Neal R Cutler, MD v Azur Pharma International III Ltd and Others

• Jurisdiction: Ireland
• Judge: Mr. Justice Noonan
• Judgment Date: 11 June 2015
• Neutral Citation: [2015] IEHC 355
• Court: High Court
• Docket Number: [2014 No. 1 FTE]
• Date: 11 June 2015

[2015] IEHC 355

THE HIGH COURT

[No. 1 FTE/2014]

Neal R Cutler, MD v Azur Pharma International III Ltd & Ors.

IN THE MATTER OF THE FOREIGN TRIBUNALS EVIDENCE ACT, 1856

AND IN THE MATTER OF A CIVIL PROCEEDING NOW PENDING FOR THE SUPERIOR COURT OF THE STATE OF CALIFORNIA FOR THE COUNTY OF LOS ANGELES ENTITLED AS FOLLOWS CASE NUMBER: BC 471775

BETWEEN:

NEAL R CUTLER, MD

PLAINTIFF

AND

AZUR PHARMA INTERNATIONAL III LIMITED, AZUR PHARMA LIMITED, AVANIR PHARMACEUTICALS, INC.

DEFENDANTS

International law – Foreign Tribunals Evidence Act 1856 – O.39 of the Rules of the Superior Courts – Whether discovery of documents permissible under letters rogatory

Facts: The applicant being the auditors of the defendants sought an order setting aside the order of the Court giving effect to a request for international judicial assistance made by way of letters rogatory directing the examination of a representative of the applicant and production of documents specified in the said request. The applicant also sought an order for security for costs from the plaintiff in lieu of compliance of the said request. The applicant contended that under the disguise of the letters of requests, the plaintiff wanted discovery of documents and therefore, it must be refused. The plaintiff contended that the applicant being the auditors of the defendants were in the possession of relevant documents which were necessary to prove the facts of the case.

Mr. Justice Noonan refused to grant an order for setting aside the earlier order of the Court; however, the Court granted an order for giving effect to the letters of request with some modifications and conditions. The Court imposed the conditions of furnishing security of costs by the plaintiff and that the plaintiff shall not join the applicant in any existing proceedings or institute any fresh proceedings against the applicant in any jurisdiction whatsoever. The Court held that the Court would make best efforts to co-operate and provide whatever assistance possible via the letters rogatory to the foreign states. The Court held that the power of Court to provide international assistance being discretionary would be subject to certain conditions namely relevancy of evidence, nature of application, consideration of privilege or protection available to prospective witness and admissibility of evidence in the foreign state. The Court held that though the letters of requests in the case ask for discovery of certain documents yet it would be necessary in the administration of justice to accede to such request.

Introduction

1 1. This matter comes before the court by way of notice of motion brought by KPMG Ireland ("KPMG") seeking the following reliefs:

1 An order pursuant to s. 1 of the Foreign Tribunals Evidence Act 1856 and Order 39 of the Rules of the Superior Courts setting aside the order of this court (Hedigan J.) of the 21 ^st of July, 2014 giving effect to a request for international judicial assistance made by way of letters rogatory to this court ("the Request") by the Superior Court of the State of California for the County of Los Angeles on the 11 ^th of July, 2014 directing a representative of KPMG to be examined upon oath on the matters specified in the Request and to produce the documents specified therein;

2 Alternatively an order varying the said order of the 11 ^th of July, 2014;

3 Further or alternatively an order directing the plaintiff to provide security for costs due to KPMG arising out of compliance with the request.

Background Facts

2 2. The plaintiff ("Dr. Cutler") is a psychiatrist. In 2000, he founded a corporation called Alamo Pharmaceuticals LLC. Through the medium of this corporation, Dr. Cutler devised and developed a drug called FazaClo for the treatment of schizophrenia. In 2006, Dr. Cutler entered into a unit purchase agreement ("UPA") for the sale of the FazaClo brand to the third defendant ("Avanir"). The consideration for this sale was a purchase price that would comprise deferred payments contingent upon FazaClo's future net revenues. Dr. Cutler alleges that under the UPA, his right to be paid these Contingent Payments, worth up to US $35.45 million, arose upon the net revenues reaching certain thresholds.

3 3. Avanir subsequently sold the FazaClo business to the first defendant ("Azur III") and Azur III thereby assumed the obligations to Dr. Cutler under the UPA. The second defendant ("Azur Pharma") is an Irish company and the corporate parent of Azur III (collectively "Azur").

