Mulderrig v. Amyris, Inc., Case No.: 19-CV-1765 YGR
| Decision Date | 05 October 2020 |
| Docket Number | Case No.: 19-CV-1765 YGR |
| Citation | 492 F.Supp.3d 999 |
| Parties | Shane MULDERRIG and Rony Devorah, on behalf of themselves and all others similarly situated, Plaintiffs, v. AMYRIS, INC., John G. Melo, Kathleen Valiasek, Defendants. |
| Court | U.S. District Court — Northern District of California |
Lesley F. Portnoy, Charles Henry Linehan, Lionel Z. Glancy, Pavithra Rajesh, Robert Vincent Prongay, Glancy Prongay & Murray LLP, Los Angeles, CA, Robert S. Green, Green & Noblin, P.C., Larkspur, CA, Amanda Brooke Murphy, Pro Hac Vice, Federman and Sherwood, Oklahoma City, OK, for Plaintiffs Shane Mulderrig, Rony Devorah.
Amanda Brooke Murphy, William B. Federman, Federman and Sherwood, Oklahoma City, OK, for Plaintiffs Rob Jansen, Vincent Carbone.
Michael D. Celio, Gibson, Dunn & Crutcher LLP, Palo Alto, CA, Elizabeth A. Dooley, Gibson, Dunn Crutcher LLP, Piper Molly Pehrson, Gibson Dunn, San Francisco, CA, Shireen A. Barday, Pro Hac Vice, Gibson Dunn Crutcher LLP, New York, NY, for Defendant Amyris, Inc.
Michael D. Celio, Gibson, Dunn & Crutcher LLP, Palo Alto, CA, Elizabeth A. Dooley, Gibson, Dunn Crutcher LLP, Piper Molly Pehrson, Gibson Dunn, San Francisco, CA, for Defendant John G. Melo.
James N. Kramer, James Neil Kramer, Molly McCafferty, Orrick Herrington & Sutcliffe LLP, Elizabeth A. Dooley, Gibson, Dunn Crutcher LLP, Piper Molly Pehrson, Gibson Dunn, San Francisco, CA, Michael D. Celio, Gibson, Dunn & Crutcher LLP, Palo Alto, CA, for Defendant Kathleen Valiasek.
ORDER DENYING MOTION OF DEFENDANTS TO DISMISS AMENDED CLASS ACTION COMPLAINT
Defendants Amyris, Inc., John G. Melo, and Kathleen Valiasek move this Court for an order dismissing plaintiffs’ claims for violation of Section 10(b) and Section 20(a) of the Exchange Act, 15 U.S.C. §§ 78j(b) and 78t(a), as alleged in plaintiffs’ first Amended Class Action Complaint (Dkt. No. 43, "FAC"). Having carefully considered the papers submitted and the pleadings in this action, and the matters judicially noticeable, and for the reasons set forth below, the Court DENIES the Motion to Dismiss.
Plaintiffs contend that Amyris's financial statements overstated estimations of future royalty payments based on projected and estimated product sales, in violation of Generally Accepted Accounting Principles ("GAAP")1 . Violations of GAAP are presumed to be misleading. See SEC Regulation S-X, 17 C.F.R. § 210.4-01. Plaintiffs have alleged facts sufficient to show that defendants’ alleged GAAP violations here were significant and material. See In re Daou Systems, Inc. , 411 F.3d 1006, 1016-17 (9th Circ. 2005). In addition, the statements defendants contend were forward-looking growth and revenue projections were accompanied by and premised upon false representations of current revenue, making them ineligible for the PSLRA's safe harbor. Moreover, defendants made false or misleading statements concerning material weaknesses in its internal controls. With respect to all these allegations, plaintiffs have alleged sufficient facts that, when viewed holistically, give rise to a strong inference of scienter. Further, these allegations support plaintiffs’ claims of control person liability pursuant to Section 20(a).2
Amyris is an industrial biotechnology company that manufactures and sells products in the health and wellness, "clean beauty," flavor, and fragrance markets. Beginning in 2014, Amyris commercialized and licensed "farnesene," a type of hydrocarbon molecule that it manufactured using its engineered microbes. Defendant John Melo was the Chief Executive Officer and director of Amyris beginning in January 2007, and president of the company beginning in 2008, through the relevant alleged Class Period.4 Melo had worked previously at Ernst & Young, an accounting firm. Defendant Kathleen Valiasek became the Chief Financial Officer in January 2017 until June 2019. Valiasek holds a degree in accounting from the University of Massachusetts, Amherst.
