`
`8/17/2020 3:11 PM
`
`Clerk of Court
`
`Superior Court of CA,
`County of Santa Clara
`200V369387
`
`Reviewed By: R. Walker
`
`Robert V. Prongay (#270796)
`Pavithra Rajesh (#323055)
`GLANCY PRONGAY & MURRAY LLP
`
`1925 Century Park East, Suite 2100
`Los Angeles, California 90067
`Telephone: (310) 201-9150
`Facsimile: (310) 201—9160
`Email: rprongay@glancylaw.com
`Email: prajesh@glancylaw.com
`
`Daniella Quitt
`GLANCY PRONGAY & MURRAY LLP
`
`712 Fifth Avenue
`
`New York, New York 10019
`Telephone: (212) 935-7400
`Email: dquitt@glancylaw.com
`
`Attorneys for PlaintififSteven Hill
`
`SUPERIOR COURT OF THE STATE OF CALIFORNIA
`
`COUNTY OF SANTA CLARA
`
`Case No. 20CV369387
`
`VERIFIED SHAREHOLDER
`DERIVATIVE COMPLAINT
`
`PUBLIC-REDACTS MATERIALS FROM
`
`CONDITIONALLY SEALED RECORD
`
`STEVEN HILL, Derivatively on Behalf of
`Nominal Defendant APPLE INC.,
`
`Plaintiff,
`
`V.
`
`
`
`TIMOTHY D. COOK, LUCA MAESTRI,
`CRAIG FEDERIGHI, ARTHUR D.
`LEVINSON, ALBERT GORE, JR, ANDREA
`JUNG, JAMES A. BELL, RONALD D.
`SUGAR, ROBERT A. IGER, and SUSAN L.
`WAGNER,
`
`Defendant,
`
`and
`
`APPLE INC., a California Corporation,
`
`Nominal Defendant.
`
`A \
`
`IO\LII
`
`10
`
`11
`
`12
`
`13
`
`14
`
`15
`
`16
`
`17
`
`18
`
`19
`
`20
`
`21
`
`22
`
`23
`
`24
`
`25
`
`26
`
`27
`
`28
`
`
`
`VERIFIED SHAREHOLDER DERIVATIVE COMPLAINT
`
`
`
`Plaintiff Steven Hill (“Plaintiff”), by and through his undersigned attorneys, brings this
`
`derivative complaint for the benefit of nominal defendant, Apple, Inc. (“Apple” or the “Company”),
`
`against certain members of its Board of Directors (the “Board”) and certain of its executive officers
`
`seeking to remedy defendants’ breaches of fiduciary duties, unjust enrichment abuse of control, and
`
`waste of corporate assets. Plaintiff’ s allegations are based upon his personal knowledge as to
`
`himself and his own acts, and upon information and belief, developed from the investigation and
`
`analysis by Plaintiff’ s counsel, including a review of documents produced in response to a demand
`
`pursuant to California Corporation Code § 1601, as well as a review of publicly available
`
`information,
`
`including filings by Apple with the US. Securities and Exchange Commission
`
`(“SEC”), press releases, news reports, analyst reports, investor conference transcripts, publicly
`
`available filings in lawsuits, and matters of public record.
`
`1
`
`A \
`
`]O\Lll
`
`10
`
`11
`
`12
`
`I.
`
`NATURE AND SUMMARY OF THE ACTION
`
`1.
`
`Apple is a multinational technology company that designs, develops, and sells
`
`consumer electronics, computer software, and online services.
`
`Its most well-known products
`
`include its iPhone smartphones, the iPad tablet computer, the Mac personal computer, the iPod
`
`portable media player, the Apple Watch smartwatch, the Apple TV digital media player, and the
`
`HomePod smart speaker.
`
`2.
`
`Apple’s flagship product is its iPhone, which uses the Company’s iOS operating
`
`system, powering applications including Siri, an intelligent assistant, and Apple Pay, Touch ID, and
`
`Face ID on qualifying devices.
`
`Sales of iPhones generated approximately two-thirds of the
`
`Company’s 2018 revenue.l Since its original launch in 2007 through 2015, the Company released,
`
`on average, one new iPhone model per year. The Company also increased the pricing of its iPhones
`
`from the $99-$399 range maintained through 2013 to a top offering price of $1,449 for the Apple
`
`XS Max with 512 gigabytes in September 2018.
`
`3.
