Lickteig v. Cerberus Capital Mgmt., L.P.

589 F.Supp.3d 302

Ronald LICKTEIG, Plaintiff,

v.CERBERUS CAPITAL MANAGEMENT, L.P., Covis Pharmaceuticals, Inc., Covis Management Investors LLC, and Covis S.à.r.l., L.P., Defendants.

1:19-cv-05263-GHW

United States District Court, S.D. New York.

Signed March 7, 2022

Joshua Lynn Seifert, Joshua L. Seifert PLLC, Henry Bell, Bell Law PLLC, New York, NY, for Plaintiff.

Brandon Michael Fierro, Frank Thomas More Catalina, Jennifer Ann Randolph, Nicole Theresa Castiglione, Rolnick Kramer Sadighi LLP, Meg Traci Slachetka, Lowenstein Sandler LLP, New York, NY, Sheila A. Sadighi, Rolnick Kramer Sadighi LLP, West Orange, NJ, for Defendants.

MEMORANDUM OPINION & ORDER

GREGORY H. WOODS, United States District Judge:

Plaintiff Ronald Lickteig's contract gave him the option to require defendants Cerberus Capital Management, L.P. ("Cerberus"), Covis Pharmaceuticals, Inc. ("Covis"), Covis Management Investors LLC (the "MIP Limited Partner"), and Covis Holdings, L.P. ("Covis Holdings") (together with Cerberus, Covis, and Covis Management, the "Defendants") to purchase his equity interests in Covis at "Fair Market Value" if he resigned or otherwise left the company. He resigned. And Defendants sent him a document valuing Covis and his equity interests at $466.7 million and $1.1 million respectively. Lickteig and Defendants engaged in negotiations and ultimately settled on a payment of $1.3 million for Lickteig's equity interests.

At the same time as these negotiations—unbeknownst to Lickteig—Defendants were attempting to sell Covis and refused an initial offer because it did not exceed $1 billion. Just months after Lickteig was told the company was worth $466 million, Covis was sold for $1.2 billion. Lickteig brought this action alleging that Defendants violated both federal and Iowa law by misrepresenting certain numbers underlying the valuation of his interests and by failing to disclose that Defendants were attempting to sell Covis for a much higher amount than the value represented to Lickteig.

Defendants now move for summary judgment, arguing that the record indisputably establishes that the alleged misrepresentations were honestly held statements of opinion and that Defendants were not required to disclose the negotiations. Because Defendants contemporaneously used different Adjusted EBITDAs and Adjusted EBITDA multiples when negotiating the purchase of Lickteig's equity interests and attempting to sell Covis to a third party, material issues of fact exist regarding whether the numbers conveyed to Lickteig were false or misleading and whether Defendants’ failure to disclose the fact of the ongoing negotiations to sell the company at a substantially higher valuation rendered the valuation conveyed to Lickteig false or misleading. Accordingly, Defendants’ motion for summary judgment is DENIED.

Defendants also move to exclude the testimony of Plaintiff's designated experts—Jeffrey Ammerman and Philip Kanyuk. Because the Court finds that both experts are qualified, apply reliable principles and methods, rely on sufficient facts and data, and will assist the trier of fact—and because Defendants’ arguments to exclude the testimony of Plaintiff's designated experts go to weight rather than admissibility—Defendants’ motions to exclude the testimony of Ammerman and Kanyuk are DENIED.

I. BACKGROUND

Much of the relevant factual background described below is undisputed by the parties.¹ Where disputes exist, the Court draws all reasonable inferences in favor of the non-moving party—Plaintiff Lickteig.² See Johnson v. Killian , 680 F.3d 234, 236 (2d Cir. 2012) (holding that a court is "required to resolve all ambiguities and draw all permissible factual inferences in favor of the party against whom summary judgment is sought") (citing Terry v. Ashcroft , 336 F.3d 128, 137 (2d Cir. 2003) ).

A. Covis Pharmaceuticals’ Ownership and Operations

Covis was a pharmaceutical enterprise established to acquire the rights to neglected off-patent drugs from larger pharmaceutical companies and to try to increase the profitability of those drugs through more active management. Pl.’s Resp. to Defs.’ Rule 56.1 Statement, Dkt. No. 169 ("Defs.’ 56.1"), ¶¶ 1–2. The insight that led to the development of Covis was sparked by two pharmaceutical industry executives, Bill Collins and Jack Davis. Defs.’ 56.1 ¶ 3. Collins and Davis retained Bourne Partners, an investment banking firm, to raise capital to acquire the rights to a portfolio of pharmaceutical products from GlaxoSmithKline ("GSK"). Defs.’ 56.1 ¶ 4. Bourne Partners then contacted Cerberus to solicit its investment in Covis, and Cerberus ultimately decided to invest in the company. Defs.’ 56.1 ¶ 5. In December 2011, Covis acquired an initial portfolio of drugs from GSK. Defs.’ 56.1 ¶ 7.

