In re Resideo Techs., Inc. Sec. Litig., Case No. 19-cv-2863 (WMW/KMM)

In re Resideo Technologies, Inc., Securities Litigation

Case No. 19-cv-2863 (WMW/KMM)

UNITED STATES DISTRICT COURT DISTRICT OF MINNESOTA

March 30, 2021

ORDER

This securities-litigation matter is before the Court on Defendants' motion to dismiss and Defendants' motion requesting judicial notice. (Dkts. 69, 74.) For the reasons addressed below, Defendants' motion requesting judicial notice is granted in part and denied in part and Defendants' motion to dismiss is denied.

BACKGROUND

Plaintiffs in this putative class-action lawsuit are investment management companies, investment funds and a pension plan that purchased Defendant Resideo Technologies, Inc.'s (Resideo) stock between October 29, 2018, and November 6, 2019 (class period).¹

Defendant Resideo, a Delaware corporation with its principal place of business in Austin, Texas, was incorporated on April 24, 2018 and became an independently traded company on October 29, 2018. Resideo's common stock trades on the New York Stock Exchange. Defendants Michael G. Nefkens, Joseph D. Ragan III and Niccolo de Masi were Resideo executives during the class period.

This lawsuit arises from the October 2018 spin-off of Resideo from Honeywell International Inc. (Honeywell), which is not a party to this lawsuit. The amended complaint alleges that Honeywell spun off Resideo to offload billions of dollars of liabilities and failing business lines onto shareholders. Plaintiffs allege that, during the class period, Defendants materially misled investors in a series of public statements that concealed the shortcomings of Resideo's products and internal operations.

On October 10, 2017, Honeywell announced its intent to spin off portions of its Homes and Global Distribution business into an entity known as "Resideo." Resideo includes product lines from various Honeywell divisions. In an October 10, 2018 Form 8-K filed with the Securities and Exchange Commission (SEC), Resideo's 2019 revenue was projected to be $500 million in adjusted earnings before income tax, depreciation and amortization (EBITDA). Resideo later filed an SEC Form 10-K in March 2019, in which Resideo listed risk factors for its future business and noted that its performance as asubsidiary under Honeywell may not be representative of its performance after becoming an independent company.

On October 29, 2018, the first day of the class period, Resideo became an independent company as a result of a corporate spin-off by Honeywell. On that day, Resideo commenced regular trading on the New York Stock Exchange at $28 per share. During the next several fiscal quarters, Resideo's stock declined. In March 2019, Resideo lowered its projected full-year 2019 EBITDA guidance from $500 million to a range of $410 million to $430 million. In October 2019, Resideo again lowered its projected 2019 EBITDA guidance from a range of $410 million to $430 million to a range of $330 million to $350 million.

On or about November 6, 2019, the last day of the class period, Resideo acknowledged a list of factors that contributed to its underperformance. Plaintiffs allege that these factors either were known to Defendants before the spin-off or directly contradict statements that Resideo executives made to the public during the class period. Resideo's stock closed at $10.02 per share on November 6, 2019. Plaintiffs allege that Defendants' corrective disclosures during the class period caused the Resideo stock price to drop by $12.16 per share, which cost investors more than $1.3 billion dollars. Honeywell's stock price during the class period grew by more than 32 percent.

Plaintiffs commenced several putative class-action lawsuits in late 2019 and early 2020. On January 27, 2020, the Court consolidated Plaintiffs' lawsuits and appointed "Lead Plaintiffs" in the instant consolidated action. On April 10, 2020, Plaintiffs filed thenow-operative consolidated amended complaint in this action on behalf of a class of individuals and organizations that owned or obtained Resideo stock during the class period.

Plaintiffs' amended complaint alleges two counts. Count I alleges that Defendants made false statements or omissions of material fact that deceived Plaintiffs, in violation of Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act), 15 U.S.C. § 78j(b), and SEC Rule 10b-5, 17 C.F.R. § 240.10b-5. Count II, a derivative claim against the individual defendants (Nefkens, Ragan and de Masi), alleges violations of Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a). Defendants move to dismiss with prejudice the amended complaint and seek judicial notice of several exhibits.

ANALYSIS

A complaint must allege sufficient facts such that, when accepted as true, a facially plausible claim for relief is stated. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009); Fed. R. Civ. P. 12(b)(6). When applying this pleading standard, a district court accepts as true the factual allegations in the complaint and draws all reasonable inferences in the plaintiffs' favor. Blankenship v. USA Truck, Inc., 601 F.3d 852, 853 (8th Cir. 2010). The factual allegations must be sufficient to "raise a right to relief above the speculative level," and they must "state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 570 (2007). Legal conclusions that are couched as factual allegations may be disregarded by the district court. See Iqbal, 556 U.S. at 678.

