Teroganesian v. Southwest Airlines Co. et al

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION
ARTHUR TEROGANESIAN, §
individually and on behalf of all others §
similarly situated, §
§
Plaintiff, §
§
v. § Civil Action No. 4:23-CV-00115
§
SOUTHWEST AIRLINES CO., GARY §
KELLY, TAMMY ROMO, ROBERT §
E. JORDAN, MICHAEL G. VAN DE §
VEN, THOMAS NEALON, and §
ANDREW WATTERSON, §
§
Defendants. §
MEMORANDUM OPINION AND ORDER
This is a securities fraud class action against Southwest Airlines Co. (“Southwest”
or “the Company”) and several of its current and former high-level executives: Gary
Kelly (former Chief Executive Officer and current Executive Chairman), Tammy Romo
(current Chief Financial Officer), Robert Jordan (current Chief Executive Officer), Michael
Van de Ven (former Chief Operations Officer and President), Thomas Nealon (former
President), and Andrew Watterson (current Chief Operations Officer) (the “Individual
Defendants”).
This action stems from allegations that Defendants made a series of misstatements
to the investing public over a three-year period1 about the Company’s operational
1 The proposed Class Period is from February 4, 2020, through March 14, 2023, inclusive
(the “Class Period”). (Dkt. No. 51 at 8).
United States District Court
Southern District of Texas
ENTERED
April 01, 2026
Nathan Ochsner, Clerk
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resiliency and its technology infrastructure. Plaintiffs, Southwest shareholders, claim
that these misstatements artificially inflated the Company’s stock price and that they
incurred losses when three severe flight-disruption events exposed the fragility of
Southwest’s operations.
Pending before the Court is Defendants’ Motion for Reconsideration, (Dkt. No.
65), and Plaintiffs’ and Defendants’ post-hearing submissions, (Dkt. No. 87). For the
following reasons, the Court GRANTS Defendants’ Motion for Reconsideration, (Dkt.
No. 65), WITHDRAWS its Order denying Defendants’ Motion to Dismiss Plaintiffs’
Complaint, (Dkt. No. 62), and GRANTS Defendants’ Motion to Dismiss Plaintiffs’
Complaint, (Dkt. No. 57). Plaintiffs’ claims are DISMISSED without prejudice.
I. BACKGROUND2
A. SOUTHWEST OPERATIONS
Southwest is the third largest airline in North America based on passengers flown.
(Dkt. No. 51 at 22). Unlike many competitors who utilize a “hub-and-spoke” system, the
Company’s “point-to-point” route structure flies directly between cities without a central
hub. (Id. at 23). As a result of this decentralized structure, and as Plaintiffs acknowledge,
“while flight and crew scheduling is complex and critical for all major airlines, it is
uniquely and particularly challenging for Southwest—and even more so when
[operational irregularities] occur.” (Id.).
2 Unless otherwise noted, the Court’s recitation of facts is derived from the operative
Complaint, (Dkt. No. 51), and are taken as true and viewed in the light most favorable to
Plaintiffs, see Sonnier v. State Farm Mut. Auto Ins., 509 F.3d 673, 675 (5th Cir. 2007).
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To manage its logistics, Southwest utilizes a suite of legacy scheduling software,
including SkySolver for crew assignments, Baker for aircraft and passenger routing, and
the Crew Hotel and Accommodations Team (“CHATNOC”) for communicating the
assignments. (Id. at 9 n.2). Plaintiffs allege that SkySolver is “ancient by any standard”
and struggled with short-notice cancellations, which then forced the Company into a
process of manually matching planes, pilots, and crew members. (Id. at 24). Further,
Baker did not work well with SkySolver because it failed to account for crew
requirements during delays and cancellations. (Id. at 24–25). And these software
incompatibilities were exacerbated by Southwest’s lack of “an automated, internet-based
system for [communicating] flight and crew scheduling changes.” (Id. at 25). Instead,
Defendants relied on CHATNOC, a call center where pilots and crews learned what
flights they were staffed on and booked hotels to ensure compliance with federal rest
requirements. (See id. at 9 n.2, 25).
Plaintiffs allege that Southwest Airlines Pilots Association (“SWAPA”) and
Southwest Flight Attendants’ Union, Transport Workers Union of America Local 556
(“TWU”), publicly warned Defendants of their lingering technology issues for years
leading up to the flight disruption events. (See id. at 8, 9, 12).
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B. FLIGHT-DISRUPTION EVENTS
Plaintiffs contend that the scheduling software issues caused at least three severe
flight-disruption events during the Class Period.3
First, the June 2021 disruptions. Beginning on June 14, 2021, Southwest canceled
approximately 2,000 flights over a three-day period. (Id. at 31). The issues were
reportedly triggered by a “network connectivity issue with weather data from a third-
party vendor.” (Id.).
Second, the October 2021 disruptions. Beginning on October 8, 2021, Southwest
canceled approximately 2,000 flights over a four-day period. (Id. at 39). The cancellations
coincided with thunderstorms in the Orlando, Florida area “that impacted many flights
in and out of the region on all airlines.” (Id.). That day, in a post on X (formerly Twitter),
Southwest noted that air traffic control issues and weather caused the high volume of
cancellations. (Id.). Air Traffic Control then posted that “widespread severe weather,
military training, & limited staffing in one area of the Jacksonville en route center” had
caused cancellations and “[s]ome airlines continue to experience scheduling challenges
due to aircraft and crews being out of place.” (Id. at 40).
And third, the December 2022 disruptions. Beginning on December 21, 2022,
Southwest canceled over 16,700 flights during a ten-day period. (Id. at 71). Winter Storm
Elliott, which generated snow, high winds, and record cold temperatures for five days,
3 Southwest experienced at least two other flight-disruption events before the Class
Period, including the “Midway Meltdown” in 2014 and a “Router Burnout” or “Brownout” in
2016. (Dkt. No. 51 at 10, 164). In Plaintiffs’ estimation, these events were early indicators of future
systemic technological failures. (Id. at 163–64).
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was the catalyst of the cancellations. (Id. at 54). Plaintiffs allege that “[e]very airline was
initially impacted by the severe weather; however, as the severe weather abated, every
major airline, except Southwest, was able to timely recover from the event and steadily
return to normal operations.” (Id.). An article published on January 3, 2023, explained
that “[t]he primary reason for the [December 2022 disruptions] at Southwest was its
outdated optimization technology.” (Id. at 158).
C. POST-DECEMBER 2022 DEVELOPMENTS
In the aftermath of the December 2022 disruptions, federal lawmakers and
regulatory agencies launched investigations into Southwest’s operations, some of which
are ongoing. (Id. at 11, 63–64). In February 2023, the Senate Committee on Commerce,
Science, and Transportation (“the Committee”) held a hearing where Southwest
executives apologized for the cancellations. (Id. at 160–61). In March 2023, Southwest
announced a $1.3 billion tactical plan to modernize its technology, including upgrades to
address the “functional gap” in its scheduling software revealed during the December
2022 disruptions. (Id. at 161–62).
D. PROCEDURAL HISTORY
On January 12, 2023, Arthur Teroganesian brought a class action lawsuit against
Southwest, Kelly, Romo, and Jordan for violations of (1) Section 10(b) of the Securities
Exchange Act of 1934 (the “Exchange Act”), see 15 U.S.C. § 78j(b), and Rule 10b-5
promulgated thereunder by the Securities and Exchange Commission (“SEC”), see 17
C.F.R. § 240.10b-5; and (2) Section 20(a) of the Exchange Act, see 15 U.S.C. § 78t(a), (Dkt.
No. 1).
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Defendants requested that the response date be deferred until after the
appointment of a lead plaintiff and after the timetable for an amended complaint was set,
(Dkt. No. 8), which Judge Lynn N. Hughes, then presiding, granted, (Dkt. No. 10). This
case was reassigned to the undersigned shortly thereafter. (Dkt. No. 12).
Four individuals requested that the Court appoint one of them as the lead plaintiff
in this litigation, (Dkt. Nos. 13, 14, 16, 17), and two of the four moved to consolidate this
case with a closely related, subsequently filed action,4 (Dkt. Nos. 13, 14). On July 15, 2023,
the Court permitted consolidation of the cases and appointed Plaintiff Michael Berry as
lead plaintiff. (Dkt. No. 46).
On September 15, 2023, Lead Plaintiff Michael Berry (“Lead Plaintiff”) and an
additional named Plaintiff Jay Almer (collectively, “Plaintiffs”) filed the operative
Complaint (the “Complaint”). (Dkt. No. 51). The Complaint was brought on behalf of
the Plaintiffs and “all persons or entities who purchased Southwest Airlines Co.
securities” during the Class Period. (Id. at 8). It alleges two counts against Southwest
and the Individual Defendants. (Id.). In the first count, Plaintiffs assert a “misstatement”
claim, alleging that the Defendants violated Section 10(b) and Rule 10b-5(b)5 by making
4 See Carlson v. Southwest Airlines Co., et al., Civil Action No. 4:23-CV-00920 (S.D. Tex. filed
Mar. 13, 2023).
5 Section 10(b) of the Exchange Act provides:
It shall be unlawful for any person, directly or indirectly, . . . To use or
employ, in connection with the purchase or sale of any security
registered on a national securities exchange . . . any manipulative or
deceptive device or contrivance in contravention of such rules and
regulations as the Commission may prescribe as necessary or
appropriate in the public interest or for the protection of investors.
(continue)
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several misleading statements about Southwest to investors. (Id. at 176–79). In the second
count, Plaintiffs assert that the Individual Defendants controlled Southwest and are
derivatively liable for Southwest’s fraudulent misstatements under Section 20(a).6 (Id. at
179–80).
Defendants moved to dismiss the Complaint under the mandatory pleading
requirements imposed by the Private Securities Litigation Reform Act (the “PSLRA”) and
Federal Rules of Civil Procedure 9(b) and 12(b)(6). (Dkt. No. 57). The Court denied
Defendants’ Motion to Dismiss. (Dkt. No. 62). Defendants moved for reconsideration of
the denial. (Dkt. No. 65).
The Court held a hearing on the Motion for Reconsideration. In it, the Court
requested post-hearing submissions from the Parties on the purported factual and legal
15 U.S.C. § 78j(b).
Rule 10b-5, promulgated by the SEC to enforce Section 10(b), provides:
It shall be unlawful for any person, directly or indirectly, . . . (a) To
employ any device, scheme, or artifice to defraud, (b) To make any
untrue statement of a material fact or to omit to state a material fact
necessary in order to make the statements made, in the light of the
circumstances under which they were made, not misleading, or (c) To
engage in any act, practice, or course of business which operates or
would operate as a fraud or deceit upon any person, in connection
with the purchase or sale of any security.
17 C.F.R. § 240.10b-5.
6 Section 20(a) of the Exchange Act establishes control-person liability. A person who
controls another person—i.e., a controlling person—shall be held liable to the same extent as the
controlled person, unless the controlling person “acted in good faith and did not directly or
indirectly induce” the fraud. 15 U.S.C. § 78t(a). Control in this context means “the possession,
direct or indirect, of the power to direct or cause the direction of the management and policies of
a person, whether through the ownership of voting securities, by contract, or otherwise.” 17
C.F.R. § 230.405.
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deficiencies in the Complaint. (Dkt. No. 81 at 34–35). The Parties filed their post-hearing
submissions. (Dkt. No. 87).
II. LEGAL STANDARD
A. MOTION TO DISMISS
Rule 12(b)(6) of the Federal Rules of Civil Procedure permits a defendant to move
to dismiss for “failure to state a claim upon which relief can be granted.” In reviewing a
Rule 12(b)(6) motion to dismiss, a court must accept the plaintiff’s factual allegations as
true and view those allegations in the light most favorable to the plaintiff. White v. U.S.
Corrs., LLC, 996 F.3d 302, 306–07 (5th Cir. 2021). The court must evaluate whether the
complaint contains “sufficient factual matter, accepted as true, to ‘state a claim to relief
that is plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 1949, 173
L.Ed.2d 868 (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 1974, 167
L.Ed.2d 929 (2007)). “A claim has facial plausibility when the plaintiff pleads factual
content that allows the court to draw the reasonable inference that the defendant is liable
for the misconduct alleged.” Id. (citing Twombly, 550 U.S. at 556, 127 S.Ct. at 1965). “The
plausibility standard is not akin to a ‘probability requirement,’ but it asks for more than
a sheer possibility that a defendant has acted unlawfully.” Id. (quoting Twombly, 550 U.S.
at 556, 127 S.Ct. at 1965).
Rule 9(b) creates a heightened pleading standard when alleging fraud or mistake
and requires that “a party . . . state with particularity the circumstances constituting
fraud or mistake.” Rule 9(b)’s particularity requirement “is an exception to Rule 8(a)’s
simplified pleading that calls for a ‘short and plain statement of the claim.’” United States
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ex rel. Grubbs v. Kanneganti, 565 F.3d 180, 185 (5th Cir. 2009) (citing Fed. R. Civ. P. 8(a)).
“To satisfy Rule 9(b)’s pleading requirements, the plaintiffs must ‘specify the statements
contended to be fraudulent, identify the speaker, state when and where the statements
were made, and explain why the statements were fraudulent.’” Southland Sec. Corp. v.
