Eastern District Of New York Denies Motion To Dismiss Putative Class Action Against Subscription-Based Meal Kit Company But Rejects Claims Based On Alleged Omission Of Intra-Quarter Decline In Key Metric
On April 22, 2020, Judge William F. Kuntz II, of the United States District Court for the Eastern District of New York granted in part and denied in part a motion to dismiss a putative securities fraud class action based on purportedly misleading statements in the prospectus and registration statement (the “Offering Materials”) filed by a subscription-based meal kit service (the “Company”) in connection with its initial public offering (“IPO”). The complaint asserted claims under Sections 11 and 15 of the Securities Act of 1933 against the Company and certain of its officers. In re Blue Apron Holdings, Inc. Sec. Litig., No. 17-CV-4846 (E.D.N.Y. Apr. 22, 2020). Plaintiffs alleged that the Company, which provides meal kits to customers through a weekly subscription service, concealed known risks and made misleading statements concerning challenges the Company faced with one of its product fulfilment centers. Although the Court denied defendants’ motion to dismiss claims that the Company had failed to disclose risks associated with the performance of this fulfillment center, it rejected plaintiffs’ claims based on the alleged non-disclosure of declines in a Company statistic for measuring the number of meal kits delivered on time with all of their ingredients, which were announced by the Company in the quarter immediately following the IPO. Confirming that Section 11 claims generally cannot be based on disclosures in earnings announcements following an offering, even when the quarterly earnings announcements closely follow, the Court held that the complaint failed to allege sufficiently that the declines were known even though the quarter ended one day after the IPO.
In 2012, the Company began selling ingredient-and-recipe meal kits, which contained pre-portioned ingredients to cook recipes that customers selected on the Company’s website. In 2016, the Company announced the construction of a fulfillment center in Linden, New Jersey that would be outfitted with “state-of-the-art” technology and enable the Company to ship boxes more quickly and with fewer errors. Given the enormous logistical complications of packaging and shipping meals kits on a large scale, the Linden facility was, according to plaintiffs, a “key part of the pitch to Wall street” for the IPO, which ultimately launched in July 2017. However, plaintiffs allege that the Linden facility was experiencing persistent delays prior to the IPO, and, by May 2017, was producing just a small fraction of the meals it was expected to ship.
Plaintiffs alleged that the Company’s statements in the Offering Materials touting improving cost and operational efficiencies and predicting further improvements upon the completion of the Linden facility were materially misleading because the Company failed to disclose: (a) existing delays at the Linden facility, (b) declines in the Company’s On-Time-In-Full (“OTIF”) rating—a performance metric indicating the number of meal kits delivered on time with all their ingredients, (c) that these delays and low OTIF rates hurt the Company’s customer retention and overall ability to compete in the marketplace, and (d) as a result of the delays and low OTIF rates, the Company had reduced its marketing budget and scrapped an anticipated product expansion.
Although the Court denied the motion to dismiss as to certain claims based on the Company’s alleged non-disclosure of delays at the Linden facility, it rejected claims based on declines in the OTIF rating. These claims were based on declines in the OTIF rating that were disclosed by the Company in the first quarterly earnings announcement following the IPO, which plaintiffs alleged must have been known to the Company before the IPO because the quarter ended one day after the IPO. The Court held that even though the OTIF rating declines may have materialized by the time of the IPO, the complaint failed to allege that this was something actually known at the time of the IPO. The Court observed that “[i]t is not a reasonable inference to assume prior knowledge based upon actual knowledge at a later date” (internal quotation marks omitted). The Court also rejected the product expansion and marketing claims. With respect to the product expansion claims, the Court held that the alleged misstatements were forward-looking and that plaintiffs failed to allege sufficiently that the Company knew that the delays and declining OTIF rates would limit product expansion. The allegedly misleading statements about the Company’s marketing efforts were held not to be misleading because the Offering Materials disclosed that marketing would decrease.
Claims are often asserted under Section 11 when a company discloses lower than expected results following a securities offering. The Court’s decision stands as a reminder that such claims, which are often styled as alleged omissions of known intra-quarter trends, cannot be pleaded based on hindsight, even when the lower than expected results follow closely after the securities offering.