Billions in possible damages turn to zero in 14-year legal battle over water pipe
The headlines blared after the whistleblower lawsuit against JM Eagle was unsealed, and then three years later in 2013, after a jury found the world’s largest plastic pipe manufacturer had made false claims about the quality of its products.
The Los Angeles company was said by the law firm representing three states and 42 cities and water districts to be on the hook for “billions of dollars” of potential damages because of leaky pipes that would have to be replaced “much sooner than expected” — the result of “shoddy manufacturing” and a focus on the bottom line.
For the record:
6:47 PM, Jul. 12, 2020A previous version of this story misspelled the last name of attorney David Birka-White as Burka-White.
Fourteen years after the lawsuit was filed, the Los Angeles federal court judge presiding over the case delivered his own ruling last month on what was warranted to five cities and districts chosen to have their cases heard first: zero.
“There is no ‘real world’ evidence of defects as to the pipe,” U.S. District Judge George H. Wu ruled in a 67-page decision that noted the plaintiffs failed to dig up and test the pipe at issue. “It is undisputed that they have not ceased the use of that pipe and thereby have obtained, retained (for many years), and continue to receive value from it.”
The ruling hasn’t ended the dispute but has dealt a severe blow to the plaintiffs in the lengthy legal saga, which a JM Eagle attorney said posed an “existential” threat to the company — and was fought in a commensurate manner. The company twice sued the plaintiffs’ lawyers, once for racketeering and another time for defamation, cases that were thrown out on appeal. Along the way, it has hired multiple attorneys of its own and spent what it called the “equivalent to a huge fine” in fighting the allegations.
Driving the defense has been the company’s owner and chief executive, Walter Wang, who has refused to settle. The company’s co-defendant, resin supplier Formosa Plastics, exited the lawsuit for $22.5 million and legal fees. But Wang, the son of the late Taiwanese billionaire who founded Formosa and JM Eagle’s predecessor company, said he is determined to fight to the end.
“I don’t want to settle, because I did nothing wrong. This is under my direct watch. If I settle, it’s not about money. It’s about ruining [my] whole reputation,” said Wang, a prominent Los Angeles businessman and philanthropist. “I could not possibly settle, so I fought on and fought on. Even my sister and brother-in-law told me, ‘Walter, you have to have an exit strategy.’”
Wang said he felt vindicated by the judge’s decision, but it is too early for the company to celebrate. The plaintiffs are expected to appeal the ruling, and JM Eagle still faces a class-action lawsuit that despite the whistleblower ruling is proceeding on a separate track.
Both kinds of cases can result in large awards. Among big-money whistleblower cases in recent years was one in which GlaxoSmithKline agreed in 2012 to pay $3 billion to settle all criminal and civil claims for wrongdoing, including promoting off-label uses of its prescription drugs. Bank of America agreed to pay $2.43 billion to settle a class-action lawsuit with investors related to its acquisition of Merrill Lynch & Co. amid the financial crisis.
Eric Havian, lead attorney for the plaintiffs in the whistleblower case, said Wu’s decision “effectively created a Catch-22" for the water suppliers, given “they’ve been sold pipe that is inferior, according to the first jury’s ruling.”
“Yet because it’s buried under the ground and the cost of digging it up would require shutting down the water system for some number of weeks or maybe even longer to exhume and test it, you can’t get any damages,” said Havian, who maintains that only a “random sample” of pipe would hold up in court.
Havian also disagreed there was no real-world evidence of JM Eagle pipe failures involving the plaintiffs, including one experienced by the Calleguas Municipal Water District in Thousand Oaks. Wu did not allow it to be heard at trial, he said, because the pipe was installed outside the time period of the lawsuit, which is not in dispute. A representative for JM Eagle also claims the failure might have been caused by poor installation or pressure surges.
