On June 24, 2024, the United States District Court for the Southern District of New York granted with prejudice a motion to dismiss a putative securities class action against a coffee chain and two of its executive officers. Rein v. Dutch Bros, Inc., et al., No. 23-cv-1794 (PAE) (S.D.N.Y. June 24, 2024). Plaintiff alleged that defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder, by making a series of false and misleading statements touting the company's performance in a manner that understated the threat to sales and profitability presented by rising inflation affecting the cost of commodities key to the company's success. The Court granted defendants' motion to dismiss the amended complaint with prejudice, holding that plaintiff failed to allege materially false or misleading statements and scienter.
Plaintiff, representing a putative class of investors who allegedly purchased the company's securities between November 10, 2021 and May 11, 2022, alleged that defendants made false and misleading statements in SEC filings, conference calls, and interviews regarding (1) the company's susceptibility to rising inflation rates and supply chain issues for dairy products, (2) the mitigating effect of price increases implemented by the company before the class period, and (3) the expected impact of inflation in gas prices on consumer behavior, resulting in artificially increased prices in the company's securities. The complaint also alleged that the individual defendants sold stock in the company in March, April, and May 2022, purportedly demonstrating scienter. The complaint further alleged that on May 11, 2022, the company issued an earnings report that acknowledged that the rising costs of dairy and gasoline had adversely impacted the company's revenues and that the company's price increases had not adequately countered this adversity, resulting in a net loss that prompted the company to adjust future earnings forecasts downward; the next day, the share price fell by over 25%, which was down over 50% from the start of the class period.
The Court dismissed the complaint because it failed to allege any actionable statements that were materially false or misleading and because it failed to adequately allege facts that would give rise to a reasonable inference of scienter.
With respect to falsity, the Court analyzed numerous alleged statements made throughout the class period and concluded that most were either accurate and truthful, unactionable opinion, or forward-looking statements protected by the PSLRA safe-harbor. In response to plaintiff's arguments that some positive statements unrelated to inflation were misleading because they failed to qualify the positive factors with precise data regarding the impact of inflation, the Court held that the complaint failed to allege how the failure to disclose inflation data made accurate statements unrelated to inflation misleading. As for alleged statements related to inflation that plaintiff argued were incomplete, the Court held that the complaint failed to show that the alleged statements misstated the impact of inflation, rather than accurately disclosing that inflation was a challenge the company was seeking to address. With respect to the alleged opinion statements, the Court found that no facts were alleged to infer that the speaker did not actually hold the alleged opinions and they were thus not actionable. The Court also held that the alleged forward-looking statements fell within the PSLRA safe-harbor because they were "replete with meaningful cautionary language."
As to alleged statements that were arguably false, the Court held that the complaint failed to allege facts to show that defendants knew them to be false when made. For example, the complaint alleged that (a) the individual defendants stated on March 9, 2022 that they did not believe an increase in gas prices would cause consumers to purchase the company's drive-through coffee less frequently; and (b) the individual defendants were aware in "mid-March" of a drop in sales—the Court held that this allegation was inadequate to show that the individual defendants knew on March 9, 2022 that drive-through sales were decreasing.
The Court also addressed plaintiff's argument that the company failed to adequately disclose all known negative trends or uncertainties that might materially impact the company as required under Item 303 of SEC Regulation S-K. The Court acknowledged that, until recently, such omissions could be grounds for a claim under Section 10(b) and Rule 10b-5. But under the recent Supreme Court decision in Macquarie Infrastructure Corp. v. Moab Partners, L.P., 144 S. Ct. 855 (2024), "Item 303 can support a claim under these provisions only where there has been an otherwise-misleading statement." Having found no such misleading statement, the Court held that any alleged Item 303 violation could not support plaintiff's claims.
With respect to scienter, the Court found that the alleged percentage of shares sold by the individual defendants was "relatively modest," amounting to 6.7% of one defendant's holdings, and 2.1% of the other's holdings. The Court further noted that the shares were sold pursuant to a Rule 10b5-1 plan, which the individual defendants "entered into long before the company's struggles coping with inflation crystalized." Thus, the Court held that neither the size nor the timing of the alleged trades was suspicious and therefore the sales could not give rise to an inference of scienter.
Having found that the complaint failed to allege materially false or misleading statements and scienter, the Court granted the motion to dismiss in its entirety with prejudice.
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