On July 19, 2021, Judge Vernon S. Broderick of the Southern
District of New York granted a motion to dismiss claims alleging
violations of Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934 (the "Exchange Act") and Rule 10b-5
thereunder against a clothing company (the "Company"),
its executives, and its majority shareholder. Cheng v.
Can. Goose Holdings Inc., No. 19-cv-08204 (S.D.N.Y. July 19,
2021). Plaintiffs alleged defendants made materially false
and misleading statements concerning the shifting timeframe of
sales in its direct-to-consumer ("DTC") channel (the
"Timing Shift" allegations), and inventory growth rates.
The Court granted defendants' motion to dismiss
plaintiffs' Consolidated First Amended Complaint
("CFAC").
According to plaintiffs' CFAC, the Company reports its revenue based on two sales channels—their wholesale channel and DTC channel. The Company realizes a "significant portion of its annual wholesale revenue during the second and third quarters of a fiscal year" and a "significant portion of its annual DTC revenue in the third and fourth quarters of a fiscal year." Plaintiffs alleged that in Fiscal Year 2019 consumers "began to purchase heavyweight parkas earlier than usual, suggesting that the DTC channel would generate relatively less revenue than usual in its third and fourth quarters." Plaintiffs further alleged that defendants failed to disclose that the Company's third and fourth quarter financial results would be negatively impacted by the alleged Timing Shift. They alleged that this omission was "highly significant" given the importance of the Company's DTC sales channel since the Company "generates higher margins on the products it sells directly through its DTC channel than it does in its wholesale channel." Plaintiffs also alleged that defendants misleadingly "'conveyed to investors that the Company was building customer demand ahead of supply'" and therefore its increase in inventory tracked the "increasing demand" for its products, when the Company's inventory growth outpaced revenue growth in the second, third, and fourth quarters of Fiscal Year 2019. Specifically, plaintiffs referenced a statement, allegedly made by one of the individual defendants during an investor call to discuss the results of the fourth fiscal quarter of 2019, that the Company "had shifted its approach from 'building demand ahead of supply' to 'building inventory ahead of demand,' and that 'this reflects the change in [their] model of building demand ahead of supply.'"
The Court first addressed plaintiffs' allegations that defendants misleadingly omitted information concerning the Timing Shift in the Company's DTC revenue growth. The Court observed that defendants actually disclosed the information in August 2018, when one of the individual defendants stated that "people are buying parkas early" in a call with investors and analysts. Regarding plaintiffs' assertion that defendants only "partially disclosed" the timing shifts, the Court maintained that "the legal standard does not necessarily require [d]efendants to disclose the 'full, negative impact,'" rather it is plaintiff's burden to demonstrate that any alleged omission is material and misleading to a reasonable investor. The Court noted that even still, defendants had "warn[ed] investors that DTC growth would be slowed for the rest of the fiscal year." Thus, defendants could not be expected to disclose "more granular, empirical, or dire information" about the Timing Shift, nor did plaintiffs allege that defendants "possessed or had access to any such information."
The Court turned next to the allegedly misleading statements concerning the Company's intention to create customer demand ahead of supply. The Court rejected defendants' arguments that these statements were puffery or non-actionable forward-looking statements. The Court found that defendants' statements were "not merely generic corporate expressions of optimism; they conveyed material information about [d]efendants' then-current inventory levels and demand" and their reasons for building inventory. Similarly, the Court held the statements were not forward-looking because they were not "'projections' or 'statement[s] of future economic performance'" and instead concerned then-current inventory and demand, and accordingly also rejected defendants' "bespeaks caution" theory of defense. Nonetheless, the Court held that plaintiffs "failed to identify any misstatements or omissions of material fact." The Court found that plaintiffs did not allege that any of defendants' projected growth figures were inaccurate, or that defendants' statements that they were "trying to build demand ahead of supply" were "misleading or false when made."
