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Louisiana Municipal Police Employees' Retirement System v. Hesse

United States District Court, S.D. New York

July 26, 2013

LOUISIANA MUNICIPAL POLICE EMPLOYEES' RETIREMENT SYSTEM, Derivatively on Behalf of Itself, and All Others Similarly Situated, Plaintiffs,
v.
DAN R. HESSE, JOSEPH J. EUTENEUR, ROBERT H. BRUST, PAUL N. SALEH, JAMES H. HANCE, JR., ROBERT R. BENNETT, GORDON M. BETHUNE, LARRY C. GLASSCOCK, V. JANET HILL, FRANK IANNA, SVEN-CHRISTER NILSSON, WILLIAM R. NUTI, and RODNEY O'NEAL, Defendants, and SPRINT NEXTEL CORP., Nominal Defendant

Page 577

For Louisiana Municipal Police Employees' Retirement System, Derivately on Behalf of Itself, and all others similarly situated, Plaintiff: Jason Moths Leviton, LEAD ATTORNEY, PRO HAC VICE, Berman DeValerio (MA), Boston, MA; Jeffrey Craig Block, LEAD ATTORNEY, Block & Leviton LLP, New York, NY.

For Dan R. Hesse, Joseph J. Euteneur, Robert H. Brust, Paul N. Saleh, James H. Hance, Jr., Robert N. Bennett, Gordon M. Bethune, Larry C. Glasscock, V. Janet Hill, Frank Ianna, Sven-Christer Nilsson, William R. Nuti, Rodney O'Neal, Defendants: Dane Hal Butswinkas, LEAD ATTORNEY, David S. Blatt, Kenneth Jerome Brown, Willians & Connolly LLP, Washington, DC; Thomas J. McCormack, LEAD ATTORNEY, Marc David Ashley, Robert Matthew Kirby, Chadbourne & Parke LLP (NY), New York, NY; David George Keyko, Leo Elias Milonas, Pillsbury Winthrop Shaw Pittman, LLP (NY), New York, NY.

For Sprint Nextel Corp., Nominal Defendant: Dane Hal Butswinkas, LEAD ATTORNEY, PRO HAC VICE, Willians & Connolly LLP, Washington, DC; Thomas J. McCormack, LEAD ATTORNEY, Marc David Ashley, Robert Matthew Kirby, Chadbourne & Parke LLP (NY), New York, NY; Adam Harber, PRO HAC VICE, Williams & Connolly LLP, Washington, DC; David S. Blatt , Evan M. Mendelson, PRO HAC VICE, Kenneth Jerome Brown, Willians & Connolly LLP, Washington, DC; David George Keyko, Leo Elias Milonas, Pillsbury Winthrop Shaw Pittman, LLP (NY), New York, NY.

OPINION

Page 578

MEMORANDUM & ORDER

ANDREW L. CARTER, JR., United States District Judge.

I. Introduction

This case is a shareholder derivative action brought by Plaintiff Louisiana Municipal Police Employees' Retirement System (" LAMPERS" ) seeking relief from alleged harm caused by Dan Hesse, Joseph Euteneur, Robert Brust, Paul Saleh, James Hance, Jr., Robert Bennett, Gordon

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Bethune, Larry Glasscock, Janet Hill, Frank Ianna, Sven-Christer Nilsson, William Nuti, and Rodney O'Neal (collectively " Defendants" or " Directors" ), as members of the Board of Directors of Sprint Nextel Corporation (" Sprint" ). Plaintiffs claim the Directors permitted Sprint to adopt a tax policy clearly in violation of New York law, thereby breaching their fiduciary duties and wasting corporate assets. Defendants move to dismiss the Complaint for failure to state a claim pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure.

II. Background

Sprint provides telecommunications services and products throughout the country and is the third largest wireless communications provider in the United States. Defendants are all members of Sprint's Board of Directors and either hold senior executive offices or are members of high-level committees, including the Audit Committee, Finance Committee, Executive Committee, Nominating & Corporate Governance Committee, and Compensation Committee. Defendant Hesse currently serves as Sprint's Chief Executive Officer, and Defendant Euteneur is the company's Chief Financial Officer.

As of 2005, Sprint has sold wireless plans for a designated number of minutes per month at a fixed periodic, or monthly, access charge. (Compl. ¶ 33.) The fixed monthly access charge remains the same regardless of whether the customer makes interstate (between two or more states) or intrastate (within the same state) calls. (Id.) At the end of each month, Sprint sends its customers invoices showing the fixed monthly access charge, any overages, and charges for sales tax. The invoice does not break-out interstate and intrastate usage and does not indicate taxes are collected on less than the full fixed monthly access charge for voice services. (Id. ¶ 34.)

