United States: Southern District Of Florida Dismisses Putative Class Action Against Beverage Company For Failure To Adequately Allege Misstatements, Scienter And Loss Causation

On August 29, 2019, Judge K. Michael Moore of the United States District Court for the Southern District of Florida dismissed a putative class action against National Beverage Corporation and certain of its officers asserting claims under Section 10(b) of the Securities Exchange Act of 1934. Luczak v. National Beverage Corporation, et al., 18-cv-61631-KMM (S.D. Fla. Aug. 29, 2019). Plaintiff alleged that defendants' public statements contained misrepresentations regarding the company's main product (a brand of sparkling water), the use of purportedly unique proprietary methods to drive growth, and sexual harassment allegations with respect to the company's CEO. The Court held that the alleged misrepresentations were inadequately pleaded with respect to either falsity, scienter or loss causation, and therefore dismissed the complaint in its entirety.

Plaintiff alleged four categories of misrepresentations. First, plaintiff alleged that the company's statements that its sparkling water was "all natural" or "100% natural" were false in light of allegations in a separate consumer class-action lawsuit, and that in response to that lawsuit the company was forced to issue an updated disclosure that it relied on its suppliers to certify the accuracy of its claims. Slip op. at 2-3. Second, plaintiff alleged that the company failed to disclose the total share of its sales and profits attributable to the sparkling water, which plaintiff alleged violated Generally Accepted Accounting Principles ("GAAP"). Id. at 3-4. Third, plaintiff alleged that the company misrepresented that it used unique proprietary methods—"velocity per outlet" and "velocity per capita"—to both measure and drive growth, but that in subsequent correspondence with the SEC the company admitted that these terms merely "characterized" the company's "entrepreneurial spirit" and are not "key performance indicators," correspondence that was then publicized by a newspaper article. Id. at 5-6. Fourth, another newspaper article reported allegations of sexual harassment against the company's CEO, which allegedly conflicted with the company's Code of Ethics incorporated by reference in the company's certified SEC filings. Id. at 6-7.

The Court held that plaintiff failed to adequately allege falsity as to the company's statements that its products were "all natural." The Court held that plaintiff could not rely solely on allegations from another lawsuit to establish falsity, and in addition, that defendants' disclosure that it relied on its suppliers to certify that their ingredients were "all natural" did not render the underlying claim false. Id. at 11-12.

With respect to the company's alleged failure to disclose the exact proportion of its revenue derived from the sparkling water brand, the Court held that plaintiff failed to adequately allege scienter. The Court emphasized that the company repeatedly disclosed that the sparkling water was its "strategically largest," "most significant" and "dominant" brand, and plaintiff's complaint itself alleged that the market already knew that the brand amounted to a "huge concentration." Id. at 13-14. Moreover, regardless of whether the alleged omission might be a GAAP violation, the Court concluded that plaintiff failed to allege additional "particularized facts" to suggest that defendants acted with scienter and that generalized allegations based solely on the officer defendants' positions were insufficient. Id. at 14-15.

The Court next held that the allegations regarding proprietary methods for measuring and generating growth insufficiently alleged loss causation. Plaintiff attempted to establish loss causation by pointing to declines in the price of the company's stock following a letter from the SEC and a subsequent news article regarding the company's correspondence with the SEC. Id. at 17. The Court held that the SEC correspondence did not reveal a "previously concealed truth"; it merely requested more information about the company's use of the metrics. Id. at 18. In addition, the Court determined that the news article was merely "repackaging" information that was already publicly available. Id. at 19. While plaintiff attempted to argue that defendants failed to explain the stock price drops that appeared to follow these events, the Court emphasized that it was plaintiff's burden to establish the requisite "causal link," including eliminating other possible explanations for the price drop. Id. at 19-20.

Similarly, the Court held that plaintiff's allegations regarding sexual harassment claims failed to adequately allege loss causation. The Court rejected plaintiff's argument that a news article summarizing two lawsuits filed more than eighteen months prior constituted a "corrective disclosure." Indeed, the Court determined that plaintiff failed to provide any explanation of why the information in the article—derived from publicly filed dockets—was not already publicly available, and that while Eleventh Circuit precedent permitted "some lag in the market's processing of public information," an eighteen-month gap is "far greater" than the narrow leeway permitted. Id. at 22.


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