Okla. Law Enforcement Ret. Sys. ex rel. Situated v. Papa John's Int'l, Inc.

444 F.Supp.3d 550

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, S.D. New York.

Signed March 16, 2020

Joseph Alexander Hood, II, Jeremy Alan Lieberman, Pomerantz LLP, New York, NY, for Plaintiff

William Michael Regan, Allison Michele Wuertz, Matthew Alan Ducharme, Hogan Lovells US LLP (NYC), Amit Sondhi, Steven Glen Mintz, Terence William McCormick, Timothy Joseph Quill, Jr., Mintz and Gold LLP, New York, NY, for Defendants.

OPINION & ORDER

KIMBA M. WOOD, United States District Judge:

Lead Plaintiff Oklahoma Law Enforcement Retirement System ("Plaintiff") brings this putative securities 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 falsely and misleadingly touted the Company's culture while enabling and perpetrating workplace sexual harassment. In so doing, according to the Amended Complaint ("AC"), 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").

Defendants move to dismiss this action for failure to state a claim upon which relief can be granted, under Federal Rule of Civil Procedure 12(b)(6). For the reasons set forth below, Defendants' motions are GRANTED.

I. BACKGROUND¹

A. The Parties

Papa John's operates and franchises pizza delivery and carryout restaurants throughout the United States and abroad. (AC ¶ 2.) Schnatter founded the Company in 1984. (AC ¶ 31.) Today, it is the third largest pizza delivery and carryout restaurant chain in the country. (AC ¶ 2.)

Schnatter's name and likeness were central to the Papa John's brand. Schnatter frequently appeared in the Company's advertisements and his image was featured on the Company's pizza boxes. (Id. ) From February 25, 2014 through August 7, 2018 (the "Class Period"), he held a range of formal roles. Until December 31, 2017, he was the Company's Chief Executive Officer. (Id. ) Until July 11, 2018, he was also the Chairman of the Board. (Id. ) Briefly, from May 15, 2014 through July 30, 2015, he served as the Company's President. (Id. ) Schnatter remains the Company's largest shareholder, owning approximately 26% of its stock. (Id. )

Ritchie began working for Papa John's as a customer service representative in 1996 and steadily climbed the corporate ladder. (AC ¶ 40.) He was the Company's Senior Vice President from May 2013 through May 1, 2014. (AC ¶ 24.) Then, from May 15, 2014 through December 31, 2017, he was the Chief Operating Officer. (Id. ) He took over Schnatter's role as President on July 30, 2015 and Schnatter's role as CEO on January 1, 2018. (Id. ) He remained in those positions through the end of the Class Period. (Id. )

Lead Plaintiff Oklahoma Law Enforcement Retirement Systems purchased Papa John's stock during the Class Period. (AC ¶ 21.) Specifically, between August 16, 2016 and June 26, 2018, Plaintiff bought 8,454 shares of the Company's common stock. (Id. )

B. Public Statements and Disclosures During the Class Period

Plaintiff claims that Defendants made material and misleading representations, which can be sorted as follows:

1. Statements Contained in the Papa John's Code of Ethics and Business Conduct (the "Code")

The Code 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." (AC ¶ 70.) It pledged compliance with labor and employment laws and referenced guiding principles of honesty, fairness, respect, and trustworthiness. (AC ¶¶ 71, 73.)

2. Statements Contained in Financial Disclosures, Press Releases, and Earnings Conference Calls

On February 25, 2014, the first day of the class period, Papa John's filed an annual report on Form 10-K with the SEC (the "2013 10-K"). In that filing, the Company reported that it "consider[s] [its] team member relations to be good." (AC ¶ 75.) The 2013 Form 10-K further stated that the Company was "committed to the development and motivation of our team members through training programs, incentive and recognition programs and opportunities for advancement." (AC ¶ 77.) The 2013 Form 10-K also contained risk disclosures related to the Company's public image. For example, it warned that the "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. Schnatter were negatively impacted." (AC ¶ 81.) The Company made these same representations in its 2014, 2015, 2016, and 2017 10-Ks. (AC ¶ 83.)

