| Commitments and Contingencies | Note 7. Commitments and Contingencies
Securities Investigation
In M ar c h 2015, the Company r eceived a g r and ju r y subpoena i s sued in conn e ction with a c ri m inal inv e stigation being conducted by the U . S. Attorney’s Office for the E astern District of Virginia (the “ U .S. Attorney”). In a ddition, on May 19, 20 1 5, J u ly 13, 20 1 5 and March 11, 2016, the Co m p any r e ceived s u bp o e n as fr o m the N e w Y o r k Regional O f f ice of the S E C in connection wi t h an in q u iry by the SEC staff. Based on t h e s u bp o e n as, the Co m p any b e lieves the focus of both the U . S. Attorney investigation a n d S E C investigation primarily relate to compliance with disclosur e , fin a nci a l r e p o r tin g an d t r a d in g r e q ui r e m e n t s un d e r the securiti e s laws since 2011. T h e Company is fully cooper a ting with the inv e s tigations by the U. S . A ttorn e y and S EC staff and continues to produce documents responsive to the subpoenas and pursuant to other requests received from the U.S. Attorney’s Office. Given that the investigation by the U.S. Attorney and S E C staff are still ongoing, the Com p any cannot estimate the reasonably p o ssi b le lo s s o r r a n g e o f loss t h a t may r e s u lt from this matter.
Prop 65 M a tter
On or ab o u t July 2 3 , 2 0 14, Gl o b al Community Monitor and Sun s h ine Park LLC (t o g ether, the “Prop 65 Plaintiffs”) filed a lawsuit, which was s ubse q uently amende d , in the Superior C o urt of the State of Califo r nia, C o unty of A lameda, a g ainst the Company. I n the amended c o mplai n t, the Prop 65 P lain t iffs allege that the Company v iolated California’s Safe Drinking W a ter and Toxic E n f o rcement Act of 19 8 6, Health a n d Safety Code se c tion 2 5 24 9 . 5 , et se q . (“Prop o sit i on 65”). In particular, the Prop 65 Plaintiffs allege that the Company failed to warn c o nsu m ers in Calif o r n ia that certain of t h e Co m p any’s prod u cts ( c olle c tiv e ly, the “Product s ” ) emit form a ld e hyde in excess of the applicable sa f e h a rbor limits. T h e Prop 65 Plaintiffs d id not q u antify any alleged dam a g es in t h eir amended complaint but, in addition to attorneys’ fees a n d c o sts, t h e Prop 65 Plaintiffs s eek (i) equitable relief i n volvi n g the ref o r m ulation of the Products, add i tional w arnings relat e d to the Produ c ts, the i s suance of noti c es to certain of the p u r c h asers of t h e Prod u cts (the “ C usto m e rs”) and t h e waiver of restoc k i n g fees f o r Cu s tomers who r e turn the Produ c ts and (ii) ci v il penalties i n the amount of t wo thousand five hundr e d dollars p e r day for e a ch violation of Propo s ition 65.
On April 4, 2016, the court issued a ruling granting the Company’s motion for judgment. The court entered judgment for the Company on June 30, 2016. Although t h e Company accrued $900 in the fourth quarter of 2015 as its best estimate of the proba b le loss t h at may r e s u lt from this action at such time, given the court’s ruling, the Company has subsequently reversed this accrual during the first quarter of 2016 . In light of the court’s entry of judgment, the likelihood of a material loss in connection with this matter is now remote.
Securities Class Action and Derivative Litigation Matters
As more fully set forth below, in each of the Securities Class Action Litigation (as defined below) and the Consolidated Derivative Litigation Matter (as defined below), the Company has entered into a Stipulation of Settlement. Both the Securities Class Action Stipulation (as defined below) and the Consolidated Derivative Stipulation (as defined below) are dependent on each other and are subject to court approvals and other contingencies. Therefore, there can be no assurance that a settlement will be approved by the courts or as to the ultimate outcome of the Securities Class Action Litigation or the Derivative Litigation Matter.
