Petition for Writ of Certiorari — Longman v. Food Lion, Inc.

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991313 FEBO3

OFFICE OF THE CLERK

__No.

Supreme Court of the United States

DAVID I. LONGMAN; JEFFREY FEINMAN; P..UL M. GARDNER,

Defined Plan Trust; EDWARD HANKIN and LINDA HANKIN,

Petitioners,

versus

FOOD LION, INCORPORATED; TOM E. SMITH,

Respondents.

On Petition for Writ of Certiorari to

the United States Court of Appeals

for the Feire Circuit

y“t>

PETITION FOR CERTIORARI

WEISS & YOURMAN David M. Clark

The French Building Counsel of Record

551 Fifth Avenue, Suite 1600 John F. Bloss

New York, NY 10176 CLARK BLOSS & McIVER,PLLC

(212) 682-3025 125 S. Elm Street, Suite 600

P. O. Box 1349

WOLF HALDERSTEIN Greensboro, NC 27402

ADLER FREEMAN & HERZ, (336) 275-7275

LLP

270 Madison Ave

New York, NY 10016

(212) 545-4600

Attorneys for Petitioners

QUESTION PRESENTED

Whether, in a securities fraud action, a public statement is

sufficient, as a matter of law, to rebut the “fraud on the

market” presumption established by this Court regardless of

the credibility of the statement’s source.

TABLE OF CONTENTS

PAGE

Questions Presented ........................ i

SOO OF COMIN 6s oss cs Ce li

ile! Amelie. a iv

Opiniones Pl oo A ee l

Jurisdictional Statement ..................... l

Kelevant Constitutional} Provisions, Treaties,

Statutes, Ordinances, and Regulations Involved ... l

Statement of the Case .................... ars 3

Proceedings Below ......................._. 4

atement of Fact... os. ssd hank eee 5

Reasons for Granting the Writ .....-----+-+-+-> 15

THE COURT BELOW ERRED IN RULING THAT

THE PRESUMPTION THAT PETITIONERS

RELIED ON RESPONDENTS’ MISREPRESEN-

TATIONS WAS DEFEATED BY THE

EXISTENCE OF PUBLIC STATEMENTS

CONTRADICTING THE MISREPRESENTA-

TIONS, NOTWITHSTANDING THE

OVERWHELMING EVIDENCE THAT THE

MARKET DID NOT CONSIDER THE SOURCE

OF THE CONTRADICTORY STATEMENTS TO

i ace dune ses ewe erwroseres 17

a, Ske rie ered ereknogebeenns 24

Appendix

Decision of the Circuit Court(App A) ... la

Decision ef the District Court of 1/4/99

(eee ee 29a

Decision of the District Court of 6/18/98

OSS > A ee eee S4a

Order Denying Rehearing (App D)

hh. A oe oe we

TABLE OF AUTHORITIES

CASES: |

Associated Randall Bank v. Griffin, 3 F.3d 208,

213-14 (7 Cir. 1993). ....-- ee eee eee

Basic Inc. v Levinson, 485 U.S. 224, 238

CUIGE Rc xccc sv sdecncie eaves wes nes

Berry v. Valence Tech., Inc., 175 F.3d 699, 706

(9th Cir. 1999) ...... cece ee ee eens

Braxton v. United States, 500 U.S. 344 (1991).

Ernst & Ernst v. Hochfelder, 425 U.S. 195, 196

2) eee renner hi eer

Finkel v. Docutel/Olivetti Corp., 817 F.2d 356,

360 (S™ Cir. 1987) .....-- cece eee ees

Gasner v. Board of Supervisors, 103 F.3d 351,

356 (4th Cir. 1996). ......--- 2+ e ee

Grossman v. Novell, Inc., 120 F.3d 1112, 1122

(10 Cir. 1997) 2... eee ee ee eee eee

Heflin v. United States, 358 U.S. 415 (1959) ..

In re Taxable Mun. Bonds Litig., [1994-1995

Transfer Binder] Fed. Sec. L. Rep.

(CCH) § 98,405 at 90,780 (E.D. La. Sept.

| reer rr rr re Tire sy Cre

Kaplan v. Rose, 49 F.3d 1363, 1376 (9% Cir.

Lo) re rere re ey rrr ya ei

Longman vy. Food Lion, Inc., 197 F.3d 675 (4

Cle, SORE kc nic cb ae eae es

Ockerman v. May Zima & Co., 27 F.3d 1151,

F456 06* Cie, TORU cnc cicespactuess

Provenz v. Miller, 102 F.3d 1478, 1492 (9% Cir.

1946), cert. denied, 188 S. Ct. 48 (1997);

Pure Oil Co. v. Suarez, 384 U.S. 202 (1966);

Sailors v. Northern States Power Co., 4 F.3d

610, 613 (8® Cir. 1993) 2... vc cccesces

Schneider v. Vennard (In re Apple Computer

Sec. Litig.), 886 F.2d 1109 (1989), cert.

denied, 496 U.S. 943 (1990). ........

Shaw v. Digital Equip. Corp., 82 F.3d 1194,

1214 w.25 CA" CR. TFG) cce avenues

19,

ee ee — - I EEE EEE EEE

Vii

TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438

1) rere eine ress sre 21

Wielgos v. Commonwealth Edison Co., 892 F.2d

509, 516 (7 Cir. 1989) ........-.-.- 21

COURT RULES:

F.R.C.P. Rule 12(O(6) .. 1... ee eee eee eee 21

Sup. Ct. R. 10(c); 2c. eee eee eee ee eee eee 16

REGULATIONS:

yee PS Se. Bn rae eo passim

STATUTES:

CER Toe &, BRR eer ree ee |

p RE Sade Gs | | GR ee eer |

OTHER AUTHORITIES:

Vill

John M. Newman, Jr., et al., Basic Truths: The

Implications of the

Fraud-On-The-Market Theory for

Evaluating the “Misleading” and

“Matcriality” Elements of Securities

Fraud Claims, 20 J. Corp. L. 571, 576

(re Pere Ts terre or 22

The Fraud-on-the-Market Theory, 95 Harv. L.

Rev. 1143, 1159(1982) ........--+-: 23

Petitioners, David I. Longman, Jeffrey Feinman, Paul N.

Gardner Defined Plan Trust, Edwin Hankin, and Linda

Hankin, and a class of similarly situated persons, respectfully

request that a writ of certiorari be issued to review the

judgment of the United States Court of Appeals for the

Fourth Circuit in this case.

OPINIONS BELOW

The opinion of the United States Court of Appeals for the

Fourth Circuit is reported at Longman v. Food Lion, Inc., 197

F.3d 675 (4" Cir. 1999) at App A). The opinion of the

district court in Longman v. Feod Lion, Inc., Nos.

4:92CV696 and 4:92CV705 (M.D.N.C. June 18, 1998) (App.

C), is not published.

STATEMENT OF JURISDICTION

The judgment of the United States Court of Appeals for

the Fourth Circuit was entered on October 7, 1999. The

Fourth Circuit denied a timely petition for rehearing on

November 5, 1999. (App. D).

The iurisdiction of this Court is invoked under 28 U.S.C.

§ 1254(1).

CONSTITUTIONAL AND STATUTORY

PROVISIONS INVOLVED

15 U.S.C. § 78j(b) provides:

It shall be unlawful for any person, directly

or indirectly, by the use of any means or

instrumentality of interstate commerce or of

the mails, or of any facility of any national

securities exchange—

* * *

(b)To use or employ, in connection

with the purchase or sale of any

security registered on a_ national

securities exchange or any security

not so registered, any manipulative

or deceptive device or contrivance in

contravention of such rules and

regulations as the Commission may

prescribe as necessary or appropriate

in the public interest or for the

protection of investors.

17 C.F.R. 240.10b-5 provides:

It shall be unlawful for any person, directly

or indirectly, by the use of any means or

instrumentality of interstate commerce, or of

the mails or of any facility of any national

securities exchange,

(a)To employ any device, scheme, or

artifice to defraud,

(b)To make any untrue statement of

a material fact or to omit to state a

material fact necessary in order to

make the statements made, in the

light of the circumstances under

which they were made, _ not

misleading, or

(c)To engage in any act, practice, or

course of business which operates or

would operate as a fraud of deceit

upon any person, in connection with

the purchase or sale of any security.

STATEMENT OF THE CASE

This case involves the “fraud on the market” presumption

established by this Court to relieve a plaintiff in a securities

fraud action of the burden of proving his actual reliance upon

a corporation’s public misrepresentations. The fundamental

question presented in this petition is whether the fraud on the

market presumption may be rebutted, as a matter of law, by a

public | statement contradicting the — corporation’s

misrepresentations without regard to the credibility of the

public statement’s source.

"Inder the analysis of the court below, such a public

statement, even from the least reputable source, will

conclusively operate to defeat the presumption—even, as

here, in the face of overwhelming evidence that the market

completely disregarded the statement. Moreover, once such a

statement is made, whatever its source, the appellate court’s

ruling permits the corporation to re-publicize its outright false

statements with impunity—again, exactly the situation in this

case. The Fourth Circuit’s ruling, if it is allowed to stand,

promises effectively to eliminate the fraud on the market

presumption in that jurisdiction.

Proceedings Below

Petitioner Longman filed his class action complaint on

November 12, 1992. Petitioners Feinman, Paul N. Gardner

Defined Trust Plan, and Hankins filed a similar class action

on November 13, 1992. Both the Longman and Feinman

complaints alleged, inter alia, causes of action for securities

fraud under § 10(b) of the Securities Exchange Act of 1934

and Rule 10b-5 thereunder. The gravamen of petitioners’

complaints, for purposes relevant here, is that respondent

Food Lion, Inc. (“Food Lion”), a grocery store chain, and its

president, respondent Tom E. Smith, failed to disclose, and

expressly denied, widespread illegal labor practices that

artificially inflated its earnings and margins and, in turn, the

value of its stock.

The district court consolidated the cases on March 16,

1994. On Cctober 17, 1994, the court certified the cases as a

class action for open market purchasers of Food Lion stock

between May 7, 1990 and November 5, 1992 (the “Class

Period’).

On June 18, 1998, the United States District Court for the

Middle District of North Carolina, per Judge James A. Beaty,

granted respondents’ motion for summary judgment and

dismissed the action. The district court ruled that Food

Lion’s illegal labor practices were fully disclosed to the

public on September 11. 1991—the date of an announcement

by the United Food and Commercial Workers Union

(UFCW) that it had filed a complaint against Food Lion with

the United States Department of Labor (DOL). As a result of

such “full disclosure to the market,” the district court

determined that investors who purchased Food Lion stock

after that date did not justifiably rely on Food Lion’s

allegedly material omissions. Investors who purchased

before the “full disclosure” date of September 11, 1991, the

court ruled, were barred by limitations since their actions

were filed more than one year after that date. (App -}.

On October 7, 1999, a divided panel of the Fourth Circuit

affirmed. The majority concluded that respondents’ faise and

misleading statements were not material as a matts: of law,

since the UFCW had announced, during the Class Period, that

it was filing a complaint with DOL requesting that DOL file

a Fair Labor Standard Act (FLSA) class action against Food

Lion:

Plaintiffs’ securities fraud claim cannot

succeed because, despite the fact that Food

Lion denied the charges, the nature of the

off-the-clock claims and the claims’ risk to

earnings were in fact well known to the

market before the [end of the Class Period],

and therefore Food Lion’s omissions were not

material. . . . The market had a full

opportunity to evaluate these claims and to

reflect their risk in the market price for Food

Lion stock.

(App. A).

Judge Murnaghan, in dissent, wrote:

The majority incorrectly suggest that any

public information § contradicting Food

Lion’s misleading statements forecloses the

possibility of finding that these statements

were material. However, the controlling

principle is that in a fraud on the market

case, Food Lisn’s failure to disclose material

information may be excused where that

information has been made credibly

available to the market by other sources. . . .

The majority does not analyze whether the

allegations against Food Lion came from a

credible source.

(App. A) (emphasis in original; citations, footnoteomitted).

The Fourth Circuit denied petitioners’ petition for

rehearing and rehearing en banc on November 5, 1999.

(App. D).

Statement of Facts

Throughout the Class Period, Food Lion failed to

disclose, and expressly denied, the illegal labor practices that

artificially inflated its earnings and profit margins, and in

turn, the value of its stock. Petitioners purchased Food Lion

stock during the Class Period in reliance on the integrity of

the price set by the market. However, upon the public

disclosure of Food Lion’s illegal practices in a November 5,

1992 broadcast of the ABC news program PrimeTime Live

(PTL), and an announcement by DOL on November 7, 1992,

that it would file a FLSA class action against Food Lion, the

market corrected the price of Food Lion’s common stock,

much to petitioners’ detriment.

Petitioners adduced extensive evidence that Food Lion’s

oppressive labor policies resulted in widespread illegal labor

practices, and that Food Lion’s management was aware of

such widespread violations during the Class Period. Food

Lion had in place a time-management quota system called

“Effective Scheduling,’ which required employees to

perform certain duties within specified times. If the

employee failed to complete the tasks within the allotted

time, he or she was faced with two choices: (1) be fired or (2)

finish the work “off the clock.”

Food Lion’s top management was well aware that its

effective scheduling labor practice inevitably resulted in

employees working off \the clock. The overwhelming

evidence of the existence of, and Food Lion’s knowledge of,

widespread labor law violations includes (1) a report to top

Food Lion officials prepared by a Food Lion lawyer who had

been directed to investigate off-the-clock work at Food Lion,

concluding that Food Lion’s labor policies would

unavoidably result in off-the-clock work throughout the Food

Lion system; (2) internal survey responses, circulated to top

Food Lion executives, from employees of more than 30 Food

Lion stores complaining of oppressive working conditions in

which employees frequently worked from 10 to 40 hours per

week off-the-clock in order to perform all the duties required

of them; (3) internal investigative reports, copied to top Food

Lion executives, detailing rampant federal labor law

violations throughout the Food Lion system; and (4)

numerous’ internal memoranda, circulated among

management officials, discussing reports of widespread

illegal labor practices.

Despite this overwhelming evidence of internal corporate

knowledge of widespread illegal labor practices, Food Lion

continually and vociferously denied any knowledge of such

practices throughout the Class Period. There is no question

that Food Lion published during the Class Period several

false and misicading statements about its Jabor practices and

policies—and the Fourth Circuit did not hold otherwise.

Indeed, the evidence that Food Lion made numerous false

public statements about its illegal labor practices is

undisputed.

For exemple, on May 7, 1990—the first day of the

Class Pericd—Food Lion filed with the Securities and

Exchange Commission its Annual Report to Stockholders for

the year ending December 31, 1989. The report boasted

about decreased selling and administrative costs, as well as

“improved operating efficiencies,” but in no way suggested

that Food Lion had discounted its labor costs by means of

illegal practices. The document referred to Food Lion’s labor

practices in glowing terms, alluding to “expand{ed] financial

rewards for employees,’ as well as the company’s

commitment to “insur[ing] that Food Lion employees receive

competitive wages and excellent benefits.”

Food Lion, on August 30, 1990, issued a press release in

response to calls by the UFCW for a boycott of Food Lion

stores. The press release falsely portrayed Food Lion

employees as well-compensated persons working in positions

that were highly sought after by the work force, as follows:

call —_----

The fact is, Food Lion opens more than 100

stores each year and adds more than 5,000

employees each year. Food Lion could not do

this without offering competitive wages and

excellent benefits. On average, Food Lion

receives three to four applications for every

available job.

(Emphasis added).

In a September 11, 1991 press release, the UFCW

disclosed that it had filed a complaint with the DOL

requesting that the government bring a class action suit

against Food Lion. The UFCW press release described its

complaint before the DOL as alleging that Food Lion had

derived about 37% of its after-tax profit from illegal work.

The press release further disclosed that the union’s complaint

asked the DOL to seek an injunction requiring Food Lion to

desist from further use of its Effective Scheduling System,

Food Lion’s time-management quota system.

Food Lion, on the same date, publicly denied the

UFCW’s allegations and impugned the UFCW’s motives.

Food Lion’s September 11, 1991 press release asserted that it

had a “very clear policy against working off the clock,” and

cautioned that “[iJt should be kept in mind that this same

union was previously involved in another Fair Labor

Standards Act (FLSA) Complaint in which it was discovered

many of the allegations were totally without merit.” The

press release did not mention that Food Lion had entered into

two secret compliance agreements with the DOL and had

paid substantial fines as a result of illegal labor practices in

the previous three years.'

The next day, Food Lion issued an even stronger denial of

the union’s claims. Food Lion’s September 12, 1991 press

release include’ .xe following passages:

The UFCW’s most recent claims of illegal

employment practices by Food Lion and its

employees insult the hard work and integrity

of all Food Lion employees. Those

ingredients are the key to Food Lion’s success

and ability tc bring customers extra low

prices. /t is not off the clock work by

employees or other illegal employment

practices as the UFCW-sponsored

propaganda alleges. . . . (Ojur employees’

hard work and company efficiencies in

' Before the Class Period, Food Lion had been the target of investigations

and disciplinary actions for its illegal labor practices; however, the

punitive measures resuiting from the earlier investigations were kept in

strict confidence. Three years before the PTL broadcast, Food Lion

entered into a compliance agreement with the DOL and consented to pay

$300,000.00 in wages related to off-the-clock work. This 1989

settlement agreement, however, was confidential and was not disclosed

even to most Food Lion employees. After a second DOL investigation,

Food Lion, on October 11, 1990, entered into another compliance

agreement and iurther agreed to pay all back wages earned by

participants in a sham “training” program. The terms of this 1990

settlement were not disclosed to the investing public or even to most

Food Lion employees. In both compliance agreements, Food Lion

explicitly agreed to assume accountability for monitering and enforcing

the company’s compliance with the FLSA.

operations result in lower prices which

threaten unionized competitors.

Food Lion denies the claims of employee

mistreatment, but the public doesn’t have to

accept the word of either the Company or the

union. Let employees and the free

marketplace decide that. If employees don’t

want to work at Food Lion, they don’t have to.

