United States District Court, S.D. Indiana, Indianapolis Division
EVA and HAROLD BARON, individually and on behalf of all others similarly situated, Plaintiffs,
ANGIE'S LIST, INC., et al., Defendants.
ENTRY ON DEFENDANTS' MOTION TO DISMISS
WILLIAM T. LAWRENCE, District Judge.
This cause is before the Court on the Defendants' motion to dismiss (Dkt. No. 75). This motion is fully briefed and the Court, being duly advised, GRANTS the motion for the following reasons.
Investors in Angie's List, Inc. ("Angie's List"), a publicly-traded corporation with its principal place of business in Indianapolis, Indiana, have filed this putative class action alleging that corporate and individual officer malfeasance was responsible for Angie's List stock-price decline in 2013. The class period asserted by the Plaintiffs extends between February 13, 2013, and October 23, 2013.
Angie's List operates a subscription-based website that publishes customer reviews of "high cost of failure" services, i.e., home remodeling, plumbing, and roofing. "Highly rated" service providers-those who receive an "A" or "B" on an A through F scale-are then invited to advertise on the website, offering discounts and other promotions to Angie's List members. Lead Plaintiff United Food & Commercial Workers Local 464A Pension Fund ("Local 464A") filed a Consolidated Class Action Complaint ("the Complaint") (Dkt. No. 65) alleging that Angie's List, its Chief Executive Officer William S. Oesterle, its Chief Marketing Officer Angela R. Hicks Bowman, its Chief Accounting Officer Charles Hundt, its Chief Operating Officer Mark Howell, and its Chief Financial Officer Robert R. Milliard made materially false and misleading statements regarding: 1) the stability and predictability of the two core revenue streams that the paid membership model ("PMM") provided to Angie's List; and 2) Angie's List's present success and long-term sustainability based upon those streams. The facts alleged in the Plaintiffs' Complaint are as follow.
A. The Paid Membership Model
The PMM is unique to Angie's List and sets it apart from its competitors. In order to be a member of Angie's List-to have access to the website and the ability to post and view ratings of service providers-one has to pay a subscription fee. This is in contrast to, for instance, Yelp!, where anyone-for free-can post a review and read reviews posted by others. The benefits of the PMM were touted by the Defendants as follows: 1) it creates a membership base of consumers who are motivated, engaged, and willing to provide meaningful, reliable reviews; and 2) it provides a superior advertising platform for local service providers, as the membership base is comprised of "engaged, affluent, educated, and busy" consumers. Compl. ¶ 29. By charging membership fees, Angie's List was able to offer "a premium product." Id. ¶ 13.
The PMM generated a so-called "flywheel" of two separate, but related, predicable revenue streams: 1) membership subscription fees (which accounted for approximately 27% of Angie's List revenue in 2013); and 2) paid advertising contracts with local service providers (which accounted for approximately 73% of Angie's List revenue in 2013). As Defendant Howell stated, "the more members that [sign up], the more service providers that sign up[;] it drives word-of-mouth with the membership and they feed on themselves." Id. ¶ 30.
B. Expansion into New Markets
Since its inception in 1995, Angie's List has been expanding across the nation; it is now available in 253 markets. Angie's List divides its markets into cohorts according to the time period in which the markets transition to the PMM. For example, markets that were established prior to 2003, including Indianapolis, New York, San Francisco, and Washington, D.C, are the oldest, most mature cohort. Markets established after 2010 are the newest cohort.
The key growth strategy for Angie's List is to aggressively advertise in new markets to increase the membership base and expand the number of customer reviews. In order to accomplish this, Angie's List offers complimentary memberships to new members in the new markets. Within 24 to 30 months, the complimentary memberships transition to introductory rate memberships and then to fully paid memberships. Angie's List touted obtaining paid memberships as the key to its success; this is what gave it "an engaged user." Id. ¶ 37. As Defendant Oesterle noted, paying members are "ready, willing and able to consume the services, which makes them unbelievably valuable for the service companies." Id. Thus, the broader base of loyal and engaged members increased the number of local service providers that desired to advertise on the website, which in turn increased the advertising rates. This model of expansion was represented to work in Angie's List oldest and most mature cohort and was touted as providing a path for future expansion into new markets.
C. Price Cuts
In 2013, Angie's List began cutting the price of membership subscriptions in its oldest cohort. Specifically, "Angie's List dramatically reduced new member subscription fees by as much as 75% by offering memberships at near-complimentary introductory rates in established markets, such as Indianapolis, New York, Chicago, San Francisco, and Washington D.C., among others." Id. ¶ 54. The Complaint alleges that Angie's List
was [thus] effectively abandoning the core value proposition of the Company's PMM which: (i) compromised the predictability of the revenue derived from its member subscription fees; and (ii) impaired the PMM's ability to offer service providers a "qualified" and "engaged" pool of potential customers-the very asset that the Company routinely touted as the critical feature in securing and maintaining advertising revenues and in differentiating itself from its competitors.
Id. D. Defendants' Allegedly Misleading Statements
According to the Plaintiffs, the Defendants made several fraudulent statements between February and October 2013. Specifically, the Complaint alleges that the
Defendants' Class Period statements... were materially false and misleading when made because Defendants knowingly or recklessly misrepresented and/or failed to disclose that in order to remain competitive with the growing number of free services offered within the same markets where the Company operated, Angie's List was slashing membership prices charged to new members in existing markets-including in the Company's "oldest cohorts" and most well-established markets[.]"
Id. ¶ 9.
On February 13, 2013, Angie's List announced its fourth quarter 2012 financial results. In the accompanying press release, Defendant Oesterle contributed much of Angie's List's success to its oldest, most mature cohort, stating that "the operating characteristics of our oldest cohort continue to demonstrate the potential for the entire business." Id. ¶ 56. Similarly, in Angie's List's 2012 Form 10-K, 1Q 2013 Form 10-Q, and 2Q 2013 Form 10-Q, signed by Defendants Oesterle, Millard, and/or Hundt, the PMM was emphasized, noting that "subscription fees from members represent a significant source of working capital and provide a relatively predicable revenue stream, " and that "the markets in these older cohorts have begun to achieve penetration rates that allow us to transition beyond introductory membership and advertising rates." Id. ¶ 57.
During the May 21, 2013, conference, the PMM was again the emphasis. Defendant Oesterle noted that Angie's List was "the premium provider in the marketplace" because "[w]e charge. Other people don't." Id. ¶ 58. Defendant Howell similarly highlighted the success of the PMM during the August 15, 2013, conference, noting that "the more members that you get through that first 30 months, the more service ...