By: Catherine Kavanaugh
May 16, 2014
Last year a jury found that J-M Manufacturing Co. had violated the False Claims Act by falsely representing that its pipe products met industry standards in order to receive government payments from dozens of public utilities between 1996 and 2006.
However, six months later, a question remains as to whether the verdict against the world’s largest PVC pipe maker — now called JM Eagle — will stand.
In hundreds of pages of recent court filings, J-M attorneys are trying to convince the federal judge in California overseeing the whistleblower case that there is insufficient evidence to support the jury’s decision and he should issue a direct verdict.
At the least, the judge should grant a new trial, according to J-M attorneys with the Los Angeles law firm Bird, Marella, Boxer, Wolpert, Nessim, Drooks & Lincenberg, P.C.
The request for what is called a judgment as a matter of law (JMOL) is before U.S. District Judge George Wu, who acknowledged near the end of the seven-week trial that the case “is very unusual” and “somewhat problematic.”
For starters, unlike a product liability case, the five government entities selected as “exemplar plaintiffs” of the three states and 40-plus cities and water districts that joined the lawsuit did not have to show the jury any broken pipes or any actual damages to establish their fraudulent claims.
Also, most false claims cases have involved federal plaintiffs that presented direct evidence that they received defective products, like substandard Army Jeep brakes, mine components and naval cables, or in one situation, excessive hours billed to Medicare/Medicaid.
The J-M pipes in the litigated projects are buried under streets in California, Nevada and Virginia. Almost all are in service with pressurized water running through them and no problems of leaking, bursting, cracking or splitting.
Even so, the life spans of the pipes were called into question by whistleblower John Hendrix, who worked as a product assurance engineer at a J-M facility in New Jersey. Hendrix accused the company owned by Walter Wang of misrepresenting the quality of its products following cost-cutting measures like using a cheaper, inferior proprietary PVC compound and speeding extrusion lines.
Wang is the son of the late Taiwanese billionaire and Formosa Plastics Co. USA owner Y.C. Wang.
The crux of the plaintiffs’ case is that J-M changed how it produced pipe and knowingly wasn’t manufacturing products in a consistent manner that assured they met strength and durability requirements set by the American Water Works Association (AWWA) and Underwriters Laboratories (UL).
J-M end users got the luck of the draw, according to the plaintiffs’ attorneys at Phillips & Cohen LLP, which is based in Washington, D.C. They say their clients bought some $2.2 billion of pipe in the 10-year timeframe and it may fail prematurely.
At trial, J-M argued that it met applicable standards and the pipe received by the five plaintiffs has performed as promised.
However, the jury found on Nov. 14, 2013, that J-M falsely represented uniform compliance with AWWA’s C900 and C905 pipe standards and UL’s 1285 standard.
At a Feb. 24 hearing about the JMOL, the judge said the standard is extremely high and he must view all evidence in light favorable to the verdict. At that point, he said he didn’t see any basis for granting a JMOL — or as he put it, “giving the defense a verdict” — and he didn’t know how he would end up on the request for a new trial.
The JMOL request is the most potent post-trial motion a losing party can make, and success is dependent on proving there isn’t sufficient evidence to support the verdict.
J-M attorneys contend the jury’s finding is “empty” and says nothing more about the company and its products than could be said of any manufacturer. J-M isn’t perfect; that’s why warranties are offered.
J-M attorneys maintain that no evidence of false claim and no evidence of any pipe violating industry standards were presented at trial.
“Norfolk does not have a false claim for payment presented to it unless Norfolk can show Norfolk got product that was not subject to quality testing,” J-M attorney Paul Chan told the judge on Feb. 24.
The plaintiffs’ lead atorney, Eric Havian, countered, “They keep saying it is about what pipe shows up on the doorstep and then we got to test it to see if it is good or bad. No, the representation is, look, we make all our pipe in the same way... (and) you are going to know the pipe is good because we are going to follow these industry standards. Now that was a lie. We proved that was a lie, and that is what the jury accepted.”
Among the issues J-M says are grounds for the judge to issue a direct verdict or grant a new trial are:
• The falsity element of the case wasn’t proved. It’s not enough to show a limited probability that some product may need future repairs.
• The uniform-compliance theory is legally indefensible and practically unworkable. It requires J-M to achieve perfect manufacturing consistency.
• The verdict is unsupported because industry standards don’t require perfect manufacturing consistency.
• The jury instructions were insufficient, in part because of wording that said no actual damage had to be shown to establish a false claim. J-M attorneys said this instruction was exploited by the plaintiffs’ attorneys to take the jury’s focus away from whether the pipe sold to their clients was noncompliant.
