-
Northern District Of California Declines To Dismiss Putative Class Action Against Clothing Company
07/15/2025On July 9, 2025, Judge P. Casey Pitts of the United States District Court for the Northern District of California largely declined to dismiss a putative securities class action asserting claims under the Securities Exchange Act of 1934 against a clothing company and certain of its executives. Retail Wholesale Dept. Store Union Loc. 338 Ret. Fund v. Stitch Fix, Inc., —F. Supp. 3d—, 2025 WL 1900722 (N.D. Cal. July 9, 2025). Plaintiffs alleged that defendants made misrepresentations concerning the launch of a new business line. The Court held that plaintiffs adequately alleged misrepresentations and scienter with respect to all defendants but dismissed plaintiffs’ control person claims against the individual defendants.
Plaintiffs’ allegations concerned the company’s new business line, which allowed customers to select and purchase specific clothing items, which differed from the company’s primary business of shipping curated boxes of items. Id. at *1. Plaintiffs alleged that, while company executives reported that the new business line would be additive, incremental, and complementary to its primary business, executives and the company knew, based on internal testing, that pursuing the initiative would cannibalize the existing business. Id. at *4.
The Court had dismissed plaintiffs’ prior complaint for failure to adequately allege falsity or scienter, in particular after concluding that the challenged statements concerned existing customers, while the internal testing was alleged only to have involved prospective customers. Id. at *6. However, the Court explained that the further amended complaint cured this deficiency by clarifying that the internal testing included not only customers who had never engaged with the company but also customers who had signed up for the company’s existing service but never made a purchase—rendering the “cannibalization” between product lines revealed by the internal testing “potentially material.” Id.
In this context, the Court held that plaintiffs adequately alleged misrepresentations as to numerous challenged statements, e.g., “we can see in the data that [the new business is] working,” the “incrementality of these two offerings [is really] … quite complementary,” the company is focusing on the “incrementality, complementarity, and additive nature” of the new product alongside its core business, and the company’s “data show[s] the success” of the new product. Id. The Court emphasized that, once the company made these statements, it was “bound to disclose the multiple negative internal test results that strongly contradicted such laudatory conclusions.” Id.
The Court rejected defendants’ argument that the allegations were not made with sufficient particularity. To the contrary, the Court held that the allegations regarding the company’s negative internal test results were highly detailed, including those based on statements by a former employee who worked on launching the new business line, and revealed that customers channeled into the new business line purchased less from the company than customers channeled into the company’s core product and were 30–40% less likely to make any purchases from the company at all. Id. at *7. The Court also rejected defendants’ argument that the allegations were insufficient to show that adverse internal results were available before one of the challenged statements, as the Court concluded it was “reasonable to infer” that the results were available based on detailed allegations about how the “tests were conducted and reported, as well as the broader context of the [new business line’s] launch.” Id. And while defendants claimed that these challenged statements were protected forward-looking statements or inactionable puffery, the Court largely disagreed. While noting that certain statements were inactionable, the Court emphasized that the primary misrepresentations that the Court had held were adequately alleged “all reference[d] what ha[d] already happened and what [was] currently known” and that each statement reflected “terms with specific, technical meanings for investors” concerning how the company’s offerings were performing and were “not empty corporate babble.” Id. at *8.
The Court further held that plaintiffs adequately alleged scienter. First, the Court noted plaintiffs alleged specific facts indicating that one executive was presented with information about the negative results from internal testing. Id. at *9. Second, the Court observed that both individual defendants allegedly had access to the company database containing detailed information about customer behavior, including the results from the internal testing, and weekly reports about customer acquisition and retention. Id. Finally, the Court explained that the new business line was alleged to be so important to the company’s business that it was implausible that the executives did not know about the negative testing. Id. Collectively, the Court found these allegations supported a strong inference at the pleading stage that the executives knew the failure to disclose the information relating to the cannibalization of its product lines was likely to mislead investors. Id.
Finally, the Court dismissed control person claims against the individual defendants. The Court explained that, because plaintiffs adequately pleaded direct claims under the Exchange Act against those individual defendants, they could not also pursue a control person claim against those same persons based on the same challenged statements. Id. at *10. Moreover, the Court concluded that there was no allegation that either individual defendant had control of the other individual defendant with respect to statements made by the other defendant. Id.
