Ortiz v. Canopy Growth Corp.

• Decision Date: 06 May 2021
• Docket Number: No. 2:19-cv-20543-KM-ESK,2:19-cv-20543-KM-ESK
• Parties: Eduardo ORTIZ, individually and on behalf of all others similarly situated, et al., Plaintiffs, v. CANOPY GROWTH CORPORATION, Bruce Linton, Mark Zekulin, Mike Lee, Tim Saunders, David Klein and Rade Kovacevic, Defendants.
• Court: U.S. District Court — District of New Jersey

537 F.Supp.3d 621

Eduardo ORTIZ, individually and on behalf of all others similarly situated, et al., Plaintiffs,

v.CANOPY GROWTH CORPORATION, Bruce Linton, Mark Zekulin, Mike Lee, Tim Saunders, David Klein and Rade Kovacevic, Defendants.

No. 2:19-cv-20543-KM-ESK

United States District Court, D. New Jersey.

Signed May 6, 2021

Filed May 7, 2021

Laurence M. Rosen, The Rosen Law Firm, PA, South Orange, NJ, for Plaintiff Eduardo Ortiz.

Vincent M. Giblin, Decotiis, Fitzpatrick, Cole & Giblin, LLP, Paramus, NJ, for Plaintiff Robert Pollock.

Serina Marie Vash, Herman Jones LLP, Westfield, NJ, for Plaintiff Michael Gedell.

James E. Cecchi, Carella Byrne Cecchi Olstein Brody & Agnello, P.C., Roseland, NJ, for Plaintiff Shawn Monteith.

Christopher A. Seeger, Seeger Weiss LLP, Ridgefield Park, NJ, for Plaintiff Douglas S. Chabot.

Gonen Haklay, The Rosen Law Firm, P.A., Jenkintown, PA, for Plaintiffs Anna Cooney, Anthony Sultan, Ellaine Sultan, Formica Industries Limited.

Andrew Muscato, Skadden Arps Slate Meagher & Flom LLP, New York, NY, for Defendants.

AMENDED OPINION

KEVIN MCNULTY, U.S.D.J.:

Plaintiffs bring a putative securities class action against Canopy Growth Corporation ("Canopy"), the largest cannabis company in Canada, and against numerous individuals who served or are currently serving in high-ranking positions with that company. Plaintiffs allege that Canopy failed to timely disclose numerous facts, and that as a result the company's stock price was artificially inflated. Ultimately, plaintiffs claim, the truth came out and Canopy's stock price fell precipitously.

Now before the Court is defendants’ motion to dismiss the complaint for failure to state a claim. See Fed. R. Civ. P. 12(b)(6). Defendants argue that plaintiffs have failed to plead scienter or any false or misleading statements. For the reasons stated below, the defendants’ motion to dismiss the complaint is GRANTED. Plaintiffs, however, will be permitted the opportunity to amend the complaint.

I. BACKGROUND¹

A. Plaintiffs

Plaintiffs are a class of all persons and entities who purchased or otherwise acquired publicly traded Canopy securities sold on the New York Stock Exchange ("NYSE") between June 27, 2018 and May 28, 2020, inclusive. (DE 65, Second Amended Complaint ("SAC") ¶¶ 1, 26–27.) They bring claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 promulgated thereunder. (Id. ; 15 U.S.C. 78j(b) ; 15 U.S.C. § 78t(a).)

B. Canopy

Defendant Canopy is a Canadian corporation with its principal executive offices in Ontario, Canada. (SAC ¶ 28.) The company describes itself as a world-leading, multi-brand cannabis company, offering varieties in dry flower, oil, and gelcap forms. (Id. ¶ 43.) It has been listed on the NYSE since May 24, 2018 and the Toronto Stock Exchange since April 4, 2014. (Id. ¶ 28.) The company first sold cannabis oils in 2016 and began selling cannabis in gelcap form in 2017. (Id. ¶ 43.)

Defendant Bruce Linton founded Canopy. He served as its CEO until June 2018, and as co-CEO until July 2, 2019. (Id. ¶ 29.) On July 3, 2019, he was fired. (Id. ¶ 29.) Defendant Mark Zekulin served as Canopy's President and co-CEO from June 27, 2018 to July 3, 2019 and as CEO from July 2, 2019 to January 13, 2020. (Id. ) At that point, defendant David Klein took over as President and CEO, though defendant Zekulin remained at the company as a strategic adviser until June 30, 2020. (Id. ¶¶ 30–31.) Defendant Tim Saunders served as CFO until June 1, 2019, after which that role was taken over by defendant Mike Lee. (Id. ¶¶ 32–33.) Defendant Rade Kovacevic joined Canopy in 2016 and served in a variety of Vice President-level roles before becoming the company's president in July 2019 and Chief Product Officer in June 2020. (Id. ¶ 34.)

C. Canada Legalizes Cannabis Use in Canada

On June 18, 2018, the Canadian Federal Government passed a bill legalizing recreational marijuana use in Canada. (Id. at ¶ 45.)² The bill permitted legal recreational sales of certain cannabis products, including dry flower, oils, and gelcap products, starting October 17, 2018. (Id. ) Regulation of recreational sales, however, was left to Canada's provinces. (Id. ¶ 46.)