`
`The Company sells its products worldwide, and the Greater China region, which
`
`encompasses China, Hong Kong, and Taiwan, is Apple’s third-largest market after the United States
`
`
`
`1 The Company’s fiscal year ends in September of each calendar year. The Company’s 2018 fiscal
`year began on September 31, 2017 and ended on September 29, 2018.
`
`1 V
`
`ERIFIED SHAREHOLDER DERIVATIVE COMPLAINT
`
`13
`
`14
`
`15
`
`16
`
`17
`
`18
`
`19
`
`20
`
`21
`
`22
`
`23
`
`24
`
`25
`
`26
`
`27
`
`28
`
`
`
`and Europe, accounting for $52 billion in sales in Apple’s fiscal year 2018 or nearly 20% of Apple’s
`
`total FY18 annual sales. However, Apple faces competition from Chinese upstart brands such as
`
`Huawei, Xiaomi and Oppo that offer similar looking all-screen phones for much lower prices. While
`
`iPhone sales revenues increased in China due to outsized price increases, Chinese smartphone
`
`manufacturers launched competing products that were priced lower than Apple’s phones, thereby
`
`decreasing the Company’s market share in the region.
`
`4.
`
`During fiscal 2018, Apple’s sales were impacted by tariffs imposed by the US.
`
`during its ongoing trade dispute with China. Specifically, between April and September 2018, the
`
`Trump administration levied import tariffs between 10% and 25% on billions of dollars of Chinese
`
`products.
`
`5.
`
`In the midst of the ongoing trade war between the United States and China, on
`
`September 12, 2018, Apple introduced three new phones: the iPhone XR, the iPhone XS, and the
`
`iPhone XS Max. Unlike the prior iPhone releases, the 2018 iPhones were not viewed as having
`
`significant technological advances beyond the iPhone X released in late 2017. The iPhone XS and
`
`XS Max that were launched and began shipping in September 2018 featured a Super Retina OLED
`
`display, an all—screen stainless steel and glass design, faster processors and enhanced cameras. The
`
`highest gigabyte version of the iPhone XS Max launched at a price of $1,449 — $300 more than the
`
`2017 highest gigabyte version of the iPhone X.
`
`6.
`
`At the same time, Chinese manufacturers like Huawei, Oppo, and Xiaomi, which
`
`have since commandeered 24.6%, 20.5%, and 13.6% of the Chinese market, respectively, were
`
`slashing Apple’s Chinese market share to 7.5% by offering more innovative features for hundreds
`
`of dollars less per phone. For instance, Huawei’s P20 Pro sells for approximately $800 in China
`
`and Xiaomi’s MIX 28 sells for approximately $500 in China.
`
`7.
`
`The strength of the US. dollar and the high price of iPhones, combined with a
`
`declining Chinese economy, placed the iPhone out of reach of many Chinese consumers who might
`
`otherwise have upgraded — at the same time that many less expensive Chinese smartphones were
`
`flooding the market.
`
`A \
`
`]O\Lll
`
`10
`
`11
`
`12
`
`13
`
`14
`
`15
`
`16
`
`17
`
`18
`
`19
`
`20
`
`21
`
`22
`
`23
`
`24
`
`25
`
`26
`
`27
`
`28
`
`2 V
`
`ERIFIED SHAREHOLDER DERIVATIVE COMPLAINT
`
`
`
`8.
`
`Moreover,
`
`in December 2017, Apple admitted that
`
`it had been intentionally
`
`degrading, or “throttling,” the performance of the batteries in older iPhones Via software “updates,”
`
`which created artificial demand for newer iPhones because consumers thought they needed to
`
`replace outdated, poorly performing devices.
`
`In response to the customer outrage, Apple slashed
`
`the price of its battery replacements from $79 to $29 in January 2018 “for anyone with an iPhone 6
`
`or later whose battery need[ed] to be replaced, available worldwide through December 2018” — right
`
`as Apple would be debuting its three new iPhones.
`
`9.
`
`To mask the declining sales caused the by slowing Chinese economy and the
`
`software upgrades, Defendants caused the Company to issue materially misleading statements
`
`regarding iPhone demand. For example, on November 1, 2018, one—third of the way through its
`
`first quarter 2019, Apple touted that “[o]ver the past
`
`two months,
`
`[it had] delivered huge
`
`advancements for [its] customers through new versions of iPhone, Apple Watch, iPad and Mac as
`
`well as [its] four operating systems,” and that as a result, it had “enter[ed] the holiday season with
`
`[its] strongest lineup of products and services ever.” As a result, Apple expected first quarter 2019
`
`revenue between $89 billion and $93 billion and gross profit margins between 38% and 38.5%.
