In re Target Corp. Sec. Litig.

• Citation: 275 F.Supp.3d 1063
• Decision Date: 31 July 2017
• Docket Number: Master File No. 16–CV–1315 (JNE/BRT), Master File No. 16–CV–2400 (JNE/BRT)
• Parties: IN RE: TARGET CORPORATION SECURITIES LITIGATION In re: Target Corporation ERISA Litigation This Order Relates to: All Actions

275 F.Supp.3d 1063

IN RE: TARGET CORPORATION SECURITIES LITIGATION

In re: Target Corporation ERISA Litigation

This Order Relates to: All Actions

Master File No. 16–CV–1315 (JNE/BRT)

Master File No. 16–CV–2400 (JNE/BRT)

United States District Court, D. Minnesota.

Signed July 31, 2017

ORDER

JOAN N. ERICKSEN, United States District Judge

Shareholders of Target Corporation stock brought suit against the company and its current and former agents under the Securities Exchange Act of 1934 (the "Exchange Act"), codified at 15 U.S.C. § 78a et seq. , and the Employee Retirement Income Security Act of 1974 ("ERISA"), codified in relevant part at 29 U.S.C. ch. 18, for conduct related to Target's expansion into Canada during the years 2013 and 2014. The Court consolidated the shareholder suits into the two above-referenced actions, and Target filed motions to dismiss in each action. For the following reasons, the Court grants Target's motions to dismiss.

II. BACKGROUND

Target is a large retailer in the United States with over 1,800 store locations. (Securities Amended Complaint ("SAC") ¶ 43, S. Dkt. No. 57.)¹ By as late as 2010, Target evaluated opportunities for opening stores in international markets, such as Canada. (See id. ¶ 46.) An opportunity to expand into Canada presented itself, and in January 2011, Target announced that it would open stores in the country starting in 2013. (Id. ¶ 49.)

The expansion into Canada became a "key component" of Target's "growth story" and efforts to compete with other retailing rivals, such as Wal–Mart. (Id. ¶ 53; see id. ¶¶ 43, 45, 48.) In pursuit of these ends, Target embarked on an ambitious plan to open over 100 stores in Canada in two years. (See id. ¶ 49.) Accomplishing this tall order required "Target Canada" to rapidly develop stores, distribution centers, vendor relationships, and supply chain information technology systems. (See id. ¶¶ 47, 49.)

Large-scale retailers like Target rely heavily on supply chain systems to keep track of inventory, shipments, costs, product information, replenishment, sales, and more. (See id. ¶ 61.) In order to operate effectively, systems performing supply chain functions must be integrated and have the ability to share crucial business data. (See id. ) Accordingly, part of Target's success in the US is due to its "well-developed supply chain and IT infrastructure.... customized and adjusted over the years to meet [Target's] specific needs." (Id. ¶ 62.) Although Target already had a refined US supply chain infrastructure in place when it announced expansion into Canada, the company chose to use a different, new set of supply chain systems for the expansion because extending its existing US systems "would have been too complex and taken too much time." (Id. ¶ 71.) Thus, Target purchased a new, central "Enterprise Resource Planning" ("ERP") system and other new systems for its Canadian supply chain infrastructure. (Id. ¶ 64.)

From the beginning, the central ERP system contained data integrity issues, which caused problems in other systems. (See id. ¶¶ 64–65, 78–80.) The new warehouse management system had troubles communicating with the central system. (See id. ¶¶ 65, 85.) The inventory replenishment system was "dysfunctional" and required "manual overrides." (Id. ¶ 66; see id. ¶ 94.) The long-term inventory demand software "did not provide accurate sales forecasts, and Target employees did not know how to use it." (Id. ¶ 67; see id. ¶ 95.) And the point-of-sale systems "often malfunctioned." (Id. ¶ 68; see id. ¶ 97.) Prior to opening any Canadian stores, the supply chain systems suffered from "systemic problems" related to "most" of the above-mentioned issues. (Id. ¶¶ 60, 69, 100.) When Target Canada finally opened its first stores in March 2013, customers were "confronted with empty store shelves," but, at the same time, Target Canada's "three massive distribution centers were overwhelmed with excess products." (Id. ¶¶ 82–83.) Other "various problems persisted through 2015." (Id. ¶ 92; see id. ¶ 102.) As more stores opened, the problems "magnified" and became "more disruptive and difficult to correct." (Id. ¶ 114.)

Target Canada incurred significant net operating losses throughout 2013 and 2014. (See id. ¶¶ 126, 157.) On May 5, 2014, Target's Board of Directors issued a statement announcing that Target's CEO, Gregg Steinhafel, resigned from his roles at the company. (Id. ¶ 127.) The resignation was due in part to Target Canada's underperformance, as well as Target's "massive credit card data breach." (Id. ¶ 128.) On May 20, 2014, Target announced that Target Canada's President, Tony Fisher, had been terminated. (Id. ¶ 132.) Then, on August 12, 2014, Target announced a variety of initiatives to address inventory issues, including a "physical count of inventory at all stores, resulting in a reset of systems, and more accurate ordering and shipping data." (Id. ¶ 146 (emphasis omitted).)

