| Commitments and Contingencies | Note 7 . Commitments and Contingencies
Governmental Investigations
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 Company 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 Company 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 federal securiti e s laws since 2011. The 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 Company 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.
Litigation Relating to Chinese Laminates
Formaldehyde-Related Cases
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 the Company’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 did not q u a n tify damag e s sought f r om the Company in these class actions.
On June 12, 2015, the 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. The Company c o ntin u es to seek to have any new l y filed cases transferred and con s olidated in the Virginia Court and, u l timatel y , it 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 (the “MDL”) .
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 Company’s labeling o f its fl o o ring prod u cts and as s e rted claims u nder California, New York, Illinois, Florida and Texas law for fraudulent concealment, violation of consumer protection statutes, negligent misrepresentation and declaratory relief, as well 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. The 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. The Company al s o filed a m o tion to strike nationwide cl a s s allegations, on which the V ir g inia Court 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. The Company’s motion for summary judgment on plaintiffs’ First Amended Representative Complaint in the MDL was granted in part and denied in part, and its motion to exclude expert reports and testimony by plaintiffs’ experts related to deconstructive testing was denied.
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 Company. 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.
Abrasion-Related Cases
On M ay 20, 2015, a pur p ort e d class ac t ion titl e d A b ad v . L u m b er L i q u i d at o rs, I n c . w as fil e d in the United Sta t es District Court f o r t h e Ce n tral Distri c t o f Ca l if o rnia and two a m e n ded compl a ints were s u bsequ e ntly filed. In the Se c o nd Amend e d Complaint (“SA C ”), the plaintiffs ( collectively, the “Abad Abrasion Plaintif f s”) sought to ce r tify a nat i onal c lass composed of “ A ll Pe r sons in the U n it e d States w h o purchased Defenda n t ’s Dream Home bra n d laminate fl o o rin g p r o du c t s (the “Dream Home Product”) f r o m De f e n d a n t f o r person a l use in their homes , ” o r , i n the alte r n a t ive, 32 state w ide classes f r om C a lifornia, North Ca r o lina, T e xas, New Jers e y , Florida, Nevada, C onnecticut, I o wa, Minn e sot a , N eb r as k a, G e o r g ia, Ma r y l a n d , Massac hu setts, N ew Y o r k , W est V ir g ini a , Kansas, Kentucky, Mississip p i, Pe n n s y l v a n ia, S o u th Car o li n a, Te nn essee, Vir g i n ia, W a shi ng to n , Mai n e, M i chi g a n , Miss o u r i, Ohio, O k lahoma, Wiscon s in, India n a, Illinois a n d L o uisiana. The products that are the subject of these complaints are part of the same products at issue in the MDL. The S AC alleges vio l ations of e a ch of t h ese sta t es’ consumer protections statu t es and the f e de r al M agnuson-Moss War r anty A c t, as w ell as b r each of implied w ar r anty and f raudul e nt con c ealment. T h e Abad Abr a s ion Plaintiffs did not quantify a n y al l eg e d damages in the SAC but, in a d dition to a ttorneys’ fees and costs, sought a n o r d e r c erti f ying the a c tion a s a cl a ss action, an o r de r ado p tin g th e Abad A b rasi o n P l ai n tiff s ’ class defi n itions and findi n g that the Abad A b r asion Plaintiffs are their p r oper rep r esent a tiv e s , an ord e r appointing th e ir c o un s e l as c lass counsel, injunctive r elief pro h ibiting the Company f r o m c o ntinu i ng to advertise and/or sell laminate flooring products with false a b rasion class r a tings, r e s titution of a ll monies it re c eiv e d from the Abad A b rasion Plai n tiffs and class memb e rs, damages (actual, compensatory, and cons e q uential) and punitive damag e s .
The Abad Abrasion Plaintiffs filed a Third Amended Complaint and the Company moved to dismiss the Third Amended Complaint. The court decided that it would decide the motion only as to the California plaintiffs (hereinafter referred to as the Abad Abrasion Plaintiffs) and ordered that all the non-California plaintiffs (collectively, the “Non-California Abrasion Plaintiffs”) be dropped from the action with leave to re-file. Many of the Non-California Abrasion Plaintiffs re-filed separate complaints in the Central District of California within the required 60-day period, which were then transferred to the district court located in the place of residence of each Non-California Abrasion Plaintiff. These complaints included similar causes of action and sought similar relief as those of the Abad Abrasion Plaintiffs.
