SHEPPARD, MULLIN, RICHTER & HAMPTON v. J-M MANUFACTURING

Respondent’s Request for Judicial Notice

Cal.June 27, 2016

SUPREME CUuR? FIED No. 8232946 . JUN 97 2016 IN THE SUPREME COURT OF CALIFORNaniitcGuire cler ~Depuke SHEPPARD, MULLIN, RICHTER & HAMPTONLLP, Plaintiffand Respondent, V. J-M MANUFACTURING CO.,, INC., Defendant and Appellant. After a Decision of the Court of Appeal of the State of California, Second Appellate District, Division Four, Case No. B256314 The Superior Court of Los Angeles County, Case No. YC067332 The Honorable Stuart M.Rice, Presiding PLAINTIFF-RESPONDENT’S MOTION FOR JUDICIAL NOTICE; MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT THEREOF; DECLARATION OF KEVIN S. ROSEN *KEVIN S, ROSEN (SBN 133304) THEANE EVANGELIS.(SBN 243570) BRADLEY J.HAMBURGER(SBN 266916) ANDREW G. PAPPAS (SBN 266409) GIBSON, DUNN & CRUTCHER LLP 333 South Grand Ave. Los Angeles, CA 90071 Tel: (213) 229-7000 Fax: (213) 229-7520 krosen@gibsondunn.com Attorneysfor Plaintiffand Respondent Sheppard, Mullin, Richter & Hampton LLP No. 8232946 IN THE SUPREME COURT OF CALIFORNIA SHEPPARD, MULLIN, RICHTER & HAMPTONLLP, Plaintiffand Respondent, Vv. J-M MANUFACTURINGCO., INC., Defendant and Appellant. After a Decision of the Court of Appeal of the State of California, Second Appellate District, Division Four, Case No. B256314 The Superior Court of Los Angeles County, Case No. YC067332 The Honorable Stuart M.Rice, Presiding PLAINTIFF-RESPONDENT’S MOTION FOR JUDICIAL NOTICE; MEMORANDUM OFPOINTS AND AUTHORITIES IN SUPPORT THEREOF; DECLARATION OF KEVIN S. ROSEN *KEVIN S. ROSEN (SBN 133304) THEANE EVANGELIS.(SBN 243570) BRADLEY J. HAMBURGER(SBN 266916) ANDREWG. PAPPAS (SBN 266409) GIBSON, DUNN & CRUTCHER LLP 333 South Grand Ave. Los Angeles, CA 90071 Tel: (213) 229-7000 Fax: (213) 229-7520 krosen@gibsondunn.com Attorneysfor Plaintiffand Respondent Sheppard, Mullin, Richter & Hampton LLP MOTION FOR JUDICIAL NOTICE Pursuant to Evidence Code sections 452 and 459 andrule 8.520(g) of the California Rules of Court, Sheppard Mullin respectfully requests that this Court take judicial notice of the following documents attached as Exhibits A through I to the concurrently filed Declaration ofKevin S. Rosen (the “MJN Declaration”). These documents were before the Court of Appeal below, which had granted a similar request for judicial notice so that the record related to the arbitration would be complete: 1. The complaint in United States ex rel. Hendrix v. J-M Manufacturing Company, Inc., No. 06-55-GW (C.D.Cal. filed Jan. 17, 2006) (the “Qui Tam Action”), submitted to the arbitration panel in Sheppard, Mullin, Richter & Hampton, LLP y. J-MManufacturing Company, Inc., No. 1220045609 (the “Arbitration Panel”) on September 30, 2013 (attached as Exhibit A to the MJN Declaration); 2. The reporter’s transcript ofthe June 6, 2011 hearing on South Tahoe Public Utility’s Motion to Disqualify Sheppard Mullin as Counsel in the Qui Tam Action, submitted to the Arbitration Panel on September 30, 2013 (attached as Exhibit B to the MJN Declaration), 3. The expert report of Professor Lawrence C. Marshall, submitted to the Arbitration Panel on September 30, 2013 (attached as Exhibit C to the MIJN Declaration); 4. June 7, 2011 email communications between Charles L. Kreindler of Sheppard Mullin and Camilla M. EngofJ-M,titled “Discussion re Motion to Disqualify” and Bates Stamped SMRH01316-01318, submitted to the Arbitration Panel on September 30, 2013 (attached as Exhibit D to the MJN Declaration); 5. The supplemental declaration of Bryan D. Daly, submitted to the Arbitration Panel on October 25, 2013 (attached as Exhibit E to the MJN Declaration); 6. The supplemental declaration ofJeffrey A. Dinkin, submitted to the Arbitration Panel on October 25, 2013 (attached as Exhibit F to the MIN Declaration); 7. The supplemental declaration of Charles L. Kreindler, submitted to the Arbitration Panel on October 25, 2013 (attached as Exhibit G to the MIN Declaration); 8. The supplemental expert report ofProfessor Lawrence C. Marshall, submitted to the Arbitration Panel on October 25, 2013 (attached as ExhibitH to the MJN Declaration); and 9. The supplemental declaration ofD. Ronald Ryland, submitted to the Arbitration Panel on October 25, 2013 (attached as Exhibit I to the MJN Declaration). The foregoing items are appropriate subjects of judicial notice and comply with the criteria for judicial notice under the California Rules of Court: 1, Exhibits A through I to the MJN Declaration are relevant to the appeal for the purpose ofgiving this Court a complete accountingofthe facts before the Arbitration Panel in the event that this Court determines that the Arbitration Panel’s award is subject to judicial review. (See Cal. Rules of Court, rule 8.252(a)(2)(A).) 2. Sheppard Mullin did not submit Exhibits A through to the trial court as evidence with its petition to confirm the Arbitration Panel’s award because it took the position that the trial court could not review the award. Sheppard Mullin did, however, summarize the underlying facts to thetrial court in an offer of proof. (See 3AA785-787; Cal. Rules of Court, rule 8.252(a)(2)(B).) 3. Although Exhibits A through I were not noticed by the trial court (Sheppard Mullin argued to the trial court that there was no legal basis for judicial review ofthe arbitration award, irrespective of the facts presented to the Arbitration Panel), Sheppard Mullin requests that this Court take judicial notice of these documents that were submitted to the Arbitration Panel. (See Cal. Rules ofCourt, rule 8.252(a)(2)(C); Evid. Code, § 452, subd. (h); see also Evid. Code, § 459.) Exhibits A and are furtherjudicially noticeable because they are federal court records. (Evid. Code, § 452, subd. (d).) 4. Sheppard Mullin made the same request to the Court of Appeal, which took judicial notice of these documents. (See May 1, 2015 Order.) 5. Noneofthe items submitted with this motion relates to proceedings occurring after the judgmentthatis the subject ofthis appeal. (Cal. Rules of Court, rule 8.252(a)(2)(D).) DATED: June 27, 2016 Respectfully submitted, GIBSON, DUNN & CRUTCHER LLP By: Kw rer Kevin S. Rosen Attorneys for Plaintiff and Respondent Sheppard, Mullin, Richter & Hampton LLP TABLE OF CONTENTS IL. ARGUMENTworccccnessesseees eedennereesescocsetsnisseounenenenensnea pease asenatavsnanenaneserenesees 2 LIT. CONCLUSION .wsesessccsscssssesnecorsnsesesusnetssuninessneitneressncaseatenonatersenencs anne 5 DECLARATION OF KEVIN S. ROSEN.rsestssissesecsenssnseeteseeenseesenseeseaasaeese O TABLE OF AUTHORITIES Page(s) Cases Arce v. Kaiser Foundation Health Plan, Inc. (2010) 181 Cal.App.4th 471 cccerecreeseereneates pvecovaseurvegeseunstleeeesessabtnse 4 Schweitzer v. Westminster Investments (2007) 157 Cal.App.4th 1195... cecsesueserensesenessseenssissenensesrsscereennens 4 Seelig v. Infinity Broadcasting Corp. (2002) 97 Cal.App.4th 798 wicccseccongdbebaserencoussvessvecanescanenssaeseees iete Ste. Marie v. Riverside County Regional Park && Open-Space District (2009) 46 Cal4th 282 w.esicssesccssserssesssscerenesssorennenensettinendaginencbvenatevsvendavia 3 Walnut Producers ofCal. v. Diamond Foods, Inc. (2010) 187 Cal.App.4th 634 ...cccccerenerssnesceceresnnesersecesssrstecnsereocnereserentes 4 In re Watford (2010) 186 Cal.App.4th 684 vcsscccorecscesseenensmetessersenesesssearsassesnsenrn A Statutes Evid. Code, § 452 ciccecccssssrecnssessteresvastesnsvenecereesers wolves susdddvenniven daenvyerenecastnss 1,3 Evid. Code, § 452, subd. (d) v.csssssteoeseesececierssavsnensesnesneneeneeneenrensdeasensesseeens 4 Evid. Code, § 452, subd. (hh) -sssscssssssseccssseecsreseteesessseensesnnarensesesenensenenses 3,4 Evid. Code, § 459 sesscciicecsecesssererenerceensenteesseiesivevitisresenctteneeseecessanentessensens 3 Evid. Code, § 459, Subd.(a) ssssescnrerscecrecensesecsnnen sansebaredecsens seennentaneeseenetrecess 3 Rules Cal. Rules of Court, rule 8.252(a) scccccsssrsscesssnceesseccnansesendetteceresstereeeterenss 1 Cal. Rules of Court, rule 8.252(a)(2)(A) weececsessecsesesenticcnetsnetersteecssaneverstsese 2 Cal. Rules of Court, rule 8.252(a)(2)(C) ....... eeteneseceestacnenseontageveaessencesenes 3,5 Cal. Rules of Court, rule 8.520(2) .cccussccseneseesercstentecsntesenrerssscssttescsee il MEMORANDUMOFPOINTS AND AUTHORITIES I. INTRODUCTION This motion seeksjudicial notice of(i) exhibits that where undisputedly submitted to the Arbitration Panel, including(ii) two exhibits that are federal court records. These materials—which the Court of Appeal judicially noticed—satisfy the requirements for judicial notice under the California Rules of Court, rules 8.252(a) and 8.520(g), because they are relevant to this proceeding; they are proper subjects ofjudicial notice under Evidence Code section 452 even though they were not submittedto the trial court; and they do not relate to proceedings occurring after thejudgmentthatis the subject matter of this proceeding. This appeal concerns, among other things, whethera final arbitration awardis subject to judicial review. Sheppard Mullin argued tothetrial court that there was no legal basis for judicial review of the arbitration award, irrespective of the facts presented to the Arbitration Panel. (3AA785-787.) Sheppard Mullin therefore did notfile its arbitration briefs and declarationsin the trial court. It did, however, make an offer ofproof summarizing the facts that these materials establish. (See 3AA785-787.) J-M, in contrast, relied extensively upon its arbitration briefs and declarations before the trial court. The trial court nevertheless ruled in Sheppard Mullin’s favor and confirmedthe arbitration award. Although J-M included some of the materials submitted to the Arbitration Panel in the Appellant’s Appendix it filed in the Court ofAppeal, it did not includeall of the relevant submissions. Sheppard Mullin therefore respectfully requests that this Court take judicial notice of Exhibits A through I to the Declaration of Kevin S. Rosen (“MIJN Decl.’”). Each of these documents appears in the arbitration record - (MJN Decl.at {§ 2-10) and supports Sheppard Mullin’s offer of proof to the trial court (see 3AA785-787). Moreover, each ofthese documentsis explicitly referenced, if not quoted verbatim, in the documents J-M included in its Appendix. (See, e.g., 2AA434; 2AA437-440; 2AA45 1-466; 2AA472-473; 2AA48 1-482; 2AA484; 3AA636-669). Judicial notice is proper becausethere can be no dispute that all ofthese documents were submitted to the Arbitration Panel and were before the Court of Appeal, which granted judicial notice. In addition, two of the exhibits are noticeable on the independent groundthat they are federal court records. Sheppard Mullin filed a materially identical motion in the Court ofAppeal on the same grounds, whichthat court granted. (See May 1, 2015 Order.) I. ARGUMENT The materials ofwhich Sheppard Mullin seeks judicial notice meetall of the applicable requirements underthe California Rules of Court: First, they are relevant for the purposeofgiving this Court a complete accounting of the facts before the Arbitration Panel (and before the Court of Appeal). (See Cal. Rules of Court, rule 8.252(a)(2)(A).) The materials in Exhibits A through I were all submitted to the Arbitration Panel and formed the basis for its award. Accordingly, when it became apparent from J-M’s opening brief in the Court of Appeal that it would seek to re-litigate the Arbitration Panel’s factual findings, Sheppard Mullin requested that the Court of Appeal take judicial notice of additional exhibits. The Court of Appeal granted Sheppard Mullin’s request, which was in all material respects the same as this Motion. (See May 1, 2015 Order.)