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Gubricky v. Ells

United States District Court, D. Colorado

June 7, 2017

SEAN GUBRICKY, derivatively on behalf of nominal Defendant,
v.
STEVE ELLS, MONTGOMERY F. MONTY MORAN, MARK CRUMPACKER, JOHN S. CHARLESWORTH, KIMBAL MUSK, PATRICK J. FLYNN, STEPHEN GILLETT, ALBERT S. BALDOCCHI, DARLENE J. FRIEDMAN, and NEIL W. FLANZRAICH, Defendants, Chipotle Mexican Grill, Inc., Plaintiff, and CHIPOTLE MEXICAN GRILL, INC., Nominal Defendant.

          ORDER GRANTING MOTION TO DISMISS

          William J. Martínez United States District Judge

         This is a shareholder derivative action brought by Sean Gubricky nominally against Chipotle Mexican Grill, Inc. (“Chipotle”), and in reality against ten Chipotle directors and officers (together, “Defendants”). (See ECF Nos. 1 (redacted complaint), 20 (unredacted, restricted complaint).) Gubricky's complaint stems from a series of foodborne illness outbreaks linked to Chipotle stores in the latter half of 2015. Gubricky alleges that Chipotle's directors shirked their duty to properly oversee the company, thus leading to the outbreaks and substantial harm to Chipotle as a company.

         Before the Court is Defendants' Motion to Dismiss. (ECF No. 52.) For the reasons explained below, the Court agrees with Defendants that Gubricky has failed to plead demand futility under controlling Delaware standards. The Court therefore grants Defendants' Motion, but without prejudice so that Gubricky may consider whether to make a demand on Chipotle's board of directors (the “Board”). If Gubricky informs the Court that he has chosen not to make a demand, the Court will convert this dismissal to “with prejudice” and enter final judgment.[1]

         I. BACKGROUND

         A. Events Preceding the 2015 Outbreaks

         1. Kent, Ohio & the Norwalk Protocol (April 2008)

         “In April 2008, more than 500 people became ill after eating at a Chipotle restaurant located near Kent State University in Kent, Ohio.” (ECF No. 20 ¶ 78.) This outbreak “was rumored to have been linked to an infectious employee.” (Id.)

         In the wake of this incident, Chipotle “purportedly established” the “Norwalk Protocol, ” which requires an employee not to return to work for five days if the employee vomits or suffers from a combination of diarrhea, nausea, fever, or stomach cramps. (Id. ¶¶ 79, 80.) If Chipotle receives two or more complaints of illness linked to a Chipotle restaurant, the Norwalk Protocol also apparently calls for shutting down the restaurant temporarily so that it may be cleaned and sanitized. (Id. ¶ 47.)

         2. Chipotle's 2014 10-K (February 2015)

         On February 4, 2015, Chipotle filed its SEC Form 10-K for the year 2014. (Id. ¶ 77.) Among the potential risks Chipotle noted was a comparatively heightened risk of food poisoning based on Chipotle's business model: “We may be at a higher risk for food-borne illness outbreaks than some competitors due to our use of fresh produce and meats rather than frozen, and our reliance on employees cooking with traditional methods rather than automation.” (Id. (internal quotation marks omitted).)[2]

         3. Paid Sick Leave Policy Change (June/July 2015)

         In June or July 2015, Chipotle changed its paid sick leave policy to provide employees with five paid sick days if they have been with Chipotle for a year or longer, but no paid sick days for employees with less than a year on the job. (Id. ¶¶ 47, 69, 79.) The complaint does not allege Chipotle's paid sick leave policy before this change.

         B. The 2015 Outbreaks

         1. Hazel Dell, Washington, Outbreak (Early August 2015)

         In early August 2015, a manager at a Chipotle restaurant in Hazel Dell, Washington, told a sick employee that she needed to come in to work or find someone to cover for her. (Id. ¶¶ 42-43.) The employee came to work, stayed for four hours, and was vomiting during that time. (Id.) A norovirus outbreak ensued in Hazel Dell, which the Washington State Department of Health linked to the sick employee at Chipotle. (Id.) The complaint does not describe the extent of this outbreak, nor does it allege that the Board members were aware of this outbreak at any time relevant to this lawsuit.

         2. Simi Valley, California, Outbreak (Late August 2015)

         During the week of August 18, 2015, a Chipotle restaurant in Simi Valley, California, became the epicenter of another norovirus outbreak, this one sickening at least 234 people. (Id. ¶ 44.) A Wall Street Journal article later asserted that Chipotle knew as of August 18 that one Simi Valley employee had been complaining of gastrointestinal illness-whether on duty or not is unclear from Gubricky's summary of the article-but Chipotle continued to serve food there. (Id. ¶¶ 46, 48.) A later report by the Ventura County Environmental Health Division reached a similar conclusion. (Id. ¶ 48.) Gubricky alleges, however, that the Board itself did not learn of the Simi Valley outbreak until several months later. (Id. ¶ 89.)

         Chipotle instituted its Norwalk Protocol to shut down and sanitize the restaurant on August 20, 2015, and it first contacted local health officials on August 21, 2015. (Id. ¶¶ 48, 49.) Inspections on August 24 and 27, 2015, uncovered a number of health code violations. (Id. ¶¶ 50-51.)

