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Angela Tyler, Individually and On Behalf of All Others Similarly Situated v. Liz Claiborne

September 29, 2011

ANGELA TYLER, INDIVIDUALLY AND ON BEHALF OF ALL OTHERS SIMILARLY SITUATED, PLAINTIFF,
v.
LIZ CLAIBORNE, INC., TRUDY F. SULLIVAN, AND WILLIAM L. MCCOMB, DEFENDANTS.



The opinion of the court was delivered by: Richard J. Holwell, District Judge:

ORDER AND MEMORANDUM OPINION

Lead Plaintiff James S. Metz brings this putative class action against defendants Liz Claiborne, Inc. ("LIZ"), Trudy F. Sullivan, and William L. McComb, alleging violations of Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78j(b), Exchange Act Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, and Exchange Act Section 20(a), 15 U.S.C. § 78t(a). Plaintiff alleges that between January 16, 2007, and April 30, 2007 (the "Class Period"), defendants fraudulently misrepresented facts relating to LIZ's relationship with Macy's, Inc. ("Macy's") and to LIZ's design of a new line of clothing for J.C. Penney Company, Inc. ("JC Penney"). Defendants now move to dismiss. For the reasons set forth below, and specifically because plaintiff fails to adequately plead scienter, defendants' motion is GRANTED in its entirety; and this action is dismissed with prejudice.

I. FACTUAL SETTING

For the purposes of the present motion, the following facts-drawn from the complaint, documents incorporated by reference therein, Securities Exchange Commission ("SEC") public disclosure documents, and documents known to the plaintiffs and upon which they relied in bringing this action*fn1 -are taken as true.

A. Background

Plaintiff seeks to represent the class of persons who purchased LIZ's common stock during the Class Period, January 16, 2007, through April 30, 2007. (Second Amended Compl. ("SAC") ¶¶ 1, 18.) LIZ, a Delaware corporation with its principal place of business in New York, designs and sells clothing and other apparel, both wholesale and retail. (Id. ¶ 19.) LIZ's stock trades on the New York Stock Exchange under the symbol "LIZ." (Id.) As relevant to this action, LIZ designs mid- and high-end clothing, releasing new fashion lines each spring and fall, and sells those lines wholesale to department stores such as non-parties Macy's and JC Penney. (See generally id. ¶¶ 1, 6, 19, 25, 35, 40.) Trudy F. Sullivan was the President of LIZ during the Class Period. (Id. ¶ 20.) William L. McComb was the CEO of LIZ, and a director of the company, during the Class Period. (Id. ¶ 21.)*fn2

In 2005, two of the most powerful department store chains, Federated Department Stores, Inc. ("Federated"), and May Department Stores Company ("May") merged. (Id. ¶ 24.) Federated operated the department store Macy's. (Id.) After the merger, Macy's become one of the United States' largest department stores. (Id. ¶¶ 24, 26, 29.) With its new power, Macy's demanded merchandise and fashion lines that were exclusive to Macy's; it desired to sell items not available at other stores. (Id. ¶¶ 26, 28, 31.) Fashion items designed by LIZ were sold wholesale to, and sold retail by, Macy's under the brand "Liz Claiborne." (See id. ¶¶ 9, 13, 36.)

Macy's was LIZ's largest customer by volume, accounting for eighteen percent of LIZ's total sales in 2005 and sixteen percent in 2006. (Id. ¶ 25.) However, sales of the Liz Claiborne brand at Macy's had been "slumping for some time," (id. ¶ 36); and therefore the relationship between LIZ and Macy's "was already precarious" (id.), at the time of the events described herein. According to CW1*fn3 , a LIZ "Vice President and General Manager," whose "area of responsibility included wholesale sales of the Liz Claiborne brand, and in particular, sales to Macy's" (id. ¶ 36), "everyone at [LIZ] knew that Liz Claiborne sales to Macy's had been falling" in the time prior to the Class Period. (Id. ¶ 39.) In addition, according to the New York Post, as part of Macy's reworking of its business model, Macy's "ha[d] been reducing inventory across the board," including, but not only, of LIZ's apparel. (Id. ¶ 95.)

