Martone v. Robb

Decision Date04 September 2018
Docket NumberNo. 17-50702,17-50702
Citation902 F.3d 519
Parties Thomas MARTONE, Plaintiff-Appellant, v. Walter E. ROBB, III; Roberta Lang ; Glenda Jane Flanagan, Defendants-Appellees.
CourtU.S. Court of Appeals — Fifth Circuit

Samuel Ethan Bonderoff, Esq., Jacob H. Zamansky, Esq., Zamansky, L.L.C., New York, NY, James Hampton Skelton, Attorney, Skelton & Woody, Austin, TX, for Plaintiff-Appellant.

Gregory John Casas, Esq., Jesse Wadell Wainwright, Greenberg Traurig, L.L.P., Austin, TX, Jonathan L. Sulds, Greenberg Traurig, L.L.P., New York, NY, for Defendants-Appellees.

Before HIGGINBOTHAM, SMITH, and CLEMENT, Circuit Judges.

PATRICK E. HIGGINBOTHAM, Circuit Judge:

Thomas Martone, a former Whole Foods employee, brought an action against certain Whole Foods executives who are named fiduciaries for the company’s 401(k) plan. Martone alleges that these executives breached their fiduciary duties by allowing employees to continue to invest in Whole Foods stock while its value was artificially inflated due to a widespread overpricing scheme. The district court dismissed the claims, finding that Martone failed to plausibly allege an alternative action that the fiduciaries could have taken that would have been consistent with the securities laws and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it. We affirm.

I.

Whole Foods Market, Inc., offers its employees a defined contribution benefit plan called the Growing Your Future 401(k) Plan. The Plan provides multiple investment options, including the Company Stock Fund, which is an employee stock ownership plan.1 Thomas Martone is a former Whole Foods employee and Plan participant, and brings this suit against the three members of Whole Foods’ Board and Investment Committee who are designated by the Investment Committee Charter as Plan fiduciaries.2

Martone alleges that Defendants "breached their fiduciary duties to the Plan and its participants when they knew (or should have known) ... that Whole Foods’ stock price had become artificially inflated due to undisclosed misrepresentation and fraud, yet they took no action whatsoever to protect the Plan or Plan participants from foreseeable resulting harm." Specifically, Martone claims that during the Class Period from January 1, 2010 through July 30, 2015, Whole Foods engaged in "systemic, illegal overcharging of its customers" by "regularly misstat[ing] the weight of pre-packaged food on which prices were based."3 He further alleged that the company had "insufficient and flawed quality control systems in place to prevent this fraud."

These allegations stem from multiple investigations by government agencies in California and New York. According to Martone’s Amended Complaint, City Attorneys for Los Angeles, Santa Monica, and San Diego filed a complaint against Whole Foods in June 2014, alleging that it had violated California law by "selling packaged items that contained less than the amount stated on the packaging, failing to deduct the tare weight when selling pre-packaged items, and selling items by unit when California law required them to be sold by weight." A week later, Whole Foods allegedly entered into the "California Stipulation" and agreed to pay $800,000 and comply with a permanent injunction prohibiting the company from engaging in certain practices involving products sold by weight. Then, in August 2014 and January 2015, Whole Foods was allegedly caught overcharging customers in Albany, New York; Martone claims that these Albany violations "result[ed] in thousands of dollars of fines." Finally, in June 2015, the New York City Department of Consumer Affairs ("NYCDA") announced it had uncovered that Whole Foods’ eight New York City locations were systematically overcharging customers by "routinely overstat[ing] the weights of its pre-packaged products." Martone further contends that it later "became clear that Whole Foods’s illegal overcharging was systemic and widespread, and not limited to simply New York City." He cites a Washington Post article reporting that Whole Foods stores received "more than 800 violations during 107 separate inspections" between 2010 and 2015.

Martone alleges that throughout this period, Whole Foods was "report[ing] enormous growth of its sales revenues, net income, new stores and stock price." He also notes that during this time, Whole Foods made various representations about its integrity and reputation, which he claims "led investors to believe that the Company was not only committed to consumer values and corporate responsibility, but that it had the controls and systems to do so and the corporate culture among its employees that would prevent it from hiding quality control problems from the public."

