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In re Extreme Networks, Inc. Securities Litigation

United States District Court, N.D. California, San Jose Division

July 22, 2019




         On June 27, 2019, the Court heard (1) Lead Plaintiff's Motion for Final Approval of Class Action Settlement and Plan of Allocation (Appr. Mot., ECF 172), and (2) Lead Counsel's Motion for an Award of Attorneys' Fees and Payment of Expenses (Fees Mot., ECF 173). For the reasons discussed below and those stated on the record at the hearing on the motions, the motions are GRANTED.

         I. BACKGROUND

         A. Facts

         This is a putative class action for securities fraud brought against Extreme Networks, Inc. (“Extreme”) and its officers Charles W. Berger, John T. Kurtzweil, and Kenneth B. Arola (“Individual Defendants”) (collectively with Extreme, “Defendants”). Founded in 1966, Extreme is a Delaware corporation with its principal offices in San Jose, California. See First Am. Compl. (“FAC”) ¶ 2, 32, ECF 105. Extreme develops and sells network infrastructure equipment such as wired and wireless devices for accessing the Internet, as well as related software. Id. ¶ 2. The Individual Defendants were officers and directors of Extreme during the time relevant to this litigation. Defendant Charles W. Berger was Extreme's President and Chief Executive Officer (“CEO”) and a member of Extreme's Board of Directors from April 2013 until April 19, 2015. Id. ¶ 34. Defendant John T. Kurtzweil was Extreme's Chief Financial Officer (“CFO”) and Senior Vice President from June 29, 2012 until June 1, 2014. Id. ¶ 35. From June 2, 2014 until September 30, 2014, Kurtzweil served as Special Assistant to the CEO. Id. Defendant Kenneth B. Arola was the Company's CFO and Senior Vice President from June 2, 2014 through May 2016. Id. ¶ 36.

         The First Amended Complaint (“FAC”) alleges that Defendants misrepresented to investors the success of Extreme's post-acquisition integration with its former competitor, Enterasys Networks, Inc. (“Enterasys”), as well as developments in Extreme's “key partnership” with Lenovo Group Ltd. (“Lenovo”). See, e.g., id. ¶¶ 1-18. Defendants' positive representations to investors about the resulting “synergies” from the Enterasys integration and benefits of the Lenovo partnership-including a commitment that cost savings from these arrangements would lead to double-digit revenue growth and a 10% operating margin by June 2015-caused Extreme's stock price to rise. Id. ¶¶ 17-19. Extreme's stock price then dropped when Extreme reported disappointing financial results at various points between February 2014 and the end of the Class Period on April 9, 2015. Id. ¶¶ 20-22.

         Relying on six confidential witnesses (“CWs”), Lead Plaintiff Arkansas Teacher Retirement System (“ATRS” or “Lead Plaintiff”) alleged that Defendants knew or recklessly disregarded material adverse facts regarding the lack of any integration plan for the Enterasys merger, which was not “on track” or “complete” as represented. Id. ¶ 13. ATRS also pointed to accounts from CWs that the Lenovo partnership was largely unproductive, in direct contrast to Defendants' representations to the market. Id. ¶ 17. According to ATRS, Defendants' false statements caused Extreme's stock to trade at artificially inflated prices between September 12, 2013, and April 9, 2015 (the “Class Period”), reaching a high of $8.14 per share on January 23, 2014. Id. ¶ 19. ATRS alleges that four partial corrective disclosures by Defendants announcing revenue shortfalls, guidance misses, and turnovers of Extreme executives, caused the stock price to plummet as the undisclosed risks relating to Enterasys integration and Lenovo partnership materialized. Id. ¶ 20-22.

         Defendants have agreed to pay $7, 000, 000 in cash, to secure a settlement of the claims in the Action and related claims that could have been brought (“Released Claims”).

