Not so Fast: Statement on In the Matter of Keurig Dr Pepper Inc.

Is a car company’s claim—proven by company speed tests—that its top-of-the-line sports car can go from 0-60 MPH in 2.9 seconds misleading if the company knows that its more conservative drivers do not press the pedal to the metal? The Commission’s settlement with Keurig Dr Pepper Inc. (“Keurig”) would suggest that it is. The Commission’s Order finds that Keurig violated Exchange Act Section 13(a) and its accompanying Rule 13a-1, which require issuers to file complete and accurate annual reports, for making an analogous claim.[1] The disclosure standard embodied in this settlement may have the positive effect of dissuading companies from talking about immaterial items in their SEC filings, but it also will expose companies to endless second-guessing by the Commission unless they pad any statements they do make with a mountain of caveats. Accordingly, I dissent.

Keurig’s purported violation of the Exchange Act hinges on what it means for an item to be “effectively recyclable.” In 2014, Keurig set a sustainability goal of making 100% of its pods recyclable by 2020. To that end, Keurig researched options and “determined that pods made of polypropylene number 5 plastic (‘PP5’), sold in packaging with certain specific consumer recycling instructions, would achieve this goal.” By the end of 2020, all the pods Keurig manufactured for sale in the United States and Canada were made of the recyclable material. Additionally, Keurig performed tests using tracking chips and radio frequency identification readers to track the pods through the recycling process. These tests showed that “pods typically could be successfully sorted from other materials to make it to a stage of the recycling process from which items have the potential to be sorted into groups of various materials for purchase by parties who might further process the materials for their potential reuse.” Notwithstanding the testing results, two recycling companies involved in the testing “conveyed significant negative feedback to Keurig regarding the commercial feasibility” of recycling the pods. Both companies “indicated to Keurig that they did not presently intend to accept pods” for recycling, and one company explained that “there is simply not a sufficient benefit for small format materials, and/or hard-to-recycle materials—including K-Cups pods—to make the financial case for inclusion as part of curbside recycling programs.”

After receiving the testing results and the negative feedback from two recycling companies, Keurig stated in its Form 10-K in 2019 and 2020 that the pods “can be effectively recycled” (¶12-13). Specifically, in the “Corporate Responsibility” section under the heading “Sustainable Packing”, Keurig’s 2019 10-K stated:

We are on track to make allK-Cup pods sold in theU.S.recyclable by the end of 2020, having converted allK-Cup pods sold in Canada to a recyclable format in 2018. The new pods are made of polypropylene #5 plastic, a material that is accepted curbside for recycling by many communities, and we have conducted extensive testing with municipal recycling facilities to validate that they can be effectively recycled.[2]

Similarly, in the same section, under the same heading, Keurig’s 2020 10-K stated:

In December 2020, we achieved our goal of making all K-Cup pods sold in the U.S. recyclable by the end of 2020, having converted all K-Cup pods sold in Canada to a recyclable format in 2018. The new pods are made of polypropylene #5 plastic, a material that is accepted curbside for recycling by many communities, and we have conducted extensive testing with municipal recycling facilities to validate that they can be effectively recycled. We continue to engage with municipalities and recycling facilities to advance the quantity and quality of recycled polypropylene and have committed $10 million toward the advancement of polypropylene recycling in the U.S. through the Polypropylene Recycling Coalition, an effort led by The Recycling Partnership and funded by leading brands, recyclers, converters and producers of polypropylene.[3]

The Commission concludes that the statements “that [Keurig’s] recyclability testing had validated that pods could be “effectively recycled” were incomplete and inaccurate because they did not also disclose the negative feedback from recycling companies involved in the testing concerning the recyclability of pods.”

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. But would the Commission also have determined that the pods could not be “effectively” recycled if all recycling companies accepted them, but most consumers simply threw them in the trash bin because it was easier? In both cases—the recycling company seeking profits and the consumers seeking convenience—the pods could be effectively recycled, but intervening decisions by a third-party meant that it was probable that they would not be recycled. The former fact is not rendered false or misleading by the latter consequence of the intervening decision.

In any event, even if one were to accept the Commission’s misreading of Keurig’s statements, the Order nowhere states that they 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.” At most, these statements might be read to suggest that pod sales were a material portion of Keurig’s revenue in 2019. But “consumer research” indicating that “certain consumers” identified “environmental concerns” as one factor “among others . . . when deciding whether to purchase a Keurig brewing system” in 2016 may or may not offer useful insight into what factors are significant to consumers in 2019. Moreover, the Order’s description of the 2016 consumer research does not even show that recyclability was a material consideration for investors in 2016, let alone 2019. 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. The Commission’s pedantic parsing of Keurig’s recyclability statements and its $1.5 million penalty do little to disguise the weakness of this case. On the bright side, next time you get pulled over for speeding, you will have an excuse: “I am doing it to keep my car company’s 10-K from being misleading.”