Securities Litigation Matter
O n o r ab o u t N o vem b e r 26 , 2013 , G r e g g Ki k e n ( “Kike n ” ) f ile d a securit i es class a ction l a wsuit (the “Kiken La w sui t ”), which was s ubseq u ently amende d , in the U n it e d States D i s t rict C ourt for the Easte r n D i stri c t of V irgin i a against the Company, its founde r , f o rm er Chief Exe c utive O f f icer a n d President, former C h ief Financial Officer a n d f o r m er Chi e f M er c h a n d ising Of f icer ( c olle c tiv e ly, the “ K ik e n Def e ndant s ”). On or about S e ptember 17, 2014, the City of Hall a ndale Beach Police Of f ice r s’ and Firefigh t ers’ Personn e l Retir e m ent Trust ( “ Hall a ndal e ”) filed a s e curities cl a ss action lawsuit (the “ Hallandale Lawsuit”) in the United States District Court for the Eastern District of Virginia against the Company, its former Chief Executive Officer and President and its former Chief Financial Officer (collectively, the “Hallandale Defendants,” and with the Kiken Defendants, the “Defendants”). On March 23, 2015, the court consolidated the Kiken Lawsuit with the Hallandale Lawsuit, appointed lead plaintiffs and lead counsel for the consolidated action, and captioned the con s olidated acti o n as In re L u m b er Liq u idat o rs Holdings, Inc. Se c u rities Litigatio n (the “Securities Class Action Litigation”) .
The lead plaintiffs filed a consolidated amended com p laint on April 22, 2015. T h e consolidated amend e d c o mplaint all e ges that the D efendants made mate r ial f alse and/or misleading s t a tem en ts that caused los s e s to inves t ors. In pa r ticular, the lead plaintiffs allege that the De f endants made mate r ial misstateme n ts or omissions related to their compliance with the La c ey Act, the chemical content of ce r tain of their wood products, and their supply chain and inv e nto r y position. The l e ad plaint i ffs do n ot quantify any alleged dam a ges in th e ir c o nsol id at e d am e n ded comp l aint but, in addit i on to at t o r n eys’ fe e s and costs, they seek t o r e c o ver dama g e s o n b ehalf of themselves and ot h e r pers o n s who p u r c hased or other w i s e acquired the C o mpa n y ’s st o ck during the putative class period a t allegedly inflated p r ices and p u rp o r tedly s u ffered financial h arm as a result. T h e Defendants m oved to dismiss the consolid a ted ame n d ed c o mplaint b u t, on Decem b er 2 1 , 2 0 15, the c o ur t d eni e d this m o ti o n.
On April 27, 2016, the Defendants entered into an agreement in principle, a Memorandum of Understanding (“Securities Class Action MOU”), with the lead plaintiffs in the consolidated securities class action. On June 15, 2016, the Company entered into a definitive settlement agreement (the “Securities Class Action Stipulation”) and, on July 7, 2016, the court entered an order granting preliminary approval for the Securities Class Action Stipulation. The terms of the Securities Class Action Stipulation were consistent with those of the Securities Class Action MOU. Under the terms of the Securities Class Action Stipulation, the Company, through its insurers, will contribute $26,000 to a settlement fund that will be used to compensate individuals who purchased the Company’s shares during the period from February 22, 2012 to February 27, 2015. In addition, under the terms of the Securities Class Action Stipulation, the Company will issue 1 million shares of its common stock to the settlement fund with a value of approximately $15,420 based on the $15.42 closing price of the Company’s common stock on June 30, 2016. The Company has classified the loss contingency of $41,420 as accrued securities class action and the expected insurance proceeds of $26,000 as insurance receivable on the accompanying condensed consolidated balance sheet. The amount of loss associated with the issuance of shares of common stock as a part of the settlement will be determined based on the trading value of the shares on the date of issuance, which could increase the recognized loss if the trading value increases or result in a gain if the trading value decreases. The Company will record the fair value of the expected number of shares to be issued in its condensed consolidated balance sheet based on the closing price of its common stock as of the reporting date until the liability is settled. The Company recorded a benefit of $600 within selling, general and administrative expense during the second quarter of 2016 to reflect the decrease in the closing price of the Company’s common stock between April 27, 2016, the initial recording of the liability, and June 30, 2016. The settlement is subject to further consideration at the settlement hearing scheduled to be held on November 17, 2016 and to several contingencies including final court approval. There can be no assurance that a settlement will be finalized and approved or as to the ultimate outcome of the litigation. The ultimate resolution of these actions could have a material adverse effect on the Company’s financial condition and results of operations.