INSpire Ins. Sols., Inc., 365 F.3d 353, 362 (5th Cir. 2004) (quoting Williams v. WMX
Technologies, Inc., 112 F.3d 175, 177–78 (5th Cir. 1997)).
The Private Securities Litigation Reform Act (“PSLRA”) also creates a heightened
pleading standard in actions brought under Section 10(b) of the Exchange Act. See Merrill
Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71, 81, 126 S.Ct. 1503, 1511, 164 L.Ed.2d
179 (2006). A court must dismiss the complaint unless two requirements are met. 15
U.S.C. § 78u-4(b). First, if the plaintiff alleges that the defendant “made an untrue
statement of material fact” or “omitted to state a material fact necessary in order to make
the statements made, in the light of the circumstances in which they were made, not
misleading,” “the complaint shall specify each statement alleged to have been
misleading, the reason or reasons why the statement is misleading, and, if an allegation
regarding the statement or omission is made on information and belief, the complaint
shall state with particularity all facts on which that belief is formed.” § 78u-4(b)(1). A
fact is material if there is “a substantial likelihood that, under all the circumstances, the
omitted fact would have assumed actual significance in the deliberations of the
reasonable shareholder.” Southland Sec. Corp., 365 F.3d at 362; see also Basic Inc. v. Levinson,
485 U.S. 224, 240, 108 S.Ct. 978, 988, 99 L.Ed.2d 194 (1988) (“[M]ateriality depends on the
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significance the reasonable investor would place on the withheld or misrepresented
information.”).
Second, “the complaint shall, with respect to each act or omission alleged to violate
this chapter, state with particularity facts giving rise to a strong inference that the
defendant acted with the required state of mind.” § 78u-4(b)(2). The required state of
mind is “an intent to deceive, manipulate, defraud, or severe recklessness.” Owens v.
Jastrow, 789 F.3d 529, 535–36 (5th Cir. 2015) (quoting Lormand v. US Unwired, Inc., 565 F.3d
228, 251 (5th Cir. 2009)). A reviewing court must “take into account plausible inferences
opposing as well as supporting a strong inference of scienter.” Ind. Elec. Workers’ Pension
Tr. Fund IBEW v. Shaw Grp., Inc., 537 F.3d 527, 533 (5th Cir. 2008).
Taken together, to survive a motion to dismiss under Rule 9(b) and the PSLRA, a
plaintiff must (1) specify each statement alleged to have been misleading; (2) identify the
speaker; (3) state when and where the statement was made; (4) plead with particularity
the contents of the false representations; (5) plead with particularity what the person
making the misrepresentation obtained thereby; and (6) explain the reasons why the
statement is misleading. Goldstein v. MCI WorldCom, 340 F.3d 238, 245 (5th Cir. 2003).
And for allegations made upon information and belief, the complaint must “state with
particularity all facts” on which the belief is formed. 15 U.S.C. § 78u-4(b)(1). To survive
a motion to dismiss on the Section 20(a) claim, a plaintiff must plead (1) a primary
violation and (2) that the defendant had control over the primary violator. See In re
Venator Maters. PLC Sec. Litig., 547 F.Supp.3d 624, 652 (S.D. Tex. 2021) (citing In re Kosmos
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Energy Ltd. Sec. Litig., 955 F. Supp. 2d 658, 674 (N.D. Tex. 2013)); see also Heck v. Triche, 775
F.3d 265, 283 (5th Cir. 2014).
“A complaint can be long-winded, even prolix, without pleading with
particularity. Indeed, such a garrulous style is not an uncommon mask for an absence of
detail.” Williams, 112 F.3d at 178.
B. MOTION FOR RECONSIDERATION
“The Federal Rules of Civil Procedure do not recognize a general motion for
reconsideration.” St. Paul Mercury Ins. Co. v. Fair Grounds Corp., 123 F.3d 336, 339 (5th Cir.
1997). Nevertheless, “[a] court retains the power to revise an interlocutory order before
entering judgment adjudicating the parties’ claims, rights, and liabilities.” W&T Offshore,
Inc. v. Apache Corp., No. 4:11-CV-02931, 2014 WL 1600540, at *3 (S.D. Tex. Apr. 21, 2014).
“Rule 59(e)’s legal standards are applied to motions for reconsideration of interlocutory
orders.” T-M Vacuum Prods., Inc. v. TAISC, Inc., No. 4:07-CV-04108, 2008 WL 2785636, at
*2 (S.D. Tex. July 16, 2008), aff’d, 336 F.App’x 441 (5th Cir. 2009).
III. DISCUSSION
The Court first reviews the claim under Section 10(b) of the Exchange Act
(including Rule 10b-5, promulgated by the SEC to enforce the Section) and then the claim
under Section 20(b) of the Exchange Act. For the reasons discussed below, the Court
finds that the Complaint fails to state a claim for securities fraud under the PSLRA7 and,
therefore, must be dismissed.
7 Defendants’ arguments focus primarily on Plaintiffs inability to meet the heightened
standards under the PSLRA. That said, Defendants also argued that some of the statements
(continue)
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A. DEFENDANTS’ MOTION TO DISMISS SECTION 10(B) AND RULE 10B-5 CLAIMS
The Complaint alleges that dozens of statements violated Section 10(b) of the
Exchange Act. These statements allegedly downplayed or concealed Southwest’s
exposure to flight-disruption events.
These statements were made in: (1) Southwest’s 2019 Annual Report on Form 10-
K (the “2019 Annual Report”) on February 4, 2020, (id. at 82–87); (2) Southwest’s Form 10-
Q for the period ending March 31, 2020 (the “1Q20 Report”), on April 28, 2020, (id. at 87–
89); (3) Southwest’s Form 10-Q for the period ending June 30, 2020 (the “2Q20 Report”),
on July 27, 2020, (id. at 89–90); (4) Southwest’s Form 10-Q for the period ending September
30, 2020, (the “3Q20 Report”), on October 27, 2020, (id. at 90–91); (5) Southwest’s 2020
Annual Report on Form 10-K (the “2020 Annual Report”) on February 8, 2021, (id. at 92–
97); (6) Southwest’s Form 10-Q for the period ending March 31, 2021 (the “1Q21 Report”),
on April 27, 2021, (id. at 97–98); (7) a KTSM article published on June 14, 2021, (id. at 99);
(8) a CNBC article published on June 15, 2021, (id. at 100); (9) a New York Times article
published on June 16, 2021, (id. at 101); (10) an earnings conference call on July 22, 2021,
(id. at 102); (11) Southwest’s Form 10-Q for the period ending June 30, 2021 (the “2Q21
Report”), on July 27, 2021, (id. at 111); (12) a conference discussion on September 9, 2021,
(id. at 112); (13) a post on X on October 9, 2021, (id. at 113); (14) an AZ Central article
published on October 9, 2021, (id. at 114); (15) a news release on Southwest’s website
alleged by Plaintiffs “fail to the extent they are premised on corporate statements and [posts on
X] not specifically attributed to any individual.” (Dkt. No. 57 at 25). Because the allegedly
unattributed statements in question are not misleading, the Court need not decide whether
Plaintiffs sufficiently pled the requisite details about the speaker.
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published on October 11, 2021, (id. at 114–15); (16) a CNBC interview on October 12, 2021,
(id. at 116–18); (17) an earnings conference call on October 21, 2021, (id. at 119–24);
(18) Southwest’s Form 10-Q for the period ending September 30, 2021 (the “3Q21
Report”), on October 26, 2021, (id. at 125–26); (19) a virtual Investor Day presentation on
December 8, 2021, (id. at 126); (20) a ZDNet article published on January 15, 2022, (id. at
127–28); (21) Southwest’s 2021 Annual Report on Form 10-K (the “2021 Annual Report”)
on February 7, 2022, (id. at 128–32); (22) an earnings conference call on April 28, 2022, (id.
at 133–36); (23) Southwest’s Form 10-Q for the period ending March 31, 2022 (the “1Q22
Report”), on May 2, 2022, (id. at 136–37); (24) a press release on Form 8-K on July 28, 2022,
(id. at 137–38); (25) an earnings conference call on July 28, 2022, (id at 137–41);
(26) Southwest’s Form 10-Q for the period ending June 30, 2022 (the “2Q22 Report”), on
August 2, 2022, (id. at 141–42); (27) an earnings conference call on October 27, 2022, (id. at
142–45); (28) Southwest’s Form 10-Q for the period ending September 30, 2022 (the “3Q22
Report”), on October 31, 2022, (id. at 146–47); (29) an Investor Day presentation on
December 7, 2022, (id. at 147–48); (30) a press release on December 21, 2022, (id. at 149);
(31) a press release on December 22, 2022, (id. at 150); (32) a press release on December
23, 2022, (id. at 151); (33) a press release on December 24, 2022, (id. at 152); (34) a press
release on December 26, 2022, (id. at 152–53); (35) a press release on December 27, 2022,
(id. at 154); (36) a video press release on December 27, 2022, (id. at 155); (37) a press release
on December 31, 2022, (id. at 157–58); (38) a conference call on January 26, 2023, (id. at
159–60); and (39) a hearing before the Committee on February 9, 2023, (id. at 160–61).
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To determine whether the statements are actionable under Section 10(b), the Court
first analyzes whether the statements are materially false or misleading and then analyzes
whether the statements were made with the required state of mind.
1. Alleged Material Misstatements or Omissions
The challenged statements fall into five general categories:8 (1) statements that
warned of certain risks inherent to Southwest’s operations; (2) statements about the
Company’s technology investments and initiatives; (3) statements praising Southwest;
(4) statements concerning Southwest’s operational stability; and (5) statements about
widespread flight-cancellation events in June and October 2021 and December 2022. For
the reasons discussed below, the Court finds that the Complaint fails to adequately allege
the existence of any materially false or misleading statements, with the exception of six
statements.
a. Published Risk Warnings
The Complaint alleges that Southwest’s risk disclosures in its annual and quarterly
filings as well as public statements were misleading because they presented specific,
known risks—such as the inadequacy of the scheduling software—as generic,
hypothetical, or external risks. The Court finds that neither the risk warnings nor the
“beyond Southwest’s control” warnings are actionable misstatements.
8 Plaintiffs identified the allegedly actionable statements in chronological order; however,
given the volume of statements asserted, the Court has organized and analyzed them in general
categories for clarity and efficiency.
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i. Risk Warnings
Plaintiffs allege that several statements containing risk warnings from the 2019,
2020, and 2021 Annual Reports were materially false and omitted to disclose material
facts:
• “The Company is increasingly dependent on technology to operate its
business and continues to implement substantial changes to its information
systems; any failure, disruption, breach, or delay in implementation of the
Company’s information systems could materially adversely affect its
operations.” (Dkt. No. 51 at 84, 93).
• “The Company is increasingly dependent on the use of complex technology
and systems to run its ongoing operations and support its strategic
objectives. These technologies and systems include, among others, the
Company’s website and reservation system; flight dispatch and tracking
systems; . . . [and] crew scheduling systems . . . . Implementation and
integration of complex systems and technology present significant
challenges in terms of costs, human resources, and development of effective
internal controls.” (Id. at 130).
• “The Company is increasingly dependent on the use of complex technology
and systems to run its ongoing operations and support its strategic
objectives. These technologies and systems include, among others, the
Company’s website and reservation system, flight dispatch and tracking
systems, flight simulators, check-in kiosks, maintenance record keeping
management systems, telecommunications systems, flight planning and
scheduling systems, crew scheduling systems, and financial planning,
management, and accounting systems. The performance, reliability, and
security of the Company’s technology infrastructure and supporting
systems are critical to the Company’s operations and initiatives.” (Id. at 84,
93–94).
• “If any of the Company’s significant technologies or automated systems
were to cease functioning, or if its third party vendor service providers were
to fail to adequately and timely provide technical support, system
maintenance, security, or software upgrades for any of the Company’s
existing systems, the Company could experience service interruptions,
delays, and loss of critical data, which could harm its operations, and result
in financial losses and reputational damage.” (Id. at 84, 94, 130).
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• “In the ordinary course of business, the Company’s systems will continue
to require modification and refinements to address growth and changing
business requirements . . . .” (Id. at 84, 94, 130).
• “[T]he Company’s operations could be adversely affected, or the Company
could face imposition of regulatory penalties, if it were unable to timely or
effectively modify its systems as necessary or appropriately balance the
introduction of new capabilities with the management of existing systems.”
(Id. at 84–85, 94, 130–31).
• “[T]he Company’s systems may require modification to enable the
Company to comply with changing regulatory requirements.
Modifications and refinements to the Company’s systems have been and
are expected to continue to be expensive to implement and can divert
management’s attention from other matters.” (Id. at 130).
• “The Company has experienced system interruptions and delays that have
made its websites and operational systems unavailable or slow to respond,
which has prevented the Company from efficiently processing Customer
transactions or providing services.” (Id. at 85, 94, 131).
• “Any future system interruptions or delays could reduce the Company’s
operating revenues and the attractiveness of its services, as well as increase
the Company’s costs.” (Id. at 131).
Plaintiffs explain that these statements were misleading because they drastically
downplayed Southwest’s reliance on systems that were “unconscionably exposed to
meltdowns,” “at high risk of not functioning,” “were profoundly unreliable,” and were
“fundamentally inadequate to handle the complexity of the Company’s operations.” (Id.
at 85–86, 95–96, 131–32).
