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In re Synchronoss Securities Litigation

April 6, 2010

IN RE SYNCHRONOSS SECURITIES LITIGATION


The opinion of the court was delivered by: Garrett E. Brown, Jr., Chief Judge

OPINION

TABLE OF CONTENTS

I. Introduction

II. Background

III. Parties' Contentions

A. Dismissal Motion

1. Plaintiffs' Position

a. Overall Factual Assertions

b. Four Lines of Plaintiffs' Allegations

i. Allegations Related to the iPhone 3G

ii. Allegations Related to "Unlocking"

c. Plaintiffs' Additional Contentions and Legal Claims

2. Defendants' Position

B. Strike Motion

IV. Discussion

A. Strike Motion

1. Evidentiary Aspects

2. Procedural Aspects

B. Dismissal Motion

1. Pleading Requirements

a. Rule 8 Pleadings

b. Pleading Under Rule 9 and the Reform Act

2. Substantive Law

a. Element Pled Pursuant to Rule 8: Materiality

b. Elements Pled Pursuant to Rule 9

i. Reliance

ii. Scienter

iii. Forward-looking Statements

iv. Omissions

c. Liability of Controlling Person

3. Claims Based on Defendants' Forward-Looking Statements

a. Future Projections Allegedly Related to the iPhone 3G

b. Future Projections Allegedly Related to "Unlocking"

i. "False Failure to Project" as a Cause of Action

ii. Insufficiency of Pleadings

iii. Substantive Insufficiency of the Claim

4. Claims Based on Defendants' Alleged Omissions

a. Lack of Duty to Disclose Ensuing from Waldis and Irving's Trades

b. Allegations as to Omissions and/or Duty to Correct or Update

i. Omissions as to the iPhone 3G

ii. Omissions as to the Change in Synchronoss' Revenue

C. Leave to Amend

V. Conclusion

I. INTRODUCTION

This matter is before the Court upon Defendants' motion ("Dismissal Motion"), see Docket Entry No. 24, seeking dismissal of Plaintiffs' Consolidated Class Action Complaint ("Complaint"). See Docket Entry No. 22. Plaintiffs filed their opposition to the Dismissal Motion ("Dismissal Opposition"), see Docket Entry No. 25, to which Defendants filed a reply ("Dismissal Reply"). See Docket Entry No. 30. The foregoing submissions appear to be intertwined with Plaintiffs' later filed motion ("Strike Motion") requesting the Court to strike certain Defendants' arguments raised in the Dismissal Motion. See Docket Entry No. 27. Defendants filed their opposition to the Strike Motion ("Strike Opposition"), see Docket Entry No. 31, to which Plaintiffs filed a reply ("Strike Reply"). See Docket Entry No. 32.

For the reasons detailed below, Plaintiffs' Strike Motion will be denied, without prejudice, as premature. Defendants' Dismissal Motion will be granted on grounds unrelated to Plaintiffs' Strike Motion, and the Consolidated Class Action Complaint will be dismissed. Such dismissal, however, will be without prejudice, and Plaintiffs will be granted leave to cure the deficiencies of their pleadings.

II. BACKGROUND

Plaintiffs brought this action on behalf of a putative class consisting of all persons and entities that purchased or otherwise acquired securities ( seemingly, common shares only) issued by Synchronoss during a slightly more than four month period, from February 4, 2008 to June 9, 2008, both dates inclusive ("Class Period"). See Compl. ¶ 2.

According to the Complaint, Defendant "Synchronoss [Technologies] is a Delaware corporation[,] with principal executive offices located at... Bridgewater, New Jersey*fn2.... As of August 27, 2008, [Synchronoss] had approximately 31.4 million shares outstanding that traded on the NASDAQ under the symbol 'SNCR.'" Compl. ¶12. While the technical endeavors in which Synchronoss is involved are complex and multiple, it can be said that Synchronoss is, generally, in the business of creating and licensing software used by other business entities, which are involved in providing wireless services; one of the functions that Synchronoss' software can perform is activation of wireless devices from remote locations, e.g., remote (meaning, online/off-site) activation of iPhones (mobile/cell phones produced by Apple Inc. ("Apple").*fn3 See id. ¶¶ 26-27.

Apple is a corporation that designs and manufactures consumer electronics and computer software; Apple's most well-known hardware products include Macintosh computers, the iPod, the iPhone, etc. Steven "Steve" Paul Jobs is the co-founder and chief executive officer of Apple.

