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Smilovits v. First Solar Inc.

United States District Court, D. Arizona

December 17, 2019

Mark Smilovits, individually and on behalf of all others similarly situated, Plaintiffs,
First Solar, Inc.; Michael J. Ahearn; Robert J. Gillette; Mark R. Widmar; Jens Meyerhoff; James Zhu; Bruce Sohn; and David Eaglesham, Defendants.



         This securities fraud class action is set for trial in January 2020. The parties have filed nine motions to exclude expert testimony under Federal Rule of Evidence 702 and Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993). The motions are fully briefed. No party requests oral argument or a Daubert hearing. This order addresses six of the motions. The Court will address the remaining motions in a separate order.

         I. Background.

         Defendant First Solar, Inc. produces photovoltaic solar panel modules. Its stock is publicly traded on the NASDAQ stock exchange. Plaintiffs purchased First Solar stock between April 30, 2008 and February 28, 2012 (the “Class Period”). See Doc. 171 at 22.[1] The Individual Defendants are First Solar officers and executives who purchased or sold First Solar stock during the Class Period while allegedly concealing information from the market about manufacturing and design defects causing faster power loss in certain modules.[2]

         Steep declines in First Solar's stock price, beginning on July 29, 2010, followed the departure of First Solar's CEO, disappointing financial results, and the release of quarterly financial disclosures reporting the product defects. See Doc. 401 at 7-8. First Solar's stock fell from nearly $300 per share to less than $50 per share during the Class Period. See Id. at 2.

         Plaintiffs allege that Defendants engaged in several acts of fraud during the Class Period, including concealing the product defects, misrepresenting the cost and scope of the defects, and reporting false information on financial statements. Doc. 93 at 7-20. Plaintiffs further allege that when First Solar later disclosed the product defects and attendant financial liabilities to the market, the stock price fell, causing economic loss to Plaintiffs. Id. at 124-41.

         Plaintiffs assert violations of §§ 10(b) and 20(a) of the Securities Exchange Act of 1934 and Securities Exchange Commission (“SEC”) Rule 10b-5. Id. at 135-36. Section 10(b) “makes it unlawful to ‘use or employ, in connection with the purchase or sale of any security[, ] . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [SEC] may prescribe.'” In re Oracle Corp. Sec. Litig., 627 F.3d 376, 387 (9th Cir. 2010) (quoting 15 U.S.C. § 78j(b)). Rule 10b-5 forbids, in connection with the purchase or sale of a security, “the making of any ‘untrue statement of a material fact' or the omission of any material fact ‘necessary in order to make the statements made . . . not misleading.'” Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 341 (2005) (quoting 17 C.F.R. § 240.10b-5). The scope of Rule 10b-5 is coextensive with that of § 10(b). See Oracle, 627 F.3d at 387; Stoneridge Inv. Partners, LLC v. Sci.-Atlanta, Inc., 552 U.S. 148, 157 (2008). To establish a violation of § 10(b) and Rule 10b-5, “a plaintiff must prove (1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation.” Stoneridge, 552 U.S. at 157.

         Plaintiffs claim that the Individual Defendants are liable for the alleged § 10(b) and Rule 10b-5 violations as “controlling persons” under § 20(a). Doc. 93 at 136, ¶¶ 257-58. To establish a claim under § 20(a), a plaintiff must first prove a primary violation of § 10(b) or Rule 10b-5 and then show that the defendant exercised actual power over the primary violator. See In re NVIDIA Corp. Secs. Litig., 768 F.3d 1046, 1052 (9th Cir. 2014).[3]