The fact that Food Lion receives four or five

job ar-licants for every job opening and

consistently has one of the lowest employee

turnover rates in the supermarket industry,

should tell you more about the UFCW’s

propaganda than anything Food Lion says.

This same union was involved two years ayo

in another FLSA “class action” lawsuit against

the company. Upon investigation of the

UFCW-instigated claims, however, it was

discovered most of the allegations were totally

without merit and at least one of the

complainants had never even worked for Food

Seer

Such results from previous lawsuits by this

same union against Food Lion make it all the

more important to recognize that this latest

Complaint is simply a charge filed with the

Department of Labor by a labor union which

is trying to destroy Food Lion and its

employees’ jobs.

——

(Emphasis added).

A week later, on September 19, 1991, Food Lion’s Class

A stock was trading at $18.25, up from the $17.00 price after

the UFCW’s announcement. UFCW’s announcement that it

had filed a comp! unt with the DOL did not negatively impact

the price of Food Lion’s stock, for a variety of reasons. First,

as conceded by Food Lion’s own expert, the reports of the

company’s labor violations before and during the Class

Pericd were not “wideiy reported.” More importantly, due to

Food Lion’s efforts to discredit the UFCW’s claims,

combined with the lack of any public statement by the DOL

on Food Lion’s labor practices during the Class Period,

leading market analysts discounted the UFCW’s claims as

mere “harassment,” and even suggested that it was a good

time to buy Fvod Lion - stock. For example,

Robinson-Humphrey’s October 8, 1991 company report on

Food Lion recites:

in this latest move, the union filed a complaint

with [DOL] claiming that a significant portion

of Food Lion’s profits are derived from illegal

off-the-clock work of employees.

Bottom line, we have yet to see a complaint

trom this union which accurately documents

illegal practices and believe that this latest

action is a form of harassment.

The Robinson-Humphrey report recommended purchasing

Food Lion stock.

Paine Webber’s November 21, 1991 Report on Food Lion

stated:

The [UFCW] has named Food Lion as a top

priority target for unionization and toward this

end has essayed a variety of pressure tactics

over the years. Yet the union has neither

gotten to first base with employees nor

disrupted business.

Likewise, Goldman Sachs’ October 2, 1991 Research

Brief on Food Lion discounted the validity of the UFCW’s

claims:

We regard this complaint as another attempt

by the union to establish collective bargaining

agreements at Food Lion. . . . [W]e note that

the same union has brought allegations in the

past, which have been largely unsubstantiated.

See also Decl. of Lee Wilder dated 1/24/96 (stock analyst

states that he “discounted the merit of the UFCW’s charges”

in light of Food Lion’s insistence that the union’s allegations

were groundless). In contrast, respondents have come

forward with no evidence that any brokerage firm or stock

analyst was influenced in his analysis of Food Lion’s stock

by the union’s claims.

Even Food Lion’s own expert economist, Frederick C.

Dunbar, conceded at deposition that Food Lion’s denials of

FLSA violations affected the total mix of information

available to the market:

| TEE

| think that if Food Lion had issued

absolutely no press release and had been

silent, there may have been a different result.

If Food Lion admitted the charges, which

Food Lion never did, it’s hard to say what

would have happened to the stock price.

On February 27, 1992, in response to UFCW’s

announcement that the union had filed a supplemental

complaint with the DOL alleging additional new claims,

Food Lion issued yet another press release expressly denying

the claims: “UFCW = snensored claims of extensive

wage/hour violations are simply untrue. . . . Food Lion denies

this and other UFCW sponsored allegations of mistreatment

of employees.”

Food Lion’s offenses were first disclosed to the public in

credible fashion on November 5, 1992—the last day of the

Class Period—when the ABC news program PrimeTime Live

presented an exposé on Food Lion’s labor and sanitation

practices. The PTL broadcast was the result of six months of

investigation by ABC. The P7L team interviewed 70

then-current and former employees at stores across the

southeastern United States. In addition to undercover footage

of repugnant sanitary practices which were the inevitable

result of Food Lion’s brutal scheduling system, Diane

Sawyer, the narrator of the broadcast, reported as follows:

Over and over again, we were told that for

workers, Food Lion is a kind of pressure

cooker. The employees all said that the

company pays good salaries and has excellent

benefits, including profit sharing. But there’s

a flip side, a time-management policy called

effective scheduling, which critics charge

forces a lot of workers to finish the work on

their own time....

Many employees told us that the pace

[required by Effective Scheduling] 1s

pounding. And since very little overtime 1S

permitted, at the end of the day good workers

were faced with an impossible choice: leave

work unfinished jeopardizing their jobs, or

stay and finish, giving extra hours to the

company without pay. It’s called working

off-the-clock, and it’s illegal.

The day after the PTL broadcast, the price of Food Lion’s

stock plunged. The company’s Class A stock fell from $9%

per share to as low as $6 1/8 per share, a new low for the

year, before closing at $8%, down $1 per share. Food Lion’s

Class B stock dropped from $10 per share to $6 5/8 per share,

a decrease of $1 3/8 per share.

After the DOL announced tivo days later, on November 7,

1992, that it intended to bring a complaint against Food Lion

alleging labor law violations, the company’s Class A shares

decreased by an additional $.50 per share on extremely heavy

trading volume.

On August 3, 1993, the DOL reported that Food Lion had

agreed to pay the largest settlement of a FLSA claim ever

negotiated, a total of $16.2 million to settle claims for its

violations of federal laws regulating overtime, the minimum

wage, and child labor. Even more significantly, DOL

ordered Food Lion to submit detailed quarterly updates on

reported labor violations, thus precluding Food Lion from

enforcing policies inevitably resulting in widespread

off-the-clock work that artificially inflated profits. Even

today, Food Lion stock has not recovered.

REASONS FOR GRANTING THE WRIT

As previously discussed, the Fourth Circuit

concluded—in the face of undisputed evidence that the

market discounted the UFCW’s accusations that Food Lion

was engaged in widespread violations of the FLSA—that the

UFCW’s allegations provided the market, as a matter of law,

with “a full opportunity to evaluate these claims and to reflect

their risk in the market price for Food Lion stock.” (App. A).

The Fourth Circuit’s ruling that the presumption of reliance

on a corporation’s misrepresentations may be rebutted by

establishing the existence of any contrary public statement,

regardless of the market’s view of the credibility of its

source, cannot be harmonized with relevant decisions of this

Court and directly conflicts with the decisions of other United

States courts of appeals. A failure by a lower court to adhere

to a decision of this Court is grounds for granting a writ of

certiorari, Sup. Ct. R. 10(c); see Pure Oil Co. v. Suarez, 384

U.S. 202 (1966); Heflin v. United States, 358 U.S. 415

(1959), as is the existence of a Circuit split. Sup. Ct. R.

10(a); see, e.g., Braxton v. United States, 500 U.S. 344

(1991).

THE COURT BELOW ERRED IN RULING THAT

THE PRESUMPTION THAT PETITIONERS RELIED

ON RESPONDENTS’ MISREPRESENTATIONS WAS

DEFEATED BY THE EXISTENCE OF PUBLIC

STATEMENTS CONTRADICTING THE

MISREPRESENTATIONS, NOTWITHS fr ANDING

THE OVERWHELMING EVIDENCE THAT THE

MARKET DID NOT CONSIDER THE SOURCE OF

THE CONTRADICTORY STATEMENTS TO BE

CREDIBLE.

Petitioners’ securities law claims arise under § 10(b) of

the Securities Exchange Act of 1934 and Rule 10b-5. To

establish liability under § 10(b) and Rule 10b-5, petitioners

must prove the following elements: (1) the respondents made

a false or misleading statement or omission of material fact,

Basic Inc. v. Levinson, 485 U.S. 224, 238 (1988), (2) with

scienter, Ernst & Ernst v. Hochfelder, 425 U.S. 195, 196

(1976), (3) upon which the petitioners justifiably relied, /d. at

206 (4) that proximately caused the petitioners’ damages,

e.g., Gasner v. Board of Supervisors, 103 F.3d 351, 356 (4th

Cir. 1996).

The sole ground articulated by the court below for

affirmance on the labor practices question was that the

UFCW’s September 11, 1991 press release fully disclosed to

the market the existence of Food Lion’s widespread illegal

labor practices. Because a dispute of fact plainly exists as to

whether the information of Food Lion’s labor policies came

from a source credible to the market, however, summary

judgment should not have been granted.

This Court, in Basic v. Levinson, supra, instructed that

when purchasers of stock on an open and developed market

pursue a § 10(b) and Rule 10b-5 claim, they are relieved of

proving the element of direct reliance. Rather, it is presumed

that a materially false or misleading statement regarding a

corporation or its business defrauded purchasers of its stock

even if they did not directly rely on the statement because

they are deemed to have relied instead on the integrity of the

price set by the market. The Court reasoned as follows:

The modern securities markets,

literally involving millions of shares changing

hands daily, differ from the face-to-face

transactions contemplated by early fraud

cases, and our understanding of Rule 10b-5’s

reliance requirement must encompass these

differences. ...

Requiring a plaintiff to show a speculative

state of facts, i.e., how he would have acted if

omitted material information had been

disclosed, . . . or if the misrepresentation had

not been made, . . . would place an

unnecessarily unrealistic evidentiary burden

on the Rule 10b-5 plaintiff who has traded on

an impersonal market. . . .

Recent empirical studies have tended to

confirm Congress’ premise that the market

price of shares traded on well-developed

markets reflects all publicly available

information, and, hence, any material

2 Raa

misrepresentations. . . . Because most publicly

available information is reflected in market

price, an investor’s reliance on any public

material misrepresentations, therefore, may be

presumed for purposes of a Rule 10b-5 action.

485 U.S. at 243-47 (citations, footnotes omitted).

The Basic Court’s discussion in dicta of methods that the

defendant corporation in that case could rebut the

presumption of fraud 1s significant here. The Court explained

that one method of rebuttal was to show that news of the

misrepresentation or omission “credibly entered the market

and dissipated the effects of the misstatements.” /d. at 249.

A year after Basic was issued, the Ninth Circuit published

Schneider v. Vennard (In re Apple Computer Sec. Litig.), 886

F.2d 1109 (1989), cert. denied, 496 U.S. 943 (1990). Apple

has become the leading case on the method of rebutting the

fraud on the market presumption by establishing that the

market discounted the corporation’s misrepresentations due

to competing, credible information—an analysis termed by

some courts as the “truth on the market” doctrine or

corollary. E.g., Provenz v. Miller, 102 F.3d 1478, 1492 (9"

Cir. 1996), cert. denied, 188 3. Ct. 48 (1997), Associated

Randall Bank v. Griffin, 3 F.3d 208, 213-14 (7 Cir. 1993).

Because the market necessarily places significant weight on a

corporation’s representations about its own operations, the

Apple court emphasized that statements refuting a

corporation’s claims that are published by sources not

deemed credible by the investing public should not operate to

rebut the presumption:

We conclude that in a fraud on the market

case, the defendant’s failure to disclose

material information may be excused where

that information has been made credibly

available to the market by other sources. The

issue . . . is Whether, in light of the press’

documentation . . ., a rational jury could

nonetheless find a “substantial likelihood” that

full disclosures by Apple would have

“significantly altered the ‘total mix’ of

information made available.” . . .

We stress the limits of our holding.

Scrutiny by the press will not ordinarily

excuse the type of unqualified exuberance

expressed by Apple and its officers in this

case. Even in a fraud on the market case,

corporate insiders are not relieved of their duty

to disclose material information where that

information has received only brief mention in

a few poorly-circulated or lightly-regarded

publications. The investing public justifiably

places heavy reliance on the statements and

opinions of corporate insiders. Jn order to

avoid Rule 10b-5 liability, any materia!

information which insiders fail to disclose

must be transmitted to the public with a

degree of intensity and credibility sufficient to

effectively counter-balance any misleading

impression created by the insiders’ one-sided

representations.

886 F.2d at 1115-16 (emphasis added; quoting 7SC /ndus.,

Inc. v. Northway, Inc., 426 U.S. 438 (1976).

A number of other Circuits have adopted Apple’s holding

that the fraud on the market presumption may sometimes be

rebutted when information contradicting a corporat: i’s false

statements is svfficiently publicized. Until te Fourth

Circuit’s ruling in this case, however, all of the appellate

courts adopting the “truth on the market” corollary have

required that the source of the competing information be

scrutinized to determine whether the market deemed it

credible. See, e.g., Shaw v. Digital Equip. Corp , 82 F.3d

1194, 1214 1.25 (1"* Cir. 1996) (“While evidence of actual

market knowledge might be proper grist for the summary

judgment mill on the question of materiality, it cannot be

properly considered in evaluating whether plaintiffs’

complaint is legally sufficient to survive a motion to dismiss

under Rule 12(b)(6)”); Wielgos v. Commonwealth Edison

Co., 892 F.2d 509, 516 (7 Cir. 1989) (where competing

information was sufficiently credible to affect stock price,

fraud on the market presumption could be rebutted: “Prompt

incorporation of news into stock price is the foundation for

the fraud-on-the-market doctrine and therefore supports the

truth-on-the-market doctrine as well’’); Sailors v. Northern

States Power Co., 4 F.3d 610, 613 (8 Cir. 1993)

(acknowledging that competing statements in poorly

circulated or lightly regarded sources would not relieve

corporation of duty to disclose material information, but

concluding that, in light of “repeated references” in mass

media and specialized press to information allegedly withheld

by corporation and testimony of market analysts that the

press reports negatively affected their analyses, nondisclosure

at issue “was public information that could have easily been

obtained by any investor”); Provenz v. Miller, supra, 102

F.3d at 1493 (respondents seeking summary judgment on

truth-on-the-market defense “bear a heavy burden of proof. . .

_ Summary judgment is proper only if [defendants] show that

‘no rational jury could find’ that the market was misled”

(quoting Kaplan v. Rose, 49 F.3d 1363, 1376 (9 Cir.

1994))); Berry v. Valence Tech., Inc., 175 F.3d 699, 706 (9th

Cir. 1999) (in reversing summary judgment based on

truth-on-the-market, court explained that Lev Dawson, the

respondent corporation’s founder and first CEO, “responded

publicly to [a negative Forbes magazine] article immediately

after it was published, refuting its ailegations and claiming

that (the corporation] was everything it purported to be... .

Given the lack of any notable adverse market reaction or

negative press follow-up, it would have been reasonable for a

shareholder to read Dawson’s letter and to conclude that

nothing was amiss”); Jn re Taxable Mun. Bonds Litig.,

[1994-1995 Transfer Binder] Fed. Sec. L. Rep. (CCH)

98,405 at 90,780 (E.D. La. Sept. 26, 1994) (“[I]t is a rare case

in which the respondent can carry its ‘staggering burden’

under the truth on the market defense, particulariy at the

summary judgment stage”). Cf Grossman v. Novell, Inc.,

120 F.3d 1112, 1122 (10% Cir. 1997) (“Particularly in a fraud

on the market case, the relevant inquiry concerns the total

mix of information available to the market at the time of the

allegedly fraudulent statements”); see generally John M.

Newman, Jr., et al., Basic Truths: The Implications of the

Fraud-On-The-Market Theory for Evaluating _ the

“Misleading” and “Materiality” Elements of Securities

Fraud Claims, 20 J. Corp. L. 571, 576 (1995) (“Under [the

truth on the market] doctrine, a defendart can escape liability

for a false statement—or one that reveals less than the full

truth—by showing that the market was not affected by the

misrepresentation because the truth of the matter was known

already and had been factored into market prices. The issue

of when the truth is actually ‘on the market’ often arises in

such cases’’).

Indeed, the Fourth Circuit’s analysis in this case

undercuts ihe logic of the fraud on the market theory,

articulated in Basic, that individual investors in modern

securities markets simply cannot absorb all the information

available to the market, but must instead rely on the price of a

stock as a reflection of its value. 485 U.S. at 243-44. If the

fraud on the market presumption can be rebutted as a matter

of law by cny public statement contradicting a corporation’s

misrepreseatation—regardless of the credibility of its source

or the statement’s failure to affect the stock price—an

investor wili be required to scrutinize all available

information to ensure the absence of any statement, whatever

its source, that might later operate to rebut the fraud on the

market presumption. But see Finkel v. Docutel/Olivetti

Corp., 817 F.2d 356, 360 (5" Cir. 1987) (“[T]he fraud on the

market theory rejects the traditional notion of the investor

who acts after carefully examining all available

information”): Ockerman v. May Zima & Co., 27 F.3d 1151,

1158 (6% Cir. 1994) (while “in a developed market,

sophisticated financial professionals can generally be

expected to read the publicly available information about a

security . . . , unsophisticated investors generally rely on a

security’s market price as reflecting the security’s value”);

Note, The Fraud-on-the-Market Theory, 95 Harv. L. Rev.

1143, 1159 (1982) (“Most SEC disclosure documents not

only go unread by their intended recipients but in fact ‘can be

used effectively only by market professionals” (quoting H.

Kripke, THt SEC AND CorPorRATE Disclosure at 14 (1979))).

It is straightforward that the Fourth Circuit's expansion of the

truth on the market corollary defies the logic underlying the

fraud on the market presumption.

CONCLUSION

The Fourth Circuit erred in ruling—in the face of

uncontroverted evidence that the market discounted as

incredible the UFCW’s accusations that Food Lion was

engaging in widespread violations of the FLSA—that the

UFCW’s press release provided the market, as a matter of

law, with “a full opportunity to evaluate these claims and to

reflect their risk in the market price for Food Lion stock.”

The court’s analysis disregards the teaching of Basic, 1s at

odds with the decisions of every other appellate court that has

addressed the issue, and defies reason. Accordingly, the

lower court’s order affirming summary judgment in favor of

respondents should be reversed.

Respectfully submitted, this the 3 day of February, 2000.

David M. Clark

Counsel of Record

John F. Bloss

CLARK BLOSS & McIVER, PLLC

125 S. Elm Street, Suite 600

P. O. Box 1349

Greensboro, NC 2749?

