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Formosa Plastics agrees to pay $22.5 million to settle faulty pipe suit

Nov. 15, 2013
JM Eagle will have to pay an as yet-undetermined amount of damages to Nevada, New Mexico and Virginia. States and water districts covered by this lawsuit spent $2.2 billion to buy JM Eagle during a 10-year period. Plaintiff's lawyers filed the original whistleblower suit 2006 on behalf of John Hendrix, a former JM Eagle engineer. The company’s standard practice was to blame it on the customer. A separate trial will be held to determine the amount of damages.

LOS ANGELES — A federal jury unanimously agreed in mid-November that JM Eagle, which claims to be the largest pipe manufacturer in the world, knowingly manufactured and sold to government entities substandard plastic pipe that was used in water and sewer systems in various states around the country — opening JM Eagle up to potentially billions of dollars in damages.

As a result of the decision, JM Eagle, formerly known as J-M Manufacturing, will have to pay an as yet-undetermined amount of damages to three states — Nevada, New Mexico and Virginia — and 42 cities and water districts that joined a whistleblower lawsuit, as well as dozens of other states, cities and water districts that bought JM Eagle pipe but did not join the lawsuit. The trial exposed JM Eagle’s deliberate efforts to cut costs by using manufacturing practices to make weaker but more profitable polyvinyl chloride (PVC) pipe.

“States and water districts that are covered by this lawsuit spent $2.2 billion to buy JM Eagle during the 10-year period JM was lying about the long-term strength of the pipe,” said Eric Havian, an attorney with Phillips & Cohen LLP who argued the case on behalf of the plaintiffs. “Those entities now are entitled to recover a substantial portion of that cost plus the cost to replace the shoddy pipe much sooner than expected. This likely will mean damages could total billions of dollars because it’s expensive and disruptive to replace water pipe.”

For instance, Calleguas Municipal Water District, in Thousand Oaks, California, had to spend $4 million to replace JM Eagle pipe after the water pipe that was part of one project broke and leaked seven times.

Nevada one of the largest buyers

Nevada Attorney General Catherine Cortez Masto said, “The PVC pipe has already failed across the Silver State and will have to be replaced sooner than expected — a budget nightmare for our cash-strapped state, cities and local agencies. We know from firsthand experience that this PVC pipe will prematurely leak or break and can jeopardize lives. Today’s verdict demonstrates that manufacturers cannot get away with fraud that puts lives at risk. I will continue to fight to protect the State of Nevada and taxpayers against big manufacturers who fail to meet key standards.”

Nevada was one of the largest purchasers of JM Eagle pipe and experienced many failures of that pipe.

Formosa Plastics, which was formerly the owner of JM Eagle, has agreed to pay $22.5 million to those same government entities to settle claims in the qui tam lawsuit about its role in the fraud. The settlement was reached shortly before the JM Eagle trial began in September but wasn’t announced at that time. The court must approve the settlement before it is final. A hearing is scheduled for Dec. 19.

During the seven-week civil trial in federal district court in Los Angeles, more than 30 witnesses testified, many of them current and former JM Eagle employees, including JM Eagle President and sole owner Walter Wang.  The jury also saw over 300 JM Eagle documents, including emails and internal test reports.

Whistleblower was JM Eagle engineer

Phillips & Cohen filed the original whistleblower complaint in 2006 on behalf of John Hendrix, a former engineer in JM Eagle’s product assurance division in New Jersey. The lawsuit was brought under federal False Claims Act and similar state and local false claims laws. The False Claims Act encourages private citizens to sue companies that are defrauding the government and recover funds on its behalf.

The plaintiffs were represented by Phillips & Cohen and two other law firms, McKool Smith and Day Pitney LLP.

In 2006, after learning about the lawsuit, JM Eagle launched an effort to get other pipe manufacturers to convince UL to change the test so that only the compound used to make the pipe was tested, not samples of actual pipe.

“JM Eagle’s attitude was that if you can’t clear the bar, then lower the bar,” Havian said.

When customers complained about problems with JM Eagle pipe, the company’s standard practice was to blame it on the customer and insist the problem was caused by the way the customer installed the pipe. A company manual stated that JM Eagle employees should “take the position that the failure is a result of factors other than the manufacturing defects. We must defend this position, but at the same time maintain good customer relations.”

District Court Judge George H. Wu, the presiding judge, divided the case into two phases. The first trial determined whether from 1996 to 2006 JM Eagle lied about whether its pipe met strength and durability standards required by government specifications, thereby making it liable for damages under state and local false claims laws.

The claims in the trial focused on those of five government entities that were selected from the larger group as “exemplar” plaintiffs as a way to streamline the trial. The five plaintiffs were: Calleguas Municipal Water District, in Thousand Oaks, California; South Tahoe Public Utility District in South Lake Tahoe, California; the Palmdale Water District in Palmdale, California; the city of Reno, Nevada; and the city of Norfolk, Virginia.

A separate trial will be held to determine the amount of damages. The date for that trial hasn’t been set yet. Although the trial involved just five plaintiffs, all the states, cities and water districts named in the case could share in the damages that are recovered.

The damages are supposed to cover not just the costs to replace water pipes that already have failed, but also the additional huge costs government entities will be forced to pay to replace the PVC pipes sooner than expected.  One of the five “exemplar” plaintiffs, Calleguas Municipal Water District, has already spent millions of dollars to replace fairly new JM Eagle water pipes that failed, despite being considered “hundred-year pipe.”  A second plaintiff, South Tahoe Public Utility District, also experienced a catastrophic failure of JM Eagle pipe that required extensive repairs.

Plant managers under pressure

Many witnesses testified that JM Eagle plant managers were under intense pressure to meet production quotas that were impossible to fulfill without cutting corners. Those who failed to meet the quotas had their pay docked, and some lost their jobs. If they met the quotas, they could double their monthly salaries.

The quotas created strong incentives to ship bad pipe. The jury heard many witnesses testify that plant managers routinely removed “reject” tags from pipe that quality control personnel had identified as failing to meet quality standards. That pipe then was shipped to unknowing customers.

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