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IN RE CORNING

December 21, 2004.

IN RE CORNING, INC. SECURITIES LITIGATION.


The opinion of the court was delivered by: THOMAS GRIESA, Senior District Judge

OPINION

This is a class action brought by purchasers of the stock of Corning, Inc. Plaintiffs allege that defendant Corning, Inc. violated federal securities laws and committed common law fraud by failing to disclose the extent of the potential losses faced by Corning in connection with the manufacture and sale of silicone breast implants by Dow Corning Corp. The latter company is owned by Corning and Dow Chemical Company.

Dow Corning was originally a defendant, but the action was stayed against Dow Corning because of its bankruptcy proceedings, although Dow Corning recently emerged from those proceedings. The complaint also named as defendants certain individual directors and officers of Corning and Dow Corning. The individual defendants were dismissed from the action in the Court's opinion of May 6, 1997. Finally, there was a companion action against Dow Chemical, but that action has been dropped.

  Corning now moves for summary judgment. The motion is granted.

  Facts

  Plaintiffs are persons who purchased Corning common stock during the period January 14, 1989 through January 13, 1992. They seek to represent themselves and others similarly situated in a class action. Corning is a public company engaged in the manufacture and sale primarily of glass products. During the class period it had over ninety million shares outstanding, which were traded on the New York Stock Exchange.

  Dow Corning is owned by Corning and Dow Chemical Company, each holding 50% of Dow Corning's common stock. Dow Corning manufactures and sells primarily silicone-based products. During the class period, Dow Corning manufactured and sold more than 4,500 products. In the overall silicone business of Dow Corning, silicone gel breast implants never constituted more than 1% of the company's business. During the class period, Dow Corning made a substantial contribution to Corning's net income.

  Dow Corning has no publicly traded stock, but did have public debt securities, and thus was subject to federal securities law reporting requirements. Accordingly, it filed with the SEC annual Form 10-Ks and quarterly Form 10-Qs.

  The Annual Reports, Form 10-Ks, and Form 10-Qs issued by defendant Corning during the class period January 14, 1989 through January 13, 1991 were as follows:
Annual Report — Fiscal Year Ended 1/1/89 (signed 3/89)
Form 10-K — Fiscal Year Ended 1/1/89 (signed 3/13/89)
Form 10-Q — Quarter Ended 3/26/89 (signed 5/5/89)
Form 10-Q — Quarter Ended 6/18/89 (signed 7/21/89)
Form 10-Q — Quarter Ended 10/8/89 (signed 11/9/89)
Annual Report — Fiscal Year Ended 12/31/89 (signed 1/22/90)
Form 10-K — Fiscal Year ended 12/31/89 (signed 3/12/90)
Form 10-Q — Quarter Ended 3/25/90 (signed 4/25/90)
Form 10-Q — Quarter Ended 6/17/90 (signed 7/20/90)
Form 10-Q — Quarter Ended 10/7/90 (signed 11/9/90) Annual Report — Fiscal Year Ended 12/30/90 (signed 1/21/91)
Form 10-K — Fiscal Year ended 12/30/90 (signed 3/11/91)
Form 10-Q — Quarter Ended 3/24/91 (signed 4/23/91)
Form 10-Q — Quarter Ended 6/16/91 (signed 7/17/91)
Form 10-Q — Quarter Ended 10/6/91 (signed 11/15/91)
  The Annual Report for the fiscal year ended January 1, 1989 said nothing about breast implant litigation or claims or litigation in general. It did, however, contain the following statement about Dow Corning's sales and its contribution to Corning:
 
Dow Corning's sales increased 13% in 1988 following 20% increases in 1987 and 1986. Corning's share of earnings increased to $73.2 million from $65.7 million in 1987 and $52 million in 1986.
Corning's Form 10-K for the same period contained this same language. In addition, the Form 10-K, in Item 3, headed "Legal Proceedings," stated:
There are no pending legal proceedings to which Corning or any of its subsidiaries is a party or of which any of their property is the subject which are material in relation to the consolidated financial statements.
  Corning's Form 10-Q for the quarter ended March 26, 1989 contained nothing about breast implant litigation or claims or litigation in general, but attached to it was Dow Corning's Form 10-Q for the quarter ended March 31, 1989, which stated in Item 1, headed "Legal Proceedings":
 