(336) 275-7275

WEISS & YOURMAN

The French Building

551 Fifth Avenue, Suite 1600

New York, NY 10176

(212) 682-3025

WOLF HALDERSTEIN ADLER

FREEMAN & HERZ, LLP

270 Madison Ave

New York, NY 10016

(212) 545-4600

EIT ee - = —_ a ————— -— Se

(Any footnotes trail end of each document)

No. 98-2116

UNITED STATES COURT OF APPEALS FOR THE

FOURTH CIRCUIT

DAVID I. LONGMAN; JEFFREY FEINMAN; PAUL M.

GARDNER, Defined Plan Trust, EDWARD HANKIN;

LINDA HANKIN,

Plaintiffs-Appellants,

FOOD LION, INCORPORATED; TOM E. SMITH,

Defendants-Appellees,

and

LYNNE NEUFER-DALE,

Respondent,

ROBERT HARBRANT; JEFFREY FIEDLER; KEITH

MESTRICH; SEAN CUNNIFF; FOOD AND ALLIED

SERVICE TRADES DEPARTMENT, AFL-CIO;

RESEARCH ASSOCIATES OF AMERICA; NEEL

LATTIMORE; NICHOLAS W. CLARK; MAUREEN

DWYER; ALLEN Y. ZACK; CHARLES L. ULSCH;

SUSAN BARNETT; COOPERS & LYBRAND, LLP,

Movants.

May 4, 1999, Argued

October 7, 1999, Decided

COUNSEL:

ARGUED: John Francis Bloss, Sr., CLARK & WHARTON,

Greensboro, North Carolina, for Appellants.

Richard L. Wyatt, Jr., AKIN, GU'MP, STRAUSS, HAUER &

FELD, L.L.P., Washington, D.C.; William Kearns Davis,

BELL, DAVIS & PITT, P.A., Winston-Salem, North

Carolina, for Appellees.

ON BRIEF: David M. Clark, CLARK & WHARTON,

Greensboro, North Carolina; Jeffery G. Smith, Shane

Rowley, WOLF, HALDERSTEIN, ADLER, FREEMAN &

HERTZ, L.L.P., New York, New York; Joseph H. Weiss,

David C. Katz, WEISS & YOURMAN, New York, New

York; Lubna Farugi, FARUQI & FARUQI, New York, New

York; B. Ervin Brown, Il, MOORE & BROWN,

Winston-Salem, North Carolina; Bernard Persky,

GOODKIND, LABATON, RUDOFF & SUCHAROW, New

York, New York, for Appellants.

Charles L. Warren, Larry E. Tanenbaum, Thomas P. McLish,

AKIN, GUMP, STRAUSS, HAUER & FELD, Les

Washington, D.C.; James T. Williams, Reid L. Phillips,

BROOKS, PIERCE, MCLENDON, HUMPHREY &

LEONARD, L.L.P., Greensboro, North Carolina, for

Appellees.

JUDGES:

Before WIDENER, MURNAGHAN, and NIEMEYER,

Circuit Judges. Judge Niemeyer wrote the opinion, in which

Judge Widener joined. Judge Murnaghan wrote a dissenting

opinion.

OPINIONBY:

NIEMEYER

OPINION:

OPINION

NIEMEYER, Circuit Judge:

On the day after ABC aired its "PrimeTime Live"

television broadcast on November 5, 1992, detailing

allegedly widespread unsanitary practices and labor law

violations in grocery stores owned by Food Lion, Inc., the

price of Food Lion's Class A stock fell approximately 11%,

and the price of its Class B stock fell approximately 14%. A

week later, stockholders David Longman, Jeffrey Feinman,

and others who had purchased Food Lion stock during the

2-1/2-year period before the broadcast filed these two class

actions against Food Lion, which were later consolidated,

alleging securities fraud under § 10(b) of the Securities

Exchange Act of 1934 and Rule 10b-5 promulgated

thereunder. The plaintiffs alleged that Food Lion

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. They alleged

that these violations and practices were attributable to Food

Lion's "Effective Scheduling System," which required

employees to perform certain duties within specified times at

the risk of losing their jobs.

The district court granted Food Lion's motion for

summary judgment, concluding cs a matter of law that Food

Lion did not knowingly fail to disclose labor or sanitation

problems and finding that plaintiffs could not "prove

justifiable reliance" as to labor problems because they had

already been disclosed and that the alleged sanitation

problems were not material. For the reasons that follow, we

affirm.

Food Lion is a publicly traded (over the counter)

company with headquarters in Salisbury, North Carolina, that

operates a chain of approximaiely 1,000 retail grocery stores

in the southeastern part of the United States. During the

relevant period, its earnings exceeded $ 200 million per year,

and it employed aLout 60,000 persons.

As a management tool, Food Lion 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. While some stores have never met

the goals set by the Effective Scheduling guidelines, others

consistently have met those goals. In their complaints,

plaintiffs 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 comers, including

disregarding sanitary practices.

During the 2-1/2-year "Class Period" between May 7,

1990, when Food Lion issued its 1989 Annual report, and

November 5, 1992, when the PrimeTime Live broadcast

aired, plaintiffs purchased stock in Food Lion, allegedly

relying on its rosy statements about its relationship with its

employees and the cleanliness of its stores. Plaintiffs alleged

that during this period, Food Lion "reported optimistically

about its future" when, in fact, its profits and optimistic

outlook were dependent oi a system that required its

employees to violate the labor laws and to pursue unsanitary

methods, facts which Food Lion failed to report.

In its 1989 Annual Report, circulated on May 7, 1990,

Food Lion stated that the Human Resources Department

"continues to insure that Food Lion employces receive

competitive wages and excellent benefits," tha: aithough

inflation led to higher costs, "these costs were recovered

primarily through improved operating efficiencies and an

increased average selling price per item;" and that "we will

continue to pay close attention to service levels and

cleanliness ii. our stores and believe we will achieve high

marks from customers in these areas." The report said

nothing about any widespread labor or sanitary problems.

During the Class Period, Food Lion continued to face and

to resist the efforts of the United Food and Commercial

Workers Union ("UFCW") to organize Food Lion workers.

When the union called for a boycott of Food Lion, the

company issued a press release on August 30, 1990, stating:

How ironic it is on this Labor Day weekend

for a union leader to call for the destruction

of more than 45,000 jobs of Food Lion

employees in retaliation for their desire to

remain union free. Suc: blatant threats and

arrogant disregard of true employee free

choice is the kind of coercion of employees

that totally desecrates the purpose and spirit

of Labor Day.

The fact is, Food Lion opens more tian 100

stores each year and adds more than 5,000

employees each year. Food Lion could not

do this without offering competitive wages

and excellent benefits. On average, Food

Lion receives three to four applications for

every available job.

About a year later, 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. In its press release, the union

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.

*** *

"Food Lion's profit is reported to exceed the

industry average," the complaint [filed with

the Department of Labor] states, "and its

profit advantage is widely attributed to more

efficient operations. With over one-third of

its profit derived from illegal off-the-clock

work, it is clear ihat 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."

Food Lion responded with its own press release the same

day:

i Food Lion has a very clear policy against

F working off the clock. Employees, includir 5

managers, who have violated this polic:/

4 have received discipline up to and including

discharge.

This Complaint and news release by the

UFCW union is simply one more example

of the union's attempt to harass and coerce

Food Lion management into recognizing the

union without regard to the sentiments of

our employees.

Food Lion employees have repeatedly

rejected the UFCW union despite union

efforts for more than ten years.

** *

As has been the case in all other attacks on Food Lion by this

union, the company intends to defend itself vigorously in this

matter.

; On the following day, Food Lion issued another press

; release, stating:

The UFCW's most recent claims of illegal

employment practices by Food Lion and its

employees insult the hard work and integrity

of ali Food Lion employees. Those

ingredients are the key to Food Lion's

ei SE Ss ar RMS Le Sere V4 SLO

BLE COPY

success and ability to bring customers extra

low prices. It is not off the clock work by

employees or other illegal employment

practices as the UFCW-sporsored

propaganda alleges.

* * *

Food Lion denies union claims of employee

mistreatment, but the public doesn’t have to

accept the word of either the Company or

the union. Let employees and the free

marketplace decide that.

***

Nothing has been proven and nothing has

been decided. Nevertheless, Food Lion is

immediately commencing a detailed

investigation of all the allegations in the

Complaint and will take appropriate action.

Several months later, on February 27, 1992, Food Lion

made further public statement with respect to the union's

claims:

As before, the UFCW union is simply

exploiting administrative charges and other

litigation as part of its effort to unionize

Food Lion. The fact is, Food Lion strictly

forbids working off-the-clock or other

wage/hour law violations. UFCW sponsored

claims of extensive wage/hour violations are

ASE adil Na WPT AE Aa A LUSSIER DALE LES SERRE, ROGET ROR GEE

ae es

;

bed

simply untrue. Food Lion management

diligently works to prevent even isolated

occurrences. When management discovers

them, those responsible receive appropriate

discipline, and the misconduct is stopped.

Food Lion's 1991 Annual Report, circulated on June 1,

1992, referred to "continued and constant harassment of Food

Lion by the United Food and Commercial Workers Union,"

but it also stated more positively, "We believe that Food

Lion's Extra Low Prices and its clean and conveniently

located store. ure especially well suited to the demands of our

customers." The report quoted a store manager as saying,

"Food Lion also provides job security, good wages, good

working conditions and some of the dest benefits in the

supermarket industry." The report also included an

unattributed statement that "Food Lion is one of the

best-managed high growth operators in the food retailing

industry." This Annual Report, like the 1989 Annual Report,

did not acknowledge any widespread labor violations or

sanitation problems.

Finally, in July 1992, Food Lion filed a form 10-Q with

the Securities and Exchange Commission which stated:

Management and legal counsel for the

Company are currently investigating and

evaluating the allegations contained in the

[UFCW] Complaints. The ultimate liability,

if any, which may result is not presently

determinable; however, in the opinion of

management, the Company has mezitorious

defenses to the allegations and the Company

intends to defend the allegations vigorously

and any liability will not have a material

10a

adverse effect on the financial condition or

results of operations of the Company.

On August 3, 1993, approximately one year after this public

filing (and sev~-s' months after the close of the Class Period),

the Departmer of Labor announced a settlement of the

UFCW-instigated complaints against Food Lion, in which

Food Lion agreed to pay $ 16.2 mitlion, $ 8.1 miilion in 1993

and $ 8.1 million in 1994. The $ 16.2 million represented $

13.2 million in back wages for current and former Food Lion

employees and $ 3 million in penalties. The cost of the

settlement to shareholders was 1.67 cents per share for each

year, 1993 and 1994 (i.e., $ 8.1 million divided by the

484,000,000 shares outstanding). Experts retained by both the

plaintiffs and the defendants agreed that the settlement was

not material to Food Lion's earnings. Indeed, the expert for

Food Lion stated that the settlement's effect on income was

"de minimis."

On November 5, 1992, after all of the publicity about

Food Lion's ongoing labor disputes but nine months before

the Department of Labor settlement, ABC broadcast a

PrimeTime Live episode about Food Lion stores, alleging

widespread unsanitary practices and off-the-clock work by

Food Lion employees. PrimeTime Live attributed these

deficiencies to Feod Lion's Effective Scheduling system. The

broadcast included interviews with former and current Food

Lion employees and a hidden camera investigation conducted

by two ABC employees who obtained jobs at three Food

Lion stores. The employees who were interviewed alleged

various unsanitary business practices, including pulling meat

out of a dumpster and selling it, bleaching fis: and pork with

Clorox "to et the smell out" and then selling them, mixing

rotten pork with other pork and selling it as fresh sausage,

lla

and cutting off the edge of a block of cheese that had been

nibbled by rats so that the rest of the block could be sold. An

employee stated that she used "fingernail polish remover to

take the dates off" of products so that they could be sold after

the manufacturer's date for sale had passed. The hidden

: camera investigation showed unsanitary practices, such as an

employee being instructed to alter the expiration date on ham

so that it could be sold weeks after its expiration date.

Several employees described how they worked extra

hours off the clock in order to be able to complete their

assigned tasks. Diane Sawyer, who narrated the broadcast,

summarized:

Dish bee Beth

: Over and over again, we were tuld that for

workers, Food Lion is a kind oi pressure

cooker. The employees all said the company

pays good salaries and has excellent

benefits, including profit sharing. But there's

j a flip side, a time-management policy called

4 Effective scheduling, which critics charge

forces a lot of workers to finish the work on

their own time.

DOSY aah Wola

** *

Many employees told us that [the] pace

[required by the Effective Scheduling

system] is pounding. And since very little

overtime is permitted, at the end of the day

good workers were faced with an impossible

choice. leave work unfinished, jeopardizing

their jobs, or stay and finish, giving extra

12a

hours to the company without pay. It's called

working off the clock, and it's illegal.

The day after the broadcast, Food Lion's Class A stock fell

from $ 9.25 per share to $ 8.25 per share, and its Class B

stock fell from £ 10.00 per share to $ 8.625 per share. Within

a week, the plaintiffs in these cases filed their class action

suits -. one on November 12, 1992, and the other on

November 13, 1992 -- alleging that they purchased Food

Lion stock based on artificially inflated earnings during the

Class Period. They alleged that Food Lion's profits during

that period before the broadcast had been attributable to these

illegal practices and that Food Lion failed to disclose them to

the market. The plaintiffs sued both Food Lion and its

chairman of the board, president and chief executive officer,

Tom E. Siaith.

In ite motion for summary judgment, Food Lion

presented evidence that no corporate policy authorized or

encouraged the unsanitary practices described in the

PrimeTime Live broadcast. It stated that, on the contrary, it

employs a team of auditors to ensure that its stores meet

internal sanitation standards, as well as state and local

regulatory standards. In addition, Food Lion pointed out that

it is regularly subject to a variety of federal, state, and local

inspections, including U.S. Department of Agriculture meat

inspections, U.S. Food and Drug Administration surveys and

evaluations, dairy inspections, and state and county food

safety inspections. On the average, Food Lion stated that each

store was inspected on an unscheduled, "surprise" basis

between one and one and a half times per year by state or

local health or agricultural inspectors. It claimed that it

consistently seceived very high marks from state food

sanitary authorities using numerical or alphabetical scales and

PRET ne EP A AOR SES BLP RRR eae a eR

13a

always passed inspection in states that use a pass/fail

inspection system. In one affidavit, Food Lion asserted that

its sanitation and food handling compliance record was as

good as, and in many cases better than, the records of its

principal competitors. Food Lion also stated that it has a

customer relations department that receives and investigates

customer complaints about the quality of store conditions and

products. Food Lion presented evidence that it served

approximately 400 million customers per year but only

received, on average, less than one complaint per store per

year regarding the quality of sanitation.

Food Lion also challenged the plaintiffs' claim of labor

law violations, presenting information that it was Food Lion's

policy to require employees to report all time worked. Food

Lion acknowledged that it has occasionally received reports

that an employee worked off the clock, but in each case it

investigated the report and corrected any violation. Food Lion

contended that it also audits its stores for off-the-clock work,

and internal audits showed that off-the-clock work occurred

relatively infrequently and that when such work did occur, it

was addressed appropriately and effectively. Food Lion

acknowledged that before the Class Period, it had been

charged with off-the-clock work involving a small number of

claims and that it had settled those claims with the

Department of Labor for $ 300,000. However, Food Lion

maintained that at no time during the Class Period did Food

Lion become aware of any evidence of widespread violatiors

of its policy against off-the-clock work.

The district court granted Food Lion's motion for

summary judgment, concluding first that the plaintiffs 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

—

l4a

substantial likelihood that a reasonable investor would

consider these isolated instances of workplace errors

important in deciding whether to purchase Food Lion

securities." In addition, as to the alleged labor violations, the

court concluded that because the allegations had already been

disclosed to the market, the plaintiffs were unable to prove

"justifiable reliance on an alleged artificial stock price set by

the market." Finally, the court concluded that the plaintiffs

failed tc offer evidence that defendants acted "with scienter

by failing to disclose the alleged omission concerning

working off the clock or the aileged omission concerning

poor sanitation in Food Lion stores." For the same reasons,

the court dismissed all related claims against Smith, as well

as analogous claims alleged under state law.

This appeal followed.

The Securities Exchange Act of 1934, 1/5 U.S.C. § 78a et

seq., was "designed to protect investors against manipulation

of stock prices” through a philosophy of public disclosure.

Basic Inc. v. Levinson, 485 U.S. 224, 230, 99 L. Ed. 2d 194,

108 S. Ct. 978 (1988); Santa Fe Indus., Inc. v. Green, 430

U.S. 462, 477-78, 51 L. Ed. 2d 480, 97 S. Ct. 1292 (1977).

And it is well established that a private cause of action exists

for violation of § 10b of the Act, /5 U.S.C. § 78j(b), and for

violation of Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated

thereunder. See Ernst & Ernst v. Hochfelder, 425 U.S. 185,

196-97, 47 L. Ed. 2d 668, 96 S. Ct. 1375 (1976).

To establish liability under § 10b of the Securities Exchange

Act and under Rule 10b-5, a plaintiff must prove that, in

TENE aa aan ee aR aa ALE

RR iO aa A Serle. GRA RES AED ol PE EH A,

15a

connection with the purchase or sale of a security, "(1) the

defendant made a false statement or omission of material fact

(2) with scienter (3) upon which the plaintiff justifiably relied

nl (4) that proximately caused the plaintiffs damages."

