Curran v. Freshpet, Inc. et al

BRIEF in Support

D.N.J.May 26, 2017

IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY GARY CURRAN, Individually and on Behalf of All Others Similarly Situated, Plaintiff, v. FRESHPET, INC., RICHARD THOMPSON, RICHARD KASSAR, SCOTT MORRIS and CHARLES A. NORRIS, Defendants. : : : : : : : : : : : : : : : No. 2:16-cv-2263(MCA)(LDW) Motion Day: September 5, 2017 Oral Argument Requested MEMORANDUM OF LAW IN SUPPORT OF DEFENDANTS’ MOTION TO DISMISS AMENDED COMPLAINT Robert L. Hickok Angelo A. Stio III PEPPER HAMILTON LLP (A Pennsylvania Limited Liability Partnership) 301 Carnegie Center Suite 400 Princeton, NJ 08543 (609) 951-4125 -and- Jay A. Dubow (admitted pro hac vice) Gay Parks Rainville (admitted pro hac vice) PEPPER HAMILTON LLP 3000 Two Logan Square Eighteenth & Arch Streets Philadelphia, PA 19103 (215) 981-4000 Attorneys for Defendants Freshpet, Inc., Richard Thompson, Dated: May 26, 2017 Richard Kassar, Scott Morris and Charles Norris Case 2:16-cv-02263-MCA-LDW Document 30 Filed 05/26/17 Page 1 of 36 PageID: 375 -i- TABLE OF CONTENTS Page I. PRELIMINARY STATEMENT ........................................................................................ 1 II. FACTUAL BACKGROUND ............................................................................................. 4 A. General Overview Of Freshpet’s Business ............................................................. 4 B. Freshpet’s Periodic Reporting Of Financial Results ............................................... 5 1. March 31, 2015 Earnings Release .............................................................. 5 2. May 7, 2015 and August 11, 2015 Earnings Releases ................................ 6 3. November 11, 2015 Earnings Release ........................................................ 6 4. March 9, 2016 Earnings Release ................................................................ 8 C. Freshpet’s Secondary Offering ............................................................................... 8 III. ARGUMENT FOR DISMISSAL OF EXCHANGE ACT CLAIMS ................................. 9 A. Applicable Pleading Standards ............................................................................. 10 B. All Of The Statements Plaintiff Has Challenged Are “Forward-Looking” And Protected Under The PSLRA Safe Harbor ................................................... 11 1. Courts Must Dismiss Claims Based On Forward-Looking Statements That Meet The Safe Harbor Criteria....................................... 11 2. Because Defendants’ Statements Qualify For Safe Harbor Immunity, Plaintiff’s Claims Must Be Dismissed .................................... 13 (a) The Statements At Issue Are All Forward-Looking ..................... 13 (b) Defendants’ Forward-Looking Statements Were Accompanied By Meaningful Cautionary Language ................... 14 (c) Plaintiff Has Failed To Plead A Strong Inference That Defendants Acted With Actual Knowledge .................................. 18 C. The Amended Complaint Fails To Meet The PSLRA’s Heightened Pleading Requirements For Alleging A Strong Inference Of Scienter ................. 18 1. Plaintiff Has Failed To Plead A Strong Inference That Defendants Acted With The Requisite Actual Knowledge.......................................... 19 Case 2:16-cv-02263-MCA-LDW Document 30 Filed 05/26/17 Page 2 of 36 PageID: 376 -ii- 2. Stock Sales By Messrs. Kassar, Morris And Thompson Do Not Support An Inference Of Scienter............................................................. 21 D. The Amended Complaint Fails To Plead Loss Causation .................................... 25 E. Plaintiff’s Derivative Section 20(a) Claim Should Be Dismissed ........................ 26 IV. ARGUMENT FOR DISMISSAL OF SECURITIES ACT CLAIMS .............................. 27 A. Plaintiff’s Section 11 And Section 12(a)(2) Claims Must Be Dismissed ............. 27 B. Plaintiff’s Derivative Section 15 Claim Should Be Dismissed ............................ 29 V. CONCLUSION ................................................................................................................. 30 Case 2:16-cv-02263-MCA-LDW Document 30 Filed 05/26/17 Page 3 of 36 PageID: 377 -iii- TABLE OF AUTHORITIES Page(s) CASES In re Adams Golf, Inc. Securities Litigation, 381 F.3d 267 (3d Cir. 2004) ...................................27 In re Advanta Corp. Securities Litigation, 180 F.3d 525 (3d Cir. 1999) ............................... passim In re Aetna Securities Litigation, 617 F.3d 272 (3d Cir. 2010) .....................................................12 In re AOL Time Warner, Inc. Securities Litigation, 503 F. Supp. 2d 666 (S.D.N.Y. 2007) .........25 In re Astea International Inc. Securities Litigation, No. 06-1467, 2007 U.S. Dist. LEXIS 58238 (E.D. Pa. 2007) .......................................................................24 Bell Atantic Corp. v. Twombly, 550 U.S. 544 (2007) ....................................................................27 Building Trades United Pension Trust Fund v. Kenexa Corp., No. 2:09-cv-02642, 2010 U.S. Dist. LEXIS 102729 (E.D. Pa. Sept. 27, 2010) .........................................................13, 24 In re Burlington Coat Factory Securities Litigation, 114 F.3d 1410 (3d Cir. 1997)...............22, 27 Castlerock Management Ltd. v. Ultralife Batteries, Inc.,114, F. Supp. 2d 316 (D.N.J. 2000)............................................................................................................................29 In re CDNow, Inc. Securities Litigation, 138 F. Supp. 2d 624 (E.D. Pa. 2001) ............................26 Congregation of Ezra Sholom v. Blockbuster, Inc., 504 F. Supp. 2d 151 (N.D. Tex. 2007).........26 Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005) .......................................................24 Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976)..................................................................11, 18 GSC Partners CDO Fund v. Washington, 368 F.3d 228 (3d Cir. 2004) .............................9, 15, 16 Harris v. Ivax Corp., 182 F.3d 799 (11th Cir. 1999) ...............................................................11, 15 In re Hertz Global Holdings, Inc. Securities Litigation., No. 13-7050, 2017 U.S. Dist. LEXIS 65156 (D.N.J. April 27, 2017) ...............................................................................10, 12 Indiana Public Retirement System v. SAIC, Inc., 818 F.3d 85 (2d Cir. 2017 ) ..............................27 Institutional Investors Group v. Avaya, Inc., 564 F.3d 242 (3d Cir. 2009) ........................... passim In re IPO Securities Litigation, 399 F. Supp. 2d 261 (S.D.N.Y. 2005) .........................................25 In re Jumei International Holding Ltd. Securities Litigation, No. 14-9826, 2017 U.S. Dist. LEXIS 3206 (S.D.N.Y. Jan. 10, 2017) ............................................................................28 Case 2:16-cv-02263-MCA-LDW Document 30 Filed 05/26/17 Page 4 of 36 PageID: 378 -iv- In re MobileMedia Securities Litigation, 28 F. Supp. 2d 901 (D.N.J.1998) .................................29 Morse v. Lower Merion School District, 132 F.3d 902 (3d Cir. 1997) .........................................27 In re NAHC, Inc. Securities Litigation, 306 F.3d 1314 (3d Cir. 2002)..........................................10 Nami v. Fauver, 82 F.3d 63 (3d Cir. 1996)....................................................................................27 National Junior Baseball League v. PharmaNet Development Group, Inc., 720 F. Supp. 2d 517 (D.N.J. 2010) ..........................................................................................25 In re Nutrisystem, Inc. Securities Litigation, 653 F. Supp. 2d 563 (E.D. Pa. 2009) ..........11, 13, 15 Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, 135 S. Ct. 1318 (2015) .............................................................................................................28 Oran v. Stafford, 226 F.3d 275 (3d Cir. 2000) ........................................................................22, 23 In re Party City Securities Litigation, 147 F. Supp. 2d 282 (D.N.J. 2001) ...................................24 Payne v. Deluca, 433 F. Supp. 2d 547 (W.D. Pa. 2006) ...............................................................11 Sapir v. Averback, No. 14-7331, 2016 U.S. Dist. LEXIS 15956 (D.N.J. Feb. 10, 2016) ................3 Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007) ....................................... passim In re Tellium, Inc. Securities Litigation, No. 02-5878, 2005 U.S. Dist. LEXIS 26332 (D.N.J. Aug. 26, 2005) .............................................................................................................25 In re Vonage IPO Securities Litigation, No. 07-177, 2009 U.S. Dist. LEXIS 28255 (D.N.J. Apr. 6, 2009) ...............................................................................................................27 Western Pa. Elec. Employees Pension Trust v. Plexus Corp., No. 07C0582, 2009 U.S. Dist. LEXIS 18123 (E.D. Wis. Mar. 6, 2009) .........................................................................14 Winer Family Trust v. Queen, 503 F.3d 319 (3d Cir. 2007) ..........................................................10 STATUTES AND RULES 15 U.S.C. § 77k(a) ........................................................................................................................27 15 U.S.C. § 77z-2(c) .............................................................................................................1, 4, 28 15 U.S.C. § 78j(b) ...........................................................................................................................9 15 U.S.C. § 78u-4(b) ............................................................................................................. passim 15 U.S.C. § 78u-5 ................................................................................................................. passim Case 2:16-cv-02263-MCA-LDW Document 30 Filed 05/26/17 Page 5 of 36 PageID: 379 -v- 17 C.F.R. § 240.10b-5 ............................................................................................................ passim Federal Rule of Civil Procedure 12(b)(6) ............................................................................1, 10, 27 Federal Rule of Civil Procedure 9(b) .............................................................................1, 10, 11, 27 OTHER AUTHORITIES H.R. Conf. Rep. No. 104-369 (1995), reprinted in 1995 U.S.C.C.A.N. 730 (1995) .....................11 Case 2:16-cv-02263-MCA-LDW Document 30 Filed 05/26/17 Page 6 of 36 PageID: 380 In its Amended Complaint, Lead Plaintiff Alaska Electrical Pension Fund (“Plaintiff”) seeks damages for alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 promulgated by the Securities and Exchange Commission (“SEC”) – referred to herein as Plaintiff’s “Exchange Act Claims,” and Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 (“Securities Act”) – referred to herein as Plaintiff’s “Securities Act Claims.” With respect to all of its claims, Plaintiff purports to represent a class of all persons or entities who purchased or otherwise acquired common stock issued by Defendant Freshpet, Inc. (“Freshpet” or “the Company”) between April 1, 2015 and November 11, 2015 (the putative “Class Period”). Because Plaintiff’s Claims fail to meet the pleading requirements of the Private Securities Litigation Reform Act of 1995 (“PSLRA”), 15 U.S.C. §§ 78u-4(b), 78u-5, & 77z-2, and Federal Rules of Civil Procedure 12(b)(6) and 9(b), Freshpet and individual defendants Richard Thompson, Richard Kassar, Scott Morris and Charles A. Norris (collectively “Defendants”), by their attorneys, have moved to dismiss the Amended Complaint in its entirety and with prejudice. In support of their motion, Defendants respectfully submit this memorandum of law and accompanying declaration and exhibits thereto. I. PRELIMINARY STATEMENT Freshpet manufactures and markets natural fresh foods, refrigerated meals, and treats for dogs and cats. Freshpet sells its products to consumers through a network of Company-owned branded refrigerators, known as Freshpet Fridges, which are located in grocery stores, pet specialty stores, and other retail outlets throughout North America. (See infra Section II.A.) Freshpet commenced operations in 2006, and after becoming a publicly-held company in November 2014, began issuing press releases to announce its quarterly and year-end Case 2:16-cv-02263-MCA-LDW Document 30 Filed 05/26/17 Page 7 of 36 PageID: 381 -2- financial results. In each such “earnings release,” the Company also shared its forecast – or “guidance” – for the full year’s net sales, adjusted EBITDA, and number of Freshpet Fridges installed in new store locations. (Id.) On March 31, 2015, May 7, 2015, and August 11, 2015, Freshpet announced its financial results for the fourth quarter of 2014 and the first and second quarters of 2015, respectively.All three earnings releases made identical projections for the Company’s full-year net sales, adjusted EBITDA and Freshpet Fridges. (See infra Section II.B.) In its November 11, 2015 earnings release for the third quarter, Freshpet announced that it was lowering its full-year guidance. During the Company’s earnings conference call later that day, Freshpet explained that it had to adjust its full-year projections because of the following unexpected events: (a) a lower production rate in manufacturing Freshpet’s new Shredded product; (b) the decision by an “anchor tenant” (Target) to postpone the installation of Fridges it had already ordered; and (c) bankruptcy filings by two of Freshpet’s grocery outlets during the Company’s third quarter, Great Atlantic & Pacific Tea Co. (“A&P”) and Haggen Holdings, LLC (“Haggen”). (See infra Section II.B.3.) On November 12, 2015, the day after Freshpet’s announcement, the price of Freshpet’s stock fell from $8.37 to $6.28. (See Amended Complaint (“AC”) ¶ 149; Exh. A, Freshpet Historical Stock Prices.) For the full year of 2015, Freshpet ultimately met or exceeded its revised projections, achieving record net sales, adjusted EBITDA and Freshpet Fridge installations. (See infra Section II.B.4.) Despite these positive financial results, the instant putative securities class action, filed on April 21, 2016, asserts the implausible claim that Freshpet’s revised full-year guidance was not the result of unexpected events, but rather the product of a fraudulent scheme devised by Defendants for the purpose of deceiving Freshpet’s shareholders. Case 2:16-cv-02263-MCA-LDW Document 30 Filed 05/26/17 Page 8 of 36 PageID: 382 -3- In the Amended Complaint, filed on March 27, 2017, Plaintiff claims that its allegations are based upon its counsel’s “investigation.” (AC at p. 1.)Plaintiff’s counsel – who filed the original complaint as well – had over sixteen months after Freshpet issued its November 11, 2015 earnings release to determine whether the claims asserted in the Amended Complaint have any factual basis. Despite the significant length of time Plaintiff’s counsel had to conduct a thorough investigation, the Amended Complaint lacks the requisite factual support for Plaintiff’s farfetched theories. Despite the heightened “actual knowledge” standard Plaintiff must meet for pleading its claims (see infra Sections III.B.2.c, III.C, and IV.A), the Amended Complaint does not refer to a single document or single confidential witness to support its bald assertions that Defendants actually knew – as early as Freshpet’s March 31, 2015 earnings release – that the Company’s original full-year forecasts would not materialize. See, e.g., Sapir v. Averback, No. 14-7331, 2016 U.S. Dist. LEXIS 15956, at *31-32 (D.N.J. Feb. 10, 2016) (failure to “cite a single document or witness that corroborates allegations of scienter . . . ‘count[s] against inferring scienter under the PSLRA’s particularity requirements’”) (quoting Institutional Invs. Grp. v. Avaya, Inc., 564 F.3d 242, 263 (3d Cir. 2009)). The Court should dismiss Plaintiff’s Rule 10b-5 Claim (Count IV) on the following separate and independent grounds: First, the Amended Complaint fails to allege a misstatement or omission of material fact because the only statements Plaintiff contends are fraudulent are Freshpet’s original forecasts and predictions of economic performance for the full year of 2015.1 All of these statements are “forward-looking” and qualify for protection under the PSLRA’s “safe harbor,” 15 U.S.C. § 78u-5(c); therefore, Defendants are immune from any Rule 1 Although the Complaint quotes many statements and portions of statements attributed to Defendants during the putative Class Period, Plaintiff does not claim that Defendants misrepresented any of the 2015 financial results Freshpet actually achieved. (See generally AC.) Case 2:16-cv-02263-MCA-LDW Document 30 Filed 05/26/17 Page 9 of 36 PageID: 383 -4- 10b-5 liability as a matter of law. Second, the Amended Complaint fails to meet the PSLRA’s heightened requirements for pleading a strong inference of scienter. Third, the Amended Complaint fails to plead loss causation. Because Plaintiff’s Section 20(a) Claim (Count V) is derivative of its Rule 10b-5 Claim, the Court should dismiss it as well. Plaintiff’s Securities Act claims assert that Defendants failed to disclose in Freshpet’s Registration Statement for the May 5, 2015 Secondary Offering certain alleged trends and uncertainties in alleged violation of Item 303 of SEC Regulation S-K. Yet, the Amended Complaint does not aver any facts showing that Defendants had the requisite “actual knowledge” of the alleged trends and uncertainties required for pleading such a claim. Although Plaintiff also claims that several statements in the Registration Statement are false and misleading, the challenged statements constitute non-actionable expressions of opinion and/or forward-looking statements protected under the Securities Act’s safe harbor provided by the PSLRA, U.S.C. § 77z-2(c). For these reasons, Plaintiff’s Section 11 and Section 12(a)(2) claims (Counts I and II) should be dismissed. And because Plaintiff’s Section 15 Claim (Count III) is purely derivative of Plaintiff’s Sections 11 and 12(a)(2) claims, it should be dismissed as well. II. FACTUAL BACKGROUND2 A. General Overview Of Freshpet’s Business Freshpet commenced operations in 2006 as the first manufacturer of fresh, refrigerated pet food distributed across North America. Headquartered in Secaucus, New Jersey, Freshpet became a publicly-held company in November 2014. (See AC ¶¶ 7, 20, 21; Exh. B, 2014 Form 10-K at 4-5, 22.) 