More than 1,800 product liability lawsuits have transformed Pacor Inc. into a legal battlefield.
It is hard to imagine how Jim Sullivan lives each day with the knowledge: He is dying, and Pacor Inc., the $20 million-a-year company over which he presides, is succumbing to a legal blood-letting. The Philadelphia-based firm, which distributes and installs insulation in commercial and industrial settings, has been sued more than 1,800 times during the past five years. Sullivan, 52, now spends all of his time on litigation, and Pacor earmarks approximately 20% of its annual expenses for legal expenditures, up from about 1% before the onslaught began.
Sullivan and Pacor are both victims of asbestos, a material much more dangerous than most people realized until barely a decade ago, and of tort law, which, beginning in 1965, has been interpreted in an increasing strict manner. In 1973, the Supreme Court of California ruled that anyone who handles a defective product before it reaches the consumer -- including jobbers, distributors, retailers -- may essentially be considered a manufacturer, and therefore share the liability. Other states have followed California's lead, among them Pennsylvania, one of the tougher states in which to defend product liability suits (see The Law, page 93).
It is a personal and business tragedy that involves thousands of Jim Sullivans and millions of Americans. The Department of Health and Human Services estimates that from 8 million to 11 million workers have been exposed to asbestos since the beginning of World War II; of that number, approximately 1.6 million will die of asbestos-related diseases. Already, some 25,000 to 30,000 lawsuits have been filed. "And things are just beginning to heat up," notes Robert Copeland, head of a Labor Department office on health and disability issues.
But the truly sobering fact is that the problem transcends asbestos. Strict liability interpretations, an improved ability on the part of the scientific community to trade medical cause-and-effect, and juries that are more and more likely to look with favor upon the injured have created a climate that is increasingly fraught with risk for business, and small business in particular. While companies that handled asbestos watch their profits shrink and contemplate bankruptcy, half a dozen different industries are preparing for their decade in court. Lead, hydrocarbon compounds (used in a wide variety of products, including fertilizers and insecticides), and ionizing radiation (found in medical and nuclear power areas) loom as the asbestos of the future, and few businesses are completely safe.
The growing danger of what today is essentially unlimited liability is a business problem with few precedents and no clear-cut solutions, and the lessons are ones that each businessperson teaches himself. Jim Sullivan has learned the hard way, defending Pacor on a daily basis, trying to preserve it for his family -- he is one of three principal stockholders of the closely held company -- and for his 225 employees. "I'm about the oldest guy in the group," he explains," and if I can stay in there and save it, then the younger guys will have something to hang in there and work for."
Thus far, Sullivan has been successful. Both he and Pacor have survived. But each day has been a battle, and each battle has taken its toll. At the end of a particularly trying day in late March -- he had spent the entire afternoon with insurance company attorneys ("Who wants to deal with attorneys?" he groused) -- he is sitting at the kitchen table at his home in Pennsauken, N.J., discussing his situation. The house is alive with activity; as Sullivan nurses a mug of coffee, his wife finishes up the dinner dishes, two grown daughters watch television in the living room, and Danielle, his seven-year-old granddaughter, pads from room to room in her Dr. Dentons.
"The insulation business has been good to me," he admits. "It's killed a lot of people, but it's been good to me." C. B. Wheatley, who preceded Sullivan as chairman of the board of Pacor, died from an asbestos-related disease four years ago. A year ago, Sullivan was diagnosed as having mesothelioma, a cancerlike growth in the lungs associated with exposure to asbestos. The doctors have since reconsidered; they're not sure it's mesothelioma, but they know that a growth triggered by asbestos is there, and they're certain that it's going to kill him. A year ago doctors gave Sullivan eight months to live. Now Sullivan is living on determination alone, defying all the odds.
Sullivan is a short, stout man with a solid smile and blond hair that has thinned to the point of extinction. "I enjoyed business too much to worry about exercise," he explains, acknowledging his ample gut with a pat. "My life was nothing but work." Sullivan accepts the fact that the work, which at one point involved installing insulation containing asbestos, will cause his death; what he cannot accept is the prospect of the death of his company.