There are no material legal proceedings pending, other than ordinary routine litigation incidental to its business, to which the registrant or any of its subsidiaries has become a party or of which any of their property is subject.
The Corning Form 10-Qs for the second quarter ended June 18, 1989 and October 8, 1989 contained nothing about litigation. The court has not been furnished with the Dow Corning Form 10-Qs for these quarters, but it will be assumed that they contained the same disclaimer quoted above from the Dow Corning Form 10-Q for the quarter ended March 31, 1989.
  Corning's Annual Report for the fiscal year ended December 31, 1989 had nothing about breast implant litigation or claims or litigation in general. However, there were the following statements about Dow Corning:
Dow Corning's sales and earnings have increased in each of the past three years as a result of continued worldwide demand for silicone-based products and tight cost control.
* * *
Dow Corning is expected to lead the growth in sales and earnings of equity companies in this segment.
  The Corning Form 10-K for the fiscal year ended December 31, 1989 contained a disclaimer regarding legal proceedings identical to the one in the Form 10-K for the fiscal year ended January 1, 1989.

  The Corning and Dow Corning Form 10-Qs for the quarters ended March 25, 1990, June 17, 1990, and October 7, 1990 were the same in respect to the relevant subjects as the Corning and Dow Corning Form 10-Qs for the first quarter of 1989, described above.

  The Corning Annual Report for the fiscal year ended December 30, 1990 had nothing about breast implant litigation or claims or litigation in general. The Corning Form 10-K for the fiscal year ended December 30, 1990 had the same disclaimer regarding legal proceedings as was contained in the Form 10-K for the fiscal year ended January 1, 1989.

  The Corning and Dow Corning Form 10-Qs for the quarters ended March 24, 1991, June 16, 1991, and October 6, 1991 were the same in respect to the relevant subjects as the Corning and Dow Corning Form 10-Q for the first quarter of 1989, described above.

  As will be discussed in greater detail, the crux of plaintiffs' claim is that Corning, in the above-described filings, failed to disclose material information known to Corning regarding Dow Corning's potential litigation liability from silicone breast implants. Plaintiffs claim that by the time of the class period Dow Corning's potential liability was $1 billion, which should have resulted in a $1 billion charge to Dow Corning's earnings. Plaintiffs contend that Corning, as half owner of Dow Corning, should have disclosed the $1 billion problem of Dow Corning, and should have recorded the effect on its own financial position, which would have caused Corning to record losses instead of profits.

  Claims and their Disposition

  Dow Corning entered the breast implant market in 1964. By 1980, lawsuits were being filed against Dow Corning by women who alleged that they had been injured by defective Dow Corning silicone breast implants. Also, claims were made against Dow Corning which did not result in lawsuits.

  During the years 1980-1991 five breast implant lawsuits against Dow Corning were tried to conclusion. Three of these resulted in defense verdicts, and two resulted in verdicts for the plaintiffs.

  Year Plaintiff State Result

  1983 Klein New York Defense Verdict 1983 Forbes Arkansas Defense Verdict 1984 Stern California $1,711,000 Plaintiff's Verdict 1986 Chandler Texas Defense Verdict 1991 Hopkins California $7.3 million Plaintiff's Verdict The Stern verdict awarded $211,000 in compensatory damages and $1.5 million in punitive damages. The Hopkins verdict awarded $800,000 in compensatory damages and $6.5 million in punitive damages. The Hopkins verdict was in December 1991 at almost the end of the class period and after the last of the reports complained of had been filed. Both the Stern and Hopkins cases were tried in the federal court in San Francisco. Both cases will be discussed in more detail later in the opinion.

  It should be noted that when Dow Corning breast implants were sold, they were accompanied by product inserts. The product inserts which have been provided to the court are from the years 1972, 1973, 1985 and 1988. These inserts are of substantial length and consist largely of detailed instructions for use. However, they also included warnings of possible adverse reactions. The warnings in the 1972 and 1973 inserts consisted of a single paragraph, stated in somewhat general terms. However, the inserts of 1985 and 1988 (obviously after the Stern verdict) had detailed lists of possible complications — 18 in the 1985 insert and 16 in the 1988 insert.

