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(Article from Securities Law Alert, May 2016) 

For more information, please visit the Securities Law Alert Resource Center

On May 11, 2016, the Southern District of New York dismissed in its entirety a putative securities fraud class action alleging that Weight Watchers International and certain of its executives issued misleading opinions regarding competition from free mobile applications, software transition issues, and enrollment declines. In re Weight Watchers Int’l Sec. Litig., 2016 WL 2757760 (S.D.N.Y. 2016) (Kaplan, J.).[1] The court held plaintiffs failed to meet the standard set forth in Omnicare v. Laborers District Council Construction Industry Pension Fund, 135 S.Ct. 1318 (2015), for pleading a securities fraud claim based on an alleged misstatement of opinion.[2]

Court Addresses Omnicare’s High Bar for Pleading a Securities Fraud Claim Based on an Allegedly Misleading Opinion 

The court explained that under the Omnicare standard, a plaintiff asserting a securities fraud claim based on an allegedly misleading opinion must allege either that (1) the statement of opinion or belief itself “‘constitute[d] a factual misstatement’” and “the speaker did not ‘actually hold[ ] the stated belief’”; or (2) the “defendant ‘omit[ted] to state a material fact necessary’ to make whatever statement(s) it made ‘not misleading.’” The court underscored that “a statement of opinion is not misleading just because external facts show the opinion to be incorrect.”

The court observed that reasonable investors expect that certain types of opinions—including those made in “‘formal documents,’ like financial statements filed with the SEC”—do not “‘reflect baseless, off-the-cuff judgments.’” Rather, reasonable investors “properly may assume” that those opinions “‘convey facts about how the speaker has formed the opinion’—i.e., facts ‘about the speaker’s basis for holding that view.’” The court stated that opinions that fail to disclose such facts “may mislead their audiences in violation of Rule 10b-5.”

The court explained that “a plaintiff who asserts that the defendant omitted to state a fact (or facts) necessary to make a statement of opinion or belief ‘not misleading’ must ‘call into question the issuer’s basis for offering the opinion.’” Under the Omnicare standard, “a plaintiff ‘cannot just say that the issuer failed to reveal [the] basis’ for the opinion.” To state a valid claim, the “plaintiff ‘must identify particular (and material) facts going to the basis for the issuer’s opinion—facts about the inquiry the issuer did or did not conduct or the knowledge it did or did not have—whose omission makes the opinion statement at issue misleading to a reasonable person reading the statement fairly and in context.”

Court Holds Plaintiffs Failed to State a Claim Based on Weight Watchers’ Opinions Concerning Competition From Free Mobile Applications

Plaintiffs contended “Weight Watchers made false and misleading statements regarding the competitive pressure it faced from free mobile apps.” The court found “the essence of the claim” turned on “Weight Watchers’ opinion . . . that its intended differentiation of its own product from the free apps would offset the ‘potential . . . additional pressure’ exerted by the apps.”

To state a claim based on this opinion, the court explained that plaintiffs had “to do more than merely allege that Weight Watchers was wrong when it stated that free mobile applications were not having a significant impact on its business.” Rather, plaintiffs had “to allege sufficiently facts that, if true, plausibly could justify a conclusion that defendants either knew that their statements were false or, at least, that they had no reasonable basis for making them.”

Plaintiffs had attempted to meet the Omnicare standard through confidential witness allegations. The court explained that confidential witness allegations “may be credited on a motion to dismiss” if (1) the allegations in the complaint “support the probability that a person in the position occupied by the source would possess the information alleged[,]” and (2) “the confidential witness statements relied upon . . . support the assertions based upon them.” The court found plaintiffs’ allegations did not meet this bar.

Court Holds Plaintiffs Failed to State a Claim as to Weight Watchers’ Opinions Regarding the Extent of Software Transition-Related Problems

Plaintiffs also contended that “Weight Watchers made false and misleading statements by failing to disclose the alleged severity of disruption” caused by the company’s transition to new software. Weight Watchers had disclosed the existence of software issues and explained that they were “in the process of being addressed.” The court found the company’s statements were opinions subject to the Omnicare standard.

To support their claim that the software-related opinions were misleading, plaintiffs relied on a confidential witness who stated that management was aware that the new software was “a complete disaster.” The court deemed this “rather grandiose and hyperbolic assertion” to be “a characterization or opinion of the witness, not an objectively testable statement of fact.” The court explained that “[o]ne person’s ‘complete disaster’ is another’s ‘setback’ or ‘problem.’” Plaintiffs also quoted a second confidential witness who stated that a number of clients had left the Weight Watchers program due to “system glitches.” The court found “the observation of ‘system glitches’ [was] not a sufficient basis for the accusation that the company lied about its view or that it lacked a reasonable basis for its statements of opinion.”

The court determined plaintiffs’ confidential witness allegations did not “suggest that either defendants did not actually believe (1) that the technical issues were being addressed . . ., or (2) those statements did not rest on a meaningful inquiry” as required under Omnicare.

Court Holds Plaintiffs Failed to State a Claim as to Weight Watchers’ Growth Forecast for 2012 

Finally, plaintiffs claimed “Weight Watchers’ statements forecasting top line growth for 2012 . . . were false or misleading” because the company “knew that its online-only business was cannibalizing its traditional meetings business and that it was facing a ‘material decline’ in traditional meeting attendance that would not be reversed until it updated its ‘PointsPlus diet plan.’” The court found Weight Watchers’ growth forecasts to be “clear statement[s] of opinion.”

Because Weight Watchers “disclosed its enrollment trends in public SEC filings,” the court held plaintiffs could not “demonstrate . . .  that Weight Watchers omitted material facts” that rendered its forecasts misleading. The court further noted that “the online business had significantly higher margins than the traditional business and that the margins for the online business continued to grow.” The court found that “even if the online business was cannibalizing customers from the traditional business and the traditional meetings business was in decline,” these trends would not “necessarily . . . be inconsistent with an optimistic growth forecast.”

The court agreed with defendants that “there is nothing fraudulent about a disappointing year,” and held plaintiffs’ allegations concerning Weight Watchers’ growth forecasts insufficient to meet the demands of Omnicare.