2 This Factual Background is drawn from the Amended Complaint’s factual allegations, which are accepted as true solely for purposes of this motion, and from documents designated as exhibits (“Exh. __”) to the Declaration of Gay Parks Rainville, dated May 26, 2017, which materials the Court may consider when deciding the motion.See infra Section III.A, n. 11. Case 2:16-cv-02263-MCA-LDW Document 30 Filed 05/26/17 Page 10 of 36 PageID: 384 -5- With product innovation as its core strategy, Freshpet seeks to disrupt the $22.5 billion North American pet food industry “by driving consumers to reassess conventional dog and cat food offerings that have remained essentially unchanged for decades.” (AC ¶ 22; Exh. B, 2014 Form10-K at 4.) The Company “take[s] a fresh approach to pet food and [is] not constrained by conventional pet food products, attributes and production capabilities.” (Exh. B, 2014 Form 10-K at 6.) For the year ended 2014, new product introductions since 2011 represented 37% of Freshpet’s net sales. (Id.) Freshpet sells its products to consumers through a network of Company-owned branded refrigerators installed in grocery stores, pet specialty stores, and other retail outlets. (Id. at 4.) These refrigerators are known as “Freshpet Fridges.” (Id.; see also id. at 7.) By December 31, 2014, the Company had expanded its network of Freshpet Fridges within leading blue-chip retail chains such as Albertsons, BJ’s, Kroger, Petco, PetSmart, Publix, Safeway, Target, Wal- Mart and Whole Foods, and its Freshpet Fridges were located in over 13,300 stores. (Id. at 4.) Freshpet manufactures its products in what it believes is the only fresh, refrigerated pet food manufacturing facility in North America, the Freshpet Kitchens in Bethlehem, Pennsylvania.(Id. at 6.) In the first quarter of 2015, the Company commenced a capital expansion project at its Freshpet Kitchens manufacturing facility to expand Freshpet’s plant capacity and increase distribution. (Exh. C, 1Q 2015 Form 10-Q at 14.) B. Freshpet’s Periodic Reporting Of Financial Results 1. March 31, 2015 Earnings Release On March 31, 2015, Freshpet issued a press release announcing the Company’s financial results for its fourth quarter and fiscal year ended December 31, 2014. (Exh. D, 03.31.15 Press Release (“PR”).) In this earnings release, Freshpet also shared its forecast – or Case 2:16-cv-02263-MCA-LDW Document 30 Filed 05/26/17 Page 11 of 36 PageID: 385 -6- “guidance” – for the Company’s 2015 full year net sales, adjusted EBITDA,3 and number of Freshpet Fridges installed in new store locations: Outlook For full year 2015 the Company expects: • Net sales of $112.0 to $114.5 million, an increase of 29% to 32%, compared to 2014. • Adjusted EBITDA of $16.0 to $17.5 million an increase of $10.5 to $12.0 million compared to 2014. • Freshpet Fridges of approximately 15,100 to 15,600, an increase of approximately 13% to 17%, compared to 2014. (Id. at 2.) 2. May 7, 2015 and August 11, 2015 Earnings Releases On May 7, 2015, and August 11, 2015, Freshpet announced its financial results for the first and second quarters of 2015, respectively. (Exh. E, 05.07.15 PR; Exh. F, 08.11.15 PR.) Each earnings release reiterated the same guidance for full year 2015 as that provided in the March 31, 2015 release. (Exh. E, 05.07.15 PR at 2; Exh. F, 08.11.15 PR at 2.) 4 3. November 11, 2015 Earnings Release In the November 11, 2015 earnings release for the third quarter, Freshpet lowered its full-year 2015 guidance. (Exh. G, 11.11.15 PR at 2.) As the release explained: 3 As explained in Freshpet’s 2014 Form 10-K: “EBITDA represents net loss plus depreciation and amortization, interest expense (including fees on debt guarantee, which we believe were a cost of our prior financing arrangement akin to interest expense), and income tax expense. . . . Adjusted EBITDA represents EBITDA plus loss on disposal of equipment, new plant startup expense and processing, share based compensation and launch expenses.” (Exh. B, 2014 Form 10-K at 27.) 4 As these releases explained, the Company’s guidance for 2015 excluded the impact of Freshpet’s Baked product, which was still being tested, on net sales and adjusted EBITDA. (Exh. E, 05.07.15 PR at 2; Exh. F, 08.11.15 PR at 2.) Case 2:16-cv-02263-MCA-LDW Document 30 Filed 05/26/17 Page 12 of 36 PageID: 386 -7- We made meaningful progress across several areas of our business, however, we experienced lower than expected Freshpet Fridge growth and our gross margin was negatively affected by manufacturing inefficiencies from new product innovation and the near term cost of adjusting processes on our primary products. As a result, we have updated our annual guidance to reflect these headwinds, and are intently focused on the execution of our operational and financial objectives. Going forward, we will further improve our manufacturing costs and processes, drive greater leverage across our business model and in turn, enhance long-term shareholder value. Id. at 1.) During its earnings conference call later that day, Freshpet further explained that it revised its full-year guidance in order to account for (a) a lower production rate in manufacturing Freshpet’s new Shredded product;5 (b) the unexpected decision by an “anchor tenant” (Target) to postpone the installation of Fridges it had already ordered; and (c) the surprise bankruptcy filings by two of Freshpet’s grocery outlets, A&P and Haggen during the third quarter. (Exh. H, 11.11.15 Conf. Call Tr. at 3, 5, 6, 8, 12 & 13.) Unlike the full-year guidance the Company provided in its March 31, May 7, and August 11 earnings releases, the Company’s November 11 release included the impact of its Freshpet Baked product on expected net sales (adding $5 million in expected net sales for the Baked product) and the Baked product’s marketing costs on adjusted EBITDA (subtracting $3.5 million). Accordingly, the comparisons between the Company’s prior full-year guidance and its revised guidance are as follows: 5 During its March 31, 2015 earnings conference call, Freshpet explained that its new Shredded product had been “in early test stages across certain retailers,” that “[t]he initial product response has been strong from both [its] retail partners and consumers,” and that the Company was in the process of rolling it out for “broader distribution over the next six months.” (Exh. J, 03.31.15 Conf. Call Tr. at 4.) During the August 11, 2015 earnings call, Freshpet reported that it was still refining its process for manufacturing the Shredded product. (Exh. K, 08.11.15 Conf. Call Tr. at 5 (“The manufacturing team is gaining insight on how to best optimize manufacturing of our new shreds and co-packed baked products. As we further enhance and refine the process and benefit from economies of scale, our hourly productivity will increase which will gradually improve our gross margin.”). Case 2:16-cv-02263-MCA-LDW Document 30 Filed 05/26/17 Page 13 of 36 PageID: 387 -8- REVISED GUIDANCE PRIOR GUIDANCE Net Sales:6 $115.5 million to $117.0 million $117.0 million to $119.5 million Adjusted EBITDA:7 $10.0 million to $11.0 million $12.5 million to $14.0 million Freshpet Fridges: 14,900 to 15,000 15,100 to 15,600 4. March 9, 2016 Earnings Release On March 9, 2016, Freshpet released its fourth quarter and full-year financial results for 2015. (Exh. I, 03.09.16 PR.) In that earnings release, the Company announced, inter alia, that for the full year of 2015, it had achieved: • $116.186 in net sales, which is in the upper range of its revised full-year guidance and 33.9% higher than 2014’s net sales (id. at 1-2). • $11.1 in adjusted EBITDA, which is higher than the revised guidance and more than twice the result achieved in 2014 (id.). • 15,015 Fridges were installed in new locations in 2015, which is higher than the revised guidance and 12.2% higher than the 13,386 installed in 2014 (id.). C. Freshpet’s Secondary Offering In April 2015, certain Freshpet shareholders – including three of the Individual Defendants (Messrs. Kassar, Morris, and Thompson) – offered to sell their shares of Freshpet stock in a secondary offering (“Secondary Offering”). In connection with the Secondary Offering, on April 13, 2015, the Company filed with the SEC a Form S-1 registration statement, 6 Both current and prior guidance include net sales of approximately $5.0 million associated with Freshpet Baked test product. 