Cooke v. Manufactured Homes, Inc., 998 F.2d 1256, 1261

(4th Cir. 1993) (quoting Myers v. Finkle, 950 F.2d 165, 167

(4th Cir. 1991)); see also Gasner v. Board of Supervisors,

103 F.3d 351, 356 (4th Cir. 1996).

It is the first element that is at issue in this case -- whether

Food Lion made a false statement or omission of material

fact. To establish this element, plaintiffs must point to a

factual statement or omission -- that is, one that is

demonstrable as being true or false. See Virginia Bankshares,

Inc. v. Sandberg, 501 U.S. 1083, 1091-96, 115 L. Ed. 2d 929,

111 S. Ct. 2749 (1991) (observing that even opinivn in the

proper context can be demonstrably true or false and

therefore factual); see also 7 Louis Loss & Joel Seligman,

Securities Regulation 3423 (3d ed. 1991). Also, the statement

must be false, or the omission must render public statements

misleading. See 17 C.F.R. § 240.10b-5. And finally, any

statement or omission of fact must be material. Materiality is

an objective concept, “involving the significance of an

omitted or misrepresented fact to a reasonable investor."

Gasner, 103 F.3d at 356 (citing TSC Industries, Inc. v.

Northway, Inc., 426 U.S. 438, 445, 48 L. Ed. 2d 757, 96 S.

Ct. 2126 (1976)). Thus, a fact stated or omitted is material if

there is a substantial likelihood that a reasonable purchaser or

seller of a security (1) would consider the fact important in

deciding whether to buy or sell the security or (2) would have

viewed the total mix of information made available to be

significantly altered by disclosure of the fact. See Basic. 485

U.S. at 231-32 (adopting standard from TSC Industries, 426

U.S. at 448-49); Gasner, 103 F.3d at 356.

16a

These components -- a factual statement or omission that is

false or misleading and that is material-- interact to provide a

core requirement for a securities fraud claim. While opinion

or puffery will often not be actionable, in particular contexts

when it is both factual and material, it may be actionable.

Thus, for example, a CEO's expression of "comfort" with a

financial analyst's prediction of his company's future earnings

was held not to be factual in that, as a future projection, it

was not capable of being proved false. See Malone v.

Microdyne Corp., 26 F.3d 471, 479-80 (4th Cir. 1 994); see

also Raab v. General Physics Corp., 4 F.3d 286, 289 (4th

Cir. 1993) (holdiug similar statement predicting future

growth not material because "the market price of a share is

not inflated by vague statements predicting growth"). On the

other hand, the Supreme Court has held that an opinion by

board members to minority stockholders that the stock price

of $ 42 for the purchase of their shares was a "high value"

and represented a "fair" transaction could be both factual and

material. See Virginia Bankshares, 501 U.S. at 1090-93. In

Virginia Bankshares, the Court noted that the opinions could

be false and factual if the directors did not believe what they

said they believed and proof could be had "through the

orthodox evidentiary process." Id. at 1093. In addition, the

court found "no serious question" that the statements could be

materia! in that shareholders, knowing that directors have

greater knowledge and expertise as well as a fiduciary duty to

sharehoiders, often act on what their board members say they

believe. Jd. at 1090.

With these relevant principles in hand, we turn to the

misstatements and omissions that plaintiffs in this case allege

"caused" them to nurchase Food Lion stock during the Class

Period.

17a

Ill

The essence of the plaintiffs’ claim is that during the Class

Period, Food Lion's earnings were “artificially inflated due to

Food Lion's widespread violations of federal labor laws and

pervasive unsanitary food-handling practices" and that Food

Lion failed to disclose these facts and, indeed, publicly

denied them. Plaintiffs contend that the true facts were "first

disclosed to the public in credibie fashion" when ABC News

aired PrimeTime Live on No'ember 5, 1992, presenting "an

expose on Food Lion's labor and sanitation practices."

Relying on the "integrity of the market" theory, the plaintiffs

claimed that they purchased Food Lion stock "at artificially

inflated prices and [there fore] were damaged." They alleged

further that "had the plaintiffs and the other Class members

known the truth, they would not have purchased Food Lion's

common stock at the prices they did or at all.”

Plaintiffs thus make two claims: (1) that Food Lion's labor

practices illegally "forced employees to work overtime

without pay," resulting in overstated profits, and (2) that

Food Lion's "widespread unsanitary conditions and sale of

spciled meat inflated sales." We address each claim in turn.

Throughout the Class Period, Feod Lion expressed, in public

statements, substantial pride in the fact that its employees

were well-paid and enjoyed good benefits. It claimed that it

provided its employees with job security, good working

conditions, and "some of the best benef:ts in che supermarket

industry." Its Annual Reports for 1989 and 1991 and similar

public statements expressed a belief that "Food Lion is one of

18a

the best-managed high growth operators in the food retailing

industry."?

Plaintiffs claim that these rosy statements about employee

compensation and benefits masked Food Lion's real labor

problems that were created by its Effective Scheduling

system and by the UFCW's complaint filed with the

Department of Labor charging Food Lion with wage/hour

violations. Plaintiffs’ contention focuses on the allegation that

Food Lion knew about employees being forced to work oft

the clock and that, even though the practice was widespread,

it failed to disclose it. Because such work provided

productivity from employees without compensation, the

plaintiffs' theory goes, the practice illegally and artificially

inflated Food Lion's earnings.

In addition, plaintiffs contend that, to the extent that the

practices were made public by the UFCW and others, Food

Lion's response was deceptive in explicitly denying or giving

the implicit impression that it did not have significant

amounts of off-the-clock work. For example, Food Lion said

ini response to the UFCW’'s complaint that it "intends to

defend itself vigorously in this matter;" that the company's

success was based upon the "hard work and integrity of all

Food Lion employees," rather than on any "illegal

employment practices;" and that "UFCW sponsored claims of

extensive wage/hour violations are simply untrue." Likewise,

in a filing with the SEC, Food Lion stated that while the

“ultimate liability, if any, which may result [from the UFCW

complaint] is not presently determinable. . ., in the opinion of

management, the Company has meritorious defenses to the

allegations and the Company intends to defend the

allegations vigorously and any liability will not have a

material adverse effect on the financial condition or results of

BEST AVAL

19a

operations of the Company." Plaintiffs also point to the fact

that, during this same period, Food Lion omitted to admit that

its profits were substantially dependent on this off-the-clock

work.

Plaintiffs' securities fraud claim cannot succeed because,

despite the fact that Food Lion denied the charges, the nature

of the off-the-clock claims and the claims' risk to earnings

were in fact well known to the market before the PrimeTime

Live broadcast, and therefore Food Lion's omissions were not

material. See Hillson Partners Ltd. Partnership v. Adage,

Inc., 42°F.3d 204, 212-13 (4th Cir. 1994) (noting that the

securities laws do not require disclosure of information that is

already in the public domain). On September 11, 1991, for

instance, more than a year before the PrimeTime Live

broadcast, the UFCW publicly announced that it had filed a

complaint with the Department of Labor, asserting that 183

people had claimed to have illegally worked off the clock,

that "more than 37 percent of the after tax profit" of Food

Lion was attributable to off the clock work, and that "Food

Lion could owe as much as $ 194 million in back wages."

The union warned that Food Lion's liability could be as inigh

as $ 388 million based on claims for liquidated damages.

Even as Food Lion denied the claims, however, it

nevertheless promised to conduct an investigation of the

allegations and take appropriate action. The market had a full

opportunity to evaluate these claims and to reflect their risk

in the market price for Food Lion stock. See Raab, 4 F.3d at

289 (discussing "the presumption that the market price has

internalized all publicly available information"). The

PrimeTime Live broadcast added nothing to inform the

market further. Rather, it simply repeated earlier charges

through experiences of seven employees.

20a

Because the market was thus informed of the union's charges

before PrimeTime Live aired, what PrimeTime Live

disclosed was not material. Indeed, even the much larger

problem alleged more than a year earlier by the union was not

material. Food Lion settled all of the claims made by the

union with the Department of Labor for $ 16.2 million, $ 8.1

million payable in each of 1993 and 1994. During the saiae

period, Food Lion's earnings exceeded $ 200 million per

year. Experts on both sides agree that this settlement,

reflecting a charge of less than two cents per share for e2ch

year, was not material to Food Lion's stock price. And

consistent with this conclusion, Food Lion's share price did

not drop following annovncement of the Department of

Labor settlement.

In short, the off-the-clock violations disclosed during

PrimeTime Live were already publicly available and,

therefore, were not material either to Food Lion's earnings or

the price of its stock. See Gasner, 103 F. 3d at 356.

We turn now to the second category of alleged misstatements

and omissions by Food Lion--those which related to

unsanitary practices. The plaintiffs have juxtaposed Food

Lion's ongoing public statements about the cleanliness of its

stores with the PrimeTime Live broadcast which revealed

allegedly widespread unsanitary practices. In its 1989 Annual

Report, Food Lion stated: "We will continue to pay close

attention to service levels and cleanliness in our stores and

believe we will achieve high marks from customers in these

areas." Similarly, in its- 199] Annual Report, Food Lion

stated: "We believe that Food Lion's Extra Low Prices and its

2la

clean and conveniently located stores are especially well

: suited to the demands of our customers."

On their face, these statements are the kind of puffery and

generalizations that reasonable investurs cou'? ~ot have

relied upon when deciding whether to buy stock. “ ze Gasner,

103 F.3d at 356; see also Raab, 4 F.3d at 290 ("The market

price of a share is not inflated by [such] vague statements").

Additionally, the plaintiffs have presented no evidence that

Food Lion's stores were not generally clean or that customers

complained about the lack of cleanliness in their stores. To

the extent that the plaintiffs claim that these ciean-stores

representations masked the existence of unsanitary practices,

they point to the broadcast from PrimeTime Live to support

their claim.

Before considering the broadcast, the district court noted that,

with a few exceptions, most of the broadcast was

inadmissible hearsay. None of the people who spoke were

under oath or subject to cross examination. In the absence of

the evidence presented by the PrimeTime Live broadcast, or

at least most of it, the district court was left with the

affidavits of Food Lion which demonstrated that it had no

corporate policy, written or unwritten, that would permit or

encourage unsanitary food-ha idling practices. The court

noted that Food Lion had "an avdit staff in place who

conducted surprise inspections of Food Lion stores to ensure

that the stores complied with health and sanitation policies."

And the court concluded that Food Lion's efforts were

apparently sufficient to satisfy federal, state, and local

inspections which revealed that Food Lion's record was "just

as good, if not better, than its competitors’ inspection

reports.”

22a

But even considering the entire PrimeTime Live broadcast,

the district court stated it "still does not present evidence of

widespread unsanitary conditions of which Defendants

knew." It noted that "with respect to the sanitary conditions at

Food Lion's 1.900 stores, the [PrimeTime Live] broadcast is

insufficient to draw any conclusions about Food Lion's

operations as a whole." The court pointed out that the

broadcast was filmed at only 3 of Food Lion's almost 1,000

stores and that out of 69,000 active employees and 40,000

former ernployees, PrimeTime Live interviewed a total of 70

current and former employees, 22 of whom had left the

employ of Food Lion as much as 8 years before the Class

Period. The district court concluded:

To the extent that there are any isolated

instances of workplace errors, . . . not only is

there not a substantial likelihood that the

reasonable investor would consider the

limited instances of workplace errors

important in deciding whether to purchase

Food Lion securities, but the Court also

finds . . . that Defendants were taking steps

to remedy these isolated problems. As a

result, the Court finds that to the extent that

there is any omission by Defendants in their

Annual and Quarterly Reports of isolated

instances of workplace errors, this omission

not only is not material as required by § 10b

but also could not make any affirmative

statements misleading in Defendants’

Annual and Quarterly Reports.

(Citations omitted).

23a

We agree with the district court that, based on the record

in this case, Food Lion was not required to make public

statements about the existence of various sanitation problems

that were revealed from time to time. These day-to-day

conditions were not shown to be material to the price of Food

Lion's stock. We also agree, as earlier noted, that the public

statements that it did make were no more than soft, puffing

statements about clean and convenientiy located stores that

no reasonable investor could rely upon in buying or selling

Food Lion stock. Accordingly, we conclude that Food Lion

did not defraud the market with false statements or omissions

of material fact as required to maintain an action under §

1U(b) of the Securities Exchange Act and Ruie 10b-5

promulgated thereunder. See Hillson Partners, 42 F.3d at

219 (noting that materiality depends on the "magnitude" of

the event in light of total company activity).

Plaintiffs also sued Tom E. Smith, the CEO of Food Lion,

under § 20(a) of the Securities Exchange Act, which

provides:

Every perscn who, directly or indirectly,

controls any person liable under any

provision of this chapter or of any rule or

regulation thereunder shall also be liable

jointly and severally with and to the same

extent as such controlled person to any

person to whom such controlled person is

liable, unless the contro!ling person acted in

good faith and did not directly or indirectly

24a

induce the act or acts constituting the

violation or cause of action.

15 U.S.C. § 78t(a). Even if Tom Smith had sufficient

"control" over Food Lion such that he couid be held liable

under § 20(a) for any of the alleged securities violation by

Food Lion, we conclude that because there is nc evidence of

any such violation in this case, Tom Smith cannot be held

liable, vicariously or otherwise.

For the foregoing reasons, the judgment of the district

court is

AFFIRMED.

| Where, as here, a plaintiff pursues a securities fraud action

based on a fraud-on-the-market theory, he may, to

demonstrate reliance, rely on a presumption of direct reliance

created by his reliance on the integrity of the market.

In face-to-face transactions, the inquiry into

an investors reliance upon information is

into the subjective pricing of that

information by that investor. With the

presence of 2 market, the market is

interposed between selier and buyer and,

ideally, transmits information to the investor

in the processed form of a market price.

Thus the market is performing a substantial

part of the valuation process performed by

the investor in a face-to-face transaction.

The market is acting as the unpaid agent of

the investor, informing him that given all the

25a

information available to it, the value of the

stock is worth the market price.

Basic, 485 U.S. at 244 (quoting Jn re LTV Sec. Litig., 88

F.R.D. 134, 143 (N.D. Tex. 1980)). Accordingly, where

material false statements or omissions have been

disseminated to "an impersonal, weil-developed market for

securities, the reliance of individual plaintiffs on the integrity

of the market price may be presumed." 485 U.S. at 247; see

also Malone v. Microdyne Corp., 26 F.3d 471, 476 n.5 (4th

Cir. 1994). Rut this fraud-on-the-market presumption is

rebuttable. See Basic, 485 U.S. at 250; see also id. at 25] (

White, J., concurring in part and dissenting in part) (agreeing

with the majority that the presumption "must be capable of

being rebutted by a showing that a »!cintiff did not 'rely’ on

the market price").

in this case, the parties apparently agree that the market

for Food Lion's stock is well-developed and efficient, and

there is no suggestion that plaintiffs did not rely on the

martet price of Food Lion's stock.

2 While not material to our holding, we note that we can find

nothing in the record that would make these general

statements by Food Lion, standing alone, actionable. First,

these statements are immaterial puffery that is not actionable

under the securities laws. See, e.g., Raab, 4 F.3d at 289-90;

Howard v. Haddad, 962 F.2d 328, 331 (4th Cir. 1992).

Second, there is no evidence in the record that Food Lion

employees were not well paid; that Food Lion did not have

"some of the best benefits" in the industry; or that Food Lion

was not well managed. Third, whether or not these statements

are true, they do not bear on plaintiffs’ claims that Food Lion

forced its employees to work off the clock. Even if Food

26a

Lion's employees worked overtime without pay, they could

still be well paid compared to other employees in the

industry.

DISSENTBY.

MURNAGHA

DISSENT:

MURNAGHAN, Circuit Judge, dissenting:

I respectfully dissent. The majority opinion claims that Food

Lion's failure to disclose its "off the clock" policy was not

material because the market was fully informed of any risks

in the price of Food Lion's stock. The majority relies on the

press reports reflecting the dispute between Food Lion and

thc UFCW over Food Lion's employment practices. In doing

so, the majority cites Hillson Partners Ltd. Partnership v.

Adage, Inc., 42 F.3d 204 (4th Cir. 1994), and Raab v.

General Physics Corp., 4 F.3d 286 (4th Cir. 1993).

In Hillson Partners and Raab, the corporation-defendants

made misleading statements to the market about their

economic situations. In both cases, however, the defendants

admitted their financial problems through additional public

disclosures. See Hillson Partners, 42 F.3d at 212 (defendant

disclosed the financial problems of its subsidiary in its

Annual Report and a Form 10K filing); Raab, 4 F.3d at 289

(defendant issued a press release informing the market of an

impending reduction in its earnings on the same day as the

misleading statements in its Annual Report). Because the

market had access to the defendants’ financi2! problems, we

held that the misleading statements were not material to the

plaintiffs’ decisions to purchase stock. See Hillson Partners,

42 F.3d at 212-13; Raab, 4 F.3d at 289.

nai

eed 27a

Hillson Partners and Raab do not control the case at bar. The

majority incorrectly suggests that any public information

contradicting Food Lion's misleading statements forecloses

the possibility of finding that those statements were material.

However, the controlling principle is that "in a fraud on the

market case, Food Lion's failure to disclose material

informaiion may be excused where that information has been

made credibly available to the market by other sources."

Raab, 4 F.3d at 289 (quoting In re Apple Sec. Litig., 886 F.2d

1109, 1115 (9th Cir. 1989) (emphasis added)); see also Basic

Inc. v. Levinson, 485 U.S. 224, 248-49, 99 L. Ed. 2d 194, 108

S. Ct. 978 (1988). The majority does not analyze whether the

allegations against Food Lion came from a credible source. !

Here, the market first heard about Food Lion's problems

through an employment dispute between Food Lion and the

UFCW. Food Lion had been resisting the efforts of the

UFCW to organize Food Lion's workers. In August of 1990,

the UFCW called for a boycott of Food Lion's stores to

protest Food Lion's opposition to the union. Food Lion

responded by accusing the UFCW of "the kind of coercion of

employees that totally desecrates the purpose and spirit of

Labo: Day." The public thus was aware that Food Lion and

the UFCW were involved in a bitter dispute over whether

Food Lion's stores would unionize.

In September of 1991, the UFCW filed its complaint with

the Department of Labor, citing Food Lion's policy of

encouraging "off the clock" work by employees. Food Lion

responded by denying the UFCW's claim. Food Lion also

suggested that the claim was an effort to use unmeritorious

litigation to force Food Lion to unionize. Food Lion stated in

a public statement that "as before, the UFCW union is simply

exploiting administrative charges and other litigation as part

of its effort to unionize Food Lion . . . . UFCW sponsored

28a

claims of extensive wage/hour violations are simply untrue."

