Root’s Sixth Circuit Win Affirming Dismissal of Putative Securities Class Action

On April 29, 2024, a three‑judge panel of the U.S. Court of Appeals for the Sixth Circuit ruled in favor of Cravath clients Root, Inc., an insurance company primarily focused on automobile insurance, and certain of its officers and directors (collectively, “Root”) in affirming the U.S. District Court for the Southern District of Ohio’s dismissal of a purported class action securities complaint. The decision is a precedential opinion that creates new law of the circuit.

In 2021, a complaint was filed against Root and Root’s underwriters on behalf of certain Root shareholders alleging that the defendants made false or misleading statements and omissions following Root’s initial public offering. The complaint alleged defendants misdescribed Root’s “customer acquisition costs” (“CAC”) in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b‑5 thereunder, and Sections 11, 12(a)(2) and 15 of the Securities Act of 1933. The district court dismissed the complaint in its entirety and held, among other things, that (a) Federal Rule of Civil Procedure 9(b)’s heightened pleading standard applied to all claims because the complaint sounds in fraud, (b) certain of Root’s statements concerning its CAC were true statements of past performance and therefore unactionable, and (c) the “Bespeaks Caution” doctrine excused any liability for forward‑looking statements relating to Root’s CAC that were accompanied by meaningful cautionary statements. The plaintiff appealed the district court’s decision to dismiss plaintiff’s Sections 11, 12(a)(2) and 15 claims on those bases.

A panel of three judges for the Sixth Circuit affirmed. The panel upheld the district court’s application of Rule 9(b) to the plaintiff’s claims under Sections 11 and 12(a)(2), creating new circuit law to hold that when a fraud claim and a negligence claim brought under the federal securities laws are grounded in one fraudulent course of conduct relying on one set of facts, the complaint sounds in fraud and Rule 9(b) applies. The panel additionally held that two of the three statements whose dismissal the plaintiff appealed were unactionable because they accurately described Root’s past CAC. The panel also created new circuit law by holding that the “Bespeaks Caution” doctrine shields companies from liability for forward‑looking statements contained in a registration statement or concerning an initial public offering that are accompanied by meaningful cautionary language. On that basis, the panel held that the third statement whose dismissal the plaintiff appealed was also unactionable. Finally, the panel affirmed dismissal of the plaintiff’s Section 15 claims because its Sections 11 and 12(a)(2) claims were properly dismissed.

The Cravath team was led by partners Wes Earnhardt and Michael P. Addis, who argued the appeal, and included associate Brent E. Bomkamp.

The case is Kolominsky v. Root, Inc., No. 23‑3392 (6th Cir.).