The Covis³ enterprise consisted of both U.S. and international entities and was effectively owned and controlled by Cerberus. See Decl. of Sheila Sadighi in Supp. of Defs.’ Mot. for Summ. J., Dkt. No. 140 ("Sadighi Decl."), Ex. 2. Switzerland-based Covis Pharma S.à.r.l. acquired intellectual property and manufacturing rights to drugs, and the U.S.-based Covis Pharmaceuticals, Inc. distributed those drugs in the U.S. pursuant to a distribution agreement. Defs.’ 56.1 ¶ 10.

B. Lickteig's Contribution Agreement and "Profits Interests"

Lickteig was a former executive at GlaxoSmithKline. Cerberus and Covis recruited Lickteig to serve as the General Manager of Covis. Pursuant to a contribution agreement between Lickteig, the MIP Limited Partner, and Covis Holdings (the "Contribution Agreement"), Lickteig was granted equity interests, referred to as "Profits Interests," equivalent to 200,000 Class B partnership interests in Covis Holdings, or 2.0% of the fully diluted equity of Covis Holdings. Defs.’ 56.1 ¶¶ 11–12; Sadighi Decl., Ex. 5. Half of Lickteig's equity interests vested according to a time schedule, and the remainder would vest upon a "Winding Up Event" in an amount depending on the return on invested capital realized through such an event. Defs.’ 56.1 ¶ 14.

Following any not-for-cause termination of Lickteig's employment (including his resignation), Lickteig could exercise a put option (the "Put Option") whereby he could "compel [Covis] to purchase from [Lickteig] all, but not less than all" of his equity interests that had vested as of the date of his termination. Defs.’ 56.1 ¶ 15. Covis would have to purchase the equity interests at "Fair Market Value"—as defined in the MIP Limited Partner's operating agreement (the "Operating Agreement")—as of the date of termination. Defs.’ 56.1 ¶ 16. The Operating Agreement defined Fair Market Value as:

[W]ith respect to any Profits Interest or any asset or liability, as applicable, the fair market value of such Profits Interest, asset or liability, as determined in good faith by the Board of Managers, taking into account all relevant factors, including without limitation the most recent valuation, prior to such determination, of the Company and/or its equity interests (provided that the Board of Managers shall provide written notice to the Management Members of such determination).

Defs.’ 56.1 ¶ 17. The Contribution Agreement obligated Covis to provide Lickteig with a good-faith determination of Fair Market Value, after which Lickteig was entitled to provide Covis with a written dispute notice "[setting] forth in reasonably specific detail the good faith basis of the dispute, including (i) the value that Contributor reasonable believes should be ascribed to the Subject Lickteig Profits Interests and (ii) all facts and figures that Contributor reasonably believes supports Contributor's view of the relevant valuation." Contribution Agreement, Ex. A ¶ 4(b). Under the terms of the Contribution Agreement, if Lickteig and Covis could not agree on Fair Market Value, each would select an independent third-party appraiser, who would together select a third appraiser, and the third appraiser would appraise the Fair Market Value of the equity interests. Id. If Lickteig did not provide the MIP Limited Partner with a dispute notice, however, "the Fair Market Value [would] be conclusively deemed to be equal to the Fair Market Value established by the MIP Limited Partner ...." Id.

C. Adjusted EBITDA

Both Cerberus and Covis regularly assessed Covis’ performance and value based on calculations of adjusted EBITDA. EBITDA means earnings before interest, taxes, depreciation, and amortization. Defs.’ 56.1 ¶ 22. EBITDA is not a defined metric under Generally Accepted Accounting Principles ("GAAP"). Defs.’ 56.1 ¶ 23. "Adjusted EBITDA" is a non-GAAP measure that may be computed by adding back or subtracting out certain one-time events. Defs.’ 56.1 ¶ 26.⁴ Which items are added back or subtracted out to reach adjusted EBITDA is determined by the person making the calculation and may change depending on the purpose of computing the metric. Thus, a company may define adjusted EBITDA differently in different situations. Determining what adjustments are appropriate for calculating an adjusted EBITDA "requires much judgement." Defs.’ 56.1 ¶ 29.

D. Cerberus's Valuation Policy

It was the policy of Cerberus to determine the fair value of its investments, in accordance with GAAP, on a quarterly basis. Defs.’ 56.1 ¶ 38. Cerberus performed those valuations in accordance with its written valuation policy and procedures, which were consistent with GAAP. Defs.’ 56.1 ¶¶ 38–39. These valuations, referred to as "Marks," were determined by Cerberus's valuation committee after reviewing and discussing valuations prepared by Cerberus's private equity valuation group. Defs.’ 56.1 ¶ 41. The valuation group collected and analyzed data about Covis, gathered and reviewed market data, ran models, and discussed potential adjustments. Defs.’ 56.1 ¶ 42. The valuation group's work was reviewed and adjusted by Cerberus's CFO and the valuation committee. Defs.’ 56.1 ¶¶ 44–45. And, semi-annually, the Marks were reviewed by Cerberus's independent...