On July 2, 2015, Whole Foods’ co-CEOs Walter Robb and John Mackey released a video apologizing to customers for "any discrepancies that may have occurred" and discussing steps that the company would take to ensure future pricing accuracy. On July 29, 2015, Whole Foods filed a Form 8-K announcing its financial and operating results for 2015, which fell below expectations. In an earnings call, Robb acknowledged that the NYDCA press release and attendant media coverage "ha[d] [a] significant impact on [the company’s] sales" that was "felt across the whole country."

Martone alleges that "[a]s a result of these disclosures, Whole Foods stock price declined" significantly. Martone claims that on January 1, 2010, Whole Foods stock closed at $13.61 per share. After splitting two-for-one in May 2013, it peaked at $63 per share in October 2013. Before the NYDCA press release issued, the stock was trading above $40 per share. After Whole Foods filed its Form 8-K, the company’s stock price declined over 11% to close at $36.08 per share on July 30, 2015.

On October 2, 2015, Martone filed his original Complaint. The district court dismissed the claims without prejudice, and on October 14, 2016, Martone filed the Amended Complaint at issue in this appeal. On August 2, 2017, the district court again dismissed the claims, finding that Martone failed to state a claim that met the requirements outlined by the Supreme Court in Fifth Third Bancorp v. Dudenhoeffer .4 Martone timely appealed.

II.

"To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’ "5 "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged."6

We review a district court’s grant or denial of a Rule 12(b)(6) motion to dismiss de novo, "accepting all well-pleaded facts as true and viewing those facts in the light most favorable to the plaintiff[.]"7 However, "the tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions" or "[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements."8

III.

As a threshold matter, Defendants challenge Martone’s standing to bring this action. To have standing, a plaintiff must have "(1) suffered an injury in fact, (2) that is fairly traceable to the challenged conduct of the defendant, and (3) that is likely to be redressed by a favorable judicial decision."9 "Where ... a case is at the pleading stage, the plaintiff must ‘clearly ... allege facts demonstrating’ each element."10 Defendants focus on the first element: injury-in-fact. They contend that Martone lacks standing because he did not allege that he sold his stock at a loss and "[w]hen a plaintiff alleges that a company’s stock has been over inflated, simply holding the stock during the class period is insufficient to establish a loss." Specifically, Defendants contend that a plaintiff must have bought the stock at the inflated price and sold it at a loss in order to have standing.

Defendants raised this issue in their first motion to dismiss. The district court found that Martone alleged a concrete and particularized injury, namely "the loss in value and retirement money that he incurred from overpaying for Whole Foods stock when it was artificially inflated and then holding the stock while the price fell after news broke of the company’s overcharging practices."

We agree with the district court. Defendants’ argument overreads Dura Pharmaceuticals v. Broudo , where the Supreme Court held that a "private plaintiff who claims securities fraud must prove that the defendant’s fraud caused an economic loss."11 Pleading "loss causation" requires more than merely alleging an inflated purchase price.12 This is so because "at the moment the transaction takes place, the plaintiff has suffered no loss"; he simply owns a stock that still retains its inflated value.13 If the purchaser were to sell immediately, while the stock is still inflated, there would be no loss. A loss only occurs when the market corrects and the stock’s value declines.14 Contrary to Defendants’ suggestion, the Supreme Court did not establish a further requirement that the purchaser sell the stock to prove loss causation.15 The infirmity in Dura was the "complaint’s failure to claim that [defendant’s] share price fell significantly after the truth became known."16

Here, Martone alleged exactly that: he "purchased and held shares of Whole Food’s stock ... during the Class Period," and "[w]hen the truth came out" about the alleged overcharging scheme, "the stock price fell." In doing so, he alleged an injury-in-fact sufficient to establish his standing to sue.

IV.

ERISA "protects participants in voluntarily established, private sector retirement plans ... ‘by establishing standards of conduct, responsibility, and obligation for fiduciaries of employee benefit plans.’ "17 It "provides that an employer who sponsors an employee plan may also serve as a fiduciary of that plan, and it imposes on the...

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