United States District Court, S.D. New York
[Copyrighted Material Omitted]
For Meda AB, Plaintiff: Michael Barry Carlinsky, LEAD ATTORNEY, Quinn Emanuel Urquhart & Sullivan, LLP (NYC), New York, NY; Christopher James McNamara, Nicholas John Calamari, Nilakshi Gamwasam Parndigamage, Stephen Andrew Broome, Quinn Emanuel Urquhart & Sullivan LLP, New York, NY; Deborah K. Brown, Joseph Daniel Hammond, Peter John Armenio, Quinn Emanuel Urquhart & Sullivan, LLP (NYC), New York, NY.
For 3M Company, 3M Innovative Properties Company, Riker Laboratories, Inc., Defendants: Alexandra A. E. Shapiro, Daniel Jonathan O'Neill, James Spiegel Darrow, LEAD ATTORNEYS, Shapiro, Arato & Isserles LLP, New York, NY; James Stephen Renard, Michael J. Collins, LEAD ATTORNEYS, Bickel & Brewer, Dallas, TX; Jeremy Daniel Camp, LEAD ATTORNEY, PRO HAC VICE, Bickel & Brewer, Dallas, TX; Alexander David Widell, Bickel & Brewer (NYC), New York, NY; Amy K. Sterner, PRO HAC VICE, Dorsey & Whitney, Minneapolis, MN; Theresa Bevilacqua, PRO HAC VICE, Dorsey & Whitney, LLP (MN), Minneapolis, MN.
MEMORANDUM, ORDER, AND JUDGMENT
ALISON J. NATHAN, United States District Judge.
This action arises out of the acquisition in late 2006 and early 2007 by Plaintiff Meda AB (" Meda" ) of a European pharmaceutical business from Defendant 3M Company (" 3M" ). Meda alleges that 3M breached the acquisition agreement signed on November 8, 2006 (" Acquisition Agreement" ), as well as the implied covenant of good faith and fair dealing. Meda further claims that 3M defrauded Meda by failing to disclose a drug pricing agreement that it had with the French government relating to the reimbursement price for an anti-arrhythmic medication in France, and by misrepresenting the value of the company in light of the information allegedly contained in that agreement. A nonjury trial was held in this action on January 14, 15, 16, 17, 22, 23, 24, and 31, 2013.
Pursuant to this Court's procedures for non jury trials, the parties submitted the direct testimony of their witnesses by affidavit and their documentary evidence with the pretrial order, except that live testimony was heard from those witnesses who were not under the direct control of the party calling them. The Court received
direct examination declarations from seven 3M executives and personnel (Paul Keel, John Sampson, David Wanlass, Benoit Traineau, Stephanie Barreau, Celine Forey, and Brad Sauer), and four Meda executives (Anders
Löner, Anders Larnholt, Jorge-Thomas Dierks, and Henrik Stenqvist). The Court heard live direct testimony from a representative of Goldman Sachs (Jason Haas), who served as deal advisor to 3M. The Court also heard live direct testimony from Brad Sauer, a 3M executive who was called to testify by Meda. In addition to the fact witnesses, the Court also received direct examination declarations from three experts on French law (Jonathan Schur, Olivier Mariotte, and
Frédéric Destal), three experts on damages (Mark Gallagher, Jonathan Neuberger, and Michael Cragg), and two experts on due diligence and industry practice (Peter Garrambone, Jr. and Bimal Shah). All witnesses who submitted direct examination declarations were cross-examined live at trial. The Court received deposition designations from an additional seven witnesses and over 250 exhibits.
This Opinion represents the Court's findings of fact and conclusions of law for purposes of Rule 52 of the Federal Rules of Civil Procedure. The findings of fact appear principally in the following " Findings of Fact" section, but also appear in the remaining sections of the Opinion. To set forth the Court's reasoning in a manner clear to someone unfamiliar with French pharmaceutical-pricing regulations, some of the Court's conclusions of law regarding French pharmaceutical pricing policy and regulations are interspersed in the findings of fact, and are principally contained in Sections " I.C." below. For the following reasons, the Court concludes that Meda has failed to establish that 3M breached any of the warranties in the Acquisition Agreement, breached the implied covenant of good faith and fair dealing, or committed a fraud.
I. FINDINGS OF FACTS
Based on the evidence presented at trial, the facts stipulated to in the Joint Proposed Pretrial Order (" JPTO" ), and the Court's assessment of the credibility and demeanor of the witnesses and the inferences reasonably to be drawn there from, the Court makes the following findings of facts.
