Robins Runs for Shelter

By Charles P. Alexander

On the surface, A.H. Robins of Richmond would seem to be a thriving company. Its popular products, including Robitussin cough syrup, Chap Stick lip balm and Sergeant's flea and tick collars, last year generated record sales of $632 million. But the 119-year-old pharmaceutical firm is now facing financial ruin because of a $3 item it has not sold in a decade: the Dalkon Shield intrauterine birth control device. Deluged by more than 12,000 lawsuits charging that the Dalkon Shield was responsible for countless serious illnesses and at least 20 deaths among the women who used it, Robins last week filed for protection under Chapter 11 of the Bankruptcy Code. The move could suspend the suits for at least a year while the company tries to work out a plan to pay claims that may amount to $1 billion. E. Claiborne Robins Jr., the firm's president, said that the action was necessary "to protect the company's economic vitality against those who would destroy it for the benefit of a few."

By seeking shelter under the bankruptcy laws, Robins is following a controversial precedent set three years ago by the Manville Corp., which filed under Chapter 11 as a way of temporarily freezing 16,500 suits on behalf of people who claimed to have contracted cancer and other diseases caused by asbestos that the company produced. Manville, an otherwise healthy Denver firm that sells building materials, kept up business as usual. A month ago it offered to set up a $2.5 billion fund for asbestos victims as part of a plan to emerge from bankruptcy proceedings within a year or two.

The disasters at Robins and Manville are only the two biggest cases in an epidemic of product-liability problems that has clogged courts, shaken American companies and raised the costs and risks of doing business. Last year Dow Chemical and other producers of Agent Orange, a defoliant used in Viet Nam, agreed to pay $180 million to veterans who said they developed cancer and other ailments because of exposure to the chemical. The claims were never proved, but the companies settled rather than face an endless siege in court. American Motors has paid out millions of dollars as a result of suits charging that its Jeeps are unsafe, but the company will not reveal the amount.

Pharmaceutical companies have been especially vulnerable. Merrell Dow, a Cincinnati-based subsidiary of Dow Chemical, last year agreed to establish a $120 million fund to satisfy claims that Bendectin, a pill prescribed for morning sickness during pregnancy, caused birth defects. But attorneys for some plaintiffs rejected the settlement, and the debate about Bendectin is back in the courts. Last week Eli Lilly pleaded guilty to criminal charges stemming from injuries caused by its arthritis drug Oraflex (see box).

The Dalkon Shield case may turn out to be the worst liability nightmare that a U.S. drugmaker has suffered. The focus of the furor is a nickel-size plastic device that looks like a shield with spikes around the edges. It was developed in 1968 by Hugh Davis, a professor of obstetrics and gynecology at Johns Hopkins University, and Irwin Lerner, an engineer. In 1970 they sold the rights to the invention to Robins, which agreed to pay royalties on future sales and $750,000 in cash. Like other intrauterine devices, the Dalkon Shield was designed to be inserted inside the uterus, where it usually prevented pregnancy by making it difficult for a fertilized egg to attach itself to the wall of the womb. Beginning in 1971 Robins sold 4.5 million Dalkon Shields around the world, including 2.8 million in the U.S.

But the design of the Dalkon Shield was apparently flawed. For one thing, it had a nylon tail that hung through the opening of the uterus so that a doctor could periodically check that the device was still in place. The problem with the tail, some investigators believe, is that it soaked up bacteria from the vagina and allowed the microbes to pass into the uterus. That often caused infection, which sometimes resulted in sterility. In some cases, women became pregnant despite the IUD and suffered miscarriages because of infection. In 1974 Robins suspended sales of the device after receiving evidence that linked the Dalkon Shield to four deaths.

Since then the lawsuits have steadily mounted. So far the company has settled 9,230 cases for $378 million, plus legal expenses of $107 million. Robins' insurer, a unit of Aetna Life & Casualty, has paid much of that money, but the insurance coverage is almost exhausted. More than 5,000 suits are pending, and suits are still being filed at a rate of 371 per month.