         B. Procedural History

         This litigation has a long history of nearly four years. In October of 2015, two securities class action complaints were filed on behalf of individuals who invested in Extreme during the relevant time period.[1] On December 1, 2015, the Court granted the parties' stipulation to consolidate the two actions. ECF 18. On June 28, 2016, the Court appointed ATRS as Lead Plaintiff, Labaton Sucharow LLP as Lead Counsel, and Berman DeValerio[2] as Liaison Counsel to represent the putative class. ECF 75.

         On September 26, 2016, ATRS filed a Consolidated Class Action Complaint on behalf of all investors who purchased the publicly traded common stock of Extreme and/or exchange-traded options on such common stock during the Class Period. See Consol. Compl. ¶ 1, ECF 87. Prior to filing the Consolidated Complaint, Lead Counsel conducted extensive factual investigation, including reviewing SEC documents, press releases, and other publicly available information, as well as reviewing research reports issued by financial analysists and other public data. Villegas Decl. ISO Final Appr. (“Villegas Decl.”) ¶ 17, ECF 174. Lead Counsel also interviewed former employees of Extreme and other persons with relevant knowledge and consulted with an economics expert for loss causation and damages. Id. The Consolidated Complaint asserted two causes of action, based on the facts described above: (1) violation of § 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 against all Defendants; and (2) violation of § 20(a) of the Securities Exchange Act of 1934 against the Individual Defendants for liability as control persons of Extreme. See generally Consol. Compl.

         On November 10, 2016, Defendants moved to dismiss the Consolidated Complaint. See ECF 89. On April 17, 2017, the Court granted Defendants' motion with leave to amend because ATRS had failed to adequately plead that Defendants made any false or misleading statements and that they did so with scienter. See ECF 102 at 42. On May 29, 2017, ATRS filed its First Amended Complaint, asserting the same two causes of action for securities violations against the same Defendants, focusing their amended factual allegations on statements that the Court had indicated were actionable. See generally FAC. Prior to filing the FAC, ATRS contacted 148 former employees of Extreme and interviewed 24 of those employees. Villegas Decl. ¶ 25. ATRS also consulted with an expert in the field of executive compensation. Id. On July 10, 2017, Defendants filed a motion to dismiss the FAC. See ECF 107. On March 21, 2018, the Court granted in part and denied in part Defendants' motion to dismiss, finding that ATRS stated a claim under Section 10(b) and Rule 10b-5 against all Defendants except Kurtzweil and that ATRS stated a claim under Section 20(a) against the Individual Defendants. On June 21, 2018, more than one and a half years after the Consolidated Complaint was filed and over two and a half years after the lawsuit's inception, Defendants answered the FAC. See ECF 145.

         The parties then engaged in some discovery, including numerous requests for production and interrogatories and their responses, as well as depositions. Lead Plaintiff served eighty-seven requests for the production of documents on Defendants on April 30, 2018. Villegas Decl. ¶ 33. Defendants served responses and objections to Lead Plaintiff's document requests on June 14, 2018. Id. The parties exchanged initial disclosures on May 21, 2018. Id. And the parties met and conferred extensively regarding the production of electronically stored information and a protective order governing the disclosures in the action. Id. ¶ 34.

         Concurrently with discovery, the parties engaged in mediation and settlement discussions. On July 18, 2018, the parties attended an in-person mediation with Robert A. Meyer, Esq. (“Mr. Meyer”), an experienced mediator. Id. ¶¶ 35-36. The initial mediation was preceded by the exchange of mediation statements and Defendants' production of approximately 1, 270 pages of documents, including Board of Director minutes and presentations, which Lead Counsel reviewed. Id. ¶¶ 36-37. Following rigorous arm's length negotiations led by Mr. Meyer, the parties accepted a mediator's proposal on August 17, 2018. Id. ¶ 38. On September 26, 2018, the parties entered into a settlement term sheet, and on November 30, 2018, ATRS filed the finalized settlement agreement in support of its motion seeking preliminary approval of the settlement. See ECF 155, 156-1.