Derivative Litigation Matter - Consolidated Cases
On o r a b o u t M ar c h 1 1 , 2 01 5 , R. A n d r e Kl e in ( “ K lein”) f iled a s h a r eholder derivative suit in the Un i ted States D istrict Court f o r the E a s t ern Dist r ict o f Vir g i n ia a g ai ns t the Compan y ’s di r ectors at that time, as w ell as its Senior V ice President, Supply Chai n , f o r m er Chief Merchan d ising Officer and f o r m er Chief Fin a n c ial Offic e r (collectively, t h e “Klein Defendants”). On or ab o u t A p ril 1, 2 01 5 , Phuc Doan (“Doan”) filed a shareholder derivative suit in the United States District Court for the E a s t e rn District of Virginia against the Comp a n y’s di r ectors a t that time, as w e ll as its Seni o r Vi c e P r esi d e n t, S u p pl y Ch ai n , f o r m er C h ief M e r ch a n d isi n g Of f icer a n d f o r m er Chi e f F inanci a l Officer (coll e ctively, t h e “Do a n De f en d a n ts ” ). On o r a b o u t April 1 5 , 2 01 5 , Amalgamated Bank, as trustee f o r the L o n gview 6 00 Small Cap In d ex F u nd, filed a share h older d e rivative suit in the United S tates Dist r ict Court f o r the E aste r n District of V i rginia again s t the Company’s dire c tors at that time, a s well as its f o r m er Chief Mercha n d ising Officer, f o rmer C h ief Financial Officer, Senior Vice Pre s ident, Supply C h ain a n d its f o r m er C h ief Executive O ffi c er and P resident ( c oll e ctiv e ly, the “ A m a lgamat e d Def e ndants,” and, with the Kl ein and Doan De f end a n ts, the “I ndividual Def e ndant s ”). The C o mpany w as named as a nominal def e ndant on l y in these three suits.
On May 2 7 , 2 0 15, the c o urt co n solidated the K lein, D o an, and Amalgam a ted Bank s u its, appointed lead plaintif f s and lead counsel for the con s oli d ated action, a n d ca p tioned the con s olidated acti o n as In r e L u m b e r Liq u idat o r s H o ldin g s, I nc. Shareholder D erivative L itigation (the “Consolidated Derivative Litigation Matter ” ). I n the complaints, K lein ’ s, Doan’s and A m algamated Bank’s (coll e ctively, “Pl a intiffs”) allegations include (i) breach of fiducia r y duties, (ii) abuse of control, (iii) gross mismanageme n t, ( iv) unjust e n r ichment, (v) insider trading, (vi) c o rpor a te w a s t e, (v i i) common-l a w c onspiracy, a n d (viii) statutory conspiracy. P laintiffs did not qu a n ti f y a n y alleged damages in their complaints but, in addition to attorneys’ fees and costs, Pl a intiffs s ee k (1) a decla r ation th a t the Indi v idual Defendants ha v e breac h ed a n d/or a ided and a b ett e d the b rea c h of t h eir fid u ciary duties to the Com p a n y, ( 2 ) a determination and awa r d to t h e Co m p any of the d amages sustained by t h e C o m p any as a r esult of the violations of e ach of the Individual D efendants, jointly and s e verall y , (3 ) a directive to the Company and the Indi v idual Defendants to take all n e cessa r y actions to r e f o rm and im p r o v e t h e Co m p any’s corporate g o ver n ance and inte rn al procedures to c o m p ly with applicable l a ws and to protect the Company and i ts s h areholders from a r e pe a t of t h e events that led to the filing of this action, (4) a d e termina t ion and award to the Co m p any of e x emplary d amages in an amou n t n ecessary to pu n i s h the I n d ividual Defen d a n ts a n d to make an example of the Individu a l De f end a n ts t o the community accordi n g to p r oof of t r ial, (5) the awa r ding of