! ' Inthe Court ofAppeal, J-M soughtjudicial notice of additional documents it filed in the arbitration in response to Sheppard Mullin’s request, and Becausethe attached materials were before the Court ofAppeal whenit issuedits ruling, Sheppard Mullin requests that this Court take judicial notice of the same material to ensure that this Court considers all material before the Court ofAppeal. (See Ste. Marie v. Riverside County Regional Park & Open- Space District (2009) 46 Cal.4th 282, 291, fn. 6 [“The Court of Appeal granted the District’s first request forjudicial notice .... Plaintiffrecently filed a request for judicial notice of this same material in order to ensure this court considers it. We grant this request.”’].) Second, although these materials were not presentedto the trial court, they are subject to judicial notice under Evidence Codesections 452 and 459. (See Cal. Rules of Court, rule 8.252(a)(2)(C).) Evidence Code section 459, subdivision (a), provides that the “reviewing court may takejudicial notice of any matter specified in Section 452.” (Evid. Code, § 459, subd. (a).) In turn, Evidence Code, section 452, subdivision (h) allows the Court to take judicial notice of “[flacts and propositions that are not reasonably subject to dispute and are capable of immediate and accurate determination by resort to sources of reasonably indisputable accuracy.” (Evid. Code, § 452, subd. (h).) Under this provision, the Court may take judicial notice of a document’s existence, publication,or filing. (See, e.g., Seelig v. Infinity Broadcasting Corp. (2002) 97 Cal.App.4th 798, 808 [‘“the fact that news articles discussing [certain] topics ... were published is not reasonably subject to dispute” and is thus noticeable under section 452, subdivision (h)]; see also Schweitzer v. opposed Sheppard Mullin’s request for judicial notice only to the extent that the Court of Appeal did not also take judicial notice of its additional documents. (See Appellant’s Conditional Opp.at p. 3 [“[O]ur opposition to Sheppard’s RJN is conditional, and is coupled with a condition motion forjudicial notice ofJM’s own parallel documents. Ifthe Court is inclined to grant Sheppard’s RJN, then it should also grant JM’s MJN.”].) The Court ofAppealultimately took judicial notice ofboth sets ofdocuments. Westminster Investments (2007) 157 Cal.App.4th 1195, 1203.) Sheppard Mullin requests that this Court take judicial notice of the attached documents that were submitted to the Arbitration Panel. (Evid. Code, § 452, subd. (h).) Each of these documents appears in the administrative record of the arbitration proceeding. (MJN Decl. at {J 2-10.) These documentsare all explicitly referenced and cited in documents included | in J-M’s Appendix, and J-M’s briefing before the Court of Appeallikewise referred to and implicated the documents Sheppard Mullin seeksto havethis Court notice. (See, e.g., 2AA434; 2AA437-440; 2AA45 1-466; 2AA472-473; 2AA481-482; 2AA 484; 3AA 636-669; see also Appellant’s Br. at pp. 2, 4, 22.) Judicial notice is therefore proper under Evidence Code section 452, subdivision (h). (See Walnut Producers of Cal. v. Diamond Foods, Inc. (2010) 187 Cal.App.4th 634, 649, fn. 6 [observing that “the fact of [two] filings [demands for arbitration] could be immediately verified with the American Arbitration Association (Evid. Code, § 452, subd. (h)),” but denying the request for judicial notice on other grounds].) Exhibits A and B to the MJN Declaration are additionally judicially noticeable as records of the federal qui tam action involving J-M, United States ex rel. Hendrix v. J-MManufacturing Company, Inc., No. 06-55-GW (C.D.Cal. filed Jan. 17, 2006), Evidence Code section 452, subdivision (d) allows the Court to take judicial notice of records of judicial proceedings. (See Evid. Code, § 452, subd. (d)) And records of related or collateral proceedingsare particularly appropriate subjects ofjudicial notice. (See Jn re Watford (2010) 186 Cal.App.4th 684, 687, fn. 2 [granting judicial notice of records from related proceedings]; Arce v. Kaiser Foundation Health Plan, Inc. (2010) 181 Cal.App.4th 471, 483 [same].) Finally, none of the materials to be noticed relates to proceedingsthat have occurred after the orders and judgments that are the subject of this appeal. (See Cal. Rules of Court, rule 8.252(a)(2)(C)). The earliest order at issue here is the Arbitration Panel’s January 30, 2014 award, but the materials to be noticed do notrelate to any proceedings that took place after that date. Ii, CONCLUSION For these reasons, Sheppard Mullin respectfully requests that the Court grant its Motion for Judicial Notice. DATED: June 27, 2016 Respectfully submitted, GIBSON, DUNN & CRUTCHER LLP By: RinJeon Kevin S. Rosen Attorneys for Plaintiff and Respondent Sheppard, Mullin, Richter & Hampton LLP DECLARATION OF KEVIN S. ROSEN I, Kevin S. Rosen declare as follows: 1. I am an attorney duly licensed to practice law in the State of California and am partnerat the law firm ofGibson, Dunn & Crutcher LLP, attorneys for Plaintiff-Respondent Sheppard, Mullin, Richter & Hampton LLP. I have personal knowledgeofthe facts stated herein, andifcalled as a witness, I could and would testify competently thereto. I make this declaration in support of Sheppard Mullin’s Motion for Judicial Notice. 2. Attached hereto as Exhibit A is a true and correct copy of the complaint in United States ex rel. Hendrix v. J-M Manufacturing Company, Inc., No. 06-55-GW (C.D.Cal. filed Jan. 17, 2006) (the “Qui Tam Action”), submitted to the arbitration panel in Sheppard, Mullin, Richter & Hampton, LLP v. J-MManufacturing Company, Inc., No. 1220045609(the “Arbitration Panel’) on September30, 2013. 3. Attached hereto as Exhibit B is a true and correct copy of the reporter’s transcript of the June 6, 2011 hearing on South Tahoe Public Utility’s Motion to Disqualify Sheppard Mullin as Counsel in the Qui Tam Action, submitted to the Arbitration Panel on September 30, 2013. 4, Attached hereto as Exhibit C is a true and correct copy ofthe expert report of Professor Lawrence C. Marshall, submitted to the Arbitration Panel on September 30, 2013. 5. Attached hereto as Exhibit D is a true and correct copy of June 7, 2011 email communications between Charles L. Kreindler ofSheppard Mullin and Camilla M. Eng of J-M,titled “Discussion re Motion to Disqualify” and Bates Stamped SMRH01316—01318, submitted to the Arbitration Panel on September30, 2013. 6. Attached hereto as Exhibit E is a true and correct copy of the supplemental declaration ofBryan D. Daly, submitted to the Arbitration Panel on October 25, 2013. 7, Attached hereto as Exhibit F is a true and correct copy of the supplemental declaration of Jeffrey A. Dinkin, submitted to the Arbitration Panel on October 25, 2013. 8. Attached hereto as Exhibit G is a true and correct copy of the supplemental declaration ofCharles L. Kreindler, submitted to the Arbitration Panel on October 25, 2013. 9. Attached hereto as Exhibit H is a true and correct copy of the supplemental expert report of Professor Lawrence C. Marshall, submitted to the Arbitration Panel on October 25, 2013. 10. Attached hereto as Exhibit I is a true and correct copy of the supplemental declaration of D. Ronald Ryland, submitted to the Arbitration Panel on October 25, 2013. I declare under penalty of perjury under the laws of the State of California that the foregoing is true and correct and that this declaration was executed on this 27th day of June, 2016, in Los Angeles, California. Kooom Kevin S. Rosen Exhibit A Cas -& - W o W b s NH N w T 10 ll 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 P 5:06-cv-00055-GW:PJW Document 1 Filed 01/17/06 Page 1lof50 Page ID #:1 — - -! et ERIC R. HAVIAN(State Bar No. 102295) MARYA.INMAN(State Bar No. 176059) PHILLIPS & COHEN LLP 131 Steuart Street, Suite 501 San Francisco, California 94105 Tel: (415) 836-9000 Fax: (415) 836-9001 Attorneys for Qui Tam Plaintiff [Under Seal] UNITED STATES DISTRICT COURT FOR THE CENTRALDISTRICT OF CALIFORNIA FDCV06.G055 SGL UNITED STATES, THE STATES OF Civil No.: CALIFORNIA, DELAWARE,FLORIDA, NEVADAand TENNESSEEand THE COMPLAINT FOR VIOLATION OF COMMONWEALTHS OF FEDERAL AND STATE FALSE CLAIMS MASSACHUSETTS AND VIRGINIAexrel. ACTS [UNDER SEAL] JURY TRIAL DEMANDED Plaintiffs, vs. FILED IN CAMERA & UNDER SEAL (AS REQUIREDBY31 U.S.C. § [UNDER SEAL] 373 Z Defendant. COMPLAINT FOR VIOLATION OF FEDERAL & STATE FALSE CLAIMS ACTS 001 Case 5:06-cv-00055-GW-PJw Document 1 Filed 01/17/06 ‘¥Page 2 of 50 Page ID #:2 :22 AN Receipt 4: 81721 leadoesSeBELLAMY {LA 1-1) PaidgtiPRILLIPS AND COHEN 55 beebatcna 3 > Civil Filing Fee{1) Amount ; $68.8853CV@5-G0B55 2686-510008 Ml - Special Fund F/F(1)Amount : $198. 98Check Payment :5 1844 / 258. 