On February 3, 2021, Judge Kimba M. Wood of the Southern District of New York granted a motion to dismiss claims under Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 thereunder, as well as Section 20(a) of the Exchange Act against an international chain restaurant (the “Company”) and two of its senior former executives. Okla. Law Enf’t Ret. Sys. v. Papa John’s International Inc. et al., No. 18-CV-7927 (KMW) (S.D.N.Y. Feb. 3, 2021). In the First Amended Complaint (“FAC”), plaintiffs alleged the Company made materially false and misleading statements concerning the Company’s culture and failed to disclose material information concerning the Company’s workplace. The Court granted the Company’s motion to dismiss the FAC with leave to amend, holding certain alleged misstatements were not actionable as mere puffery and that statements about the Company’s culture were too speculative to be actionable. See Oklahoma Law Enf’t Ret. Sys. v. Papa John’s Int’l, Inc., 444 F. Supp. 3d 550 (S.D.N.Y. 2020) (“Papa John’s I”). In addressing the sufficiency of plaintiffs’ Second Amended Complaint (“SAC”), the Court found that it “failed to plausibly allege that [defendants’] positive assurances about the Company’s toxic culture exceeded the protected bounds of generic puffery.” The Court also found that allegations that the Company would face harmful consequences from the allegedly toxic workplace was not “so concrete and substantial that there arose an affirmative duty to disclose it.” Accordingly, the Court granted defendants’ motions to dismiss with prejudice.

Plaintiffs’ suit arose from a period of negative publicity for the Company. According to the SAC, in 2017 and 2018 the Company’s founder, whose “name and likeness were central” to the Company brand, made several public statements on an earnings call that were widely considered racist. Although the founder eventually resigned as the CEO following public backlash, the negative publicity continued. According to the SAC, a major media outlet reported that on a July 11, 2018 diversity conference call the founder used a racial slur and made inappropriate and hurtful remarks regarding race. The founder resigned as Chairman of the Board when the article came out and the Company announced that it was cutting ties with him. A week later the same media outlet published a separate article in which 37 unnamed, former employees described “disturbing instances of workplace sexual harassment” at the Company, perpetuated by the founder and several other senior executives. The Company’s stock price fell 4.9 percent after the article was published, and dropped an additional 9.7 percent a few days later when the Board voted to adopt a “poison pill” to prevent the founder from gaining a controlling interest. A third stock drop allegedly occurred after the Company released its second quarter financial results a few weeks later. Plaintiffs filed their FAC in February 2019.

According to the FAC, the Company made material misrepresentations and omissions in its Code of Ethics and Business Conduct (the “Code”), and also in positive assertions made in SEC filings, press releases, and earnings conference calls. Plaintiffs alleged that the Company “often touted its culture” and its “‘commit[ment] to the development and motivation of [its] team members” in a manner that was misleading in light of the toxic workplace created by the founder and senior executives. The Court dismissed plaintiffs’ suit with leave to amend, holding the allegedly misleading statements in the Company’s Code—such as the Company’s commitment to conduct reflecting “principles of honesty, fairness, mutual respect, trustworthiness, courage, and personal and professional commitment”—constituted “quintessential puffery,” and were “too ‘hazy and general,’ or otherwise relied on speculation.”

According to the Court, plaintiffs’ SAC relied “on largely the same set of allegedly material misrepresentations and omissions” concerning the Code, SEC filings, press releases, and earnings conference calls. In the SAC, plaintiffs placed greater emphasis on the fact that “[d]efendants knew about the toxic culture of harassment,” because the founder and senior executives allegedly were “responsible for cultivating it.” Plaintiffs alleged that “with the rise of the #MeToo movement, it was likely that their wrongdoing would come to light and harm the Company’s reputation, adversely impacting operations and revenue.” Plaintiffs further alleged that “[d]efendants misleadingly touted the Company’s culture and failed to divulge the danger that business would suffer.” The Court first addressed plaintiffs’ allegations that the Company misrepresented statements in the Company’s Code of Ethics and Business Conduct, which allegedly “require[ed] employees to exhibit ‘the highest ethical standards,’” ensured “a working environment ‘free of harassment,’” and stated that the Company “complies with all applicable labor and employment laws and regulations.” Plaintiffs alleged that these statements were misleading because the toxic workplace allegedly fostered by the Company’s founder and senior executives went unchecked for so long. The Court held that plaintiffs failed to adequately plead that the statements in the code were material, finding that the statements in the SAC were “identical to the FAC’s allegations” and “largely copied and pasted” from prior filings. The Court observed that the “only noteworthy addition” was a reference to the Code’s language on compliance with labor and employment laws, however, the Court noted that such language was “vague, broad, and merely aspirational.” Moreover, the Court found that the Code made “no promises as to what [the Company] would do to prevent or respond to workplace sexual harassment,” nor did plaintiffs allege the Company used the Code to misleadingly assuage investor concerns when the negative publicity came to light. Therefore, the Court concluded that “no reasonable investor could have relied on the Code’s vague assurances in making investment decisions.”

