A superior court judge in California recently ruled that paint makers Sherwin-Williams (NYSE:SHW) and NL Industries (NYSE:NL) are liable for more than $1 billion in damages for lead-based paint they sold decades ago, but the brush with which the case was applied was so broad that all product manufacturers are at risk.
Early in the last century, lead-based paint was a commonly used wall covering, with the federal government often even specifying that it be used on home interiors. But as evidence of its health risks mounted, the industry began phasing lead out of paints in the 1940s in favor of zinc and titanium dioxide, the stuff that gives paint (and things like toothpaste and Oreo cookies, even) their whiteness. By the time the federal government banned lead's use in 1978, it was almost a completely closed matter.
Yet there were trade-offs. Lead, for all the health woes it causes if ingested, actually creates a higher-quality paint that adheres to a surface better and prevents the color from fading. Today's paints, while less toxic, are not as durable and need constant attention. Zinc-based paints, for example, can resist mildew, but can lead to cracking and delamination. Titanium dioxide, on the other hand, provides greater opacity than either zinc or lead, but can lead to chalkiness in paint and does little to resist mildew. Meanwhile, like asbestos, removal of lead-based paint from a building causes just as many problems as it solves due to the potential for toxic dust to be inhaled during remediation. That's why even the EPA recommends both be left in place and covered if they're otherwise in good condition.
The California judge, however, recommended the lead paint be removed from millions of homes built before the 1978 ban in the 10 cities that sued. He also wielded his decision like a major urban redevelopment cudgel, forcing paint makers to replace windows and maybe even plumbing and roofing if their condition would lead to the "corrective measures" failing. Landlords, who are actually responsible for maintaining the properties and ensuring that peeling paint is remedied, have no liability as a result of the decision and in fact are getting a property upgrade at the expense of the paint makers. The judge essentially said that just because they own the property doesn't mean Sherwin-Williams and the others can't be forced to clean up the problem.
Two defendants in the case, specialty chemicals maker DuPont (NYSE:DD) and oil company Atlantic Richfield, escaped any liability because they either only briefly sold paint or only advertised lead paint's use to industry. Food giant ConAgra (NYSE:CAG), on the other hand, was also held liable because its 1991 acquisition of Beatrice in 1991 brought with it the liabilities of W.P. Fuller, a lead paint and pigment manufacturer that Beatrice owned and operated until 1967.
The risk to product manufacturers everywhere comes from plaintiffs' lawyers using public nuisance laws against the paint companies, as was the case here, and a judge who creatively used standards not normally applied to achieve a social justice end. While similar attempts against the paint makers have been tried in seven states, including Illinois, Missouri, New Jersey, and Rhode Island, all were struck down because public nuisance laws typically don't apply to product manufacturers. Rather, their basis is derived from centuries-old British law compelling the government to remove obstacles from shared resources, such as roadways, waterways, and the air.
Courts in those other states have said a better course of action is to pursue claims through product liability lawsuits, but because that route most often has a two- or three-year statute of limitations -- most of which have already expired in these cases -- public nuisance lawsuits are favored by trial attorneys because the clock can never run out. They are also very vague and can apply to almost anything while carrying a lower threshold of proof necessary to get a conviction compared to product liability claims.
Product manufacturers now have to worry that what they legally sell today may be found harmful tomorrow, and they will then be found liable and forced to pay billions to abate the "nuisance." Sherwin-Williams, NL, and ConAgra have two weeks to appeal, and no doubt they will, but while such attempts to paint the industry with such broad strokes have failed before, there's no telling what might happen in California.
The paint makers can likely afford to pay the money out of their free cash flows, but allowing the ruling to stand risks letting more such lawsuits paint them into a corner from which they and other manufacturers might never recover.
Fool contributor Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends Sherwin-Williams. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.