Publicly traded corporations are often involved in lawsuits that stay under the radar, yet involve large amounts of money, not to mention the time of well-compensated executives.
The filings are written in dry legalese, often obfuscating fascinating backstories. Here are some highlights from Orange County companies’ regulatory filings this year:
• Irvine-based Edwards Lifesciences Corp. is involved in a number of lawsuits to protect its patents. The following paragraph from its 2017 annual report reveals two interesting items:
“In November 2017, we recorded a $112.5 million litigation gain related to the theft of trade secrets. We incurred external legal costs related to intellectual property litigation of $39.2 million, $32.6 million and $7.0 million during 2017, 2016 and 2015, respectively.”
As it turns out, Edwards got the windfall after acquiring CardiAQ in 2014 for $378 million. CardiAQ won a 2016 jury trial against service provider Neovasc Inc.
The millions Edwards paid in outside legal costs last year represented a fivefold two-year increase.
• Irvine-based Opus Bank (Nasdaq: OPB) sued cross-town rival First Foundation Inc. (Nasdaq: FFWM), alleging theft of employees. The banks settled in March, and it looks like Opus immediately benefitted on expenses for professional services, which fell 62% year-over-year in the first quarter to $1.72 million. Its first-quarter report, which didn’t mention First Foundation, said:
“The decrease of $2.8 million in professional services for the three months ended March 31, 2018 as compared to the same period last year was due to a $2.9 million recovery related to a legal settlement.”
An Opus spokesperson declined to comment on whether the recovery was related to First Foundation, saying the settlement was private.
• Chipotle Mexican Grill Inc. (NYSE: CMG), which recently moved from Colorado to Newport Beach, showed how costly a computer system hack can be. Its annual report said:
“In April 2017, our information security team detected unauthorized activity on the network that supports payment processing for our restaurants, and immediately began an investigation with the help of leading computer security firms … During the year ended December 31, 2017, we recorded an expense of $30 million [$18.2 million after tax], or $0.64 per diluted earnings per share, as an estimate of potential liabilities associated with anticipated claims and assessments by payment card networks in connection with the data security incident.”
The filing said malware searched for data that may include cardholder names, card numbers, expiration dates and internal verification codes.
In August, the U.S. Department of Justice revealed it arrested three Ukrainians who are accused of hacking thousands of fast-food restaurants, including Chipotle, through email messages containing malware to infiltrate a company’s network.
• Santa Ana-based Banc of California Inc. (NYSE: BANC) had a contentious fight with several former executives over their employment, including former Management Vice Chairman Jeffrey T. Seabold, who on the day he quit in September 2017, filed a lawsuit against the bank in a Los Angeles court. Five months later, the two sides settled.
The annual report noted the bank paid Seabold benefits such as $38,000 in health insurance premiums and $650,000 in attorney fees. In exchange, it extracted a promise from Seabold to not agitate shareholders for changes:
“Mr. Seabold will receive lump sum cash payments from the Company and/or the Bank aggregating $4.3 million … The Settlement Agreement contains certain standstill provisions that, prior to December 31, 2018, generally restrict Mr. Seabold and his affiliates from, among other things, acquiring beneficial ownership of any shares of the Company’s common stock … in excess of 4.99% … or initiating any stockholder proposal.”
• Allergan PLC, based in Irvine before it was involved in a bitter 2014 acquisition battle that ended in 2015 when it was bought, annually reports a line item for “litigation-related reserves and legal fees.” Note the trend at the drugmaker, which still has an Irvine presence:
2014: $415.3 million
2015: $191.7 million
2016: $101.1 million
2017: $78.3 million
• Garden Grove-based KushCo Holdings Inc. (OTC: KSHB) supplies paraphernalia to the cannabis industry. Its 2017 annual report has the following caveat emptor for potential stock buyers:
“Twenty-nine states and the District of Columbia currently have laws legalizing marijuana in some form. We do not believe that federal or any state laws prohibit us from selling our packaging products to cannabis growers and dispensers. See, however, the risk factors in Item 1A – Risk Factors under the captions U.S. Federal and foreign regulation and enforcement may adversely affect the implementation of marijuana laws and regulations may negatively impact our revenue and profit or we could be found to be violating the Controlled Substances Act or other U.S. federal, state or foreign laws … and We and our customers may have difficulty accessing the services of financial institutions and related financial services, which may make it difficult to sell our products and services.”
• It’s easy to see why lawyers like Acacia Research Corp. (Nasdaq: ACTG), a Newport Beach-based firm that relies on enforcing patents to collect royalties. It’s a litigation machine.
“We spend a significant amount of our financial and management resources to pursue our current litigation matters,” its annual report said. “We believe that these litigation matters and others that we may in the future determine to pursue could continue for years and continue to consume significant financial and management resources. The counterparties to our litigation are sometimes large, well-financed companies with substantially greater resources than us.”
For example, Acacia reported $15.8 million in “contingent legal fees” in the first quarter. That’s almost a fourth of the quarter’s revenue of $62.1 million. At least its inventors got paid, picking up $21.7 million in royalties.
• Irvine-based ChromaDex Corp. (Nasdaq: CDXC) is a “nutraceutical” company “devoted to improving the way people age.” Its flagship ingredient, Niagen, is “backed with clinical and scientific research as well as extensive intellectual property protection.”
It’s attracted investors that include Hong Kong billionaire Li Ka-shing and the investment arm of Facebook co-founder Mark Zuckerberg.
In late 2016, ChromaDex sued New York-based Elysium Health Inc., which describes itself as a life sciences company developing clinically validated health products based on aging research, and that’s entered into an exclusive license agreement with the Mayo Clinic and Harvard University.
Elysium has “maliciously” misappropriated ChromaDex’s trade secrets and failed to pay for products received, Chromadex said in its second-quarter report.
Elysium countersued, accusing ChromaDex of failing to issue certain refunds or manufactured Niagen to a defined standard, and “fraudulently” inducing Elysium into a trademark license and royalty agreement in 2014.
Elysium has also filed petitions with the U.S. Patent and Trademark Office to review patents for which ChromaDex is the exclusive licensee.
ChromaDex said its legal costs in the first half of the year climbed to $5.1 million, up from $1.4 million year-over-year. The costs amounted to more than a third of its $14.3 million in sales.
“The ongoing litigation with Elysium and our increased efforts to file and maintain patents related to the proprietary ingredient technologies were the main reasons for the increase in legal expenses,” the second-quarter report said.
— Peter J. Brennan