A. New York's Taxation of Wireless Services

Wireless companies frequently bundle services -- that is package different types of services together in a single plan, such as internet and wireless calling. Various services are treated differently for tax purposes when sold individually. As a result of bundling, non-taxable services are commonly sold with taxable services in a single plan. For example, New York law does not impose a sales tax on interstate voice services sold on a per minute basis but does impose a sales tax on intrastate voice services. Compare N.Y. Tax Law § 1105(b)(1)(B) (McKinney 2012) with § 1105(b)(3). Often, a wireless company will sell both interstate and intrastate calling services as part of the same plan for the single, fixed access rate.

As alleged in the Complaint, New York law unequivocally requires where a wireless provider bundles interstate calling, a non-taxable service on its own, with other taxable voice services, like intrastate calling, the entire amount of wireless voice services sold in New York is subject to state sales tax. (Pl.'s Mem. 6; Compl. ¶ ¶ 38-39.) In other words, interstate calls cannot be unbundled from other voice services that are part of the fixed monthly access charge for purposes of paying sales tax.[1] To clarify this requirement, the New

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York Tax Department provided wireless carriers with guidance in a 2002 Technical Services Bureau Memorandum, which also contained examples of its proper application. (Compl. ¶ ¶ 38-41.) Plaintiffs claim the tax provision at issue was clear to Sprint. (Id. ¶ 37.)

B. Sprint's Alleged Tax Strategy

Beginning in July of 2005, Plaintiffs allege Sprint initiated a strategic plan to avoid paying sales tax on an arbitrary portion of its monthly charges for voice services, which it characterized as " interstate" in nature. (Id. ¶ 46.) Under this plan, Sprint unbundled interstate usage from its fixed monthly access charge and did not collect or pay sales tax on that portion of the charge. (Id. T¶ 46, 51.) Because the fixed monthly charge was not divisible based on customer usage, Sprint was forced to manufacture an arbitrary method for determining what portion of the charge was interstate usage and what portion was not. (Id. ¶ 51.)

Sprint allegedly developed this plan to gain a competitive advantage by reducing the amount of tax collected from its customers and, in turn, offering lower cost monthly plans. (Id. ¶ 47.) Plaintiffs claim Sprint executives attended conferences with competitors, at which they discussed tax requirements, and sought an agreement amongst the wireless carriers whereby only internet services would be unbundled for tax purposes. (Id. ¶ 50.) Sprint then changed course and decided to abandon the approach it championed with its competitors, proceeding to unbundle interstate usage as well. (Id. ¶ ¶ 50-51.) Unbundling only internet services led to an alleged savings of $623,000 per month in taxes. (Id. ¶ 50.) Unbundling interstate voice services allowed Sprint to realize an additional savings of $4.6 million per month and a total of $100 million in savings since 2005. (Id. ¶ ¶ 51, 53.)

In choosing which tax strategy to adopt, Sprint was aware that its competitors opted to unbundle only internet services through competitive surveillance but abandoned this approach " because there wasn't enough bang for the buck." (Id. ¶ 50.) The Complaint alleges in early 2005, Sprint's Assistant Vice President of State and Local Tax, Director of External Tax, and other employees recommended to senior executives that interstate voice services be unbundled from the fixed monthly access charge and treated as if they were interstate usage billable on a per-minute basis, which was not taxed. (Id. ¶ 52.) This approach was purportedly authorized by Sprint's senior executives. (Id.)

C. Sprint's Alleged Plan to Cover-Up the Tax Strategy

To cover-up its tax strategy, Plaintiffs claim Sprint did not pursue $30 million in refunds for " overpayment" of taxes, so as not to bring attention to the company's tax practices. (Id. ¶ 56.) The overpayment occurred when Sprint discovered, in 2009, it had failed to unbundle interstate voice services from its fixed monthly access charge and treat them as non-taxable. (Id. ¶ 55.) Thus, Sprint " discovered that it did not adhere completely to its own unbundling program and therefore accidentally collected and paid the correct amount of sales taxes on a number of its plans." (Id.) Sprint employees unfamiliar with the company's tax strategy suggested Sprint seek a refund, however, Sprint's Director of Telecom Tax thought otherwise: " My 2 cents is that, based on what [another Sprint employee] has laid out here, I don't think we should [seek a refund] -- i.e., we can't change our books and records after the fact to support a refund." (Id. ¶ 56.) A Senior Tax Counsel allegedly commented, " Sprint is already taking some risk with unbundling. Our risks are exponentially increased if we try to pursue

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refunds when we didn't jump through the hoops on unbundling." (Id.)

Additionally, Sprint purportedly did not disclose its tax strategy to customers due to its illegality. In July of 2005, the State and Local Tax Group and Marketing Group contemplated whether to communicate the component taxation program with customers but ultimately decided not to do so. (Id. ΒΆ 57.) Further, when an employee in the Customer Billing Services Department inquired internally as to whether unbundling was part of the Subscriber Agreement, shown in the invoices, or available information to Customer Care Representatives, a member of the State and ...


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