U.B. v. Maverick Tube et al

Filing 69

OPINION on Summary Judgment. Bhandari will take nothing from the defendants. (Signed by Judge Lynn N Hughes) Parties notified. (ghassan, 4)

UNffiD STATES DISTRICT COURT

SOUTHERN DISTRICT OF TEXAS

United States District Court
Southern District of Texas

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Ujwala Bhandari,
Plaintiff,

versus
Maverick Tube Corporation,

ct

al.,

Defendants.

ENTERED
August 31, 2018
David J. Bradley, Clerk

Civil Action H-r6-226s

Opinion on Summary Judgment
r.

Background.
Ujwala Bhandari served as the North American tax director at Maverick

Tube Corporation from

2007

to August of 20r 5. Her job duties included

coordinating transfer pricing, spotting tax risks related to Maverick's
international operations, and making sure Maverick complied with tax laws.
When she thought she found a tax risk, she would inform her supervisors. She
reported to Fabian Lev, Tenaris's global tax director, and Christopher North,
Maverick's chief financial officer.
Maverick, Hydril Company, Tenaris Global Services (U.S.A.) Corporation,
and Tenaris Connections, Ltd., are wholly owned subsidiaries ofTenaris, S.A.,
which has headquarters in Argentina. Connections is in St. Vincent and the
Grenadines. Maverick, Hydril, and Global are in the United States. T enaris
bought Hydril in

2007.

Hydril is a subsidiary of Maverick, and it is included in

Maverick's tax return.
By 2007, Hydril's primary business was threading seamless pipe with its
technology. Its technology is a patented range of threads for joints and couplings
that are used to link casing and tubing, among other products, in high-pressure
or high-temperature environments. These may be in deep-water offshore wells,
deep gas wells, and horizontal wells. Tenaris manufactures pipe used in high-

pressure applications and in other settings such as in offshore or onshore
pipelines.
Hydril primarily threaded pipe made by other Tenaris companies, but it
also licensed its technology.

A.
In

The Transaction.
2010,

Hydril gave Connections a ten;year, non;exclusive right

to

sublicense its technology in the market outside of the North;American Free
Trade Agreement. Hydril had already licensed its technology to customers in
Mexico, United States, and Canada. Connections paid Hydril

$22.5

million in

a lump sum.
The price Connections paid was based on its continuing to charge
companies the same royalty that Hydril charged. In

2010,

Hydril charged

companies a royalty of 10% of the price of threading pipe. The sublicense was
valued at what Hydril could expect to earn if it continued to license its
technology at this royalty rate.
B.

Pricing.

Because the sublicense is between two related companies, the United
States company must include a transfer pricing report in its tax return. A transfer
pricing report ensures that the price paid by a related party is roughly what an
unrelated third party would have paid. This requires the object of exchange to be
valued. The value of a license may be calculated by determining the projected
income that the licensor would earn if it continued to charge the same royalty
rate for the duration of the agreement. If the Internal Revenue Service reviews a
company's pricing report and thinks that the deal did not use an approximation
of the market value, it may adjust the company's tax liability to reflect the actual
income earned.
In

2010,

Hydril asked Duff & Phelps, an outside advisor, to value the

sublicense. Duff & Phelps used Hydril's past royalty rate to value the sublicense.
In the past, Hydril had charged companies a

10%

royalty rate on the cost

to

thread pipe with its technology. Using this rate, Duff predicted the sublicense to
be presently worth $22.5 million. This amount reflects the formula:
Valuation

mmus

Present value of the

Cost saved plus

projected royalty

reversion right

revenue earned by

offset

Connections
Duff estimated the present value ofwhat Connections could earn over ten
years charging the same royalty as Hydril to be $30.9 million. Duff estimated
that Hydril saved $3.3 million by having Connections administer the license.
Duff estimated the reversion~right offset to be $5.I million. The reversion~right
offset reflects how much Connections's use and marketing add to the value of
Hydril's technology.
In

20 I 2,

Maverick retained Ernst &- Young to prepare its

pricing report, which it also calculated at the

C.
In

IO%

20 I 2

transfer

rate.

