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EASTMAN KODAK COMPANY v. STWB INC.

October 19, 2002

EASTMAN KODAK COMPANY, PLAINTIFF-COUNTERCLAIM DEFENDANT,
V.
STWB INC., FORMERLY STERLING WINTHROP INC.; AND BAYER CORP., FORMERLY MILES INC., DEFENDANTS-COUNTERCLAIM PLAINTIFFS.



The opinion of the court was delivered by: John G. Koeltl, United States District Judge

  OPINION AND ORDER

FINDINGS OF FACT AND CONCLUSIONS OF LAW

FINDINGS OF FACT

The Parties

1. Kodak is a corporation organized and existing under the laws of the State of New Jersey and has its principal place of business at 343 State Sweet, Rochester, New York 14650. (Am. Joint Pretrial Order, Stipulations of Fact ("Stip. Fact") ¶ 1.)

2. Sterling is a corporation organized and existing under the laws of the State of Delaware and has its principal place of business at 100 Bayer Road, Pittsburgh, Pennsylvania 15205. From September 18, 1991 to September 16, 1996, Sterling operated under the name Sterling Winthrop Inc.(Stip. Fact ¶ 2.)

3. Bayer is a corporation organized and existing under the laws of the State of Indiana and has its principal place of business at 100 Bayer Road, Pittsburgh, Pennsylvania 15205. Bayer is a wholly-owned subsidiary of Bayer, AG, a German corporation. From January 1, 1992 to April 3, 1995, Bayer operated under the name Miles Inc. (Stip. Fact ¶ 3.)

Background

4. In or about March or April 1994, Kodak decided to divest its wholly-owned subsidiary Sterling, which was involved in the research, development, manufacture and sale of, among other things, consumer products, consumer health products and pharmaceuticals. (Stip. Fact ¶¶ 4, 5; Tr. at 58 (Mabon).)

5. At that time, Sterling was comprised of three business groups — Pharmaceuticals, Lehn & Fink ("L&F") and Consumer Health — and a corporate headquarters group that provided services to those business groups. (DX-7 at EKC 003024; Tr. at 58-9 (Mabon); Tr. at 110-11 (Pollack).)

6. In June 1994, Kodak and Sterling entered into an agreement (the "Asset Purchase Agreement") with Sanofi S.A. ("Sanofi") to transfer to Sanofi certain assets and liabilities of Sterling's ethical or prescription pharmaceutical business, which was comprised of portions of several internal divisions of its Pharmaceuticals business. (PX-1; Tr. at 60-61 (Mabon); Tr. at 108, 114 (Pollack).)

7. In late August 1994, Kodak entered into an agreement (the "Stock Purchase Agreement") with SmithKline Beecham plc ("SmithKline") to sell all of the issued and outstanding shares of Sterling common stock. (Stip. Fact ¶ 9; PX-4 at EKC 005826 (Recitals), PX-4 at EKC 005838 (Section 2.1).) Kodak sold the shares of Sterling to SmithKline for an aggregate purchase price of $2,925,000,000.(Id.)

8. In October 1994, Kodak transferred all of the assets and liabilities of the L&F business out of Sterling. (PX-7 at EKC 003668 (Recitals).) The L&F business included the production of household products such as Lysol and rug cleaner. (Tr. at 58-59 (Mabon).)

The Agreement with Sanofi

10. On June 22, 1994, Kodak, Sterling and Sanofi entered into the Asset Purchase Agreement, which was subsequently amended and restated on September 30, 1994. (Stip. Fact ¶¶ 7; PX-1; PX-8.) The provisions of the Asset Purchase Agreement that were amended or restated are not relevant to this dispute. (Stip. Fact ¶ 18.)

