News | November 15, 2013

JM Eagle Faces Billions In Damages After Jury Finds JM Liable For Fraud For Making And Selling Faulty Water System Pipes

Formosa Plastics agrees to pay $22.5 million settlement

Los Angeles, CA /PRNewswire/ - A federal jury unanimously agreed last night that JM Eagle, which claims to be the largest pipe manufacturer in the world, knowingly manufactured and sold to government entities substandard plastic pipe that was used in water and sewer systems in various states around the country – opening JM Eagle up to potentially billions of dollars in damages.

As a result of the decision, JM Eagle, formerly known as J-M Manufacturing, will have to pay an as yet-undetermined amount of damages to three states – Nevada, New Mexico and Virginia -- and 42 cities and water districts that joined a "qui tam" (whistleblower) lawsuit, as well as dozens of other states, cities and water districts that bought JM Eagle pipe but did not join the lawsuit. The trial exposed JM Eagle's deliberate efforts to cut costs by using shoddy manufacturing practices to make weaker but more profitable polyvinyl chloride (PVC) pipe.

"States and water districts that are covered by this lawsuit spent $2.2 billion to buy JM Eagle during the 10-year period JM was lying about the long-term strength of the pipe," said Eric Havian, an attorney with Phillips & Cohen LLP who argued the case on behalf of the plaintiffs. "Those entities now are entitled to recover a substantial portion of that cost plus the cost to replace the shoddy pipe much sooner than expected. This likely will mean damages could total billions of dollars because it’s expensive and disruptive to replace water pipe."

For instance, Calleguas Municipal Water District, in Thousand Oaks, California, had to spend $4 million to replace JM Eagle pipe after the water pipe that was part of one project broke and leaked seven times.

"JM Eagle defrauded its customers for 10 years," Havian continued. "The jury obviously decided that JM Eagle management cared only about the amount of pipe JM produced, not the quality of that pipe. JM Eagle deceived outside inspection agencies and ignored over a decade of failing test results. The jury's conclusion that JM Eagle committed fraud was based on a lot of evidence."

Meanwhile, Formosa Plastics, which was formerly the owner of JM Eagle, has agreed to pay $22.5 million to those same government entities to settle claims in the qui tam lawsuit about its role in the fraud. The settlement was reached shortly before the JM Eagle trial began in September but wasn't announced at that time. The court must approve the settlement before it is final.

During the seven-week civil trial in federal district court in Los Angeles, more than 30 witnesses testified, many of them current and former JM Eagle employees, including JM Eagle President and sole owner Walter Wang. The jury also saw over 300 JM Eagle documents, including emails and internal test reports.

"The support of Nevada Attorney General Catherine Cortez Masto, Virginia Attorney General Ken Cuccinelli and New Mexico Attorney General Gary King was important to the success of this case and has made a big difference for their taxpayers," said attorney Havian. "I particularly want to thank Nevada Attorney General Masto and Nevada Deputy Attorney General Susan Stewart for the huge efforts they have made in this matter to recover funds for Nevada taxpayers."

Nevada was one of the largest purchasers of JM Eagle pipe and experienced many failures of that pipe.

Nevada Attorney General Catherine Cortez Masto:
"The PVC pipe has already failed across the Silver State and will have to be replaced sooner than expected -- a budget nightmare for our cash-strapped state, cities and local agencies. We know from firsthand experience that this PVC pipe will prematurely leak or break and can jeopardize lives. Today's verdict demonstrates that manufacturers cannot get away with fraud that puts lives at risk.  I will continue to fight to protect the State of Nevada and taxpayers against big manufacturers who fail to meet key standards."

Virginia Attorney General Ken Cuccinelli: "We joined this lawsuit in 2010 to hold JM Eagle accountable to Virginia taxpayers for misleading our localities into buying substandard pipes for their water and sewer systems. The trial showed the company's attempt to cut costs with shoddy manufacturing practices resulted in weaker PVC pipes, which ended up leaking and costing Virginia localities millions to repair or replace. The jury's decision affirmed that JM Eagle is liable for falsely representing the quality and durability of its product." 

New Mexico Attorney General Gary King: "JM defrauded New Mexico taxpayers when they sold us sub-standard products that jeopardize 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."

San Diego City Attorney Jan Goldsmith: "We are pleased with the jury verdict and that JM Manufacturing will be held accountable for supplying substandard products to our city."

The trial was the culmination of seven years of litigation that began in 2006 when the whistleblower lawsuit was filed in federal district court in Los Angeles. JM Eagle launched rancorous attacks against participants after the court unsealed the case in 2010 and made it public. In the past three years, over 1,700 filings filled the court docket and dozens of hearings were held on individual issues.

District Court Judge George H. Wu, the presiding judge, divided the case into two phases. The first trial determined whether from 1996 to 2006 JM Eagle lied about whether its pipe met strength and durability standards required by government specifications.

The claims in the trial focused on those of five government entities that were selected from the larger group as "exemplar" plaintiffs as a way to streamline the trial: Calleguas Municipal Water District, in Thousand Oaks, California; South Tahoe Public Utility District in South Lake Tahoe, California; the Palmdale Water District in Palmdale, California; the city of Reno, Nevada; and the city of Norfolk, Virginia.

A separate trial will be held to determine the amount of damages. The date for that trial hasn't been set yet. Although the trial involved just five plaintiffs, all the states, cities and water districts named in the case could share in the damages that are recovered.

Phillips & Cohen filed the original qui tam complaint in 2006 on behalf of John Hendrix, a former engineer in JM Eagle's product assurance division in New Jersey.  The lawsuit was brought under federal False Claims Act and similar state and local false claims laws.

The plaintiffs were represented by Phillips & Cohen and two other law firms, McKool Smith and Day Pitney LLP.

More information is available on the Philips & Cohen website:

Case citation: United States and States of California et al. ex rel. John Hendrix v. J-M Manufacturing Company, Inc. and Formosa Plastics Corp. U.S.A., Case No. ED CV-06-0055-GW (C.D. of CAL).

Source: Phillips & Cohen LLP

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