In re Weight Watchers Int'l Inc.

• Decision Date: 30 November 2020
• Docket Number: 19cv2005
• Citation: 504 F.Supp.3d 224
• Parties: IN RE WEIGHT WATCHERS INTERNATIONAL INC. SECURITIES LITIGATION
• Court: U.S. District Court — Southern District of New York

504 F.Supp.3d 224

IN RE WEIGHT WATCHERS INTERNATIONAL INC. SECURITIES LITIGATION

19cv2005

United States District Court, S.D. New York.

Signed November 30, 2020

OPINION & ORDER

WILLIAM H. PAULEY III, Senior United States District Judge:

This case presents a familiar narrative: when a company's earnings plunge and the stock tanks, shareholders flock to court for recourse. But not every stock drop is the product of securities fraud.

Plaintiffs bring this putative class action against Defendants WW International, Inc. ("WW" and f/k/a Weight Watchers International, Inc.), Artal Luxembourg S.A., Artal International S.C.A., Artal Group S.A. (together with Artal Luxembourg S.A., Artal International S.C.A., "Artal"), Raymond Debbane, Mindy Grossman, and Nicholas Hotchkin (collectively, "Defendants") for violations of the Securities Act of 1933 (the "Securities Act") and the Securities Exchange Act of 1934 (the "Exchange Act"). At bottom, Plaintiffs allege that Defendants misled investors by failing to disclose that WW's new business model was reliant on recruiting lapsed members and that WW had abandoned its practice of releasing program innovations at the end of each year. Defendants move to dismiss the Second Amended Complaint under Federal Rules of Civil Procedure 12(b)(6) and 9(b) and the Private Securities Litigation Reform Act of 1995 ("PSLRA"), 15 U.S.C. § 78u-4(b). For the reasons that follow, Defendants’ motion to dismiss is granted.

BACKGROUND

Unless otherwise noted, the following facts are derived from the Plaintiffs’ Second Amended Complaint and are accepted as true for purposes of this motion.

I. The Parties

Plaintiffs purchased shares in Weight Watchers (now known as "WW"), a publicly-traded company. Mindy Grossman is the President and CEO of Weight Watchers, and Nicholas Hotchkin serves as its CFO. Raymond Debbane—the CEO of Artal—chairs Weight Watchers’ board of directors. Artal has owned a major stake in Weight Watchers’ from September 1999 until it divested a significant portion of its Weight Watchers stock in 2018.

II. WW Overview

Weight Watchers was founded in 1961 as a weight-loss program. (Second Consolidated Amended Class Action Complaint, ECF No. 86 ("SAC"), ¶ 47.) When Jean Nidetch founded the company, she "invited friends to her home in Queens to discuss the best ways to lose weight." (SAC ¶ 47.) Weight Watchers expanded this in-person weight loss meeting model to millions of members around the globe. (SAC ¶ 47.) To monetize these meetings, members would pay a fee to attend and receive guides on how to lose weight. (SAC ¶¶ 47, 49.) More recently, Weight Watchers has capitalized on the internet by offering a suite of online programs, including workshops and products for additional fees. (SAC ¶ 47.) Weight Watchers also added a "points" system to aid subscribers in tracking what they eat. (SAC ¶ 48.) That system assigned specific point values to different foods, which allowed members to budget calories. (SAC ¶ 6.)

Historically, Weight Watchers’ " ‘bread and butter’ customers consisted of middle-aged, white women." (SAC ¶ 47.) A significant proportion of WW's new subscriptions come from people who had previously subscribed to the program but allowed their memberships to lapse. (SAC ¶ 55.)

Weight Watchers also relied principally on a seasonal model. (See SAC ¶¶ 50, 157.) Most Weight Watchers customers subscribe between Thanksgiving and the post-New Year's period when many people make aspirational resolutions regarding diet and weight loss. (See SAC ¶¶ 50, 157.) To monetize the seasonal nature of diets, Weight Watchers would release program innovations in early December of each year. (SAC ¶ 51.) These program innovations typically "took the form of offering a new benefit or an attractive modification to the Company's program (e.g., a simpler or improved diet plan, a new counseling program, or other new service benefit)." (SAC ¶ 5.) In that way, potential new subscribers would be motivated to join Weight Watchers as part of their New Year's resolutions. (SAC ¶¶ 51–55, 158–62.) Plaintiffs allege that program innovations would take between one and two years to develop and launch. (SAC ¶ 54.)

