On July 25, 2023, Judge Jed S. Rakoff of the United States
District Court for the Southern District of New York denied a
motion to dismiss a putative securities class action against an
online food ordering and delivery platform (the
"Company"), alleging violations of Section 10(b) and
20(a) of the Securities Exchange Act of 1934. Steamship Trade
Ass'n of Baltimore-Int'l Longshoreman's Ass'n
Pension Fund v. Olo Inc., No. 22-CV-8228 (JSR), 2023 WL
4744197 (S.D.N.Y. July 25, 2023). Plaintiff alleged that the
Company and two of its officers misled investors by (1) failing to
disclose that one of its restaurant partners intended to terminate
its partnership with the Company; and (2) misrepresenting the
number of "active" restaurant locations that utilized the
Company's product. Although the Court held that Company's
omission of the termination of its restaurant partnership was not
actionable, the Court held that plaintiff adequately alleged
actionable misstatements regarding the number of restaurant
locations using the Company's software. Accordingly, the Court
denied the Company's motion to dismiss.
The Company provides software to restaurants to assist with online
ordering and food delivery. Plaintiff alleged that the Company
failed to disclose the upcoming end to a partnership with a major
fast-food chain while making rosy projections about its future
revenue. Specifically, plaintiff alleged that the Company's
February 2022 statements that it could increase the number of
active users of the platform and maintain what historically had
been a 30% growth rate were "unrealistic" given the
termination of the partnership. Additionally, plaintiff alleged
that the Company made misleading statements about "the number
of its 'active locations'—that is, the number of
unique restaurant locations using at least one of [the
Company's] product modules." Plaintiff alleged that the
Company's share price fell by approximately 36% on August 12,
2022 after the Company disclosed the termination of the partnership
and reported no growth in the number of users.
The Court first held that the Company could not be held liable for
failure to disclose the termination of its partnership with a major
fast-food chain in connection with its revenue projections. The
Court held that the Company's statements about its future
revenue projections were forward-looking and accompanied by
"meaningful cautionary language" that there was "no
assurance" that future growth would not differ materially from
historic growth rates. Accordingly, the alleged omission related to
the partnership termination was held to be inactionable.
The Court did, however, find that plaintiff sufficiently alleged
facts to support the claim that the Company made misstatements
about the number of locations actively using the Company's
software. Specifically, the Court held that plaintiff adequately
alleged, with corroboration from confidential witnesses, that: (1)
the Company "prematurely included individual restaurant
locations in its active locations count before those locations had
actually begun utilizing any of [the Company's] products;"
(2) the Company "failed to remove inactive locations from the
active locations count;" and (3) the Company, while touting
the number of restaurant chains that adopting its software, failed
to clarify that not all "brand locations within a single chain
joined [the Company's] platform." While the Company argued
that the alleged misstatements were not material because the
numbers were only alleged to have been inflated by 2%, the Court
held that materiality was rarely something that could be resolved
on a motion to dismiss and that "a reasonable investor
plausibly would have considered a difference of (at the least)
several thousand locations" to be material when deciding
whether to trade in the Company's stock.
The Court also held that the pleaded facts raised a strong
inference of scienter. Specifically, the Court held that the
complaint alleged strong circumstantial evidence of conscious
misbehavior or recklessness on the part of two of the Company's
officers. Because plaintiff alleged that one of the officers
"had access to and used a specific software to obtain data
about [the Company's] active locations," the Court held
that there was a "strong inference that [the officer] knew or
should have known about the inflation and inaccurate reporting of
the active locations count based on that data." Similarly, the
Court held that the other officer's "frequent interactions
and involvement with clients, including onboarding and
negotiations, would make him privy to facts that would have
indicated an inflation of the active locations count." The
Court further held that scienter could also "be imputed to the
[Company] because [the officers were] management-level employees
that made the alleged misstatements."
Steamship Trade Ass'n of Baltimore-Int'l Longshoreman's Ass'n Pension Fund v. Olo Inc.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