The Change.
20I4,

Connections changed its royalty rate structure. Connections

charged a 6% royalty rate calculated on the price of pipe plus the cost to thread
it. Despite being a smaller percentage, Connections earned more money. Hydril
continued to charge its IO% royalty rate to its North American customers while
Connections charged the 6% rate to its other customers.
Bhandari argues that the change in the royalty structure affected the
sublicense's value, resulting in Maverick' s under~reporting its tax liability. The
difference between the projected revenue in the Duff &- Phelps

20IO

valuation

and the actual revenue Connection earned is:
Year

Projected millions of dollars

Actual millions of dollars

20I2

4]

I2·5

20q

4- 8

I7-7

20I4

4-9

22- 6

Bhandari used the differences in actual income received to highlight how
much more money Connections earned under the new structure. After it
increased the royalty rate, T enaris also internally updated the sublicense
valuation. It increased the present value of the projected I o "year royalty revenue
from

$30.9

million to

$115.5

million. Whether Maverick needed to presently

update the reversion rights offset is disputed.
Bhandari says that Maverick misled the Service by under-reporting its
taxable income. Without increasing the offset, the sublicense would be worth
more than what Connections paid. She does not think the offset should be
increased because the increased revenue is due to the pipe, not Connections's
marketing.
Although she thinks the difference between actual and projected revenue
indicates Maverick's misbehavior, Bhandari gives another possible reason for the
difference - the price of oil increased worldwide. More drilling meant more sales
ofTenaris's threaded pipe, which meant more revenue.

It does not matter whether the transfer pricing report was updated in
2014.

Maverick self-reported Bhandari's allegations to the IRS by giving it the

letter that her counsel sent Maverick. Maverick met with the Service to discuss
the letter. It requested the opinions Maverick had from its advisors - Ernst

t:r

Young, Deloitte, and Sullivan t:r Cromwell. Sullivan t:r Cromwell's opinion said
that Maverick's conclusions on its tax return were" consistent with [its] view on
the tax treatment of these [transfer pricing report] issues. " The Service made no
further requests relating to Bhandari's complaint. On March

I, 2016,

it told

Maverick that it had completed the audit of its 20 12 tax return without changes
made by the Service or Maverick.
2.

The Claim.
In May 2015, the Service initiated an audit of Maverick' s 2012 tax return.

Maverick was scheduled to meet with it on August 13, 20 I 5, to discuss the 20 12
pricing report. This did not happen. In a conference that Bhandari secretly
recorded, she told her supervisors that she would not stick to the meeting agenda
to only discuss the

2012

tax return. She said she could not present it "as is"

without also telling the Service about the increased royalty rates. Bhandari claims
that her protected activity was her telling her supervisors that Maverick underreported its tax liability and that she could not present the

20 12

tax return "as

is." She argues this is protected because Maverick's potential tax exposure was
material, so it should have been included on Maverick's books and public
financials statements. She also says that Maverick violated its own internal
controls. Maverick decided to fire her in February 2015. On August

14, 2015,

it fired her - one day after the scheduled IRS meeting.
She filed a charge with the Equal Employment Opportunity Commission
and did not receive a response in

180

days. She claims that Maverick retaliated

against her as a whistle blower because (a) she engaged in a protected activity,
and (b) these actions contributed to Maverick's decision to fire her.
A.

Protected Acti'Viry.

Bhandari claims that her actions are protected because (a) her conduct
is within the scope of the Sarbanes-Oxley Act, and (b) her belief that Maverick
was acting illegally was objectively reasonable. She also argues that performing
her job duties and reporting wrongful conduct to the wrongdoers might be
protected by the statute. Someone charged with identifying tax risks and who
lawfully reports such risks to her supervisors might be protected if she
reasonably believes that the company behaved illegally.

I

It was not reasonable for someone like Bhandari to think Maverick broke
the law by not adjusting its transfer pricing report. Actions by Maverick in 2014
do not change the value of the sublicense in

2012.

While she takes issue with Maverick's not changing its transfer pricing
report in the years after T enaris changed the royalty, a regional tax director
should know that pricing reports are not adjusted on a year-by-year basis.
Because transfer pricing reports are changed using multi-year averages, she
would have expanded the agenda to the

1 IS u.s.c. I5IfA(a) (I).

2015

meeting on the

2012

return had

she brought it to the Service's attention. No one would have been prepared to
discuss it. She was not reporting wrongdoing - only a fact about something else.
The Service reviewed Bhandari's complaint, talked to Maverick about it,
and did not change Maverick's tax liability for
Maverick's

2012

2012.

