On March 13, 2020, Judge Philip S. Gutierrez of the United States District Court for the Central District of California denied class certification in an action against a restaurant franchising company and certain of its executives asserting claims under Section 12(a)(2) of the Securities Act of 1933 in connection with the company’s IPO. Vignola v. FAT Brands, Inc., No. CV 18-7469 PSG (C.D. Cal. Mar. 13, 2020), ECF No. 94. The Court previously determined at the motion to dismiss stage that allegations based on a statement in an SEC filing expressing confidence in the “track record and vision” of the management team was potentially misleading because it allegedly omitted that certain subsidiaries had entered bankruptcy and the involvement of a company executive in managing those subsidiaries. Slip op. at 3, 6-7. However, the Court denied the motion for class certification, holding that the predominance and superiority requirements were not satisfied because individualized inquiries would be necessary to establish putative class members’ knowledge (or lack of knowledge) of the bankruptcies and the executive’s involvement with those subsidiaries. Id. at 7, 9.
With respect to whether common issues predominated over issues requiring individualized proof, defendants argued that the issue of class members’ knowledge was not susceptible to class-wide proof because the allegedly omitted information appeared in news articles over an eight-year period from a variety of sources. Id. at 6-7. The Court agreed, emphasizing that because this information was widely available it was likely that “some purchasers came upon, or discovered or were exposed to this allegedly omitted information regarding the bankruptcies, requiring individualized inquiries into each class members’ alleged lack of knowledge.” Id. at 7.
The Court rejected plaintiffs’ argument that defendants had not established that any members of the putative class had actual knowledge of the omitted information. Id. at 8. In doing so, the Court noted that cases in which the defendant was required to show actual knowledge to defeat certification were distinguishable because they did not involve information that was widely available publicly. Id. In addition, the Court rejected plaintiffs’ argument that knowledge issues could be tested on a class-wide basis after certification by using interrogatories for a representative sample of class members, or individual class members could simply be asked to check a box as to their alleged knowledge. The Court stated that it was not convinced that these methods would be sufficient and that defendants might need to depose individual purchasers. Id. at 8.
For similar reasons, the Court held that plaintiffs failed to establish that a class action was superior to other methods of adjudication. Because lack of knowledge would require resolving investor-specific factual issues regarding knowledge, and because the Court was not convinced that other methods such as interrogatories were adequate, the Court concluded that it was unclear that a class action would result in reducing litigation costs or promoting efficiencies. Id. at 9.
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