City of Taylor Police and Fire v. Zebra Technologies Corporation ( 2021 )

In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 20-3258
CITY OF TAYLOR POLICE AND FIRE RETIREMENT SYSTEM, on be-
half of a class,
Plaintiff-Appellant,
v.
ZEBRA TECHNOLOGIES CORPORATION, ANDERS GUSTAFSSON,
and MICHAEL C. SMILEY,
Defendants-Appellees.
____________________
Appeal from the United States District Court for the
Northern District of Illinois, Eastern Division.
No. 19 C 5782 — Harry D. Leinenweber, Judge.
____________________
ARGUED MAY 18, 2021 — DECIDED AUGUST 10, 2021
____________________
Before EASTERBROOK, BRENNAN, and SCUDDER, Circuit
Judges.
EASTERBROOK, Circuit Judge. The City of Taylor Police and
Fire Retirement System contends that Zebra Technologies
Corporation defrauded investors by making bad predictions
during a corporate consolidation. Zebra manufactures com-
mercial electronics such as barcode scanners and receipt
2 No. 20-3258
printers. In 2014 it acquired a division of Motorola Solutions,
Inc., that had a similar line of products. Zebra began to inte-
grate Motorola’s assets and operations with its own. Initially
Zebra’s executives touted the savings expected from the com-
bination and announced that the process was “progressing as
planned.” But consolidation proved more onerous than antic-
ipated, leading to expenditure of an additional $200 million
and a decline in Zebra’s share price.
The Retirement System filed this suit under §10(b) of the
Securities Exchange Act, 15 U.S.C. §78j(b), and 17 C.F.R.
§240.10b-5, seeking to represent a class that purchased
Zebra’s stock between November 2014 and November 2015.
The Retirement System asserts that Zebra, CEO Anders Gus-
tafsson, and CFO Michael Smiley duped investors by know-
ingly issuing false statements about the integration of
Motorola’s assets with Zebra’s. The district judge dismissed
the complaint, finding that the Retirement System failed to
state an adequate §10(b) claim and did not satisfy the plead-
ing requirements of the Private Securities Litigation Reform
Act. 2020 U.S. Dist. LEXIS 191627 (N.D. Ill. Oct. 16, 2020).
The Retirement System’s complaint identifies a variety of
asserted misrepresentations. Some consist of optimistic pro-
jections. When the acquisition closed, Zebra predicted that the
“synergies” of combining Motorola’s assets with Zebra’s
would yield substantial recurring savings. The Retirement
System complains that Zebra did not qualify that forecast
with the ongoing costs of integration. Later, as consolidation
was underway, Zebra projected a gross profit margin of be-
tween 45.5 and 46.5 percent for the second quarter of 2015.
The actual margin turned out to be 44.2 percent. The com-
plaint also contends that Zebra’s executives knew about
No. 20-3258 3
issues plaguing integration but told investors that all was well
with the process. Most notably, in March 2015, Gustafsson
represented that integration was “progressing as planned.”
Rule 10b-5 forbids the inclusion in a securities disclosure
of “any untrue statement of a material fact”. The complaint
does not identify any such statement. Consider Zebra’s cost-
savings estimates. The Retirement System does not allege that
those estimates are untrue; rather, it contends that they are
misleading when not coupled with more information about
the ongoing costs of consolidation. But why should that be?
Just as stocks and flows differ, the one-time expenses of inte-
gration are categorically distinct from recurring savings
gained by melding similar businesses. As we have held, the
Securities Exchange Act does not impose a “duty of total cor-
porate transparency”. City of Livonia Employees’ Retirement
System v. Boeing Co., 711 F.3d 754, 759 (7th Cir. 2013). A corpo-
ration need not couple each piece of good news with disclo-
sure of some tangential difficulty.
Zebra’s profit-margin projection also falls short of fraud.
The Securities Exchange Act does not demand perfection
from forecasts, which are inevitably inaccurate. “[S]ecurities
laws encourage companies to make public predictions of fu-
ture performance to assist investors in estimating a firm’s fu-
ture value.” Arazie v. Mullane, 2 F.3d 1456, 1465 (7th Cir. 1993),
citing Wielgos v. Commonwealth Edison Co., 892 F.2d 509, 513–
14 (7th Cir. 1989). For that reason, the Private Securities Liti-
gation Reform Act exempts certain forward-looking state-
ments from liability. 15 U.S.C. §78u–5. According to the com-
plaint, Zebra’s forecast missed the actual profit margin by just
over one percentage point. A near miss of that sort is a long
way from fraud.
4 No. 20-3258
Finally, the Retirement System complains that CEO Gus-
tafsson stated that integration was “progressing as planned.”
The district judge concluded that this statement is puffery.