`
`10.
`
`The same day, defendant Timothy D. Cook (“Cook”) dismissed concerns that the
`
`US. tariffs had impacted iPhone demand in China, assuring that Apple was only “seeing pressure
`
`in markets like Turkey, India, Brazil,
`
`[and] Russia .
`
`.
`
`. where currencies ha[d] weakened.”
`
`Defendant Cook reported, however, “[i]n relation to China specifically, I would not put China in
`
`that category. Our business in China was very strong last quarter. We grew 16%, which we’re very
`
`happy with.
`
`iPhone, in particular, was very strong double-digit growth there.”
`
`11.
`
`At the same time, Apple announced that it would no longer disclose unit sales for
`
`iPhones and other hardware, claiming that these metrics were not relevant to assess the Company’s
`
`performance and assuring that Apple would still experience strong performance. Specifically,
`
`defendant Luca Maestri (“Maestri”) stated that, “[a]s demonstrated by our financial performance in
`
`recent years, the number of units sold in any 90-day period is not necessarily representative of the
`
`underlying strength of our business.”
`
`A \
`
`]O\Lll
`
`10
`
`11
`
`12
`
`13
`
`14
`
`15
`
`16
`
`17
`
`18
`
`19
`
`20
`
`21
`
`22
`
`23
`
`24
`
`25
`
`26
`
`27
`
`28
`
`3 V
`
`ERIFIED SHAREHOLDER DERIVATIVE COMPLAINT
`
`
`
`12.
`
`In reality, the decision not to report unit sales was merely an attempt to conceal that
`
`demand for iPhones was declining. Specifically, Defendants made materially misleading statements
`
`that failed to disclose: (a) that the U.S.-China trade war had negatively impacted demand for iPhones
`
`and Apple’s pricing power in greater China, one of Apple’s most important growth markets; (b) that
`
`the rate at which Apple customers were replacing their batteries in older iPhones rather than
`
`purchasing new iPhones was negatively impacting Apple’s iPhone sales growth; (c) that, as a result
`
`of slowing demand, Apple had slashed production orders from suppliers for the new 2018 iPhone
`
`models and cut prices to reduce inventory; ((1) that unit sales for iPhone and other hardware was
`
`relevant to investors and the Company’s financial performance, and the decision to withhold such
`
`unit sales was designed to and would mask declines in unit sales of the Company’s flagship product;
`
`and (e) that, as a result of the foregoing, Defendants lacked a reasonable basis in fact when issuing
`
`the Company’s revenue outlook for 1Q19 and/or making the related statements concerning demand
`
`for its products, as Apple’s business metrics and financial prospects were not as strong as
`
`Defendants had led the market to believe.
`
`13.
`
`On January 2, 2019, Apple revealed that its iPhone sales had declined, especially in
`
`China, and that the Company missed revenue projections for first quarter 2019 by a whopping $9
`
`billion.
`
`In addition to the U.S.-China trade tensions, the iPhone sales had been impacted by the
`
`price cuts to battery replacements. Among other things, the Company stated that “100 percent of
`
`[its] year—over—year worldwide revenue decline, occurred in Greater China across iPhone, Mac, and
`
`iPad” and that iPhone performance had been impacted by “some customers taking advantage of
`
`significantly reduced pricing for iPhone battery replacements.”
`
`14.
`
`On this news, the Company’s share price fell $15.73, or approximately 10%, to close
`
`at $142.19 per share on January 3, 2019, on unusually heavy trading volume.
`
`A \
`
`]O\Lll
`
`10
`
`11
`
`12
`
`13
`
`14
`
`15
`
`16
`
`17
`
`18
`
`19
`
`20
`
`21
`
`22
`
`23
`
`24
`
`11.
`
`JURISDICTION AND VENUE
`
`15.
`
`This Court has jurisdiction over this action pursuant to the California Constitution,
`
`Art. VI, § 10, as this derivative action is brought pursuant to § 800 of the California Corporation’s
`
`Code to remedy Defendants’ breaches of fiduciary duties.
`
`25
`
`26
`
`27
`
`28
`
`4 V
`
`ERIFIED SHAREHOLDER DERIVATIVE COMPLAINT
`
`
`
`l
`
`16.
`
`The amount
`
`in controversy, exclusive of interests and costs, exceeds the
`
`2 jurisdictional minimum of this Court.
`
`17.
