By: Catherine Kavanaugh
November 4, 2013
Formosa Plastics Corp. USA (FPC-USA) and scores of government entities that allege they were sold defective PVC pipes for sewer systems from 1996-2005 have agreed to a $22.5 million settlement in a whistle-blower lawsuit.
The Taiwan-based plastics giant was sued along with J-M Manufacturing Co., which is now called JM Eagle, by a whistle blower, three states, and 42 cities and water districts. The lawsuit says the defendants violated the False Claims Act by knowingly selling pipe that would fail earlier than promised.
Details about the proposed settlement between Formosa and the plaintiffs came to light as the first part of a two-phase trial wraps up before U.S. District Court Judge George H. Wu in California. If a jury finds liability, a second phase of the trial will determine damages.
In a joint motion filed on Oct. 28, Formosa and the plaintiffs are asking the judge to approve a proposed settlement that covers all claims against FPC-USA in both federal and state actions.
The motion also says the pending settlement does not include JM or Walter Wang, a co-defendant in a state action and son of the late Taiwanese billionaire Y.C. Wang, who controlled FPC.
Los Angeles-based JM Eagle is the largest pipe extruder in North America, according to Plastics News' ranking. Formosa is its former parent company.
Judge Wu will rule on the settlement between FPC-USA and the plaintiffs on or before Dec. 2. FPC contests any liability in the motion awaiting approval and is agreeing to settle to avoid further litigation.
The proposed resolution is the result of extensive negotiations involving retired Chief U.S. Magistrate Judge Edward A. Infante as the mediator.
Infante recommended the settlement, noting it represents "meaningful consideration" to the plaintiffs and recognizes "the threat and expense of protracted litigation and possible appeals."
If the motion is granted, the plaintiffs will submit a plan to allocate the settlement money to the parties, which include whistleblower John Hendrix.
Hendrix is a former J-M quality assurance engineer who worked at a New Jersey plant. He claims J-M lied about the quality of PVC pipes used all over the country and that the pipes would rupture earlier than expected.
The lawsuit says after Walter Wang became president of J-M Manufacturing, the company substituted cheaper, lower-quality ingredients in its PVC compound and used manufacturing shortcuts that hurt the pipes' tensile strength.
Hendrix allegedly was fired in November 2005 after writing a memo that says J-M cherry-picked the product it tested and much of the PVC pipe sold did not meet Underwriters Laboratories Inc. standards.
Attorneys for J-M call the fraud allegations meritless and malicious. They refer to Hendrix as a "dishonest and disgruntled" former employee who cobbled together incorrect testing standards and baseless insinuations. They also contend there is no proof that the plaintiffs received substandard pipes.
Retired Judge Infante proposed the settlement between Formosa and the plaintiffs following six weeks of mediation sessions that included confidential and candid assessments of their cases and positions.
"The process was time-consuming and challenging; there were several occasions during the mediator's negotiation process where the parties appeared to have reached an impasse," according to the joint motion for settlement.
All the parties accepted the $22.5 million mediation proposal on July 16. A couple weeks later, on Aug. 5, all the parties also agreed that Formosa would make an additional payment of $5.5 million to settle claims for plaintiffs' attorney fees and costs.
The settlement agreement was sent to all the plaintiffs for final execution on Sept. 12, the day before jurors began hearing testimony for the first phase of the trial. As signatures were gathered by the dozens of parties involved, Formosa deposited the settlement funds in an escrow account as required by the order of conditional dismissal.
The motion seeking approval of the settlement says the legal issues in the case are complex and in some respects unprecedented.
"This action has been pending for almost eight years ‒ with 1,700 entries on the judicial docket attesting to the vigor of battle. Indeed, it took more than two years of court proceedings and countless rounds of legal briefing just to settle the pleadings against FPC-USA.
"During this process, plaintiffs filed four separate amended complaints to each of which FPC-USA responded with a motion to dismiss. Ultimately, all claims of direct violations of federal and state (False Claims Acts) were dismissed with prejudice as to FPC-USA, as well as one claim under the 'inadvertent submittal' provisions of New Mexico law."
All parties have reason to settle, according to the motion, which says Formosa faces significant litigation risks considering its PVC resin was a principal ingredient in hundreds of millions of feet of J-M's PVC pipe at issue.
"The risks are great, even if only a small portion of claims against FPLC-USA are ultimately successful," the motion says. "For their part, plaintiffs also face many burdens in their claims…"
The plaintiffs would have to establish the timing, source and scope of Formosa's discovery of alleged false claims to the plaintiffs.
Formosa had turned over 700,000 documents ‒ more than 2 million pages of electronic and paper information – to the plaintiffs. And, the plaintiffs had depositions from dozens of experts.
"The settlement provides the plaintiffs with an immediate benefit and eliminates the risk that, given the circumstances of this case, the plaintiffs could recover less than the settlement from FPC-USA ‒or take nothing," the motion says.
The proposed settlement has been signed by attorneys and attorney generals representing Formosa; Hendrix; the states of Nevada, Virginia and New Mexico; and 21 cities and 21 water districts in California.