Debacle At Dow Corning: How Bad Will It Get?

The comparisons are already in the air. A.H. Robins and the Dalkon Shield contraceptive. Manville Corp. and asbestos.

Dow Corning Corp. is quickly becoming the latest casualty of mounting liability woes. Hundreds of women are expected to file suit alleging that the Midland (Mich.) manufacturer hid the health risks of its silicone gel breast implants. It also faces a barrage of shareholder class actions and possible government probes. The damage suits alone could cost the company hundreds of millions of dollars--against a business that contributed less than 1% of Dow Corning's $1.84 billion in 1991 revenues and has been unprofitable since 1986. And because many believe Dow Corning responded slowly to safety concerns, the ultimate tab "will be much higher than if they faced this thing determinedly at the outset," says Harvey L. Pitt, a partner in the law firm of Fried, Frank, Harris, Shriver & Jacobson.

OVERSEAS CALLS. The big question is whether the volume of suits will drive Dow Corning into filing for Chapter 11 bankruptcy protection. Just in case, lawyers are researching the potential liability of Dow Corning's 50-50 owners, Dow Chemical and Corning. Corning says it's not responsible for the joint venture's liabilities, while Dow Chemical asserts that as a shareholder in Dow Corning, it's not liable for the actions of that company. Dow Corning counters liability worries by insisting that the implants are safe. "The costs of defending ourselves are going to be significant," adds J. Kermit Campbell, group vice-president for U.S. operations, but "it's not something we can't handle on a short-term basis."

That may be so, but Dow Corning is still at great financial risk, especially from suits by implant recipients (table). Dan Bolton, a San Francisco attorney who last December won a judgment against Dow Corning, says there are close to 1,000 such cases against implant makers, including Dow Corning. More are on the way. Connecticut attorney Karen E. Koskoff, who co-chairs a trial lawyers' breast-implant litigation group, reports receiving calls from lawyers around the world seeking advice on filing suit. Dow Corning's national breast-implant counsel, Frank C. Woodside III, says the company has been served with about 200 suits, but "we don't have all of them." He also says "there's going to be more suits, no question about it," referring to the Food & Drug Administration's recent hearings on whether to ban the devices.

Plaintiffs got their biggest boost in December, when a San Francisco jury agreed with Mariann Hopkins that Dow Corning knowingly sold her a defective implant and awarded her $7.3 million. The only other verdict against Dow Corning was for $1.7 million in 1984, but the company is quietly settling cases. And it took a $25 million fourth-quarter charge to pay for shutting down the implant business. The charge included legal fees.

Shareholders of Corning, which gets 25% of its profits from the joint venture, are also running to court. Large awards to implant recipients will, of course, damage their interests. They already took a bruising on Jan. 13, when Corning stock fell 13% following reports of internal Dow Corning documents questioning the implants' safety. Joseph Reiss, a Corning shareholder from New York, recently filed a suit seeking class action status accusing Corning, Dow Chemical, and Dow Corning of violating securities laws by failing to disclose the implants' risks. Corning believes the case is without merit. Dow Chemical claims that it is shielded from liability.

FELONY CHARGE? By seeking Chapter 11, Dow Corning could put a temporary halt to the private litigation and resolve all of the claims simultaneously. A. H. Robins, for example, sought bankruptcy protection to avoid the risk of multiple punitive-damage awards over its Dalkon Shield contraceptive. Dow Corning says it isn't considering bankruptcy. But the company may have little choice if suits continue to flood in from the 600,000 women with its implants.

Even if the company did seek bankruptcy protection, it would still risk government civil and criminal probes. On Feb. 14, Representative Ted Weiss (D-N.Y.), chairman of a subcommittee overseeing FDA activities, sent the Justice Dept. a letter requesting an investigation. Weiss says documents his staff reviewed may show that the company misrepresented its safety data on implants for more than 15 years. If that's true, Dow Corning could be charged with a felony: filing false reports with a government agency. Meanwhile, Los Angeles County District Attorney Ira Reiner has opened his own criminal investigation (box, page 38).

Manville and Robins, which both filed for Chapter 11, aren't the only role models for Dow Corning. Pfizer Inc. recently set up a mechanism for dealing with damage claims over its Shiley heart valves. The company didn't set an upper limit on its liability, though its best guess is around $200 million, including $80 million for medical care and $75 million for a research fund.

The Pfizer settlement seems to have caught the attention of Dow Corning's new CEO, Keith R. McKennon. He's not only promising full cooperation with the FDA but also is talking about funding research and paying the medical bills of poor women whose implants must be removed. While it's probably too late to keep Dow Corning's name off the list of corporate liability disasters, such efforts could help restore both the company's reputation and the public's trust.

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