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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