On November 2, 2021, Judge Sharon Johnson Coleman of the Northern District of Illinois Eastern Division granted in part defendants’ motion for summary judgment and denied plaintiff’s partial motion for summary judgment in a securities class action asserting claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) against a retail drugstore chain (the “Company”) and two of its former senior executives. Washtenaw County Employees' Retirement System v. Walgreen Co. et al.
, No. 15-cv-03187 (N.D. Ill. Nov. 2, 2021). Plaintiff alleged defendants made materially false and misleading statements concerning the Company’s earnings before interest and taxes (“EBIT”) projections and its ability to meet it. The Court granted in part defendants’ motion for summary judgment, holding that one of the alleged misstatements was a non-actionable forward-looking statement under the Private Securities Litigation Reform Act’s (“PSLRA”) safe harbor, that defendants proved the truth of certain alleged misstatements, but that triable issues of material fact remained with respect to a number of other alleged misstatements. The Court denied plaintiff’s motion for partial summary judgment regarding one of the individual defendant’s intent to deceive, holding that there was a genuine issue of material fact as to the falsity of that defendant’s statements and is therefore a question for the jury.
According to the complaint, a substantial component of the Company’s business involved sales of generic drugs. The profit margin of these sales depended on the difference between the cost of the generic drug and the reimbursement by various third parties, such as insurance companies. For a number of years prior to the alleged misstatements, generic drugs had allegedly followed a deflationary trend and the Company, in an effort to protect its margins and on the assumption that generic drug prices would continue to decline, allegedly contracted with third parties to set a maximum rate of reimbursement for the generic drugs it sold. The Company also announced in 2012 that it was entering into a two-step merger with another retail drugstore chain, in which the Company acquired 45% of the target company’s stock and gave the Company the option to acquire the remaining 55% approximately three years later if the Company’s shareholders approved. Against this backdrop, the Company allegedly set forth long-range goals for FY16, which reflected the expected benefits of the new partnership with the target, including generating $1 billion in combined synergies and between $9.0 - $9.5 billion in EBIT.
According to plaintiff, the deflationary trend in generic drug prices that precipitated the merger and the Company’s announcement of its long-range financial goals for fiscal year 2016 began to shift in 2013. Plaintiff alleged that the Company’s executive officers misrepresented the extent of the impact this shift had on the Company’s ability to meet its fiscal year 2016 EBIT target of $9-9.5 billion. Specifically, plaintiff alleged that defendants made the following misstatements: (i) statements made by one of the individual defendants during a March 25, 2014 second quarter earnings call that the Company remained focused on delivering the EBIT target; (ii) a statement by one of the individual defendants in March 2014 that “the most significant factor affecting the pharmacy margin was dramatically slower rate of new generic introductions year over year;” (iii) the Company’s similar statements in a March 2014 Q2 10-Q filing; (iv) statements by one of the individual defendants at an April 17, 2014 investor conference about generic drug price inflation and its impact along with reimbursement pressures by third-party payers; (v) statements by one of the individual defendants between May 14-15, 2014 that Company management believed the EBIT target was achievable; and (vi) a statement made by the individual defendants during a May 16, 2014 conference call that the Company had not seen unusual trends in generic drug price inflation.
The Court first turned to defendants’ motion for summary judgment on loss causation grounds. The Court summarized that the parties’ loss causation arguments focused on plaintiff’s loss causation expert’s opinion that the corrective disclosure at issue was made on August 6, 2014. Defendants, on the other hand, contended that the corrective disclosure occurred during a June 2014 earnings call when the Company withdrew its projection for fiscal year 2016’s EBIT, stating that the “goal was not attainable and that generic inflation and reimbursement pressures significantly affected the goal.” According to defendants, “under an efficient market theory, this earlier disclosed information was already incorporated into the share price before the August 6 disclosures” that plaintiff argued constituted the corrective disclosure. Plaintiff contended that the August 6 disclosures acted as the corrective disclosure, because it was the first time the Company revised its fiscal year 2016 EBIT goal, which the Company decreased from $9-$9.5 billion to $7.2 billion—a $1.8 billion drop from its prior goal. The Court held that there was a “triable issue of fact of whether the August 6 disclosure revealed new information concerning the extent and seriousness of Walgreens missing its FY16 EBIT goal.” The Court further observed that defendants’ argument for the earlier corrective disclosure date “does not take into account that the relevant truths can leak out over time through a series of partial disclosures” and “does not acknowledge that the market may not have realized the significance of [the Company] missing the FY16 EBIT target until the actual shortfall” was announced in August. Accordingly, the Court denied defendants’ motion for summary judgment in relation to loss causation and observed that the parties’ criticism of the designated loss causation experts and their reports “are best left” for the upcoming Daubert
Turning next to defendants’ alleged misstatements, the Court granted defendants’ motion for summary judgment with respect to (i) the alleged March 25, 2014 statement that the Company remained focused on delivering the EBIT target despite progress not meeting expectations thus far, (ii) the alleged March 25, 2014 statements on the earnings call asserting that “the most significant factor affecting the pharmacy margin was [the] dramatically slower rate of new generic introductions year over year” and similar commentary in the Company’s SEC filing, and (iii) the alleged statements made at the April 17, 2014 investor conference that the Company has always experienced a degree of reimbursement pressure. Specifically:
- Regarding the alleged statements on March 25, 2014 that the Company’s progress towards its “adjusted operating income goal of $9 billion to $9.5 billion [was] . . . below . . . initial expectations” and they were still focused on delivering it, the Court held that the statement was forward-looking under the PSLA because “it expressly concerns future economic performance” and noted that statements in the relevant SEC filings included cautionary statements that “explain that the principal risks included drug pricing changes and reimbursement pressures.” Given defendants’ cautionary statements in its filings, the Court held the individual defendant’s statements were “firmly . . . within the PSLRA’s safe harbor provision.”
