Saint Louis University sued Medtronic (NYSE:MDT) this month, accusing the medical device giant of using opaque accounting methods to cheat the school out of at least $7 million in royalties for surgical navigation and imaging technology licenses.
SLU signed a licensing contract in 1995 with Stealth Technologies Inc., providing the school with 2.33% royalties on the net selling price of all licensed products, according to court documents. Stealth was acquired by Sofamor Danek Group, which was later acquired by Medtronic in 1999.
SLU received the first of its royalty payments in 1995, with royalty statements indicating that payments amounted to 2.33% of net sales, as prescribed by the contract.
In 2006 SLU brought in Pricewaterhouse Coopers to perform an audit of the royalty payments, finding that "Medtronic had been calculating royalties under the agreement at 2.33% of a transfer price … rather than the much higher net selling price invoiced to customers."
"Using the actual invoiced prices for licensed products found in Medtronic’s general ledger and sales transaction detail for U.S. sales from 2003 to 2006, PwC calculated that royalties were underpaid during that time in the amount of $1,200,558," SLU alleges in court filings. "The PwC audit was never completed, however, because information was either withheld by Medtronic or otherwise was not available in a form that would permit PwC to analyze it – but this information would have revealed further deficiencies in Medtronic’s royalty payments."
SLU claims that Medtronic’s international transaction details were not in a format that would allow PwC to determine whether there were discrepancies between the royalties paid on a net selling price as compared with the internal transfer price. SLU further claims that the device maker didn’t provide details on transactions for its Xomed and IGN subsidiaries.
Medtronic later changed the format of its quarterly royalty reports after the audit, according to the complaint, beginning to list the "total sales" price, which "were much higher than prices listed" in previous reports, according to court documents.
The reports appeared to use the new "total sales" value in calculating SLU’s 2.33% royalties, but "only later, upon further scrutiny, however, did SLU discover that the 2.33% royalty was not being applied to the total sales prices listed, but on lesser amounts not shown on the royalty reports – and in amounts consistent with the use of an internal transfer price."
Although the plaintiff says its can’t calculate the full damages from underpaid royalties due to inaccessible data, the school estimated that Medtronic owes at least $7 million for underpayments since 2002.
"The use of a transfer price rather than the net selling price to calculate royalties was of a continuing nature, however, and SLU is informed and believes that the resulting underpayment of royalties may date back to the very first sales by SNT pursuant to the agreement in 1995," according to the complaint.
The lawsuit was filed last week in the U.S. District Court for the Easter District of Missouri. The plaintiffs have demanded a jury trial.