DuPont Will Be Back in Court Sooner Than Most Chemours Investors Know

JUL 15, 2016 @ 01:02 PM
Max Frumes
CONTRIBUTOR

POST WRITTEN BY
Chelsea Frankel
Last week a major new jury verdict in the C-8 multi-district litigation against DuPont was issued. Ultimately, Chemours securities are up after the week’s events but dropped initially on July 6 after a jury found DuPont liable for punitive damages (the amount of which the jury still needed to determine) and $5.1 million in compensatory damages for causing David Freeman ’s testicular cancer. The debt and equity rebounded almost completely after Chemours signaled to investors that night that there would be no more jury trials – and resultantly no more bad news of jury verdicts – until May 2017 when 40 cancer cases are scheduled to be tried in the MDL. Still, investors in Chemours awaited what multiple of the $5.1 million in compensatory damages the jury might grant for punitive damages, and sent the company’s securities above pre-verdict levels on July 8 when, after one day of testimony, the jury awarded a tenth in punitive damages of what they awarded in compensatory damages.

In its more than 200-year history, the industrial conglomerate DuPont has been at the center of major corporations under attack for unsavory business practices – most notably under the scrutiny of the 1934 Nye Committee – and later became one of the most emblematic companies of the M&A boom starting in the 1970s. The company, currently $59 billion in size by market capitalization, according to New York Stock Exchange, was the world’s fourth-biggest chemical company in 2014, and it’s currently working its way through a major merger with the fifth-largest such company in 2014, Dow Chemical, which is expected to close later this year. In spinning its performance chemicals division off into a newly traded company, Chemours, completed in July 2015, DuPont shed a potentially damaging asset – which manufactured the chemical perfluorooctanoic acid, also known as C-8, used to make commercial products and which wound up in many public water systems – through a separation agreement with Chemours that indemnified DuPont against C-8 and other liabilities.

Trials Not Disclosed

Although not disclosed in Chemours’ July 6 8-K announcing the resolution of all six bellwether cases in the C-8 multidistrict litigation against DuPont, there will be two additional jury trials held prior to the 40 cancer cases scheduled to begin trial in May 2017, plaintiff’s steering committee attorney Tim O’Brien of Levin Papantonio told Reorg Research on Monday. The MDL involves about 3,500 plaintiffs who allege C-8 from DuPont’s Washington Works Plant in West Virginia contaminated their drinking water and caused them injuries. The docket reflects that there are about 260 pending cancer cases and about 290 pending ulcerative colitis cases.

Trading Reaction

The credits traded in volume after the week’s news broke, with MarketAxess estimating that about $334.2 million of the 2023 notes changed hands between July 6 and July 14, and estimating that about $121.3 million of the 2025 notes changed hands during the same period.

On the New York Stock Exchange, Chemours and DuPont equity followed the same trajectory. At market close on July 5, Chemours had a market capitalization of approximately $1.4 billion compared with $1.6 billion today. DuPont closed with $55 billion in market capitalization on July 5, compared with today’s market capitalization of $58.5 billion.

The C-8 Litigation

The C-8 litigation and its implications for corporate responsibility in the United States and DuPont’s history with environmental liabilities has garnered attention from prominent news outlets including The New York Times, The Huffington Post, and The Intercept, and the indemnification agreement between Chemours and DuPont, along with the potential impact of a Dow-DuPont merger on liability claims, has recently become a focus after Citron Research – which gained fame from its attacks on Valeant Pharmaceuticals VRX -1.30% – released a report in June claiming that Chemours was designed for bankruptcy by its former parent, DuPont. Chemours, which spun off from DuPont in July 2015, contractually indemnified DuPont for the liabilities in its separation agreement but stated – as recently as last week in an 8-K following the punitive damages verdict – that “in the event DuPont claims that it is entitled to indemnification from Chemours as to some or all of the judgment, Chemours retains its defenses to such claims” (emphasis added).