`
`This Court has general jurisdiction over each Defendant who is a resident of
`
`California. Additionally, this Court has specific jurisdiction over each non—resident Defendant
`
`because these Defendants maintain sufficient minimum contacts with California, as directors or
`
`officers of Apple, to render jurisdiction by this Court permissible under traditional notions of fair
`
`play and substantial justice. Because the claims asserted in this Complaint are brought derivatively
`
`on behalf of a Califomia-headquartered corporation, Defendants’ conduct was purposefully directed
`
`at California. Finally, exercising jurisdiction over any non-resident Defendant is reasonable under
`
`3 A \
`
`]O\Lll
`
`10
`
`these circumstances.
`
`11
`
`12
`
`13
`
`14
`
`15
`
`16
`
`18.
`
`Venue is proper in this Court because the Company maintains its primary
`
`headquarters in Santa Clara County, where many of the wrongs described herein took place.
`
`19.
`
`In connection with the acts and conduct alleged herein, Defendants, directly and
`
`indirectly, used the means and instrumentalities of interstate commerce, including, but not limited
`
`to, the United States mails, interstate telephone communications, and the facilities of the national
`
`securities exchanges and markets.
`
`17
`
`III.
`
`PARTIES
`
`18
`
`Plaintiff
`
`19
`
`20
`
`20.
`
`Plaintiff Steven Hill purchased his Apple stock on December 29, 2006 and still
`
`retains his Apple shares. Plaintiff will continue to hold Apple shares throughout the pendency of
`
`21
`
`this action.
`
`22
`
`Nominal Defendant
`
`21.
`
`Nominal Defendant Apple is a California corporation with principal executive
`
`offices located at One Apple Park Way, Cupertino, California. Apple designs, manufactures, and
`
`markets mobile communication and media devices and personal computers, and sells a variety of
`
`related software, services, accessories, and third-party digital content and applications.
`
`23
`
`24
`
`25
`
`26
`
`27
`
`28
`
`5 V
`
`ERIFIED SHAREHOLDER DERIVATIVE COMPLAINT
`
`
`
`Director Defendants
`
`22.
`
`Defendant Timothy D. Cook (“Cook”) is, and was at all relevant times, CEO of the
`
`Company and a member of its Board of Directors (the “Board”).
`
`23.
`
`Defendant Arthur D. Levinson (“Levinson”) is the Company’s Chairman of the
`
`Board and has been since November 2011 and has been a director since August 2000. Defendant
`
`Levinson was also the Company’s co-lead director from 2005 to November 2011. Defendant
`
`Levinson is a member of the Company’s Audit and Finance Committee and has been since at least
`
`January 2017.
`
`24.
`
`Defendant Albert Gore, Jr. (“Gore”) is a director of the Company and has been since
`
`March 2003. Defendant Gore is also a member of the Company’s Nominating and Corporate
`
`Governance (“N&CG Committee”) and has been since at least January 2017.
`
`25.
`
`Defendant Andrea Jung (“Jung”) is a director of the Company and has been since
`
`January 2008. Defendant Jung is also a member of the Company’s N&CG Committee and has been
`
`since at least January 2017.
`
`26.
`
`Defendant James A. Bell (“Bell”) is a director of the Company and has been since
`
`October 2015. Defendant Bell is a member of the Company’s Audit and Finance Committee and
`
`has been since at least January 2017.
`
`27.
`
`Defendant Ronald D. Sugar (“Sugar”) is a director of the Company and has been
`
`since November 2010. Defendant Sugar is the Chair of the Company’s Audit and Finance
`
`Committee and has been since at least January 2017.
`
`28.
`
`Defendant Robert A. Iger (“Iger”) was a director of the Company from November
`
`2011 to September 2019.
`
`29.
`
`Defendant Susan L. Wagner (“Wagner”) is a director of the Company and has been
`
`since July 2014. Defendant Wagner is a member of the Company’s Audit and Finance Committee
`
`and has been since at least January 2017.
`
`30.
`
`Defendants Cook, Levinson, Gore, Jung, Bell, Sugar,
`
`Iger and Wagner are
`
`collectively referred to herein as “Director Defendants.”
`
`A \
`
`]O\Lll
`
`10
`
`11
`
`12
`
`13
`
`14
`
`15
`
`16
`
`17
`
`18
`
`19
`
`20
`
`21
`
`22
`
`23
`
`24
`
`25
`
`26
`
`27
`
`28
`
`6
`VERIFIED SHAREHOLDER DERIVATIVE COMPLAINT
`
`
`
`Officer Defendants
`
`31.
