Kipling v. Flex Ltd.

ORDER GRANTING DEFENDANTS' MOTION TO DISMISS WITH PREJUDICE

Re: Dkt. No. 128

Lead Plaintiff National Elevator Industry Pension Fund ("Plaintiff" or "National Elevator"), individually and on behalf of all other persons similarly situated, alleges that Defendants Flex Ltd. ("Flex"), Michael M. McNamara, Christopher E. Collier, Michael C. Dennison, and Kevin Kessel (collectively, "Defendants") violated federal securities laws. Before the Court is Defendants' motion to dismiss the amended consolidated class action complaint. ECF No. 141 ("Mot." or "motion to dismiss"). Having considered the parties' briefing, the relevant law, and the record in this case, the Court GRANTS Defendants' motion to dismiss with prejudice.

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I. BACKGROUND

A. Factual Background

1. The Parties

Plaintiff National Elevator is a multiemployer pension plan as defined in sections 3(2)(A) and 3(37) of the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. §§ 1002(2)(A) and 1002(37). Am. Consolidated Class Action Compl. ¶ 35, ECF No. 140 ("AC" or "Amended Complaint"). Plaintiff purchased Flex securities and was allegedly damaged by Defendants' misrepresentations and omissions. Id. Plaintiff seeks to represent a class "of all persons and entities who, during the period from January 26, 2017 to October 25, 2018, inclusive (the 'Class Period'), purchased the publicly traded common stock of Flex Ltd." Id. at 1.

Defendant Flex is incorporated in Singapore and maintains offices in San Jose, California. Id. ¶ 36. Flex's common stock trades on the NASDAQ Stock Market under the ticker symbol "FLEX." Id. Defendant Michael M. McNamara ("McNamara") served as the CEO of Flex and a member of its Board of Directors until December 31, 2018. Id. ¶ 37. Defendant Christopher E. Collier ("Collier") serves as the CFO of Flex. Id. ¶ 38.¹ Defendant Kevin Kessel ("Kessel") serves as the Vice President of Investor Relations and Corporate Communications of Flex. Id. ¶ 39. Defendant Michael C. Dennison ("Dennison") served as the President of Flex's Consumer Technology Group ("CTG"). Id. ¶ 40. Defendant Dennison's employment with Flex ended in approximately July or August 2018. Id.

2. Flex's Business

Plaintiff alleges Flex is a design, engineering, manufacturing, and supply chain firm, though Plaintiff contends that Flex is and always was principally in the business of electronics manufacturing services. Id. ¶¶ 48, 49. Plaintiff alleges that Flex is divided into four business segments: Consumer Technologies Group ("CTG"), which includes consumer-related businesses

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in connected living, wearables, gaming, augmented and virtual reality, fashion, and mobile devices; Communications & Enterprise Compute ("CEC"), which includes Flex's telecom, networking, and server and storage business; Industrial & Emerging Industries ("IEI"), which includes Flex's energy and metering, semiconductor tools and capital equipment, office solutions, household industrial and lifestyle, industrial automation and kiosks, and lighting businesses; and High Reliability Solutions ("HRS"), which includes Flex's medical, automotive and defense and aerospace businesses. Id. ¶ 50.

At some point in 2015, in an effort to expand its business beyond electronic manufacturing, Flex rebranded from "Flextronics International" to its current name, Flex. Id. ¶ 52. Flex also embraced a strategy that Flex dubbed "Sketch-to-Scale," a term that Flex trademarked. Id. Under the Sketch-to-Scale strategy, Flex provides its own in-house design engineers to customers with a view towards helping take a product idea or concept ("sketch") to a final manufactured product ("scale"). Id. ¶ 53. This process purportedly allows Flex to become involved in designing and incorporating product specifications that are tailored to Flex's established manufacturing and supply chain operations which then allows Flex to manufacture and ship the product more efficiently (and ostensibly generate more profits for Flex and its customers). Id.

3. The Nike Contract

In October 2015, Flex announced that it had entered into a contract with Nike to manufacture shoes (the "Nike contract"). Id. ¶ 56. Plaintiff alleges that this effort was part of Nike's larger push to create regional manufacturing centers in order to permit Nike to more rapidly move from shoe design to sale. Id. Nike also sought to lower required inventory levels and reduce the amount of scrap produced by the manufacturing process. Id.

Flex agreed to craft a state-of-the-art, custom-built factory in Guadalajara, Mexico that would more efficiently automate the production cycle for Nike shoes. Id. ¶ 57. In the meantime, before the new factory was built, Flex used existing electronics manufacturing facilities in Guadalajara to produce Nike shoes. Id. The CTG segment of Flex was tasked with managing the Nike contract.