Several circuits, including ours, have held that non-specific
puffery is not actionable under Rule 10b-5. Eisenstadt v. Centel
Corp., 113 F.3d 738, 746 (7th Cir. 1997) (collecting cases). Gus-
tafsson’s statement did not make any concrete assertion; it ex-
pressed only vague optimism. And it cannot be called false:
the consolidation continued throughout the class period. Alt-
hough the cost proved higher than expected, Zebra achieved
the goal of consolidating its operations with Motorola’s.
The Retirement System faces another obstacle. Even if any
of Zebra’s statements could be deemed a material falsehood,
the complaint must satisfy the Private Securities Litigation
Reform Act. One provision requires plaintiffs to “state with
particularity facts giving rise to a strong inference” that de-
fendants spoke with intent to deceive (the scienter required in
a fraud suit). 15 U.S.C. §78u–4(b)(2)(A). A plaintiff must do
more than tell a possible or even plausible story about a de-
fendant’s intent. Rather, the plaintiff must “plead facts ren-
dering an inference of scienter at least as likely as any plausible
opposing inference.” Tellabs, Inc. v. Makor Issues & Rights, Ltd.,
551 U.S. 308, 328 (2007) (emphasis in original).
Consider two competing inferences from the facts alleged
in the Retirement System’s complaint. As plaintiff tells the
tale, Zebra’s executives knew early in the process that consol-
idation would be costlier and more difficult than anticipated.
Rather than disclosing difficulties or simply saying nothing,
Gustafsson and Smiley chose to hoodwink investors into
thinking that integration was seamless. (Why they would opt
for that strategy, when it would conceal the increased costs
No. 20-3258 5
for only a few months, is a mystery.) But one can tell a differ-
ent story: when consolidation began, Gustafsson and Smiley
had only limited information about the inner workings of
Motorola. Difficulties in melding the companies’ operations
would come to light only over time. In this account, their early
positive statements stemmed not from fraudulent intent but
limited knowledge and optimism. The process did not pro-
ceed as smoothly as they hoped, and Zebra later disclosed
these difficulties.
The second inference offers a beoer fit for the facts alleged
in the complaint. The sequence of Zebra’s statements com-
ports with a company learning about difficulties over time.
On a March 2015 conference call, in the early months of the
process, Gustafsson announced in general terms that the “in-
tegration is progressing as planned.” That statement was not
unqualified: an SEC Form 10-Q filed that same month warned
that absorbing Motorola’s assets may not be “performed
timely and effectively” and could “adversely affect Zebra’s
business.” True to that warning, Gustafsson stated in Novem-
ber 2015 that “the complexity of the IT systems has been
greater than we had expected.” The following year, he further
elaborated that because Motorola’s systems were “different
than what we had expected”, integrating them with Zebra’s
entailed more labor than anticipated. The plaintiff asserts that
later specificity proves earlier obfuscation. But a more sensi-
ble inference is that more information was available to Zebra’s
executives in November 2015 than in March 2015.
The plausibility of potential inferences depends on con-
text. An inference of scienter may be warranted when a cor-
porate executive communicates false retrospective infor-
mation to investors. Typically, an executive will be privy to
6 No. 20-3258
good historical information about the inner workings of her
own corporation. As a result, securities law demands preci-
sion from retrospective disclosures. But an ongoing corporate
consolidation is a different maoer. Executives possess only
limited information about the internal operations of other cor-
porations. Gustafsson and Smiley would have known com-
paratively liole about Motorola’s operations until consolida-
tion was underway, and the full extent of any roadblocks
would take time to come to light. Retrospective disclosures
can be precise and so they must be. The same standards do
not apply to statements about an ongoing process.
Suppose we deemed §10(b) to require a complete account-
ing of difficulties as they emerged during a merger or acqui-
sition. That duty would open a corporation to a new swathe
of securities claims. Aoempting to tally and predict the costs
of consolidation while consolidation is ongoing would be a
risky business. Guess too high and the company might unnec-
essarily drive down stock prices; guess too low and the com-
pany might be accused of fraudulent misrepresentation. Al-
ternatively, perhaps Zebra could have indicated at the outset
that it was seoing aside a sum for contingencies. Investors
would still demand regular updates about how much of the
fund had been spent. Securities law does not force corpora-
tions into this sort of no-win circumstance.
Retrospective disclosures can and should be precise be-
cause corporations generally possess good information about
completed operations. The law tolerates greater imprecision
from forecasts because predicting the future is an uncertain
enterprise. So too is speaking about a developing process, es-
pecially when another corporation’s assets are involved.
Zebra made retrospective disclosures about the difficulties it
No. 20-3258 7
encountered (and surmounted) when integrating Motorola’s
assets, but none has been challenged. Instead, the Retirement
System elected to challenge only statements made before or
during integration. The fatal flaw of the Retirement System’s
suit is that it seeks to apply rules covering retrospective state-
ments to ongoing developments. Unexpected difficulties that
crop up in any corporate consolidation are a business prob-
lem, not a securities problem. Because the plaintiff has failed
to state a viable claim under the Securities Exchange Act, the
district court’s dismissal must be
AFFIRMED.