| 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 ® 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 March 31, 2017 remains consistent with our
estimate as of December 31, 2016, and, accordingly, we did not
record any additional expense during the three month period ended
March 31, 2017. With respect to the same prior year period, we
also did not record any expense for Durom Cup-related claims.
We maintain insurance for product liability claims, subject to
self-insurance retention requirements. As of March 31, 2017,
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 March 31, 2017 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 March 31, 2017 of the remaining liability
for all Durom Cup-related claims is $233.3 million, of which $75.0
million is classified as short-term in “Other current
liabilities” and $158.3 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 ® 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 were eligible
to participate in the settlement. Those claims that did not settle
via the MDL settlement program have re-commenced litigation in the
MDL under a new case management plan. 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 March 31, 2017 of the remaining liability
for all Biomet metal-on-metal hip implant claims is $46.2
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 is responsible for any amounts by which the ultimate
losses exceed the amount of Biomet’s third-party insurance
coverage. As of March 31, 2017, 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:
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, rendering that decision final. In December 2016,
Heraeus filed papers to restart proceedings against Biomet
Orthopaedics Switzerland GmbH, seeking to require that entity to
relinquish its CE certificates for the European Cements. In January
2017, Heraeus notified Biomet it had filed a claim for damages in
the amount of €121.9 million for sales in Germany.
Biomet’s response to the complaint is due in June 2017.
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. 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 Biomet is not 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. On
November 28, 2016, Heraeus filed a motion to add Biomet as a
party to the lawsuit. On January 5, 2017, the Discovery
Special Master recommended that such motion be denied; Heraeus has
filed an objection to the recommendation, which has not been
addressed by the court. In light of various unresolved discovery
disputes, the court vacated the June 2017 trial date without
setting a new date.
Heraeus continues to pursue 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 Heraeus-related
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 it is reasonably possible that our estimate of the
loss we may incur may change in the future. Although we are
vigorously defending these lawsuits, their ultimate resolution is
uncertain.
Stryker patent infringement lawsuit ® en banc
Putative Class Action: Shah v. Zimmer Biomet Holdings, Inc. et
al.)
Regulatory Matters, Government Investigations and Other
Matters
FDA warning letters
Deferred Prosecution Agreement (“DPA”) relating to
U.S. Foreign Corrupt Practices Act (“FCPA”)
matters:
Pursuant to the terms of the Order, Biomet resolved claims with the
SEC related to violations of the books and records, internal
controls and anti-bribery provisions of the FCPA by disgorging
profits to the U.S. government in an aggregate amount of
approximately $6.5 million, inclusive of pre-judgment interest, and
paying a civil penalty in the amount of $6.5 million (collectively,
the “Civil Settlement Payments”). We also agreed to pay
a criminal penalty of approximately $17.5 million (together with
the Civil Settlement Payments, the “Settlement
Payments”) to the U.S. government pursuant to the terms of
the DPA. We made the Settlement Payments in January 2017 and, as
previously disclosed, had accrued, as of June 24, 2015, the
closing date of the Biomet merger, an amount sufficient to cover
this matter.
Under the DPA, which has a term of three years, the DOJ agreed to
defer criminal prosecution of us in connection with the charged
violation of the internal controls provision of the FCPA as long as
we comply with the terms of the DPA. In addition, we will be
subject to oversight by an independent compliance monitor for at
least 12 months. The monitor will focus on legacy Biomet operations
as integrated into our operations. If we remain in compliance with
the DPA during its term, the charges against us will be dismissed
with prejudice. The term of the DPA may be extended for up to one
additional year at the DOJ’s discretion. In addition, under
its Plea Agreement with the DOJ, JERDS pleaded guilty on
January 13, 2017 to aiding and abetting a violation of the
books and records provision of the FCPA. In light of the DPA we
entered into, JERDS paid only a nominal assessment and no criminal
penalty.
If we do not comply with the terms of the DPA, we could be subject
to prosecution for violating the internal controls provisions of
the FCPA and the conduct of Biomet and its subsidiaries described
in the DPA, which conduct pre-dated our acquisition of Biomet, as
well as any new or continuing violations. We could also be subject
to exclusion by the Office of Inspector General of the Department
of Health and Human Services from participation in federal
healthcare programs, including Medicaid and Medicare. Any of these
events could have a material adverse effect on our business,
financial condition, results of operations and cash flows. |