Finally, on January 15, 2015, Target announced that it would discontinue operating its Canadian stores and that Target Canada would file for insolvency protection. (Id. ¶ 158.) Target's new CEO, Brian Cornell, noted that continued operations in Canada would require additional investments in the supply chain "to make further operational improvements and enable Target to sell online in Canada." (Id. ¶ 159.) He further explained that the company was "unable to map out a scenario which would allow Target Canada to generate profits or cash flow until at least 2021." (Id. (emphasis omitted).) In the insolvency filings, Target Canada's general counsel stated that the venture did not succeed due to issues in four principal categories, one of which was the supply chain. (See id. ¶ 161.)

III. THE SECURITIES ACTION

Plaintiffs² allege that between March 20, 2013 and August 4, 2014 (the "Securities Class Period"), certain Defendants made a series of false and/or misleading statements regarding Target Canada's performance and supply chain.³ (See id. ¶¶ 1, 170–261.) Generally speaking, Plaintiffs allege that these Defendants represented that Target Canada was progressing well and facing minor or common problems, when in reality the supply chain issues were much larger and success was much less certain or impossible. (See id. ¶¶ 3, 8–9.) Plaintiffs assert causes of action under (1) § 10(b) of the Exchange Act and Securities and Exchange Commission ("SEC") Rule 10b–5 and (2) § 20(a) of the Exchange Act. (See id. ¶¶ 336–51.) Defendants move to dismiss both counts. (See S. Dkt. No. 69.)

A. Exchange Act § 10(b) and Rule 10b–5 Claims

Section 10(b) of the Exchange Act, codified at 15 U.S.C. § 78j(b), makes it unlawful for any person "[t]o use or employ, in connection with the purchase or sale of any security ... any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [SEC] may prescribe." SEC Rule 10b–5 makes it unlawful to, among other things, "make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading." 17 C.F.R. § 240.10b–5(b). Together, § 10(b) and Rule 10b–5 create a private cause of action for fraud. See Halliburton Co. v. Erica P. John Fund, Inc. , ––– U.S. ––––, 134 S.Ct. 2398, 2407, 189 L.Ed.2d 339 (2014) (citing Blue Chip Stamps v. Manor Drug Stores , 421 U.S. 723, 730, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975) ). Claims brought pursuant to these provisions have six elements:

(1) a material misrepresentation or omission;

(2) scienter;(3) a connection with the purchase or sale of a security;

(4) reliance;

(5) economic loss; and

(6) loss causation.

Matrixx Initiatives, Inc. v. Siracusano , 563 U.S. 27, 37–38, 131 S.Ct. 1309, 179 L.Ed.2d 398 (2011) ; Dura Pharm., Inc. v. Broudo , 544 U.S. 336, 341, 125 S.Ct. 1627, 161 L.Ed.2d 577 (2005).

To survive a motion to dismiss, plaintiffs must plausibly plead a claim to relief under § 10(b) and Rule 10b–5 when accepting all of the alleged facts as true. See Tellabs, Inc. v. Makor Issues & Rights, Ltd. , 551 U.S. 308, 322, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007). In addition, plaintiffs must plead facts as to elements (1) and (2) with the level of particularity required by the Private Securities Litigation Reform Act of 1995 ("PSLRA"), codified in relevant part at 15 U.S.C. § 78u–4.

The PSLRA's pleading standards are "more rigorous than those under Rule 9(b) of the Federal Rules of Civil Procedure." Lustgraaf v. Behrens , 619 F.3d 867, 874 n.2 (8th Cir. 2010). They "are unique to securities and were adopted in an attempt to curb abuses of securities fraud litigation." In re Navarre Corp. Sec. Litig. , 299 F.3d 735, 741 (8th Cir. 2002). One of those abuses is "the practice of pleading 'fraud by hindsight.' " Id. at 742 (citing In re Vantive Corp. Sec. Litig. , 283 F.3d 1079, 1084–85 (9th Cir. 2002) ).

Defendants primarily argue that Plaintiffs failed to plead enough facts as to elements (1) and (2) to meet the PSLRA's requirements. (See Securities Defendants' Memorandum in Support of Their Motion to Dismiss ("S. Def. Br.") 2, S. Dkt. No. 71.) Their overarching theory as to why this is the case is that Plaintiffs' claims are really just "impermissible fraud-by-hindsight claim[s]." (Id. ) They argue, for example, that the SAC "[f]ails to identify particular facts or sources showing that any of Defendants' public statements were materially false or misleading in context and when made." (Id. (emphasis omitted).) Plaintiffs counter that the SAC contains sufficient facts and that their reliance on confidential witnesses and well-sourced news articles as a basis for their allegations helps Plaintiffs clear the PSLRA's pleading hurdle and is not an attempt to plead fraud by hindsight. (See Securities Plaintiffs' Response Memorandum in Opposition to the Motion to Dismiss ("S. Pl. Br.") 3, 14–16, 25–27, S. Dkt. No. 87.)

Focusing solely on element (1), a material misrepresentation or...