On October 3, 2016, the M DL Pane l issued an order transferring a n d c o ns o li d ati n g sixteen o f the f e deral abrasion c lass actions to the Virginia Court. In subsequent conditional transfer orders, the MDL Panel transferred other cases to the Virginia Court. The Company will seek to have any additional related cases transferred and con s olidated in the Virginia 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 Laminate Flooring Durability Marketing and Sales Pract i ces Litigatio n (the “Abrasion MDL”) .
The Virginia Court issued an initial pretrial order instructing all parties to undertake certain discovery and planning tasks and scheduled certain preliminary conferences. Pursuant to a court order, on February 27, 2017, the plaintiffs filed a Representative Class Action Complaint in the Virginia Court. The complaint challenged the durability of the Dream Home Product and asserted claims under Alabama, California, Nevada, New York and Virginia law for breach of warranty, fraudulent concealment, violation of the Magnuson-Moss Warranty Act, and violation of consumer protection statutes. The Company filed a motion to dismiss the representative complaint and a motion to strike irrelevant and prejudicial allegations from the representative complaint. Both motions are currently pending.
Estimated Liability Associated with Formaldehyde and Abrasion MDL’s
In April 2017, the Company initiated settlement discussions to jointly settle the MDL and the Abrasion MDL. As a result of this and other developments, the Company has recognized an estimated liability of approximately $18,000 in its results of operations (within selling, general and administrative expenses ) for the three months ended March 31, 2017, with a corresponding current liability on the accompanying condensed consolidated balance sheet as the Company determined a loss was both probable and reasonably estimable. This is an estimate and significant uncertainty remains regarding whether a reasonable settlement can be reached, and the timing, amount and form of any ultimate loss. The Company believes that such a settlement may be funded by a combination of cash, shares of common stock, and coupons. The ultimate resolution of the MDL and the Abrasion MDL matters, including the form of any settlement or any loss in the absence of a settlement, could have a material impact on the Company’s results of operations, financial condition, and may have a material adverse impact on the Company’s liquidity. The Company will monitor new information or developments in these contingencies in future reporting periods and adjust its accruals, as necessary, in accordance with ASC 450-20-25. The Company is currently unable to reasonably estimate the amount or range of possible loss in excess of the amounts accrued.
If the Company is unable to reach a reasonable settlement, the Company will defend the matter vigorously and believes there are meritorious defenses and legal standards that must be met for, among other things, class certification and success on the merits. The Company does not have insurance coverage with respect to the MDL and Steele matters, and may have limited insurance coverage relative to the Abrasion MDL.
In addition to the MDL, the Steele matters, and the Abrasion MDL, there are a number of individual claims and lawsuits alleging (i) damages due to excessive formaldehyde emissions and (ii) damages similar to those in the Abrasion MDL. While the Company believes that a loss associated with these additional matters and the Steele matter is reasonably possible, the Company is unable to reasonably estimate the amount or range of possible loss.
Gold Matter
On or about December 8, 2014, D a na Gold ( “ G o ld ” ) fil e d a purpo r ted class a ction l awsuit in the United S tates Dist r ict Court f o r the N o rt h e r n Distri c t o f Cali fo r n ia alle g ing that the M o r n ing Star b amboo flo o ring (the “Bamb o o Pro d uct”) that the Company sells is defecti v e. On February 1 3 , 2 01 5 , Gold filed an amen d ed c o mplaint that added three additional plaintiffs ( c olle c tiv e ly with Gold, “ G old P laintiffs” ) . The Company m o ved to dismiss t h e amen d ed complaint. The co ur t dis m i s sed most of G o ld Plaintiff s ’ c l aims but allowed c ertain omission -b ased claims to proce e d. Gold P l aintiffs filed a S e cond Amended Complaint on D ece m be r 1 6 , 2 0 15 , a n d the n a T hi rd A m ended Co m p laint on Jan u ary 2 0 , 2 0 16. In t h e T h ird Ame n ded Com p lai n t, Gold Plaintiffs allege th a t the Company has enga g e d in u n fair b u siness practi c es and u n fair c o mpetition b y falsely re p r esenting t h e q u ality a n d characteristics of t h e Bamboo Prod u c t and by conce a ling the B a mboo Prod u c t ’s def e ctive nature. Gold Pla i ntiffs seek the c ertification of a class of i n divid u als in t h e United States who p u rc h a sed t h e Bam b oo Pr o duct, as well as seven s t ate s u bclasses o f in d ivid u als who are r e s idents of C a lifornia, New York, Illinoi s , West V irgini a , M inne s ota, Penn s ylvania, a n d Fl o r i d a, res p ecti v el y , and p u rchased t h e Bam b o o Pr o duc t f o r perso n a l, famil y , or hou s e h old u s e . G o ld P l ai n tiffs did not q u a n tify any alleged dam a g es in t h e ir c o mplaint b u t, in additi o n to attorneys’ fees and costs, Gold Plaintiffs seek (i) a declaration that the Company’s actions violate the law and that it is financially responsible for notifying all purported class memb e rs, (ii) in j u nctive relief requir i ng the Company to re p lace a n d / o r r e pair all of the Bamboo Product insta l led in structures owned by the pu r ported class members, and ( iii) a de c laration that the Company m u st disg o r g e , f o r the benef i t of the p u rported clas s e s , all or part of the p r o f its r e cei v ed f r om t h e s a le of the alle g edly defe c tive Bamboo Product and/or to make full restitution to Gold Plai n tiffs and the purported class members.