Food Lion thus characterized the UFCW's claim as merely

another tactic in an ongoing labor dispute.

The information available to the public when the

plaintiffs purchas:-d Food Lion stock came from an admitted

adversary of Fuod Lion. Given the history of antagonism

between the parties and Food Lion's vehement denials, the

information about Food Lion's policies did not come from a

credible source. A dispute of fact, therefore, exists as to

whether Food Lion's representations were material to the

plaintiffs’ decisions to purchase Food Lion vtock.

Because a dispute of fact exists as te whether Food Lion's

representations were material, the district court's grant of

summary judgment to Food Lion was inappropriate. | would

reverse the district court's grant of summary judgment in

favor of Food Lion.’

| Obviously, we did not have to analyze whether the negative

information in Hillson Partners aid Raab came from a

credible source. In both cases, the information came from the

defendant's own statements.

? For the same reasons, I would reverse the district court's

grant of summary judgment in favor of defendant Tom

Smith.

29a

4:92CV696, 4:92CV705

UNITED STATES DISTRICT COURT FOR THE MIDDLE

DISTRICT OF NORTH CAROLINA

DAVID I. LONGMAN,

Plaintiff,

Vv.

FOOD LION, INC. and TOM E. SMITH,

Defendants.

JEFFREY FEINMAN, PAUL N. GARDNER DEFINED

PLAiW TRUST and EDWIN HANKIN and LINDA

HANKIN,

Plaintiffs,

Vv.

FOOD LION, INC. and TOM E. SMITH, Defendants.

January 4, 19¥9, Decided

January 4, 1999, Filed

COUNSEL:

For DAVID I. LONGMAN, plaintiff (92-C'V-696): DAVID

M. CLARK, CLARK & WHARTON, GREENSBORO, NC.

| TT

30a

For DAVID I. LONGMAN, plaintiff (92-CV-696): JOSEPH

H. WEISS, MOSHE BALSAM, DAVID KATZ, LAW

OFFICES OF WEISS & YOURMAN, NEW YORK, NY.

For DAVID I. LONGMAN, plaintiff (92-CV-696):

STANLEY D. BERNSTEIN, KREINDLER &

KREINDLER, NEW YORK, NY.

For JEFFREY FEINMAN, GARDNER, PAUL M.,

DEFINED PLAN TRUST, EDWARD HANKIN, LINDA

HANKIN, plaintiffs (92-CV-705): B. ERVIN BROWN, II,

MOORE AND BROWN, WINSTON-SALEM, NC.

For JEFFREY FEINMAN, plaintiff (92-CV-705): JEFFREY

H. SQUIRE, KAUFMAN, MALCHMAN, KIRBY %&

SQUIRE, NEW YORK, NY.

For JEFFREY FEINMAN, plaintiff (92-CV-705):

MICHAEL J. FUCHS, WOLF, POPPER, ROSS, WOLF &

JONES, NEW YORK, NY.

For JEFFREY FEINMAN, plaintiff (92-CV-705): LUBNA

M. FARUQI, FARUQI & FARUQI, LLP, NEW YORK, NY.

For GARDNER, PAUL M., DEFINED PLAN TRUST,

plaintiff (92-CV-705): LAWRENCE A. SUCHAROW,

GOODKIND, LABATON, RUDOFF & SUCHAROW,

NEW YORK, NY.

For EDWARD HANKIN, LINDA HANKIN, plaintiffs

(92-CV-705): JEFFREY G. SMITH, SHANE T. ROWLEY,

WOLF, HALDENSTEIN, ADLER, FREEMAN & HERZ,

NEW YORK, NY.

3la

For EDWARD HANKIN, LINDA HANKIN, plaintiffs

(92-CV-705): DAVID BROWER, WOLF, HALDENSTEIN,

ADLER, FREEMAND & HERZ, NEW YORK, NY.

For FOOD LION, INC., TOM E. SMITH, defendants

(92-CV-696, 92-CV-705): JAMES T. WILLIAMS, JR.,

ROBERT A. SINGER, REID L. PHILLIPS, BROOKS,

PIERCE, MCLENDON, HUMPHREY & LEONARD,

GREENSBORO, NC.

For FOOD LION, INC., defendant (92-CV-696, 92-CV-705):

RICHARD L. WYATT, JR., CLINTON R. BATTERTON,

AKIN GUMP STRAUSS HAUER & FELD, L.L-P.,

WASHINGTON, DC.

For TOM E. SMITH, defendant (92-CV-696, 92-CV-705):

DANIEL ALAN M. RULEY, WILLIAM KEARNS DAVIS,

BELL, DAVIS & PITT, P.A., WINSTON-SALEM, NC.

For LYNNE NEUFER-DALE, respondent (92-CV-696,

92-CV-705): HARRELL HUGH STEVENS, JR.,

EVERETT, GASKINS, HANCOCK & STEVENS,

RALEIGH, NC.

For LYNNE NEUFER-DALE, respondent (92-CV-696,

92-CV-705): RANDALL J. TURK, MILLER, CASSIDY,

LARROCA & LEWIN, WASHINGTON, DC.

For ROBERT HARBRANT, JEFFREY FIEDLER, KEITH

MESTRICH, SEAN CUNNIFF, FOOD AND ALLIED

SERVICE TRADES DEPARTMENT, AFL-CIO,

RESEARCH ASSOCIATES OF AMERICA, movants

(92-CV-696, 92-CV-705): THOMAS E. GRAHAM,

SS dea s

32a

KILPATRICK STOCKTON, L.L-P., WINSTON-SALEM,

NC.

For NEEL LATTIMORE, NICHOLAS W. CLARK,

MAUREEN DWYER, ALLEN Y. ZACK, CHARLES L.

ULSCH, movants (92-CV-696, 92-CV-705): CHARLES E.

JOHNSON, CHARLOTTE, NC.

For SUSAN BARNETT, movant (92-CV-696, 92-CV-705):

HARRELL HUGH STEVENS, JR., EVERETT, GASKINS,

HANCOCK & STEVENS, RALEIGH, NC.

For COOPERS & LYBRAND, movent (92-CV-696,

92-CV-705): MARK A. ASH, JAMES Y KERR, II, SMITH,

ANDERSON, BLOUNT, DORSETT, MITCHELL &

JERNIGAN, RALEIGH, NC.

JUDGES:

James A. Beaty, Jr., United States District Judge.

OPINIONBY:

James A. Beaty, Jr.

OPINION:

MEMORANDUM OPINION

BEATY, District Judge.

This matter is before the Court pursuant to Plaintiffs’

Motion to Strike Confidentiality Order [Document # 234).

Plaintiffs request that all of the documents and material in the

judicial record be released from the seal which was imposed

on confidential documents as part of the Court's December 2,

33a

1994 Confidentiality Order. For the reasons that follow,

Plaintiffs’ request is denied. )

|. FACTUAL BACKGROUND

On June 18, 1998, the Court granted Defendants’ Motion

for Summary Judgment and thereby resolved the underlying

dispute in this case. The facts of the dispute are fully set

forth in the Memorandum Opinion accompanying that Order.

Plaintiffs have appealed the summary judgment decision to

the Fourth Circuit.

However, the current dispute revolves around the

Confidentiality Order entered during discovery in this case.

During pretria! discovery, Defendants moved for a protective

order to limit discovery of confidential business information

pursuant to Fed. R. Civ. P. 26(c). On March 16, 1994, the

Court granted Defendants’ request for a protective order, and

directed the parties to "meet and determine whether or not

they [could] stipulate to the contents of this order." The

parties agreed to a Confidentiality Order, which was entered

by the Court on December 2, 1994.

| Under the terms of the Confidentiality Order, any party

| had the power to stamp discovery material as "confidential."

) Material stamped "confidentiai" could only be disclosed to

certain parties who needed access for purposes of this

litigation. Under the Order, a party could challenge the

"confidential" designation by filing an application with the

Court challenging the confidentiality of a specific document

or category of documents. For discovery material submitted

to this Court in connection with a motion to dismiss or

motion for summary judgment, any discovery material

designated as "confidential" was required to be filed under

seal.

34a

Defendants turned over numerous documents during

discovery, with many documents and categories of

documents stamped "confidential." Plaintiffs did not

challenge any of the confidentiality designations during

discovery. Plaintiffs submitted much of this discovery

material to the Court, including over nine binders of

documents, at the summary judgment stage. All of the

material that was stamped "confidential" was filed under seal,

as required by the Confidentiality Order.

Plaintiffs now seek to generally strike the Confidentiality

Order, at the very least as it pertains to material that is part of

the "judicial record." Thus, Plaintiffs seek to unseal the entire

record on appeal, and request full public disclosure of the

discovery material in the nine volumes submitted in

connection ‘vith the summary judgment motion. Plaintiffs

claim that they are proceeding under Paragraph Twelve of the

Confidentiality Order, which provides that "nothing in this

order shall prevent any party or other person from seeking

modification of this order... ."

I]. PROCEDURAL POSTURE

Local Rule of Appellate Procedure 10(d) provides that "in

the rare event that a change of circumstances occurs during

the pendency of an appeal that warrants reconsideration of a

sealing issue decided below, or initial consideration of the

need to seal all or part of the record on appeal, an appropriate

motion may be filed with the Clerk of the Court of Appeals. .

-_ Material contained in the record subject to a protective

order remains subject to that order on appeal unless modified

or amended by the Court of Appeals." Defendants contend

that under this rule, Plaintiffs’ motion may only be brought

35a

before the Fourth Circuit while the case is on appeal, and

may only be brought if Plaintiffs can indicate a "change of

circumstances during the pendency of [the] appeal."

However, under Local Rule 10(d), "the Court of Appeals

expects that motions to seal all or any part of the record will

be presented to, and resolved by, the lower court . . . during

the course of trial, hearing, or other proceeding below." In

addition, under Local Rule 10(e), "disputes concerning the

accuracy or composition of the record on appeal should be

resolved in the trial court in the first instance." When the

Fourth Circuit was presented with a similar motion to unseal

a record while the case was on appeal in Rushford v. New

Yorker Magazine, Inc., the Fourth Circuit chose to remand

the case to the district court to resolve the issues that were

raised for the first time in that motion. See Rushford, 846

F.2d 249, 250-51 (4th Cir. 1988). The Fourth Circuit

remanded the motion, despite the fact that Local Rule 10(d)

provided that "material contained in the record subject to a

protective order remains subject to that order on appeal

unless modified or 2mended by the Court of Appeals." Local

R. App. P. 10(d) (1988).

Plaintiffs’ motion is currently pending before this Court,

and, in this Court's view, it would not be an effective use of

judicial resources to decide the issue on procedural grounds

without reaching the merits, only to have the Fourth Circuit

remand the case to this Court for a determination of the

merits of these newly raised issues. Therefore, this Court will

consider Plaintiffs’ motion to strike the Confidentiality Order,

while acknowledging that the Fourth Circuit may conclude

that such a motion to unseal the record is best directed to that

Court for initial consideration during the pendency of an

appeal, pursuant to Local Rule 10(d).

————<x=—_-

Ill. ANALYSIS

A. Standard for Modification of Discovery Order

The standard for modifying a protective order depends on

whether the parties were required to demonstrate good cause

for the issuance of the order, whether the parties relied on the

order, and whether the parties stipulated to the terms of the

order. Based on a consideration of all of these factors in this

case, Plaintiffs bear the burden of establishing the need for

modification of the protective order.

Rule 26(c) allows a court to issue a pretective order on a

showing of good cause. If the parties agree to a protective

order and it is entered without a showing of good cause, the

party who later seeks to keep information confidential will

bear the burden of showing good cause. However, if the party

seeking protection was required to show good cause initially,

the burden will be on the party seeking modification of the

order. See Bayer AG and Miles, Inc. v. Barr Laboratories,

Inc., 162 F.R.D. 456, 463-64 (S.D.N.Y. 1995). In this case,

Defendants moved for a protective order during pretrial

discovery. On March 16, 1994, the Court granted the request

for a protective order, necessarily finding that good cause

was established.

Discovery in this case involved hundreds of documents

containing confidential business information that Defendants

feared could be used by Defendants’ competitors to gain a

business advantage. The Court therefore instructed the parties

to try to stipulate to the terms of the order, which was entered

based on the original finding of good cause. The parties

agreed to a "blanket" protective order that permitted them to

designate documents containing confidential business

information. The arrangement was essential to the efficient

functioning of the discovery process, and was entered based

37a

on a general "good cause" determination. Cf. id. at 465.

Therefore, to the extent that Defendants made a good cause

showing in obtaining the initial protective order, the burden

now shifts to Plaintiffs to show good cause as to why the

confidentiality order should be modified or stric'...:

It is particularly appropriate to hold the Plaintiffs to this

burden where Plaintiffs stipulated to the terms of the

protective order and Defendants relied on that protection. See

Bayer, 162 F.R.D. at 465 ("Where, however, the modification

motion is brought by a party who stipulated to 4 blanket

protective orc.., the party should be held to its agreement and

thus should have the burden of showing good cause for its

modification request."); Omega Homes, Inc. v. Citicorp.

Acceptance Co., 656 F. Supp. 393, 404 (W.D.Va. 1987)

("When, however, the proposed modification affects a

protective order stipulated to by the parties . . . it is clear that

the shared and explicit assumption that discovery was for the

purposes of one case alone goes a long way toward denying

the movant's request without more."); Jochims v. Isuzu

Motors, Ltd., 145 F.R.D. 499, 501 (S.D. Iowa 1992) ("There

is general unanimity among the courts that where a party to

[a] stipulated protective order seeks to modify that protective

order, that party must demonstrate particular good cause in

order to gain relief from the agreed to protective order.").

Here, Plaintiffs agreed to the terms of the protective order

and did not challenge any of the confidentiality designations

during discovery. Defendants relied on this protection in

producing documents. Now, Plaintiffs seek to modify the

protective order so that they can submit the record on appeal!

without the administrative burden of filing it under seal.

Plaintiffs also seek to provide the discovery material to the

class members and the public at large. The Court does not

accept either of these arguiuents as the type of "good cause"

‘

ill laa

38a

that must be shown to justify modifying a protective order.

Plaintiffs have failed to show sufficient reason to strike the

confidentiality order in its entirety and release all discovery

material to the public. Therefore, Plaintiffs’ motion to strike

the December 2, 1994 Confidentiality Order previously

entered in this matter is denied.

B. Access to the Judicial Record

Plaintiffs also argue that material submitted to the Court

as part of the summary judzment consideration is part of the

judicial record and should be unsealed based on the common

law presumption of access to judicial records and the First

Amendment right of access. Plaintiffs are correct that judicial

seals are generally disfavored, and materials considered by

the Court in granting a motion for summary judgment are

part of the judicial record and subject to the conimon law

presumption of access and the First Amendment right of

access. See Rushford, 846 F.2d at 252-54.

However, unlike the situation in Rushford, this case does

not involve an intervenor seeking to unseal the record based

on the public's right of access. Instead, this case involves a

claim by Plaintiffs, who agreed to the provisions of the

confidentiality order, including the sealing of the documents,

and who now seek to escape their agreement based on access

arguments that they bargained away. It is not appropriate to

allow a party to agree to a protective order, only to attempt to

undo their agreement at the last possible moment. See Zenith

Radio Corp. v. Matsushita Elec. Indus. Co., Ltd., 529 F.

Supp. 866, 894 (£.D. Pa. 1981) (noting that a party who

voluntarily entered into a protective order to facilitate

discover "effectively waived their right to seek wholesale

declassification"). Therefore, because Plaintiffs agreea io the

Confidentiality Order, the Court will not entertain their First

Amendment and public access arguments. ' y

39a

This approach was sanctioned by the Fourth Circuit in an

analogous context in United States v. Morgan, 962 F.2d 8,

1992 WL 102573 (4th Cir. 1992), an unpublished opinion

which this Court uses only for illustrative purposes. There,

the parties had litigated the initial imposition of a seal, and

later one party attempted to unseal the document based on

First Amendment arguments. The Fourth Circuit noted that:

at a minimum, these concerns strengly

counsel against requiring the full analysis

argued for by the appellant. Requiring the

full complement of procedural requirement

set forth in In re Knight Publishing Co., 743-

F.2d 231, 235 (4th Cir. 1984), would

amount to a full and complete relitigation of

the issue every time a motion was made to

unseal the documents. We believe a more

appropriate balance was drawn by the court

below. Where the motion is brought by a

party that has had a full opportunity to

litigate the initial imposition of the seal, the

appropriate threshold question is whether or

not that party has shown a change in

circumstance sufficient to warrant a

reconsideration of the seal.

Id. In this case, the parties did not litigate the protective

order; instead, Plaintiffs agreed to the order, failed to object

to confidentiality designations, and only now seek to raise

public access arguments. When a motion is brought by a

party who is represented vy counsel who agreed to the terms

of a protective order, that party is estopped from raising

access arguments that they bargained away. Cf. Omega

_ 40a

Homes, 656 F. Supp. at 404 ("The court refuses to endorse

Omega's tactic of inducing broad disclosure under a set of

ground rules and of then avoiding any limitations on itself by

asking the court to come in and change those rules."); West

Virginia v. Moore, 902 F. Supp. 715, 718 (S.D.W.Va. 1995)

(estopping a party from maintaining that a deposition was not

confidential wnere the party failed to seek resolution of the

issue during discovery); Zenith, 529 F. Supp. at 894 ("All

parties have relied on these provisions in producing

documents, aid wholesale declassitication would undermine

their justified expectations. Plaintiffs canr~t now attempt to

undo what they have willingly wrought; having made their

bed, they must sleep in it.").

