Kolominsky v. Root, Inc.

667 F.Supp.3d 685

Ilia KOLOMINSKY, Individually and on Behalf of All Others Similarly Situated, Plaintiff, v. ROOT, INC., et al., Defendants.

Case No. 2:21-cv-1197

United States District Court, S.D. Ohio, Eastern Division

Filed March 31, 2023

Robert J. Wagoner, Dittmer, Wagoner & Steele, LLC, Gahanna, OH, J. Alexander Hood, II, Pro Hac Vice, Jeremy A. Lieberman, Pro Hac Vice, New York, NY, for Plaintiff Ilia Kolominsky.

Andrew P. Kimble, Biller & Kimble, LLC, Cincinnati, OH, for Plaintiff Bryan Anderson.

Joseph F. Murray, Murray Murphy Moul + Basil LLP, Columbus, OH, Jonah H. Goldstein, Pro Hac Vice, Timothy a.B. Folkerth, Robbins Geller Rudman & Dowd LLP, San Diego, CA, Michael Gerard Capeci, Pro Hac Vice, Robbins Geller Rudman & Dowd LLP, Huntington, NY, for Plaintiff Plumbers Local # 290 Pension Trust Fund.

William Darrell Kloss, Jr., Vorys Sater Seymour & Pease, Columbus, OH, Alison A. Doyle, Pro Hac Vice, Christina N. Barreiro, Pro Hac Vice, David R. Marriott, Pro Hac Vice, J. Wesley Earnhardt, Pro Hac Vice, Joe Wesley Earnhardt, Cravath Swaine and Moore LLP, New York, NY, for Defendants Root, Inc., Alexander Timm, Daniel Rosenthal, Megan Binkley, Christopher Olsen, Doug Ulman, Elliot Geidt, Jerri Devard, Larry Hilsheimer, Luis Von Ahn, Nancy Kramer, Nick Shalek, Scott Maw.

Gregory Alan Harrison, Kelly E. Pitcher, Dinsmore & Shohl, LLP, Cincinnati, OH, Andrew Finn, Pro Hac Vice, Liang Hsuan Pai, Pro Hac Vice, Sharon Leigh Nelles, Pro Hac Vice, Sullivan & Cromwell LLP, New York, NY, for Defendants Barclays Capital Inc., Goldman Sachs & Co. LLC, Morgan Stanley & Co. LLC, Wells Fargo Securities, LLC.

OPINION AND ORDER

MICHAEL H. WATSON, JUDGE

Defendants Root, Inc. ("Root"), Alexander Timm, Daniel Rosenthal, Megan Binkley, Christopher Olsen, Doug Ulman, Elliot Geidt, Jerri DeVard, Larry Hilsheimer, Luis von Ahn, Nancy Kramer, Nick Shalek, and Scott Maw (collectively, the "Root Defendants"), jointly with Goldman Sachs & Co. LLC, Morgan Stanley & Co. LLC, Barclays Capital Inc., and Wells Fargo Securities, LLC's (the "Underwriter Defendants"; together with the Root Defendants, "Defendants") move to dismiss the Amended Complaint. ECF No. 57. For the reasons below, the Court GRANTS Defendants' motion.

I. BACKGROUND

A. Factual Background

Plumbers Local #290 Pension Trust Fund ("Plaintiff") brings this putative class action on behalf of all who purchased Root's Class A common stock traceable to the Registration Statement issued in connection with Root's initial public offering ("IPO") between October 28, 2020 (the date of the IPO) and August 12, 2021.

Root, a Columbus-based holding company founded in 2015, operates a technology company that "seeks to disrupt the traditional automobile insurance model by pricing and quoting insurance through a mobile phone app and using the app to collect driving data from Root's customers." Am. Compl. ¶¶ 4, 23, ECF No. 37. Through this model, Root believes it is better able to screen risky drivers compared to traditional automobile insurers like GEICO, Allstate, and Progressive. Id. Defendant Alexander Timm co-founded Root and served as Root's CEO and as a member of Root's board of directors (the "Board"); Defendant Daniel Rosenthal was Root's Chief Financial Officer at the time of the IPO, as well as a director on the Board; Defendant Megan Binkley was Root's Chief Accounting Officer at the time of the IPO; Defendants Christopher Olsen, Doug Ulman, Elliot Geidt, Jerri DeVard, Larry Hilsheimer, Luis von Ahn, Nancy Kramer, Nick Shalek, and Scott Maw were all directors on the Board at the time of the IPO. Id. ¶¶ 24, 27-37. Defendants Goldman Sachs & Co. LLC, Morgan Stanley & Co. LLC, Barclays Capital Inc., and Wells Fargo Securities, LLC served as underwriters and co-lead book running managers of the IPO. Id. ¶ 39.

