In re Lululemon Securities Litigation
14 F. Supp. 3d 553
S.D.N.Y.2014Background
- Securities class action by Louisiana Sheriffs’ Pension & Relief Fund alleging lululemon and two insiders (founder/Chair Dennis Wilson and former CEO Christine Day) misled investors about product quality during Sept 7, 2012–Jan 10, 2014 class period after recurring quality problems and a March 2013 recall of black "luon" yoga pants for sheerness.
- CAC relied on eleven confidential witnesses describing prior color-bleeding, sheerness, and other defects, and alleged lax quality controls (notably, insufficient "live model" testing) and inadequate third‑party testing oversight.
- Plaintiffs alleged specific public statements about superior quality, leadership in technical fabrics, reliance on third‑party testing, and assurances of remediation were false or misleading; also relied on insiders’ stock sales as evidence of scienter.
- Defendants moved to dismiss for failure to plead falsity, scienter, and loss causation with the particularity required by Rule 9(b) and the PSLRA; Court heard argument and considered context of the challenged statements.
- Court dismissed the Consolidated Amended Complaint in full, holding plaintiffs failed to plead contemporaneous falsity, a cogent and compelling inference of scienter, or adequate loss causation; Section 20(a) claim fell with the 10(b) claim.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Actionable misstatements/omissions (falsity) | Statements touting "highest"/"superior" quality and third‑party testing were false because company knew of pervasive quality deficiencies and did not perform industry‑standard testing | Statements were opinion/puffery or qualified, contained contextual disclaimers, and were not false when made; plaintiffs offer hindsight complaints | Dismissed — plaintiffs failed to plead contemporaneous falsity; statements read in context were non‑actionable opinion/puffery or not proven false when made |
| Scienter (intent or recklessness) | Knowledge of recurring quality complaints, internal reports to Day, blaming supplier, and large insider stock sales show intent or recklessness | Allegations show corporate mismanagement or remediation efforts, not intent to deceive; stock sales mostly under 10b5‑1 plan or consistent with past practice | Dismissed — collective factual allegations do not give a cogent and compelling inference of scienter over more plausible nonculpable inferences |
| Loss causation | Recall, executive departures, and later downgrades/cuts in guidance caused the stock declines and investor losses (~$2B) traceable to alleged misstatements | Alleged corrective disclosures and subsequent events reflect disclosed risks and other negative information; plaintiffs’ causal chain is attenuated | Dismissed — plaintiffs failed to adequately connect alleged misstatements to the losses (attenuated and explained by disclosed risks/events) |
| Section 20(a) control‑person liability | Wilson and Day controlled lululemon and are culpable participants in the alleged 10(b) violations | No primary securities violation adequately pleaded, so control‑person claim fails | Dismissed — control liability requires underlying primary violation, which was not pleaded sufficiently |
Key Cases Cited
- Santa Fe Indus. v. Green, 430 U.S. 462 (1977) (corporate mismanagement is not securities fraud)
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007) (scienter pleading: inference must be cogent and at least as compelling as nonculpable inference)
- Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) (plausibility standard at motion to dismiss)
- Ashcroft v. Iqbal, 556 U.S. 662 (2009) (courts accept well‑pleaded facts and reject legal conclusions)
- Dura Pharm., Inc. v. Broudo, 544 U.S. 336 (2005) (loss causation requirement)
- Basic Inc. v. Levinson, 485 U.S. 224 (1988) (materiality and misleading silence principles)
- Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. 135 (2011) (maker of a statement is the person with ultimate authority over it)
- Novak v. Kasaks, 216 F.3d 300 (2d Cir. 2000) (confidential witnesses must provide basis for believing defendants’ statements were false)
- Fait v. Regions Fin. Corp., 655 F.3d 105 (2d Cir. 2011) (falsity of opinion requires pleading that defendant did not believe the opinion when expressed)
- Lentell v. Merrill Lynch & Co., 396 F.3d 161 (2d Cir. 2005) (elements of securities fraud and loss causation analysis)