7 Current and prior guidance include Adjusted EBITDA loss of $3.8 million and $3.5 million, respectively, associated with Freshpet Baked test. Case 2:16-cv-02263-MCA-LDW Document 30 Filed 05/26/17 Page 14 of 36 PageID: 388 -9- which it amended on April 27 and 29, 2015, and on April 30, 2015 filed a prospectus (collectively “Registration Statement”) (See AC ¶¶ 25-27.) On May 5, 2015, Freshpet completed the secondary public offering, in which the selling stockholders sold 6,110,353 shares of common stock at $21.47 per share. (AC ¶ 27; Exh. C, 1Q 2015 Form 10-Q at 13.) In the Secondary Offering, Mr. Kassar sold 30,300 shares of stock, but retained 91% of his Freshpet holdings; Mr. Morris sold 52,255 shares, but retained 85% of his holdings; and Mr. Thompson sold 50,808 shares, but retained 96% of his holdings. (See infra Section III.C.2.) III. ARGUMENT FOR DISMISSAL OF EXCHANGE ACT CLAIMS To state a claim under Section 10(b)8 and Rule 10b-5,9 a plaintiff must allege that the defendant “(1) made a misstatement or omission of material fact (2) with scienter (3) in connection with the purchase or the sale of a security (4) upon which the plaintiffs reasonably relied and (5) the plaintiffs’ reliance was the proximate cause of their injury.” GSC Partners CDO Fund v. Washington, 368 F.3d 228, 236 (3d Cir. 2004). The failure to adequately plead any one of these essential elements necessarily precludes a securities fraud claim. See In re Advanta Corp. Sec. Litig., 180 F.3d 525, 531 (3d Cir. 1999). Because Plaintiff’s Amended Complaint fails to adequately plead the first, second, and third elements of its Rule 10b-5 Claim 8 Section 10(b) prohibits the “use or employ[ment], in connection with the purchase or sale of any security, . . . [of] any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [SEC] may prescribe . . . .” 15 U.S.C. § 78j(b). 9 Under Rule 10b-5, it is unlawful to “make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading . . . in connection with the purchase or sale of any security.” 17 C.F.R. § 240.10b-5. Case 2:16-cv-02263-MCA-LDW Document 30 Filed 05/26/17 Page 15 of 36 PageID: 389 -10- – falsity, scienter and loss causation, Count IV should be dismissed on each of these separate and independent grounds. A. Applicable Pleading Standards To survive a motion to dismiss, a plaintiff’s allegations of a Rule 10b-5 violation must not only state a claim upon which relief can be granted under Federal Rule of Civil Procedure 12(b)(6),10 but they must also comply with the heightened pleading requirements of the PSLRA, 15 U.S.C. § 78u-4(b), which enhanced Rule 9(b) as the primary pleading standard for private Rule 10b-5 actions. See Institutional Investors Grp. v. Avaya, Inc., 564 F.3d 242, 253 (3d Cir. 2009). Both Rule 12(b)(6) and the PSLRA require that the Court “‘consider the complaint in its entirety, as well as . . . documents incorporated into the complaint by reference, and matters of which a court may take judicial notice.’” Id. at 252 (quoting Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322 (2007)).11 The PSLRA imposes on plaintiffs asserting securities law violations “two distinct pleading requirements, both of which must be met in order for a complaint to survive a motion to dismiss.” Id. First, the complaint must “‘specify each allegedly misleading statement, [and] why the statement was misleading.’” Id. at 252-53 (citation omitted). To adequately plead a false statement or omission of material fact under the PSLRA, a plaintiff must “specify with particularity all statements alleged to have been misleading and the reasons why each statement 10 Rule 12(b)(6)’s pleading standard is set forth in Section IV below. 11 Specifically, the Court may take judicial notice of documents whose authenticity is not in dispute, such as the full text of a defendant company’s SEC filings, press releases, and investor conference call transcripts, and stock price data. See, e.g., In re NAHC, Inc. Sec. Litig., 306 F.3d 1314, 1331 (3d Cir. 2002) (SEC filings and stock price data); In Re: Hertz Global Holdings, Inc. Sec. Litig., No. 13-7050, 2017 U.S. Dist. LEXIS 65156, at *5 n.5 (D.N.J. April 27, 2017) (Arleo, J.) (SEC filings, press releases, and transcripts). Case 2:16-cv-02263-MCA-LDW Document 30 Filed 05/26/17 Page 16 of 36 PageID: 390 -11- was misleading.” In re Nutrisystem, Inc. Sec. Litig., 653 F. Supp. 2d 563, 576-77 (E.D. Pa. 2009) (citing 15 U.S.C. § 78u-4(b)(1)(B) and Winer Family Trust v. Queen, 503 F.3d 319, 326 (3d Cir. 2007)). Moreover, the standard “‘requires plaintiffs to plead the who, what, when, where and how: the first paragraph of any newspaper story.’” Avaya, 564 F.3d at 253 (quoting Advanta, 180 F.3d at 534). In addition, “Rule 9(b) requires that a plaintiff show that the person responsible for the misstatement or omission alleged had knowledge of its false or misleading character at the time.” Nutrisystem, 653 F. Supp. 2d at 577. Second, the complaint must, “‘with respect to each act or omission alleged to violate this chapter, state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.’” Avaya, 564 F.3d at 253 (quoting 15 U.S.C. § 78u-4(b)(2)). For Rule 10b-5 actions, the required state of mind is scienter – “the defendant’s intention ‘to deceive, manipulate, or defraud.’” Tellabs, 551 U.S. at 313 (quoting Ernst & Ernst v. Hochfelder, 425 U.S. 185, 194 & n.12 (1976), and citing 15 U.S.C. § 78u-4(b)(1), (2)). Where, as here, a complaint fails to comply with the PSLRA’s heightened pleading requirements, “the court shall, on the motion of any defendant, dismiss the complaint . . . .” 15 U.S.C. § 78u-4(b)(3)(A) (emphasis added). B. All Of The Statements Plaintiff Has Challenged Are “Forward-Looking” And Protected Under The PSLRA Safe Harbor 1. Courts Must Dismiss Claims Based On Forward-Looking Statements That Meet The Safe Harbor Criteria To encourage public companies to disclose their own assessment of their future potential without fear of liability should their predictions turn out to be inaccurate, Congress included in the PSLRA a “safe harbor” for forward-looking information. See Payne v. Deluca, 433 F. Supp. 2d 547, 560 (W.D. Pa. 2006) (quoting H.R. Conf. Rep. No. 104-369, at 43 (1995), reprinted in 1995 U.S.C.C.A.N. 730, 742 (1995)). See also Harris v. Ivax Corp., 182 F.3d 799, Case 2:16-cv-02263-MCA-LDW Document 30 Filed 05/26/17 Page 17 of 36 PageID: 391 -12- 806 (11th Cir. 1999) (“Congress enacted the safe-harbor provision in order to loosen the ‘muzzling effect’ of potential liability for forward-looking statements, which often kept investors in the dark about what management foresaw for the company.”) This safe harbor “immunizes from liability any forward-looking statement, provided that: the statement is identified as such and accompanied by meaningful cautionary language; or is immaterial; or the plaintiff fails to show the statement was made with actual knowledge of its falsehood.” Avaya, Inc., 564 F.3d at 254.12 Thus, statements meeting any of these criteria, as a matter of law, cannot support a Rule 10b-5 claim, and the complaint, to the extent it is based on any such statements, must be dismissed. See 15 U.S.C. § 78u-5(e). In accordance with the PSLRA’s mandate, the Third Circuit has consistently upheld the dismissal of Rule 10b-5 claims that are based on forward-looking statements protected by the safe harbor. See, e.g., In re Aetna Sec. Litg., 617 F.3d 272, 285 (3d Cir. 2010); Avaya, 564 F.3d at 257-58. Thus, following Third Circuit precedent, district courts in this circuit 12 Under the safe harbor, a reporting company and its officers, directors and employees may not, as a matter of law, be held liable for any prediction or other forward-looking statement which later prove to be inaccurate if: (1) The forward-looking statement is “identified as a forward- looking statement, and is accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statement” (15 U.S.C. § 78u-5(c)(1)(A)(i)); or (2) The forward-looking statement is “immaterial” (15 U.S.C. § 78u-5(c)(1)(A)(ii)); or (3) The plaintiff fails to prove the forward-looking statement was made, or approved by an executive officer of the company, with actual knowledge that the statement was false or misleading. (15 U.S.C. § 78u-5(c)(1)(B)). See Avaya, 564 F.3d at 254 n.18. Case 2:16-cv-02263-MCA-LDW Document 30 Filed 05/26/17 Page 18 of 36 PageID: 392 -13- routinely dismiss claims based on forward-looking statements. See, e.g., In Re: Hertz Global Holdings, Inc. Sec. Litig., No. 13-7050, 2017 U.S. Dist. LEXIS 65156, at *38-44 (D.N.J. April 27, 2017) (Arleo, J.); Building Trades United Pension Trust Fund v. Kenexa Corp., No. 2:09-cv- 02642, 2010 U.S. Dist. LEXIS 102729, at *44-45 (E.D. Pa. Sept. 27, 2010); Nutrisystem,, 653 F. Supp. 2d at 578. 