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Perrigo Seeks Reconsideration in Investors’ Securities Suit

AUG. 16, 2021

In re: Perrigo Co. PLC Securities Litigation

DATED AUG. 16, 2021
DOCUMENT ATTRIBUTES

In re: Perrigo Co. PLC Securities Litigation

IN RE
PERRIGO COMPANY PLC SECURITIES LITIGATION

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK

DEFENDANTS' REPLY MEMORANDUM OF LAW IN FURTHER SUPPORT OF THEIR MOTIONS FOR RECONSIDERATION

FRIED, FRANK, HARRIS, SHRIVER & JACOBSON LLP

Samuel P. Groner
Samuel M. Light
One New York Plaza
New York, NY 10004
(212) 859-8000
samuel.groner@friedfrank.com
samuel.light@friedfrank.com

James D. Wareham (admitted pro hac vice)
James E. Anklam (admitted pro hac vice)
Katherine L. St. Romain (admitted pro hac vice)
801 17th Street, NW
Washington, DC 20006
(202) 639-7000
james.wareham@friedfrank.com
james.anklam@friedfrank.com
katherine.st.romain@friedfrank.com

Counsel for Defendant Perrigo Company plc

SIMPSON THACHER & BARTLETT LLP

Joseph M. McLaughlin
Amy L. Dawson
425 Lexington Avenue
New York, NY 10017
Tel: (212) 455-2000
jmclaughlin@stblaw.com
amy.dawson@stblaw.com

Counsel for Defendant Murray S. Kessler

DECHERT LLP

Hector Gonzalez
Three Bryant Park
1095 Avenue of the Americas
New York, NY 10036
Tel: (212) 698-3500
hector.gonzalez@dechert.com

Angela Liu (admitted pro hac vice)
35 West Wacker Drive
Suite 3400
Chicago, IL 60601
Tel: (312) 646-5816
angela.liu@dechert.com

Counsel for Defendant Ronald L. Winowiecki


TABLE OF CONTENTS

PRELIMINARY STATEMENT

ARGUMENT

I. PLAINTIFFS OFFER NO SUBSTANTIVE RESPONSE TO THE CLEAR ERRORS IDENTIFIED BY DEFENDANTS IN THE COURT'S OPINION

II. PLAINTIFFS' ATTEMPTS TO PROVIDE OTHER BASES FOR THE COURT'S DECISION FAIL

III. PLAINTIFFS' ASSERTION THAT THERE WAS SOME ALTERNATIVE BASIS FOR THE COURT'S DECISION ON FALSITY IS INCORRECT

IV. PLAINTIFFS CONCEDE THAT DEFENDANTS' EXPERT DEAN HOLDER ALSO OPINED ON ASC 450, TESTIMONY THAT UNEQUIVOCALLY SHOULD NOT BE EXCLUDED

CONCLUSION


PRELIMINARY STATEMENT1

Plaintiffs' Opposition (“Opp.”) barely addresses the arguments put forth in Defendants' Memorandum explaining why Defendants' motions for reconsideration should be granted. Defendants' arguments track the four rationales provided by the Court for its determination that ASC 450, rather than ASC 740, applied to Defendants' disclosure obligations and explained the clear error in each of those rationales. Rather than attempt to offer legal or factual support for those rationales, Plaintiffs' Opposition largely seeks to avoid the substance of the Court's analysis. To the extent that the Opposition attempts to provide any substantive reason for the Court's decisions, it does so on the basis of a different set of arguments than the rationales offered by the Court in the Opinion. For example, Plaintiffs cite to documents referring to ASC 450 related to the later disclosure of the Notice of Amended Assessment. Yet, Plaintiffs ignore the contemporaneous documentation and testimony by Perrigo, its multiple advisors, and its independent auditor EY that ASC 740 was the accounting standard actually applied to the Audit Findings Letter and subsequent November 8, 2018 Form 10-Q disclosure. As such, insofar as all parties have acknowledged (explicitly in the case of Defendants, implicitly in the case of Plaintiffs) the errors in the Opinion, the Court should grant Defendants' motions for reconsideration, reverse its finding excluding Defendants' accounting expert, and reverse the portion of its summary judgment decision granting summary judgment to Plaintiffs as to falsity (insofar as that decision was premised on the clear errors in the Opinion).

