On May 28, the Judicial Panel on Multidistrict Litigation will hear oral arguments about whether to consolidate and centralize class action lawsuits against Lumber Liquidators. Plaintiffs have filed complaints in courts across the country, alleging that formaldehyde emissions from the retailer’s laminate flooring exceed health standards. These plaintiffs are seeking damages under various tort and contract theories including claims for breach of warranty, negligent misrepresentation, fraud, unjust enrichment, and violations of consumer protection laws. Lumber Liquidators denies such allegations and claims that its advertising and product labels confirm compliance with formaldehyde emission limits. California is the only state that regulates the amount of formaldehyde in building materials and home furniture. There is currently no federal standard for formaldehyde in wood products, but the Environmental Protection Agency is working to issue a regulation that would restrict emissions of formaldehyde and impose testing requirements to ensure that products sold in the United States comply with those limits.
To reassure customers of the quality and safety of its flooring, Lumber Liquidators supplied free home air testing kits to measure the formaldehyde emissions from laminate flooring. However, these kits have only resulted in additional litigation for the company, as a class action lawsuit has been filed against Lumber Liquidators and the laboratories it hired to analyze the testing kits, alleging violations of the Racketeer Influenced and Corrupt Organizations (RICO) Act. While results from the testing kits showed that more than 97% of customers’ homes had acceptable indoor formaldehyde levels, these plaintiffs hired other companies to conduct air testing and found that the formaldehyde in their homes that far exceeded minimum risk levels. The suit claims that Lumber Liquidators and the laboratories engaged in a pattern of racketeering through mail and wire fraud to conceal the true levels of formaldehyde emissions.
In addition to consumer lawsuits, Lumber Liquidators is facing investigations by attorneys general in several states, and a derivative complaint was filed in Delaware chancery court against the board of directors. The company also recently disclosed that the U.S. Department of Justice is seeking criminal charges against it for violations of the Lacey Act, an environmental conservation provision that bars imports of illegally logged wood.
The civil and criminal allegations against Lumber Liquidators are negatively impacting its financial performance: Despite strong sales in January and February, sales dropped by 13% in March and overall the company lost $7.8 million (or 29 cents a diluted share) in the first quarter of 2015—whereas in the first quarter of 2014 it had a net income of $13.7 million (or 49 cents a diluted share). In addition, shares of Lumber Liquidators stock have fallen nearly 50% this year, and the company claims to have incurred more than $15 million in defense costs so far.