Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca6-15-05064/USCOURTS-ca6-15-05064-0/pdf.json

Nature of Suit Code: 850
Nature of Suit: Securities, Commodities, Exchange
Cause of Action: 

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NOT RECOMMENDED FOR FULL-TEXT PUBLICATION

File Name: 15a0596n.06

No. 15-5064

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

ARUN BONDALI, et al.,

Plaintiffs-Appellants,

v.

YUM! BRANDS, INC., et al.

Defendants-Appellees.

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ON APPEAL FROM THE UNITED 

STATES DISTRICT COURT FOR THE 

WESTERN DISTRICT OF KENTUCKY

BEFORE: CLAY and McKEAGUE, Circuit Judges; BERTELSMAN, District Judge.*

McKEAGUE, Circuit Judge. In this securities class action, investors sued Yum! 

Brands, Inc. (“Yum”), a publicly traded corporation which owns restaurant chains Taco Bell and

Kentucky Fried Chicken (“KFC”). The investors also sued three of Yum’s senior officers: CEO 

David C. Novak, Richard T. Carucci, and Jing-Shyh Su. In their amended complaint, the 

investors allege that Yum and its senior officers knew batches of chicken being supplied to

Yum’s KFC China subsidiary1had tested positive for drug and antibiotic residues and that

Yum’s food standards and safety protocols were ineffective and also inadequate. The thrust of 

the amended complaint is that it was false or misleading for Yum not to disclose the adverse 

results and system failures to the public, the result of which was a 17 percent drop in stock price

 

* The Honorable William O. Bertelsman, Senior United States District Judge for the 

Eastern District of Kentucky, sitting by designation. 

1 Yum! China is a division of Yum! Brands, Inc. and is based in Shanghai, China. (See

R. 72, Page ID # 638.) KFC China is a brand of Yum! China. (See id. at Page ID # 679.)

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after the media began exposing the issues. The district court dismissed the amended complaint 

for failure to state a claim on which relief could be granted. For the reasons below, we affirm.

I.

Between 2010 and 2011, Yum received a series of test results from the Shanghai Institute 

for Food and Drug Control (“SIFDC”). The SIFDC is an independent laboratory Yum retained

to conduct bimonthly spot testing on the chickens it accepted for distribution to its Chinese

KFCs. The results showed that eight of nineteen batches of chicken from one supplier, the 

Shandong Liuhe Group (“Liuhe”), had tested positive for drug and antibiotic residues prohibited 

under Chinese law. (R. 72, Page ID # 650.) In a December 2012 statement, Yum reported that, 

after receiving the test results in 2011, it disqualified the Linyi Factory (“Linyi”), a Liuhe 

subsidiary, identifying Linyi as “the factory saddled with the major problems.” In that same 

statement, Yum also explained that, in August 2012, it also disqualified Liuhe. (R. 72-11, Page

ID # 827.)

Yum, however, did not immediately disclose the SIFDC results or disqualifications of 

Liuhe and Linyi to regulators or the public. Moreover, Yum did not immediately disclose that, 

in 2010, it learned of another supplier’s poultry—the Yingtai Group—also testing positive for 

drug and antibiotic residues. (R. 72, Page ID # 672.)2

Indeed, Yum did not publicly acknowledge any issues with drug or antibiotic residues

until the media began reporting on the issues in late 2012. The first media report mentioned in 

the amended complaint is a November 23, 2012 Bloomberg News article. It suggested that 

another supplier, the Shanxi Suhai Group, was using hormones to increase the size of its 

 

2

The amended complaint also identifies two other suppliers, Wintop Food and Shanxi 

Suhai, as having sold contaminated poultry to Yum. (R. 72, ¶ 11, Page ID # 635.) The

plaintiffs’ Section 10(b) claim, however, rests only on Yum’s failure to disclose the issues with 

Liuhe and Yingtai. (See id. at Page ID # 701–703.)

