From Uncertainty to Certainty: Lawsuits

One of the things that investment decision makers struggle with is estimating the size of the exposure that portfolio companies face from outstanding lawsuits. Deception And Truth Analysis (D.A.T.A.) can provide an assist in assessing these potential liabilities. By scientifically measuring the level of deceptiveness and truthfulness in a company’s lawsuit disclosures investment decision-makers can begin to move from uncertainty to certainty.

Let’s compare and contrast two companies with differing levels of deceptiveness and truthfulness around their ongoing lawsuits and litigation risks: Johnson and Johnson (JNJ) and Inspire Medical Systems (INSP). Typically disclosures for lawsuits and litigation risks are covered most thoroughly in annual 10(k) reports in Item 1A, Risk Factors.

Johnson and Johnson

What follows below are JNJ’s 2021 10(k) “Legal Proceedings” as disclosed in Item 19 and their DATA Scores for disclosures around lawsuits or potential litigation liabilities. Importantly, below the DATA Scores relate to the entire language of the risk factor. But below we are only reporting the heading for the Risk Factor. In other words, the DATA Scores shown do not relate to the headings shown, but instead to the entirety of the language of the risk disclosure.

• DATA Score = -35.61% when discussing claims for personal injury made against DePuy Orthopaedics, as well as Ethicon and its product Physiomesh.
• DATA Score = +6.22% when discussing its handling of litigation regarding its production of talc.
• DATA Score = -15.84% when discussing additional details of its talc litigation and its rejection of the Plan as well as other parties to the lawsuit, including: Imersys, Cyprus Mines Corporation, and others.
• DATA Score = -65.48% when discussing the company’s talc product liability in the State of New Jersey, and various Baby Powder lawsuits, including two ERISA-based lawsuits.
• DATA Score = -22.34% when discussing a California lawsuit regarding its Baby Powder products INVOKANA, ELMIRON, TYLENOL, among others.

By contrast their disclosures for litigation risks in 2022 10(k) score as follows… 

• DATA Score = -39.53% when discussing claims for personal injury made against DePuy Orthopaedics, as well as Ethicon and its product Physiomesh. In 2021, this same section of the JNJ 10(k) had a DATA Score of -35.61%. For 2022 this represents a slight decline in truthfulness.
• DATA Score = -20.16% when discussing its handling of litigation regarding its production of talc. By contrast, this same product liability discussion in 2021 had a DATA Score of +6.22%. In other words, JNJ’s disclosure became significantly more deceptive year over year.
• DATA Score = -40.23% when discussing additional details of its talc litigation and its rejection of the Plan as well as other parties to the lawsuit, including: Imersys, Cyprus Mines Corporation, State of New Jersey, and others. In 2021 the DATA Score around these various products was -15.84%. Thus, the company was still deceptive last year, but again this represents a significant increase in the level of deceptiveness for JNJ around its talc liability. Super interesting is that JNJ’s DATA Score from the previous year when discussing State of New Jersey was much, much higher. Likely we can conclude then that the company feels better about its standing in the State of New Jersey with regard to its talc lawsuit exposure. Furthermore, there is not a disclosure around the ERISA litigation in 2022.
• DATA Score = -32.02% when discussing a California lawsuit regarding its Baby Powder products INVOKANA, ELMIRON, TYLENOL, among others. In 2021 the DATA score for this section was -22.34%. Thus, again, JNJ became more deceptive year over year in discussing its product liability.

In general, we have demonstrated that disclosures around lawsuits are not boiler plate and that DATA Scores measure increasing and differing levels of deceptiveness and truthfulness. Furthermore, our assessments are valuable to investment decision makers because they indicate a company’s overall comfort level around its lawsuits. These levels can then be incorporated in valuation models that include estimates of the company’s liabilities.

Inspire Medical Systems

When we demo our D.A.T.A. platform for Clients it is frequently the case that among the most deceptive fragments in a company’s regulatory filings is its disclosures around lawsuits. Because of this, it is easy to draw an erroneous conclusion: higher legalese = worse/more deceptive DATA Scores. That this is not the case is demonstrated by looking at INSP and its disclosures around lawsuits. 

As we did with JNJ, let’s look at INSP’s most recent two 10(k)s from 2021 and 2022. Of note, INSP has the same risk factors in both years, but the scores either stayed the same or improved year over year.

