September 14, 2004
Handgun control lobbyists are rejoicing. America's trial lawyers are licking their chops. But for the beleaguered U.S. weapons industry, last week was a grim one. On Thursday, privately held Bushmaster Firearms, the maker of an M-16 lookalike that a couple of nasty characters used to create the 2002 "Sniper Scare" on the East Coast, agreed to settle a lawsuit filed by relatives of eight victims of the Washington snipers.
To my knowledge, this is the first time that a firearms manufacturer has settled a lawsuit alleging that it bore responsibility for damages inflicted with the use of its product. The precedent cannot be considered a good one for the two public companies involved in this industry, Smith & Wesson (AMEX: SWB ) and Sturm, Ruger (NYSE: RGR ) , or for gun and ammunition retailers such as Kmart (Nasdaq: KMRT ) and Wal-Mart (NYSE: WMT ) .
The allegations in the victims' relatives' lawsuit make it clear that they avoided the usual -- and usually unsuccessful -- argument in such lawsuits: that guns are inherently dangerous and their makers should be liable for any injuries they cause. Rather, the plaintiffs hung their legal hat on a much sturdier peg: the fact that Bulls Eye Shooter Supply, the retailer from which the sniper acquired the Bushmaster rifle in question, had a history of having guns "go missing" (238 weapons over three years). That Bushmaster knew of Bulls Eye's propensity to "lose" weapons. And that Bushmaster didn't require the retailer to carefully monitor its inventory.
Personally, I think even those charges were basically without merit, and the plaintiffs ultimately would have lost this lawsuit if it went to trial. Bushmaster thought so too but agreed to settle anyway to limit its legal expenses (a practice known as "paying greenmail"). The settlement numbers bear that out. Bulls Eye will pay the bulk of the settlement -- $2 million. Bushmaster will pay only $500,000 -- a bargain price to make a high-profile legal case disappear.
Ultimately, the significance of this story is that a crack has appeared in the weapons makers' armor. One of their number has cried "Uncle!" and paid up to make the pesky lawyers go away. It's now only a matter of time before Bushmaster is known not as the only manufacturer to settle such a lawsuit, but as the first manufacturer to settle such a lawsuit. Investors in the other gun makers should take warning now, before this isolated incident becomes a trend. And investors in companies likely to be similarly targeted by lawyers -- Taser (Nasdaq: TASR ) springs to mind -- should consider what might happen if their company's product is used in a crime similar to the one that marred Bushmaster's reputation.
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Fool contributorRich Smith owns no interest in any of the companies mentioned in this article.