Finally, even if Plaintiffs could bring this public access

argument, the appropriate solution would not be to strike the

confidentiality order and release the record in its entirety. A

wholesale release of the record would be particuiarly

inappropriate in a case such as this, where Plaintiffs

submitted over nine volumes of documents, many of which

could be sealed even given the public access requirements

because they contain Defendants’ trade secrets, confidential

business information, or information protected by

attorney-client privilege. See Nixon v. Warner

Communications, Inc., 435 U.S. 589, 598, 55 L. Ed. 2d 570,

580, 98 S. Ct. 1306 (1978). Defendants would normally be

given an opportunity to raise confidentiality arguments in

favor of sealing sensitive information in the record. However,

Defendants did not have the opportunity to make these

arguments when the documents were released to Plaintiffs or

when they were submitted by Plaintiffs to the Court, because

Defendants relied on the protective order that Plaintiffs had

agreed to. In these circumstances, considering Plaintiffs’

request for release waile still providing the appropriate

4la

protection for Defendants would require this Court to

undertake a document-by-document review of all the material

in the record. However, Plaintiffs cannot now request such a

document-by-document review because Plaintiffs failed to

exercise their rights under the confidentiality order to

challenge confidentiality designations during the course of

discovery. The Court will hold Plaintiffs to their agreement,

and will refuse to allow a wholesale deciassification of all

documents at this late stage. Cf. Doctor's Hosp. of Jefferson,

Inc. v. Southeast Medical Alliance, Inc 878 F. Supp. 884,

885-886 (E.D. La. 1995) (denying plaintiffs motion to lift

protective order as to all exhibits prepared for trial because

plaintiff failed to specifically identify the documents it

believed should not be protected); Zenith, 529 F. Supp. at

893-894 (discussing the impropriety of wholesale

declassification years after discovery began where the party

failed to make any contemporaneous objection to the

confidentiality designation).

IV. CONCLUSION

The Court concludes that Plaintiffs have failed to show

good cause for modification of the protective order. In

addition, because Plaintiffs agrced to the protective order and

the sealing provisions, the First Amendment and presumption

of access arguments are not available to support Plaintiffs’

request. Even if these arguments were available to Plaintiffs,

wholesale declassification of the record would be

inappropriate in this case. Therefore, Plaintiffs’ Motion to

Stnke Confidentiality Order is DENTED, and the

Confidentiality Order as entered on December 2, 1994

remains~ in effect. An Order consistent with _ this

42a

Memorandum Opinion will be filed contemporaneously

herewith.

This the 4th day of January, 1999.

James A. °*,’, Jt.

United Stas District Judge

ORDER

BEATY. District Judge.

For the reasons enumerated in the Memorandum Opinion

filed contemporaneously herewith, IT IS HEREBY

ORDERED that Plaintiffs’ Motion to Strike Confidentiality

Order [Document # 234] is DENIED, and the Confidentiality

Order as entered by the Court on December 2, 1994 remains

in effect.

This the 4th day of January, 1999.

James A. Beaty, Jr.

United States District Judge

| This analysis does not affect the separate question of the

ability of an appropriate intervenor who was not a party to the

protective order to raise an interest in the documents under

seal.

eae a

43a

Nos. 4:92CV00696, 4:92CV00705.

United States District Court, M.D. North Carolina.

LONGMAN, et al.,

FOOD LION, INC., et al.

Oct. 17, 1994.

ERWIN, District Judge.

Facts

On November 5, 1992, The American Broadcasting

Company, in its "Prime Time Live" network television

program, reported the findings of a six-month long

investigation it had conducted into Food Lion's operation

and practices. This investigation included research which.

utilized hidden cameras and involved — interviews with

numerous employees at several Food Lion stores.

The November 5, 1992 broadcast revealed for the first time

that Food Lion had concealed from its customers the

company's practice of:

(a) selling rotten meat and fish products by, among other

things, bleaching them in Clorox covering them with

barbecue sauce, grinding them with sausage mixture, and

repackaging them with false expiration dates,

(b) altering expiration dates on products such as eggs,

yogurt, cheese and meats, by usinz fingernail polish remover,

rats and putting it out for sale; and

44a

(d) removing spoiled food from dumpsters and putting it out

for sale.

First Amended Complaint of David I. Longman at ala

26(a)-(d); Com; taiat of Jeffrey Feinman, et al. at qf 28-36.

The Complaint sets forth numerous alleged misstatements

by the Defendants contained in various Securities and

Exchange Commission (SEC) filings. The Complaint alleges

violstions of Sections 10(b) and 20(a) of the Securities and

Exchange Act, 15 U.S.C. §§ 78j(b), 78t(a) (1934), as well as

a violation of Rule 10(b)-5 of the SEC. Additionally, there

are alleged state law claims of fraud and deceit and negligent

misrepresentation.

Issues Presented

|. Have Plaintiffs satisfied Local Rule 212?

II. Are the alleged violations of federal securities law proper

for class certification?

Ill. Are Plaintiffs proper representatives of both Class A and

Class B Stock?

IV. Is the proposed class period appropriate?

V. Should Plaintiffs’ pendent claims be certified for class

treatmeni?

1. Locai Rule 212

Local Rule 212(d), M.D.N.C., provides that "(t]he burden

shall be upon any party seeking to maintain a case as a class

action to present an evidentiary basis to the court showing

that the action is properly maintainable as such."

4Sa

Class determination is made at the advent of an action;

therefore, the allegations contained in the complaint,

including the class action allegations, are accepted for the

purposes of the class motion. See Eisen v. Carliele &

| Jacquelin, 417 U.S. 156, 177-78 (1974); Stastny v. Southern

Bell Tel. & Tel. Co., 628 F.2d 267, 275 (4th Cir.1980);

Doctor v. Seaboard C.L.R. Co., 540 F.2d 699, 708-09 (4th

Cir.1976).

The Complaint makes factua! allegations to substantiate the

necessary elements for certification under Rule 23(a) and

23(b)(3) of the Federal Rules of Civil Procedure. Local Rule

202(d), M.D.N.C., provides that "[w]hen allegations of facts

not appearing of record are relied upon to support a motion,

affidavits, parts of depositions, and other pertinent

documents then available shall accompany the motion."

(Emphasis added.)

The Court finds that the plaintiffs complied with Local Rule

212. Sufficient factual allegations have been made to

establish the necessary elements for class certification.

II. Class Certification

When considering a motion tor the certification of a class,

the allegations of the complaint must be taken as true.

Simpson v. Specialty Retail Concepts, Inc., 149 F.R.D. 94.

97 (M.D.N.C.1993) (quoting Blackie v. Barrack, 524 F.2d ©

891, 901 n. 17 (9th Cir.1975), cert. denied, 429 U.S. 816

(1976)). Taking the allegations in the Complaint as true, the

Court finds that the alleged violations of federal securities

laws are well suited for class acticn. Rule 23 is to be

construed liberally to effectuate this end. Simpson, 149

46a

F.R.D. at 98. See also Kahan v. Rosenstiel, 424 F.2d 161,

169 (3d Cir.1970), cert. denied, 398 U.S. 950 (1970).

To proceed with a class action, the Court must find the four

prerequisites enumerated in Rule 23(a). Additionally, at

least one of the requirements of Rule 23(b) must be satisfied.

Rule 23(a) requires that at least one member of a class may

sue or be sued as representative parties of all only if: (1) the

class is so numerous that joinder of all members is

impracticable; (2) there are questions of law or fact commor:

to the class; (3) the claims or defenses of the representative

are typical of the claims or defenses of the class; and (4) the

represcniative parties will fairly and adequately protect the

interest of the class.

Supsection 23(b) requires that common questions of fact or

law predominate and that a class action be superior to other

methods of adjudication.

A Numerosity

in securities fraud actions brought against publicly owned

and nationally listed corporations, the numerosity

requirement has been met by a showing that a large number

of shares were outstanding and traded during the relevant

period. Simpson, 149 F.R.D. at 99. See also Garfinkel v.

Memory Metals, Inc., 695 F.Supp. 1397, 1401

(D.Conn.1988). The numerous shareholders of Food Lion

stock coupled with the substantial purchases during the class

period are sufficient to establish the numerosity as

required by Rule 23(a)(1).

B. Commonality

47a

The commonality requirement of Rule 23(a)(2) is often

applied in the context of securities fraud litigation.

Moskowitz v. Lopp, 128 F.R.D. 624, 628 (E.D.Pa.1989). "In

the 10b-5 context, misrepresentation in annual reports,

interim reports, and press releases have been found to satisfy

the common question requirement." Simpson, 149 F.R.D. at

98. See Blackie, 524 F.2d at 902. The federal claims alleged

in the Complaint contain elements of fraud that would be

common to the Class.

C. Typicality

The typicality requirement is met if plaiutiffs' claims arise

from the same course of conduct that gives rise to the claims

of other Class members and is based on the same legal

theory. Simpson, 149 F.R.D. at 98. See also In re Kirschner

Medical Corp. Sec. Litig., 139 F.R.D. 74. 79 (D.Md.1991).

D. Fair and Adequate Representation by Class

Representatives

The requirements for adequate representation under Rule

23(a)(4) are that the named plaintiffs have no conflict of

interest with the class and that a qualified and experienced

attorney is obtained for the pwipose of litigation. Id. at 101.

See also South Carolina National Bank v. Stone, 139 F.R.D.

325, 329-31 (D.S.C.1991) (holding a plaintiff's adequacy to

represent class is determined by plaintiff's counsel's ability to

vigorously prosecute the matter).

1. Mr. Longman

The Court finds that there is ample evidence in the record to

conclude that Longman, in conjunction with his counsel, can

48a

fairly and adequately support the interest of the Class. There

is nothing that requires a plaintiff to possess encyclopedic

knowledge of the legal theories supporting a class’ claims in

order to be a class representative. Accordingly, Mr. Longman

shall be a Class representative.

2. Mr. Gardner

The Court finds that there is substantial evidence in the

record to conclude that Mr. Gardner will provide vigorc''s

representation of the Class. The Defendants have offered no

evidence of how Mr. Gardner's participation in other legal

proceedings does anything but indicate that he is able to serve

as a representative in this matter. It is incontrovertible that

participation in prior securities litigation, without other

significant disabling factors, is not relevant to a proposed

class representative's adequacy.

Accordingly, Mr. Gardner shall be a Class representative.

3. Mr. Hankin

The Defendants contend that since Mr. and Mrs. Hankin

purchased 200 shares of Food Lion stock as tenants by the

entireties, Mr. Hankin is not a typical and adequate class

representative. Defendants contend that since-Mrs. Hankin

does not want to be a named party in the suit, Mr. Hankin

lacks standing. To establish standing, the Hankins only need

to establish that they are members of the Class. Sosna v.

lowa, 419 U.S. 393, 401 (1975), citing Rosario v.

Rockefeller, 410 U.S. 752 (1973); Hall v. Beals, 396 U.S. 45

(1969). ti is not contested that both Mr. and Mrs. Hankin will

be members of the Class; therefore, the only question that

remains with respect to class certification is whether Mr.

49a

Hankin will "fairly and adequately protect the interests of the

class." Sosna, 419 U.S. at 403. The evidence in the record

reveals that Mr. Hankin, with the assistance of his counsel,

will fairly and adequately represent the interests of the Class;

therefore, he shall be a Class representative.

E. Common Issues of Fact and Law

Rule 23(b) requires that common questions of law and tact

predominate over Guestions affecting individual members.

Additionally "the Court must determine whether the class

action device is superior to other methods of adjudication."

Simpson, 149 F.R.D. at 102.

With respect to the alleged federal securities violations, the

individual issues will involve reliance and damages. Those

issues become significant only if the Class can demonstrate

the common elements of material misrepresentation and/or

omissions and scienter. Id. The Court finds that the common

issues predominate over the individual issues. Additionally,

the Court finds that the class action device is superior to other

methods of adjudication.

III. Class A and Class B Stock

The court, in Sanders v. Robinson Humphrey/American

Express, 634 F.Supp. 1048, 1057 (N.D.Ga.1986), cert.

denied, 485 U.S. 959 (1988), stated that "[w]hen plaintiffs

have alleged such a common course of conduct, courts

consistently have found no bar to class certification even

though member: of a class may have purchased different

types of securities or interests, or purchased 3!milar securities

at different timés.”

50a

In Endo v. Albertine, 147 F.R.D. 164, 167-68

(N.D.111.1993), defendants argued that plaintiffs who had

bought only Class A common stock could not also represent

purchasers of debentures and notes. The court firmly rejected

this contention, stating:

These claims are equally applicable to stock and debenture

holders. The facts and legal theories asserted by the class to

prove any violations will be identical regardless of the type of

security at issue. Backie v. Barrack, 524 F.2d 891, Sil n. 27

(9th Cir.1975). The only difference between the claims for

the different types of securities is that any violation may have

affected the value of each differently. (Citations omitted.)

This difference does not make the claims of the purchasers of

each type of security atypical of the others. The defendants

point to no claim under which the positions of the holders of

the different types of securities would be adverse. There is no

question here that the claims of both the named plaintiffs and

the debenture holders arose "from the same event or practice

or course of conduct that [gave] rise to the claims of other

class members and [their] claims are based on the same legal

theory". See Rosario, 963 F.2d at 1018. Therefore, we find

that plaintiffs have shown that the class claims are typical

under Rule 23(a)(3).

Id. at 167-68 (alterations in original). The Court finds that the

Plaintiffs are the appropriate representatives for both Ciass A

and Class B stock.

IV. The Proposed Class Period

The plaint‘ffs propose a class period beginning March 31,

1990. This is the date on which the Defendants allegedly

began withholding information. The Defendants contend that

Sla

May 7, 1990 is the appropriate starting date since the first

alleged misrepresentation was made on this date. The Court

finds that May 7, 1990 is the proper starting date for the class

period. The Food Lion Annual Report was filed with the

Securities and Exchange Commission on May 7, 1990. This

is the first alleged misrepresentation; therefore, it could not

have been relied upoa by investors prior to this date.

Accordingly, the class period shall begin May 7, 1990 and

extend through November 5, 1992.

V. Pendent Common Law Claims

Courts have split on the issues presented by certification of

pendent securities claims. Priest v. Zayre Corp., 118 F.R.D.

552, 557 (D.Mass.1988). See Gruber v. Price Waterhouse,

117 F.R.D. 75, 81 (E.D.Pa.1987) (referencing the divergent

judicial perspectives regarding the question of whether

individual issues predominate as to common law claims).

In Kirkpatrick v. J.C. Bradford & Co., 827 F.2d 718, 725

(11th Cir.1987), the court found "that the differing standards

of liability required by the laws of the various states would

render class action treatment unmanageable," and determined

that the state law claims failed to satisfy the requirements of

Rule 23(b)(3).

Although there are undoubtedly differences among the

various applicable state laws, it remains uncertain at this time

whether there exists such a substantial variation among the

states with regard to the common law claims as to outweigh

the commonality of legal and factual issues otherise present

in this litigation. Kirschner, 139 F.R.D. at 84. See In re

Energy Systems Equipment Leasing Securities Litigation,

52a

642 F.Supp. 718, 753 (E.D.N.Y.1986). Accordingly,

Plaintiffs’ pendent claims will be provisionally certified as a

Class along with the federal securities claims. Should

problems relating to conflicting state laws or other issues of

management arise as to the pendent claims, the Court will

reconsider the certification of those claims at that time.

Simpson, 149 F.R.D. at 103; See Kirschner, 139 F.R.D. at 85

n. 5.

Conclusion

The Court GRANTS the Plaintiffs’ Motion to Certify Class.

The Class shall include all persons who purchased the

common stock of Food Lion, Inc. from May 7, 1990 through

November 5, :992 and were damaged thereby. Excluded

from the Class are Defendants herein, members of the

immediate families of the individual Defendants, any entity

in which any Defendant has a controlling interest, and

Defendants' legal representatives, heirs, | successors,

predecessors-in-interest, or assigns of any Defendant.

Plaintiffs David I. Longman, Jeffrey Feinman, Paul N.

Gardner Defined Plan Trust, and Edwin Hankin shall be

representatives of said Class.

Pursuant to Rule 23, the Court retains the power to adjust or

reconsider its decision. Simpson, 149 F.R.D. at 104.

ORDER

Consistent with the Memorandum Opinion filed

contemporaneous!y herewith, the federal securities claims'

along with the pendent state claims? shall proceed as a class

action pursuant to Federal Rules of Civil Procedure 23(a) and

53a

23(b)(3) on behalf of the following class: all persons who

purchased the common stock of Food Lion, Inc., from May 7,

1990 through November 5, 1992, and were damaged thereby.

Excluded from the Class are defendants herein, members of

the immediate families of the individual defendants, any

entity in which any defendant has a controlling interest, and

defendants' legal representatives, heirs, successors,

predecessors-in-interest, or assigns of any defendant.

Plaintiffs David I. Longman, Jeffrey Feinman, Paul N.

Gardner Defired Plan Trust, and Edwin Hankin shall be

representatives of said Class.

Pursuant to Rule 23, the Court retains the power to adjust or

reconsider its decision. Simpson, 149 F.R.D. at 104.

IT IS SO ORDERED.

Footnotes

1 15 U.S.C. §§ 78(j) and 78t(a), and Rule 10(b)5 of the

Securities and Exchange Act of 1934.

2. The pendent state law claims are for fraud and negligent

misrepresentation.

54a

Dated 6/18/98

4:92C V696, 4:92CV705

UNITED STATES DISTRICT COURT FOR THE MIDDLE

DISTRICT OF NORTH CAROLINA

DAVID I. LONGMAN,

Plaintiff,

¥.

FOOD LION, INC. and TOM E. SMITH,

Defendants.

JEFFREY FEINMAN, PAUL N. GARDNER DEFINED

PLAN TRUST and EDWIN HANKIN and LINDA

HANKIN,

Plaintiffs,

¥.

FOOD LION, INC. and TOM E. SMITH, Defendants.

MEMORANDUM OPINION

BEATY, District Judge.

This matter is presently before the Court on

Defendant Food Lion, Inc.’s (“Food Lion”) Motion for

Summary Judgment [Document # 190], Defendant Tom E.