The U.S. Judicial Panel reported today that of the 262 U.S. MDL dockets, the C-8 MDL had the tenth-largest number of plaintiff actions – 3,435. Of the plaintiffs’ cases, six bellwether cases were selected to be tried first to establish precedent and rulings that could lead to a global settlement. Chief Judge Edmund Sargus presides over the MDL in the U.S. District Court for the Southern SO -0.48% District of Ohio, and career law clerk to Judge Sargus, Penny Barrick, tells Reorg Research that David Freeman v. E.I. du Pont de Nemours and Company – which spanned six weeks – was the second-longest case the judge has presided over. The longest trial that Judge Sargus has presided over – a 1999 civil trial between architectural firm V Group and the Jefferson County Board of Commissioners – lasted ten weeks, the judge tells Reorg.

In Freeman, jurors specifically found last week that the plaintiff proved by preponderance of evidence that DuPont did not act – with regards to its use of C-8 – as “a reasonable corporation would [have] at the time based on what they knew at the time.” This finding brought the jurors to a verdict in favor of Freeman on negligence due to DuPont specifically causing Freeman’s testicular cancer. Jurors also found that DuPont acted with a “conscious disregard” for the rights and safety of others in a way “that has a great probability of causing substantial harm,” which, along with a finding of compensatory damages, granted Freeman punitive damages under Ohio State Law.

Although there will be no bellwether trial held at the end of August as previously scheduled, there will be an additional trial, selected by the PSC, which is scheduled for November, and another additional trial that will be scheduled for January 2017, O’Brien says. Meanwhile, DuPont’s appeal of the first bellwether trial, Carla Marie Bartlett v. E.I. du Pont de Nemours and Company, to the U.S. Appeals Court for the Sixth Circuit – challenging the probable link threshold established by Judge Sargus that was key for the plaintiffs’ cases in both Bartlett and Freeman – is ongoing, and Judge Sargus has said before counsel that he expects the Sixth Circuit court to issue its decision on Bartlett by the end of this year. DuPont filed its appellant brief on June 13, and the appellee’s brief is due to the Sixth Circuit by July 28. In another 8-K issued by Chemours on July 8, the company said that the verdict in Freeman will be appealed, adding that “there are substantial legal grounds to challenge the result.”

Since being appointed to the U.S. District Court for the Southern District of Ohio by President Bill Clinton in 1996, numerous Judge Sargus decisions have appeared before the Sixth Circuit, with three making their way to the U.S. Supreme Court. Judge Sargus’ 2005 rejection of a claim in Cutter v. Wilkinson was reversed by the Court of Appeals, but the Supreme Court unanimously reversed the Sixth Circuit ruling, and similarly in a 2000 case, Judge Sargus’ ruling was reversed by the Sixth Circuit with the Supreme Court later reversing the Sixth Circuit’s decision. In a case surrounding Jehovah’s Witnesses and a Stratton, Ohio, ordinance prohibiting canvassers from approaching homes, Judge Sargus ruled primarily in favor of the canvassers but ruled that they must register with the village. The Sixth Circuit affirmed Judge Sargus’ ruling but the Supreme Court found in 2002 that the preregistration requirement was unconstitutional.

Judge Sargus was appointed to his current position of Chief Judge in 2015 and tells Reorg Research that, while the limit for the position is set at seven years, he will serve in the role for just under five years, allowing Judge Algenon Marbley, who was appointed as district judge in 1997, to then succeed Judge Sargus in the role of chief judge. Under theU.S. Code’s Judiciary and Judicial Procedure, the district judge who is senior in his or her commission and has not already served as chief judge is appointed to the role. However, a district judge may not serve in the role if his or her age exceeds 70 years, according to the statute. Judge Sargus’ agreement to limit his role as chief judge to just under five years will allow Judge Marbley to serve in the role for an equal amount of time.

Also, since Judge Sargus’ appointment as chief judge, he has mediated two notable cases: United States of America v. Ohio Edison Company, in which the parties reached a $1.2 billion settlement requiring the defendant to install emission controls with the settlement proceeds, and a similar case involving nine American Electric Power plants, resulting in emission controls of $4.6 billion. The record in the cases reflect that the cases took years, each with several hundred pages of settlement agreements. On July 13, Judge Sargus scheduled in-person court-ordered mediation for July 27 and July 28 in order to discuss the MDL.