         II. Rule 702 and Daubert Standards.

         Under Rule 702, an expert may offer “scientific, technical, or other specialized knowledge” if it “will assist the trier of fact to understand the evidence, ” provided the testimony rests on “sufficient facts or data” and “reliable principles and methods, ” and “the witness has reliably applied the principles and methods to the facts of the case.” Fed.R.Evid. 702(a)-(d). The proponent of expert testimony has the ultimate burden of showing, by a preponderance of the evidence, that the proposed testimony is admissible under Rule 702. See Cooper v. Brown, 510 F.3d 870, 942 (9th Cir. 2007); Fed.R.Evid. 104(a). The trial court acts as a gatekeeper for expert testimony to assure that it “both rests on a reliable foundation and is relevant to the task at hand.” Daubert, 509 U.S. at 597; see Davis v. McKesson Corp., No. CV-18-1157-PHX-DGC, 2019 WL 3532179, at *3-4 (D. Ariz. Aug. 2, 2019).

         III. Defendants' Motion to Exclude Davisson's Testimony (Docs. 528, 631).

         Plaintiffs retained Valerie Davisson, a former securities analyst, to opine on several issues related to non-public information First Solar purportedly failed to disclose to investors and analysts. See Doc. 528-1 at 6. Davisson was asked to opine about: (1) the role of securities analysts with respect to publicly traded companies; (2) the state of the solar panel market and the challenges First Solar faced during the Class Period; (3) the importance of cost per watt, efficiency, product quality, product reliability, and warranty to market participants considering making an investment in First Solar; and (4) whether and how the allegedly concealed information would have materially altered analysts' ability to assess First Solar's stock value. Id. at 6-7. Davisson's opinions on these topics, and her qualifications and methodology, are set forth in a 75-page report. Id. at 2-80.

         Defendants move to exclude all of Davisson's opinions. Docs. 528 (sealed lodged motion), 631 (redacted public version). Defendants argue that Davisson has no expertise in the solar industry, that she employs no reliable method in reaching her opinions, that her testimony would confuse the jury, and that she offers impermissible legal conclusions about materiality. Id. at 5-6. The Court will address each argument.

         A. Davisson's Expertise.

         Defendants assert that Davisson has no expertise in the solar industry. Doc. 528 at 5, 10-11. In support of this argument, Defendants purport to rely on Davisson's own testimony that stock analysts typically specialize by industry. Id. at 12. But Davisson testified that sell-side analysts specialize by industry, and that she was a buy-side analyst. Doc. 528-4 at 16. Defendants do not address this distinction, and do not cite any other source for their assertion that Davisson must have solar industry expertise to render her expert opinions. Doc. 528 at 12.[4]

         From this evidence, the Court cannot conclude that solar industry expertise is necessary for the opinions Davisson offers about the market effects of Defendants' alleged misrepresentations. She worked for more than ten years as a securities portfolio manager. Doc. 528-1 at 8. As a buy-side analyst, Davisson recommended the purchase of stocks for large institutional clients. Id. She assessed and predicted market dynamics, opined on management credibility, forecasted earnings, and valued stocks. Id. She interviewed more than 500 management teams, participated in thousands of earnings conference calls, and attended hundreds of investor conferences. Id. As a sell-side analyst, Davisson performed industry research and in-depth analysis, wrote research reports, and modeled company financials to establish a price target and allow valuation comparisons between companies. Id. at 9. Davisson also spent ten years at large publicly traded manufacturing companies, where her job entailed understanding quarterly earnings forecasts and performing quarterly variance analyses used by investor relations departments. Id. She attended St. Louis University, earning Bachelor of Science in Business Administration and Master of Accounting degrees. Id. She was a certified public accountant in Arizona from 1994 to 2001. Id.

         Davisson also served as the chief financial officer of the solar company PosiGen from 2014 to 2015. Doc. 528-1 at 7-8, 528-4 at 22. As a member of PosiGen's executive team, Davisson was heavily involved in each department, including the company's technology department. Doc. 528-4 at 23. Defendants note that PosiGen is a residential solar company, but do not explain why Davisson's position at PosiGen “did not provide her with any relevant expertise” in the industry. Doc. 528 at 11.

