A bankruptcy court last week declined to extend chapter 11 protections to 3M based on a bankruptcy filing by its Aearo Technologies subsidiary.
Photo: Glen Stubbe/Zuma Press
had good reason to bet that it could use U.S. bankruptcy laws to shield itself from a mountain of personal-injury lawsuits filed over its allegedly defective military earplugs.
But after a bankruptcy judge rejected a key aspect of its legal strategy, 3M is facing an uphill battle to find a way to control its costs stemming from 230,000 lawsuits on behalf of military veterans, the largest single multidistrict litigation by number in U.S. history.
A handful of large, solvent businesses have accessed chapter 11 in recent years to fight back against tort litigation, moving those liabilities to a new subsidiary and then to bankruptcy court for settlement. And bankruptcy courts have shielded them from further trials and verdicts in the civil justice system, even though they didn’t file for chapter 11 themselves.
3M used an existing subsidiary to try to replicate that outcome for its own legal problem: the mass lawsuits alleging the company’s combat earplugs exposed U.S. service members to harmful noise that damaged their hearing.
It hasn’t worked as planned. Last week, a bankruptcy court in Indianapolis declined to extend chapter 11 protections to 3M based on a bankruptcy filing by its subsidiary Aearo Technologies LLC, the earplugs’ manufacturer. As a result, 3M remains exposed to further jury verdicts in the earplug cases, which have yielded $265 million in damage awards against 3M in the small number that have gone to trial.
The company’s appeal could take months. Meanwhile, legal proceedings around the earplug claims will sprawl into new forums. 3M will need to keep defending the earplug litigation in federal and state courts, while simultaneously seeking to persuade an appeals panel that the bankruptcy court was wrong to let the earplug claims proceed. Aearo’s chapter 11 case, which 3M is bankrolling, is also expected to continue.
“Trying to resolve mass tort allegations in the bankruptcy system involves a series of gambles because this system was not designed to give them the relief that they want.”
— University of North Carolina School of Law Professor Melissa Jacoby
Last week’s ruling marked a departure from a string of court decisions expanding the powerful legal tools of bankruptcy to
Johnson & Johnson,
Georgia-Pacific LLC and other large, profitable businesses seeking to stem mass injury lawsuits.
“Trying to resolve mass tort allegations in the bankruptcy system involves a series of gambles because this system was not designed to give them the relief that they want,” University of North Carolina School of Law Professor Melissa Jacoby said.
A 3M representative said Monday it continues to be confident in its legal strategy. The chapter 11 filing by Aearo was supposed to provide a single forum to estimate the plaintiffs’ claims collectively, at lower cost than conducting trials one-by-one, and settle all claims against both the bankrupt subsidiary and its solvent parent, 3M.
The battle now under way in multiple court districts highlights the risks that solvent companies take when they try to tap chapter 11 and may cool interest in pursuing the same tactics from other corporate defendants.
3M in July predicted that Aearo could settle the roughly 230,000 claims for $1 billion in bankruptcy court, in part by aggressively reducing the number of cases after identifying veterans with very little hearing loss. In a handful of bellwether trials decided against 3M, which denies its combat earplugs were defective, the awards averaged about $26 million a case.
Last week’s setback for 3M heightens the risk that the ultimate cost for the earplug lawsuits will significantly exceed the $1 billion it has put up in the Aearo bankruptcy toward a global settlement, according to analysts.
The Environmental Protection Agency on Friday added to investors’ anxiety about 3M’s legal exposures by proposing that two chemicals that are part of a class of perfluoroalkyl and polyfluoroalkyl substances, or PFAS, be designated as hazardous substances under federal Superfund law.
3M was among the companies that once manufactured PFAS, including for Scotchgard, a water-repellent coating for fabrics. The company has said it supports federal regulation of PFAS and determining “a path forward to achieve our shared goal of protecting people and the environment.” The EPA’s new proposal “will not meaningfully advance that goal,” 3M said.
The earplug litigation and the potential for liability for PFAS threaten to siphon tens of billions dollars from 3M in the coming years, according to some analysts who say the costs could undermine the company’s business model.
3M for years has offset slow-growing sales from the thousands of products and materials it makes with high operating margins from its often market-leading brands. As the exclusive supplier of earplugs to the U.S. military, 3M sold them to the government for $7.63 a pair after spending less than 20 cents to manufacture the foam plugs.
The large amounts of cash that 3M generates typically have been returned to shareholders through dividends or the company’s purchases of its shares. 3M this year expects to pay dividends of $5.96 a share, costing the company $3.4 billion, according to William Blair & Co.
William Blair analyst
said he expects 3M’s dividend to be safe for now, but it could be subject to reductions in the future if 3M needs to raise cash by divesting itself of businesses.
3M in July said it would spin off its healthcare business, which accounted for nearly a quarter of its sales last year, and distribute equity in the new company to 3M shareholders. The new company is also expected to provide a one-time dividend to 3M of $7 billion to $8 billion. That could be used to pay off debt or buy back shares, but some analysts now expect it will more likely go to cover liability costs for earplugs.
Without protection from ongoing lawsuits from the bankruptcy court, 3M returns to the Florida federal court where most of the earplug cases have been consolidated. Aearo’s lawyers have criticized the federal court’s rulings, saying that U.S. District Judge M. Casey Rodgers in Pensacola, Fla., couldn’t provide a fair resolution of the earplug litigation, and called it “a magnet for unvetted claims.”
Judge Rodgers has criticized 3M for orchestrating the bankruptcy case and accused the company of scheming to escape her jurisdiction and relitigate decisions it already lost.
Samir Parikh, a law professor at the Lewis & Clark Law School in Portland, Ore., said Aearo was aggressive in how it criticized the earplug litigation, likely anticipating that 3M wouldn’t have to return to Judge Rogers’s court, which proved incorrect.
Write to Jonathan Randles at Jonathan.Randles@wsj.com and Bob Tita at email@example.com