Lawyers for the victims contend that Robins knew the Dalkon Shield could be dangerous long before the company stopped selling it. They also complain that Robins refused to alert women who were still wearing the device to have it removed. It was not until last year that the company finally ran full-page newspaper and magazine ads that warned women of the Dalkon Shield's risks and offered to pay the doctor's fee for having it taken out. To this day, though, Robins maintains that the Dalkon Shield is just as safe as any other IUD when properly inserted.

Robins' case suffered a devastating blow last year from Judge Miles Lord of the U.S. district court in Minneapolis. Denouncing Robins for "monstrous mischief" and "corporate irresponsibility at its meanest," the judge ordered a search of the company's files. After combing through documents at Robins' Richmond headquarters, court-appointed officials said they found strong evidence that the company had covered up its knowledge of the Dalkon Shield's dangers. To make matters worse for Robins, Roger Tuttle, a former attorney for the company, testified that he had destroyed internal documents relating to the Dalkon Shield on orders from his bosses. Robins flatly denied Tuttle's testimony, but it helped produce the largest jury verdict against the company to date: a $9.2 million award in May to a Wichita woman who had to undergo a hysterectomy after using the Dalkon Shield.

Victims' lawyers are outraged at Robins' decision to go into bankruptcy proceedings. Says Sidney Matthew, a Tallahassee attorney: "The filing of this petition is in bad faith and is fraudulent. This is an attempt by Robins to escape responsibility for thousands of injuries." Agrees Wichita Lawyer Bradley Post, whose client won the $9.2 million verdict: "It's an unwarranted, inappropriate use of the judicial system."

! Many experts not involved in the case are also disturbed. Says Thomas Kerr, an associate professor of business ethics at Carnegie-Mellon University's Graduate School of Industrial Administration: "If the filing is a device to avoid paying as much in damages as the company would have without the bankruptcy proceeding, it is ethically questionable." But others argue that Robins' strategy will benefit victims in the long run if it keeps the firm from going under. "If the company is liquidated," says Lawrence King, a New York University law professor, "future claimants whose injuries have not come to light yet will get nothing. Even what the present claimants would receive in the event of liquidation might turn out to be much less than if they agreed to a deal that would allow the company to survive."

Those hurt by the Dalkon Shield can take some comfort in what has happened in the Manville case. Though the asbestos victims have already waited three years for compensation, the company's proposed $2.5 billion settlement is, in the opinion of some experts, probably more than the plaintiffs could have won by pursuing their suits individually. Under the plan, Manville shareholders would bear the brunt of the cost. They would have to put at least 50% and perhaps as much as 80% of their stock into a trust fund to settle the asbestos suits. Moreover, Manville has pledged that after three years it would turn up to 20% of its annual profits over to the fund if needed. Manville's stock has fallen from a 1981 high of 26 1/2 to 6 1/4 last week.

Robins' shareholders will not get off lightly. The firm's stock has dropped to 8 1/4 from a 1983 peak of 29 3/8. Since April, Robins has paid no dividends. Conceivably, the stockholders might have to give up a portion of their shares to a settlement fund, as in the Manville plan.

Some stock analysts are confident that Robins will overcome its Dalkon Shield ordeal. Says Louis Hannen of Wheat, First Securities in Richmond: "The company will survive in some form or other." Concludes Craig Dickson of Interstate Securities in Charlotte, N.C.: "Anything that allows Robins to separate its problems with the Dalkon Shield from its basic businesses will benefit the company, and probably all concerned."

Robins officials insisted last week that the firm was not trying to dodge its responsibilities. Says William Cogar, an attorney representing Robins: "We don't for a moment question that every business creditor for Robins will be paid and that every meritorious Dalkon Shield claimant will be compensated." The bankruptcy petition, in the company's view, is merely a way to buy time so that it can settle later.

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With reporting by B. Russell Leavitt/Atlanta and Raji Samghabadi/New York