In 2017, as stated in the Company's Annual 10-K Report for the fiscal year ended December 31, 2017, Amyris disclosed a material weakness in its internal control over financial reporting related to "a lack of sufficient resources ... to be able to adequately identify, record, and disclose non-routine transactions." (FAC ¶¶ 5, 47.) The disclosure stated that the company "lacked a sufficient number of trained resources with assigned responsibility and accountability over the design and operation of internal controls related to complex, significant non-routine transactions as well as routine transactions and financial statement presentation and disclosure," and did not "have an effective risk assessment process to identify and analyze necessary changes in significant accounting policies and practices that were responsive to: (i) changes in business operations resulting from complex significant non-routine transactions, (ii) implementation of new accounting standards and related disclosures, and (iii) completeness and adequacy of required disclosures." (FAC ¶ 47.)
The statement for the year ended December 31, 2017, indicated these material weaknesses resulted in "material misstatements" in financial statements, and created "a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements that would not be prevented or detected on a timely basis." (Id. ) Amyris further represented that it was addressing the material weaknesses with a remediation plan, including increased staffing in key accounting positions, "documenting and augmenting" accounting policies, and training staff on new and existing accounting issues. (Id .) The 2017 Form 10-K reported total liabilities of $346.1 million and net loss attributable to the Company's common stockholders of $93.3 million. (FAC ¶ 46.)
On December 28, 2017, Amyris finalized the sale of its Amyris Brasil farnesene manufacturing facility to Koninklijke DSM N.V. ("DSM"). Under that agreement, Amyris licensed the use of farnesene in the Vitamin E
, lubricant, and flavor and fragrance markets to DSM for a fee of $27.5 million and assigned to DSM a farnesene supply agreement Amyris had with Nenter & Co. ("the Agreement"). (FAC ¶ 23.)5 The Agreement required DSM to pay to Amyris a portion of the profits realized by Nenter and paid to DSM. (Id. )
Beginning in March 2018, Amyris informed investors that it was now reporting revenue based upon new GAAP accounting standards issued by the Financial Accounting Standards Board—Accounting Standard Codification ("ASC") Topic 606, Revenue from Contracts with Customers ("ASC 606")—which for Amyris went into effect as of January 1, 2018. In fact, Amyris's reported royalty revenue was not made consistent with ASC 606 but was based upon estimations of future payments that in turn relied on projected and estimated Nenter product sales. (FAC ¶ 30.) Thus, Amyris represented that it had recognized royalty payments that were estimate of sales by DSM's client, Nenter, and any payments Amyris would receive under the Agreement were dependent on Nenter's profits at a later date. (Id. ) Some detail about ACS 606 is necessary to put the allegations into context.
ASC 606 regarding Revenue from Contracts with Customers, issued May 2014, went into effect for nonpublic entities as of annual reporting periods beginning after December 15, 2017. (ASC 606 at 9.) As a general matter, ASC 606 allows a business to recognize revenue once it has fulfilled all of its performance obligations under a contract, rather than upon receipt of payment. (FAC ¶ 24.) So, for example, a business may recognize revenue when it delivers a good sold for a fixed price if delivery of the goods is the business's final performance obligation under the contract. In such a scenario, the amount of revenue is certain since there is a fixed price for the goods.
When the consideration to be paid by the customer is variable, ASC 606 puts restraints on how revenue from the contract can be recognized:
An entity shall include in the transaction price some or all of an amount of variable consideration estimated ... only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.
(FAC ¶ 28, citing ASC 606-10-32-11, emphasis in FAC.)6 In the case of a licensing agreement, as Amyris had with DSM here, ASC 606 more specifically provides that sales-based royalties received in exchange for a license of intellectual property should be recognized as revenue only under the following conditions:
(Id. ¶ 30; ASC 606-10-55-65, emphasis supplied.) This sales-based royalty exception "applies when the royalty relates only to a license of intellectual property or when a license of intellectual property is the predominant item to which the royalty relates." (FAC ¶ 27 citing ASC 606-10-55-65A.) When revenue is sales-based but the license of intellectual property is not the only or predominant item to which the royalty relates, "the guidance on variable consideration ... applies to the sales-based or usage-based royalty." (Id . citing ASC 606-10-55-65B)7
As plaintiffs allege, the provisions of ASC 606 applicable to sales-based royalties differ from the general principles of ASC 606:
Royalties are [a] form of variable consideration. However, ASC 606 contains an exception to the principle requiring an estimate of variable...
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