68Total Paysent : 258.BG STPSGO 002 Case 5:06-cv-00055-GW-PJW Document 1 Filed 01/17/06 W w NW N “ a N A M N 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 I. INTRODUCTION 1. This is an action to recover damagesandcivil penalties on behalf of the United States, the States of California, Delaware, Florida, Nevada and Tennessee, the Commonwealths of Massachusetts and Virginia and numerouscities and public water agencies located within these States/Commonwealths(collectively the "real parties in interest" or "Real Parties") arising from false statements and claims made by defendant J-M Manufacturing Company,Inc. ("J-M")in violation of the Federal False Claims Act, 31 U.S.C. §§ 3729 et seq., and the following State False Claims Acts: California False Claims Act, Cal. Gov't Code §§ 12650et seq., Delaware False Claims And Reporting Act, 6 Del. C. §§ 1201 et seq., Florida False ClaimsAct, Fla.Stat. Ann. §§ 68.081 et seq., Massachusetts False Claims Law, Mass. Gen. Lawsch. 12 §§ 5A et seq., NevadaFalse Claims Act, Nev. Rev.Stat. Ann. §§ 357.010 et seq., Tennessee False Claims Act, Tenn. Code Ann. §§ 4-18-101 et seq., and Virginia Fraud Against Taxpayers Act, Va. Code Ann. §§ 8.01-216.1 et seq. (collectively the "Acts"). The Real Parties defrauded by Defendant J-M include withoutlimitation, the United States, the States of California, Delaware, Florida, Nevada and Tennessee, the Commonwealths ofMassachusetts and Virginia,the cities and public water agencieslisted on Exhibit 1, all other cities, public water agencies andpolitical subdivisions within the States of California, Delaware, Nevada,Illinois and Tennessee and the . Commonwealths of Massachusetts and Virginia that purchased J-M’s Polyvinyl Chloride (“PVC”) pipe between 1997 and present, all state agencies and departments in the States of Illinois and Indianathat purchased J-M’s PVC pipe between 1997 andpresent, andall state and county agencies and departments in the State of Hawaii that purchased J-M’s PVC pipe between 1997 and present. 2. For the past 22 years, J-M hasbeenin the business of manufacturing and selling PVC pipe for the transmission and distribution of water. Federal military bases, State Roads and HighwayProjects, cities and public waterdistribution agencies are the primary purchasers of J-M’s PVC pipe. J-M sells to these entities by enlisting water worksparts distributors to act as middlemen between J-M andits customers. J-M's PVC pipe products are designed almost exclusively for use in water distribution systems so that even parts sold to distributors are 1 COMPLAINT FOR VIOLATION OF FEDERAL & STATE FALSE 60a ACTS Case 5:06-cv-00055-GW-PJW Document1 Filed 01/17/06 Page 5 of 50 Page ID #:5 1 eventually installed in these systems. J-M’s PVCpipe products are used primarily in the "water 2 main,"the artery that typically runs down the middleofthe street and carries waterto the service 3 laterals that branch off from the main and supply the individual homes andbusinesses, and the 4] “transmission line,” the trunk line that transports water from the water treatmentplantto the 5 water mains. PVCpipefor use in water mainsis between four and 12 inchesin diameter, 6 whereas PVCpipeforuse in the transmission line is between 14 and 48 inches in diameter. 7 | 3. To encourage and enable Real Parties to purchase J-M pipe, J-M provided RealParties 8 with copies of J-M’s catalogs describing J-M’s PVC pipe products. J-M’s outside salespeople 9] visited Real Parties regularly and brought new catalogsor updatesto existing catalogs. J-M also 10] provided Real Parties with copies of “new productbulletins” andothersalesliterature describing 11] J-M’s products. J-M also providedcopiesofits catalogs andsalesliterature to distributors, who 12] in turn provided these materials to end-users, including Real Parties, to enable them to order J-M 13] products through the distributor. In each ofits sales documents, J-M maderepeated 14] representations that its PVC pipe products conform to applicable industry standards for PVC 15] pipe. 16 4. Starting in at least 1997, J-M began knowingly to manufacture substandard PVC 17] pipes, selling them through distributors to military bases, State Roads and HighwayProjects, and 18] public water distribution agencies as well as to contractorsinstalling portions of the water 191} distribution systems. J-M falsely representedto its customers, including Real Parties, that the 20] PVC pipe products sold to them conformedto applicable industry standards for water works 21} parts, when in fact the products were made usinginferior materials, processing and tooling which 22 resulted in their having substandardtensile strength. As a result, Real Parties have suffered, and 23 will continue to suffer, substantial damage. Starting in at least 1997, more thanhalfof the PVC 24] pipe J-M supplied had tensile strengths below the minimum required by applicable industry 25 standards and Real Parties’ contracts and specifications. As a result of the diminishedtensile 26] strength, J-M’s PVCpipe will havea shorterlife span, is more likely to swell and leak, andwill 27|| need to be replaced more quickly than pipe manufactured to specification. 28 5. The Federal and State False Claims Acts provide that any person who knowingly 2 COMPLAINT FOR VIOLATION OF FEDERAL & STATE FALSE CLAIMS ACTS Case 5:06-cv-00055-GW-PJW Document1 Filed 01/17/06 Page 6of 50 Page ID #:6 submits or causes to be submitted a false or fraudulent claim to a governmentalentity for paymentor approvalisliable for a civil penalty of up to $11,000 for each such claim,plus three times the amount of the damagessustained bythe government. The Acts allow any person having informationregarding a false or fraudulent claim against the governmentto bring an action on behalf of himself(the “qui tam plaintiff’ or “relator”) and the governmentandto share in any recovery. 6. Basedon these provisions, qui tam plaintiff John Hendrix seeks to recover damages and civil penalties arising from Defendant J-M’s actions in presenting false records and statements to its federal, state and local governmental customers and causingits distributors to submit false records, claims and statements to its federal, state and local governmental customers. II. PARTIES 7. Qui tam plaintiff John Hendrix (“Relator”) is a resident of Clifton, New Jersey. After graduating from college in December 2001, Relator began working for Defendant J-M onJuly 8, 2002 in its corporate headquarters in Livingston, New Jersey as an engineer in J-M’s Product Assurance Division. Throughout his employment at J-M,the majority of Relator’s job duties involved advising J-M onthe technical aspects of claims brought by J-M’scustomersforfailing or non-conforming product. To a lesser degree, Relator’s job also involved sales and customer service work,including advising current and prospective customers(primarily fellow engineers) on technical aspects of J-M’s products. On November9, 2005, a little over a week after Relator wrote a memo to J-M managementhighlighting the fact that the tensile strength of J-M’s PVC pipe was below that required by Underwriters Laboratories (“UL”) to qualify for the UL Mark stamped onits pipes, J-M terminated Relator’s employment. 8. Real Parties, on whose behalf Relator brings this suit, are the United States, the States of California, Delaware, Florida, Nevada and Tennessee, the Commonwealths of Massachusetts and Virginia, the cities and public water agencies listed on Exhibit1, all ofwhom purchased J-M’s PVC pipe between July 3, 2003 and August 31, 2005,all cities, public water agencies and political subdivisions within the States of California, Delaware, Illinois, Nevada and Tennessee and the Commonwealths of Massachusetts and Virginia who purchased J-M PVCpipeproducts 3 COMPLAINT FOR VIOLATION OF FEDERAL & STATE FALSE CLAIMS ACTS 006 Case 5:06-cv-00055-GW-PJW Document1 Filed 01/17/06 Page 7of50 Page ID #:7 1 | between atleast 1997 andpresent, all agencies or departments of the State of Indiana who purchased J-M PVCpipeproducts betweenat least 1997 andpresent, andall state and county agencies and departments within the State of Hawaii who purchased J-M PVCpipe products e R W w W N between at least 1997 and present. Exhibit 2, incorporated herein, containsa partiallist of federal w s projects for which the United States Armed Forces purchased J-M PVCpipe during the period between July 3, 2003 and August 31, 2005. Exhibit 3, incorporated herein, contains a partial list of projects for which the State of Florida purchased J-M PVCpipe during the period between July 3, 2003 and August 31, 2005. O o C O Y D D H 9. Atall times relevant to this Complaint, Defendant J-M Manufacturing Company,Inc. 10 (“J-M”) was a Delawarecorporation with its headquarters at 9 Peach Tree Hill Road in 11] Livingston, New Jersey. With $800 million in annualsales, J-M is the largest manufacturer of 12} PVCpipe in the United States and the world. J-M manufacturesits PVC pipe at 11 plants in the 13] following locations: Fontana and Stockton, California; Pueblo, Colorado; Adel, Georgia; Wilton, 14] Iowa; Batchelor, Louisiana; Winnebago, Minnesota; Butner, North Carolina; MeNary, Oregon; 15 Meadville, Pennsylvania; and Wharton, Texas. Fromits inception in 1982 until November1, 16 2005, J-M was a wholly-owned subsidiary of FormosaPlastics Corporation, U.S.A. (“Formosa”). 17] Formosais largely controlled by the Wang family of Taiwan. Yung-ching Wang, known as 18} “Y.C. Wang,” is Formosa’s Founder and Chairmanof the Board. Each of Mr. Wang’s ten 19} children has served as an executive at either Formosaor one ofits subsidiaries. Walter Wang, 20} Y.C. Wang’s youngestson,is the PresidentofJ-M. 21 III. JURISDICTION AND VENUE 22 10. This Court has jurisdiction over the subject matter of the Federal False Claims Act 23 (“FCA”) action pursuant to 28 U.S.C.§ 1331 and 31 U.S.C. § 3732(a), which specifically confers 24} jurisdiction on this Court for actions brought pursuant to 31 U.S.C. §§ 3729 and 3730. This 25 Court has jurisdiction over the subject matter of the State False Claimsactions pursuant to 28 26] U.S.C. § 1367 and 31 U.S.C. § 3732(b) because the State False Claimsactions arise from the 27 same transactions or occurrences as the Federal FCA action. 