restitution to the C o m p a n y f r om t h e I n di v i d u a l De f e n d a n ts, (6) a requirem e n t th a t the Co m p any establish corpora t e p o licies a n d p r o c ed u r e s pro h ibiting the use of C h inese manufact u r ers of its prod u cts, ( 7 ) a prohi b i ti o n against the Com p a n y using wo o d or wo o d pro d ucts from the Russian Far East, ( 8 ) a requirement that the Comp a n y establish corporate p o licies and p r ocedu r es to ensure com p liance with CARB standar d s f o r all o f its flo o ri n g products, and ( 9 ) dis g orgem e nt and payment to t h e C o mpany o f all com p ensation and p r o f its made by the I n divi d u al Def e n d ants, a n d each of them, at any time during which such Indi v idual De f end a n ts w ere b r eaching fiduciary duties owed to t h e Compa n y and/or committing, or a iding and abetting the commitment of, corporate waste.
On May 16, 2016, the Company and the Individual Defendants entered into an agreement in principle, a Memorandum of Understanding (“Consolidated Derivative MOU”), with the lead plaintiff in the Consolidated Derivative Litigation Matter. On July 18, 2016, the Company entered into a definitive settlement agreement (the “Consolidated Derivative Stipulation”). The terms of the Consolidated Derivative Stipulation were consistent with those of the Consolidated Derivative MOU. Under the terms of the Consolidated Derivative Stipulation, the Consolidated Derivative Litigation Matter will be settled for a combination of corporate governance changes, a payment of $26,000 in insurance proceeds to the Company (which the Company will then use to settle the pending Securities Class Action Litigation), and attorneys’ fees. During the first quarter of 2016, t he Company determined that a probable loss was incurred related to the Derivative Litigation Matters and recognized a net charge to earnings of $2,500 within selling general and administrative expense in the condensed consolidated statement of operations. The Company also classified the loss contingency of $5,000 within other current liabilities and the expected insurance proceeds of $2,500 within insurance receivable on the balance sheet. The settlement is subject to several contingencies including preliminary and final court approval. There can be no assurance that a settlement will be finalized and approved or as to the ultimate outcome of the litigation. The ultimate resolution of these actions could have a material adverse effect on the Company’s financial condition and results of operations.
Derivative Litigation Matters
On J une 11, 20 1 5, t h e Special Committee of the Boa r d of Di r ectors ( the “Speci a l Committee”) e x e r cised its authority to c r eate a Demand Review Co m m ittee, which is c o mprised of t h ree independent directors and tasked with reviewing, analyzing, investigating and considering the allegations made in the Consolidated Derivative Litigation Matter, other Derivative Matters and the Horton Action, as described below, and to report its recommendations thereon to the board of directors. Following an extensive review, investigation and analysis, including taking into consideration the report of independent counsel engaged to assist in the investigation of these matters, the Demand Review Committee recommended to the board of directors that bringing the claims articulated in the Consolidated Derivative Litigation Matter, the other Derivative Matters and the Horton Action would not be in the Company’s best interest.