2. Because Defendants’ Statements Qualify For Safe Harbor Immunity, Plaintiff’s Claims Must Be Dismissed Although the Amended Complaint quotes many statements and portions of statements attributed to Defendants during the six-month putative Class Period (see generally AC), Plaintiff does not claim that Defendants misrepresented any of the financial results Freshpet achieved in the first three quarters of 2015. Instead, Plaintiff’s Rule 10b-5 claims are based solely on statements made by Defendants on March 31, 2015, May 7, 2015, and August 11, 2015 regarding Freshpet’s forecasts for the full year of 2015. (See, e.g., AC ¶¶ 109-134.) Because each such statement qualifies for safe-harbor protection, Defendants are immune from liability and Plaintiff’s claims must be dismissed. (a) The Statements At Issue Are All Forward-Looking The PSLRA’s safe harbor defines the term “forward-looking statement” to include, inter alia, the following categories of statements: (A) a statement containing a projection of revenues, income (including income loss), earnings (including earnings loss) per share, capital expenditures, dividends, capital structure, or other financial items; . . . . . (C) a statement of future economic performance, including any such statement contained in a discussion and analysis of financial condition by the management or in the results of operations included pursuant to the rules and regulations of the Commission; Case 2:16-cv-02263-MCA-LDW Document 30 Filed 05/26/17 Page 19 of 36 PageID: 393 -14- any statement of the assumptions underlying or relating to any statement described in subparagraph (A) . . . or (C). 15 U.S.C. § 78u-5(i)(1)(A), (C), (D) (emphasis added). Plaintiff’s principal claim is that Defendants’ March 31, 2015, May 7, 2015, and August 11, 2015 statements containing Freshpet’s projections for the full year of 2015 violate Rule 10b-5. (See AC ¶¶ 110-111; 117; 120-121; 123; 124-125; 134.) Yet, each of these statements is indisputably forward-looking – by definition – under the PSLRA. 15 U.S.C. § 78u- 5(i)(1)(A). Plaintiff also challenges certain statements made by Defendants in connection with Freshpet’s projections. (See AC ¶¶ 112-117; 122-123; 126-134.) All such statements are predictions of Freshpet’s “future economic performance,” however, and therefore are deemed forward-looking under the PSLRA. 15 U.S.C. § 78u-5(i)(1)(C). Defendants’ discussions of the assumptions underlying and relating to these statements are considered forward-looking as well. 15 U.S.C. § 78u-5(i)(1)(D). See, e.g., Western Pa. Elec. Employees Pension Trust v. Plexus Corp., No. 07C0582, 2009 U.S. Dist. LEXIS 18123, at *22-23 (E.D. Wis. Mar. 6, 2009) (holding that the statements – “Defense sector and expansion of business with existing customers in the Wireline sector are driving the anticipated sequential improvement in the third quarter” and “Looking to the full year, the strength of new programs won over the last few quarters, coupled with improved visibility for end market demand, suggests that our revenue growth will approach 20% organic growth for the year” – are forward-looking because they contain the assumptions underlying the corporate defendant’s projections, plans and predictions). (b) Defendants’ Forward-Looking Statements Were Accompanied By Meaningful Cautionary Language As explained above, forward-looking statements qualify for protection under the PSLRA’s safe harbor so long as they are identified as forward-looking and “accompanied by Case 2:16-cv-02263-MCA-LDW Document 30 Filed 05/26/17 Page 20 of 36 PageID: 394 -15- meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statement.” 15 U.S.C. § 78u-5(c)(1)(A)(i). Specifically, “[t]he cautionary language should be directly related to the alleged misrepresentations, but it does not have to actually accompany the alleged misrepresentation.” GSC Partners, 368 F.3d at 243 n.3 (citations and internal quotation marks omitted). Therefore, a company’s earnings releases and conference calls may incorporate by reference cautionary language contained in its SEC filings. See, e.g., Avaya, 564 F.3d at 257 (finding that cautionary statements contained in corporate defendant’s Form 10-Q, which were cross-referenced in defendant’s conference calls and press releases, were sufficiently extensive and specific); Nutrisystem, 653 F. Supp. 2d at 579 (“Cautionary language must be related to the forward- looking statements but need not actually accompany them.”). Moreover, while the cautionary language “must be extensive and specific,” Avaya, 564 F.3d at 257, a company need not warn against every possible risk or provide “a listing of all factors,” Harris, 182 F.3d at 807. As Congress explained, a “failure to include the particular factor that ultimately causes the forward-looking statement not to come true will not mean that the statement is not protected by the safe harbor.” Id. (quoting H.R.Rep. No. 104-369, at 44). Here, Defendants’ March 31, 2015, May 7, 2015, and August 11, 2015 projections and predictions, described supra in Section III.B.2.a, were identified as “forward- looking” and accompanied by meaningful cautionary language. (Exh. D, 03.31.15 PR at 3; Exh. J, 03.31.15 Conf. Call Tr. at 2; Exh. E, 05.07.15 PR at 2; Exh. L, 05.07.15 Conf. Call Tr. at 2; Exh. F, 08.11.15 PR at 3; Exh. K, 08.11.15 Conf. Call Tr. at 2.) Each press release also contained meaningful cautionary language, “identifying important factors that could cause actual Case 2:16-cv-02263-MCA-LDW Document 30 Filed 05/26/17 Page 21 of 36 PageID: 395 -16- results to differ materially from those in the forward-looking statement,” 15 U.S.C. § 78u- 5(c)(1)(A)(i). (See Exh. D, 03.31.15 PR at 3; Exh. E, 05.07.15 PR at 2; Exh. F, 08.11.15 PR at 3.) Similarly, at the beginning of the March 31, 2015, May 7, 2015, and August 11, 2015 earnings conference calls, the call’s host advised participants that the conference call would contain forward-looking statements. (See Exh. J, 03.31.15 Conf. Call Tr. at 2; Exh. L, 05.07.15 Conf. Call Tr. at 2; Exh. K, 08.11.15 Conf. Call Tr. at 2.) As is permitted in the Third Circuit, the cautionary language provided in Freshpet’s March 31, 2015, May 7, 2015, and August 11, 2015 earnings releases and conference calls incorporated by reference the detailed list of risk factors contained in the Company’s 2014 Form 10-K. The “Risk Factors” section of the 2014 Form 10-K specifically warned investors, inter alia, that investing in Freshpet’s common stock “involves a high degree of risk,” and that “[i]f any of the following risks actually occurs, [its] business, financial condition, results of operations or cash flows could be materially adversely affected.” (Exh. B, 2014 Form 10-K at 10.)13 The cautionary language contained in Freshpet’s 2014 Form 10-K was “extensive and specific” and “directly related” to the alleged defects in Defendants’ revenue projections. GSC Partners, 368 F.3d at 243 n.3. Plaintiff claims that Defendants’ revenue forecasts were false and misleading because they did not take into account the risk that “the Company was experiencing manufacturing and production problems that were affecting Freshpet’s production of its shredded product” (AC ¶ 117(a)). Yet, Freshpet’s Form 10-K specifically warned investors about the risks of innovation, that “[a] key element of [Freshpet’s] growth strategy 13 These risk factors were incorporated by reference in Freshpet’s quarterly financial reports filed with the SEC on Form 10-Q. (See, e.g., Exh. C, 1Q 2015 Form 10-Q at 3; Exh. P, 2Q 2015 Form 10-Q at 3.) Case 2:16-cv-02263-MCA-LDW Document 30 Filed 05/26/17 Page 22 of 36 PageID: 396 -17- depends on [its] ability to develop and market new products and improvements to [the Company’s] existing products that meet its standards for quality and appeal to consumer preferences.” (Exh. B, 2014 Form 10-K at 12.) Plaintiff also contends that Freshpet’s full-year forecasts were misleading because “A&P and Haggen were experiencing serious financial hardships such that it was likely that any Freshpet Fridges located in their respective stores would soon have to be removed” (AC ¶ 134(a)). Yet, Freshpet’s Form 10-K specifically warned investors, inter alia, that “[t]he loss of a significant customer, certain actions by a significant customer or financial difficulties of a significant customer could adversely affect our results of operations,” and that “especially during economic downturns, [Freshpet’s] customers may face financial difficulties, bankruptcy or other business disruptions that may impact their operations and their purchases from [Freshpet] and may affect their ability to pay [the Company] for products purchased from us.” (Exh. B, 2014 Form 10-K at 11.) As for Target’s decision to postpone the installation of Fridges it had already ordered, Freshpet warned investors that, “[t]o the extent customers seek to reduce their usual or customary inventory levels or change their practices regarding purchases in excess of consumer consumption, [Frespet’s] sales and results of operations could be adversely impacted in that period. If [Freshpet’s] sales of products to one or more of [its] significant customers are reduced, this reduction could have a material adverse effect on [the Company’s] business, financial condition and results of operations. (Id. at 12.) Thus, Freshpet’s cautionary language is sufficiently meaningful under the PSLRA’s safe harbor because it is “substantive, extensive and tailored to the future-looking statements they reference.” Avaya, 564 F.3d at 258 (citation and internal quotation marks Case 2:16-cv-02263-MCA-LDW Document 30 Filed 05/26/17 Page 23 of 36 PageID: 397 -18- omitted). Because Freshpet’s cautionary language is sufficiently “meaningful” under the PSLRA, defendants are immune from liability under Rule 10b-5. (c) Plaintiff Has Failed To Plead A Strong Inference That Defendants Acted With Actual Knowledge Even in the absence of meaningful cautionary language, a forward-looking statement is not actionable under Rule 10b-5 where, as here, the plaintiff’s allegations fail to show that the defendant had “actual knowledge” that the statement, when made, was false or misleading. 