28 11. This Court has personaljurisdiction over Defendant J-M pursuantto 31 U.S.C. § 4 COMPLAINT FOR VIOLATION OF FEDERAL & STATE FALSE CLAIMS ACTS 007 Case 5:06-cv-00055-GW-PJW Document1 Filed 01/17/06 Page 8 of 50 Page ID #:8 Ww W W N c o f o N K R A N O f 10 ll 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 3732(a), which provides that “[a]ny action under section 3730 may be broughtin any judicial district in which the defendant, or in the case of multiple defendants, any one defendantcan be found, resides, transacts business or in which any act proscribed by section 3729 occurred.” Section 3732(a) also authorizes nationwide service of process. Duringthe relevant period, J-M operated a foundry in Fontana, California, at which manyofthe fraudulent practices occurred, and thereby transacted business in the Central District of California. 12, Venueis properin this district pursuant to 31 U.S.C. § 3732(a) because J-M can be foundin, resides in, and/or transacts business in the Central District of California and because manyofthe violations of 31 U.S.C. § 3729 described herein occurred within this judicial district. IV. FRAUD AGAINST REAL PARTIES A. Turnover in J-M’s Upper Management 13. J-M was foundedin 1982 when Formosa acquired the Pipe Division of Johns- Manville Corporation and created J-M. Forits first 10 years, J-M’s management was populated largely by former Johns-Manville employees. However, by the mid 1990s, most of the old Johns- Manville employees hadeither retired or left. In 1990, J-M’s former parent company, Formosa Plastics Corporation, U.S.A. (“Formosa”), installed Walter Wang, the son of Formosa’s Founder and Chairman of the Board, Y.C. Wang,as J-M’s President. At the time he assumedthispost, Mr. Wang wasonly 25 years old. Having just graduated from college, he hadlittle to no practical experience in managing a company,let alone the world’s largest manufacturer ofPVC pipe. Shortly after naming Mr. WangPresident, J-M movedits corporate headquarters from Stockton, California to Livingston, New Jersey, where it occupies the same office building in which Formosa and several other Formosasubsidiaries also have corporate offices. 14. Under Mr. Wang’sleadership, J-M implemented a series of “cost-cutting” measures that undermined the quality of J-M’s PVC pipe products. At Mr. Wang’s direction,the outgoing former Johns-Manville managers were replaced by individuals with significantly less experience and fewercredentials. For instance, the Director of Production, who formerly had been a senior engineer, was replaced by Barry Lin, an accountant from Formosa’s managementcenter in Taiwan with no engineering background. The new Director of Engineering, Kaider Liao, did not have an 5 COMPLAINT FOR VIOLATION OF FEDERAL & STATE FALSE 03 ACTS ARIS aiyBae oeORRBARE Case 5:06-cv-00055-GW-PJW Document1 Filed 01/17/06 Page 90f50 Page ID #:9 wu n & W W h b o O o D W 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 engineering degree. The new Quality Control Manager, Jack Hwang, wasan electrical engineer with no experience or formaltraining in failure analysis. After Hwangleft the Quality Control Managerpostin 2004, the position was laterfilled in 2005 by a recent college graduate. 15. In filling these and other supervisory positions, J-M drew almostexclusively from two sources ~ Taiwanesenationals and recent college graduates(like Relator) — both ofwhich garnered smaller salaries. Up until three years ago, Formosa ownedandoperated a boarding housenear its Livingston, New Jersey headquarters to accommodatethe large numberof Taiwanese employeesat J-M andits other subsidiaries who could not otherwiseafford to live in the greater New York Metropolitan area on their modest J-M salaries. 16. Backed by this new crop of inexperienced managers, Mr. Wangshifted J-M’s focus away from product quality to a single-minded mission of gaining market share and improving the bottom line irrespective of quality. Under the direction of Mr. Wang and his new managers, J-M implemented three “cost-cutting” measures that have seriously compromisedthetensile strength of the majority of its PVC pipe. B. Substituting Inferior Ingredients in PVC Compound 17. First, J-M began to substitute cheaper and lowerquality ingredients in its PVC compound. While most PVC pipe manufacturers use for their compound a moreexpensive, pre-_ prepared stock formula published by the Plastic Pipe Institute, J-M uses a proprietary compound called “J-M 90”that it mixesitself. By making the compounditself, J-M can controlthe type of ingredients that go intoit. 18. To save money, J-M replaced two primary ingredients — resin and additives (like wax and stabilizers) — with cheaper, lower grade brands. J-M replacedits more expensive, higher viscosity resin with a cheaper, lower viscosity resin. While J-M’s previous resin had a viscosity rating of .92, the new resin had rating of .88. In addition to being cheaper, the lower viscosity resin could be formedinto pipe more quickly and with less processing, thereby allowing J-M to increaseits production rates and output(as described in more detail below). 19, However, the effect of the lower viscosity resin and increased production rates was to decrease the compound’s overall tensile strength. Because the lowerviscosity resin was a more 6 COMPLAINT FOR VIOLATION OF FEDERAL & STATE FALSE 003." ACTS Case 5:06-cv-00055-GW-PJW Document1 Filed 01/17/06 Page 10 of 50 Page ID #:10 O o O o N D R WH B W H LP O =| N O b o N O t O N O b o N o b d N o — — — _ — — _ — — — — _ — o o ~ ~ O N W G a S ka d N _ ° o \ o o o ~ l n N W w > ta d N _ S o ductile material, it required more processing to achieve the requiredtensile strength. However, instead of slowingits production rates to account for the lowerviscosity resin, J-M increased its productionrates to increase its output ofPVC pipe. By switching other additives such as waxes andstabilizers to lower grade brands, J-M also decreasedthetensile strength ofits J-M 90 compound. Taken together, these substitutions accountedfor a decreasein thetensile strength of the J-M 90 compoundfrom nearly 8,000 pounds per square inch (“psi”) to just above the minimum requiredtensile strength of 7,000 psi. C. Accelerating Production Rates 20. With its J-M 90 compoundhoveringsoclose to the minimum tensile strength, J-M could not afford to make any mistakes in its manufacturing process. However, rather than use good manufacturing techniques, J-M began to make changesto its manufacturing process that further eroded the tensile strength and caused the finished PVC pipe to be out-of-specification. 21. PVC pipe is manufactured by extrusion. Broadly described, extrusion involves the following steps. The ingredients that comprise the PVC compound (e.g., base resin and additives like paraffin wax and calcium sterate) are weight-measured out ofsilos and pouredinto a hopper where they are mixed. The mixed PVC compoundis then poured into the extruder whereit is melted and formed by being forced (by a barrel and screw acting as an auger) through an orifice known as thedie that creates the shape and dimensions of a pipe. Onceout ofthe extruder and die, the hot PVC pipeis then cooled in a series of water cooling tanks. 22. To meet an ever increasing demand for PVCpipe, J-M beganto increase production rates in each ofits 11 plants that produce PVCpipe. Instead of investing in more extruders, replacing outdated extruders or building moreplants, J-M started running its existing extruders (manyof whichare over 30 years old) at speeds that exceed the extruders’ rated capacity. Each extruder has a recommended maximum output measuredtypically in pounds per hour, and J-M began runningits extruders at 20 percent above the rated capacity. 23. Asa result of the increased speed of J-M’s productionline, more torque and higher temperatures were needed to melt the J-M 90 compoundand, once melted, the PVC material received less processing timein the extruder and dieasit was being formed into pipe. The 7 COMPLAINTFOR VIOLATION OF FEDERAL & STATE FALSE CLAIMS ACTS 010 Case 5:06-cv-00055-GW-PJW Document 1. Filed 01/17/06 Page 11 0f50 Page ID #:11 0D Oo WY DH NW B® Ww W DB = N N Y D N N Y N O N O N D R D m e e y e e u e e e e e e a a o N D H N F F Y B N Y K F S G O O H I D R A W B P W H P H K S B S temperature of the water being sprayed onthe pipein the cooling baths had to be lowered to counteract both the increased temperature ofthe pipe emerging from the extruder and thefactthat the pipe was spendinglesstime in the cooling baths. (Since the cooling baths occupya fixed distance on the productionline, the increased production rates had the pipe moving more quickly overthis andall other parts of the productionline.) 24. Not surprisingly, the effect of this accelerated manufacturing process (in addition to increased output) wasto further decreasethe tensile strength of J-M’s PVC pipe. Like a cake bakedfor eight minutes at 800 degrees and then quickly cooled in a freezer, the PVC pipe being producedat the accelerated production rate was notas strong as pipe that was afforded proper processing time and conditions. Having been subjected to a quick burst of cooling, the surface of the outside of the pipe was hard whereas the portion of pipe below the surface, not having had adequate timeto cool and form, was soft. The accelerated manufacturing process also created hugevariations in the temperatures of the inside and outside diameterofthe pipe andtherate at which each cooled. Theeffect of these differential temperatures and cooling rates was to further weaken the pipe and create locked-in stresses in the pipe that increase the likelihood the pipewill catastrophically rupture whenit is tapped. D. Improper Tooling and Maintenance of Extruders 25. With the exception ofits newer plants in Adel, Georgia and Meadville, Pennsylvania, in each ofits nine remaining PVC plants, J-M has manyextruders that are over 30 years old. Rather than invest in new extruders, J-M placed a new,high-outputdie on the endofthe older extruders to keep up with the accelerated production schedule set by President Wang. However, because J-M’s lower quality PVC compound required more processing time and the older extruders were not able to work the PVC compound enoughforthe high-outputdie, the tensile strength of the pipe produced by the combination of older extruder and high-output die was further diminished. 