A. The Parties
Plaintiff Meda is an international pharmaceutical company based in Solna, Sweden. (Lönner Decl. ¶ 19). In 2006, it commenced the acquisition of a European pharmaceuticals business (" the Euro Pharma Business" ) from Defendant 3M, a publicly-owned diversified technology company headquartered in St. Paul, Minnesota. (Keel Decl. ¶ 6; Sampson Decl. ¶ ¶ 6, 8).
B. 3M's Decision to Sell its Worldwide Pharmaceutical Subsidiary
The events leading up to the present dispute began in 2005 when 3M began to explore options for its worldwide pharmaceutical business (" Pharma Business" ), which it viewed as possibly yielding long-term growth, but also short-term financial problems. ( See, e.g., Keel Decl. ¶ 15; Sampson Decl. ¶ 12). Meda urges that the Court conclude that 3M was trying to dump a failing business onto an unsuspecting buyer, but the evidence leads the
Court to the opposite conclusion. Indeed, as discussed below, the Court finds that 3M had legitimate reasons for seeking to spin off its Pharma Business, and 3M executives with direct oversight over the Pharma Business sincerely believed that the unit could thrive when paired with a better fitting parent company, such as Meda.
3M executives began to determine that the Pharma Business did not fit within their company's portfolio in early to mid-2005. (Keel Dec. ¶ ¶ 15-19). 3M executives were concerned that the Pharma Business required costly investments to maintain, and that the high-risk, high-reward business of trying to find a pharmaceutical that " hit" did not fit within the stable consistency of results sought by 3M investors. ( Id .). As a result of this assessment, 3M's management assembled a team of experts from 3M, McKinsey & Company (" McKinsey" ), and Goldman Sachs (" Goldman" ) to assess strategies for re-tooling or possibly selling the Pharma Business. McKinsey advised that 3M should either " fix" the Pharma Business through a rebuilding and acquisition strategy, harvest it, or sell it. ( Id .). The Court credits the testimony of John Sampson, the then-Division Vice President and General Manager of 3M's worldwide Pharma Business, that he viewed the Pharma Business as too valuable to " harvest," meaning to reduce costs by reducing investment and thereby increasing short-term profitability at the expense of the business' future. (Trial Transcript (" Tr." ) at 1281). Instead, Sampson believed that the best course of action was to sell the Pharma Business to someone who would be in a position to profit from it. (Tr. at 1282).
At a board meeting held on November 14, 2005, 3M executive Brad Sauer, along with Jessica Hopfield of McKinsey, reported management's assessment of 3M's Pharma Business and recommendations for moving forward. (Keel Decl. ¶ ¶ 23-24). The board then set in motion a process that ultimately resulted approximately seven months later in what Paul Keel, the Director of Business Development for 3M's Health Care Business at the time of the acquisition, accurately described as " a global open auction initiated by 3M" for the sale of the Pharma Business. (Tr. at 1088).
C. 3M's French Pharmaceutical Subsidiary
Only one small piece of this worldwide sale is at issue in this litigation: the reimbursement price for an anti-arrhythmic heart medication sold by the Pharma Business' French subsidiary, 3M Santé . Meda argues that 3M hid from Meda information indicating that this anti-arrhythmic--which is known as Tambocor in most of the world and known as
Flécaïne in France, and which was 3M Santé 's best selling drug--was overdue for a price reduction. Specifically, Meda alleges that 3M's failure to disclose during due diligence a non-public provision of a document produced by the French drug pricing authority known as " CEPS" caused Meda to overpay for the entire Euro Pharma Business by over $200 million, an amount that represents close to 25% of the purchase. However, as discussed below, in light of the nature of French drug reimbursement policies and processes, the Court concludes that threat of a price reduction for
Flécaïne LP, the drug at issue, derived largely from a myriad of publicly known factors about which a sophisticated pharmaceutical company with experience doing business in France, such as Meda, would have or should have known.
The Court begins by looking into the introduction of Tambocor/Flécaïne to the
French market. 3M had patented an immediate release compound of flecainide acetate in 1974, and that drug was sold under various brand names in different markets, including the brand name
Flécaïne LI in France. Flécaïne LI is also commonly referred to outside of France as Tambocor IR. (Joint Stip. ¶ 10).
In 1988, 3M patented a controlled release compound of flecainide acetate that was known in most of the world as Tambocor CR, though it was not introduced to the French market prior to 2001. (Joint Stip. ¶ 11-12). Upon its introduction to the French market, Tambocor CR was branded as
Flécaïne LP. 3M Santé obtained a patent for Flécaïne LP in France, which was set to expire in November 2009. (Joint Stip. ¶ 16).