`
`Defendant Luca Maestri (“Maestri”) is the Company’s Senior Vice President and
`
`Chief Financial Officer (“CFO”) and has been since May 2014. Defendant Maestri was also the
`
`Company’s Vice President and Corporate Controller from March 2013 to May 2014.
`
`32.
`
`Defendant Craig Federighi (“Federighi”) is the Company’s Senior Vice President,
`
`Software Engineering and has been since August 2012. Defendant Federighi was also the
`
`Company’s Vice President, Mac OS Engineering from April 2009 to August 2012, and Director of
`
`Engineering from 1997 to February 1999.
`
`33.
`
`34.
`
`Defendants Maestn' and Federighi are herein referred to as the “Officer Defendants.”
`
`The Director Defendants and Officer Defendants are collectively referred to herein
`
`as the “Defendants.”
`
`A \
`
`]O\Lll
`
`10
`
`11
`
`12
`
`IV.
`
`DUTIES OF THE DEFENDANTS
`
`A.
`
`Fiduciary Duties
`
`35.
`
`By reason of their positions as officers, directors, and/or fiduciaries of Apple and
`
`because of their ability to control the business and corporate affairs of Apple, Defendants owed the
`
`Company and its shareholders fiduciary obligations of good faith, loyalty, and candor, and were and
`
`are required to use their utmost ability to control and manage Apple in a fair, just, honest, and
`
`equitable manner. Defendants were and are required to act in furtherance of the best interests of
`
`Apple and its shareholders so as to benefit all shareholders equally, and not in furtherance of their
`
`personal interest or benefit.
`
`36.
`
`Each director and officer of the Company owes to Apple and its shareholders the
`
`fiduciary duty to exercise good faith and diligence in the administration of the affairs of the
`
`Company and in the use and preservation of its property and assets, as well as the highest obligations
`
`of fair dealing. In addition, as officers and/or directors of a publicly held company, Defendants had
`
`a duty to promptly disseminate accurate and truthful information with regard to the Company’s
`
`operations, finances, financial condition, and present and future business prospects so that the
`
`market price of the Company’s stock would be based on truthfiil and accurate information.
`
`13
`
`14
`
`15
`
`16
`
`17
`
`18
`
`19
`
`20
`
`21
`
`22
`
`23
`
`24
`
`25
`
`26
`
`27
`
`28
`
`7 V
`
`ERIFIED SHAREHOLDER DERIVATIVE COMPLAINT
`
`
`
`37.
`
`Defendants, because of their positions of control and authority as directors and/or
`
`officers of Apple, were able to and did, directly and/or indirectly, exercise control over the wrongful
`
`acts complained of herein, as well as the contents of the various public statements issued by the
`
`Company. Because of their advisory, executive, managerial and directorial positions with Apple,
`
`each of the Defendants had access to adverse non-public information about the financial condition,
`
`operations, sales and marketing practices, and improper representations of Apple.
`
`38.
`
`To discharge their duties, the officers and directors of Apple were required to
`
`exercise reasonable and prudent supervision over the management, policies, practices, and controls
`
`of the financial affairs of the Company. By virtue of such duties, the officers and directors of Apple
`
`were required to, among other things:
`
`(a)
`
`Exercise good faith to ensure that the affairs of the Company were conducted
`
`in an efficient, business-like manner so as to make it possible to provide the highest quality
`
`performance of their business;
`
`(b)
`
`Exercise good faith to ensure that the Company was operated in a diligent,
`
`honest, and prudent manner and complied with all applicable federal and state laws, rules,
`
`regulations and requirements, and all contractual obligations, including acting only within the scope
`
`of its legal authority;
`
`(0)
`
`Exercise good faith to ensure that the Company’s communications with the
`
`public and with shareholders are made with due candor in a timely and complete fashion; and
`
`(d)
`
`When put on notice of problems with the Company’s business practices and
`
`operations, exercise good faith in taking appropriate action to correct the misconduct and prevent
`
`A \
`
`]O\Lll
`
`10
`
`11
`
`12
`
`13
`
`14
`
`15
`
`16
`
`17
`
`18
`
`19
`
`20
`
`21
`
`22
`
`its recurrence.
`
`B.
`
`Audit Committee Charter
`
`39.
`
`The Company’s Audit Committee charter provides that the Committee shall assist
`
`the Board with oversight of the Company’s accounting and financial reporting processes and the
`
`audit of the Company’s financial statements.
`
`23
`
`24
`
`25
`
`26
`
`27
`
`28
`
`8 V
`
`ERIFIED SHAREHOLDER DERIVATIVE COMPLAINT
`
`
`
`40.
