Strougo v. Tivity Health, Inc.
| Decision Date | 29 July 2021 |
| Docket Number | 3:20-cv-00165 |
| Citation | 551 F.Supp.3d 839 |
| Parties | Robert STROUGO, individually and on behalf of all others similarly situated, Plaintiffs, v. TIVITY HEALTH, INC., et al., Defendants. |
| Court | U.S. District Court — Middle District of Tennessee |
Caroline M. Robert, Sara Polychron, Robbins Geller Rudman & Dowd LLP, San Diego, CA, Gustavo F. Bruckner, J. Alexander Hood, II, Jeremy A. Lieberman, Pomerantz LLP, New York, NY, Patrick V. Dahlstrom, Pomerantz LLP, Chicago, IL, Paul Kent Bramlett, Robert P. Bramlett, Bramlett Law Offices, Nashville, TN, for Plaintiffs.
Brandon R. Keel, Jessica Perry Corley, Lisa R. Bugni, Logan R. Hobson, King & Spalding LLP, Atlanta, GA, Briana T. Sprick Schuster, Joseph B. Crace, Jr., Wallace Wordsworth Dietz, Bass, Berry & Sims, Nashville, TN, for Defendants.
Plaintiffs brought this putative class action under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b) and 78t(a) on behalf of all those who purchased Tivity stock between March 8, 2019 and February 19, 2020. Pending before the Court is Defendants’ fully briefed Motion to Dismiss. (Doc. Nos. 108, 109, 112, 113). For the following reasons, the motion will be denied.
Tivity Health, Inc. provides fitness and wellness programs geared toward senior citizens. (Compl. ¶ 2). Donato Tramuto served as Tivity's Chief Executive Officer and Adam Holland served as Chief Financial Officer. (Id. ¶¶ 23, 25). Hoping to expand the business in the face of intense competition, Tivity acquired Nutrisystem, a company known for its diet programming, for $1.3 billion. (Id. ¶¶ 6, 41–43, 51, 123). Following the acquisition, which became final on March 8, 2019, Dawn Zier, who was Nutrisystem's former top executive, became Tivity's President and Chief Operating Officer. (Id. ¶¶ 6, 24).
It is alleged that Tivity painted a deceitfully rosy picture of the Nutrisystem acquisition (the "Nutrisystem Claim"). (Id. ¶¶ 52–77). Executives misled investors about Nutrisystem's performance in the beginning of 2019 and the acquisition's impact on Tivity's new "nutrition segment." (Id. ). Tivity misstated that the new segment was "on track" and "performing well" despite its poor performance from the onset. (Id. ¶¶ 8–9, 54–55, 80, 98, 181). At the heart of Tivity's alleged cover-up were misstated financial statistics. Specifically, the company reported that its adjusted earnings before interest, taxes, depreciation, and amortization ("EBITDA") was $13.3 million. (Id. ¶ 8). But this number failed to account for an $8.3 million loss that resulted in an actual adjusted EBITDA of $5 million. (Id. ¶¶ 8–9, 53–54, 56, 88, 94–95, 98, 178).
In August 2019, Defendants again told investors that Tivity's nutrition segment results were "on track according to plan," (Id. ¶¶ 10, 64, 69, 101), and continued to report an adjusted EBITDA that failed to account for the $8.3 million loss. (Id. ¶¶ 9, 54 67–69, 74–76, 98(a), 107(a), 119(a)). Despite these assurances, however, Tivity launched a "Buy One, Get One Free" offer to customers, allegedly to recoup the hidden Nutrisystem losses. (Id. ¶ 12). Soon after the offer's launch, on December 9, 2019, Zier was "mutually terminated" without explanation. (Id. ¶ 13).
Then, on February 19, 2020, Defendants disclosed, for the first time in nearly a year, the $8.3 million adjusted EBITDA loss. (Id. ¶¶ 14, 78–83, 174, 179). Executives also admitted to the weaknesses of the Nutrisystem acquisition and announced a charge that reduced the value of the goodwill associated with the acquisition (the "Goodwill Claim"). .
Lead Plaintiff Sheet Metal Workers Local No. 33, Cleveland District, Pension Fund acquired Tivity securities between March 8, 2019 and February 20, 2020.2 They brought this putative class action under Federal Rule of Civil Procedure 23 against Tivity, Tramuto, Holland, and Zier ("Defendants") on behalf of all those who purchased Tivity securities during that period. (Id. ¶¶ 21, 192). Defendants have now moved to dismiss under Federal Rule of Civil Procedure 12(b)(6). (Doc. No. 108).
