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Washtenaw County Employees' Retirement System v. Walgreen Co.

United States District Court, N.D. Illinois, Eastern Division

March 29, 2018

WASHTENAW COUNTY EMPLOYEES' RETIREMENT SYSTEM, Individually and on Behalf of All Others Similarly Situated, Plaintiffs,
v.
WALGREEN CO., GREGORY D. WASSON, and WADE MIQUELON, Defendants.

          MEMORANDUM OPINION AND ORDER

          SHARON JOHNSON COLEMAN, United States District Court Judge.

         Industriens Pensionforsikring A/S, acting as lead plaintiff on behalf of itself and all others similarly situated, brings this class action against defendants Walgreen Co. (“Walgreens”), former Walgreens CEO Gregory D. Wasson, and former Walgreens CFO Wade Miquelon, alleging violations of sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The plaintiffs now move for class certification. For the reasons set forth herein, that motion [114] is granted.

         Background

         The following is a general overview of those allegations relevant to the present motion. A more complete description of the allegations contained in the amended complaint may be found in this Court's September 30, 2016, ruling on the defendants' motions to dismiss.

         Walgreens is a retail drugstore chain that sells prescription and non-prescription drugs. Prescription drugs represent Walgreens' largest class of products and are the lead driver of its revenue and profit. At the times relevant here Gregory D. Wasson was Walgreens' CEO and a director on the company's Board of Directors and Wade Miquelon was Walgreens' CFO.

         The substantial majority of prescription drugs that Walgreens sold were generic drug versions of branded drugs, which generated a higher profit margin than branded drugs due to their lower production costs. That profit margin, however, was dependent on the difference between the cost to procure the generic drug and the reimbursement rate that Walgreens received for supplying a customer with the drug. Historically, generic drug prices had followed a deflationary trend, but in 2014 that trend reversed. Walgreens' contracts with several major Pharmacy Benefit Managers (“PBMs”) provided for fixed maximum rates of reimbursement for each drug over the term of the contract, based on the assumption that generic drug prices would continue to decline. If those prices instead rose, Walgreens would be forced to absorb the additional cost of those drugs beyond the contractually-capped rate of reimbursement.

         In June 2012, Walgreens announced that it was entering into a strategic transaction with Alliance Boots GmbH (“Alliance”). As part of this process, Walgreens announced a set of goals for FY 2016 reflecting the expected benefits of the new partnership, including generating $1 billion in combined synergies and between $9 and $9.5 billion in adjusted earnings before interest and taxes (“EBIT”). The EBIT goal was especially important to investors because it was the only metric gauging the potential profitability of the combined companies.

         In late 2013, Walgreens' internal long range planning process revealed that the EBIT goal was tracking at under $8.5 billion.[1] Miquelon, in a verified complaint filed in a separate action (“the Miquelon complaint”), admitted that by the end of 2013 the company had identified the sources of that deficit as (1) the unprecedented level of generic drug price inflation that the industry was experiencing and (2) reimbursement contracts that failed to provide meaningful inflationary relief. Nonetheless, Walgreens restated the EBIT goal when it reported its first quarter results for 2014. During the conference call announcing the quarterly results, Miquelon admitted that Walgreens was tracking “a bit below” the EBIT goal, but asserted that the company was prepared to mitigate the risks to achieving the goal and that it had the right tools at its disposal to meet the target. During that call, Miquelon also reassured analysts that “[q]uarter by quarter we look at [the FY2016 goals], and say are these still realistic based upon all the risk and opportunities we have internally. If we ever feel that's not the case, we'll certainly tell you.” By March 2014, the EBIT goal was tracking around $7.5 billion dollars, $2 billion less than the high end of the EBIT goal.

         The class period, which runs from March to August 2014, encompasses the announcement of Walgreens second quarter results and third quarter results and public statements made in the interim. During that time, the defendants continued to issue statements that allegedly downplayed the risk to the EBIT goal and failed to acknowledge the impact of systematic generic drug price inflation.

         On June 24, 2014, Walgreens issued its third quarter report and withdrew its FY 2016 earnings targets, attributing the decision to “Step 2 considerations” and “current business performance.” Walgreens also made reference to experiencing generic drug price inflation and reimbursement pressures, although its statements could be taken as downplaying the actual significance of those trends. On August 6, 2014, Walgreens disclosed the extent of the resulting EBIT shortfall, attributing it primarily to “rapid and pronounced generic drug cost inflation” and unfavorable contract terms. The August 6th disclosures caused Walgreens stock to plummet over 14% in a single day and gave rise to the present litigation.

         Although the plaintiffs initially sought to pursue a number of claims, their claims were narrowed by a motion to dismiss and now concern a period from March 25 to August 6, 2014, during which the defendants purportedly concealed or failed to fully disclose the impact of generic drug price inflation and reimbursement pressures. Following the Court's ruling on the motion to dismiss, the Court bifurcated discovery on the defendants' motion, and the present motion for class certification followed.[2]

         Legal Standard

         In order to be certified, a proposed class must satisfy the requirements of Federal Rule of Civil Procedure 23(a), as well as one of the three alternatives set forth in Rule 23(b). Messner v. Northshore Univ. Health Sys., 669 F.3d 802, 811 (7th Cir. 2012). Rule 23(a) requires that a proposed class meet requirements of numerosity, typicality, commonality, and adequacy of representation. Id. When certification is sought under Rule 23(b)(3), the proponents of the class must also show that questions of law or fact common to the members of the proposed class predominate over questions affecting only individual class members and, relatedly, that a class action is superior to other available methods of resolving the controversy. Id.

         Rule 23 does not set forth a “mere pleading standard.” Comcast Corp. v. Behrend, 569 U.S. 27, 33, 133 S.Ct. 1426, 185 L.Ed.2d 515 (2013). When factual disputes bear on matters vital to certification, the Court must receive evidence and resolve those disputes prior to certifying the class. Parko v. Shell Oil Co., 739 F.3d 1083, 1085 (7th Cir. 2014). Certification is proper only if, after rigorous analysis, the Court is satisfied that Rule 23's prerequisites have been met. Comcast Corp., 569 U.S. at 33. The Seventh Circuit, however, has repeatedly reiterated that the focus of class certification must be on Rule 23 and that class certification proceedings cannot be allowed to turn into a preemptive determination of the merits. Bell v. PNC Bank, Nat. Ass'n, 800 F.3d 360, 376 (7th Cir. 2015). Rule ...


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