CHARLES R. SIMPSON III, Senior District Judge.
This matter is before the Court on the Motion to Dismiss (DN 82) of Defendants Yum! Brands, Inc. ("Yum!" or the "Company"), David C. Novak, Richard T. Carucci, and Jing-Shyh S. Su ("Individual Defendants"). Defendants request that the Court dismiss the Consolidated Class Action Complaint ("Complaint") (DN 72) with prejudice for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6). For the following reasons, the Court will grant Defendants' Motion to Dismiss (DN 82).
Plaintiffs in this consolidated litigation are a proposed class that purchased or acquired Yum!'s securities between February 6, 2012, and February 4, 2013, ("Class Period") when prices were allegedly inflated by fraudulent misrepresentations or omissions. (Compl., DN 72, at 1.) On May 1, 2013, Frankfurt-Trust Investment GmbH ("Frankfurt-Trust") was appointed as Lead Plaintiff.
Defendants are Yum! and a group of its senior corporate officers.
During the Class Period, the Individual Defendants held positions as Yum!'s senior corporate officers. (Compl., DN 72, ¶¶ 22-24.) Novak served as Yum!'s chairman of the board of directors and chief executive officer. (Compl., DN 72, ¶ 22.) When the Class Period began, Carucci worked as the Yum!'s chief financial officer, but on May 1, 2012, he left that position to assume his new role as the Company's president.
The Complaint asserts three claims against Defendants. First, Count I alleges that Yum! violated § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Securities and Exchange Commission ("SEC") Rule 10b-5, 17 C.F.R. § 240.10b-5, by making fraudulent misrepresentations or omissions in connection with the purchase or sale of a security. (Compl., DN 72, Ct. I.) Second, Count II alleges that the Individual Defendants also committed securities fraud under § 10(b) and Rule 10b-5 through their fraudulent misrepresentations or omissions. (Compl., DN 72, Ct. II.) Third, Count III alleges that the Individual Defendants are liable for Yum!'s securities fraud as controlling persons under § 20(a) of the Securities Exchange Act, 15 U.S.C. § 78t(a). (Compl., DN 72, Ct. III.)
For purposes of this motion, the Court construes the Complaint in the light most favorable to Plaintiffs and accepts as true the following well-pleaded factual allegations. Ashland, Inc. v. Oppenheimer & Co., Inc., 648 F.3d 461, 467 (6th Cir.2011). Yum!'s restaurants are comprised of several different brands, but this litigation concerns its Kentucky Fried Chicken ("KFC") restaurants. (Compl., DN 72, ¶ 20.) Yum! separates its global operations into divisions, one of which is Yum! China. (Form 10-K for 2011, DN 82-2, at 3.) From its headquarters in Shanghai, Yum! China oversees all KFC restaurants located in mainland China. (Compl., DN 72, ¶ 20.) The growth of Yum! China has served as a major component of Yum!'s overall profitability, and that growth can be largely attributed to the success of KFC. (Compl., DN 72, ¶¶ 30-31.) Between 2000 and 2011, KFC restaurants accounted for eighty-five percent of Yum! China's growth. (Compl., DN 72, ¶ 30.)
Maintaining a reputation for food safety is vital to the continued success of Yum!'s business, and the Company has recognized the importance of that issue repeatedly. Before the Class Period, Yum!'s white papers, corporate responsibility reports, and SEC filings reflected the significance of food safety and discussed how the Company maintains strict standards across diverse markets. (Compl., DN 72, ¶¶ 33, 40, 42-50.) Su emphasized food safety and supply chain control in his cover letters to white papers published in 2008 and 2009. (Compl., DN 72, ¶¶ 44-45, 49.)
Prior experience with food safety problems made Yum! aware of the potential impact of negative publicity. In March 2005, a banned food dye with carcinogenic properties, Sudan Red Dye No. 1, was discovered in the seasoning for chicken sourced to Yum! China by a local supplier. (Compl., DN 72, ¶ 35.) The publicity from the Sudan Red incident lowered Yum! China's sales and precipitated a slow recovery. (Compl., DN 72, ¶¶ 35-36) In February 2007, Yum! experienced an E. coli outbreak at several Taco Bell restaurants in the United States, which again reduced sales. (Compl., DN 72, ¶ 37.) In 2008, Yum! China received media scrutiny for its supposed overuse of hormones and steroids in chickens. (Compl., DN 72, ¶¶ 51-52.) While appearing on a television show, Novak responded to a question concerning whether Yum! China used the same standards for administering hormones and steroids to its chickens as would be required in the United States by stating, "Absolutely we use the same standards and our food is absolutely outstanding over there." (Compl., DN 72, ¶¶ 51-52.)
