A recently-unsealed lawsuit against a maker of PVC pipe should serve as a powerful reminder to the manufacturing sector that its businesses may be vulnerable to expensive False Claims Act litigation.

Under the federal False Claims Act, any person with knowledge of fraud against the United States government may file a lawsuit on behalf of the government against the government contractor that committed the fraud. The individual filing the suit, referred to as the “qui tam plaintiff,” receives a portion of the recovery if the suit is successful, with the remainder of the recovery going to the government. The federal government may choose to intervene in the suit, or the suit may continue with only the qui tam plaintiff suing the defendant if the federal government chooses not to participate. False Claims litigation has been prevalent. During the 12 months ending September 30, 2009, the federal government secured more than $2.4 billion in civil penalties under the False Claims Act.

Many states have enacted their own false claims laws that closely track the federal statute. While the federal government declined to intervene in this action against PVC pipe manufacturer JM Eagle, the states of Nevada, Virginia, Delaware, Tennessee and 42 California municipalities chose to intervene and move forward with the case, which is pending in federal court in Los Angeles (United States ex rel. John Hendrix, et al. v. J-M Manufacturing Company, Inc. and Formosa Plastics U.S.A., Case No. CV-06-0055).

The false claims suit against JM Eagle alleges that from 1997 through 2005, at least half of the PVC pipe manufactured by JM Eagle had tensile strengths below the minimum required by both industry standards and JM Eagle’s contracts. The suit further alleges that JM Eagle knowingly presented bills for its sale of substandard PVC pipes to federal, state and local governments for payment.

If the allegations are true and the JM Eagle pipes are substandard, then state and local governments who were sold the pipes will have to replace them long before the end of their 50-year lifespan. The qui tam plaintiff (also referred to as the whistleblower) is former JM Eagle engineer John Hendrix. He alleges that he was terminated after raising concerns about the substandard pipe to his supervisors.

The suit does not identify any instances of pipe or water system failures resulting from the use of JM Eagle’s alleged substandard pipes. Rather, the suit cites the results of various strength tests, and it states that the substandard quality could result in pipe and water system failures in the future.

JM Eagle, which claims to be the world’s largest manufacturer of PVC pipes, has denied all allegations of the whistleblower and interveners. The company has noted in press interviews that it was subject to unannounced visits from auditors who would perform tests on their pipes.

False Claims Act suits alleging that products are substandard are nothing new, as it is nearly impossible for the government to perform a quality check on every item purchased. These suits are particularly common with regard to defense contractors who, like JM Eagle, are expected to “self-police” the products they sell to the government. Here, JM Eagle’s pipes were required to meet standards set forth by Underwriters Laboratories and the American Water Works Association.

This case underscores the critical importance of internal quality controls for every manufacturer with government contracts. Proactive False Claims Act compliance is essential to every manufacturer who has government contracts.