Fact disco v ery in the matter is now complete. The Gold Plaintiffs filed a motion for class certification seeking to certify state-wide classes for purchases of the Bamboo Product in California, Florida, Illinois, Minnesota, Pennsylvania, and West Virginia. The Company filed an opposition to class certification and a motion to exclude the opinions of the Gold Plaintiffs’ experts. These motions are currently pending.
In addition, there are a number of other claims and lawsuits alleging damages similar to those in the Gold matter. The Company dispu tes these and the Gold Plainti f fs’ cla i ms and intends to de f end such m a tters vigorously. Given the unc e rtainty of l itigat io n, the p r eliminary stage of the case, and the legal standards th a t must be m e t f o r, among other things, c lass certific a tion an d success on the merit s , the Company is unable to estimate the amount of loss, or range of possible loss, at this time that may result from this action.
Antidumping and Countervailing D u ties Investigation
In O ctober 2010, a conglomerat i on of domestic manufactur e rs of multilayered wood flooring filed a p e tition se e k ing the imposition of a n tidumping ( “ AD”) and c o untervailing duti e s (“C V D ”) with the U n ited States D ep a rtment of Comm e rce (“DOC ” ) and the United St a tes Intern a tional Tr a d e Commis s i o n (“I T C”) a g a inst imports of multilayered wood flooring from China. T h is ruling applies to companies importing multilayered wood flooring from Chinese suppliers subject to the AD and CVD orders . The Company’s multilayered wood flooring imports from China ac c ounted for app r oximately 7% , 6% and 1 0 % o f its fl o o ri n g purchases in 2016, 2015 and 20 1 4, respectively. The Company’s consistent view through the course of this matter has been, and remains, that its imports are neither dumped nor subsidized.
As part of its p r o c esses in these procee d ing s , the DOC con d u c ts a n nual r eviews of the CVD and AD r ates. In such cases, the DOC will issue pr e liminary rat e s th a t are not binding and are subject to comment by inter e s t ed p a rties. Aft e r c o nsideration of the comm e n ts rece i ved, the D O C will issue f inal r a tes for the applicable pe r iod, which may lag by a year or more. As rates are adju s t e d through the administrative r e vi e ws, the Company adjusts its payments p r o spectively based on the fi n al rate. The Company will begin to pay the finalized rates on each applicable future purchase when recognized by U.S. Customs and Border Protection.
T h e DOC made its initial d e ter m inatio n s regar d ing CVD and AD rates o n A p ril 6, 2 0 11 and May 26, 2 011, res p ecti v el y . O n De c ember 8, 2011, orders were issued setting final A D and CVD r a tes at a maximum of 3 . 3% and 1.5% , respectively. These r ates bec a me ef f e c tive in the form of additional du ty d e p o sits, w h ich the Company has paid, and applied r e troactively to the D OC initial determinati o ns.
Follo w ing the is s u ance of the orde r s issued on December 8, 2011, a number of app e als we r e f iled by sev e ral parties, in c luding the Company, with the Court of In t ernation a l T r ade ( “CI T ”) c h a llenging, among other things, ce r tain aspects that may impact the validi t y of the AD and CVD ord e rs and the a p plicable rates. The appeal of the CVD o r d e r was dis m issed in June 2 0 15. On Ja n u ary 2 3 , 2 015, the CIT i s sued a d e cisi o n rejecting the challen g e of the AD r a te f o r all but o n e Chi n ese ex p o rter. T h is decision was finalized on J u ly 6, 2 015, and appealed to the C ourt o f Appeals f o r the Fe d e ral Circuit (“CAFC”) o n July 3 1 , 2 0 15. On February 15, 2017, the CAFC vacated the CIT’s prior decision with instructions to the DOC to recalculate its AD rate. The schedule for the DOC’s recalculation has not yet been set. The Company is unable to determine the impact of the CAFC’s decision to vacate the initial determination of AD rates; however, the DOC’s recalculation could materially impact the Company’s previously recorded loss related to annual reviews of AD rates discussed below.