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chickens. (See id. at Page ID # 711.) The most comprehensive media report aired on December 

18, 2012 on Chinese Central Television (“CCTV”). That report suggested that Yum’s issues 

with food safety went beyond a single supplier. Rather, several farmers in Shandong Province, 

including farmers selling to Liuhe and Yingtai, were feeding their poultry antibiotics and other 

drugs to increase the chickens’ size and reduce the chickens’ mortality rates. (See R. 72-18, 

Page ID # 895–897.) CCTV also reported that farmers were not maintaining the legally required 

“feeding journals” and that suppliers like Liuhe were fabricating their inspection and quarantine 

certificates to show there were no drug residues in the chicken. (See id. at Page ID # 899–900.)

The day after the CCTV report aired, Chinese regulators “raided, ransacked, then 

shuttered several farms and plants that had supplied chicken to KFC.” Yum’s stock price also

declined 2.7 percent. (See id. at Page ID # 717.) By the end of the Class Period, Yum stock had 

“f[a]ll[en] nearly 17% from $74.47 per share on November 29, 2012, to $68.08 per share on 

February 5, 2013.” (Id. at Page ID # 720.) February 5, 2013—the day after the close of the 

Class Period—was, according to the plaintiffs, the day on which “the truth was fully revealed”

by Yum admitting that: “Due to continued negative same-store sales and [Yum’s] assumption 

that it will take time to recover consumer confidence, we no longer expect to achieve [earnings 

per share] growth in 2013.” (Id. at Page ID # 676).

The plaintiffs allege the market’s negative response to the media reports was 

unsurprising, given first the “hypersensitive” nature of Chinese consumers to food contamination 

issues, (see R. 72, Page ID # 634), and second the consumer backlash that has followed previous

food safety issues at Yum. For example, in 2005, news that Chinese KFCs were using Sudan 

Red Dye, “a known and prohibited carcinogen,” caused “Yum’s sales to drop immediately and 

remain depressed for months.” (See id. at Page ID # 634.) Likewise, in 2007, Yum’s 

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“reputation, and bottom line ... took a severe hit when E.coli was found in food sold by several 

Taco Bell restaurants in the U.S.” (See id.)

II.

The cases forming this class action were consolidated on May 1, 2013. An amended 

complaint on behalf of the consolidated class was filed on August 5, 2013, contaning three 

counts: Count I alleged that Yum violated Section 10(b) of the 1934 Securities Exchange Act, 15 

U.S.C. § 78j(b), and SEC Rule 10b-5, 17 C.F.R. § 240.10b-5; Count II alleged Section 10(b) and 

Rule 10b-5 liability against the individual defendants; and Count III alleged controlling-person 

liability against the individual defendants under Section 20(a) of the 1934 Securities Exchange 

Act, 15 U.S.C. § 78t(a). On October 14, 2013, the defendants filed a motion to dismiss pursuant 

to Federal Rule of Civil Procedure 12(b)(6), and on December 23, 2014, the district court granted 

the motion, dismissing all three counts with prejudice.

The amended complaint avers that during the Class Period, the defendants made ten 

materially false or misleading statements. These statements can be divided into four categories.3

Cautionary Statements or Risk Disclosures. The defendants made statements on the 

investment risk that food safety issues posed. One appears in each of Yum’s Earnings 

Announcements and 10-Qs during the Class Period:

 Our forward-looking statements are subject to risks and uncertainties, which 

may cause actual results to differ materially from those projected. Factors 

that can cause our actual results to differ materially include, but are not 

limited to: food borne-illness or food safety issues[.] (R. 72, Page ID # 701.)

The other appears in the “Risk Factors” section of Yum’s 2011 Form 10-K:

 

3 Because of their length, we have copied the statements only in relevant part. To do so, 

we have relied on the amended complaint’s own italicization of those portions of the statements 

which the plaintiffs believed most supported their claims. The statements as they originally 

appeared in the amended complaint can be found at R. 72 in the district court record.

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 [F]ood safety issues have occurred in the past, and could occur in the future. 

