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Ong v. Chipotle Mexican Grill, Inc.

United States District Court, S.D. New York

March 8, 2017

SUSIE ONG, individually and on behalf of all others similarly situated, et al., Plaintiffs,
v.
CHIPOTLE MEXICAN GRILL, INC., et al., Defendants.

          OPINION AND ORDER

          KATHERINE POLK FAILLA United States District Judge

         In the wake of several food-borne illness outbreaks in 2015 that were sourced to Chipotle restaurants, Lead Plaintiffs Metzler Investment GmbH (“Metzler”) and Construction Laborers Pension Trust of Greater St. Louis (the “Trust, ” and together, “Plaintiffs”) brought this lawsuit on behalf of a putative class of purchasers (the “Class”) of the common stock of Defendant Chipotle Mexican Grill, Inc. (“Chipotle” or the “Company”), for the period between February 5, 2015, and January 5, 2016, inclusive (the “Class Period”). Plaintiffs allege that Chipotle and certain of its executives, M. Steven Ells, Montgomery F. Moran, and John R. Hartung (together, the “Individual Defendants”), violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”), 15 U.S.C. §§ 78j(b) and 78t(a), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, in public statements issued throughout 2015. Defendants have moved to dismiss Plaintiffs' Amended Complaint (the “Complaint”) pursuant to Federal Rules of Civil Procedure 9(b) and 12(b)(6) for failure to state a claim. Plaintiffs have cross-moved to strike Exhibits 8, 11-14, and 17-40 (the “Exhibits”) attached to Defendants' motion.

         Plaintiffs' Complaint may be long on text, but it is short on adequately-pleaded claims. Accordingly, and for the reasons outlined below, Defendants' motion to dismiss is granted and Plaintiffs' related motion to strike is denied. However, Plaintiffs' request for leave to file an amended pleading is also granted, and the Complaint is therefore dismissed without prejudice.

         BACKGROUND[1]

         A. Factual Background

         1. The Parties

         Plaintiffs are purchasers of Chipotle common stock during the Class Period. (Compl. ¶ 1; see also Dkt. #28, Ex. A). “Chipotle is a publicly traded fast-food restaurant chain that directly operate[d] more than 1, 900 Mexican food restaurants in the United States” during the Class Period. (Compl. ¶ 2; see also Id. at ¶ 17).[2] The Company “distinguishes itself from its competitors primarily through its corporate philosophy of ‘Food with Integrity, ' which is Chipotle's promise to find the highest quality ingredients that are sourced sustainably and organically, while still charging reasonable prices.” (Id. at ¶ 17; see also Id. at ¶¶ 40-41). As of February 4, 2015, Chipotle had more than 31 million shares of common stock issued and outstanding, and these were listed on the New York Stock Exchange under the ticker symbol “CMG.” (Id. at ¶ 17).

         The Individual Defendants are Chipotle executives. Defendant Ells founded Chipotle in 1993, and during the Class Period was the Company's co-CEO and Chairman of its Board of Directors (the “Board”). (Compl. ¶ 18). Defendant Moran was Ells's co-CEO and also a Director on the Board; he had joined Chipotle in 2005 as President and Chief Operating Officer. (Id. at ¶ 19). Moran had also previously served as the Company's outside general counsel while working as the CEO of the Denver law firm Messner & Reeves, LLC. (Id.). Defendant Hartung was Chipotle's Chief Financial Officer, and had been since 2002. (Id. at ¶ 20). In these positions, Plaintiffs allege, each of the Individual Defendants “directly participated in the management of the Company, was directly involved in the day-to-day operations of the Company at the highest levels[, ] and was privy to confidential proprietary information concerning the Company and its business, operations, products, growth, financial statements, and financial condition.” (Id. at ¶ 24; see also Id. at ¶¶ 23, 25-28).

         2. The Outbreaks and Their Aftermath

         Between July 2015 and December 2015, there were at least seven incidents of food-borne illness outbreaks involving Chipotle restaurants in the United States. (Compl. ¶ 4). These included:

(i) an outbreak of E. coli O157:H7 in July in Washington State; (ii) an outbreak of Norovirus in August in Washington; (iii) an outbreak of Norovirus in August in California; (iv) an outbreak of Salmonella in August in Minnesota; (v) an outbreak of E. coli STEC O26 in October in Washington, Oregon, California, Illinois, Maryland, Minnesota, New York, Ohio, Pennsylvania, Delaware, and Kentucky; (vi) an outbreak of E. coli STEC O26 in November in Kansas, North Dakota, and Oklahoma; and (vii) an outbreak of Norovirus in December in Massachusetts.