The history of the iPhone began with a conclusion reached by Steve Jobs in 2003 that the high-tech future belonged to mobile phones that could also operate as devices enabling access to portable information. By that time, Jobs had Apple put its energies into the iPod, a portable media player, and the corresponding iTunes software, a digital media player application used for purchasing and downloading digital music and video files. In September 2006, Apple released a new version of iTunes that included references to a then-yet-unknown mobile phone which was announced four months later as the "iPhone"; the iPhone was actually introduced into the market on June 29, 2007.*fn4

The iPhone is an excellent example of what is commonly known as a "smartphone," meaning that it is a mobile telephone offering computer-like capabilities, i.e., it is an advanced cell phone (allowing such features as text messaging, visual voicemail, audio conferencing, call holding, call merging, caller ID, etc.) that also functions as a camera and a portable media player equivalent to a video iPod, allows the user a Wi-Fi connection with complete access to the Internet (including email, full web browsing, etc.) and, in addition, performs many other functions.

When the original version of iPhone was introduced to the purchasing public in 2007, TIME Magazine named it the Invention of the Year. The second generation of the iPhone, popularly known as the "iPhone 3G," is an even more advanced device capable of receiving and processing data faster than the original iPhone; it also performs additional and more complex functions than the original iPhone and, in addition, ensures that the user -- even if (s)he is located in an area suffering from a poor cell phone connection -- could nonetheless access the transmission frequency securing due reception.*fn5

Apple tightly controls most aspects of the iPhone; for instance, the iPhone's operating system is designed to only run software that has an Apple-approved "cryptographic signature," i.e., the code protecting against alterations or corruptions.

All iPhones must -- theoretically -- be "activated," meaning that they have to be assigned a telephone number and carrier before the user could obtain assess to iPhone features. For the purposes of the United States market, all iPhones are "locked," in the sense that the creators of the iPhone tried (and keep aggressively trying) to ensure that the iPhone could be used only with one particular authorized carrier, namely, AT&T, which is Apple's partner network.*fn6

However, various "hackers," who are unwilling to switch from their carriers to AT&T either out of customer loyalty or because they are planning to use different service providers when traveling to Europe/ Asia (in order to avoid the roaming fees charged by AT&T on overseas calls), or because they simply dislike AT&T's subscription terms or AT&T as a business entity, found methods to "unlock" -- meaning, to "activate" -- their iPhones in order to use them with unauthorized carriers (that is, carriers other than the AT&T) after such "unlocking."*fn7 In sum, it can be said that "unlocking" is the process by which a cell phone (or any mobile device) is made compatible with telephone network(s) it was not specifically licensed to be used with.

Many owners of smartphones (including the owners of iPhones) are, however, not concerned with the issue -- or not concerned with only the issue -- of changing their service providers: rather, they want to gain control over the applications/software they can install on their mobile devices. Presumably, the reason is that many smartphone manufacturers "lock" the devices so that only their approved applications can be installed. Apple is no exception to that practice, and the iPhone can only install applications purchased from Apple's App Store (since the iPhone's operating system is designed to run only the software that has an Apple-approved cryptographic signature); therefore, if there is an application an owner of the iPhone wants to install that is not officially approved and offered by Apple, (s)he out of luck. However, similar to the "unlocking" restriction (relevant for the purposes of phone "activation"), this installment-of-software restriction could be overcome by "jailbreaking" the phone, that is, by replacing the iPhone's firmware with a slightly modified version that does not enforce the signature check.

While the goals and technical aspects of "unlocking" and "jailbreaking" are qualitatively different,*fn8 the financial implications of these processes are somewhat similar for the purposes of both Apple and AT&T. In the case of "unlocking," AT&T is prevented from collecting fees associated with its acting as a carrier of cell phone accounts of the iPhone owners, while in the case of "jailbreaking" -- Apple is prevented from collecting the fees associated with the iPhone owners' installment and/or usage of Apple's App Store software applications.*fn9 Consequently, beginning in September 2007, Apple has been releasing various technical updates and new firmware aimed at either relocking the "unlocked/jailbroken" iPhones or to "bricking" such devices (i.e., rendering these "hacked" devices inoperable).

It appears that Synchronoss was the entity which created the program allowing Apple/AT&T to offer their customers an opportunity to self-activate their new iPhones. In other words, in contrast with the traditional model necessarily requiring a customer to go through the process of in-store purchase-and-activation of his/her new iPhone, Synchronoss' program (adopted by Apple/AT&T) allowed the customer to choose between: (1) the in-store purchase-and-activation; and (2) an opportunity to (a) purchase an iPhone (either in-store or online); and then (b) self-activate this new iPhone from the comfort of the customer's own home via iTunes. Since the self-activation option permitted iPhone purchasers to physically take their yet-to-be-activated iPhones outside AT&T' stores, such option also provided these purchasers with a "window-of-opportunity" during which they could "hack" their new iPhones by "unlocking" their new devices. In light of the obvious financial losses caused by the practice of "unlocking" original iPhones, Apple/AT&T -- starting from release of Apple's iPhone 3G -- decided to part with the customer-convenient-but-profit-endangering model of self-activation and elected to permit only the old-but-financially-more-secure model of in-store purchase-and-activation. Consequently, Synchronoss' off-site/online self-activation program became of no use for the purposes of the iPhone 3G, causing the stream of compensation Synchronoss was receiving from Apple/AT&T for the use of its program to progressively dry up, since Synchronoss' program kept being used only for the purposes of off-site activations of the original iPhones that were (re-)entering the market.*fn10

