J-M Mfg. Co. v. Phillips & Cohen LLP

247 Cal.App.4th 87

201 Cal.Rptr.3d 782

J–M MANUFACTURING COMPANY, INC., Plaintiff and Respondent,

v.PHILLIPS & COHEN LLP, Defendant and Appellant.

B256927

Court of Appeal, Second District, Division 7, California.

Filed May 2, 2016

Kendall Brill & Klieger, Richard B. Kendall, Laura W. Brill, and Nicholas F. Daum, Los Angeles, for Defendant and Appellant.

Glassman, Browning, Saltsman & Jacobs, Anthony Michael Glassman, and Rebecca Nell Kaufman, Beverly Hills, for Plaintiff and Respondent.

PERLUSS, P.J.

The law firm of Phillips & Cohen LLP, issued a celebratory press release following the verdict in false claims act litigation in which the jury found J–M Manufacturing Company, Inc. (J–M) had knowingly misrepresented to Phillips & Cohen's governmental clients over a 10–year period that its polyvinyl chloride (PVC) pipe had been manufactured and tested in a manner that assured it had the strength and durability required by applicable industry standards. J–M responded by suing Phillips & Cohen for defamation and trade libel. The trial court denied Phillips & Cohen's special motion to strike the complaint under Code of Civil Procedure section 425.16 (section 425.16 ), finding it was a question of fact for the jury whether the press release was privileged as a fair and true report of a judicial proceeding within the meaning of Civil Code section 47, subdivision (d). We reverse.

FACTUAL AND PROCEDURAL BACKGROUND

1. The False Claims Act Litigation

J–M manufactures and sells PVC pipes used in underground water systems. In 2006 Phillips & Cohen filed a federal qui tam lawsuit on behalf of a number of states, cities and local water districts asserting J–M had violated applicable false claims acts by knowingly misrepresenting that two types of pipes (C900 and C905) purchased by the plaintiffs had been manufactured in compliance with industry standards established by the American Water Works Association (AWWA) and the Underwriters Laboratories (UL) for long-term strength and durability.¹

To certify its pipes met the AWWA and UL standards, J–M had submitted qualification samples for testing. Based on those tests, J–M's production pipes were eligible to bear the corresponding AWWA and UL marks. However, AWWA and UL require the product to be "continually manufactured in such a manner as to maintain [its] long-term strength and durability" in conformity with the AWWA and UL standards. In other words, a product that bears the AWWA and UL marks must be substantially identical to the previously approved qualification samples. This requirement obligates a manufacturer to maintain uniformity in the manufacturing process so that every production pipe satisfies the standard. Any material variation in the process that produces a downward departure from the established standard is prohibited.

Trial of the qui tam action was to proceed in two phases. The first phase, which started in September 2013, concerned only issues of liability as presented by five representative governmental entity plaintiffs. Causation and damages were deferred to the second phase (if necessary). In its bifurcation order the district court described Phillips & Cohen's theory of the case: "Plaintiffs allege that J–M falsely represented that (a) all (not just some) J–M pipe satisfied the requirements, rules, and standards of [AWWA and UL] ...; and (b) all (not just some) of the pipe was manufactured in a substantially identical manner to the pipe that was originally determined to comply with the standards. Plaintiffs allege that J–M's statements were false because J–M did not properly manufacture ‘all’ its pipe as represented in (a) and (b) above. Plaintiffs further allege that J–M's statements were false because J–M did not uniformly test its pipe as represented in (a) and (b) above. Plaintiffs allege that instead, J–M manufactured or tested its pipe in a manner that did not comply with the foregoing industry standards. Plaintiffs allege that, as a result of J–M's inconsistent and substandard manufacturing and testing, J–M's customers received a ‘lottery ticket,’ in which there was no assurance that the pipe was made and tested in the manner represented." The court's order explained the first jury would decide whether J–M's manufacturing and testing deficiencies deviated from its representations to such a degree as to render J–M's representations false and whether, if false, the representations were material and made with the requisite scienter. If the plaintiffs prevailed in the first trial, there would be a second trial to determine, among other things, the damages each governmental entity had suffered as a result of J–M's false claims.

