Sherwin-Williams Co. (SHW:US), NL Industries Inc. (NL:US) and ConAgra Grocery Products LLC were ordered by a judge to pay $1.1 billion to replace or contain lead paint in millions of homes after losing a public-nuisance lawsuit brought by 10 California cities and counties.
Superior Court Judge James Kleinberg in San Jose, California, yesterday tentatively ruled against the companies after a non-jury trial that lasted about five weeks. Two other defendants, Atlantic Richfield Co., a Los Angeles-based unit of BP Plc (BP/), and Wilmington, Delaware-based DuPont Co. (DD:US), won dismissal of the claims against them.
The local governments that sued, including Los Angeles County and the cities of San Diego and San Francisco, broke the companies’ streak of victories in similar suits in seven other states. Los Angeles County will get $605 million for lead abatement in the ruling.
Kleinberg rejected the manufacturers’ arguments that paint was “not the whole problem,” and that alternate sources of lead contribute to poisoning.
“Consistent with their arguments throughout the trial the defendants rely on statistics and percentages,” Kleinberg wrote. “When translated into the lives of children that is not a persuasive position. The court is convinced there are thousands of California children in the jurisdictions whose lives can be improved, if not saved through a lead abatement plan.”
The companies were given 15 days to object to the ruling.
If the ruling isn’t overturned on appeal, which could take years, it could set a precedent for additional lawsuits, Ghansham Panjabi, a New York-based analyst at Robert W. Baird & Co. who recommends buying Sherwin-Williams shares, said in a note today. Sherwin-Williams could “easily” pay the penalty from free cash flow that exceeds $750 million a year, he said.
Bonnie J. Campbell, a spokeswoman for the paint manufacturers, said in an e-mailed statement that Kleinberg’s decision is “at odds with California law and judicial decisions across the country that have uniformly rejected similar public nuisance claims.”
The ruling penalizes the manufacturers for “the truthful advertising of lawful products, done at a time when government officials routinely specified those products for use in residential buildings,” and “rewards scofflaw landlords who are responsible for the risk to children from poorly maintained lead paint,” according to the statement.
The companies will file objections with the trial judge, Campbell said. If those aren’t accepted, the defendants will ask for a new trial or mistrial, and if that’s rejected, they will appeal, she said.
Public nuisance cases filed in Ohio, Rhode Island, Missouri, New Jersey, Illinois, New York and Wisconsin all were by courts or by a jury, or voluntarily dismissed, Campbell said.
ConAgra Grocery, a unit of the Omaha, Nebraska-based maker of Pam cooking spray and Chef Boyardee, said it will appeal. The judge found that ConAgra assumed the liabilities of W.P. Fuller & Co. as the result of a series of mergers.
“We are absolutely not an appropriate defendant,” Lanie Friedman, a spokeswoman for ConAgra, said in an e-mail. “ConAgra Foods was never even in the paint business. As a food maker who employs thousands of people in California, we believe this case is an unfortunate example of extreme overreach.”
Joe Cotchett, a lawyer representing the cities and counties, told Kleinberg at trial that “thousands” of children continue to be poisoned every year by lead paint, the primary source of lead exposure for children who live in homes built before 1978, the year the paint was banned for use in public buildings.
The California Legislature has determined that homes built before that year, or more than 3.5 million homes within the 10 jurisdictions, presumably contain lead-based paint, according to Cotchett. As early as the 1930s the companies knew their product was poisoning children and attempted to conceal it, according to Cotchett.
Cotchett argued that the threat of lead poisoning to children qualified it as a public nuisance. The municipalities sought as much as $1.3 billion for inspections and remediation, according to a court filing.
Cotchett based his case on a report on the dangers of lead poisoning from a 1937 Chicago gathering of staff doctors for each of the paint companies. Physicians attending the conference were told not to tell anyone about it, and not to take notes, Cotchett told the judge.
“We’re extremely excited that there’s going to be abatement of lead in these homes and improve the health of the children,” Nancy Fineman, another lawyer for the cities and counties, said in an interview. “It’s going to have a tremendous impact for society, and it’s time that these defendants who caused this problem help the government and property owners and families abate the nuisance.”
Arco wasn’t held liable because, Kleinberg ruled, there was no evidence showing its promotion of lead paint caused it to be applied on homes within the cities and counties that sued. Arco’s behavior wasn’t a shown to be a “substantial factor” in the homes at issue, the judge concluded.
The plaintiffs also failed to prove that DuPont promoted lead paint in California, Kleinberg ruled. There was no evidence supporting a conclusion that the company knew in the 1960s, when it last manufactured exterior primer containing a small percentage of lead, that the product was hazardous, according to Kleinberg.
NL Industries, based in Dallas, contended that under California law, the company couldn’t be required to pay damages or to fund any reimbursement for remediation.
California’s public nuisance laws don’t permit damages in lawsuits “brought on behalf of the people to abate a public nuisance,” NL Industries argued, citing a 2006 state appeals court ruling in the case.
Tony Dias, a lawyer for Cleveland-based Sherwin-Williams, said in an interview in September that the document from the 1937 conference concerns the occupational risks of working with lead, and that it has “nothing to do with lead paint.”
Cotchett’s emphasis on the document “shows how little if any evidence they have concerning the knowledge of risks in lead paint in the early half of the last century,” Dias said.
Sherwin-Williams, which fell today as much as 3.8 percent when trading started, the biggest intraday loss since Oct. 30, rose 65 cents to $177.96 at 3:08 p.m. in New York trading. NL Industries, which dropped as much as 6.3 percent earlier today, was down 58 cents at $10.08. ConAgra declined 0.8 percent to $31.52.
While Sherwin-Williams has never lost or settled a lead paint case, the shares may be depressed until the ruling is overturned on appeal, John Roberts, a New York-based analyst at UBS Securities who recommends buying Sherwin-Williams shares, said in a note today.
“This should be viewed more as a process than an outcome,” Roberts said of the California case.
The case is California v. Atlantic Richfield Co., 1-00-CV-788657, California Superior Court, County of Santa Clara (San Jose).
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