In 2011, Weight Watchers launched its "PointsPlus" program that overhauled how points were calculated in the system. (See Decl. of George S. Wang in Supp. of Defs.’ Mot. to Dismiss, ECF No. 94 ("Wang Decl."), Ex. A.)¹ This program revamped how Weight Watchers calculated points to encourage more "nutrient dense foods." (Wang Decl. Ex. A, at 1.) In 2012, Weight Watchers introduced "WW 360," which allowed for expanded online weight loss tools. (See Wang Decl. Ex. A.) For its end of the year update in 2013, Weight Watchers offered a "Simple Start" program that eased new members’ entry into the Weight Watchers ecosystem. (See Wang Decl. Ex. B.) In 2014, Weight Watchers added a feature for users to chat with experts and coaches. (See Wang Decl. Ex. C.) In 2015—much like in 2011—Weight Watchers changed its point calculation system with its "Beyond the Scale" program that included "SmartPoints." (See Wang Decl. Ex. D.) This program sought to reinvent Weight Watchers’ point allocation by "translating complex nutritional information into one simple number," and "nudg[ing] members toward a pattern of eating that includes more lean protein, fruits and vegetables, and less sugar and saturated fat." (Wang Decl. Ex. D, at 1.) In 2016, Weight Watchers offered new subscribers an Apple Watch as an incentive to sign up and track their fitness goals. (See Wang Decl. Ex. E.) In 2017, Weight Watchers launched a "Freestyle" program which allotted zero points to certain foods. (See SAC ¶¶ 56–61, 163–68; Wang Decl. Ex. G.) This innovation was a major overhaul of the Weight Watchers points system and was immensely popular, precipitating a jump in Weight Watchers’ earnings and stock price. (SAC ¶¶ 57–59, 61, 164–66, 168.)

III. WW Changes its Business Model

In February 2018, Weight Watchers determined to change its core ethos by transitioning from a weight loss program to a wellness program. Weight Watchers even changed its name from Weight Watchers to WW, to focus on wellness. (SAC ¶ 83.) In Grossman's words, WW sought to stress that "[b]eing healthier is not just about weight anymore. It's about overall health and wellness—being your best self." (SAC ¶ 60.) Broadening WW's appeal was key to this new strategy. (See SAC ¶¶ 60, 68–73.)

Before the paradigm shift, WW subscribers were overwhelmingly comprised of middle-aged, Caucasian women. (SAC ¶ 55.) After the shift, WW sought to reach an array of demographic groups, including younger and more ethnically diverse groups that had historically been under-represented in the WW community. (SAC ¶ 83.) WW planned to achieve this goal in part by partnering with "brand influencers" and celebrities to draw a younger and more diverse audience. (See SAC ¶¶ 60, 92–93, 167.) While engaging in this rebranding effort, WW failed to disclose that it would not implement a major program innovation at the close of 2018. (SAC ¶ 84.)

Initially, this strategy appeared to pay off. In Q1 2018, overall recruitment numbers were up over the same period in 2017 and a significant percentage of the signups were brand-new to WW. (See Wang Decl. Ex. P, at 5.) WW's earnings also rose dramatically compared to Q1 2017. (See Wang Decl. Ex. P, at 6.)

WW additionally sought to reduce the seasonality in its business model. Typically, people sign up for weight loss programs in the winter, especially around the beginning of the new year with people making New Year's resolutions. (See SAC ¶¶ 2, 5, 50, 157; Wang Decl. Ex. JJ, at 7.) But WW wanted to move away from that model for two reasons. First, it would "inspire people to be healthier all year long," which would advance WW's transition from a weight-loss program to a wellness company. (Wang Decl. Ex. K, at 10.) Second, a year-round focus would reduce seasonality in WW's revenues. (See Wang Decl. Ex. R, at S-7.)

Throughout 2018, WW launched a series of innovations to accomplish their goal of year-round wellness. This included a line of kitchen tools and products in March, (see Wang Decl. Ex. M), a social impact campaign in May, (see Wang Decl. Ex. X), a "Summer of Impact" campaign to promote year-round health in June, (see Wang Decl. Ex. Y), a member referral program in July, (see Wang Decl. Ex. JJ, at 8–9), a meal-kit program in September, (see Wang Decl. Ex. JJ, at 11), and a membership rewards program in October, (see Wang Decl. Ex. JJ, at 10).

WW also launched a number of program innovations in December 2018. This included a partnership with Aaptiv to offer curated workouts, a partnership with Headspace to offer mediation, a social network, "FitPoints" which measured personalized activities, and a partnership with Blue Apron to have meal kits delivered that were automatically tracked in the WW system. (See Wang Decl. Exs. MM, NN.) However, Plaintiffs aver that these changes were a significant departure from WW's practice of releasing "meaningful" program innovations at the end of each calendar year. (SAC ¶¶ 9, 20, 85.)

IV. WW's Earnings Slide

WW's new strategies did not drive subscriber growth at the end of 2018. WW was not able to attract as many new subscribers at it had previously touted. (See SAC ¶ 13.) When reporting the 2018 results, WW lowered its earnings guidance for 2019 to $1.25–$1.50 per share compared with a reported $3.19 earnings per share. (SAC ¶ 225.) WW stock dropped precipitously. It fell 33% from $29.57 at the close on February 26, 2019—before the earnings release—to $19.37 on February 27, 2019. (See SAC ¶¶ 97, 227.) Notably, this is a 72% decline from the stock's May 2018 secondary public offering price of $69. (SAC ¶¶ 97, 227.) During the earnings call accompanying this announcement, WW's CEO, Grossman, noted that the WW "campaign did not drive recruitment of our significant universe of lapsed members," and that WW's "winter advertising did not drive consumers,...