None of the challenged statements are misleading. See Abrams v. Baker Hughes Inc.,
292 F.3d 424, 433 (5th Cir. 2002) (“[A]s long as public statements are reasonably consistent
with reasonably available data, corporate officials need not present an overly gloomy or
cautious picture of the company’s current performance.”). To the contrary, “[t]hese
sobering disclosures provided investors with clearly stated information about the impact
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and risks of” Southwest’s technology shortfalls. Dawes v. Imperial Sugar Co., 975
F.Supp.2d 666, 707 (S.D. Tex. 2013). Southwest is “not obligated to characterize its
performance” negatively or “paint themselves in the most unflattering light possible.”
Id. (quoting Solow v. Citigroup, Inc., No. 10 Civ. 2927 (RWS), 2012 WL 1813277, at *4
(S.D.N.Y. May 18, 2012)). Accordingly, the Court finds that the aforementioned risk
warnings are not actionable.
ii. “Beyond Southwest’s Control” Warnings
Plaintiffs also challenge Southwest’s frequent assertions in corporate filings that it
was exposed to potential issues by circumstances that were “beyond Southwest’s
control.” Namely:
• The 2019 Annual Report disclosed that “[t]he airline industry is affected by
many conditions that are beyond its control, which can impact the
Company’s business strategies and results of operations. . . . [T]he
Company, like the airline industry in general, is affected by conditions that
are largely unforeseeable and outside of its control, including . . . adverse
weather and natural disasters . . . .” (Dkt. No. 51 at 86).
• The 1Q20 Report disclosed that “[a]ir travel is also significantly impacted
by . . . extreme or severe weather and natural disasters . . . and other factors
beyond the Company’s control.” (Id. at 88).
• The 2Q20 Report disclosed that “[a]ir travel is also significantly impacted
by . . . extreme or severe weather and natural disasters . . . and other factors
beyond the Company’s control. These and other factors . . . have created,
and may continue to create, significant volatility in the Company’s financial
results.” (Id. at 89).
• The 3Q20 Report disclosed that “[a]ir travel is also significantly impacted
by . . . extreme or severe weather . . . and other factors beyond the
Company’s control. These and other factors . . . have created, and may
continue to create, significant volatility in the Company’s financial
results. . . . Operating results for the three and nine months ended
September 30, 2020, are not necessarily indicative of the results that may be
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expected for future quarters or for the year ended December 31, 2020.” (Id.
at 90–91).
• The 1Q20, 2Q20, and 3Q20 Reports also referenced the 2019 Annual Report
risk factors. See supra III(A)(1)(a)(i); (Dkt. No. 51 at 89, 90, 91).
• The 2020 Annual Report disclosed that “[t]he airline industry is affected by
many conditions that are beyond its control, which can impact the
Company’s business strategies and results of operations. . . . [T]he
Company, like the airline industry in general, is affected by conditions that
are largely unforeseeable and outside of its control, including . . . adverse
weather and natural disasters . . . .” (Dkt. No. 51 at 96).
• The 1Q21 Report disclosed that “[a]ir travel is also significantly impacted
by . . . extreme or severe weather and natural disasters . . . and other factors
beyond the Company’s control. These and other factors . . . have created,
and may continue to create, significant volatility in the Company’s financial
results. . . . Operating results for the three months ended March 31, 2021,
are not necessarily indicative of the results that may be expected for future
quarters or for the year ended December 31, 2021.” (Id. at 98).
• The 2Q21 and 3Q21 Reports disclosed that “[a]ir travel is also significantly
impacted by . . . extreme or severe weather and natural disasters . . . and
other factors beyond the Company’s control. These and other
factors . . . have created, and may continue to create, significant volatility in
the Company’s financial results.” (Id. at 111, 125).
• The 1Q21, 2Q21, and 3Q21 Reports also referenced the 2020 Annual Report
risk factors. See supra III(A)(1)(a)(i); (Dkt. No. 51 at 91, 112, 126).
• The 2021 Annual Report disclosed that “[t]he airline industry is affected by
many conditions that are beyond its control, which can impact the
Company’s business strategies and results of operations. In addition to the
unpredictable economic conditions and fuel costs discussed above, the
Company, like the airline industry in general, is affected by conditions that
are largely unforeseeable and outside of its control, including, among
others: adverse weather and natural disasters . . . .” (Dkt. No. 51 at 132).
• The 1Q22, 2Q22, and 3Q22 Reports disclosed that “[a]ir travel is also
significantly impacted by . . . extreme or severe weather and natural
disasters . . . and other factors beyond the Company’s control.” (Id. at 136,
141, 146).
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• The 1Q22, 2Q22, and 3Q22 Reports also referenced the 2021 Annual Report
risk factors. See supra III(A)(1)(a)(i); (Id. at 137, 142, 147).
Plaintiffs argue that Southwest should have disclosed (1) that it was less prepared
for weather events than other airlines and (2) that such events would “overwhelm[]” the
scheduling software, “forc[ing] the airline to resort to an unwieldy manual process.” (Id.
at 87, 88, 89–90, 91, 97, 98, 125–126, 132–33, 137, 141–42, 146). Defendants argue that
Southwest’s cautionary disclosures “made no promises that Southwest was immune to
major disruptions and specifically warned disruptions could occur.” (Dkt. No. 57 at 12).
The Court agrees with Defendants.
As an initial matter, it is rather obvious that all airlines face operational risks due
to factors outside of their control. Defendants explicitly warned that “extreme or severe
weather” and factors beyond the Company’s control would significantly impact air
travel. Those risks materialized exactly as described—significantly. See In re KBR, Inc.
Secs. Litig., No. 4:17-CV-01375, 2018 WL 4208681, at *5 (S.D. Tex. Aug. 31, 2018)
(explaining that statements do not become actionable unless such statements
“affirmatively create an impression of a state of affairs that differs in a material way from
the one that actually exists” (quoting Ind. Elec. Workers’ Pension Tr. Fund IBEW v. Shaw
Grp., Inc., 537 F.3d 527, 541 (5th Cir. 2008))); see also Hill v. Gozani, 638 F.3d 40, 60 (1st Cir.
2011) (“To the extent that the plaintiff’s complaint is that the precise degree of risk was
not stated, that failure is not sufficient to have rendered the statements misleading.”).
Turning to the first alleged omission, Plaintiffs complain that Southwest was less
equipped than other airlines to combat severe weather. Even so, Plaintiffs did not plead
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facts establishing that Southwest was an outlier in terms of its risk exposure to weather
events. For example, Plaintiffs did not allege that Southwest’s scheduling software was
inconsistent with industry norms or that it did not meet all relevant aviation-authority
operational standards. (See generally Dkt. No. 51). Instead, Plaintiffs allege that, during
a phone call in the wake of Winter Storm Elliott, Watterson privately admitted the
Company had a “lack of tools” given the size and complexity of its operation and that
“[t]he process of matching up [crew members] with the aircraft could not be handled by
our [existing] technology.” (Id. at 66). And “[a]ll told, Southwest’s cancellations were
radically higher than any other airlines” following Winter Storm Elliott. (Id. at 67).
The problem is that Plaintiffs now have the benefit of hindsight. At the time the
disclosures were made, the scheduling software was functioning properly. The fact that
the software later failed under extreme stress does not mean the earlier disclosures were
not true. See Lormand, 565 F.3d at 254 (“This is not the classic fraud by hindsight case
where a plaintiff alleges that the fact that something turned out badly must mean
defendant knew earlier that it would turn out badly.” (quoting Miss. Pub. Emps.’ Ret. Sys.
v. Boston Sci. Corp., 523 F.3d 75, 91 (1st Cir. 2008))). Plaintiffs’ argument that Southwest
was uniquely exposed to weather risks due to its scheduling software is merely
conjecture.
Next, the Court turns to the second alleged omission: that the Company’s
scheduling software would likely be disrupted by major weather events. Southwest
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disclosed precisely that. See supra III(A)(1)(a)(i).9 The alleged “beyond our control”
warnings cannot be evaluated in a vacuum, ignoring the Company’s risk warnings in its
Annual Reports. See Magruder v. Halliburton Co., 359 F.Supp.3d 452, 460 (N.D. Tex. 2018)
(noting that a court should assess all allegations holistically, not in isolation); see also
Omnicare, Inc. v. Laborers Dist. Council Const. Indus. Pension Fund, 575 U.S. 175, 190, 135
S.Ct. 1318, 1330, 191 L.Ed.2d 253 (2015) (same). Considering the statements together,
Southwest did not omit material facts.
To the extent Plaintiffs believe the warnings were not sufficiently pessimistic, it
bears repeating that Southwest is “not obligated to characterize its performance”
negatively or “paint themselves in the most unflattering light possible.” Dawes, 975
F.Supp.2d at 707 (quoting Solow v. Citigroup, Inc., No. 10 Civ. 2927 (RWS), 2012 WL
1813277, at *4 (S.D.N.Y. May 18, 2012)). Nor is Southwest obligated to catastrophize or
catalog every contingency. Carlton v. Cannon, 184 F.Supp.3d 428, 457 (S.D. Tex. 2016)
(“[S]ome information is of such dubious significance that insistence on its disclosure may
accomplish more harm than good. . . . [M]anagement’s fear of exposing itself to
substantial liability may cause it simply to bury the shareholders in an avalanche of trivial
9 “The Company is increasingly dependent on the use of complex technology and systems
to run its ongoing operations and support its strategic objectives. These technologies and systems
include, among others, . . . flight planning and scheduling systems [and] crew scheduling
systems . . . . The performance, reliability, and security of the Company’s technology
infrastructure and supporting systems are critical to the Company’s operations and initiatives.”
(Dkt. No. 51 at 84, 93–94). “If any of the Company’s significant technologies or automated
systems were to cease functioning, or if its third party vendor service providers were to fail to
adequately and timely provide technical support, system maintenance, security, or software
upgrades for any of the Company’s existing systems, the Company could experience service
interruptions, delays, and loss of critical data, which could harm its operations, and result in
financial losses and reputational damage.” (Id. at 84, 94, 130).
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information[,] a result that is hardly conducive to informed decision[-]making.” (quoting
TCS Indus., Inc. v. Northway, Inc., 426 U.S. 438, 448–49, 96 S.Ct. 2126, 2132, 48 L.Ed.2d 757
(1976)). For these reasons, the Court finds that the aforementioned “beyond Southwest’s
control” statements are not actionable.
b. Technology-Investment Statements
The Complaint alleges that Southwest’s statements about its various technology
investments are misleading because the Company was not meaningfully investing and
had no plans to meaningfully invest in the scheduling software. The Court finds that
none of the then-current or future technology-investment statements are actionable.
i. Then-Current Investments
Plaintiffs allege several statements that recapped Southwest’s technology
investments and initiatives were materially false and misleading:
• The 2019 Annual Report stated that the Company had “committed
significant resources to technology improvements in support of its ongoing
operations and initiatives” and was continuing “to invest significantly in
technology resources including, among others, the Company’s systems
related to . . . flight planning and scheduling, [] crew scheduling, and []
technology infrastructure.” (Dkt. No 51 at 82–83).
• The 2020 Annual Report stated that “[w]hile the Company deferred a
significant number of technology projects in 2020 [in response to the
COVID-19 pandemic], it continued to invest in and execute on major
technology projects including, among others, the Company systems related
to . . . flight planning and scheduling, including with respect to schedule
changes and Customer reaccommodations; [] crew scheduling; and []
technology infrastructure.” (Id. at 92).
• The 2021 Annual Report stated that “[a]lthough during 2020 the Company
narrowed its near-term technology focus and deferred a significant number
of technology projects in response to the COVID-19 pandemic, over the past
several years the Company has committed significant resources to
technology improvements in support of its ongoing operations and
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initiatives. . . . The Company continues to focus on the prioritization and
execution of its technology investments and is in the process of continually
executing an evolving multi-year plan for technology, with the goal of
developing a stronger, more adaptable, and more efficient and reliable
technology foundation to support the Company’s strategic priorities. The
Company continues to invest significantly in technology resources
including, . . . flight planning and scheduling, including with respect to
schedule changes and Customer reaccommodations; [] crew
scheduling; . . . and [] technology infrastructure.” (Id. at 129).
• In December 2022, during a conference call with investment analysts and
media members, Romo stated, “[T]echnology is another big piece of that
[spending] as well. We spend several hundred millions in technology.” (Id.
at 148).
Plaintiffs argue that these statements were materially false and misleading because
Southwest was not meaningfully investing in its scheduling software and Defendants
had been repeatedly warned about scheduling software issues by SWAPA and TWU. (Id.
at 83, 93, 129). Defendants maintain that Plaintiffs failed to allege facts showing that
Southwest was not investing in operational technology. (Dkt. No. 57 at 20). The Court
agrees with Defendants.
Plaintiffs believe Southwest‘s continued reliance on the same scheduling software
after the statements were made proves that the Company was not significantly investing
in technology. (Dkt. No. 51 at 83, 93, 129). But a lack of scheduling software
improvements doesn’t necessarily translate into a lack of significant technology
investments. Companies routinely invest “significant” funds in technologies without
overhauling entire systems. Even if Southwest supposedly “repeatedly rejected pleas
and proposals made by SWAPA and TWU to overhaul and improve” its scheduling
software, (id.), the conclusion that Southwest did not significantly invest in technology
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does not necessarily flow therefrom. For all Plaintiffs know, Southwest could have been
building new scheduling software from scratch while continuing to use the existing
software. See Johnson v. Costco Wholesale Corp., No. 2:18-CV-01611, 2019 WL 6327580, at
*17 (W.D. Wash. Nov. 26, 2019) (finding company’s statements that it was making
“significant technology investments” was not misleading).
