Indiana bankruptcy case could help shake up US mass tort litigation system
Driving the news: 3M, the conglomerate, recently filed for bankruptcy its subsidiary Aearo Technologies. It aims to use the bankruptcy process to settle more than 230,000 lawsuits brought by military service members who allege faulty earplugs made by Aearo caused hearing loss – the largest multi-district litigation (MDL) in history.
Why is this important: from Aeroro reasoning because bankruptcy involves asking whether the United States mass crime and the MDL system is even functional, calling his own experience “a cautionary tale of an MDL that is beyond repair”.
- And big companies routinely exposed to mass crime — think pharmaceutical and medical device makers — are keeping a close eye on what happens with Aearo and the bankruptcy of a Johnson & Johnson subsidiary last year. The latter was filed to help settle a baby powder dispute and is the second largest MDL in history.
- The findings could provide a playbook for large, profitable parent companies — which do not appear to be insolvent — to take advantage of certain features of the bankruptcy process without filing for bankruptcy themselves.
- In other words: The advantages of bankruptcy, without the disadvantages.
Benefits: Bankruptcy offers an efficient way to settle with a sprawling group of claimants. Instead of sifting through thousands of individual cases, the bankruptcy court estimates liability via expert testimony and indicative verdicts so far and facilitates settlement negotiations if the company doesn’t have the money.
- Often, bankrupt entities get an automatic “suspension” (or pause) of litigation against them, which prevents further adverse trial verdicts from occurring – and thus can give them more leverage in settlement talks.
The inconvenients : Bankrupt entities are under the control of the courts for day-to-day financial decisions such as paying suppliers and their use of money. They would generally not be able to transfer value to shareholders in the form of dividends or spinoffs (3M is currently planning to separate from its healthcare business).
What they say : After the J&J case last year, “the floodgates are open,” Georgetown law professor Adam Levitin wrote on the Credit Advice Blog.
- In Levitin’s view, “Like J&J, 3M appears solvent and able to pay all hearing demands in full. Instead, it hopes to use bankruptcy as a forum to force a settlement on plaintiffs.”
State of play: So far, the Indiana bankruptcy judge isn’t entirely in agreement — he refused to stay litigation against 3M. The business is attractive.
- Meanwhile, critics in particular cite 3M’s planned health care fallout as a way to potentially move assets out of plaintiffs’ reach — and a group of earplug plaintiffs have sued for blocking the spin-off. (3M Chief Legal Officer Kevin Rhodes says the two transactions have completely separate rationales; 3M maintains that the earplugs were effective when used correctly.)
By the numbers: Whether fallout plans are bad or not may depend on how much you think earplug plaintiffs will ultimately be owed.
- 3M estimates it will likely be around $1 billion – and it funded a trust with that amount in conjunction with Aearo’s bankruptcy filing. Rhodes says the estimate is based on valuation analysis by consultancy Bates White.
- But plaintiffs allege it could be more than $80 billion, based on extrapolation from headline cases so far (plaintiffs have prevailed in 10 of 16 jury trials). Meanwhile, a 3M sell-side research note released by Wells Fargo lists a settlement expectation in the range of $15-20 billion.
- For comparison, 3M’s market capitalization is around $66 billion, and analysts believe the healthcare business it plans to expand could be worthwhile. up to $45 billion.
The bottom line: The MDL process “is going to be the main issue in Aearo’s bankruptcy. It’s no understatement to say that this case will help decide whether mass tort MDLs remain viable, or whether defendants like Aearo will regularly use bankruptcy. to avoid them, wrote Alison Frankel of Reuters.