Wane Ru had a plan to grow his paper-selling business. The chief executive of 8 Net Inc. decided to buy used cardboard from other businesses and resell it overseas, where there’s demand for recycled paper and cardboard.
So 8 Net moved into a much larger headquarters in the City of Industry and started his recycling initiative in 2012.
Industry, however, hasn’t made for a happy home. The private company claims the city has confiscated the metal bins it distributed to client companies to hold used cardboard, and the city is charging 8 Net impound and storage fees. Even worse, the company claims, there might be a conflict of interest because a city official is closely allied with businesses that compete with 8 Net.
The city claims there is no conflict and that 8 Net is simply refusing to abide by regulations that similar companies follow.
“No one is trying to keep 8 Net from operating,” said Stephen McEwen, an assistant city attorney for the city.
But 8 Net executives believe their company has been targeted. They claim the city’s actions have crippled their business and the whole cardboard recycling initiative is in danger of folding.
“Unless we get this resolved, we can’t continue our business,” said George Liu, 8 Net’s executive assistant.
The dispute has landed in court. 8 Net filed a lawsuit in Los Angeles Superior Court against Industry this month, alleging a conflict of interest and asking to be exempt from the city’s recycling regulations. Industry responded with a cross-complaint, asking for the company to pay overdue permit and impound fees.
Great fit?
The fight is a big comedown from the promise the company seemed to possess just a short time ago.
Founded in 2000, 8 Net grew to generate $35 million in annual revenue in 2009 by selling commercial paper products and office supplies. Then Ru developed the expansion plan.
“We started to think how we could help our printers and customers,” he said.
The company came up with the recycling plan. Instead of making businesses pay for a recycling service, 8 Net would pay the businesses for their old cardboard.
“We increase their productivity, safety and increase their income,” Ru said.
So he integrated cardboard collections into the business model. It’s good for the environment, he said, and he believed it could increase revenue by $20 million within two or three years.
The City of Industry appeared, at the time, like a great fit for 8 Net’s expansion as it advocates for businesses to ramp up recycling efforts.
8 Net knew it could pay for old cardboard and sell it for a profit in China, where it’s recycled into new cardboard. Indeed, paper mills in China purchased more than 7.6 million tons of old cardboard and paper waste last year from the United States alone, maintaining a market valued higher than $1 billion.
Last year, 8 Net said that it paid more than $200,000 to companies in return for used cardboard. Crews collected cardboard from more than 100 businesses located in 19 Southern California cities, hauling the materials back to 8 Net’s headquarters. Ru said his company pays about 2 cents a pound, or $40 a ton.
Even after paying to ship the cardboard to China, 8 Net could make a profit. Chinese mills, on average, paid $183 for every ton of paper waste that came from L.A. ports last year. Today’s going rate is less, about $165 a ton, according to data from Risi Inc., a Massachusetts firm that tracks the global waste paper market. The market is now somewhat stagnant but has rebounded after plummeting in 2009, Risi Senior Economist Hannah Zhao told the Business Journal.
Still, Ru believes 8 Net – which collected about 5,000 tons of cardboard last year – could boast a strong return on its investment. That’s why 8 Net needed additional space and moved to Industry, where a new 160,000-square-foot facility doubled the size of its former Cerritos headquarters.
The move was a hefty investment. The company agreed to lease the space for five years, paying about $1 million annually – more than double its previous rent.
Dispute arises
Things soon went awry. 8 Net alleges that city officials confiscated 33 wire bins that the company issued to nearby businesses. The bins are designed to hold and organize cardboard and other recyclable materials so 8 Net can easily collect the commodities, said Liu, the 8 Net executive assistant. The city then charged 8 Net multiple impound and storage fees, totaling $36,300.
McEwen, the assistant city attorney, said 8 Net does not abide by recycling regulations adopted by Industry. Any business that wants to collect recyclable materials within city limits must first obtain a permit from the city. A permit is $500 each year, plus $200 for any additional type of recyclable material collected. Bins used to collect materials must also bear a city-issued decal, which is $10 a bin.
Municipalities statewide are required to report how much solid waste that’s diverted from landfills each year. Industry has elected to closely regulate businesses that pick up recyclable materials in an effort to provide the most accurate figures to the state, McEwen said.
He said the city is not trying to keep 8 Net from operating.
“They just haven’t complied with those regulations,” he said.
However, Thomas P. Brown IV, an attorney representing 8 Net, argues the company should not fall under the same rules as other recycling services. He cited a 1994 California Supreme Court decision that protects companies from municipal ordinances that prohibit them from collecting recyclable materials acquired through compensation.
“What this company is trying to do is create a market where one didn’t exist before,” Brown said. “They’re only buying things they can resell. That’s the great American way.”
Conflict deepens
But Ru believes his company has been singled out. He claims Industry officials, including the city’s recycling coordinator, Jeff Duhamel, harass 8 Net’s clients and demand they stop selling their materials to Ru’s firm.
As a result, he claims, 8 Net’s business has fallen significantly. As of July 31, it had paid other businesses $48,000 for their cardboard – less than half of what it bought in the same period last year. Its clientele was also cut in half, down to about 50 companies.
“Basically our whole business has stalled,” Liu said.
They point out that Industry contracts with Waste Systems Technology Inc. – where Duhamel serves as president – to operate its recycling program. Industry pays the firm $147,060 a year, city records indicate.
Duhamel has also served as a consultant to Valley Vista Services Inc., which is Industry’s exclusive trash hauler.
Brown, 8 Net’s attorney, insists Duhamel must have a conflict of interest. After all, 8 Net could take business away from the companies that pay Duhamel.
McEwen, however, provided a list of about 40 businesses he says collect recyclable materials. Several of those businesses, he said, operate much like 8 Net.
“He is not enforcing regulations in a way that benefits one company over another,” McEwen said.
Industry earlier this month listed Duhamel as its recycling coordinator on the city’s website. But shortly after 8 Net filed its lawsuit, his name was removed.
“They’re trying to cover up their tracks because they know they’ve done something wrong,” Brown said.
McEwen said it would be best for Duhamel not to comment for this article. But the lawyer insisted it’s a mere coincidence that the recycling coordinator’s name was removed from the website.
“It’s really a nonissue,” McEwen said. “There’s no significance whatsoever. It’s no secret he’s the recycling coordinator.”
