As I have noted previously (most recently here), there have been a number of COVID-19-related securities class action lawsuits filed since the initial coronavirus outbreak in the U.S. in March 2020. But while these lawsuits have continued to be filed since the outset of the pandemic, as time has gone by, it has become increasingly challenging to say with certainty whether or not a new lawsuit is COVID-19-related. A case in point is the lawsuit filed this week against the online clothing rental and sales platform, Rent the Runway, Inc. (RTR). The lawsuit unquestionably raises allegations related to the challenges that the company faced (and faces) as a result of the pandemic; however, the plaintiff’s complaint raises a number of other allegations as well. For reasons discussed below, and even though the complaint raises a number of different kinds of allegations, I think that on balance the lawsuit counts as COVID-19-related. A copy of the complaint filed against RTR can be found here.
RTR is an online e-commerce platform offering clothing rentals and sales. RTR completed an IPO in October 2021. Prior to the IPO, the company was, as the subsequently filed complaint alleges, “severely impacted by the COVID-19 pandemic.” The company’s sales were adversely affected by governmental stay-at-home orders and the resulting decline in social gatherings. The complaint alleges further that “in the months leading up to the IPO,’ RTR “claimed that it was experiencing a business resurgence as concerns about the COVID-19 pandemic lessened [and] lockdown orders ceased.”
The company’s Registration Statement prepared in connection with its IPO, according to the complaint, claimed that RTR “was experiencing rapid growth at the time of the IPO.” The complaint alleges that the Registration Statement said that “the COVID-19 pandemic has accelerated our consumer tailwinds” as “consumer values have shifted the landscape” toward the company’s business model. The Registration also highlighted the company’s low marketing costs (owing to the success of word-of-mouth business generation) and touted the company’s lower fulfillment costs as percentage of revenue “as a result of efficiencies in transportation rates and fulfillment labor.”
In first quarterly earnings report following the IPO, the company reported a quarterly loss nearly double in size of the year prior quarter. The company also reported that its fulfillment and marketing costs had risen, and that the company had experienced, in the words of the complaint, “a sharp deceleration in active subscriber growth” which, the complaint alleged, indicated “that the Company was several months away from achieving pre-pandemic active subscribers.”
In subsequent quarterly reports during calendar year 2022, the company reported further declines in the number of active subscribers, as well as elevated marketing and fulfillment expenses. In its September 12, 2022 quarterly earnings release, the company announced a restructuring plan that included a 24% workforce reduction. By October 2022, a year after the company’s IPO, the company’s share price, according to the complaint, had fallen below $2 per share, 90% below the price of the stock at the time of the IPO.
On November 14, 2022, a plaintiff shareholder filed a securities class action lawsuit in the Eastern District of New York against RTR, certain of its directors and officers, and its offering underwriters. (Some readers may be interested to know that Gwyneth Paltrow is among the director defendants.) The complaint purports to represent a class of investors who purchased RTR securities in or traceable to the company’s October 2021 IPO.
The complaint alleges that the defendants failed to disclose the following adverse facts that existed at the time of the IPO: “(a) that RTR was continuing to face extraordinary business headwinds, such as transportation headwinds and labor wage rate increases, from the COVID-19 pandemic; (b) that RTR’s active subscriber enrollments had sharply decelerated from the grow trajectory represented in the Registration Statement and, as a result, the Company was several months away from approaching its pre-pandemic levels of active subscriptions; (c) that RTR needed to substantially increase marketing and advertising costs from historical figures in order to attempt to grow its active subscriber network; (d) that RTR was suffering from ballooning fulfillment and transportation costs; and (e) that, as a result of (a)-(d) above, RTR was suffering from accelerating operation losses at the time of its IPO and was far less likely to achieve profitability in the near term, if ever, than represented.”
The complaint alleges that the defendants violated Sections 11 and 15 of the Securities Act of 1933. The complaint seeks to recover damages on behalf of the plaintiff class.
As I mentioned at the outset, the case illustrates the ways in which it has become increasingly difficult to classify cases as (or not as) COVID-19-related. On the one hand, the RTR complaint not only expressly mentions the challenges that the pandemic caused this company prior to and at the time of the IPO, but many of the adverse financial developments that affected the company post-IPO are clearly related to the pandemic.
Because of these considerations, I have no hesitation classifying this case as COVID-19-related. On the other hand, there are a lot of other factors at work here. The increase in marketing costs, for example, is not as clearly COVID-related. However, the increase in fulfillment costs and labor costs arguably are at least in part due to the pandemic. While reasonable minds could disagree, I think this case qualifies as COVID-19-related.
By my count, this case is the 60th COVID-19-related securities class action lawsuit to be filed since March 2020, and the 17th to be filed so far this year. It is interesting that even now, well into the pandemic’s third year, the COVID-19-related securities suits continue to be filed. As I have noted before, just as the pandemic has lingered on long beyond what any of us anticipated at the outset, so too has the inflow of pandemic related securities suits. Just as it seems the coronavirus will be with us for the foreseeable future, so too does it seem that the related securities suits will continue to be filed as well.
The COVID-19-related securities suits that have been filed generally have fallen into one of three categories. First, there are the cases against companies that experienced COVID-19 outbreaks in their facilities (cruise ship lines, private prison systems). Second, there are the companies that allegedly claimed that they would profit from the pandemic (such as diagnostic testing companies and vaccine developers). Third, there were the companies whose operations or finances were disrupted by the pandemic (hospital systems, real estate developers. More recently, a fourth category has developed, involving companies whose fortunes soared at the outset of the outbreak, but whose fortunes lagged as the stay-at-home orders were lifted (think Peloton).
This case is the unusual case that falls into the third category. At least according to the complaint’s allegations, the pandemic disrupted both the company’s operations and its finances. Not only did pandemic disruptions interrupt demand for its products, but the pandemic disrupted the company’s fulfillment and labor costs. Interestingly, at least according to the complaint, these effects continued to trouble the company well into 2022. Many other companies may continue to be experiencing these challenges.
It remains to be seen how this case, which has only just been filed, will fare. In any event, this case does suggest that we will continue to see pandemic-related securities suit filings for some time to come.