Central District Of California Dismisses Putative Class Action Against Food Company For Failure To Adequately Allege Misrepresentations
On October 8, 2020, Judge Michael W. Fitzgerald of the United States District Court for the Central District of California dismissed a putative class action asserting claims under the Securities Exchange Act of 1934 against a food company and certain of its executives. Larry Tran v. Beyond Meat, Inc., et al., No. 20-CV-00963-MWF-AFM, slip op. (C.D. Cal. Oct. 8, 2020). Plaintiffs alleged that the company made misleading statements in public filings falsely suggesting that litigation brought against the company by a supplier, after the company had terminated a manufacturing agreement with that supplier, was meritless. The Court held that plaintiffs failed to adequately allege an actionable misstatement or omission.
Plaintiffs contended that the company made two allegedly false statements in its SEC filings: (i) first, its denial of the supplier’s claims; and (ii) second, that the company believed it was justified in terminating the manufacturing agreement, did not misappropriate the supplier’s trade secrets, and was not liable for the fraud or negligent misrepresentation alleged by the supplier. Slip op. at 11.
The Court held that the challenged statements were statements of opinion and that plaintiffs had not made the required showing to allege any facts calling into question the basis of the opinions. Id. at 11-12. In particular, the Court emphasized that plaintiffs’ allegations were largely drawn from the “unproven allegations” from the supplier’s litigation, and that plaintiffs did not even have access to the agreement on which the supplier’s complaint was based. Id. at 12-13. The Court rejected plaintiffs’ argument that the underlying evidence was in the company’s possession, explaining that “the Court cannot just accept at face value [the supplier’s] characterization of the underlying evidence supposedly implicating [the company].” Id. at 13. The Court further noted that, even if plaintiffs’ allegations were deemed to have a factual basis, they would fail for the independent reason that plaintiffs must point to information “in the issuer’s possession at the time” in order to plead falsity under an omissions theory. Id. at 14.
In addition, the Court observed that it was “far from clear that a more-detailed disclosure of the risks posed by the [supplier’s] litigation was required.” Id. at 14. The Court noted that, under Ninth Circuit precedent, a “complaint must specify the reason or reasons why the statements made by the [company] were misleading or untrue, not simply incomplete.” Id. at 14 (citing Brody v. Transitional Hosps. Corp., 280 F.3d 997, 1006 (9th Cir. 2002)). The Court emphasized that while the company stated that it did not believe it was liable in the supplier’s litigation, it also “offered no assurances that it would not be found liable.” Beyond Meat, slip op. at 15. Indeed, the company stated that it “cannot assure you that [the supplier] will not prevail in all or some of [its] claims,” and further that, if found liable, the company could be required to pay damages and potentially lose some portion of ownership over its intellectual property. Id. The Court concluded that these statements gave investors “sufficient notice of the potential risks” of the supplier’s litigation, and that plaintiffs failed to demonstrate that those statements were “inconsistent with the true state of affairs.” Id.
While noting that the Court was uncertain that further amendment could “rescue” plaintiffs’ claims, the Court nevertheless granted plaintiffs one “final opportunity” to amend. Id. at 18.