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LUXOTTICA GROUP, S.P.A. v. BAUSCH & LOMB INC.

March 30, 2001

LUXOTTICA GROUP, S.P.A, PETITIONER,
v.
BAUSCH & LOMB INCORPORATED RESPONDENT.



The opinion of the court was delivered by: Pauley, District Judge.

MEMORANDUM AND ORDER

Luxottica Group S.p.A. ("Luxottica") moves for an order to compel Bausch & Lomb, Incorporated ("B & L") to submit disputes concerning the purchase of a business to an independent accountant for an arbitration or appraisal. B & L asks this Court to deny Luxottica's petition and requests further discovery. For the reasons stated below, Luxottica's motion is granted and B & L's application is denied.

BACKGROUND

In 1998, B & L, a New York corporation, began to explore the possibility of selling its worldwide non-prescription sunglass business. (See Declaration of Alan H. Farnsworth ("Farnsworth Dec.") ¶ 3.) To assist potential investors in evaluating its sunglass business, B & L compiled due diligence materials describing its financial and management histories, drafted a model purchase agreement, and prepared a Baseline Net Operating Assets Statement ("BNOAS") which valued the sunglass business's assets as of December 26, 1998 ("Baseline Date") at $397,125,000. (Farnsworth Dec. ¶¶ 6, 9; Farnsworth Dec., Ex. D.) B & L disclosed the accounting principles ("Accounting Principles") used to prepare the BNOAS in their due diligence materials. (Farnsworth Dec. ¶ 15.)

On April 28, 1999, after reviewing the due diligence materials, Luxottica, an Italian corporation, agreed to purchase B & L's sunglass business for approximately $600 million. (Farnsworth Dec. ¶ 14.) Since this price was derived partly from the BNOAS, the parties devised a procedure in the purchase agreement ("Agreement") authorizing post-closing price adjustments in the event that the sale assets changed between the Baseline Date and the closing date. (Farnsworth Dec. ¶ 16.) Section 2.5 of the Agreement, titled "Post-Closing Adjustment", provided that after a joint audit of the inventory, B & L would provide Luxottica with a Closing Net Operating Assets Statement ("CNOAS") valuing its assets as of the closing date. (Agreement §§ 2.5(a)-(b).) Within thirty days of receipt of the CNOAS, Luxottica would, if it found that any part of the CNOAS was "incorrect or [had] not been prepared in accordance with the Accounting Principles . . . inform [B & L] in writing . . . setting forth a specific description of the basis of the [Luxottica's) Objection, and the adjustments to the [CNOAS]." (Agreement § 2.5(c).) Thereafter, B & L had thirty days to respond to Luxottica's objections (the "Response Period"). (Agreement § 2.5 (c).) If the parties were unable to resolve their dispute within thirty days following the response Period, they agreed to submit unresolved items to a U.S. office of Arthur Andersen LLP or other internationally recognized firm of independent public accountants. The Agreement provided the following mandate:

(the "CPA Firm") . . . shall, acting as experts in accounting and not as arbitrators, determine on the basis of the Accounting Principles, whether and to what extent, if any, the [CNOAS] requires adjustment. The CPA Firm's review shall be limited to the items raised in [Luxottica's] Objection . . . and no adjustment shall be made unless the CPA Firm determines that the information used to prepare the [CNOAS] is incorrect or was] not prepared in accordance with the Accounting Principles. The CPA Firm's determination shall be conclusive and binding upon the Buyer and Seller.

(Agreement § 2.5(c) ("Expert Accountant Procedure").)

The sale of B & L's sunglass business closed on June 25, 1999. (Farnsworth Dec. ¶ 24.) Thereafter, B & L delivered to Luxottica the CNOAS listing the value of the sunglass business assets as $415,659,000 at the closing date. (Farnsworth Dec. ¶ 24; Farnsworth Dec., Ex. D.) This figure represented an $18,534,000 appreciation of the sunglass business's operating assets from the Baseline Date.

On November 19, 1999, Luxottica advised B & L that it sought "indemnification . . . in the amount of $80.758 million on the basis of B & L's breaches of the representations and warranties contained in sections 4.6 [financial information warranty] and 4.9 [inventory warranty] of the Agreement." (Farnsworth Dec., Ex. C.) This claim reflected $99,838,000 in damages claimed under the warranties less a deductible of "three percent (3%) of the Purchase Price," or $19,800,000, as required under section 10.4(a). (Farnsworth Dec., Ex. C.)

On December 1, 1999, B & L demanded $17,231,000 for the appreciation after taxes of the sunglass business's assets from the Baseline Date to the June 25, 1999 closing date. On December 2, 1999,*fn1 Luxottica informed B & L that it had thirty-two separate objections to the CNOAS's calculations. The parties resolved twenty-three objections and Luxottica withdrew one other. (See Farnsworth Dec. ¶ 29; Farnsworth Dec. Ex. F.) The remaining eight objections to proposed adjustments totaled approximately $81 million. The disputed objections are:

Objection 3: Failure to record adequate allowance for gross margins on sales exchange returns ($7,250,000);
Objection 5: Failure to write off inventory assigned to Omega Labs (U.S.) ($22,000);
Objection 7: Failure to provide an adequate allowance for excess and obsolete inventories ($68,956,000);
Objection 10: Failure to eliminate prepaid insurance whose benefit was retained by B & L (refunds on ...

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