`
`Specifically, the Audit Committee Charter states in relevant part:
`
`E.
`
`Duties and Responsibilities
`
`The Committee shall:
`
`7%
`
`7%
`
`7%
`
`Financial Reporting
`
`9.
`
`Review with management and the independent auditor:
`
`'
`
`'
`
`-
`
`-
`
`'
`-
`
`-
`
`the Corporation’s annual audited financial statements, and related
`footnotes, and quarterly unaudited financial statements, including the
`disclosures under “Management’s Discussion and Analysis of Financial
`Condition and Results of Operations,” prior to filing the Corporation’s
`Annual Report on Form 10-K and Quarterly Reports on Form lO-Q,
`respectively, with the SEC;
`the independent auditors’ audit of the annual financial statements and
`their report thereon;
`the accompanying management letter and any reports with respect to
`interim periods;
`any material changes to the Corporation’s accounting principles and
`practices used in preparing financial statements to be filed with the SEC;
`any significant changes required in the independent auditors’ audit plan;
`any difficulties or disputes with management encountered during the
`course of the audit; and
`other matters related to the conduct of the audit
`
`that are to be
`
`communicated to the Committee under the auditing standards of the
`Public Company Accounting Oversight Board.
`
`Review with management, the independent auditors, and the Corporation’s
`10.
`counsel, as appropriate, any legal and regulatory matters that may have a material
`impact on the financial statements, related compliance policies, and programs and
`reports received from regulators.
`
`Review and discuss earnings press releases, including the use of non—GAAP
`11.
`financial measures, prior to public disclosure.
`
`Provide a report for inclusion in the Corporation’s proxy statement in
`12.
`accordance with the rules and regulations of the SEC.
`
`Oversee compliance with the requirements of the SEC for disclosure of
`13.
`auditors’ services and audit committee member qualifications and activities.
`
`Discuss with the independent auditors the financial statements and audit
`14.
`findings, including any significant adjustments, managementjudgments and accounting
`estimates, significant new accounting policies and disagreements with management and
`any other matters required to be discussed by Public Company Accounting Oversight
`
`A \
`
`]O\Lll
`
`10
`
`11
`
`12
`
`13
`
`14
`
`15
`
`16
`
`17
`
`18
`
`19
`
`20
`
`21
`
`22
`
`23
`
`24
`
`25
`
`26
`
`27
`
`28
`
`9 V
`
`ERIFIED SHAREHOLDER DERIVATIVE COMPLAINT
`
`
`
`Board Auditing Standard No. 1301 (“Communications with Audit Committees”) and
`Rule 2-07 of SEC Regulation S-X (“Communication with audit committees”), as in
`effect at the time in the case of annual statements, and Statement on Auditing Standards
`No. 100, as in effect at the time in the case of quarterly statements.
`
`Internal Control Over Financial Reporting and Disclosure Controls and
`Procedures
`
`Review the adequacy of the Corporation’s internal control over financial
`15.
`reporting and the disclosure controls and procedures designed to ensure compliance
`with applicable laws and regulations.
`
`Consider and review with the independent auditor and the head ofInternal Audit
`16.
`the adequacy of the Corporation’s internal controls and any related significant findings
`and recommendations of the independent auditor and internal auditors together with
`management’s responses thereto.
`
`Periodically review with management any significant deficiencies or material
`17.
`weaknesses in the design or operation of internal controls over financial reporting, any
`fraud involving any employees who have a significant role in the Corporation’s internal
`control over financial reporting, and any significant changes in internal controls over
`financial reporting or in other factors that could significantly affect internal controls
`over financial reporting, including management’s responses thereto.
`
`Establish procedures for receiving, retaining and treating complaints received
`18.
`by the Corporation regarding accounting, internal accounting controls, or auditing
`matters and procedures for the confidential, anonymous submission by employees of
`concerns regarding questionable accounting or auditing matters.
`
`C.
`
`Nominating and Corporate Governance Committee Charter
`
`41.
`
`Pursuant to the Company’s Nominating and Corporate Governance Committee
`
`(“N&CG”) Charter, the purpose of the N&CG Committee is to: “1. Consider and report periodically
`
`to the Board on matters relating to the identification, selection and qualification of Board members
`
`and candidates nominated to the Board; and 2. Advise and make recommendations to the Board of
`
`Directors with respect to corporate governance matters.”
`
`42.
`
`The duties of the N&CG Committee are, in relevant part:
`
`Monitor compliance with the Guidelines Regarding Director Conflicts of
`8.
