Ong v. Chipotle Mexican Grill, Inc., 16 Civ. 141 (KPF)

• Court: United States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York
• Writing for the Court: KATHERINE POLK FAILLA, United States District Judge
• Citation: 294 F.Supp.3d 199
• Parties: Susie ONG, individually and on behalf of all others similarly situated, et al., Plaintiffs, v. CHIPOTLE MEXICAN GRILL, INC., M. Steven Ells, Montgomery F. Moran, and John R. Hartung, Defendants.
• Docket Number: 16 Civ. 141 (KPF)
• Decision Date: 22 March 2018

294 F.Supp.3d 199

Susie ONG, individually and on behalf of all others similarly situated, et al., Plaintiffs,
v.
CHIPOTLE MEXICAN GRILL, INC., M. Steven Ells, Montgomery F. Moran, and John R. Hartung, Defendants.

16 Civ. 141 (KPF)

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

Signed March 22, 2018

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Joseph Alexander Hood, II, Jeremy Alan Lieberman, Pomerantz LLP, New York, NY, for Plaintiffs.

Andrew Brian Clubok, Susan Elisabeth Engel, Latham & Watkins LLP, Susan Elisabeth Engel, Kirkland & Ellis LLP, Washington, DC, Mark B. Collier, Messner Reeves LLP, Denver, CO, Nathaniel Jacob Kritzer, Richard William Nicholson, Jr., Robert Anthony Gretch, Kirkland & Ellis LLP, New York, NY, for Defendants.

OPINION AND ORDER

KATHERINE POLK FAILLA, United States District Judge

Lead Plaintiffs Metzler Asset Management GmbH and Construction Laborers Pension Trust of Greater St. Louis ("Plaintiffs"), on behalf of themselves and other similarly situated shareholders, bring this securities class action against Defendants Chipotle Mexican Grill, Inc. ("Chipotle" or "the Company"), and Chipotle executives Steven Ells, Montgomery F. Moran, and John R. Hartung (collectively, the "Chipotle Executives" or the "Individual Defendants," and including Chipotle, "Defendants"). Plaintiffs allege, and Defendants do not dispute, that after a rash of food-borne illness outbreaks in late 2014 and 2015, some of which were linked to Chipotle, the value of the Company’s stock steeply declined. But while others attribute these losses to the adverse publicity surrounding the outbreaks, Plaintiffs instead claim that they are due, in part or in whole, to the Company’s failure to disclose certain granular details and attendant risks of its produce-processing and food-safety procedures.

Plaintiffs have brought securities fraud claims under §§ 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b) and 78t(a), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5. The Court previously dismissed Plaintiffs' First Amended Complaint (the "FAC"), and Defendants now move to dismiss the Second Amended Complaint (the "SAC"). Defendants also move to strike an expert witness declaration attached to the SAC. For the reasons that follow, the Court grants Defendants' motion to strike

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in part, and grants their motion to dismiss in its totality. The Court is as concerned as the parties about food-borne illness outbreaks generally and about those described in the SAC specifically. That said, not all adverse events are the product of corporate misfeasance or nonfeasance, and the Court cannot find on this record that Plaintiffs have adequately pleaded securities fraud.

BACKGROUND¹

A. Factual Background

The Court’s prior opinion considering Defendants' motion to dismiss the FAC provided an extensive discussion of the alleged facts. See Ong v. Chipotle Mexican Grill, Inc. ("Chipotle I "), No. 16 Civ. 141 (KPF), 2017 WL 933108, at *1-5 (S.D.N.Y. Mar. 8, 2017). Nevertheless, given the extensive additions to Plaintiffs' complaint, the Court again outlines the factual allegations, while noting at times where Plaintiffs' allegations have remained the same and where they have changed.

1. The Parties

Plaintiffs bring this case as a class action "on behalf of all purchasers of the common stock of Chipotle between February 5, 2015[,] and February 2, 2016, inclusive" (the "Class Period"). (SAC ¶ 1). "Chipotle is a publicly traded fast-food restaurant chain," which, as of December 31, 2015, operated over 1,900 restaurants in the United States that offer cuisine containing produce items including tomatoes, lettuce, red onion, jalapeños, and cilantro. (Id. at ¶ 20). As of February 4, 2015, Chipotle had more than 31 million shares of common stock issued and outstanding. (Id. ).

