Florida Court Denies Dismissal of Securities Suit Arising From Target’s 'Pride Month' Campaign

A Florida federal court recently denied a motion to dismiss a securities class action against Target Corp. arising from a customer backlash and stock drop following Target’s LGBT-themed marketing campaign in 2023.  

The decision in Craig v. Target Corporation (M.D. Fla. Dec. 4, 2024) addresses corporate disclosures about the risks of engaging in potentially controversial environmental, social, and governance (ESG) and diversity, equity, and inclusion (DEI) initiatives in a politically charged environment in which companies might alienate some constituencies by taking such steps – and other constituencies by not taking them.

The Target case, while framed in normal securities-law parlance, was not filed by a traditional plaintiffs’-side securities class-action firm but, rather, by Boyden Gray PLLC and America First Legal Foundation, which have been involved in other anti-DEI litigation.  The victory at the pleading stage in the Target case could lead to other securities suits challenging companies’ alleged misstatements or omissions about the potential risks of their ESG and DEI plans.

Background

The Target litigation arose from Target’s May 2023 “Pride Month” marketing and sales campaign, which displayed Pride-Month-related merchandise at the front and center of Target stores across the country. A customer backlash and boycott ensued, and Target’s stock price fell after the repercussions became known.

Target allegedly had had previous negative experiences with its DEI efforts:

• In 2015, Target began a “Pride Month campaign” and published a “Pride Manifesto” and video transcript.
• In 2016, Target publicly opposed a North Carolina law on transgender bathrooms.

Plaintiffs pled that Target had “experienced customer and investor backlash after both publications” and that “shareholders, consumer groups, and conservative commentators repeatedly warned Target that future ESG, DEI, and LGBT initiatives would cause the company to lose customers.”  Moreover, Target’s CEO allegedly admitted that the company “‘didn’t adequately assess [the] risk’ of backlash” after opposing the North Carolina bathroom law.

The current securities suit was filed in 2023, after the stock drop following the Pride Month campaign.  The complaint alleged that Target had failed to disclose the risk that its marketing campaign would lead to a customer boycott, loss of revenue, and reputational injury.  Target moved to dismiss, but the court denied the motion and held that, for pleading purposes, plaintiffs had adequately pled their securities claims.

The Court’s Decision

            Material Misstatements/Omissions

The court first held that plaintiffs had adequately alleged for pleading purposes that Target’s risk warnings might have been insufficient.

In its 2021 Annual Report, Target had addressed the risk of opposition to its ESG and DEI positions:

Target’s responses to crises and our position or perceived lack of position on environmental, social, and governance (ESG) matters . . . and diversity, equity, and inclusion (DE&I), and any perceived lack of transparency about those matters, could harm our reputation.  While reputations may take decades to build, negative incidents can quickly erode trust and confidence and can result in consumer boycotts, workforce unrest or walkouts, government investigations, or litigation.

Target’s 2022 Annual Report also had addressed this issue, although allegedly in more general terms.

But the court held that the risk disclosures – even the more-specific 2021 warnings – “could be materially misleading because [they were] not specifically tailored to the risks from [Target’s] 2023 Pride Month Campaign.”  The disclosures “failed to account for the specific risk that Target’s upcoming 2023 Pride Month campaign (or previous campaigns championed by Target) could cause customer boycotts and a loss of sales.  The amended complaint alleges that Target knew the risks of the 2023 Pride Month Campaign and failed to disclose such risks.” The court therefore concluded that the disclosures were too “generic” “to shield defendants from liability for failing to disclose known risks.”

The court also upheld at the pleading stage the allegation that Target had misrepresented its oversight over ESG/DEI-related risks.  The company’s proxy statements had said that Target’s board monitored social and political risks through its Governance & Sustainability Committee (the GSC), but plaintiffs contended that the board was not actually doing so – or was monitoring those risks only “from one side of the political spectrum” (the pro-DEI side).

The court ruled that “[t]he existence of the GSC implies a structured investigation and analysis of social and political risks,” and the committee’s “formal status . . . creates the impression amongst investors that social and political risks are being considerably analyzed, reviewed, and monitored.”  For pleading purposes, however, plaintiffs had alleged facts “demonstrat[ing] that it is plausible that Target, its board, and its GSC may have ignored social and political risks relating to the 2023 Pride Month Campaign.”

Scienter

The court next held that plaintiffs had adequately pled that Target had made the alleged misstatements or omissions with scienter, which includes “severe recklessness.” The CEO, whose state of mind could be attributed to Target, had known that “prior LGBT campaigns led to backlash, such as Target’s opposition to the North Carolina transgender bathroom law,” and he had admitted that Target had not adequately assessed the risk of opposing the North Carolina law.  “It is highly unreasonable that [the CEO] would approve a new, more aggressive LGBT campaign in 2023 after allegedly admitting that Target didn’t adequately assess the risk of boycotts in a prior campaign.”

However, the court rejected plaintiffs’ two other efforts to show the CEO’s scienter.  The fact that a portion of the CEO’s compensation was based on a “team scorecard,” which included progress on DEI goals, was too speculative to create a strong inference of scienter because the court could not determine “how much the DEI incentives affected [the CEO’s] compensation.”  The court also held that the CEO’s public statements about promoting “stakeholder” rather than “shareholder” benefits did not create a strong inference of scienter.

Implications

The Target decision raises several interesting issues, particularly in the politically fraught ESG/DEI context.

First, there is nothing new or controversial in the court’s ruling that overly generic risk warnings cannot shield a company from liability for allegedly failing to disclose a risk.  Target’s risk disclosures (particularly in its 2021 Annual Report) might have been more specific than other companies’ warnings because Target had expressly addressed the risk of “consumer boycotts” based on its “position or perceived lack of position” on ESG and DEI matters.  But the court concluded that even that warning was not sufficiently concrete because Target had had specific experience with backlash from prior LGBT-related initiatives and therefore should have said more about the risks from future campaigns.  The sufficiency of a risk warning thus can depend not only on the extent to which a particular subject is discussed but also on the company’s past experience with the same risk.

Second, if historical experience (such as experience with earlier consumer warnings or backlashes) can affect a court’s view of the adequacy of a risk disclosure, can agitators with an agenda warn a company about the potential consequences of engaging in a future course of conduct and thereby effectively require more detailed, less “generic,” risk warnings?  For example, if anti- or pro-DEI/ESG proponents expressly threaten a customer boycott if a company engages or does not engage in a particular DEI/ESG initiative, does the company need to say more about the business and reputational risks of any such initiative if the company plans or does not plan to undertake it? The answer will likely depend on the facts of the particular situation.  For the court in the Target case, the question was less hypothetical because Target allegedly had faced actual threats and boycotts from its past DEI efforts.

Third, if a company says that it has delegated oversight of a particular matter to a board committee, the committee in fact should consider, analyze, review, and monitor that matter.  As the Target court observed, the disclosed existence of a committee might suggest that the committee is actually doing what it was charged to do.  If the committee is not doing its work, the statement about oversight might be materially misleading.