To monitor China's disintegrated supply chains, the Company adopted various supplier oversight protocols. First, Yum! China required suppliers to provide government quarantine certificates. (Compl., DN 72, ¶ 107.) Second, Yum! China insisted that suppliers conduct drug residue testing and present the results before any shipment was accepted. (Compl., DN 72, ¶ 107; Compl. Ex. K, DN 72-11) Third, Yum! created a global audit system for suppliers, known as STAR, which was designed to track and assess supplier compliance. (Compl., DN 72, ¶¶ 48, 50.) Fourth, Yum! China conducted an annual evaluation of each supplier. (Compl. Ex. O, DN 72-15.) Finally, Yum! China performed supplemental spot tests for certain veterinary drugs after receiving poultry shipments. (See Compl. Ex. J, DN 72-10, at 6.)
In this case, the Complaint focuses on Yum! China's own spot testing of received shipments. To complete that spot testing, Yum! China hired a third-party inspector, the Shanghai Institute for Food and Drug Control ("SIFDC"), which is affiliated with a government agency, the Shanghai Food and Drug Administration ("SFDA"). (Compl., DN 72, ¶ 54; Compl. Ex. L, DN 72-12, at 1.) Throughout 2010 and 2011, the SIFDC notified Yum! China that eight of nineteen test samples from the Shandong Liuhe Group ("Liuhe") showed elevated levels of certain antibiotics.
Yum! did not contact the Chinese government concerning those failed test results or voluntarily disclose the results to the public. (Compl., DN 72, ¶ 63.) In fact, Yum! China sold the overmedicated chicken to consumers at KFC restaurants. (Compl., DN 72, ¶ 62.) Su explained that, under then-prevailing procedures, Yum! China often did not receive spot test results before poultry needed to be shipped to restaurants, and once the chicken entered the logistics system, such problems could not be cured. (Compl., DN 72, ¶ 62; Compl. Ex. J, DN 72-10, at 5-6.)
The Complaint alleges that, by misrepresenting or omitting the suppliers' negative
On February 21, 2012, Yum! filed its SEC Form 10-K for 2011, which was authorized and signed by the Individual Defendants. (Compl., DN 72, ¶ 198.) The Complaint alleges that the Form 10-K contained three separate false or misleading statements. First, in a section discussing legal actions in which Yum! is involved, the Form 10-K stated,
(Compl., DN 72, ¶ 201.) Second, the Complaint asserts that the Form 10-K's description of restaurant standards for food quality and safety was a false or misleading statement. In pertinent part, that description stated,
(Compl., DN 72, ¶ 203.) Third, the Complaint alleges that the Form 10-K's risk factors, which discuss significant factors that may affect Yum!'s prospective performance, contained false or misleading statements. Those risk factors appeared as follows:
(Compl., DN 72, ¶ 199.) The statements contained in the Form 10-K were incorporated by reference into each subsequent SEC Form 10-Q filed during the Class Period. (Compl., DN 72, ¶¶ 216-19, 222-23, 226-27.)
The third source of an alleged false or misleading statement is Carucci's response to an investor analyst during a March 8, 2012, conference. The Complaint relies on the following exchange:
(Compl., DN 72, ¶ 207.)
Next, the Complaint alleges that Yum!'s Code of Conduct contained false or misleading statements in the following passages:
(Compl., DN 72, ¶ 211.) On April 4, 2012, Yum!'s board of directors, which included
Finally, the Complaint alleges that several of Yum!'s responses to negative media reports were false or misleading statements. First, on November 23, 2012, Bloomberg News published an article concerning the use of prohibited growth hormone stimulants on poultry by the Shanxi Suhai Group, a Yum! China supplier. Bloomberg News paraphrased the response of a Yum! representative: "[Yum!] watches food safety very closely, expects all its chicken meat suppliers to follow strict food safety rules, and conducts random checks on the products." (Compl., DN 72, 228-29.)
Second, in December 2012, Yum! China received media attention for the accelerated growth rates of certain chickens and the corresponding food safety risks. (Compl., DN 72, ¶ 240.) In response, on December 7, 2012, Yum! posted the following on its Chinese website: "All chickens will undergo inspection by the government, suppliers and KFC before entering KFC. KFC will continue to supervise all the suppliers, strengthen the management of the suppliers continuously to ease people's concern about food safety risks and keep the superior and eliminate inferior suppliers to minimize the risks." (Compl., DN 72, ¶ 240.)
Third, on December 18, 2012, Chinese Central Television ("CCTV") reported that an undercover investigation revealed flaws in Yum!'s food safety protocols for suppliers. (Compl., DN 72, ¶ 245.) The CCTV report accused Yum! of accepting poultry from its suppliers that had tested positive for banned antibiotics and failing to adequately monitor the quality of its raw product supply. (Compl., DN 72, ¶ 246.) In response, Yum! posted the following statement on KFC's Chinese website: "KFC requires all suppliers to conduct drug residue inspections of their chicken products supplied to KFC.... KFC makes spot checks on drug residues in all the chickens purchased." (Compl., DN 72, ¶ 247.)
