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Employees' Retirement System of State of Hawaii v. Whole Foods Market, Inc.

United States Court of Appeals, Fifth Circuit

October 3, 2018


          Appeal from the United States District Court for the Western District of Texas

          Before KING, ELROD, and HAYNES, Circuit Judges.

          KING, Circuit Judge

         Whole Foods Market, Inc.-an international grocery-store chain specializing in organic products-recently ran into trouble with several state and local consumer-protection agencies for weights-and-measures violations. On multiple occasions, Whole Foods admitted to mislabeling prepackaged foods such that it charged consumers for more food than the packages actually contained, in violation of national standards and local laws.

         Whole Foods subsequently faced lawsuits from or on behalf of consumers who overpaid. This is not such a case. Rather, the plaintiffs in this putative class-action lawsuit allege that in perpetuating this weights-and-measures fraud against customers, Whole Foods and several of its executives also defrauded Whole Foods shareholders in violation of federal securities law. The district court disagreed and dismissed the plaintiffs' complaint for failure to state a claim. For the reasons explained below, we AFFIRM.


         We draw the following facts from the plaintiffs' second-amended complaint, documents attached to the complaint, and matters on which we may take judicial notice. See Funk v. Stryker Corp., 631 F.3d 777, 783 (5th Cir. 2011).


         The plaintiffs' allegations stem from a weights-and-measures scandal that began to brew as early as 2013 and boiled over in the summer of 2015. Principally, regulators in California and New York caught Whole Foods including the weight of packaging-"tare weight," in the industry parlance- in the price of many of its prepackaged products. As a result, Whole Foods effectively charged consumers more than the advertised price per pound for the affected products. This practice violates national weights-and-measures standards and various state and local laws that incorporate those standards.

         The plaintiffs allege that the defendants knew about Whole Foods' weights-and-measures problems as early as February 2013, when it entered a tolling agreement with authorities in California who were investigating the issue. On June 11, 2014, this investigation culminated in a lawsuit the State of California and three California cities brought against Whole Foods in state court. Whole Foods settled that lawsuit within a week. As part of the settlement, Whole Foods agreed to refrain from further violations at its California stores and to implement procedures to ensure pricing accuracy. It also agreed to pay about $800, 000 in fines, fees, and restitution. The state court issued an injunction that incorporated the terms of the settlement and retained jurisdiction over the case to oversee Whole Foods' compliance.[1] Shortly thereafter, Whole Foods wrote an open letter to its customers in which it acknowledged unintentionally violating weights-and-measures standards and promised to improve its practices.

         But the California settlement hardly marked the end of Whole Foods' woes. Regulators in Albany, New York fined Whole Foods for weights-and-measures violations in August 2014 and again in January 2015. Then, on June 24, 2015, the New York City Department of Consumer Affairs ("DCA") released a scathing report on Whole Foods' weights-and-measures practices. In a press release, the DCA said it uncovered violations at each of Whole Foods' stores in New York City. In fact, it reported that 89 percent of the products it tested failed to meet federal weights-and-measures standards, causing Whole Foods to overcharge customers between $0.80 and $14.84 per affected product. DCA inspectors characterized their findings as "the worst case of mislabeling they [had] seen in their careers."

         Although Whole Foods officials initially denied the DCA's allegations, they soon pivoted to strike a conciliatory tone. On June 29, 2015, Whole Foods' co-CEOs John Mackey and Walter Robb-both defendants in this lawsuit- posted a video to Whole Foods' website admitting that the company had "made some mistakes" with regards to pricing in its New York City stores. Whole Foods simultaneously posted a statement on its website detailing policy changes it intended to implement to guard against future violations.

         The DCA report and Whole Foods' subsequent apology received national media attention in the weeks that followed. The New York Times published an article highlighting the DCA's allegations the day they were released. USA Today and Forbes later published articles discussing Whole Foods' acceptance of responsibility. At least one market analyst weighed in with a report that discussed Whole Foods' "surprising apology for inaccurate pricing."

         The plaintiffs allege that consumers took notice. Whole Foods' third-quarter financial data, which it released on July 29, showed that Whole Foods missed its sales targets for the quarter and demonstrated a marked slowdown in sales growth in the two weeks between the DCA's report and the end of the quarter. On a conference call with investors that evening, Robb and Whole Foods CFO Glenda Jane Flanagan-another defendant in this lawsuit- attributed the decline to the DCA findings and the negative press that it attracted. Market analysts concurred in this assessment. Whole Foods' common-stock price fell about ten percent the next day on high-volume trading.


         The putative class plaintiffs purchased Whole Foods common stock between July 31, 2013, and July 29, 2015. The plaintiffs say that during this period, Whole Foods made various fraudulent statements that artificially inflated the price of its stock. Then, the plaintiffs allege, when the extent of Whole Foods' weights-and-measures issues came to light, Whole Foods stock declined to reflect its true value, harming those investors that purchased the stock at artificially inflated prices.

         The plaintiffs allege three general categories of statements that Whole Foods made, which (they say) the weights-and-measures scandal eventually revealed to be false. First, they challenge the defendants' frequent assertions that Whole Foods provides competitive pricing to its customers or is working to improve its pricing:

• On July 31, 2013, defendant Kenneth Meyer-a Whole Foods executive vice president-told investors on a conference call, "We don't have to be ashamed compared to any other competitor for the exact same items we have great prices."
• On November 6, 2013, Mackey told investors on a conference call, "We have narrowed the price gap versus our competitors on known value items to its narrowest margin yet . . . ."
• On February 12, 2014, Robb told investors on a conference call, "Our internal pricing surveys showed improvements from Q4 to Q1, in a competitive price positioning across virtually all competitors in all areas . . . ."
• On February 21, 2014, Whole Foods stated in a Form 10-Q it filed with the SEC that it was "improving [its] relative price positioning[] [and] expanding its value offerings across the store."
• On May 6, 2014, Robb told investors on a conference call that Whole Foods was "continuing to make . . . investments strategically in price." On that same call, defendant A.C. Gallo, Whole Foods' president and COO, said Whole Foods was "really focused on being really competitive with [its] prices."
• On July 30, 2014, Robb told investors on a conference call, "[W]e believe our value efforts continue to be a key element in driving sales growth over the long-term," and "[o]ur focus going forward is primarily in perishables, where we see opportunities to narrow price gaps on select known value items."
• On November 5, 2014, Mackey told investors on a conference call, "We remain committed to the highest quality standards and to expanding our value offering." On that same call, defendant David Lannon-a Whole Foods executive vice president-said Whole Foods' internal testing showed it was "matching toe-to-toe with all of [its] competitors."
• On February 11, 2015, Robb told investors on a conference call, "We continue to see unit lift from the lower produce pricing we are testing in several markets . . . . [W]e believe more competitive produce pricing will ...

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