11. The Asset Purchase Agreement was structured such that specified assets and liabilities of Sterling's ethical or prescription pharmaceutical group were transferred to Sanofi, and the remaining assets and liabilities were retained by Sterling. (Tr. at 118-20 (Pollack); Tr. at 255-56 (Doolittle).) The Asset Purchase Agreement defined the assets and liabilities transferred to Sanofi as "Transferred Assets" and "Assumed Liabilities," and the assets and liabilities retained by Sterling as "Excluded Assets" and "Excluded Liabilities". (PX-1 at EKC 005303-005312 (Sections 2.1, 2.2, 2.3 and 2.4))

12. Kodak, Sterling and Sanofi extensively negotiated the terms of the Asset Purchase Agreement, including the allocation of expenses for benefits owed to Sterling's retired employees ("retiree benefit expenses"). (Tr. at 222-26 (Alpern); Tr. at 116-17, 120-23 (Pollack).)

13. Historically, Sterling allocated its retiree benefit expenses as a corporate headquarters liability, although an allocation was made as of December 31, 1993 that allocated such expenses to the Consumer Health, the Pharmaceutical Group, and Corporate based on the active United States headcount for those groups. (PX-1 at B 003165-003166; PX-4 at EKC 005984-005985; DX-8 at EKC 002683-002684; Tr. at 327-28, 336-37 (Gomez-Nieto).) In order to apportion a percentage of those corporate headquarters liabilities to Sanofi, the parties to the Asset Purchase Agreement considered allocating the retiree benefit expenses by attempting to determine the number of former employees who had worked for the portion of the ethical pharmaceuticals business which was transferred to Sanofi. The parties concluded that such an allocation was neither practical nor possible. (Tr. at 224-25 (Alpern); Tr. at 258-59 (Doolittle).) Many of Sterling's former employees had worked for more than one division or corporation function during the course of their employment. (Tr. at 224-25 (Alpern); Tr. at 121-22 (Pollack); Tr. at 259 (Doolittle); Tr. at 322-24 (Gomez-Nieto).) Moreover, Sterling had only began to keep records during the last five years or so as to the particular business within Sterling an employee was working for at the time of his or her retirement. (Tr. at 224 (Alpern); Tr. at 258-59 (Doolittle).)

14. Sanofi, Sterling and Kodak agreed to allocate the retiree benefit expenses between Sterling and Sanofi using formulas that relied on distributions and calculations of active, not retired, employees. (PX-1 at EKC 005393-005394 (Section 5.5(g)); PX-1 at EXC 005396-005397 (Section 5.5(k)); Tr. at 226-27, 230 (Alpern); Tr. at 122 (Pollack).)

16. Pursuant to Section 5.5(g) of the Asset Purchase Agreement, Sterling is responsible for administering the following Sterling retiree benefit plans: (i) Sterling Winthrop Inc. Supplemental Executive Retirement Plan ("SERP"); (ii) Sterling Winthrop Inc. Deferred Compensation Plan ("DCP"); (iii) Sterling Winthrop Inc. Supplemental Retirement Benefit Plan ("SRBP"); (iv) Individual Pension Agreements as set forth on Exhibit A to Schedule 3.10(a) of the Asset Purchase Agreement ("Individual Pensions"); (v) Sterling Winthrop Inc. Foreign Service Pension Plan ("FSPP"); and (vi) Sterling Winthrop Inc. Severance Benefits Plan ("SBP"), (collectively, excluding the FSPP, the "Schedule 5.5(g) Plans"). (Stip. Fact ¶ 13; PX-1 at EKC 005393-005394 (Section 5.5(g)); PX-1 at B 003271 (Schedule 5.5(g)).) The parties do not dispute the allocation of expenses for the FSPP. the DCP, or the SERP. (Stip. Fact ¶ 13.)

