| Commitments and Contingencies | 15. Commitments and Contingencies
On a quarterly and annual basis, we review relevant information
with respect to loss contingencies and update our accruals,
disclosures and estimates of reasonably possible losses or ranges
of loss based on such reviews. We establish liabilities for
loss contingencies when it is probable that a loss has been
incurred and the amount of the loss can be reasonably
estimated. For matters where a loss is believed to be
reasonably possible, but not probable, no accrual has been
made.
Litigation
Durom ® Cup-related
claims In Re: Zimmer
Durom Hip Cup Products Liability
Litigation Santas, et al. v. Zimmer, Inc.,
et al. McAllister, et
al. v. Zimmer, Inc., et al. Santas McAllister Santas McAllister
Since 2008, we have recognized expense of $479.4 million for Durom
Cup-related claims. Our estimate of our total liability for
these claims as of September 30, 2016 remains consistent with our
estimate as of December 31, 2015, and, accordingly, we did not
record any additional expense during the three and nine month
periods ended September 30, 2016. With respect to the same
prior year periods, we recognized $7.7 million in expense for Durom
Cup-related claims.
We maintain insurance for product liability claims, subject to
self-insurance retention requirements. As of September 30,
2016, we have exhausted our self-insured retention under our
insurance program and have a claim for insurance proceeds for
ultimate losses which exceed the self-insured retention amount,
subject to a 20 percent co-payment requirement and a cap. We
believe our contracts with the insurance carriers are enforceable
for these claims and, therefore, it is probable that we will
recover some amount from our insurance carriers. We have
received a portion of the insurance proceeds we estimate we will
recover. We have a $95.3 million receivable in “Other
assets” remaining on our consolidated balance sheet as of
September 30, 2016 for estimated insurance recoveries for Durom
Cup-related claims. As is customary in this process, our
insurance carriers have reserved all rights under their respective
policies and could still ultimately deny coverage for some or all
of our insurance claims.
Our estimate as of September 30, 2016 of the remaining liability
for all Durom Cup-related claims is $299.8 million, of which $75.0
million is classified as short-term in “Other current
liabilities” and $224.8 million is classified as long-term in
“Other long-term liabilities” on our consolidated
balance sheet. We expect to pay the majority of
the Durom Cup-related claims within the next few
years.
Our understanding of clinical outcomes with the Durom Cup and other
large diameter hip cups continues to evolve. We rely on
significant estimates in determining the provisions for Durom
Cup-related claims, including our estimate of the number of claims
that we will receive and the average amount we will pay per
claim. The actual number of claims and the actual amount we
pay per claim may differ from our estimates. Among other
factors, since our understanding of the clinical outcomes is still
evolving, we cannot reasonably estimate the possible loss or range
of loss that may result from Durom Cup-related claims in excess of
the losses we have accrued.
Margo and Daniel Polett v. Zimmer, Inc. et al. en banc en banc en banc en banc
NexGen ® Knee
System claims In Re:
Zimmer NexGen Knee Implant Products Liability
Litigation
Biomet metal-on-metal hip implant claims TM (In Re: Biomet M2a Magnum Hip Implant Product Liability
Litigation)
On February 3, 2014, Biomet announced the settlement of the
MDL. Lawsuits filed in the MDL by April 15, 2014 may
participate in the settlement. Biomet continues to evaluate
the inventory of lawsuits in the MDL pursuant to the categories and
procedures set forth in the settlement agreement. The final
amount of payments under the settlement is uncertain. The
settlement does not affect certain other claims relating to
Biomet’s metal-on-metal hip products that are pending in
various state and foreign courts, or other claims that may be filed
in the future. Our estimate as of September 30, 2016 of the
remaining liability for all Biomet metal-on-metal hip implant
claims is $60.7 million.
Biomet has exhausted the self-insured retention in its insurance
program and has been reimbursed for claims related to its
metal-on-metal products up to its policy limits in the
program. Zimmer Biomet will be responsible for any amounts by
which the ultimate losses exceed the amount of Biomet’s
third-party insurance coverage. As of September 30, 2016,
Biomet had received all of the insurance proceeds it expects to
recover under the excess policies. Although we are vigorously
defending these lawsuits, their ultimate resolution is
uncertain.