III. PARTIES' CONTENTIONS

A. Dismissal Motion

1. Plaintiffs' Position

a. Overall Factual Assertions

For reasons not entirely clear, and -- seemingly -- without any correspondence to the remainder of Plaintiffs' allegations, the Complaint opens with Plaintiffs' contention that "Synchronoss' [self-activation program was designed] to prevent Apple iPhones from being activated with wireless phone carriers other than AT&T," Compl. ¶ 2 (emphasis supplied), even though it appears that the Synchronoss' program*fn11 was not designed to be a "lock" (or an anti-"hacking" device) of any kind and, indeed -- for the purposes of phone activation -- such "lock" was already imbedded in the iPhone by Apple itself, via its firmware intertwined with its GSM system (using the SIM cards tied to each iPhone's serial number). Accord Compl. ¶ 28 ("Synchronoss provided the software allowing U.S. purchasers of the iPhone to activate that device from their home computers for use on AT&T's network"). Thus, while -- as detailed infra -- the Court is obligated to take all Plaintiffs' factual allegations as true for the purposes of Defendants' Dismissal Motion, the Court presumes that this particular piece of information (i.e., the allegation seemingly suggesting that Synchronoss was hired, but failed, to protect the iPhone from "unlocking" or other forms of hacking) was included by Plaintiffs in the Complaint as a result of inadvertence.

The remainder of Plaintiffs allegations do not appear inherently self-contradicting. According to the Complaint, Synchronoss, in its report addressing the second quarter of 2007, "[a]nnounced a multi-year contract with AT&T to support the launch and ongoing operational support of the Apple iPhone." Id. ¶ 33. The utilization of ConvergenceNow by AT&T "allowed Synchronoss to profit every time an Apple iPhone was activated on the AT&T network."*fn12 Id. ¶¶ 2, 29. In 2007, Synchronoss' gross receipts from off-site iPhone activations via ConvergenceNow amounted to 32.38% of Synchronoss' gross revenue.*fn13 Id. ¶¶ 2, 31, 44 and 50. By the beginning of the Class Period, "Synchronoss continued to maintain that the iPhone was producing and would produce tremendous results for [Synchronoss,] and [Synchronoss'] financial condition was strong." Id. ¶ 4.

The Complaint further alleged that, because: (a) "[a]t the time the iPhone was released, it was unlike any other phone on the market[; and (b)] most consumer wireless contracts [were, as they typically] are[,] two years in length..., [some investors, Plaintiffs included, as well as some] technical journalists and [some] financial analysts[*fn14 somehow] believed that the number of iPhone sales would increase in coming years," and Synchronoss' income from off-site activations [of iPhones] would show an "astronomical growth."*fn15 Id. ¶¶ 32, 38. The aforesaid beliefs of these "journalists, financial analysts and investors" were, apparently, fueled in 2008 by the exact-content-unspecified rumors of unspecified origin, the gist of which was that the iPhone 3G would soon be released and, also, available for off-site self-activation, and, in addition, that Synchronoss would, also, handle these off-site activations of iPhones 3G. Plaintiffs maintain that this rumor-based three-step deducement had to be warranted because: (a) Synchronoss had widely publicized its 2007 "multi-year contract with AT&T to support the launch and ongoing operational support of the Apple iPhone," id. ¶ 2, 29, 33; and (b) Synchronoss was not discussing/projecting/publicizing the possibility that it might be excluded from off-site activations of future models of the iPhone, or that these future models of the iPhone (the iPhone 3G inclusive) could be, altogether, not offered by Apple/AT&T for off-site activation. See id. ¶¶ 32-34; Dismissal Opp., at 5-6 (asserting that Plaintiffs' deduction as to Synchronoss' upcoming off-site activation of the iPhone 3G was necessarily logical simply because "Defendants said nothing to the contrary").

b. Four Lines of Plaintiffs' Allegations

Plaintiffs assert that, on May 6, 2008,... [Synchronoss] announced that it had 'materially lowered' its [financial projections] for [the remainder of] 2008 due[,] in large part[,] to declining revenue associated with Apple's iPhone." Compl. ¶ 4. From this statement on, the Complaint, as well as the Dismissal Opposition, seems to run on the following four, rather distinct, tracks of allegations, although these allegations are at first heavily interwoven, if not plainly conflated, but then presented in a somewhat patchy fashion.

