COMMITMENTS, GUARANTEES, PRODUCT WARRANTIES AND OTHER LOSS CONTINGENCIES

9 Months Ended

Sep. 30, 2020

Commitments and Contingencies Disclosure [Abstract]

COMMITMENTS, GUARANTEES, PRODUCT WARRANTIES AND OTHER LOSS CONTINGENCIES

NOTE 19. COMMITMENTS, GUARANTEES, PRODUCT WARRANTIES AND OTHER LOSS CONTINGENCIES

COMMITMENTS. The GECAS business within the Capital segment has placed multiple-year orders for various Boeing, Airbus and other aircraft manufacturers with list prices approximating $27,455 million (including 295 new aircraft with estimated delivery dates of 5% in 2020, 25% in 2021 and 70% in 2022 through 2026) and secondary orders with airlines for used aircraft approximating $2,301 million (including 53 used aircraft with estimated delivery dates of 17% in 2020, 60% in 2021 and 23% in 2022 through 2023) at September 30, 2020. When we purchase aircraft, it is at a contractual price, which is usually less than the aircraft manufacturer’s list price and excludes any pre-delivery payments made in advance. As of September 30, 2020, we have made $3,596 million of pre-delivery payments to aircraft manufacturers.

During 2020, GECAS agreed with Boeing to restructure its 737 MAX orderbook including previously canceled positions, resulting in 77 orders now remaining.

GE Capital had total investment commitments of $2,628 million at September 30, 2020. The commitments primarily comprise project financing investments in thermal and wind energy projects of $1,190 million and investments by our run-off insurance operations in investment securities and other assets of $1,411 million, included within these commitments are obligations to make additional investments in unconsolidated VIEs of $334 million and $1,171 million, respectively. See Note 18 for further information.

As of September 30, 2020, in our Aviation segment, we have committed to provide financing assistance of $1,977 million for future customer acquisitions of aircraft equipped with our engines.

GUARANTEES. Credit Support and Indemnification Agreements - Continuing Operations. For further information on credit support and indemnification agreements for continuing operations, see our Annual Report on Form 10-K for the year ended December 31, 2019.

Indemnification agreements - Discontinued Operations. At September 30, 2020, we have provided specific indemnities to buyers of GE Capital's assets that, in the aggregate, represent a maximum potential claim of $648 million with related reserves of $103 million.

PRODUCT WARRANTIES. We provide for estimated product warranty expenses when we sell the related products. Because warranty estimates are forecasts that are based on the best available information, mostly historical claims experience, claims costs may differ from amounts provided. The liability for product warranties was $2,022 million and $2,165 million at September 30, 2020 and December 31, 2019, respectively.

LEGAL MATTERS. The following information supplements and amends the discussion of Legal Matters in Note 23 in our Annual Report on Form 10-K for the year ended December 31, 2019 and in Note 19 in our Quarterly Report on Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020; refer to those discussions for information about previously reported legal matters that are not updated below. In the normal course of our business, we are involved from time to time in various arbitrations, class actions, commercial litigation, investigations and other legal, regulatory or governmental actions, including the significant matters described below that could have a material impact on our results of operations. In many proceedings, including the specific matters described below, it is inherently difficult to determine whether any loss is probable or even reasonably possible or to estimate the size or range of the possible loss, and accruals for legal matters are not recorded until a loss for a particular matter is considered probable and reasonably estimable. Given the nature of legal matters and the complexities involved, it is often difficult to predict and determine a meaningful estimate of loss or range of loss until we know, among other factors, the particular claims involved, the likelihood of success of our defenses to those claims, the damages or other relief sought, how discovery or other procedural considerations will affect the outcome, the settlement posture of other parties and other factors that may have a material effect on the outcome. For these matters, unless otherwise specified, we do not believe it is possible to provide a meaningful estimate of loss at this time. Moreover, it is not uncommon for legal matters to be resolved over many years, during which time relevant developments and new information must be continuously evaluated.

Alstom legacy matters. In November 2015, we acquired the Thermal, Renewables and Grid businesses from Alstom. Prior to the acquisition, the seller was the subject of two significant cases involving anti-competitive activities and improper payments: (1) in January 2007, Alstom was fined €65 million by the European Commission for participating in a gas insulated switchgear cartel that operated from 1988 to 2004 (that fine was later reduced to €59 million), and (2) in December 2014, Alstom pled guilty in the United States to multiple violations of the Foreign Corrupt Practices Act and paid a criminal penalty of $772 million. As part of GE’s accounting for the acquisition, we established a reserve amounting to $858 million for legal and compliance matters related to the legacy business practices that were the subject of these and related cases in various jurisdictions, including the previously reported legal proceedings in Slovenia that are described below. The reserve balance was $863 million and $875 million at September 30, 2020 and December 31, 2019, respectively.

Regardless of jurisdiction, the allegations relate to claimed anti-competitive conduct or improper payments in the pre-acquisition period as the source of legal violations and/or damages. Given the significant litigation and compliance activity related to these matters and our ongoing efforts to resolve them, it is difficult to assess whether the disbursements will ultimately be consistent with the reserve established. The estimation of this reserve involved significant judgment and may not reflect the full range of uncertainties and unpredictable outcomes inherent in litigation and investigations of this nature, and at this time we are unable to develop a meaningful estimate of the range of reasonably possible additional losses beyond the amount of this reserve. Damages sought may include disgorgement of profits on the underlying business transactions, fines and/or penalties, interest, or other forms of resolution. Factors that can affect the ultimate amount of losses associated with these and related matters include the way cooperation is assessed and valued, prosecutorial discretion in the determination of damages, formulas for determining fines and penalties, the duration and amount of legal and investigative resources applied, political and social influences within each jurisdiction, and tax consequences of any settlements or previous deductions, among other considerations. Actual losses arising from claims in these and related matters could exceed the amount provided.

