3M Can't Use Bankruptcy to Stop Warring Earplug Lawsuits, Judge

(Bloomberg) — 3M Co . lost its battle to block trials in more than 230,000 lawsuits accusing it of injuring American soldiers. The company’s shares fell after the decision.

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U.S. Bankruptcy Judge Jeffrey J. Graham declined to temporarily halt lawsuits accusing 3M and its bankrupt subsidiary, Aearo Technologies, of selling defective combat earplugs that damaged the hearing of veterans who used them.

“We are disappointed with the court’s decision today and will appeal. Further litigation in MDL court benefits no one,” the company said, referring to the federal multidistrict litigation program where soldiers’ claims are being prepared for trial.

Shares of 3M fell nearly 10% after the decision was announced Friday afternoon.

“3M has every incentive to seek a settlement in this scenario,” said Nigel Coe, an analyst at Wolfe Research. “A trial in these cases is not a realistic scenario.”

Graham’s ruling overturns 3M’s decision to settle the lawsuits, placing Aearo in bankruptcy, where controversial rules sometimes allow parent companies to benefit by suspending litigation and settling their lawsuits in one place.

A temporary suspension would help pressure 3M soldiers to settle, Graham said in his ruling. But Indiana’s federal bankruptcy law prevents it from granting 3M’s request for an injunction, Graham ruled.

“Of course, it is tempting to be swayed by the sheer size of the MDL at issue in this case, but that alone does not provide a sufficient basis for the court to conclude that an injunction is necessary,” Graham wrote.

3M is using an increasingly popular strategy in which profitable companies use bankruptcy proceedings to force settlement negotiations with victims of allegedly harmful products. Johnson & Johnson and logging giant Georgia-Pacific also filed for bankruptcy with the same goal of ending their legal woes in one place rather than fighting thousands of lawsuits across the country.

Lawyers for the soldiers demanded the right to continue to litigate their cases. The ruling means 3M now faces the prospect of jury verdicts across the country, with one expert hired by the military’s law firms estimating the company could face more than $100 billion in damages from the claims.

That figure has been disputed by the company and criticized by some soldier advocates. During a trial over whether Graham should drop the lawsuits, a lawyer for the soldiers called the expert a nutcase before apologizing for the insult.

Veterans’ advocates said the decision vindicates their view that profitable companies should not be allowed to use bankruptcy court to avoid lawsuits.

“This is a huge victory for the 230,000 American service members who were harmed by 3M’s fraud and greed,” Brian Aylstock, one of the lead lawyers suing the company, said in a statement. “We look forward to pursuing our claims against 3M.”

On July 26, the company filed for Aearo bankruptcy in Indianapolis. Under Chapter 11 rules, Aearo automatically has the right to freeze the lawsuits it faces, but because 3M itself did not file for bankruptcy, the judge had to agree to grant the industrial conglomerate the same protection.

The decision creates a conflict between two branches of the federal judiciary. A judge in another district reached the opposite conclusion in the bankruptcy of a division of Johnson & Johnson.

U.S. Bankruptcy Judge Michael Kaplan, who is based in Trenton, New Jersey, not far from J&J’s headquarters, found that a stay of about 40,000 lawsuits against the health care giant was necessary to resolve the claims.

Kaplan’s decision is being appealed by lawyers suing J&J on behalf of women who claim they got cancer from the company’s baby powder.

Until last month, 3M fought the claims in federal court in Pensacola, Florida, where a judge oversaw the initial procedural steps needed to prepare the cases for separate trials that would have been held in other courts. The judge overseeing that process, which is known as multidistrict litigation, or MDL, questioned 3M’s decision to use bankruptcy instead.

The bankruptcy is Aearo Technologies LLC, 22-02890, United States Bankruptcy Court for the Southern District of Indiana (Indianapolis).

(Updates with analyst commentary in the fifth paragraph.)

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