Costs mount for 3M as earplug trials drag on

After nearly a year and 11 trials, 3M's courtroom battle over its military earplugs still rages on with no end in sight — and Wall Street is increasingly worried about a potential multibillion-dollar threat to the company.

Former or active military members, who claim 3M knowingly made defective earplugs that damaged their hearing, have won six trials. The Maplewood-based company, which claims the earplugs are safe, has won five.

Without a settlement, thousands more cases will go to trial in what has become the largest U.S. mass tort ever. Two stock analysts recently estimated total payouts to plaintiffs could be around $15 billion.

"Right now, it looks like a 50-50 shot the plaintiffs will win," said Alexandra Lahav, a professor at the University of Connecticut School of Law. Their ratio of victories shows "there is merit to their cases. ... The plaintiffs right now have a lot of leverage, and 3M is thinking, how can we turn the tide?"

3M says it is "confident" in its case and has begun appealing jury verdicts it lost.

Recently filed appellate court documents show that 3M is reasserting the "government contractor" defense. A potentially powerful tool, the defense shields companies from tort liability for defects in products designed and developed for the federal government.

3M has claimed its earplugs were designed in close collaboration with the military. But Casey Rodgers, the U.S. District judge in Florida presiding over the earplug case, rejected 3M's government contractor plea in 2020.

The lawsuit avalanche centers on the Combat Arms or CAEv2 earplug, which a company called Aearo Technologies began selling to the U.S. Army in the late 1990s. 3M bought Aearo in 2008 and continued sell the CAEv3 until 2015, dominating the military earplug market.

About 280,000 military earplug claims are pending against 3M. They have been roped together in a multidistrict litigation, or MDL, case in U.S. District Court of northern Florida.

MDLs are used in the federal court system for complex product liability matters with many separate claims. They commonly feature bellwether trials, which set a tone for settling all claims.

Between the end of March 2021 and late January, 11 earplug bellwether trials were held. Five more are scheduled from mid-March through May.

If there's no settlement after those trials, Rodgers has ruled that active cases be remanded back to the various federal courts from which they came. They would be tried in waves of 500 cases.

Theoretically, the close win-loss ratio should play well for a settlement since neither 3M or the plaintiffs would have overwhelming leverage in negotiations. However, judgments for plaintiffs have been wide-ranging, complicating the value for any settlement.

In the plaintiffs' first four wins, awards tallied $7.1 million (split among three U.S. Army veterans); $1.05 million; $8.2 million; and $13 million. But in the last two plaintiffs' victories — one each in December and January — the awards were $22.5 million and $110 million (split by two Army veterans).

Beyond the 11 trials, eight other cases have been dismissed. If that dismissal pattern holds, about 80,400 cases could be thrown out before or during discovery, Rodgers wrote in a February order.

Still, as thousands of cases play out, J.P. Morgan stock analyst Stephen Tusa wrote in a January report that 3M's earplug liabilities could realistically be $15 billion to $25 billion — with $1 billion as the "low-end of possibilities."

"It would appear that the potential liabilities could be significant, currently underappreciated by investors as far as our investor conversations suggest," he wrote.

Joshua Pokrzywinski, a stock analyst at Morgan Stanley, sees a "base case" of $14 billion in earplug litigation liabilities for 3M, with a range of outcomes from $2 billion to $53 billion. The market has only recently begun pricing earplug litigation risk into 3M's stock, he wrote in a mid-February report.

The company's shares are already burdened by an even bigger legal war over PFAS, a class of chemicals that 3M manufactured for decades. Hundreds of cities, states and individuals have sued 3M for allegedly contaminating water and soil with PFAS.

"3M shares have underperformed multi-industry peers by [about] 80% over the past three years based on challenged fundamentals and as PFAS has become notable," Pokrzywinski wrote.

Each earplug bellwether trial — with a fleet of lawyers involved — could easily be costing 3M $1 million, swelling its overall litigation expenses and providing another incentive to settle. Plaintiffs and their lawyers — who work on contingency — also have an incentive: The longer the trials drag on, the longer they'll wait for a payoff.

Still, 3M could aim for a "silver bullet" to get lost cases thrown out or retried, said Lahav, the Connecticut law professor. Reasserting the government contractor defense in the 11th Circuit Court of Appeals appears to be such a strategy.

Because Rodgers ruled that 3M could not use the government contractor defense in the bellwether trials, jurors "heard a distorted version of reality largely scrubbed of the government's pervasive involvement [in the earplug's development]," the company argued in a court filing.

Plaintiffs' attorneys, in a statement, called the appeal "yet another attempt by 3M to blame the military for its misconduct."

Of the roughly 280,000 military earplug claims against 3M, 42,337 are active and being readied for trial, court records show.

The rest sit on what's called an administrative docket — which is essentially a placeholder, said Lahav, an expert in tort law and complex litigation. "Some are good claims — people who are really injured — but not all of them."

3M said in a statement that the number of claims on the administrative docket "is highly misleading."

"Plaintiffs' counsel were able to file thousands of claims, generated through advertising and other solicitation efforts, without having to comply with the typical, threshold vetting process customary in any lawsuit filed in civil courts."

Bryan Aylstock, a lead plaintiffs attorney in Pensacola, Fla., countered that "the vast majority of the cases on the administrative docket are indeed cases."

Rodgers has so far ordered that around 75,000 cases be "transitioned" from the administrative docket to actives status — or be dismissed. About 25,000 cases were covered by Rodgers' two orders last fall, and about 84 % have moved to the active docket, court records show.

The other 50,000 cases are included in orders that Rodgers issued in just the past five weeks.