`Interest and, as it relates to individual directors, the Corporation’s Business Conduct
`Policy.
`
`Consider matters of corporate governance and periodically review the
`9.
`Corporation’s
`corporate governance policies
`and recommend to the Board
`modifications to the policies as appropriate.
`
`
`10
`VERIFIED SHAREHOLDER DERIVATIVE COMPLAINT
`
`A \
`
`]O\Lll
`
`10
`
`11
`
`12
`
`13
`
`14
`
`15
`
`16
`
`17
`
`18
`
`19
`
`20
`
`21
`
`22
`
`23
`
`24
`
`25
`
`26
`
`27
`
`28
`
`
`
`structure, processes, and membership
`Review the Committee’s charter,
`10.
`requirements and submit any recommended changes to the Board at least once a year.
`
`Review the Corporate Governance Guidelines annually and submit any
`11.
`recommended changes to the Board.
`
`to the Board concerning the Committee’s activities with such
`Report
`12.
`recommendations as the Committee deems appropriate at least once a year.
`
`Perform such other functions as assigned by law, the Corporation’s charter
`13.
`or bylaws, or the Board.
`
`V.
`
`SUBSTANTIVE ALLEGATIONS
`
`A.
`
`Batteries and Processor Chips Were Defective
`
`43.
`
`Apple’s 108 operating software is crucial to its sales. As the Company’s Form 10-
`
`K for fiscal 2016 acknowledges, Apple’s “financial condition and operating results depend
`
`substantially on the Company’s ability to continually improve 108 and iOS devices in order to
`
`maintain their functional and design advantages.” Indeed, the Company has issued many updates
`
`to iOS since the initial sale of each version of the device to date.
`
`44.
`
`The batteries and processor chips that supported Apple’s devices suffered from
`
`defects that shortened the life of the device, and the Company’s constant updates to iOS exacerbated
`
`those defects.
`
`1.
`
`Key Power Components of the Devices
`
`45. With each hardware update, Apple has prioritized designing “thinner” devices that
`
`perform “faster” and “stronger” with “long” battery life, compared to prior versions. However, this
`
`design model places critical limitations on battery size.
`
`46.
`
`The major components are integrated into the device in iPhone 7. The main printed
`
`circuit board (“PCB”), also called the main logic board, is nestled against the battery. The integrated
`
`circuits and other small components comprising the main logic board are the “brain” of the mobile
`
`device and are responsible substantial power usage.2
`
`47.
`
`The back side of the logic board houses, among other things, two power management
`
`integrated circuits (“PMICS”), a primary and a secondary one. The primary PMIC provides a
`
`
`2 Q Novo, The Anatomy of an iPhone 6, https://qnovo.com/anatomy-of—an-iphone/.
`
`l 1
`VERIFIED SHAREHOLDER DERIVATIVE COMPLAINT
`
`10
`
`11
`
`12
`
`13
`
`14
`
`15
`
`16
`
`17
`
`18
`
`19
`
`20
`
`21
`
`22
`
`23
`
`24
`
`25
`
`26
`
`27
`
`28
`
`
`
`number of critical functions such as providing voltage rails to the logic board as well as battery
`
`charging. This is also where the primary battery management functions tend to reside.3
`
`48.
`
`Apple was among the first companies to sell a smartphone with non-user replaceable
`
`lithium—ion batteries.
`
`Indeed, “before the iPhone, cell phones without user—replaceable batteries
`
`were almost unheard of.”4 Special skills and tools, including a pentalobe screwdriver, are required
`
`to replace the lithium-ion batteries in the devices; replacement batteries are not sold directly to
`
`consumers, who pay for the battery and battery installation by a Company representative.
`
`49.
`
`Critically, the batteries used in the devices require careful handling and packaging,
`
`and while rechargeable, there are limits to how often they can be recharged. Lithium—ion batteries
`
`work on ion and electron movement between the positive and negative electrodes. The primary
`
`measure of battery performance is capacity. A lithium-ion battery’s capacity is degraded over time
`
`by discharge/recharge cycles, elevated temperatures, and aging.
`
`50.
`
`The Company represents that its battery is “designed to retain up to 80% of its
`
`original capacity at 500 complete charge cycles,” but this does not convey the rate at which batteries
`
`are able to deliver power after 500 charge cycles.
`
`In truth, the Company’s batteries (as designed)
`
`degraded quickly, such that they were incapable of delivering the power required to run the devices
`
`during the normal life of a lithium-ion battery.
