## Facts

- Food Lion, Inc. operated roughly 1,000 grocery stores in the southeastern United States, employing tens of thousands of workers and earning over $200 million annually.
- Shareholders brought a putative class action covering a 2½-year period ending November 5, 1992, alleging securities fraud under § 10(b) and Rule 10b-5 against Food Lion and its CEO.
- Plaintiffs alleged Food Lion used an “Effective Scheduling System” that pressured employees into unpaid off-the-clock work and encouraged shortcuts leading to unsanitary food-handling practices.
- Food Lion made public statements during the class period praising store cleanliness, operations, and employee pay and benefits, including responses to earlier criticism.
- In September 1991, a union publicly filed a Department of Labor complaint alleging labor-law violations similar to those later highlighted by a television investigation; Food Lion’s stock price did not materially react to the complaint.
- On November 5, 1992, a national broadcast depicted purported labor and sanitation misconduct in a small number of stores; the next day Food Lion’s stock price fell significantly.
- Plaintiffs claimed Food Lion’s statements and nondisclosures artificially inflated earnings and the market price of Food Lion stock.
- The district court granted summary judgment for defendants, finding no triable issue as to material misstatement/omission, scienter, or justifiable reliance; plaintiffs appealed.

## Issues

1. Whether Food Lion’s positive statements and alleged nondisclosures about labor practices and sanitation conditions constituted materially false or misleading statements or omissions under § 10(b) and Rule 10b-5.
2. Whether plaintiffs could show justifiable reliance under a fraud-on-the-market theory where similar labor allegations had already entered the public domain.
3. Whether plaintiffs produced sufficient evidence of scienter and of a meaningful connection between the alleged operational misconduct and reported earnings or stock price.

## Decision

- The Fourth Circuit affirmed summary judgment for Food Lion and its CEO.
- The court held plaintiffs failed to show an actionable, material misstatement or omission regarding either labor practices or sanitation conditions.
- The court concluded plaintiffs could not establish justifiable reliance on nondisclosure of labor problems because substantially similar allegations had been publicly made before the end of the class period.
- The court found the sanitation evidence too limited in scope to support materiality or an inference of companywide financial impact.
- The court accepted the district court’s determination that the record did not support scienter.

## Legal Principles

- An omitted fact is material only if there is a substantial likelihood that disclosure would significantly alter the total mix of information available to a reasonable investor.
- Generalized, optimistic statements about cleanliness, high standards, or employee treatment are often too indefinite to be treated as actionable representations in a Rule 10b-5 case.
- Fraud-on-the-market reliance is weakened where the alleged “concealed” facts were already publicly alleged and the market had an opportunity to assimilate that information.
- Evidence of misconduct limited to isolated incidents in a small subset of locations, without proof of pervasiveness or measurable earnings impact, is insufficient to establish materiality or to infer securities fraud.
- Summary judgment is appropriate where plaintiffs fail to raise a genuine dispute on essential Rule 10b-5 elements such as material misstatement/omission, reliance, or scienter.

## Conclusion

The Fourth Circuit held that shareholders failed to produce evidence that Food Lion’s statements or alleged nondisclosures about labor and sanitation conditions were materially misleading, relied upon in a legally cognizable way, or made with the required fraudulent intent, and it therefore affirmed summary judgment for the defendants.


Longman v. Food Lion, Inc., 197 F.3d 675 (4th Cir. 1999)