In the first DOC annual review in this matter, AD rates for the period from May 26, 2011 through No v ember 30, 2 012 and CVD rates from April 6, 2011 thr o u gh December 31, 2 0 11 were modified to a maximum of 5.92% and a maximum of 0.83% , respectively, which resulted in an additional payment obligation for the Company, based on best estimates and shipments during the applicable window, of $833 . We recorded this as a long-term liability on our accompanying consolidated balance sheet and in cost of sales in our second quarter 2015 financial statements. T h e s e r a tes have been appe a led to the CIT by several parties, including the Company. While the appeal is still pending, the CIT has issued a remand to the DOC requesting reconsideration of certain AD rate calculations.
Pursuant to the second annual review, in early July 2015, the DOC finalized the AD rate for the period from December 1, 2012 through November 30, 2013 at a maximum of 13.74% and the CVD rate for the period from January 1, 2012 through December 31, 2012 at a maximum of 0.99% . The Company believes the best estimate of the probable loss was $4,089 for shipments during the applicable time periods, which was recorded as a long-term liability on its accompanying consolidated balance sheet and included in cost of sales in its second quarter 2015 financial statements. Beginning in July 2015, the Company began paying these rates on each applicable purchase. The rates relating to this second annual review have been appealed to the CIT and that appeal is pending.
The third annual review of the AD and CVD rates was initiated in February 2015. The third AD review covered shipments from December 1, 2013 through November 30, 2014. The third CVD review covered shipments from January 1, 2013 through December 31, 2013. In May 2016, the DOC issued the final CVD rate in the third review, which was a maximum of 1.38% . On July 13, 2016, the DOC set the final AD rate at a maximum of 17.37% . The Company has appealed the AD rates to the CIT, and the appeal is currently pending. The Company believes its best estimate of the probable loss associated with AD and CVD is approximately $5,500 for shipments during the applicable time periods. During the quarter ended June 30, 2016, the Company recorded this amount in other long-term liabilities in its balance sheet and as a charge to earnings in cost of sales on its statement of operations.
The total amount recorded in other long-term liabilities through the third annual review in the accompanying balance sheet s was $10,400 at March 31, 2017 and at December 31, 2016.
In February 2016, the DOC initiated the fourth annual review of AD and CVD rates, which follows a similar schedule as the preceding review. The AD review covers shipments from December 1, 2014 through November 30, 2015. The CVD review covers shipments from January 1, 2014 through December 31, 2014. In December 2016 and January 2017, the DOC issued non-binding preliminary results in the fourth annual review for AD rates and CVD rates, respectively. The preliminary AD rate was a maximum of 4.92% and the CVD preliminary rate was a maximum of 1.68% . The final AD and CVD results in the fourth annual review are currently expected to be issued in May 2017. The Company paid AD and CVD rates in excess of preliminary amounts for shipments during the periods impacted by the fourth annual review. The Company has not recorded a gain contingency as a result of this preliminary review. If the final rate is determined to be above the rates paid, the Company may incur additional expense or may receive a return of funds if the final rate is set below these rates.
The DOC initiated the fifth annual review of AD and CVD rates in February 2017, which is expected to follow the same schedule as preceding reviews. The AD review covers shipments from December 1, 2015 through November 30, 2016. The CVD review covers shipments from January 1, 2015 through December 31, 2015.
The 5 -year Sunset Review of the antidumping and countervailing duty orders on multilayered wood flooring (the “Sunset Review”) began in November 2016 at the ITC to determine whether to terminate the orders. The Company filed a notice of appearance and documentation required at this phase of the proceeding and intends to participate fully in the Sunset Review. The Sunset Review is expected to be completed in late 2017 or early 2018.
Oth e r Matters
The Company is a l s o , from time to tim e , subject to claims and d isp u t es ari s ing in the normal c o urse o f bu s iness. In the opi n ion of manag e ment, while the outcome of any such cl a ims a n d disputes cannot be predicted with c ertainty, its ultimate liability in conne c tion w ith th e s e matters is not expec t ed to h a ve a mate r ial a d ve r s e e f fect on the results of oper a tions, financial po s i ti o n or cash f lo w s . |
