Court blocks 3M strategy to prevent earplug lawsuits through bankruptcy

A federal judge has rejected 3M’s attempt to use the US bankruptcy system to manage personal injury claims related to earplugs, a legal tactic the corporations have used to shield themselves from financial damage from lawsuits in the latest setback Is.

Soldiers filed nearly 255,500 personal injury claims claiming their hearing was damaged by earplugs made by 3M subsidiary Aero Technologies. 3M put Aearo into bankruptcy last year, setting aside $1bn to cover settlements as part of the case.

But US Bankruptcy Judge Jeffrey Graham in Indiana ruled Friday that Arrow should not be allowed to use the bankruptcy system because it is financially sound for the time being.

Graham dismissed 3M’s pleas, saying, “Sitting here today and considering the evidence presented by the parties, the Court cannot conclude that the Arrow Entities’ pleadings were anything but fatally immature. ”

Graham said this situation could change because a bankruptcy dismissal would expose Arrow and 3M to a wave of litigation that could rapidly undermine their financial standing. He said the decision would not lead to repeated bankruptcy filings by Arrow — or an initial filing by 3M — should the circumstances warrant.

The decision is a blow to 3M, which had sought to use the US bankruptcy system to limit its exposure to earplug litigation and sought a global settlement of all existing and future claims.

3M shares fell about 1 percent after the ruling. They’re down about a third over the past 12 months, amid concerns about exposure to earplugs and litigation over the so-called forever chemicals.

The decision paves the way for a jury trial against 3M to continue, in what has become one of the largest mass tort lawsuits in US history. 3M, an industrial conglomerate best known for selling Post-It notes and Scotch tape, said Arrow is evaluating whether to appeal.

3M is the latest in a succession of companies including Johnson & Johnson and Koch Industries to use the bankruptcy system to manage personal injury claims. But courts have begun to closely scrutinize the strategy, which typically allows parents to protect themselves from legal claims by having a subsidiary file for Chapter 11 bankruptcy protection.

In March a judge rejected J&J’s first attempt to use the bankruptcy courts to settle claims that its talcum powder could cause cancer. However, the world’s largest healthcare products company responded by enabling a helpful LTL management within hours of the dispatch.

In 2008, 3M spent $1.2 billion to buy Arrow, which made military-grade earplugs that are the subject of litigation. 3M denies that the earplugs were defective.

Lawyers representing the soldiers said they would move quickly to lift the stay on the civil lawsuits so the cases could be taken to a jury.

The earplugs litigation isn’t the only legal liability facing 3M. The company has faced thousands of lawsuits alleging that its products expose people to so-called “forever chemicals” that do not break down over time in nature or the human body.

RBC Capital Markets analyst Dean Dray said 3M could now try to settle the earplugs litigation, which could cost $5bn to $10bn. He said the liabilities of “forever chemicals” are expected to be several times higher, with 3M’s total legal financial exposure at $30bn.