The Federated-May merger rocketing Macy's into the department store stratosphere apparently caused "turmoil" and "confusion" in "the department store landscape." (Id. ¶ 33.) Taking advantage of the situation, JC Penney undertook a new business strategy of closing down stores located in shopping malls and opening several stand-alone, more traditional department stores. (Id.) To establish its presence as a "real department store," (id.), and to bring in customers, JC Penney needed brand-name merchandise. It obtained that merchandise by entering into a deal with LIZ under which LIZ would design two new fashion lines branded as "Liz & Co." and "CONCEPTS by Claiborne." (Id. ¶ 35.) JC Penney would sell those lines exclusively at JC Penney stores. (Id.) The deal was announced on October 5, 2006. (Id.) McComb, who prior to becoming CEO of LIZ was Company Group Chairman at Johnson & Johnson, became CEO of LIZ on November 6, 2006. (Id. ¶ 42.) Between October 2006 and April 2007, LIZ did not repurchase any of its own stock from the market. (Id. ¶¶ 11, 72, 93a, d.) Allegedly, prior to the fourth quarter of 2006, LIZ had repurchased some of its stock in each quarter for over a year. (Id. ¶ 72.)

Some LIZ employees and some in LIZ management found the new JC Penney deal odd. For example, CW1 was surprised. According to CW1, Terry Lundgren, Macy's CEO, "knew that [JC Penney] was becoming a big competitor to Macy's." (Id. ¶ 36) Thus, explains CW1, Macy's was quite upset with the LIZ-JC Penney deal which allowed JC Penney to sell items branded with the word "Liz." (Id.) CW2, who "worked in [LIZ's] Fragrance Division"*fn4 during the class period, "was startled, because Macy's was [LIZ's] biggest customer: In the world of apparel, if you launch a major line for a competitor, you have to consider how Macy's will react." (Id. ¶ 41.)

Apparently, Lundgren, Macy's CEO, made his displeasure with the LIZ-JC Penney deal known to McComb in November 2006. According to an article published in Fortune on December 4, 2008, on November 22, 2006, McComb had a meeting with Lundgren in which "Lundgren was furious at [LIZ] for creating a less expensive line for [JC Penney] that competed directly with products sold in Macy's stores." (Id. ¶ 54.) In addition, according to a New York Times article from July 31, 2007, Lundgren apparently "told executives at [LIZ]," that "'You have lost your most-favored-nation status.'" (Id. ¶ 55.)*fn5

B. The Class Period

1. Alleged Misstatements and Omissions During the Class Period The Class Period begins on January 16, 2007, and ends on April 30, 2007. (Id. ¶ 1.) Plaintiff alleges that McComb and Sullivan made fraudulently misleading statements during that period that fall generally into three categories. The first category consists of statements allegedly indicating that the LIZ-Macy's relationship was strong. The second is made up of statements to the effect that the LIZ-JC Penney deal would not affect sales to Macy's generally. The third category is of statements allegedly representing that Macy's understood that the "Liz Claiborne" and "Liz & Co." lines were differentiated and appealed to different consumers, and that therefore Macy's was on board with the LIZ-JC Penney deal.

On January 16, 2007-the first day of the Class Period-the trade journal Women's Wear Daily published a profile of McComb. (Id. ¶ 57.) The article suggested that Macy's was "miffed" at LIZ for selling the "Liz & Co." brand to JC Penney, and quoted "[s]ources" as saying that Macy's was "looking to cut back space for the Claiborne brand as [Macy's] focuses more on exclusive collections . . . or it could drop Claiborne's licensed products." (Id.) When McComb was asked whether Macy's was going to drop LIZ, he responded, "You would have to ask [Macy's], but I would be surprised if that was the case because it is a long-standing and important relationship for both of us." (Id.) In the same article, a Macy's spokesman stated, "Liz Claiborne will continue to be an ongoing brand at [Macy's]." (Id.) Plaintiff alleges that McComb's statements were false and misleading when made because (1) LIZ's relationship with Macy's was in fact deteriorating, and apparently thus not important or long-standing;*fn6 (2) at some undetermined time before July 31, 2007, Lundgren told executives at LIZ that LIZ had "lost [its] most-favored-nation status" at Macy's;*fn7 (3) Macy's wanted to sell only exclusive merchandise; (4) Lundgren had been "furious" about LIZ's deal with JC Penney; and (5) LIZ employees had been "surprised" by the LIZ-JC Penney deal. (Id. ¶ 58.a-d.)

