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Eric Silverman, On Behalf of Himself and All Others Similarly v. Motorola

February 16, 2010


The opinion of the court was delivered by: Hon. Amy J. St. Eve


AMY J. ST. EVE, District Court Judge:

On August 9, 2007, Plaintiffs brought a securities-fraud class action on behalf of all purchasers of the publicly traded securities of Motorola, Inc., against Motorola and certain of its officers ("the individual defendants"). (R. 1.) The Second Amended Complaint, which Plaintiffs filed on May 26, 2010, alleges violations of Section 10(b) of the Securities and Exchange Act of 1934 ("the 1934 Act") and SEC Rule 10b-5 against all defendants, as well as Section 20(a) of the 1934 Act against the individual defendants. (R. 276 at 79-82.)

On September 7, 2010, Defendants Gregory Q. Brown, Daniel M. Moloney, and Richard D. Nottenburg (collectively, "Defendants," for the purpose of this Opinion)-a subset of all the defendants in this case-filed the motion for summary judgment that is now before the Court.

(R. 326.) In support of that motion, Defendants argue that there is no evidence that Moloney, Brown, or Nottenburg was a control person for the purpose of Section 20(a) of the Securities and Exchange Act. (R. 327.) Defendants further submit that no evidence would support a finding that Nottenburg is primarily liable under Section 10(b) of the same Act. (Id. at 24-27.) For the reasons discussed below, the Court grants in part and denies in part Defendants' motion for summary judgment.


Plaintiffs' class-action Complaint alleges that Motorola and certain of its directors and officers violated the 1934 Act and seeks recovery on behalf of all persons who purchased or otherwise acquired Motorola's publicly traded securities from July 19, 2006, through January 4, 2007. (R. 276 at 2.) The Court certified a class of those who purchased publicly traded securities of Motorola during this period, and appointed Macomb County Employees Retirement System and St. Clair Shores Police and Fire Pension Systems as class representatives. (R. 140.)

Motorola has three primary business segments: Mobile Devices, Networks and Enterprise, and Connected Home Solutions. (Id.; R. 327 at 7.) The Second Amended Complaint ("the Complaint") avers that Motorola and its officers engaged in a fraudulent scheme with respect to the Mobile Devices business segment. (R. 276 at 3.) According to the Complaint, the Mobile Devices segment relied on its vendor, Freescale Semiconductor, Inc., ("Freescale") for the production of integrated circuits for use in the segment's 3G handsets. (Id.) Allegedly, Freescale repeatedly failed to deliver commercially viable circuits to Motorola on a timely basis, which had "disastrous" consequences. (Id. at 4) Specifically, those failures allegedly resulted in Motorola's being unable, three times, to deliver a 3G handset for introduction in the North American market during the first three quarters of 2006. (Id.) The Complaint provides that these problems threatened Motorola's ability consistently to deliver double-digit operating earnings, as the company's competitors, Nokia and Samsung, had already introduced 3G handsets by May 2006. (Id.)

As a result, the Complaint alleges, Motorola suffered an earnings "gap" that grew to over $1.1 billion in July 2006. (R. 276 at 4-5.) Further, despite knowing that it was highly unlikely that the 3G handsets would contribute to earnings in 4Q06, Motorola and the defendant officers "continued to assure analysts and investors that the 3G product portfolio was 'on track' and that Mobile Devices would deliver record, double-digit operating earnings during 3Q06 and 4Q06 based on increased market share for handset sales, including the purportedly forthcoming high-tier 3G devices." (Id. at 5.) The Complaint further provides that, "[r]ather than disclose the truth about the collapse of Motorola's earning potential . . ., defendants persisted in their fraudulent conduct and covered-up the Company's resulting earnings gap." (Id. at 6.) Specifically, it avers that Motorola and the defendant officers "executed two highly unusual, 98.7% profit, intellectual property . . . licensing transactions valued at $440.0 million for the purpose of obfuscating the fact that the Company's 3G portfolio was in tatters and was materially affecting Motorola's handset margins and financial results." (Id.)

On September 7, 2010, three of the named defendants, Daniel M. Molloy, Gregory Q. Brown, and Richard N. Nottenburg, moved for summary judgment on the ground that no reasonable jury could find them liable for violations of Section 20(a). (R. 326.) They submit that the evidence reveals that none of them was in a position of control, and that no evidence exists that Nottenburg-the only one of three alleged to have committed a primary violation-violated Section 10(b) and SEC Rule 10b-5. (R. 327.)


Summary judgment is appropriate when "the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(c)(2). A genuine issue of material fact exists if "the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). In determining summary-judgment motions, "facts must be viewed in the light most favorable to the nonmoving party only if there is a 'genuine' dispute as to those facts." Scott v. Harris, 550 U.S. 372, 380 (2007). The party seeking summary judgment has the burden of establishing the lack of any genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). After "a properly supported motion for summary judgment is made, the adverse party 'must set forth specific facts showing that there is a genuine issue for trial.'" Anderson, 477 U.S. at 255 (quotation omitted); see also Fed. R. Civ. P. 56(e)(2) (requiring adverse party to "set out specific facts"). "The party opposing summary judgment . . . bears the burden of coming forward with properly supported arguments or evidence to show the existence of a genuine issue of material fact." Treadwell v. Office of Ill. Sec'y of State, 455 F.3d 778, 781 (7th Cir. 2006) (citations omitted).


