As I have noted in recent posts, the #MeToo movement has led to a number of D&O lawsuits as the accountability process has led not only to claims against the wrongdoers but also against the wrongdoers’ company and other company executives for turning a blind eye or failing to disclose the problems. On August 30, 2018, in the latest of these D&O claims arising out of revelations of sexual misconduct, investors filed a securities class action lawsuit against Papa John’s International, following news reports of sexual harassment at the company involving the company’s founder and former CEO and Chairman, John H. Schantter, as well as other executives at the company.
Schnatter is the founder of Papa John’s and he still owns 29% of the company’s shares. Schnatter’s decline began last November when he criticized the NFL’s handling of national anthem protests, as a result of which the company’s share price declined 11%. The kerfuffle led to Schnatter’s loss of the CEO title. Schnatter resigned as Chairman in July 2018, after Forbes reported that Schnatter had used “the N-word” in a conference call. The company’s share price dropped 4.8% on the news.
Things took a turn for the worse when on July 19, 2018 Forbes published an article entitled “The Inside Story of Papa John’s Toxic Culture” (here). The article claimed to have been written based on interviews with 37 current and former Papa John’s employees. The article describes a dysfunctional operating environment characterized by favoritism and riven by division and infighting. The article also described something a “bro culture” at the company. Among other things, the article reported that Schnatter’s “alleged behavior ranges from spying on his workers to sexually inappropriate conduct, which has resulted in at least two confidential settlements.” The article describes incidents of sexual harassment involving other company executives, as well as a workplace thick with use of sexual innuendo. The company’s share price fell another 4.85% on this news. Schnatter is now in a fight with the company’s board for control of the company.
On August 30, 2018, a Papa John’s shareholder filed a securities class action lawsuit in the Southern District of New York against the company, Schnatter, and two other executives. A copy of the complaint can be found here. According to the plaintiff’s counsel’s August 30, 2018 press release about the lawsuit (here), the defendants “failed to disclose material adverse facts about the Company’s business, operations and prospects.”
Specifically, the press release states, the defendants failed to disclose that: (i) Papa John’s executives, including Defendant John H. Schnatter (‘Schnatter’) had engaged in a pattern of sexual harassment and other inappropriate workplace conduct at the company; (ii) Papa John’s Code of Ethics and Business Conduct was inadequate to prevent the foregoing misconduct; and (iii) the foregoing conduct would foreseeably have a negative impact on Papa John’s business and operation, and expose Papa John’s to reputational harm, heightened regulatory scrutiny, and legal liability.”
This new lawsuit, the latest in a series of D&O claims arising out of revelations of sexual misconduct, follows just days after a securities class action lawsuit was filed against CBS based on stories of sexual harassment involving the company’s CEO, Leslie Moonves. A number of companies have now become involved in these kinds of complaints. The Papa John’s lawsuit arguably is a bit different, as the problems at Papa John’s involve a number of different issues and incidents relating to the company’s high profile former CEO and Chairman. At least according to the Forbes article, there were a number of different problems at the company beyond just the alleged sexual misconduct.
The Papa John’s lawsuit has only just been filed and it remains to be seen whether or not it will be successful. I will say that the lawsuit reads more like a mismanagement claim than a securities claim. The allegations that investors were misled consist basically of the company’s reference in its SEC filings to its ethics policy and then a reference to the sexual misconduct allegations first raised in the Forbes article. There are no insider trading allegations, and the scienter allegations essentially consist of the allegations that the defendants knew of the misconduct. Just because these various D&O lawsuits arising from allegations of sexual misconduct are being filed does not mean that the lawsuits are meritorious.
In any event, the filing of this lawsuit reinforces a point that I have been making about these kinds of lawsuits as they have been filed, which is that we should expect to see more of these kinds of suits. There are going to continue to be revelations of misconduct and many cases, the revelations are going to be followed by claims, including D&O claims. The one thing is clear is that the accountability process is going to involve not only claims against the wrongdoers themselves but also against their companies and other company executives for permitting the misconduct, turning a blind eye, or making misrepresentations about the misconduct.
I will say that these sexual misconduct-related securities suits represent the latest manifestation of the filing pattern I first noted last year about the rise of event-driven litigation. By contrast to the pattern in prior years, very few securities suit involve allegations of financial misrepresentations; increasingly the pattern now is that a company is hit with an adverse development or unfavorable publicity, and then on comes the securities suit. The sudden wave of sexual misconduct-related securities suits may represent its own phenomenon, but it is also part of the larger patter involving the filing of event-driven securities suits. The event-driven suits in turn represent a significant part of the elevated levels of securities class action litigation that we have seen in 2017 and so far in 2018.