"I guess I get bitter at times," he says. "When your company gets sued 1,800 times in five years -- unfairly -- and there's no end in sight, you feel bitter. And when the suits come in, pile after pile, and you know that you're just working for lawyers, it gets to you." Pacor had been averaging 75 new lawsuits per month, but recently the pace has picked up; on one day in mid-April, 50 arrived in the mail.
Sullivan has been in the business since he was 18. "I started out in the field applying insulation for Johns-Manville. I worked with it and breathed it. In those days we breathed it like it was something you were supposed to do -- and the asbestos products were really dusty then, especially in the holds of ships. The dust in the holds was so thick the air was cloudy. And, in the early days, there weren't any air masks, disposable gloves, boots, or clothing; we went home and took off our clothes in the backyard, and gave them to our wives to put in the washing machine." (Though asbestos is used in more than 3,000 products, including wallboard, pot holders, and brake drums, one of its principal applications was as a binder in insulation, for example, on ships; approximately 85% of Pacor's lawsuits were filed by former Philadelphia Naval Shipyard employees.)
Sullivan worked his way up through the ranks, joined the Mechanical Insulation Co. of Philadelphia in 1960, and four years later was named executive vice-president of the company. At about the same time, the first extensive statistical evidence demonstrating the magnitude of the health problems associated with asbestos -- a report by Dr. Irving Selikoff, of New York City's Mount Sinai Hospital -- was published. Insulation manufacturers began printing a warning on their cartons, but it wasn't until 1971 that the Occupational Safety and Health Administration (OSHA) issued emergency standards on asbestos, primarily at the urging of the AFL-CIO. But, as late as 1972, the federal government was still awarding contracts that called for asbestos insulation, and it wasn't until 1973 that the industry produced asbestos-free insulation.
By that time, Sullivan was with Pacor. "Pacor started cleaning up its operation -- started to phase out of asbestos whenever it was possible -- in 1969," Sullivan notes. "When I joined the company in 1969, it was doing about $3.5 million in sales," Sullivan recalls. "It was a good healthy company; each year it had some growth. The former president had run a one-man show, but I made everyone accountable, and we went from $8 million in 1977 to $20 million last year. And we could expand further, but why bother? The plaintiffs might take it all away from us."
The troubles began in 1975, when the first lawsuit appeared on Sullivan's desk. "We had heard some suits were being filed against manufacturers," he says, "so it wasn't a complete surprise. But we had no idea what was coming. By 1977, we knew that we were into some real problems." In most of the 1,800 suits filed against Pacor to date (by the time you read this, the number may have passed 2,000), the company is named as one of 15 to 25 defendants, along with manufacturers and other firms that handled the product. In only about 25 cases has the company been sued by former employees.
Approximately 350 of the suits have already been settled."A plaintiff might be 55 years old, with five kids, and eight months to live. Now how do you think a defendant is going to do in a case like that?" asks Sullivan. "So the insurance companies began advising us to settle out of court." Of the 350, only 4 have made it to trial, and none has gone before a jury. "The typical case takes two years, and the negotiations go down to the wire; the attorneys wait until the day they're going to pick a jury, and then they settle it," he explains. The final figure, which the defendants share on the basis of a percentage agreement hammered out in negotiations, has been averaging $85,000. The only alternative has been to ignore the insurance company's recommendation, go to trial, and, in the event of an unfavorable decision, pick up the difference between the award and the proposed settlement.
Recently, some of the big manufacturers have taken their cases to trial, and have even won a few; large firms, or small firms facing a handful of suits, can do that, but the small business confronting a mountain of litigation can't afford the additional risk. Pacor's last insurance policy was canceled in 1979 because of the asbestos problem. "We'd gone through a couple of carriers," Sullivan says. "We'd keep one for a year, then have to go to another one... and another. Now we're not able to do anything except insure ourselves." The coverage he had purchased will take care of legal expenses and damages resulting from about the first 600 suits, but, beyond that, every dollar comes out of Pacor's own pocket.
