As I have documented on this site, conservative advocacy and legal groups have been pursuing an aggressive ESG backlash campaign. Among other things, these groups’ efforts have caused several high-profile companies to walk back their DEI initiatives. These groups have also pushed for state-level anti-ESG legislation and have also even pursued anti-ESG litigation. The litigation results have been mixed at best, as noted for example here. However, in the ESG-backlash securities lawsuit filed by a conservative advocacy group against Target in the wake of a consumer boycott following the company’s LGBT “Pride Month” campaign, a federal district court has denied the defendants’ motion to dismiss. As discussed below, there are several interesting features of the court’s ruling. A copy of the Court’s December 4, 2024, opinion can be found here.

Background

Following Brian Cornell’s 2014 hiring as Target’s CEO, the company adopted several ESG and DEI initiatives. These initiatives were incorporated into the company’s business plan. Among other things, the company launched a Pride Month campaign in 2015. In addition, in 2016, the company announced its opposition to a North Carolina transgender bathroom law, as a result of which the company experienced consumer and investor backlash.

In May 2023, Target launched a family-themed Pride Month campaign that focused on displaying Pride Month merchandise in at the front and center of Target stores across the U.S. Consumers began boycotting Target. The subsequently filed securities lawsuit alleges that between May 18 and May 23, 2023, the company’s market capitalization declined $10 billion. By early October, the company’s market cap decline allegedly exceeded $20 billion.

The Lawsuit

On August 8, 2023, as discussed here, a legal team led by the conservative legal activist group America First Legal filed a securities lawsuit in the Middle District of Florida on behalf of a company shareholder against Target, its CEO, and certain other executives, alleging that the company misled investors by failing to disclose the risk of customer backlash to its May 2023 Pride Month marketing and sales campaign. The plaintiff alleges that the ensuing customer backlash led to billions in losses.

The plaintiff alleges that the defendants violated Sections 10(b), 14(a), and 20(a) of the Securities Exchange Act of 1934 and Rules 10b-5 and Rule 14a-9 thereunder. The plaintiff seeks a declaration that the defendants violated the ’34 Act; a declaration that the Target directors’ 2023 election was void; and damages. The defendants filed motions to dismiss.

The December 4 Opinion

In a detailed December 4, 2024, opinion, Middle District of Florida Judge John L. Badalamenti denied the defendants’ motion to dismiss.

The defendants had first argued that plaintiffs had failed to adequately allege falsity in connection with the company’s 2021 and 2022 Annual Reports. In making this argument, the defendants quoted at length from the Annual Reports, which included the following:

Target’s responses to crises and our position or perceived lack of position on environmental, social, and governance (ESG) matters, such as sustainability, responsible sourcing, and diversity, equity, and inclusion (DEI) and any lack of perceived lack of transparency about these matters, could harm our reputation. While reputations may take decades to build, negative incidents involving us or others with whom we do business can quickly erode trust and confidence and can result in consumer boycotts, workforce unrest or walkouts, government investigations, or litigation…. Negative reputational incidents could adversely affect out business and results of operations, including through lost sales, loss of new store and development opportunities, or team member or retention difficulties.

The court found that this risk disclosure “could be materially misleading” because it was “not specifically tailored to the risks from their 2023 Pride Month campaign.” The court went on to say that it was not finding the 2021 disclosure to be misleading “because such an assertion would be premature at this stage in the proceedings.” The Court noted that the plaintiff’s amended complaint alleges that “Target knew the risks of the 2023 Pride Month Campaign and failed to disclose these risks,” and cited legal authority for the proposition that “generic risk disclosures are inadequate to shield defendants from liability for failing to disclose known risks.” 

Because the plaintiff has alleged that “Target knew of the risks of their upcoming 2023 Pride Month campaign and failed to craft a tailored disclosure,” the Court “declines to dismiss this case on the basis that the 2021 Annual Report adequately disclosed the risk of backlash from Target’s 2023 Pride Month Campaign.”

The defendants argued further that the plaintiff had failed to plead that the company’s risk warnings were misleading because the risk of the company’s May 2023 Pride Month campaign were already known and in the public domain. The court rejected this argument because none of the material the defendants cite “mention Target’s plans for a new and aggressive 2023 Pride Month campaign.” The court also said that “it is unclear whether this information was publicly available and it is further unclear how much information investors and Plaintiffs knew about the plans for the new campaign.” Thus, the court said the plaintiff has adequately pleaded that information revealed in the 2021 and 2022 risk disclosures may not have been complete.

