TheCorporateCounsel.net

Last week, the SEC announced settled charges against Keurig Dr Pepper Inc. for allegedly inaccurate statements about the recyclability of its K-Cup pods. Keurig agreed to pay $1.5 million in civil penalties.

According to the SEC’s order, in annual reports for fiscal years 2019 and 2020, Keurig stated that its testing with recycling facilities “validate[d] that [K-Cup pods] can be effectively recycled.” But Keurig did not disclose that two of the largest recycling companies in the United States had expressed significant concerns to Keurig regarding the commercial feasibility of curbside recycling of K-Cup pods at that time and indicated that they did not presently intend to accept them for recycling.

In fiscal year 2019, sales of K-Cup pods comprised a significant percentage of net sales of Keurig’s coffee systems business segment, and research earlier conducted by a Keurig subsidiary indicated that environmental concerns were a significant factor that certain consumers considered, among others, when deciding whether to purchase a Keurig brewing system.

In her dissent, Commissioner Peirce says:

The Commission both misreads Keurig’s statement and overreacts to its own misreading. The pods were recyclable: Keurig chose a type of plastic that was recyclable and ran tests to show that the pods could be recycled. That claim is all Keurig’s statements reasonably should be read to say. Branding Keurig’s Forms 10-K as incomplete or inaccurate because Keurig did not also disclose that two recycling companies “did not presently intend to accept pods” for “commercial feasibility” reasons misreads Keurig’s statement that the pods could be recycled as an implicit assertion that the pods would be recycled.

This reading, however, places far too much weight on the word “effectively.” In the Commission’s view, the pods cannot be “effectively” recycled because two recycling companies were uninclined to accept them for curbside recycling.

She also points out that the order doesn’t claim Keurig’s statements were material and says the charges — brought only under Section 13(a) and Rule 13a-1, which require the filing of “complete and accurate” annual reports — were somewhat unique:

[T]he Order nowhere states that [the statements] were material. The closest the Order comes to addressing materiality is a statement that “sales of pods comprised a significant percentage of net sales of Keurig’s coffee systems business segment” in 2019, which appears in the same paragraph with the statement that “[c]onsumer research conducted by Keurig Green Mountain in 2016 indicated that, for certain consumers, environmental concerns were a significant factor, among others, considered when deciding whether to purchase a Keurig brewing system.” … That some consumers thought, among other factors, about environmental factors does not mean that the recyclability of pods was material to investors.

Rarely does the Commission bring standalone Section 13(a) and Rule 13a-1 charges. Telling to me is the absence of other charges—such as charges under Exchange Act Section 10(b) and Rule 10b-5, Securities Act Section 17(a), or even under Exchange Act Rule 12b-20, which requires issuers to add to their statements or reports such further material information, if any, as may be necessary to make the required statements, in the light of the circumstances under which they are made, not misleading. I do not believe that Keurig’s recyclability statements support such charges because I do not think that they are false or misleading, which means there is no basis for Section 13(a) and Rule 13a-1 charges either.

That doesn’t mean this enforcement action is a one-off event. It’s somewhat reminiscent of charges against Fiat-Chrysler under Exchange Act Section 13(a) and Rule 12b-20. And it probably won’t be the last of its kind. WilmerHale’s Keeping Current blog says:

Notwithstanding Peirce’s dissent, the SEC’s action highlights the importance of ensuring disclosures are complete and not misleading due to the omission of adverse information known to the company. While this is the case for all disclosures and is nothing new, the context in which this action arises serves as an important reminder of the SEC’s continued focus on environmental and social disclosures and the agency’s willingness to look outside of SEC filings [e.g., sustainability reports] for additional context surrounding such disclosures.

– Meredith Ervine