NOT PRECEDENTIAL

UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT _____________

No. 20-1292

_____________

In re: NEWELL BRANDS, INC. SECURITIES LITIGATION

HAMPSHIRE COUNTY COUNCIL AS ADMINISTERING AUTHORITY OF THE HAMPSHIRE COUNTY COUNCIL PENSION FUND, Appellant

v.

NEWELL BRANDS INC; MICHAEL B. POLK; RALPH J. NICOLETTI; JAMES L. CUNNINGHAM, III _____________________________________

On Appeal from the United States District Court for the District of New Jersey (District Court No.: 2-18-cv-10878) Judge: Honorable John M. Vazquez _____________________________________

Submitted under Third Circuit L.A.R. 34.1(a) September 25, 2020

(Filed: December 1, 2020)

Before: MCKEE, JORDAN and RENDELL, Circuit Judges. _________

OPINION* _________

* This disposition is not an opinion of the full Court and pursuant to I.O.P. 5.7 does not constitute binding precedent. RENDELL, Circuit Judge:

Plaintiff-Appellant challenges the District Court’s decision to grant Defendants-

Appellees’ motion to dismiss for failure to state a claim. Plaintiff, a pension fund,

brought a federal securities class action on behalf of purchasers of Newell Brands, Inc.

(“Newell”) stock between February 6, 2017 and January 24, 2018 (“Class Period”). The

District Court concluded that Plaintiff failed to sufficiently plead a violation of Section

10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5

promulgated thereunder by the Securities and Exchange Commission (“SEC”),

.10b-5. As result, the District Court determined that Plaintiff’s claim under Section

20(a) also fails. For the following reasons, we will affirm.

I. FACTUAL BACKGROUND

Plaintiff sued Newell, as well as three senior officers, Michael B. Polk, Ralph J.

Nicoletti, and James L. Cunningham, in the United States District Court for the District

of New Jersey claiming material misrepresentation and fraud.1

Newell manufactures and markets consumer products. Newell acquired Jarden

Corporation (“Jarden”) in April 2016 for approximately $15.3 billion, which more than

doubled the size of Newell. Newell reported strong financial results in the first three

1 The senior officers’ positions are as follows: Michael B. Polk, President and Chief Executive Officer of Newell; Ralph J. Nicoletti, Executive Vice President and Chief Financial Officer; and James L. Cunningham, Senior Vice President and Chief Accounting Officer.

2 quarters of 2016. According to Plaintiff, “by all accounts, the momentum behind Newell

and its integration of Jarden was building entering the Class Period.” App. 69.

Plaintiff alleges that during the Class Period, Newell was suffering from various

operational problems that had a material adverse impact on Newell’s financial

performance. Plaintiff averred that Newell “embarked on a scheme to conceal these

issues from investors, and later chose to actively mislead investors about the true reasons

behind the downturn in Newell’s business.” App. 70.

Plaintiff claims that Defendants’ “issued and reaffirmed false and misleading 2017

financial guidance to investors without a reasonable basis.” App. 96. The Complaint

alleges that Defendants deceived investors by misrepresenting or failing to disclose three

categories of information: 1) excess inventory levels, 2) pricing conflicts between

Newell’s E-Commerce and Brick-and-Mortar divisions, and 3) operational issues relating

to Newell’s acquisition of Jarden.

A. Excess Inventory Levels

Plaintiff claims that before and during the Class Period, Defendants recognized

that Newell’s retail customers were reducing their inventory (or “destocking”), but that

Defendants led investors to believe that any negative effects due to destocking would

abate by mid-2017. Defendant Polk told investors on a call in February 2017 that “while

the Company would ‘continue to feel some of those dynamics through the first half of the

year,’ once Newell got ‘through that window, this reset of the inventory algorithms that

retailers have will be behind us.’” App. 109. In May 2017, Defendant Polk told

investors that “[s]o the inventory reduction impacts were broad-based. . . . The good news

3 is that these things are now behind us.” App. 115. In August 2017 Defendant Polk

represented that “. . . once we get . . . into the fourth quarter, I think the degree of impact

lessens,” and that destocking would not have “as profound an impact on the business as

the last three quarters and a month or two through Q4 of the last year.” App. 120.