26. In late 2004, J-M began receiving complaints from customersregarding a certain type of PVC pipe (IPS white pipe) producedat its plant in Stockton, California. Instead of the white color characteristic of this particular type of pipe, the combination ofincreased productionrates, 8 COMPLAINT FOR VIOLATION OF FEDERAL & STATE FALSE CLAIMS ACTS 011 Case 5:06-cv-00055-GW-PJW Document 1 Filed 01/17/06 Page 12 of 50 Page ID #:12 oO o C O N D N W B R W D P O w e N y N N H N Y N O N N N H N — O B e m R w e e o e e i e o e v e U L o N T D U H F F W D N Y K § SD S O m e N D D H H W B F W Y H H S F O C higher temperatures and high-output dies on older extruders had caused the pipe to bum, turning it yellow in color. To remedy the problem, K.C. Yang, J-M’s Corporate Quality Control Supervisor, instructed the Stockton plant to use a regular die for this product. In an email dated January 4, 2005, K.C Yang instructed Stockton’s Superintendent ofProduction, Jim Reichert, that “PST [Plant Stockton] should use regular die for IPS white products when high-output die cause burning. If necessary, PST should request new IPS die.” See Exhibit 4, incorporated herein. 27. By increasing its production rates to speeds exceeding the extruders’ rated capacity, J-M accelerated the wear onits extruders. Movingparts like the extruders’ screw and barrel were most affected by the added wear. However,rather than increase the amount of maintenance to account for more wear, J-M abandoned its formerpractice of regularly monitoring and replacing the screw andbarrel unit whenit fell below a certain tolerance and decided instead to amortize the unit over a one-year period and onlyreplaceit at the end of the 12 months. ‘28. J-M managers like Will Fassler, a senior engineer in J-M’s Research and Development Department, began to observethat, under the increased production rates, the screw and barrel unit was exceeding the old tolerances and needing replacementafter only six months. Nevertheless, under its new amortization policy, J-M continued to use the screw and barrel unit for another six months before it was replaced. Experienced J-M engineerslike Will Fassler were well aware that the PVC material extruded in the secondhalf of the unit’s amortized life with the underperforming screw andbarrel unit had reducedtensile strength. See Exhibit 5 (Relator’s notes dated 11/3/05), incorporatedherein. 29. In discussion with Relator on November 3, 2005, Will Fassler explained that the reason for the decrease in tensile strength stems from the proximity of the screw and barrel. For instance, a new screw andbarrel unit, whichfits closely together, will generate more shear and yield better mechanical properties in the finished pipe. See Exhibit 5. However, as the unit wears,the fit loosens and the shear decreases, which compromisesthe processing anddecreases the tensile strength of the PVC material. Id. Despite this knowledge, J-M failed to replaceits underperforming screw andbarrel units after the first six months of use and allowed them to be 9 COMPLAINTFOR VIOLATION OF FEDERAL & STATE FALSE CLAIMSACTS 012 Case 5:06-cv-00055-GW-PJW Document 1 Filed 01/17/06 Page 13 of 50 Page ID #:13 N C o f e N N H h B P Ww W 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 used for an additional six monthsin spite ofthe detrimental effect on the pipe’s tensile strength. 30. While noneof these practices alone would have proven fatal, the combinedeffect of J-M’s substitution of inferior ingredients, increased production rates and improper tooling and maintenanceofits extruders caused J-M to produce PVCpipethatfails to meetthe tensile strength requirements set forth by Underwriters Laboratories Inc. (“UL”), the American Water WorksAssociation (“AWWA”), and ASTM International. V. J-M’S SALE OF SUBSTANDARD PVC PIPE BEARING UL MARK DESPITE KNOWLEDGETHATPIPE DOES NOT QUALIFY FOR UL LISTING A. J-M PVC Pipe Does Not Meet UL’s Longitudinal Tensile-StrengthRequirement 31. Underwriters Laboratories Inc. (“UL”) is a not-for-profit corporation that tests and certifies a wide range ofproducts for public safety. Once a productis tested and found to conform to UL’s safety requirements, that product becomes ULcertified andis eligible to bear the UL Mark. The UL Mark has become synonymouswith safety and a product bearing a UL Markis universally accepted as being safe. 32. UL has promulgated a safety standard governing PVCpipe for use in underground, nonpotable fire service systems. UL Standard 1285 (“UL 1285”)lists a variety of requirements that must be met for PVC pipeto be UL certified and bear the UL Mark. Specifically, UL 1285 requires that “[r]epresentative samples of each class, pressure rating and size ofPVC pipe... shall be subjected to the tests described in Sections 11 - 20.” Exhibit 6, incorporated herein. Oneofthosetests, Section 17, is the Longitudinal Tensile-Strength Test which provides that “[m]achined specimensfrom the pipe shall have a minimumtensile strength of 7,000 psi.” Id. 33. J-M has only undergone two rounds of Longitudinal Tensile-Strength Tests for UL on its PVC pipe products. The first round wason its founding in 1982 when J-Mhadto initially qualify its PVC pipe products for UL listing. The second round wasin the mid-1990s when J-M sought to change its PVC pipe compound and begin making pipe out ofits newly created J-M 90 compound. J-M passedboth ofthese tests and received ULlisting for its PVC pipe products. 34. Once it has certified a product, UL does not require that the product undergo the PerformanceTestslisted in Sections 11 through 20 ofUL 1285,including the Longitudinal 10 COMPLAINT FOR VIOLATION OF FEDERAL & STATE FALSE O13 ACTS 013 Case o O C O S N 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 9:06-cv-00055-GW-PJW Document 1 Filed 01/17/06 Page 14 of 50 Page ID #:14 Tensile-Strength Test, unless and until there has been a material change in the product’s materials, design or processing. While UL requires manufacturersto “conduct the necessary production control, inspection, and tests” as they producethe pipe,these routine Manufacturing Tests are muchless stringent than the Performance Tests UL 1285 requiresto initially qualify the PVCpipe. Exhibit 6. 35. UL operates on an honor system. Once a productis UL listed, ULrelies on manufacturers to notify it of any material changesto the product’s materials, design or processing. In the absence of such notification, UL presumes the manufacturer is continuing to use the same materials, design and processing it used in preparing the samples ULtested aspart of the PerformanceTesting to qualify the pipe. By requiring “representative samples ofeach type of PVCpipe”for qualification testing, UL conditionsits ongoingcertification of the product on the understandingthatall future pipe will be made in the same manneras the samples submitted to UL to qualify the pipe. Exhibit 6 (emphasis added). In the Foreword, UL 1285 specifically states that “[t]he observanceofthe requirements of this Standard by a manufactureris oneofthe conditions of the continued coverage of the manufacturer’s product.” Id. 36. By at least 1997, J-M’s “cost-cutting” practices of substituting inferior ingredients in its compound,accelerating production rates and improperly tooling its extruders were well- established and had seriously degradedthe tensile strength of J-M’s PVCpipe. Bythis time, J-M had begunto receive test results (from J-M’s internal testing and testing performed by customers in connection with claimsfor failing pipe) showing that more than 50 percentofthe time J-M’s PVCpipe failed to meet the minimum longitudinaltensile-strength requirements set forth in UL 1285. 1. Results of Internal Testing Performed by CRT Laboratories 37. A couple of times a year, Will Fassler, a senior engineer in J-M’s Research and Development Division in the Stockton, California plant, sends samples taken from J-M’s finished PVC pipe to CRT Laboratories, Inc. in Orange, California for longitudinal tensile- strength testing. These tests are conductedfor internal purposes only to allow J-M to monitorthe longitudinal tensile strength of its PVC pipe. Theresults are not shared with anyone outside J-M. i COMPLAINT FOR VIOLATION OF FEDERAL & STATE FALSE CLAIMS ACTS 014 Case 5:06-cv-00055-GW-PJW Document1 Filed 01/17/06 Page 15 of 50 Page ID #:15 m A F& F W H W N O o C O N N N W 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 38. By 1997, the test results from CRT Laboratories began to show that more than half of the samples taken from J-M’s PVC pipefailed to meet 7,000 psi, the minimum longitudinal tensile strength required by UL 1285. From 1997to present, the failure rate has continued to exceed 50 percent. Will Fassler, who has ordered and reviewedall of CRT’s test reports over the past nine years, calculates that J-M’s PVCpipe has failedtensile strength 70 percent ofthetime. See Exhibit 7 (Relator’s notes dated 9/12/05), incorporatedherein. 39. In 2002, while working on twolarge claims against J-M for failed PVC pipe, Relator was asked to reviewtheresults of all internal tests J-M had performed on PVC pipe manufactured between 1998 and 1999,the time period whenthefailed pipe was produced. In so doing, Relator wasableto review the results from six of the longitudinal tensile-strength tests CRT Laboratories performed on J-M’s PVC pipe. Ofthe six tests, Relator observed that four failed the tensile strength requirements and only two passed. 40. At various times, together and separately, Will Fassler, K.C. Yang, J-M’s former Corporate Quality Control Supervisor, and Relator each have expressed concer to Barry Lin, J-M’sDirector ofProduction, about the large percentage offailing tensile strength results on J-M’s PVC pipe. Each time, Mr. Lin has responded by saying that the failures were “an acceptable business risk” to meet company production goals, failures were normal, and notevery piece ofpipe would always meetspecification. Exhibit 7 (Relator’s notes dated 9/12/05), incorporated herein. 41. After seeing a subsetof the results of CRT’s longitudinal tensile-strength testing in which60 percentofthe samples failed and learning from Will Fasslerthatthe collective results of the past nine years showed an overall failure rate of 70 percent, Relator was no longer comfortable signing his name to customercertifications andletters to claimants representing that J-M’s pipe complies with the UL Standard. On August 23, 2005, Relator told Barry Lin about his concerns and said he would not sign any moreletters without first seeing copiesofall ofthe results of J-M’s internal testing performed by CRT Laboratories. 