Any report or publicity linking us or one of our Concept restaurants, including 

restaurants operated by our franchisees, to instances of food-borne illness or 

other food safety issues, including food tampering or contamination, could 

adversely affect our Concepts’ brands and reputations as well as our revenues 

and profits....In addition, instances of food-borne illness, food tampering or 

food contamination solely involving our suppliers or distributors or solely at 

restaurants of competitors could adversely affect our sales as a result of 

negative publicity about the foodservice industry generally. Such instances of 

food-borne illness, food tampering and food contamination may not be within 

our control. (Id. at Page ID # 702–703.)

The plaintiffs allege these statements were misleading because they portrayed food safety 

issues as a potential risk instead of a risk that had already materialized, given the issues with 

Liuhe and Yingtai.

Statements Touting Standards and Protocols. Yum also made statements generally 

touting its food standards and safety protocols. Two appear in Yum’s 2011 Form 10-K:

 These suppliers are required to meet and maintain compliance with the 

Company’s standards and specifications. (Id. at Page ID # 703.)

 All restaurants, regardless of their ownership structure or location, must 

adhere to strict food quality and safety standards. The guidelines are 

translated to local market requirements and regulations were appropriate and 

without compromising the standards. (Id. at Page ID # 704.)

The third appears in Yum’s Code of Conduct, cited by Yum in its 2012 Proxy Statement:

 Food safety is a primary responsibility of Yum!, and nothing, including cost, 

is allowed to interfere with this responsibility.

To ensure that our customers receive safe, wholesome food, and “food you 

crave,” Yum!:

o Maintains strict specifications for raw products including 

specifications which meet or exceed government requirements.

...

o Adheres to a strict food safety testing program.

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o Continually monitors and improves its procedures and practices to 

ensure food safety.

The responsibility for food safety is shared by everyone in our system:

...

o Any product suspected to be unsafe must immediately be pulled from 

distribution until safety can be assured....

(Id. at Page ID # 706–707.)

Lastly, during a March 2012 investor conference, Carucci told the audience:

 But realistically, we know there’s probably more risk [in China] than there is 

in places like Western Europe and the US in terms of just the way the food 

chain works. But we’ve spent a lot of time and energy getting that right and 

having the right suppliers. (Id. at Page ID # 654.)

The plaintiffs allege these statements were false or misleading because Yum’s standards 

and protocols were nowhere near strict. Rather, Yum’s standards and protocols were “woefully 

inadequate to cope with the known problem of local farmers administering dangerous chemicals 

to chickens supplied to Yum.” (R. 72, Page ID # 705.) The plaintiffs raise several inadequacies

with Yum’s standards and protocols: that spot testing was performed only bimonthly and that 

suppliers violating the standards were not immediately disqualified, just to name a few. (See R. 

72, Page ID # 660–61, 666.)

Responses to Negative Publicity. The next statements were responses made to the 

negative publicity that began in November 2012. They concern the actions Yum was 

undertaking or promising to undertake to protect consumers.

 KFC always attaches importance to food safety, requesting all chicken 

suppliers to adopt complete food safety management measures. It also makes 

spot checks on their products. Shanxi Suhai Group is a relatively small 

regional supplier within KFC’s chicken supply system, supplying only about 

1% of the chicken for KFC, and it has maintained a normal food safety record 

in the past. KFC will carry out investigations according to the media reports, 

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enhance inspections and mete out punishments according to the results of the 

investigations. (Id. at Page ID # 712.)

 All chickens will undergo inspection by the government, suppliers, and KFC 

before entering KFC. KFC will continue to supervise all the suppliers, 

strength the management of the suppliers continuously to ease people’s 

concern about food safety risks, and keep the superior and eliminate inferior 

suppliers to minimize the risks. (Id. at Page ID # 714.)

 KFC requires all the suppliers to conduct drug residue inspections of their 

chicken products supplied to KFC....KFC makes spot checks on drug residues 

in all the chickens purchased. (Id. at Page ID # 716.)

