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Cybex Liability Case Could Lead to Bankruptcy

If Cybex loses its appeal of a recent $66 million product liability suit, it could mean bankruptcy for the company.

“The ultimate outcome of this product liability case is virtually impossible to handicap at this point,” writes Reed Anderson, a research analyst with DA Davison & Co., a full-service investment firm that provides brokerage and investment banking services. “However, if the judgment stood, it would likely bankrupt the company, in our view.”

Last month, a jury handed down a $66 million verdict in the case Barnhard v. Cybex International Inc. Cybex was found 75 percent liable while Amherst Orthopedic Physical Therapy PC was found 20 percent liable and the plaintiff, Natalie M. Barnhard, was found 5 percent liable. Under New York law, Cybex would be responsible for 95 percent of the verdict but may collect 20 percent of the verdict from Amherst Orthopedic.

Barnhard was rendered a quadriplegic after a Cybex 4106 ZR Classic leg extension machine at Amherst Orthopedic Physical Therapy fell on her as she leaned on the machine to stretch her shoulder, according to her lawyers, Kevin English and Michael Law, partners with Phillips Lytle in Buffalo, NY. Barnard, who was a physical therapy assistant, was working with a client on a nearby machine at the time. It took four people to pull the machine off of Barnhard, she recounts on her website.

Cybex, Medway, MA, says it will appeal the verdict.

“We think we have a strong basis on appealing,” says Art Hicks, president and COO. “There were some critical errors in the trial and pretrial. We are very confident in our appeal."

Hicks says that Cybex’s operation is doing “great.”

“This won’t affect us,” he says of the verdict. “One way or another, this will be able to be handled.”

James H. Moss, an attorney specializing in recreation law and the editor of Outdoor Recreation & Fitness Law Review, echoes Anderson’s concern, though, saying that the verdict could mean bankruptcy for Cybex.

“No one has that amount of insurance,” he says.

Cybex has $4 million in insurance coverage that can be used in this case.

Anderson writes, “The nearly $6 million in EBITDA that we’ve been modeling for FY10 would not be sufficient to cover regular operating expenses as well as the additional $45 million of estimated borrowings needed to pay the judgment.”

DA Davidson lowered its rating on Cybex from neutral to underperform because of the uncertainty about the impact of the judgment on the company.

“Future litigation losses could have a material adverse effect on the company’s business prospects, liquidity, financial condition and cash flows,” Anderson writes, adding that many of Cybex’s competitors have strong name recognition and more extensive financial and other resources.

However, Anderson writes that his company still believes that Cybex’s underlying fitness business has a well-regarded product offering and respectable position in the marketplace.

Moss says that the $66 million verdict is excessive, considering the normal range for product liability cases is $5 million to $15 million, but the care that a quadriplegic needs throughout life is so large that many families soon look for someone to cover the costs.

Hicks expressed hope that this verdict would be won on appeal.

“These fairly outrageous verdicts are normally overturned,” he says.

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