Beyond CPSC Recalls: Peloton Wins Motion To Dismiss on Investors’ Bike Recall Claims

When a company recalls its products, there can be additional legal risks stemming from the recall, including personal injury litigation related to the hazard, consumer class action claims, and enforcement investigations by the government regulator. Another risk that some recalling companies may face is that of a shareholders’ lawsuit for alleged misrepresentations and/or omissions relating to the product recall. A federal court decision in favor of Peloton Interactive, Inc. (Peloton) provides insights into how consumer product companies may protect themselves in federal securities litigation related to product recalls.

Peloton’s Recall of 2.2 Million Exercise Bikes

In May 2023, Peloton voluntarily recalled approximately 2.2 million exercise bikes due to fall and injury hazards. Two years earlier, on May 5, 2021, Peloton recalled approximately 125,000 treadmills, which resulted in Peloton paying a $19 million civil penalty to the U.S. Consumer Product Safety Commission (CPSC) for late reporting under the Consumer Product Safety Act (CPSA). Following the treadmill recall, Peloton and its leadership reportedly made several statements to the public and investors, including in Peloton’s securities filings, assuring them that Peloton was committed to consumer safety and was working “to further enhance the safety of [Peloton’s] products.”¹ However, investors allege that during this time, Peloton was receiving “a cascade of complaints that the seat post on [certain exercise bikes] was detaching while in use . . . .”² Specifically, Peloton was reportedly receiving these complaints from reports to customer service, Peloton’s social media pages, and directly from CPSC.³ In total, Peloton apparently received “at least [thirty-five] reports of the seat post breaking ‘during use.’”⁴

Peloton’s risk disclosures stated Peloton’s commitment to consumer safety, and also acknowledged that the company’s products and services could be affected by design and manufacturing defects that could negatively impact its business and reputation.⁵ Specifically, Peloton’s risk disclosures stated:

Our products and services may be affected from time to time by design and manufacturing defects, real or perceived, that could adversely affect our business and result in harm to our reputation. We offer complex hardware and software products and services that can be affected by design and manufacturing defects.... Defects may also exist in components and products that we source from third parties. Any defects could make our products and services unsafe and create a risk of environmental or property damage and/or personal injury.... [T]he occurrence of real or perceived defects in any of our products, now or in the future, could result in additional negative publicity, regulatory investigations, or lawsuits filed against us, particularly if Members or others who use or purchase our Connected Fitness Products are injured.⁶

Investors were apparently first informed of the seat post issue in Peloton’s third quarter Form 10-Q, which disclosed that Peloton had “accrued ‘$8.4 million of estimated contingent loss expense related to a voluntary corrective action plan . . . involving certain seat posts.”⁷ Peloton further disclosed that it had voluntarily notified CPSC of the issue and additional losses that could not be estimated may be incurred.⁸

Following the exercise bike recall announcement, Peloton’s Class A common stock price “fell $0.67 per share, or approximately 9.3%, from a close of $7.53 on May 10, 2023, to close at $6.86 on May 11, 2023.”⁹ On May 24, 2023, Peloton’s stock reportedly fell “over 5% in response to” Peloton’s CEO stating that the “scope and cost of the [exercise bike recall] would be more extensive” than originally reported to investors.¹⁰ Approximately three months later, Peloton announced that the exercise bike recall “substantially exceeded” the expected cost, resulting in “an additional accrual of $40 million,” which reportedly increased reported losses by 600%.¹¹ Peloton’s stock price fell 22.6% at this news and closed at $5.41 per share on August 23, 2023.¹²

Investors File Suit

Investors promptly filed suit against Peloton alleging that the company had made materially false and misleading statements or omitted material facts about its business, operations, and compliance policies.¹³ Plaintiffs alleged that Peloton concealed and/or failed to disclose information, including the following:

• The affected seat posts were prone to breaking or detaching during use.
• Peloton did not remedy the seat post defect or suspend sales of the affected bikes, despite its recent CPSC recall experience with the treadmills.
• Peloton would need to recall millions of bikes.
• The risks posed by the seat post defect were not hypothetical and consumer safety was not prioritized.
• Peloton failed to immediately report the seat post defect to CPSC.
• Peloton attempted to cover up visible rust and/or corrosion on the inner frame of new exercise bikes before selling them at full price.
• Peloton understated reserves for future product recall expenses by at least $40 million and the indirect impact the recall would have on revenue generated by subscriptions to Peloton’s fitness classes.
• Peloton failed to disclose that the recall was CPSC-mandated.¹⁴

Court Finds in Favor of Peloton, Dismisses Lawsuit

In February 2025, Judge Margo Brodie of the United States District Court for the Eastern District of New York dismissed the investors’ allegations against Peloton, finding that the plaintiffs failed to plead any materially misleading statements or omissions, or any facts establishing that Peloton acted with fraudulent intent.¹⁵

