ITEM 1. LEGAL PROCEEDINGS
Breast Implant Matters
The Company and Corning Incorporated ("Corning") are each 50
percent shareholders in Dow Corning Corporation ("Dow
Corning"). Dow Corning, and in many cases the Company and
Corning as well, have been sued in a number of individual and
class actions by plaintiffs seeking damages, punitive damages
and injunctive relief in connection with injuries purportedly
resulting from alleged defects in silicone breast implants.
In addition, certain shareholders of the Company have filed
separate consolidated class action complaints alleging that
the Company, Dow Corning or some of their respective
Directors violated duties imposed by the federal securities
laws regarding disclosure of alleged defects in silicone
breast implants. The Company and one of its former officers
have also been sued in two separate class action complaints
(now consolidated) alleging that the defendants violated
duties imposed by the federal securities laws regarding
disclosure of information material to a reasonable investor's
assessment of the magnitude of the Company's exposure to
direct liability in silicone breast implant litigation. In a
separate action, a Corning shareholder has sued certain Dow
Corning Directors (including three current Company Directors
and two former Company Directors) alleging breaches of state
law duties relating to the manufacture and marketing of
silicone breast implants and seeking to recover unquantified
money damages derivatively on Corning's behalf.
Two separate derivative actions have been brought in the
federal court, Southern District of New York, by Company
shareholders purportedly on the Company's behalf. In Kas, et
al. v. Butler, et al., two Company shareholders brought suit
in 1992, naming as defendants all persons who were serving
the Company as Directors on December 31, 1990, certain Dow
Corning Directors, Dow Corning, Corning and certain Dow
Corning officers, seeking derivatively on the Company's
behalf unquantified money damages. In Rubinstein, et al. v.
Ludington, et al., four Company shareholders brought suit in
1992, naming as defendants Dow Corning's Directors who were
also Company Directors and three former Company Directors,
also seeking derivatively on the Company's behalf
unquantified money damages. Plaintiffs in both cases
subsequently made demands that the Company's Board bring suit
on behalf of the Company. After the Board rejected those
demands, the plaintiffs refiled their complaints alleging
that the demands were wrongfully rejected.
On May 15, 1995, Dow Corning announced that it had
voluntarily filed for protection under Chapter 11 of the
United States Bankruptcy Code. Under Chapter 11, all claims
against Dow Corning (although not against its co-defendants)
are automatically stayed.
It is impossible to predict the outcome of each of the
above described legal actions. However, it is the opinion of
the Company's management that the possibility that these
actions will have a material adverse impact on the Company's
consolidated financial statements is remote, except as
described below.
In January 1994, Dow Corning announced a pretax charge of
$640 million ($415 million after tax) for the fourth quarter
of 1993. In January 1995, Dow Corning announced a pretax
charge of $241 million ($152 million after tax) for the
fourth quarter of 1994. These charges included Dow Corning's
best estimate of its potential liability for breast implant
litigation based on a global Breast Implant Litigation
Settlement Agreement (the "Settlement Agreement"); litigation
and claims outside the Settlement Agreement; and provisions
for legal, administrative and research costs related to
breast implants. The charges for 1993 and 1994 included
pretax amounts of $1,240 million and $441 million,
respectively, less expected insurance recoveries of $600
million and $200 million, respectively. The 1993 amounts
reported by Dow Corning were determined on a present value
basis. On an undiscounted basis, the estimated liability
above for 1993 was $2,300 million less expected insurance
recoveries of $1,200 million. As a result of the Dow Corning
actions, the Company recorded its 50 percent share of the
charges, net of tax benefits available to the Company. The
impact on the Company's net income was a charge of $192
million for 1993 and a charge of $70 million for 1994.
Dow Corning reported an after tax net loss of $167 million
for the second quarter of 1995, of which the Company's share
amounted to $83 million. Dow Corning's second quarter loss
was a result of a $221 million after tax charge taken to
reflect a change in accounting method from the present value
basis noted above to an undiscounted basis resulting from the
uncertainties associated with its Chapter 11 filing. As a
result of Dow Corning's 1995 second quarter loss and Chapter
11 filing, the Company recognized a pretax charge against
income of $330 million for the second quarter of 1995, fully
reserved its investment in Dow Corning and will not recognize
its 50 percent share of future equity earnings while Dow
Corning remains in Chapter 11.
Breast Implant Matters (Continued)
On September 1, 1994, Judge Sam C. Pointer, Jr. of the
United States District Court for the Northern District of
Alabama approved the Settlement Agreement pursuant to which
plaintiffs choosing to participate in the Settlement
Agreement released the Company from liability. The Company
was not a participant in the Settlement Agreement nor was it
required to contribute to the settlement. On October 7,
1995, Judge Pointer issued an order which concluded that the
Settlement Agreement was not workable in its then-current
form because the funds committed to it by industry
participants were inadequate. The order provided that
plaintiffs who had previously agreed to participate in the
Settlement Agreement could opt-out after November 30, 1995.