The December 18, 2012, CCTV report served as the first major disclosure of Yum!'s supplier problems. (Compl., DN 72, ¶ 106.) That CCTV report mentioned the overuse of antibiotics by Liuhe and Yingtai specifically. (Compl., DN 72, ¶ 106.) The next day, on December 19, the SFDA launched an investigation into Yum! China's poultry supply. (Compl., DN 72, ¶ 109.) On December 20, 2012, Bloomberg News reported that, during 2010 and 2011, Yum! received notice of multiple failed test results for Liuhe and Yingtai. (Compl., DN 72, ¶ 113.)
Prior to the market's close, on December 21, 2012, Yum! filed a press release with the SEC that discussed the investigation into its supply problems. (Compl., DN 72, ¶ 116.) The press release admitted that two suppliers provided Yum! China with poultry containing unapproved levels of antibiotics and also stated that the recent publicity had caused a moderate sales decline. (Compl., DN 72, ¶ 116.)
On January 25, 2013, the SFDA concluded its investigation of Yum! China's poultry supply. (Compl., DN 72, ¶ 133.) The SFDA provided Yum! China with a set of supervisory recommendations to strengthen its supply chain practices and improve its voluntary testing procedures. (Compl., DN 72, ¶ 133.) The SFDA decided not to bring a case or assess a fine against Yum! China. (Compl., DN 72, ¶ 133.)
On the final day of the Class Period, February 4, 2013, Yum! filed its SEC
On February 25, 2013, Su announced Operation Thunder, a program designed to improve Yum! China's food safety practices and reassure the public. (Compl., DN 72, ¶ 137.) Operation Thunder's initiatives included the following: (1) increasing the frequency and sophistication of testing; (2) terminating small, high-risk suppliers; (3) developing a mechanism to share results with the Chinese government; (4) adopting a zero-tolerance policy for suppliers that cannot control their farmers. (Compl., DN 72, ¶ 137.)
During an interview, on May 25, 2013, Su explained that Yum! did not disclose the failed test results to safeguard the reputation and goodwill of its suppliers. (Compl., DN 72, ¶¶ 74-75.) Su also asserted that the antibiotics discovered by the tests did not pose a severe risk to the public's health. (Compl., DN 72, ¶¶ 74-75.) Using Liuhe as an example, Su stated,
(Compl. Ex. J, DN 72-10, at 4-5.)
To survive a Rule 12(b)(6) motion to dismiss, the complaint must allege "enough facts to state a claim to relief that is plausible on its face." Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007); Frank v. Dana Corp. (Frank II), 646 F.3d 954, 958 (6th Cir.2011). When ruling on such a motion, the court must construe the complaint in the light most favorable to the plaintiff and accept all well-pleaded factual allegations as true. Ashland, 648 F.3d at 467. In doing so, however, the court will not accept as true legal conclusions or unwarranted factual inferences. Zaluski v. United Am. Healthcare Corp., 527 F.3d 564, 570 (6th Cir.2008) (citing In re Sofamor Danek Grp., Inc., 123 F.3d 394, 400 (6th Cir.1997)); see Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). The court must weigh the complaint's allegations in their entirety and examine other sources ordinarily reviewed when ruling on such a motion, "in particular, documents incorporated into the complaint by reference, and matters of which a court may take judicial notice."
A securities fraud claim arising under § 10(b), like any claim for fraud, must satisfy the heightened pleading requirements of Federal Rule of Civil Procedure 9(b). La. Sch. Emps.' Ret. Sys. v. Ernst & Young, LLP, 622 F.3d 471, 478 (6th Cir.2010). Rule 9(b) requires the plaintiff to "state with particularity the circumstances constituting fraud." Fed. R.Civ.P. 9(b). To comply with Rule 9(b), the complaint must "(1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent." Frank v. Dana Corp. (Frank I), 547 F.3d 564, 570 (6th Cir.2008) (quoting Gupta v. Terra Nitrogen Corp., 10 F.Supp.2d 879, 883 (N.D.Ohio 1998)) (internal quotation marks omitted).
Additionally, a securities fraud claim must meet the more exacting pleading requirements imposed by the Private Securities Litigation Reform Act of 1995 ("PSLRA"), 15 U.S.C. § 78u-4. Securities fraud litigation is especially prone to "`strike suits' aimed at jackpot discovery and predatory settlement."
Section 10(b) of the Securities Exchange Act, makes it unlawful for any person to "use or employ, in connection with the purchase or sale of any security[,] ... any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [SEC] may prescribe as necessary or appropriate in the public interest or for the protection of investors." 15 U.S.C. § 78j(b). SEC Rule 10b-5 implements § 10(b) by declaring it unlawful to "make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading ... in connection with the purchase or sale of any security." 17 C.F.R. § 240.10b-5(b)-(c). Section 10(b) affords an implied private right of action to purchasers and sellers of securities injured by its violation. Tellabs, 551 U.S. at 318, 127 S.Ct. 2499.
