3M Co.’s plan to use controversial bankruptcy rules to shield itself from some 230,000 lawsuits over military earplugs looked like a relatively simple solution to a long-simmering problem that could cost it billions. of dollars.
Like most things that seem too good to be true, it was. Now may be the time for Plan B: a full, and always expensive, settlement process for American soldiers who claim hearing damage.
An Indiana bankruptcy judge on Friday rejected 3M’s bid to temporarily halt a flurry of lawsuits accusing the manufacturing giant and a bankrupt subsidiary of selling faulty combat earplugs.
3M said it would appeal, but it was no relief for investors, who saw their shares fall the most in the S&P 500 index at Friday’s close. It was the company’s biggest rout in three years.
The decision was a blow to 3M and CEO Mike Roman’s most decisive action yet to deal with the growing legal burden. Losses in 10 test trials have already resulted in $300 million in damages awarded by juries and millions more in legal costs, with other trials likely to continue after Friday’s ruling.
“It takes them back to where they started before they filed for bankruptcy,” said Alexandra Lahav, a law professor at Cornell University who teaches product liability law. “It’s pretty clear that they need to negotiate some sort of comprehensive resolution to these cases.”
3M had hoped that by putting its Aearo Technologies LLC unit into Chapter 11 bankruptcy, it might also get the court’s blessing to extend the same litigation freeze benefits of court protection to the parent.
Under the plan, veterans who would qualify for compensation would be paid from a $1 billion trust, an amount RBC Capital Markets analyst Deane Dray said is insufficient. He estimates settlements can cost $10 billion or more.
“It’s not a completely surprising development,” he said. “3M’s bankruptcy strategy was expected to be vigorously challenged.”
3M announced the surprise decision to put its subsidiary Aearo into bankruptcy late last month as it announced its second-quarter results and planned to spin off its huge healthcare products division. The unit accounts for about a quarter of 3M’s revenue and is a major source of growth, and the news punch showed Roman’s willingness to shake up the staid, insular conglomerate.
But Friday’s bankruptcy ruling threatens to keep 3M in a cloud of uncertainty, at least until the appeal process runs its course.
The decision makes it more likely that 3M’s litigation costs, which already represent a mid-single-digit percentage of its annual earnings per share, could rise further, Citigroup analyst Andrew Kaplowitz said in a note.
As 3M continues its appeal, veterans’ attorneys will continue to prepare for trials across the country. This process is overseen by a federal judge in Florida.
The first of these trials is scheduled to begin on October 24. Plaintiff, a U.S. Army Reserve veteran with four years of active duty deployment, who suffers from hearing loss and tinnitus allegedly due to use of the combat earplugs, according to a representative .
“3M needs to do the right thing for these veterans they harmed,” said Mikal Watts, an attorney who is suing 3M over the earplugs. “3M will voluntarily offer fair compensation to these veterans or watch jury after jury compel them to do so.”
Cornell’s Lahav said 3M officials could try to set up a comprehensive resolution system — like the one created by Merck & Co in 2007 to settle cases involving the withdrawn painkiller Vioxx. As part of this settlement, customers presented evidence of their injuries and were compensated based on the severity of the harm suffered. Or 3M could join the ranks of companies that have recently chosen to settle inventories of product liability lawyers’ cases, like Bayer in the Roundup litigation, she said.
“I think it’s manageable for 3M, but someone has to step in and strategize going forward,” Lahav said. “A mediator has to come in and see what kind of deal is workable.”
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