A failure in Reno that was heard at trial occurred while the pipe was being installed in 2002. The company representative said ruptures were caused by trapped air during pressure testing improperly conducted by the city. However, he acknowledged, JM Eagle’s investigation into the incident discovered a defect in one piece of pipe, so the company made good on its warranty and replaced all of it.
Havian said it was a clear example of “bad” pipe, and he expected the issue of failures to be raised on appeal. He also said there was nothing preventing the litigation from going forward with other plaintiffs.
The damages case relied on plaintiffs’ experts who developed a sophisticated engineering model — based on internal JM Eagle tests — and alleged the pipe could fail sooner than if it was compliant with standards. A jury that heard the testimony hung on the issue of damages in November 2018, prompting the company to ask for Wu to issue his own ruling. Wu threw out the expert testimony, noting the analysis was untested and lacking peer review, among other shortcomings.
John Nockleby, a professor at Loyola Law School who has written on tort law, said it appeared that Wu may have been satisfied with just a sample large enough to test — though an expert would then have to construct a longevity test.
“I don’t know if such a test would be feasible, but that’s the kind of evidence the court seemed to be looking for,” said Nockleby, who called the decision a “complete win for the defendant.”
The litigation began in 2006 when Phillips & Cohen, a leading whistleblower law firm where Havian was a partner at the time, filed a complaint on behalf of the federal government, several states and numerous localities, as well as a former JM Eagle quality assurance engineer who said he was fired after raising questions about the quality of the company’s pipe.
The lawsuit, which covered pipe made from 1996 to 2006, accused JM Eagle in its quests for profits of using inferior resins and other raw materials, running its pipe-making machines too fast and “cherry picking” pipe for testing to fool certifying bodies, according to a second amended version of the complaint.
In the years before the first case was unsealed in 2010, the federal government investigated the whistleblower’s complaint, which alleged violations of the False Claims Act, a Civil War-era law intended to ensure the military is not sold shoddy goods by suppliers. It allows for private whistleblowers to receive up to 30% of damages in certain cases.
The government ultimately decided not to pursue the case, nor did California or several other states under their own false claims statutes — which JM Eagle has pointed out in its defense. Havian said that is because the pipe was largely purchased by local governments and water districts. He also notes that the federal government’s investigating agent testified on behalf of the plaintiffs.
The first trial, conducted over two months in 2013, was reduced to five “exemplar” plaintiffs — the city of Palmdale, the Thousand Oaks water district and public water suppliers in Virginia and Nevada, including Reno — with the rest to be considered later. The plaintiffs introduced company emails and documents that raised questions about pipe quality, and presented internal test results that they argued declined over time, according to a PowerPoint presentation in court files that Havian said was displayed during closing arguments.
The company says the plaintiffs seized on the results of tests on pipe under development or that were used to ferret out manufacturing problems. It also has accused the whistleblower, John Hendrix, of being a disgruntled employee fired after seeking a kickback from a customer who had complained about receiving bad pipe — producing a signed affidavit from the customer saying Hendrix asked him to seek out a larger settlement and give him some of the proceeds.
Hendrix, who shared in the Formosa settlement, was not made available for comment but has previously denied the allegations. Havian called them false.
Attorney David Bernick, who represented the company in the damages trial, said Havian exploited Wang’s efforts to build a company assembled from aging factories acquired from other pipe companies, first by Formosa and later by Wang, who bought out Formosa Plastics’ interest in 2005. He said the company essentially had a “very strong record” of compliance.
Havian “created a picture of sloppy manufacturing, essentially what it was,” Bernick said. “Yes, there were problems at these plants in particular points in time — various plants in various places. But that doesn’t mean that these plaintiffs got bad pipe.”
The jury in the first trial found that JM Eagle “knowingly” and “falsely represented uniform compliance” with standards of the American Water Works Assn. and UL — two key certification organizations — to the five plaintiffs, which were building 26 pipeline projects. That has left JM Eagle still liable for penalties of up to $260,000, a nominal amount compared with the potential damages the company feared.
