Grubhub urged an Illinois federal judge Wednesday to toss a proposed class action that claims the food delivery company hid negative trends among new customers from investors, arguing it was in fact transparent and the lawsuit impermissibly alleges fraud by hindsight.
The lawsuit, originally filed in November 2019, alleges that Grubhub Inc.; its founder and CEO, Matthew Maloney; and its president and chief financial officer, Adam DeWitt, misled shareholders into thinking the company was successfully expanding its market with new customers regularly using its service when the actual growth was disappointing.
Grubhub said in its Wednesday motion to dismiss that the lawsuit doesn't show that the company and its executives had any information that made their statements false or misleading.
Instead, the lawsuit cites a shareholder letter — dated months after the challenged statements at issue — in which Grubhub "transparently and responsibly reported its discovery" that Grubhub's newly acquired customers weren't ordering as frequently as the company's existing customers, the motion noted.
"This theory is not just legally flawed, it makes no sense: Plaintiff fails to allege how Grubhub could possibly have disclosed the long-term habits of its newly-acquired diners more quickly, that is, without having seen how those diners acted over time," the company said.
Their claims "rely on hindsight and fail as a matter of law," Grubhub claimed, adding that the lawsuit "seeks to impose liability on Grubhub for certain statements that may have turned out to be wrong (but were not wrong when said) or for statements of opinion or corporate optimism."
To compete with other third-party online and mobile food ordering businesses like DoorDash and Uber Eats, Grubhub announced that it would expand its delivery market, expand advertising for new customers and begin accelerating its brand sales efforts in the fourth quarter of 2018, according to the motion to dismiss.
The company made it clear that there would be increased costs associated with the strategy and short-term performance would most likely suffer, the motion said.
In its 2018 third-quarter earnings call, Grubhub said its profitability would likely decrease in the fourth quarter but that it expected profitability to improve over time in new markets, according to Wednesday's filing.
On Oct. 28, 2019, Grubhub disclosed disappointing results and lowered its outlook for the year, explaining that in August 2019 — despite the explosion of new customers — daily average orders were less than expected, the company said.
Grubhub discovered that new customers were not ordering with the same frequency as earlier ones, that retention rates of customers acquired late in the second quarter of 2019 were lower than for previous ones, and that new customers were increasingly ordering from multiple platforms, not just Grubhub.
As a result of the news, Grubhub stock closed down more than 40% on Oct. 29, 2019, on extremely heavy trading volume, according to the complaint.
On Jan. 30, U.S. District Judge Charles R. Norgle Sr. named the City of Pontiac General Employees' Retirement System and City of Pontiac Police and Fire Retirement System lead plaintiff and Robbins Geller Rudman & Dowd LLP as lead counsel.
An amended complaint was filed in July alleging Grubhub, Maloney and DeWitt misled shareholders about how successful the company was in attracting new customers and the frequency with which they use the service.
But Grubhub argued that none of the challenged statements were false when made, so the company therefore had no duty to disclose anything more, despite what investors allege.
"Plaintiff fails to allege that Grubhub had sufficient data of any trends — and how could it, when a trend takes time to reveal itself? — to know that its newly acquired diners were not behaving like its older diners before the third quarter, when it disclosed that fact," according to Wednesday's motion.
Allegations that Grubhub acted with scienter because it experienced negative trends are baseless because the challenged statements were made when the company was not suffering negative trends, Grubhub said.
"Plaintiff's complaint relies on the flawed theory that, because the strategic plan Grubhub launched in late 2018 to try to acquire new customers ultimately yielded some disappointing results, Grubhub must have known (and concealed from investors) that the plan would fail all along," the motion to dismiss said.
Counsel for the parties didn't immediately respond to requests for comment Thursday.
The City of Pontiac General Employees' Retirement System and City of Pontiac Police and Fire Retirement System are represented by James E. Barz and Brian E. Cochran of Robbins Geller Rudman & Dowd LLP.
Grubhub, Maloney and DeWitt are represented by John F. Hartmann, Sandra C. Goldstein, Stefan Atkinson and Madelyn A. Morris of Kirkland & Ellis LLP.
The case is Roei Azar v. Grubhub Inc. et al., case number 1:19-cv-07665, in the U.S. District Court for the Northern District of Illinois.
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