3M to pay $6 billion to earplug customers after bankruptcy plan failed
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Corporate America's attempt to use bankruptcy court to minimize certain product liabilities suffered another setback this week as 3M agreed to a $6 billion out-of-court settlement.
Why it matters: Whether financially healthy companies are allowed to use bankruptcy to reduce victim payouts has a direct impact on customers, shareholders and legal precedent.
Driving the news: 3M on Tuesday confirmed that it had reached a deal to pay $6 billion over six years to people who say they were harmed by 3M subsidiary Aearo Technologies' Combat Arms Earplugs.
- 3M was facing hundreds of thousands of lawsuits — including many by members of the U.S. military — saying the earplugs led to hearing damage.
Context: 3M had tried placing Aearo into Chapter 11 bankruptcy, but a federal judge rejected that attempt in June.
- The company will now pay six times more than it had initially proposed when Aearo filed in July 2022.
What they're saying: "Companies are saying it's in the plaintiffs' best interests for this to be in bankruptcy," Pamela Foohey, a professor at the Cardozo School of Law and an expert on attempts to mitigate litigation liability through bankruptcy, tells Axios. "3m shows that's not true."
In a similar case, a federal court in July rejected Johnson & Johnson's second attempt to file its talc-based baby powder liabilities into bankruptcy through a specially created subsidiary.
- Alleged victims say the baby powder caused cancer, and J&J has proposed to pay $8.9 billion in settlement funds.
In both cases — 3M and J&J — courts ruled that the companies can't access bankruptcy because they're not broke.
- On the contrary, they're excelling.
- "It's, 'You're both not broke now and you have not proven sufficiently that these lawsuits — and the totality of the lawsuits stemming from your allegedly tortious conduct — are going to make you broke in the future," Foohey says.
Yes, but: Other companies have found success with similar strategies.
- Georgia-Pacific recently won a court's approval to pause asbestos lawsuits against the pulp and paper maker after it spun off its related liabilities into a separate company in a maneuver known as the Texas two-step.
What's next: 3m earplug customers will be given the opportunity to file a claim through a settlement process that will resolve the multi-district litigation against the company in Florida and Minnesota.
- J&J's alleged victims are hoping for a settlement that could top the $8.9 billion they were offered in April.
- And the Supreme Court is poised to rule next term in the Purdue Pharma case on whether the Bankruptcy Code allows non-consensual third-party releases in a decision that, Foohey says, could decide the fate of the two-step strategy.
Reality check: Like J&J, which says its baby powder has always been safe, 3m is not admitting its earplugs were faulty.
- "The products at issue in this litigation are safe and effective when used properly," the company said Tuesday in a statement. "3M is prepared to continue to defend itself in the litigation if certain agreed terms of the settlement agreement are not fulfilled."
The bottom line: Bankruptcy court is not open to all.
