Nature of the Case
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Facts
ABC aired a television broadcast on November 5, 1992, detailing widespread unsanitary practices and labor law violations in grocery stores owned by D. The price of D's Class A stock fell 11%, and the price of its Class B stock fell 14%. Ps, who had purchased D's stock during the 2-1/2-year period before the broadcast filed these two class actions against D. Ps alleged that D affirmatively misled the market and failed to disclose that its earnings during the 2-1/2-year period were artificially inflated due to its misrepresentations about and failure to disclose widespread violations of federal labor laws and pervasive, unsanitary food handling practices. P required employees to perform certain duties within specified times at the risk of losing their jobs. D has employed a labor scheduling system, known as 'Effective Scheduling,' to assist department managers in scheduling their workforces based on the time that it should take an average employee to complete various tasks. Ps alleged that the Effective Scheduling system established guidelines that were not attainable for many employees, thereby causing them to work 'off the clock' without additional pay and to cut corners, including disregarding sanitary practices. Ps, when they purchased stocks, allegedly relied on D's rosy statements about its relationship with its employees and the cleanliness of its stores. The reports said nothing about any widespread labor or sanitary problems. During the Class Period, D resisted the efforts of the United Food and Commercial Workers Union (UFCW) to organize workers. On September 11, 1991, the UFCW announced that it had filed a lengthy complaint with the Department of Labor, accusing Food Lion of widespread labor violations in tacitly encouraging employees to work 'off the clock' without pay. It stated: 'More than 37 percent of the after-tax profit of the nation's fastest-growing retail food chain, Food Lion, is derived from illegal off-the-clock work of employees. With over one-third of its profit derived from illegal off-the-clock work, it is clear that Food Lion's profit advantage is unfairly obtained. Food Lion could owe as much as $194 million in back wages. With liquidated damages allowed by law, its liability could be 'as high as $ 388 million.” D countered with its press release that called the Union “liars and propaganda whores” (our words). D referred to the continued and constant harassment of the Union in all its releases. D and the Department of Labor reached a settlement of $16.2 million. The settlement was 1.67 cents per share and experts agreed that it was not material to D’s earnings. Nine months before the Department of Labor settlement, ABC broadcast allegations of widespread unsanitary practices and off-the-clock work. They included a hidden camera investigation conducted by two ABC employees who obtained jobs at three Food Lion stores (for which ABC was sued and lost). The day after D’s stock fell. Ds sued and P moved to dismiss. The court granted the motion. The court held that Ps were 'unable to demonstrate that any alleged omission concerning isolated instances of workplace errors [involving sanitation] is actionable as a matter of law because there is not a substantial likelihood that a reasonable investor would consider these isolated instances of workplace errors important in deciding whether to purchase Food Lion securities.' The court concluded that because the allegations had already been disclosed to the market, Ps were unable to prove 'justifiable reliance on an alleged artificial stock price set by the market.' It held that Ps failed to offer evidence that Ds acted 'with scienter by failing to disclose the alleged omission concerning working off the clock or the alleged omission concerning poor sanitation in D stores.' Ps appealed.
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