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In re Bracket Holding Corp. Litigation

Superior Court of Delaware

April 11, 2019

IN RE BRACKET HOLDING CORP. LITIGATION,

          Submitted: March 28, 2019

         Express Scripts, Inc. and United BioSource LLC's Motion in Limine to Exclude Certain Evidence at Trial - GRANTED in Part and DENIED in Part

         Express Scripts, Inc. and United BioSource LLC's Motion for Summary Judgment - DENIED

         Bracket Holding Corp.'s Motions in Limine to Exclude Certain Irrelevant, Confusing, and Prejudicial Evidence - GRANTED in Part and DENIED in Part

         Express Scripts, Inc. and United BioSource LLC's Daubert Motion to Exclude the Expert Testimony of Louis Dudney - DENIED

         Bracket Holding Corp.'s Daubert Motion to Exclude the Expert Testimony of Mark Zmijewski and Gordon Klein - DENIED

          David E. Ross, Esquire; Eric D. Selden, Esquire (Argued); Ross Aronstam & Moritz LLP, Attorneys for Plaintiff.

          Howard M. Kaplan, Esquire (Argued); Reed S. Oslan, Esquire; Mark Premo-Hopkins, Esquire (Argued); Kirkland & Ellis LLP, Attorneys for Plaintiff.

          Kevin G. Abrams, Esquire; Michael A. Barlow, Esquire (Argued); Abrams & Bayliss LLP, 20 Montchanin Road, Attorneys for Defendants.

          Richard I. Werder, Jr., Esquire (Argued); Rollo Baker, Esquire (Argued); Dominic Pody, Esquire; Ben Cornfeld, Esquire; Silpa Maruri, Esquire (Argued); Quinn Emanuel Urquhart & Sullivan LLP, Attorneys for Defendants.

          MEMORANDUM OPINION

          WILLIAM C. CARPENTER, JR. JUDGE

         Before the Court is Defendants Express Scripts, Inc. ("ESI") and United BioSource LLC's ("UBS") (collectively, "Defendants") Motion in Limine to Exclude Certain Evidence at Trial and Motion for Summary Judgment. Plaintiff Bracket Holding Corp. ("Plaintiff or "Bracket") has also filed its own Motions in Limine to Exclude Certain Irrelevant, Confusing, and Prejudicial Evidence. Both parties have also filed Daubert Motions to exclude the testimony of each other's expert witnesses. For the reasons set forth in this Opinion, Defendants' Motion in Limine is GRANTED in part and DENIED in part, and their Motion for Summary Judgment is DENIED. Plaintiffs Motions in Limine are GRANTED in part and DENIED in part. The Daubert Motions to exclude expert witnesses are DENIED.

         I. FACTUAL & PROCEDURAL BACKGROUND

         A. The Parties

         ESI is a Delaware corporation engaged in pharmaceutical support services and benefits management.[1] In April 2012, ESI purchased UBC, which owned Bracket Global Holdings LLC, Bracket Global K.K., and Bracket Global Limited (collectively, "the Company).[2] In June 2013, Parthenon Capital Partners ("Parthenon"), a private equity fund, formed Bracket Holding Corp. in order to purchase the Company from UBC (the "Sale" or "Transaction").[3] At all relevant times prior to closing the Sale, Jim Stewart ("Stewart") was the Company's Vice President of Finance and Controller for its Scientific Services Division.[4] After the Transaction closed on August 15, 2013, Stewart was appointed Bracket's Vice President of Finance and Secretary.[5]

         B. Marketing & Sale of the Company

         ESI and UBC began marketing the Company for sale in the fall of 2012.[6] ESI, through its agents and employees, apparently "exercised significant control over the process of selling the Company."[7] ESI hired Credit Suisse Securities (USA) LLC ("Credit Suisse") as a financial advisor and KPMG LLC ("KPMG") to perform seller-side due diligence.[8] Credit Suisse prepared a Confidential Information Memorandum ("CIM"), [9] and KPMG conducted a Quality of Earnings ("QoE") investigation and issued its findings in a February 2013 QoE Report.[10]