         C. Settlement Agreement, Allocation Plan, and Notice Plan

         On March 13, 2019, the Court granted ATRS's motion for preliminary approval of class action settlement and approved the forms of notice to the Settlement Class. See ECF 167. The class includes “all persons and entities that purchased or otherwise acquired the publicly traded common stock and exchange-traded call options, and/or sold put options, of Extreme Networks, Inc. during the period from September 12, 2013 through April 9, 2015, inclusive, and who were damaged thereby.” See ECF 156-1 (“Agreement”) at 10 ¶ hh. Under the Settlement Agreement, Extreme has agreed to provide a settlement fund in the amount of $7 million. See Agreement at 10 ¶ gg, 13 ¶ 6. Of the $7 million, the Settlement Class will receive what remains after subtracting the cost of any attorney's fees and expenses, notice and administration costs, Lead Plaintiff's service awards, and applicable taxes (the “Net Settlement Fund”). Villegas Decl. ¶ 62; Agreement ¶ 26. The Net Settlement Fund will be distributed among claimants on a pro rata basis based on “Recognized Loss” formulas tied to claimants' potential damages and developed by ATRS's expert. Settlement Agreement ¶¶ 22-26; Villegas Decl. ¶ 63; ECF 167 ¶¶ 48-57. Each claimant's calculated recognized loss will be compared to the aggregate recognized loss of all claimants to determine that claimant's pro rata share of the settlement fund. Villegas Decl. ¶ 64. Because the Court dismissed claims prior to February 5, 2014, but the class covers individuals who purchased shares prior to that date, those individuals' claims will be calculated using 20% of the alleged artificial inflation of the share prices. Id. ¶ 63.

         The Court preliminarily approved, and the Settlement Administrator (“KCC”) and the parties complied with, the following notice process: KCC obtained the names and addresses of potential settlement class members from listings provided by Extreme's transfer agent and from banks, brokers, and other nominees. Villegas Decl. ¶ 42; Villegas Decl., Ex. 2 ¶¶ 1-7, ECF 174-2. KCC sent by first-class mail notice packets (containing the notice and claim form) to settlement class members and potential nominees (third-party purchasers who may have purchased shares on behalf of potential claimants). Villegas Decl. ¶ 42; Villegas Decl., Ex. 2 ¶¶ 4-7. As of June 4, 2019, KCC had mailed 27, 972 notice packets. Suppl. Decl. of Lance Cavallo ¶ 2, ECF 177. The summary notice was also published in Investor's Business Daily and disseminated over PR Newswire. Villegas Decl. ¶ 43. KCC also created and maintained a settlement website. Villegas Decl., Ex. 2 ¶ 10.

         The Agreement (and approved notice plan) contemplates a process for direct payments to the class members. First, class members needed to submit by June 6, 2019 a simple claim form for their shares purchased during the class period. Villegas Decl. ¶ 61; ECF 167. The direct mail and website notices informed members of the opportunity to opt out through a simple form. Requests for exclusions or objections needed to be filed by May 23, 2019. Villegas Decl. ¶ 45; ECF 167. Once KCC has processed submitted claims and provided claimants with an opportunity to cure deficiencies or challenge rejection determinations, payment distributions will be made to eligible claimants through PayPal (for all payments below $10.00 and for payments between $10.00 and $100.00 for those who elect this option), or by check. Villegas Decl. ¶ 65. At least six months after the initial distribution of the funds, any funds remaining will be redistributed to those who have previously cashed their checks. Id. This process will be repeated until the remaining sum is no longer economically feasible to distribute. At that time, Lead Counsel will request with the Court that the unclaimed balance be distributed to a Cy Pres Recipient: Consumer Federation of America (“CFA”). Id. CFA is a national non-profit consumer advocacy organization for investor protection; it has been approved as a Cy pres beneficiary in several securities cases in California. Id. ¶ 66.

         As of June 4, 2019, 1, 244 valid claims had been submitted, representing over 66, 777, 000 shares of common stock purchased during the class period. Villegas Decl., Ex. 2 ¶¶ 5-6. Of those claims, 888 were filed by or on behalf of institutions and 356 claims were submitted by or on behalf of individuals. Id. ¶ 5.