Plaintiff alleges that Defendants’ statements related to inventory destocking were

false and misleading statements because “far from being behind them, Defendants knew

that inventory destocking by its retailer customers would have an increasingly negative

effect on Newell’s sales growth and margins.” App. 109. Plaintiff cites to the fact that

Newell’s inventory levels “were around 42% higher than industry averages, and

substantially higher than any of the inventory levels for the companies in Newell’s peer

group” to allege that “Defendants knew that its bloated inventory levels would have an

increasingly negative effect on Newell’s sales growth and margins.” App. 115–16.

On appeal, Plaintiff asserts that these statements were false or misleading because

Newell’s rising inventory levels and associated financial problems were in fact the result

of additional factors that Defendants concealed, such as Newell firing much of the Jarden

legacy salesforce and lack of flexibility within Newell’s supply chain.

B. Pricing Conflicts Between E-Commerce and Brick and Mortar Divisions

Plaintiff claims that Defendants misled investors by concealing pricing conflicts

between the Brick and Mortar divisions and the E-Commerce divisions. Plaintiff alleges

that before the Class Period, Defendant Polk assured investors that management was

aware of the potential issues that could arise from pricing conflicts and was actively

monitoring for these issues, but then failed to disclose to investors when pricing conflicts

4 occurred. Plaintiff claims that Defendants misled the market by “prominently touting the

growth of the Company’s E-commerce division as a driver of sales growth in the second

half of 2017,” while knowing there were ongoing pricing conflicts. App. 80. The

Complaint includes two examples—fishing reels and Calphalon pots—in which pricing

conflicts resulted “in Newell offering that retailer substantial promotional funding, which

also negatively impacted the Company’s margins.” App. 77–78. Plaintiff claims that this

caused “inconsistent pricing, strained customer relationships, and ultimately a negative

impact on the Company’s sales growth and margins.”

at 76–77. Plaintiff does not

further detail the specific financial impact of these pricing conflicts.

C. Operational Issues Associated with the Jarden Acquisition

Plaintiff alleges that Defendants concealed operational and cultural issues which

prevented Newell from capturing the benefits from the Jarden acquisition as Newell had

promised. Plaintiff claims that Defendants’ false or misleading statements about the

integration included that “the change in the U.S. is largely behind us,” there is “nothing

material” left to do, and “I’m resting a lot easier than I was.” App. 109, 133. Plaintiff

contends that the firing of Jarden legacy sales team members, increases in corporate costs

from mismanagement and poor organizational structure, and widespread communication

issues together created significant problems within Newell. Additionally, the

Transformation Office was designed to create cost savings and synergies, but it

contributed to escalating costs.

5 Plaintiff contends that Defendants concealed these problems and instead “falsely

reassured investors that the Company was on track with the integration of Jarden and that

any significant issues were behind it.” App. 93.

Defendant moved to dismiss the Complaint, contending that Plaintiff failed to state

a claim pursuant to the Private Securities Litigation Reform Act of 1995 (“PSLRA”), 15

U.S.C. § 78u et seq., and Federal Rule of Civil Procedure 12(b)(6).

II. THE DISTRICT COURT’S OPINION

The District Court granted Defendants’ motion to dismiss Plaintiff’s First

Amended Consolidated Complaint. The District Court concluded that Plaintiff failed to

sufficiently plead the first element of a Section 10(b) claim in that it “failed to adequately

allege ‘a false representation of material fact or omission that makes a disclosed

statement materially misleading.’” App. 28 (citing In re NAHC, Inc. Securities

Litigation,

(3d Cir. 2002)). Because Section 20(a) of the Exchange

Act is “contingent upon sufficiently pleading an underlying violation of Section 10(b) by

the controlled person,” the District Court also dismissed Plaintiff’s Section 20(a) claim

against Polk, Nicoletti, and Cunningham. App. 31.