Statement on Softer Sales. Lastly, the plaintiffs allege it was false or misleading for 

Novak in a November 29, 2012 Press Release to attribute lowered same-store sales projections to 

“softer sales in China” because, in fact, the lowered projections were due to the negative 

publicity. (See id. at Page ID # 712.)

III.

We review de novo a district court’s Rule 12(b)(6) dismissal of a complaint. 

“[C]onstru[ing] the complaint in the light most favorable to the plaintiff” and “accept[ing] all 

well-pleaded factual allegations as true,” La. Sch. Emps. Ret. Sys. v. Ernst & Young, LLP, 

622 F.3d 471, 477 (6th Cir. 2010), we must determine whether the complaint alleges “enough 

facts to state a claim that is plausible on its face,” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 

570 (2007). A claim is plausible if the court can “draw the reasonable inference that the 

defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). A 

claim is not plausible if the facts alleged are “merely consistent with a defendant’s liability.” Id.

(quotation marks and citation omitted).

Because Section 10(b) and 20(a) claims sound in fraud, this court must also impose the 

pleading requirements of Federal Rule of Civil Procedure 9(b) and determine whether the 

complaint alleges fraud with particularity. Fraud is alleged with particularity by identifying the 

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statements or omissions alleged to be false or misleading and detailing the “who, what, when, 

where, and how” of the alleged fraud. See Sanderson v. HCA-The Healthcare Co., 447 F.3d 873, 

877 (6th Cir. 2006) (quoting United States ex rel. Thompson v. Columbia/HCA Healthcare 

Corp., 125 F.3d 899, 903 (5th Cir. (1987)). Lastly, the complaint must satisfy the pleading 

requirements of the Private Securities Litigation Reform Act (“PSLRA”). Under the PSLRA, a 

complaint bringing Section 10(b) or Rule 10b-5 claims must, with respect to each actionable 

statement, allege “with particularity facts giving rise to a strong inference that the defendant 

acted with the required state of mind [i.e., scienter.]” 15 U.S.C. § 78u-4(b)(2)(A). “Scienter 

may take the form of knowing and deliberate intent to manipulate, deceive, or defraud, and 

recklessness.” Frank v. Dana Corp., 646 F.3d 954, 959 (6th Cir. 2011) (quotation omitted).

IV.

To state a claim under Section 10(b) and Rule 10(b)(5), the plaintiffs must plausibly

allege the following elements:

(1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a 

connection between the misrepresentation or omission and the purchase or sale of 

a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; 

and (6) loss causation.

Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148, 157 (2008).

The district court dismissed the amended complaint for failure to allege the first and 

second of these elements. We begin with its assessment as to the first element and agree that a 

“material misrepresentation or omission” has not been alleged because the amended complaint 

fails to assert facts showing Yum’s statements were “objectively false or misleading in light of 

the information now known,” In re Omnicare, Inc. Sec. Litig., 769 F.3d 455, 478 (6th Cir. 2014).

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A.

Beginning with Yum’s general statements touting its standards and protocols, the 

plaintiffs have alleged no facts to suggest that Yum did not require its suppliers to adhere to 

corporate food standards and safety protocols. In fact, the amended complaint makes several 

assertions of fact to suggest that Yum did impose such requirements. As detailed in the amended 

complaint, Yum performed bimonthly spot testing of its chickens, conducted evaluations of its 

suppliers, and disqualified suppliers that did not meet its requirements like Liuhe.

4

(See R. 72, 

Page ID # 658 (discussing example of supplier disqualification); 660–61 (discussing supplier 

evaluations); 666 (discussing spot testing); 682–83 (discussing audit system).) That a few 

suppliers did not adhere to the standards does not mean Yum did not have the standards in place, 

and it is not reasonable to interpret Yum’s statements as a guarantee that its suppliers would, in 

all instances, abide by the corporate standards and protocols.

