In re Irobot Corp. Sec. Litig.

527 F.Supp.3d 124

IN RE IROBOT CORPORATION SECURITIES LITIGATION

Civil Action No. 19-cv-12536-DJC

United States District Court, D. Massachusetts.

Filed March 12, 2021

MEMORANDUM AND ORDER

CASPER, United States District Judge

I. Introduction

Lead Plaintiffs Carpenters Annuity Trust Fund for Northern California and Carpenters Pension Trust Fund for Northern California ("Plaintiffs") have filed this lawsuit upon behalf of themselves and a proposed class under Fed. R. Civ. P. 23 against iRobot and its Chief Executive Officer ("CEO") Colin Angle ("Angle"), Chief Financial Officer ("CFO") Alison Dean ("Dean") and Chief Operating Officer ("COO") Christian Cerda ("Cerda") (collectively, "Defendants"), alleging securities fraud in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 ("Exchange Act") and Securities and Exchange Commission Rule 10b-5 ("Rule 10b-5"), promulgated thereunder, between September 13, 2017 and October 22, 2019 ("the Class Period"). D. 66. Defendants have moved to dismiss the consolidated amended complaint. D. 77. For the reasons discussed below, the Court ALLOWS the motion to dismiss.

II. Factual Background

The following facts are as alleged in the consolidated amended complaint, D. 66, and the Court accepts them as true for the purpose of resolving the motion to dismiss. Plaintiffs are shareholders of iRobot Corporation, a "global consumer robot company that primarily designs and builds robot vacuum cleaners ("RVCs") and other related products that autonomously clean consumers’ homes." D. 66 ¶ 61. Plaintiffs have brought this class action on behalf of "all persons and entities who purchased publicly traded common stock of iRobot during the Class Period and were damaged thereby." Id. ¶ 345.

iRobot's flagship product is the Roomba, launched in 2002 and was the first RVC "to succeed commercially." Id. ¶ 2. Two years after its launch, in 2004, Roomba sales "surpassed one million units" and by 2016 "over 14 million, with iRobot holding 70% market share of the global RVC market at that time." Id. ¶ 61. At the start of the Class Period, in September 2017, Roomba held an approximate 85% share of the U.S. RVC market. Id. ¶ 69. The Roomba accounted for 90% of iRobot's revenue during the Class Period, deeming it "by far [iRobot's] most important product." Id. ¶ 62.

A. Roomba Models and Tiers

During the Class Period, iRobot manufactured Roomba models sold "in two distinct tiers: (1) less expensive, entry-level models that had fewer and more basic features and older, less-sophisticated technology, and (2) more expensive, premium-tier models that included more higher-end features and up-to-date technology." Id. ¶¶ 63. The premium-tier Roomba sales accounted for 60% of iRobot's "overall Roomba revenue annually" during the Class Period with the entry-level Roomba sales accounting for the other 40%. Id. Before the launch of the new "e5" "mid-level" Roomba in September 2018, the "600 series" entry-level Roombas were sold at approximately $300, compared to the e5 which retailed at $449. Id. ¶ 64. The 800 and 900 series premium-tier Roombas, including extra features "such as dual, multi-surface brushes, proprietary camera-based navigation technology, advanced mapping technology, and Wi-Fi and smartphone connectivity" retailed "between $500 and $900, or more." Id. ¶ 65.

In September 2018, iRobot launched the i7 and i7+ premium-tier Roombas for $699 and $949, respectively. Id. ¶ 66. In May 2019, they released "the most expensive model in its history," the premium-tier s9 and s9+ models, sold at $999 and $1,299, respectively. Id. As part of its competitive business strategy, iRobot launched new premium-tier Roomba models every eighteen months to two years. Id. ¶ 67. iRobot implemented technology from older premium-tier Roombas into the entry-level 600 series models. Id. Plaintiffs allege that "[p]rior to and during the Class Period, Defendants repeatedly told investors that this strategy was key to iRobot's ability to stave off competition from companies that charged significantly less for their robotic vacuums." Id. ¶ 68. For example, in a February 8, 2018 fiscal year 2017 and fourth quarter 2017 earnings call, Angle explained that iRobot takes the "premium features and roll them down to ensure that [their] entry-level price points continue to be competitive and to ensure that [they] can hold off these lower tech entrants into the marketplace." Id.

B. Roomba's Market Share and Growth

During the Class Period, Defendants relayed to investors "that iRobot was experiencing rapid and substantial revenue growth across all of its primary global regions and that this growth would continue for years to come." Id. ¶ 70. During a March 1, 2018 analyst call, Angle said that iRobot had experienced nearly a 40% compound annual growth rate ("CAGR") in North America, 24% CAGR in Europe, Middle East and Africa and 14% CAGR in Asia-Pacific, highlighting that "on a global basis, the robot vacuuming segment [was] moving in a very exciting direction," wherein they anticipated "continued strong momentum for years to come." Id. In his words then, given the "massive amount of revenue growth expected in the U.S. (39%)," the U.S. market was crucial for iRobot's financial success. Id. ¶ 71.