ARGUMENT

I. PLAINTIFFS OFFER NO SUBSTANTIVE RESPONSE TO THE CLEAR ERRORS IDENTIFIED BY DEFENDANTS IN THE COURT'S OPINION

The Court's Opinion identified “several reasons” for the Court's conclusion that “ASC 450 applies to the defendants' disclosure obligations.” Op., 2021 WL 2935027, at *2. Those reasons included:

  • the Court's interpretation of the Areas in which ASC 740 and ASC 450 fall in the Accounting Standards Codification (id. at *2-3);

  • the Court's interpretation of ASC 450's exclusionary language (id. at *3);

  • the Court's interpretation that ASC 740 “is about the recognition of currently payable income taxes” and “the taxes at issue here are not currently payable” (id.); and

  • the Court's interpretation that “ASC 450, rather than ASC 740, applies to uncertain tax positions based on capital” (id.).

In moving for reconsideration of the Court's Opinion, Defendants demonstrated why these rationales for the Court's decision are clearly erroneous. The Court: (i) misinterpreted the import of ASC 740 appearing in the “Expenses” Area of the Accounting Standards Codification, as ASC 740 relates to current and deferred assets, liabilities, and expenses; (ii) overlooked the plain meaning of ASC 450's exclusionary language; (iii) overlooked the text of ASC 740 explaining its applicability to a company's previously filed tax returns; and (iv) confused a tax “on capital” with income taxed at a capital gains rate.

First, rather than addressing the substance of this argument, Plaintiffs argue that the “Court did not determine that ASC 740 does not apply solely because it appears in the 'Expenses' Area of the ASC.” Opp. at 13-14. The Court's Opinion asserted the “Expenses” argument for the first time, without briefing from the parties, in support of the conclusion that ASC 450, and not ASC 740, applies to the disclosures at issue. Op., 2021 WL 2935027, at *2. As explained in Defendants' Memorandum, the Court's use of the “Areas” to support its holding that ASC 740 does not apply to recognition or disclosure of taxes paid in a prior year is belied by the Financial Accounting Standards Board's own specific explanation that an “Area” cannot be used to exclude the application of an applicable Section of the Accounting Standards Codification. Defs.' Mem. at 3-4. Plaintiffs fail to respond to this clear guidance from the FASB as to how to use its own Accounting Standards Codification. Plaintiffs also fail to respond to Defendants' arguments that: (i) Sections within an Area do not apply solely to the financial statement element referenced by that Area (id. at 4); and (ii) the Court's reading of ASC 450 would put the recognition and disclosure of uncertain income taxes in two entirely different Areas (id. at 5). In failing to offer any support for the Court's primary rationale, Plaintiffs implicitly concede the error in the Court's analysis.

Second, Plaintiffs claim that Defendants simply repeat past arguments regarding ASC 450's exclusionary language. Opp. at 14-15. But in response to the Opinion, Defendants also brought to the Court's attention that the specific accounting guidance cited by the Court, Op., 2021 WL 2935027, at *3, supports Dean Holder's explanation that ASC 450-20-15's exclusionary language encompassed both disclosure and recognition. Defs.' Mem. 5-6. Plaintiffs offer no response on the merits, as they could not. Instead, Plaintiffs make a flawed procedural argument. This procedural argument, however, fails because, “it may be an abuse of discretion to let stand an error of law brought to [the court's] attention in a timely manner” and “it is an abuse of discretion not to correct [an] obvious factual mistake.” Cruz v. Barhart, 2006 WL 547681, at *2, 4 (S.D.N.Y. Mar. 7, 2006) (Cote, J.) (granting motion for reconsideration where the court's previous interpretation of a regulation was in error).

Third, Plaintiffs do not dispute that ASC 740 applies to income tax positions in previously filed tax returns, consistent with Defendants' position that ASC 740 has specific disclosure requirements for income tax positions “taken during a prior period” (Defs.' Mem. at 6-7) and contrary to the Court's decision that ASC 740 only applies to “the recognition of currently payable income taxes.” Op., 2021 WL 2935027, at *3. Rather, Plaintiffs argue (Opp. at 14 n.6) that the Court's mistaken holding that ASC 740 only applies to “the recognition of currently payable income taxes” does not matter because the Court also held that “[t]he Audit Findings Letter created a 'loss contingency' for the defendants” and “[t]hus, this case concerns a liability, not an expense.” Op., 2021 WL 2935027, at *3. As set forth above, the analysis by the Court of the purported distinction between the “Liabilities” and “Expenses” Areas of the Accounting Standards Codification was clearly erroneous.

