3M Co. has agreed to give the state of Minnesota $850 million to resolve the biggest environmental lawsuit in the state's history over the decades-long contamination of groundwater in the east metro area.

On Tuesday, the day that the trial between the state and 3M was set to begin, Attorney General Lori Swanson said the money will be used to clean up contaminated water in the communities that were affected by the perfluorinated chemicals (PFCs) used in consumer products like Teflon and Scotchgard that were dumped for years at four sites in Washington County. The agreement provides money for improved drinking water infrastructure, sustainability and natural resource projects. About 12 percent of the total will be paid to the national law firm Swanson retained on a contingency basis to represent the state.

Swanson said at a news conference that she was pleased with the settlement, which attorneys have been negotiating for weeks, and said that the money can be used to improve drinking water for individual homeowners and municipal drinking water systems. The company also agreed to pay up to another $40 million in the next five years as part of a remediation agreement it made with the state in 2008, bringing the total to about $890 million.

3M officials also said that the settlement allows them to address contamination in the area of the metro where many of its employees live and where it's operated for years.

"This agreement reflects 3M's long-standing commitment to always acting with integrity and conducting business in an ethical and sustainable way," said John Banovetz, 3M's senior vice president of research and development. "While we have never believed there is a PFC-related health issue, this agreement allows us to move past this litigation and work together with the state on activities and projects to benefit the environment and our communities."

While a major lawsuit in Minnesota, it is only one of about 37 PFC-related cases against 3M across the country tied to contaminated drinking water.

The settlement amount is dwarfed by the $7.1 billion settlement in 1998 between the state and Blue Cross and Blue Shield of Minnesota and the tobacco companies. But it's among the larger awards in most environmental cases in recent years. While large, the settlement is probably not a big financial hit to 3M, said Matt Arnold, stock analyst at Edward Jones. It equals about 1 percent of the company's market value, and the company has $4.1 billion in cash on its balance sheet.

In the lawsuit filed in 2010 by Swanson and the Pollution Control Agency, the state claimed that 3M knowingly contaminated the drinking water of 67,000 residents of east-metro communities, causing up to $5 billion in potential damage to property values, wildlife and human health. The company has denied wrongdoing, saying it followed the law in disposing of its industrial wastes and that it voluntarily stopped making the chemicals in 2002. It also said that it settled the matter with the state in a 2008 agreement in which it agreed to clean up the chemicals and pay for clean drinking water in the affected communities.

Since that first agreement, 3M has paid an estimated $13 million for new private and municipal drinking water systems in half a dozen east metro communities.

As part of the new settlement, 3M agreed to pay up to $40 million in the next five years to continue funding that work.

Soaring costs

But the costs have exploded in the last two years as a wave of new research has shown that PFCs are linked to significant health problems, including premature births, some cancers and liver toxicity. Both the Environmental Protection Agency and the Minnesota Department of Health have drastically lowered their recommendations for safe drinking water levels that affect an estimated 15 million people nationally who are exposed to contaminated water.

Cottage Grove, for example, had to spend $2 million last year for a temporary fix, and has joined other cities to push for a $50 million new drinking water treatment plant for entire area.

Kristina Handt, city administrator for Lake Elmo, said the city still has many residents who rely on private wells, which are still contaminated. "We need to build out a distribution system in order to get them clean water sources," Handt said.

Several Republican House lawmakers who represent districts in the east metro — Kathy Lohmer of Stillwater, Kelly Fenton of Woodbury, Keith Franke of St. Paul Park, and Tony Jurgens of Cottage Grove — issued a joint statement lauding the settlement.

"This settlement will help bring peace-of-mind to local residents," they said. "We hope these settlement dollars will be used to pay for needed water quality improvements and ongoing maintenance."

But the science around the potential health effects of PFCs unexpectedly became a major dilemma for Swanson just a week before the trial was originally scheduled to begin.

One expert hired by the attorney general to estimate the potential damages found significant differences in cancer and premature births for some affected communities compared to others outside Washington County.

It was the first time such effects had been identified, raising significant concerns among residents who have lived with the contaminated water for years.

But just days before the trial was to begin, Minnesota Department of Health officials said their own analysis of health data showed no apparent health effects from PFCs, a finding that 3M attorneys called a "game changer."

Hennepin County District Judge Kevin Burke agreed to delay the trial for one week, and the 3M attorneys' witness list made it clear that they intended to use the Health Department scientists to make their case.

Swanson took a swipe at Health Department officials on Tuesday, saying she was blind-sided by their report.

"The swamp that was referred to in the last election is not limited to Washington," she said. "We have our own problems in Minnesota with regulatory agencies that are captive to the industries that they are supposed to regulate."

In a statement Tuesday night, the Health Department called Swanson's statement inaccurate and disappointing.

"Our mission is to protect Minnesotans from negative health effects and inform them about threats to their health," it said. "We based our information on the best scientific information available without favor or prejudice."

Swanson said that the events, which Burke described as powerful pretrial publicity for 3M, did not lead to the settlement.

"But it certainly didn't help our case," she said.

Staff writers Pat Pheifer, Karen Zamora and Mike Hughlett contributed to this story. Josephine Marcotty • 612-673-7394