Sullivan estimates that if the suits don't begin coming in even more quickly over the next five years, Pacor may be able to hold on. "We could make it," he says, "because the settlements would be spread over years. But, I don't care how big you are, you just can't keep spending that kind of money and keep your operation going. There's only so much profit."
Other distributors and insulation manufacturers face similarly grim outlooks. Ted Brodie, the head of an $18 million holding company in the Boston area that owns the New England Insulation Co., has been named in 43 lawsuits. "We're sitting on a time bomb," he says. J. T. Hunter, chairman of the board of Greensboro, N.C.'s Starr Davis Co. Inc., a $13 million firm that handled asbestos insulation, notes, "We've been sued 48 times in the last two and a half years, but only three or four of our suits have come to court, and there has still been no decision against us." And Johns-Manville, the Giant of the industry (1981 revenues, $2.2 billion), has been taking a beating: David Pullen, manager of U.S. government affairs for the firm, says the company now confronts a specter of no less than 11,000 suits.
Everyone, it seems, is suing everyone else. Injured employees are suing distributors and manufacturers; distributors are suing manufacturers; manufacturers are suing insurance companies. Only the attorneys are profiting (generally, the attorney for the plaintiff walks away with half of the settlement or award). The action has become so frantic that plaintiffs' lawyers sometimes mimeograph complaints and mail them off at random. "Half of our suits came out of a shipyard that our company never did any work for," says Brodie. Explains Hunter: "If you're in the insulation business in a certain part of the country, then you are presumed to have been a supplier in any particular situation." But even such groundless suits require expensive legal representation; defense attorneys have to go to court and argue for dismissals.
All of this has made an impossible situation even more painful. "Look," exclaims Sullivan, has frustration surfacing, "I can't sit here and say, 'We're all goodies and everybody that's suing us is wrong.' That's not the case; there are some legitimate suits, and some very sick people out there. The problem is that the people who were really injured aren't being treated fairly; some of them are going to die before these things get to court. And what happens if Pacor goes under? Then there's no money for anyone."
In short, the problem has grown far larger than the available remedies. No one any longer denies that asbestos, when breathed for an extended period, may cause mesothelioma or asbestosis, a respiratory disease that results when asbestos fibers block air passages.Who knew about the danger and how long ago they knew about it varies from company to company, and from telling to telling.James Vermeulen, 55, founder and executive director of Asbestos Victims of America, adopts the hard line: "They knew it was going to kill me before I was born, and they never told me about it," he says. "In 1898, Henry Ward Johns, the founder of Johns-Manville, died of a lung disease that doctors now believe was asbestosis; in 1918, life insurance companies stopped selling life insurance policies to asbestos workers." The charges go on and on, but many of the people made out to be the villains, men like Sullivan, simply had no idea how dangerous asbestos was. If they had, they wouldn't be dying of asbestos-related diseases today.
"Somebody has to do something," Sullivan says. "The government, manufacturers -- somebody."
William E. Bailey, senior vice-president at the Commercial Union Insurance Co. in Boston, concurs. "We can't jam social-policy decisions through the tort system," he explains. "If we want total care for those who become sick, then we've got to identify that as a social-policy decision and move within the social framework."
Among the approaches that have been considered are legislative reform (Colorado senator Gary Hart's "white lung" bill, which would set minimum workers' compensation standards for the states, and Wisconsin senator Robert Kasten's bill, which would better define and restrict product liability), industry insurance pools, and a cooperative defense effort by manufacturers and other defendants.
But there has been little progress. Congress has thus far taken no action. Hearings have been held on Hart's legislation, and Kasten's staff is now refining the second draft of his bill, but neither is expected to pass during the current session; the Congress -- White House impasse over the budget has pushed such policy issues onto the back burner, and, even if a compromise is worked out, the bills face some tough going. The legal community, with its powerful voice on Capitol Hill, views product liability reform unsympathetically, considering it a threat to one of its major sources of income.