The SAC names, as individual defendants, three current and former Chipotle executives. Defendant M. Steven Ells is Chipotle’s founder and, during the Class Period, was one of two of the Company’s co-Chief Executive Officers, along with Defendant Montgomery F. Moran. (SAC ¶¶ 21-22). Moran was also on Chipotle’s Board of Directors during the Class Period. (Id. at ¶ 22). Before serving in these capacities, Moran was Chipotle’s outside counsel while working for the Denver law firm of Messner & Reeves, LLC. (Id. ). It is alleged that "[o]n December 12, 2016, in light of the significant fallout from the Class Period food-borne illness outbreaks[,] Moran resigned as co-CEO and director at the Board’s request." (Id. ). Defendant John R. Hartung is, and served throughout the Class Period as, Chipotle’s Chief Financial Officer. (Id. at ¶ 23). In this capacity, Hartung was responsible for Chipotle’s "financial and reporting functions," as well as overseeing information technology; safety, security, and risk; and compensation and benefits. (Id. ).

Plaintiffs allege that, given their positions in the Company during the Class

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Period, the Chipotle Executives "had access to the adverse undisclosed information about its business, operations, products, operational trends, financial statements, markets and present and future business prospects via internal corporate documents," as well as "conversations and connections with other corporate officers and employees, attendance at management and/or Board meetings and committees thereof and via reports and other information provided to them[.]" (SAC ¶ 26). Drawing from this, along with other allegations, Plaintiffs posit that these Executives, and thus Chipotle, "were aware of[ ] food-borne illness outbreaks at the Company," as discussed more fully below. (Id. at ¶ 44).

2. Chipotle’s Food-Safety Practices

The SAC expands on the FAC’s discussion of food-safety procedures that Chipotle had in place before, during, and after the Class Period.² Before the Class Period, Chipotle received its produce "from a central commissary where it was processed, prepared[,] and tested at least twice for pathogens before being delivered." (SAC ¶ 2). Plaintiffs contend that this is "the industry standard practice in the fast food industry" for ready-to-eat food, as it "allows for much greater control over food safety than at individual restaurants." (Id. at ¶ 63). Commissary food-processing systems also provide "the ability to conduct raw material testing and end product testing." (Id. at ¶ 64). Raw material testing involves testing food products for pathogens at their preliminary arrival at the commissary. (Id. ). Food product that passes these tests is then subject to end product testing, which involves sampling batches of the food at intervals and disposing of any batch that fails. (Id. at ¶¶ 64-65). A negative test result may also trigger procedures for tracing the contaminated product back to its source to prevent further distribution of pathogen-ridden food. (See id. at ¶ 65). Plaintiffs assert that "any professional in the food safety business understands that raw material testing and end product testing are the industry standard for verifying that the food served at individual restaurants is safe." (Id. at ¶ 67).

In late 2014, Chipotle "switch[ed] the cutting and processing of its produce to each of its 1,900 individual restaurants, instead of a central commissary, believing that this would improve taste and freshness." (SAC ¶ 2). In Plaintiffs' view, because this entailed a drastic shift in the method in which Chipotle went about assuring food safety, maintaining the same standard of quality "would have required a detailed hazard analysis of the food safety risks associated with this change in operations." (Id. at ¶ 70; see id. at ¶ 69). Failure to do so would "exponentially increase" the risk that Chipotle would experience food-borne illness outbreaks "as soon as the switch was made," as Chipotle would be unable to recreate the safety mechanisms in place at commissary distributors. (Id. at ¶ 70; see id. at ¶¶ 70-76). Plaintiffs also allege that the switch away from commissary food distribution prevented Chipotle from being able to trace its ingredients back to specific suppliers, which in turn would frustrate investigations into the source of pathogens. (See id. at ¶¶ 82-85).

Plaintiffs further claim that Chipotle maintained a practice of internally auditing

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the food safety levels at individual locations, rather than what they claim is the "industry standard" of external auditing, which eliminates "the possibility of collusion between the stores and the auditors." (SAC ¶¶ 86-87). Chipotle would also "pre-announce[ ]" the audits, which would allow the restaurants "ample time to hide or mask deficient food safety practices." (Id. at ¶ 88).

On December 4, 2015, after Chipotle was involved in a number of food-borne illness outbreaks (discussed more fully below), the Company "disclosed that it had begun high-resolution testing of produce as part of its remediation plan." (SAC ¶ 77). High-resolution testing is a form of end product testing "that uses a larger number of samples based on the timing of manufacturing ... or the lot size," and it "can only take place at...