Shareholders suing Tivity Health over the company’s failure to adequately disclose that one of its largest customers was becoming a direct competitor cleared an important hurdle in March when a federal judge denied defendants’ motion to dismiss the class action lawsuit.
Cohen Milstein represents Oklahoma Firefighters’ Pension & Retirement System as sole lead plaintiff in the lawsuit, which accuses Tivity and three individual defendants of violating the Securities Exchange Act of 1934 by misleading investors about the terms of the contract renewal with United Healthcare (UHC), the company’s second largest customer, and the actual competitive threat posed by UHC. Tivity’s share price fell by more than a third on news that UHC had launched a senior fitness program that would rival SeniorSneakers, the flagship program which generates 82% of Tivity’s revenues.
Working in partnership with fitness centers, Tivity provides UHC and other health plan customers with fitness and health programs that the health plans offer to their members. Because of UHC’s importance to Tivity, analysts and investors were closely watching Tivity and UHC’s contract renewal negotiations in early 2017. As defendants reported it, the news looked good. On April 27, 2017, Tivity said it had renewed the contract for three years. While defendants refused to provide specifics when pressed by analysts, they said they were “pleased” with the contract’s “favorable terms.”
On November 6, 2017, however, investors learned that defendants had failed to disclose that UHC had been offering a rival fitness program to SilverSneakers in two states since late 2016, and planned to roll it out in nine more states starting in January 2018. The stunning disclosure sent Tivity stock tumbling by more than 34%, causing significant losses to Oklahoma Firefighters and other investors who bought stock during the March 6, 2017 to November 6, 2017 class period.
In denying defendants’ motion to dismiss, Judge Waverly D. Crenshaw, Jr. of the U.S. District Court for Northern Tennessee rejected all their arguments, including that the alleged actionable statements were immaterial and that certain statements were protected because they were forward-looking and therefore exempt from liability under “safe harbor” statutory provisions.
In his March 18 ruling, Judge Crenshaw found that Oklahoma Firefighters sufficiently pleaded that Tivity’s statements about the terms of the UHC contract were material to investors because (1) Tivity had said UHC was one its most important health plan customers and (2) Tivity had warned that a loss or major change to its contract with UHC—or UHC’s launch of a competitive program—would hurt its operations. Further underscoring the material nature of the events, Judge Crenshaw noted, defendants themselves reacted when the contract terms changed to allow UHC to compete directly with SilverSneakers and UHC launched its own program. “Tivity was hardly nonplussed,” he wrote. “It formed a committee to address the problem.”
Judge Crenshaw also held that defendants could not avail themselves of the statutory safe harbor for forward-looking statements about Tivity’s ability to strengthen market share, long-term opportunities, and improved performance because the statements “were provided in the context of cautionary statements that were boilerplate, not meaningful, and inconsistent with the historical facts” that UHC had started to compete with Tivity and Tivity was scrambling to try and “contain the UHC threat.” In addition to the company, the lawsuit names as defendants Chief Executive Officer Donato Tramuto, former interim Chief Financial Officer Glenn Hargreaves, and Chief Financial Officer Adam Holland. The case has moved into the discovery phase with Oklahoma Firefighters scheduled to move for class certification on July 1.
The case is Eric Weiner, et al. v. Tivity Health, Inc., et al., Case No. 3:17-cv01469, U.S. District Court, Middle District of Tennessee, Nashville Division.