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Court Tosses Investor Suit Over HP's Failed Integration Venture

Thursday, September 6, 2012
Gammel v. Hewlett-Packard Co., C.D. Cal., No. SACV 11-1404 AG (RNBx ), 8/29/12

  • Key Holding: Court tosses suit over Hewlett-Packard’s unsuccessful project to integrate mobile computing devices running on the webOS system.

  • Key Takeaway: The suit faltered based on scienter pleading deficiencies; the court granted the plaintiffs 30 days to amend their pleading.


The U.S. District Court for the Central District of California Aug. 29 dismissed a securities fraud class action over Hewlett-Packard Co.’s (HPQ) allegedly failed project to develop an “ecosystem” of integrated mobile computing devices, such as PCs, printers, smartphones and tablets, running on the webOS operating system (Gammel v. Hewlett-Packard Co.,C.D. Cal., No. SACV 11-1404 AG (RNBx ), 8/29/12).

Judge Andrew Guilford found that the plaintiff-investors failed to adequately plead the required scienter element of their claims against the computer giant and certain of its senior officials.

 

$1.2B Purchase of Palm Inc
The court said that HP hardware products “have traditionally run on Microsoft’s ubiquitous Windows operating system.” By contrast, hardware products made by HP competitors run on proprietary non-Windows operating systems, the court noted.

According to the plaintiffs, HP “ 'wanted to get in on the action,’” the court recounted. So in July 2010, for $1.2 billion, HP purchased Palm Inc.--maker of the “once-popular” Palm Pilot hand-held computing device--and exclusive rights to Palm’s webOS operating system, the court continued.

The plaintiffs asserted that while the defendants were publicly touting HP’s commitment to developing and integrating its webOS products, “things were different behind the scenes,” the court noted. Among other specifics, HP’s key webOS product, the TouchPad tablet, was allegedly “ 'riddled with hardware and software defects that HP failed to disclose.’”

 

'House of Cards’ Collapses
The “house of cards came crashing down” in August 2011 when HP announced that it was shutting down all of its webOS hardware operations, the plaintiffs asserted.

HP’s stock price dropped 6 percent the day of the announcement and an additional 20 percent the next day, according to the complaint. In December 2011, after writing off more than $3 billion in webOS-related costs, HP contributed webOS to the public as “ 'open-source’ software for anyone to use and develop,’” the complaint alleged.

The plaintiffs advanced claims under 1934 Securities Exchange Act Sections 10(b) and 20(a).

 

Lack of a ’Strong Inference’
The court ultimately determined that the plaintiffs’ allegations of scienter, both “standing alone and viewed holistically, are insufficient to raise a 'strong inference that the [Defendants] acted with the required state of mind,’” and thus dismissed the Section 10(b) claims.

Among other specifics, the court said that the plaintiffs’ allegations that the defendants knowingly lied about HP’s commitment to webOS are undermined by their inconsistent allegations concerning HP’s July and August 2011 efforts to improve flaws in certain webOS devices.

Meanwhile, the court said that the plaintiffs do not adequately plead the “core operations inference” of scienter. In this regard, the court said that it “does not automatically follow from the 'core’ nature of HP’s PC and printer businesses or the anticipated volume of webOS sales that each Individual Defendant was immediately aware of developments in HP’s webOS strategy.” The court also remarked that the plaintiffs’ “vague” claims that the individual defendants directly participated in management of the company and were privy to confidential information are insufficient to establish an inference of scienter.

The court said that it considered the plaintiffs’ additional allegations and finds them unpersuasive. Thus, the plaintiffs’ securities fraud claims must be dismissed, the court determined. It said that the plaintiffs may file an amended pleading within 30 days.

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