Among the numerous companies hit with #MeToo-related management liability lawsuits in the late 2017 to early 2019 time frame was the national pizza restaurant company Papa John’s International Inc. The plaintiffs in the securities class action lawsuit alleged that company founder and former CEO John Schnatter and other executives sexually harassed company employees and cultivated a hostile workplace culture while the company misleadingly touted the Company’s culture and failed to divulge the true conditions to investors. The defendants’ moved to dismiss. In a March 16, 2020 order, Southern District of New York Judge Kimba Wood granted motion to dismiss, with leave to amend. Judge Wood’s order can be found here.
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.
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.” The defendants moved to dismiss.
The March 16, 2020 Order
On March 16, 2020, Judge Kimba Wood granted the defendants’ motions to dismiss, with leave to amend.
In granting the motions to dismiss, Judge Wood found that “Plaintiff has not plausibly alleged that Defendants’ positive statements about the Company’s culture exceeded the protected bounds of generic puffery.” She went on to say that the plaintiff “has not plausibly alleged that the risk that Papa John’s would face a #MeToo reckoning was so concrete and substantial that there arose a duty to disclose it.”
With respect to the misrepresentations that the plaintiff alleged based upon the company’s Code of Ethics, Judge Wood said that “the statements in the Code are quintessential puffery,” adding (in reliance on, among other things, the dismissal motion ruling in the CBS #MeToo-based securities lawsuit) that “Court have allowed claims based on alleged misrepresentations contained in a code of ethics or conduct to survive a motion to dismiss only in rare circumstances.” Judge Wood observed that “the statements in Papa John’s Code are broad, aspirational, and vague,” and that “no reasonable investor could have relied on the Code’s standard and vague assurances in making investment decisions.”
Judge Wood said that the “positive assurance” in the various public statements on which the plaintiff sought to rely as the basis of alleged misrepresentations “are likewise inactionable as immaterial puffery.” The statements did not assert or imply that the company’s executives had never engaged in misconduct or that the company would never be implicated in the #MeToo movement. They statements were instead “expressions of general corporate optimism.” Even a statement that the company had addressed internal problems, while it “comes closest to stating a misleading material fact.” is “simply too vague to have invited an investor’s reasonable reliance.”
Similarly Judge Wood rejected the plaintiff’s contention that the risk factor disclosures in the company’s SEC filings were “misleading half-truths” when, the plaintiff alleged, the risk had already materialized, is “speculative and unsupported,” as the complaint does not specify when the alleged employee harassment began or when the alleged harassing behavior was widely known.
Finally, with respect to the plaintiff’s allegations that the company had failed to disclose, as it was required to do under Item 303 of Reg. S-K, the “known trends and uncertainties” that could impact future operating results, the plaintiff has “not adequately pled the existence of an uncertainty that was both ‘presently known to management’ and ‘reasonably likely to have material effects on the registrant’s financial condition or results of operations.’” Specifically, the possibility that Schnatter and other executives would be exposed as harassers and be forced to leave the Company and that these changes would affect the company’s results and brand “rests on a tenuous chain of causality and falls short of a known risk, disclosure of which Item 303 would mandate.”
Judge Wood’s opinion in a comprehensive takedown of the plaintiff’s complaint, and coming as it does on the heels of opinion in the CBS #MeToo-related securities cases, underscores the fact that the plaintiffs in these kinds of cases face a definite uphill battle. (To be sure, one claim asserted in the CBS case did survive the dismissal motion, but otherwise the case was completely dismissed.)
I think plaintiffs’ lawyers’ were drawn to file these kinds of management accountability cases as part of the general wave of anger and upheaval that followed in the wake of the unfolding revelations of serious misconduct involving senior corporate management as part of the #MeToo phenomenon. The plaintiffs’ lawyers undoubtedly felt encouraged in bringing these kinds of claims because of the success of the very first #MeToo-related management liability claim – the shareholder derivative lawsuit filed against company officials of 21st Century Fox, which settled for $90 million.
Despite the early success of the 21st Century Fox case, the plaintiffs in these kinds of cases face the challenge that claimants in any of the various kinds of so-called event-driven lawsuits face. The claimants in these kinds of cases base their claims on the fact that something very bad has happened that (they allege) has hurt the company’s operating results. The plaintiffs then have to try to go back in time to try to show that investors should have been told earlier of the possibility of the adverse event or should have managed the company differently to avoid the adverse event. Because these kinds of efforts transparently look like exercises in fraud or mismanagement by hindsight, courts rightly are both skeptical and dismissive of the allegations.
It is probably worth noting that after an initial wave of these kinds of #MeToo-related management liability lawsuits, more recently the plaintiffs have not filed any more of these kinds of claims. The drop off is of course due to the fact that the wave of high-profile #MeToo revelations has substantially diminished. However, another factor may also be that by and large these kinds of cases have not proven particularly successful for the claimants (other than the notable exception of the 21st Century Fox case).
UPDATE: Following publication of this blog post, I received a communication from the Cohen Milstein law firm, in which they correctly pointed out that there was one other significant settlement of a #MeToo-related management liability lawsuit. The law firm acted as counsel for the lead plaintiff in the Wynn Resorts, Ltd. Derivative Litigation, another high profile #MeToo related lawsuit. As detailed on the law firm’s website (here), the parties settled the derivative lawsuit for a payment to the company of $41 million in cash (including $20 million from Steve Wynn personally), and additional corporate therapeutics and corporate governance reforms that the plaintiff’s expert valued at an additional $49 million in value. So clearly in addition to the 21st Century Fox case there has also been at least one additional significant #MeToo management liability related lawsuit settlement. My apologies for this omission.
A couple of final points here. First, I would not want to suggest that because I have said that claimants in these cases face an uphill battle and that many of these kinds of cases have been dismissed that I think the defendants are or have been exonerated from wrongdoing here. There is nothing about the dismissal of this management liability claim that represents an acquittal for the underlying alleged wrongdoing. The dismissal merely means that the allegations were not sufficient to state a claim of the kind that the plaintiff here sought to assert.
Along those same lines, even if many of these #MeToo management liability claims are not successful, that does not mean that company management in general can disregard the larger lessons from the whole #MeToo phenomenon. A critical part of the plaintiffs’ case in this management liability lawsuit was that Schnatter was hit with employment practices liability lawsuits for which the company was forced to pay settlements. Not only that, the company itself did a disruption in its operating performance when the #MeToo allegations came to light. These circumstances alone, and similar circumstances at other companies caught up in the #MeToo phenomenon, should motivate all well-advised company officials to try to ensure that the kinds of circumstances alleged here do not take place and do not continue.