  Set forth below are tables regarding the number of claims made in various years regarding Dow Corning breast implants and data about the disposition of such claims. In these tables the year 1984 will be marked with the symbol* and the years 1989, 1990 and 1991 will be marked with the symbol**. The reason for marking 1984 is that, as noted above, this was the year of the Stern verdict. Plaintiffs argue that the Stern verdict was significant in indicating the threat of massive breast implant litigation. Thus it is of interest to see what occurred after 1984 in terms of the volume of claims and the amounts needed to dispose of claims. The years 1989, 1990 and 1991 are marked because the class period was June 14, 1989 through January 13, 1992. Thus about half of 1989 was in the class period plus the full years 1990 and 1991. Only a few days of 1992 were in the class period.

  The number of plaintiffs suing Dow Corning were:
Year Plaintiff Count
1980 13 1981 10 1982 20 1983 27 1984 22* 1985 39 1986 25 1987 14 1988 14 1989 17** 1990 15** 1991 238** ___ 454
  Corning has presented quarterly figures for lawsuits filed in 1991.

  Quarter Number

 
1st 7 2nd 38 3rd 46 4th 93 ___ 184
  This total is different from the 238 shown in the list of annual figures. The 238 refers to the number of plaintiffs, whereas the 184 refers to the number of lawsuits.
  The number of claimants making non-litigation claims against Dow Corning were:
Year Claimant Count
1980 22 1981 25 1982 29 1983 89 1984 70* 1985 133 1986 130 1987 121 1988 162 1989 107** 1990 115** 1991 259** ___ 1262
  The dollar amounts involved in the settlement of lawsuits are shown in the following table:
 
Lawsuit Total Amounts for Average Lawsuit Year Settlements Lawsuit Settlements Settlement Amount
1980 7 $ 109,750 $15,679 1981 9 46,000 5,111 1982 6 29,750 4,958 1983 10 70,000 7,000 1984 24 1,955,798 81,492* 1985 27 320,203 11,859 1986 21 771,600 36,743 1987 25 653,250 26,130 1988 21 571,750 27,226 1989 19 433,031 22,791** 1990 12 771,500 64,292** 1991 11 271,350 24,688**
  The $1,995,798 figure for settlements in 1984 includes the Stern case. As described earlier, there was a jury verdict for $1,711,000, and the case was subsequently settled for this amount. Excluding the Stern figure, the amount for settlements in 1984 was $244,789 and the average was $10,643. It appears that the $1,711,000 settlement amount in the Stern case was not actually paid until early 1997. However, the payment related, of course, to the Stern verdict of 1984, and the amount of that verdict ($1,711,000) was public knowledge in 1984. Consequently it is of interest to observe what occurred in breast implant claims in the period after the Stern verdict, and to see the significance of what occurred it is reasonable to include the $1,711,000 figure in the amount for 1984. The above tabulation does not include the amount of the Hopkins verdict. As described, it was rendered in December 1991, shortly before the end of the class period. The Dow Corning Form 10-K for 1991, dated January 16, 1992, states that post-trial motions in Hopkins were pending. The record before this Court does not show how the Hopkins case was ultimately disposed of.

  The table below contains the relevant figures regarding settlement of non-litigation claims.

 
Claim Total Claim Average Claim Year Settlements Settlements Settlement Amount
1980 7 $ 16,701 $2,386 1981 13 23,669 1,821 1982 36 43,641 1,212 1983 34 45,512 1,339 1984 39 106,233 2,724* 1985 55 101,862 1,854 1986 90 215,260 2,392 1987 75 222,011 2,960 1988 105 175,553 1,678 1989 77 346,516 4,500** 1990 50 136,034 2,721** 1991 65 253,572 3,901**
  The following shows the total of settlements of both lawsuits and non-litigation claims:

  Year Total

  1980 $ 126,451 1981 69,669 1982 73,391 1983 115,512 1984 2,062,031* 1985 422,065 1986 986,960 1987 875,261 1988 747,303 1989 779,547** 1990 907,534** 1991 524,922** The record on the present motion contains an internal report of Dow Corning relating to product liability litigation (obviously including breast implant cases) as of August 1990. It shows that Dow Corning set up reserves against such litigation. These reserves were approved by Dow Corning's auditors. The following table contains the amounts of the reserves.