15 U.S.C. § 78u-5(i)(1)(A); see Avaya, 564 F.3d at 274 (recognizing that liability for forward-looking statements “attaches only upon proof of knowing falsity”). As explained in Section III.C.1, infra, Plaintiff’s conclusory assertions that defendants “knew” the alleged falsity of Freshpet’s forecasts for the full year of 2015 (see, e.g., AC ¶¶ 81-83; 97) fail to meet this actual knowledge standard, which is even stricter than the “recklessness” scienter pleading requirement for statements of current fact. See Avaya, 564 F.3d at 259 n.29, 274. Thus, defendants are immune from liability for their forward-looking statements on this separate and independent ground. C. The Amended Complaint Fails To Meet The PSLRA’s Heightened Pleading Requirements For Alleging A Strong Inference Of Scienter The PSLRA requires that a Rule 10b-5 complaint “state with particularity facts giving rise to a strong inference” of scienter, 15 U.S.C. § 78u-4(b)(2), which the Supreme Court has defined as the intention “‘to deceive, manipulate, or defraud,’” Tellabs, 551 U.S. at 313 (quoting Ernst & Ernst, 425 U.S. at 194 & n.12). When applied to alleged false statements of current fact, “[t]his scienter standard requires plaintiffs to allege facts giving rise to a ‘strong inference’ of ‘either reckless or conscious behavior.’” Avaya, 564 F.3d at 267 (quoting Advanta, 180 F.3d at 534-35 (footnote omitted); see also id. at 274. Where, as here, the alleged false statements are forward-looking, a plaintiff must comply with the even stricter “actual Case 2:16-cv-02263-MCA-LDW Document 30 Filed 05/26/17 Page 24 of 36 PageID: 398 -19- knowledge” standard and plead facts supporting a strong inference of “knowing falsity.” Id. at 274 (emphasis added).14 To qualify as “strong” under the PSLRA, “an inference of scienter must be more than merely plausible or reasonable – it must be cogent and at least as compelling as any opposing inference of nonfraudulent intent.” Tellabs, 551 U.S. at 314. This pleading requirement “obliges courts to weigh the ‘plausible nonculpable explanations for the defendant’s conduct’ against the ‘inferences favoring the plaintiff.’” Avaya, 564 F.3d at 267 (quoting Tellabs, 551 U.S. at 324). Accordingly, the court must ask: “when the allegations are accepted as true and taken collectively, would a reasonable person deem the inference of scienter at least as strong as any opposing inference?” Tellabs, 551 U.S. at 326. 1. Plaintiff Has Failed To Plead A Strong Inference That Defendants Acted With The Requisite Actual Knowledge In the Amended Complaint, Plaintiff posits several speculative theories in support of its contention that defendants had “actual knowledge” that their forecasts for the full year of 2015 were allegedly false and misleading. Plaintiff contends that Defendants allegedly knew – as early as March 31, 2015 when Freshpet issued its earnings release for the fourth quarter and full year of 2014 – that “the Company was experiencing manufacturing and production problems that were affecting Freshpet’s production of its shredded product” (AC ¶ 117(a)). Yet, Plaintiff 14 As the Third Circuit explained in Avaya: “[T]he scienter requirement for forward- looking statements is stricter than that for statements of current fact. Whereas liability for the latter requires a showing of either knowing falsity or recklessness, liability for the former attaches only upon proof of knowing falsity.” 564 F.3d at 274. Case 2:16-cv-02263-MCA-LDW Document 30 Filed 05/26/17 Page 25 of 36 PageID: 399 -20- has averred no facts whatsoever in support of this bald assertion, much less a document or confidential witness.15 Plaintiff also claims that Defendants “actually knew” that “A&P and Haggen were experiencing serious financial hardships such that it was likely that any Freshpet Fridges located in their respective stores would soon have to be removed” (id. ¶ 134(a)). But Plaintiff has failed to proffer any document or confidential witness showing that Defendants actually knew – as early as March 31, 2015 – that A&P and Haggen would be filing for bankruptcy and that such filings would have a material impact on Freshpet’s sales to these companies’ stores. Plaintiff also theorizes that Target postponed the installation of the Fridges it ordered from Freshpet because (a) the filing for bankruptcy by Target’s Canadian operations “was having, and would have, a material impact on Freshpet Fridge growth and dog food sales at those locations” (id. ¶ 117(c)); and (b) Target was “undergoing a corporate reorganization such that it was likely to postpone the installation of a significant number of Freshpet Fridges” (id. ¶ 117(d)). Not only does Plaintiff allege no facts, document, or confidential witness in support of this theory, but this supposed explanation bears no relationship to reality. First, Plaintiff does not (for it cannot) aver that Freshpet ever sold products in Target’s Canada stores to begin with. Second, Freshpet’s sales through Target alone rose to 11% of its net sales in 2015 (Exh. M, 2015 Form 10-K at 7), which indicates that Freshpet successfully grew its Target business in 2015. Finally, ignoring Freshpet’s stated reasons for its revised guidance (see supra Section II.B.3), Plaintiff conjures up a list of allegations that no document or confidential witness could support because they are false: 15 Moreover, as pointed out in footnote 5, supra, Freshpet fully disclosed during the August 11, 2015 earnings call that it was still refining its process for manufacturing the Shredded product. (See Exh. K, 08.11.15 Conf. Call Tr. at 5.) Case 2:16-cv-02263-MCA-LDW Document 30 Filed 05/26/17 Page 26 of 36 PageID: 400 -21- • “[T]he growth of Freshpet Fridges was stagnating in Petco and PetSmart, and the Company was not growing the number of Fridges in those retailers as fast as expected” (id. ¶ 117(b)). • “[T]he Company’s relationship with BJ’s was strained, resulting in removal of some Freshpet Fridges and decreased total revenue per BJ’s club” (id. ¶ 134(c)). • “[T]he Company’s baked test product generated lower profit margins than originally expected due to higher cost per pound and a fire at the co- packing facility that produced the product” (id. ¶ 134(b)). To the contrary, as the Company explained during the August 11, 2015 earnings call, Freshpet was already in 95% of all Petco and PetSmart stores.(Exh. K, 08.11.15 Conf. Call Tr. at 15.) In addition, Freshpet did not attribute its revised 2015 guidance to any alleged strained relationship with BJ’s. With respect to the third assertion regarding Freshpet’s Baked product, Plaintiff has not, because it cannot, proffer one document or witness to show that the facility fire had any impact on the Baked product’s profit margins. Thus, Plaintiff’s fictional theories cannot support a plausible inference, much less a cogent or compelling inference, that defendants had actual knowledge of the alleged falsity of Freshpet’s revenue forecasts. 2. Stock Sales By Messrs. Kassar, Morris And Thompson Do Not Support An Inference Of Scienter Having failed to plead facts showing that Defendants “actually knew” as early as March 31, 2015 that Freshpet would need to revise its full-year guidance for 2015, Plaintiff attempts to fill this scienter void with allegations that Messrs. Kassar, Morris, and Thompson sold some of their Freshpet stock in the Secondary Offering. Yet, motive allegations, alone, are no longer sufficient for pleading a strong inference of scienter. Avaya, 564 F.3d at 277 (citing Tellabs, 551 U.S. at 324). Indeed, even where (unlike here) a plaintiff does allege facts suggesting a defendant’s actual knowledge, additional allegations showing a plausible motive for Case 2:16-cv-02263-MCA-LDW Document 30 Filed 05/26/17 Page 27 of 36 PageID: 401 -22- fraud will not “bolster scienter” if the complaint, in its entirety, fails to support an inference that the defendant was “at least as likely as not to have acted on that motive and actually committed fraud.” Id. at 278 (finding that motive allegations did not strengthen scienter inference). Furthermore, stock sales may support an inference of scienter only if such sales were “unusual in scope or timing.” Oran v. Stafford, 226 F.3d 275, 290 (3d Cir. 2000) (citing Advanta, 180 F.3d at 540). This is because “‘[a] large number of today’s corporate executives are compensated in terms of stock and stock options. It follows