In short, Plaintiffs failed to allege the particularized facts necessary to show that
Southwest’s statements were misleading. For instance, to contradict Romo’s statement,
Plaintiffs would need to plead that Southwest spent less than “several hundred millions”
on technology. (Dkt. No. 51 at 148). They did not. Likewise, Plaintiffs did not provide
any reference point to assess whether Southwest’s investments in its scheduling software
were insignificant in 2019 through 2021. See Emps.’ Ret. Sys. v. Whole Foods Mkt., Inc., 905
F.3d 892, 901 (5th Cir. 2018) (noting that “plaintiffs cannot plausibly allege that defendant
lied about improving [their] prices without comparing the prices at the time of the alleged
misrepresentations with prior prices”). Unsurprisingly, Plaintiffs fail to cite a single case
in any jurisdiction where representing that a company made significant investments in
technology was held actionable without any particularized allegations that such funds
were not invested. Accordingly, the Court finds that the then-current technology
investment statements are not material misstatements. (Dkt. No. 51 at 82–83, 92, 129).
ii. Desired Future Investments
Plaintiffs allege several statements that explained Southwest’s plans for
technology investments and initiatives were materially false and misleading:
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• In October 2021, on an earnings conference call, Jordan responded to a
question about upcoming priorities for Southwest. “[Technology]’s central
to everything that we do . . . . [I]f I had a headline, it’s our investment in
operational tools. . . . [A]t our size and scale and complexity, I think there is
a need to continue to invest heavily in the operation and particularly
heavily in the operational tools that we provide to our employees. They’re
terrific but they could use tools that better help manage their day, manage
the complexity. . . . [T]he #1 objective is our continued investment
in . . . modernizing our operational tools.” (Id. at 123).
• On the same call, Van de Ven stated, “We’ve got things that we want to do
in flight planning. We’ve got things we want to do in our crewing systems.
We have things that we want to do as we’re coordinating and executing our
turns on the ground. And then we have investments we want to make in
our decision support and optimization of technology.” (Id. at 124).
• In December 2021, in a virtual presentation, Jordan stated, “There’s work to
do, again, to become more efficient coming out of the pandemic. But it’s
not just that. We are a large and complex company. We have—I think
there’s software that we can work on. There are ways that we think about
how we utilize data, how we move people appropriately to the aircraft, how
we think about the turn we’ll go on and on about some of those as they
become more specific.” (Id. at 126).
• In December 2022, during a conference call with investment analysts and
media members, Jordan stated, “We have initiatives planned to help lessen
the impact of disruptions and improve our recovery time and keep the
operation better on track throughout the day. . . . Network design and
recovery reverts to real time decision-making that can take advantage of
our unique network design to lessen ripple effects through the network.”
(Id. at 147).
Plaintiffs argue that these statements were materially false and misleading because
the statements implied that the issues were not urgent, (id. at 124–25, 127), and Southwest
was proactively upgrading its technology, (id. at 124), while the Company was actually
exposed to “massive operational and financial risk” while the “outdated” scheduling
software remained, (id. at 148). Defendants contend that it disclosed that its operational
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modernization projects were long-term, spanning into at least 2026. (See Dkt. No. 57 at
10). The Court agrees with Defendants.
Plaintiffs do not explain how Defendants’ statements establish any expectations as
to the “urgency” of the technology initiatives or the impression that Southwest was
“proactively upgrading” its operational systems. Nor can the Court, upon reviewing the
statements, reasonably infer such a characterization. The statements are silent as to
timing. Instead, they discuss particular areas of focus for Southwest’s technology
objectives, such as tools that manage employees’ daily activities, (Dkt. No. 51 at 123),
assist with flight planning and crew management, (id. at 124), move people appropriately,
(id. at 126), and improve recovery time, (id. at 147).
In any event, Southwest publicly disclosed the timing of its modernization efforts.
On December 8, 2021, in a virtual presentation, Van de Ven stated, “[O]ver the next 5 years,
we will have a laser focus on continuing to modernize the operation.” (Dkt. No. 56-19 at
21 (emphasis added)). On December 7, 2022, in a presentation, Watterson stated that,
“We have initiatives planned to help lessen the impact of disruptions and improve our
recovery time” with four initiatives, only two of which were planned for “2023 delivery.”
(Dkt. No. 56-21 at 17). Specifically, the “[o]riginator performance” and “[t]ransfer
operations” initiatives were slated for 2023 delivery, while the “[n]etwork design &
recovery” and “[s]tation command centers” initiatives were not. (Dkt. No. 56-20 at 38);
(see also id. at 6 (explaining that modernizing the operation was a strategic priority
through 2026)).
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Plaintiffs attempt to recast Southwest’s strategic business decision to defer certain
software upgrades into a misrepresentation that the issues did not demand urgency. But
ultimately, a disagreement with Southwest’s “business judgment does not state a claim
under federal securities law.” Coates v. Heartland Wireless Comms., Inc. (Coates I), 26
F.Supp.2d 910, 922 (N.D. Tex. 1998) (quoting Novak v. Kasaks, 997 F.Supp. 425, 432
(S.D.N.Y. 1998)). The Court finds that the prospective technology statements are not
actionable.
c. Corporate Praise Statements
Plaintiffs raise several other statements regarding Southwest generally that they
argue were materially false and misleading, but none are actionable.
• In July 2021, on an earnings conference call, Kelly stated, “[W]e need to be
a top drawer when it comes to our technology. . . . [W]e view ourselves as
a technology company. We have an excellent team. We have ample dollars
allocated for that effort. And one thing that the pandemic has done for us
is it’s made us a lot more efficient with our technology investment and
management. . . . So I feel like we’re better than ever at Southwest, and you
can be sure that we’re going to continue to make that a high strategic focus.”
(Dkt. No. 51 at 107).
• On October 12, 2021, on a CNBC program, Kelly responded to a question
about whether Southwest was underspending on technology, “I think the
answer is . . . a very emphatic no, we’re not underspending. . . . [W]e have
wonderful technology, we have a wonderful technology department.
They’re [] very well resourced.” (Id. at 118).10
• On October 21, 2021, on an earnings conference call, Jordan responded to a
question about upcoming priorities for Southwest, “[Technology]’s central
to everything that we do . . . . [O]ur people are terrific. We have good tools.
But at our size and scale and complexity, I think there is a need to continue
10 Kelly also stated that, “The two technology outages that occurred back in June were
human error so it wasn’t a lack of technological capability, it was simply, in one case, not adhering
to a procedure.” (Id. at 118). That portion of the statement is discussed in infra III(A)(1)(e)(i).
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to invest heavily in the operation and particularly heavily in the operational
tools that we provide to our employees. They’re terrific but they could use
tools that better help manage their day, manage the complexity. . . .” (Id. at
123).
• In December 2021, in a virtual presentation, Jordan stated, “[O]ur
employees are terrifically efficient. There’s work to do, again, to become
more efficient coming out of the pandemic.” (Id. at 126).
Plaintiffs accuse Defendants of misleading investors because “Southwest was far
from a ‘top drawer’ and could not credibly be called a ‘technology company.’” (Id. at
107). In Plaintiffs’ view, claiming that Southwest had an “excellent team,” “ample dollars
allocated,” “wonderful technology,” “good tools,” “terrifically efficient” employees, and
was taking steps for the Company to be “‘better than ever’ was a complete farce.” (Id. at
105, 107).
These statements are aspirational puffery and not actionable fraud. See Linenweber
v. Southwest Airlines Co., 693 F.Supp.3d 661, 676 (N.D. Tex. 2023) (“None of these
statements are actionable because investors understand generalized commitments to
laudable goals are not promises of specific actions or results and that executives’ vague
praise of their business is not a guarantee of quality.”). Such statements are “of the vague
and optimistic type that cannot support a securities fraud action.” Southland Sec. Corp.,
365 F.3d at 372. “Because analysts ‘rely on facts in determining the value of a security,’
these statements ‘are certainly not specific enough to perpetrate a fraud on the market.’”
Id. (quoting Raab v. Gen. Physics Corp., 4 F.3d 286, 290 (4th Cir. 1993)). Accordingly, the
Court finds that the aforementioned statements do not constitute material misstatements.
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d. Operational Stability Statements
The Complaint alleges that Defendants falsely assured investors that Southwest
was operationally stable and prepared for weather events. Specifically, Plaintiffs allege
several statements, included below, that they believe were materially false and
misleading. Of these, only one is ultimately misleading.
• In July 2021, on an earnings conference call, Nealon stated, “So I feel like
the worst part of all that is behind us. And given all the information that
we had, . . . we were planned appropriately well . . . . But I think the
worst—clearly the worst of it is behind us in June.”11 (Dkt. No. 51 at 110).
• On that same call, Kelly stated, “So we’re very well positioned and very
well prepared to manage pretty much any scenario here in the next couple
of years.”12 (Id. at 103).
• In January 2022, ZDNet published an article about Southwest’s technology
and operations where Jordan “confessed the need to ‘modernize.’” (Id. at
127). Jordan went on, “When you’re in irregular operations (such as
cancelations and delays caused by weather or other factors), I’ve got aircraft
out of place and customers out of place, and this aircraft needs to end up in
that maintenance base. There are probably tools that we can use to more
quickly notice problems and provide solutions.” (Id. at 127–28).
• In April 2022, on an earnings call, Van de Ven stated, “We’ve had a tough
time during irregular operations given our thinner network and some of
the unanticipated air traffic control slowdowns. The good news is that
we’ve made some adjustments to our network starting this month that we
believe will help . . . .” (Id. at 133–34).
11 Nealon also stated, “The biggest change that I think we faced this year with 2020
hindsight is we can’t absorb those significant events as efficiently this year as we did in the past,
because we don’t have as much frequency in our network today that we did yesterday, but we
will in the future. . . . And then also, we’re going to come into a period of time where we don’t
have the thunderstorms and these pop-up weather events that we do here in June and July.” That
portion of the statement is addressed in infra III(A)(1)(e)(i).
12 Kelly also stated, “Normal summer demand is always a challenge to manage, and it’s,
of course, even more so here in 2021, especially in June when we had technology issues and bad
weather combined.” (Dkt. No. 51 at 102). That portion of the statement is addressed in infra
III(A)(1)(e)(i).
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• In July 2022, on an earnings call, Van de Ven stated, “Our new hires,
combined with the scheduled reductions that we made earlier in the year
as well as our ongoing operational modernization efforts, have stabilized
the operation as we continue forward. . . . [W]e’ve improved the quality of
the schedule for our operation with more depth and more nonstop flights.
We’ve added short-haul flights in the business-oriented markets. That
provides us more options when we have weather or ATC delays.” (Id. at
139–40).
• On that same call, Jordan stated, “[W]e’ve gotten staffing stable. . . . [W]e
are in so much better shape. We’ve gotten operationally stable, same
thing.” (Id. at 141).
• In October 2022, on an earnings call, Jordan stated, “[I]t makes a big
difference in our ability to more effectively plan, set our flight schedules
and avoid revising them, and deliver a more reliable operation both for our
customers and our employees. That’s exactly what we’re doing in the
second half of 2022 . . . .” (Id. at 142).
• On that same call, Van de Ven stated, “[J]ust as with last quarter, we have
improved the quality of the schedule with more depth and more nonstop
flights. . . . [W]e’ve added short-haul flights in business or in markets, and
that provides more options when we have weather or ATC delays.” (Id. at
142–43).
• On that same call, Jordan went on, “We continue to hire and train new
employees. And that should have us well prepared for the upcoming
holiday season, and we should continue just to get better as we continue
our network restoration through next year and get even more employees
through training.” (Id. at 144).
• On that same call, Jordan was asked by an analyst about how the operations
would respond to a “really bad winter storm.” (Id. at 144). Jordan
responded, “[T]here are several things in here that are . . . helping drive the
operational improvement. . . . [W]e are so much better staffed today than
we were even 3 to 4 months ago.” (Id.).
• On that same call, Van de Ven stated, “[W]e’ve had really good experience
over the summer in difficult weather conditions with high load factors, all
the kind of things that would be an operational challenge during the
holidays, and . . . we navigated through all of them very stably. So I feel
like we’re really set up to perform well over the holidays as we go into
Thanksgiving and the Christmas season.” (Id. at 145).
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Generally, Plaintiffs allege that the aforementioned statements were materially
false and misleading because the true root cause of the operational problems was the
scheduling software—not weather, ATC delays, or staffing—and stability was impossible
without addressing the scheduling software drawbacks first. (Id. at 103, 110–11, 134, 140,
141, 143, 144–45). Further, it was misleading to suggest that the software scheduling
issues were minor or resolved. (Id. at 139, 140, 141, 143). Defendants argue that
Southwest never represented that it had addressed all of the operational issues, and the
representations are “too untethered to anything measurable.” (Dkt. No. 87-9 at 1–3).
