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Pierrelouis v. Gogo Inc.

United States District Court, N.D. Illinois, Eastern Division

October 16, 2019

ASHLEY PIERRELOUIS, individually and on behalf of all others similarly situated, Plaintiff,
v.
GOGO, INC., MICHAEL J. SMALL, NORMAN SMAGLEY, BARRY ROWAN, and JOHN WADE, Defendants.

          MEMORANDUM OPINION AND ORDER

          Hon. Jorge Alonso United States District Judge.

         Lead plaintiffs, Maria Zingas and Daniel Rogers[1] (“plaintiffs”), have filed an Amended Class Action Complaint For Violation of the Federal Securities Laws, asserting violations of sections 10(b) and 20(a) of the Securities Exchange Act and Rule 10b-5 of the Securities Exchange Commission (“SEC”). Defendants, Gogo, Inc. (“Gogo”), Michael J. Small, Norman Smagley, Barry Rowan, and John Wade, move to dismiss the complaint pursuant to Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim under Rule 8, Rule 9(b), and the Private Securities Litigation Reform Act of 1995 (“PSLRA”). For the following reasons, the motion is granted.

         BACKGROUND

         Gogo provides in-flight internet connectivity services to customers traveling by airplane. The individual defendants are current and former Gogo executives. This lawsuit centers on defendants' public statements concerning the performance of Gogo's new 2Ku system.

         Gogo's service works by integrating hardware and software installed on airplanes with satellite and ground-based networks. To provide internet access, Gogo relies for each flight on one of two systems-the “air to ground” (“ATG”) system or its new 2Ku antenna-and-satellite-based system, first deployed in 2016. The 2Ku system, an upgrade on Gogo's earlier “Ku-band” satellite system, relies on the Ku open-architecture satellite network, from which Gogo purchases capacity as needed, to deliver in-flight internet connectivity at up to twice the speed of its earlier Ku-band system, as well as significantly faster than the ATG systems. Gogo announced the 2Ku system in 2014 and began marketing it to airlines. By the end of 2016, 2Ku had been installed on 94 airplanes. By the end of 2017, it had been installed on approximately 550 airplanes.

         Each 2Ku system is installed in a ventilated compartment known as the “radar dome” or “radome.” When airport personnel spray the aircraft with de-icing fluid, the fluid may permeate the radomes via the ventilation valves. The 2Ku hardware consists of disc-like antennas stacked on top of one another that rotate in different directions-but when de-icing fluid infiltrates the radomes, the antennas become “sticky” and unable to function due to the glycol in the fluid. (Am. Compl. ¶ 55, ECF No. 55.)

         In November or December 2017, Delta Airlines, a major partner that accounted for 25% of Gogo's revenue in 2014, 2015, and 2016, placed calls to Gogo complaining that its 2Ku systems were not working and threatening to shut them down if they were not fixed. Gogo reacted promptly, and its employees worked overtime to address the problem. Gogo first attempted to change the antennas and install a part known as a deflector, a folded piece of rubber surrounding the antennas, to prevent the de-icing fluid from reaching the antennas. The deflectors did not fix the problem. Gogo's repair crews would often replace the radome entirely, but the repair would not prevent the problem from recurring. (Id. ¶ 59.) Repairs sometimes had to be postponed for weeks because the airline could not afford to take the plane out of service long enough to complete them, and the longer a 2Ku system was down, the greater the potential decrease in Gogo's average revenue per aircraft (“ARPA”), an important accounting metric that Gogo-and its investors- used to track its financial performance.

         Between February 27, 2017, and February 22, 2018, defendants made numerous statements to investors and analysts on conference calls, at conferences, and in documents filed with the SEC, in which, plaintiffs allege, defendants omitted to fully disclose that a defect in the 2Ku system or its installation was inhibiting its performance or concealed the defect's seriousness. In these statements, defendants described the company's outlook in optimistic terms, and they described any stagnation of ARPA as a short-term problem caused by “dilution” due to new installations, apparently because, when a Gogo system is first installed in a new aircraft, it takes time for the passengers who travel in that aircraft to adopt the habit of purchasing Gogo's internet services. Plaintiffs contend that defendants' omissions made these statements materially misleading.

