3M Seeks to Resolve Legal Disputes Surrounding 'Forever Chemicals' and Earplugs

3M Company's stock (MMM) is down 1.19%.

The decision to quit making "forever chemicals" represents a tactical retreat aimed at containing its potential liability over its products in legal fights expected to last for years, analysts say. This move may help the company avoid costly litigation and damages, but it is not likely to end the controversy surrounding its products.

3M is facing allegations that its chemicals and products have contaminated drinking water and pose health risks. The company is expected to be engaged for years in remediating alleged soil and water contamination from so-called "forever chemicals," which are used in industrial and consumer products including nonstick cookware, carpeting and firefighting foam.

The Minnesota-based company is also a defendant in liability lawsuits for earplugs manufactured for the military. Claims filed by about 230,000 veterans allege that the earplugs failed to protect them from service-related hearing loss. This is a record number of claims in a single federal court case.

3M is disputing the allegations. In future trials concerning the chemicals' use in fire-suppression foam, the company will likely argue that the foam was manufactured to U.S. military specifications, which gives 3M legal protection as a government contractor. 3M has stated that the earplugs are safe and effective when soldiers receive the proper training on how to use them.

Some analysts believe that the company's liability costs could reach tens of billions of dollars. However, 3M lawyers and executives have said that they expect the ultimate costs to be much less. In fact, they forecast last summer that the earplug cases alone could be settled for $1 billion.

3M's CEO, Mike Roman, has been working to increase profits from the company's slowly-growing businesses by selling weaker performers. Mr. Roman, who became 3M's leader in 2018, is also planning to spin off the company's healthcare business by the end of 2023. This would give 3M's investors shares in a separate company that includes some of 3M's best-performing product lines.

Analysts say that investors' anxiety about the litigation is reflected in 3M's stock price, which has fallen 32.5% since the beginning of 2022. This is compared to a 20% decline in the S&P 500 index. The company's challenges can weigh on the broader equities market because 3M's stock is a component of the Dow Jones Industrial Average.

3M is expected to use a series of legal moves to lessen its exposure to liability, mixed with negotiated settlements with plaintiffs. Over time, this could reduce or spread out its liability costs to manageable amounts, legal analysts said. "3M will continue to remediate the chemicals and address litigation by defending ourselves in court or through negotiated resolutions," a company spokesman said.

Analysts said that 3M would likely try to minimize the impact of the litigation costs on the large shareholder dividends that the company is known for on Wall Street. This would be done in order to maintain the company's reputation and keep shareholders happy.

3M's efforts to protect itself from liability in the earplugs litigation have been unsuccessful. In July, Aearo Technologies LLC, the military-earplug developer that 3M acquired in 2008, filed for bankruptcy protection, citing the litigation. Aearo's move attempted to shift earplug-related injury claims against Aearo and 3M to bankruptcy court, where Aearo would attempt to broker a settlement deal that 3M has pledged to pay.

In August, a federal bankruptcy judge in Indianapolis refused to extend bankruptcy-court protection to 3M in the same way that Aearo had received it against pending earplug-injury lawsuits. This ruling effectively allowed the complaints in federal district court in Florida to continue against 3M without Aearo. Aearo is appealing the decision and continuing to pursue a settlement deal with the claimants.

Since Aearo's bankruptcy filing, 3M lawyers have been arguing that liability for the alleged injuries from the earplugs should be split between Aearo and 3M. However, the judge presiding over the Florida cases rebuked 3M's arguments in a Dec. 22 ruling. The judge said that 3M assumed responsibility for the product after acquiring Aearo and had previously made no attempt to separate liability. The judge ruled that proceedings in the cases be put on hold, pending an expected appeal of her decision.

Liability claims related to chemicals called perfluoroalkyl and polyfluoroalkyl substances, or PFAS, are still growing for 3M. Commonly referred to as "forever chemicals" because they take a long time to break down in the environment, the chemicals have highly durable compounds that can resist heat and repel water, grease and stains.

According to the Environmental Protection Agency, exposure to some forms of chemicals has been linked to health problems such as kidney and testicular cancers, thyroid disease, and other conditions.

Some analysts have predicted that eradicating PFAS chemicals could rival the efforts waged a generation ago to rid buildings and construction materials of asbestos. Some cautioned that any health impacts from using products with PFAS aren’t as conclusive as with asbestos, which is widely understood to cause a specific type of cancer after prolonged exposure. However, the potential risks associated with PFAS exposure are still being studied and the long-term effects are not yet known.

Mark Gulley, who heads a chemical industry consulting firm, explained that forever chemicals last a long time, but they're chemically inert. He said that scientists need to be able to explain why they're a problem.

Approximately 20 years ago, 3M ceased production of two varieties of PFAS chemicals that have often been associated with health concerns. Prior to discontinuing production of the two chemicals, 3M sold them to other companies for use in their products, which could potentially expose 3M to litigation and cleanup expenses incurred by other companies, analysts have indicated.

3M has announced that it will wind down its production of PFAS chemicals by the end of 2025, citing increasing regulation and customers’ interest in alternatives. While the company will continue to make other varieties of PFAS chemicals that it has said are safe, the increasing regulation and customer demand for alternatives has led to the decision to wind down production.

Analysts say that ceasing production of the chemicals will limit 3M's exposure to liability for the chemicals that already exist. UBS Securities wrote in a note to investors that profit margins on the chemicals have been declining for 3M as regulations have tightened.

3M has estimated that its current annual sales of PFAS chemicals are around $1.3 billion, or approximately 4% of total sales. Nigel Coe, an analyst for Wolfe Research, has said that exiting the business would be relatively immaterial for 3M, but is a “reminder of long-tail PFAS remediation and compensation risks.”