         In moving to exclude Defendants' rebuttal expert, Dr. Varun Sivaram, Plaintiffs explain that Davisson's opinions about the state of the solar panel market and the challenges First Solar faced as a public company (see Doc. 528-1 at 11-29) are based on her expertise in financial analysis, including predicting market dynamics, evaluating management credibility, forecasting earnings, and valuing stocks. Docs. 472, 488 at 14. Plaintiffs concede that Davisson is not an expert on solar technology or manufacturing and avow that she will offer no opinions on these topics. Id. at 6, 14; see Doc. 528-3 at 7-8 (Davisson explaining that she does “not offer any technical opinions in this case”).[5]

         Rule 702 “contemplates a broad conception of expert qualifications.” Thomas v. Newton Int'l Enters., 42 F.3d 1266, 1269 (9th Cir. 1994). “As the terms of the rule state, an expert may be qualified either by ‘knowledge, skill, experience, training, or education.'” Id. Davisson's substantial knowledge and experience as a securities analyst, coupled with her experience in manufacturing and her exposure to the solar industry, are sufficient to qualify her to opine about the role of securities analysts and the effect the allegedly concealed information had on analysts' ability to assess the true value of First Solar stock. See Doc. 528-1 at 7-11 (Davisson's qualifications and summary of opinions); see also Hangarter v. Provident Life & Accident Ins. Co., 373 F.3d 998, 1016 (9th Cir. 2004) (“Given Caliri's significant knowledge of and experience within the insurance industry, the district court did not abuse its discretion in concluding that he was qualified to testify as an expert witness.”); GSI Tech., Inc. v. Cypress Semiconductor Corp., No. 5:11-CV-03613-EJD, 2015 WL 364796, at *2 (N.D. Cal. Jan. 27, 2015) (collecting cases where “testimony grounded on the expert's personal knowledge and experience was admissible in light of his background in the area”); Donahoe v. Arpaio, No. CV-10-02756-PHX-NVW, 2013 WL 12419625, at *2 (D. Ariz. Sept. 20, 2013) (“Like Hangarter, [the expert's] opinions rest on personal experiences derived from fifty-plus years involved directly and indirectly in law enforcement and the knowledge accumulated therefrom.”).

         Defendants specifically challenge Davisson's opinion that analysts would have wanted to know about the “inverse relationship between STBi and module efficiencies.” Doc. 528 at 12-13 (quoting Doc. 528-1 at 11). Davisson explained in her deposition that internal First Solar documents confirm such an inverse relationship. Doc. 528-4 at 32; see Doc. 528-3 at 10, 19-20. Defendants are free to disagree with this conclusion, but such disagreements do not render Davisson unqualified to offer opinions in this case. See Alaska Rent-A-Car, Inc. v. Avis Budget Grp., Inc., 738 F.3d 960, 969 (9th Cir. 2013) (explaining that a judge should “not exclude opinions merely because they are impeachable”).

         B. Davisson's Methodology.

         Defendants contend that Davisson identifies no reliable methodology in reaching her opinions. Doc. 528 at 14. The Court does not agree.

         Davisson approached her analysis in this case “in the same way that [she] would have approached First Solar if it were a company [she] covered as a Wall Street analyst.” Doc. 528-1 at 10. Davisson describes her methodology as follows:

I read the Company's public filings, earnings transcripts, analyst reports about the Company, and contextual analyses and information about the solar industry and the Company's competitors. In conducting my analysis, I also reviewed numerous internal documents produced by First Solar to plaintiffs in this case.
I then analyzed the differences between the information about First Solar and the solar industry that was publicly available and the internal information about the Company and the solar industry that was not available to investors, analysts, or anyone in the public. I also conducted my own analyses of the public and nonpublic information.

Id.; see Doc. 528-4 at 8-9 (explaining that her methodology was based in part on her “experience as an equity analyst”). Davisson's opinions about information First Solar concealed from the market and the effect of the concealment on analysts' ability to fairly assess the value of First Solar stock are based on documents she reviewed, her independent analysis, and her knowledge and experience as a securities analyst. Doc. 528-1 at 10-11.