`
`2.
`
`Apple Compounded the Defects by Stressing Device Batteries with
`Power-Hungry Software: iOS Updates
`
`51.
`
`The Company’s battery could not meet the demands of iOS over the life of the
`
`device. Updates to the iOS are pushed directly to customers’ devices through a red signal with a
`
`number in it that notifies users of the existence of an available “software update.” Users can click
`
`the prompt and download the operating system.
`
`52.
`
`It is very difficult, if not impossible, for typical Apple owners to avoid downloading
`
`an iOS update. As one site explains:
`
`
`
`3 Id.
`4 Kyle Wiens, “Apple’s Latest ‘Innovation’ is Turning Planned Obsolescence into Planned Failure,”
`IFixit (Jan. 20, 201 1) (available at https://www.ifixit.com/blo g/ 201 1/01/20/ appleslatestinnovation-
`
`is-tuming-planned-obsolescence-into-planned-failure).
`
`12
`VERIFIED SHAREHOLDER DERIVATIVE COMPLAINT
`
`10
`
`11
`
`12
`
`13
`
`14
`
`15
`
`16
`
`17
`
`18
`
`19
`
`20
`
`21
`
`22
`
`23
`
`24
`
`25
`
`26
`
`27
`
`28
`
`
`
`The bad news is there’s no easy way to stop iOS from repeatedly throwing this alert at
`you .
`.
`.
`.
`
`To encourage people to get on the latest version of iOS, Apple implemented a feature
`called Automatic Downloads. This download updates in the background, and once
`it is downloaded, you are pushed to install it. Apple typically installs the software
`update at night when the iPhone, or iPad, is plugged in and charging.5
`
`53.
`
`Turning off the updates and the daily push notifications requires users to delve deep
`
`into their settings or to forgo WiFi, which ordinary customers would not do.6
`
`3.
`
`The iOS Historical Updates
`
`54.
`
`As to the relevant devices, the earliest operating system is iOS 6, which was released
`
`in Fall 2012 and introduced 200 new features.
`
`55.
`
`On January 28, 2013, Defendants caused the Company to issue a press release,
`
`reporting “Apple Updates iOS to 6.1.” and promising that users could experience “ultrafast wireless
`’5
`
`performance to browse, download and stream content at blazing fast speeds.
`
`Further, the press
`
`release represented that:
`
`iOS 6 is the world’s most advanced mobile operating system, and with nearly 300
`million iPhone, iPad and iPod touch devices on 108 6 in just five months, it may be the
`most popular new version of an OS in history,” said Philip Schiller, Apple’s senior vice
`president ofWorldwide Marketing. “iOS 61 brings LTE support to even more markets
`around the world, so even more users can enjoy ultrafast Safari browsing .
`.
`.
`
`**>l<
`
`Availability
`
`108 6.1 is available as a free software update today. 108 6.1 is compatible with
`iPhone 5, iPhone 48, iPhone 4, iPhone 3GS, iPad (third and fourth generation), iPad
`mini, iPad 2 and iPod touch (fourth and fifth generation).
`
`56.
`
`On June 10, 2013, the Company unveiled iOS 7, which was purportedly “the most
`
`significant iOS update since the original iPhone, featuring a stunning new user interface.” Further,
`
`according to Jony Ive, the Company’s senior vice president of Design, iOS 7 has “a profound and
`
`
`
`5 Lucy Hattersley, “How to Stop iOS Nagging You to Update to the Latest Version,” MacWorld
`
`(July 6, 2016) (available at https://www.macworld.co.uk/how-to/iphone/how-stop-ios-nagging-
`youupdate-latest—version-3641478).
`6 Hattersly, How to Stop iOS Nagging You, supra.
`
`13
`VERIFIED SHAREHOLDER DERIVATIVE COMPLAINT
`
`10
`
`11
`
`12
`
`13
`
`14
`
`15
`
`16
`
`17
`
`18
`
`19
`
`20
`
`21
`
`22
`
`23
`
`24
`
`25
`
`26
`
`27
`
`28
`
`
`
`enduring beauty in simplicity, in clarity, in efficiency.”
`
`57.
`
`On September 10, 2013, Defendants caused the Company to issue a press release,
`
`reporting that iOS 7 would be available for the public to download on September 18, 2013 for
`
`“iPhone, iPad and iPod touch users as a free software update.” The release represented that “iOS 7
`
`has been engineered with deep technical and design integration with both the iPhone 5s and iPhone
`
`5C” as:
`
`Apple engineered iOS 7 to