- Concerning the alleged statement on the March 25, 2014 earnings call asserting that “the most significant factor affecting the pharmacy margin was dramatically slower rate of new generic introductions year over year” as well as the Company’s March 27, 2014 Q2 2014 filing which stated in part“[r]etail pharmacy margins were negatively impacted by a significant reduction in the number of brand to generic drug conversions and lower market driven reimbursements,” the Court found that defendants provided evidence showing that “the lower number of new generic conversions in 2Q14” compared to the prior year reduced the Company’s adjusted gross margin at least 1.4%, which plaintiff “failed to refute.” The Court further noted that “[the] fact that generic drug inflation and reimbursement pressures impacted the pharmacy margin does not render false the fact that the most significant factor affecting the pharmacy margin in 2Q14 compared to 2Q13 was the slower rate of new generic introductions.”
- Lastly, regarding the alleged statement at the April 17 investor conference call that the Company “always experience[s] some level of reimbursement pressure,” the Court held that plaintiff “failed to present evidence that the impact of reimbursement pressures on gross margin percentage in 2Q14 was not ‘routine’” finding that defendants “presented unrebutted evidence that reimbursement pressures were ongoing within the industry and that it took place every year.”
The Court next turned to three alleged misstatements that it found presented a genuine issue of material fact and therefore were not subject to adjudication at summary judgment. Specifically:
- The Court held that statements made by one of the individual defendants at a April 17, 2014 conference that generic drug price inflation “was really kind of a one-time phenomenon” and that that there were no “unusual” reimbursement pressures by third-party payers, conflicted with record evidence that the executive knew by mid-April “that generic drug manufacturers had taken an aggressive industry-wide pricing action . . . creating price inflation above historical and expected levels.” Defendants argued that such alleged statements were not actionable because they were the executive’s honestly held opinion, citing to Omnicare, 575 U.S. 175 (2015). The Court found, however, that there is a “triable issue of fact” of whether that executive honestly believed his statements.
- The Court held that the May 14-15, 2014 alleged statements that Company management believed the fiscal year 2016 EBIT target was achievable were not protected forward-looking statements under the PSLRA, finding that plaintiff’s arguments that the falsity of those statements were known when they were made, and that the executive “had actual knowledge that his statement was false or misleading” and therefore raised a triable issue of fact, namely when did the Company know it could not attain the FY16 EBIT goal.
- The Court also held that the alleged statement at a May 16, 2014 conference that the Company had not seen unusual activity regarding generic drug pricing raised triable issues regarding who made the statements and presented factual issues regarding falsity and scienter that must be presented to the jury. The alleged statements at issue were memorialized in an analyst report summarizing “key takeaways” Citing the Supreme Court’s decision in Janus Capital Group, 564 U.S. 135 (2011), defendants argued that plaintiff cannot prove that either individual defendant made this alleged statement. But while acknowledging that the report does not reference which individual defendant made the alleged statement, the Court found that “Janus teaches” that “‘in the ordinary case, attribution within a statement or implicit from surrounding circumstances is strong evidence that a statement was made by—and only by—the party to whom it is attributed.’”
Having found that plaintiff raised triable issues of fact with respect to certain of the foregoing statements, the Court granted in part and denied in part defendants’ motion for summary judgment, and the Court denied plaintiff’s motion for partial summary judgment, holding that defendants raised a genuine issue of material fact precluding a finding of scienter as a matter of law. The Court concluded its opinion by “remind[ing]” the parties and citing opinions of the Seventh Circuit holding that arguments made for the first time in reply and “cursory arguments made in footnotes” are waived, especially where parties were permitted to file oversized briefs.