Smith’s (“Tom Smith” or collectively “Defendants”) Motion

tor Summary Judgment [Document # 188], and Plaintiffs’

55a

Motion for Partial Summary Judgment [Document # 192].

This matter is further before the Court on Plaintiffs’ Motion

to Strike or, in the alternative, Motion to Respond [Document

# 223] to Defendants’ reply briefs [Documents # 221 & 222]

on the inadmissability of certain evidence before this Court.

For the reasons stated herein, Plaintiffs’ Motion to Strike or,

in the alternative, Plaintiffs’ Motion to Respond is hereby

DENIED. Defendant Food Lion’s Motion for Summary

Judgment and Defendant Tom Smith’s Motion for Summary

Judgment are hereby GRANTED and this action is

DISMISSED. Plaintiffs’ Motion for Partial Summary

Judgment is hereby rendered MOOT.

I. FACTS

Plaintiffs originally brought these consolidated class

actions fnl against Food Lion. a North Carolina based

supermarket chain, and its President, Chief Executive

Officer, and Chairman of the Board of Directors, Tom E.

Smith. The plaintiff class consists of all persons or entities

whe purchased Food Lion’s securities from May 7, 1990

through Noveinber 5, 1992 (the “Class Period”). fn2 In the

Complaint, Plaintiffs allege causes of action for securities

fraud under §§ 10(b) fn3 and 20(a) fn4 of the Securities

Exchange Aci of /934, fn5 and 17 C.F.R. § 240.10b-5 (“Rule

10b-5")6 fn6 promulgated by the Securities Exchange

Commission under §10(b) of the Securities Exchange Act of

1934. Plaintiffs also allege state law claims for fraud, deceit,

and negligent misrepresentation. Except for Plaintiffs’ §

20(a) claim, Plaintiffs bring all of these claims against both

Food Lion, Inc. and Tom Smith. Plaintiffs bring the § 20(a)

claim against only Tom Smith as a coiitrolling person.

56a

Plaintiffs brought this securities fraud action shortly

after a sharp decline in the market value of Food Lion stock

following a November 5, 1992 broadcast of the television

show PrimeTime Live (‘PTL”). Plaintiffs allege that the

broadcast revealed that Food Lion had in place a time

management policy called “Effective Scheduling” which

allegedly forced employees to work off the clock. (Am.

Compl. | 27.) Plaintiffs also allege and contend, based upon

the content of the PTL broadcast, that Food Lion increased its

earnings and margins by engaging in (1) the selling of rotten

food by, among other things, bleaching it in Clorox, covering

it with barbeque sauce, grinding it with sausage mixture, and

repackaging it with false expiration dates; (2) the unwrapping

of products that had passed the manufacturer’s “sell by” date,

trimming off the edges of spoiled meats, and repackaging and

redating the products with new extended expiration dates; (3)

the trimming of portions of cheese that had been caten away

by rats and selling the remaining portions to consumers, and

by (4) illegally working off the clock and cutting corners by

avoiding certain non-immediate tasks such as

sanitation-related duties. (Am. Compl. { 26.)

Relying upon these allegations, Plaintiffs have filed

the present securities fraud claims against Food Lion and

Tom Smith based on several statements, made by Defendants

in Food Lion’s Annual and Quarterly Reports, which

Plaintiffs contend were misstatements, were misleading, or

were rendered misleading because Deferdants omitted

material information concerning the effects of Food Lion’s

Effective Scheduling System on Food Lion’s net profits and

sanitation. (Am. Compl. 435.) Plaintiffs further claim that the

market was not aware of these material omissions until the

PTL broadcast on November 5, 1992. (See Am. Compl.

20.) Plaintiffs contend that what they describe as materially

57a

misleading statements in and omissions from Defendants’

Annual and Quarterly Reports caused the securities market to

set an artificially high price for Food Lion stock. (Id.)

Defendants Food Lion and Tom Smith have moved

for summary judgment on Plaintiffs’ securities fraud claims.

In a separate motion, Plaintiffs have moved for partial

summary judgment on Defendants’ affirmative defenses

numbered thirteen through eighteen.fn7 A hearing was held

on February 18, 1998 on all of the motions raised by

Plaintiffs and Defendants. At the conclusion of the hearing,

the Court allowed Defendants to provide the Court with

supplemental briefs in order that Defendants could address

the question of the admissibility of certain evidence before

this Court. The Court granted Plaintiffs ten days to respond to

Defendants’ supplemental briefs. After Plaintiffs filed their

responsive briefs, Defendants filed reply briefs to Plaintiffs’

responsive briefs. Plaintiffs have now moved to strike

Defendants’ reply briefs. In the alternative, Plaintiffs have

moved for leave to respond to Defendants’ reply briefs. The

Court will first address Plaintiffs’ Motion to strike and

alternaiive Motion to Respond. The Court will then address

Defendants’ and Plaintiffs’ motions for summary judgment.

II. PLAINTIFFS’ MOTICN TO STRIKE and MOTION

TO RESPOND

In Plaintiffs’ Motion to Strike Defendants’ reply

briefs, Plaintiffs raise what they contend are several problems

with Defendants’ reply briefs: (1) Defendants are not entitled

to reply to Ple‘ntiffs’ responsive brie‘s, which deal with

evidentiary issues raised in connection with Defendants’

motions for summary judgment, (2) these reply briefs are not

in the proper font as required by the Local Rules, and (3)

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these reply briefs contain new material not addressed in

Plaintiffs’ responsive briefs. Addressing whether or not

Defendants are entitled to reply to Plaintiffs’ responsive

briefs, the Court notes that at the conclusion of the February

18, 1998 hearing, the Court allowed Defendants to provide

the Court with supplemental brieis to their original motions

for summary judgment. Plaintiffs were also allowed leave to

file responsive briefs to Defendants’ supplemental briefs in

order to address further the admissibility of the evidence. It

was anticipated by the Court that Defendants would then file

reply briefs to Plaintiffs’ responsive briefs. The Court finds

that this procedure, relating to the filing of briefs in

connection with a motion, as well as the font of Defendants’

reply briefs, are both consistent with Local Rule 7.3. See L.C.

7.3 (e), (f), & (h) (allowing for supporting briefs, responsive

briefs, and reply briefs on motions before the Court). The

Court further finds that Defendants’ reply briefs to Plaintiffs’

responsive briefs do not contain new material and that these

reply briefs simply address the arguments raised in Plaintiffs’

responsive briefs. The Court will therefore deny Plaintiffs’

Motion to Strike Defendants’ reply briefs. The Court will also

deny Plaintiffs’ alternative Motion to Respond to Defendants’

reply briefs. As to the evidence that is discussed in these

briefs—that is, the PTL broadcast, the “Simonsen Letter,”

and statements made by Secretary Reich fn8—to the extent

that this evidence may be relevant to the issues addressed in

this Memorandum Opinion, the Court will address the

admissibility of this evidence in the discussion of the motions

for summary judgment. 7

Ill. STANDARD OF REVIEW FOR SUMMARY

TUDGMENT

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Summary judgment is appropriate when “there is no

issue as to any material fact and. . . the moving party is

entitled to judgment as a matter of law.” Fed. R. Civ. P.

56(c). In making this determination, the Court views the

evidence in the light most favorable to the non-moving party,

according that party the benefit of all reasonable inferences.

Bailey v. Blue Cross Blue Shield of Va., 67 F.3d 53, 56.(4th

Cir. 1995), cert. denied, 516 U.S. 1159, 116 S. Ct. 1043, 134

L. Ed. 2d 190 (1996). Judges are not “required to submit a

question to a jury merely becavse some evidence has been

introduced by the party having the burden of proof, unless the

evidence be of such character that would warrant the jury in

finding a verdict in favor of that party.” Anderson v. Liberty

Lobby, Inc., 477 U.S. 242, 251, 91 L. Ed. 2d 202, 213 (1986)

(quoting Schuylkill & Dauphin Improvement & R.R. Co. v.

Munscn, 81 U.S. (14 Wall) 442, 448, 20 L. Ed. 867, 872

(1872)). However, a motion for summary judgment should

not be granted “unless the entire record shows a right to

judgment with such clarity as to leave no room for

controversy and establishes affirmatively that the adverse

party cannot prevail under any circumstances.” Campbell v.

Hewitt. Coleman & Assoc.. Inc., 21 F.3d\52, 55 (4th Cir.

1994) (quoting Phoenix Say. & Loan, Inc. v. Aetna Cas. &

Sur. Co., 381 F.2d 245, 249 (4th Cir. 1967)).

IV. DISCUSSION

A. PLAINTIFFS’ SECURITIES FRAUD CLAIM

UNDER SECTION 10(b)

This action was filed as a securities fraud case. In

order to establish liability for securities frtud under § 10(b)

of the Securities Exchange Act, and Rule 10b-5 promulgated

thereunder, plaintiff must prove (1) that the defendant made a

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false statement or omission of material fact, (2) with scienter,

(3) upon which the plaintiff justifiably relied, and (4) which

proximately caused the plaintiffs damages. Cooke v.

Manufactured Homes. Inc., 998 F.2d 1256, 1261 (4th Cir.

1993). Defendant Food Lion argues that it is entitled to

summary judgment because, as a matter of law, Plaintiffs are

unable to establish liability under § 10(b) of the Securities

Exchange Act, or Rule 10b-5 promulgated thereunder, based

on any statements or omissions which Plaintiffs contend are

in violation of this Act. Defendart Tom Smith joins in Food

Lion’s Motion for Summary Judgment and has also filed his

own Motion for $ummary Judgment arguing that if Plaintiffs

have failed to establish primary liability under § 10(b), then

he is ertitled to summary judgment on Plaintiffs’ § 20(a)

claim against him as a controlling person. See In re

Cryomedical Sciences, Inc. Sec. Litig., 884 F. Supp. 1001,

1011 <D Md. 1995) (stating that if plaintiff fails to show §

10(b) or Rule 10b-5 primary liability, then plaintiff also fails

to show § 20(a) secondary liability); Shapiro v. UJB

Financial Corp., 964 F.2d 272, 279 (3rd Cir.), cert. denied,

506 U.S. 934, 113 S. Ct. 365, 121 L. Ed. 2d 278 (1992).

In support of their theory that Defendants made

certain statements which Plaintiffs contend were

misstatements, or were misleading, or which Plaintiffs

contend omitted certain facts which rendered these statements

misleading, Plaintiffs have identified the following

representations made by Tom Smith on behalf of Food Lion:

(1) Food Lion’s 1989 Annual Report:

(a) “In addition to the focus on new store

growth, Food Lion has continued _ its

aggressive re-set and remodeling program, in

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order to maintain all Food Lion stores in

excellent condition for our customers. We

improved many of our stores in 1989 by

installing scanning equipment, nev: meat and

frozen food cases and in-store cor. » ors. Our

goal is to provide our customers w’ i modern,

efficient stores in which to shop.”

(b)“In i989, same store sales continued to

grow, which allowed the Company to spread

‘ts fixed costs over a larger revenue base. This

growth demonstrates the increased acceptance

of Food Lion’s “Extra Low Prices” in the

marketplace. In addition, ovr focus on the

grocery business allows us to fine tune our

operations to satisfy customer needs, which we

believe is a big factor in same store sales

growth. Our company has no plans to engage

in any peripheral business as many of our

competitors do. We will continue to pay close

attention to service levels and cleanliness in

our stores and believe we will achieve high

marks from customers in these areas.”

(c)““We believe the future holds exciting

opportunities for Food Lion. Though

competition remains fierce and many other

retailers continue to aggressively compete with

supermarkets, we are confident of our ability

to remain a strong force in supermarketing.”

(d) “Challenges in 1990 include effectively

addressing environmental concerns, food

safety, health issues and customer

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convenience. The demand for precooked and

microwavable products will continue to grow

and our ability to provide fresh vegetable and

fruits will be an important part of our

operation.

We are ready for the challenges of 1990 and will take

advantage of appropriate opportunities in this

dynamic marketplace.”

(e) “for the 22nd consecutive year Food Lion

achieved record sales and earnings. Sales were

$4.7 billion, a 23.6% increase over fiscal

1988. Earnings reached $139.8 million, up

24.2% over 1988. . . Food Lion remains one

of the fastest growing supermarket chains in

America.”

(2) Food Lion’s 1990 Annual Report:

(a) “Food Lion strives to stay ahead of the

competition and stay on top of new trends and new

technology. We constantly develop and evaluate new

retailing strategies to address the needs of our

customers. Recent examples include our emphasis on

foods that can be prepared quickly, which led us to

expand food areas and equip all stores with upright

freezer cases. In addition, as a result of our customer’s

concerns for a healthier lifestyle, we have added many

new products. We also take advantage of up-to-date

technology in order to promote efficiency at both

mangement and retail levels.”

(b)’Future Plans

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Our goal for 1991 and future years is to achieve

consistent, quality growth. We are convinced that

Food Lion’s commitments to extra low prices, quality,

service and variety will enable us to ac'iicve this

goal.”

(3) Food Lion’s Quarterly Report for the quarter ending

September 7, 1991:

“The Company’s gross profit percentage increased

0.76% and .40% of sales for the quarter and the year

to date, respectively. Customer trends towards

convenience, with increased purchases of frozen and

ready-to-eat foods continue to favorab!y impact gross

profits. These items generate strong gross profits.

Other factors contributing to the gross profit increase

are lower LIFO charges and favorable purchasing

contracts negotiated by the Company in conjunction

with the opening of three new distribution centers.”

(4) Food Lion’s 1991 Annual Report:

(a) “Food Lion is one of the best-managed high

growth operators in the food retailing industry.”

(b) “During 1991, Food Lion continued to see

increased emphasis by our customers on both prices

and store convenience. We believe that Food Lion’s

Extra Low Prices and its clean and conveniently

located stores are especially well suited to the

demands of our customers and enable us to effectively

compete with all existing and potential competition,

including conventional supermarkets, combination

stores and warehouse clubs. We believe that the

64a

American consumer will demand low prices,

convenient stores and a full range of products. Food

Lion is well positioned to meet this demand.”

Gross profit wes 20.7% of sales in 1991, 20.36% in

1990 and 20.03% in 1989. Gross profit improved as a

result of increased merchandising and operating

efficiencies, favorable purchasing contracts and a

lower LIFO charge in 1991.”

(d) “Selling and Administrative Expenses

The Company's cost containment philosophy

continues to produce a ratio of selling and

administrative expenses to sales that is significantly

below the industry average.”

(e) “The Company achieved its 24th consecutive year

of record sales and earnings. Sales for 1991 were

$6.44 hillion compared to $5.58 billion in 1990 and

$4.72 billion in 1989 representing increases of 15.3%,

18.4% and 23.6%, respectively. . . . The 1991 same

store sales growth of 2.7% ranks among the highest in

the supermarket industry during 1991.”

(5) Food Lion’s Quarterly Report for the quarter ending

September 5, 1992:

“The Department of Labor has advised the Company

that its investigation has disclosed what it terms

‘substantial’ overtime and child labor violations. The

ultimate liability, if any, which may result is not

65a

presently determinable because, among other reasons,

the Department of Labor has not fully disclosed to the

Company the results of its investigation; however, in

the opinion of management of the Company, the

Company has

meritorious defenses to the allegations and the

Company intends to defend the allegations

vigorously. Based on currently available information,

any liability wiil not have a material adverse effect on

the financial conditions or results of operations of the

Compny.”

(Am. Compi. {ff] 17-23, 25) (emphasis added by

Plaintiffs).fn9 Although Plaintiffs do not claim that these

statements are actionable as false statements of material facts,

Plaintiffs do claim that these statements are actionable

because, as Plaintiffs contend, Defendants omitted material

information from these statements. For example, in Plaintiffs’

Memorandum of Law in Opposition to Food Lion’s Motion

for Summary Judgment, Plaintiffs explain these omissions,

which are the gravamen of their case, as follows:

Food Lion and its CEO, Tom Smith, issued

statements to the public while concealing material

information that rendered those statements

misleading. Food Lion’s public filing statements

regarding its higher than industry standard profit

margins omitted to state the extent to which those

margins were based on _ illegal and, hence,

unsustainable labor practices. Food Lion’s public

statements about its efficient use of labor and high

regard for good sanitation practices and health*:! food

handling and food products omitted to state the extent

to which its brutal Effective Scheduling System . . .

66a

which forced employees to work off the clock . . . is

in violation of the Fair Labor Standards Act. . . and

caused employees to skimp on good sanitary food

handling standards.

(Pls. Mem. of aw in Opp’n to Food Lion’s Mot. for Summ.

J. at 1) (emphasis added). Plaintiffs contend that these

alleged omissions are material because while Defendants

were making stateinents in their Annual and Quarterly

Reports, as set forth above, a reasonabie investor would want

to know, as Plaintiffs allege, that Food Lion was engaging in

violations of the Fair Labor Standards Act (“FLSA”) and had

widespread sanitation problems as a result of its Effective

Scheduling Systen:. However, as the Court will discuss

below, the Court finds that there are no genuine issues of

material fact, and Defendants are entitled to summary

judgment as a matter of law, as to Plaintiffs’ securities fraud

claims based on these alleged omissions as set forth above. In

making this determination, the Court will discuss the alleged

omissions as they relate to the prima facie case, as set forth in

Cooke, as follows: (1) under the materiality element, the

Court will address the alleged omission concerning poor

sanitation, (2) under the justifiable reliance element, the

Court will address the alleged omission concerning working

off the clock, and (3) under the scienter element, the Court

will address both of the alleged omissions as set forth above.

l. Materiality and the Alleged Omission

Concerning Poor Sanitation

The first prong of the prima facie vase, that the

defendant made a false statement or omission of material fact,

has two components. Hillson Partners Ltd. Partnership v.