I. Motion for Judicial Notice

As a threshold matter, Defendants seek judicial notice of certain documents attached as exhibits to the declaration of Charles D. Cording (Cording Declaration). When ruling on a motion to dismiss, a court ordinarily limits its consideration to the allegations in the complaint. See BJC Health Sys. v. Columbia Cas. Co., 348 F.3d 685, 687-88 (8th Cir. 2003). However, there are two exceptions to this rule: (1) the incorporation-by-reference doctrine and (2) judicial notice under Federal Rule of Evidence 201.²

Incorporation by reference is a judicially created doctrine that treats certain documents "as though they are part of the complaint itself."! Khoja v. Orexigen Therapeutics, Inc., 899 F.3d 988, 1002 (9th Cir. 2018). This doctrine seeks to prevent plaintiffs from selectively excerpting documents in a manner that supports their claims, while omitting those portions that weaken or defeat their claims. Id. When applying the incorporation-by-reference doctrine, a court is not limited to the four corners of the complaint and may consider "materials that are necessarily embraced by the pleadings and exhibits attached to the complaint." Mattes v. ABC Plastics, Inc., 323 F.3d 695, 697 n.4 (8th Cir. 2003). A mere mention of a document in a complaint is insufficient to warrant incorporation by reference. Khoja, 899 F.3d at 1002. Rather, the complaint must necessarily embrace the document such that it forms the basis of the plaintiff's claim. Id.

Federal Rule of Evidence 201 provides the second exception that permits courts to consider facts outside the complaint. Rule 201 permits a court to take judicial notice of a fact if it is "not subject to reasonable dispute because it: (1) is generally known within the trial court's territorial jurisdiction; or (2) can be accurately and readily determined from sources whose accuracy cannot reasonably be questioned." Fed. R. Evid. 201(b). On a motion to dismiss, it is improper for a court to take judicial notice of disputed facts, as a "high degree of indisputability is the essential prerequisite" for taking judicial notice under Rule 201. Fed. R. Evid. 201 advisory committee's note (1972); accord Khoja, 899 F.3d at 1000.

Defendants seek the Court's judicial notice of exhibits attached to the Cording Declaration. Because many of the exhibits are neither public records nor embraced by the amended complaint, Plaintiffs argue that judicial notice is not appropriate. Plaintiffs concede, however, that some of the documents are incorporated by reference in the amended complaint and, therefore, are appropriate for judicial notice.³ The Court takes judicial notice of Exhibits A, I, O, Q, R, W, Y, BB, EE, FF and HH, which are exhibits that Resideo filed with the SEC or other publicly available call transcripts, press releases and presentation materials, because these exhibits are beyond reasonable dispute and can beaccurately and readily determined from sources whose accuracy cannot reasonably be questioned. See Fed. R. Evid. 201.

The Court declines to take judicial notice of the remaining twenty-four exhibits attached to the Cording Declaration, because the parties dispute the relevance and accuracy of these exhibits, and these exhibits are not needed to address Defendants' motion to dismiss. Moreover, the Court declines to take judicial notice of these twenty-four exhibits under the incorporation-by-reference doctrine because the amended complaint does not "necessarily embrace" these exhibits. Mattes, 323 F.3d at 697 n.4; see also Khoja, 899 F.3d at 1002.

In summary, the Court grants in part and denies in part Defendants' motion for judicial notice. The Court takes judicial notice of Exhibits A, I, O, Q, R, W, Y, BB, EE, FF and HH. Defendants' motion for judicial notice is denied as to the remaining exhibits attached to the Cording Declaration.

II. Motion to Dismiss

The Private Securities Litigation Reform Act (PSLRA) applies heightened pleading standards to securities claims, including those arising under the Exchange Act. See 15 U.S.C. § 78u-4(b); accord In re Hutchinson Tech., Inc. Sec. Litig., 536 F.3d 952, 958 (8th Cir. 2008). The PSLRA establishes higher pleading standards for two aspects of Exchange Act claims. The complaint must "state with particularity both the facts constituting the alleged violation, and the facts evidencing scienter, i.e., the defendant's intention 'todeceive, manipulate, or defraud.' " Tellabs, Inc. v. Makor Issues & Rts., Ltd., 551 U.S. 308, 313 (2007) (quoting Ernst & Ernst v. Hochfelder, 425 U.S....