To survive a motion to dismiss under Rule 12(b)(6), "the complaint must include a ‘short and plain statement of the claim showing that the pleader is entitled to relief.’ " Ryan v. Blackwell, 979 F.3d 519, 524 (6th Cir. 2020) (quoting Fed. R. Civ. P. 8(a)(2) ). When determining whether the complaint meets this standard, the Court must accept all of the complaint's factual allegations as true, draw all reasonable inferences in the plaintiff's favor, and "take all of those facts and inferences and determine whether they plausibly give rise to an entitlement to relief." Doe v. Baum, 903 F.3d 575, 581 (6th Cir. 2018) ; see also Ashcroft v. Iqbal, 556 U.S. 662, 678–79, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). Moreover, the Court must determine only whether "the claimant is entitled to offer evidence to support the claims," not whether the plaintiff can ultimately prove the facts alleged. Swierkiewicz v. Sorema N.A., 534 U.S. 506, 511, 122 S.Ct. 992, 152 L.Ed.2d 1 (2002) (quoting Scheuer v. Rhodes, 416 U.S. 232, 94 S.Ct. 1683, 40 L.Ed.2d 90 (1974) ). But "[w]hile the complaint ‘does not need detailed factual allegations, a plaintiff's obligation to provide the grounds of his entitlement to relief requires more than labels and conclusions, and a formulaic recitation of a cause of action's elements will not do.’ " Blackwell, 979 F.3d at 524 (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) ).
"Where, however, a complaint alleges fraud in the purchase or sale of securities in violation of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) and Rule 10b-5 promulgated thereunder, 17 C.F.R. 240.10b-5, a heightened pleading standard is mandated by the Private Securities Litigation Reform Act of 1995 ("PSLRA")." Weiner v. Tivity Health, Inc., 365 F. Supp. 3d 900, 907 (M.D. Tenn. 2019) (citing Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71, 126 S.Ct. 1503, 164 L.Ed.2d 179 (2006) ; Miller v. Champion Ents. Inc., 346 F.3d 660, 686 (6th Cir. 2003) ). In these instances, "the complaint shall specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading," and must "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2) ; see also Weiner, 365 F. Supp. 3d at 907–08.
The parties categorize Tivity's alleged misstatements into two groups: (1) the Nutrisystem Claim, where Tivity's executives allegedly misled investors about the success of the Nutrisystem acquisition; and (2) the Goodwill Claim, where Tivity allegedly impaired its goodwill by carrying a goodwill value that exceeded its implied fair value. (See Compl. ¶¶ 98, 107, 109, 119, 124; see also Doc. No. 109 at 9, 20). Plaintiffs argue that both the Nutrisystem Claim and Goodwill Claim violate Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b) and 78t(a). ("The 1934 Act").
Defendants move to dismiss on two grounds. First, they argue that neither the Nutrisystem Claim nor the Goodwill Claim adequately alleges that any statements were misleading. (Doc. No. 109 at 9). And second, they argue that each claim failed to allege the requisite scienter, or state of mind. (Id. ). The Court will address each argument in turn after summarizing the relevant law.
Section 10(b) forbids the "use or employ, in connection with the purchase or sale of any security ... [of] any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [SEC] may prescribe as necessary or appropriate in the public interest or for the protection of investors." Ohio Pub. Emples. Ret. Sys. v. Fed. Home Loan Mortg. Corp., 830 F.3d 376, 383 (6th Cir. 2016) (citing 15 U.S.C. § 78j(b) ). And Rule 10b-5 promulgated thereunder forbids "the making of any ‘untrue statement of a material fact’ or the omission of any material fact ‘necessary in order to make the statements made ... not misleading.’ " Id. (citing Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 341, 125 S.Ct. 1627, 161 L.Ed.2d 577 (2005) ); see also 17 C.F.R. § 240.10b-5(b).
"There are six elements to a securities-fraud suit under Section 10(b) and Rule 10b-5: ‘(1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation.’ " In re Omnicare, Inc. Sec. Litig., 769 F.3d 455, 469 (6th Cir. 2014) (citing Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27, 131 S. Ct. 1309, 1317, 179 L.Ed.2d 398 (2011) ); see also Dougherty v. Esperion Therapeutics, Inc., 905 F.3d 971, 979 (6th Cir. 2018). Defendants challenge only the first and second elements of a Section 10(b) claim. (See Doc. No. 109). Because neither party disputes the remaining elements, and because the Court agrees that Plaintiffs have adequately pled facts to support them, the Court will examine only whether Plaintiffs properly allege that Defendants made a material misstatement or omission and whether they did so with scienter. See In re EveryWare Global, Inc. Secs. Litig., 175 F. Supp. 3d 837, 851 (S.D. Ohio 2016).
"Successfully pleading an actionable material misrepresentation or omission requires a plaintiff to allege facts demonstrating two things: (1) that a defendant made a statement or omission that was false or misleading; and (2) that this statement or omission concerned a material fact." Omnicare, 769 F.3d at 470 (citing Matrixx, 131 S. Ct. at...
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