Washtenaw Cnty. Emps.' Ret. Sys. v. Walgreen Co.
| Decision Date | 15 November 2019 |
| Docket Number | Case No. 15 C 3187 |
| Parties | WASHTENAW COUNTY EMPLOYEES' RETIREMENT SYSTEM, Individually and on Behalf of All Others Similarly Situated, Plaintiffs, v. WALGREEN CO., GREGORY D. WASSON, and WADE D. MIQUELON, Defendants. |
| Court | U.S. District Court — Northern District of Illinois |
MEMORANDUM OPINION AND ORDER
Lead Plaintiff Industriens Pensionsforsikring, A/S ("Plaintiffs")1 has renewed its Motion To Compel Defendant Wade D. Miquelon To Produce Documents Provided to the Securities and Exchange Commission (D.E. 260, "Motion to Compel"). The documents consist of three PowerPoint presentations dated April 18, May 2, and June 7, 2018, and one "white paper" dated June 4, 2018 (collectively, "the Miquelon Rule 408 SEC Materials"), submitted to the SEC during discussions leading to a September 2018 settlement of the SEC's investigation into Miquelon and the other two defendants in this case, Walgreen Co. ("Walgreens") and Gregory D. Wasson. Miquelon has submitted the Miquelon Rule 408 SEC Materials for in camera review.2 This matteris before the magistrate judge on the district court's referral for discovery supervision. (D.E. 147.) For the reasons stated below, the Court denies the Motion to Compel.
The underlying facts and allegations in this matter are set forth in detail in Judge Sharon Johnson Coleman's recent Memorandum Opinion (D.E. 244) granting in part and denying in part the defendants' motion to dismiss under Rule 12(b)(6) and need not be repeated in full here. In short, Plaintiffs have brought a securities fraud class action lawsuit against Walgreens, its former Chief Executive Officer Gregory D. Wasson ("Wasson"), and Miquelon, its former chief financial officer (collectively, "Defendants") under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. Plaintiffs' allegations relate to Walgreens's public statements concerning the expected benefits of a 2012 merger with Alliance Boots GmbH, in the form of a goal, for fiscal year 2016, of between $9 billion and $9.5 billion ("the FY 2016 EBIT Goal") in adjusted earnings before interest and taxes ("EBIT"). Id. at 2.
Plaintiffs allege that Walgreens had become aware that earnings would fall short of that goal, in large part due to a significant level of generic drug price inflation and a phenomenon known as "reimbursement pressure," by the class period of March to August 2014 but continued to make statements or omissions that downplayed the risk of not achieving the FY 2016 EBIT Goal. Id. "Despite Defendants' actual knowledge of the Company's massive FY16 EBIT shortfall and the company-specific reasons underlying it (i.e., generic drug price inflation combined with unfavorable reimbursement contracts), Defendants concealed these material facts from investors and continued to tout the $9 to $9.5 billion in FY16 EBIT." Redacted First Amended ConsolidatedClass Complaint (D.E. 199, "Complaint") ¶ 9. Defendant Miquelon, whose 2018 submissions to the SEC are sought in the Motion to Compel, was chief financial officer of Walgreens during the class period up to August 4, 2014. Defendant Miquelon's Amended Answer to Consolidated Class Action Complaint (D.E. 87) ¶ 38.
Walgreens asserts that it began negotiating a settlement with the SEC in September 2017. Walgreens's Statement Regarding Plaintiff's Motion to Compel (D.E. 273) at 1; Miquelon has represented that in mid-December 2017, the SEC proposed settlement terms to Miquelon's attorneys.3 Defendant Wade D. Miquelon's Response to Lead Plaintiff's Motion To Compel Defendant Wade D. Miquelon To Produce Documents Provided to the Securities and Exchange Commission (D.E. 272, "Response") at 1. On September 28, 2018, the SEC concluded its three-year investigation by announcing a settlement that called for Walgreens to pay a $34.5 million penalty and included a cease-and-desist order, along with a penalty of $160,000 for Miquelon and Wasson, without an admission or denial by Walgreens, Miquelon, or Wasson of the SEC's findings that they had misled investors about the FY 2017 EBIT Goal. SEC Press Release 2018-220, "SEC Charges Walgreens and Two Former Executives With Misleading Investors About Forecasted Earnings Goal" (Sept. 28, 2018) (https://www.sec.gov/news/press-release/2018-220); Motion to Compel, Ex. A.
