At a time when litigation involving corporate disclosures regarding cybersecurity, privacy, and human resource practices and other hot topics dominate the discussion, potential corporate exposure arising from environmental liabilities and disclosures does not always receive the attention it deserves. However, as I have previously noted on this blog, environmental disclosures can and frequently are the subject of D&O litigation, both in the form of securities class action litigation and shareholder derivative litigation. A new securities suit recently filed against 3M is the latest example of corporate and securities litigation arising from environmental disclosure-related issues. As discussed further below, the 3M complaint is also the latest example of event-driven securities litigation as well.
The 3M Litigation
On July 29, 2019, a plaintiff shareholder filed a securities class action lawsuit in the United States District Court for the District of New Jersey against 3M Corporation and certain of its directors and officers. The complaint purports to be filed on behalf of a class of investors who purchased 3M common stock between February 9, 2017 and May 28, 2019. A copy of the plaintiff’s complaint can be found here.
The gist of the complaint is the plaintiff’s allegation that the defendants engaged in a scheme to defraud investors by issuing false and misleading statements “to conceal the truth about the Company’s exposure to legal liability associated with its most lucrative product offerings: man-made chemicals known as per- and polyfluoroalkyl substances (PFAS).”
PFAS manufactured by 3M are used in a variety of products, including Scotchguard stain protectant, Teflon cookware, Gore-Tex water resistant outdoor gear, greaseproof food paper, and other products. The complaint notes that the same property that makes PFAS effective in consumer products (i.e., that its molecular bonds are so strong) means that PFAS do not break down in the environment, hence the nickname “forever” chemicals.
The timeline of events in plaintiff’s complaint begins in 2010, when the State of Minnesota sued 3M for environmental damage caused in the state. The securities lawsuit complaint alleges that on the eve of trial in the Minnesota lawsuit, 3M settled the suit for $850 million, the third largest natural damage claim settlement in history (behind only the Deepwater Horizon and Exxon Valdez oil spill settlements).
After the settlement of the Minnesota lawsuit, the Minnesota attorney general posted internal 3M emails and memos on a state website, most of which had not previously been published. Several articles based on the information in these documents appeared in a number of publications. The articles suggested that 3M had been aware for years of the toxicity of PFAS and that the company’s public statements and statements in its SEC disclosure documents about the safety of these products contrasted with what company officials were saying internally.
In May 2019, the states of New Jersey and New Hampshire filed their own lawsuits against 3M and other PFAS manufacturers based on environmental and consumer fraud claims.
The securities lawsuit complaint details the statements in the company’s SEC filings with respect to its environmental liabilities generally and with respect to PFAS specifically. The complaint alleges that
“while publicly denying that PFAS cause harm to humans and the environment,” the defendants concealed and misrepresented that: “(i) 3M’s vast internal evidence dating back decades confirming that PFAS are toxic (which was first publicly revealed in February 2018 by Minnesota’s Attorney General); (ii) 3M’s decades-long history of suppressing negative information and/or damaging data about PFAS; and (iii) 3M’s legal exposure to state, county, and local governments and individuals around the country as a result of its knowledge and intentional concealment of the toxic harm caused by the use of PFAS.”
The complaint alleges that these misrepresentations and omissions caused 3M’s stock price to trade at artificially inflated prices throughout the Class Period. The complaint alleges that the defendants’ misrepresentations and omissions violated Sections 10(b) and 20(a) of the Exchange Act, and seeks to recover damages on behalf of the plaintiff class.
This new lawsuit has only just been filed and it remains to be seen whether or not it will prove to be successful. However, as this new lawsuit illustrates, corporate environmental liabilities and disclosures can lead to director and officer liability exposures. Indeed, this case is just the latest in a series of corporate and securities lawsuits based upon defendant company’s environmental liabilities and disclosures.
This lawsuit is also the latest example of what I have described as event-driven litigation. I used this description to contrast these kinds of lawsuits from the more historically typical securities suit based upon alleged accounting or financial misrepresentations. In an event-driven securities suit, by contrast, the defendant company has suffered some type of setback in its business operations that has triggered a stock-price drop. The plaintiffs in these cases will allege that the defendants failed to disclose the possibility of the setback or the extent of damage a setback of that type might cause.
The prototypical event-driven lawsuit is the investor suit filed by Arconic shareholders in the wake of the Grenfell Tower fire. Other examples are the lawsuits filed against Boeing after the Lion Air and Ethopian Air plane crashes and the lawsuits filed against Marriott after the company announced the significant breach of its Starwood Customer database.
The new lawsuit against 3M differs somewhat from the typical event-driven lawsuit, in that in this case, there is no one single event that triggered the lawsuit. Rather, the culmination of a series of events beginning with the Minnesota lawsuit and settlement; the Minnesota AG posting the internal 3M documents online; the adverse media attention arising from the internal documents; and the most recent state lawsuits against 3M.
But the gist of the lawsuit is that there have been a series of adverse events in the company’s operations that have adversely affect the company’s performance and financial results, and that investors were inadequately informed about the company’s environmental liabilities and regulatory exposures.
The new 3M lawsuit shares many of the arguable shortcomings in common with the other event-driven lawsuits. For example, as is the case in other event-driven suits, the scienter allegations in the new 3M lawsuit arguably are scarce and diffuse. It also seems to me that loss causation may be difficult to establish as well. There is no single stock price drop alleged, and the list of adverse developments that would have affected the company’s stock price during the class period (e.g., the massive settlement with the State of Minnesota) that it could be challenging for the plaintiff to establish that any single corrective disclosure—or even any one of a series of corrective disclosures – and resulting loss was caused by the alleged misrepresentations.
In any event, the occurrence of lawsuits like this one, arising as it does from environmental liabilities and disclosures, has implications for D&O insurance underwriters. Underwriters considering companies whose operations may present environmental concerns will want to review the environmental disclosures in the companies’ periodic reports in order to assess the extent to which the disclosures provide a specific and detailed picture of the company’s environmental compliance circumstances.
Finally, for companies that have environmental liability and regulatory exposures, it clearly is going to be important to ensure that their D&O policy contains no pollution exclusion (as is the case in many current policies, which, rather than including a pollution exclusion simply carve out environmental remediation costs from the definition of covered loss), or, if they have a pollution exclusion, that the exclusion contains a provision carving back coverage for derivative claims and securities suits.