A California jury found J-M Manufacturing Inc. knowingly manufactured and sold substandard PVC pipes to government entities for water and sewage systems across the country from 1996 to 2006.
The unanimous verdict reached Thursday comes seven years after whistle-blower John Hendrix alleged J-M, which is now called JM Eagle, violated the False Claims Act by selling products with shorter life spans than promised.
Hendrix is a plaintiff along with the states of Nevada, New Mexico and Virginia, 21 cities in California and 21 water districts in California. Originally filed by Hendrix in 2006, the suit was unsealed Feb. 8, 2010, in Los Angeles in U.S. District Court, when the government entities formally joined the suit.
Los Angeles-based JM Eagle, which is the largest pipe extruder in North America according to Plastics News' ranking, plans to appeal the verdict. It said the lawsuit was brought by a disgruntled former employee.
JM Eagle is on the line for paying a yet-to-be-determined amount of damages to the plaintiffs, as well as dozens of other states, cities and water districts that bought the company's pipe products but didn't join the lawsuit.
During the seven-week trial, the jury heard technical testimony about various pipe failures, Underwriters Laboratories Inc. (UL) standards and the forensic analysis of plastic to determine the root causes of failure. They also saw more than 300 JM Eagle documents.
Next phase: determining damages
Jurors deliberated for a week before reaching their verdict, which ends the first phase of the trial that began Sept. 17 before U.S. District Judge George H. Wu. Damages will be determined in a second phase of the trial. Hendrix is entitled to 15-25 percent of the amount recovered.
The trial exposed JM Eagle's deliberate efforts to cut costs by using shoddy manufacturing processes to make weaker but more profitable PVC pipe, according to Eric Havian, a lawyer with Phillips & Cohen LLP who represented the plaintiffs.
"The jury obviously decided that JM Eagle management cared only about the amount of pipe JM produced, not the quality of the pipe," Havian said in a statement. "JM Eagle deceived outside inspection agencies and ignored over a decade of a failing test results."
JM Eagle officials respect but strongly disagree with the jury, according to Neal Gordon, the company's vice president of marketing and waterworks sales.
"During a seven-week trial with over 20 witnesses, JM Eagle presented irrefutable evidence that our products meet and even exceed national standards based on hundreds of independent tests and audits by outside certifying agencies," Gordon said in a statement.
Even after learning about the lawsuit, Gordon said, two plaintiffs in the case acquired tens of thousands of additional feet of JM Eagle pipe that were installed in their public utility systems.
Gordon said another plaintiff, the City of Reno — which maintained that three pipe breaks in a wastewater reclamation project supported the false claim allegations — nominated the same project for a 2002 Outstanding Achievement in Civil Engineering award, calling JM Eagle piping "the backbone" of the project.
In addition to Reno, the claims in the trial focused on the city of Norfolk, Va., and the Calleguas Municipal Water District, South Tahoe Public Utility District and Palmdale Water District, which are all in California.
Those five government entities were selected from the larger group as exemplar plaintiffs. However, 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 the cost to replace pipes that have failed as well as the cost government entities will pay to replace PVC pipes sooner than expected.
Managers say production quotas led to cutting corners
During the trial, JM Eagle plant managers told the court they were under pressure to meet production quotas and that lead to cutting corners.
Hendrix worked as an engineer in the product assurance division of a New Jersey facility of J-M. He alleged the company cherry-picked the product it tested and much of what it sold did not meet industry standards — but he did not take the stand to testify.
Other witnesses told the court that plant managers removed "reject" tags from pipe identified as substandard and shipped it to customers. When customers complained, the witnesses said they were told to blame factors other than manufacturing defects, such as improper installation.
PVC pipe has failed across Nevada and will have to be replaced sooner than expected, creating a "budget nightmare" for states and cities there, according to Nevada Attorney General Catherine Cortez Masto.
"We know from firsthand experience that this PVC pipe will prematurely leak or break and can jeopardize lives," she said in a statement.
Judge to rule on settlement with Formosa
In a related matter, Judge Wu is scheduled to rule Dec. 19 on a proposed $22.5 million settlement between the plaintiff's and JM Eagle's former parent company, Formosa Plastics Corp. USA.
Formosa acquired Johns-Mansfield Corp. in 1982 and changed the name to J-M. Walter Wang, son of the late Formosa founder and Taiwanese billionaire Y.C. Wang, was later named J-M president. The lawsuit says that under his leadership, a series of cost-cutting measures was implemented — switching to inferior ingredients, accelerating production and not maintaining extruders — that undermined the quality of J-M's PVC pipe products.
In the proposed settlement, Formosa, which supplied some of the PVC resin for J-M pipes, admits no liability and agrees to settle all state and federal claims to avoid further litigation.
In the JM Eagle trial, government officials are lauding the jury's decision. Virginia Attorney General Ken Cuccinelli said in a statement the verdict affirms the company is liable for falsely representing the quality and durability of its product, which leaked and cost cities in that state millions to repair or replace.
New Mexico Attorney General Gary King added, "JM defrauded New Mexico taxpayers when they sold us substandard products and jeopardized our citizens' access to clean drinking water. By joining in this suit, we are sending a message to JM and other would-be fraudsters that they will be held accountable."