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3M bankruptcy: MMM losses may reach $100bn from veterans’ earplug lawsuits

By Kevin Donovan


Updated

Photo: earplugs are worn by a US Navy patrol squad member firing an M4 rifle
Earplugs sold by a unit of 3M (MMM) to the US military are alleged to have malfunctioned, causing hearing loss for thousands.

Shares in 3M (MMM) were down nearly 2% on Tuesday after a bankruptcy judge in the US on Friday declined to block a mass litigation against one of its subsidiaries for allegedly selling defective earplugs to the US military.

Aearo Technologies is currently filing for bankruptcy protection as it seeks to settle more than 230,000 lawsuits that accuse the maker of noise-cancelling earware of selling products that caused wearers hearing loss. The company is currently undergoing a restructuring in Chapter 11 bankruptcy court to isolate the parent from any potential judgement.

3M (MMM) stock price

Testifying before the court last week, corporate solvency expert J.B. Heaton said he believes the lawsuits could eventually force 3M into bankruptcy.

“It is more and more likely within the next several years we’ll see a 3M bankruptcy,” Heaton said before the court, according to reporting from Bloomberg.

At the close of trade on the New York Stock exchange on Tuesday, shares in MMM were down 1.5%, and have now dropped 12.5% since Friday's court decision.

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Chart showing 3M stock price last week 3M (MMM) stock Source: Tradingview

Market not over-reacting 

But Scott Sheridan, CEO of options trading firm tastyworks, does not believe the Scotch Tape and Post-It notes maker will face the extreme case scenario.

“It’s really hard to see 3M going bankrupt. Not that it can’t happen, but it’s just tough to envision,” Sheridan said, adding he is just speculating on the litigation.

Noting the options market currently prices in a plus or minus $12 per share swing in 3M stock before the November option expiration date, Sheridan said: “it doesn’t seem the market is overly concerned about the financial ramifications this lawsuit might have.”

“That’s not to say this isn’t a humanitarian tragedy, rather, it just seems the market isn’t pricing in much impact,” Sheridan summed up.

Bankruptcy protects parent from litigation

The issue arose during 3M’s most recent second-quarter earnings call with analysts, during which 3M announced it had set aside $1.20bn for Aearo to “efficiently and equitably resolve litigation related to Combat Arms Earplugs.” The fund resulted in a $1.66 per-share per-tax charge.

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“We believe the applicable law supports our position as we move forward into this process,” said 3M Chief Legal Counsel Kevin Rhodes during the call. “And the goal, again, is to remove uncertainty to set up a more efficient and equitable process for establishing a fund to compensate claimants who are entitled to compensation as opposed to the process of continuing to litigate on a claim-by-claim basis.”

The bankruptcy was filed simultaneously with the announcement of a spin-off of 3M’s health care unit, and is part of the broader legal strategy to isolate 3M from any potential damages awarded to the plaintiffs and expedite future potential claims. In May, a Florida judge ruled 3M was liable for $77.5m in damages awarded to a US Army veteran who suffered hearing loss. The ruling found that there were design flaws in the Combat Arms earplugs that 3M aware of, but continued to sell the earplugs to the US military between 2003 and 2013.

“The decision to really take the steps related to Combat Arms litigation came out of, first and foremost, the result of the bellwether trial,” said 3M CEO Mike Roman on the same call. “We believe it would take years to litigate those claims.”

 

Dividends and buybacks not affected

Bloomberg also reported that some plaintiff advocates have requested US Bankruptcy Judge Jeffrey Graham freeze any 3M dividends and share buyback programs, in order to protect any potential future judgements in favor of the military veterans.

3M denies all responsibility for any alleged defects and added, “We are committed to using science and innovation to improve lives and solve the world’s biggest challenges, including those faced by the U.S. military,” on a website dedicated to the litigation.

“We are confident in our case and stand prepared to defend ourselves against plaintiffs’ allegations.”

Additionally, 3M says some of the lawsuits lack merit, citing the dismissal of more than 20,000 lawsuits on 6 May.

“3M supports recent efforts, like these orders, by the court to help prevent potentially frivolous lawsuits and to remove existing claims without merit.”

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