17. Pursuant to Section 5.5(k) of the Asset Purchase Agreement, Sanofi is responsible for administering the following Sterling retiree benefit plans: (i) Sterling Winthrop Inc. Group Insurance Plan for Salaried Employees-Retiree Medical Plan; (ii) Sterling Winthrop Inc. Group Insurance Plan for Hourly Employees-Retiree Medical Plan; (iii) Sterling Winthrop Inc. Life Insurance Plan for Salaried Employees-Retiree Life Insurance Plan; (iv) the Sterling Winthrop Inc. Life Insurance Plan for Hourly Employees-Retiree Life Insurance Plan; and (v) the Sterling Winthrop Inc. Group Insurance Plan for its Employees in Puerto Rico-Retiree Medical Insurance Plan (collectively, the "Retiree Welfare Plans"). (Stip. Fact ¶ 14; PX-1 at EKC 005395-005397 (Section 5.5(k)).)

18. Sections 5.5(g) and 5.5(k) of the Asset Purchase Agreement provide express formulas (the "expense allocation formulas") for calculating Sanofi's and Sterling's respective percentage shares of expenses for the retiree benefit plans. (PX-1 at EKC 005393-005394 (Section 5.5(g)); PX-1 at EKC 005395-005397 (Section 5.5(k)).)

19. Pursuant to the expense allocation formulas, the total amount advanced by each party is multiplied by a headcount fraction. Sanofi's share of the retiree benefit expenses is capped at 70% of the total cost of benefits payable to former employees of Sterling under the relevant plans, except for Sanofi's share of FSPP expenses which is capped at 46% (Stip. Fact ¶ 17; PX-1 at EKC 005393-005394 (Section 5.5(g)); PX-1 at EKC 005395-005397 (Section 5.5(k)).)

20. Section 5.5(g) of the Asset Purchase Agreement requires Sanofi to pay to Sterling:

in accordance with [Sterling's] statement of the estimated annual cost of the employee benefits and deferred compensation payable to the Former Employees under the plans and arrangements listed on Schedule 5.5(g), an amount equal to the result of multiplying one fourth of such annual cost for each such plan or arrangement by the fraction, the numerator of which is equal to the number of U.S. Transferred Employees of the Business on the Closing Date, and the denominator of which is equal to the number of U.S. active employees of [Sterling] and all of its subsidiaries on the Closing Date.

(PX-1 at EKC 005393-005394)

21. Section 5.5(k)(ii) of the Asset Purchase Agreement requires Sterling to pay Sanofi:

in accordance with [Sanofi's] statement of the estimated annual cost of the benefits under the Retiree Welfare Plans payable with respect to the Retiree Welfare Plan Participants, an amount equal to the result of multiplying (A) one fourth of such annual cost by (B) one minus a fraction, the numerator of which is equal to the number of U.S. Transferred Employees of the Business on the Closing Date, and the denominator of which is equal to the number of U.S. active employees of [Sterling] and all of its subsidiaries on the Closing Date.

(PX-1 at EKC 005396-005397.)

22. Sections 5.5(g) and 5.5(k) of the Asset Purchase Agreement expressly require that the headcount fraction denominator include employees of all Sterling businesses if, on the closing date of the Asset Purchase Agreement, they were active employees of Sterling. (PX-1 at EKC 005393-005394 (Section 5.5(g)); PX-1 at EKC 005395-005397 (Section 5.5(k)).)

23. The Asset Purchase Agreement closed on October 1, 1994. (Stip. Fact ¶ 8.)

24. Sterling's L&F business, including its U.S. active employees, was not transferred out of Sterling before the Asset Purchase Agreement closed. (Stip. Fact ¶ 20.) Neither the Asset Purchase Agreement nor the Stock Purchase Agreement required that the L&F business be transferred out of Sterling before the closing of the Asset Purchase Agreement, and no party requested that the transfer occur before the closing of the Asset Purchase Agreement. (PX-1; PX-4 at EKC 005825-005826 (Recitals); PX-4 at EKC 005843-005844 (Section 2.3); PX-4 at EKC 005918-005919 (Section 5.9(g)); PX-5 at EKC 006115 (Recitals); Tr. at 126-28, 134-35 (Pollack).) However, had the L&F business been transferred out of Sterling prior to the closing of the Asset Purchase Agreement, L&F employees would not have been included in the headcount of active Sterling U.S. employees, consequently, would not have been included in the denominator of the headcount fraction. As a result of the way in which the reimbursement formulas worked, this would have increased Sanofi's share of costs for the various retiree benefit plans.