2. Negotiating a Reimbursement Price for Flécaïne LP in France
As part of bringing Flécaïne LP to the market, 3M Santé executives engaged in the ordinary process for obtaining a reimbursement price for a new drug in France. This process consists of negotiating a bilateral pricing document with the French drug pricing authority known as CEPS. After initially obtaining a reimbursement price for
Flécaïne LP higher than that of a generic, 3M Santé executives engaged in ongoing negotiations with the French government to prevent a decline in that price.
Meda urges the Court to believe that 3M Santé 's concerns about maintaining the reimbursement price for
Flécaïne LP derived solely from a non-public provision in a document negotiated with the French government in 2003 that was not disclosed to Meda at the time of the acquisition. However, as discussed below, the Court finds that the concerns about the future reimbursement price of
Flécaïne LP that animated 3M Santé 's executives from 2003 through 2006 derived largely from a myriad of publicly known factors.
i. The French Drug Approval Process
In France, where the government provides reimbursement for the price of over 90% of drugs on the market and the citizenry expects to be reimbursed for the cost of their medicines, one of the most important objectives of a pharmaceutical company introducing a drug to the market is to convince the French government to agree to a high reimbursement price. Such was the case for 3M Santé executives when they brought
Flécaïne LP to market. To understand what steps 3M Santé executives took to obtain their desired reimbursement price for
Flécaïne LP upon its introduction to the French market, it is necessary to first have a basic understanding of the French pharmaceutical regulatory landscape.
Permission to market a drug in France is initially granted by the National Agency for the Security of Medicines ( Agence Nationale de
Sécurité de Medicament ) (" ANSM" ), which, until 2011, was called the Agency for the Health and Safety of Products ( Agence
Française de Sécurité Sanitaire des Produits de Santé ) ("AFSSAPS" ). (Joint Stip. ¶ 5). The ANSM provides " medical approval," which is roughly equivalent to the kind of approval granted by the FDA in the United States deeming a drug safe for the public. ( Id .).
Once medical approval is granted, the Transparency Commission of the High Health Authority ( Haute Autorité de Santé ) assigns ratings to the drug reflecting its medical benefits (" SMR Rating" ) and the comparative benefit the drug provides relative to other drugs on the market (" ASMR Rating" ). (Joint Stip. ¶ 6). The ASMR is assigned on a scale from I to V that assesses a new drug's level of innovation. ( See Mariotte Rep. § II.1.ii; Schur Decl. ¶ ¶ 11-14). The ASMR scale operates as follows:
I. Major Innovation
II. Important Improvement
III. Modest Improvement
IV. Minor Improvement
V. No Improvement
(Schur Decl. ¶ 12).
ii. The Pricing Reimbursement Approval Body Known as CEPS
After the drug is rated by the Transparency Commission, the pharmaceutical company must negotiate the reimbursement price of the drug with le Comité Economique des Produits de Santé (" CEPS" ), the agency responsible for establishing and negotiating the price of reimbursable drugs that are sold in France. (Joint Stip. ¶ 7). In English, CEPS is sometimes referred to as " the Economic Committee." Article L. 162-16-4 of the French Social Security Code (the " CSS" ) establishes general principles for drug price fixing and sets forth the competence of CEPS to fix drug prices. It is important to keep in mind that CEPS is an agency independent of the ANSM. As discussed in the previous section, the ANSM is the agency responsible for providing medical approval without which no drugs may be sold in France. CEPS' responsibility, by contrast, relates to pricing reimbursements for drugs that have already received medical approval from the ANSM.
Pursuant to Article L. 162-17-4 of the CSS, CEPS and a pharmaceutical company can execute a " convention," which is a bilateral negotiated document between the company and CEPS that addresses the price of drugs sold by the company.
There are three kinds of conventions. First, there is a multi-year convention between an industry organization called " LEEM" and CEPS that sets the framework for the negotiation of annual CEPS conventions. (Schur Decl. ¶ 19). This is either a three-year or a four-year sector-wide agreement
Second, there is what is commonly referred to as an " annual convention," which typically contains a list of prices for all reimbursed drugs and a re-affirmation of any other commitments made by a company. Annual conventions are generally signed at or around the end of each year, and the prices of reimbursed drugs are generally not negotiated in connection with this process. (Mariotte Rep. ¶ 14; Schur Decl. ¶ 19).
