JM Eagle is one of the few recent manufacturing success stories in Los Angeles, which has seen its industrial base shrink over the last two decades.

The company, which moved its corporate headquarters to Los Angeles in 2008, is the world’s largest maker of plastic pipe. Its products are used in water and sewage lines and electrical and gas distribution systems across the globe.

But now, JM Eagle finds itself in a protracted legal battle that is damaging its reputation and could perhaps cost the plastics powerhouse hundreds of millions of dollars in damages.

Nevada, Virginia, Delaware, Tennessee and 43 municipalities and water districts, including the Los Angeles Department of Water and Power, have joined a lawsuit accusing the company of manufacturing poor quality PVC pipe since at least 1997.

The whistle-blower lawsuit, unsealed in February, also accuses JM Eagle of falsifying quality assurance tests and misrepresenting the strength of its pipe to customers.

JM Eagle denies the allegations, and now is making aggressive efforts to clear its name.

The normally press-shy company recently brought on former White House counsel Lanny Davis to handle the public relations nightmare. It’s also fought back on its Web site, asserting the quality of its products and providing results from testing it commissioned on the suspect PVC pipe.

What’s more, it’s adopted a slash-and-burn legal offensive against its chief accuser, whistle-blower John Hendrix. The former JM Eagle engineer is accused by the company of being involved in a kickback scheme.

“Credibility is part of the case since it was Mr. Hendrix’s contention that this was fraud,” said Davis, who is working on the case with attorneys at the Los Angeles office of Sheppard Mullin Richter & Hampton.

Mary Inman, an attorney at Washington, D.C.’s Phillips & Cohen, a firm that specializes in whistle-blower lawsuits and which brought the suit, said the kickback allegations are unfounded.

“They are clearly in damage control mode, that’s why they hired Lanny Davis,” Inman said. “But I feel it’s been dialed up a notch too much. It’s one thing to push back hard and another thing to cross the line into blatant falsehoods.”

Hendrix filed the whistle-blower suit against JM Eagle in January 2006, about two months after he was allegedly fired for writing in a memo to company executives that the tensile strength of its PVC pipe was below industry standards. Under federal and state statutes, whistle-blower lawsuits allow private citizens to bring claims of wrongdoing on behalf of government agencies.

The lawsuit prompted a three-year investigation by the U.S. Attorney’s Office in Los Angeles, but in the end prosecutors decided not to bring any charges pertaining to the pipe quality.

Also, the company notes that the attorneys general for Florida and California – which completed its own independent investigation – declined to join the case.

However, the case is still in its early stages. Five more states – New York, New Mexico, Illinois, Indiana and Washington, D.C. – have yet to decide whether to participate. A preliminary hearing in the case has yet to be set, but it could be years before the matter gets resolved.

“If it takes 100 years to make it clear that our pipe quality meets or exceeds industry standards, we’re prepared to fight that long,” said Marcus Galindo, a spokesman for JM Eagle, in a statement to the Business Journal.

The beginnings

Formosa Plastics Corp., a Livingston, N.J.-based subsidiary of Taiwan’s Formosa Plastics Group, formed JM Eagle’s predecessor company J-M Manufacturing Co. in 1982. Formosa Plastics Group was founded by Yung-ching Wang, Taiwan’s second-richest man at the time of his death in 2008.

The Wang family grew J-M to dominate the PVC pipe market, vertically integrating its plants by using Forma’s plastic resin in its PVC pipe, and implementing “large-scale, low-cost production,” according to industry trade publication Plastics News.

Wang’s youngest son, Walter Wang, became president of J-M in 2001 and purchased the company in 2005, splitting from his father. The younger Wang then acquired PW Eagle Inc., the U.S.’s second largest maker of PVC pipe, in 2007 and formed JM Eagle.

After the acquisition, Wang relocated the company’s corporate headquarters – but no factories – to Los Angeles. JM Eagle now operates 22 manufacturing plants throughout the United States, employs more than 1,000 and has annual sales estimated at $1.6 billion.

According to Hendrix’s lawsuit, the troubles at JM Eagle started in the mid-1990s, when the company began implementing cost-cutting measures that undermined the quality of its PVC pipe.

Hendrix claims JM Eagle hired people with little experience and formal training, and operated a boarding house near the company’s New Jersey headquarters because a large number of its employees “could not otherwise afford to live in the greater New York metropolitan area on their modest J-M salaries.”