Derivative Litigation Matter - Cos t e llo Matt e r
On or ab o u t Mar c h 6 , 2 0 15, James Costello ( “Costell o ”) f i led a shar e h older de r iv a tive suit in the Court of Chance r y of the State of D elawa r e against the C o mp a n y ’s di r ectors a t that time (the “Costello D e rivative D e fend a n ts” ) . Th e Company was named as a n o mi n a l defendant o n ly. On April 1 , 20 1 5, t h e case w a s voluntarily s t a y e d . On June 19, 2015, the s t a y was lifted at Costello’s request and Costello subsequently f iled an amend e d complaint. The a m e n ded complaint added the C o mpan y ’s Senior Vice Pr e sident, Supply C h ai n , f o r m er Chief M e rchan d ising Officer and f o r m er Chief Finan c ial Offi c er a s defendants (along with the D e rivative D e fendants, the “Costello D e fendants” ) . C o stello ’ s allegations include ( i) b r each of fidu c iary duties, ( ii) g r o s s mismanagement, (iii) unj u st enrichment, a n d (iv) insid e r sell i ng and the m i sappropriation of certain of the Company’s information in conne c tion therewith. Costello did n o t q u antify a n y alle g e d d amages in the ame n d e d comp l aint but, in add it i o n to at t o r n e ys ’ fe e s and cost s , Costello seeks (i) a g ainst the Costello Defend a n ts and in the Compan y ’s favor t h e am o unt of damages sustained b y the Company as a result of the Costello De f endants’ b r eaches of fiduciary duties, g r oss mismanag e m e n t and unju s t enrichmen t , (ii) extr a o rdinary e q uit a ble and/or in j u nctive relief, including att a chi n g, impo u ndi n g , im p o si n g a con s tructi v e trust on or oth e rwise restr i cting the pro c eeds of the C o stello D efendants’ trad i n g a c tiviti e s or t h eir assets, (iii) awarding to the C o mp a ny r e s titution from t h e Costello D efendants, and ea c h of them, a n d ordering disgorg e ment of all profits, benefi t s and other compensation obtained by the Costello Defend a n ts; a n d (iv) additional equit a ble and/or injunctive relief that would require the Company to in s titute cer t ain compliance policies and proc e d ur e s .
T h e C o mpa n y filed a m o tion to d i s m iss the amended com p lai n t b ased on the failure to m a k e a demand u pon the Co m p any’s b o ard of dir e ctors and the Costello Defen d a n ts filed a m o tion to di s m iss based on the failure to state a claim and the exculpat o r y pro v ision in the Com p any’s Certifi c ate of Incorporati o n . O n Se p t e m be r 1 4 , 2 0 15 , th e pa rties e n tered into a stipulation voluntarily staying the case until the Demand Review Commi t tee ha d an opportunity to investig at e Co s t ello’s allegations and make a recomme n dation to the Co m p any’s board of d irectors, a n d t h e b o ard of dir e ctors has the op p ort u nity to act on t h at r e c o mmen d ati o n. T h e court app r oved the stipulation. The stay remains in effect.
Derivative Litigation Matter - M c Bride M atter
On o r a b o u t M ar c h 2 7 , 2 01 5 , Ja m es M ic h ael M cBride ( “M cBride”) fil e d a shareholder deriv a tive suit in the Cir c uit Court of the City of Willi a msburg and County of James City, Virginia a g ainst the Compan y ’s directors at that time, as w ell as its former C h ief M e r ch a n d isi n g Of f icer a n d f o r m er Chi e f F inanci a l Officer (coll e ctively, the “McB r ide De f endants ”) . T h e Company was named as a nomin a l defendant only. In the complaint , M cBrid e ’s allegations in c lude ( i) b r each of fiduciary duties, (ii) g r o s s mismanagement, (iii) abuse of control, (iv) insider t r ading, and (v) u n just enrichment. M cBride d i d not qu a n tify any alleged damag e s in h i s complaint but, in a d dition to attorneys’ fees and costs, M cBride s e eks ( i ) the a w arding, against the M cBride Defen d a n ts, and in favor of the Co m p any, of d a m ages susta i ned by t h e C o mpany as a result of cert a in of the McBride Defendants’ breaches of their fidu c iary duties and (ii) a di r ecti v e to t h e Company to (a) take a ll necessary a ctions to re f o r m and imp r ove its corporate governance and inte r n a l procedu r es, (b) c omply with its e x isting governa n ce obligations a n d all applicab l e laws and (c) protect the C o mpany a n d its investors from a recurre n ce of the events that led to t h e filing of this a c tion. On J ul y 6 , 2 0 15, McBride filed an ame n ded com p lai n t. T h e ame n ded com p l aint add e d claims for statu t o r y conspira c y and c o mmon l a w co n spir a cy an d , in con n ecti o n with the statutory co n spir a cy claim, seeks d a m a ges in the a m ount of th r ee times the actual dama g e s i n c u rred by the Com p any as t h e result of t h e alleged w r o n g f u l acts . Pur s uan t t o a v o luntary ag r eement between the parties, the def e n d ants have not yet r esponded to the amended c o mplaint.