Third, there is " [a]n agreement that establishes the price of a new drug on the French market or changes the price of an existing drug on the market." (Mariotte Rep. ¶ 14; Schur Decl. ¶ 19). The key convention at issue in this case--the March 2003 Convention between 3M Santé and CEPS setting the price of
Flécaïne LP in France, and in particular Article 2.2 of that convention--falls in this third category. As 3M's French law expert Jonathan Schur persuasively explained, these agreements are not hard and fast rules. Instead,
there is a degree of flexibility in the instructions given by the ministers, leaving open avenues for improving the position of the drug company even when the broad lines of pricing policies are maintained. Drug companies regularly raise numerous factors--scientific, medical, economic, and social--in trying to negotiate the most favorable possible arrangement. Indeed, the French Courdes Comptes, the administration's financial watchdog, has criticized the flexibility of the pricing system as leading to higher drug prices than would apply if the rules were applied strictly, in particular as concerns drugs like
Flécaïne LP, which are classified by CEPS as 'counter-generics.'
(Schur Decl. ¶ 24). In general, information from this category of conventions that
is publicly available includes the current wholesale and retail reimbursement prices, which are published in the Journal Officiel de la
République Française (the " Journel Officiel " ). (Dierks Decl. ¶ 17; PX 415 at 20; Schur Decl. ¶ 25). However, all parties knowledgeable in French drug-pricing procedures are aware that conventions may contain so-called Annex 4 provisions that address non-public information between CEPS and the pharmaceutical company regarding future drug pricing. (Tr. at 592-93).
In the event that CEPS and a drug company fail to reach an agreement, CEPS will fix the drug price by unilateral decision. (JX-135 at 20). Companies therefore have an incentive to conclude a " convention" with CEPS.
One of the harshest things that CEPS can do is impose so-called " TFR pricing," which stands for Tarif Forfaitaire de Responsabilité (" Reference Price System" ). This procedure empowers CEPS to impose a single maximum reimbursement amount (called the " TFR" ) for a branded version of a drug and all of its generics, in effect forcing their price down to the TFR price. (Schur Decl. ¶ 16 & n.4; Destal Decl. ¶ ¶ 50-55; Biffaud Decl. ¶ 27; Barreau Decl. ¶ 18).
iii. 3M Santé Obtained a Reimbursement Price for
In late 2002 and into 2003, Eric Felber, the then-manager of 3M Santé 's Pharma Business, negotiated with CEPS concerning the pricing of both
Flécaïne LI, the older immediate release compound form of flecainide acetate whose convention was terminating and whose patent was expired, and flecainide acetate, the new version of
Flécaïne whose patent was not scheduled to expire until November of 2009. Felber's negotiations largely took place with Noë l Renaudin (" Renaudin" ), the then-President of CEPS. (Biffaud Decl. ¶ 28).
Historically, Flécaïne LI had been 3M's most profitable drug in France, accounting for approximately 61% of 3M Santé 's pharmaceutical sales and 82% of its pharmaceutical profits. (Biffaud Decl. ¶ 30; DX 54.) With the anticipated entry of generics of
Flécaïne LI into the marketplace, and with it an expected 25-30% decrease in the price of
Flécaïne LI, it was 3M's business strategy to accelerate the penetration of
Flécaïne LP by having cardiologists shift their patients from the lower priced
Flécaïne LI to what would be the more expensive Flécaïne LP. (Biffaud Decl. 1 30).
Working against this plan, however, 3M Santé understood that CEPS viewed
Flécaïne LP as a " counter-generic" -- that is, a drug that provided little or no additional benefit over
Flécaïne LI. CEPS took the view that 3M manufactured Flécaïne LP to offset the expected decline in the price of
Flécaïne LI upon the expiration of its patent. (Biffaud Decl. 1 30). CEPS' view was driven by the Transparency Commissions' granting
Flécaïne LP an ASMR Rating of only " IV," which signals the Commission's view that the drug represents only a " minor improvement" over a prior drug.
With that background, 3M Santé and CEPS entered into a convention in March 2003 (the " March 2003 Convention" ) which set the prices for
Flécaïne LP for a three-year period. (Biffaud Decl. ¶ 31; Barreau Decl. ¶ 12). CEPS set the price of
Flécaïne LP at € 17.10 per unit. (Forey Decl. ¶ 8). Pursuant to Article 2.2 of the March
2003 Convention--which was a so-called " Annex 4" provision, as discussed in the previous section--3M Santé was to:
take all necessary steps to ensure that, at the end of a 3-year period dating from the publication in the Official Journal of the prices of the proprietary drugs mentioned in Table 2 or Article 1, an equivalent of each of these proprietary drugs, or failing that, each of these proprietary drugs, are placed on the market at the price of the generic drug corresponding to these proprietary drugs.
