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  • Northern District Of California Pares Claims In Putative Class Action Against Food Supplement Manufacturer

    On February 4, 2020, Judge James Donato of the United States District Court for the Northern District of California partially dismissed a putative class action asserting claims under Section 10(b) of the Securities Exchange Act of 1934 against a food supplement company and certain of its former executives.  In Re TerraVia Holdings, Inc. Sec. Litig., No. 16-CV-06633-JD, 2020 WL 553939 (N.D. Cal. Feb. 4, 2020).  Plaintiffs alleged that the company made misrepresentations regarding the health benefits and commercial viability of certain ingredients it created and sourced for its food manufacturing partners, based on the company having received reports that these ingredients were causing illnesses, ultimately leading to product recalls.  The Court held that certain of the alleged misstatements were non-actionable, but that plaintiffs’ allegations respecting certain other alleged misstatements were sufficient to state a claim.

    Plaintiffs alleged that the company had an affirmative duty to disclose reports that its products had caused illnesses, and that its failure to do so rendered its public statements misleading.  The Court explained, however, that the federal securities laws “prohibit only misleading and untrue statements, not statements that are incomplete.”  Id. at *3.  The Court held the company’s failure to disclose reports that its products had caused illnesses, without more, did not support a claim under the Exchange Act, but that “these omissions provide context” that rendered certain challenged statements misleading.  Id.

    Indeed, the Court rejected the company’s argument that plaintiffs should be required to plead facts sufficient to show that the company’s products were the actual cause of the reported illnesses.  Id. at *4.  Rather, “the existence of [the] reports, and the fact that [the company’s] partners attributed consumers’ adverse reactions to [the company’s] products” were enough to constitute allegations that statements were misleading.  Id.  In particular, because the company had disclosed that its products were used by the food manufacturers, but not that the manufacturers linked the company’s products to illnesses, the Court held that the company’s statements about those relationships were misleading.  Id.  The Court similarly found that a statement on the company’s website that its products have “high protein digestibility” were also undermined by reports of customer illnesses following consumption of foods made with their product.  Id. at *5. 

    The Court concluded, however, that the remaining alleged misrepresentations were not actionable because they were either too generalized or because plaintiffs failed to plead specific facts to support a claim that the statements were misleading.  Id. at *5-7.  This included statements about the company’s general mission (such as to “create products that are truly better for people”), and statements about the safety of the ingredients in question (such as that the products provided “an array of benefits” and contained no “known allergens”).  Id. at *6.  The Court also held that certain statements by executives expressing optimism (such as “we’re making strong progress commercially in food and nutrition”) were non-actionable statements of opinion, and plaintiffs did not allege that the opinions were not actually held or that particular facts underlying the statements were untrue.  Id. at *6-7.

    With respect to scienter, plaintiffs argued that a holistic reading of the complaint established scienter because the company and the individual defendants withheld knowledge of the reports of adverse health reactions and related recalls during their quarterly earnings calls.  Id. at *7.   The Court agreed, holding that the complaint in its entirety sufficiently alleged scienter, and that a failure to disclose “even statistically insignificant reports of adverse effects” is properly considered under a holistic analysis of scienter.  Id.

    The Court also rejected the company’s argument that plaintiffs failed to adequately allege loss causation because they relied on a news article that revealed the company had been notified by its manufacturing partners that its ingredients were causing illnesses but did not itself reveal a fraud.  Id. at *8.  The Court concluded that the article was “not akin to the mere announcement” of an investigation or complaint, but rather disclosed previously omitted information about the company’s products and associated recalls, which plaintiffs alleged caused a stock price decline; the article was therefore sufficient to plead loss causation.  Id.