  Year Amount

 
1985 $2,938,000 1986 4,238,000 1987 4,111,000 1988 3,788,000 1989 3,347,000 As of 8/90 3,253,000
  Presumably these reserves were taken into account in an appropriate manner in the financial statements of Dow Corning, and were reflected in the share of earnings apportioned to Corning.

  As described earlier, plaintiffs argue that Dow Corning at some point (at least by the beginning of the class period) should have charged $1 billion against earnings and presumably this would have affected Corning's earnings by $500 million to reflect its 50% share. Thus, it is of interest to show the actual costs of disposing of claims during the relevant years, as a percentage of the net income of Dow Corning. In the case of Corning, the data shown takes into account that the reduction of Corning's earnings would be only 50% of Dow Corning's disposition costs. Thus for Corning, the percentage table shows the relation of Corning's one-half share of the disposition costs to Corning's net income.

  Before presenting the percentage table, the figures for the net income of Dow Corning and Corning need to be set forth. Net Income (in millions)

  Year Dow Corning Corning

 
1980 $ 73.9 $120.5 1981 75.9 103.7 1982 52.7 74.5 1983 68.4 92.2 1984 91.3 100.3 1985 95.2 133.3 1986 110.6 177.1 1987 135.0 207.5 1988 150.5 210.7 1989 162.8 261.0 1990 171.1 292.0 1991 152.9 316.8
  The following table shows claim disposition costs as a percentage of net income for both Dow Corning and Corning, calculated as described above:

  Year Dow Corning Corning

 
1980 2/10% 5/100% 1981 9/100% 3/100% 1982 1/10% 5/100% 1983 2/10% 6/100% 1984 2% 1%* 1985 4/10% 2/10% 1986 9/10% 3/10% 1987 6/10% 2/10% 1988 5/10% 18/100% 1989 5/10% 15/100%** 1990 5/10% 15/100%** 1991 3/10% 8/100%**
  Since plaintiffs in the present action lay considerable stress on the Stern case, a description of that case is necessary. On November 4, 1984 a federal jury in San Francisco found Dow Corning liable in a suit brought by Maria Stem alleging that her silicone breast implants had ruptured, causing a variety of severe immunologic reactions and other medical complications. The jury found for plaintiff on each of the following theories: (1) strict liability for design defect; (2) strict liability for manufacturing defect; (3) breach of express warranty; (4) breach of implied warranty; and (5) fraud. The jury awarded Ms. Stern $211,000 in compensatory damages and $1.5 million in punitive damages. In a June 13, 1985 Memorandum Decision and Order, Judge Patel denied defendant's motion for a new trial. The judge also denied the motion for JNOV on all grounds except the issue of strict liability for manufacturing defect. Maria Stern v. Dow Corning Corporation, et al., No. C-83-2348-MHP at 9 (N.D. Cal. 1985). Judge Patel wrote a lengthy decision finding, among other things, that there was substantial evidence to support the jury verdict as to fraud and punitive damages, because there was evidence of Dow Corning's knowledge of the inadequacy of its testing and knowledge of rupture and gel bleed, together with willful failure to inform the consumer. Following the Stern verdict, and during the pendency of an appeal by Dow Corning, a settlement was reached in the case. This was in May 1997. The settlement was for the amount of the verdict — $1,711.000. The settlement agreement provided, in part, that a protective order would seal documents and trial transcripts.

  The Stern verdict was reported in at least two publications. On November 7, 1984 the Wall Street Journal ran a story on the case. It contained the following description of the evidence at trial:

  Evidence was presented at the trial that the silicone gel leaked into [Stern's] body from the 1978 implants, which were found to be ruptured when removed in 1981. . . . In addition to finding the implants were defectively designed and manufactured, the jury also found that there had been a breach of implied and expressed warranty and fraud. The Stern verdict was also reported in a September 9, 1985 publication of Personal ...


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