         On June 20, 2019, the Court held a hearing on the motions. Counsel represented on the record at the hearing that a total of 3, 845 claims had been received, constituting a response rate of approximately 14 percent. Counsel also represented that of these claims, over 3, 000 had been filed by or on behalf of institutions and approximately 400 by or on behalf of individuals. The deadline to submit claims had passed, but Counsel was continuing to accept claims through an informal grace period. At the hearing, this Court ordered Lead Counsel to post by June 21, 2019 a firm grace period termination date of June 28, 2019 on the website maintained by KCC, and to accept only claims filed before that date as determined by postmark and email timestamp. Only two requests for exclusion were received by June 20, 2019, one of which was deemed invalid for failing to provide the requisite information and neglecting to cure the deficiency when notified by KCC that the exclusion request was invalid. Villegas Decl., Ex. 2 ¶ 3. There were no objectors before the deadline and no objectors appeared at the hearing. Id. Counsel represented on the record at the hearing that initial distribution was expected to commence in December 2019. The Court indicated on the record that both motions would be granted. On the day of the hearing, the Court issued an order approving the Plan of Allocation. ECF 180.


         In order to grant final approval of the class action settlement, the Court must determine that (1) the class meets the requirements for certification under Federal Rule of Civil Procedure 23, and (2) the settlement reached on behalf of the class is fair, reasonable, and adequate. See Staton v. Boeing Co., 327 F.3d 938, 952 (9th Cir. 2003) (“Especially in the context of a case in which the parties reach a settlement agreement prior to class certification, courts must peruse the proposed compromise to ratify both the propriety of the certification and the fairness of the settlement.”).

         A. The Class Meets the Requirements for Certification under Rule 23

         A class action is maintainable only if it meets the four requirements of Rule 23(a):

(1) the class is so numerous that joinder of all members is impracticable;
(2) there are questions of law or fact common to the class;
(3) the claims or defenses of the representative parties are typical of the claims or defenses of the class; and
(4) the representative parties will fairly and adequately protect the interests of the class.

Fed. R. Civ. P. 23(a). In a settlement-only certification context, the “specifications of the Rule- those designed to protect absentees by blocking unwarranted or overbroad class definitions- demand undiluted, even heightened, attention.” Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 620 (1997).

         In addition to satisfying the Rule 23(a) requirements, “parties seeking class certification must show that the action is maintainable under Rule 23(b)(1), (2), or (3).” Id. at 614. Plaintiffs seek certification under Rule 23(b)(3), which requires that (1) “questions of law or fact common to class members predominate over any questions affecting only individual members” and (2) “a class action is superior to other available methods for fairly and efficiently adjudicating the controversy.” Fed.R.Civ.P. 23(b)(3).

         The Court concluded that these requirements were satisfied when it granted preliminary approval of the class action settlement. See ECF 167. The Court is not aware of any new facts which would alter that conclusion. However, the Court reviews the Rule 23 requirements again briefly, as follows.

         Turning first to the Rule 23(a) prerequisites, the Court has no difficulty concluding that because the class contains thousands of members (3, 845 claims filed as of the June 20, 2019 hearing), joinder of all class members would be impracticable. The commonality requirement is met because the key issues in the case are the same for all class members, including, for example, whether Defendants misrepresented material facts or omitted material facts for publicly traded stocks in violation of the law and whether these alleged actions artificially inflated the stock price. See Villegas Decl. ¶ 31. ATRS's claims are typical of those of the class, as it advances the same claims, shares identical legal theories, and allegedly experienced losses from Extreme's misrepresentations. See Hanlon v. Chrysler Corp., 150 F.3d 1011, 1020 (9th Cir. 1998) (typicality requires only that the claims of the class representatives be “reasonably co-extensive with those of absent class members”). Finally, to determine ATRS's adequacy, the Court “must resolve two questions: (1) do the named plaintiffs and their counsel have any conflicts of interest with other class members and (2) will the named plaintiffs and their counsel prosecute the action vigorously on behalf of the class?” Ellis v. Costco Wholesale Corp., 657 ...

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