It is also difficult to see how Yum misled investors by describing its food quality and 

safety standards as “strict.” The fact of the matter is Yum had multiple protocols in place to 

promote food quality and safety, including spot checks, supplier evaluations, and an auditing 

system. Describing those protocols as “strict” was reasonably grounded in objective fact and, 

thus, is not “disproven” just because Yum could have strengthened its standards and protocols. 

By pointing out the structural weaknesses of Yum’s standards and protocols, all the plaintiffs

 

4 Counsel for the plaintiffs suggested at oral argument that the panel could not accept as 

true that Yum had disqualified Liuhe. However, it was the plaintiffs who made the allegation in 

the first instance. (See R. 72, Page ID # 658.) At the Rule 12(b)(6) stage, the court is obligated 

to accept all well-pleaded allegations in a complaint as true. The plaintiffs cannot direct the 

court as to which well-pleaded allegations should be accepted and which should be disregarded

merely because, upon further examination, some well-pleaded allegations might not be to their 

benefit.

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have done is shown that whether Yum’s standards and protocols could be described as “strict” is 

a question subject to reasonable debate.

The only portion of these statements that could be arguably false or misleading is Yum’s 

statement that “[a]ny product suspected to be unsafe must immediately be pulled from 

distribution until safety can be assured.” See supra at 6. As the amended complaint alleges, 

Yum did not immediately pull Liuhe and Yingtai poultry from distribution because according to 

Su it was already “too late.” (See R. 72, Page ID # 708.)

Nevertheless, Yum’s statement is not actionable because it was a statement of aspiration

made in Yum’s corporate Code of Conduct rather than rather an assertion of objective fact made 

in a public filing or press release. As the district court properly explained, a code of conduct is 

not a guarantee that a corporation will adhere to everything set forth in its code of conduct. 

Instead, a code of conduct is a declaration of corporate aspirations. (See R. 119, Page ID # 

1453); see also Andropolis v. Red Robin Gourmet Burgers, Inc., 505 F. Supp. 2d 662, 685–86 

(D. Colo. 2007). To treat a corporate code of conduct as a statement of what a corporation will 

do, rather than what a corporation aspires to do, would turn the purpose of a code of conduct on 

its head.

B.

Similarly, Yum’s responses to the negative publicity that began in November 2012 also 

do not appear false or misleading, given the facts alleged in the amended complaint. Yum did

take the actions it outlined in these statements. It conducted spot checks on its chickens and 

required suppliers to conduct drug-residue inspections before KFC China would accept the 

chickens for distribution. To the extent the plaintiffs chastise Yum for not “keep[ing] the 

superior and eliminat[ing] the inferior suppliers to minimize the risk,” it is clear from the 

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amended complaint that Yum did eliminate “inferior” suppliers like Liuhe even if it did not do as 

efficiently as the plaintiffs would have preferred. To the extent the plaintiffs take issue with the 

efficiency or effectiveness of Yum’s monitoring system, the plaintiffs raise a claim of corporate 

mismanagement, not investor deception. See Marsh v. Armada Corp., 533 F.2d 978, 986 (6th 

Cir. 1976) (“Congress by § 10(b) did not seek to regulate transactions which constitute no more 

than internal corporate mismanagement.”).

C.

The plaintiffs contend that Yum’s risk disclosures were false or misleading, emphasizing

the statement that food safety issues “have occurred in the past, and could occur in the future.”

That statement, the plaintiffs contend, and its failure to mention Liuhe and Yingtai, created a 

misleading impression: that it was only possible for food safety issues to harm investment in 

Yum when, in fact, food safety issues had already come to pass and were presently harming 

investment in Yum.