Several of these statements contain hedging language.13 For opinions or hedges to
be actionable as a “false statement of fact,” the plaintiff must prove that the speaker did
not hold the belief they professed, even if the opinion is ultimately wrong. See Omnicare,
575 U.S. at 184, 135 S.Ct. at 1326. Plaintiffs failed to plead any facts that demonstrate that
the speakers didn’t believe their statements. The statements are therefore not
misstatements nor materially misleading.14
13 “So I feel like the worst part of all that is behind us,” (Dkt. No. 51 at 110 (emphasis
added)); “There are probably tools that we can use to more quickly notice problems and provide
solutions,” (id. at 128 (emphasis added)); “And that should have us well prepared for the
upcoming holiday season, and we should continue just to get better . . . ,” (id. at 143 (emphases
added)); “The good news is that we’ve made some adjustments to our network starting this
month that we believe will help . . . ,” (id. at 133–34 (emphasis added)); “So I feel like we’re really
set up to perform well over the holidays as we go into Thanksgiving and the Christmas season,”
(id. at 145 (emphasis added)).
14 Defendants argue that many of the opinion statements were also “[f]orward-looking
statements . . . insulated under the PSLRA safe harbor.” (Dkt. No. 57 at 26). Plaintiffs contend
that the PSLRA safe harbor does not apply. (Dkt. No. 59 at 21–22). The safe harbor provides that
“a person . . . shall not be liable with respect to any forward-looking statement, whether written
or oral, if and to the extent that . . . the plaintiff fails to prove that the forward-looking
statement . . . if made by a natural person, was made with actual knowledge by that person that
(continue)
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While several statements15 are objectively verifiable assertions, Plaintiffs do not
allege the appropriate facts to challenge Southwest’s representations. See supra
III(A)(1)(b)(i). As one example, Southwest said it had added non-stop and short-haul
flights. (Dkt. No. 51 at 140, 142). Plaintiffs did not plead facts to establish that Southwest
maintained or reduced non-stop and short-haul flights, or that adding flights did not
improve the overall stability of Southwest’s operations. See Emps.’ Ret. Sys., 905 F.3d at
901; see also Okla. Firefighters Pension & Ret. Sys. v. Six Flags Ent. Corp., 48 F.4th 195, 210,
212–15 (5th Cir. 2023) (finding that stating “our parks are progressing nicely” was
misleading when alleged facts showed that “almost no progress” had been made).
Instead, Plaintiffs speculate that adding flights without making scheduling-software
changes was like rearranging the deck chairs on the Titanic. (See Dkt. No. 51 at 140, 143).
But “securities fraud claims cannot rest on speculation and conclusory allegations.”
Coates v. Heartland Wireless Comm., Inc. (Coates II), 100 F.Supp.2d 417, 425 (N.D. Tex. 2000)
(citing In re Comshare, 183 F.3d 542, 553 (6th Cir. 1999)).
the statement was false or misleading.” 15 U.S.C. § 78u-5(c)(1). So, regardless of whether the
statements are opinions or forward-looking statements, they are not actionable because again,
Plaintiffs failed to plead any facts that demonstrate that the speakers knew that they didn’t believe
their statements.
15 “Our new hires, combined with the scheduled reductions that we made earlier in the
year as well as our ongoing operational modernization efforts, have stabilized the operation as
we continue forward . . . . [W]e’ve improved the quality of the schedule for our operation with
more depth and more nonstop flights. We’ve added short-haul flights in the business-oriented
markets. That provides us more options when we have weather or ATC delays.” (Id. at 139–40).
“[I]t makes a big difference in our ability to more effectively plan, set our flight schedules and
avoid revising them, and deliver a more reliable operation both for our customers and our
employees. That’s exactly what we’re doing in the second half of 2022 . . . .” (Id. at 142). “[W]e’ve
added short-haul flights in business or in markets, and that provides more options when we have
weather or ATC delays.” (Id. at 142–43). “[W]e are so much better staffed today than we were
even 3 to 4 months ago.” (Id. at 144).
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Two statements present closer questions. The first statement, made by Kelly in
July 2021, is misleading. He said the Company was “very well positioned and very well
prepared to manage pretty much any scenario here in the next couple of years.” (Dkt.
No. 51 at 103). Just prior, Kelly explained that “things are much better” and would
“continue to improve.” (Id. at 102). Kelly discussed the Company’s immediate focus—
“running a very high-quality, on-time airline”—and its future goals—restoring
traditional efficiencies and the route network, sustaining profitability, and resuming new
aircraft deliveries. (Id.).
Carlton is similar and instructive. 184 F.Supp.3d at 493. An executive there said
that an oil company was “well-positioned to build on [its] progress” to produce
additional oil, was “seeing significant operational progress,” and was “turning the corner
toward steady-state operations.” Id. at 493–94. The court observed that while generalized
positive statements about the company’s progress were not actionable, they became
actionable when tethered to statements about its yield projections. Id. The court reasoned
that “the promises were not so vague, subjective, or general that reasonable investors
would find them unimportant.” Id. at 494.
Similarly, Kelly’s statements go further than simply saying that Southwest was
well-positioned or prepared—they assert that the Company was solid enough to
withstand “pretty much any scenario in the next couple of years.” (Dkt. No. 51 at 103).
Coupled with the information about Southwest’s strategic priorities, it is plausible that
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an investor would find the statement important. The Court finds that this statement is
misleading.16
The second statement, made by Jordan in July 2022, is ultimately not misleading.
Plaintiffs focus on the assertion that Southwest had “gotten staffing stable” and was
“operationally stable.” (Id. at 141). In isolation, the statement could be misleading and
interpreted as Jordan promising that the Company would be operationally stable in
perpetuity. (See id. at 141). But a broader review of Jordan’s statement, as is required by
Omnicare, 575 U.S. at 190, 135 S.Ct. at 1330, clarifies that he was referring to progress in
the preceding six months. (Dkt. No. 51 at 141 (“If you look at just the past six months and
where we were.”)). Jordan was saying that, as compared to the Company’s staffing and
operations in February 2022, Southwest had improved. (See id. at 141). Because Plaintiffs
offer no facts to refute that Southwest had stabilized its staffing or operations in July 2022
compared to the preceding six months, Jordan’s statement is not actionable.
e. Statements Regarding the Disruption Events
Southwest suffered three major flight disruption events during the Class Period.
See supra I(B). The Complaint alleges that Southwest’s statements about these events are
misleading because the Company dishonestly blamed the events on non-scheduling
software issues. The Court finds that the Complaint fails to adequately allege the
statements are materially false or misleading statements, with the exception of three
statements.
16 However, Plaintiffs’ claim still fails because there are no well-pleaded facts to establish
Kelly’s scienter. See infra III(A)(2)(b).
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i. June 2021 Event
Plaintiffs allege several statements relating to the June 2021 disruptions were
materially false and misleading:
• On June 14, 2021, in an article published in KTSM, Southwest stated that it
had suffered a “technical difficulty” and “[w]e’ve resumed normal flight
operations after our third-party weather data provider experienced
intermittent performance issues Monday evening preventing transmission
of weather information that is required to safely operate our aircraft.” (Dkt.
No. 51 at 99).
• On June 15, 2021, in a CNBC article, Southwest spokesman Chris Mainz
stated, “Southwest is in the process of resuming normal operations after a
brief pause in our flight activity resulting from intermittent performance
issues with our network connectivity Tuesday afternoon. . . . Our Teams
are working quickly to minimize flight disruptions and Customer impact.”
(Id. at 100). Further, Southwest did not believe the issue was connected to
the June 14, 2021, problem. (Id.).
• On June 16, 2021, in a New York Times article, Southwest spokesman Dan
Landson said, “While our technology issues from Tuesday have been
resolved, we are still experiencing a small number of cancellations and
delays across our network as we continue working to resume normal
operations.” (Id. at 101). The article also reported that Landson stated that
the June 15 network connectivity issues were unrelated to the June 14
weather data problems. (Id.).
• On July 22, 2021, on an earnings conference call, Kelly stated, “Normal
summer demand is always a challenge to manage, and it’s, of course, even
more so here in 2021, especially in June when we had technology issues and
bad weather combined. . . .”17 (Id. at 102).
• On that same call, Van de Ven stated, “Mid-month [June], we did run into
a combination of technology issues, followed by weaker weather challenges
across our entire network. And those introduced some extreme delays into
the network, and it caused significant crew availability concerns as well as
delays and cancellations that impacted our customers, and that dropped
our OTP to 62.4% for June. . . . As we move through July, weather is still a
17 Kelly also stated, “So we’re very well positioned and very well prepared to manage pretty
much any scenario here in the next couple of years.” That portion of the statement was addressed
in supra III(A)(1)(d).
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bit of a concern as is the overall tempo of the airport environment. But the
entire industry is feeling the impact of those things, and that’s reflected in
the overall industry OTP thus far in July. We expect our operational
reliability to continually improve from our June performance. We use
planning models that require an adequate level of airplanes and people and
facilities to run our schedules. As we entered into the second quarter, we
had all those resources aligned and we were on track until roughly mid-
June. And so there are a couple of focus areas for the operation as we move
forward. . . . And we’re still ramping up the operation, and we have 16
fewer flight [sic] than we did in June of 2019, which for us means there are
fewer ways to reaccommodate customers when we have delays or
cancellations, while higher volumes and fewer reaccommodation options
translate for us into a longer operating day. . . . But our employees just
navigate those—through those things heroically.” (Id. at 104–05).
• On that call, Nealon stated, “I think that this is a network that is so
technology-dependent and so network-dependent that I think that’s an area
of investment that everyone’s probably investing more in.” (Id. at 106).
• On that call, Nealon stated, “First of all, it was not a cybersecurity issue. It
was not a hardware failure. It was not an engineering failure or an
architectural issue. It was a human error. And it’s just something that was
a mistake made and we’re dealing with it. But it was not a structural issue
or investment level issue. It was just a simple human error. . . . But this was
not a failure of technology, if you will, it was a human mistake.” (Id. at 108).
• On that call, Kelly stated, “So weather, we factored in weather as best we
could, and the weather was more spring-like in June, in particular, than
normal. And so that kind of whacked us. That’s out of our control.
Technology are one-off things. . . . I blame it on the pandemic.” (Id. at 109).
• On that call, Nealon stated, “The biggest change that I think we faced this
year with 20/20 hindsight is we can’t absorb those significant events as
efficiently this year as we did in the past, because we don’t have as much
frequency in our network today that we did yesterday, but we will in the
future. . . . And then also, we’re going to come into a period of time where
we don’t have the thunderstorms and these pop-up weather events that we
do here in June and July.”18 (Id. at 110).
18 Nealon also stated, “So I feel like the worst part of all that is behind us. And given all the
information that we had, as Gary said, we were planned appropriately well . . . . But I think the
worst—clearly the worst of it is behind us in June.” (Dkt. No. 51 at 110). That portion of the
statement was addressed in supra III(A)(1)(d).
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• In September 2021, at a conference, Jordan stated, “[W]e had a tough
summer, operating sometimes in the 60s, and a lot of that was due to being
understaffed. . . . But we need to get the operation and the staffing
matched . . . .” (Id. at 112).
• In October 2021, in an interview, Kelly stated, “The two technology outages
that occurred back in June were human error so it wasn’t a lack of
technological capability, it was simply, in one case, not adhering to a
procedure.” (Id. at 118).
Plaintiffs contend that these statements were misleading because Southwest
blamed several factors, including a third-party provider and “network connectivity,”
when it knew that the scheduling software was “on the verge of triggering a catastrophic
meltdown.” (Id. at 99, 100–01); (see also id. at 101–02, 103, 108, 109). Further, Southwest
had not begun to address the technology issues and ignored warnings from its
employees. (Id. at 105, 107). Accordingly, it was misleading to suggest “the June
Meltdown was a one-off event unlikely to occur again rather than . . . another example of
a system problem very likely to occur again . . . .” (Id. at 108).
The Court does not agree with Plaintiffs’ assessment. A majority of the statements
are about the causes of the June 2021 disruptions—technology problems, third-party
weather data issues, network connectivity, bad weather, human error, less network
frequency, the pandemic, and understaffing. While Plaintiffs claim the scheduling
software was the central cause, they have not pled any facts showing that the other
problems did not contribute to the June 2021 disruptions.
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At least two of the statements include comments about the Company’s operations
and technology.19 Neither are actionable. First, in July 2021, Van de Ven explained that
although Southwest had stabilized operations during the second quarter, the June
disruptions stalled progress, and the Company was still “ramping up the operation.”
(Dkt. No. 51 at 104). Plaintiffs have not pled facts to establish that operations were
unstable during the second quarter of 2021 before the June disruptions or that Southwest
was not restoring its operations in July. Plaintiffs’ argument that the comment was
misleading by suggesting that the Company had acted responsibly in its planning is
untenable and unsupported by the record. (Dkt. No. 51 at 105). Second, Nealon said that
the airline industry was focused on investing in technology improvements. (Id. at 106).
Plaintiffs argue that the assertion was misleading because Southwest hadn’t “adequately
invested in optimizing Southwest’s critical technology infrastructure.” (See id.). But
whether Southwest had invested “adequately” in the past has no bearing on determining
whether technology would be a priority for the Company moving forward. (See id.).
Accordingly, the Court finds that these statements are not actionable.
