were complaining about problems with 6 the company's main products. In the securities context, an omitted fact is material if there is a 7 substantial likelihood that a reasonable investor would have viewed the disclosure as "significantly 8 alter[ing] the 'total mix' of information made available." Basic Inc. v. Levinson, 485 U.S. 224, 231-9 (1988) (internal quotation marks and citation omitted). As a general matter, a company is not 10 obligated to disclose publicly "any and all" material information. See Matrixx Initiatives, Inc. v.
Siracusano, 131 S. Ct. 1309, 1321 (2011). Disclosure is necessary, if under the circumstances, omitting the material information would render a company's statement misleading. See id. at 1321-22 (quoting 17 C.F.R. § 240.10b-5(b)). "Silence, absent a duty to disclose, is not misleading under Rule 10b-5." Basic, 485 U.S. at 239 n.17. With respect to its quarterly reports and annual report, 15 plaintiffs contend that silence was not an option, because NVIDIA was under an affirmative duty based on ...