42. Mr. Lin refused to provide Relator with the CRT results. Instead, he simply assured Relator that J-M’s ULlisted products meetall the requirements ofUL anddirected him to 12 COMPLAINT FOR VIOLATION OF FEDERAL & STATE FALSE OBACTS Case 5:06-cv-00055-GW-PJW Document 1 Filed 01/17/06 Page 16 of 50 Page ID #:16 N o — & Ww W S o O o N N D H W N 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 continue to certify this to J-M’s customers. Exhibit 8, incorporated herein, is a copy of Relator’s August 25, 2005, email to Barry Lin asking him to acknowledgein writing his statements regarding J-M’s compliance with the ULtensile-strength requirement despite CRTtestresults to the contrary. After having similar conversations with K.C. Yang, Kai Cheng, J-M’s Director of Product Assurance, and Mai Huynh, J-M’s Product Assurance Manager, Relatorsent similar emails to each of them. See id. None ofthe recipients provided Relator a written acknowledgment. 2. Results of Testing Performed in Conjunction with Claims Against J-M 43. By at least 1997, J-M wasalso beginningto get test results for failing longitudinal tensile strength from its Product Assurance Department. J-M’s Product Assurance Department handles all claims and complaints brought by J-M customersforfailing pipe. Because longitudinaltensile-strength testing can only be performed by a certified independentlaboratory and is expensive ($2,500 per specimenfor the series of tests with whichthis test is packaged),it is typically only requested in the case of larger claims involving significant damages. 44. During Relator’s three years in J-M’s Product Assurance Department, longitudinal tensile-strength testing was only performed in 14 ofthe claims. Ofthose 14 claims, Relator saw 12 instances in which thetensile strength of J-M’s PVC pipe was below the 7,000 psi minimum requirement and only twoinstances in which the PVC pipe mettensile strength. Exhibit 9, incorporated herein, contains copies of some ofthe test results documenting the following failing tensile strengths measuredin pipe from four of the 14 claims: // / // Hf // i // H 13 COMPLAINT FOR VIOLATION OF FEDERAL & STATE FALSE Ole ACTS Case 5:06-cv-00055-GW-PJW Document 1 Filed 01/17/06 Page 17 of 50 Page ID #:17 “ a N n n N B h W W N o o 10 11 12 13 14 15 16 17 “18 19 20 21 22 23 24 25 26 27 28 Longitudinal Independent Tensile Strength Longitudinal Tensile Laboratory That Number & Required by UL Strength Measured in Performed the Name of Claim 1285 Sample of J-M PVC Pipe Test Test Date Q00-H-41 7,000 psi Hobbs B: 6,600 psi Law Engineering 09/28/00 Ferguson Cities and Supply Brigman Environmental Construction Services,Inc. Q00-H-14 7,000 psi Sample 2: 6,680 psi Modern 10/31/00 Tec Utilities Sample 3: 6,750 psi Industries, Inc. Sample 4: 6,940 psi Q02-J-40 7,000 psi 6,833 psi Bodycote 10/01/02 Westgate Broutman, Inc. Resorts Q05-C-08 7,000 psi Sample 1: 6,777 psi CRT 6/9/05 Sheldon Sample 2: 6,775 psi Laboratories 45. In his Internal Recommendation and/or Authorization (“IRA”) advising J-M on how it should handle the Sheldon claim referenced above, Relator noted that “CRT conductedtesting on the pipe and foundthat the tensile strength ofthe pipe was below that required by the UL Listing Mark on the pipe on all samples tested.” Exhibit 10, incorporated herein. Because ofthe pipe’s substandardtensile strength, Relator recommendedthat J-M offer the customer a settlement of $30,000. Id. 46. Kai Cheng, J-M’s Director ofProduct Assurance, disagreed with Relator’s recommendation and instructed Relator to “find a way to deny the claim and follow his thoughts, that JM is not responsible even if we fail the test, and offer alternative theories as to the cause of failure for this case.” Exhibit 11 (Relator’s notes dated 11/1/05), incorporated herein. In his conversation with Relator, Mr. Cheng also stated that he “knew that probably half of our pipe did not meetthis requirement of UL [UL 1285 longitudinaltensile strength] and forall of our pipe to meetthe standard we would haveto be perfect in production and we could not always dothat.” Id. 14 COMPLAINT FOR VIOLATION OF FEDERAL & STATE FALSE oTACTS Case 5:06-cv-00055-GW-PJW Document 1 Filed 01/17/06 Page 18 of 50 Page ID #:18 a A F F W O s D 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 3. Results of Internal Testing of J-M’s 30- and 36-Inch Big Blue Pipe 47, Beginning in approximately 1999 with the openingofits new plant in Adel, Georgia, J-M added two newproductsto its Big Blue PVC pipe productline. J-M began manufacturing Big Blue PVC pipe with a pressure rating of 165 psi in both the 30- and 36-inchsizesin its Adel, Georgia and Fontana, California plants. Shortly after starting to manufacture these two products, J-M sent specimensfrom bothpipes to an outside laboratory for longitudinal tensile-strength testing to see if they could qualify for ULlisting. However, all of the specimens failed to meet the minimum tensile strength of 7,000 psi required by UL 1285. 48. Once it established a customer base for these two products, J-M introduced a second pressure class — one with a pressurerating of 125 psi — in both its 30- and 36-inch Big Blue PVC pipe. Again, J-M subjected samples from these two new products as well (as the original two products) to longitudinal tensile-strength testing at an outside laboratory, andall of the samples hadtensile strengths below 7,000 psi. Sincethat time, J-M has continuedto test the longitudinal tensile strength of its 30- and 36-inch Big Blue PVCpipe and has received nothing butfailing results. Without a passingresult, J-M has been unable to approach UL about qualifying these products and they do not have a UL Mark. 49. Since J-M’s 30- and 36-inch Big Blue PVC pipe is made using the same materials, equipment and processing as all of J-M’s UL-listed Big Blue and Blue Brutepipe, the substandard tensile strengths reported on the 30- and 36-inch Big Bluepipes are representative of the tensile strengths of all J-M UL-listed pipe. Like the results of J-M’s internal CRT testing and its claimstesting, the failing results for its 30- and 36-inch Big Blue pipeare further proofthat J-M’s “cost-cutting” measures of substituting inferior ingredients in its J-M 90 compound, accelerating its production rates, and improperly tooling its extruders have had a negative effect on the longitudinaltensile strength of its PVC pipe. B. J-M PVC Pipe Does Not Meet UL’s Radial Tensile Strength Requirement 50. In August 2003, Relator proposed a changeto the bell design of J-M’s Blue Brute and Big Blue PVC pipe. The two ends on a length ofPVC pipeare called alternately the barrell end and the bell end. Under J-M’s existing design, the bell end had a greater wall thickness than the 15 COMPLAINT FOR VIOLATION OF FEDERAL & STATE FALSE CLAIMS ACTS 018 Case 5:06-cv-00055-GW-PJW Document 1. Filed 01/17/06 Page 19 0f 50 Page ID #:19 & _ W w NH N S o C o ~ A W N 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 remainderofthe pipe. To make the bell walls, the extruder had to be slowed down andadditional material added to increase the wall thickness. Under Relator’s proposal, dubbed the “No Thickened Section”Project, the bell wall would not be thickened and would have the same dimensionsas the remainderofthe pipe, thereby allowing the extruderto run at a nearly continuous speed, increasing output and reducing the amount of material needed perlength of pipe. 51. Relator found support for his proposed design change in the American Water Works Association (“AWWA”)standards governing PVC Pipe for Water Transmission andDistribution, AWWA C900 and C905. Under Section 4.3.2.2 ofboth AWWA C900 and C905,the pipe’sbell end must meet one of two requirements. It must have the same wall thicknessas the barrel of the pipe,or it must be tested to ensure that the joint assembly qualifies for a hydrostatic design basis (“HDB”) category of 4,000 psi. See Exhibit 12, incorporated herein. Whereaslongitudinal tensile-strength testing measures the tensile strength of the lengthwise portion of the pipe from end to end, HDBtesting is one of several ways of measuring thetensile strength of the radial, circular or hoop section of the pipe. From this Section, Relator concluded that the thickened bell could be omitted from the pipe design so long as a joint manufactured from the thinnerbell could meet the required HDBcategory of 4,000psi. 52. In his ProjectInitiation Form dated October 28, 2003, Relator estimated that by omitting the thickenedbell section of its two most popular products, Blue Brute and Big Blue, J-M would save $3,000,000 a year in materials costs alone, not to mention the additional efficiencies to be gained from not having to slow down its extruders and running them at a continuous speed. See Exhibit 13, incorporated herein: Other managers, including Will Fassler, extolled the potential benefits of a “No Thickened Section” pipe. In an email to Jack Hwang, J-M’s Quality Control Manager, dated September 3, 2003, Mr. Fassler wrote “The potential benefits are large: significantly reduced material usage; greatly reduced bell-end forming scrap; easier bell-end forming;better bell-end appearance.” Exhibit 14, incorporated herein. On December 8, 2003, Walter Wang, J-M’s President, approved the “No Thickened Section”Project with a budget of $65,000 to cover the costs of designing and developing the new bell end and 16 COMPLAINT FOR VIOLATION OF FEDERAL & STATE FALSE CLAIMS ACTS 019 Case 5:06-cv-00055-GW-PJW Document 1 Filed 01/17/06 Page 20 0f 50 Page ID #:20 oO o o e K N D N m W F F W D H N K e N H N N N N N N Y D D N R R m m m m a e a a o N n K N U F Y W Y H -K Y§ G D G O w e Y D D H m H B R D H V N S& S» C O performing the varioustests needed to gain ULlisting. See Exhibit 13. 53. Since the thinner bell wall only involved a change in the pipe’s design, as opposed to its materials or processing, J-M did not have to undergo manyofthe PerformanceTests in UL 1285, including the Longitudinal Tensile-Strength Test,to qualify the newly designedpipe for ULlisting. Instead, to qualify the new design, UL required J-M to pass the following three strength tests, each of which measuresthe radialtensile strength of the newly designed bell end of the pipe: (1) HDB Test (2,000 hour test); (2) Sustained Pressure Test (1,000 hourtest); and (3) Quick Burst Test (60 secondtest). 