In re AppHarvest Sec. Litig.

684 F.Supp.3d 201

IN RE APPHARVEST SECURITIES LITIGATION

21-cv-7985 (LJL)

United States District Court, S.D. New York

Signed July 31, 2023

OPINION AND ORDER

LEWIS J. LIMAN, United States District Judge:

Defendants AppHarvest, Inc. ("AppHarvest" or the "Company"), Jonathan Webb, Loren Eggleton, and David Lee ("Defendants") move to dismiss the second consolidated amended complaint ("Operative Complaint") in this action pursuant to Federal Rule of Civil Procedure 12(b)(6). Dkt. No. 79. Lead plaintiff Alan Narzissenfeld ("Plaintiff") moves, pursuant to Federal Rule of Civil Procedure 12(f), to strike certain exhibits attached to Defendants' motion to dismiss. Dkt. No. 86.

For the following reasons, the motion to strike is denied and the motion to dismiss is granted in part and denied in part.

BACKGROUND

The Court accepts as true for purposes of this motion the well-pled allegations of the Operative Complaint as supplemented by the documents incorporated by reference.

I. Parties and Company Background

AppHarvest was founded on January 19, 2018. Dkt. No. 76 ¶¶ 28, 41. It is a domestic producer of fruits and vegetables and, as opposed to traditional outdoor agriculture, grows all of its crops indoors utilizing Controlled Environment Agriculture ("CEA") technology. Id. ¶ 41. AppHarvest began planting its first crops in November 2020. Id. ¶ 35. AppHarvest's only operating CEA facility from February 1, 2021 to August 10, 2021 (the "Class Period") was the Morehead Facility in Morehead, Kentucky. Id. ¶¶ 1, 3. The greenhouse at the Morehead Facility contained nearly 2.8 million square feet of growing space over approximately sixty-three acres. During the Class Period, the Morehead Facility produced two varieties of tomatoes: Beefsteak and Tomatoes on the Vine. Id. ¶ 52.

Because agriculture is highly labor-intensive, AppHarvest required a labor force that was properly staffed and trained. Id. ¶ 70. At the beginning of 2020, before operations began, AppHarvest only employed twenty people, although its goal was to staff the Morehead Facility with up to 500 living wage jobs. Id. ¶ 71. Defendants made frequent statements regarding the progress of the Company's hiring efforts to assuage investors concerning hiring. For example, Webb stated during an interview on April 9, 2021, "Here at AppHarvest, we have about 550 employees . . . ." Id. ¶¶ 73-74.

Starting on February 1, 2021, AppHarvest's common stock and warrants traded on the NASDAQ under the ticker symbols $APPH and $APPHW, respectively. Id. ¶ 46.

Defendant Webb founded AppHarvest, has served as its Chief Executive Officer and as a member of the Board of Directors since its inception, and served as its President from January 2018 to January 2021. Id. ¶ 29. Defendant Eggleton has served as AppHarvest's Chief Financial Officer since November 2020, id. ¶ 30, and defendant Lee (together with Eggleton and Webb, the "Individual Defendants") has served as its President since January 2021 and on the Board of Directors since August 2020, id. ¶ 46. Plaintiff purchased AppHarvest securities during the Class Period. Id. ¶ 27.

II. Mastronardi Agreement

Mastronardi Produce Limited ("Mastronardi") is the largest producer and distributor of greenhouse-grown produce in North America. Id. ¶ 34. In March 2019, AppHarvest and Mastronardi entered into a ten-year agreement ("Mastronardi Agreement") pursuant to which Mastronardi would become AppHarvest's sole, exclusive marketing and distribution partner for all tomatoes, peppers, cucumbers, berries, and leafy greens produced at the Morehead Facility. Id. ¶¶ 34, 57. AppHarvest's internal quality ranking system for tomatoes from the Morehead Facility consisted of three grades: USDA Grade No. 1, USDA Grade No. 2, and "Bad." Id. ¶ 62. Under the Mastronardi Agreement, Mastronardi was obligated to purchase all AppHarvest's products that are at or above USDA Grade No. 1 standards, which applies to products with characteristics that include being free from damage, decay, and sunscald; Mastronardi was not obligated to purchase any crops that fell below those standards. Id. ¶¶ 61, 64. "Bad" tomatoes were thrown away, while Grade No. 2 tomatoes were edible but had an obvious deformity that made them unfit for public display. Id. ¶ 62. Defendant Eggleton admitted at the end of the 2021 Q2 Earnings Call that "we get very little to no value in our #2 tomatoes." Id. ¶ 68.

