On March 16, 2020, Judge Kimba Wood of the United States District Court for the Southern District of New York dismissed a putative class action asserting claims under Section 10(b) of the Securities Exchange Act of 1934 against a restaurant chain and certain of its executives. Oklahoma Law Enforcement Ret. Sys. v. Papa John's Int'l, Inc., No. 18-CV-7927 (KMW), 2020 WL 1243808 (S.D.N.Y. Mar. 16, 2020). Plaintiff alleged that the company made misleading public statements regarding the company's culture while at the same time enabling workplace sexual harassment. The Court held that plaintiff had failed to adequately allege any actionable misstatements or omissions but granted plaintiff leave to amend to attempt to cure the deficiencies.
The alleged misstatements fell into three broad categories: (1) statements contained in the company's Code of Ethics and Business Conduct; (2) positive assertions made in SEC filings, press releases, and earnings calls; and (3) risk disclosures in SEC filings. Id. at *6. With respect to the first category, the Court observed that courts have rarely allowed claims to proceed based on alleged misstatements contained in a code of ethics or conduct. Id. In the case at hand, the code required employees to exhibit the "highest ethical standards" and to ensure a working environment "free of harassment or other intimidating, hostile or offensive behavior." Ruling that the statements at issue were broad, aspirational, and vague, the Court held that they amounted to mere "puffery" and could not provide the basis for an Exchange Act claim.
The Court also held that plaintiff's allegations based on SEC filings, press releases, and earnings calls championing the company's commitment to workplace culture were nothing but puffery. The Court emphasized that these statements did not mention sexual harassment or misconduct and did not assert or imply that company executives had never engaged in misconduct or would not be implicated in accusations of sexual harassment. Id. at *7-8. While noting that one statement—that "it is not business as usual," regarding a comment widely perceived as racist—might be understood to imply that the company had addressed any internal problems, the Court concluded that it was "simply too vague to have invited an investor's reasonable reliance." Id. at *8.
As for the third category of alleged misstatements, plaintiff primarily alleged that the company's disclosure that its business and brand "may be harmed" if its founder's reputation were negatively impacted was misleading because the company's founder was allegedly already at the time "fueling a toxic workplace culture." Id. The Court determined, however, that plaintiff's argument that the risk of harm had already materialized was speculative and unsupported, as the complaint did not identify when the founder began harassing employees or when that behavior became widely known. Id. at *9. Moreover, even if such details had been specified in the complaint, the Court emphasized that the allegations remained uncharged and unadjudicated throughout the class period, and "[s]tatements regarding [the founder's] importance to the company were not misleading for having omitted unadjudicated allegations that might one day lead to his ouster."
In addition, the Court assessed whether the company had a duty to disclose known trends or uncertainties pursuant to Item 303 of Regulation S-K. Id. While the Court observed that Item 303 is generally aimed at financial conditions and operations rather than the behavior of company executives, it concluded that information regarding workplace sexual misconduct is not categorically exempt from Item 303's disclosure requirements. Id. Addressing plaintiff's specific allegations, however, the Court determined that plaintiff failed to allege the existence of an uncertainty that was both "presently known to management" and "reasonably likely to have material effects on the registrant's financial conditions or results of operations" as required by Item 303. Indeed, the Court held that the possibility that the company's founder and other executives "would be exposed as harassers" and thus be forced to leave the company or assume a lesser role, and that the changes would disrupt operations and reduce revenue, "rests on a tenuous chain of causality and falls short of a known risk" that would be subject to Item 303. Id.
In an exercise of discretion, however, and in light of the fact that plaintiff had only once before amended the complaint, which was pursuant to a stipulation, the Court granted plaintiff leave to replead. Id. at *10.
Oklahoma Law Enforcement Ret. Sys. v. Papa John's Int'l, Inc.
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