Finally, with regard to Defendants' argument that the Court confused a tax “on capital” with income taxed at a capital gains rate, Plaintiffs argue that “Defendants' motion . . . impermissibly raises . . . arguments they already fully raised to the Court in prior briefing and that this Court already clearly considered and rejected.” Opp. at 15. However, Plaintiffs fail to account for the fact that the Court overlooked the prior briefing on that very issue. Indeed, the Court itself stated that it believed that neither party had “address[ed] the footnote in Perrigo II” (Op., 2021 WL 2935027, at *2) in which the Court first conflated a tax “on capital” with income taxed at a capital gains rate (even though, as Plaintiffs concede, the parties did in fact address that issue in prior briefing). Where, as here, a court has overlooked “factual matters that were put before it on the underlying motion,” it is proper for a party to bring those factual matters to the Court's attention in the context of a motion for reconsideration. See Barbaro v. United States ex rel. Fed. Bureau of Prisons FCI Otisville, 2006 WL 3161647, at *1 (S.D.N.Y. Oct. 30, 2006) (Cote, J.) (granting motion for reconsideration because defendants “identified two issues raised in the briefs on the original motion that the Court did not address in the Opinion”).

Likely because Plaintiffs have no response to this argument on the merits, they fail to address the authorities cited by Defendants demonstrating that ASC 740 applies to income taxed at a capital gains rate (as opposed to a tax “on capital”). Plaintiffs further fail to properly address the fact that their own accounting expert, Mr. Devor, conceded this point during his deposition. See Defs.' Mem. at 9. Instead, Plaintiffs merely argue that the Court must have already considered those arguments and found some unstated reason for rejecting them. Opp. at 15-16. The Court did not do so in its Opinion.

II. PLAINTIFFS' ATTEMPTS TO PROVIDE OTHER BASES FOR THE COURT'S DECISION FAIL

Plaintiffs devote the vast majority of their Opposition to searching for alternative bases for the Court's holdings rather than the actual reasons cited by the Court. Op., 2021 WL 2935027, at *2. None of those alternative bases are adequate to support the Court's rulings.

First, Plaintiffs argue that Defendants never asserted at the pleading stage that ASC 450 did not apply here and that this “undercuts any contention that ASC 740 is the relevant standard here.” Opp. at 10 (relying solely on one paragraph in the background section of the Opinion, Op., 2021 WL 2935027, at *2). This argument fails. The Second Amended Complaint (“SAC”) alleged that three GAAP provisions were at issue: ASC 450, ASC 855, and ASC 740. SAC ¶¶ 99-110, 121. Accepting those allegations as true at the pleading stage, as Defendants were required to do, Defendants argued that the conduct described in the SAC complied with each of those provisions — including not only ASC 450, but ASC 740 as well. ECF 66 at 26-30; ECF 69 at 7-8. Defendants have never put forth any argument that undercuts their contention that ASC 740 is the relevant standard.

Where, as here, at an earlier stage in the proceedings, “the parties did not present [an] issue as an adversarial matter to be resolved by the court,” the court's “treatment of this uncontested matter as undisputed at a prior stage of this litigation did not, therefore, establish it as the law of this case.” Nucap Indus., Inc. v. Robert Bosch LLC, 273 F. Supp. 3d 986, 1004 (N.D. Ill. 2017); see also Maraschiello v. City of Buffalo Police Dep't, 709 F.3d 87, 97 (2d Cir. 2013) (court is not precluded “from granting summary judgment based on evidence after denying a motion to dismiss based only on the plaintiff's allegations,” especially where the evidence reflected that “the situation was a good deal more complicated” than it appeared from the pleadings); FDIC v. Stahl, 89 F.3d 1510, 1523 n.7 (11th Cir. 1996) (reversing district court's decision to treat determination at the pleading stage as law of the case); Krys v. Aaron, 106 F. Supp. 3d 472, 476, 480 & n.7 (D.N.J. 2015) (law of the case doctrine did not apply because at the pleading stage the court had not “actually and fully considered” the issue and lacked “the robust and nuanced . . . discussion and expert analysis received by this Court in connection with the [summary judgment] motion”).