Several Canadian provinces, including the most populous, Ontario,³ initially opted to permit recreational cannabis sales solely through government-operated retail stores, and committed only to opening 40 such stores, or approximately one store for every 358,000 people. (Id. ¶¶ 48, 50.) Though Ontario eventually announced in August 2018 that it would permit private retail stores, it stated that no such stores would open prior to April 1, 2019. (Id. ¶ 52.) Canopy noted that those provinces’ slow move towards retail would delay its sales growth; in disclosures prior to the Class Period, Canopy anticipated that it would take two years or longer to develop a full network of retail cannabis stores capable of satisfying consumer demand. (Id. ¶ 47.) Indeed, when the recreational market opened on October 17, 2018, there were only 18 Canopy-operated stores in all of Canada, and none in Ontario. (Id. ¶ 51.)

D. Canopy Increases its Cannabis Production Capacity

On February 16, 2018, the Canadian government granted a license for a joint venture in which Canopy had a majority stake. (Id. ¶ 59.) The license permitted 840,000 square feet of growing space for cannabis plants in Aldergrove, British Columbia, which could spread into 1.3 million square feet for flowering and harvesting. (Id. ) On April 13, 2018, the government granted the joint venture an additional 900,000 square feet for growing cannabis plants in Delta, British Columbia, to spread into 1.7 million square feet for flowing and harvesting. (Id. ) In a February 16, 2018 press release, defendant Zekulin stated that the site would position the company "to continue this trend as Canada's, and indeed the world's largest, most reliable and most diversified producer and seller of high quality regulated cannabis." (Id. ¶ 60.)

According to former employees FE3 and FE4,⁴ instead of purchasing and outfitting new greenhouses to grow cannabis in Aldergrove and Delta, Canopy opted to retrofit old, existing greenhouses which had been used to grow peppers. (Id. ¶ 73.) Those greenhouses lacked the necessary lighting, humidifiers, and watering capabilities needed to produce high-quality cannabis. (Id. ) FE1 stated that those problems led to seeds mixed with flowers, lower yield, and low-quality, immature buds. (Id. ¶ 82.) FE4 confirms that the absence of light in the facilities caused immature cannabis. (Id. ¶ 81.) FE3 and FE4 both further noted that the humidity problems in the facilities caused "bud rot" and "grey mold." (Id. ¶ 83.) FE3 states that Canopy never solved the lighting problems in those facilities. (Id. ¶ 81.)

Cannabis is graded according to quality. "Bud"-grade cannabis, which is the highest grade, can be sold in its dry flower form. (Id. ¶¶ 74–75.) Any grade lower than "bud"-grade cannot be used in dry flower form but can nevertheless be used for extraction, in which the active ingredients are extracted from the plant and reduced to oil or gelcap form. Canopy's Aldergrove and Delta facilities did not grow "bud" quality cannabis, but rather only C or C-minus grade cannabis, which could only be used to produce extracts like oil or gelcap products. (SAC ¶ 75.) FEs 1, 3, and 4 attribute the failure to grow "bud" quality cannabis to the lighting, humidity, and watering problems they identified at the facilities. (Id. ¶¶ 77, 80–83.) Plaintiffs claim that because Canopy's facilities were only capable of producing extracts, the company produced an oversupply of extract products like oils and gelcaps. (Id. ¶ 79.) According to FE4, Aldergrove and Delta produced such a large quantity of extract products only because the greenhouses were not suitable for growing anything else. (Id. ¶¶ 79–80.)

According to FE3, the low quality of the plants at these facilities was openly and often discussed, including by several company vice presidents and regional general managers. (Id. ¶ 78.) FE3 claims that Canopy senior executives, including defendant Linton, visited the sites regularly in 2018 and 2019 and knew about the low quality of the plants. (Id. ¶¶ 85–86.) FE3 recalled a particular occasion in which defendant Linton asked employees direct and detailed questions and the employees answered honestly regarding lighting issues and other causes of low-grade cannabis production. (Id. ¶ 86.) Linton specifically asked the master grower why the plants were so small and the master grower cited lighting problems. (Id. ¶ 87.)

Defendant Kovacevic posted on Twitter that he had visited the Aldergrove facility, where he found that Canopy's "vegging plants [were] looking super healthy!" (Id. ¶ 89.) He attached pictures of cannabis plants to his post, but, according to FE3, the plant photos were actually of plants from the Delta facility. (Id. ) FE1⁵ states that Canopy's executives knew about the production challenges faced at the Aldergrove and Delta facilities, and recalls weekly meetings attended by defendant Kovacevic in which the attendees mocked the poor conditions of the growing facilities and low-quality product. (Id. ¶ 88.)

FE1 explains that his supervisor, Jim Brandle, told FE1 that he personally conveyed to defendant Linton the problems in Canopy's greenhouses. (Id. ¶ 95.) FE1 claims that Linton knew about the problems with the greenhouses even before speaking with Bundle, because, according to FE1, the company had been budgeting to fix those problems. (Id. ¶ 96.) Brandle told FE1 that he told Kovacevic about the problems with the low quality of the cannabis in every interaction he had with Kovacevic. (Id. ¶ 97.)

As 2020 began, Canopy held 115 metric tons of unsold cannabis inventory, nearly double the 68 metric tons it had sold since Canada legalized recreational marijuana. (Id. ¶ 16.) According to FE1, cannabis products expire one year from the date of...