The High Court has upheld a California court’s request for evidence from KPMG Ireland in a dispute over payments linked to the schizophrenia drug FazaClo, subject to conditions that must be met before KPMG has to comply.
Mr Justice Noonan gave judgment on 11 June 2015 on KPMG’s application to set aside or vary an order made in July 2014 under the Foreign Tribunals Evidence Act 1856. That earlier order required a KPMG representative to give evidence on oath and produce documents for use in civil proceedings before the Superior Court of California for Los Angeles County. KPMG also sought security for its compliance costs.
Dr Neal R Cutler, a psychiatrist who developed FazaClo through a company he founded, alleges that the defendants suppressed the drug’s net revenues through marketing and accounting practices, depriving him of contingent payments under a 2006 sale agreement. The defendants deny those allegations. Their defence includes the contention that KPMG, their auditor, approved relevant accounting practices, particularly the reserve for product returns.
The California request sought testimony about KPMG’s audits and advice concerning FazaClo financial reporting from 2007 to 2013, along with broad categories of related documents. KPMG argued that the request was effectively an attempt at document discovery, was too broad and oppressive, and was premature while discovery in California was ongoing. It also complained that Dr Cutler’s original application had not disclosed the US discovery process.
The judge found that the request was not merely a demand for documents: KPMG could give relevant evidence about its audit work and the returns reserve. He said the court should generally assist foreign courts, while recognising its discretion to refuse or limit a request. The breadth and potential burden of production could be addressed by narrowing the documents required. The omission about US discovery was not serious enough to justify refusing the request, and internal KPMG records could potentially shed light on its audit methodology.
The court therefore refused to set aside the request and decided to give effect to it with conditions. Documents already held by Azur and covered by the US discovery order are not to be duplicated; the precise form of that limit was left for discussion with counsel. Dr Cutler must provide security for KPMG’s compliance costs, as agreed by the parties or fixed by the court, and undertake not to join KPMG to the existing proceedings or bring fresh proceedings against it over matters at issue in the US case.
KPMG is not required to attend an examination, produce documents or take other compliance steps until those conditions are fulfilled. The judgment did not determine the underlying payment dispute or the allegations against the defendants.