19 “We expect our operational reliability to continually improve from our June
performance. We use planning models that require an adequate level of airplanes and people
and facilities to run our schedules. As we entered into the second quarter, we had all those
resources aligned and we were on track until roughly mid-June. And so there are a couple of
focus areas for the operation as we move forward. . . . And we’re still ramping up the operation,
and we have 16 fewer flight [sic] than we did in June of 2019, which for us means there are fewer
ways to reaccommodate customers when we have delays or cancellations, while higher volumes
and fewer reaccommodation options translate for us into a longer operating day. . . . But our
employees just navigate those—through those things heroically.” (Dkt. No. 51 at 104–05). “I
think that this is a network that is so technology-dependent and so network-dependent that I
think that’s an area of investment that everyone’s probably investing more in.” (Id. at 106).
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Two statements that attribute the June 2021 disruptions to solely human error are
misleading. Over a month after the June 2021 disruptions, Nealon insisted that it was
“not a structural issue or investment level issue. It was just a simple human error. . . . But
this was not a failure of technology, if you will, it was a human mistake.” (Id. at 108).
Then, in the wake of the October disruptions, Kelly doubled down, reiterating that the
June event was caused by “human error” and not “a lack of technological capability.” (Id.
at 118).
Unlike the other statements that emphasize that the event was caused by a
combination of issues including technology deficiencies, these statements convey the
complete opposite message. By suggesting that technology issues played no part in the
June event, Plaintiffs believe Defendants Nealon and Kelly “gave the market the false
impression that the June Meltdown was a one-off event unlikely to occur again . . . .”
(Dkt. No. 51 at 108). The Court agrees.
In addition to Southwest’s own contradictory explanations, Plaintiffs pled at least
some facts indicating that technology did, in fact, play a role in the disruptions. (See Dkt.
No. 51 at 31 (discussing a New York Times article published on June 16, 2021, that stated
“technical troubles” and “technological problems” caused the cancellations)). Because it
is plausible than an investor would rely on them, the Court finds that the “human error”
statements are misleading.20 See Southland Sec. Corp., 365 F.3d at 362.
20 However, Plaintiffs’ claim still fails because there are no well-pleaded facts to establish
either Nealon’s or Kelly’s scienter. See infra III(A)(2)(b), (f).
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ii. October 2021 Event
Plaintiffs allege several statements relating to the October 2021 disruptions were
materially false and misleading:
• On October 9, 2021, Southwest published a post on X stating, “ATC [air
traffic control] issues and disruptive weather have resulted in a high
volume of cancellations throughout the weekend while we work to recover
our operation.” (Dkt. No. 51 at 113).
• Later that day, Southwest clarified that statement explaining, “We
experienced significant impact in the Florida airports yesterday evening
after an FAA-imposed air traffic management program was implemented
due to weather and resulted in a large number of cancellations.” (Id. at 114).
• On October 11, 2021, Southwest published a news release on its website
stating, “On Friday evening, the airline ended the day with numerous
cancellations, primarily created by weather and external
constraints . . . . Unfortunately, the out-of-place aircraft and continued
strain on our Crew resources created additional cancellations across our
point-to-point network that cascaded throughout the weekend and into
Monday.” (Id. at 114–15).
• On October 12, 2021, on a CNBC program, Kelly stated, “[E]very single
airport in the state of Florida was impacted by this. So it’s, it’s very unique.
It’s very unusual. It wasn’t anything that Southwest caused. If you go back
to the June outage, that was, that was us. That was a technology outage and
those are, those are few and far between. . . . We were thinly staffed coming
into the weekend and that certainly didn’t help things as we were trying to
recover. . . .” (Id. at 116).
• Kelly went on, in response to an interviewer’s comment that the June and
October outages were unrelated, “[N]ot related at all but I think in the, in
this particular case, it would help for us to have better tools to
recover. . . . And then, secondly, there’s technology that’s required to
reschedule our flight crews . . . it’s just difficult to get that back together so
I think the opportunity is to improve on that process.” (Id. at 117).
• On October 21, 2021, on an earnings conference call, Jordan stated, “Our
challenges started with a widespread ATC ground stop and ground delay
program that effectively shut down our Florida operation from that
afternoon through the end of the day. . . . [T]hat caused a significant
number of crews and aircraft to be out of position and then that took several
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days to recover. . . . [T]he key to continued improvement is getting staffed
and continuing to invest in our operation, and we are absolutely laser-
focused on both of those. Looking forward, our immediate goals are really
basic: number one, to bulk up our staffing.” (Id. at 119).
• On that same call, Van de Ven stated, “[I]n a separate but still related issue
from on-time performance is balancing our schedule with our crew
resources. . . . [W]e continue to add staffing, and we’ve made schedule
adjustments to both improve our on-time performance and add more
staffing cushion to navigate through our current environment. And as our
environment and our staffing and scheduling balance begin to stabilize,
we’ll be in a good position to begin restoring our network frequencies
during 2022.” (Id. at 119–20).
• On the call, Watterson stated, “So just the level of capacity versus staffing
was the initial issue. The second is the day-to-day recovery is more difficult
when you have fewer options for reaccommodation, whether that’s
reaccommodating the customer, the crew or even the airplane to get it
where it needs to be that night. And so bringing back that density, we’ve
identified as the #1 thing that will help our day-to-day operations recover
more easily when there are things that are exogenous shocks from weather
or something else that allows us to recover.” (Id. at 121).
• Jordan then stated, “So by the time we were ready to fly, for example, the
summer, we just weren’t staffed to the point that we thought we would
be. . . . So to me, really the learning is on just how important it is . . . to have
that margin in the crew network, especially as you operate. . . . [T]he
learnings were really more there, the importance of staffing than they were
on the network design.” (Id. at 121–22).
• Van de Ven echoed Jordan stating, “[T]he biggest learning that I’ve had is,
and I talked about it earlier, is this industry ecosystem. And it’s dependent
on having people at work. . . . And that’s where I think everybody got into
issues with their on-time performance and their staffing and their crews.”
(Id. at 122).
Plaintiffs argue that these statements were materially false and misleading because
the real cause of the issue was not disruptive weather or staffing but rather deficient
technology. (Id. at 114, 120, 121, 122, 123). Further, the June and October outages were
related and caused by the same systems, which “could not handle the inevitable short
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notice cancellations that followed a brief inclement weather event.” (Id. at 114); (see also
id. at 115, 117, 120, 121, 122, 123). In support, Plaintiffs point to a post issued by ATC:
Flight delays & cancellations occurred for a few hours Friday
PM due to widespread severe weather, military training, &
limited staffing in one area of the Jacksonville en route center.
Some airlines continue to experience scheduling challenges
due to aircraft and crews being out of place.
(Id. at 40).
The majority of the statements at issue implicate the causes of the October 2021
disruptions. As with the June 2021 disruptions, see supra III(A)(1)(e)(i), Plaintiffs claim
that the scheduling software was the fundamental issue but did not plead any facts
showing that the other cited problems did not contribute to the October 2021 disruptions.
Indeed, the ATC post indicates that severe weather, military training, and limited staffing
initially caused the flight delays and cancellations, (Dkt. No. 51 at 40), which is consistent
with Defendants’ representations.
At least three of the statements remark on anticipated technological and
operational developments. For instance, Kelly stated that there was an opportunity to
improve the technology to reschedule flight crews, (id. at 117), and Van de Ven mentioned
adding staff and adjusting schedules to restore “network frequencies in 2022,” (id. at 120).
(See also id. at 121 (Watterson’s statement)). These comments were not misleading,
because they were general observations that were consistent with other statements made
by the Company. Just three months prior, in July 2021, Southwest cautioned that the
Company was still “ramping up the operation.” (Id. at 104). Just one month prior, in
September 2021, Southwest explained that it needed to “get the operation and the staffing
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matched.” (Id. at 112). Southwest never promised—nor would any reasonable investor
believe—that the Company would have every operational issue resolved by October. In
other words, the efforts Southwest mentioned in July and September were still on-going
in October. To the extent Plaintiffs disagree with Defendants’ strategic decisions—
including the pace and priority of technological upgrades—that is a dispute over the
Company’s business decisions. Such disputes do “not state a claim under federal
securities law.” Coates I, 26 F.Supp.2d at 922 (quoting Novak, 997 F.Supp. at 432). Thus,
the Court finds that these statements are not actionable.
Only one statement warrants a deeper dive. Kelly stated that the June and October
outages were “not related at all.” (Dkt. No. 51 at 117). Plaintiffs pled facts indicating that
technology was a factor in the June disruptions. See supra III(A)(1)(e)(i). Plaintiffs also
pled at least some facts indicating that technology was a factor in the October disruptions.
(Dkt. No. 51 at 14 (“SWAPA published an article explaining that the October Meltdown
was primarily caused by Southwest’s Flawed Systems.”)). Because it is plausible that an
investor would rely on them, the Court finds that the statements indicating that the June
and October 2021 disruptions were unrelated are misleading.21 See Southland Sec. Corp.,
365 F.3d at 362.
iii. December 2022 Event
Plaintiffs allege several statements relating to the December 2022 disruptions were
materially false and misleading:
21 However, Plaintiffs’ claim still fails because there are no well-pleaded facts to establish
Kelly’s scienter. See infra III(A)(2)(b).
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• On December 21, 2022, Southwest issued a press release stating, “The Safety
of Employees and Customers is Southwest’s top priority and proactive
schedule adjustments aim to ensure safe operations, protect the integrity of
the entire Southwest Network, and limit subjecting our People to
dangerous working conditions. Of the nearly 8,000 scheduled flights for
both Thursday, Dec. 22[,] and Friday, Dec. 23, Southwest has canceled
about 500 flights.” (Dkt. No. 51 at 149).
• Southwest subsequently issued another press release that was largely a
copy of the prior-day’s release but added, “Most of these disruptions were
proactive schedule adjustments to ensure safe operations, to protect the
integrity of the entire Southwest Network, and to limit prolonged exposure
in dangerous working conditions. However, the changing operational
environment and treacherous conditions led to additional later
cancellations.” (Id. at 150).
• On December 23, 2022, Southwest issued another press release stating, “We
continue to proactively manage and update our operational plan and flight
schedules in response to Winter Storm Elliott. With more than half of the
airports where we operate in the continental U.S. under duress from the
storm, Southwest has been uniquely effected [sic] given our size and
structure. As it remains a very dynamic situation, we don’t have specific
numbers to share on flight disruptions, but the storms have forced
hundreds of cancelations throughout our network.” (Id. at 151). A copy of
the release was largely re-issued the next day. (Id. at 152).
• On December 26, 2022, Southwest issued a press release stating, “We were
fully staffed and prepared for the approaching holiday weekend when the
severe weather swept across the continent, where Southwest is the largest
carrier in 23 of the top 50 travel markets in the U.S. These operational
conditions forced daily changes of an unprecedented volume and
magnitude to our flight schedule and the tools our teams use to recover the
airline remain at capacity.” (Id. at 153). Southwest issued a virtually
identical statement the following day as well. (Id. at 154).
• On December 27, 2022, Jordan stated, “[A]fter days of trying to operate as
much of our full schedule across the busy holiday weekend, we reached a
decision point to significantly reduce our flying to catch up. . . . The tools
we use to recover from disruption serve us well, 99 percent of the time; but
clearly, we need to double down on our already existing plans to upgrade
systems for these extreme circumstances so that we never again face what’s
happening right now.” (Id. at 155).
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• On December 31, 2022, Southwest issued a press release where Jordan
stated, “One of our five-year strategic plan priorities established in 2021 is
to modernize the operation along with a 2022 company focus area of getting
back to our historic operational reliability and efficiency. As Andrew
stepped into his role, he told you all that one of his key areas of focus was
to improve our ability to recover effectively from irregular operations and
invest in processes, People, and technology that were already underway.”
(Id. at 157).
• In January 2023, during a conference call with investment analysts and
media members, Jordan stated, “[B]ased on what we know at this point, our
processes and technology generally worked as designed. But we were hit
by an overwhelming volume of close-in cancellations, which put us behind
in creating crew solutions, which, in turn, pushed us to manual efforts and
solutions . . . . We’re also currently budgeted to spend $1.3 billion of our
2023 annual operating plan on investments, upgrade and maintenance of
our IT systems, which is higher than what we spent in 2022.” (Id. at 159–
60).
• In February 2023, the Committee held a hearing and Watterson testified,
“To be clear, our Crew Scheduling software didn’t stop working during this
event. However, the pace and volume of close-in Crew and schedule
changes over multiple days left our Crew Scheduling professionals unable
to efficiently address the state of the operation. . . . Without updated Crew
schedules, the Crew decision support software could not reassign Crews to
solve for flights with Crew coverage issues.” (Id. at 161).
Plaintiffs argue that these statements were materially false and misleading because
Southwest would not be able to recover after Winter Storm Elliott subsided due to the
deficient scheduling software and because the Company would be forced to manually re-
schedule flights, pilots, and crews for days. (Id. at 149). In their view, the December 2022
disruptions were not caused by Southwest’s size and structure, the unprecedented
weather, staffing, or close-in cancellations, but instead were due to its scheduling
software. (Id. at 151, 152, 153–54). They contend that “every other airline was able to
promptly resume normal operations when the bad weather subsided, and but for the
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[scheduling software], Southwest would have been able to recover quickly like other
airlines.” (Id. at 156).
