On May 28, 2021, Judge K. Michael Moore of the United States District Court for the Southern District of Florida granted a motion to dismiss a putative securities class action against a cruise line (the "Company") and its CEO for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5. Plaintiffs alleged that the Company made false and misleading statements and omissions about the risks posed by COVID-19 and the Company's health and safety protocols during the early stages of the pandemic. Consistent with another recent decision covered here, the Court dismissed plaintiffs' claims for failure to adequately plead falsity and scienter, but granted leave to amend.
On January 25, 2020, a Company vendor located in Wuhan, China allegedly warned a senior executive at the Company about COVID-19. On January 28, 2020, the Company issued a press release stating the COVID-19 risk to its passengers and crew was "very low." On February 1, 2020, a passenger aboard one of the Company's cruise ships—the Diamond Princess—which had disembarked five days earlier, tested positive for COVID-19. On February 4, 2020, the Company issued a press release stating that "the safety, security, and well-being of all guests and crew is our absolute priority." However, passengers and crew members still aboard the Diamond Princess were not given masks or other personal protective equipment ("PPE"). Ultimately, 712 passengers on the Diamond Princess tested positive for COVID-19 and 12 died.
On February 12, 2020, the CDC issued guidance for cruise ship operators recommending that passengers be given symptom, temperature, and potential exposure checks before boarding. Throughout February, the Company said that "all guests will be required to go through thermal screening . . . in many of our embarkation ports" and that the Company was implementing enhanced sanitation protocols onboard. However, from mid-February to early March, three of the Company's cruise ships set sail without performing the type of pre-boarding screening recommended by the CDC, and at least 21 passengers were later diagnosed with COVID-19. On March 13, 2020, the Company announced that no diagnosed case of COVID-19 had been linked to its operations. On the same day, the Company announced it was pausing operations. Shortly thereafter, the Company disclosed that it expected its fiscal year to end in a net loss.
Plaintiffs first claimed that the Company's January 2020 statement regarding the "very low" risk of COVID-19 on its cruise ships was false and misleading. The Court rejected this argument, however, holding that the Company had no obligation to warn investors because (i) the vendor in Wuhan had not shared "medically or scientifically based knowledge regarding the spread of the virus" beyond what "the average person" could readily ascertain; and (ii) the Company was following "the guidance and recommendations of public health officials" at the time.
The Court next considered plaintiffs' argument that the Company's February 2020 statements about enhanced health and safety measures were misleading. The Court held that these statements were not misleading because (i) they "reflect[ed] [the Company's] goals which cannot be objectively measured in the face of a rapidly evolving global pandemic"; (ii) the Company stated that temperature checks would be conducted at many embarkation ports, not all ports; and (iii) plaintiffs had merely alleged that the Company's enhanced health and safety protocols did "not ultimately prove effective to combat" the virus. With respect to the efficacy of the Company's precautionary measures, the Court emphasized that "hindsight knowledge cannot be used to assert securities fraud."
The Court next considered the Company's March 2020 statement that no diagnosed case had been linked to its cruise operations. Although this statement was false, the Court held that no reasonable investor would have been misled, and the statement was not materially misleading, because of the Company's contemporaneous suspension of its cruises on the very same day.
The Court next considered the Company's statements throughout the class period affirming its general commitment to health and safety. The Court noted that plaintiffs' arguments "require the Court to infer that, because passengers would ultimately fall ill aboard [the Company's] ships—just as people did in other venues across the globe—the Company was non-compliant with health and safety standards." The Court held that such inference was too tenuous to meet the heightened pleading standard for securities fraud and that, while more stringent safety requirements—such as ship-wide distribution of masks and PPE—may have reduced the spread of COVID-19 on the cruise ships, CDC guidance at the time did not require such measures.
Finally, the Court held that even if certain of the Company's statements were materially false or misleading, plaintiffs had not adequately alleged scienter because it was plausible that the Company believed the risk posed by COVID-19 "to be relatively low, as cases outside of China were only then starting to surface" and because the Company's voluntary cessation of its cruise operations in March 2020 undercut any inference of scienter.
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