54. Since the newly designed, no-thickened-section pipe was made from the same materials and processasthe existing thickened-section pipe, J-M experienced manyofthe same problems with the new pipeasit had with the existing pipe. For instance, J-M’s three “cost- cutting” practices (substitution of inferior materials, accelerated production rates and improper tooling of its extruders), which caused J-M’s existing pipe to fail the Longitudinal Tensile- Strength Tests a majority of the time, also caused J-M to fail many of the above-referencedradial strength tests on the newly designed, no-thickened-section pipe. 55. To gain ULlisting for the new pipe designin the face of such failures, J-M resorted to a numberoffraudulentpractices, including withoutlimitation (1) specially producing the UL specimensusing higher quality ingredients and reduced productionratesthat are not representative of J-M’s actual materials and process; (2) concealing failing test results from UL; (3) where early results indicated a specimenultimately would fail, stopping long-term tests before they were completed and substituting new specimens; and (4) making multiple specimens from onelot, testing a subset of the specimensin advanceto ensure that when the remaining specimens are tested for UL,they willpassthetests. 1. HDB Testing 56. As discussed above, the two AWWAstandards governing PVC pressure pipe — AWWAC900 and AWWAC905 — bothstate at Section 4.3.2.2(b) that the joint assemblies of the pipe’s bell must“qualify for a hydrostatic design basis (HDB)category of 4,000 psi (27.58MPa) whentested in accordance with ASTM D2837 as modified in ASTM D3139.” Exhibit 12. 17 COMPLAINT FOR VIOLATION OF FEDERAL & STATE FALSE CLAIMS ACTS 020 Case 5:06-cv-00055-GW-PJW Document1 Filed 01/17/06 Page 21 of 50 Page ID #:21 N o O e o S N D R H D F F Ww W 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 ASTM D2837,in turn, provides the test method for obtaining the pipe’s HDB. See Exhibit 15, incorporated herein. 57. The purpose of HDBtesting is to determinethe long-term radial strength characteristics of PVC pipe. Broadly described, HDBtesting is performed byplacing 10 specimens under varying degrees of pressure and recording the point in time, up to a maximum of 2,000 hours, whenthe jointfails. In a November 14, 2003, email to Jack Hwang,Will Fassler described the HDBtest as “the most stringent test ofPVC pressure pipe quality.” Exhibit 16, incorporated herein. Because HDBtesting lasts 83.3 days and requires special equipment,it must be performedat an independent,certified testing laboratory. Given the length of the test, UL doesnot require that a UL representative be present to observe the testing. 58. Oncethetesting is complete, Section 5.4 ofASTM D2837requiresthat the following three calculations be performed to determine a pipe’s HDB: (1) the hydrostatic strength at 100,000 hours; (2) the hydrostatic strength at 50 years; and (3) the percent of circumferential expansion. Eachofthese calculations measuresthe pipe’s long-term hydrostatic strength. To obtain an HDBcategory of 4,000 psi, the smallest of these three values must have a long-term hydrostatic strength between 3,830 and 4,800 psi. Exhibit 15 (at Table 1). However, in Note 7, ASTM D2837notes that the expansion measurement is not required in North America because expansion strengths taken from North American stress rated PVC materials have not been found to be “the limiting factor,”i.e., the lowest of the three values described above. 59. From the beginningofthe “No Thickened Section” Project, many of J-M’s Quality Control managers expressed concern abouttheability of J-M’s pipe, thickened or no, to pass the required HDBcategory of 4,000 psi. In a November 14, 2003, email to Jack Hwang, Will Fassler listed first among the challenges J-M needed to overcomefor the Project to succeed J-M’s “increasing failure rates in long-term pressure tests.” Exhibit 16. Mr. Fassler also cited three other obstacles: (1) the recent failure of J-M’s pipe to pass sustained pressure tests at NSF International (formerly known asthe National Sanitation Foundation), which provides product testing and certification services for products in contact with potable water, (2) failing HDB testing and (3) numerousjoint specimen failures “where the pipe burst before the joint leaked.” 18 COMPLAINT FOR VIOLATION OF FEDERAL & STATE FALSE CLAIMS ACTS 021 Case 5:06-cv-00055-GW-PJW Document1 Filed 01/17/06 Page 22 0f 50 Page ID #:22 C o f e N D A W B R W H P O e S N N N O N N Y N Y N Y Y Q R D N R m e i a o N D W N F R Y W N F F S F O e H D D H H W B R W D B H K & O o Id. 60. Given its history ofproblemswith the tensile strength of its PVC pipe, J-M was skeptical that no-thickened-section pipe produced at random on the same machinery using the same materials and processas its existing pipe would pass the HDBtesting. To increase its odds of passing, J-M directed the Plant Managers preparing the no-thickened-section specimensto monitor the results of the daily Quick Burst tests being performed onits existing pipe and only produce the specimens whenthoseresults were favorable. 61. In a December 9, 2003, email, Will Fassler, who was heading up specimen preparation for the Project, informed Stephen Yang, the Plant Manager at J-M’s Fontana, California plant, that the Quick Burst test data “is very useful in identifying pipe that has an elevated chanceof failing HDB.” Exhibit 17, incorporated herein. Mr. Fassler instructed Mr. Yang to consult that data in choosing whento produce the specimens. Id. (“We needtotest the pipe before testing the joint because the pipewill limit the strength ofthe joint.”) Similarly, in another email of the same date, Jack Hwangnotified Mr. Yang that “Wehaveto havea good test result within JM before we send out for HDBtest.” Id. 62. Oncetheinitial specimens were produced (using the Quick Burst data to increaseits odds ofpassing HDB), J-M sent specimensofits no-thickened-section Blue Brute pipe(in size 4- inch Dimension Ratio (“DR”) 18) to Charles Stanley, the Director ofUniversal Laboratory, Inc. in Garland, Texas, for preliminary testing. Before incurring the cost of 2,000 hoursoftesting as required by full-scale HDBtesting, J-M instructed Mr. Stanley to first subject 10 specimensto a shortened HDBtestof only 100 hours to give J-M a preview of howthe pipe would likely perform. 63. Theresults of this testing, which J-M managers dubbed “Accelerated HDB Testing,” were mixed. Approximately half ofthe 10 specimens had hydrostatic strengths that were well below the confidence limit and caused the entire lot to fail the HDBtest. Exhibit 18, incorporated herein, is a copy of the notes Relator took as Mr. Stanley reported ontheresults of the HDBtesting. Under item numberthree, Relator notes that the Blue Brute specimenin size 4- inch DR 18 failed the confidence limit under the Accelerated HDBtesting. Id. 19 COMPLAINT FOR VIOLATION OF FEDERAL & STATE FALSE CLAIMS ACTS 022 Case 5:06-cv-00055-GW-PJW Document1 Filed 01/17/06 Page 23 of 50 Page ID #:23 N S oO o S& S N N O W F R W w 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 64. Undeterred by these results, J-M instructed Mr.Stanley to begin the full-scale HDB testing. Early in the testing, J-M beganto receive reports from Mr. Stanley that manyofthe specimens were exhibiting excessive swelling. While ASTM D2837 allows specimensto expand a maximumoffive percent during HDBtesting, several of J-M’s specimens had swelled by as muchas 33 percent. Having never seen such swelling before, Mr. Stanley sent several of the swollen specimens to Will Fassler and Relator for their review. (At the time Relator left J-M in November 2005, one of the swollen pipe specimens — a Blue Brute pipein size 4-inch DR 18 -- wasstill in J-M’s literature room.) 65. Despite the fact these specimens clearly showeda serious problem with excessive swelling, J-M continuedto rely on Note 7 ofASTM D2837 (whichprovidesthat the expansion measurementis not required wherethe five percent expansionstrengths are not the limiting factor) and refused to consider the expansion measurementin determining HDB. From the degree of swelling, J-M was aware that if Universal Laboratories had calculatedit, the expansion measurement would have been the lowestvalueof the three calculations for determining long- term hydrostatic strength and would have causedthe pipe to fail HDB. Instead, J-M continued to take only the lowerofthe first two calculations (hydrostatic strength at 100,000 hours and hydrostatic strength at 50 years) when calculating HDB. 66. Even with the advantage gained by omitting the expansion measurement, J-M repeatedly failed the HDB test when using the lowerofthe hydrostatic strength at 100,000 hours and at 50 years. Relator recalls four instances in which Blue Brute specimensfailed HDBtesting. Of the four sets of failing specimens, two were in size 8-inch DR 18, one was 4-inch DR 18, and one was8-inch DR 14. See Exhibit 18. J-M had no reports documenting the failing results because it had instructed Mr.Stanley only to prepare reports for the passing results and to report the failing results orally. Relator recorded many ofthesefailing results on a piece of paper as Mr. Stanley reported them to him. Id. 67. Asdiscussed above, per ASTM D2837(as modified by ASTM D3139), HDBtesting is performed using 10 specimensthat are subjected to varying pressures for varying lengths of time up to 2,000 hours. During its HDBtesting at Universal Laboratories, J-M asked Mr. Stanley 20 COMPLAINT FOR VIOLATION OF FEDERAL & STATE FALSE CLAIMS ACTS 023 Case 5:06-cv-00055-GW-PJW Document1 Filed 01/17/06 Page 24o0f50 Page ID #:24 & - Ww W W N S s NH N W N 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 to notify it whenearly indications revealed that one or more ofthe 10 specimens,iftested to completion, would cause the overall HDBtest to fail. In such instances, J-M instructed Mr. Stanley to stop thetesting ofthose particular specimens(in orderto avoid getting any bad data points) and substitute in a new specimen for the continuation of the HDB testing. 