         Both the CIM and QoE Report were provided to potential purchasers in connection with the sale of the Company.[11] The materials reflected, among other things, the Company's historical earnings before interest, tax, depreciation, and amortization ("EBITDA"), along with current and projected estimates of working capital.[12] The CIM touted the Company as a leading pharmaceutical services provider with a 16.4% increase in revenue from 2009 to 2012.[13] These financial figures were apparently based on historical "unaudited internal management financial statements" and projections supplied by Company management.[14] The QoE Report cited the CIM, information provided by management, and "Q&A sessions" with Stewart and others as the "key sources" KPMG relied upon in arriving at its QoE findings.[15]

         ESI and UBC collected and prepared the financial information KPMG and Credit Suisse used to complete the CIM and QoE Report.[16] In this regard, ESI and UBC worked closely with Stewart, as the Company's then-Vice President of Finance and Controller of the Scientific Services Division.[17] Throughout the sales process, Stewart was "substantially involved and worked closely with ESI and UBC in responding to due diligence requests with respect to the Company's revenue recognition policies and financial statements."[18]

         At ESI's direction, UBC sent a copy of the CIM to Parthenon in October of 2012. Based on the representations contained in the CIM and conversations with Credit Suisse personnel, Parthenon viewed the Company as a potential acquisition target. On January 3, 2013, Parthenon sent Credit Suisse an indication of interest.[19]

         Several meetings among Parthenon, Company management, and representatives of both ESI and UBC took place in January and February of 2013.[20]On February 22, 2013, Parthenon sent a letter of intent to purchase the Company.[21]Thereafter, Parthenon continued to perform due diligence, which included review and consideration of the QoE Report, the Company's financials, and customer agreements. Parthenon also engaged auditors from Ernst & Young to further assist with the diligence process.

         On April 13, 2013, Parthenon submitted a revised letter of intent based collectively on the CIM, QoE Report, and the represented historical financial information of the Company through March 31, 2013. These financials reflected that the Company continued to generate over $30 million in EBITDA over the prior twelve-month period. Parthenon's intent to purchase the Company would nevertheless remain contingent upon the Company's financial performance through May 2013.

         UBC and Credit Suisse provided the May 31, 2013 financial statements to Parthenon in early June 2013. The updated financials were based on and incorporated the March 31, 2013 statements, and reflected similar trailing twelve months ("TTM") revenue and EBITDA.[22] UBC and ESI allegedly represented that the financial information was true and accurate.[23]

         Satisfied with the information it received about the Company, Parthenon formed Bracket to complete the Transaction.[24] Bracket agreed to purchase the Company from UBC for over $ 180 million.[25]

         C. The Securities Purchase Agreement

         UBC and Bracket entered a Securities Purchase Agreement ("SPA") on July 12, 2013.[26] The SPA included express representations and warranties by UBC as to the accuracy of certain financial information. Specifically, in § 3.4, UBC represented and warranted that the "Financial Statements" were derived from and consistent with the Company's books and records, had been "prepared in accordance with" U.S. Generally Accepted Accounting Principles ("GAAP"), and "present[ed] fairly in all material respects the financial position and results of operation" of the Company.[27] As defined, "Financial Statements" included the Company's unaudited combined balance sheets as of (1) March 31, 2013 and "related statements of income for the three-month period then ended;" (2) December 31, 2012 and "related statements of income for the twelve-month period then ended;" and (3) December 31, 2011 and "related statements of income for the twelve-month period then ended."[28]

         Closing took place on August 14, 2013. In accordance with SPA Disclosure Schedule 2.3, Bracket wired the funds to close the deal to ESI's account.[29] UBC, at ESFs direction, executed a closing certificate affirming to Bracket that UBC's representations and warranties remained true and correct as of the Closing date and that all covenants and agreements had been performed.[30] Individuals comprising the "Knowledge Group," including Stewart, likewise signed certificates at closing attesting to the truth and accuracy of representations and warranties contained in the SPA.[31]

         D. Bracket's Discovery of the Alleged Fraud

         The day after the Transaction Closed, August 15, 2013, Stewart was named Bracket's Vice President of Finance and Secretary. However, by December 2013, Stewart's financial reporting and accounting practices were called into question. Bracket's new Chief Financial Officer and consultants apparently "discovered that many of the unbilled receivables" Stewart recorded "were invalid and could never be billed." Further investigation allegedly revealed that Stewart had tracked revenue in a separate file maintained only by him and recognized revenue for contracts prior to work being performed, from non-existent and/or terminated contracts, and/or in amounts above contracted totals for active contracts.