I. There Is No Genuine Issue that Defendant Daniel M. Moloney Is not a Control Person for the Purpose of Section 20(a) of the 1934 Act The Complaint alleges that Defendant Moloney acted as a controlling person of Motorola within the meaning of the Section 20(a) of the 1934 Act and is liable pursuant to that section for violations of Section 10(b) of the same Act and SEC Rule 10b-5. (R. 276 at 82-83.) Section 20(a) provides that "[e]very person who, directly or indirectly, controls any person liable under any provision of this title or of any rule or regulation thereunder shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable . . . unless the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action." 15 U.S.C. § 78t(a). Defendants argue in their motion for summary judgment that undisputed evidence requires that Moloney is not a "control person" for the purpose of Section 20(a). (R. 327 at 14-20.) They submit that no reasonable jury could find otherwise. (Id.) They further contend that there is uncontroverted evidence that Moloney acted in good faith. (Id. at 20-21.)

The Seventh Circuit has laid out a two-part test to determine control-person liability. See, e.g., Donohoe v. Consol. Operating & Prod. Corp., 30 F.3d 907, 911-12 (7th Cir. 1994). First, "the 'control person' needs to have actually exercised general control over the operations of the wrongdoer." Id. at 911 (emphasis in original). Second, "the control person must have had the power or ability-even if not exercised-to control the specific transaction or activity that is alleged to give rise to liability." Id. at 911-12; see also Harrison v. Dean Witter Reynolds, Inc., 79 F.3d 609, 614 (7th Cir. 1996); Jones v. Corus Bankshares, Inc., 701 F. Supp. 2d 1014, 1030 (N.D. Ill. 2010); Premier Capital Mgmt., L.L.C. v. Cohen, No. 02-CV-5368, 2008 WL 4378300, at *7 (N.D. Ill. Mar. 24, 2008); accord Lustgraaf v. Behrens, 619 F.3d 867, 873 (8th Cir. 2010). Furthermore, good faith is a defense to control-person liability. Donohoe, 30 F.3dat 912. In addition, "[l]iability under § 20(a) is obviously derivative of liability under some other provision of the Exchange Act." Morrison v. Nat'l Austl. Bank, 130 S. Ct. 2869, 2876 n.2 (2010).

A. Undisputed Facts Concerning Defendant Moloney

There is no dispute that Motorola, during the Class Period, was comprised of three separate businesses, each of which reported revenue and operating earnings separately: Mobile Devices, Networks and Enterprise, and Connected Home Solutions. (R. 327-6 at 4, ¶ 22; R. 341 at 3, ¶ 22). Mr. Edward J. Zander ("Zander") was Motorola's CEO and Chairman of the Board of Directors during this time. (R. 327-6 at 2, ¶ 8; R. 341 at 2, ¶ 8.) The parties agree that, during the Class Period, Moloney led Connected Home Solutions, and reported to Zander. (Id.) During that time period, Moloney was not a member of Motorola's Disclosure committee. (R. 327-6 at 10, ¶ 47; R. 341 at 7-8, ¶ 47.) Nor did any corporate accounting, financial, or investor-relations personnel report to him during that time. (Id.) No party contends that Moloney made any of the alleged misstatements in the Complaint. (R. 327-6 at 10, ¶ 49; R. 341 at 8, ¶ 49.) Further, there is no dispute that Defendants Brown, Moloney, and Nottenburg were members of Motorola's Senior Leadership Team, which reported directly to Zander. As members of this team, Defendants were expected to and did regularly participate in Motorola weekly staff and monthly operations review meetings led by Zander. (R. 340 at 2, ¶ 3; 352 at 3, ¶ 3.) The parties agree that Moloney presented information regarding the Connected Home business at Senior Leadership Team operations reviews led by Zander, and attended by some, though not necessarily all, of Zander's direct reports. (R. 327-6 at 11, ¶ 55.)

In their statement of undisputed facts, Defendants contend that, during the relevant time period, "Moloney had no managerial oversight over the Mobile Devices business, and took no part in the development of Mobile Devices products, its forecasts, its accounting for transactions entered into by the business, or preparation and/or presentation of its financial results or its portion of any earnings release or Form 10-Q." (R. 327-6 at 11, ¶ 54.) They further assert that "[n]one of the Mobile Devices personnel, including its accounting, financial, intellectual property, or product development teams, reported to Mr. Moloney." (Id.) Plaintiffs disagree with these assertions only "to the extent that during the Class Period Garriques reported to Moloney regarding the financial results and operations of Mobile Devices prior to and during Senior Leadership Team meetings and defendant Moloney was expected to attend those meetings, as well as be attentive." (R. 341 at 10, ¶ 54.) Ronald G. Garriques was an Executive Vice President and President of Motorola's Mobile Devices business. (R. 327-6 at 3, ¶ 10; R. 341 at 2, ¶ 10.)

B. A Reasonable Jury Could Not Find that Moloney Actually Exercised General

Control over Motorola's Operations

On the basis of the preceding undisputed evidence, Defendants contend that there is no genuine issue that Moloney lacked general control over Motorola's operations. (R. 327 at 21-22.) Defendants submit that, as head of Connected Home Solutions, Moloney had authority only as to that particular division and had ...

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