The District Court provided Plaintiff thirty days of leave to file an amended

pleading, but Plaintiff did not file an amended pleading. The District Court ordered that

Plaintiff’s First Amended Consolidated Complaint be dismissed with prejudice. Plaintiff

timely appealed.

6 III. JURISDICTION AND STANDARD OF REVIEW

The United States District Court had jurisdiction over this action under Section 27

of the Exchange Act, 15 U.S.C. § 78aa, and

and 1337. This Court has

jurisdiction under

.

Our review of a district court’s dismissal under Federal Rule of Civil Procedure

12(b)(6) is plenary and we may affirm a dismissal on any ground supported by the

record. Hassen v. Gov’t of Virgin Islands,

(3d Cir. 2017). We apply

the same test as the District Court. Maio v. Aetna, Inc.,

(3d Cir. 2000).

IV. ANALYSIS

Section 10(b) of the Exchange Act 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). SEC Rule 10b–5 implements this provision

by making it unlawful to, among other things, “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.”

.10b–5(b). “To state a claim under Rule 10b-5, a plaintiff must demonstrate: (1) A

material misrepresentation (or omission); (2) scienter (a wrongful state of mind); (3) a

connection between the misstatement and the purchase or sale of a security; (4) reliance

upon the misstatement; (5) economic loss; and (6) loss causation.” Fan v. StoneMor

Partners LP,

(3d Cir. 2019) (citing City of Cambridge Ret. Sys. v.

Altisource Asset Mgmt. Corp,

(3d Cir. 2018)).

7 Plaintiff also must satisfy the particularity requirements for a fraud claim under

Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act

(“PSLRA”), 15 U.S.C. § 78u–4. City of Cambridge Ret. Sys.,

. The

purpose of the heightened pleading requirements is to ensure that private securities

actions do not become “a partial downside insurance policy” against the vicissitudes of

the market. Id. at 880. Plaintiffs “must state with particularity the circumstances

constituting fraud or mistake.” Fed. R. Civ. P. 9(b). A complaint involving securities

fraud must “specify each statement alleged to have been misleading, the reason or

reasons why the statement is misleading, and, if an allegation . . . is made on information

and belief . . . all facts on which that belief is formed.” 15 U.S.C. § 78u-4(b)(1). It must

also must “state with particularity facts giving rise to a strong inference that the defendant

acted with the required state of mind.” 15 U.S.C. § 78u-4(b)(2)(A).

For allegations of securities fraud, statements are actionable only if, “when read in

light of all the information then available to the market or a failure to disclose particular

information, [they] conveyed a false or misleading impression.” Fan, 927 F.3d at 715–16

(citing In re Bell Atl. Corp. Sec. Litig., No. 91-0514,

, at *23 n.86 (E.D.

Pa. Apr. 17, 1997), aff’d,

(3d Cir. 1998)). We must distinguish material

representations from statements of opinion, motive, or statements which “constitute no

more than ‘puffery’ and are understood by reasonable investors as such.” EP

Medsystems, Inc. v. EchoCath, Inc.,

(3d Cir. 2000) (quoting In re

Burlington Coat Factory Sec. Litig.,

, 1428 n.14 (3d Cir. 1997)). Although

8 traditionally appropriate for the trier of fact, statements that are obviously unimportant

may be immaterial as a matter of law. Id. at 875.

We accept all well-pleaded allegations as reasonable inferences in favor of the

plaintiff, but “we are not compelled to accept unsupported conclusions and unwarranted

inferences, or a legal conclusion couched as a factual allegation.” Baraka v.

