On September 30, 2021, Judge Nancy E. Brasel of the United
States District Court for the District of Minnesota granted a
motion to dismiss a putative class action against an industrial
chemical manufacturer (the "Company") and certain of its
officers alleging violations of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and Rule 10b-5. In re 3M
Co. Sec. Litig., No. 19-CV-2488 (D. Minn. Sept. 30,
2021). Plaintiffs alleged that the Company downplayed its
potential legal and financial exposure over its production and
disposal of toxic per- and poly-fluoroalkyl substances
("PFAS") by failing to estimate the contingent losses
associated with the Company's PFAS liabilities. The Court
dismissed plaintiffs' complaint for failure to plead an
actionable misrepresentation or allegations sufficient to support a
strong inference of scienter.
For decades, the Company manufactured PFAS for use in a variety of
commercial and industrial products, such as fire-fighting
foam. Plaintiffs alleged that the Company disposed of PFAS
waste products in public waters and unlined dumps,
knowing—but not disclosing—that these chemicals were
extremely toxic. In 2010, the Minnesota Attorney General sued
the Company over the environmental damage caused by the manufacture
and disposal of these chemicals in the state. In 2018, a few
weeks before the trial, the Company disclosed in its Form 10-K that
Minnesota's damages expert had submitted a report opining that
the Company's practices had resulted in $5 billion in
environmental damage. The Company, however, recorded no
liability on its financial statements, explaining in its Form 10-K
that any such liability was "not probable and
estimable." Among other reasons, the Company explained
that it had filed a summary judgment motion on statute of
limitations grounds that, if successful, would completely bar the
state's recovery. The day before trial, the Company
announced that it had settled the lawsuit for $850 million, which
was significantly higher than the $50 million of environmental
liabilities recorded on the Company's balance sheet. In
May 2019, the Company increased its accrual for environmental
liabilities by $235 million, stating the figure represented the
Company's best estimate of probable losses related to other
litigation arising from the Company's disposal of PFAS in
another five sites, but also stated that it was unable to estimate
a possible loss beyond these accruals. In July 2019, after
the Company disclosed it was investigating PFAS contamination at an
additional site, third-party analysts estimated that the Company
faced between $6 billion and $22 billion in PFAS-related
liabilities based on the number of cases filed and contaminated
sites identified to date. The Company continued to increase
its accruals for PFAS-related environmental liabilities through the
first three quarters of 2020.
The Court first considered technical aspects of general accepted
accounting principles ("GAAP"), and in particular, the
Financial Accounting Standards Board Accounting Standards
Codification 450, Contingencies ("ASC 450"). The
Court rejected plaintiffs' claim that the Company's
accruals violated GAAP and ASC 450, and misleadingly understated
its multi-billion exposure, as impermissible
"fraud-by-hindsight." Under the relevant accounting
rules, the Company was only required to accrue for losses that were
"probable"—having at least a 70% chance of
occurring—and were "reasonably estimable" at the
time the Company issued its financial statements. Plaintiffs
argued that the Company knew multi-billion losses were probable and
could reasonably estimate these losses because of (i) its $850
million settlement with Minnesota, (ii) the expert report in that
litigation estimating damages at $5 billion, and (iii) a $671
million dollar settlement by another company in a comparable
PFAS-related litigation. The Court held, however, that
plaintiffs failed to allege that the losses were
"probable" because success of the Company's pending
summary judgment motion would have resulted in no liability for the
Company. The Court also held that plaintiffs did not
adequately allege that the losses were "reasonably
estimable" because they offered "no factual allegations
showing that cost estimates for the PFAS-related liabilities were
anything but difficult to derive because of uncertainties about a
variety of factors." The Court noted that the $5 billion
figure contained in Minnesota's expert report illustrated the
challenges with estimating liability because the eventual $850
million settlement was substantially lower. For these
reasons, the Court also held that the Company did not breach any
alleged duty to predict potential PFAS-related liabilities and that
various statements of opinion by the Company about its PFAS-related
liabilities were inactionable.
The Court also held that the allegations in the complaint were not
sufficient to give rise to a strong inference of scienter.
The Court rejected plaintiffs' argument that trading activity
by the Company's officers suggested a motive to commit fraud,
noting that the officers' increase in their holdings during the
relevant period "weaken[ed] the allegation of suspicious
insider trading." The Court also rejected
plaintiffs' argument that the Company's internal documents
regarding "reserves" that would help the company resolve
"litigation that is related to environmental matters,"
and the sheer size of the Minnesota settlement, suggested that the
Company knew its potential liabilities were far higher than it had
reported. The Court noted that, at most, these allegations
suggested that the Company knew losses were possible, but
they did not show the Company had access to information that would
allow it to assess whether its PFAS-related liabilities were
"probable" or "reasonably estimable."
Finally, the Court rejected plaintiffs' argument that
defendants "failure to timely accrue more for PFAS-related
liabilities was 'at least reckless,'" because
plaintiffs did not allege that the Company had failed to comply
with GAAP. To the contrary, the Court noted that any
inference of scienter was contradicted by the fact that the
Company's independent auditors had stated that the
Company's financial statements complied with GAAP.
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