Plastic pipemaker JM Eagle has escalated its fight against plaintiff lawyers who won the first phase of a federal whistleblowing case against it last month, hiring a celebrity attorney to accuse them of making “false and defamatory statements” about the company in the wake of the trial.
In a demand letter to winning lawyer Eric Havian of Phillips & Cohen, JM Eagle said Havian’s statements go far beyond the Nov. 14 findings of a federal jury in Los Angeles, and could cause the company to “lose millions of dollars in business.”
In this post-trial news release, Havian said JM Eagle “knowingly manufactured and sold to government entities substandard plastic pipe” that could cost billions of dollars to replace. The company says the jury found only that JM Eagle failed to universally comply with industry standards, however, not that it produced defective pipe.
I spoke with Havian last week about the case, and some of his comments are below. But on Dec. 5 U.S. District Judge George Wu again warned the parties not to talk to the press, and in a subsequent e-mail Havian told me "the plaintiffs intend to comply with that instruction." The demand letter was sent Dec. 6.
JM Eagle's complaint illustrates the nagging question at the center of this long-running case, which began as a sealed whistleblower suit in 2006: Did the company actually sell defective pipe? Answering that was complicated by Judge Wu's decision to split the case in two parts, with one jury determining liability under the False Claims Act and a second one determining damages.
Lawyers at Phillips & Cohen, who specialize in false-claims suits, unearthed lots of incriminating e-mails and internal communications suggesting JM Eagle may have sped up its production processes and sold pipe that had failed certain tests under pressure. However, the jury never heard conclusive evidence that a single piece of pipe failed to meet standards. Plaintiff lawyers were able to keep out of the trial tests the federal government had conducted on randomly selected pieces of pipe that showed it passed.
The feds declined to participate actively in the case after receiving those test results, although they still stand to recover a portion of any proceeds. The states of Virginia, Nevada and New Mexico along with a number of cities and sewer and water districts remain as active plaintiffs.
To go after the lawyers suing it, JM Eagle hired Anthony Michael Glassman of Glassman, Browning, Saltzman & Jacobs, whose celebrity clients have included Hugh Hefner and Nicholas Cage.
“You had no rational basis for the allegations,” Glassman said in his Dec. 6 letter to Havian, which was also distributed to JM Eagle executives. “The jury made no findings that any of the plaintiffs were defrauded or damaged, let alone ascribe a value to their purported damages.”
Suing the lawyers who are suing you is a rare and unusual strategy, partly because judges strongly discourage such tit-for-tat tactics and because most of what litigants say is considered privileged and beyond the reach of slander and defamation law.
"If the statements complained of were made in connection with litigation, that's different than statements made outside litigation or after it's over," said Lance Koonce, a media lawyer and partner with Davis Wright Tremaine in New York .
Hence JM Eagle’s references to Havian’s post-trial comments, which lawyer Glassman said were contradicted by Havian’s closing argument to the jury. Only one of the five representative plaintiffs presented evidence of faulty pipe, and in closing, Havian said “this is not a products liability case …it is not about substandard products and we do not have to show that in this phase of the case.”
In the post-trial news release, Havian said "JM Eagle defrauded its customers for 10 years," "deceived outside inspection agencies" and will have to pay damages to the plaintiffs -- all claims that were made in litigation, but not specific findings of the jury.
Winning a commercial defamation suit is a long shot under any circumstances. To prevail, plaintiffs must show somebody made a false statement that directly harms the company’s reputation, either knowing it was false or in reckless disregard for the truth. This so-called defamation per se is easier to prove than a product disparagement claim, where the company must also show “special damages,” or how much money it lost because of the false statement.
Most judges consider lawsuits attacking a company's reputation to be product-disparagement suits anyway, Koonce said, since the company's reputation is intimately tied up with the quality of its products. So would-be plaintiffs should be prepared to prove they actually lost money because of the false allegations.
“It's not the easiest thing to prove, but it can be proven if the facts line up," said Koonce, who co-writes a chapter on commercial defamation in a yearly textbook on New York commercial law.
The jury, in a 50-page special verdict, found that JM Eagle had presented “false or fraudulent” claims to government purchasers, because the company “falsely represented uniform compliance” with standards set by Underwriters Laboratories and the American Water Works Association.
Plaintiff lawyers presented testimony from a former UL executive who said based on the internal e-mails he saw, JM Eagle’s products probably wouldn’t meet the organization’s standards. Current executives of both standards organizations testified that JM Eagle’s facilities were audited frequently, however, and were never found out of compliance.