C. Roomba's Increasing Competition in the RVC Market

iRobot "began facing mounting pressure from new competition entering the RVC market" as the RVC market "grew from only a small fraction of the worldwide overall vacuum cleaner in the market in the early 2000s to approximately 20% by 2016." Id. ¶ 72. Vacuum manufacturers Dyson, Bissell and Hoover launched RVCs beginning in 2014, 2015 and 2016 respectively, while electronic manufacturers Panasonic, LG and Samsung released RVCs in 2015 and 2016. Id. iRobot also faced competition from "new RVC specialists" Neato Robotics, bObsweep and ECOVACS Robotics. Id.

Neato launched its first RVC in 2010 and has since released other models including its most popular, the "Botvac." Id. ¶ 73. At the beginning of the Class Period, Neato had just launched its flagship RVC, Botvac D7 Connected, "one of its highest-end RVCs." Id. bObsweep introduced its RVCs, the bObi and bObi Pet, in the U.S. in 2015 and ECOVACS, began launching models such as its Deebot series in 2016. Id. By the start of the Class Period, there were at least twenty different manufacturers attempting to gain market share from iRobot in the United States. Id. ¶ 74. Notably, SharkNinja, one of iRobot's biggest competitors and the number one seller of traditional upright vacuums in the United States announced three models of RVCs: Shark ION 750, 720 and 700 on September 12, 2017, one day before the start of the Class Period. Id. ¶ 75-76. The Shark ION, along with other major competitors, would later be sold side-by-side with Roomba models at large online and retail stores including Amazon, Best Buy, Target, Walmart, Home Depot and Bed, Bath & Beyond. Id. ¶ 79. The Neato Botvac, Samsung Powerbot and bObsweep models all sold their vacuums at price points well below the cost of iRobot's models, with Samsung Powerbot, for instance, receiving better reviews from "top consumer electronics publications" than the comparable Roomba 980 for $300 less. Id. ¶ 78. Plaintiffs allege that, according to multiple former iRobot employees, during the Class Period, new SharkNinja models as well as other competing RVCs began to take up more shelf room at retail stores "previously dedicated exclusively to Roombas," iRobot's product. Id. ¶ 79.

Analysts at J.P. Morgan recognized the "competitive threat" of these newer RVC models, reporting in September 2017 that the Shark ION appeared to "match the capabilities of the iRobot Roomba 600 and 800 series, with a lower price." Id. ¶ 80. Analysts at Spruce Point Capital Management similarly reported on September 13, 2017 that "given Shark's historical success, [they] assume[d] that their entry into the market [would] translate into sales and margin pressure for iRobot beginning with Q4 2017." Id. ¶ 81.

D. iRobot's Alleged Material Misstatements or Omissions

Plaintiffs allege that Defendants iRobot and Angle, Dean and Cerda (collectively, the "Individual Defendants") "consistently and misleadingly reassured the market that the new competition did not threaten [iRobot's] market share advantage or impact iRobot's revenues and gross margins because Roombas were equipped with superior technology and features that differentiated them from the competition." Id. ¶ 83. They further allege that analysts "were encouraged" by Defendant's false and misleading statements, "remaining confident of [iRobot's] continued dominance in the RVC market despite this increased competitive market." Id. As the market became increasingly saturated with greater competition, Plaintiffs allege that iRobot and the Individual Defendants had knowledge that the rising competition has begun to "significantly erode" iRobot's market share by early 2018, but failed to disclose to investors these "material, adverse competitive trends" regarding iRobot's performance. Id. ¶ 84.

III. Procedural History

This class action was initiated on October 24, 2019 in the Southern District of New York. D. 1. The case was transferred to this Court. D. 19, 21. This Court consolidated related actions, appointed lead plaintiffs and lead counsel. D. 52. Plaintiffs filed the consolidated amended complaint on April 3, 2020. D. 66. Defendants have now moved to dismiss. D. 77. After oral argument, the Court took this motion under advisement. D. 87.

IV. Standard of Review

For allegations of securities fraud under Sections 10(b) and 20(a) of the Securities Exchange Act, Plaintiffs "must plead the circumstances of the fraud with particularity, pursuant to Rule 9(b)," Hill v. Gozani, 638 F.3d 40, 55 (1st Cir. 2011) (citation omitted) and pursuant to the Private Securities Litigation Reform Act ("PSLRA"), must also "specify each statement alleged to have been misleading [and] the reason...