McGreevey,

(3d Cir. 2007) (citations and internal quotation marks

omitted).2

A. False and Misleading Statements

The District Court correctly found that Plaintiff has failed to sufficiently plead an

actionable material misrepresentation or omission. As noted above, Plaintiff’s claim

involves representations related to 1) Newell’s excess inventory levels, 2) pricing

conflicts between the Brick and Mortar and the E-Commerce Divisions, and 3)

operational issues related to the Jarden integration. We will discuss each in turn.

1. Excess Inventory Levels

We agree with the District Court that Plaintiff failed to “plausibly allege the

material impact of excess inventory levels on Newell’s finances.” App. 27. Without

allegations to support that the excess inventory had a material financial effect on Newell,

we cannot say that Defendants omitted information that would have “significantly altered

the total mix of information made available.” Jaroslawicz v. M&T Bank Corp.,

(3d Cir. 2020).

2 We need not address the PSLRA safe harbor issue because we can decide this matter based on the first element of Plaintiff’s Section 10(b) fraud claim. 9 The District Court also correctly determined that the Complaint lacks allegations

to show that Defendants’ representations about inventory destocking were false. In

alleging falsity, a plaintiff cannot “rely on conjecture based on subsequent events,” but

should instead cite contemporaneous sources. Williams v. Globus Med., Inc.,

(3d Cir. 2017). The allegations “must be sufficient to show that the challenged

statements were ‘actionably unsound when made.’”

(quoting In re Burlington Coat

Factory Sec. Litig.,

).

Plaintiff’s allegations fail to refer to contemporaneous sources showing that

Defendants’ statements were false or misleading. As the District Court explained,

Plaintiff has not alleged that “the Executive Defendants were given internal warnings

about the precise inventory issues that caused Newell to miss its predicted guidance

figures.” App. 27. The District Court also correctly noted that “while Plaintiff relies on

the Starboard Presentation to show that Newell’s inventory levels were approximately

42% higher than industry averages, Plaintiff does not explain why such a comparison is

indicative of fraud.” App. 27 (citation omitted). Even if Defendants were aware of their

inventory levels relative to industry averages, Plaintiff has not pled allegations to support

that this renders any of their statements false. Actual knowledge of inventory levels

differs from actual knowledge that inventory levels would continue to impair Newell’s

financial performance.3

3 Plaintiff alleges on appeal that “Defendants attribution of inventory destocking as the principal cause of Newell’s increasing inventories was highly misleading because it concealed the fact that the Company’s failed integration of Jarden and its inflexible supply chain were also responsible.” App. Br. 34. Even if this theory aligns with the 10 2. Pricing Conflicts Between the E-Commerce Division and Brick and Mortar Stores

The District Court correctly decided that Plaintiff failed to sufficiently allege that

the pricing conflicts had a material financial impact on Newell. As the District Court

explained, Plaintiff only alleges that the pricing conflicts led to “extensive promotional

discounting” but provides no information “such as when such discounts occurred, the

amount of such discounts, the adverse financial impact of such discounts, or when the

adverse impact was felt by Newell.” App. 27. Without information to support that the

pricing conflicts had a material financial effect on Newell, we cannot say that it would

“alter the total mix of relevant information available to a reasonable investor.” EP

Medsystems, Inc.,

.4

We also agree with the District Court that Plaintiff has not alleged how the

resulting promotional discounting suggests fraud. Plaintiff’s theory of misrepresentation

relies on Defendant Polk’s pre-Class Period discussion with investors about the

importance of avoiding pricing conflicts that could affect the growth of the E-Commerce

division. Plaintiff argues that Defendants’ Class Period statements about the strength of

theory of misrepresentation alleged in the Complaint, these allegations still lack any particularized allegation about how the increasing inventories impacted Newell’s growth margins or otherwise rendered Defendants’ statements false. 4 Plaintiff argues that the District Court inappropriately required that they demonstrate a quantitative impact to show materiality. We have rejected “that materiality must be quantified at a specified percentage of income or assets” and instead evaluate materiality case-by-case. In re Westinghouse Sec. Litig.,