The Court also rejected plaintiffs' related arguments that allegedly contradictory explanations for the Company's elevated inventory "helped create 'the misleading impression' that [the Company] was building inventory to meet demand." The Court found that defendants' separate statements that they increased inventory both to account for more stores and to meet increasing demand in fiscal year 2020 were not "mutually exclusive," and noted that plaintiffs failed to allege either of the statements were false when made. Moreover, as to plaintiffs' argument that defendants' statements created "the misleading impression that the Company would continue to experience . . . accelerated growth commensurate with historical trends," but by the end of the class period, "Canada Goose's FY20 revenue was expected to grow at only half the rate that the Company's revenue had grown in prior years," the Court held that plaintiffs never alleged that defendants themselves claimed the Company would continue to experience "accelerated growth commensurate with historical trends," and defendants' projections for fiscal year 2020 matched their initial projections in fiscal year 2019. The Court emphasized that "most fundamentally," plaintiffs "provide[d] no factual allegations" that defendants knew of the "more meager revenue projections for fiscal year 2020 earlier in the class period and chose to sit on them." Therefore, the Court concluded that plaintiffs did not adequately plead a material misstatement or omission.
Although the Court found that plaintiffs failed to adequately allege any misleading statements or omissions, the Court went on to separately hold that plaintiffs did not sufficiently plead scienter. The Court first held that plaintiffs could not satisfy their burden "by virtue of [the individual defendants'] high-level positions" alone. As for plaintiffs' allegations that defendants were motivated by the desire to have a "strong DTC channel and be perceived as a hyper-growth company," the Court noted such an argument for scienter is "expressly prohibited under the case law" and that plaintiffs could not prove scienter "'based on motives possessed by virtually all corporate insiders,' such as the desire to 'sustain the appearance of corporate profitability.'" While the Court found that large stock sales by an individual defendant in November 2018 were "marginally helpful" to plaintiffs' scienter argument, the Court noted that the sales were made roughly six months before the "revelation of the alleged falsity" and comprised less than 10% of his holdings, which the Court found "insufficiently unusual to permit an inference of scienter." Lastly, the Court found that the three month gap between when defendants stated they were building demand ahead of supply and when they stated they were building inventory ahead of demand was not probative, noting that "[c]hanging one's mind or methodology" cannot be the sole basis for finding scienter.
Having dismissed the Section 10(b) claims, the Court similarly dismissed plaintiffs' control- person liability claims under Section 20(a), finding no predicate violations of the Exchange Act under which such claims could be established.
According to plaintiffs' CFAC, the Company reports its revenue based on two sales channels—their wholesale channel and DTC channel. The Company realizes a "significant portion of its annual wholesale revenue during the second and third quarters of a fiscal year" and a "significant portion of its annual DTC revenue in the third and fourth quarters of a fiscal year." Plaintiffs alleged that in Fiscal Year 2019 consumers "began to purchase heavyweight parkas earlier than usual, suggesting that the DTC channel would generate relatively less revenue than usual in its third and fourth quarters." Plaintiffs further alleged that defendants failed to disclose that the Company's third and fourth quarter financial results would be negatively impacted by the alleged Timing Shift. They alleged that this omission was "highly significant" given the importance of the Company's DTC sales channel since the Company "generates higher margins on the products it sells directly through its DTC channel than it does in its wholesale channel." Plaintiffs also alleged that defendants misleadingly "'conveyed to investors that the Company was building customer demand ahead of supply'" and therefore its increase in inventory tracked the "increasing demand" for its products, when the Company's inventory growth outpaced revenue growth in the second, third, and fourth quarters of Fiscal Year 2019. Specifically, plaintiffs referenced a statement, allegedly made by one of the individual defendants during an investor call to discuss the results of the fourth fiscal quarter of 2019, that the Company "had shifted its approach from 'building demand ahead of supply' to 'building inventory ahead of demand,' and that 'this reflects the change in [their] model of building demand ahead of supply.'"
