TheCorporateCounsel.net

In the latest “Deep Quarry” newsletter, Olga Usvyatsky shares takeaways from SEC comment letters to sixteen companies issued between January 2023 and February 2024 focused on adjustments for legal expenses in non-GAAP numbers. She found that the companies receiving these comments had some common characteristics:

– Involvement in a mix of routine and non-routine legal cases;
– A high impact of litigation charges on the non-GAAP bottom line;
– A generic title of the non-GAAP line that does not specify which cases are excluded in the non-GAAP calculations.

The blog then discusses in detail the treatment of IP-related litigation costs — particularly for companies with businesses that would ordinarily involve IP litigation — and whether adjusting for those costs is appropriate under Regulation G. It cites an instance where the SEC disagreed with the company’s arguments that litigation expenses were non-routine due to the “size, scope, complexity and frequency.” The SEC focused on the fact that IP litigation arises in the ordinary course given the nature of the company’s business and products.

But even for companies where IP-related litigation is common, the analysis remains very fact-intensive. The newsletter describes another comment letter where the company successfully argued that an adjustment was appropriate for one specific IP matter. The blog highlights that the company treated costs associated with all other IP litigation matters as ordinary course and did not adjust for them in non-GAAP measures.

– Meredith Ervine