Litigation is an unavoidable cost of doing business, and product manufacturers know this better than anyone. From automakers to building materials fabricators and — increasingly — medical device producers, litigation — whether valid or not — can threaten a company’s solvency.
Nearly 50 years ago, Congress recognized that the costs of liability litigation were hurting the economy, which led to the passage of the Bankruptcy Reform Act in 1978. The law made it easier for individuals and companies with crippling debts that were otherwise solvent to reorganize debts.
One of the first corporations that availed itself of the law to manage the liabilities from large-scale product liability cases was the Johns-Manville Corp., which needed to manage decades worth of asbestos claims. The case established a settlement trust to fund payments on current and future claims. It is a structure that has been replicated by numerous other corporations in a similar predicament.
Congress formally codified such trusts in 1994.
Such a structure not only establishes a means to pay claims but also limits the cost of continuing litigation.
Over the last decade, the magnitude of settlements and payouts for product liability lawsuits has grown significantly, according to the Insurance Information Institute, which notes that personal injury jury awards paid by insurers for product liability lawsuits brought in 2020 averaged $7.1 million. That is more than twice the average award for business negligence, the next-highest category of awards. The median amount that juries awarded nearly doubled in the last decade and was $3.9 in 2020.
It is not just the payouts that are creating problems for manufacturers: Defending against product liability invariably engenders high litigation costs, partly because many are class-action suits that use novel tactics and legal theories to deal with highly complex issues, all to boost payouts through punitive damages. The cost of defending averages nearly $750,000.
In many asbestos cases, the complexities involved with causality and liability benefit from the structure afforded by bankruptcy courts. Product liability attorneys have made peace with settlement trusts and embraced them as a pool of settlement capital. In the Johns-Manville case, the company initially contributed $2.5 billion to the fund, and its total payments exceeded $5 billion. It’s paid nearly $50 million so far in 2022.
Despite the length of time some asbestos settlement trusts have been paying — the JMC trust continues paying claims 34 years into its existence — new petitions regularly arise against established trusts and newcomers to the structure. One newcomer to the bankruptcy trust was created by Georgia-Pacific: it initially eschewed creating one because the company’s exposure was “a minuscule percentage” of the total asbestos market, but it found itself being named as defendants in 70 percent to 80 percent of all newly filed asbestos cases each year.
After having already spent nearly $3 billion defending and resolving more than 430,000 cases, in 2017, it created a special-purpose entity to aggregate and assume its asbestos liabilities.
The approach is not without its detractors. Judge Casey Rodgers — from the District Court in Northern Florida and head of the multi-district litigation panel hearing the case for 3M Co. and its subsidiary Aearo Technologies — chided 3M for using the bankruptcy strategy. Likewise, the bankruptcy judge rejected Aearo’s full indemnification of 3M against more than 233,000 pending claims.
Aearo filed for bankruptcy last summer, and the company committed $1 billion to fund a settlement trust based on the analysis of an external estimator of claims and committed an additional $240 million to fund projected related case expenses.
Despite the efficiency afforded by bankruptcy courts in such matters, the approach could benefit from even greater efficiency, mainly when dealing with multinational conglomerates. Johnson & Johnson devoted one-fourth of its third-quarter 10-Q filing to discussions and disclosures about litigation and product liability matters, which currently encompasses 16,500 lawsuits with 64,000-plus plaintiffs.
Its new consumer products subsidiary allotted $2.5 billion for a trust to settle asbestos-based baby powder claims, and there is a separate $5 billion fund to settle lawsuits brought by families of people who suffered as a result of the company’s ill-advised marketing of opioid-based products. Still, the structure has proven itself better able to deal with such cases than the system led by liability attorneys.
While Chapter 11 filings still make headlines, the more methodical approach of the bankruptcy system in dealing with complex corporate liability cases has benefited plaintiffs and defendants alike. The only losers are the liability attorneys.