Second, Plaintiffs misleadingly assert that “Defendants have never once been able to identify a single shred of evidence showing that they ever analyzed the issue of whether to disclose the €1.6 billion liability in the November 8, 2018 Form 10-Q under ASC 740.” Opp. at 3. This assertion is false. For example:

  • Michael Lindemann, Perrigo's Vice President of Financial Reporting and Shared Services, testified that EY and Perrigo's tax team evaluated the Audit Findings Letter under FIN 48, the predecessor of ASC 740.2 ECF 258-2 at 190:10-20.

  • On November 2, 2018, Hendrik Bogers, Perrigo's then Vice President of Global Corporate Tax, relayed to Mr. Lindemann that he had spoken to EY and that EY “would be okay with this kind of disclosure (no need for FIN[ ]48 calc[ulations]).” ECF 214-82.

  • Jay Preston, the signing partner from EY's audit team, testified that EY evaluated the Irish Revenue audit “under ASC 740 as an income tax matter.” ECF 214-63 at 33:25.

  • Perrigo's management representation letter to its auditor, EY, dated November 7, 2018 prior to filing the Form 10-Q, makes it clear that Defendants applied ASC 740 to the accounting disclosure of the Audit Findings Letter. Perrigo specifically addressed the Audit Findings Letter in the representation letter section on accounting for uncertain tax positions under ASC 740. ECF 214-87. No mention or evaluation of the Audit Findings Letter is included in the separate section of the representation letter pertaining to contingent liabilities (and ASC 450), as this accounting standard was not applicable.

  • Perrigo's accounting memorandum, dated November 8, 2018, sent to Mr. Preston, explicitly analyzes the Audit Findings Letter under the requirements of ASC 740. See ECF 214-89 (“Tax positions have been reflected in the consolidated financial statement in accordance with ASC 740, Income Taxes. . . . We believe that our tax returns as filed were appropriate and that no reserves for uncertain tax positions related to the Irish taxation of the Tysabri transactions are needed.”); see also ECF 217 ¶ 200 (“Mr. Preston and Mr. Stauffer told Mr. Bogers that so long as Perrigo could say that there were 'no new facts that would make [Perrigo] reconsider [its] position,' the 10-Q did not need to include any potential liability calculation.”).

Plaintiffs cite documents analyzing disclosure in accordance with ASC 450, which they classify as “contemporaneous” documents. Opp. at 11. Yet, in the same sentence, Plaintiffs admit (as they must) that all their cited documents post-date the November 8, 2018 10-Q and are from the period “after Perrigo received the NOA.” Opp. at 11. The reason that Plaintiffs stretch to cite documents that are not in fact “contemporaneous” with the 10-Q disclosure decisions concerning the Audit Findings Letter is because all contemporaneous documents, as set forth above, make clear that Defendants analyzed disclosure decisions in the period leading up to the November 8 10-Q under ASC 740, not ASC 450.

III. PLAINTIFFS' ASSERTION THAT THERE WAS SOME ALTERNATIVE BASIS FOR THE COURT'S DECISION ON FALSITY IS INCORRECT

Plaintiffs contend that the Court's Opinion held that “the November 8, 2018 Form 10-Q disclosure was false and misleading as a matter of law regardless of GAAP or ASC 450.” Opp. at 12, 16. However, the Court's analysis was premised on its finding that the November 8, 2018 10-Q “did not comply with ASC 450,” and was, therefore, “presumptively misleading.” SJ Op., 2021 WL 3005657, at *6; see id. at *4-7. The Court specifically held that “Perrigo had a duty to disclose under GAAP, and its failure to include the €1.6 billion figure from the Audit Findings Letter in its November 2018 Form 10-Q violated GAAP. As a result, the omission of the €1.6 billion is 'presumptively misleading or inaccurate.'” Id. at 17. The Court found that Perrigo had a duty to disclose under ASC 450's “more than remote” possibility standard, rather than ASC 740's more permissive “more likely than not” standard. The Court never found — nor have Plaintiffs ever argued — that Perrigo's disclosures were misleading for any reason other than an alleged GAAP violation.