         As a result of these alleged improper accounting practices, it is asserted that UBC overstated revenue in connection with the sale of the Company by approximately $8 million in the financial statements provided for the twelve months ended December 31, 2011; $8 million in the financial statements for the twelve months ended December 31, 2012; and $2.8 million in the financial statements for the three months ended March 31, 2013. Overall, Bracket claims it overpaid to acquire the Company by $50 million dollars as a result of the purportedly fraudulent financials Defendants supplied in connection with the Transaction.

         E. The Instant Litigation

         On April 13, 2016, Bracket filed an Amended Complaint in this Court. Bracket's Amended Complaint asserted a number of claims, including fraud, aiding and abetting, conspiracy, and breach of fiduciary duty against ESI, UBC, and Stewart. The Court dismissed Plaintiffs Amended Complaint against Stewart in a Memorandum Opinion dated July 31, 2017. Defendants' Motion to Dismiss was denied in the same Opinion.

         On October 1, 2018, Defendants filed a Motion in Limine to Exclude Certain Evidence at Trial and a Motion for Summary Judgment. Plaintiff filed its own Motions in Limine on the same date. The Court reserved decision on these Motions after hearing oral argument on December 18, 2018. The Court conducted a hearing on March 28, 2019 to determine the admissibility of the Plaintiffs expert opinion. While briefly addressed at the end of this Opinion, the parties have been advised that the expert testimony would not be excluded. This Opinion resolves all pending motions before the Court, and the trial in this matter is scheduled to begin on June 10, 2019.

         II. DISCUSSION

         A. Defendants' Motion in Limine to Exclude Certain Evidence at Trial

         Defendants have filed a Motion in Limine seeking to exclude: (1) baseless and unfairly prejudicial assertions of a "secret" Revenue File; (2) irrelevant, dated, and unfairly prejudicial emails; (3) the Allied World arbitration decision; (4) testimony devoid of personal knowledge and based on hearsay regarding purported analysis by, or communications with, third parties; (5) compensation information; and (6) inflammatory and conclusory descriptors.[32] This Opinion will address each issue in the order in which it was presented to the Court.

         1. "Secret" Revenue File

         Defendants argue that Plaintiff should not be permitted to offer any testimony, evidence, or argument that Stewart allegedly kept a "secret" revenue file on his Company-issued laptop because it is unfounded speculation and unfairly prejudicial.[33] In response, Bracket contends that "objections to evidence concerning Stewart's secret revenue file are premature ... and should be reserved for trial."[34]

         The Court generally agrees with Plaintiff that any rulings regarding the admissibility of the alleged secret revenue file should be made during trial. At the hearing on March 28, 2019 regarding the admissibility of Plaintiff s expert, Louis Dudney ("Dudney"), there appeared to be no dispute that Stewart maintained a revenue file separate from the routine financial records of the Company. It further appears this file was utilized to make changes to the Company's financial records at the direction of Stewart. The Court has been told the revenue file was provided to Plaintiff upon the closing of the Sale. If true, the Court finds it unfairly prejudicial to reference this file as "secret." If Plaintiff did not know about the revenue file until after closing, Bracket certainly may testify that its existence was not disclosed or that it was unaware of the revenue file when making the purchase decision. Plaintiffs expert may also testify how, from his review, this file was maintained and used by Stewart. However, "secret" has a particularly sinister connotation and should not be used at trial. As to whether Plaintiff will establish the proper foundation for its admissibility will remain an issue for trial.

         2. "Earnings Management" Emails

         Defendants next seek to exclude certain emails purportedly indicative of Stewart's manipulation of the Company's financial statements, or his "earnings management," because they are irrelevant, prejudicial, and would create an unnecessary series of mini-trials.[35] Plaintiff claims that the emails are relevant because they "demonstrate Stewart's long history of manipulating financial reports and overstating revenue" and also establish Defendants' knowledge of his fraud.[36]

         These emails do not appear to reference the Transaction at issue here, nor is it possible to fairly put them in context without unnecessarily expanding the trial into areas not related to this Sale. Therefore, unless Plaintiff can demonstrate that an email specifically references the Bracket Transaction, it is not admissible. That said, the Court can envision the possibility of the emails becoming relevant for impeachment purposes on cross-examination. If a party wants to use the emails in this manner, it will be required to seek a ruling from the Court at trial and may not display them to the jury or ask questions about them until the Court rules on their limited admission. Therefore, Defendants' Motion in Limine to exclude the "earnings management" emails as substantive evidence is granted, with the very limited exception noted above.

