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UPDATE – Flextronics ordered to pay near $1 bln by U.S. jury
Thursday September 25, 12:41 am ET
LOS ANGELES, Sept 24 (Reuters) – A southern California jury on Wednesday Awarded nearly $1 billion to a top medical device maker After finding that the world’s largest supplier of manufacturing services had pressured it to pay exorbitant prices for components.The jury ordered Flextronics International Inc. (NasdaqNM: FLEX – News) to pay Beckman Coulter Inc. (NYSE: BEC – News) some $3 million in compensatory damages and a staggering $931 million in punitive damages for fraud, economic duress and breach of contract, one of the largest such verdicts ever in a state famed for big jury payouts.
Analysts were stunned by the size of the verdict and said it could cast a shadow over an emerging turnaround for the Singapore-based contract manufacturer, though many agreed the award was likely to be reduced on appeal.
Some investors were also dismayed that Flextronics had not flagged the lawsuit, brought in 2001, in its filings with securities regulators.
Shares in Flextronics were halted at $15 on the Nasdaq, but were expected to come under selling pressure once trade resumed on Thursday, the day the company’s chief executive was scheduled to preside over the market’s ceremonial opening.
The Orange County Superior Court jury found Flextronics had threatened to stop manufacturing circuit boards for medical instruments if Beckman did not pay hefty surcharges.
“APPALLED” BY VERDICT
Flextronics said in a statement that it was “appalled and extremely disappointed” by the verdict, which it said was excessive and “unsupported by the law or the facts.”
“We intend to mount a vigorous challenge of this runaway jury verdict and are fully confident that this award will be almost entirely eliminated in subsequent legal proceedings,” said Flextronics Chief Executive Michael Marks.
The company, which makes Microsoft Corp’s (NasdaqNM: MSFT – News) Xbox game machine and electronics for industry leaders such as Dell Inc. (NasdaqNM: DELL – News) and Hewlett-Packard Co. (NYSE: HPQ – News), has been struggling to recover from a slump marked by excess capacity and slack demand.
Its net loss in the quarter through June more than doubled from a year earlier to $289.7 million on revenue of $3.11 billion.
In his statement, Marks did not address the disclosure issue but called the verdict “irrational” and “absurd” and said it underscored the need to reform the American legal system.
But Daniel Callahan, lead counsel for Beckman Coulter, told Reuters that “a conservative Orange County jury…found that Flextronics had a single-minded pursuit of profits and no concern for public health and safety.”
“FLEXTRONICS DID WRONG”
Jury forewoman Myrtle Dupret told Reuters the panel took great care in reaching a verdict and did not consider it excessive in light of the evidence.
“We felt that Flextronics just honest-to-goodness did not care,” Dupret said. “The evidence presented to us was clear and convincing to us that Flextronics did wrong. It was pretty shocking and an eye-opener for a lot of the jurors.”
Beckman had argued that Flextronics, which agreed to a five-year contract in 1997, forced it to pay an extra $650,000 and concealed a $350,000 overpayment for production of a component for its flagship LX20 clinical blood analyzer.
Attorneys for Beckman said Flextronics pulled out of the contract in May 2000, during booming demand for electronics parts, so it could make cell-phone chips for Motorola Inc (NYSE: MOT – News). They said Beckman stood to suffer $295 million in economic damages.
“If you have a circuit board that doesn’t work, the LX20 doesn’t work. You can withhold one 14-½ cent component and cause $295 million in economic damages. What was at risk were various hospitals, clinics, research centers and universities,” Callahan said.
Jurors deliberated for about three days after the close of the trial, which began in July, and reached their decision on Tuesday afternoon. Orange County Superior Court Judge Greg Lewis sealed the verdicts until Wednesday, allowing both sides an 11th-hour opportunity to settle the case. When they could not, the verdicts were read.
The verdict sent shares of Fullerton, California-based Beckman Coulter up almost 7 percent before they eased to close at $46.70, up 2 percent on the New York Stock Exchange ( News – Websites). In after-hours trade, Beckman shares were at $47.05.
FACES GRILLING
Analysts said Flextronics would face a grilling at its analyst day in New York, which had been scheduled for Thursday before news of the verdict.
“It’s a very poor standard of disclosure and smacks of dishonesty,” said Paul Hodgson of The Corporate Library, a corporate governance research group.
However, Charles Elson, a professor of corporate governance at the University of Delaware, said deciding which lawsuits are material and subject to regulatory disclosure can often be a tough call for management.
“Companies get into litigation all the time and the question is: Is (it) material to the company and therefore worthy of disclosure and how much disclosure?” he said.
Others worried about the signal the verdict would send to businesses in California and its potential to raise costs for a still-battered manufacturing sector.
“Every single contract manufacturer will see its insurance go up,” said Doug Whitman, principal of Palo Alto-based Whitman Capital, who called the amount of the award “ridiculous.”
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