Schwartz v. Celestial Seasonings, Inc.

• Decision Date: 06 November 1995
• Docket Number: No. 95-K-1045.,95-K-1045.
• Citation: 904 F. Supp. 1191
• Parties: Arthur M. SCHWARTZ, on behalf of himself and all others similarly situated, Plaintiff, v. CELESTIAL SEASONINGS, INC., Paine-Webber, Inc., Shearson/Lehman Brothers, Inc., Mo Siegel, Ronald V. Davis, Philip B. Livingston, Vestar/Celestial Investment Limited Partnership, John D. Howard, James P. Kelley, Arthur J. Nagle, Daniel S. O'Connell, Robert L. Rosner, and Barnet M. Feinblum, Defendants.
• Court: U.S. District Court — District of Colorado

904 F. Supp. 1191

Arthur M. SCHWARTZ, on behalf of himself and all others similarly situated, Plaintiff, v. CELESTIAL SEASONINGS, INC., Paine-Webber, Inc., Shearson/Lehman Brothers, Inc., Mo Siegel, Ronald V. Davis, Philip B. Livingston, Vestar/Celestial Investment Limited Partnership, John D. Howard, James P. Kelley, Arthur J. Nagle, Daniel S. O'Connell, Robert L. Rosner, and Barnet M. Feinblum, Defendants.

No. 95-K-1045.

United States District Court, D. Colorado.

November 6, 1995.

COPYRIGHT MATERIAL OMITTED

Robert N. Miller, LeBoeuf, Lamb, Greene & MacRae, L.L.P., Denver, Colorado, for plaintiff.

Daniel J. Thomasch, Richard J. DeMarco, Jr., Donovan Leisure Newton & Irvine, New York City, for defendant.

MEMORANDUM OPINION AND ORDER

KANE, Senior District Judge.

Introduction

Plaintiff Arthur M. Schwartz filed this suit on behalf of himself and all others similarly situated, claiming the investors who purchased Celestial Seasonings stock during the period beginning with Celestial's initial public offering on July 12, 1993, and ending on May 18, 1994, were defrauded. Schwartz has named the corporation itself, its underwriters, and several individuals as defendants.

Celestial Seasonings, Inc. ("Celestial") is a Delaware corporation with its principal place of business in Boulder, Colorado. Celestial controls 53% of the herb tea market. It is the largest manufacturer and marketer of herb teas in the United States. (Compl. ¶ 7.)

PaineWebber, Inc. and Shearson/Lehman Brothers, Inc. ("Underwriters") are investment banking houses that specialize in underwriting public offerings of securities. They served as co-lead underwriters for an initial public offering ("IPO") made by Celestial Seasonings, Inc. (Compl. ¶ 8.)

The individual defendants are: Mo Siegel, Ronald V. Davis, Philip B. Livingston, Vestar/Celestial Investment Limited Partnership, John D. Howard, James P. Kelley, Arthur J. Nagle, Daniel S. O'Connell, Robert L. Rosner, and Barnet M. Feinblum.¹ (Compl. ¶¶ 9-21.) Schwartz alleges all of these defendants are either previous or current members of Celestial's Board, signatories of the registration statement or other SEC forms, or persons who controlled Celestial.

Schwartz claims subject matter jurisdiction for the federal securities causes of action pursuant to § 22 of the Securities Act of 1933 and § 27 of the Securities Exchange Act of 1934. He seeks supplemental jurisdiction over the state and common law claims pursuant to 28 U.S.C. § 1367.

Specifically, Schwartz's claims arise under §§ 11 and 15 of the Securities Act (codified at 15 U.S.C. §§ 77k & 77o), §§ 10(b) and 20(a) of the Securities Exchange Act (codified at 15 U.S.C. §§ 78j(b) & 78t(a)), Rule 10b-5, §§ 11-51-501 & 11-51-604 of the Colorado Securities Act, and the common law.

Pending Motions

Defendants have formed two groups, the Underwriters and all others. Each has filed a motion to dismiss the complaint with prejudice. Defendants Celestial, Vestar, Siegel, Davis, Livingston, Howard, Kelley, Nagle, O'Connell, Rosner and Feinblum ("Celestial Defendants") filed the first motion to dismiss. The Celestial Defendants contend Schwartz lacks standing, his claims are time barred, and the complaint fails under Fed.R.Civ.P. 12(b)(6) & 9(b). In addition, they move to dismiss the state law claims because the court lacks independent jurisdiction over them.

The Underwriters move to dismiss pursuant to Fed.R.Civ.P. 12(b)(6) & 9(b) and incorporate by reference the Celestial Defendants' motion to the extent applicable. They further contend Schwartz failed to plead properly the element of reliance and that they are not liable under § 10(b) because it does not provide for secondary liability.

All parties have attached appendices to their respective briefs. The documents, however, are incomplete and inconclusive. Therefore, I decline to convert the motions to dismiss on the pleadings to motions for summary judgment. Accordingly, I reject the appendices for purposes of this opinion.²

Facts

Schwartz maintains the disclosures in the prospectuses and other materials referring to a licensing agreement with Perrier were materially false and misleading because they failed to disclose that: Perrier was neither able nor willing to distribute Celestial's ready-to-drink iced teas; Perrier's distribution system was dominated by delivery routes incompatible with the sale of ready-to-drink iced teas; and Perrier was not likely to market Celestial's product due to its affiliation with Nestle. Schwartz further alleges there was no reasonable basis for defendants' belief that this conflict of interest would not adversely affect the distribution of Celestial's ready-to-drink iced tea. (Compl. ¶ 47.)

