JM Eagle is the world's largest pipe manufacturer. It also used to be part of the world's largest producer of asbestos-containing products before it went bust, and could ostensibly be a Berkshire Hathaway (NYSE: BRK-B) (NYSE:BRK-A) company today if it hadn't been sold off during the bankruptcy. But if you've heard anything about this company, it's likely due to its seemingly never-ending faulty pipes lawsuit. For those just now getting up to speed on JM Eagle and its faulty pipes, here are the lawsuit's major moments -- and a lesson for us all.
JM Eagle 101
Bigger doesn't always mean better, but JM Eagle has worked hard to maintain its position as the largest pipe manufacturer in the world. According to JM Eagle, it's not sacrificing quantity for quality. JM Eagle enjoyed a claims rate of less than 0.1% between 2005 and 2009, with a majority of those claims related to non-manufacturing or installation errors. In 2010, JM Eagle made around 2 billion pounds of PV pipe in its 23 plants located across North America. The company's non-public status keeps its books a secret, but industry media source Plastic News estimated JM Eagle's annual sales in 2010 to be approximately $1.6 billion.
But let's take a step back -- to January 2006, to be exact -- when a former employee decided to turn JM Eagle's peaceful pipe dream world upside down.
In the Beginning
In January 2006, John Hendrix, a former JM Eagle employee, filed a whistleblower ("qui tam") lawsuit against JM Eagle and its former parent company, Formosa Plastics, for allegedly supplying faulty PVC piping to Nevada, Virginia, Delaware, Tennessee, San Diego, Sacramento, San Jose, Los Angeles, and 39 other California municipalities and water districts. As the whistleblower, Hendrix was eligible to receive between 15% and 30% of all damages awarded. Hendrix's lawyers stated the he was fired for voicing concerns that JM Eagle's pipe strength didn't meet certification standards.
Whistleblower cases were nothing new for the time. Hendrix's suit followed on the heels of several famous suits. In 2003, a Halliburton Company (NYSE:HAL) worker exposed the illegality of a $7 billion no-bid "emergency" fuel contract the company was awarded in the lead-up to the war in Iraq. In 2005, a General Motors Company (NYSE:GM) employee accused GM of proactively silencing signs of a flawed ignition switch in its Chevy Cobalt that was connected to at least 54 accidents and 13 deaths. General Motors Company would ultimately cough up $35 million in fines.
Whistleblowers were loved by some, loathed by others, but listened to by all. Like other whistleblowers before him, Hendrix's claims were serious accusations, and it took some time for stakeholders to attempt to sift through fact and fiction.
Fast Forward a Few Years
In 2010, after three years of evaluation, multiple third-party pipe testing reports, and tens of thousands of pages of documentation, the federal government found no wrongdoing by JM Eagle and decided to not join the lawsuit. Perhaps sensing victory, JM Eagle took to the offensive with a sworn affidavit from a former JM Eagle stating that John Hendrix suggested inflating a quality claim in exchange for a monetary kickback.
The company also requested that the lawsuit be dismissed because of a lack of evidence or, at the least, that the court strike "certain irrelevant and objectionable references" to ethnicity and nationality, notably the numerous mentions of company connections to Taiwan and Taiwanese nationals.
The court struck certain phrases, and also made several other rulings that "significantly gut this bogus lawsuit," according to Neal Gordon, JM Eagle's VP of marketing.
Around the same time, JM Eagle introduced a retroactive 50-year warranty on thermal plastic-pipe products, the first of its kind. In a press release, JM Eagle VP of Marketing noted that "JM Eagle is excited to bring this warranty to its customers, for the betterment of their business and the industry as a whole."
Despite the federal government and several state's lack of interest in pursuing prosecution, a federal jury found JM Eagle liable for committing fraud against public sector pipe purchasers in 2013. Plaintiff law firm Phillips & Cohen released a statement noting that, "[the] jury obviously decided that JM Eagle management cared only about the amount of pipe JM produced, not the quality of that pipe."
But JM Eagle wasn't ready to throw in the towel. It asked the court to overturn its verdict or grant a new trial and also sued John Hendrix and his law firm, alleging that they collaborated before Hendrix was fired to identify specific JM Eagle documents they would need to secure to bring the case. JM Eagle also sued Phillips & Cohen, specifically, for a "false and defamatory" press release issued after the ruling.
In January 2015, a federal judge ruled that only the five cities and water agencies that served as representative plaintiffs are allowed to recover damages. Of these, the City of Reno was the only entity that previously submitted a claim, which was previously paid for by JM Eagle.
Where are we now?
Nearly a decade after Hendrix first filed his fake claims act, the legal battles rage on. But let's leave the litigation to the lawyers -- there's no need to discuss who's in the wrong and who's in the right to learn from this legal laundry list. JM Eagle and its tough times teach us three important lessons.
First, no one is safe from lawsuits. Whether you're innocent or guilty, all it takes is an accusation to throw everything into turmoil. But not all lawsuits are equally influential. They're important to consider, but their claims don't always pan out. While JM Eagle is a private company, public companies are required to list all legal proceedings that may have a material effect on their business in their annual reports. This is an investor's insight into the legitimacy of lawasuits. As Berkshire Hathaway,, the same company that now owns the company that once owned JM Eagle, put it in their last report, the "variety of legal actions arising out of the normal course of business" won't touch its bottom line.
Second, legal battles are difficult. While America prides itself on "innocent until proven guilty," it can take a lot of time and money to move the needle one way or the other. That means that even for shareholders who don't believe their corporation to be culpable, it's important to consider how ongoing legal issues could distract management from making the most of your money. No one should bend over to predatory prosecutors, but JM Eagle might have done well to let some sleeping dogs lie. Its retaliatory lawsuits prickled the plaintiffs and turned this legal battle from boring and baseless to never-ending and nerve-wracking. Corporations must make judgments as to whether a lawsuit is worth the distraction it presents, and react accordingly. For investors, it's essential to watch out for warning signs of an oversized lawsuit. If things get personal or persist longer than they should, it might be time to park your money elsewhere.
And last but not least, investor or not, everyone should check their pipes.
Justin Loiseau owns shares of Berkshire Hathaway. The Motley Fool owns and recommends Berkshire Hathaway and Halliburton. The Motley Fool recommends General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.