67a

Adage. Inc., 42 F.3d 204, 208-09 (4th Cir. 1994). The first

component requires Plaintiffs to show that Defendants made

a false statement or omission of fact. Id. at 209. The second

component requires that the false statement or omission be

material. Id. As Judge Motz explained in Hilison Partners,

[I]n order “to fulfill the materiality requirement” in

the § 10(b) and Rule 10b5 context “there must be a

substantial likelihood that the disclosure of the

omitted fact would have been viewed by the

reasonable investor as having significantly altered the

total mix of information made available” Thus,

materiality is a “fact-specific inquiry,” which

“depends on the significance the reasonable investor

would place on the withheld or misrepresented

information.”

Id. at 209 (quoting Basic, Inc. v. Levinson, 485 U.S. 224, 23

1-32, 108 S. Ct. 978, 983, 99 L. Ed. 2d 194) (11988) (citation

and internal quotation marks omitted). Although materiality

“requires delicate assessments of the inferences ‘a reasonable

shareholder’ would draw from a given set of facts and the

significance of those inferences to him,” TSC Indus., Inc. v.

Northway, Inc., 426 U.S. 438, 450, 96 S. Ct. 2126, 2133, 48

L. Ed. 2d 757, 766 (1976), materiality is appropriately

resolved as a matter of law, and summary judgment should be

granted, when “no rational finder of fact could conclude that

the alleged misrepresentations and omissions were material.”

Connelly v. General Medical Corp., 880 F. Supp. 1100, 1113

(E.D. Va. 1995); see also Johns Hopkins v. Hutton, 422 F.2d

1124, 1129 (4th Cir. 1970) (stating that summary judgment

OO aoe ee

68a

may be granted when “reasonable minds cannot differ on the

question of materiality”).

As stated previously, Plaintiffs argue that statements

made by Food [ion in its Annual and Quarterly Reports

concerning its 'ugh regard for good and safe food handling

practices were sendered misleading because, as Plaintiffs

contend, Food Lion omitted to disclose how its brutal

Effective Scheduling System forced employees to cut corners

and engage in activities that resulted in widespread

unsanitary store conditions. (See Pls.” Mem of Law in Opp’n

to Food Lion’s Mot. for Summ. J. at 1.) As to this alleged

omission, Defendants claim that there is no evidence that

demonstrates that Food Lion was aware of any widespread

sanitation problem throughout its 1000 stores as a result of

the Effective Scheduling System and that Plaintiffs evidence

only shows occurrences of isolated instances of workplace

errors in a few of Food Lion’s stores. Consequently,

Defendants have moved for summary judgment claiming

that, even accepting Plaintiffs’ evidence of occurrences of

isolated instances cf workplace errors in Food Lion stores,

the revelation of tnese few instances of workplace errors in

sanitation is not material as a matter of law.

a. The Alleged Omission of

Widespread Sanitation

Problems

In suppo:i of their motions for summary judgment,

with respect to the alleged omissions concerning widespread

sanitation problems, Defendants argue that the evidence

shows that Food Lion had no reason to believe that its food

handling and sanitation practices were anything but proper.

For example, Defendants’ evidence shows that Food Lion

69a

received high marks in federal, state, and local inspection

reports and that these reports were just as good, if not better,

than its competitors’ inspection reports. (Buckley Aff. ¥ 11;

Godwin Aff. § 7; McCanless Aff. § 40.) In addition, the

Effective Scheduling System, which the Plaintiffs contend

caused employees to engage in unsanitary practices, had built

into the system fixed hours for every store that these stores

were required to use for sanitation and cleaning. (Dawson

Aff. | 5; Dinse Aff. § 10; Franklin Aff. § 9; Gilley Aff. ¥ 6;

Godwin Aff. 48.)

Furthermore, Defendants have proffered evidence which

shows that there was no corporate policy, written or unwit-

ten, that would permit or encourage the practices alleged in

the Complaint relating to sanitation and food-haniling.

(Bundy Aff. 4 7; Bumgarner Aff. § 7; Curtis Aff. 4 3;

Dawson Aff. § 9; Dinse Aff. § 9; Hall 4 4.) For example,

Food Lion had an audit staff in place who conducted surprise

inspections of Food Lion stores to ensure that the stores

complied with health and sanitation policies. (Adams Aff. §

10; Buckley Aff. 9] 10; Bundy Aff. J 4; Curtis Aff. J 4;

Dawson Aff. J] 8; GehI Aff. 4 3; Gilley Aff. ] 4; Herbect Aff.

44.) These findings were reported in written reports to Food

Lion management. (Gehi Aff. % 3.) If substantial problems

were found, the auditors would conduct follow-up visits until

the problems were corrected. (Id. § 4; Oelkers ¥ 5; S. Smith §

4.) Food Lion was attentive to the conditions in its stores to

the extent that any violation of Food Lion’s sanitation policy

which came to management’s attention resulted in employee

discipline, up to and including discharge. (Adams Aff. ¥ 10;

Buckley Aff. ¥ 10; Bundy Aff. § 4; Dawson Aff. § 7.)

Finally, Food Lion had in place a Consumer Relations

Department which handled customer complaints and

70a

prepared, on a monthly basis, a summary of all negative

customer comments. (McCanless Aff. {| 36.) During the

Class Period, even though Food Lion served approximate’y

400 million customers per year, on average, customer

complaints regarding the quality or sanitation of Food Lion

stores were less than one complaint per store per year. (Id.;

Kluttz Att. 5.)

On the other hand, Plaintiffs rely on the PIL

broadcast, fnl0 statements made by Secretary of Labor

Robert Reich in a Department of Labor (“DOL”) news

release, the “Simonsen Letter,” and a few additional Food

Lion memoranda that wiil be discussed below, to support

their contention that Fcod Lion followed poor sanitation and

food handling practices. Plaintiffs contend that this eviderce

creates a genuine issue of material fact about whether

Defendants knew of widespread sanitation problems

throughout its stores.

Before addressing what is disclosed in the PTL

broadcast, the Court must first address whether this broadcast

is inadmissible hearsay.” This is an important determination

because hearsay evidence, which is not admissible at trial,

cannot be considered on 4 motion for summary judgment.

See Maryland Highways Contractors Ass’n, Inc. v. Maryland,

933 F.2d 1246, 1251 (4th Cir.), cert. denied, 502 U.S. 939,

116 L. Ed. 2d 325 (1991). Defendants argue that the PTL

broadcast is inadmissible hearsay because Plaintiffs offer the

broadcast to prove the truth of Plaintiffs’ allegations that

Food Lion had material widespread problems with sanitation.

In response, Plaintiffs offer several reasons, which the Court

will discuss below, to explaii why the statements made in the

video either are not hearsay or fall within an exception to the

hearsay rule. After reading the transcript of the broadcast,

Tla

(see Pls.’ Ex. A, attached to Pls.’ Resp. to Defs.’ Supp.

Mem. on the Admiss. of PTL), the Court finds that the

broadcast contains statements made by several different types

of people—that is, (1) statements by then current employees

who were filmed undercover without their knowledge (2)

statements by Kim Caudill while being interviewed by Diane

Sawyer, who also was at the time of the interview an

employee of Food Lion, (3) statements by former employees,

(4) statements and questions by the two ABC employees

while filming the undercover footage, and (5) questions and

comments by Diane Sawyer. fn12

First, Plaintiffs argue that the statements made by the

then current Food Lion employees while being filmed

undercover are admissible pursuant to Rule 801(d)(2)(D)

(admission a party opponeiit statement by party agent) of the

Federal Rules of Evidence. Rule 801(d)(2)(D) provides that

“{a] statement is not hearsay if--- (2) The statement is

offered against a party and is (D) a statement made by the

party’s agent or servant concerning a matier within the scope

of the agency or employment, made during the existence of

this relationship.” Although the statements made by the

employees of Food Lion, while they were being filmed

undercover, were statements made during the existence of

their employment relationship with Food Lion, the Court

finds that Plaintiffs have failed to offer any evidence that

demonstrates that the statements, made by the Food Lion

employees ‘while being filmed undercover, concerned a

matter within the scope of their agency. See precision Piping

and Instruments, Inc. v. E.I. du Pont de Nemours and Co.,

951 F.2d 613, 620 (4th Cir. 1991) (finding that district court

-orrectly refused to admit as a party admission an employee’s

statements concerning the termination of a contractor because

the plaintiff failed to show that hiring and firing of

72a

contractors was within the scope of the employee's

employment such that any statements made about hiring and

firing were also within the scope of the employee's

employment). As a result, because the Plaintiffs have offered

no evidence from which this Court can determine the scope

of employment of the then current employees of Food Lion

who were filmed undercover, the Court finds that the

statements made by Food Lion employees while being filmed

undercover are not admissible as admissions by a party

opponent

Plaintiffs further contend that these same statements

made by Food Lion employees while being filmed

undercover are also admissible under Rule 803(1) (present

sense impression),fnl3 Rule 803(2) (excited utterance),fnl4

or Rule 803(3) (state ot mind) fnl5 of the Federal Rules of

Evidence. Plaintiffs have identified only one statement, made

by a then current employee while being filmed undercover,

which Plaintiffs contend falls within these exceptions. (See

Pls.’ Resp. to Defs." Supp. Mem. on the Admiss. of PTL at 7

n.8.) This statement is by a deli employee of Food Lion in

which the employee states,

“Well, the floor and the meat slicer—God, coming

into a place and the gunk on the slicer is thick. The floor’s

got all kinds of crap all over it—I1 don’t think it’s real

appealing for a deli.”

(Transcript of PrimeTime Live at 12, attached as Ex. A to

Pis.’ Resp. to Defs.” Supp. Mern. on Admiss. of PTL. The

Court agrees that this statement is excepted from the hearsay

rule as a present sense impression because it is a statement

describing an event made while the employee was perceiving

the event. See Fed. R. Evid. 803(1). However, other than this

73a

one statement on the PTL broadcast, which the Court has set

forth above, Plaintiffs do not otherwise identify which

statements Plaintiffs contend fall within which exceptions. A

party who seeks the admission of hearsay evidence bears the

burden of proving each element of the exception he asserts.

United States v. Barteiho, 129 F.3d 663, 670 (Ist Cir. 1997).

Therefore, because Plaintiffs have failed to demonstrate how

the remaining statements by the then current employees,

while being filmed undercover, faii within Rules 803(1), (2),

or (3), the Court finds that the statements of the then current

employees, c-!.er than the one statements noted by the Court,

are inadmissible hearsay.

Next, Plaintiffs argue that statements made by Kim

Caudill, who agreed to be interviewed by Diane Sawyer

while he was still employed by Food Lion, are also

admissible under 801(d)(2)(D) (admission by party opponent

- Statement by party agent), which the Court has set forth

above. However, the Court finds that Kim Caudill’s

Statements are also not admissible as admissions by a party

opponent. The Court makes this determination based on the

fact that the PTL broadcast specifically states that Kim

Caudill agreed to be interviewed in order to “speaks out”

against Food Lion. (See Transcript of PrimeTime Live at 5,

attached as Ex. A to Pls.’ Resp. to Defs.’ Supp. Mem. on the

Admiss. of PTL.) Plaintiffs have failed to demonstrate how

Kim Caudill’s statements while "speaking out” against Food

Lion are statements made within the scope of his

employment. Fed. R. Evid. 801(d)(2)(D); Precision Piping,

951 F.2d at 620. As a result, the Court finds that Kim

Caudill’s statements are not admissit'e pursuant to Rule

81(d)(2)(D) as admissions by a party opponent.

74a

Third, Plaintiffs contend that the statements made by

former employees who were interviewed on the PTL

broadcast are admissible pursuant to Rule 804(b)(3)

(statement against interest) of the Federal Rules of

Evidence.fnl6 The Fourth Circuit has explained that “{a]

statement may be admitted under [Rule 804(b)] if the

declarant is unavailable; the statement s genuinely adverse to

the declarant’s . . . interest; and ‘corroborating circumstances

clearly indicate the trustworthiness of the statement.” United

States v. Lowe, 65 F.3d 1137, 1145 (4th Cir. 1995), cert.

denied, U.S. .136 L. Ed. 2d 13 (1996). The party seeking to

admit the statement bears the burden of meeting the

requirements of Rule 804. Id As a result of this interpretation

of Rule 804, to the extent that Plaintiffs contend that the

statements made by the former employees are admissible for

purposes of the summary judgment motions pursuant to Rule

804(b), the Court finds that Plaintiffs would need to

demonstrate that these former employees would be

unavailable at trial. However, the Court finds that Plaintiffs

have not complied with Rule 804 because Plaintiffs have not

offered any evidence that any of these former employees are

unavailable as defined by Rule 804(a). Therefore, the Court

finds that the statements made by former employees while

being interviewed on the PTL broadcast are not admissible

pursuant to Ruie 804(b)(3).’7

Fourth, Plaintiffs contend that the questions and

statements made by Diane Sawyer and the two ABC

employees, who went undercover to film the broadcast, are

also admissible. in regard to whether questions posed by

these declarants are hearsay, this Court relies on United

States v. Lewis, 902 F.2d 1176 (5th Cir. 1990). In that case,

the Fifth Circuit noted that a statement as defined by the

hearsay rule requires that there be either an orai or written

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assertion or nonverbal conduct intended as an assertion. Id. at

1179; see Fed. R. Evid. 80 1(a). Based on the fact that the

hearsay rule requires the statement to be an assertion, the

court found that the questions in that case were not hearsay

because they were not intended to assert anything. Lewis, 902

F.2d at 1179. The Court further noted in a footnote that

“[e]ven if the questions were ‘statements’ within Rule 80

1(a), they would not be hearsay because they were not

offered to prove the truth of the matter asserted.” Id. at 1179

n.2 (quoting Fed. R. Evid. 801/c)). As a result, to the extent

that Diane Sawyer or the two ABC employees have posed

any questions on the PTL broadcast, this Court finds that

these questions are not hearsay because they are not

assertions, as required by Rule 80 1(a), nor are they offered

for the truth of the matter asserted, as required by Rule 80

1(c}. See also United States v. Vest, 842 F.2d 1319, 1330 (Ist

Cir.), cert. denied, 488 U.S. 965, 102 L. Ed. 2d 526 (1988)

(finding that questions were not hearsay because they were

not offered for the truth of the matter asserted). Therefore the

questions are admissible. However, to the extent that Diane

Sawyer or the two ABC employees make any statements on

the PTL broadcast that are not questions, the Court finds that

Plaintiffs have failed to show that these statements are not

hearsay or are subject to an exception to the hearsay rule.

Therefore, the Court finds that these statements are not

admissible.

Finally, Plaintiffs contend that pursuant to Rule 1006

(summaries) of the Federal Rules of Evidence,fn18 the entire

PTL broadcast is admissible as a summary of the forty hours

of undercover footage. However, because the underlying

mater‘als upon which the summary is based must be

admissible in and of itself, see United States v. Johnson, 594

F.2d 1253, 1255 (9th Cir.), cert. denied sub nom., 444 U.S.

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964, 62 L. Ed. 2d 376 (1979), the Court finds unavailing

Plaintiffs’ argument that Rule 1006 provides an exception to

the hearsay rule for the PTL broadcast. As a result, the Court

finds that the PTL broadcast is not admissible pursuant to

Rule 1006.

The Court notes, however, that even if the entire PTL

broadcast is admissible on any grounds, the Court finds that

iis broadcast still does not present evidence of widespread

unsanitary conditions of which Defendants knew. This is so

because the PIL fontage, as well as the ad¢?tional forty hours

of unedited footage, was filmed at only three of Food Lion’s

almost 1000 stores. Furthermore, Plaintiffs do not dispute

that out of Food Lion’s 60,000 active employees and 40,000

former employees, the PTL broadcast and forty hours of

unedited footage only interview a totai of seventy current and

former employees, twenty-two of whom had left the employ

of Food Lion as much as eight years before the beginning of

the Class Period. seventy Food Lion’s Mem. in Supp. of Mot.

for Summ. J. at 6; Pls.’ Mem. in Opp’n to Food Lion’s Mot.

for Summ. J. at 4.) Other than these seventy current and

former employees who were mentioned on the PTL

broadcast, Plaintiffs have not come forward with any other

statements of current or former employees who claim that

Food Lion had unsanitary conditions during the Class

Period.fnl9 As a result, the Court finds that, with respect to

the sanitary conditions at Food Lion’s 1000 stores, the PTL

broadcast is insufficient to draw any conclusions about Food

Lion’s operations as a whole. fn20

Next, in support of Plaintiffs’ contention that

Defendants were aware of widespread unsanitary conditions

iri Food Lion stores, Plaintiffs offer statements made by

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Secretary of Labor Robert Reich in a DOL news release

following the DOL-Food Lion settlement. (Pls’ Ex. 44.)

Plaintiffs argue that these statements further confirm much of

the PTL broadcast regarding employees working off the

clock which inevitably led to the non-observan-- ~° formal

sanitary policies. (Pls.’ Mem. in Opp’n to Food ' ion’s Mot.

for Summ. J. at 2, 9.) Initially, the Court notes that these

statements are inadmissible hearsay and that Rule 803(8)

(public records exception)fn21 of the Federal Rules of

Evidence does not except these statements from the hearsay

tule. This is so because the press release was simply an

announcement that a settlement agreement had been executed

between Food Lion and the DOL. The press release was not

an investigatory report adopted by the DOL nor did the press

release contain any findings, opinions, or conclusions based

on a factual investigation as contemplated by the public

records exception. Beech Aircraft Corp. v. Rainey, 488

U.S. 153, 170, 102 L. Ed. 2d 445, 463 (1988) (finding that

portions of investigatory reports containing conclusions and

opinions based on a factual investigation should not be

excluded simply because the reports contain these

conclusions and opinions); see also Distaff, Inc. v.

1993) (reviewing whether an investigative report that

contains an opinion of the investigator, concerning the cause

of a fire, is admissible under the public records exception).

However, even if Secretary Reich’s statements in this press

release are admissible, the Court finds that these statements

are not probative on the question of whether Defendants

knew about widespread sanitation problems. This is so

because Secretary Reich only made statements about Food

Lion’s settlement of labor claims arising from employees

working off the clock. Secretary Reich did not make any

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conclusion based upon investigatory findings tha

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