Bartlett concluded in October when DuPont was found liable for causing Carla Marie Bartlett’s kidney cancer; Bartlett was awarded $1.6 million in compensatory damages for negligence and negligent infliction of emotional distress but jurors did not find DuPont demonstrated conscious disregard. Another bellwether case was returned to the regular class pool as a high cholesterol case after the plaintiff’s ulcerative colitis was found to be misdiagnosed, and two kidney cancer cases and one ulcerative colitis case were privately settled. The final bellwether case concluded before a jury last week when Freeman was awarded $5.1 million in compensatory damages, $500,000 in punitive damages and a not-yet-decided-upon amount for attorneys’ fees. Judge Sargus will rule on the liability amount for attorneys’ fees, and plaintiff’s counsel told Reorg that attorneys’ fees will total at least $3 million.

Precedents set in Bartlett and Freeman are subject to change if the Sixth Circuit overturns any of Judge Sargus’ rulings, but if the Sixth Circuit agrees with his rulings, it is unlikely that DuPont will be allowed to introduce before jurors in any MDL case evidence showing that a plaintiff’s C-8 dosage was not sufficient to cause the alleged injury. DuPont has repeatedly stated its disagreement with this ruling and its belief that Judge Sargus incorrectly interpreted the findings of the independent science panel both parties agreed to adopt in the Leach settlement agreement.

The Issue of Dosage

In short, DuPont reached a settlement in 2005 – memorialized in the Jack W. Leach et al. v. E.I. DuPont De Nemours and Company settlement agreement – with a class of about 80,000 people living in districts around the chemical company’s Washington Works plant. The class members alleged their water sources were contaminated with C-8 from the plant, where DuPont once manufactured Teflon. In the Leach settlement, both parties agreed to adopt the findings of an independent science panel that would determine whether or not there is a probable link between C8 exposure and any human disease in the Leach class.DuPont paid the cost of the study in full, which totaled more than $20 million, according to filings on the MDL docket. The class-action settlement agreement also led to the creation of the Brookmar C-8 Health Project, which “gathered health histories, blood chemistries, and C8 blood levels” from about 69,000 participants in the six water districts surrounding the Washington Works Plant, according to the health project web page on the website of Hill, Peterson, Carper, counsel to the Leach class. As stipulated in the settlement agreement, the Brookmar data set was used by the science panel in their determination of any probable links.

The panel found that there is a probable link – or a “more likely than not” chance of a link – between six diseases (testicular cancer, kidney cancer, ulcerative colitis, thyroid disease, diagnosed high cholesterol and pregnancy-induced hypertension and preeclampsia) and exposure to C-8. Because of this, DuPont, under the Leach settlement, is not able to dispute that general causation exists between C-8 ingestion and those diseases – but DuPont contests Judge Sargus’ ruling that the science panel determined the probable link applies to the ingestion of C-8 at or above a dose of 0.05 ppb in drinking water for at least one year.

Class membership for the science panel study was limited to persons who had ingested 0.05 ppb of C-8 in their drinking water for at least a year, and since the science panel’s findings were based on such class membership, Judge Sargus ruled that the 0.05 threshold be applied as the dosage capable of causing the six linked diseases. DuPont has argued before Judge Sargus, and argues thoroughly in its appellant brief, that this ruling impaired the defendant’s ability to contest specific causation in a way that is unfairly prejudicial. The panel found “an increased risk in higher exposure categories of C8, and little or no increased risk (and sometimes a lower risk) for class members with medium and low exposures,” DuPont argues in its brief, citing the panel’s report. “In short, the 0.05 number defines simply who is in the class; it does not determine the effects of C8 on individual class members,” it adds.

Judge Sargus’ 0.05 threshold ruling and its tangential effects excluded DuPont’s specific causation experts in Bartlett and Freeman because the witnesses intended to testify that each respective plaintiff’s C-8 dosage was insufficient to cause their injuries.

Jury’s Knowledge of Other Litigation

Just two weeks ago, in Freeman, Damond Mace of Squire Patton, counsel for the defendant, was asked into Judge Sargus’ chambers for an ex parte discussion after – in an objection to O’Brien’s line of questioning during cross-examination of DuPont toxicologist Robert Rickard (who served as DuPont’s corporate representative in Bartlett) – Mace requested in front of jurors an instruction saying there is “no evidence of injury” to the 69,000 people who were tested in the six relevant water districts outside of the Washington Works plant for the Brookmar data set. The incident resulted in Judge Sargus issuing an instruction to jurors, disclosing to them for the first time, that there are 3,500 other plaintiffs alleging similar injuries against DuPont.