Heraeus trade secret misappropriation lawsuits
Following an appeal by Heraeus, on June 5, 2014, the German
appeals court in Frankfurt (i) enjoined Biomet, Inc., Biomet
Europe BV and Biomet Deutschland GmbH from manufacturing, selling
or offering the European Cements to the extent they contain certain
raw materials in particular specifications; (ii) held the
defendants jointly and severally liable to Heraeus for any damages
from the sale of European Cements since 2005; and (iii) ruled
that no further review may be sought (the “Frankfurt
Decision”). The Heraeus and Biomet parties both sought
appeal against the Frankfurt Decision. In a decision dated
June 16, 2016, the German Supreme Court dismissed the
parties’ appeals without reaching the merits, and no other
ordinary appeal is available. The Frankfurt Decision is thus
final. As of September 30, 2016, Heraeus had not made a demand
for damages.
As a result, Biomet Europe BV and Biomet Deutschland GmbH are
enjoined from the manufacture, marketing, sale and offering of
European Cements in Germany. Heraeus has taken the position
that the judgment prohibits the manufacture, marketing, sale and
offering of European Cements outside of Germany as well and is
attempting to enforce or extend the judgment in a number of other
European jurisdictions. Biomet, Inc., Biomet Europe BV and
Biomet Deutschland GmbH are vigorously contesting any enforcement
of the judgment beyond Germany and thus filed a declaratory action
in Germany on August 3, 2014 to have the court determine the
reach of the Frankfurt Decision. In a decision dated April 28,
2016, the German appeals court confirmed Biomet’s position
that the Frankfurt Decision applies only to acts within
Germany. Heraeus has appealed this decision, and no prediction
can be made as to the likelihood of review being granted by
Germany’s Supreme Court.
On September 8, 2014, Heraeus filed a complaint against a
Biomet supplier, Esschem, Inc. (“Esschem”), in the
United States District Court for the Eastern District of
Pennsylvania. The lawsuit contains allegations that focus on
two copolymer compounds that Esschem sells to Biomet, which Biomet
incorporates into certain bone cement products that compete with
Heraeus’ bone cement products. The complaint alleges
that Biomet helped Esschem to develop these copolymers, using
Heraeus trade secrets that Biomet allegedly
misappropriated. The complaint asserts a claim under the
Pennsylvania Trade Secrets Act, as well as other various common law
tort claims, all based upon the same trade secret misappropriation
theory. Heraeus is seeking to enjoin Esschem from supplying
the copolymers to any third party and actual damages in an
unspecified amount. The complaint also seeks punitive damages,
costs and attorneys’ fees. If Esschem is enjoined,
Biomet may not be able to obtain the copolymers from another
supplier and as a result may not be able to continue to manufacture
the subject bone cement products. Although Heraeus has not
named Biomet as a party to this lawsuit, Biomet has agreed, at
Esschem’s request and subject to certain limitations, to
indemnify Esschem for any liability, damages and legal costs
related to this matter. On November 3, 2014, the court
entered an order denying Heraeus’ motion for a temporary
restraining order. On June 30, 2016, the court entered an
order denying Heraeus’ request to give preclusive effect to
the factual findings in the Frankfurt Decision. A trial is
scheduled to commence on June 19, 2017.