Plaintiffs allege no facts showing that Defendants’ statements about the
Company’s ability to recover its operations were misleading. Southwest previously
disclosed how cancellations cascaded for multiple days after the October 2021 disruption
event and made no assurances that it had remedied those issues before December 2022.
Just two months prior, in an October 2022 earnings call, Southwest executives discussed
at length how they were working on improving the schedule and staffing but that those
efforts were ongoing. (Id. at 142–45). Further, Southwest stated—and Plaintiffs do not
dispute—that the Company had managed “difficult weather conditions with high load
factors” stably that summer, justifying its prediction that it was set up to perform well
that winter. (Id. at 145). And these statements are consistent with Southwest publicly
disclosing in 2021 its modernization efforts over the next five years. See supra
III(A)(1)(b)(ii).
As with the June 2021 disruptions, see supra III(A)(1)(e)(i), and October 2021
disruptions, see supra III(A)(1)(e)(ii), Plaintiffs claim the scheduling software was the
fundamental issue but did not plead any facts showing that the other cited problems did
not contribute to the December 2022 disruptions. Along the same lines, while they
pleaded facts to show that other airlines recovered more quickly than Southwest, (id. at
67–68), Plaintiffs ultimately failed to rule out that Southwest’s lag was due to its size and
structure.
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As for Jordan’s statement that upgrades “were already underway” as Watterson
stepped into his role, Plaintiffs argue that it was misleading because the December 2022
disruptions demonstrated that the scheduling software had not changed. (Dkt. No. 51 at
158). A lack of scheduling software improvements doesn’t necessarily mean that system
upgrades were not underway, especially considering Watterson began as Chief
Operations Officer in October 2022. Neither Watterson nor Jordan promised to overhaul
the entire system in two months’ time, nor would any reasonable investor have such
unrealistic expectations.
Watterson’s statement before the Committee that “our Crew Scheduling software
didn’t stop working” is a closer call but ultimately not misleading. (Dkt. No. 51 at 161).
In isolation, the statement could be interpreted as Watterson claiming that the systems
operated perfectly fine through the December 2022 disruptions.22 But upon broader
review, Watterson clarifies what he meant by the software “didn’t stop working.” See
Omnicare, 575 U.S. at 190, 135 S.Ct. at 1330 (requiring statements be considered in context).
He explains that the “Crew Scheduling professionals [were] unable to efficiently address
22 To be sure, Plaintiffs pled facts indicating that the scheduling software at the very least
malfunctioned during the December 2022 disruptions. (Dkt. No. 51 at 62 (SWAPA published an
article on December 26, 2022, stating, “We all know that the Company has had its head buried in
the sand when it comes to its operational processes and IT. Worst of all, through the numerous
and ever-increasing meltdowns that we have endured during the last 20 months (much less the
last decade) Southwest has had enough crews in place to operate the planned schedule. It’s not
until SkySolver and scheduling roulette begin that the network spirals out of control.”)); (id. (In
an article published by the Dallas News on December 26, 2022, TWU stated, “This is not a staffing
issue, this has nothing to do with flight attendants not being able to work, it has to do with archaic,
outdated . . . systems.”)); (id. at 64–65 (In a CNN interview on December 27, 2022, a SWAPA
spokesperson stated, “[I]t really just has to do with outdated processes and outdated IT. . . . [I]t’s
the programs used to connect us . . . to airplanes—that’s where the problem lies, and it’s systemic
throughout the whole airline.”)).
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the state of the operation” and that “[w]ithout updated Crew schedules, the Crew
decision support software could not reassign Crews to solve for flights with Crew
coverage issues.” (Dkt. No. 51 at 161). Put differently, Watterson’s “didn’t stop working”
comment was qualified by his surrounding explanation that the scheduling software
encountered serious issues during the December 2022 disruptions. And this statement
was not inconsistent with the Company’s prior representations about prevalent
scheduling-software issues. See supra III(A)(1)(a), (b), (d), (e). Thus, the Court finds that
Watterson’s statement is not actionable.
2. Required State of Mind
Plaintiffs must allege that the misstatements were made with scienter, or that
Defendants made them with “an intent to deceive, manipulate, or defraud or severe
recklessness.” Ind. Elec., 537 F.3d at 533 (citation omitted). Simple and even gross
negligence are insufficient to meet the PSLRA’s scienter requirement. See Abrams, 292
F.3d at 430. “A district court may best make sense of scienter allegations by first looking
to the contribution of each individual allegation to a strong inference of scienter . . . . Of
course, the court must follow this initial step with a holistic look at all the scienter
allegations.” Owens, 789 F.3d at 537.
The Court first examines the scienter allegations raised as to the Individual
Defendants collectively, then the scienter allegations as to Individual Defendants
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individually,23 and finally “all the scienter allegations” holistically. See id. For the reasons
discussed below, the Court finds that the Complaint fails to plead facts creating the
requisite strong inference of scienter as to any Defendant.
a. Allegations Common to All Individual Defendants
Plaintiffs allege that (1) the occurrence of less severe prior disruptions and
(2) public criticisms by Southwest’s employee unions are evidence of the Individual
Defendants’ scienter. (Dkt. No. 51 at 163–67). Such “group pleading” allegations do not
contribute to a strong inference of scienter. “[U]nder the PSLRA plaintiffs must
‘distinguish among those they sue and enlighten each defendant as to his or her particular
part in the alleged fraud.’ . . . Therefore, even if in a non-PSLRA case an assertion
regarding ‘defendants’ collectively might be viewed deferentially to mean all the
defendants in the case, in a PSLRA action an allegation made against the ‘defendants’
will normally have the effect of naming no defendant at all, because the assertion will not
enlighten each defendant as to the person’s particular part in the alleged fraud.” Fener v.
Belo Corp., 425 F.Supp.2d 788, 797 (N.D. Tex. 2006) (quoting Southland, 365 F.3d at 365).
Even applying the allegations to those Individual Defendants that made a
misleading statement—namely, Kelly and Nealon—those allegations do not contribute
to a strong inference of scienter. Most importantly, the Complaint facially acknowledges
that risk of disruption events and the unions’ criticisms were publicly disclosed, which
23 Kelly and Nealon are the only Individual Defendants that the Court determined made
misleading statements. See supra III(A)(1)(d), (e)(i), (e)(ii). Nevertheless, the Court considers the
Complaint’s allegations regarding all Individual Defendants’ scienter as possible additional
grounds for dismissal.
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negates scienter. See Owens, 789 F.3d at 540 (“Plaintiffs contend that several ‘red
flags’ . . . should have alerted each defendant that the [portfolio] valuation was materially
incorrect. . . . Even as to those alleged misstatements that occurred after the ‘red flags’
were apparent, the red flags were disclosed to the public, which negates the inference
that defendants acted with scienter.”). To the extent Plaintiffs assert that Southwest
received nonpublic communications, either from the employee unions or otherwise, the
Complaint fails to allege any details about the contents, timing, or recipients of such
communications or that the communications differed from the information already in the
public domain. See Abrams, 292 F.3d at 432 (noting that plaintiffs must allege
“corroborating details regarding the contents of allegedly contrary reports, their authors
and recipients”); Flaherty & Crumrine Preferred Income Fund, Inc. v. TXU Corp., 565 F.3d
200, 211 (5th Cir. 2009) (noting that a statement consistent with company’s prior
disclosures does not establish scienter). As such, the Court finds that the allegations
about the occurrence of less severe prior disruptions and public criticisms by Southwest’s
employee unions do not contribute to a strong inference of scienter.
Plaintiffs also allege that the Individual Defendants possessed the motive to
commit fraud because “their compensation was heavily dependent on it.” (Dkt. No. 51 at
168–69); (see also id. at 71 (“[T]he Individual Defendants’ Southwest stock compensation
was many multiples higher than their salaries.”)). Again, such “group pleading”
allegations do not pass muster. Fener, 425 F.Supp.2d at 797 (quoting Southland, 365 F.3d
at 365). Nevertheless, even assuming that the allegations apply individually to Kelly and
Nealon, they do not meaningfully contribute to a strong inference of scienter. While
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“allegations of motive and opportunity . . . may enhance other allegations of scienter,”
the Fifth Circuit has stated that “the desire for enhanced incentive compensation and the
desire to sell stock at inflated prices” are “not the types of motive that support a strong
inference of scienter.” See Abrams, 292 F.3d at 430, 434. Indeed, “[i]t does not follow that
because executives have components of their compensation keyed to performance, one
can infer fraudulent intent.” Id. at 434 (quoting Tuchman v. DSC Commc’ns Corp., 14 F.3d
1061, 1068–69 (5th Cir. 1994)). Accordingly, the Court finds that the allegations about the
Individual Defendants’ motivations do not contribute to a strong inference of scienter.
Plaintiffs allege that “because of their positions with the Company,” the Individual
Defendants had “access to material non-public information” and “knew that the adverse
facts specified [in Plaintiffs’ Complaint] had not been disclosed to, and were being
concealed from, the public.” (Dkt. No. 51 at 22). That argument fails. The Fifth Circuit
has rejected arguments about presuming knowledge of internal facts based on an officer’s
position at the company.24 See Local 731 I.B. of T. Excavators & Pavers Pension Tr. Fund v.
Diodes, Inc., 810 F.3d 951, 958 (5th Cir. 2016). Indeed,
Conclusory allegations that [Defendants] had the requisite
scienter based on their executive positions at [the Company],
their involvement in day-to-day management of its business,
24 To be sure, the Fifth Circuit recognizes a narrow exception, where “special
circumstances” support a strong inference of scienter for officers by virtue of their positions. See
Local 731, 810 F.3d at 959. When determining whether the exception applies, courts consider four
factors. Id. “First, the smaller the company the more likely it is that corporate executive would
be familiar with the intricacies of day to day operations. . . . Second, the transaction at issue may
have been critical to the company’s continued vitality. . . . Third, the misrepresented or omitted
information at issue would have been readily apparent to the speaker. . . . Fourth, the defendant’s
statements were internally inconsistent with one another.” Id. (internal citations omitted).
Plaintiffs did not (and likely could not) raise the exception.
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their access to internal corporate documents, their
conversations with corporate officers and employees, and
their attendance at management and Board meetings are
insufficient; [Plaintiffs] need to provide details about alleged
negative internal reports, when they were prepared, who
prepared them, their content, the sources from whom
plaintiffs obtained such information, etc.
In re Sec. Litig. BMC Software, Inc., 183 F.Supp.2d 860, 887 (S.D. Tex. 2001). The Court finds
that the Individual Defendants’ positions within the Company do not weigh in favor of
a strong inference of scienter.
And finally, Plaintiffs characterize Defendants’ scienter defenses as nothing more
than a fact-intensive “truth-on-the-market” defense that cannot be decided in a motion
to dismiss. (Dkt. No. 59 at 9); (Dkt. No. 87-2 at 13, 40). However, as the Court understands
it, Defendants are not arguing that the alleged misrepresentations and “the truth” were
“transmitted to the market with roughly equal intensity and credibility” such that the
market was never misled. In re Apple Computer Sec. Litig., 886 F.2d 1109, 1114 (9th Cir.
1989). Instead, Defendants are asserting “that the public disclosures regarding
Southwest’s need to ‘modernize’—both through Southwest’s own disclosures and
through the admittedly public union press releases—undercuts an inference . . . that
Defendants acted with scienter.” (Dkt. No. 87-7 at 42). In other words, no inference of
scienter arises when there is little daylight between Southwest’s public statements and
“the truth.” The Court agrees and finds that Defendants’ relative transparency negates
any claim that they intended to defraud the market.
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b. Kelly’s Scienter
While Kelly made three statements that were misleading in July and October 2021,
see supra III(A)(1)(d), (e)(i), (e)(ii), Plaintiffs have failed to allege facts showing that he
possessed the requisite scienter when the statements were made. Allegations that Kelly
was an executive, that he was warned by the employee unions about the Company’s
operational exposure, and that he was incentivized to raise Southwest’s stock price are
not enough to show that he knew (or recklessly disregarded) in July 2021 that Southwest
was not positioned or prepared for future disruption events. Nor are they enough to
show that he knew (or recklessly disregarded) the causes of the June and October 2021
disruption events. This is especially so considering that the Complaint does not allege
that Kelly was individually apprised in advance of any undisclosed facts that
contradicted his statements. See Rosenzweig v. Azurix Corp., 332 F.3d 854, 868 (5th Cir.
2003) (dismissing complaint that “fail[ed] to identify exactly who supplied the
information [that contradicted company’s public disclosures] or when [management]
knew the information”).
The Complaint also alleges that Kelly signed certifications verifying the accuracy
of any material changes to the Company’s internal controls over financial reporting and
the disclosure of all fraud under the Sarbanes-Oxley Act of 2002 (“SOX”), which were
attached to the 2019 and 2020Annual Reports, (Dkt. No. 51 at 82, 92), and the 1Q20, 2Q20,
3Q20, 1Q21, 2Q21, and 3Q21 Reports, (id. at 87, 89, 90, 97, 111, 125). A signature on a SOX
certification may raise an inference of scienter if the signer had reason to know or should
have suspected the filings were false and those filings form the basis of the claims
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asserted. Cent. Laborers’ Pension Fund v. Integrated Elec. Servs. Inc., 497 F.3d 546, 555 (5th
Cir. 2007). However, the Court previously found that the Complaint failed to sufficiently
plead that the annual and quarterly reports contained any statements that were false or
misleading. See supra III(A)(1)(a), (b). Accordingly, Kelly’s signatures on the SOX
certifications do not contribute to a strong inference of scienter.
