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

Background

The plaintiffs alleged that Stitch Fix sold apparel, shoes, and accessories through its website and mobile application. The complaint alleged that Stitch Fix operated a traditional “Fix” subscription program and later introduced “Freestyle,” a direct-buy program. According to the complaint, Stitch Fix described the programs as working together and denied that Freestyle could reduce business from the Fix program.

The complaint alleged that Stitch Fix made disclosures on December 7, 2021, and March 8, 2022, that contradicted those assurances. Plaintiffs alleged that Stitch Fix’s stock price declined after each disclosure. This order did not decide whether Stitch Fix violated the securities laws or whether the plaintiffs’ allegations were correct.

Competing Lead-Plainiff Motions

The Private Securities Litigation Reform Act requires the court to appoint as lead plaintiff the person or group most capable of adequately representing the proposed class. The court generally considers which eligible movant has the largest financial interest and whether that movant satisfies the “typicality” and “adequacy” requirements of Federal Rule of Civil Procedure 23. Typicality asks whether the proposed lead plaintiff’s claims arise from the same events and legal theories as the class’s claims. Adequacy asks whether the proposed lead plaintiff can fairly protect the class’s interests.

The court considered motions from the Local 338 Funds and the New Mexico State Investment Council. It found that the required notice had been timely published in Business Wire and adequately described the action, the claims, the proposed class period, and the deadline for other class members to seek appointment.

Largest Financial Interest

The Local 338 Funds argued that they had suffered the greatest loss, estimating a loss of approximately $1.9 million under the last-in-first-out method. New Mexico estimated its own loss at approximately $1.3 million under that method, but argued that the court should instead use a retained-shares calculation. Under that approach, New Mexico claimed a loss of approximately $1.294 million and argued that the Local 338 Funds’ loss should be treated as zero because they sold their shares after the first disclosure.

The court rejected New Mexico’s proposed calculation. It reasoned that the alleged stock-price declines following the two disclosures were substantially different: 24 percent after the first disclosure and 6 percent after the second. That difference suggested that the alleged inflation in the stock price was not constant during the class period, making a retained-shares calculation less accurate. Using the last-in-first-out calculation, the court found that the Local 338 Funds had the largest financial loss and therefore the largest financial interest in the action.

Typicality and Adequacy

The Local 338 Funds made a preliminary showing that they satisfied Rule 23’s typicality and adequacy requirements. They alleged that, like other proposed class members, they purchased Stitch Fix Class A common stock during the class period at allegedly inflated prices and were harmed when the alleged truth was revealed.

New Mexico argued that the Local 338 Funds were not typical or adequate because they sold their shares after the first disclosure, allegedly creating a conflict with class members who bought shares after that disclosure or held shares through the end of the class period. The court rejected that argument, concluding that selling shares after an initial disclosure did not by itself prevent the Local 338 Funds from serving as lead plaintiffs.

New Mexico also argued that the Local 338 Funds might face a defense concerning whether they could prove losses caused by the second disclosure. The court concluded that the potential future application of such a defense did not make the Local 338 Funds atypical or inadequate for purposes of selecting a lead plaintiff. The court also declined to appoint New Mexico and the Local 338 Funds as co-lead plaintiffs, finding that appointment of co-lead plaintiffs was unnecessary and could conflict with the statutory framework.

Lead Counsel

The Local 338 Funds selected Bernstein Litowitz as lead counsel. The court explained that the lead plaintiff generally has the authority to select counsel, subject to the court’s approval. Because Bernstein Litowitz had extensive experience in securities class actions, the court approved the selection.

Disposition

The court granted the Local 338 Funds’ motion for appointment as lead plaintiff and approval of their selection of counsel. It denied New Mexico’s competing motion. The Local 338 Funds were appointed lead plaintiffs for the proposed class, and Bernstein Litowitz was approved as lead counsel. The court also set a telephonic case-management conference and directed the parties to meet and confer and submit a joint case-management statement.