On October 15, 2015, Heraeus initiated expedited proceedings
against Biomet France, Biomet SAS, Biomet Europe BV, Biomet, Inc.,
Biomet Orthopedics Switzerland GmbH and Biomet Global Supply Chain
Center BV before the Commercial Court in Paris seeking to enjoin
these entities from importing certain raw materials subject to the
rulings in Germany and from manufacturing, selling or exporting the
bone cements made from those raw materials, including under the
names of the European Cements. On November 16, 2015, the
presiding judge ruled that it had no jurisdiction over Biomet, Inc.
and on December 4, 2015, the judge denied the preliminary
measures requested by Heraeus. Heraeus has not appealed this
ruling, but it filed an action on the merits with these same
allegations before the Commercial Court of Romans-sur-Isere, France
in September 2016. On December 8, 2015, Heraeus filed
separate proceedings against Biomet France, Biomet SAS and Biomet
France Holding before the Commercial Court of Romans-Sur-Isere
seeking to gain access to certain documents which had been seized
during searches of Biomet France’s premises in June
2015. Biomet is defending itself vigorously in these
proceedings, which are ongoing.
Heraeus continues to initiate other related legal proceedings in
Europe seeking various forms of relief, including injunctive relief
and damages, against Biomet-related entities relating to the
European Cements.
We have accrued an estimated loss relating to the Frankfurt
Decision, but have not recognized any losses for lawsuits in other
jurisdictions because we do not believe it is probable that we have
incurred a liability, and we cannot reasonably estimate any loss
that might eventually be incurred. Damages relating to the
Frankfurt Decision are subject to separate proceedings and
therefore it is reasonably possible our estimated loss may change
in the future once Heraeus initiates these
proceedings. Although we are vigorously defending these
lawsuits, their ultimate resolution is uncertain.
Stryker patent infringement lawsuit ® en banc
Regulatory Matters, Government Investigations and Other
Matters
FDA warning letters
Biomet DPA and Consent
In October 2013, Biomet became aware of certain alleged
improprieties regarding its operations in Brazil and Mexico,
including alleged improprieties that predated the entry of the
DPA. Biomet retained counsel and other experts to investigate
both matters. Based on the results of the ongoing
investigations, Biomet has terminated, suspended or otherwise
disciplined certain of the employees and executives involved in
these matters, and has taken certain other remedial
measures. Additionally, pursuant to the terms of the DPA, in
April 2014 and thereafter, Biomet disclosed these matters to and
discussed these matters with the independent compliance monitor and
the DOJ and SEC. On July 2, 2014 and July 13, 2015,
the SEC issued subpoenas to Biomet requiring that Biomet produce
certain documents relating to such matters. These matters
remain under investigation by the DOJ.
On March 13, 2015, the DOJ informed Biomet that the DPA and
the independent compliance monitor’s appointment had been
extended for an additional year. On April 2, 2015, at the
request of the staff of the SEC, Biomet consented to an amendment
to the Final Judgment to extend the term of the compliance
monitor’s appointment for one year from the date of entry of
the Amended Final Judgment.
The DPA as originally extended was set to expire on March 26,
2016. However, the DOJ and the SEC continue to evaluate the
alleged misconduct in Brazil and Mexico, as well as any issues
relating to Biomet’s compliance program. The DOJ, the
SEC and Biomet have agreed to continue to evaluate and discuss
these matters and, therefore, the matter is ongoing as of the date
of the filing of this Form 10-Q. Pursuant to the DPA, the DOJ
has sole discretion to determine whether conduct by Biomet
constitutes a violation or breach of the DPA, and the DOJ has
notified Biomet that it believes a breach occurred. The DOJ
has informed Biomet that it retains its rights under the DPA to
bring further action against Biomet relating to the conduct in
Brazil and Mexico disclosed in 2014 or the violations set forth in
the DPA. The DOJ could, among other things, revoke the DPA or
prosecute Biomet and/or the involved employees and
executives. Biomet continues to cooperate with the SEC and the
DOJ, and expects that discussions with the SEC and the DOJ will
continue. There is no assurance that Biomet will enter into a
consensual resolution of this matter with the SEC or the DOJ, and
the terms and conditions of any such potential resolution are
uncertain. We believe it is probable that Biomet will incur
additional liabilities related to these investigations, which we
have accrued in “Other current liabilities” as of June
24, 2015, the closing date of the Biomet merger. It is
reasonably possible our estimates may change in the near future
once the DOJ and SEC complete their investigations and we conclude
our discussions regarding possible resolution. |
