Okla. Law Enf't Ret. Sys. v. Papa John's Int'l, Inc.

OKLAHOMA LAW ENFORCEMENT RETIREMENT SYSTEM,individually and on behalf of all others similarly situated, Plaintiffs, v. PAPA JOHN'S INTERNATIONAL, INC.,JOHN H. SCHNATTER, and STEVE M. RITCHIE, Defendants.

18-CV-7927 (KMW)

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

February 3, 2021

OPINION & ORDER

KIMBA M. WOOD, United States District Judge:

Lead Plaintiff Oklahoma Law Enforcement Retirement System ("Plaintiff") brings this putative class action against Papa John's International, Inc. ("Papa John's" or the "Company") and two of its former executives, John Schnatter and Steve Ritchie (collectively, "Defendants"). Plaintiff alleges that Defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. §§ 78j(b), 78t(a), and the corresponding rule of the United States Securities and Exchange Commission ("SEC"), 17 C.F.R. § 240.10b-5 ("Rule 10b-5").

The First Amended Complaint ("FAC", ECF No. 54) alleged that Defendants made false and misleading statements about Papa John's culture and failed to disclose material information about its toxic workplace culture. The Court granted Defendants' motions to dismiss the FAC because the allegedly false and misleading statements upon which Plaintiff relied were inactionable "puffery," and because Plaintiff's allegations about Papa John's toxic workplace culture were far too speculative to meet Rule 12(b)(6), Rule 9(b), and the PSLRA's pleading standards. See Oklahoma Law Enf't Ret. Sys. v. Papa John's Int'l, Inc., 444 F. Supp. 3d 550 (S.D.N.Y. 2020) ("Papa John's I").

Plaintiff filed a Second Amended Complaint ("SAC", ECF No. 81) that relies on, essentially, the same set of facts that Plaintiff pled in the FAC. For the reasons set forth below, the Court GRANTS Defendants' motions to dismiss the SAC.

BACKGROUND¹

Given that most of the facts in the SAC are contained in the FAC and have been set forth in Papa John's I, the Court will summarize them only briefly.

I. The Parties

Defendant Papa John's is a Delaware corporation with its principal place of business in Kentucky. (SAC ¶ 27.) Papa John's operates and franchises pizza delivery and carryout restaurants throughout the United States and internationally. (SAC ¶ 2.)

Schnatter founded Papa John's in 1984 and remains one of Papa John's largest shareholders. (SAC ¶¶ 2, 28.) Schnatter's name and likeness were central to the Papa John's brand; he frequently appeared in the Company's advertisements, and his image was featured on the Company's pizza boxes. (SAC ¶ 36.) From February 25, 2014 through August 7, 2018 (the "Class Period"), he held a range of executive positions. He was Papa John's Chief Executive Officer from April 3, 2009 through December 31, 2017, Chairman of the Board from May 10, 2007 through July 11, 2018, and President from May 15, 2014 through July 30, 2015. (SAC ¶¶ 1, 28.)

Ritchie began working for Papa John's as a customer service representative in 1996 and steadily climbed the corporate ladder. (SAC ¶ 45.) He became the Senior Vice President from May 2013 through May 1, 2014. (SAC ¶ 29.) Then, from May 15, 2014 through December 31, 2017, he was the Chief Operating Officer. (SAC ¶ 29.) He took over Schnatter's role as President on July 30, 2015 and Schnatter's role as CEO on January 1, 2018. (SAC ¶ 29.) He remained in those positions through the end of the Class Period. (SAC ¶ 29.)

Lead Plaintiff Oklahoma Law Enforcement Retirement Systems purchased Papa John's common stock during the Class Period. (SAC ¶ 26.)

II. Key Events

During the Class Period, Defendants faced a range of negative publicity.

On a November 1, 2017 earnings call with investors and market analysts, Schnatter criticized the National Football League's ("NFL") handling of NFL players kneeling during the National Anthem to protest police brutality and racism. (SAC ¶ 68.) Schnatter commented that the controversy "should have been nipped in the bud 1.5 years ago." (SAC ¶ 68.) Schnatter's comments were prompted by the NFL's failure to resolve the controversy, which led to a decreased viewership and decreased sales for Papa John's, the official pizza sponsor of the NFL. (SAC ¶ 69.) Journalists and the media viewed Schnatter's comments as racist. (SAC ¶ 69.) As a result, Papa John's faced public backlash, including from customers who vowed to boycott the Company. (SAC ¶ 69.) Papa John's issued a press release announcing Schnatter's resignation as CEO and Ritchie's appointment on December 18, 2017. (SAC ¶ 113.) The press release stated that under Ritchie's leadership, "the company's primary focus will be on its team members." (SAC ¶ 113.)

