It has been well over two years since the initial coronavirus outbreak in the U.S., but the pandemic continues to affect businesses. Many companies that found themselves making business decisions at the outset of the pandemic are still dealing with the consequences of those decisions. In at least some cases, the consequences from those business decisions are leading to securities class action litigation, as the lawsuit filed this week against Amazon shows.
According to the complaint in the new lawsuit against Amazon, when the COVID pandemic and related lockdown hit in early 2020, consumer demand for goods purchased through Amazon “skyrocketed.” To meet this demand, Amazon rapidly expanded its infrastructure and fulfillment network, more than doubling its warehouse, distribution, and data center space. In the months that followed, according to the complaint, company management reassured investors that the decisions to expand were “sound and appropriate decisions for the long term” and that the expansion was needed in order to meet “strong multiyear demand.” The growth in the company’s infrastructure was based on increased demand that not only related to the pandemic, but also “long-term trends.”
According to the complaint, “the truth emerged” on April 22, 2022, when Amazon reported a $3.8 billion net quarterly loss – its first reported quarterly loss since 2015. After months of “falsely representing that Amazon’s expansion of its e-commerce fulfillment network and infrastructure were necessary and appropriate to meet both short-term and long-term consumer demand,” the company disclosed that it was no longer “chasing physical or staffing capacity.” The company further disclosed that it had significant costs owing to “overcapacity” in its “fulfillment and transport network,” and that these conditions would persist for several quarters.” According to the complaint, the company’s share price declined more than 14% on this news.
On July 6, 2022, a plaintiff shareholder filed a securities class action lawsuit in the Western District of Washington against the company and certain of its executives. A copy of the plaintiff’s complaint can be found here. The complaint purports to be filed on behalf of investors who purchased securities of the company between July 30, 2021 and April 28, 2022.
The complaint alleges that the statements the defendants made during the class period about the company’s infrastructure investment and expansion were false, and that “in reality,” the defendants knew or recklessly disregarded that the company’s infrastructure and fulfillment network investments “substantially outpaced demand, and that those investments were a massive, self-imposed, undue drain on Amazon’s financial condition.” Indeed, contrary to the defendants’ public statements, defendants had already “implemented cutbacks to Amazon’s fulfillment capacity without disclosing the critical information to investors.”
The complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint seeks to recover damages on behalf of the plaintiff class.
By my count, this new lawsuit against Amazon is the 53rd securities class action suit to be filed since the initial COVID outbreak in the U.S. in March 2020. It is also the tenth COVID-related securities suit to be filed so far in 2022. Clearly, COVID has been and apparently appears to be remain a significant factor in driving securities class action litigation.
The lawsuit against Amazon is interesting because it does not fall into one of the three types of claims that has characterized COVID-related securities suits so far. Most of the prior COVID-related lawsuits have fallen into one of three categories: suits against companies that experienced coronavirus outbreaks in their facilities (cruise ships, private prison companies); suits against companies that claimed that they would be able to profit from the outbreak (vaccine manufacturers, diagnostic testing companies); and companies that experience disruption in their operations or financial performance because of the pandemic (real estate developers, private hospital systems).
Instead, this latest lawsuit against Amazon appears to fall into a fourth category, involving companies that profited at the outbreak of the pandemic and that then experienced a downturn as pandemic-related demand eased. There were in fact several of these kinds of lawsuits filed in late 2021. One example is the securities suit filed in November 2021 against Peloton (discussed here). As I noted at the time, and as I continue to believe, there are likely to be more of these kinds of suits, as changing conditions affect consumer demand and purchasing patterns.
It is worth noting that at the present time, there are a host of circumstances challenging companies. Economic inflation, labor shortage, supply chain constraints, interest rate increases, a war in Ukraine. All of these factors present companies with a difficult set of conditions. But as these business challenges mount, businesses also continue to be dogged by challenges relating to COVID. Indeed, as I noted in a recent post, increasingly COVID-related issues are in fact one of several factors that have affected companies in ways that have led to the filing of securities lawsuits. COVID is in fact only one of several macro factors affecting businesses these days. That said, however, it does seem likely that, even though we are now a considerable time past the initial coronavirus outbreak, COVID-related issues will continue to be the source of securities suits against listed companies.