         3. Allied World Arbitration Decision

         Defendants also argue that Plaintiff should not be permitted to introduce a prior arbitration decision related to Bracket's purchase of the Company because it is inadmissible hearsay.[37] More specifically, Bracket obtained a representation and warranty insurance policy when it bought the Company, and "prevailed ... against the insurer to recover ... proceeds for purported breaches of the representation and warranties in the Securities Purchase Agreement."[38] Defendants "were not parties in that arbitration and had absolutely no opportunity to participate or present a defense."[39] In response, Bracket contends that although it "does not intend to use the decision for collateral estoppel purposes," any ruling on its admissibility should be reserved until trial, if necessary.[40]

         The Court finds the Allied World arbitration decision is generally not admissible, unless Plaintiff can establish its relevance in trial. Bracket may not refer to the decision during trial, unless the Court rules otherwise.

         4. Certain Testimony of Plaintiffs Witnesses

         Next, Defendants move to exclude the accounting analyses and investigations performed by AlixPartners and Pine Hill Group to the extent they relied upon witnesses who allegedly have no personal knowledge of services rendered prior to the Sale of the Company.[41] Additionally, they argue that any testimony regarding Stewart's purported motivations for allegedly committing fraud, as well as any hearsay evidence concerning him, should be excluded at trial.[42]

         Bracket claims that its witnesses do have personal knowledge relating to the work done by Pine Hill Group and AlixPartners, and any objection to their testimony is premature.[43] Plaintiff also argues it "is allowed to put in evidence, and can argue from that evidence, that there was a motivation for Stewart to commit fraud, and [the] jury is free to believe or disbelieve that evidence."[44] Finally, Bracket contends that objections to hearsay evidence concerning Stewart are vague and also premature.[45]

         This issue was also raised in the hearing relating to the admissibility of Dudney's testimony. The objection rose from the fact that, when Dudney had questions regarding a particular contract, he would go to the corresponding contract manager to resolve the issue. There is some disagreement as to whether these individuals were actually managing the contracts in the time frame relevant to this litigation, and whether Dudney's team talked to the actual contract manager or to a designated intermediate acting as point person for these questions. While these issues are certainly appropriate areas for cross-examination, the Court does not find they warrant excluding the sources of the information used by Dudney in his opinions from his testimony. The Court assumes many of the contract personnel during the relevant time frame of this dispute worked for Defendants and they certainly should know who they are and could have questioned them. That said, Dudney should be prepared to respond to questions about who provided the information he is relying upon for his opinions, and what those discussions entailed. The inability to do so will undermine his credibility and the opinions he is rendering.

         Further, objections to the admissibility of any evidence concerning Stewart's motivation are premature and must await trial. If the Plaintiffs have evidence that Stewart took certain actions so he would benefit from the Transaction, they are free to present it. However, at the moment, all the Court has heard is speculation and unfounded inferences, which will not be admitted. Therefore, the admissibility of this evidence will await trial.

         5. Compensation Information

         Defendants also move to exclude evidence and testimony "concerning the compensation of Stewart and Catherine Spear (formerly the General Manager of the Company) in 2013 and the surrounding years."[46] They argue that this information is irrelevant and unfairly prejudicial because Plaintiff has been unable to establish any factual link between their compensation and the alleged fraud.[47] In response, Bracket contends that evidence relating to Stewart and Spear's salaries goes directly to the issue of motivation to commit the fraud and helps establish Defendants' liability.[48]

         The Court will not permit Plaintiff to introduce W-2s for Stewart and Spear because that information by itself is not relevant. If Bracket wishes to use Stewart's or Spear's compensation to establish motive, it must tie their financial situation to the benefit they would receive by the Sale of the Company and the alleged fraud. As such, the admissibility of this evidence will wait until it is presented at trial.

         6. Inflammatory and Conclusory Descriptors

         Finally, Defendants seek to exclude the "inflammatory and conclusory" descriptors used in Bracket's Amended Complaint.[49] They contend that the use of terms like "fake," "false," "phantom," "fictitious," "non-existent", and "forced" at trial will be unfairly prejudicial.[50] Plaintiff argues that Defendants' objection to these terms ...


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