AG passes on whistle-blower suit

APRIL 6, 2010

By KATY GRIMES

Despite his reputation as a consumer activist, California Attorney General Jerry Brown has decided against joining a controversial lawsuit against the nation’s largest PVC manufacturing company. The case involves four states, and 43 California  municipalities and water districts, with others poised to join the case.

Three years ago, an employee of the $1.6 billion Los Angeles-based JM Eagle PVC pipe manufacturing company filed a whistle-blower lawsuit two months after he was terminated. The suit was unsealed Feb. 8, 2010 in Los Angeles in U.S. District Court, and then more than 40 government entities which purchased water and sewer pipes from the company formally joined the lawsuit, seeking millions of dollars in damages.

However, the lawsuit has taken on a life of it’s own. Although many municipalities and four states are joining in the lawsuit, the federal government, Florida and California have declined to participate after conducting independent investigations.

The lawsuit does not list any specific cases of water or sewer pipe failures but alleges that JM Eagle supplied “substandard” PVC water and sewer pipe to municipalities and cities from 1997-2005. At issue is the life span of the PVC pipes, according to Phillips & Cohen, a Washington law firm that specializes in whistle-blower cases and is representing the terminate employee. The suit charges that from 1997 through 2005, more than half of the PVC pipe made by JM Eagle had tensile strengths below the minimum required.

Lanny Davis, JM Eagle’s attorney and former White House counsel, argues that the former employee “whistle-blower” John Hendrix, was terminated by JM Eagle in 2006, in part due to allegedly offering a customer, Sheldon Site Utilities, Inc., an inflated claim to repair a leaky pipe with a request that Sheldon send him a kickback. Sheldon alerted JM Eagle and Hendrix was terminated.

Hendrix has denied the allegations in published reports. Phillips & Cohen, attorneys for Hendrix, contend that Hendrix was terminated after sharing concerns with JM Eagle management that the tensile strength of the PVC pipe was below allowable standards to qualify for certification from Underwriter’s Laboratories, which provides the actual seal of approval stenciled on the pipes.

However, Davis said while the alleged kickback scheme by the former employee is serious, the central issue is the reputation of the successful PVC pipe manufacturer.

Davis explained that JM Eagle’s 23 North American plants regularly go through unannounced audits and inspections, as well as having independent third party evaluations of their product, in its normal course of business. Of the 43 municipalities joining the lawsuit, according to Davis, none of them ever contacted JM Eagle to complain about faulty product, leaving some wondering if the financially strapped state and local governments are using the justice system for future revenue windfall. According to Davis, one reason that so many municipalities chose to participate in the whistle-blower lawsuit is that false claim cases are so damaging to the companies being accused, large monetary settlements are usually paid before cases ever get to trial.

Davis said that only the Nevada Corrections Facility had contacted JM Eagle with a complaint of burst pipes at its facility prior to the lawsuit. JM Eagle investigated and found that it had been incorrectly installed. A third-party laboratory was hired to investigate as well, and also found that the burst pipes were the result of  a very “aggressive” and incorrectly done installation by an outside contractor.

The federal government, as well as Florida and California state governments, independently conducted investigations, and each declined to participate in the whistleblower lawsuit.

California Attorney General Jerry Brown’s Los Angeles office spent three years investigating the case against JM Eagle before declining to intervene. AG Deputy Press Secretary Evan Westrup said: “After receiving the complaint, our office conducted an independent investigation into the matter and declined to intervene. We do not comment on our internal investigations or deliberations and do not discuss the details of these decisions.  Declining to intervene is considered a neutral action.” However, Davis reported that Attorney General Brown is “pro-consumer,” yet chose not to intervene.

The U.S. Attorney’s office in Los Angeles conducted its own mini trial. It demanded random samples of the pipe manufactured within the three previous years, and conducted tests at its own laboratory before declining to intervene in the lawsuit.

JM Eagle announced Monday that it is issuing a 50-year warranty against manufacturing defects for its pipe products, and will retroactively cover plastic pipe products manufactured by JM Eagle and its predecessor J-M Manufacturing. JM Eagle’s 50-year warranty is in effect, offering a 50-year stature of repose on their product.

However, Mary Inman, an attorney with Phillips & Cohen, said the fine print of the warranty tells another story, and only applies to pipe purchased after April 1, 2010. Inman was critical of the announcement of the new 50-year warranty, as the pipes were originally represented to last 100 years, according to Inman. “Test results show that they last a fraction of that time,” said Inman. “PVC pipes will have to be replaced sooner than expected – a budget nightmare for cash-strapped cities and localities.” Inman said that “JM Eagle offering to replace defective water and sewer pipes is like Toyota offering consumers a new accelerator pedal for a faulty car.”

New York, New Mexico, Indiana, Illinois and the District of Columbia are ready to sign on to the lawsuit, demonstrating “a real significance in the case,” according to Inman. She somewhat discounted the decisions by the federal government and states not to participate in the lawsuit explaining, “States and the federal government don’t buy the pipes. It’s the municipalities and water districts that buy the pipes.”

However, Inman also explained that most states do not allow municipalities to represent themselves in cases such as this, unlike California’s municipalities, of which 40 water authorities are participating in the lawsuit. The states of Nevada, Delaware, Tennessee and Virginia all require municipalities to be represented by the states’ attorneys general.

While Inman alleges that JM Eagle knowingly sold sub-standard water and sewer pipes to cities, water districts and municipalities, Davis explained that proving that JM Eagle committed fraud and knowingly sold defective pipes is the goal for the plaintiffs. “The plaintiffs will plead innuendo, not facts,” asserted Davis, “but credibility of the plaintiff is an issue when fraud is alleged.”