Consistent with its theory of the case, Phillips & Cohen introduced substantial evidence that J–M manufactured pipes that did not uniformly conform to the AWWA and UL standards. In addition, it introduced evidence that the nonconformance was caused, at least in part, by J–M's decisions to alter its manufacturing process to meet increased production goals and by paying employee bonuses to achieve these goals. Though the quality of the pipes decreased because of these decisions, J–M nonetheless sold them as if they had met the AWWA and UL specifications.

Throughout trial Phillips & Cohen emphasized this was not a products liability case and that it did not need to demonstrate that J–M pipes sold to plaintiffs had already failed or to trace specific product defects to specific units of pipe that each plaintiff received. For example, in closing argument counsel stated, "... J–M falsely represented its compliance with AWWA C905, you know, general compliance. There's nothing that requires you to figure out if a particular stick of pipe that's in the ground was falsely marked or not falsely marked. Although, frankly, given the kinds of evidence that you've heard, none of their pipe was representative of what they originally qualified and none of it was able to pass UL 1285. So, really, all of the pipe was bad. But it certainly was falsely represented that all our pipe complies with AWWA C900. No question that [the] representation that all our pipe is made in uniform—in a uniform way, that was a representation they were making to their customers and it was clearly not true."

On November 14, 2013 the jury returned a special verdict in favor of each of the five representative plaintiffs, finding that J–M did "present or caused to be presented to a [government] officer or employee a claim for payment or approval that was false or fraudulent," that the claim was materially false and that J–M presented the false claim with the requisite intent. The special verdict form also asked the jury to describe why the claims were false. The jury responded with the same answer for every false claim: "J–M falsely represented uniform compliance with AWWA [C900 and] C905 and UL 1285." The jury also found for each of the 26 identified projects that J–M had acted knowingly and that the misrepresentation of compliance with the industry standards was material.

2. The Press Release

On November 15, 2013, the day after the jury's verdict, Phillips & Cohen issued a three-and-one-half page, single-spaced press release headlined, "JM Eagle faces billions in damages after jury finds JM liable for making and selling faulty water system pipes." The press release stated in its first paragraph that "[a] federal jury unanimously agreed last night that [J–M] ... knowingly manufactured and sold to government entities substandard plastic pipe that was used in water and sewer systems in various states around the country—opening [J–M] up to potentially billions of dollars in damages." The release referred to the case as a "whistleblower lawsuit" and explained it had been divided into two phases: "The first trial determined whether from 1996 to 2006 [J–M] lied about whether its pipe met strength and durability standards required by government specifications, thereby making it liable for damages under state and local false claims laws." "A separate trial will be held to determine the amount of damages" for the costs to replace failed pipes and to replace pipes sooner than expected.

3. J–M's Lawsuit for Defamation and Trade Libel

On February 21, 2014 J–M filed a complaint for defamation and trade libel alleging statements in Phillip & Cohen's press release that "a federal jury unanimously found that J–M manufactured and sold pipe that is ‘faulty,’ ‘substandard,’ ‘weak,’ and ‘shoddy’ " were "neither a fair nor an accurate report of the proceedings" and grossly misrepresented the jury's findings. As alleged in the complaint, the issue decided by the federal jury was whether J–M had falsely represented uniform compliance with industry standards. Whether its pipe was substandard or defective was not at issue in phase one of the federal litigation, and the federal plaintiffs had never proved the pipe sold was substandard or defective.

In addition to the headline of the press release, J–M specifically challenged three statements appearing on the first page of the document: (1) The last sentence of the second paragraph, "The trial exposed JM Eagle's deliberate efforts to cut costs by using shoddy manufacturing practices to make weaker but more profitable polyvinyl chloride (PVC) pipe." (2) The third full paragraph, " ‘States and water districts that are covered by this lawsuit spent $2.2 billion to buy JM Eagle during the 10–year period JM was lying about the long-term strength of the pipe,’ said Eric Havian, an attorney with Phillips & Cohen LLP who argued the case on behalf of the plaintiffs. ‘Those entities now are entitled to recover a substantial portion of that cost plus the cost to replace the shoddy pipe much sooner than expected. This likely will mean damages could total billions of dollars because it's expensive and disruptive to replace water pipe.’ " (3) The fifth full paragraph: " ‘JM Eagle defrauded its customers for 10 years,’ Havian continued. ‘The jury decided that JM Eagle management...