A confidential witness ("CW6"), who was a former AppHarvest employee in the Financial Planning and Analysis ("FP&A") Department from the third quarter of 2020 to the fourth quarter of 2021 and reported to Eggleton, stated that AppHarvest exchanged information with Mastronardi concerning plans and forecasts during AppHarvest's first growing season. Id. ¶¶ 40, 60. CW6 stated that Mastronardi administered a database, which suppliers like AppHarvest could log-into and provide a daily and weekly forecast of what would be available to be picked-up at the greenhouse so that Mastronardi could plan its logistics. Id. ¶ 60 CW6 understood that AppHarvest's forecasts were based on possibly daily—but definitely weekly—estimates of labor productivity to determine the volumes of Beefsteak and Tomatoes on the Vine that would be harvested. Id.

III. Issues at AppHarvest

Between the first harvest in January 2021 through the end of the Class Period, AppHarvest suffered various productivity challenges.

A. Waste, Damage, and Poor Quality

According to a confidential witness ("CW1"), a former Crop Care Specialist at the Morehead Facility who was employed from October 2020 through July 2021, AppHarvest workers damaged a "shocking amount" of tomatoes in the Morehead Facility. Id. ¶¶ 35, 78. Throughout CW1's tenure at AppHarvest, CW1 estimated that, on a consistent basis, anywhere from 5% to 10% of the tomatoes on a given vine ended up being damaged by workers. Id. ¶ 78. Another confidential witness ("CW5"), who worked in the Morehead Facility's Maintenance Department from June 2020 to March 2022, estimated that up to 50% of AppHarvest's crop was wasted in the first growing season (October 2020 through August 2021) due to disease, insects, and damage caused by employees. Id. ¶¶ 39, 78

Crops were destroyed in various ways: If AppHarvest's greenhouse teams could not keep up with the pace of the harvest, overripe tomatoes would fall to the ground, which made them no longer saleable. Id. ¶¶ 79-80, 83. In addition, confidential witnesses recounted that greenhouse employees often pulled too hard on the plants, damaging or dropping tomatoes. Id. ¶¶ 79, 82.

Another confidential witness ("CW2"), a former AppHarvest Quality Control Specialist at the Morehead Facility from January 2021 through March 2021, stated that the tomatoes that reached the packhouse from the greenhouse "constantly" had holes, cuts, scars, spots, were leaking fluid or flesh, or had other imperfections. Id. ¶ 81. CW2 stated that, even for those tomatoes that were not immediately damaged or discarded in the greenhouse, half of the tomatoes inspected at the packhouse were not USDA Grade No. 1, but instead Grade No. 2 or "Bad." Id.

One confidential witness ("CW4"), a former Group Lead of Crop Care Specialists who worked at AppHarvest from October 2020 to September 2021, took the below photos of the waste at the Morehead Facility in approximately May or June of 2021, which the witness stated was representative of how the entire greenhouse looked through the duration of the harvesting season, except for when news media or investors visited and it was deemed necessary to "hide the waste." Id. ¶ 83.

Image materials not available for display.

Id. CW5 was tasked with preparing and cleaning greenhouse debris before investor and visitor tours and stated that such requests for cleanup were initiated by Webb's team, if not Webb himself. Id. ¶ 84.

Starting in May 2021, CW4 stated that quality inspectors at the greenhouse carried an electronic tablet and inputted their findings based on inspecting boxes of tomatoes into a live Excel spreadsheet so that AppHarvest could "map" quality performance within the greenhouse. Id. ¶ 85.

CW6 stated that AppHarvest targeted "global standards" for labor productivity, which included measuring the percentages of tomatoes that were USDA Grade No. 1 versus Grade No. 2. Id. ¶ 84. CW6 believed that the "global standards" were about 84% of USDA Grade No. 1 for Tomatoes on the Vine and 86% for Beefsteak tomatoes. Id. CW6 stated that "we" "knew [we] were a long way off" from achieving the standards and, during AppHarvest's "toughest times" of the first growing season, the Company was approximately 50% off the "global standard" for quality. Id.

B. Failure to Train Employees Properly

CW1 attributed the waste, in large part, to AppHarvest's failure to train its employees adequately. Id. ¶ 89. CW1 said orientation only entailed watching a movie lasting a maximum of fifteen minutes dedicated to the greenhouse; the rest of the movie was about AppHarvest as a company, such as its positions on climate change. Id. CW1 stated that the orientation did not actually teach employee how to do their job. Id. CW1 also stated that, after this orientation video, Crop Care Specialists were required to watch very brief video training materials that lasted approximately fifteen minutes per task on each task that a Crop Care Specialist could perform. Id. ¶ 90. CW4 confirmed that inadequate training "absolutely" caused operational issues during the first growing and harvesting seasons and that, prior to June/July 2021, Group Leads and Crop Care Specialists were expected to figure out their assigned tasks simply by "doing it." Id. ¶ 91. CW4 believed that this inadequate training impacted quality throughout the first harvest season. Id. ¶ 92.

CW2 said training in the packhouse was essentially "trial by fire." Id. ¶ 93. While the orientation presentation lasted about six to seven hours, only about twenty-five or thirty minutes were spent on quality. Id. Furthermore,...