Cybex Analyzes Legal and Financial Options in Barnhard Case

Cybex International is analyzing its legal and financial options related to a recent decision against it in a product liability case. However, the company’s first step is to file an appeal with the New York State Supreme Court, Art Hicks, president and COO of Cybex, Medway, MA, said in a call with analysts and shareholders Tuesday.

Last week, an appellate court handed down a decision upholding a December 2010 judgment against Cybex in the Barnhard v. Cybex International case in which the plaintiff, Natalie Barnhard, originally was awarded $66 million. In 2004, Barnhard, a physical therapist at Amherst Orthopedic Physical Therapy, was stretching her shoulder using a Cybex leg extension machine. The machine fell over on her, rendering her a quadriplegic. Cybex was deemed 75 percent liable in the case but appealed the decision. The appellate court upheld the original decision last week, but it reduced the award amount to about $44 million.

“The good news is the judgment was reduced by approximately $21 million,” Hicks said. “The bad news is that the reduced amount is still an absurdly large amount. And the fact remains that Cybex was not at fault.”

Hicks would not comment on whether any settlement discussions had occurred.

“The first priority is appealing to the New York State Supreme Court,” Hicks said. “Then, the next step would be to figure out the funding for various options from paying zero to 100 percent of the ultimate judgment. Along the way, settlement is a possibility, but we have nothing to disclose at this time.”

When asked whether he thought the plaintiff’s lawyers were advising the plaintiff about how detrimental it would be to her receipt of the award if this judgment caused Cybex to file for bankruptcy, Hicks initially would not comment, but he then said, “We hope they realize that it is self defeating to cause the company any difficulty. And I can only speculate that they’ve considered these issues.”

Hicks would not comment on how much the company would be able to pay in a possible settlement.

“We have significant financial resource at our disposal,” Hicks said. “We are working with Citizens Bank. We will look at other financing options, so it is a little too early to say. There’s a variety of moving points at this time.”

He continued by saying that the state court can choose to hear the case or not hear it. If it does hear the case, it can affirm the original judgment and award or it could reduce it or it could call for a retrial.

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“Outside of that, we are looking at different financing options in terms of how much we could come up with and what scenarios and what structure that would be,” Hicks said. “But what that would be, it is too early to get into that detail.”

Although Cybex has $10 million of insurance coverage to date, the coverage relating to the year involving the Barnhard suit has a little over $2 million left in the policy.

“The policy paid other claims and legal costs relating to this case,” Hicks said.

Amerherst is liable for 20 percent of the award. Cybex would have to pay its 75 percent and Amherst’s 20 percent, then seek reimbursement from Amherst. Because Barnhard was an employee at Amherst at the time of the incident, Amherst’s portion is covered by the New York state workers compensation fund, according to Hicks. He said that the fund has significant assets and has signaled that it will be able to cover Amherst’s amount.

Since the decision was handed down, Cybex had not had discussions with the NASDAQ Stock Market, which just two days prior to the Barnhard appeal decision had granted Cybex an extension to meet two requirements to continue to be listed on NASDAQ, Hicks said.

“We are still analyzing what the impact of this might be on the NASDAQ requirements,” Hicks said.

After Cybex presented a plan earlier this month to NASDAQ on how it would meet the requirements, NASDAQ granted Cybex an extension until Jan. 2, 2012, to meet its requirement to have $10 million minimum in shareholder equity. It also granted Cybex an extension until March 12, 2012, for its stock to remain above $1 for 10 consecutive trading days. If Cybex does not meet both of these requirements, it could be delisted from NASDAQ.

“I can’t tell you how upset this makes our entire company. How unfair this is,” Hicks said about the court’s decision.

He said that John Aglialoro, CEO of Cybex, is meeting with industry leaders and organizations to get them to come together to defend themselves from “frivolous lawsuits and predatory lawyers.”

“We get together as an industry, we establish standards to make sure all equipment is safe, we meet these standards, and yet we still get sued on some strange basis,” Hicks said. “It is really detrimental to manufacturing, specifically in the United States, but also to business in general. It is very detrimental to try and conduct business in a profitable and safe way.”

Hicks said that customers have been supportive and understanding.

“I think this might have been expected by them,” Hicks said. “We have assured them that we are honoring our commitments and will continue to do so.”