Keurig Dr Pepper Inc. has agreed to pay $1.5 million to settle a matter waged against it by the U.S. Securities and Exchange Commission (“SEC”) over recycling-centric advertising claims. In its September 10 order, the SEC charged Keurig Dr Pepper Inc. (“Keurig”) with making inaccurate statements regarding the recyclability of its K-Cup single use beverage pods in its 2019 and 2020 annual reports. The regulator revealed that Keurig has agreed to a cease-and-desist order and to pay a $1.5 million civil penalty and in order to settle the matter – albeit without admitting or denying the findings in the SEC’s order.
According to the SEC’s filing, Keurig asserted in its 2019 and 2020 Form 10-K filings that its testing with municipal recycling facilities validated its claims that its K-Cup pods “can be effectively recycled.” The problem, according to the SEC, is that Keurig’s statements were “incomplete and therefore inaccurate” because the Plano, TX-headquartered company did not mention the negative feedback that it received from two significant recycling companies. These companies indicated that they had no present intention to accept the Keurig pods for curbside recycling due to concerns about their “commercial feasibility.”
This omission was critical, the SEC found, as while Keurig’s tests showed that pods could be sorted from other materials during the recycling process, it failed to disclose that the recyclability of the pods was limited by market factors – namely, that key recycling facilities did not find it financially viable to process the pods. In its order, the SEC stated that “Keurig’s statements in these Forms 10-K that its recyclability testing had validated that pods could be ‘effectively recycled’ were incomplete and inaccurate” in light of its failure to mention such negative feedback.
With the foregoing in mind, the SEC charged Keurig with violating Section 13(a) of the Securities Exchange Act of 1934 and Rule 13a-1 thereunder, which require issuers of securities to file with current and accurate information in periodic reports.
Full Disclosure and Disclosure Controls & Procedures
The settlement is notable beyond its immediate impact on Keurig, as it drives home the importance of ensuring that companies’ public disclosures are complete and not misleading in light of undisclosed information. “When a company speaks to an issue in its annual report, they are required to provide information necessary for investors to get the full picture on that issue so that investors can make educated investment decisions,” John T. Dugan, Associate Director of the SEC’s Boston Regional Office, said in connection with the settlement.
At the same time, SEC’s action against Keurig highlights the importance of companies carefully considering how their sustainability claims could be interpreted – and weighed – by regulators, investors, and consumers, alike. The SEC specifically noted that not only do K-Cup pods comprise a significant percentage of net sales of Keurig’s coffee systems business segment, but research 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.
Another important aspect of the matter that retailers should note is the emphasis that the SEC placed on companies’ “disclosure controls and procedures.” Even if the SEC does not ultimately agree with a company’s disclosure decisions, Proskauer Rose LLP’s Frank Zarb and Louis Rambo stated in a recent note that “companies are no doubt in a stronger position vis-à-vis regulators if they can demonstrate adequate disclosure controls and procedures on whether certain statements are materially complete.”
Finally, the settlement is particularly striking as it indicates that the SEC may be widening its enforcement net. In addition to increasingly reviewing companies’ sustainability reports and other disclosures for inconsistencies with what is reported in SEC filings, the regulator appears to be focusing on a larger pool of potential targets. To date, the SEC’s enforcement staff “has been primarily focused on the funds industry” when it comes to “greenwashing” cases, according to Zarb and Rambo. However, the Keurig case “may indicate that, when it comes to ESG disclosure, the SEC is turning its attention to public companies as the courts weigh its new disclosure rules for public companies on climate change, notwithstanding recent reports that the SEC’s Enforcement Division has disbanded its ESG enforcement task force.”
TLDR: The Keurig settlement is significant, as it sends a strong message about increasing regulatory scrutiny over corporate sustainability claims and highlights the risks that companies could face when they make environmental or other sustainability-focused claims without disclosing important limitations.
Commissioner Peirce’s Dissent: It is worth noting that the SEC’s view was not unanimous. SEC Commissioner Hester Peirce dissented, arguing that Keurig’s claim that the pods “could” be recycled is not the same as a guarantee that the pods “would” be recycled. In her view, Keurig’s statements were factually accurate, as the pods were made of a recyclable material and testing confirmed that they could be sorted from other materials in the recycling process.
The case is In the Matter of Keurig Dr Pepper Inc., Administrative Proceeding File No. 3-22100 (U.S. Securities and Exchange Commission).
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