With respect to the Costello Matter and the McBride Matter (collectively, the “Other Derivative Matters”), pursuant to the terms of the Consolidated Derivative Stipulation, the lead plaintiffs in the Consolidated Derivative Litigation Matter will use their best efforts to resolve the Other Derivative Matters. If the lead plaintiffs are unable to resolve the Other Derivative Matters, the lead plaintiffs will cooperate with the Company to seek dismissal of the Other Derivative Matters. While a material loss is reasonabl y possible, the Company is unable to reasonably estimate the possible or range of possible loss.
Derivative Litigation Matter - Horton Matt e r
In May 2015, the Company re c eived a shar e h older demand from Timothy Horton (“Horton”), with the allegations and d e m a n d s o v erlap su b stanti a lly w ith those raised in t h e C o nsoli d ated Derivative Litigation Matter . On J une 11, 20 1 5, t h e Special Committee of the Boa r d of Di r ectors ( the “Speci a l Committee”) e x e r cised its authority to c r eate a three - person Demand Review Co m m ittee, which is c o mprised of t h ree independent directors and tasked with investigating the claims made in the consolidated action and the Horton demand letter and making a recommendation to the board of directors as to whether it would be in the best interests of the Company to pursue any of those claims. The members of the Demand Review Committee filed a motion to stay the consolidated action pending completion by the Demand Review Committee of its investigation and recommendation to the boa r d of directo r s . As part of its determination that pursuit of the derivative claims would not be in the best interests of the Company’s stockholders, the Demand Review Committee determined to recommend to the board of directors to reject Horton’s demand and that the Company not pursue the claims described in his letters to the Company. The board adopted that recommendation on May 6, 2016.
On May 16, 2016, Horton filed a verified complaint in the Court of Chancery of the State of Delaware against the Company (the “Horton 220 Action”). In the complaint, Horton alleges that the Company violated environmental laws and regulations, as well as made misstatements regarding its sourcing and inventory. Horton did not quantify any alleged damages in the complaint but, in addition to attorneys’ fees and costs, Horton sought an order compelling the Company and its officers, directors, employees and/or agents to immediately permit Horton, his attorneys and/or agents to inspect and make copies and extracts of the books and records of the Company.
On July 7, 2016, Horton and the Company entered into a settlement agreement and release pursuant to which the Company agreed to deliver certain documents to Horton’s attorney in exchange for a release by Horton and dismissal with prejudice of the Horton 220 Action. The Company complied with the terms of the settlement agreement and, on July 20, 2016, the Horton Action was dismissed with prejudice.
