Bankrupt firearms manufacturer Remington Arms agreed on Tuesday to a $73 million settlement with the families of the 2012 Sandy Hook school shooting. Because federal law typically protects gunmakers from lawsuits over criminals using their firearms to commit a crime, the case against Remington did an end run around the ban by using state consumer protection laws.
Smith & Wesson Brands (SWBI 0.78%) is facing a similar lawsuit in New Jersey, and now that Remington has settled, other states that were also considering weaponizing their own statutes to go after gunmakers may be emboldened to file suit as well.
The question for investors in firearms manufacturers and ammunition makers is whether the dam is about to break open and gun control activists will use this opportunity to bankrupt the industry by swamping it with steep legal costs.
An end run around federal protections
Under the federal Protection of Lawful Commerce in Arms Act (PLCAA), gunmakers can't be held liable for crimes in which a gun was used. They can still be sued for for shoddy craftsmanship if the product itself is faulty, but just as Ford and General Motors can't be sued if someone used a car in the commission of a crime, Smith & Wesson, Sturm, Ruger (RGR 0.60%), and others can't be sued for "criminal or lawful misuse" of their firearms.
Remington, however, was sued because it allegedly violated Connecticut's marketing laws because it used "militaristic marketing" for its Bushmaster XM15 rifle, the gun used by the troubled youth Adam Lanza in the shooting. The argument is that the use of images like a silhouetted soldier, for instance, made someone like Lanza susceptible to choosing the rifle for his crimes.
Arguably that's a stretch. Stellantis marketed the "X" styling of its Jeep Renegade taillights as "infused with classic military themes," and no rational argument can be made that the carmaker should be held liable for drunk driving accidents or robberies. Yet the PLCAA did carve out an exception saying manufacturers could be sued for knowingly violating federal or state laws regarding the sale or marketing of guns.
In Connecticut, the state's Unfair Trade Practices Act bars marketing products that encourage violent or criminal acts. This was what the Sandy Hook families used to pursue their attack on Remington, and they won a settlement from it.
Limiting marketing license
Smith & Wesson is being sued by New Jersey's attorney general over marketing claims the gunmaker made in ads that "gun ownership makes you safer," "carrying concealed firearms enhances your lifestyle," and "it is safer to confront a perceived threat by drawing a [f]irearm."
Smith & Wesson argues the suit is unconstitutional and infringes on its First Amendment rights because such phrases are constitutionally protected speech and the attorney general can't ascribe accuracy or fraud to matters of opinion. The state Supreme Court swatted down that argument and allowed the case to proceed.
The state attorney general admits he was trying to be "creative" in going after the gunmaker, and The New York Times has called it "a Trojan horse to expose publicly, for the first time, the inner workings of the gun industry."
While New Jersey's lawsuit is problematic, particularly if it is ultimately successful, the Remington settlement is not necessarily as much of a concern.
A big difference
As mentioned, Remington declared bankruptcy in 2020 and its business was sold off. Ruger acquired its Marlin rifle business, Vista Outdoor (NYSE: VSTO) bought its Remington brand ammo business, Sportsman's Warehouse (NASDAQ: SPWH) purchased the Tapco parts and accessories unit, and various other parts were acquired by other manufacturers and private equity companies. So Remington exists in name only.
It was actually Remington's four insurers that agreed to the settlement. The National Shooting Sports Foundation said the firearms maker would have prevailed had it gone to trial, but the insurers wanted to put it to bed. Viable manufacturers will continue to aggressively defend themselves, and the PLCAA "will continue to block baseless lawsuits that attempt to blame lawful industry companies for the criminal acts of third parties."
What it can't do, though, is stop states from trying to tie up the gunmakers in courts and financially drain them. While that's a concern, the settlement is not the knockout punch it might seem.