The Court first addressed plaintiffs' allegations that defendants misleadingly omitted information concerning the Timing Shift in the Company's DTC revenue growth. The Court observed that defendants actually disclosed the information in August 2018, when one of the individual defendants stated that "people are buying parkas early" in a call with investors and analysts. Regarding plaintiffs' assertion that defendants only "partially disclosed" the timing shifts, the Court maintained that "the legal standard does not necessarily require [d]efendants to disclose the 'full, negative impact,'" rather it is plaintiff's burden to demonstrate that any alleged omission is material and misleading to a reasonable investor. The Court noted that even still, defendants had "warn[ed] investors that DTC growth would be slowed for the rest of the fiscal year." Thus, defendants could not be expected to disclose "more granular, empirical, or dire information" about the Timing Shift, nor did plaintiffs allege that defendants "possessed or had access to any such information."
The Court turned next to the allegedly misleading statements concerning the Company's intention to create customer demand ahead of supply. The Court rejected defendants' arguments that these statements were puffery or non-actionable forward-looking statements. The Court found that defendants' statements were "not merely generic corporate expressions of optimism; they conveyed material information about [d]efendants' then-current inventory levels and demand" and their reasons for building inventory. Similarly, the Court held the statements were not forward-looking because they were not "'projections' or 'statement[s] of future economic performance'" and instead concerned then-current inventory and demand, and accordingly also rejected defendants' "bespeaks caution" theory of defense. Nonetheless, the Court held that plaintiffs "failed to identify any misstatements or omissions of material fact." The Court found that plaintiffs did not allege that any of defendants' projected growth figures were inaccurate, or that defendants' statements that they were "trying to build demand ahead of supply" were "misleading or false when made."
The Court also rejected plaintiffs' related arguments that allegedly contradictory explanations for the Company's elevated inventory "helped create 'the misleading impression' that [the Company] was building inventory to meet demand." The Court found that defendants' separate statements that they increased inventory both to account for more stores and to meet increasing demand in fiscal year 2020 were not "mutually exclusive," and noted that plaintiffs failed to allege either of the statements were false when made. Moreover, as to plaintiffs' argument that defendants' statements created "the misleading impression that the Company would continue to experience . . . accelerated growth commensurate with historical trends," but by the end of the class period, "Canada Goose's FY20 revenue was expected to grow at only half the rate that the Company's revenue had grown in prior years," the Court held that plaintiffs never alleged that defendants themselves claimed the Company would continue to experience "accelerated growth commensurate with historical trends," and defendants' projections for fiscal year 2020 matched their initial projections in fiscal year 2019. The Court emphasized that "most fundamentally," plaintiffs "provide[d] no factual allegations" that defendants knew of the "more meager revenue projections for fiscal year 2020 earlier in the class period and chose to sit on them." Therefore, the Court concluded that plaintiffs did not adequately plead a material misstatement or omission.
Although the Court found that plaintiffs failed to adequately allege any misleading statements or omissions, the Court went on to separately hold that plaintiffs did not sufficiently plead scienter. The Court first held that plaintiffs could not satisfy their burden "by virtue of [the individual defendants'] high-level positions" alone. As for plaintiffs' allegations that defendants were motivated by the desire to have a "strong DTC channel and be perceived as a hyper-growth company," the Court noted such an argument for scienter is "expressly prohibited under the case law" and that plaintiffs could not prove scienter "'based on motives possessed by virtually all corporate insiders,' such as the desire to 'sustain the appearance of corporate profitability.'" While the Court found that large stock sales by an individual defendant in November 2018 were "marginally helpful" to plaintiffs' scienter argument, the Court noted that the sales were made roughly six months before the "revelation of the alleged falsity" and comprised less than 10% of his holdings, which the Court found "insufficiently unusual to permit an inference of scienter." Lastly, the Court found that the three month gap between when defendants stated they were building demand ahead of supply and when they stated they were building inventory ahead of demand was not probative, noting that "[c]hanging one's mind or methodology" cannot be the sole basis for finding scienter.
Having dismissed the Section 10(b) claims, the Court similarly dismissed plaintiffs' control- person liability claims under Section 20(a), finding no predicate violations of the Exchange Act under which such claims could be established.
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