On March 31, 2023, Judge Edward J. Davila of the United States District Court for the Northern District of California granted a motion to dismiss a putative class action against a semiconductor company (the "Company"), alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5. Specifically, the lawsuit alleged that the Company misled investors about its progress in creating a smaller, 7-nanometer microchip. In re Intel Corp. Sec. Litig., No. 5:20-cv-05194, 2023 WL 2767779 (N.D. Cal., Mar. 31, 2023). The Court granted the Company's motion to dismiss, holding that plaintiffs failed to sufficiently plead falsity and scienter.

The Company designs and manufactures microprocessors and other semiconductor products for use in computers, data center servers, communications devices, and other digital electronic devices. In the semiconductor industry, "the first to develop technology for the next smaller chip size . . . gains a significant advantage and can capture a large majority of the revenues for that chip size." According to plaintiffs, "through 2011 with the release of its 22nm chip," the Company remained well ahead of its competitors. However, beginning in 2018, one of the Company's competitors began developing work on its 7-nanometer chip while the Company was still continuing to work on its 10-nanometer chip. Plaintiffs alleged that, during this increased period of competition, the Company made several misrepresentations about its progress towards the creation of its own smaller, 7-nanometer microchip. Specifically, plaintiffs alleged that the Company made misstatements in its Form 10-K that it was accelerating the pace of production and "on track" to deliver its "first 7nm-based product" at the end of 2021. Plaintiffs also alleged the Company made misstatements about the timeline of production during its earnings calls and conferences, explaining that it would be "ramping up" production and "[felt] very good" about where production was going. Finally, plaintiffs alleged that the Company made misstatements about "lessons learned" from the production of its 10-nanometer microchip during earnings calls and conferences, including that it had learned to "reduce the complexity of its 7nm designs." At the time the Company made these statements, however, plaintiffs alleged that delays were already occurring with the Company's development of its 7-nanometer microchip, leading to the departure of a key engineer in June 2020. In July 2020, the Company announced that its 7-nanometer product schedule was delayed and that the Company had developed a contingency plan to "utilize outside manufacturers to make some of its leading-edge 7nm chips."

The Court found that the Company's representations as to its development timeline were not actionable because they were all protected by the safe harbor provision of the Private Securities Litigation Reform Act ("PSLRA"). In addressing the Company's statement about being "on track" in its Form 10-K, the Court noted that the Company's "unadorned statements" that it would "be able to achieve its objective" were forward-looking because "because they [did] no more than convey that [the Company's] 7nm launch goals [were] achievable under current circumstances." The Court also found that these statements were accompanied by "meaningful cautionary language" as the Form 10-K warned that delays could occur and, in fact, had occurred during the implementation of its 10-nanometer chip.

The Court also found that the Company's statements regarding "lessons learned" were not actionable. The Court held that the majority of these statements were "vague descriptions of [the Company's] general approach to developing its products, not concrete descriptions of past or present." The Court also found that many of these statements were forward-looking and accompanied by cautionary language, and therefore protected under the PSLRA safe harbor.

The Court next addressed plaintiffs' allegations concerning scienter. The Court first held that news articles from 2019 and 2020 that reported on the Company's delays did not support a finding of scienter because they concerned delays with different products and because plaintiffs failed to allege that the delays mentioned in the articles were ever communicated to Company executives. The Court also held that plaintiffs' confidential witness ("CW") allegations did not support "actual knowledge nor deliberate recklessness" because the CW's allegations were not based on firsthand knowledge but rather based on a "chain of hearsay" that was "not sufficiently reliable to credit." The Court next rejected plaintiffs' "core operations" argument that the "7nm process was so important to [the Company] that it would be absurd for [Company executives] to not be aware of delays," because there was no allegation that the Company executives "personally monitored 7nm development" and there were "no particularized details about what information they would have been privy to or why access to that information supports scienter." Finally, the Court conducted "the holistic review required by" the Supreme Court's decision in Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007). The Court noted that the "allegations paint a picture that there were problems with [the Company's] 7nm development, and perhaps, given the importance of 7nm to [the Company], that the [Company's executives] were generally aware that issues existed." However, because the complaint was "lacking allegations describing with particularity the information that [Company's executives] received, or the documents that they had access to, the Court cannot infer that any [Company's executives] knew [the Company] could not meet its 7nm goals or were deliberately reckless in not realizing."

The Court dismissed the action without prejudice and granted plaintiffs leave to file an amended complaint.

In re Intel Corp. Sec. Litig.

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