What follows below are INSP’s 2021 10(k) risk factors’ and their DATA Scores for disclosures around lawsuits or potential litigation liabilities. Importantly, below the DATA Scores relate to the entire language of the risk factor. But below we are only reporting the heading for the Risk Factor. In other words, the DATA Scores shown do not relate to the headings shown, but instead to the entirety of the language of the risk disclosure.

• DATA Score = -12.76% when discussing risk factor: “We face the risk of product liability claims that could be expensive, divert management’s attention and harm our reputation and business. We may not be able to maintain adequate product liability insurance.”
• DATA Score = +91.90%% when discussing risk factor: “The misuse or off-label use of our Inspire system may harm our reputation in the marketplace, result in injuries that lead to product liability suits or result in costly investigations, fines or sanctions by regulatory bodies if we are deemed to have engaged in the promotion of these uses, any of which could be costly to our business.”
• DATA Score = 96.66% when discussing risk factor: “Our products may cause or contribute to adverse medical events or be subject to failures or malfunctions that we are required to report to the FDA and foreign regulatory authorities, and if we fail to do so, we would be subject to sanctions that could harm our reputation, business, financial condition and results of operations. The discovery of serious safety issues with our products, or a recall of our products either voluntarily or at the direction of the FDA or another governmental authority, could have a negative impact on us.”
• DATA Score = -16.52% when discussing risk factor: “Litigation or other proceedings or third-party claims of intellectual property infringement could require us to spend significant time and money and could prevent us from selling our products or affect our stock price.”

By contrast their disclosures for litigation risks in 2022 10(k) score as follows… 

• DATA Score = +45.88% when discussing risk factor: “We face the risk of product liability claims that could be expensive, divert management’s attention and harm our reputation and business. We may not be able to maintain adequate product liability insurance.” This compares with DATA Score = -12.76% for the same section last year. Obviously this is a marked improvement for the company around this disclosure.
• DATA Score = +88.77% when discussing risk factor: “The misuse or off-label use of our Inspire system may harm our reputation in the marketplace, result in injuries that lead to product liability suits or result in costly investigations, fines or sanctions by regulatory bodies if we are deemed to have engaged in the promotion of these uses, any of which could be costly to our business.” This compares with DATA Score = 91.90% for the same section last year. Though the DATA Score for this section declined slightly, it is essentially the same score and is still remarkably high.
• DATA Score = +99.31% when discussing risk factor: “Our products may cause or contribute to adverse medical events or be subject to failures or malfunctions that we are required to report to the FDA and foreign regulatory authorities, and if we fail to do so, we would be subject to sanctions that could harm our reputation, business, financial condition and results of operations. The discovery of serious safety issues with our products, or a recall of our products either voluntarily or at the direction of the FDA or another governmental authority, could have a negative impact on us.” This compares with DATA = 96.66% for the same section last year and is a slight, but insignificant improvement.
• DATA Score = -16.52% when discussing risk factor: “Litigation or other proceedings or third-party claims of intellectual property infringement could require us to spend significant time and money and could prevent us from selling our products or affect our stock price.”

The DATA last year for this risk factor was also -16.52% and shows no change.

In summary, for INSP, the company shows a truly robust truthfulness around its lawsuits and potential litigation. It is noteworthy that their DATA Scores largely stayed the same, but for one key section their truthfulness improved significantly. It therefore seems safe to give high marks to INSP for its lawsuit disclosures. Investment decision makers uncertain about the legal liabilities that INSP may face can be certain that the company strives to be transparent as their DATA Scores for two potential lawsuit liabilities is among the highest DATA has seen. While another disclosure showed a marked improvement.

One disclosure, around intellectual property remains assessed as deceptive and it behooves investors to ask the company about its intellectual property. These questions might include: how it developed its IP; how it is differentiated from that of its competitors; what its competitors think of INSP’s IP; what Trade Secret or Patents is the company protected by; and so on.

DATA Scores provide valuable insights for investment decision makers regarding companies’ lawsuits and product liabilities. DATA Scores are sensitive to companies’ comfort levels with potential liabilities and resolution of their lawsuits. In turn, this means that more accurate estimates of companies and their valuation may be made. In short, Deception And Truth Analysis provides a valuable assist in turning uncertainty into certainty for investment decision-makers.