Peloton had argued that plaintiffs’ claims related to the risk disclosures must fail because the statements upon which the allegations rely were (1) “accurate at the time they were made,” or (2) “otherwise inactionable.”¹⁶ The court agreed and found that Peloton’s risk disclosures were not materially misleading because Peloton “explicitly warned investors that [its] products” could be affected by design and manufacturing defects that would adversely affect business and harm Peloton’s reputation.¹⁷ Further, the court held that even though plaintiffs accused Peloton of knowing about the bike post issue, they did not allege “that Peloton knew, at the time of the risk disclosures, that approximately five customer complaints about the Bike seat posts . . . would later lead to a recall of every Bike Peloton sold between 2018 and 2023.”¹⁸ Therefore, Peloton could “not be held liable for statements that are only false in hindsight.”¹⁹ Additionally, the court found that Peloton did not violate any disclosure duties under the federal securities laws because Peloton did disclose the risk of design and manufacturing defects, as well as the potential for recalls to incur “significant costs and regulatory fines,” which was “the exact risk” that plaintiffs alleged Peloton did not disclose.²⁰

Next, Peloton posited that plaintiffs did not allege that its statement about the $8.4 million loss accrual was false or misleading when made, arguing the statement about future losses was protected by the bespeaks caution doctrine, and the loss estimate was an inactionable opinion.²¹ The court agreed again, finding that Peloton’s statements about the accrual were sufficiently couched by cautionary language indicating the recall expenses could increase from what was estimated.²²

Peloton also argued that the statement that the recall was “voluntary” was not false or misleading because “the recall was not mandatory under the CPSA or CPSC regulations.”²³ Plaintiffs argued that a reasonable investor “would not have understood ‘voluntary’ to mean that the recall was initiated by the CPSC.”²⁴ The court was not swayed, as the recall of the exercise bikes was not due to an adjudicated Commission Order following a hearing, a preliminary injunction or judicial termination by a U.S. district court judge, or the Secretary of the Treasury refusing to admit imports of the bikes for failing to comply with consumer product safety rules or for containing defects. The court therefore found Peloton’s description of “voluntary” aligned with the “ordinary meaning” of the word as “the CPSC did not require Peloton to recall the Bike pursuant to any legal authority.”²⁵

Peloton further argued that the plaintiffs did not allege facts establishing that it had “delayed reporting the seat post issue to the CPSC or otherwise failed to ‘cooperate’ with the CPSC regarding the seat post defect.”²⁶ The court agreed and found plaintiffs failed to sufficiently allege that Peloton’s statements that it worked cooperatively with CPSC were misleading because plaintiffs did not contest that (1) Peloton had voluntarily notified CPSC about the seat post defect, or (2) it had worked with the agency on a voluntary corrective action plan to remedy the defect.

The court next addressed plaintiffs’ allegations that Peloton’s statements about its corporate values, product safety, and product quality were false or misleading. The court disagreed with the plaintiffs’ allegations and held that “generic, indefinite statements of corporate optimism” were inactionable because “reasonable investors do not place substantial reliance on generalizations regarding a company’s health or the strength of a company’s product.”²⁷ Further, statements about corporate values are “mere corporate puffery” and therefore “do not give rise to securities violations.”²⁸ The court also found that plaintiffs failed “to allege any facts that the internal rust on the” exercise bikes that Peloton reportedly covered up was “related to any issues” with the product’s safety or performance.²⁹ Without any specific allegations that Peloton’s statements about the rust were false or contributed to the seat post issue, these claims failed.³⁰

Finally, Peloton asserted that plaintiffs’ scienter allegations were “generalized allegations about what Defendants purportedly must have known as a collective group,” which are not permissible allegations, and that plaintiffs failed to establish that Peloton was “aware of the need for a recall, or of a significant safety issue requiring disclosure,” prior to May 2023.³¹ The court agreed. In particular, the court was persuaded that plaintiffs did not sufficiently allege scienter because even if the defendants knew of “reports of approximately thirty-five seat post issues over multiple years, out of 2.2 million [exercise bikes] sold,” this does not support plaintiffs’ argument that these reports “would lead to a recall of every Bike Peloton sold between 2018 and 2023.”³² The court was also unpersuaded by plaintiffs’ allegations that Peloton’s past experiences with CPSC recalls put the defendants on notice because “[u]nrelated settlements and investigations or recalls by other companies do not support an inference of scienter.”³³

Accordingly, the court dismissed the litigation against Peloton. Plaintiffs have until April 11, 2025 to file a second amended complaint.

Takeaways

What does the decision in Tian v. Peloton Interactive, Inc. mean for consumer product companies? The opinion offers a few takeaways for companies to consider:

• Including language in risk disclosures acknowledging that the discovery of design and/or manufacturing defects could adversely affect the business both reputationally and financially may offer protection against future federal securities litigation.
• Using cautionary language when estimating and making other forward-looking statements about recall expenses to investors may allow a company to use the bespeaks caution doctrine to defend allegations that it misled investors if losses ultimately exceed the original loss estimate.
• Maintaining consistency with industry terminology and practice may insulate defendants from allegations that statements about interactions with government regulators — in this case, whether the recall was “voluntary” as that term is used in the industry — were false and misleading because courts will assume investors take into account the customs and practices of the relevant industry when evaluating an investment.

For questions about securities enforcement and compliance or compliance with the Consumer Product Safety Act, including timely reporting and recalls under Section 15(b) of the CPSA, please reach out to the authors or any of their colleagues on Arnold & Porter’s Securities Enforcement & Litigation or Consumer Product Safety teams.

© Arnold & Porter Kaye Scholer LLP 2025 All Rights Reserved. This Blog post is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.