Successfully pleading a material misrepresentation or omission requires the plaintiff to allege facts demonstrating (1) that the defendant made a statement or omission that was false or misleading and (2) that this statement or omission concerned a material fact. In re Omnicare, Inc. Sec. Litig., 769 F.3d 455, 470 (6th Cir.2014).
A misrepresentation is an affirmative statement that is false or misleading based on facts held by the defendant when the statement was made. Id. When an alleged misrepresentation involves hard information, the plaintiff must plead facts "showing that the statement concerned a material fact and that it was objectively false or misleading." Id. "Hard information `is typically historical information or other factual information that is objectively verifiable.'" Sofamor Danek, 123 F.3d at 401 (quoting Garcia v. Cordova, 930 F.2d 826, 830 (10th Cir.1991)). In contrast, soft information "includes predictions and matters of opinion." Id. If an alleged misrepresentation involves soft information, the plaintiff must also plead facts "showing that the statement was `made with knowledge of its falsity.'"
Alternatively, an omission theory focuses on the defendant's failure to disclose information when it had a duty to do so. Id. at 471. "Silence, absent a duty to disclose, is not misleading under Rule 10b-5." Basic Inc. v. Levinson, 485 U.S. 224, 239 n. 17, 108 S.Ct. 978, 99
Therefore, both the misrepresentation and omission theories of liability require the plaintiff to plead facts that satisfy the materiality component of § 10(b) and Rule 10b-5. Id. Assessing materiality is a "fact-specific inquiry" that "depends on the significance the reasonable investor would place on the withheld or misrepresented information." Basic, 485 U.S. at 240, 108 S.Ct. 978. This inquiry demands that the court pay close attention to the context of the defendant's statements and the withheld or misrepresented facts. Matrixx Initiatives, Inc. v. Siracusano, ___ U.S. ___, 131 S.Ct. 1309, 1321, 179 L.Ed.2d 398 (2011); Omnicare, 769 F.3d at 478. "Misrepresented or omitted facts are material only if a reasonable investor would have viewed the misrepresentation or omission as `having significantly altered the total mix of information made available.'" Sofamor Danek, 123 F.3d at 400 (quoting Basic, 485 U.S. at 232, 108 S.Ct. 978). Immaterial statements are those statements upon which a reasonable investor would not rely, including "`vague, soft, puffing statements or obvious hyperbole.'" In re Ford Motor Co. Sec. Litig., 381 F.3d 563, 570 (6th Cir.2004) (quoting In re K-tel Int'l, Inc. Sec. Litig., 300 F.3d 881, 897 (8th Cir.2002)). Regarding such statements,
Id. at 570-71 (quoting Shaw v. Digital Equip. Corp., 82 F.3d 1194, 1217 (1st Cir. 1996)).
Here, the Complaint asserts liability based on both misrepresentations and omissions, alleging that Defendants public statements during the Class Period affirmatively misrepresented or misleadingly omitted the failed test results of Yum!'s Chinese suppliers. (Compl., DN 72, ¶¶ 189-91.) As misrepresented or omitted facts, those failed test results constitute hard information because they can be verified objectively. See Sofamor Danek, 123 F.3d at 401. That conclusion permits the analytical frameworks for misrepresentations and omissions to be consolidated in major respects. The Court will focus on three central issues: (1) whether the Defendants' alleged misrepresentations or omissions concerned material fact, (2) whether the Defendants' public statements were objectively false or misleading in light of the misrepresented or omitted test results, and (3) whether Defendants' assumed a duty to disclose the omitted test
Defendants' public statements during the Class Period can be divided into two categories: (1) statements of the risk and uncertainty posed by food safety problems and (2) statements concerning the quality of Yum!'s food safety program. The Court will address the materiality of statements in each of those categories in turn.
The first category of public statements contains Defendants warnings that food safety problems present a risk and uncertainty to Yum!'s business performance. The Complaint refers to each of the following statements as a material misrepresentation or omission. First, in the Form 8-K for 2011, Defendants stated that future projections are subject to "risks and uncertainties" and "[f]actors that can cause actual results to differ materially include ... food-borne illness or food safety."
Defendants' statements of the risk and uncertainty presented by food safety problems are not the type of statements that a reasonable investor would find important in the total mix of available information. See, e.g., Cement & Concrete Workers Dist. Council Pension Fund v. Hewlett Packard Co., 964 F.Supp.2d 1128, 1141 (N.D.Cal. 2013); Peters v. Jinkosolar Holding Co., 2013 WL 754712, at *5-8 (S.D.N.Y. Feb. 27, 2013); In re FBR Inc. Sec. Litig., 544 F.Supp.2d 346, 360-63 (S.D.N.Y.2008). Such boilerplate recitations of risk are ubiquitous in the securities marketplace. Defendants' risk statements speak in general terms and say nothing specific from which a reasonable investor could infer anything about the present state of food safety within the Company. Additionally, the risk statements do not assert that Yum!'s business is presently free of any potential for food safety problems to damage performance. In fact, the risk statements were issued to alert investors that food safety problems might hinder performance and to inform them of common circumstances that lead to such issues.
