New York Appellate Court Affirms Dismissal Of Securities Act Claim Against Canadian Cannabis Producer Alleging Material Misstatements Regarding Product Quality
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  • New York Appellate Court Affirms Dismissal Of Securities Act Claim Against Canadian Cannabis Producer Alleging Material Misstatements Regarding Product Quality

    On February 16, 2021, the Appellate Division of the New York Supreme Court, First Judicial Department, unanimously affirmed the dismissal of a putative class action against a Canadian cannabis producer (the “Company”), certain of its officers and directors, and its underwriters for violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933 and Item 303 and Item 105 of Regulations S-K.  In re Sundial Growers Inc. Sec. Litig., No. 13141 (1st Dep’t Feb. 16, 2021).  Plaintiffs alleged that the Company made false and misleading statements and omissions about the quality of its product in its offering documents for its Initial Public Offering (“IPO”).  The First Department affirmed the dismissal of these claims, agreeing with the New York Supreme Court that the alleged misstatements and omissions were either inactionable corporate puffery or opinion statements and that the offering documents contained robust risk disclosures regarding the Company’s quality control.  This is one of the first Securities Act cases to be decided on the merits at the appellate level in New York state court since the United States Supreme Court’s decision in Cyan, Inc. v. Beaver County Employees Retirement Fund, which held that state courts have jurisdiction to adjudicate class actions brought under the Securities Act and that such actions generally cannot be removed from state to federal court.

    The Company began producing cannabis in December 2018, after Canada legalized adult-use cannabis on the federal level.  In August 2019, the Company launched its IPO.  Plaintiffs alleged that the Company’s statements about its products and their quality were false and misleading because the Company’s grow rooms allegedly suffered from significant quality control problems and the Company failed to disclose that a customer had allegedly “returned a half ton” of product because it contained mold and other contaminants.  Defendants moved to dismiss, arguing that plaintiffs failed to identify a materially false or misleading statement or omission, that the Company had no obligation to report the alleged product return by a single customer, that the Company provided adequate risk disclosures, and that the statements identified by plaintiffs were not actionable as a matter of law. 
    In a succinct decision, the First Department affirmed the dismissal of the complaint, holding that:  (i) “[t]he statements in the offering materials that [the Company] produced ‘high quality’ and ‘premium’ cannabis were non-actionable puffery”; (ii) “[t]o the extent the statements were more than puffery, they were non-actionable opinion”; and (iii) “the risk disclosures in the offering materials expressly and repeatedly warned of the risk to the company’s quality control, including fire, insects, and contamination, and noted that there had been such an incident in the past.”  In light of this, the First Department rejected plaintiffs’ argument that the Company’s offering documents were misleading because they allegedly failed to disclose “a single incident of returned product, that constituted 10% of the [Company’s] sales for a single quarter.”