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Second Circuit Partially Revives Putative Securities Fraud Class Action Against Fitness Company
09/16/2025On August 27, 2025, the United States Court of Appeals for the Second Circuit issued a split decision in a putative securities fraud class action against a fitness company (the “Company”) and several executives (collectively, “Defendants”). City of Hialeah Empls. Retirement Sys. v. Peloton Interactive, Inc., No. 24-2803 (2d Cir. Aug. 27, 2025). The panel affirmed in part and vacated in part U.S. District Judge Andre L. Carter of the Southern District of New York’s dismissal of claims brought under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, alleging that Defendants made false and misleading statements about consumer demand for its products and inventory levels following the COVID-19 pandemic. We previously covered the district court’s ruling here. Reviewing the dismissal de novo, the Second Circuit agreed that most challenged statements were inactionable yet held that three specific statements could support Exchange Act liability. The Court remanded to the district court for further proceedings.
Plaintiffs allege that gym closures during the COVID-19 pandemic triggered unprecedented demand for the Company’s bikes, treadmills, and subscription services, prompting substantial expansion of manufacturing and investment into supply-chain logistics. But when gyms reopened in early 2021, demand allegedly fell, slowing sales and creating surplus inventory. In November 2021, the Company allegedly disclosed that approximately 90% of its inventory remained unsold and slashed earnings guidance by more than $1 billion, allegedly prompting a stock-price decline. Plaintiffs claim that throughout 2021 Defendants concealed waning demand and overstated the need for continued product and supply-side investment.
The district court concluded that every challenged statement identified by plaintiffs was inactionable because it was either (i) forward-looking and protected by the PSLRA safe harbor; (ii) mere corporate puffery; or (iii) consistent with the Company’s contemporaneous financial results. Having found no actionable misstatement, the Court did not reach scienter and dismissed the Section 20(a) claim as derivative. Plaintiffs appealed.
The Second Circuit largely agreed with the district court’s ruling, affirming dismissal of alleged misstatements describing demand as “strong” or “not softening,” and alleged references to a “ton of demand,” a normalized “backlog,” and “healthy inventories.” The Second Circuit found that these alleged statements were either non-actionable optimism, comparative statements referencing pre-pandemic baselines for demand and inventory, or accurately reflected the Company’s then-current financial condition.
However, the Court vacated the dismissal as to certain alleged misstatements. First, the Court found that plaintiffs adequately alleged the Company’s CEO’s statement on an August 2021 earnings call describing a $400 price reduction of the Company’s bike product as “absolutely offensive” was plausibly misleading because confidential-witness accounts raised factual inconsistencies with the CEO’s statement. Specifically, several confidential witnesses allegedly stated that by August 2021 there was a significant buildup of excess Company inventory at shipping ports. Moreover, a former senior director of operations and supply-chain management allegedly described the reduction as a direct response to excess inventory. Second, the Court held that risk disclosures in the Company’s August 2021 Form 10-K and November 2021 Form 10Q, which warned that excess inventory and discounted sales could occur if demand was misforecasted, were potentially misleading because plaintiffs plausibly alleged that those risks were not merely hypothetical, as allegedly characterized in the Company’s disclosures, but had already materialized at the time of those disclosures.
Because the district court did not address scienter, the Second Circuit remanded for further proceedings on that issue and reinstated the related Section 20(a) claims.