, 714 (3d Cir. 1996). But the issue is not that Plaintiff failed to quantify materiality. Rather, it is that Plaintiff’s Complaint lacks well-pleaded facts to link the alleged problems to material financial impacts. 11 the E-Commerce division were misleading because of Defendants’ earlier assurances that

they would monitor for pricing conflicts and the fact that “pricing conflicts had already

developed.” App. 116. But again, Plaintiff has not alleged that the E-Commerce division

was experiencing an adverse financial impact because of these pricing conflicts. Nor has

Plaintiff pled that an adverse financial impact was “inevitable” or “imminent” when

Defendants’ representations were made. See Williams,

; City of

Cambridge Ret. Sys.,

. Defendants only needed to disclose information

necessary “to make the statements made, in the light of the circumstances under which

they were made, not misleading.” Matrixx Initiatives, Inc. v. Siracusano,

(2011) (quoting

.10b–5(b)). Absent a contemporaneous financial impact,

Plaintiff has failed to show how the pricing conflicts and resulting discounting render

Defendants’ statements misleading.

3. Operational Issues Related to the Jarden Acquisition

The District Court rightly concluded that Plaintiff failed to allege any false or

misleading statement related to the Jarden integration. Plaintiff cites integration failures

that rely on hindsight rather than contemporaneous sources. This is insufficient. See City

of Cambridge Ret. Sys.,

. As the District Court explained, “Plaintiff does

not allege that Defendants indicated that they were drastically cutting costs in the

Transformation Office while, in reality, they were dramatically increasing costs.

Similarly, Plaintiff does not allege that Defendants stated that the R&D process resulted

in a high success rate while, in fact, only a very low percentage of products made it

through the process.” App. 28. Similarly, the mere firing of the legacy sales force does

12 not support that Defendants knew that this decision would cause significant problems

when they issued positive assessments of the integration. C.f. California Pub.

Employees’ Ret. Sys. v. Chubb Corp.,

, 147 (3d Cir. 2004) (finding that a

plaintiff failed to meet the particularity requirements for pleading falsity when their only

support was a statement that the initiative was a failure because it was “wholly

conclusory and lack[ed] data to support it”).

We share the District Court’s view that “allegations in this category simply reflect

bad business decisions (or reasonable decisions that did not pan out).” App. 27. Bad

business decisions, without more, do not constitute federal securities fraud. See In re

Donald J. Trump Casino Sec. Litig.-Taj Mahal Litig.,

(3d Cir. 1993) (“It

is well-established that the securities laws do not create liability for breaches of fiduciary

duty or mismanagement.”). However, the District Court’s reference to the business

judgment rule here is misplaced. The business judgment rule does not shield actors from

federal securities fraud. See Miller v. Am. Tel. & Tel. Co.,

(3d Cir.

1974) (“Where, however, the decision . . . is itself alleged to have been an illegal act,

different rules apply. . . . [W]e are convinced that the business judgment rule cannot

insulate the defendant directors from liability.”). But this issue is of no moment because

we agree with the District Court that Plaintiff’s allegations fail on the lack of falsity and

materiality. Thus, we will affirm on that basis.

B. Control Person Liability

Plaintiff asserts control person liability against the individual Defendants under

Section 20(a). Section 20(a) makes controlling persons jointly and severally liable with

13 the controlled person. 15 U.S.C. § 78t(a). “[L]iability under Section 20(a) is derivative

of an underlying violation of Section 10(b) by the controlled person.” Institutional Inv’rs

Grp. v. Avaya, Inc.,

(3d Cir. 2009). Because the District Court found

that Plaintiff had not sufficiently alleged a violation of Section 10(b), the Court dismissed

the Section 20(a) claims. We will affirm the District Court’s conclusion and find that the

Section 20(a) claims were properly dismissed as well.

V. CONCLUSION

For these reasons, we will affirm the District Court’s order granting Defendants-

Appellees’ motion to dismiss.

14