ACS Sheds More Light on Leadscope CaseDecember 21st, 2012
In today’s mailbag, an astute reader of the blog writes to bring our attention to a new post on the American Chemical Society’s Web site regarding some of the details of the ACS v. Leadscope case.
The post is written in a Q & A format that might be an homage to the “tough questions” survey that ChemBark recently sent to the candidates for ACS President. While it would appear that the ACS both asked and answered the questions found in the post, some of the questions match those posed in the presidential survey and in ChemBark‘s posts about the recent ACS v. Leadscope verdict and settlement.
First off, let me applaud the ACS for this giant leap forward in transparency. We, the members of the Society, need these details to help us function as an informed electorate. It is a pity that we’ve had to wait until the matter was almost completely resolved to get many of these basic facts.
So, what is new? Let’s start with the money. It seems that after losing the initial verdict, the ACS owed Leadscope $26.5M in damages plus another $7.9M in the defendant’s legal fees. By not immediately paying these sums as the Society pursued the appeals process, the ACS accrued another $11M in post-judgment interest. Thus, prior to the verdict in the Ohio Supreme Court, the ACS was on the hook for >$45M. After that verdict erased the defamation judgment but upheld the judgment of unfair competition, the ACS was still on the hook for >$26M. Leadscope and ACS soon settled for a $22.6M payment to end the litigation.
Now, how much of this does the ACS have to pay? Not all of it. It turns out the ACS has insured itself to reduce its financial exposure in these and similar issues, but it is unclear what is covered. From the post:
The ACS has a comprehensive suite of insurance, including primary commercial general liability and umbrella general liability coverage. As a result of this insurance, ACS has been reimbursed for over a million dollars in attorney’s fees. In light of the Supreme Court’s ruling, we are working with our legal counsel to determine the amount ACS will be responsible for paying and then we will work with our insurance providers to determine what portion, if any, may be covered by insurance.
Of course, the ACS’s legal fees far exceeded $1M…they are over $9M for the case, and the ACS does not say how much it pays for their insurance coverage.
The ACS still claims that shelling out $22.6M is not that big of a deal, which is incomprehensible to me for a non-profit of their size:
ACS paid the settlement using funds from the Society’s substantial cash reserves and investments. Nevertheless, ACS recognizes that paying $22.6 million to settle litigation begun over a decade ago is a very negative outcome to this litigation.
One of the reasons why large nonprofits strive to maintain financial reserves is to cover large, unexpected financial losses. Members and others should be assured that the settlement in this case will not result in higher ACS member dues or increased prices for ACS products, programs or services. The settlement in this case will neither restrict ACS staffing levels nor impair the ACS’s continued ability to achieve its mission.
In a bizarre twist, the ACS tries to make the argument that the cost of the settlement is not that big of a deal by comparing it to the much greater sum that the ACS finds itself shelling out for post-retirement benefits plans:
The decline in the Society’s unrestricted net assets from 2008 to the present has been largely driven by accounting charges related to the Society’s postretirement benefit plans.1 The plans have become underfunded due to historically low interest rates, which have caused the discount rate to decline. The discount rate is used to calculate the postretirement benefit plan liabilities. The rate has declined from 6.5% at December 31, 2007, to 4.0% at November 30, 2012, and resulted in accounting charges of $153 million during this period. If, as most observers expect, interest rates eventually rebound to higher levels, the accounting charges related to these plans will reverse and the Society’s unrestricted net assets will increase accordingly. Other factors impacting unrestricted net assets include the Society’s net from operations, investment gains/losses and non-operating gains/losses.
How on Earth is the ACS spending this much money on benefits? This seems like yet another matter that deserves more study.
11. This whole case seems like it was a very bad idea. If ACS had it to do all over again, would it still file suit? Will there be management changes as a result of this outcome?
In hindsight, it is very easy to second guess the 2002 recommendations made by the Society’s in-house and outside lawyers and the Governing Board for Publishing, as well as the 2002 Board’s decision to file suit.
However, given the information available to ACS management and governance at the time and the advice provided by legal counsel, ACS elected to file a suit in an effort it believed was necessary to protect valuable ACS intellectual property. ACS and its in-house and external counsel believed that its claims were valid and supported by evidence. Prior to and during the pendency of the Leadscope case, ACS management and governance engaged in a robust and thorough decision-making process. Moreover, the decision to pursue this case was not made by any one individual but rather was authorized after a careful and thoughtful analysis of the nature of the Society’s claims by internal and external legal counsel, ACS senior management, and the ACS Board of Directors.
There will be no management changes as a result of the Leadscope outcome.
This is why we have elections, my friends. The people in charge at ACS answer to nothing else. They are free to do whatever they want, however carelessly, as long as we (the electorate) allow it.