On August 9, 2024, Judge Michael W. Fitzgerald of the United States District Court for the Central District of California granted a motion to dismiss a putative securities class action against a producer of plant-based meat substitutes (the “Company”) and three of its officers. Saskatchewan Healthcare Emp.s’ Pension Plan v. Beyond Meat, Inc., et al., 23-03602-MWF (C.D. Cal. Aug. 9, 2024). Plaintiff asserted claims for violations of Sections 10(b), 20(a), and 20A of the Securities Exchange Act of 1934 (the “Exchange Act”) and SEC Rule 10b-5 thereunder, based on defendants’ alleged misrepresentations regarding the Company’s ability to scale production to meet its partners’ demands. The Court granted defendants’ motion to dismiss, holding that plaintiff failed to sufficiently allege falsity and scienter.
The Company seeks to build “meat directly from plants” by replicating the look, taste, and texture of animal meat using only vegan, nongenetically modified ingredients. Plaintiff—on behalf of a putative class of investors who allegedly acquired the Company’s common stock between May 5, 2020, and October 13, 2022—alleged that the Company first received support from venture funding and celebrity investors by creating small, sample-sized prototypes of its product offerings. Plaintiff alleged that the Company went public in 2019 in the “best-performing” IPO in nearly two decades, with shares surging more than 163% in the first day of trading. The Company’s CEO allegedly maintained a “growth-above-all” culture and exerted pressure from the top to roll out new products on rushed and unrealistic timelines.
According to plaintiff, defendants misled investors by misrepresenting the success of the Company’s product tests with its large-scale quick-service restaurant (“QSR”) partnerships, including prominent food retailers, while knowing that the Company could not successfully scale production to meet these partners’ demands. The Company allegedly concealed from investors that its investment plan to scale production was failing and its choices in manufacturing (including allegedly purchasing millions of dollars of manufacturing equipment that sat idle at the Company’s warehouses) foreclosed any large-scale success with QSRs. In addition, the Company allegedly purchased a co-manufacturer and replaced most of its senior staff with inexperienced employees and outsourced other work which, according to plaintiff, caused production to “plummet.”
As a result of these alleged issues, plaintiff contended that the Company “never came close” to a permanent launch in the U.S. and was unable to conform to large-scale production required by major restaurant chains. According to the complaint, the Company’s partnerships with certain major restaurants were ultimately discontinued as partners were dissatisfied with the products, allegedly caused by the manufacturing issues. Plaintiff alleged that the truth of defendants’ conduct was disclosed in a series of partial disclosures, causing the Company’s stock price to plummet 93% during the putative class period. Plaintiff further alleged that certain Company executives profited by selling hundreds of thousands of shares of their Company stock at artificially inflated prices.
The complaint alleged two categories of misleading statements: (i) statements regarding QSR partnerships and (ii) statements regarding the Company’s scaling and production efforts. Plaintiff argued that the QSR statements falsely suggested that “nationwide” U.S. launches were “imminent,” and that the Company’s partnerships were “strong.” The Court held that these alleged statements were inactionable because plaintiff failed to allege contemporaneous facts to demonstrate how the statements were false when made. According to the Court, plaintiff’s claims lacked the requisite link with the actual content of the statement to show how it was false. Because the factual allegations in the Complaint were almost entirely “untethered” to the actual statements made by defendants, the Court was “left to guess” how these factual allegations rendered defendants’ representations misleading. The Court likewise held that the scaling and production statements also failed for the same reasoning. The Court further found the remaining alleged misstatements or omissions were nonactionable statements of puffery or opinion, or that they fell within the PSLRA safe harbor for forward-looking statements accompanied by meaningful cautionary language.
Despite finding that plaintiff failed to sufficiently plead an actionable false or misleading statement or omission, the Court nevertheless analyzed plaintiff’s scienter allegations. The Court first noted that, because plaintiff did not allege a material misrepresentation or omission, plaintiff was unable to allege that defendants had knowledge of falsity or acted with deliberate recklessness as to any of the challenged statements. The Court then found that, even if plaintiff had sufficiently alleged a false or misleading statement, plaintiff failed to plead adequate facts to establish that defendants either intentionally or with deliberate recklessness misrepresented the Company’s relationship with QSRs or its scaling and production efforts.
Although the Court stated that it found scienter “sufficiently pled” as to the CEO on the basis of the “core operations” doctrine, the Court found that the complaint nevertheless failed to allege particularized facts to give rise to a strong inference of scienter as to the CEO as required under Rule 9(b).
The Court rejected plaintiff’s scienter arguments as to the other defendants, finding that the complaint failed to allege the precise number of shares sold and the timing of these alleged sales as it related to the insider sales allegations, and that plaintiff did not otherwise sufficiently allege scienter with particularity.
The Court similarly rejected plaintiff’s corporate scienter allegations, finding that the cited statements were not so “dramatically false” that at least some corporate official must have known of their falsity. Finally, the Court also found plaintiff’s reliance on alleged executive departures and newspaper articles to establish scienter unavailing, noting that plaintiff did not allege how the departures were related to the supposed fraudulent conduct and that the newspaper articles’ temporal proximity to the alleged fraud “alone is insufficient to create a strong inference of scienter.”
Having found no primary violation of Section 10(b) or Rule 10b-5, the Court dismissed the remaining claims brought under Section 20(a) and Section 20A. The Court did, however, grant plaintiff leave to amend to address the complaint’s deficiencies.
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