On October 28, 2020, Root executed its IPO, and Root Class A common stock began trading on the NASDAQ. Id. ¶ 60. Leading up to its IPO, Root filed a Registration Statement with the SEC, becoming effective on October 27, 2020. Id. ¶¶ 53-57.

Much of this case revolves around the language of the Registration Statement and certain public statements (and omissions) made by the Root Defendants preceding the IPO. Particularly important to Root, and central to this case, is Root's customer acquisition cost ("CAC"), which reflects the average cost of acquiring a new customer. Id. ¶¶ 73, 75-79, 106. CAC is a critical performance metric for newer companies like Root because it measures how well a company can improve its profitability as it continues to grow. Id. ¶ 75. A company's CAC is also critical to investors.

As articulated in the Registration Statement, Root's purportedly low CAC compared to traditional automobile insurance companies provided Root with a competitive advantage. Id. ¶¶ 79. Examples from the Registration Statement include:

• Within digital marketing we use data science models to dynamically bid on the basis of expected lifetime value. Over time we believe the ongoing data we accumulate through growth will fuel a pricing advantage for target customers, driving improved conversion and a cost of acquisition advantage in all channels.

• Engaging our customers and prospective customers directly through the mobile device gives us access to an underutilized distribution channel, mobile, through which many incumbents have historically had difficulty profitably acquiring customers. Through our hyper-targeted, data-driven and ever-improving performance marketing capabilities, we have been able to acquire customers for below the average cost of doing so through each of the direct and agent-based channels.

• The efficiency of our customer acquisition strategy has resulted in a cost of acquisition advantage versus direct and agent channels. While our customer acquisition costs can vary by channel mix, by state or due to seasonality, over the period from August 2018 to August 2020 our average customer acquisition cost was $332. In the near term, as we expand our licensed footprint to 50 states, we will invest in our national brand, which will increase awareness, build credibility and support all four of our distribution channels.

Id. ¶¶ 106 (alteration in original).

But Root's CAC as of the IPO was higher—and would continue to be higher—than the $332 average disclosed in the Registration Statement. This cost increase was allegedly triggered by Root's planned nationwide expansion (at the time of the IPO, Root was licensed to sell insurance in 36 states). Id. ¶¶ 89-91; Registration Statement at 2, ECF No. 57-2. As alleged, Root's "increased marketing expenditures had caused Root's customer acquisition cost as of the IPO to be virtually the same as those of the traditional insurers that the Registration Statement stated the Company had a competitive advantage over in terms of customer acquisition costs." Am. Compl. at ¶ 91, ECF No. 31. Thus, Root's elevated CAC signaled the loss of its competitive advantage. Id. ¶ 107.

This nationwide marketing rollout began prior to the IPO, but Root allegedly did not disclose its increased marketing expenditures until after the IPO. Id. ¶¶ 93-94. Defendants Timm and Rosenthal did, however, participate in a "roadshow" (i.e., a series of meetings with prospective investors) prior to the IPO in which Defendant Timm discussed Root's focus on "becoming a national brand" and explained that, as part of those efforts, Root was "experimenting" with "some brand campaigns." Id. ¶ 124. Mr. Timm then noted that there was a "recent spike" in CAC arising "from some of this experimentation on brand." Id.

In addition to Defendant Timm's comments, Root's Registration Statement also indicated Root's intention to expand nationwide:

• [W]e intend to increase our presence in digital and traditional channel media and launch a national advertising campaign to build our brand awareness.

• We will continue to aggressively invest in domestic growth by becoming active in more states while creating brand awareness through a national marketing campaign.

• In the near term, as we expand our licensed footprint to 50 states, we will invest in our national brand, which will increase awareness, build credibility and support all four of our distribution channels.

• We are licensed in 36 states, of which we are currently active in 30 states, and our goal is to be licensed in all 50 states by early 2021.

• [W]e will incur additional expenses to support our growth[.]

• Our expansion within the United States and any future international expansion strategy will subject us to additional costs and risks, and our plans may not be successful.

Registration Statement at 2, 9, 22, 28, 83, 120, ECF No. 57-2.

Along with the above representations, the Registration Statement included the following risk disclosures:

• You should not rely on forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this prospectus primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition and operating results.

• The marketing of our insurance products depends on our ability to cultivate and maintain cost-effective and otherwise satisfactory relationships with digital app stores, in particular, those operated by Google and Apple. As we grow, we may struggle to maintain cost-effective marketing strategies, and our customer acquisition costs could rise substantially.

• Our ability to attract new customers will depend on a number of factors, including the pricing of our products, offerings of our competitors, our ability to expand into new markets, and the effectiveness of our marketing efforts.

• We may lose existing customers or fail to acquire new customers.

• Our expansion into new markets may place us in unfamiliar competitive environments and involve various risks.

• [D]ue to other factors beyond our control, we may be unable to attract new customers rapidly and cost-effectively.

Id. at 22,...