Defendants periodically conducted earnings conference calls with analysts and investors and issued press releases in connection with these financial disclosures. For instance, on a call to discuss financial results for the first quarter of 2015, Schnatter stated, "I would be remiss if I didn't mention our culture. We just got rated as one of the best places to work in Kentucky, that's a couple years in a row, and I think that permeates throughout the rest of the organization." (AC ¶ 94.) In a press release issued August 2, 2016, Schnatter again emphasized employee morale, stating that "it all comes down to better ingredients – and our most important ingredient is our people. We take care of our people...." (AC ¶ 98.) On a February 22, 2017 conference call, Schnatter told investors that "[t]he fundamentals of the Company have never been better. Our food, our pizza scores, our service, our culture is at an all-time high." (AC ¶ 103.)

C. Defendants' Actions That Allegedly Rendered its Representations Misleading

1. Schnatter's NFL Comment

On November 1, 2017, on an earnings conference call with investors and analysts, Schnatter made a remark that was widely perceived as racist. (AC ¶ 58-59.) Papa John's had partnered with the National Football League (NFL) as its official pizza sponsor. On the call, Schnatter criticized NFL commissioner Roger Goodell for failing to "nip[ ] in the bud" activism among NFL players who knelt during the national anthem to protest police brutality and racism. (AC ¶ 58.) According to Schnatter, Goodell's handling of the "debacle" demonstrated "poor leadership." (Id. ). Reports of these comments prompted customers to call for a boycott of the Company. (AC ¶ 59.)

The following month, on December 18, 2017, Papa John's announced in a press release that Schnatter was resigning from his position as the Company's CEO and that Ritchie was replacing him. (AC ¶ 105.) The press release emphasized that "the company's primary focus will be on its team members." (Id. ) It quoted Ritchie, who stated, "By focusing on our team members, we will deliver the world class experiences our customers deserve." (Id. )

A year later, on February 27, 2018, Ritchie addressed the Company's ongoing sales slump. (AC ¶ 113.) He stated in a press release, "[a]ctions are underway to improve our brand proposition, how we connect with customers, and how we operate at the unit level." (Id. ) On an earnings conference call that same day, Ritchie stressed that "the strength of our culture will determine to the success of our strategy. To be clear, it is not business as usual, at Papa John's." (Id. )

2. Schnatter's Use of a Racial Slur

At some unknown or unspecified point in May 2018, Schnatter used the "N-word" during a sensitivity training conference call. (AC ¶ 119.) According to a Forbes article published on July 11, 2018, the call included Papa John's executives and the marketing agency Laundry Service. (Id. ) It involved a role-playing exercise for Schnatter, aimed at preventing public relations problems like those that surrounded the NFL comment. (Id. ) Asked how he would distance himself from racist groups online, Schnatter responded that "Colonel Sanders called blacks [the N-word]" and never faced public backlash. (Id. ) Schnatter also brought up his childhood in Indiana, where, he said, people used to drag Black people from trucks until they died. (Id. ) Schnatter apparently intended his comments to convey his antipathy to racism, but to many on the call they had the opposite effect. (Id. ) Schnatter confirmed the report. "News reports attributing the use of inappropriate and hurtful language to me during a media training session regarding race are true," he stated. (Id. ) On the day that Forbes published the story, the price of Papa John's stock fell 5.1 percent and Schnatter resigned as Chairman of the Board. (AC ¶¶ 121-22.)

A few days after the story's publication, on July 15, 2018, Papa John's named a special committee of the Board of Directors to assess "all of the Company's relationships and arrangements" with Schnatter. (AC ¶¶ 123.) The Company also announced that it had terminated "Schnatter's Founder Agreement, which defined his role in the Company, among other things, as advertising and brand spokesperson for the Company." (Id. )

3. Sexual Harassment and Misconduct at Papa John's

On July 19, 2018, eight days after it reported Schnatter's use of the "N-word," Forbes published a second article. (AC ¶ 126.) This article, based on interviews with 37 then-current and former Papa John's employees, described disturbing instances of workplace sexual harassment and misconduct, perpetrated by and with the tacit permission of senior executives, including Schnatter and Ritchie. (Id. )

Schnatter's behavior, the article alleged, "range[d] from spying on his workers to sexually inappropriate conduct, which has resulted in at least two confidential settlements." (Id. ) One former executive explained to Forbes that "the married Schnatter would disappear for days on work trips, stirring...