Seattle, WA - A federal judge dismissed a shareholder lawsuit accusing Starbucks Corp of defrauding investors by hiding slowing sales in its two biggest markets, the United States and China.
U.S. District Judge John Chun in Seattle ruled on Wednesday that statements made by former Chief Executive Laxman Narasimhan during a January 2024 analyst call could reasonably be interpreted in an innocent way. The judge found that Narasimhan's claimed belief that he was describing sales trends for a completed quarter was at least as credible as the shareholders' contention that he was speaking about current, ongoing sales performance.
That ruling reverses a previous decision by the same court to allow the case to proceed, a step Judge Chun had authorized in November. The complaint was filed by shareholders led by three pension plans based in New York. Attorneys representing those pension plans did not respond to requests for comment on Thursday.
The legal action followed a sharp market reaction to an update from Starbucks on May 1, 2024. The company lowered its full-year sales forecast, a disclosure that coincided with a roughly 16% decline in its share price on that day. In the most recent quarter disclosed at the time, Starbucks reported a same-store sales decrease of 4.4% overall, with a 3% decline in the United States and an 11% drop in China.
Since Narasimhan's departure, Brian Niccol has taken over as chief executive and launched a turnaround effort branded "Back to Starbucks." The plan emphasizes a set of operational and customer-facing priorities: simplifying menus, reducing wait times, upgrading store environments, enhancing in-store technology, and closing underperforming locations.
Context and court finding
The central legal question turned on how a reasonable investor would interpret Narasimhan's remarks during the January analyst call. Judge Chun concluded that the company offered a nonculpable explanation that the statements reflected finalized quarter results rather than contemporaneous sales trends, a view he judged equally plausible to the shareholders' interpretation.
Market and corporate response
Starbucks's downward revision to sales expectations sparked the initial investor backlash that led to the lawsuit. The company has since moved ahead with the new chief executive's turnaround initiatives intended to address traffic, speed of service, store experience, and portfolio rationalization.
No additional comments from the shareholders' legal representatives were available at the time of the court ruling.