It has been highly contested by both parties whether any class action may be mentioned during the compensatory phase of trials. Judge Sargus allowed the plaintiff in Bartlett to introduce evidence showing that the Brookmar data set tested 69,000 participants within the six districts outside the plant despite objection from DuPont, and made the same ruling in Freeman, acknowledging that the number of people tested is “partly relevant and probative [and] partly unfairly prejudicial.” On the disclosure of the number of people tested, Judge Sargus instructed jurors that as far as the plaintiff’s damages, “what happened to other people or didn’t happen to other people is not part of the case” but said that, “in terms of measuring DuPont’s conduct,” the jurors may consider the numbers.

The ex parte incident in Freeman came on June 29 after DuPont again objected to the introduction of the “69,000” figure and was again overruled. Following the judge’s limiting instruction to jurors, Mace stood to request “further clarification [that] there’s no evidence of any injury to others [in the Brookmar data set].” Judge Sargus immediately denied the request, and during a sidebar with counsel, Mike Papantonio of Levin Papantonio for Freeman argued that Mace’s comment would be “sanctionable” in any federal court he appears in front of and called Mace’s comment an “intentional effort to try to sway this jury and have them believe that Mr. Freeman, out of 69,000 people, is the only person who’s injured.”

Bartlett was among those tested in the Brookmar data set and, because DuPont was found by a jury in a federal court to have caused her kidney cancer, Judge Sargus agreed with plaintiff’s concern about the prejudicial effect Mace’s question might have on the jury – particularly after Papantonio highlighted that he saw two jurors take notes on Mace’s objection. The judge then offered a limiting instruction to jurors disclosing that of the data set, “there are 69,000 people who had water in these water districts with C-8 in it from the DuPont Washington Works plant and that 3,500 of them have filed lawsuits.” After dismissing jurors, Judge Sargus asked Mace into his chambers for a privateex parte conference that spans two redacted pages in the trial transcript. Although significant in Freeman, curative instructions do not establish a precedent for jury instruction in the MDL.

On other litigation disclosed to jurors, Judge Sargus has now twice modified his ruling on the introduction of a $10.2 million payment that DuPont made to the Environmental Protection Agency for violating the Resource Conservation and Recovery Act and the $6.2 million expenditure for Supplemental Environmental Projects that DuPont paid to resolve its violations. In May, Judge Sargus modified his ruling in Bartlett that barred the plaintiff from describing the penalty to the jurors, concluding at the time that Freeman will be allowed to describe the payment to the EPA as a “substantial civil penalty.” He had said to counsel during Bartlett that he would reconsider admission of the penalty’s dollar amount and specifically said during the last week of testimony in the Freeman trial, “If [the parties] were starting this case with opening statement right now, the way this case has been tried up to this point, [he] would change [his] ruling” to allow the introduction of the $16.4 million dollar amount. He then modified the word penalty to “fine” at DuPont’s request and allowed the plaintiff to use the adjective “very” in describing the severity of the fine during closing argument.

Ohio’s Tort Reform Act

Another issue before the Sixth Circuit that could affect future trials – or remand damages in the prior trials – is whether the Ohio Tort Reform Act, which became effective in April 2005, limits noneconomic damages in cases without an award of economic damages. Judge Sargus has ruled that the act applies to injuries occurring after the 2005 effective date and not just to claims that accrue after that date. The Ohio Supreme Court has “repeatedly held that new legislation applies prospectively to all claims that accrue after the legislation’s effective date,” DuPont says in its appeal, arguing also that Bartlett did not first hear about C-8 until she was tested for the chemical’s exposure in October 2005. Ohio incorporated a discovery rule directly into accrual for toxic torts, meaning that “a cause of action does not arise until the plaintiff discovers, or … should have discovered, that he or she was injured by the wrongful conduct,” DuPont asserts.

Application of the act to the jury’s verdict would reduce the total damages to $250,000.

Jason Sanjana, Graham Meharg, Max Frumes and Sarah Gefter contributed to this article.