For example, regarding Defendants' warning that disputes over supplier compliance may arise, Ford provides useful
Defendants' risk statements lack any specific information and offer only nebulous descriptions of broad classes of risk. Such statements are often heard in the securities marketplace and are insignificant in the decision-making calculus of a reasonable investor. Therefore, the Court concludes that Defendants' statements of the risk and uncertainty posed by food safety problems did not concern material fact.
The second category of public statements consists of statements concerning the quality of Yum!'s food safety program. The Complaint alleges that each of the following statements is a material misrepresentation or omission. First, in the Form 10-K for 2011, Defendants stated that "[a]ll restaurants ... must adhere to strict food quality and safety standards" and "guidelines are translated to local market requirements and regulations where appropriate and without compromising the standards." (Compl., DN 72, ¶ 203.) Second, in the Code of Conduct, Defendants stated that Yum! "[m]aintains strict specifications for raw products including specifications that meet or exceed government requirements," "[a]dheres to a strict food safety testing program," and "[c]ontinually monitors and improves its procedures to ensure food safety." (Compl., DN 72, ¶ 211.) Third, the Code of Conduct further asserted that "[a]ny product suspected to be unsafe must immediately be pulled from distribution until safety can be assured." (Compl., DN 72, ¶ 211.) Fourth, when responding to a question regarding the Chinese food supply, Carucci stated,
(Compl., DN 72, ¶ 207.) Fifth, a November 23, 2012, Bloomberg News article paraphrased a Yum! representative as saying that the Company "watches food safety very closely, expects all chicken meat suppliers to follow strict food safety rules, and conducts random checks on the products." (Compl., DN 72, 228-29.) Sixth, on December, 7, 2012, Yum! posted the following on its Chinese website: "All chickens will undergo inspection by the government, suppliers and KFC before entering KFC. KFC will continue to supervise all the
City of Monroe offers important guidance in the Court's analysis of Defendants' statements. 399 F.3d at 651. In City of Monroe, the plaintiffs alleged that the defendants made material misrepresentations or omissions by touting the quality and safety of tires they manufactured without disclosing known adverse information. Id. at 670. The known adverse information included internal testing that showed a high rate of tire failure, lawsuits for vehicle roll-overs caused by tire defects, and foreign government investigations into tire safety. Id. at 672. During the relevant time period, the defendants stated that the company sold "the best tires in the world," that it had "no reason to believe there is anything wrong with [the tires]," that its products demonstrated "global consistent quality," and that "[r]igorous testing under diverse conditions at our proving grounds around the world helps ensure reliable quality for original equipment customers." Id. at 670 (internal quotation marks omitted). The court concluded that those statements were immaterial and therefore did not give rise to a duty to disclose additional facts. Id. at 671. The court explained that such statements "are best characterized as loosely optimistic statements insufficiently specific for a reasonable investor to `find them important to the total mix of information available.'" Id.
However, the court reached the opposite conclusion when considering the materiality of the defendants' statement that "[w]e continually monitor the performance of all our tire lines, and the objective data clearly reinforces our belief that these are high-quality, safe tires." Id. at 671-72 (internal quotation marks omitted). The timing of the "objective data" statement appeared to be in direct response to lawsuits and other public challenges, and the defendants did not point to any actual data in the record that supported the statement's truth. Id. at 672. Accordingly, the court concluded that, "once [the defendants] elected to make statements such as the statement regarding the `objective data,' it was required to qualify that representation with known information undermining (or seemingly undermining) the claim." Id. at 673.
Here again, the Complaint alleges only immaterial statements, "too squishy, too untethered to anything measurable, to communicate anything that a reasonable person would deem important to a securities investment decision." Id. at 671. Defendants' statements repeat vague, subjective assertions, such as "strict" food safety standards, watching food safety "very closely," having the "right" suppliers, and keeping "superior" and eliminating "inferior" suppliers. (Compl., DN 72, ¶¶ 203, 207, 211, 228-29, 240.) Those terms constitute the mere opinions of management and hold no obvious, objective meaning to a reasonable investor. See City of Monroe, 399 F.3d at 670-71; City of Pontiac Gen. Emps.' Ret. Sys. v. Stryker Corp., 865 F.Supp.2d 811, 829 (W.D.Mich.2012). Unlike City of Monroe's "objective data" statement, Defendants' statements do not
Moreover, the December 7, 2012, website post, which stated, "All chickens will undergo inspection by the government, suppliers and KFC before entering KFC," (Compl., DN 72, ¶ 240.), contains no content from which a reasonable investor could gauge the type and thoroughness of the inspections. Without more specific language, a reasonable investor would take that statement as yet another positive assertion floating about the marketplace. This statement concerning inspections is bereft of detail and was accompanied by other immaterial assertions. In its terms and context, the statement is simply too vague to be material.