The five cities and districts either declined to comment or could not be reached for comment, or referred questions back to their attorneys.
Following the first verdict, Phillips & Cohen issued a news release proclaiming that the company potentially faces “billions of dollars in damages” after a trial that “exposed JM Eagle’s deliberate effort to cut costs by using shoddy manufacturing practices to make weaker but more profitable polyvinyl chloride (PVC) pipe.”
JM Eagle sued for defamation and trade libel. Its interpretation of the verdict is that the company was found not to produce every single stick of its pipe to industry standards, a benchmark no company could reach.
A California appeals court found in favor of the law firm, ruling that the release was protected speech and describing “the substantial evidence presented at trial detailing JM’s decade-long policy of emphasizing production quotas over quality control, essentially unchallenged by JM, as well as the specific findings of the jury that JM knowingly misrepresented its PVC had been manufactured and tested in a manner that assured it had the strength and durability by applicable industry standards.”
A JM Eagle spokesman pointed out that the opinion was not unanimous and that the majority was only summarizing, not substantiating, the evidence presented by the plaintiffs. He also said the appellate court noted in its opinion that the trial court found that as a matter of law it was untrue that JM Eagle was found liable for making and selling faulty water pipes. He said Wu’s ruling in the whistleblower case further supports that point.
Havian also was sued for racketeering by the company, which accused him of abetting Hendrix in copying emails, recording conversations and otherwise illegally gathering evidence. A New Jersey appeals court ruled that the dispute should be settled in Wu’s court as part of the whistleblower proceeding.
“The whole litigation was scorched-earth,” Havian said. “I’ve never had a case where I was sued for racketeering or anything else by a defendant. They never gave up. They never will give up.”
After the loss in the first trial, JM Eagle brought in Bernick, a high-profile trial attorney and former Philip Morris general counsel, for the damages phase. Bernick said the case posed an existential threat to the company even though Wang said it sells enough pipe annually to circle the globe multiple times — with only 0.1% having defects, 70% of which can be traced to installation.
“It’s all a disaster in one place only, which is in federal court in the Central District of California and in the eyes of the plaintiffs,” Bernick said.
The class-action suit faces a certification hearing, which essentially would establish whether there is a class of plaintiffs with common claims that can best be resolved together instead of individually. It is open to private purchasers of JM Eagle pipe and government entities in more than two dozen states.
Plaintiffs attorneys filed an updated complaint last month after the whistleblower ruling at the request of Wu, who is also presiding over the class-action suit. Even if he grants certification, there would have to be a jury trial on what damages may be due.
“We will attempt to come up with a model of what that company should give back,” said David Birka-White, the lead attorney on the class-action suit, who noted Wu had issued a tentative ruling in 2012 in favor of class certification before the whistleblower trials.
Bernick said Wu’s recent decision not to award damages dealt a severe blow to the class-action suit. “The class action is kind of tag-along,” he said.
Nockleby, however, cautioned that the class-action lawsuit asserted causes of action not in the whistleblower case — such as false advertising — and seeks punitive damages, so it is “not bound by the same damages constraints.”
Wang acknowledged the legal battle damaged the company’s reputation, especially after the whistleblower lawsuit was unsealed and later after the first verdict. He declined to comment on the company’s finances but said it lost business and has not been able to sell in the Nevada and Virginia markets. “Our reputation was not shattered, but it was damaged,” he said.
Whatever damage the case may have inflicted, JM Eagle is still the world’s largest plastic pipe maker, according to a February report by IBISWorld. It stated that the company had a 12.4% share of the U.S. market, just about twice the size of its largest competitor. Completed before the coronavirus outbreak was in full swing, the report projected JM Eagle would grow revenue to $2.5 billion this year.
The company could possibly make any appeal and the class-action suit go away by agreeing to a settlement. Wang said that after 14 years, that won’t happen. “Absolutely not,” he said.
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