Havian, in an interview last week, told me he presented plenty of evidence during the trial to prove that JM Eagle altered its production methods so substantially as to violate the UL and AWWA standards. Those agencies test products once and then rely on periodic audits of production facilities to make sure a company is in compliance.
JM Eagle said it has been audited thousands of times without a violation, and that UL and AWWA representatives testified to that effect. But Havian told me the jury heard also evidence that JM Eagle employees “cherry-picked” products for the testing agencies and misled them in other ways.
While the trial was light on actual evidence of defective pipe, the City of Reno showed it suffered a failure due to voids in the plastic pipe. JM Eagle says it the failure was confined to three 20-foot sections and was caused by faulty test procedures before the line went into service, which was disputed at trial. But the company replaced 2,200 feet of line anyway.
“The reason they replaced the pipe is because they admitted it was pipe defects,” Havian told me. “You don’t replace a half a mile of pipe for free.”
When I asked him why the jury wasn’t shown the results of tests the federal government conducted on pipe it pulled at random from JM Eagle factories, he said it wasn't a big enough sample to prove anything. Asked why the other plaintiffs didn’t test pipe to see if it met UL standards, Havian said because that would be costly and disruptive.
“Where is the evidence?" he asked in response to my questions. "I don’t even understand what that means. The judge told the jury and the judge told the lawyers, this case is not about failures.”
JM Eagle’s general counsel, Camilla Eng, said she's equally puzzled by the jury’s finding that its pipe didn’t uniformly meet standards.
“What does that mean?” she said. The jury didn’t find that JM Eagle had sold defective pipe to the named plaintiffs, she said, or that it produced defective pipe at all.
The judge did provide the jury with extensive instructions on how to weigh the evidence, including the fact that they could rely on circumstantial evidence. By finding the company liable for fraud by selling pipe that didn't uniformly meet standards, the jury might have been saying the evidence convinced them that at least some pipe didn't meet standards even if none was before them.
JM Eagle is likely to challenge the jury's findings, however, since any manufacturer sells at least some defective products -- even GE's vaunted Six Sigma implies 3.4 defects per million -- and it will likely argue plaintiffs need to show more to succeed with a qui tam or false claims suit. JM Eagle extended its warranty to 50 years to help counter the plaintiffs' claims, including the cost of digging up and replacing the pipe.
That warranty extends past the 1996 date plaintiffs claim for when the alleged fraud occurred, to pipe produced since the company's founding in the early 1980s. The company is clearly betting that even if the case proceeds to the damages phase, plaintiffs will have a hard time proving they lost money because of the changes JM Eagle made to its production methods.
JM Eagle is owned by Walter Wang, son of the late Taiwanese billionaire Y.C. Wang, who built Formosa Plastics into an $86 billion industrial empire. Formosa bought Johns-Mansville’s PVC pipe business in 1982, and Walter bought out Formosa in 2005 for $100 million, expanding the business by purchasing Eagle two years later.
For a case that ultimately is about defective pipe, Havian didn't have much to say about what testing would show about the millions of feet of pipe JM Eagle sold between 1996 and 2008. In my experience, the first thing plaintiff lawyers do in a products-liability case, before even filing suit, is to get samples of the product in question and hire experts to tear them down and determine if they are defective. With the federal government and state attorneys general supporting him in the early phases, Hanian had full powers to pull whatever pipe he wanted from JM Eagle factories, and the feds did just that, apparently with unsupportive results.
Hanian said it was unrealistic to expect cash-strapped municipal water districts to dig up pieces of their own pipe for testing.
"This is not the typical case where the product is just sitting in a showroom," he said. "The cost of testing it would be ridiculous."
Under the law, however, contingency-fee lawyers like Phillips & Cohen must cover litigation expenses. In exchange they can seek treble damages and substantial fees.
Phillips & Cohen has already earned a substantial fee, having negotiated a $22.5 million settlement with former JM Eagle parent Formosa that includes an additional $5.5 million fees. So has the whistleblower who got the case going, a former JM Eagle engineer named John Hendrix who, according to a sworn affidavit from a customer, was soliciting kickbacks from customers in exchange for approving inflated warranty claims. The jury didn't hear about that, either, although Havian said the case was largely built on other evidence.
Hendrix stands to make millions off of the Formosa settlement and millions more if JM Eagle drops its aggressive offense and decides to settle. So far, the company is vowing to appeal. But Hendrix and his attorneys can well afford to wait.
