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Here’s Why 3M Is Facing Billion Dollar Lawsuits

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3M is staring at billions of dollars in settlements after US military veterans sued the company over earplugs, which allegedly led to hearing damage. The company is poised to begin negotiations with the vetrans’ lawyers.

3M (MMM) is facing billions of dollars in potential legal settlements for allegedly selling defective foam earplugs to the U.S. military. According to the Wall Street Journal, more than 100,000 military veterans have filed lawsuits against the company, alleging hearing damage due to the military-grade earplugs, which the government bought for about $7.63 a pair.

Defective Earplugs

According to the court-appointed lead lawyer for the plaintiffs, Bryan Aylstock, the soldiers in question have ringing in their ears known as tinnitus after using the earplug. The legal challenge will seek to ascertain whether the hearing issues are due to faulty 3M earplugs, soldiers not wearing them enough, or something else entirely. From the early 2000s to 2015, the U.S. military bought $32 million worth of the company’s earplugs.

The company is poised to begin negotiations with lawyers representing the soldiers who say the plugs led to hearing damage when they returned from war. 3M’s lawyers and the vetrans have already completed 16 court bellwether trials designed to see how much damages can be awarded in the cases and help inform settlement discussions.

To date, plaintiffs have won 10 of the trials, with 3M winning six and eight being dismissed. In some cases, the jury awarded damages as high as $77.5 million and as low as $1.7 million. The company has already appealed some cases and indicated it is ready to appeal others.

3M faces one of the most significant legal challenges as about 107,000 active cases are associated with earplugs. An additional 127,000 could move to an additional active listing once filing fees are paid. The lawsuits also include a small number of consumer and police plaintiffs.

3M’s Defense

In its defense, 3M insists that the earplugs work when soldiers are given proper training and use them as intended. In addition, it insists it has legal protection under government contractor defense, which means it cannot be held liable for manufacturing products that the government requested.

However, earlier this year, a Florida judge ruled that the contractor defense did not apply in this case since the military did not offer precise specifications for the product. According to the company’s lawyer, Erik Rucker, the company is making newer versions of the earplugs designed in collaboration with the military.

This is not the first time 3M has found itself in hot water over earplugs. In 2018, the company agreed to pay $9.1 million to the US government to resolve claims regarding earplugs sold to the military without disclosing their defects.

The lawsuits are weighing heavily on 3M shares in the market, given the company could be forced to pay billions of dollars to settle the matter. Legal fees are already piling up, with the company estimating $63 million related to the earplug lawsuit and an older case involving industrial masks. Last year, the company incurred legal costs to the tune of $249 million.

Wall Street’s Take

The Street is bearish about the stock, with a Moderate Sell consensus rating, based on eight Holds and four Sells. The average 3M price target of $152.9 implies 13.8% upside potential from current levels.

Bloggers’ Opinion

TipRanks data shows that financial bloggers’ opinions are 84% Bullish on MMM, compared to a sector average of 69%.

Key Takeaway for Investors

Sentiments for 3M in the market are negative as investors are reacting to a string of lawsuits that threaten to force the company to make billions of dollars in payments to settle the issues. The risk of profit margins taking a hit is high, with rising legal fees as the company moves to settle the matter.

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