Sullivan addressed the differentiation between the "Liz Claiborne" and the "Liz & Co." lines in her opening remarks on a February 28, 2007 conference call announcing LIZ's financial results for fiscal year 2006 and the fourth quarter of that year. (Id. ¶¶ 63-64; see also Stern Decl. Ex. A at 7-8.) She stated, in summarizing the quarterly updates relating to the Liz Claiborne brand:

Recently, we announced the launch of Liz & Co. and Concepts by Claiborne, which are debuting this spring in JCPenney. We remain focused on maintaining a clear distinction between these core brands and the diffusion line . . . .

Our department store partners realize these new launches are geared toward a distinct and separate consumer, one who shops in a different venue and in a different price zone. They acknowledge our intent to preserve the marked differences in the product offering, as well as the consumer's esteem and desire for both Liz Claiborne and Claiborne in store stores [sic]. (SAC ¶ 64; Stern Decl. Ex. A. at 8.) Plaintiff alleges that Sullivan's statements were false and misleading when made because (1) Lundgren had been "furious" with LIZ in November; (2) Macy's had cut its fall season orders earlier in February*fn8 ; (3) JC Penney had been undertaking a strategy of opening more stand-alone traditional department stores; (4) the January 16, 2007 Women's Wear Daily article cited "[s]ources" as saying that Macy's believed that the "Liz & Co." brand "denigrate[d] the Liz Claiborne brand"; and (5) McComb stated, on a May 1, 2007 conference call after the Class Period, that changing the name of the LIZ line sold at JC Penney from "Crazy Horse, a Liz Claiborne Company" to "Liz & Co.," created a "brand halo" that bolstered business for the "Liz & Co." brand. (SAC ¶¶ 65.a-f; see also id. ¶¶ 57, 87.)

Later on the same conference call, McComb responded to the question of what his "takeaway[s]" were from meeting with his "larger customers." (Id. ¶ 66.) McComb's lengthy answer included that LIZ's customers see the vast capability that we have and our ability to buy brands, to market brands, to take them globally, and to build brand power.

So I see a significant openness and eagerness to partner with our company, in spite of any specific tensions that might exist on a given brand or on a given issue. (Id.) Plaintiff alleges that this statement was false and misleading when made, with respect to Macy's, because in fact Macy's relationship with LIZ had deteriorated and its CEO, Lundgren, was "furious" with LIZ. (Id. ¶ 67.)

Following McComb's statement above, Sullivan was asked about how the "Liz Claiborne" brand was selling at Macy's. (Id. ¶ 68.) Sullivan responded, "[W]e're pleased with the business we see in the department stores." (Id.) Plaintiff alleges that this statement was false and misleading when made because Macy's had cut around thirty percent of its fall season orders earlier that February. (Id.)

The last allegedly false and misleading comments on the February 28, 2007 conference call were made by both Sullivan and McComb in response to a question about "concerns over the Liz & Co. launch in Penney's among other department store executives." (Id. ¶ 69.) Sullivan responded that "[LIZ's] commitment to [the department stores] is that we will have very separate and distinct and elevated lines in department stores . . . ." (Id.) Later, McComb, responding to the same question, stated that "the Liz Claiborne apparel lines in the traditional department stores have a distinctive and elevated product presentation versus what we're doing with the diffused line." (Id.) Plaintiff alleges that these statements were false and misleading when made for all the reasons heretofore mentioned, including specifically (1) that at some undetermined time before July 31, 2007, Lundgren told "executives" at LIZ that LIZ had "lost [its] most-favored-nation status" at Macy's; and (2) that McComb stated, after the Class Period, that business for the "Liz & Co." brand was bolstered by the Liz Claiborne "brand halo." (Id. ¶¶ 70.a-b.)