But, as several courts have concluded, “cautionary statements are ‘not actionable to the 

extent plaintiffs contend defendants should have disclosed risk factors ‘are’ affecting financial 

results rather than ‘may’ affect financial results.” In re FBR, Inc. Sec. Litig., 544 F. Supp. 2d 

346, 362 (S.D.N.Y. 2008) (citations omitted). This conclusion, we believe, is one reached for

good reason. Risk disclosures like the ones accompanying 10-Qs and other SEC filings are

inherently prospective in nature. They warn an investor of what harms may come to their 

investment. They are not meant to educate investors on what harms are currently affecting the 

company. This is apparent from any dictionary definition of “risk.” For example, Webster’s 

Third New International Dictionary lists the primary definition of “risk” as a “possibility of loss, 

injury, disadvantage, or destruction.” Webster’s Third New International Dictionary 1961

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(1986) (emphasis added). For these reasons, a reasonable investor would be unlikely to infer 

anything regarding the current state of a corporation’s compliance, safety, or other operations 

from a statement intended to educate the investor on future harms. While there may be 

circumstances under which a risk disclosure might support Section 10(b) liability, this is not that 

case.

In any event, the plaintiffs have not alleged facts suggesting the issues with Liuhe and 

Yingtai were so severe that they would have resulted in financial loss for Yum. Thus, the 

plaintiffs have not alleged facts showing any investment risk had already materialized. See FBR, 

544 F. Supp. 2d at 362 (finding the complaint did not sufficiently allege that defendant’s 

noncompliance would cause financial loss) (citing Rombach v. Chang, 355 F.3d 164, 173 (2d 

Cir. 2004)). Taken alone, eight batches of chicken testing positive for drug and antibiotic 

residues is hardly a companywide food safety epidemic, and the plaintiffs allege no facts to 

suggest otherwise: they allege neither the proportion of chicken possibly contaminated nor 

whether Liuhe and Yingtai were two of a mere handful of suppliers or two of thousands of other

suppliers. While we are obligated to construe the facts in the light most favorable to the 

plaintiffs, we need not speculate into existence facts which might favor the plaintiffs.

D.

The remaining statement can be cast aside with little fanfare: While Yum’s “softer sales” 

were due to the negative publicity concerning its tainted poultry, as the plaintiffs allege, Novak 

did not commit any misstatement by simply explaining that because sales were lower, 

projections would be lower.

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E.

Perhaps recognizing the futility of isolating any one statement as false or misleading, the 

plaintiffs, relying on out-of-circuit precedent, invite us to focus on the overall impression created

by Yum’s statements. Appellee Reply Br. at 1. According to the plaintiffs, the sum total of 

Yum’s statements—touting its standards and protocols, failing to disclose issues with Liuhe and 

Yingtai, detailing its food safety action items—was what created a “misleading impression of an 

effective monitoring system.” Appellant Br. at 15.

We decline the plaintiffs’ invitation as it is based on a misinterpretation of the case law.

Other circuits do not forego a statement-by-statement analysis of objective falsity in favor of 

analyzing the overall impression made by a set of statements. Rather, other circuits, like this 

circuit, undertake a statement-by-statement analysis. In doing so, they ask not only whether the

statement is literally true but also whether the statement creates an impression that is false by, for 

example, impliedly asserting an objective fact that is false. As the Ninth Circuit has explained, 

the complaint “must demonstrate that a particular statement, when read in light of all the 

information then available to the market, or a failure to disclose particular information, conveyed 

a false or misleading impression.” In re Oracle Corp. Sec. Litig., 627 F.3d 376, 390 (9th Cir. 

2010) (emphasis added) (quotation omitted); see also 15 U.S.C. § 78u-4(b)(1) (requiring the 

complaint to “specify each statement alleged to have been misleading” and “the reason or 

reasons why the statement is misleading” (emphasis added)). Because each statement is neither 

literally false nor created a false impression about the effectiveness of Yum’s monitoring system,

we AFFIRM the district court’s dismissal of the amended complaint.

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V.

In the alternative, we would affirm the district court’s dismissal of the amended 

complaint on the ground that a strong inference of scienter has not been alleged. The facts the 

amended complaint alleges to establish scienter boil down to the following:

 KFC China is the “core” of Yum’s business. (See R. 72, Page ID # 680–81.)