Litigation Relating to P r oducts L iability
Begi n n ing o n or ab o u t March 3, 20 1 5, n u merous p u r p orted class a c tion ca s e s were filed in various U.S. fe d e ral d istrict courts and state c o urts involving cl a ims of excessive f o r m aldehy d e emissi o n s from t h e C o mp a ny’s flooring pro d ucts (collectively, t h e “Products L iabil i ty C a ses”). The plaintiffs in these vari o u s acti o ns sou g ht reco v e ry u n der a variety of theorie s , which alt h ou g h not id e n tic a l a r e general l y s imila r , i n cluding negligence, b r each of wa r ranty, state consumer p r ot e ction act violations, state un f air competition a c t viol a tions, st a te deceptive t r ade pra c tices a c t viola t ions, f alse a d ve r ti s i n g, fr a udulent con c ealment, neglige n t misrepresentation, failure to wa r n , unjust en r ichment a n d similar claims. The purpo r ted classes c o nsisted either or both of all U.S. c o ns u m ers or state con s umers t h at p u rc h a s e d t h e s u bject pro d ucts in certain time p e rio d s. T h e p lai n tiffs al s o sou g ht vari o us forms of d e clar a tory and injun c tive relief and v a rious damages, in c luding restit u tion, actual, compensatory, consequenti a l, a n d , in certain cases, punitive damages, a n d int e rest, c o sts, and attorney s ’ f e es incurr e d by the plai n tiffs and oth e r purported cl a ss members in conne c tion w ith the alleged cl a ims, and orders c ertifying the a c ti o ns as class actions. Plai n tiffs h ad not q u a n tifi e d damag e s sought f r om the Comp a n y in these class actions.
On June 12, 2015, U n it e d States Judicial P a nel on Multi D i s tr i ct L itigation (the “ M DL Pane l ” ) issued an order transferring a n d c o ns o li d ati n g ten o f the r e lated f e deral c lass actions to the United St a tes Dist r ict Cou r t f o r the E astern D istrict of Vi r g i nia (the “Virginia Court ” ). In a series of s ubsequent c o nditional transfer order s , the M DL Panel has transferred the other cases to t h e Vir g inia C ourt. T h e C o mpa n y c o ntin u e s to seek to have any new l y filed cases transferred and con s olidated in the Virginia Court and u l timatel y , the Com p any expects all federal class actio n s i n vol v i n g f o r m al d ehyde allegations, includi n g any newly filed cases, to be tr a n s f er r ed and consolid a ted in the Vi rg inia Court. T h e consolidated ca s e in the Virginia Court is caption e d In re: L u m b er Liquidato r s C h ines e -Manufac t u red F loor i ng Products Marketing, Sales, Pract i ces and Products L iability Litigatio n .
Pursuant to a co u r t order, plaintiffs f il e d a Repr e s e n ta t ive Class Action Complaint in the Virginia Court on September 11, 2015. T h e complaint ch a llenged the C o mpan y ’s labeling o f its fl o o ring prod u cts and as s e rted claims u nder C a lifornia, New York, Illinois, Florida and T exas law for f r audulent concealment, violation of consumer protection statutes, negligent misrepresentation and decla r atory r e lief, as w ell as a claim fo r breach of implied warr a n ty un d er Calif o r nia law. T h ereafter, o n September 18, 201 5 , plai n t iffs filed the First A m ended Representative C la s s Action C o mplaint (“FARC”) in which they added impli e d war r anty claims under N e w Yo r k , Illinois, Flo r ida and Texas l a w, as well as a fede r al w a rr a nty cl a im. T h e Company fil e d a motion to dismiss and ans w ered the FARC. Th e Virginia Court granted the motion a s to claims for negl i g ent misrepresentation filed o n behalf of cer t ain plainti f fs, de f er r ed as to c lass act i on allegation s , and ot h e rwise d e n ied t h e m o t i on. T h e C o mpa n y al s o filed a m o tion to strike nationwide cl a s s allegations, on which the V ir g inia C ourt has not yet r u le d . The Company also filed a motion to strike all personal injury claims made in class action complaints. Plaintiffs subsequently agreed and the Virginia Court has ordered that no Chinese formaldehyde class action pending in this lawsuit will seek damages for personal injury on a class-wide basis. The order does not affect any claims for personal injury brought solely on an individual basis. Fact discovery has closed and expert discovery is now proceeding in this matter.