25. Sections 2.3(e) and 2.4(h) of the Asset Purchase Agreement expressly define Sterling's share of certain retiree expenses under Sections 5.5(g) and 5.5(k) of the Asset Purchase Agreement as an "Excluded Liability" retained by Sterling that is not transferred to Sanofi. (PX-1 at EKC 005310 (Section 2.3(e)(i)); PX-1 at EKC 005312 (Section 2.4(h)).)

The Sale of Sterling — Due Diligence

26. In or about late June 1994, Kodak invited selected bidders, including Bayer and SmithKline, to participate in detailed due diligence with respect to the proposed sale of all the issued and outstanding shares of Sterling common stock. (Tr. at 68-70 (Mabon); Tr. at 136-37 (Pollack); Tr. at 261 (Doolittle).) As part of the due diligence process, these bidders were provided an opportunity to review the prior Asset Purchase Agreement between Sterling and Sanofi. (Tr. at 70 (Mabon); Tr. at 137 (Pollack); Tr. at 261-62 (Doolittle).)

27. Bayer reviewed the Asset Purchase Agreement on or about August 1, 1994, and recorded its terms for later review. (Tr. at 136-38 (Pollack); Tr. at 261-62 (Doolittle).)

28. Kodak also conducted management presentations for those bidders, including Bayer, who were invited to participate in the due diligence process. (Tr. at 68 (Mabon); Tr. at 136-37 (Pollack); Tr. at 260-61 (Doolittle).) At these presentations, representatives of Kodak explained to the bidders that any sale of Sterling would be subject to the Asset Purchase Agreement. (Tr. at 70-71 (Mabon).)

29. Bayer then submitted a formal bid to buy Sterling. (Tr. at 71 (Mabon); Tr. at 263 (Doolittle).)

The Sale of Sterling — SmithKline

30. Kodak offered SmithKline the opportunity in August 1994 to bid for Sterling, and in late August 1994 Kodak agreed to negotiate the sale of Sterling to SmithKline. (Tr. at 71-72 (Mabon); Tr. at 263-64 (Doolittle).) Representatives of Kodak and SmithKline actively negotiated the terms of the sale over a one to two week period in late August 1994. (Tr. at 72 (Mabon); Tr. at 139 (Pollack); Tr. at 264 (Doolittle).) Bayer did not participate in those negotiations. (Tr. at 81 (Mabon); Tr. at 158 (Pollack); Tr. at 275-76 (Doolittle).) During the negotiation process, Kodak provided SmithKline with a copy of the Asset Purchase Agreement. (Tr. at 141 (Pollack).) A constant theme of the negotiations was that SmithKline would be buying Sterling subject to the terms of the Asset Purchase Agreement. (Tr. at 141-42 (Pollack); Tr. at 266-67 (Doolittle).)

31. Kodak, SmithKline and 343 Holding Corp. (a subsidiary of Kodak) entered into a stock purchase agreement dated as of August 28, 1994 (the "Stock Purchase Agreement"), by which Kodak sold and transferred to SmithKline all of the issued and outstanding shares of Sterling. (Stip. Fact ¶ 9; PX-4 at EKC 005826 (Recitals); PX-4 at EKC 005838 (Section 2.1).)