Article 2.2 reflected CEPS' position that Flécaïne LP was a counter-generic drug with minimal or no health benefits over
Flécaïne LI that should be priced in accordance with the guidelines it had received from the Ministry of Health. (Biffaud Decl. ¶ 32; Barreau Decl. ¶ 12). 3M Santé executives understood Article 2.2 to embody CEPS' position on
Flécaïne LP as a counter-generic and to mean that following the conclusion of the three-year convention, they should either do what they can to get a generic version of
Flécaïne LP onto the market, or else see the price of Flécaïne LP fall to that of a generic. (Biffaud Decl. ¶ ¶ 31-32; Barreau Decl. ¶ 12). 3M Santé did not agree with that position, but " accepted" it with the expectation that 3M Santé would be able to renegotiate these matters by 2006. (Barreau Decl. ¶ 12). Though Article 2.2 was not publicly available, anyone familiar with the French pharmaceutical industry would have known that
Flécaïne LP was likely to be viewed by CEPS as a counter-generic based on its ASMR rating of IV. (Schur Decl. ¶ ¶ 20 & n.6, 35-49).
iv. 3M Santé 's " Flécaïne Steering Committee"
Because 3M Santé wanted to maintain the price of
Flécaïne LP until the expiration of its patent in 2009, Frédéric Biffaud, a 3M Santé employee, established a " Steering Committee" to prepare for future and ongoing negotiation with the Economic Committee well in advance of the 2006 re-registration for
Flécaïne LP. (Biffaud Decl. ¶ 37; Barreau Decl. ¶ 15; Forey Decl. ¶ 10). The Steering Committee's goal was broadly defined to maintain the price of
Flécaïne LP through the expiration of its patent in 2009, through two principle objectives: (1) to persuade the Transparency Committee that
Flécaïne LP was not a counter-generic, but rather, a valuable drug important to the health and welfare of the country; and (2) to analyze the economic factors that CEPS considers when pricing a reimbursable drug, including 3M Santé 's investment in France. (Biffaud Decl. ¶ 38). Meda has argued that the Steering Committee was designed specifically to combat Article 2.2. However, as discussed below, the Court finds that the Steering Committee was organized to combat a much broader perceived threat to the price of
Flécaïne LP, not a threat separately or uniquely derived from a single provision in a convention.
a. 3M Santé Executives Did Not Believe That a Price Decrease Was Automatic
3M Santé employees were concerned about the future reimbursement price for
Flécaïne LP in light of, inter alia, the constant pressure imposed by the Ministry of Health to reduce the health care budget, CEPS' view that
Flécaïne LP was a " counter-generic" drug, and CEPS' hostile attitude toward such drugs. (Biffaud Decl. ¶ 41). The Steering Committee was also reasonably concerned with the authority of CEPS to unilaterally impose TFR pricing on
Flécaïne LP at some point in time that could result in a 40% decrease in the price of the drug. ( Id .). But they adamantly
did not believe that a price decrease was a foregone conclusion.
On July 21, 2004, 3M Santé executives, including Maxim Delpy, Benoit Traineau,
Frédéric Biffaud, and Helene Kolsky, met with Mr. Renaudin of CEPS to discuss a future reimbursement price for
Flécaïne LP. During this meeting, Mr. Renaudin warned 3M Santé executives that " when the CEPS signs the agreements involving generic products, it applies them. It is imperative that the roadmaps be respected." Following this meeting, Ms. Kolsky informed her colleagues that the CEPS Convention " has a very limited renegotiation margin: For Mr. Renaudin, and on the basis of the agreement signed by 3M in April 2003, registration of a generic of the slow-acting product in 2006 is nonnegotiable: < < the CEPS will see to it that all contracts are executed with ferocity > > ." (JX-24A-R). Moreover, in preparation for meetings with Renaudin, the Steering Committee prepared scripts anticipating the way he might reject any efforts at renegotiating Article 2.2 or otherwise maintaining a high reimbursement price for
Flécaïne LP. (JX-140A). Yet, though Article 2.2 was unquestionably discussed with Renaudin and within 3M Santé vis-à-vis the future reimbursement price for
Flécaïne LP, the Court finds that 3M Santé 's employees did not view ...