In support, Schwartz alleges the following facts:

In its preliminary and final prospectuses, Celestial repeatedly referred to a licensing agreement signed in December 1991 with Perrier Group of America, Inc. Shortly after this agreement was signed, Nestle, S.A., which also participated in the ready-to-drink iced tea market, acquired Perrier's parent company. However, the prospectuses stated that Celestial did "not believe that Nestle's ownership of Perrier USA would adversely impact the Perrier Licensing Agreement." The prospectuses also stated that "no assurances can be made that the Perrier Licensing Agreement will be successful for the Company." (Compl. ¶ 46.)

This "Perrier Agreement" granted Perrier the exclusive license to manufacture, market and distribute ready-to-drink iced tea under Celestial's name within the United States and Canada. (Compl. ¶¶ 33-40). In return, Perrier paid Celestial $200,000 up front and agreed to pay royalties based on a percentage of net sales or guaranteed minimum annual payments for calendar years. (Compl. ¶ 39.) The Perrier Agreement was for a ten-year duration, subject to automatic one-year renewals, and could be terminated by Perrier with a year's notice or by either party under certain circumstances.

The agreement was part of Celestial's effort "to expand beyond its core hot herb tea business." (Compl. ¶ 33.) Celestial intended to capitalize on its brand awareness and loyalty to foster its expansion into the ready-to-drink iced tea market. (Compl. ¶ 37.) Under the Perrier Agreement, the ready-to-drink iced tea was to be marketed in fourteen major metropolitan areas in the summer of 1993. (Compl. ¶ 38.)

On December 15, 1993, Celestial announced that it had filed a registration statement with the SEC for an offering of 425,000 shares of common stock. (Compl. ¶ 54.) On January 25, 1994, the defendants filed a prospectus for the second offering of 450,000 shares, of which Vestar sold 425,000 shares. The remaining 25,000 shares were sold by defendant Feinblum and his family. (Compl. ¶ 59.) On January 26, 1994, Celestial announced the completion of the second offering and again stated that Perrier manufactures and markets tea under the Perrier Agreement. (Compl. ¶ 63.)

On April 24, 1994, PaineWebber issued a report on Celestial and rated its stock attractive. PaineWebber reported it would raise its 1994 and 1995 earnings estimates for Celestial partly because of Celestial's "strong growth in distribution and geographic channels." It also stated, "On the ready-to-drink tea front. Celestial is working closely with Perrier to broaden distribution. There appears to be a sense of urgency to move its ready-to-drink product into new markets." (Compl. ¶ 68.)

On approximately May 9, 1994, Celestial announced in its Form 10-Q, "Celestial and Perrier Groups of America, Inc. have commenced discussions concerning amendments to or the possible termination of the license agreement that the Company and Perrier entered into in 1991." (Compl. ¶ 69.) The price of Celestial's stock dropped on May 9, May 10 and May 11. On May 18, 1994, the Dow Jones News Wire reported that Perrier's national distribution system did not involve convenience stores which were needed for the iced-tea drinks. (Compl. ¶ 70.) On June 7, 1994, Celestial issued a release stating it would either revise or end its joint venture with Perrier because the Perrier Agreement had "failed to reach expectations." (Compl. ¶ 71.) On July 6, 1994, PaineWebber decided to reduce Celestial's earnings estimates, and the stock price reached a 52-week low. (Compl. ¶ 73.) On December 12, 1994, Celestial and Perrier jointly announced they had mutually agreed to discontinue their licensing agreement. (Compl. ¶ 76.)

Standing

Defendants allege that Schwartz lacks standing. Defendants' arguments are meritless regarding Schwartz's standing as an individual and premature regarding Schwartz's standing as a class representative.³

The Supreme Court in Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 730-742, 95 S.Ct. 1917, 1922-1929, 44 L.Ed.2d 539 (1975), adopted what is known as the Birnbaum purchaser-seller rule by holding that only actual purchasers or sellers of securities have standing to bring private actions under § 10(b) and Rule 10b-5. Accord Grubb v. FDIC, 868 F.2d 1151, 1161-62 (10th Cir.1989); Mullen v. Sweetwater Dev. Corp., 619 F.Supp. 809, 814-16 (D.Colo.1985). Similarly, those who purchase newly issued securities, which are directly subject to the prospectus and registration statement, may file an action under § 11. Securities Act, § 11; Barnes v. Osofsky, 373 F.2d 269, 271-73 (2d Cir.1967).

Schwartz's claims against the defendants are premised primarily upon § 11 of the Securities Act, § 10(b) of the Exchange Act and Rule 10b-5. (Compl. Counts I & II.) Schwartz alleges Celestial's IPO occurred on July 12, 1993, and he purchased 500 shares of Celestial common stock on July 15, 1993. (Compl. ¶¶ 1, 6.) Therefore, Schwartz clearly has standing to bring both § 11 and § 10(b) claims as a purchaser of the Celestial stock offered on July 12, 1993.⁴

Statute of Limitations

Defendants claim Schwartz's federal securities law claims are time barred because they do not comply with the...