In a d dition, on or about April 1, 2015, S a rah St e ele (“Steel e ”) filed a purport e d c lass action la w s uit in the Ontario, Can a da Sup e rior Court of Justi c e against the Com p any. I n the compl a int, Ste e le ’ s a lleg a tions include ( i ) st r ict liability, (ii) b r each of impli e d warranty of fitn e s s for a parti c ular purpose, (ii i ) breach of implied warranty of m e rchantability, ( i v) fraud by con c ealment, ( v ) civil negligence, (vi) ne g ligent misrepr e s e n tation, a n d (vii) breach of implied cove n a n t o f go o d faith and fa i r dealin g . Steele did n o t q u antify any alle g ed damages in her complaint but, in addition to attorneys’ f ees a n d c o sts, Steele see ks (i) comp e n satory damages, (ii) punitive, e x e m plary and a g gr a v at e d d a mages, and (iii) statutory remedies related to the Company’s brea c h of various laws in c ludi n g the Sales of Goods Act, the Consum e r Protection Act, the Competition A c t, the Co n su m er Packa g ing and L a b elli n g Act and the Canada Con s umer Prod u ct Safety Act.
While the Company believes that a loss associated with the MDL matters is reasonably possible, the Company is unable to estimate the amount of loss, or range of possible loss, at this time. In the event that a settlement is reached related to these matters, the amount of such settlement may be material to the Company’s results of operations and financial condition and may have a material adverse impact on the Company’s liquidity.
In c o nnection with the P r oducts L iability Cases, on April 2 2 , 2015, five of the C o mpan y ’s g e neral a n d umbrella l iabil i ty ins u rers broug h t an action in the United States District Court f o r the Eastern District o f Vir g i n ia, (t h e “Vir g inia Action”). T h rough t h e Vir g inia Actio n , these ins u rers s o ug h t a declaratory jud g ment that they were n o t obligated to defend or i n demnify the Company in conne c tion w ith t h e lawsuits asse r ted against the Company a r i s i n g out of its s a le of lami n ate flooring so u r ced f r om China. One insu r er also asserted a claim s e eking r eformation of one policy to incl u d e a “total pollution ex c lusion” endor s e m ent, cont e n ding th a t it w as omit t ed from that policy as t h e result of a mutu a l mistak e .
On April 2 7 , 2 0 15, the C o mpa n y filed a si m ilar but m o re c o m p rehensi v e action against ni n e o f its general, u m brella and excess insurers (including the five Plaintiffs in the V irgin i a Ac t ion) in the Circuit C ourt for D ane County, Wiscon s in (where four of the insure r s a r e domici l ed) ( the “Wisconsin A c tion ” ). In the Wisconsin Ac t ion, the Company asserted br e ach of c o ntr a ct claims against its general liability insurer s , alleging that t h ese insurers had wrongfully fail e d t o defend the Company in conne c tion w ith the Chines e -m a nuf a ctured lam i nate f loo r ing c laim s . T h e Company also asserted breach of c o ntr a ct and bad f a ith claims against t w o of its gener a l liability insurers, arising out of the manner in whi c h those insurers computed retrosp e ctive premiums under their policies in conn e ction with the Chin e s e- m a n u factured laminate flooring lawsuits. F i nally, the Company s o ught declarato r y rel i ef from the court as to its ri g h ts and the insurers’ res p onsi b iliti e s u n der their policies.
On July 12, 2016, the Company entered into a Mutual Release with Liberty Mutual Fire Insurance Company, Liberty Insurance Company, Employers Insurance Company of Wausau, Wausau Business Insurance Company and Wausau Underwriters Insurance Company, through which the parties released all claims they may have against the other with respect to, inter alia, the Product Liability Cases. Pursuant thereto, in the coming days, those insurers will dismiss claims asserted against the Company in the Virginia Action (except the reformation claim on which judgment has already been entered), and the Company will dismiss claims asserted against those insurers in the Wisconsin Action.
In addition, there are a number of state court cases and claims alleging damages from C |