Taking the Complaint as a whole, the Court finds that the allegations do not raise
a strong inference of Kelly’s scienter.
c. Romo’s Scienter
Romo did not make any materially false or misleading statements during the Class
Period. See supra III(A)(1). Even if she had, the scienter allegations against Romo fall
short of the PSLRA’s requirements. Plaintiffs allege that Romo was an executive, that she
was apprised of the Company’s issues due to the warnings by the employee unions, and
that she was motivated to inflate Southwest’s stock price to increase her compensation.
(Dkt. No. 51 at 163–69). The Court previously determined that these allegations common
to all Individual Defendants were deficient and do not contribute to a strong inference of
scienter. See supra III(A)(2)(a).
The Complaint also alleges that Romo signed the SOX certifications that were
attached to the 2019, 2020, and 2021 Annual Reports, (Dkt. No. 51 at 82, 92, 128), and the
1Q20, 2Q20, 3Q20, 1Q21, 2Q21, 3Q21, 1Q22, 2Q22, and 3Q22 Reports, (id. at 87, 89, 90, 97,
111, 125, 136, 137–38, 146). However, because the Complaint failed to sufficiently plead
that the annual and quarterly reports contained any statements that were false or
misleading, see supra III(A)(1)(a), (b), Romo’s signatures on the SOX certifications do not
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contribute to a strong inference of scienter. See Cent. Laborers’ Pension Fund, 497 F.3d at
555.
Taking the Complaint as a whole, the Court finds that the allegations do not raise
a strong inference of Romo’s scienter.
d. Jordan’s Scienter
Jordan did not make any materially false or misleading statements during the
Class Period. See supra III(A)(1). Even assuming that he did, the Complaint fails to
adequately plead that Jordan had the requisite scienter. Plaintiffs allege that Jordan was
an executive, that he was apprised of the Company’s issues due to the warnings by the
employee unions, and that he was motivated to inflate Southwest’s stock price to increase
his compensation. (Dkt. No. 51 at 163–69). These allegations, made collectively as to all
Individual Defendants, fail to contribute to a strong inference of scienter. See supra
III(A)(2)(a).
The Complaint also alleges that Jordan signed the SOX certification that was
attached to the 2021 Annual Report. (Id. at 128). Also, similar to Kelly and Romo, Jordan
signed various SOX certifications that were attached to the 1Q22, 2Q22, and 3Q22
Reports. (Dkt. No. 51 at 136, 138, 146). And similar to the outcome with Kelly and Romo,
the absence of any false or misleading statements in the annual and quarterly reports
means that Jordan’s signatures on the certifications do not contribute to a strong inference
of scienter. See Cent. Laborers’ Pension Fund, 497 F.3d at 555.
The Complaint alleges that Jordan knew “the seriousness” of the December 2022
disruptions by December 24, 2022. (Dkt. No. 51 at 168). Plaintiffs argue that “this
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admission is significant because it further strengthens his scienter and illustrates that he
was not being candid with the market.” (Id.). Generally, asserting admissions that
postdate the alleged misrepresentations amounts to “classic fraud-by-hindsight pleading
that is not sufficient to raise a strong inference of scienter.” Heck v. Orion Grp. Holdings,
Inc., 468 F.Supp.3d 828, 854 (S.D. Tex. 2020) (citing first Southland, 365 F.3d at 383; and
then citing Lormand, 565 F.3d at 254). Nevertheless, in Lormand, the Fifth Circuit departed
from the general rule and found later admissions could provide circumstantial evidence
of a speaker’s state-of-mind at the time of his misleading statements and omissions. 565
F.3d at 254. There, the Fifth Circuit noted and explained:
In the exhibits to his complaint, the plaintiff provides
numerous contemporaneous documents, such as internal
emails and memos, that support a strong inference that the
defendants had a wrongful state of mind at the time of their
representations. The plaintiff also provides admissions from
the defendants themselves regarding their state of mind at the
time of their representations (as found in the defendants’
post-class period deposition testimony and emails). The
contemporaneous documents and post-period admissions
both consistently tell the same story: the defendants privately
knew, at the time of the representations, that the . . . programs
. . . would be disastrous for the company but continued to tout
their benefits publicly.
Id.
This case is not like Lormand; it falls squarely in the “classic fraud-by-hindsight”
camp. Plaintiffs do not “directly and cogently” link Jordan’s acknowledgment of
operational problems on December 24, 2022, to any prior (or subsequent, for that matter)
contradictory statements. Id. Moreover, Plaintiffs lack the “contemporaneous
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documents, such as internal emails and memos” that the Fifth Circuit found gave
credence to the subsequent admissions in Lormand. See id.
Taking the Complaint as a whole, the Court finds that the allegations do not raise
a strong inference of Jordan’s scienter.
e. Van de Ven’s Scienter
Van de Ven did not make any materially false or misleading statements during the
Class Period. See supra III(A)(1). Allegations that Van de Ven was an executive, that he
was warned by the employee unions about the Company’s operational exposure, and
that he was incentivized to raise Southwest’s stock price do not give rise to a strong
inference of scienter. See supra III(A)(2)(a). Plaintiffs also did not allege that Van de Ven
individually knew in advance any undisclosed facts that contradicted his statements
during the Class Period. See Rosenzweig, 332 F.3d at 868.
Taking the Complaint as a whole, the Court finds that the allegations do not raise
a strong inference of Van de Ven’s scienter.
f. Nealon’s Scienter
While he did make a misleading statement in June 2021, see supra III(A)(1)(e)(i), the
scienter allegations against Nealon are deficient for many of the same reasons as Kelly.
Allegations showing that Nealon was an executive, that he was warned by the employee
unions about the Company’s operational exposure, and that he was incentivized to raise
Southwest’s stock price25 do not show that he knew (or recklessly disregarded) the causes
25 While Plaintiffs allege that the “Individual Defendants,” which includes Nealon, were
motivated to inflate the value of Southwest stock, (Dkt. No. 51 at 168), Nealon’s stock awards for
(continue)
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of the June 2021 disruption event. And the Complaint fails to allege that Nealon
individually was aware in advance of any undisclosed facts that conflicted with his
statements. See Rosenzweig, 332 F.3d at 868.
Taking the Complaint as a whole, the Court finds that the allegations do not raise
a strong inference of Nealon’s scienter.
g. Watterson’s Scienter
Watterson did not make any materially false or misleading statements during the
Class Period. See supra III(A)(1). Even if he did, the Complaint does not adequately allege
that Watterson had the requisite scienter. Plaintiffs allege that Watterson was an
executive, that he was aware of the Company’s issues due to the employee unions’
warnings, and that he wanted to drive up Southwest’s stock price to increase his
compensation. (Dkt. No. 51 at 163–69). These allegations, made collectively as to all
Individual Defendants, fail to contribute to a strong inference of scienter as to Watterson.
See supra III(A)(2)(a).
Plaintiffs also contend that a “bombshell transcript” of a December 2022 phone call
strongly supports a finding of scienter. (Dkt. No. 51 at 167). That bombshell misses the
mark. The transcript reveals that Watterson’s statements were consistent with virtually
all the Company’s disclosures around the time that the call presumably occurred,26 which
the Class Period are not included in the Complaint, (id. at 169). It is therefore unclear whether
Nealon was truly incentivized to raise Southwest’s stock price.
26 Plaintiffs allege that the post on X (formerly Twitter) containing the transcript was
leaked on December 27, 2022, and that it was revealed in a CNN article on that same date but
never indicate when the call actually occurred. (See Dkt. No. 51 at 66).
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negates scienter. See Owens, 789 F.3d at 540. For instance, Watterson discussed the need
to modernize, a lack of tools given the Company’s size, and the difficulty of manually
processing scheduling changes. (Dkt. No. 51 at 66–67). In December 2022, before the
disruptions, Southwest disclosed that it was undertaking a multi-year “Modernize the
Operation” program with the intent “to lessen the impact of irregular events and reduce
the cause of disruption” with delivery scheduled after 2023. (Dkt. No. 57 at 10–11). And
in December 2021, Southwest disclosed that there were “too few options to get our
customers and our crews to where they needed to be if our operating tempo was
disrupted.” (Id. at 10).
Plaintiffs’ claim that Watterson admitted “to knowing the Systems were never
designed to handle the scale of Southwest’s operations” is a blatant mischaracterization.
(See Dkt. No. 59 at 27). Watterson merely conceded that the specific unprecedented
weather event in December 2022 overwhelmed Southwest’s scheduling capabilities.
(Dkt. No. 51 at 66–67, 79). And again, that is not inconsistent with Defendants’ prior
disclosures and statements about the Company’s scheduling software. See Owens, 789
F.3d at 541 (“Defendants’ disclosure of the ‘red flags’ and candidness about the
uncertainty underlying its models neutralize any scienter inference from ‘red flags.’”).
The Court therefore finds that the transcript does not support an inference of Watterson’s
scienter.
Taking the Complaint as a whole, the Court finds that the allegations do not raise
a strong inference of Watterson’s scienter.
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h. Conclusion
Considered holistically, Plaintiffs’ allegations do not give rise to a strong inference
that any of the Individual Defendants made any misstatements with the requisite
scienter. Because the Court finds the Complaint does not allege scienter of the Individual
Defendants under the PSLRA, the Court also finds that the Complaint does not allege
Southwest’s scienter. See N. Port Firefighters’ Pension--Loc. Option Plan v. Temple-Inland,
Inc., 936 F.Supp.2d 722, 757 (N.D. Tex. 2013) (“A corporation only has the requisite
scienter if the individual executive making the statement had that level of scienter.”)
(citing Southland, 365 F.3d at 366). Because Plaintiffs did not adequately allege a strong
inference of scienter as to the Individual Defendants, there is no strong inference of
scienter imputable to Southwest.
The Court therefore GRANTS Defendants’ Motion to Dismiss as to the Section
10(b) and Rule 10b-5 claim against all Defendants. (Dkt. No. 57 at 17–26).
B. DEFENDANTS’ MOTION TO DISMISS SECTION 20(A) CLAIMS
Plaintiffs seek to establish secondary liability on the Individual Defendants
through Section 20(a) of the Exchange Act. (Dkt. No. 51 at 179–80). However, Plaintiffs
failed to allege a primary securities violation by a controlled person. See Southland, 365
F.3d at 383 (“Control person liability is secondary only and cannot exist in the absence of
a primary violation.”). Because the Complaint does not allege a primary securities
violation, there is no basis for secondary liability of the Individual Defendants. The Court
therefore GRANTS Defendants’ Motion to Dismiss as to the Section 20(a) claim against
the Individual Defendants. (Dkt. No. 57 at 27).
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C. PLAINTIFFS’ REQUEST TO AMEND
In their post-hearing submissions, Plaintiffs assert that they “have amply stated a
claim but should be granted leave to replead if necessary” under Federal Rule of Civil
Procedure 15(a). (Dkt. No. 87-2 at 61–62). Plaintiffs indicated additional grounds on
which the amendment is sought in the post-submission briefing. (Id. at 62 n.2). And they
note that the Complaint is the only complaint filed by the lead plaintiffs to date. (Id. at
61–62). Defendants argue that leave should be denied because the additional grounds on
which the amendment is sought fail. (Dkt. No. 87-7 at 44–45).
While the Court agrees with Defendants that the new grounds cited by Plaintiffs
may not prevent dismissal, the Court will nevertheless permit Plaintiffs an opportunity
to amend their complaint in accordance with the requirements of Rule 9(b) and the
PSLRA. See N. Port Firefighters’ Pension, 936 F.Supp.2d at 767 (explaining that amendment
was permissible “where it appears that more careful or detailed drafting might overcome
the deficiencies on which dismissal is based”). It is not clear that the defects are incurable,
and Plaintiffs have not “failed to plead with particularity after being afforded repeated
opportunities to do so.” Hart v. Bayer Corp., 199 F.3d 239, 248 n.6 (5th Cir. 2000).
Accordingly, the Court concludes that Plaintiffs should have one more opportunity to
amend their pleading.
IV. CONCLUSION
Considering the foregoing analysis, the Court GRANTS Defendants’ Motion for
Reconsideration, (Dkt. No. 65), WITHDRAWS its Order denying Defendants’ Motion to
Dismiss Plaintiffs’ Complaint, (Dkt. No. 62), and GRANTS Defendants’ Motion to
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Dismiss Plaintiffs’ Complaint, (Dkt. No. 57). Plaintiffs’ claims are DISMISSED without
prejudice.
Plaintiffs are GRANTED leave to amend their pleadings no later than April 24,
2026. Any amended pleading must be accompanied by a synopsis of no more than ten
pages, explaining how the amendments address the grounds stated for dismissal in this
Order. Should Plaintiffs amend, Defendants are granted leave to file responses to
Plaintiffs’ synopsis. Any response shall not exceed ten pages and must be filed within
fourteen days of the repleading. No further briefing will be permitted.
It is SO ORDERED.
Signed on March 31, 2026.
___________________________________
DREW B. TIPTON
UNITED STATES DISTRICT JUDGE
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