         In particular, in many of their allegedly misleading statements to investors and analysts, certain of the defendants summarized the advantages of the 2Ku system as “characterized by three numbers: 15, 98, 98. This means 15-plus megabits per second speed to connect the passengers; 98% coverage of global flight hours and 98% service availability.” (See, e.g., Id. ¶ 82.) Defendants allegedly suggested that Gogo's 2Ku systems were already achieving that level of performance, when, in reality, according to plaintiffs, the de-icing fluid infiltration problem was negatively affecting the systems' performance and requiring costly repairs.

         On February 22, 2018, in announcing Gogo's 2017 fourth quarter and year-end results, defendants acknowledged the de-icing fluid infiltration issue. During a conference call, Wade acknowledged that there had been “growing pains, ” and on “some aircraft [Gogo] saw degraded reliability, ” but also stated that they had “identified the root cause of all of these issues, and have fixes for all of them that have either been deployed or [are] in the process of being deployed.” (Id. ¶ 122.) When an analyst asked for more detail, Wade replied that the “reliability issues” were “actually really caused by the de-icing fluid, which was able to penetrate under some of the [radome], which caused the antennas to temporarily get sticky, if you will. The fix to that was very easy to do, and we've deployed that on a number of aircraft and we're not seeing any further issues around that at this time.” (Id. ¶ 124.) According to plaintiffs, this explanation failed to convey how costly the 2Ku repairs were and how likely they were to affect earnings figures in subsequent reporting periods.

         Plaintiffs allege that it was only on May 4, 2018, that Gogo's new CEO, Oakleigh Thorne, disclosed the full truth about the 2Ku defect and the associated installation and repair issues. In a conference call, Thorne revealed that Gogo's 2018 first-quarter earnings were poor because of the “de-icing fluid impact on 2Ku, ” which caused the airlines to “h[o]ld back on marketing the product” and Gogo to “ramp[] up spending to fix reliability” as soon as possible. (Id. ¶ 62.) Thorne acknowledged that Gogo had previously set forth its “goal” of “98% system availability, 98% flight route coverage and 15 megabits per second speeds, ” but the company had “slipped on the 98% system availability with [its] de-icing problems.” (Id.) The winter weather and the accompanying de-icing stops had caused availability to “plunge[] down to the mid 80s.” (Id.) However, according to Thorne, the company had conducted a “thorough analysis of root causes” and fixed certain software and manufacturing issues that had contributed to the de-icing problem, and it was already back up to 96% availability. In the second half of the year, Thorne reported, the company planned to “roll out a set of 2Ku modifications that will keep de-icing fluid out of the [antenna] raceways and get us back to our target of 98% system availability.” (Id.)

         Based on Thorne's May 4, 2018 revelations, Gogo's shares fell $1.73 per share to close at $7.86 on May 7, 2018 (a drop of over 18%). The same day, after the market closed, Moody's downgraded Gogo's credit rating, and the share price fell an additional $2.80 per share to close at $5.06. Plaintiffs allege that defendants' omission to fully disclose the defect in the 2Ku system before May 4, 2018, had inflated Gogo's share price, and the news of the full extent of the de-icing fluid issue caused the share price to fall, to the detriment of plaintiffs and other investors, and in violation of the Securities Exchange Act and Rule 10b-5 of the SEC. Additionally, plaintiff claims that the individual defendants are liable as “controlling persons” of Gogo under § 20(a) of the Securities Exchange Act, 15 U.S.C. § 78t. Defendants have moved to dismiss for failure to state a claim under Federal Rule of Procedure 12(b)(6).

         ANALYSIS

         Section 10(b) of the Securities Exchange Act prohibits the use “in connection with the purchase or sale of any security . . . [of] any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [Securities and Exchange] Commission may prescribe.” 15 U.S.C. § 78j. Under SEC Rule 10b-5, it is unlawful for any person:

(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the ...

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