Specifically:

(a) some assertions seem to suggest that Defendants unduly concealed the known-to-them truth about the financial effect the practice of "unlocking" was taking on Synchronoss' revenue;

(b) another line of allegations, also related to the practice of "unlocking," does not address the issue of what Defendants omitted to disclose about the then-existing financial situation of Synchronoss; rather this line of allegations seems to imply that Defendants wrongly forecasted (or did not correct their prior forecast as to) Synchronoss' future revenue by not factoring in the potential negative impact which the practice of "unlocking" might take on Synchronoss' revenue in the months to come;

(c) the third line of assertions has nothing to do with the practice of "unlocking." Rather, these allegations seem to imply that Defendants' statements about Synchronoss' "multi-year" contract and, perhaps, the overall optimistic tone of Defendants' future projections, somehow misled the investors into believing that: (i) the iPhone 3G would necessarily be available for off-site/online activation; (ii) Synchronoss would necessarily be involved in such online self-activation and would, thus, derive revenue on a per-activation basis, as was the case with the original iPhone; and (iii) because the iPhone 3G would be a more advanced device in comparison with the original iPhone, it would necessarily be even more popular than the original iPhone, and that would necessarily result in Syncronoss' receipt of even more lucrative profit from off-site activation of the iPhone 3G. See generally, Compl.; and

(d) the final line of allegations seems to suggest that, even prior to June 9, 2008, Defendants knew, for a fact, that Apple/AT&T decided not to involve Synchronoss in the process of activating iPhones 3G, but Defendants omitted to disclose this fact to the investors.*fn16

In addition to these four lines of allegations, Plaintiffs state a line of derivative claims against Waldis and Irving. See note 29, infra. i. Allegations Related to the iPhone 3G Plaintiffs assert that when, on May 6, 2008, Synchronoss "announced that it had 'materially lowered' its [financial projections] for [the remainder of] 2008 due[,] in large part[,] to declining revenue associated with Apple's iPhone," Synchronoss failed to disclose the allegedly already-known-to-Defendants fact that Synchronoss' services would not be utilized for the purposes of the iPhone 3G. Id. ¶¶ 5-6.

The information that Synchronoss' services would not be utilized with regard to the iPhone 3G was publicized by AT&T on June 9, 2008. Id. According to the Complaint, on the next day, that is, on "June 10, 2008, [Synchronoss] confirmed [AT&T's] announcement and admitted that [its non-retention by Apple/AT&T for the purposes of the iPhone 3G] was a reason" for Syncronoss' release of lower financial projections on May 6, 2008.*fn17 Id. ¶ 6 (emphasis supplied). Although the Complaint does not inform the Court about the actual "admission" language by Defendants, Plaintiffs seem to deduce the fact of such admission from the language of Synchronoss' 8-K Report filed with the SEC June 10, 2008. That Report read, in relevant part, as follows: on June 9, 2008, AT&T announced the expansion of its relationship with Apple relative to the much anticipated launch of the 3G Apple iPhone. Synchronoss will continue [its] relationship with AT&T as it relates to the activation and provisioning of Apple iPhones. However, Synchronoss will not participate in the on-site, retail store activations associated with the 3G iPhone, which was already taken into consideration when we provided our revised financial outlook on our first quarter 2008 financial results conference call.

Compl. ¶ 51 (emphasis supplied by Plaintiffs).

Plaintiffs seek to explain their allegations as follows: "By admitting that the revision downward of [Synchronoss'] full year 2008 [projections] was partially due to the fact that [Synchronoss] would not be involved with the activation of the 3G iPhone, Defendants also admitted that their [projections,] issued on February 4, 2008, [were] based upon the presumption that [Synchronoss] would be involved with the 3G, which they already knew was not going to occur." Compl. ¶ 52. However, this purported clarification offers more problems than solutions. First, it is not clear as to how one can possibly base his/her projection on a presumption (s)he has not actually presumed. At best, one could surmise that Plaintiffs seek to assert that: (a) Defendants knew that their services would not be utilized in activations of the iPhone 3G; but (b) Defendants' 2008 projections, nonetheless, factored in the receipts from off-site activations of the iPhone 3G.

However, this odd turn of phrase presents a minor concern. A far more substantial problem with Plaintiffs' deduction is that the 8-K Report quoted by Plaintiffs merely stated that "Synchronoss will not participate in the on-site, retail store activations associated with the 3G iPhone." Id. ΒΆ 51 (emphasis supplied). That statement is qualitatively different from Plaintiffs' leap of logic reading it as Synchronoss' admission of long-time knowledge that Synchronoss would not be involved in any activation (including off-site, online activation) of the iPhone 3G. Contrary to Plaintiffs' deduction, it seemed quite logical for Synchronoss to factor in its non-involvement in on-site, retail ...


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