The Court turned next to alleged positive affirmations in the Company’s SEC filings, press releases, and earnings calls that plaintiffs alleged were similarly misleading. In these affirmations, the Company allegedly touted good “team member relations” and a commitment to development through “incentive and recognition programs and opportunities for advancement.” The Company further emphasized a “passionate” and “inspired” culture and promised that its “most important ingredient [was its] people.” The Court held that these statements were “inactionable as immaterial puffery,” because they “did not assert or imply that [defendants] had never engaged in misconduct or [that they] would not be implicated in the #MeToo movement,” but merely served as “expressions of ‘general corporate optimism.’”

Next, the Court addressed statements made by the Company in its 2016 and 2017 10-K filings. The Company noted in its risk disclosures that a failure to comply with labor laws, workplace harassment claims, and failure to manage public incidents were areas for potential risk. Plaintiffs alleged that these statements were materially false and misleading because, at the time the Company filed its 2016 and 2017 10-K statements, such risks had already materialized in the form of an unlawful workplace. The Court disagreed, holding that “even drawing all inferences in favor of [plaintiffs], [the] allegations still fail to show that the risks . . . had already materialized at the time the Company filed” its 2016 and 2017 10-K statements. The Court also held that plaintiffs failed to specify when the Company failed to comply with labor laws, when the alleged misconduct took place, and when the Company learned of defendants’ alleged misconduct. Rather, the Court noted that plaintiffs instead used “general and conclusory claims about the influence of the #MeToo movement” to assert the Company was aware of misconduct. The Court held that the statements were not misleading because the risk had not—as plaintiffs alleged—yet materialized and the allegations regarding “illegal and unethical sexual behavior . . . [did] not amount to anything more than uncharged, unadjudicated wrongdoing” which the Company did not have a duty to disclose. In so holding, the Court observed that “‘[a]n increase in a risk does not mean the risk has already come to pass, such that a disclosure that simply identifies the risk would be misleading.’”

The Court turned next to whether the Company had an affirmative duty to disclose information about workplace sexual misconduct under Item 303 of Regulation S-K. The Court first noted that although the Item 303 disclosure requirement is aimed at trends or uncertainties related to a company’s financial conditions and operations rather than “scandalous behavior” by executives, the disclosure requirements “are intentionally general,” suggesting that “it is possible that certain negative revelations about a company’s executives ‘could have just as great an impact as an erosion of market share on a company’s financial condition, liquidity, and capital resources.’” The Court nevertheless rejected plaintiffs’ claims that the Company had an affirmative duty to disclose misconduct under Item 303, holding that plaintiffs failed to adequately plead the existence of an uncertainty that was both known to management and “reasonably likely to have material effects” on the Company’s financial conditions or operations.

Because the Court found that plaintiffs failed to adequately allege any misleading statements or omissions, the Court did not consider whether plaintiffs sufficiently pled scienter and loss causation. The Court also dismissed plaintiffs’ control-person liability claims under Section 20(a), having found no requisite violation of the Exchange Act that would establish such a claim. Finally, the Court denied plaintiffs’ request to file a third amended complaint, citing that plaintiffs already had two opportunities to amend their complaint, the SAC and its current opposition briefing “were copied and pasted from the FAC and its original opposition briefing,” and to permit further amendment would be futile and “needlessly burden counsel and the Court.”