The final allegedly false and misleading statements made in the Class Period were made by Sullivan and McComb during a question-and-answer session at a March 21, 2007 Merrill Lynch Retailing Leaders Conference. (Id. ¶ 76.)*fn9 Therein, in response to a question about the "long-term potential" for the "Liz Claiborne" brand, Sullivan stated "we are extremely pleased with the progress that's made in the Liz Claiborne brand." (Id.) Then in response to a question about "the opportunities and challenges with [Macy's]," McComb answered, "I think the real question is how can we help Macy's in particular? Macy's, which is the business in the most transition, how can we support them as a vendor? . . . I think we as a vendor that has supported them and they've supported us, I think we need to frame the question that way . . . ." (Id.) Next, in response to the question of how she would "characterize [LIZ's] relationship today with the department stores . . . ?" Sullivan answered that "for the most part they had great relationships [we're] both on a quest for innovation." (Id. (alteration in original).) Finally, responding to the question whether "the department stores" were "responsive" to LIZ's business strategy, Sullivan answered, "absolutely . . . they are fully engaged in these discussions." (Id.) Plaintiff claims these statements were false and misleading when made because (1) in fact LIZ did not have a good business relationship with Macy's; (2) the department stores were not interested in the Liz Claiborne brand; and (3) the department stores were not responsive to LIZ's business strategy. (Id. ¶ 77.)

2. Allegations Supporting Scienter

Plaintiff alleges that during the class period, McComb and Sullivan knew or should have known that the statements detailed above were false or misleading for several reasons. First, plaintiff relies heavily on the December 8, 2008 Fortune article which recounted that, at a November 22, 2006 meeting between Lundgren and McComb, Lundgren was furious at LIZ for dealing with JC Penney. (See, e.g., id. ¶¶ 59.a, 67.) Plaintiff also points out that Lundgren had made very well-known Macy's desire to partner only with designers and wholesalers who would supply Macy's with exclusive and unique products. (Id. ¶ 59.b.) Relatedly, Macy's was LIZ's biggest customer, accounting for around sixteen percent of LIZ's sales during the period in question. (Id. ¶¶ 25, 65.b; see also Pl.'s Opp'n at 14-15.) And at least one article from January 2007 noted that the "Liz & Co." brand sold to JC Penney could have a detrimental effect on the "Liz Claiborne" core brands sold at Macy's. (SAC ¶¶ 57, 65.d.) In addition, JC Penney had made known its desire to compete more directly as and against more traditional department stores such as Macy's. (Id. ¶¶ 33, 65.c.)

Plaintiff also points to Macy's spring and fall 2007 season order cuts. Following standard fashion industry practice, Macy's had placed large bulk orders for LIZ's spring 2007 line in September 2006, and placed orders for LIZ's fall 2007 line in February 2007. (Id. ¶ 40.) These orders would eventually be scaled back shortly before being filled, also a standard practice in the industry. (Id.) CW1, however, recalls that there were "big cuts" in Macy's' February 2007 orders for that fall from prior years- approximately thirty percent. (Id.) CW1 believed the reduction to be a retaliatory response by Macy's due to the LIZ-JC Penney deal. (Id.) In addition, the December 4, 2008 Fortune article asserted that a "few months" after the McComb-Lundgren November 2006 meeting, Macy's greatly scaled back its spring 2007 orders, originally placed the previous September. Quoted in the article on that issue, McComb said that "'Terry [Lundgren] wanted to teach us a lesson.'" (Id. ¶ 54). Plaintiff alleges that defendants' statements to the effect that the LIZ-Macy's relationship was strong and that Macy's understood that the "Liz Claiborne" and "Liz & Co." line were differentiated, were made with scienter because Macy's had scaled back ...


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