In connection with alleged improper payments by Alstom relating to contracts won in 2006 and 2008 for work on a state-owned power plant in Šoštanj, Slovenia, the power plant owner in January 2017 filed an arbitration claim for damages of approximately $430 million before the International Chamber of Commerce Court of Arbitration in Vienna, Austria. In February 2017, a government investigation in Slovenia of the same underlying conduct proceeded to an investigative phase overseen by a judge of the Celje District Court. In September 2020, the relevant Alstom legacy entity was served with an indictment, which we have anticipated as we are working with the parties to resolve these matters.

Shareholder and related lawsuits. Since February 2018, as previously reported, multiple shareholder derivative lawsuits have been filed against current and former GE executive officers and members of GE's Board of Directors and GE (as nominal defendant). In July 2020, a new shareholder derivative lawsuit (the Lindsey case) was filed in New York state court against former GE executive officers and GE (as nominal defendant). The lawsuit alleges breaches of fiduciary duties, based on alleged misstatements regarding accounting practices, and the plaintiff seeks unspecified damages and improvements in GE’s corporate governance and internal procedures. The case has been stayed by agreement of the parties.

As previously reported by Baker Hughes, in March 2019, two derivative lawsuits were filed in the Delaware Court of Chancery naming as defendants GE, directors of Baker Hughes (including former members of GE’s Board of Directors and current and former GE executive officers) and Baker Hughes (as nominal defendant), and the court issued an order consolidating these two actions (the Schippnick case). The complaint as amended in May 2019 alleges, among other things, that GE and the Baker Hughes directors breached their fiduciary duties and that GE was unjustly enriched by entering into transactions and agreements related to GE's sales of approximately 12% of its ownership interest in Baker Hughes in November 2018. The complaint seeks declaratory relief, disgorgement of profits, an award of damages, pre- and post-judgment interest and attorneys’ fees and costs. In May 2019, the plaintiffs voluntarily dismissed their claims against the directors who were members of the Baker Hughes Conflicts Committee and a former Baker Hughes director. In October 2019, the Court denied the remaining defendants’ motions to dismiss, except with respect to the unjust enrichment claim against GE, which has been dismissed. In November 2019, the defendants filed their answer to the complaint, and a special litigation committee of the Baker Hughes Board of Directors moved for an order staying all proceedings in this action pending completion of the committee's investigation of the allegations and claims asserted in the complaint. In October 2020, the special litigation committee filed a report with the Court recommending that the derivative action be terminated.

SEC investigation. As previously reported, the staff of the U.S. Securities and Exchange Commission (SEC) has notified GE that they are conducting an investigation of GE’s legacy revenue recognition practices and internal controls over financial reporting related to long-term service agreements. Following GE’s investor update in January 2018 about the increase in future policy benefit reserves for GE Capital’s run-off insurance operations, the SEC staff expanded the scope of its investigation to encompass the reserve increase and the process leading to the reserve increase. Following GE’s announcement in October 2018 about the expected non-cash goodwill impairment charge related to GE’s Power business, the SEC staff expanded the scope of its investigation to include that charge as well. We are providing documents and other information requested by the SEC staff, and we are cooperating with the ongoing investigation.

We reported in a Form 8-K filing on October 6, 2020 that the SEC staff issued a “Wells notice” advising GE that the staff is considering recommending to the commissioners that the SEC bring a civil action against GE for possible violations of the securities laws. GE has been informed that the issues the SEC staff may recommend that the SEC pursue relate to the historical premium deficiency testing for GE Capital’s run-off insurance operations, as well as GE’s disclosures relating to such run-off insurance operations. The staff has not made a preliminary decision whether to recommend any action with respect to the matters other than GE Capital's run-off insurance operations that are under investigation. The Wells notice is neither a formal allegation nor a finding of wrongdoing. GE disagrees with the SEC staff with respect to this recommendation and is responding through the Wells notice process.

We have recorded a reserve of $100 million as of September 30, 2020 related to the SEC investigation in its entirety, encompassing all matters that are under investigation. We are also exploring whether an appropriate settlement can be reached to fully resolve all matters that are under investigation. In the event that an appropriate settlement cannot be reached, we believe the SEC staff is likely to recommend that the commissioners authorize a civil action against GE with respect to issues involving GE Capital’s run-off insurance operations, as those issues are farthest along in the SEC staff's investigation and have already been the subject of a Wells notice. That civil action could seek an injunction against future violations of provisions of the federal securities laws, the imposition of civil monetary penalties, and other relief within the SEC’s authority. In the event that such an action is brought, GE believes it would have strong defenses to the proposed charges and would vigorously defend the case. The results of the SEC investigation (including the continued investigation of matters other than the run-off insurance operations if an appropriate settlement cannot be reached), the Wells notice, and any enforcement action are unknown at this time, and it is possible that the ultimate amount of GE's liability could be higher than our current reserve.

ENVIRONMENTAL, HEALTH AND SAFETY MATTERS. For further information, see our Annual Report on Form 10-K for the year ended December 31, 2019.