On April 10, 2021, the United States District Court for the Southern District of Florida dismissed a securities class action complaint against Norwegian Cruise Lines (“NCL”) relating to the company’s disclosures made as the coronavirus pandemic was starting to unfold in the United States. In Douglas v. Norwegian Cruise Lines, et al., the court found the plaintiff failed to plead actionable misstatements or omissions and scienter for a claim of securities fraud under Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 promulgated thereunder.
Thanks to the court’s thorough analysis, this decision serves as a useful overview to those wishing to cruise through the sea of corporate puffery, forward-looking statements, and scienter in the federal securities laws.
On March 11, 2020, just as cities across the United States were starting to impose stay-at-home orders due to the novel coronavirus, the Miami New Times published an article reporting a whistleblower employee’s account that NCL instructed its sales staff to use one-liners to customers regarding the risks of COVID-19, in order to increase sales. These included: “the only thing you need to worry about for your cruise is do you have enough sunscreen,” “the coronavirus can only survive in cold temperatures, so the Caribbean is a fantastic choice for your next cruise,” “scientists and medical professionals have confirmed that the warm weather of the spring will be the end of the coronavirus.”
As a result of this news, which was followed by similar reporting in other publications such as the Washington Post and the Miami Herald, NCL’s stock price fell approximately 27% on March 11 and even further on March 12, 2020.
The plaintiff alleged NCL made several misstatements in its February 20, 2020 press release, in which it announced the results of the fourth quarter and year ending on December 31, 2019, the conference call on the same day discussing company’s finances and projections, and the Form 10-K filed one week later. In these public statements, NCL executives disclosed, among other things, that the company had entered 2020 with record highs of customer bookings, notwithstanding the then-known impact of COVID-19. The company also announced its plans to offer lower prices to encourage advance bookings, and to continue practicing techniques to ensure the safety of guests and crew members. Notably, its Form 10-K identified COVID-19 as a risk factor that could affect NCL’s revenues.
The plaintiff asserted that these statements were false and misleading In particular, it alleged that NCL used a deceptive marketing scheme, as reported by the Miami New Times and others, to increase bookings despite the growing coronavirus outbreak.
Corporate Puffery versus Actionable Statements
The court held that the plaintiff’s alleged misstatements were mere corporate puffery because they were vague and overly broad. The court also rejected the plaintiff’s attempt to impose a duty to disclose the allegedly deceptive marketing scheme based on the challenged statements.
First, the court held that NCL’s statements such as the “long-term proven go-to market strategy of focusing on value to consumers overusing low price,” “long-term brand equity,” and “utilizing effective marketing and sales initiatives” were nothing more than corporate puffery, as they did not include affirmative representations of particular mechanisms of sales techniques or projected results. The court compared these disclosures to those made in other cases where assertions of specific, verifiable facts, such as the use of an integrated monitoring system or strict compliance guidelines, were found to be actionable statements. NCL’s disclosures, on the other hand, were viewed by the court similar to corporate statements of general regulatory compliance, transparency, and responsibility, which have long been considered to constitute corporate puffery. Similarly, the court distinguished the plaintiff’s allegations from other cases in which companies were knowingly engaging in deceptive marketing practices. The court noted that, contrary to the plaintiff’s assumption that the NCL’s sales messages were false at the time they were made, they arguably may not have been deceptive, insofar as they aligned with certain pronouncements of then-President Donald Trump regarding COVID-19, including that coronavirus could be killed by hot weather.
Second, the court rejected the plaintiffs’ contentions regarding NCL’s statements regarding improved booking rates. In the court’s view, the challenged statements constituted a general report of bookings from the prior week, which was not alleged to be actually false. The court also held that the company’s hopeful projections notwithstanding the unknown future impact of COVID-19 were mere corporate puffery.
Third, the court found the plaintiff failed to adequately plead misstatements related to NCL’s disclosures regarding its proactive safety measures. Not only did the plaintiff fail to allege that such statements were false (i.e., that NCL did not actually implement such measures), but the assertions were so vague that no reasonable investor would have relied on them.
Fourth, the court held that representations in the Form 10-K relating to NCL’s Code of Ethical Business Conduct (e.g., “You are expected to observe the highest standards of ethics and integrity” or “You shall comply with all applicable laws and regulations”), were aspirational statements that courts have consistently found to be not actionable.
Safe Harbor Provisions under the Private Securities Litigation Reform Act
While the court found all the challenged statements to be corporate puffery, the opinion also provides helpful guidance regarding the safe harbor provisions provided by the Private Securities Litigation Reform Act (“PSLRA”) and the adequacy of scienter pleading.
The PSLRA provides for two safe harbor provisions. First, it protects a “forward-looking statement” from liability if the statement is “accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statement.” 15 U.S.C. § 78u-5(c)(1)(A)(i) Second, it protects a forward-looking statement that was not made with actual knowledge that the statement was false or misleading. Id. § 78u-5(c)(1)(B).
The court admitted that NCL’s challenged statements related to historical and contemporaneous acts. However, it found them be the sort of historical statement that, by its nature, rolled into present circumstances. In other words, “when a statement forecasts in a tentative way a future state of affairs in which a present commitment unfolds into action,” the safe-harbor provisions could apply. The court also found that these statements were accompanied by meaningful cautionary language – particularly, the warnings of the very harms NCL suffered as a result of the COVID-19 pandemic. Having satisfied the first safe harbor provision, the court did not review whether the plaintiff adequately pled that the forward-looking statements were made with actual knowledge of falsity.
Scienter of CEO and CFO
Nevertheless, the court also evaluated the plaintiff’s scienter allegations. Although the court noted the plaintiff’s allegations, if true, demonstrate a “troublesome and widespread scheme,” they were insufficient to show any of the individual defendants had the requisite intent to deceive or defraud. The plaintiff’s allegation that the CEO and CFO would have known about the marketing practices by nature of their positions at the company was insufficient; the court held the plaintiff failed to adequately allege how either would have learned of the scheme apart from relying on their positions or the mere fact that they supervised the direct superior of the vice president of consumer research and passenger sales. Furthermore, despite the plaintiff’s allegations of “top down” marketing directives, the court noted the plaintiff failed to cite any email or communication from the CEO or CFO expressly ordering the use of one-liner marketing or any other types of deceptive sales tactics.
In addition to being a helpful primer on what types of statements may or may not constitute mere corporate puffery under the federal securities laws, this opinion may impact other cases in which companies are alleged to have made false or misleading public statements at the outset of the COVID-19 pandemic. We will continue to review those cases here, if and when they are decided by federal district courts.