The Company's maximum exposure for breast implant product
liability claims against Dow Corning is limited to its
investment in Dow Corning which, after the second quarter
charge noted above, is zero. As a result, any future charges
by Dow Corning related to such claims or as a result of the
Chapter 11 proceeding would not have an adverse impact on the
Company's consolidated financial statements.
The Company is separately named as a defendant in a total
of 12,549 breast implant product liability cases. In these
situations, plaintiffs have alleged that the Company should
be liable for Dow Corning's alleged torts based on the
Company's 50 percent stock ownership in Dow Corning and that
the Company should be liable by virtue of alleged "direct
participation" by the Company or its agents in Dow Corning's
breast implant business. These latter, direct participation
claims include counts sounding in strict liability, fraud,
aiding and abetting, conspiracy, concert of action and
negligence.
Judge Pointer has been appointed by the Federal Judicial
Panel on Multidistrict Litigation to oversee all of the
product liability cases involving silicone breast implants
filed in the U.S. federal courts. Initially, in a ruling
issued on December 1, 1993, Judge Pointer granted the
Company's motion for summary judgment, finding that there was
no basis on which a jury could conclude that the Company was
liable for any claimed defects in the breast implants
manufactured by Dow Corning. In an interlocutory opinion
issued on April 25, 1995, however, Judge Pointer affirmed his
December 1993 ruling as to plaintiffs' corporate control
claims but vacated that ruling as to plaintiffs' direct
participation claims.
In his opinion, Judge Pointer reaffirmed the view he had
expressed in his December 1993 ruling that the Company is a
separate, independent entity from Dow Corning and therefore
has no legal responsibility as a result of its ownership of
Dow Corning stock for Dow Corning's breast implant business.
However, Judge Pointer stated that under the law of at least
some states (although not necessarily all states), actions
allegedly taken by the Company independent of its role as a
shareholder in Dow Corning could give rise to liability under
a negligence theory. Judge Pointer declined to address
plaintiffs' other legal theories, including strict liability,
fraud, aiding and abetting, conspiracy and concert of action.
It is impossible to predict the outcome or to estimate the
cost to the Company of resolving any of the federal product
liability cases. The Company has filed claims with insurance
carriers to recover in the event it is held liable in the
federal (or any other) breast implant litigation.
After Judge Pointer's initial ruling in December 1993,
summary judgment was granted to the Company in 3,996 breast
implant cases pending in state courts in California, Indiana,
Michigan, New Jersey and New York, and 130 actions in
Pennsylvania were dismissed. Of these rulings, the
California ruling was final and has been appealed. The New
Jersey ruling has been reconsidered and all claims were again
dismissed, except the negligence claim. Plaintiffs in New
York filed a motion to reconsider based on Judge Pointer's
April 25, 1995 ruling. On September 22, 1995, Judge Lobis,
presiding over the consolidated New York breast implant
litigation, dismissed all counts of all cases filed against
the Company in New York on the ground that no reasonable jury
could find against the Company. Plaintiffs have appealed
Judge Lobis' ruling. Other rulings that are not final
decisions are also subject to reconsideration by the trial
courts. The Company expects that plaintiffs will file
motions to reconsider in some states as a result of Judge
Pointer's April 25 decision. The Company remains a defendant
in other breast implant product liability cases originally
brought in state courts and continues to be named as a
defendant as cases are filed in various courts. It is
impossible to predict the outcome or to estimate the cost to
the Company of resolving any of the state product liability
cases.
The Company is also a defendant in ten federal silicone jaw
implant cases involving implants manufactured by Dow Corning.
Federal District Court Judge Paul A. Magnuson has been
appointed by the Federal Judicial Panel on Multidistrict
Litigation to oversee all of the product liability cases
involving silicone jaw implants filed in the U.S. federal
courts. On March 31, 1995, Judge Magnuson granted the
Company's motion for summary judgment, concluding, based on
virtually the same arguments that were presented to Judge
Pointer, that no reasonable jury could find in favor of
plaintiffs on any of their claims against the Company. On
June 13, 1995, Judge Magnuson denied plaintiffs' motion to
reconsider his ruling based on Judge Pointer's April 25
decision, and granted the Company's request to enter a final
judgment in its favor. Plaintiffs have appealed the final
judgment to the U.S. Court of Appeals for the Eighth Circuit.