On July 11, 2018, Forbes reported that during a May 2018 diversity sensitivity conference call arranged between Papa John's executives and marketing agency Laundry Service, Schnatter used the "N-word" and made inappropriate and hurtful remarks regarding race. (SAC ¶ 140.) When asked during a role-playing exercise how he would distance himself from racist groups online, Schnatter attempted to downplay the significance of his NFL comment by responding that "Colonel Sanders called blacks [the N-word]" and never faced public backlash. (SAC ¶ 140.) Schnatter also brought up his childhood in Indiana, where, he said, people used to drag African Americans from trucks until they died. (SAC ¶ 140.) Although Schnatter apparently intended his comments to convey his antipathy to racism, many individuals on the call found his remarks to be offensive. (SAC ¶ 140.) Schnatter resigned as Chairman of the Board the day that Forbes published the article. (SAC ¶ 148.) On July 15, 2018, Papa John's announced that it was cutting ties with Schnatter by, among other things, terminating his role as advertising and brand spokesperson, and creating a special committee of the Board to assess "all of the Company's relationships and arrangements" with Schnatter. (SAC ¶ 144.)

On July 19, 2018, Forbes published a separate article in which 37 unnamed, former employees described disturbing instances of workplace sexual harassment and misconduct in which senior executives of the company engaged. (SAC ¶ 147.) These instances include Schnatter's sexual misconduct toward women and at least two resulting settlements; Schnatter asking a female employee "about her bra size and whether she'd slept with her previous boss," and "never let[ting] her pass in a hall without giving her a hug"; Schnatter telling a senior executive that he "had a cute wife, if she'd lose some weight"; female employees being "mocked and asked if they were menstruating"; Dustin Couts, a longtime operations leader, discussing pornography with a female employee, showing inappropriate images to other colleagues, andasking a coworker if she was on her period after she disagreed with him; male executives making references to "gangbangs" and whether women wanted "to jump on the train"; and Ritchie being present during many of these occasions and laughing along. (SAC ¶ 147.) In sum, Schnatter, Ritchie, and other Papa John's senior employees enabled and participated in a toxic, "bro" culture. (SAC ¶¶ 17, 147.)

After Forbes published the July 19 article, Papa John's stock price fell 4.9 percent, from a closing price of $53.10 per share on July 18, 2018, to close at $50.52 per share on July 19, 2018. (SAC ¶¶ 149, 206.) The stock price dropped further when Papa John's announced that its Board had voted to adopt a "poison pill" to prevent Schnatter from gaining a controlling interest in the Company on July 23: the stock price fell 9.7 percent, from a close of $51.59 per share on Friday, July 20, 2018, to close at $46.56 per share on Monday, July 23, 2018. (SAC ¶¶ 207-08). Another drop occurred when Papa John's released its financial results for the second quarter of 2018 on August 7: the stock price fell from a close of $41.07 per share on August 7, 2018 to close at $38.94 per share on August 8, 2018. (SAC ¶ 209-10.)

III. The First Amended Complaint and the Court's Opinion in Papa John's I

On February 19, 2019, Plaintiff filed the FAC alleging that, during the Class Period, Defendants made material misrepresentations and omissions in its Code of Ethics and Business Conduct (the "Code"), and also in positive assertions made in SEC filings, press releases, and earnings conference calls. Accordingly, Plaintiff claimed that Defendants violated Sections 10(b) and 20(a) of the Exchange Act, and Rule 10b-5. (FAC ¶¶ 191-97.)

The Code, for example, assured employees that they had the "the right to expect Papa John's to conduct its business lawfully, responsibly and with the highest moral and ethical standards"; that "[t]eam members in leadership roles bear the additional responsibility offostering a culture in which compliance with policies, procedures, laws and regulations is a critical business activity"; and that "[w]e must govern our conduct and ourselves by the principles of honesty, fairness, mutual respect, trustworthiness, courage and personal and professional commitment." (FAC ¶¶ 69-73.) In Papa John's I, the Court held that these statements were not material because they constitute "quintessential puffery." 444 F. Supp. 3d at 560-61.

In SEC filings, press releases, and earnings conference calls, Defendants often touted its culture: "We are committed to the development and motivation of our team members through programs, incentive and recognition programs and opportunities for advancement" (FAC ¶ 77); "We believe our continuous commitment to enhance culture and quality will further differentiate our premium brand from the rest of the industry" (FAC ¶ 102); "An inspired culture will always be our most competitive differentiation" (FAC ¶ 107); "[T]he strength of our culture will determine the success of our strategy; To be clear, it is not business as usual, at Papa John's" (FAC ¶ 115); and "[o]ur business and brand may be harmed if Mr. Schnatter's services were not available to the Company for any reason or the reputation of Mr....