Retail Wholesale Department Store Union Local 338 Retirement Fund v. Fix

Background

Four pension and benefit funds, serving as court-appointed lead plaintiffs, brought a securities class action against Stitch Fix, Inc., former chief executive officer Elizabeth Spaulding, and founder Katrina Lake. The plaintiffs represented people who purchased Stitch Fix common stock between December 8, 2020, and June 9, 2022.

The case concerned Stitch Fix’s Direct Buy business line, later renamed Freestyle. Direct Buy allowed customers to shop for particular products on Stitch Fix’s website, while the company’s original Fix product sent customers boxes of selected items. Plaintiffs alleged that Spaulding and Lake told investors that Direct Buy would be additive and complementary to Fix, even though internal testing allegedly showed that it would reduce Fix-related customer growth or sales. Plaintiffs alleged violations of Section 10(b) of the Securities Exchange Act and Securities and Exchange Commission Rule 10b-5, as well as a control-person claim under Section 20(a) against Spaulding and Lake.

Defendants moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), arguing that plaintiffs had not adequately pleaded falsity or scienter. Scienter means the required wrongful mental state, such as an intent to deceive or deliberate recklessness. Securities-fraud claims also must meet the particularity requirements of Federal Rule of Civil Procedure 9(b) and the heightened pleading requirements of the Private Securities Litigation Reform Act.

Falsity

The court held that plaintiffs had not adequately pleaded that the challenged statements were false or misleading. A statement is misleading when it would give a reasonable investor a materially different impression from the actual state of affairs. The court explained that the challenged statements had to directly contradict what the defendants knew when they made them.

The defendants argued that the statements concerned Direct Buy’s effect on existing Fix customers, while plaintiffs’ cited internal tests concerned whether Direct Buy would attract new customers. The court agreed with that distinction. It noted that Direct Buy was available only to existing Fix customers before April or August 2021, depending on the aspect of the rollout discussed in the opinion, and that the internal tests were identified as the “New Fix Customer Test.”

The court concluded that results showing Direct Buy reduced the growth of Fix customers were not inconsistent with statements that Direct Buy increased revenue from existing Fix customers. The court also found that plaintiffs had not described the alleged tests with enough detail. Plaintiffs did not adequately specify who was tested, what the tests involved, their parameters, or how their results were measured. The court therefore held that the complaint did not satisfy Rule 9(b)’s requirement that fraud allegations be pleaded with particularity and granted the motion to dismiss the Section 10(b) claim on that ground.

Scienter

The court separately held that plaintiffs had not pleaded facts creating the strong inference of scienter required by the Private Securities Litigation Reform Act. Plaintiffs relied on alleged information from company reports and presentations, statements from three former employees, access to live data and the company’s internal Looker system, Lake’s stock sales, and Spaulding’s performance-based compensation.

The court found that alleged access to internal data was not enough because plaintiffs did not identify specific reports received by the defendants or describe their contents in detail. Lake’s sale of 12.7 percent of her holdings did not establish scienter because she had sold more shares during the 18 months before the class period. The court also found that Spaulding’s compensation argument was insufficient because the new compensation package began after the challenged statements and was tied more strongly to Stitch Fix’s overall revenue and client count than to Freestyle’s success.

Section 20(a) Claim

The court held that plaintiffs’ Section 20(a) claim also failed. That claim depended on an underlying violation of Section 10(b), and the court had dismissed the Section 10(b) claim.

Disposition

The court granted defendants’ motion to dismiss plaintiffs’ complaint with leave to amend. Plaintiffs may file an amended complaint within 21 days of the July 16, 2024 order. The opinion does not decide whether the alleged statements were ultimately true or false; it addresses whether the complaint pleaded the claims sufficiently to proceed.