Breast Implant Matters (Continued)
On November 3, 1994, Judge Michael Schneider, presiding in
the consolidated breast implant cases in Harris County,
Texas, granted in part and denied in part the Company's
motion for summary judgment. Judge Schneider granted the
Company's motion as to (i) all claims based on the Company's
shareholder status in Dow Corning, (ii) the claim that the
Company was liable in negligence for failing to supervise Dow
Corning, and (iii) plaintiffs' licensor-licensee claim.
Judge Schneider denied the Company's motion with regard to
plaintiffs' claims sounding in fraud, aiding and abetting,
conspiracy, certain negligence claims and a claim brought
under the Texas Deceptive Trade Practices Act. As a result,
the Company remains a defendant as to such claims in the
Harris County product liability cases. In those cases (and
in cases brought in certain other jurisdictions including
those before Judge Pointer), the Company has filed cross-
claims against Dow Corning on the ground that if the Company
and Dow Corning are found jointly and severally liable, Dow
Corning should bear appropriate responsibility for the
injuries judged to be caused by its product. In certain
jurisdictions, the Company has also filed similar cross-
claims against Corning. It is impossible to predict the
outcome or to estimate the cost to the Company of resolving
any of the Harris County product liability cases.
In an order dated December 1, 1994, Judge Frank Andrews,
presiding in the consolidated breast implant cases in Dallas
County, Texas, granted the Company's motion for summary
judgment "in all respects except as to theories of conspiracy
and strict liability as a component supplier." As a result,
the Company remains a defendant as to such claims in the
Dallas County product liability cases. It is impossible to
predict the outcome or to estimate the cost to the Company of
resolving any of these actions.
Three breast implant product liability cases brought
against the Company have now gone to trial. In February
1995, a Harris County jury exonerated the Company in one case
and found the Company jointly and severally liable with Dow
Corning for $5.23 million on a single count in a second case.
After the verdict, however, the Court overturned the jury's
verdict and entered judgment for the Company. On October 30,
1995 a state court jury in Reno, Nevada found the Company
liable for $4.15 million in compensatory damages and $10
million in punitive damages. The Company has appealed the
verdict. The Company will also file a claim in Dow Corning's
bankruptcy proceedings to recover from Dow Corning its share
of any monies the Company might pay as a result of the Nevada
verdict.
With the principal exception of the cases filed in
Michigan and approximately 150 cases filed in Texas, Dow
Corning or the Company have removed virtually all cases
originally filed in state courts across the country to
various federal courts. The removed cases have been, in most
instances, transferred to Judge Pointer. Plaintiffs have
asked Judge Pointer to remand those cases back to their
states of origin, and the Company has opposed that motion. On
April 9, 1996, the United States Court of Appeals for the
Sixth Circuit ruled that because silicone gel breast implant
claims against the Company (and certain other parties) were
"related to" Dow Corning's bankruptcy, the federal District
Court for the Eastern District of Michigan had the power to
transfer such claims, including claims currently pending
before Judge Pointer, to itself and ordered that Court to
decide whether to make such a transfer. Plaintiffs have asked
for reconsideration of the Sixth Circuit's ruling.
It is the opinion of the Company's management that the
possibility is remote that plaintiffs will prevail on the
theory that the Company should be liable in the breast
implant litigation because of its shareholder relationship
with Dow Corning. The Company's management believes that
there is no merit to plaintiffs' claims that the Company is
liable for alleged defects in Dow Corning's silicone products
because of the Company's alleged direct participation in the
development of those products, and the Company intends to
contest those claims vigorously. Management believes that
the possibility is remote that a resolution of plaintiffs'
direct participation claims, including the vigorous defense
against those claims, would have a material adverse impact on
the Company's financial position or cash flows.
Nevertheless, in light of Judge Pointer's April 25 ruling, it
is possible that a resolution of plaintiffs' direct
participation claims, including the vigorous defense against
those claims, could have a material adverse impact on the
Company's net income for a particular period, although it is
impossible at this time to estimate the range or amount of
any such impact.
Environmental Matters
On December 19, 1994, the Texas Natural Resource Conservation
Commission sent a proposed order to the Company seeking
administrative civil penalties of $519,350 for alleged
violations of the Texas Clean Air Act. That action was
settled on March 18, 1996 and the Company paid a civil
penalty of $96,125 and made a $100,000 contribution to the
Nature Conservancy of Texas.
In February 1996, the Michigan Department of Environmental
Quality demanded payment of $258,000 in civil penalties
associated with a notice of Violation and Proposed Consent
Order issued on November 16, 1995, for alleged violations of
hazardous waste regulations.
Dow Chemical Canada Inc., a wholly owned subsidiary of the
Company, has been investigated by Alberta Environment
Protection with respect to two violations of the Ozone-
Depleting Substances Regulation alleged to have occurred on
May 31, 1995, and March 26, 1996. The Crown is seeking a
civil penalty of $200,000 (Canadian) in respect of the May
31, 1995 incident.
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