Root Wins Dismissal of Putative Securities Class Action

On March 31, 2023, the U.S. District Court for the Southern District of Ohio granted a motion to dismiss with prejudice all claims brought against Cravath clients Root, Inc. and certain of its officers and directors (collectively, “Root”). Root is an insurance company, primarily focused on automobile insurance, with a “mobile‑first”, data‑driven business model that makes risk assessments, in part, based on complex behavioral data, including an individual’s actual driving behavior.

A purported amended class action complaint was filed against Root and Root’s underwriters on behalf of certain Root shareholders alleging that defendants made false or misleading statements and omissions in violation of Sections 10(b), 12(a)(2) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b‑5 thereunder, and of Sections 11 and 15 of the Securities Act of 1933, in connection with and following Root’s initial public offering by allegedly misdescribing Root’s “customer acquisition costs” (“CAC”).

Judge Michael H. Watson dismissed all claims with prejudice. With respect to the complaint’s Section 10(b), 11 and 12(a)(2) claims, the Court held that they were required to satisfy Rule 9(b)’s heightened pleading requirements applicable to fraud-based claims because the “gravamen” of the complaint “sounds in fraud”, notwithstanding the complaint’s “express statements disavowing any fraud”. The Court further held that none of the alleged misstatements or omissions were actionable, including because (i) the “bespeaks caution” doctrine excused any liability for forward‑looking statements relating to Root’s CAC that were accompanied by meaningful cautionary statements; (ii) truthful statements concerning Root’s past performance could not give rise to liability and did not create any duty to provide more up‑to‑date information, especially in light of disclosures that “explicitly warned investors against relying on Root’s past performance when setting expectations for the future”; (iii) “mere corporate puffery” is unactionable as a matter of law; and (iv) with respect to Root’s alleged loss of its competitive advantage, “the Amended Complaint places Root’s fluctuating CAC in a vacuum, which is insufficient to allege that it no longer possessed a competitive advantage vis‑a‑vis other channels in the insurance industry”. The Court also rejected any liability under Section 11 based on SEC Item 101, Item 103 or Rule 408 or for scheme liability under Section 10(b), Rule 10b‑5(a) or Rule 10b‑5(c).

The Cravath team included partner Wes Earnhardt and associates Nicholas S. Medling and Margaret E. Anderson. Abraham C. Weiss also worked on the matter.

The case is Kolominsky v. Root, Inc., No. 2:21-cv-1197.