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Plaintiff alleges that on January 26, 2017, the first day of the Class Period, Defendant McNamara informed investors that Flex "expect[ed] to see revenue grow pretty linearly over the next year." Id. ¶ 66. Plaintiff also alleges that Defendants repeatedly informed investors that the Nike contract would cross into profitability (or "break-even") by the close of fiscal year 2018, i.e. March 2018.² Id.

However, Plaintiff contends that the Nike contract was in fact in disarray "due to a myriad of manufacturing issues that were materially impacting Flex's ability to manufacture enough shoes to come close to being on a trajectory to breakeven." Id. ¶ 70. Plaintiff relies on seven confidential witnesses ("CWs"), each of whom is alleged to have been an employee of Flex, to outline these manufacturing issues.

According to the CWs, Flex was unable to meet "production targets" contemplated by the Nike contract because, among other things: (1) the shoes that Flex manufactured had a higher return rate than projected, id. ¶ 75; (2) Flex did not have sufficient raw materials, id. ¶ 87; (3) Flex was forced to scrap product that did not meet Nike's standards, id. ¶¶ 74, 82, 85; and (4) Flex employees were trained in electronics, not shoe manufacturing, id. ¶ 88.

As to the first point, CW3 stated that colleagues "in engineering and other departments" told her that "Nike had planned to accept 5% returns but in reality Flex was generating 15-20% returns." Id. ¶ 75. CW3 herself did not see this missed forecast. Nor does CW3 specify when she heard about the missed forecast from colleagues. Rather, CW3 left Flex a year before the class period ended. See id. ¶ 43 (stating that CW3 ended her position in October 2017).

As to the second point, CW1 indicated that Flex faced "operational problems with suppliers of raw materials who were located in Asia." Id. ¶ 87. According to CW1, "due to the lead time, travel time and additional time for other issues that could arise, Flex lost flexibility when raw material orders were canceled or changed." Id.

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As to the third point, CW5 explained that Nike classified shoes produced by Flex as belonging to "A" class, "B" class, or "C" class. Id. ¶ 83. CW5 asserted that pursuant to the contract with Flex, Nike purchased "A" shoes as well as "a small percentage of B shoes to be sold at outlet stores." Id. CW5 claimed that pursuant to the Nike contract, Flex was expected to manufacture 60,000 shoes a day, "most of them being 'A' quality and a few of 'B' quality, which Nike would buy for sale in discount outlets." Id. ¶ 84. However, Flex "never produced more than 20,000 Class A sneakers per day." Id. Flex was required to "'eat' all of the scrap (i.e., 'C' quality sneakers and excess 'B' quality sneakers not bought by Nike)." Id.

As to the fourth point, CW1 indicated that "the people initially hired to work on the Nike project in Guadalajara did not have the right skills or abilities." Id. ¶ 88. CW1 opined that "this impacted Flex's ability to operate the Guadalajara factory at full capacity or meet projections." Id. CW3 specifically alleged that middle management was unqualified. Id. CW7 "heard from her colleagues" allegations similar to CW1's allegations. Id. ¶ 89.

In July 2017, Defendants "partially disclosed the existence of some manufacturing issues." Id. ¶ 88. Despite these issues, Defendants repeatedly predicted that the Nike contract would cross into profitability by the end of March 2018. Id. ¶¶ 96, 103. Defendants asserted that preparation of the new Guadalajara factory was responsible for increased investment costs, but Defendants also indicated that the transition of operations into that new factory would permit the Nike contract to meet the March 2018 target for profitability. Id. ¶¶ 92, 93.

On October 26, 2017, Defendant McNamara announced that the transition of operations related to the Nike contract into the new Guadalajara factory was "substantially complete." Id. ¶ 95. For the next few months, into January 2018, Defendants continued to maintain that the end of March 2018 represented the "target" for profitability of the Nike contract. Id. ¶ 100. However, according to Plaintiff, "the very same manufacturing issues that plagued the Nike contract from the start of the Nike contract continued to prevent Flex from hitting the production targets required to remain on the trajectory to breakeven." Id. ¶ 105.

On April 26, 2018, Defendant McNamara announced that the Nike contract had not in fact

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reached profitability by the end of March 2018. Id. ¶ 109. However, Defendant McNamara indicated that the Nike contract would become profitable in the "near future," and set the updated break-even timeframe at some point in the second half of the 2019 fiscal year. Id. Defendant McNamara indicated that new "design content" from Nike had been needed to achieve profitability, but that "the purported design content problem was resolved." Id. ¶...