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Lumber Liquidators Holdings Inc. Stock Up 14% on Favorable Ruling: Here's What You Need to Know

By Jason Hall - Apr 5, 2016 at 12:22PM

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A California judge ruled that the flooring retailer had done its part to meet a key disclosure law.

This ruling is a step forward after more than one year of controversy. Image source: Lumber Liquidators.

What: Shares of specialty flooring retailer Lumber Liquidators Holdings Inc. (LL 5.35%) are up 14.5% at 12:03 p.m. ET on April 5, following a California court
ruling that's very favorable for the company. 

So what: Lumber Liquidators had been accused of violating Proposition 65 in California, which requires businesses like Lumber Liquidators to notify Californians about significant amounts of chemicals in the products they purchase.

The issue at hand for Lumber Liquidators is tied to Chinese-made laminate flooring the company sold in prior years. Many kinds of laminate products, including laminate flooring as sold by many flooring retailers including Lumber Liquidators, as well as office furniture, carpet, and many other common household items, contain formaldehyde, which can cause irritation to the lungs and eyes at high concentrations, and can potentially cause cancer with very prolonged exposure to high levels of emissions. 

A group called Global Community Monitor filed suit against the company, accusing it of violating Prop 65. However, a California state judge issue a preliminary decision dismissing the claims that Lumber Liquidators failed to meet its obligations under Prop 65. If the order becomes final, it will be a major step forward -- and away -- from what has been easily the worst patch in the company's history, following the March 2015 60 Minutes story alleging that the company's Chinese-made laminate flooring had potentially dangerously high formaldehyde emissions. The story has continued to drive customers away and also led to a number of lawsuits, as well as several investigations by both California and federal government agencies. 

While only a preliminary ruling, this is a definite "win" for Lumber Liquidators, especially following a favorable settlement in late March with the California Air Resources Board, which found no violation by the company with regard to its Chinese laminate. As part of an agreement with CARB, it paid $2.5 million, and also agreed to implement new procedures to ensure its products would continue to meet California formaldehyde standards. 

Now what: There's still an ongoing investigation by the U.S. Consumer Products Safety Commission, which released preliminary results from product testing earlier this year. While the results of testing the CPSC worked with the CDC to complete indicated potentially high levels of formaldehyde emissions, the risk wasn't higher than many other things consumers are regularly exposed to, and the report indicated that it was highly unlikely that removing the flooring would be a necessary step. But until the final investigation by the CPSC is complete, there's still risk. 

But at the same time, the rulings are trending in the company's favor, and it seems less and less likely that the CPSC will come down hard on it, which has not only removed the product from its stores, but also invested in a testing program -- implemented and controlled by an independent third party -- for existing Chinese laminate customers. 

The recent rulings not only indicate the company has done little to nothing wrong, but also that regulators are satisfied with the steps it has taken to address this problem and make sure it doesn't happen again. This probably also significantly reduces the likelihood that any class action lawsuits alleging consumer damage would hold up in court. I'm no lawyer, but when regulators and the courts say a company hasn't done anything wrong, it's hard to sue them for wrongdoing. 

Bottom line, this is favorable news, and hopefully it's some indication that the CPSC will also issue a favorable finding when its investigation is complete. But at the same time, as long as this story stays in the news, people will continue to see "Lumber Liquidators" and "Cancer" in the headlines together. And that's not a good thing. But at least the company should, very soon, be able to move beyond this chapter.

Hopefully, it can close the book completely in the coming months and completely distance itself from this awful story. The sooner it can move completely beyond it, the sooner customers will forget and start coming back in greater numbers. 

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