         3. Minnesota Outbreak (August/September 2015)

         According to the Minnesota Department of Health, sixty-four people who dined at Chipotle restaurants between August 16 and August 28, 2015, were sickened by salmonella linked to tomatoes served at twenty-two different Chipotle restaurants in Minnesota. (Id. ¶ 53.) Symptoms of salmonella poisoning began manifesting themselves between August 19 and September 3, 2015, and nine people were hospitalized. (Id.) The complaint says nothing about whether the Board was informed of this outbreak at any time relevant to this lawsuit.

         4. Internal Corporate Reports (August/September 2015)

         “[A]ccording to a Board Pre-Read Executive Summary from Chipotle's Safety, Security and Risk Department provided to the Board on August 24, 2015 in advance of the Board meeting scheduled for September 1, 2015, the Safety, Security and Risk Department stated that ‘there were no material food safety events this quarter.'” (Id. ¶ 89 (emphasis removed).) The complaint does not specify what “this quarter” refers to, which is ambiguous given the phrasing “there were no material food safety events, ” implying a quarter already closed (as opposed to “there have been no material food safety events this quarter”).

         In any event, Chipotle held an Audit Committee meeting on August 31, 2015. (Id. ¶ 90.) At that time, the Audit Committee comprised Baldocchi, Charlesworth, Flanzraich, and Gillett. (Id. ¶ 20.) The Audit Committee received a report, prepared earlier that month, of the hours and dollars expended on internal auditing activities as of July 31, 2015. (Id. ¶ 90 (footnote omitted).) This appears to be a calendar-year-to-date report. It informed the Audit Committee that Chipotle had budgeted 303 hours for store audits but had spent only 95, and expected to spend only 150 more hours (for a total of 245) through the remainder of 2015. (Id.) It further informed the Audit Committee that Chipotle had budgeted about $38, 000 for store audits that year, but so far had spent only about $13, 000, and expected to spend approximately $17, 500 during the remainder of the year (for a total of about $30, 500). (Id.)

         This same report provided figures for a separate “2016 risk assessment internal audit.” (Id.) The company had budgeted 61 hours but spent only 1, and had budgeted just under $11, 000 but spent a little less than $200. (Id.)

         Also included with this report was a narrative regarding audits that had been performed that year. Chipotle's Internal Audit department (sometimes referred to as “IA”), noted “[m]ultiple instances of non-compliance . . . including improper cooking procedures” and “inaccurately marked food items.” (Id. ¶ 92.)

         The report additionally included IA's self-evaluation of Chipotle's performance as compared to standards established by the Institute of Internal Audit. (Id. ¶ 98.) One of those standards, known as “Standard 2100, ” states that “the internal audit activity must evaluate and contribute to the improvement of risk management, control and governance processes using a systematic and disciplined approach.” (Id. ¶ 100 (internal quotation marks omitted).) IA reported that Chipotle “Partially Conforms” to the standard, explaining as follows:

Standard 2100 encompasses risk assessment procedures. It is considered best practice to take a broader and more formalized approach in performing risk assessment procedures than is currently in practice at Chipotle. It is the opinion of IA that this level of detail is not necessary or appropriate in the Chipotle environment, and that our risk assessment procedures include an acceptable level of detail. However, a third party reviewer may comment that our risk assessment and evaluation could be more comprehensive.

(ECF No. 40-4 at 4;[3] see also ECF No. 20 ¶ 100.)

         Chipotle held a Board meeting on September 1, 2015. (Id. ¶ 89.) The minutes for that meeting contain nothing regarding discussion of the Simi Valley outbreak. (Id.) The complaint does not allege whether the Board discussed the Hazel Dell or Minnesota outbreaks.

         5. Multistate Outbreak (October/November 2015)

         Beginning on October 19, 2015, and apparently continuing into early November, an E. coli outbreak sickened fifty-three people who had dined at Chipotle restaurants in California, Illinois, Maryland, Minnesota, New York, Ohio, Oregon, Pennsylvania, and Washington state. (Id. ¶ 54.) Forty of the fifty-three cases occurred in Oregon and Washington. (Id.)

         Chipotle addressed this outbreak for the first time in a November 3, 2015 press release announcing that it had voluntarily closed forty-three Chipotle restaurants in Oregon and Washington for deep cleaning and replacement of ingredients, although only eight restaurants were the subject of investigation. (Id.) On the doors of these restaurants, Chipotle announced that they were closed for “equipment issues” or “supply issues.” (Id. ¶ 55.)

         Chipotle announced on November 10, 2015 that it would soon reopen all of the closed stores in Oregon and Washington, claiming, “Health officials have concluded that there is no ongoing risk from this incident.” (Id. ¶ 60 (internal quotation marks omitted; emphasis removed).) However, the Food and Drug Administration (“FDA”), the Centers for Disease Control (“CDC”), and the Washington and Oregon health departments were continuing to investigate the incident overall. (Id. ¶¶ 57-59, 63.)

         On December 4, 2015, Chipotle issued a press release announcing that its food safety practices had long been within industry norms, but it had now adopted a program to implement practices that were ...


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