4 4. In 2011, Dr. Cutler commenced the above entitled proceedings in the California court whereby he seeks damages. He alleges that Azur deliberately suppressed and understated, thereby reducing, the net product revenues from FazaClo, thus depriving him of the Contingent Payments to which he says he was entitled. He alleges that Azur brought this about by employing at least three improper marketing and pricing practices. First, Azur wrongly excluded proceeds from certain dosages of FazaClo from net revenues. Secondly, Azur offered unreasonable discounts on FazaClo as a means of suppressing FazaClo's net revenues to avoid reaching milestones that would trigger Contingent Payments. Thirdly, Azur established and maintained an inflated reserve for FazaClo product returns as another means of suppressing the net revenues. All of these allegations are denied by Azur. One of the principle planks of Azur's defence to these proceedings is that these practices, and in particular those relating to the returns reserve, were approved by its auditors, KPMG.

The Letters of Request

5 5. Counsel for Dr. Cutler in the US proceedings applied to the California court to issue letters rogatory to this court in July, 2014. The application was not opposed by counsel for Azur who was present at the hearings. The letters of request were dated the 11 ^th of July, 2014 and identified the witness therein as "KPMG Ireland". The factual background is set out and then the substantive request in the following terms:

"Subject matter of examination and items to be produced. "

Dr. Cutler seeks to examine the above mentioned witness concerning all matters relating to the audit or review of Azur's financial statements relating to FazaClo, and all advice or consultation regarding FazaClo revenue recognition and reserves against revenues for FazaClo, in the period 2007 to 2013, including but not limited to the following topics:

1. What audits and other services did you provide with respect to any financial reporting relating, in whole or in part, to FazaClo?

2. What procedures and methodologies did you use in performing those audits and other services?

3. What potential issues or irregularities did you suspect, find, identify, raise, or discuss in connection with those audits and other services?

4. What communication did you have relating to the product returns reserves for FazaClo?

5. What communication did you have regarding the formulations or dosages of FazaClo that should be included in the contingent payment calculation?

6. What communications did you have regarding Dr. Cutler?

7. What communications or projections did you have regarding any and all contingent payments earnable by Dr. Cutler based on the net revenues of FazaClo?

Dr. Cutler also seeks the production of documents in KPMG Ireland's possession, custody, or control that relate to the above topics, including but not limited to the following specific categories of documents:

1 All financial statements relating to FazaClo, in whole or in part.

2 All audit letters relating to FazaClo, in whole or in part.

3 All work papers from audits and other services relating to FazaClo, in whole or in part.

4 All documents that relate to any schedule of adjustments past related to FazaClo.

5 All documents that relate to any management letter relating to FazaClo.

6 All documents that relate to any audit, review, or examination of any reserve for product returns for FazaClo, in whole or in part.

7 All documents that relate to any evaluation, analysis, or consideration of any adjustment of any reserve for product returns for FazaClo.

8 All documents that relate to any audit, review, or examination of any accrual for product returns for FazaClo.

9 All documents that relate to Dr. Cutler.

10 All documents that relate to the contingent payments.

11 All documents that relate to the contingent payment quarterly reports."

6 6. On the 21 ^st of July, 2014, the plaintiff applied to this court (Hedigan J.) for an order giving effect to the Request. Although the order is stated to have been made ex parte, counsel for KPMG attended at the hearing and although some submissions were made, it would appear that the court indicated that KPMG could apply to vary or set aside the order if they wished.

7 7. By the terms of the order, the court directed that a representative of KPMG should attend before an examiner, Eileen Barrington senior counsel, on a date to be fixed for the purpose of being examined on oath regarding the matters set forth in the Request. The witness was further ordered to produce the documents set out in the Request at such examination. Both parties were to be entitled to examine the witness. Although the order provided that the examination was to be governed by the law of California, it is agreed that this provision appears to have made its way into the order in error in that it was not sought by the plaintiff. The plaintiff now accepts that any such witness examination should properly be governed by Irish law.

The Foreign Tribunals Evidence Act 1856

8 8. Section 1 of the above Act provides as follows:

i "I. Where, upon an Application for this Purpose, it is made to appear to any Court or Judge having Authority under this Act that any Court or Tribunal of competent Jurisdiction in a Foreign Country, before which any Civil or Commercial Matter is pending, is...