then that these individuals will trade those securities in the normal course of events.’” Advanta, 180 F.3d at 541 (quoting In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1424 (3d Cir. 1997)). Therefore, to allege a plausible motive for fraud, a plaintiff must aver more than “‘the mere fact that some officers sold stock’” during the putative class period. Advanta, 180 F.3d at 540 (quoting Burlington, 114 F.3d at 1424). Instead, a plaintiff “must allege that the trades were made at times and in quantities that were suspicious enough to support the necessary strong inference of scienter.” Burlington, 114 F.3d at 1424. Large retained aggregate holdings during the Class Period negate any inference of scienter. See, e.g., Avaya, 564 F.3d at 279 (finding stock sales “do not marginally increase the likelihood” of fraud where individual defendants retained a large percentage of their common stock holdings); Advanta, 180 F.3d at 540-41 (holding that where individual defendants retained a sizeable amount of the company’s stock, “[f]ar from supporting a ‘strong inference’ that defendants had a motive to capitalize on artificially inflated stock prices, these facts suggest that they had every incentive to keep [the company] profitable.”). Yet, here, the Amended Complaint Case 2:16-cv-02263-MCA-LDW Document 30 Filed 05/26/17 Page 28 of 36 PageID: 402 -23- fails to make any reference to the total number of shares and vested stock options16 retained by Messrs. Kassar, Morris, and Thompson after the Secondary Offering – providing the Court with no context for evaluating whether the scope of their sales during the Class Period were unusual or suspicious. This deficiency alone is fatal to Plaintiff’s motive allegations. See Oran, 226 F.3d at 289 (rejecting plaintiffs’ scienter allegations based on alleged insider trading where the complaint did “not allege the total number of shares held by each of the officers . . . .”). The Amended Complaint alleges that, in the Secondary Offering, Mr. Kassar sold 30,300 shares of stock, Mr. Morris sold 52,255 shares, and Mr. Thompson sold 50,808 shares of stock in the Secondary Offering (see, e.g., AC ¶ 27). What the Amended Complaint omits, however, are the public record facts that each of these defendants retained holdings after the Secondary Offering that were far greater than the number of shares he sold in the offering: Mr. Kassar retained 91% of his holdings (retaining 246,110 shares and 61,116 vested stock options); Mr. Morris retained 85% of his holdings (retaining 262,086 shares and 43,690 vested stock options); and Mr. Thompson retained 96% of his holdings (retaining 790,936 shares and 355,102 vested stock options). (See Exh. N, Def. Proxy Stm. (filed Aug. 5, 2015) at 15, 23; see also Exh. O, 2014 Form 10-K/A at 17 (showing number of stock shares held before Secondary Offering).) Indeed, consistent with the Third Court’s holding in Avaya, these Individual Defendants’ sales of between 4% and 15% of their holdings present no marginal increase in the inference of scienter. See Avaya, 564 F.3d at 279 (finding no marginal increase in inference of scienter where individual defendants sold 1.7% and 17.7% of their holdings). 16 Total stock holdings include common shares and stock options held by corporate executives. See, e.g., Avaya, 564 F.3d at 279 n.55 (including stock options in calculation of stock holdings when assessing scienter allegations). Case 2:16-cv-02263-MCA-LDW Document 30 Filed 05/26/17 Page 29 of 36 PageID: 403 -24- The temporal distance between the stock sales made by Messrs. Kassar, Moriss and Thompson and Freshpet’s November 11, 2015 announcement of its updated guidance for 2015 also weakens any inference of scienter. “A broad temporal distance between stock sales and a disclosure of bad news defeats any inference of scienter.” In re Party City Sec. Litig., 147 F. Supp. 2d 282, 313 (D.N.J. 2001) (holding that CFO’s stock sales were not suspicious in scope because they occurred twelve, four and three months before the company announced its inability to complete its year-end audit). Here, Messrs. Kassar, Morris, and Thompson sold stock pursuant to the Secondary Offering on May 5, 2015, more than six months before Freshpet’s November 11, 2015 announcement of its updated guidance for 2015.17 Such a temporal distance weakens any inference of scienter. See, e.g., In re Astea In’l Inc. Sec. Litig, No. 06-1467, 2007 U.S. Dist. LEXIS 58238, at *47 (E.D. Pa. 2007) (holding that “a lapse of five months weakens the inference that the individual defendants were motivated to cash out before the company disclosed its restatement”). In short, because the stock sales made by Messrs. Kassar, Morris, and Thompson during the Class Period do not represent a substantial portion of their holdings, and because the sales took place six months before the Company issued its updated full-year guidance for 2015, Messrs. Kassar, Morris, and Thompson’s stock sales negate, rather than support, an inference of scienter. Indeed, “[t]o find such facts merit an inference of scienter would mock the meaning of ‘scienter’ painstakingly crafted by the Supreme Court in Tellabs.” Kenexa, 2010 U.S. Dist. LEXIS 10272, at *39. In sum, Plaintiff’s stock sale allegations fail to plead a plausible motive for fraud, much less bolster any inference of scienter. See Avaya, 564 F.3d at 277-78. 17 Before the Secondary Offering, Messrs. Kassar, Morris, and Thompson had never sold any of their Freshpet stock. Case 2:16-cv-02263-MCA-LDW Document 30 Filed 05/26/17 Page 30 of 36 PageID: 404 -25- D. The Amended Complaint Fails To Plead Loss Causation The Amended Complaint’s Rule 10b-5 claim is fatally deficient for the additional reason that it fails to allege the essential element of loss causation. Under the PSLRA, the plaintiff has “the burden of proving that the act or omission of the defendant . . . caused the loss for which the plaintiff seeks to recover damages.” 15 U.S.C. s. 78u-4(b)(4). To plead loss causation, a plaintiff must allege that “the defendant’s misrepresentation (or other fraudulent conduct) proximately caused the plaintiffs’ economic loss.” Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 346 (2005). The Supreme Court’s opinion in Dura teaches that “loss causation is not pled upon allegations of drops in stock price following an announcement of bad news that does not disclose the fraud.” In re Tellium, Inc. Sec. Litig., No. 02-5878, 2005 U.S. Dist. LEXIS 26332, at *14 (D.N.J. Aug. 26, 2005). Therefore, “a plaintiff must allege . . . that the subject of the fraudulent statement or omission was the cause of the actual loss suffered, i.e., that the misstatement or omission concealed something from the market that, when disclosed, negatively affected the value of the security.” National Junior Baseball League v. PharmaNet Dev. Group, Inc., 720 F. Supp. 2d 517, 559 (D.N.J. 2010) (internal quotation marks and citation omitted). Courts routinely dismiss Rule 10b-5 claims on failure to plead loss causation grounds where, as here, liability is based on a company’s announcement of downward revisions of forecasted financial results. See, e.g., In re IPO Sec. Litig., 399 F. Supp. 2d 261, 266-67 (S.D.N.Y. 2005) (“If downturn in stock price based on such mundane events as failures to meet forecasts and downward revisions of forecasts were legally sufficient to constitute disclosures of securities fraud, then any investor who loses money in the stock market could sue to recover for those losses without alleging that a fraudulent scheme was ever disclosed and that the disclosures caused their losses.”); In re AOL Time Warner, Inc. Sec. Litig., 503 F. Supp. 2d 666, 678-79 (S.D.N.Y. 2007) (holding that “mere failure to meet earnings forecasts is insufficient to establish Case 2:16-cv-02263-MCA-LDW Document 30 Filed 05/26/17 Page 31 of 36 PageID: 405 -26- loss causation”); Congregation of Ezra Sholom v. Blockbuster, Inc., 504 F. Supp. 2d 151, 168 (N.D. Tex. 2007) (rejecting “unduly broad” argument “that a disclosure of lower than expected earnings constitutes an admission that the company’s prior positive statements about its financial health and business were false”). Plaintiff’s Amended Complaint, too, should be dismissed on this ground.18 E. Plaintiff’s Derivative Section 20(a) Claim Should Be Dismissed Plaintiff asserts a claim under Section 20(a) of the Exchange Act against the Individual Defendants. (AC ¶¶ 170-172.) To maintain its claim under Section 20(a), plaintiff must establish: (1) an underlying violation by a controlled person or entity; (2) that the defendants are controlling persons; and (3) culpable participation in the fraud by the controlling persons “‘in some meaningful sense.’” See, e.g., In re CDNow, Inc. Sec. Litig., 138 F. Supp. 2d 624, 644 (E.D. Pa. 2001). Claims asserted under Section 20(a) are purely derivative. Avaya, 564 F.3d at 252. Therefore, absent an underlying violation of the securities laws, there can be no controlling person liability. Id. at 280.Because Plaintiff has failed to plead a claim under Section 10(b), its derivative claim under Section 20(a) against the Individual Defendants must also fail. See Advanta, 180 F.3d at 541 (“claims under Section 20(a) are derivative, requiring proof of a separate underlying violation of the Exchange Act.”). 