(Id. at ¶ 14 n.1; see also Id. at ¶ 76).[3] According to Plaintiffs, Chipotle in late 2014 had “switched from using central commissary kitchens to process and prepare the produce used in its restaurants to processing produce in each of the Company's over 1, 900 restaurants, ” and “[s]everal of the[] outbreaks appear to have resulted from [this] change.” (Id. at ¶ 4; see also Id. at ¶¶ 46-47). Plaintiffs alleges that “Chipotle repeatedly undertook efforts to conceal these outbreaks from its customers, investors, and the public at large.” (Id. at ¶ 75). And “[i]nstead of immediately improving its food safety practices after these numerous outbreaks, Chipotle sought to shift the blame for these food-borne illnesses to other entities, including one of its own suppliers, even when such conclusions were not supported by the available scientific evidence.” (Id.).

         a. The July E. coli Outbreak in Washington

         The first outbreak was identified in late-July 2015, when the Washington State Department of Health traced an outbreak of E. coli O157:H7 that sickened five people to a Chipotle restaurant in Seattle. (Compl. ¶ 77). “The common ingredient eaten by these individuals was identified as cilantro, which was supplied to Chipotle by Taylor Farms.” (Id.). Chipotle was apprised of the outbreak no later than August 3, 2015, and participated in testing restaurant employees for E. coli. (Id. at ¶¶ 82-83). Despite this awareness on Chipotle's part, “the outbreak was not publicly disclosed until November 10, 2015.” (Id. at ¶ 84).

         b. The August Norovirus Outbreak in Washington

         In early August 2015, the Washington State Department of Health identified a Norovirus outbreak at Chipotle's Hazel Dell location. (Compl. ¶ 85). The outbreak was caused by a Chipotle restaurant employee who had reported to work sick and stayed for several hours while vomiting. (Id. at ¶ 87). Once the outbreak was recognized, the restaurant initiated Chipotle's “Norwalk Protocol, ” which “requires that Chipotle close any location where two or more customers complain of food-borne illness[, ] ... dispose of all food items, and bleach all cooking and food handling surfaces.” (Id. at ¶¶ 88-89).

         c. The August Norovirus Outbreak in California

         On August 18, 2015, another Norovirus outbreak was identified, this time at Chipotle's Simi Valley restaurant. (Compl. ¶ 91). 243 individuals were reported ill. (Id.). By August 20, 2015, the Company had initiated its Norwalk Protocol and closed the Simi Valley restaurant. (Id. at ¶ 92). A sign was posted at the restaurant indicating that it had “closed for the rest of the day due to a severe staffing shortage.” (Id.). The restaurant reopened the following day “with a new crew of employees from other Chipotle restaurants.” (Id. at ¶ 93).

         On August 22, 2015, Chipotle reported to the Ventura County Environmental Health Division that 17 Simi Valley employees “were sick with gastrointestinal illness and had been replaced” with other Chipotle employees. (Compl. ¶ 94). Health officials conducted testing on August 24 - though their ability to do so was hindered by Chipotle's sanitization during the implementation of the Norwalk Protocol - and “concluded that the cause of the outbreak was Norovirus.” (Id. at ¶ 95). The Ventura County Environmental Health Division issued a press release to this effect on September 4, 2015. (Id. at ¶ 97). On September 14, 2015, it issued a Notice of Violation to Chipotle regarding violations that included “Chipotle's failure to notify the ... Division when it was first aware of sick employees.” (Id. at ¶ 99).

         “In December 2015, Chipotle was served with a Federal Grand Jury Subpoena from the U.S. District Court for the Central District of California in connection with an official criminal investigation being conducted by the U.S. Attorney's Office for the Central District of California, ” and the U.S. Food and Drug Administration's Office of Criminal Investigations. (Compl. ¶ 101 (quoting Chipotle's January 6, 2016 Form 8-K)). Chipotle announced that it “intend[ed] to fully cooperate with the investigation.” (Id.). But “[i]n response to this news, the price of Chipotle's common stock declined ... 4.98%, on unusually heavy trading volume.” (Id. at ¶ 102). A class action lawsuit brought by a “purported class of Chipotle consumers who were infected with Norovirus at the Simi Valley location” was filed on January 19, 2016. (Id. at ¶ 103).

         d. The August Salmonella Outbreak in Minnesota

         On or about August 24, 2015, a Salmonella outbreak was identified at 22 Chipotle locations in Minnesota. (Compl. ¶ 104). 64 individuals were reported ill. (Id.). The Minnesota Department of Health informed Chipotle corporate employees, including the Company's Investigations Manager Patti Mann, of the outbreak by September 3, 2015. (Id. at ¶ 111). On September 10, 2015, the Department issued a press release indicating that 45 cases had been identified and that an investigation was ongoing. (Id. at ¶ 119). On September 16, 2015, the Department issued a second press release to update the first, in which it “named tomatoes as the ingredient that was tainted with Salmonella at these Chipotle locations.” (Id. at ¶ 104; see also Id. at ¶¶ 123-25). The press release also indicated that “Chipotle had switched its supplier for tomatoes in light of this outbreak.” (Id. at ¶ 125). Several civil lawsuits were filed alleging personal injuries related to this outbreak. (Id. at ¶¶ 121-22, 126, 128-29). According to Plaintiffs, “[t]he August Salmonella outbreak had a negative impact on the Company's operations and financial performance.” (Id. at ¶ 133).

