On August 25, 2017, Judge Lee Yeakel of the United States District Court for the Western District of Texas dismissed with prejudice a putative securities class action against Whole Foods Market, Inc. and certain of its officers.  Markman v. Whole Foods Market Inc. et al, No. 1:15-cv-681-LY (W.D. Tex. Aug 25, 2017).  Plaintiffs alleged that defendants’ knowingly or recklessly engaged in a scheme to overcharge customers by placing inaccurate food-weight labels on prepackaged foods, thereby rendering Whole Foods’ financial statements false and misleading, in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”).  Lead plaintiffs—the Employees’ Retirement System of the State of Hawaii—filed a second amended complaint (“SAC”) after the Court dismissed their original complaint for failure to state a claim.  The Court held that the SAC failed to adequately plead a material misrepresentation or omission, scienter, and loss causation, and denied plaintiffs’ request for leave to amend the complaint again.

First, the Court ruled that plaintiffs failed to plead an actionable misstatement or omission.  In the SAC, plaintiffs submitted affidavits from a Whole Foods data analyst and argued that the affidavits established that the company’s financial results were materially inflated.  The Court, however, rejected plaintiffs’ argument and ruled that the data analyzed in the affidavit was not connected to the weight and pricing of prepackaged products, and therefore, did not support an inference of mislabeling by Whole Foods.

Next, the Court ruled that plaintiffs failed to plead scienter with respect to each of the defendants.  In the SAC, plaintiffs asserted that it was implausible that the individual defendants were unaware that Whole Foods’ weight-and-measures procedures were inadequate and that the company was overcharging its customers.  In support, plaintiffs argued that the individual defendants must have known of the problem because Whole Foods’ in-house counsel was made aware of the alleged weights-and-measures issue through investigations in California and New York and the in-house counsel must have shared the information with the individual defendants because they were part of a “tightknit team.”  The Court rejected plaintiffs’ attempts to impute the knowledge of the company’s in-house counsel to the individual defendants, finding that plaintiffs failed to make credible factual allegations to support a theory of a system-wide scheme known to each individual defendant, nor any facts that distinguished each defendant’s role, intent, and knowledge.  Finding that there was no compelling inference that the individual defendants acted with requisite scienter, the Court held that there was no compelling inference of scienter on behalf of the company itself.

Finally, the Court ruled that plaintiffs had failed to plead loss causation, finding that the alleged corrective disclosures made by the company in a July 29, 2015 investor call did not reveal any new information to the market, and thus a stock decline the following day was not plausibly caused by the disclosures.  The Court also rejected plaintiffs’ request for leave to amend, noting that the insufficiency of the allegations added to plaintiffs’ SAC “make clear that any attempt to further amend would be futile.”

The decision serves as a reminder of the high hurdle plaintiffs must overcome in pleading scienter under the PSLRA.  Although courts evaluate factual allegations collectively, plaintiffs still must allege facts that give rise to a cogent and compelling inference that each individual defendant acted with the requisite intent to deceive and that someone whose intent can be imputed to the corporation acted with the required state of mind.