The company allegedly began using cheaper and poor quality ingredients in its PVC compound, including a low-quality resin that was produced by Formosa.

The suit claims the cheaper products allowed JM Eagle to manufacture its PVC pipe faster and with less processing, increasing its production output. What’s more, the increased production rates resulted in a decline in the PVC pipe’s tensile strength, a measure of how much stress a pipe can handle.

Davis disputes those allegations, and he said tests commissioned by JM Eagle show that the company’s product meets standards set by Underwriters Laboratories, an independent product safety certification organization that tests more than 19,000 types of products each year, and the National Sanitary Foundation, a public health and safety company that sets standards for products.

“All of the pipes that JM Eagle has sold in the last five years, but you can go back 10 years or any time period, have been certified as consistent with industry standards by very credible testing and standard organizations,” Davis said.

However, Hendrix claims in the suit that JM Eagle’s PVC pipe did not meet standards. He alleges that company memos documenting internal tests conducted from 1996 to 2005 show that the PVC pipe didn’t meet industry tensile strength requirements 70 percent of the time, but that the company continued to represent to customers that its products did comply with standards.

“JM’s own documents show it knew it was failing the pertinent tensile strength tests,” Inman said. “And it continued to label every stick of pipe that it sold.”

Multiple breaks

It is unclear how many purchasers of JM Eagle’s PVC pipe have experienced problems due to the alleged substandard quality of the company’s material.

But some have reported problems, including Nevada and the Calleguas Municipal Water District in Ventura County.

Calleguas installed an 8-mile stretch of 16-inch JM Eagle PVC pipe in 1993 to carry reclaimed water to North Ranch and Oak Park areas in and around Thousands Oaks. A 2-mile stretch of the pipe first broke in 1999, and then again in 2003 and 2006. After that, the pipe began to continually break.

Donald Kendall, Calleguas’ general manager, said the breaking pipe resulted in holes as large as 25 feet wide, 100 feet long and 6 feet deep and cost about $4 million in repairs over the years.

“The water is under pressure, so if you get a crack, water comes pushing out and then starts pushing away the bedding material the pipe is in,” Kendall said. “And before you know it, you have a sinkhole in the road and a bunch of cracked pipe.”

Calleguas contracted with a laboratory to test the quality of the ruptured pipe, and the results showed that the plastic wasn’t fused together properly and didn’t meet industry standards, including tensile strength.

“This has never happened to us before,” Kendall said. “It is supposed to have a 50 to 100 year life.”

JM Eagle’s Davis said the bad batch of pipe installed by Calleguas was an anomaly. He said the company did an investigation when the water district reported the first leak in 1999, replaced 2,000 feet of pipe and reimbursed the district about $60,000 in costs.

“For subsequent incidents they claim had happened, they never came back to us and issued a complaint,” Davis said. “If they had they done so, we would have acted as honorably as we did before.”

Meanwhile, a main that supplies a large prison in Nevada with water was breaking several times a year and as result a three-quarter-mile section of pipe had to be replaced at a cost of $5 million.

Davis said JM Eagle and Nevada split the cost of testing the broken pipe and results showed that it was installed improperly.

Kickback allegations

As JM Eagle prepares to defend itself against claims of bursting pipes, the company has fired back at Hendrix, who handled product assurance for the company, including customer complaints.

JM Eagle issued a sworn affidavit in February by a pipe buyer who claims Hendrix offered him a kickback deal. In the affidavit, William Sheldon, president of Sheldon Site Utilities Inc. in Poway, CA, said he purchased water pipe from a JM Eagle distributor.

Sheldon claims that the pipe started to leak after it was installed, and it cost about $30,000 to repair. Sheldon further alleged that Hendrix called him and told Sheldon that if he would inflate his claim to $95,000 to $103,000, he would then be able to get Sheldon a settlement between $75,000 and $76,000 within two weeks.

In a later phone call, Sheldon claims he asked Hendrix why he was suggesting the he inflate the claim, and Hendrix said “after getting your money and cashing the check, I will send you my address so you can compensate me for my efforts on your behalf.”

Hendrix’s attorney Inman dismissed the kickback allegations as a legal tactic.

“It’s the first thing that any defendant company does when a false claims act has been brought against them, blame the messenger,” Inman said. “The oldest story in the book is to vilify the whistleblower.”