In Re Norfolk Southern Corporation Bond/Note Securities Litigation

Background

This putative class action concerns seven offerings of Norfolk Southern Corporation senior notes issued under a 2021 shelf registration statement filed with the Securities and Exchange Commission. The lead plaintiff is the City of Pontiac Reestablished General Employees Retirement System. The defendants are Norfolk Southern, individual Norfolk Southern officers and directors, and the underwriters for the offerings.

The amended complaint asserted claims under Section 11 of the Securities Act of 1933, which addresses materially misleading statements or omissions in registration statements, and Section 15, which can impose derivative liability on controlling persons. The plaintiff alleged that offering documents contained misleading statements or omissions concerning three broad subjects: Norfolk Southern’s safety commitments and programs, its accident data and operating ratio, and its precision scheduled railroading strategy and related “TOP Initiative.” The complaint also alleged that the documents failed to disclose regulatory issues and trends, uncertainties, and risks required by Items 303 and 105 of Securities and Exchange Commission Regulation S-K.

The allegations concerned operational changes including staff reductions, longer and heavier trains, and reductions in locomotives. The complaint alleged that these changes increased the risk of derailments and other safety incidents. It also relied on the February 2023 derailment of a Norfolk Southern train carrying hazardous chemicals in East Palestine, Ohio. The court stated that, when deciding the dismissal motion, it assumed the complaint’s factual allegations were true and drew reasonable inferences for the plaintiff.

Procedural History and Standard

All defendants moved to dismiss the amended complaint under Rule 12(b)(6), which tests whether a complaint adequately states a legally plausible claim. Magistrate Judge Sarah Cave recommended granting the motion in part and denying it in part. The defendants objected to the portion of the recommendation that would have allowed some claims to proceed.

Section 11 Claims

The court held that the alleged safety statements were not actionable. Several statements—such as describing safety as a “way of life” or “part of who we are”—were non-actionable general statements of corporate commitment, commonly called puffery. Other statements about a safety message, training, and a board safety committee were specific enough that they could have been actionable if the complaint had alleged they were false. The court concluded, however, that the complaint did not allege facts showing those statements were false or misleading.

The court also rejected the claims based on operational statements. It held that Norfolk Southern was not required to present accident information in the per-million-mile format preferred by the plaintiff, particularly because that information was publicly available from the Federal Railroad Administration. The court further held that accurately reporting the company’s operating ratio did not itself create a duty to disclose the alleged long-term unsustainability of the company’s business model or the alleged safety-related practices underlying that metric.

The court rejected the claims concerning the strategic plan and the TOP Initiative. It found no sufficiently close connection between statements about efficiency and financial performance and the alleged increase in accident risk. The offering documents had disclosed the risk of a catastrophic rail accident involving hazardous materials, and the court held that defendants were not required to quantify an undefined increase in that risk. The court also held that the reference to “sustainable cost structure improvements” was too general to be actionable puffery and that the complaint did not identify particular, material omitted facts that made the statement misleading.

The court further concluded that the complaint did not plausibly allege a duty to disclose alleged illegal or improper conduct. It stated that defendants had no independent duty to disclose uncharged, unadjudicated wrongdoing and that the complaint did not plausibly allege either a violation of law or regulation by Norfolk Southern or a prior statement that created a duty to disclose such conduct.

Regulation S-K Claims

The court rejected the claims under Item 303, which requires discussion of known trends or uncertainties reasonably likely to materially affect financial condition or results, because the complaint did not adequately allege that senior management knew of a specific increase in risk of the required likelihood and magnitude. The court also rejected the Item 105 claim, which concerns disclosure of material factors making an investment speculative or risky, because the offering documents already disclosed the risk of a catastrophic hazardous-materials rail accident and defendants were not required to provide the additional warning proposed by the plaintiff.

Section 15 Claims and Disposition

The court dismissed the Section 15 claims against the individual defendants because the amended complaint did not adequately allege an underlying Section 11 violation. Judge Lewis Kaplan sustained the defendants’ objections in substantial part and granted defendants’ motion to dismiss in its entirety.