18 Although Plaintiff alleges that Freshpet’s revised guidance caused Freshpet’s stock price to drop from $8.37 on November 11, 2015 to $6.28 on November 12, 2015 (see AC ¶ 149), plaintiff does not and, of course, cannot claim that the November 11 guidance caused the gradual decline in Freshpet’s stock price before November 11. (See Exh. A, Freshpet Historical Stock Prices (showing gradual decline from $25.46 on April 9, 2015 to $8.37 on November 11, 2015).) Case 2:16-cv-02263-MCA-LDW Document 30 Filed 05/26/17 Page 32 of 36 PageID: 406 -27- IV. ARGUMENT FOR DISMISSAL OF SECURITIES ACT CLAIMS A. Plaintiff’s Section 11 And Section 12(a)(2) Claims Must Be Dismissed To state a claim under Section 11 of the Securities Act, 15 U.S.C. § 77k(a), “plaintiffs must allege that they purchased securities pursuant to a materially false or misleading registration statement.” In re Adams Golf, Inc. Sec. Litig., 381 F.3d 267, 273 (3d Cir. 2004). Similarly, to state a claim under Section 12(a)(2), 15 U.S.C. § 77l(a)(2), “plaintiffs must allege that they purchased securities pursuant to a materially false or misleading ‘prospectus or oral communication.’” Id. “For analytical purposes, claims arising out of Section 11 and 12 involve the same legal scrutiny” and thus will be analyzed together here. In re Vonage IPO Sec. Litig., No. 07-177 (FLW), 2009 U.S. Dist. LEXIS 28255, at *16 (D.N.J. Apr. 6, 2009).19 In addition, to adequately plead a Securities Act claim based on an alleged failure to comply with the disclosure requirements of Item 303 of SEC Regulation S-K (“Item 303”), a plaintiff must allege that the defendant had actual knowledge of the alleged undisclosed relevant trend or uncertainty. See Indiana Pub. Ret. Sys. v. SAIC, Inc., 818 F.3d 85, 95 (2d Cir. 2017 ) (“The plain language of Item 303 confirms our previous assumption that it requires the registrant’s actual knowledge of the relevant trend or uncertainty.”) (emphasis added). In addition, to meet this pleading requirement a plaintiff must allege with specificity facts 19 To survive a motion to dismiss under Rule 12(b)(6), a complaint must plead “enough facts to state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). Thus, factual allegations that fail “to raise a right to relief above the speculative level” or merely state a “conceivable” claim will not suffice. Id. at 555, 570. And though a court must accept as true a complaint’s well-pleaded factual allegations and draw all reasonable inferences therefrom in the light most favorable to the plaintiff, Nami v. Fauver, 82 F.3d 63, 65 (3d Cir. 1996), it need not give credence to “bald assertions” or “legal conclusions,” In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1429 (3d Cir. 1997), or “sweeping legal conclusions in the form of factual allegations,” Morse v. Lower Merion School Dist., 132 F.3d 902, 906 n.8 (3d Cir. 1997). Plaintiff has failed to meet this pleading standard. To the extent the Securities Act claims sound in fraud, Plaintiff also has failed to satisfy the heightened pleading requirements of Rule 9(b). Case 2:16-cv-02263-MCA-LDW Document 30 Filed 05/26/17 Page 33 of 36 PageID: 407 -28- establishing the alleged actual knowledge. See In re Jumei Int’l Holding Ltd. Secs. Litig., No. 14-9826, 2017 U.S. Dist. LEXIS 3206, at *12 (S.D.N.Y. Jan. 10, 2017) (“A plaintiff relying on Item 303 to establish a § 11 claim must plead, with some specificity, facts establishing that defendant had actual knowledge of the purported trend.”) (citation and internal quotation marks omitted; emphasis added). The Amended Complaint avers certain alleged trends and uncertainties that Plaintiff claims Freshpet should have included in its Secondary Offering Registration Statement. (AC ¶¶ 32-54.) These are the same alleged omitted “facts” that Plaintiff claims made Freshpet’s March 31, 2015, May 7, 2015, and August 11, 2015 financial projections for full-year 2015 false and misleading. (See AC ¶¶ 117(a)-(d), 134 (a)-(c).) As explained in Section III.C.1 above, Plaintiff has not, and cannot, point to any document or confidential witness in support of its assertions that these alleged “facts” were known or knowable at the time Freshpet made its March 31, May 7 and August 11 projections. Indeed, several of these “facts” are mere fiction. (See supra Section III.C.1.) Thus, Plaintiff has failed to meet Item 303’s pleading burden. In addition, because Plaintiff relies on these same alleged facts for explaining why certain statements in the Registration Statement are “inaccurate” (AC ¶¶ 50-54), those claims must fail as well. First, three of the challenged statements constitute non-actionable statements of belief or opinion20 because Plaintiff has failed to allege facts showing that the stated opinions are not honestly believed and lack a reasonable basis, as required under Omnicare, Inc. v. Laborers Dist. Council Const. Indus. Pension Fund, 135 S. Ct. 1318, 1326 (2015). Second, all 20 See AC ¶ 51 (“we believe there is an opportunity to install a Freshpet Fridge in at least 35,000 stores across North America); “We believe our Freshpet Fridges generate compelling economics . . . .” (emphasis added)); ¶ 52 (“We believe there is a significant opportunity to continue to grow our network of Freshpet Fridges . . . .” (emphasis added)). See also Exh. Q, 04.27.15 Am. Reg. Stm. at 1-4, 58, 61, 62. Case 2:16-cv-02263-MCA-LDW Document 30 Filed 05/26/17 Page 34 of 36 PageID: 408 -29- three statements – as well as four additional statements21 – are non-actionable forward-looking statements protected under the Securities Act safe harbor (provided by the PSLRA), which is identical to the Exchange Act safe harbor discussed in Section III.B above. See 15 U.S.C. § 77z- 2(c); see also Castlerock Mgmt. Ltd. v. Ultralife Batteries, Inc.,114 F. Supp. 2d 316, 326 (D.N.J. 2000) (applying PSLRA safe harbor to Sections 11 and 12 claims); In re MobileMedia Sec. Litig., 28 F. Supp. 2d 901, 930 (D.N.J.1998) (applying “actual knowledge” requirement). Here, the Registration Statement identifies the challenged statements as forward-looking22 and contains the requisite meaningful cautionary language.23 And as explained above, Plaintiff has not alleged with the requisite particularity that Defendants had “actual knowledge” that these statements, when made, were false or misleading. B. Plaintiff’s Derivative Section 15 Claim Should Be Dismissed Section 15 of the Securities Act holds corporate officers and directors liable for violations of Section 11 and Section 12(a)(2). Section 15 only applies, however, if an underlying Section 11 or Section 12(a)(2) violation has been found. See Adams, 381 F.3d at 273 n.3 (“[S]ection 15 permits investors to recover, on a joint and several basis, from ‘control persons’ 21 See AC ¶ 52 (“we plan to install over 6,000 Freshpet Fridges in new retail locations;” “[w]e expect continued demand for our Freshpet Fridges . . . .” (emphasis added)), ¶ 53 (“[w]e intend to enhance our operating margins . . . .; “[w]e expect that gross profit margins improvement and operating leverage from SG&A costs will be a significant driver of earnings growth going forward” (emphasis added)). See also Exh. Q, 04.27.15 Am. Reg. Stm. at 4, 62. 22 See Exh. Q, 04.27.15 Am. Reg. Stm. at 30 (identifying as forward-looking statements those that include, e.g., “believe,” “expect,” “plan,” and/or “intend”). 23 See id. at 14 (“We may not be able to successfully implement our growth strategy on a timely basis or at all.”); 16 (“The loss of a significant customer, certain actions by a significant customer or financial difficulties of a significant customer could adversely affect our results of operations;” “The growth of our business depends on our ability to introduce new products and improve existing products in anticipation of changes in consumer preferences and demographics.”). Case 2:16-cv-02263-MCA-LDW Document 30 Filed 05/26/17 Page 35 of 36 PageID: 409 -30- who would be otherwise liable under sections 11 and 12(a)(2).”). Because Plaintiff has failed to state a Section 11 or 12 claim, its Section 15 claim should be dismissed. V. CONCLUSION For all of the above reasons, the Amended Complaint should be dismissed with prejudice. Respectfully submitted, /s/ Robert L. Hickok Robert L. Hickok Angelo A. Stio III PEPPER HAMILTON LLP (A Pennsylvania Limited Liability Partnership) 301 Carnegie Center Suite 400 Princeton, NJ 08543 (609) 951-4125 -and- Jay A. Dubow (admitted pro hac vice) Gay Parks Rainville (admitted pro hac vice) PEPPER HAMILTON LLP 3000 Two Logan Square Eighteenth & Arch Streets Philadelphia, PA 19103 (215) 981-4000 Attorneys for Defendants Freshpet, Inc., Richard Thompson, Dated: May 26, 2017 Richard Kassar, Scott Morris and Charles Norris Case 2:16-cv-02263-MCA-LDW Document 30 Filed 05/26/17 Page 36 of 36 PageID: 410