Southern District Of New York Denies Food Delivery Company’s Motion To Dismiss Securities Class Action
Securities Litigation
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  • Southern District Of New York Denies Food Delivery Company’s Motion To Dismiss Securities Class Action

    On July 25, 2023, Judge Jed S. Rakoff of the United States District Court for the Southern District of New York denied a motion to dismiss a putative securities class action against an online food ordering and delivery platform (the “Company”), alleging violations of Section 10(b) and 20(a) of the Securities Exchange Act of 1934.  Steamship Trade Ass’n of Baltimore-Int’l Longshoreman’s Ass’n Pension Fund v. Olo Inc., No. 22-CV-8228 (JSR), 2023 WL 4744197 (S.D.N.Y. July 25, 2023).  Plaintiff alleged that the Company and two of its officers misled investors by (1) failing to disclose that one of its restaurant partners intended to terminate its partnership with the Company; and (2) misrepresenting the number of “active” restaurant locations that utilized the Company’s product.  Although the Court held that Company’s omission of the termination of its restaurant partnership was not actionable, the Court held that plaintiff adequately alleged actionable misstatements regarding the number of restaurant locations using the Company’s software.  Accordingly, the Court denied the Company’s motion to dismiss.

    The Company provides software to restaurants to assist with online ordering and food delivery.  Plaintiff alleged that the Company failed to disclose the upcoming end to a partnership with a major fast-food chain while making rosy projections about its future revenue.  Specifically, plaintiff alleged that the Company’s February 2022 statements that it could increase the number of active users of the platform and maintain what historically had been a 30% growth rate were “unrealistic” given the termination of the partnership.  Additionally, plaintiff alleged that the Company made misleading statements about “the number of its ‘active locations’—that is, the number of unique restaurant locations using at least one of [the Company’s] product modules.”  Plaintiff alleged that the Company’s share price fell by approximately 36% on August 12, 2022 after the Company disclosed the termination of the partnership and reported no growth in the number of users.

    The Court first held that the Company could not be held liable for failure to disclose the termination of its partnership with a major fast-food chain in connection with its revenue projections.  The Court held that the Company’s statements about its future revenue projections were forward-looking and accompanied by “meaningful cautionary language” that there was “no assurance” that future growth would not differ materially from historic growth rates.  Accordingly, the alleged omission related to the partnership termination was held to be inactionable.

    The Court did, however, find that plaintiff sufficiently alleged facts to support the claim that the Company made misstatements about the number of locations actively using the Company’s software.  Specifically, the Court held that plaintiff adequately alleged, with corroboration from confidential witnesses, that: (1) the Company “prematurely included individual restaurant locations in its active locations count before those locations had actually begun utilizing any of [the Company’s] products;” (2) the Company “failed to remove inactive locations from the active locations count;” and (3) the Company, while touting the number of restaurant chains that adopting its software, failed to clarify that not all “brand locations within a single chain joined [the Company’s] platform.”  While the Company argued that the alleged misstatements were not material because the numbers were only alleged to have been inflated by 2%, the Court held that materiality was rarely something that could be resolved on a motion to dismiss and that “a reasonable investor plausibly would have considered a difference of (at the least) several thousand locations” to be material when deciding whether to trade in the Company’s stock.

    The Court also held that the pleaded facts raised a strong inference of scienter.  Specifically, the Court held that the complaint alleged strong circumstantial evidence of conscious misbehavior or recklessness on the part of two of the Company’s officers.  Because plaintiff alleged that one of the officers “had access to and used a specific software to obtain data about [the Company’s] active locations,” the Court held that there was a “strong inference that [the officer] knew or should have known about the inflation and inaccurate reporting of the active locations count based on that data.”  Similarly, the Court held that the other officer’s “frequent interactions and involvement with clients, including onboarding and negotiations, would make him privy to facts that would have indicated an inflation of the active locations count.”  The Court further held that scienter could also “be imputed to the [Company] because [the officers were] management-level employees that made the alleged misstatements.”

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