On March 8, 2018, the United States District Court for the Middle District of Tennessee dismissed a consolidated class action alleging securities fraud claims under Section 10(b) and 20(a) of the Securities Exchange Act against Dollar General Corporation (“Dollar General”), and certain of its executives. Iron Worker Local Union No. 405 Annuity Fund, et al. v. Dollar General Corporation, et al., No. 3:17-cv-00063 (M.D. Tenn., Mar. 8, 2018). Plaintiffs alleged defendants misled investors about the negative impact reductions to government benefits, including Supplemental Nutrition Assistance Program (“SNAP”) benefits, would have on Dollar General’s business. The Court held, among other things, that defendants sufficiently disclosed the importance of SNAP recipients to Dollar General’s business, the impact of an earlier reduction in SNAP benefits did not render the impact of a later change to benefits foreseeable, and that risk factors accompanying optimistic projections rendered certain forward-looking statements inactionable.
Dollar General’s “core customers” are low and fixed income households who rely on SNAP benefits. Dollar General’s business grew after SNAP and other benefits programs expanded during the financial crisis, and waivers of restrictions on able-bodied adults without dependents receiving benefits (“ABAWDs”) were implemented due to high unemployment. When SNAP’s across-the-board benefits increases expired in 2013, Dollar General’s same-store sales allegedly fell. Dollar General allegedly lost additional business when ABAWDs expired in 2016. Plaintiffs alleged that statements by Todd Vasos, Dollar General’s CEO (“Vasos”) made in March and May of 2016 were misleading because they did not sufficiently describe the impact the expiration of ABAWDs would have on Dollar General’s business.
The Court held that no reasonable investor could have interpreted any of the alleged misstatements as reassurance that the expiration of ABAWDs would not materially impact Dollar General’s business, especially because Vasos specifically acknowledged that the Company’s core customer relied on SNAP benefits in “a lot” of cases. The Court also concluded that allegedly misleading statements about customers’ shopping habits, such as statements describing the value proposition sought by Dollar General customers, were generalized statements of optimism that were incapable of objective verification and therefore immaterial. The Court also rejected plaintiffs’ argument that Dollar General should have known that the ABAWD expiration would profoundly impact its business merely because the 2013 reductions in SNAP had impacted its business. The Court ruled that plaintiffs pled no facts to infer that Dollar General should have forecasted the same result in 2016, especially because the change in benefits substantially differed.
In addition, several statements about the strength of various merchandise initiatives and expressions of confidence in future sales were held to be forward-looking generalized statements of corporate optimism that were accompanied by specific cautionary language identifying as risk factors the decreases in government subsidies and the possibility of unsuccessful implementations of the initiatives. The Court dismissed the remaining allegations because they were puffery, forward looking, not false or misleading, or because plaintiffs failed to adequately plead scienter or, with respect to claims based on Item 303, actual knowledge of a negative trend.
The Court’s decision serves as a powerful reminder that company announcements of negative sales trends or disappointing sales results cannot be reverse-engineered into a securities fraud claim, particularly when there are no allegations from which to infer that the negative results were anticipated and the company includes specific risk disclosures.