On March 31, 2025, Judge Arun Subramanian of the United States District Court for the Southern District of New York denied a motion to dismiss a putative securities class action against a cosmetics company (the “Company”), its former CEO, and its CFO, alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. In re The Estée Lauder Co., Inc., 23-cv-10669 (S.D.N.Y. Mar. 31, 2025). The Court held that plaintiffs sufficiently pled that defendants knowingly made misleading statements and omissions regarding the Company’s reliance on “gray market” sales of its products in Asia.
The complaint alleges that defendants made misleading statements and omissions regarding revenue streams the Company allegedly derived from daigou—which are prohibited gray-market resellers that buy luxury goods at duty-free prices and sell them at a mark-up—and the expected impact of the Chinese government’s regulations aimed at curbing daigou activity. Plaintiffs alleged that when asked about the expected impact China’s daigou regulations would have on the Company’s sales, the former CEO stated that the Company was “never benefiting from a lot of the daigou business because of our strict policies to avoid any phenomenon like this and, obviously, to limit any risk of gray market around the world.” Plaintiffs alleged that after this statement, in order to compensate for alleged “sputtering sales growth” brought on by the COVID-19 pandemic, the Company allegedly sought to capitalize on loosened regulations in the Hainan province—a purportedly “major site” of daigou activity—by allegedly supplying “massive shipments” of products to “generate sales through the daigou gray market.” According to plaintiffs, following an additional round of regulations by China and the Company’s largest customer allegedly announcing that it was “severely cracking down” on daigou and no longer allowing sales into the gray market, the Company’s sales allegedly “tanked.” Plaintiffs allege that the truth became fully known when the Company finally admitted that “changes in government and retailer polies related to unstructured market activity” were among the primary causes of the decline in sales. Plaintiffs then brought this action claiming that defendants misled investors by failing to disclose the Company’s reliance on daigou. Defendants moved to dismiss.
The Court first held that plaintiffs adequately alleged several actionable statements and “half-truths,” including, for example, the Company’s statement that its “net sales increased in [its] travel retail business . . . reflecting continued strength of [its] brands with the Chinese consumer.” According to the Court, once the Company “chose to speak about the sources of its success, it had a duty disclose the true (and improper) nature” of those sources. The Court further held that statements in which defendants offered “glimmering predictions about future sales or prospects in China” were actionable misrepresentations that were not protected by the PSLRA safe harbor for forward-looking statements because the statements were based on alleged misrepresentations of present-day facts. For example, the Court held that defendants attributed lags in sales to “transitory issues like temporary COVID-19 lockdowns, inventory issues, or the strong U.S. dollar[,] while neglecting to mention that the daigou crackdown was a driver of the sales drop.” The Court also held that the CFO’s alleged statement regarding her opinion that the Company’s sales would recover was actionable—notwithstanding that it was an opinion—because she misleadingly omitted that the crackdowns on daigou was one of the causes of the earlier decline that formed the basis of her opinion.
The Court next held that plaintiffs sufficiently alleged scienter, identifying a “trove” of alleged information that created a compelling inference that defendants made a conscious decision not to disclose the Company’s reliance on daigou. Specifically, the Court focused on the allegations that defendants sought to avoid talking about the Company’s “legally dubious revenue stream,” notwithstanding that two executives made public statements about daigou, that they were attentive to the relevant retail sales data, and that the Company had a team whose purpose was to analyze daigou sales. The Court held that the executives “had to have known” that the Company’s use of the gray-market would have been troubling news for its investors. Finally, the Court held that plaintiffs plausibly alleged loss causation under a materialization-of-risk theory because, here, the concealed risk concerned regulatory enforcement and the crackdown on daigou, which materialized in 2022 and caused a negative impact on the Company’s stock price when the truth was allegedly revealed.
Having held that plaintiffs successfully pled Section 10(b) claims, the Court held that plaintiffs also plausibly alleged derived control person claims under Section 20(a).
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