The Complaint's reliance on Yum!'s Code of Conduct as a source of material misrepresentations and omissions is also misplaced. The adoption of a code of conduct does not imply that a corporation or its employees always comply with the code's guidelines. Hewlett Packard, 964 F.Supp.2d at 1138-39; Desai v. Gen. Growth Props., Inc., 654 F.Supp.2d 836, 859 (N.D.Ill.2009); Andropolis v. Red Robin Gourmet Burgers, Inc., 505 F.Supp.2d 662, 685-686 (D.Colo.2007). Often required by regulators or stock exchanges, the essentially mandatory nature of adopting a code of conduct makes clear to investors that "all public companies — whether run by crooks or angels — will adopt just such a code." Andropolis, 505 F.Supp.2d at 685-86. That fact alone would dissuade a reasonable investor from affording a code of conduct any importance in an investment decision, but such codes are also "inherently aspirational." Id. at 686. Codes of conduct state how a corporation or its employees ought to behave, not how they actually behave. For those reasons, the statements in Yum!'s Code of Conduct are insignificant in the total mix of available information.
A reasonable investor would pay little, if any, attention to Defendants' statements concerning the quality of Yum!'s food safety program. Those statements are vague and subjective, evidencing only the opinion of management, or derived from sources that are aspirational, rather than reliable. Therefore, the Court concludes that Defendants' statements concerning the quality of Yum!'s food safety program, like their risk statements, did not concern material fact.
A reasonable jury, considering Defendants' public statements in light of the failed test results, could not conclude that those statements were objectively false or misleading. First, the statements acknowledging the risk and uncertainty associated with food safety problems are consistent with the failed test results. Defendants did not guarantee that food safety problems would never occur or that the current potential for problems was negligible. Those statements informed investors that food safety problems may occur, that such problems may originate with suppliers, and that the problems may have a negative impact on Yum!'s business performance. Rather than undermine the truth of Defendants' risk statements, the failed test results confirm it.
Second, the objective truth or falsity of Defendants' statements concerning the quality of Yum!'s food safety program cannot be determined. As discussed above, those statements are phrased in subjective terms. Assessing the veracity of those terms can only be characterized as a matter of opinion. The one statement that does contain some objective content — the
The foregoing materiality and falsity analyses simplify the issue of whether Defendants assumed a duty to disclose the omitted test results. Though "a party who discloses material facts in connection with securities transactions `assume[s] a duty to speak fully and truthfully on those subjects,'" no duty to disclose arises from disseminating immaterial or non-misleading information. Helwig, 251 F.3d at 561 (quoting Rubin, 143 F.3d at 268) (emphasis added). A duty to disclose exists only to the extent necessary to cure the misleading nature of a material statement. See Rubin, 143 F.3d at 267 ("The question thus is not whether [a party's] silence can give rise to liability, but whether liability may flow from [its] decision to speak ... concerning material details ..., without revealing certain additional known facts necessary to make [its] statements not misleading." (emphasis added)). While a reasonable investor might view the failed test results, in isolation, as useful information, "a corporation is not required to disclose a fact merely because a reasonable investor would very much like to know that fact."
The opposite conclusion here would encourage corporations "simply to bury the shareholders in an avalanche of trivial information — a result that is hardly conducive to informed decisionmaking." Basic, 485 U.S. at 231, 108 S.Ct. 978 (quoting TSC Indus. Inc. v. Northway, Inc., 426 U.S. 438, 448-49, 96 S.Ct. 2126, 48 L.Ed.2d 757 (1976)) (internal quotation marks omitted). Any business that tests its suppliers' products will inevitably discover defective or otherwise unacceptable items. The purpose of a supplier testing program is to discover such instances of noncompliance. If suppliers could always be trusted to tender perfect products, testing programs would not be necessary. Saddling a corporation, such as Yum!, with a duty to disclose its suppliers' test results each time it discusses, in the most general terms, the quality of its products or the risks surrounding those products would incentivize that corporation to dump a unmanageable number of test results on investors to avoid potential liability for securities fraud.
Defendants also contend that the Complaint fails to plead a strong inference of scienter. The mental state of scienter encompasses the "knowing and deliberate intent to manipulate, deceive, or defraud, and recklessness." Ley v. Visteon Corp., 543 F.3d 801, 809 (6th Cir.2008); see Comshare, 183 F.3d at 550. "Recklessness is defined as `highly unreasonable conduct which is an extreme departure from the standards of ordinary care. While the danger need not be known, it must at least be so obvious that a reasonable man would have known of it.'" PR Diamonds, Inc. v. Chandler, 364 F.3d 671, 681 (6th Cir.2004) (quoting Mansbach v. Prescott, Ball & Turben, 598 F.2d 1017, 1025 (6th Cir. 1979)). Distinct from mere negligence, recklessness is "akin to conscious disregard." Comshare, 183 F.3d at 550.
