District of Colorado Dismisses Putative Class Action Against Restaurant Chain For Failure To Adequately Allege Misstatements Or Omissions
04/09/2019On March 29, 2019, Judge Wiley Y. Daniel of the United States District Court for the District of Colorado dismissed with prejudice a putative securities class action asserting claims under the Securities Exchange Act of 1934 and Rule 10b-5 thereunder against the restaurant chain Chipotle and certain of its executives. Nardy v. Chipotle Mexican Grill, Inc., No. 1:17-cv-1760 (WYD) (STV), slip op. (D. Colo. Mar. 29, 2019), ECF No. 64. Plaintiffs alleged that, in the wake of foodborne illness outbreaks at Chipotle restaurants, defendants made misrepresentations and omissions regarding the company’s compliance with food safety regulations and its implementation and training of employees on food safety practices. The Court held that plaintiffs’ various allegations failed to assert actionable misrepresentations, or in certain cases did not adequately allege scienter, or loss causation.
Plaintiffs’ allegations centered on statements that Chipotle had made expressing the importance of food safety, the Company’s dedication to food safety, and steps Chipotle was taking to improve food safety in the wake of well-publicized outbreaks. With respect to statements that employee training and food safety programs were in compliance with applicable law, the Court concluded that Chipotle’s actions were consistent with its statements and that plaintiffs failed to identify applicable laws that Chipotle was not in compliance with. Id. at 21-25. The Court also concluded that statements regarding Chipotle’s investments and confidence in its employees, confidence in its food safety programs, and statements that it was undertaking efforts to make its food as safe as possible, were expressions of confidence in future progress that no reasonable investor would base their investment decisions upon. Id. at 28-31.
The Court also rejected plaintiffs’ claims for violations of Items 303 and 503 of the SEC Rules. First, the Court held that, although there was no ruling on the issue from the Tenth Circuit Court of Appeals, a violation of Items 303 or 503, which call for disclosure of, among other things, significant events, risks, or trends, did not by themselves constitute a violation of Rule 10b-5 but, instead, would only be “probative of what a company is otherwise obliged to disclose.” Id. at 20 (quoting Anderson v. Abbott Labs, 140 F. Supp. 2d 894, 909 (N.D. Ill. 2001)). Second, the Court rejected plaintiffs’ claims that failure to disclose alleged training and safety risks constituted violations of Rule 10b-5 because plaintiffs had failed to adequately allege either loss causation or scienter. Specifically, the Court held that plaintiffs had failed to plead loss causation with regard to certain events because news of store-specific outbreaks did not disclose underlying issues with regard to Chipotle’s safety measures and that plaintiffs had failed to plead knowledge or scienter with regard to allegations of insufficient training. Id. at 32-34. With respect to allegations that Chipotle’s omissions regarding food safety audits, remediation efforts, imperfect culture, and additional outbreaks were actionable, the Court also disagreed, holding that Chipotle had already disclosed that it remained at “high risk for food-borne illness” even after implementing remediation efforts and that outbreaks continued to have a negative impact on performance. Id. at 34-38.
The Court also considered and rejected plaintiffs’ motion for leave to amend. Plaintiffs argued that they had received additional documentation since the filing of their complaint that proved the existence of an outbreak that was allegedly omitted from defendants’ filings. The Court held that this argument was “futile,” given that the Court had rejected claims that non-disclosure of any specific outbreak was actionable, “regardless of whether those outbreaks were confirmed or refuted.” Id. at 40. Second, the Court rejected plaintiffs’ argument that statements made by an individual defendant on an earnings call would salvage certain claims. The Court concluded that these statements did not support plaintiffs’ claims because they were made before the class period and also because they concerned the implementation of food safety protocols and the quality of the company’s employees, matters that the Court had already determined were either not material misrepresentations or were mere puffery. Id.