 In response to the negative publicity beginning in November 2012, Su made 

statements discussing the issues with contaminated poultry and the SIFDC 

results. (See id. at Page ID # 678–79.)

 The individual defendants paid close attention to food safety as it was 

important to Yum’s operations. The attention paid is clear from Yum’s 

formation of a Food Safety Council, adoption of a Code of Conduct requiring 

the reporting of food safety issues, and creation of a global audit system. (See

id. at Page ID # 681–82.)

 The individual defendants had reason not to disclose the SIFDC results 

because doing so would have harmed Yum’s financial bottom line and, in 

turn, their own performance-based compensation. (See id. at Page ID # 683–

700.)

All these alleged facts establish, as the district court noted, is that Su, Carucci, and Novak

had the motive (because of their overall concern with food safety and its importance to

profitability and their compensation) as well as the opportunity (because of their high-level 

positions) to conceal any knowledge of the issues with Yingtai and Liuhe. But, as this court has 

made abundantly clear, “plaintiffs may plead scienter ... by alleging facts giving rise to a strong 

inference of recklessness, but not by alleging facts merely establishing that a defendant had the 

motive and opportunity to commit securities fraud.” In re Comshare, Inc. Sec. Litig., 183 F.3d 

542, 549 (6th Cir. 2009).

To be sure, some Yum employees received and reviewed the SIFDC results. The issue, 

however, is whether there is a strong inference that the individual defendants—Novak, Carucci, 

or Su—received the test results and, thus, knew or should have known that Yum’s statements 

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discussing investment risks or touting its safety protocols were false or misleading. The amended 

complaint fails to include facts sufficiently tying the individual defendants to the SIFDC results 

like, for example, by alleging that senior officers were regularly notified of test results or that 

Yingtai and Liuhe supplied such a substantial proportion of KFC China’s chickens that senior 

officers would have had to be aware of any issues with such major suppliers.

5

As to corporate scienter, this court held in Omnicare that a corporation’s state of mind in 

making a false or deceptive statement is assessed by reference to the state of mind of:

[1] The individual agent who uttered or issued the misrepresentation; [2] Any 

individual agent who authorized, requested, commanded, furnished information 

for, prepared (including suggesting or contributing language for inclusion therein 

or omission therefrom), reviewed, or approved the statement in which the 

misrepresentation was made before its utterance or issuance; [or 3] Any high 

managerial agent or member of the board of directors who ratified, recklessly 

disregarded, or tolerated the misrepresentation after its utterance of issuance ....

Omnicare, 769 F.3d at 476 (citation omitted).

Because the amended complaint has not established that Novak, Carucci, or Su (senior

officers falling within the third Omnicare category) acted with scienter, the plaintiffs would need 

to establish scienter on the part of another agent, falling into one of the Omnicare categories, to 

successfully allege corporate scienter. This the plaintiffs have not done. Though some Yum 

employees were aware of the issues with Liuhe and Yingtai, the amended complaint alleges no 

facts to suggest it was those employees who prepared or were otherwise involved in making the 

allegedly false or misleading statements at issue. As such, the plaintiffs have not plausibly 

alleged scienter on the part of Yum the corporate entity and have not made out a sufficient claim 

of Section 10(b) or Rule 10b-5 liability.

 

5

The only fact alleged in this regard is that another supplier, the Shanxi Suhai Group, 

constituted 1 percent of the overall supply. (See R. 72, Page ID # 712.)

 Case: 15-5064 Document: 34-2 Filed: 08/20/2015 Page: 15
No. 15-5064, Arun Bondali, et al. v. Yum! Brands, Inc., et al.

-16-

VI.

Because Yum has not sufficiently alleged a Section 10(b) violation, there is no primary 

violation to support Section 20(a) liability with respect to any of the individual defendants.

VII.

For the foregoing reasons, we AFFIRM the district court’s dismissal of the amended 

complaint.

 Case: 15-5064 Document: 34-2 Filed: 08/20/2015 Page: 16