Formosa settlement approved; JM Eagle wants new trial

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A federal judge on Jan. 16 approved a $22.5 million settlement that essentially ends a legal dispute between resin supplier Formosa Plastics Co. USA and dozens of government entities that bought PVC pipe of questionable quality for municipal water and sewer systems.

The settlement was reached through mediation last summer, just before the start of a seven-week trial that ended with a jury finding the co-defendant, pipe maker J-M Manufacturing Co., guilty of violating the False Claims Act (FCA).

J-M once was owned by Formosa and now is called JM Eagle.

Monetary damages for JM Eagle — the largest pipe extruder in North America — are to be determined by a new jury that will be seated for a second phase of the whistle-blower trial.

However, in a related matter, JM is asking for a new trial, raising issues about jury instructions and distortions of industry pipe standards that one of the company’s defense attorneys says contributed to a “miscarriage of justice.”

U.S. District Judge George Wu is presiding over the lengthy, complicated case in his Los Angeles courtroom. He granted Formosa a conditional dismissal from the trial after the settlement was reached. But the judge held off until now on formally approving whether the settlement amount is fair, reasonable, adequate and in the best interest of all parties.

In addition to a $22.5 million cash payment, which is already in escrow, the settlement includes a separately negotiated $5.5 million payment to compensate the plaintiffs’ attorneys for their fees and costs.

The plaintiffs are being represented by attorneys from Phillips & Cohen LLP, McKool Smith, and Day Pitney LLP. Their clients include the states of California, Nevada and Massachusetts, 42 cities and water districts, and more than a dozen intervenors for a total of 58 parties that bought JM pipe between 1996-2006.

During that period, a former JM employee alleged in a whistle-blower lawsuit that the company stamped products with certification ratings from Underwriters Laboratories and the American Water Works Association knowing it didn’t meet those standards.

In the settlement, Formosa admits no liability and agrees to settle to avoid further legal costs.

“The plaintiffs’ original theory back in 2006 was that Formosa had until just before that time owned the stock of JM. The plaintiffs were concerned our client had controlled JM and directed its various decisions,” Formosa attorney Richard T. Williams of Holland & Knight LLP said in a telephone interview.

“One thing the plaintiffs came to realize in the course of the discovery was that there really was no [Formosa] control over the product formulations at JM. They [JM] decided what should go into their pipe and what belongs in the compound, and there was no control over manufacturing. We [Formosa] didn’t have a manufacturing officer. There was none of the kind of intrusive direction or control that you might see in other situations.”

Also, Formosa was not JM’s only resin supplier during the 10-year period, Williams said.

“We certainly were concerned that part of this case was going to be about raw materials,” he added. “It really wasn’t until the plaintiffs came to do their presentation in the phase one trial that they were very clear that they think the compound was good. They said good pipe can be made from the compound. We are not attacking the compound or its ingredients.”

The court case centers on whether bills for payment to the plaintiffs were false claims because the goods delivered differed from what they were represented, which was alleged by a former, fired J-M quality supervisor who became the whistle-blower.

In a motion filed this week asking the judge to overturn the verdict or grant a new trial, JM attorney Paul Chan said the plaintiffs’ witnesses admitted they have no evidence that specific pipe they received violated any industry standards.

Chan pointed to testimony from a witness from Virginia that “100 percent of Norfolk’s JM pipe is good pipe” and other municipal representatives who told the court they could not verify whether their cities bought substandard pipe.

JM Eagle is asking the judge to either order a new trial or grant a motion for judgment as a matter of law, which claims the jury did not follow proper instructions and ruled for the opposing party based on insufficient evidence.

“…the phase one verdict is replete with factual inconsistencies and deficiencies…,” according to a 48-page court document filed Jan. 14 by Chan.

He also called the verdict “unworkable” for the second phase of the trial in which a new jury is to be seated to determine any monetary damages JM Eagle might owe the plaintiffs.

“After seven years of litigation and seven weeks of trial, plaintiffs never proved that the goods they were asked to pay for failed to comply with industry standards, either in terms of their physical properties or in the way they were manufactured or quality tested,” Chan wrote.

He said the plaintiffs’ attorneys “pulled out of their back pocket” an unprecedented uniform-compliance theory that they had held in reserve in case they couldn’t prove an FCA substandard-goods case.

Chan contends the plaintiffs’ attorneys exploited ambiguities in the jury instruction to argue that J-M had sold them an iron-clad guarantee of absolute manufacturing consistency.

“Under this imaginary guarantee, J-M supposedly promises that every stick of pipe that it sells to everyone everywhere in the world complies with industry standards…” Chan wrote.

“…A product or testing failure anywhere in the world allegedly renders J-M strictly liable to every customer, including the vast majority who receive excellent and fully standards-compliant pipe.”

JM Eagle offers a 50-year warranty on its pipe products and its existence disproves any contention that the plaintiffs could have believed they were purchasing any other guarantee, Chan continued.

If the court lets a distorted industry standard determine the outcome of the trial it will “unleash an unfair and unworkable new form of liability upon an already fragile national economy,” Chan wrote.

At a bare minimum, a new trial is needed with different jury instruction to “preclude the miscarriage of justice that occurred,” Chan concluded.

Judge Wu will hear arguments for and against JM Eagle’s latest motion on Feb. 24.