On March 22, 2018, Judge Katherine Polk Failla of the United States District Court for the Southern District of New York dismissed a putative securities class action against Chipotle Mexican Grill, Inc. (“Chipotle”), its two former co-CEOs, and its CFO. Ong v. Chipotle Mexican Grill, Inc. et al., No. 1:16-cv-141-KPF (S.D.N.Y. March 22, 2018). Plaintiffs—shareholders of Chipotle who allegedly purchased the company’s shares between February 5, 2015 and February 2, 2016—alleged that the company and the individual defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) by failing to disclose in securities filing and press releases certain attendant risks in the fast-food chain’s produce processing and food-safety procedures, allegedly causing plaintiffs to suffer losses when Chipotle’s stock dropped after a series of food-borne illness outbreaks occurred in 2014 and 2015. The Court disagreed, finding that while it was “as concerned as the parties about food-borne illness outbreaks,” plaintiffs had not adequately pleaded securities fraud, and dismissed plaintiffs’ second amended complaint (“SAC”) with prejudice.
The Court first considered a motion by defendants to strike a declaration submitted by plaintiffs as an attachment to their SAC. The Court found that the declaration, which opined on food-safety standards and practices for fast-food companies and Chipotle’s adherence thereto, was written long after the illness outbreaks and thus was not a “written instrument”—as that term has been interpreted under Federal Rule of Civil Procedure 10(c)—that could be considered at the motion to dismiss stage. The Court also found that the declaration was not “incorporated by reference” into the SAC, because it was used by plaintiffs in an attempt to prove the truth of its contents. Determining that the declaration was drafted for the purposes of the litigation, and therefore plaintiffs could not have relied on its terms while drafting their SAC, the Court granted defendants’ motion to strike the declaration, and noted that it would not consider any conclusory allegations in the amended complaint that were based on the declaration.
The Court next considered whether any of the six misstatements or omissions alleged by plaintiffs in the SAC were material and pled with sufficient particularity to establish scienter under the heightened pleading standards of the PSLRA. First, the Court rejected plaintiffs’ contention that Chipotle had a duty to disclose any heightened risk associated with a change in its produce processing, finding that the company’s securities filings contained a lengthy disclosure of risks associated with food safety and processing of produce and that defendants were not required to outline the myriad possible outcomes associated with its process. Second, the Court held that generalized, aspirational statements providing that, for example, Chipotle is “committed to serving safe, high quality food to [its] customers,” were nonactionable puffery. Third, the Court rejected plaintiffs’ contention that defendants had a duty to disclose facts regarding the company’s ability to trace ingredients back to its suppliers, finding that the company’s statement regarding its use of multiple produce suppliers was “far too attenuated” from the alleged omission—the nondisclosure of Chipotle’s ability to trace ingredients—to trigger a corresponding duty to disclose. The Court added that “no reasonable investor would have considered significant Chipotle’s ability to trace ingredients through its supply chain in deciding whether to invest” in the company, and therefore the alleged misstatement was immaterial. Fourth, the Court rejected plaintiffs’ contention that Chipotle omitted material risk factors and the existence of several outbreaks from certain of its regulatory filings, finding that the documents provided robust risk disclosures that “were company-specific and related to the direct risks it uniquely faced,” and thus there could be “no argument that these were boilerplate statements insufficient to satisfy the Company’s” disclosure obligations. Fifth, the Court reached a similar conclusion regarding plaintiffs’ allegations that defendants failed to disclose information relating to the outbreaks in Chipotle’s financial projections, finding that the company’s produce processing and food-safety compliance standards were not tied to sales in any manner not addressed by its existing disclosures. The Court added that any such forward-looking statements are also protected by the PSLRA’s safe harbor provisions, because plaintiffs failed to allege that they were made with actual knowledge that they were false or misleading. Finally, the Court rejected plaintiffs’ contention that a press release issued by the company was known to be false, finding that plaintiffs had taken cribbed phrases from the release out of context and had not sufficiently alleged scienter by defendants.
Additionally, the Court analyzed the scienter allegations in the SAC against the individual defendants, but found that the SAC’s allegations fell short of pleading a Section 10(b) claim. First, the Court concluded that defendants could not have recklessly disregarded information to which they never had access. Second, in analyzing the allegations concerning the individual defendants’ alleged stock trades, the Court found no evidence from which an inference of scienter may be drawn, determining that the alleged trades “were not sufficiently unusual to suggest that they were made in order to offload stock before anticipated illness outbreaks were tied to Chipotle.”
Finding that all of plaintiffs’ claims under Section 10(b) failed to adequately plead either a material misstatement or omission, or facts giving rise to scienter, the Court summarily dismissed plaintiffs’ Section 20(a) claims for control person liability. The Court also rejected plaintiffs’ application for leave to amend yet again, noting that plaintiffs’ proposed attempts to gather further information to amend the deficiencies in the SAC did not assure the Court that amendment would not be futile. In particular, the Court did not find persuasive any of plaintiffs’ stated reasons for why further amendment would not be futile, which included that (i) plaintiffs are awaiting responses to FOIA requests, (ii) plaintiffs have moved to intervene in other cases against Chipotle involving similar allegations for the limited purpose of unsealing the redacted pleadings filed therein, (iii) the criminal investigation into Chipotle is ongoing, and (iv) plaintiffs are continuing their own investigation. The Court observed that “none of these efforts has a clear end date, and extending the pleading stage in this litigation indefinitely would cause Defendants undue prejudice given their interest in finality and repose.”
The decision serves as a reminder of the high bar to plead a securities fraud claim, which requires a plaintiff to plead with specificity factual allegations seeking to tie allegations of misstatements or omissions to specific language within corporate filings and press releases.