         e. The October E. coli Outbreak in Washington and Oregon

         On October 30, 2015, the Washington State Department of Health alerted Chipotle that an outbreak of E. coli STEC O26 beginning on October 17, 2015, had been identified at Chipotle restaurants in Washington and Oregon. (Compl. ¶ 134). On October 31, 2015, Chipotle closed 43 of its restaurants in these states. (Id. at 139). Somewhat curiously, “signs on the closed Oregon restaurants blam[ed] the closures on ‘equipment issues, '” and “similar signs” at Chipotle locations in Washington blamed “supply issues.” (Id. at ¶ 140). But on November 1, 2015, news coverage began reporting that the closures were due to an E. coli outbreak. (Id. at ¶ 141). “Almost immediately, news of this E. coli outbreak began having a significantly negative impact on Chipotle's common stock price and same store sales.” (Id. at ¶ 142).

         The outbreak was chronicled in a series of press releases. On November 3, 2015, the outbreak was publically acknowledged; “a spokesman for the Oregon Public Health Division[] publicly stated that the specific produce under scrutiny for this E. coli outbreak was cilantro, romaine lettuce and tomatoes, ” and Chipotle issued a press release that “publicly addressed this E. coli outbreak and the remediation efforts that the Company had begun to undertake.” (Compl. ¶¶ 146-47). Chipotle indicated that it would “continue[] to work swiftly and thoroughly with health department officials as they look[ed] to conclude this investigation.” (Id. at ¶ 147). The Center for Disease Control and Prevention (the “CDC”) joined the conversation on November 4, 2015, announcing in a web posting that 39 people were ill in Washington and Oregon and that the CDC and its local partners were “continuing laboratory surveillance ... to identify additional ill persons and to interview them.” (Id. at ¶¶ 148-49). CDC updates issued on November 5, 6, and 9 reiterated this information and indicated the count of infected persons had risen to 41. (Id. at ¶¶ 151-52, 154). A November 9, 2015, press release from the Washington State Department of Health stated that the Department's staff were “still working to investigate the cause of an outbreak of illnesses, ” because “[t]he first round of test results did not find E. coli bacteria in food samples taken from several Chipotle restaurants.” (Id. at ¶ 155). Chipotle published a press release on November 10 stating that its 43 closed restaurants would be reopened because “[h]ealth officials [had] concluded that there [was] no ongoing risk from this incident.” (Id. at ¶ 156). The November 10 press release also claimed that “[n]o Chipotle locations outside of Oregon and Washington [had] been connected to this issue in any way.” (Id.). “[N]o fewer than 30 news outlets reported on and repeated Chipotle's ... claim ... that the health officials believed there was ‘no ongoing risk.'” (Id. at ¶ 192).

         But on November 12, 2015, the CDC announced that it had identified 51 ill persons in Washington and Oregon, that it was “continuing laboratory surveillance, ” and that its investigation was “still ongoing to determine if the ill people ate a meal item or ingredient in common that was served at the Chipotle Mexican Grill locations.” (Compl. ¶ 157). And on November 20, 2015, another CDC update indicated that the E. coli outbreak had “been linked to Chipotle customers in California, New York, Ohio[, ] and Minnesota as well.” (Id. at ¶ 158). The November 20 statement repeated that the CDC was “continuing laboratory surveillance, ” and engaged in “ongoing” investigatory work. (Id.). Chipotle issued a responsive statement later that day, providing more detail regarding the cases in California, Ohio, New York, and Minnesota and Chipotle's remediation efforts. (Id. at ¶ 159). “In response to this news, which became public during the trading day on November 20, 2015, the price of Chipotle common stock declined $75.81 per share, or approximately 12.4%[.]” (Id. at ¶ 160).