• Irrelevant evidence was allowed and likely affected the verdict. For example, a lot of time was devoted to talk about J-M raising its internal quick burst test results to 7,200 psi and then lowering it to 6,400 psi. J-M attorneys say that was irrelevant because both values met or exceeded the industry standard.
Also, the plaintiffs presented evidence of J-M’s unsuccessful research and development related to large-diameter pipe. The company’s attorneys say the bigger size pipes subjected to the experimental tests for longitudinal tensile strength were never certified or sold as UL 1285 compliant.
In addition, the plaintiffs didn’t show evidence that they bought unlisted pipe in the larger sizes from J-M, the company’s attorneys add, so the R&D experiment shouldn’t have been admitted. And, they say the UL 1285 was flawed and changed in 2008, which is why the the timeframe of the case ends in 2006.
J-M attorneys also say the plaintiffs’ project specifications didn’t require compliance with the UL 1285 standard in Palmdale and South Tahoe, Calif., or Reno, Nevada, or Norfolk, Va.
Because the standard wasn’t specified, J-M contends any representation of compliance with it couldn’t have influenced the plaintiffs’ decision to install the pipe.
The UL 1285 standard was required for a project in the Calleguas Municipal Water District in Thousand Oaks, Calif., where the plaintiffs’ attorneys have said the utility had to spend $4 million to replace J-M water pipe because it broke and leaked seven times.
J-M attorneys contend no evidence was submitted to show the failure rate of its pipes is abnormally high. They also point to UL’s 2010 investigation of the company, which found no evidence that J-M was intentionally violating UL 1285 or any UL rules. In addition, J-M never lost any product listing with UL.
In another filing, corporate attorneys remind the judge about Reno experiencing a hydro-test failure of J-M’s purple 24-inch C905 pipe, which is used for reclaimed water, in 2002. The company points to testimony that the pipe was manufactured at the Adel, Ga., plant at a time the facility had some “growing pains” as employees learned to operate new equipment. Witnesses told they court they didn’t intentionally manufacture and ship any out-of-spec pipe.
J-M covered all costs related to Reno’s pipe failure and the city later nominated the project for a civil engineering award for outstanding achievement, calling J-M’s pipe the “backbone” of the system.
The company’s attorneys also take issue with testimony about J-M’s quality control practices, which centered on supervisors removing reject tags from pipe at the plants in Stockton, Calif., and McNary, Orgeon, and malfunctioning quick-burst machinery at the plants in McNary and Butner, N.C.
J-M’s legal team says the evidence was irrelevant because the plaintiffs didn’t connect the conduct to a specific invoice so it doesn’t give rise to a false claim. They also describe quality control problems as “occasional failures” that never were a concern for auditing agencies.
Is verdict justified?
The plaintiffs’ attorneys say J-M manipulated test results to conceal problems from customers and third-party certifiers resulting in government agencies buying PVC pipe that has only a fraction of the strength and endurance that J-M represented.
After hearing from about 30 witnesses and reviewing 300 documents, jurors ruled in favor of the plaintiffs on all 26 projects at issue in the first phase of the trial. In filling out the 49-page verdict form, they identified project titles and claim numbers and wrote that J-M falsely represented uniform compliance to the AWWA/UL standards.
A different jury is supposed to be seated to determine monetary damages in the case, which was split into two phases to streamline the litigation ahead of arguments about what each plaintiff suffered.
However, important parts of the case didn’t come out at trial and it set the stage for “free-for-all,” according to J-M attorneys.
The request for a JMOL says, “Proof that plaintiffs’ pipe or that all J-M pipe was non-compliant might have had some significance, but a finding that some J-M pipe somewhere may have been non-compliant (which is at most what the Phase One jury’s verdict says) is so narrow and limited as to be meaningless.”
The plaintiffs oppose the JMOL but their formal written response is listed as a sealed document at J-M’s request to protect confidential business information.
The judge has indicated he will need time to “reflect” on all the documents, arguments and evidence in the case that was filed in 2006, sealed until 2010, and has led to a flurry of other lawsuits.
In related cases, J-M is suing the whistleblower and his attorneys for theft of trade-secret information and other crimes in New Jersey. J-M also is suing Phillips & Cohen for defamation because of a press release. And, those parties, in turn, allege retaliatory harassment and accuse J-M lawyers of filing a strategic lawsuit against public participation.
Then, there’s a request pending for class-action certification by individuals and other entities that bought J-M pipes.
And, in another related legal action, Formosa, which sold resin to J-M and was being sued as a co-defendant, settled with the plaintiffs for $22.5 million plus $5.5 million for attorney fees. The whistleblower will get 15 percent to 25 percent of the amount recovered.
Formosa’s attorney said the company admitted no wrongdoing but wanted to avoid further legal costs.
In addition to its legal fight, JM Eagle is demonstrating the durability of its PVC pipe in an advertisement comparing its product to corroded metal piping.