Sullivan [:,- Cromwell said

tax return was reasonable.

Between 2007 and 2015, Bhandari worked on major projects, including
the merger and restructuring of Maverick. She has an undergraduate degree in
accounting, a master's degree in business, a master's degree in tax, and has
worked for several years with large, public companies, including ExxonMobil.
She should have known that what she saw was not a problem because pricing
reports are not adjusted on a year-by-year basis and because a change in
would not have affected

20 12.

2014

The law allows her to be mistaken in her belief,

but it does not protect unreasonable beliefs or talking about whatever she wants
in a meeting. 2.
In essence, she says it was illegal to wait until the time for receiving the
reversion valuations to decide the amount reported. It is not reasonable for
someone with her background to think Maverick tried to defraud the United
States government by underpaying its tax liability on these facts. Her supervisor
told her that it was improper for Connections to charge T enaris-related parties
in different market areas different royalty rates. This, however, does not change
the fact that transfer pricing reports are not updated yearly. For the

2012

tax

return, it was unreasonable for her to insist that a change in royalty rate two
years later would immediately affect that tax return. It was unreasonable for her
to think the pricing report needed to be changed the same year the royalty rate
changed.
Also, Bhandari was supposed to be figuring out the effect of the change
in the royalty rate. Not only was that part of her job, but also Lev specifically
asked her to do it. Instead of analyzing the problem, Bhandari accused the
company of under-reporting its tax liability. Lev had asked her to look at the
change in royalty rate in March of 2014. In January of 2015, she said that it

2 18 U.s.c. I5I¢(a)(I).

needed to be examined - she had not done it. After dragging her feet on the work
she was supposed to be doing, she admitted that she did not have the facts to
support her accusations. Then she blamed others for not giving her the facts.
B.

Contributing Factor.

Maverick would have fired her regardless of whether she had told her
bosses that the company was going to under-report its taxes.
She says that what she did contributed to Maverick's decision to fire her.
She says her name did not appear on Maverick's list of potential employees to fire
until after she (a) first received Connections's royalties revenue between
and

2014,

2010

(b) told North and Tenaris's tax compliance regional manager that

based on what she saw, Maverick's tax liability was significant, and (c) requested
more information to help her understand the effect ofTenaris' s changing royalty
rates.
She thinks that her actions are why she was considered for termination.
She says that Maverick's decision not to fire her on March

30, 2015,

is

suspicious. Bhandari questions why Maverick would call her to the meeting of
August

13, 20 15,

charge her with presenting the

20 12

tax return, and fire her

the day after she said she refused to only speak about what the Service wanted to
know. Refusing a direct, legal order is a significant insubordination.
Bhandari was one of 752 employees laid off between

2015

and

2016.

Maverick laid off workers in all sectors of its Houston division. During the
meeting when her name came up as an employee Maverick could layoff, the
company decided it would also layoff three people from accounts payable, a cost
accountant, and one person in the treasury department. Her position made her
a candidate to be fired in a reduction of force. Maverick no longer needed
someone of her skill level and pay rate to do what it needed done. Bhandari's
services were needed when Maverick was expanding, but Maverick did not expect
to expand in the near term. Bhandari finds it significant that Maverick posted a
job opening for a position with similar duties after she was fired. This job posting
was for a job of similar work but lower rank. Her responsibilities could be
handled by someone oflower rank and lower pay.

Bhandari misinterprets why Maverick continued to employ her until
August 2.or 5. It wanted to get as much information from her as it could.
Maverick continued to operate as usual until it fired her. She was involved in
preparing the 2.or2. tax return. It made sense for Maverick to want her, its North
American tax director, to present its 2.or2. tax return to the Service. That the day
she was fired was one day after the day of the presentation does not prove
causation. Maverick had decided that she would be laid off several months earlier.
She pretends that she was mistreated because Maverick was hiding its
inter;company pricing; however, Maverick sent her letter to the Service
voluntarily.

3.

Conspirary and Joint Enterprise.
Without a violation of the Sarbanes;Oxley Act, Bhandari cannot have a

conspiracy or joint enterprise claim.

4.

Conclusion.
Ujwala Bhandari will take nothing from Maverick Tube Corporation,

Hydril Company, and Tenaris Global Services (U.S.A.) Corporation.
Signed on August 3r, 2.or8, at Houston, Texas.

Lynn N. Hughes
United States District]udge

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