32. The Stock Purchase Agreement expressly acknowledges that SmithKline's purchase of Sterling was subject to the Asset Purchase Agreement. (PX-4 at EKC 005825 (Recitals); PX-4 at EKC 005881-005884 (Section 5.3); PX-4 at EKC 005914-005924 (Section 5.9); PX-4 at EKC 005925 (Section 5.11).) SmithKline also explicitly agreed to "cause Sterling and its Subsidiaries to perform their obligations" under the Asset Purchase Agreement. (PX-4 at EKC 005917 (Section 5.9(c)).) Recognizing SmithKline's obligation to cause Sterling to perform these obligations, Kodak agreed to obtain SmithKline's consent before amending the Asset Purchase Agreement to "impose material liabilities or obligations on Sterling," and also agreed to indemnify SmithKline if necessary to obtain such consent. (Id.)

33. The Stock Purchase Agreement did not require that Kodak transfer the assets and liabilities of the L&F business from Sterling before the closing of the Asset Purchase Agreement. (PX-4 at EKC 005825-005826 (Recitals); PX-4 at EKC 005918-005919 (Section 5.9(g)).) Rather, the parties agreed that Kodak would cause Sterling to sell the L&F business or transfer the assets and liabilities of the L&F business from Sterling prior to the closing of the Stock Purchase Agreement. (Id.) The Stock Purchase Agreement was not scheduled to close until at least ten business days after the Asset Purchase Agreement closed. (PX-4 at EKC 005843-005844 (Section 2.3).)

35. As of September 26, 1994, Kodak, L&F Products Inc., Sterling and Reckitt & Colman, PLC ("Reckitt & Colman") entered into an asset purchase agreement, pursuant to which Sterling agreed to transfer to Reckitt & Colman certain assets and liabilities of Sterling's L&F household products business. (Stip. Fact ¶ 15; PX-7.) Sterling agreed to remain responsible for retiree benefit expenses payable under the SERP, DCP and FSPP plans. (PX-7 at EKC 003762-003763 (Section 5.5(h)).) Reckitt & Colman agreed to pay Sterling a specified percentage share of the retiree benefit expenses of Sterling's SERP, DCP and FSPP plans. (Stip. Fact ¶ 15; PX-7 at EKC 003762-003763 (Section 5.5(h)).) The expense allocation formula used to calculate Reckitt and Colman's share of the retiree benefit expenses under those plans is, like the expense allocation formulas set forth in Section 5.5(g) and 5.5(k) of the Asset Purchase Agreement, based on a headcount fraction, where the denominator is the number of U.S. active employees of Sterling as of the date of the closing of the Asset Purchase Agreement. (PX-7 at EKC 003762-003763 (Section 5.5(h)).)

36. As of October 30, 1994, Kodak, L&F Products Inc. and SmithKline amended the Stock Purchase Agreement to add, among other changes, a Section 5.5(g). (Stip. Fact ¶ 16; PX-41 at B 001113-001114 (Section 2.4).) Pursuant to this Section 5.5(g), Sterling agreed to remain responsible for amounts payable under the SERP, DCP and FSPP plans. (PX-41 at B 001113-001114 (Section 2.4).) Kodak agreed to pay Sterling a specified percentage share of Sterling's SERP, DCP and FSPP expenses. (Id.) The expense allocation formula used to calculate Kodak's percentage share of these retiree benefit expenses under these plans is, like the expense allocation formulas set forth in Sections 5.5(g) and 5.5(k) of the Asset Purchase Agreement, based on a headcount fraction, where the denominator is the number of U.S. active employees as of the date of the closing of the Asset Purchase Agreement. (Id.)

37. The negotiations of the amendment to the Stock Purchase Agreement occurred after the closing of the Asset Purchase Agreement. (Stip. Fact ΒΆ 8, 16; Tr. at 238 (Alpern).) During these negotiations, SmithKline and Bayer, which were both then aware that Sanofi had rejected Kodak's request to amend the retiree benefit expense allocation formulas in the Asset Purchase Agreement, did not request any amendment that would obligate Kodak to pay any portion of Sterling's retiree benefit liabilities ...


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