Opinion ID: 653198
Heading Depth: 3
Heading Rank: 3

Heading: The Third Apple Computer Condition

Text: 37 As to Apple Computer 's third condition, the plaintiff contends that Nakao was aware of five undisclosed facts which tended to seriously undermine the accuracy of his $2.10 per share estimate. 38 a. The plaintiff first contends Adobe's 1990 Financial Plan included an estimate of fiscal 1990 earnings of only $1.47. This estimate, however, was an internal projection. It was designed as a basis for calculating employee bonuses and internal operating expenditures. Financial Plan projections in previous years had never been publicly released and were intended solely for internal use. 39 A corporation may be called upon to make confidential projections for a variety of sound purposes where public disclosure would be harmful. In re Lyondell Petrochemical Co. Seq. Litig., 984 F.2d 1050, 1052-53 (9th Cir.1993). Indeed, in Vaughn v. Teledyne Inc., 628 F.2d 1214, 1221 (9th Cir.1980), we observed: It is just good general business practice to make such projections for internal corporate use. There is no evidence, however, that the estimates were made with such reasonable certainty even to allow them to be disclosed to the public. Vaughn, 628 F.2d at 1221 (emphasis in original). 40 There is no evidence from which a reasonable jury could infer that disclosure of the $1.47 projection in the Financial Plan would have seriously undermined Nakao's $2.10 projection and reduced Adobe's stock price. The facts show the Plan estimate was completely uncertain: it had been historically inaccurate by 50%, it was 50% off by the end of the first quarter, and ended up 25% off by the end of fiscal 1990. 41 Attempting to rebut the uncertainty argument, the plaintiff points to evidence showing that the 1990 Financial Plan was carefully prepared, had been approved by the Board of Directors, had a relatively small contingency reserve compared to previous years, and was the first annual plan under Adobe's new management team. The defendants dispute the meaning of some of this evidence, but this dispute does not create a genuine issue of material fact. The evidence proffered by the plaintiff only shows that the 1990 plan was not as conservative as previous years, not that the market would have used it to discount Nakao's $2.10 projection per share estimate. 42 b. As his next challenge to the $2.10 projection, the plaintiff contends that at the time it was made, Adobe's largest customer, Apple, was demanding lower royalty rates, thereby rendering revenue amounts from Apple highly uncertain. We have consistently rejected similar arguments. In Apple Computer, we held that the defendants' knowledge of facts showing that the company's prospects were uncertain ... [was] insufficient to support liability as a matter of law. 886 F.2d at 1117 (emphasis added). In Hanon, we held that [d]iscussion among management staff regarding potential action to be taken sometime in the distant future is not an item appropriately made a part of public disclosure because of its speculativeness. Hanon, 976 F.2d at 506. Within the constraints imposed by Basic Inc. v. Levinson, 485 U.S. 224 (1988) (disclosure of merger negotiations), highly speculative discussions among companies are also not appropriate for disclosure. Cf. id. at 232 n. 9 (declining to address other kinds of contingent or speculative information, such as earnings forecasts or predictions.) 43 The fact that Apple was demanding lower royalty rates does not necessarily mean that Adobe's earnings would be lower. For example, a royalty reduction might be offset by increased sales. Further, there is no evidence that either Adobe or Apple believed the royalty reduction would actually happen, either in fiscal 1990, in which Apple was contractually bound to continue to pay the rate prevailing on March 20, 1990, or thereafter. This undisclosed fact at most shows some uncertainty of future revenues, which is insufficient to meet the third Apple condition. See 886 F.2d at 1117. 44 c. The plaintiff's third challenge to the $2.10 per share estimate is that the defendants knew that Q2 revenues from two of Adobe's OEMs would be significantly under the 1990 Financial Plan projections, and failed to disclose these projections or the shortfall. The evidence shows that Adobe knew in November that NEC was replacing its old PostScript laser printer with a new model in March and that there were serious concerns about the market competitiveness of the new model. Further, Adobe knew by February 26, 1990 that NEC laser printer sales had declined 22% from Q1. Adobe also knew when it prepared its 1990 Plan that sales of IBM's PostScript laser printers would be lower in Q2 because IBM was introducing a new PostScript laser printer in the spring of 1990. 45 None of these facts seriously undermines the accuracy of the $2.10 prediction. They only pertain to a shortfall in Q2. Even given the undisclosed Q2 shortfall, Adobe's annual revenues from IBM and NEC could still have reached the necessary level to support the predicted $2.10 figure. Further, Adobe's overall revenues would not have suffered had competitors of IBM and NEC sold more PostScript-based products in Q2 or later. Sales by other OEMs had covered shortfalls in predicted revenue in prior years. On March 20, Adobe had no way of knowing that this wouldn't happen again. Lower than anticipated sales in a small percentage of Adobe's business in one quarter does not tend to seriously undermine the accuracy of a prediction that pertains to earnings from all revenue sources for the entire fiscal year. 46 d. The plaintiff's fourth challenge to the $2.10 estimate is that HP's shipments of PostScript products were delayed. This contention lacks merit. Although Adobe knew and did not disclose that Q2 revenues from HP would be lower than expected because introduction of HP's new PostScript cartridge had been delayed, the strong possibility that the revenues would come later in the year means that this undisclosed fact did not tend to seriously undermine the Nakao $2.10 estimate. 47 e. In support of his fifth challenge to the $2.10 estimate, the plaintiff contends that the fact top executives of Adobe were selling huge blocks of stock during the class period tends seriously to undermine the accuracy of Nakao's prediction. 48 This contention conflates the false representation and scienter elements of the plaintiff's case. The undisclosed fact that insiders were selling large blocks of stock is material evidence of scienter. [I]nsider trading in suspicious amounts or at suspicious times is probative of bad faith and scienter. Apple Computer, 886 F.2d at 1117. However, before the element of scienter becomes relevant, the plaitniff must establish that the defendant made an untrue statement of a material fact or [omitted] to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading. 17 C.F.R. Sec. 240.10(b)-5. As we have previously stated, the defendants did not make or omit such a statement.