         The CDC's investigation concluded on February 1, 2016, when the CDC issued its Final Case Count Update. (Compl. ¶ 171). The CDC's “Final Count stated that the October E. coli outbreak infected 55 people across 11 states - California, Delaware, Illinois, Kentucky, Maryland, Minnesota, New York, Ohio, Oregon, Pennsylvania[, ] and Washington.” (Id.).

         f. The November E. coli Outbreak in Kansas, North Dakota, and Oklahoma

         While the October outbreak was evolving, a second E. coli STEC O26 outbreak manifested in Chipotle customers in Kansas, North Dakota, and Oklahoma. (Compl. ¶ 174). Five people were sickened and two Chipotle restaurants implicated. (Id. at ¶¶ 174, 176). Both Chipotle and the CDC were aware of this outbreak by November 26, 2015. (Id. at ¶ 175). The CDC investigated a possible connection between this outbreak and the October E. coli outbreak, but announced definitively in its February 2016 Final Count that “the November E. coli outbreak had a different DNA profile from the October E. coli outbreak, ” and that the CDC's investigation into both outbreaks had concluded. (Id. at ¶ 178).

         g. The December Norovirus Outbreak in Massachusetts

         On December 7, 2015, there was a Norovirus outbreak identified at Chipotle's Brighton location. (Compl. ¶ 179). 143 individuals were reported ill. (Id.). The restaurant was closed from December 7 to 9, 2015, and the employee found to have caused the outbreak by “reporting to work while sick” was fired. (Id. at ¶¶ 182-83). “In response to public reports of this Norovirus outbreak, which began surfacing after the close of trading, the price of Chipotle common stock declined $19.64 per share, or approximately 3.6%, from a close of $551.75 per share on December 7, to an opening price of $532.11 per share on December 8, 2015.” (Id. at ¶ 181).

         h. Chipotle's Remediation Efforts

         On December 4, 2015, Chipotle filed its Form 8-K, “which quantified for the first time the devastating impact that this E. coli outbreak had on Chipotle's operations and financial performance.” (Compl. ¶ 165). Chipotle rescinded its “previously announced 2016 outlook for comparable restaurant sales increases, ” because of “recent sales trends and additional uncertainty related to the E. coli incident.” (Id.). “In response to the [December 4] Form 8-K, filed after the close of trading on Friday, December 4, the price of Chipotle common stock declined $44.37 per share, or approximately 7.9%, from a close of $561.20 per share before the announcement, to an opening price of $516.83 per share on Monday, December 7, 2015.” (Id. at ¶ 166).

         Among other modifications to its policies and procedures, Chipotle “reverted back to commissary preparation for its produce.” (Compl. ¶ 4; see also Id. at ¶¶ 55-58). On December 4, 2015, the Company announced that it had agreed to implement a new food safety regimen that it had devised together with “food safety experts IEH Laboratories.” (Id. at ¶ 163). In December 2015 and January 2016, the company announced that it was “implementing ‘[e]nhanced internal training to ensure that all employees thoroughly understand the [C]ompany's high standards for food safety and food handling.'” (Id. at ¶ 5; see also Id. at ¶ 71). And on February 8, 2016, “Chipotle closed all of its stores for a company-wide staff meeting to review Chipotle's new food safety protocols issued as part of the Company's remediation efforts.” (Id. at ¶ 72).

         B. Procedural Background

         This lawsuit was first brought on January 8, 2016. (Dkt. #1). On March 8, 2016, then-putative Class Members Metzler and the Trust moved the Court for an order appointing them together as Lead Plaintiffs in this case and approving their selected counsel as Lead Counsel. (Dkt. #23, 28-30; see also Dkt. #39). This motion was granted on April 18, 2016. (Dkt. #43, 45).

         On June 17, 2016, Plaintiffs filed the Complaint. (Dkt. #49). On August 18, 2016, Defendants filed their motion to dismiss the Complaint. (Dkt. #60-62). Plaintiffs filed their opposition to Defendants' motion on October 31, 2016 (Dkt. #70), along with a Motion to Strike the majority of the 40 exhibits that Defendants had submitted in support of their motion (Dkt. #66-68). On December 14, 2016, Defendants filed their opposition to Plaintiffs' motion to strike their exhibits (Dkt. #75), as well as their reply in further support of their motion to dismiss the Complaint (Dkt. #74) and a request for oral argument with regard to both pending motions (Dkt. #76). Plaintiffs filed their reply in support of their motion to strike on January 11, 2017. (Dkt. #77).

         DISCUSSION

         A. Applicable Law

         1. Motions to Dismiss Under Federal Rule of Civil Procedure 12(b)(6)

         When considering a motion to dismiss under this rule, a court should “draw all reasonable inferences in [the plaintiffs'] favor, assume all well-pleaded factual allegations to be true, and determine whether they plausibly give rise to an entitlement to relief.” Faber v. Metro. Life Ins. Co., 648 F.3d 98, 104 (2d Cir. 2011) (internal quotation marks and citation omitted) (quoting Selevan v. N.Y. Thruway Auth., 584 F.3d 82, 88 (2d Cir. 2009)). Thus, “[t]o survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.'” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). In this regard, a complaint is deemed to include any written instrument attached to it as an exhibit or any statements or documents incorporated in it by reference. See, e.g., Hart v. FCI Lender Servs., Inc., 797 F.3d 219, 221 (2d Cir. 2015) (citing ...


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