Cheng v. Canada Goose Holdings Inc.

Background

Lead plaintiff National Elevator Industry Pension Fund brought a securities-fraud class action against Canada Goose Holdings Inc.; Dani Reiss, the company’s chairman, chief executive officer, and president; Jonathan Sinclair, its chief financial officer and executive vice president; Bain Capital, LP; and Bain affiliates. The complaint asserted claims under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, which prohibit securities fraud, and Section 20(a), which can impose secondary liability on controlling persons.

The alleged class period ran from August 9, 2018, through May 29, 2019. The plaintiff challenged statements and omissions concerning two subjects: consumers buying heavyweight parkas earlier than expected through the company’s direct-to-consumer channel, and the company’s inventory levels and relationship between inventory, demand, and revenue growth. The plaintiff also pointed to stock sales by Reiss and the Bain defendants in November 2018.

Legal standard

The defendants moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint states a legally plausible claim. For purposes of that motion, the court treated well-pleaded factual allegations as true and drew reasonable inferences for the plaintiff, but it did not treat legal conclusions as true. Securities-fraud claims also had to meet heightened pleading requirements, including identifying the allegedly fraudulent statements, their speakers, where and when they were made, and why they were misleading.

Section 10(b) and Rule 10b-5

The court rejected the plaintiff’s claim concerning timing shifts. The opinion explained that securities law does not require a company to disclose every fact investors might want to know. However, when a company speaks on a subject, it must not create a misleading impression by withholding material information. The court found that Canada Goose had disclosed that consumers were buying parkas earlier and had warned that direct-to-consumer growth would slow during the remainder of the fiscal year. The complaint did not plausibly allege that the defendants possessed and withheld more detailed information that made those disclosures misleading.

The court also rejected the claim concerning inventory and future demand. It found that the challenged statements were not merely vague corporate optimism and were not protected forward-looking statements to the extent they described then-current inventory and demand. Even so, the plaintiff did not plausibly allege that the statements were false when made. The court found that statements about building demand ahead of supply could have been true when made, followed by a later decision to change the company’s approach. It also found that the explanations that inventory supported new stores and that inventory was being built for fiscal year 2020 were not necessarily inconsistent.

The plaintiff did not specifically allege that Canada Goose’s reported financial figures were inaccurate. Instead, it argued that the defendants’ statements created a misleading impression about demand and future growth. The court concluded that the amended complaint did not adequately plead a material misstatement or omission, which independently warranted dismissal of the Section 10(b) and Rule 10b-5 claim.

Scienter

The court separately held that the plaintiff failed to plead scienter, meaning the required intent to deceive, manipulate, or defraud, or sufficiently reckless conduct. The executives’ senior positions and the company’s general interest in maintaining growth and stock value were insufficient. The November 2018 stock sales provided only limited support because of their timing, the percentage of Reiss’s holdings sold, the public-offering context, and the fact that the Bain defendants retained a majority stake.

The court also found that the three-month gap between statements about building demand ahead of supply and the later statement about building inventory ahead of demand did not establish fraudulent intent. The complaint lacked specific facts showing that the defendants possessed contradictory information when they made the challenged statements. The court therefore found no strong inference of scienter.

Section 20(a)

Section 20(a) provides a claim against a person who controls someone liable for a securities-law violation. Because the plaintiff had not adequately pleaded a primary Section 10(b) violation, the court held that there was no underlying violation to support the Section 20(a) claim. The court granted the motion to dismiss that claim against the individual and Bain defendants.

Disposition

The court granted the defendants’ motion to dismiss the amended complaint. It directed the clerk’s office to terminate the motion at Document 60 and close the case. The opinion does not state that the dismissal was with or without prejudice.