The portion of the SEC investigation leading to that settlement was known as "Phase II." On November 14, 2018, this Court, per then-Magistrate Judge Rowland, ordered defendants to produce certain exhibits and core documents submitted to the SEC during Phase II (Phase I being irrelevant to this matter), except for materials concerning solely international and/or non-pharmacy matters. (D.E. 171.) The November 2018 ruling on that separate, earlier motion to compel did notconcern the Miquelon Rule 408 SEC Materials. Judge Rowland by then already had concluded that "documents addressing the impact of generic inflation and/or reimbursement pressure on the FY 2016 EBIT Goal are relevant for discovery" and that Walgreens would have to produce them, whether they address the impact of those two issues either in 2013-14 or through fiscal year 2016. (D.E. 167.) Those conclusions are unaffected by Judge Coleman's ruling on Walgreens's motion to dismiss the Complaint, as she found nonactionable only Plaintiffs' claim stemming from statements made at the April 30, 2014, Barclay's conference by Rick Hans of Walgreens. (D.E. 244 at 12.) In the end, this Court must consider whether the Miquelon Rule 408 SEC Materials are within the scope of permissible discovery as relevant to a claim or defense and proportional to the needs of the case. Fed. R. Civ. P. 26(b)(1).
The Motion to Compel argues that the purported inadmissibility of the Miquelon Rule 408 SEC Materials as settlement communications does not render them non-discoverable in the litigation. Motion to Compel at 3. Plaintiffs' argument for discoverability rests mostly on what they describe as the undisputed relevance of the Miquelon Rule 408 SEC materials to the question of whether Defendants made actionable misrepresentations, and their argument on proportionality is limited to stating that "there is no burden in re-producing the documents here." Id. at 3-6. In response, Miquelon argues that FRE 408 and its underlying purposes shield from discovery these four documents, which he says in any event were "sourced from documents produced to the SEC and testimony that has already been or will soon be (as part of Walgreens' productions), produced to Plaintiff[s]." Response at 3-4. Miquelon, like Plaintiffs, presents little or no argument about Rule 26(b)(1)'s proportionality requirement as it might apply to the compelled production of the Miquelon Rule 408 SEC Materials. At oral argument on the motion, on November 12, 2019, counsel for Walgreens stated in open court that disclosure of the Miquelon Rule 408 SEC Materialswould have a chilling effect on future settlement discussions, insofar as Walgreens or other parties would have reason to be concerned that their statements to the regulators would be discovered in the private litigation.
The Court's resolution of the Motion to Compel turns on an analysis of whether the requested discovery meets Rule 26(b)(1)'s proportionality requirement. Both parties correctly have cited Clark v. Experian Information Solutions, Inc., No. 03 C 7882, 2006 WL 626820 (N.D. Ill. Mar. 8, 2006), although for different propositions. As Plaintiffs note, the district court in Clark reasoned that Rule 408 "does not create any category of documents that is off limits from discovery." Id. at *2. In fact, Rule 26(b)(1), as amended in 2015, added the express language that "information within th[e] scope of discovery need not be admissible in evidence to be discoverable." Fed. R. Civ. P. 26(b)(1). As Miquelon notes, the Clark court acknowledged that "the purpose of Rule 408 to encourage settlement of disputes might be chilled by fear that negotiations might be discoverable, and have sought to balance furthering that purpose with the policy of liberal discovery." Clark, 2006 WL 626820 at *3. In considering how to determine whether the requested discovery of Rule 408-protected materials is proportional to the needs of this case, the Court must consider the degree to which such compelled discovery would impose a burden on the important social policy goals underlying Rule 408, and it must make that determination within the framework of the needs of the instant case and with the benefit of an in camera review of the substance of the documents.
The Northern District of Indiana was one of the first courts to have considered proportionality under Rule 26(b)(1) in the context of a request to discover FRE 408 materials. SeeArcelormittal Indiana Harbor LLC v. Amex Nooter, LLC, No. 2:15-CV-195-PRC, 2016 WL 614144 (N.D. Ind. Feb. 16, 2016). The Arcelormittal court analyzed Clark and other pre-2015 amendment decisions that "adopted a higher standard for discovering the settlement negotiations based on the pre-amendment language of Rule 26(b)(1) that otherwise inadmissible evidence is discoverable if it appears reasonably calculated to lead to the discovery of admissible evidence." Id. at *5 (internal quotations omitted) ). The court in Arcelormittal discussed how these cases denied or restricted discovery into FRE 408 materials while recognizing the absence of a federal settlement privilege, and how judicial concerns about the policies underlying FRE 408 could rest on Rule 26(b)(1)'s post-amendmen...
To continue reading
Request your trial