         Plaintiffs have shown, by a preponderance of the evidence, that Davisson employed a reliable methodology in reaching her opinions. See GSI Tech., 2015 WL 364796, at *2 (“Murphy relied on his industry experience to form an opinion. This methodology is proper, thus Murphy's opinion is admissible.”); Bixby v. KBR, Inc., No. 3:09-CV-632-PK, 2012 WL 12952722, at *4 (D. Or. Aug. 29, 2012) (“[W]hen experts employ established methods in their usual manner, a district court need not take issue under Daubert”); Noyes v. Kelly Servs., Inc., No. 2:02-CV-2685-GEB-CMK, 2008 WL 782846, at *2 (E.D. Cal. Mar. 21, 2008) (“[T]he methods described by [the expert] are sufficiently reliable to support his proffered opinions . . . and satisfy the requirement in Rule 703 that data upon which the expert relies be ‘of a type reasonably relied upon by experts in the particular field.'”).

         Defendants assert that Davisson's opinions should be excluded because she uses no “scientific” method. Doc. 528 at 5; see Doc. 652 at 7 (Davisson “employs no testable or replicable methodology”). But the “Daubert factors (peer review, publication, potential error rate, etc.) simply are not applicable to [non-scientific] testimony, whose reliability depends heavily on the knowledge and experience of the expert.” Hangarter, 373 F.3d at 1017; see Fed. R. Evid. 702 advisory committee's notes to 2000 amendments (“In certain fields, experience is the predominant, if not sole, basis for a great deal of reliable expert testimony.”). Under Rule 702 and Daubert, expert testimony “is reliable if the knowledge underlying it has a reliable basis in the knowledge and experience of the relevant discipline.” Primiano v. Cook, 598 F.3d 558, 565 (9th Cir. 2010) (citation omitted).

         Defendants further assert that Davisson ignores a large amount of public information about First Solar that securities analysts would consult, selectively quotes from statements made by stock analysts, and relies on a small subset of documents produced in this litigation. Doc. 528 at 14-15. But unless an expert's opinion lacks enough accurate factual information to provide a reasonable factual foundation, “criticism of an expert's decision to base an opinion on some facts but not others should be challenged through the traditional means at trial, not through a Daubert motion.” IceMOS Tech. Corp. v. Omron Corp., No. CV-17-02575-PHX-JAT, 2019 WL 4750129, at *9 (D. Ariz. Sept. 30, 2019). The Court finds that Davisson's opinions are based on a sufficient factual foundation to satisfy Rule 702(b). Defendants' factual arguments are appropriate subjects for cross-examination, rebuttal expert testimony, and jury argument, but they do not so undercut Davisson's opinions as to render them inadmissible under Rule 702. See id.; In re Citimortgage, Inc. HAMP Litig., No. ML 11-2274 DSF, 2013 WL 8844095, at *3 (C.D. Cal. Oct. 7, 2013) (expert's “failure to deal with the entire universe of documents is not a reason for exclusion”).

         C. Whether Davisson's Testimony Will Confuse or Assist the Jury.

         Defendants argue that Davisson's testimony will confuse the jury because a section of her report “is about 25% ‘opinion' and 75% ‘recitation of facts that she assumed[.]” Doc. 528 at 16 (citing Doc. 528-1 at 52-79). Defendants also cite portions of Davisson's deposition testimony for the proposition that she “has difficulty keeping ‘facts' straight from the ‘opinions[.]'” Id. at 16-17 (citing Doc. 528-4 at 13); see Doc. 652 at 11-12.

         Davisson clearly sets forth the factual bases for her opinions in her report. See Doc. 528-1. The Court assumes she will do so in her testimony, and that Defendants will clarify on cross-examination any factual assumptions they believe are not actual opinions. The Court cannot conclude that the jury will be confused by Davisson's testimony.

         D. ...

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