For their part, most of the manufacturers have been reluctant to link their assets with the risks of the other defendants. "We both have to defend the same cases," Sullivan points out. "We both have to spend money on attorneys. But the manufacturers simply won't join us in defending suits -- they claim it would be a conflict of interest, but we don't agree."
With no judicial or legislative reprieves in sight, and with no consensus for a commonsense solution (defendants, insurance companies, and the government might, says Sullivan, share the cost of asbestos liability), each person, each company, and each interest group has been left to fight for itself.
Recently, Sullivan and the heads of 13 other firms formed the Insulation Contractor/Distributor Defense Group (ICDDG), which wants manufacturers to indemnify them for their losses; the group has requested a meeting with 25 producers, but Sullivan is less than hopeful. "What's going to happen is that they're going to come, they're going to listen, and they're going to try to give us a stall job, and we'll turn around and tell our attorney, 'You get a complaint together.' We'll probably wind up having to sue them." But lawsuits, as everyone involved with asbestos has discovered, are generally the least direct route to relief; and Pacor is hurting now.
Not only is the company spending an inordinate amount of its income on attorneys and settlements, the gauntlet of litigation has also required extraordinary expenditures of time and energy. "It puts real pressure on your top executives," Sullivan explains. "They have to perform their regular work, and find time to answer interrogatories or write letters. Myself, Fraatzie [Paul T. Fraatz, president of Pacor], and Jim Brown [executive vice-president] are the only ones who talk about the problem. There's no point in bringing the rest of your management or your employees into it -- let them worry about running the department or whatever they're supposed to be doing."
In June 1981, Sullivan turned the presidency over to Fraatz, 40, and became chairman of the board. "I stepped down primarily to take care of asbestos," he says, "and also because of my health. We needed to provide for a good, orderly transition in case something did happen suddenly. But, at the same time, I was spending so much time with asbestos litigation that we needed someone to oversee the everyday operation of the company." Since then, Sullivan has adopted a part-time schedule. "I put in three days a week, and do nothing but work on the asbestos problem for the company. It isn't easy. By this time of night, I'm usually on the sofa, half asleep and half awake. My biggest problem is just breathing -- I get winded when I go to bed upstairs."
He had considered the possibility of retiring, but dismissed it: "I know more about the asbestos problem than anybody else, so, as long as I can do it, I'll stay in there and try to hammer this thing out."
But it is, he concedes, like defending a castle under siege. Each day, more lawsuits arrive and are processed, attorneys call, other distributors update him on their status, and, occasionally, when all of the defenses have failed, checks are written out to plaintiffs. "I still like running the company, but this has really taken the fun out of it," says Sullivan. "It's a battlefield every day.
"We had to hire one girl to do nothing but make copies of complaints. We have to make eight copies of each one that comes in, and that's all she does -- makes copies of complaints all day. And another girl spends about 25% of her time overseeing the first one, making sure that everything's perfect before it's sent out."
And for uninsured cases, every penny of the defense comes out of Pacor's profits. The company no longer has product liability coverage, and there's no escrow account for settlements. "We would like to have set something up years ago," Sullivan explains, "but Uncle Sam says you can't do it until after taxes, so we've elected to pay as we go.
"But you just can't stand it -- there's only so much profit you can make. I think quite a few small companies are going to have to go belly-up before the government finally steps in." He notes, with irony, that Pacor can't even seek relief in bankruptcy, generally the court of last resort. "If we went into Chapter 11, they'd decide what percentage of our assets should be put into reserve pending the outcome of the suits. In our case, that would be everything. All that we can really do is dissolve the company."
And, while Sullivan lives, while he can breathe at all, that will not happen. Instead, he will continue to fight the daily battle: copying complaints, conferring with lawyers, discussing cash flow with Fraatz and Brown, lobbying for legislative reform, praying for a new judicial climate, pressing manufacturers to indemnify Pacor and the other members of ICDDG for their losses -- and hoping against hope that his business will survive.