When deciding whether a complaint pleads a strong inference of scienter, the court must, of course, accept all factual allegations as true and weigh the complaint and other sources ordinarily considered in their entirety. Tellabs, 551 U.S. at 322, 127 S.Ct. 2499. The proper inquiry is "whether all of the facts alleged, taken collectively, give rise to a strong inference of scienter, not whether any individual allegation, scrutinized in isolation, meets that requirement."
The Complaint asserts that the following allegations establish a strong inference that Defendants acted with scienter because they knew or should have known of the suppliers' failed test results and the false or misleading nature of their public statements. First, Yum! China received notice of its supplier's failed test results throughout 2010 and 2011, but it did not disclose those results to the Chinese government or the public. Second, the failed test results implicated core operations of Yum!'s business because Yum! China represents a large portion of the Company's overall profitability. Third, Yum! China's business is particularly susceptible to food safety problems, and the Individual Defendants understood that high risk in light of previous instances of contamination, the nature of Chinese poultry supply chains, and acknowledgement of that susceptibility in the Company's risk statements, white papers, and corporate responsibility reports. Fourth, the Individual Defendants could have accessed and reviewed the suppliers' failed test results on STAR. Fifth, the Individual Defendants should have known of the failed test results because the Code of Conduct provides that each employee is "expected to immediately report any problem with food safety to [his] supervisor or the next level of management." (Compl., DN 72, ¶ 211.) Sixth, Defendants responded to negative media reports without revealing the suppliers' failed test results in close proximity to the unplanned public disclosure of those results. Seventh, the Individual Defendants concealed the failed test results to maintain Yum!'s growing profits, to ensure higher compensation, and to protect their personal reputations.
In addition, the Complaint alleges certain facts to establish a strong inference of scienter with respect to particular Individual Defendants. The Complaint alleges that Novak's 2008 television appearance in which he discussed food safety standards for Chinese poultry shows that he paid close attention to that issue and should have known of the suppliers' failed test results. Next, the Complaint asserts that Carucci spoke with certainty in his March 8, 2012, response to the investor analyst's question and therefore he must have known of the current state of the Chinese supply chain and the failed test results. The Complaint also alleges that Su knew or should have known of the suppliers' failed tests results because he oversaw Yum! China's operations directly and maintained an intense, personal focus on food safety and drug residue testing as evidenced by his statements and cover letters to white papers. Finally, the Complaint alleges that Su's May 25, 2013, discussion of Yum!'s excuses for failing to disclose the negative test results demonstrates that he knew of those results during the Class Period.
When reviewed holistically, the Complaint's factual allegations do not establish a strong inference of scienter with respect to any Individual Defendant. The Complaint relies solely on allegations of circumstantial evidence that the Individual Defendants knew or should have known of the suppliers' failed test results and the misleading effect of misrepresenting or omitting those results. There are no allegations of direct evidence — no smoking gun — indicating that the Individual Defendants acted with knowledge of the failed test results, such as a report of the results directed to senior management or specific conversations or meetings concerning the results.
The Complaint's allegations of scienter focus primarily on various important aspects
For the same reasons, the Complaint's allegations concerning Novak's 2008 television appearance, Carucci's response to the investor analyst, and Su's personal focus on food safety and drug residue testing are likewise unpersuasive. The Complaint cites those examples as evidence that the Individual Defendants knew or should have known of the suppliers' failed test results. Again, the inference that general familiarity with important aspects of Yum!'s business demonstrates knowledge or the need to obtain knowledge of specific test results is weak.
Next, the Complaint alleges that the Individual Defendants knew or should have known of the suppliers' failed test results because they could have accessed and reviewed those test results on STAR. Regarding the availability of test results on STAR, which served as an auditing system for all of Yum!'s suppliers, the Individual Defendants' fraudulent intent or recklessness cannot be presumed merely from their high-level positions and alleged access to information. See PR Diamonds, 364 F.3d at 688. The Complaint must do more than point out access and opportunity. It must allege specific facts showing that the Individual Defendants actually reviewed the STAR records or failed to review the records when a reasonable person would have done so.
The Complaint further alleges that the Individual Defendants knew or should have known of the failed test results because the Code of Conduct required employees to report food safety problems to their supervisors. Assuming that employees comply with the Code of Conduct's reporting rule, the requirement that food safety issues be relayed to a supervisor or the next level of management does not mean that every such issue will landed on the desk of a senior corporate officer. The Code's mandate most likely relates to the initial reporting of food safety issues. Thereafter, lower levels of management may resolve many of those issues without involving senior officers. These allegations provide little help in raising a strong inference of scienter.
