Southern District Of Florida Dismisses Putative Class Action Against Cruise Line For Failure To Adequately Allege Misrepresentations Or Scienter
On April 10, 2021, Judge Robert N. Scola, Jr. of the United States District Court for the Southern District of Florida dismissed with prejudice a putative class action asserting claims under Section 10(b) of the Securities Exchange Act of 1934 against a cruise line and certain of its executives. Douglas v. Norwegian Cruise Lines, No. 20-21107-CIV, 2021 WL 1378296 (S.D. Fla. Apr. 12, 2021). Plaintiff alleged the company made misrepresentations in February 2020 regarding the impact of COVID-19 on its business. The Court held that plaintiff failed to adequately allege any actionable misrepresentations or scienter.
Plaintiff challenged statements regarding the company’s marketing strategy, including that the company “did not intend to deviate from its long-term proven go-to market strategy of focusing on value to consumers over using low price as a lever to stimulate demand” and that it “would not do it in a way in which we believe will hurt the long-term brand equity.” Id. at *4. While plaintiff argued that such statements were rendered misleading by failing to disclose that the company was allegedly engaged in deceptive sales practices to downplay the danger of the pandemic to its customers, the Court determined that the statements constituted corporate puffery and “d[id] not assert specific, verifiable facts that reasonable investors would rely on in deciding whether to buy or sell [the company’s] stock.” Id. The Court also questioned plaintiff’s “assumption” that the company’s statements to customers were false or deceptive, noting that the statements aligned with pronouncements made at the time by the President to the effect that COVID-19 could not survive in warm weather. Id. at *5.
Similarly, the Court concluded that statements that the company’s bookings remained ahead of the prior year “despite the current known impact” of COVID-19, and that bookings had improved (and cancellations decreased) compared to the prior three weeks, constituted a general report of the company’s bookings and non-actionable puffery as to the company’s intention to market its cruises. Id. at *6. The Court also emphasized that the company had acknowledged the pandemic’s impact on bookings and “no reasonable investor would believe that a brief window of improvement in bookings during a global pandemic implied that all was well within the company.” Id. In addition, the Court rejected as “extremely vague” allegations based on statements regarding safety measures taken by the company and concluded that challenged statements in the “Code of Ethical Business Conduct” were “corporate puffery and aspirational statements, rendering them non-actionable.” Id. at *6-7.
Moreover, the Court held that certain of these statements were also non-actionable as forward-looking statements accompanied by meaningful cautionary language. While plaintiff argued that the statements “relate[d] to historical and contemporaneous acts,” the Court explained that forward-looking statements could “forecast a future state of affairs in which a present commitment unfolds into action.” Id. at *8 (citing Carvelli v. Ocwen Fin. Corp., 934 F.3d 1307, 1329 (11th Cir. 2019)). And the Court further concluded these statements were accompanied by meaningful cautionary language regarding the impacts of COVID-19 on the company’s costs, lost revenue, government measures, and consumer sentiment. Id.
The Court further held that plaintiff failed to adequately allege scienter. The Court agreed that some of plaintiff’s allegations regarding deceptive sales practices, if true, “demonstrate a troublesome and widespread scheme to minimize the effects of Covid-19 in order to avoid cancellations and drive bookings,” but that the allegations failed to show that any defendant had the requisite intent to commit fraud. Id. at *9. While plaintiff argued that executives’ positions created an inference that they knew of the scheme, the Court emphasized that “scienter cannot be inferred solely by a defendant’s position.” Id. And while plaintiff pointed to internal emails, meetings, and whistleblower accounts, the Court concluded that none specifically connected the individual defendants to the allegedly deceptive sales practices. Id. The Court further observed that more complex schemes might be more likely to have originated from a few people at the top of a company, but that the alleged sales practices in question constituted a “fairly simple” scheme regarding the use of “scripted one-line statements” that did not require the participation of top executives. Id. at *10. The Court concluded, particularly in light of allegations in the complaint as to pressure on sales personnel to meet quotas and avoid losing commissions, that the “most plausible inference” was that the alleged marketing scheme originated at the sales level. Id.