IV. PLAINTIFFS CONCEDE THAT DEFENDANTS' EXPERT DEAN HOLDER ALSO OPINED ON ASC 450, TESTIMONY THAT UNEQUIVOCALLY SHOULD NOT BE EXCLUDED

Regardless of the Court's errant determination that ASC 450, as opposed to ASC 740, applies to Defendants' disclosure obligations, it was clear error to exclude the entirety of Dean Holder's expert opinions insofar as Dean Holder's report specifically addresses ASC 450 and opines that Mr. Devor failed to demonstrate that Defendants' disclosures did not comply with GAAP even if one were to apply ASC 450. Plaintiffs concede (as they must) that Dean Holder's report specifically addresses ASC 450. Opp. at 16. Plaintiffs' only argument for why Dean Holder's testimony about ASC 450 should be excluded is premised on their faulty argument that the Court held that the November 8, 2018 Form 10-Q “was false or misleading as a matter of law under both ASC 450 and independently under the federal securities laws.” Opp. at 16. As set forth above (supra Sec. III.), the Court's holding that the disclosure violated the federal securities laws was premised on the Court's finding that ASC 450 applied and required disclosure. Moreover, even if the Court would have made such a holding, there is no more reason to exclude testimony by Dean Holder about the contours of disclosure obligations pursuant to ASC 450 than there is reason to exclude the testimony by Plaintiffs' expert about the same topic. Because the experts have competing views about the contours of disclosure obligations pursuant to ASC 450, the Court should let the jury decide that issue after hearing the views of both experts. See Washington v. Kellwood Co., 105 F. Supp. 3d 293, 326 (S.D.N.Y. 2015) (discussing that it is the role of the factfinder to determine which expert is more trustworthy and credible). The grant of summary judgment on falsity should thus be reversed not only because the applicable accounting standard is a jury question, but also because, even if ASC 450 were the applicable accounting standard, the parties' experts have competing views about the contours of disclosure obligations under ASC 450.

CONCLUSION

For the foregoing reasons, Defendants respectfully request that the Court grant their Motions for Reconsideration.

Dated: August 16, 2021

Respectfully submitted,

FRIED, FRANK, HARRIS, SHRIVER & JACOBSON LLP

By: Samuel P. Groner
Samuel M. Light
One New York Plaza
New York, NY 10004
Telephone: (212) 859-8000
Facsimile: (212) 859-4000
samuel.groner@friedfrank.com
samuel.light@friedfrank.com

James D. Wareham (admitted pro hac vice)
James E. Anklam (admitted pro hac vice)
Katherine L. St. Romain (admitted pro hac vice)
801 17th Street, NW
Washington, DC 20006
Telephone: (202) 639-7000
Facsimile: (202) 639-7003
james.wareham@friedfrank.com
james.anklam@friedfrank.com
katherine.st.romain@friedfrank.com

Counsel for Defendant Perrigo Company plc

SIMPSON THACHER & BARTLETT LLP

By: Joseph M. McLaughlin
Amy L. Dawson
425 Lexington Avenue
New York, NY 10017
Tel: (212) 455-2000
jmclaughlin@stblaw.com
amy.dawson@stblaw.com

Counsel for Defendant Murray S. Kessler

DECHERT LLP

By: Hector Gonzalez
Three Bryant Park
1095 Avenue of the Americas
New York, NY 10036
Tel: (212) 698-3500
hector.gonzalez@dechert.com

Angela Liu (admitted pro hac vice)
35 West Wacker Drive
Suite 3400
Chicago, IL 60601
Tel: (312) 646-5816
angela.liu@dechert.com

Counsel for Defendant Ronald L. Winowiecki

FOOTNOTES

1Unless noted, when quoting text, this Reply Memorandum omits internal citations, emphasis is added in italics, and alterations are added in brackets. Defined terms have the same meaning as in Defendants' Memorandum of Law in Support of Their Motions for Reconsideration, ECF 280 (“Defendants' Memorandum” or “Defs.' Mem.”).

2See Holder Rep. ¶ 56, ECF 231-2 (“To address the diversity in practice, the FASB clarified the financial accounting and reporting for uncertain tax positions by issuing FIN 48. FIN 48 was then codified in the FASB's Accounting Standards Codification as ASC 740 in 2009.”).

END FOOTNOTES

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