The court also said that the defendants had failed to establish that they were eligible to claim protection from the safe harbor for forward looking statements, as the plaintiff’s allegation were sufficient at this pleading stage that the statements were made with knowledge of falsity. The court also upheld the sufficiency of the plaintiff’s allegations that the defendants were monitoring the risks of the company’s campaigns were false, because the complaint adequately alleges that the defendants were not monitoring the risks that led to the backlash to the 2023 Pride Month campaign.

Finally, the court concluded that the plaintiff had adequately plead scienter, based on the finding that the company’s CEO (whose actions were imputed to the company) acted with “severe recklessness,” observing that it was “highly unreasonable that Cornell would approve a new, more aggressive campaign in 2023 after allegedly admitting that Target didn’t adequately assess the risk of boycotts in a prior campaign.” The plaintiff, the court observed, had alleged that Cornell’s decision to launch a new aggressive campaign “is an extreme departure from the standards of ordinary care that was so obvious that Cornell should have been aware of it.” Accordingly, the court said, plaintiffs have adequately alleged scienter.

Discussion

There is no doubt that Target’s decision to launch the 2023 Pride Month sales and marketing campaign turned out badly, for the company and its shareholders. It is easy to see how someone might argue with the benefit of hindsight that the campaign was a huge mistake. It is not hard to see how someone armed with the observation that the campaign was a mistake might launch a mismanagement lawsuit against the company’s executives. However, this lawsuit is not a mismanagement lawsuit; it is a misrepresentation lawsuit. While the court’s reactions to the defendants’ arguments in their motion to dismiss in many ways feel as if the court’s analysis tracked with what might apply in a mismanagement case, the court nevertheless concluded that the plaintiff’s allegations were sufficient to sustain a misrepresentation case.

In denying the defendants’ motion to dismiss, the court found that the broad risk disclosures in prior documents were insufficient to warn of potential risks associated with a much later initiative. That is, the court held that disclosures in the 2021 and 2022 annual reports were misleading with respect to events that were not even going to take place until May 2023 (if in fact anyone at the time the 2021 and 2022 annual reports were published was aware that there would even be a May 2023 campaign). How specific should or even could risk disclosures be in prior documents about subsequent events?  Especially when the company went to such lengths to warn investors that based on prior events at the company, there could be problems with future company initiatives?

The court’s scienter analysis is also interesting. As UNLV Law Professor Benjamin P. Edwards observed in his December 5, 2024, post on the Business Law Prof Blog (here), the court’s ruling on the scienter issues effectively represents a determination that the decision to launch the Pride Month campaign was reckless, not a ruling that the allegedly misleading statement was recklessly made. As Edwards notes, “As best I can understand it, the scienter reasoning here seems entirely disconnected from the alleged possible misstatements. The reasoning seems to find, in hindsight, that the business decision to run a pride campaign was ‘severely reckless’ because Target had faced a boycott before. That doesn’t seem like securities fraud to me.”

From my perspective, it is worth noting that along with denying the motion to dismiss, the court also denied the defendants’ accompanying motion to transfer. The defendants had sought to have the case moved from Middle District of Florida, where the plaintiff is located, to Minnesota, where the company is located. Undoubtedly, it was important to the defendants to try to move the case from the very conservative federal court where the plaintiff filed the action. (Regular readers will recall that in October 2024, a different judge in the Middle District of Florida had declared the more that 160 year-old False Claims Act to be unconstitutional.) It could be argued that losing the motion to transfer was in effect outcome determinative on the motion to dismiss.

I will say this: the Court’s decision in this case is surprisingly plaintiff-friendly. I wonder whether the court would show the same receptivity to a securities suit brought by a traditional member of the securities class action plaintiffs bar as it showed for this action brought by a conservative activist legal group. (Judge Badalamenti was appointed to the federal bench in 2020 by then-President Donald Trump.)

One final note. This lawsuit was not filed as a class action lawsuit. As far as I can tell, it was filed as and remains as an individual action. Which tells me that this lawsuit is not about the damages. It is about punishing Target for having the audacity to initiate a Pride Month marketing and sales campaign. It is, in categorical terms, an ESG-backlash lawsuit.