The Complaint also alleges that the Individual Defendants acted with scienter to perpetuate Yum!'s rapid growth rate and profitability and, by doing so, maintain their jobs, high compensation levels, and personal reputations. This allegation, however, is so sweeping that similar motive could be imputed to every corporate officer. See Plumbers & Pipefitters Local Union 719 Pension Fund v. Zimmer Holdings, Inc., 679 F.3d 952, 956 (7th Cir. 2012); PR Diamonds, 364 F.3d at 690; Kalnit v. Eichler, 264 F.3d 131, 140 (2d Cir.2001). All members of senior management wish to see their corporations prosper and their personal reputations improve. Furthermore, the prevalence of
Finally, the Complaint asserts that the close proximity of Defendants' responses to negative media reports and Su's after-the-fact excuses for not disclosing the failed test results raise a strong inference of scienter. While Defendants quick responses to critical news stories could suggest deceptive intent, those responses could also be legitimate and routine attempts to preserve Yum!'s public image. Similarly, the excuses for nondisclosure offered by Su could be interpreted as an admission that he knew of the failed test results during the Class Period, or those excuses could be construed as an attempt to explain away poor monitoring and oversight. Given the contrasting inferences to be drawn from those allegations, they cannot alone serve as the basis for a strong inference of scienter.
Taken collectively, the Complaint's factual allegations against the Individual Defendants do not raise an inference of fraudulent intent or recklessness that is at least as compelling as the inference of non-fraudulent intent. The inference that the Individual Defendants lacked both knowledge of and an obligation to discover the suppliers' failed test results overwhelms the contrary inference that the results were intentionally or recklessly concealed to deceive the public. Even if the Individual Defendants knew of the negative test results, the Complaint fails to adequately allege that, by not disclosing the results, they consciously disregarded the risk that their statements would mislead investors. Those statements consisted of warnings and commonplace assertions of quality. When making such general statements, a reasonable corporate officer in similar circumstances would be unlikely to recognize any risk posed by the nondisclosure of specific test results. Therefore, the Court concludes that the Complaint fails to sufficiently plead a strong inference of scienter with respect to the Individual Defendants.
In Omnicare, the Sixth Circuit recently clarified the rule for attributing scienter to a corporate entity.
Id. (quoting Patricia S. Abril & Ann Morales Olazábal, The Locus of Corporate Scienter, 2006 Colum. Bus. L.Rev. 81, 135). This formulation cuts back on the broad dicta of City of Monroe, which stated that the "knowledge or a corporate officer or agent acting within the scope of [his] authority is attributable to the corporation." 399 F.3d at 688 (quoting 2 Thomas Lee Hazen, Treatise on the Law of Securities Regulation § 12.8[4], at 444 (4th ed.2002)) (internal quotation marks omitted); Omnicare, 769 F.3d at 476-77.
The Court previously concluded that the facts alleged do not support a strong inference that the Individual Defendants knew or should have known of the failed test results and the risk of misleading investors by misrepresenting or omitting those results. Therefore, to plead scienter attributable to Yum!, the Complaint must allege that additional agents, falling within the Omnicare categories, acted with knowledge or recklessness concerning the failed test results and their nondisclosure. The facts alleged clearly show that, throughout 2010 and 2011, unidentified agents received notice of the suppliers' failed test results. The facts further demonstrate that, during the Class Period, unidentified agents prepared and issued public statements related to food safety risks and the quality of Yum!'s food safety program. However, the Complaint does not contain factual allegations that permit the Court to infer a connection between those two groups of unidentified agents. The inference that Yum!'s high managerial agents and other agents related to the preparation and issuance of public statements — as noted in the Omnicare categories — lacked knowledge of and an obligation to discover the failed test results overpowers the inference that these agents, at minimum, consciously disregarded the risk that their statements would mislead investors. Accordingly, the Complaint fails to plead a strong inference of Yum!'s corporate scienter.
The Court concludes that the Complaint's factual allegations do not raise a strong inference of scienter with respect to any Defendant. For this additional reason, the Complaint's allegations of securities fraud are insufficient, and Counts I and II will be dismissed for failure to state a claim.
In Count III, the Complaint alleges that the Individual Defendants are liable as controlling persons under § 20(a) of the Securities Exchange Act, 15 U.S.C. § 78t(a). (Compl., DN 72, Ct. III.) Section 20(a) provides as follows:
15 U.S.C. § 78t(a). A § 20(a) claim must be predicated on at least one underlying violation of securities law by a controlled person, which would be Yum! in this case. Frank II, 646 F.3d at 962. As discussed above, the Complaint fails to plead a material misrepresentation or omission and a strong inference of scienter attributable to Yum!. That failure eliminates the claim for
For the reasons stated above, the Court will grant Defendants' Motion to Dismiss (DN 82). A separate order and judgment will be entered this date in accordance with this Memorandum Opinion dismissing Counts I, II, and III of the Complaint (DN 72) with prejudice.
251 F.3d at 552. In this case, the factual allegations in no way implicate Helwig factors (1), (4), (5), (7), and (8). The Court will address the remaining factors, at least indirectly, in its holistic analysis of the scienter allegations.