68. If the substitutions were unable to produce a passing result and the 10 specimens produced a failing HDB, J-M instructed its managersat the plants preparing the specimensto destroy all other specimens madefrom thefailing lot. As was the case with theinitial set of specimens,J-M hadits Quality Controlstaff, including Will Fassler and Armondo Martinez, oversee the production of additional specimens. To increase the oddsof getting a passingresult, J-M slowedits regular production rates and adjusted its typical temperatures and torque to allow for optimum processing of the specimens. To reduce the excessive swelling, J-M replaced the lower grade multiwax ordinarily used in its J-M 90 compoundwith a high quality calcium sterate. 69. On July 5, 2004,after seven monthsoftesting, J-M gotits first passing result for HDBwith tests performed on Blue Brute specimens in size 8-inch DR 18. However, one month later on August 31, Will Fassler wrote an email to Relatorstating that “The HDBtesting so far has revealed material issues (excessive swelling) and workmanship issues (mid-wall void). The chances of two consecutive samplings passing HDB appear to beless than 50%.” Exhibit 19, incorporated herein. Eight monthslater, in an Internal Recommendation and/or Authorization (“IRA”) recommending that J-M proceed with the production ofno-thickened-section pipe, Mr. Fassler summarized the HDBtesting as follows: “J-M submitted DR 14 & DR 18 joint samplings to Universal Laboratories for HDB tests per ASTM D3139-98. Someearly samplings failed. Later submittals passed — confirming that with suitable materials and workmanship the design meets the requirements.” Exhibit 20, incorporated herein. 70. By January 2005, after many intermittent failures, J-M had achieved passing HDB results in all of the three pipe sizes that UL requiredforits qualification of the new pipe design. J-M providedthe passing results to UL. In so doing, however, J-M concealed from UL the following material facts: (1) J-M had conducted other HDBtests on eachofthese pipe sizes,all of which hadfailed; (2) to achievethe passing results, J-M had consulted Quick Burst test results 21 COMPLAINT FOR VIOLATION OF FEDERAL & STATE FALSE CLAIMS ACTS 024 Case 5:06-cv-00055-GW-PJW Document 1 Filed 01/17/06 Page 25 of 50 Page ID #:25 - _ W W b b C o O o NI N D O M N 10 ll 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 in deciding whento producethe specimens,alteredits regular materials and process, and prematurely stopped testing of specimens that would have produced failing results and substituted new specimensintheir place. 2. Sustained Pressure Test 71. The Long-Term Hydrostatic-Pressure Test, also referred to within J-M as the “Sustained Pressure Test” or “1,000 Hour Test,” is anothertest that measures the long-term radial tensile strength ofPVC pipe. Unlike HDBtesting, which measures 10 specimensat varying pressures for varying lengths of time up to 2,000 hours, the Sustained Pressure Test measuresfive specimensat the sametest pressure for 1,000 hours. Topass, the specimens mustnot “rupture, permanently distort, or weep” when subjected to the specified pressure for 1,000 hours. Exhibit 6. 72. As described above, Sustained Pressure Testing is one ofthe three strength tests UL required J-M to perform to qualify its no-thickened-section pipe for UL listing. The requirements for Sustained Pressure Testing appear in Section 18 of the UL 1285 Standard. Like Longitudinal Tensile-Strength Testing, Sustained Pressure Testing is one of UL’s Performance Tests and UL requires that the specimens tested must be representative of the manufacturer’s materials, design and processing. Like HDB Testing, Sustained Pressure Testing requires special equipment andis typically performed by an independent, certified laboratory. 73. In outlining its requirements for qualifying the no-thickened-section pipe, UL informed J-M that it would observe J-M’s Sustained Pressure Testing. Because of the length of the test, which lasts 1,000 hours/41.6 days, UL only required a UL observerto be presentat the beginning, middle and endofthetesting. 74, Because UL would be observing portions of the Sustained Pressure Tests, J-M wanted to ensure that the specimensit sent Charles Stanley at Universal Laboratoriesfor testing would actually passthe test. To accomplish this, J-M made multiple specimens from each 20 foot section of no-thickened-section pipe it specially produced. J-M subjectedthefirst 10 specimens from each lot to the HDBtesting described above. If the specimens produced a passing HDB result, J-M would then send other specimens from that same lot to Universal Laboratories for the 22 COMPLAINT FOR VIOLATION OF FEDERAL & STATE FALSE CLAIMS ACTS 025 Case 5:06-cv-00055-GW-PJW Document 1 Filed 01/17/06 Page 26 of 50 Page ID #:26 o C O “ 1 D H 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Sustained Pressure Testing. Since the specimens had passed HDBtesting, whichis the most demandingof pipe quality, J-M could be confidentthat other specimensfrom that lot would also pass the less onerous Sustained Pressure Testing. 75. Onceit had passed HDBtesting for a particular size of non-thickened-section pipe, J-M sent Universal Laboratories for Sustained Pressure Testing additional specimens from the samelot as the passing HDB specimens. In that way, J-M was able to passall of the Sustained Pressure Tests witnessed by UL observersfor the two pipe sizes UL required — Blue Brute 4-inch DR 14 and 4-inch DR 18. 76. At no time during the course of these Sustained Pressure Tests did J-M discloseto the UL observerthat J-M had specially produced each ofthe test specimensusing materials and processing that were not representative of J-M’s actual manufacturing process. J-M also concealed from UL the fact that the test specimens had not been chosen at random butinstead were selected from lots that had produced passing HDBtestresults. 3. Quick Burst Test 77. The third and final strength test that UL required for J-M to qualify its no-thickened- section pipe was the Quick Burst Test. The Quick Burst Test is designed to measure the short- term radial strength characteristics of the pipe. The requirements for the Quick Burst Test are contained in Section 4.3.3.2 of the AWWA C900 Standard. Broadly described, Section 4.3.3.2 providesthat a pipe specimen must beable to attain a hydrostatic stress of 6,400 psi within 60 to 70 seconds of being pressurized. See Exhibit 12. 78. The Quick Burst Test is a routine quality control test that J-M is required to perform daily at each ofits plants at the start-up of the extruder and following any changein operating conditions. Given the frequency with which this test is required to be performed, J-M hastest equipmentin eachofits plants and performsthetestsitself. 79. Jnoutlining the requirements needed to qualify J-M’s no-thickened-section pipe, UL informed J-M that it would come to J-M’s plant to observe each of the Quick Burst Tests on the various sizes of its Blue Brute DR 14 and DR 18 no-thickened-section pipe. Because a UL representative would be observingthetests, J-M again took steps to try and ensurethat the 23 COMPLAINTFOR VIOLATION OF FEDERAL & STATE FALSE 036s ACTS Case 5:06-cv-00055-GW-PJW Document1 Filed 01/17/06 Page 27 0f 50 Page ID #:27 & _ W w W N o O O o N N D H W N 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 specimens would pass while UL was watching. 80. Because the Quick Burst Tests werethe last of the three strength tests required for UL listing, at the time it performed the Quick Burst Tests, J-M had already received passing results in both the HDB and Sustained Pressure Testing. In choosing specimensfor the Quick Burst Testing, J-M selected specimens from the samelots as the specimensthat had produced the passing results on the HDBand Sustained Pressure Tests. 81. For added insurance, J-M also ran someinternal Quick Burst Tests on a few ofthe specimens from the selected lots to be doubly certain that the specimens would pass while UL watched. Using this approach, J-M passed the Quick Burst Tests for all but one ofthe sizes ofits Blue Brute DR 14 and DR 18 no-thickened-section pipe. In the case of the Blue Brute specimens in size 12-inch DR 14, however, J-M failed four consecutive Quick Burst Tests while UL observed before ultimately getting a passing result. On October 26, 2005, Will Fassler told Relator that J-M had only obtained the passing result using a thickened-, instead of a no- thickened-, section pipe. See Exhibit 21, incorporated herein. According to Mr. Fassler, the pipe was measured “while UL wasn’t really paying attention andthe test pressure calc[ulation] wasn’t properly computed on the accurate measurements.” Id, In short, J-M gained UL listing for the new design in size 12-inch DR 14 using a specimen from the old design. 82. To prevent UL from investigating the real source of these four failures(i.e., the three “cost-cutting” measures and their negative effect on tensile strength), J-M blamedthe four failures on illusory problems with the test equipment. Specifically, J-M attributed the failures to the end caps that are inserted into either end of the specimen to create a seal so it can be pressurized. J-M told Jerry Kirkpatrick, UL’s representative observingthetests, that the end caps had not sealed properly, were too old and were not good for the new pipe design. All of these statements werefalse. 83. At no time during the Quick Burst Testing did J-M inform UL’s Jerry Kirkpatrick that it had prepared the specimens using materials and productionrates that are not representative of J-M’s manufacturing processorthat it had not chosen the specimensat random butinstead selected them basedonthe fact that they came from lots that had already passed the HDB and 24 COMPLAINT FOR VIOLATION OF FEDERAL & STATE FALSE CLAIMS ACTS 027 Case 5:06-cv-00055-GW-PJW Document1 Filed 01/17/06 Page 28 of 50 Page ID #:28 bh Ww W Ww o FS F S S NH N W N 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Sustained Pressure Testing. Nor did J-M inform ULthatit only passedthefifth test using the original thickened-section pipe design (and an improperly calculated test pressure) as opposed to the new design. J-M also concealed from ULthereal reason for the four tensile strength failures, i.¢., that J-M’s “cost-cutting” measures had decreasedthetensile strength ofits pipe. 4. J-M Authorizes Production of No-Thickened-Section Pipe 84. In early 2005, shortly after he began raising concerns with J-M managementaboutthe excessive swelling and failing HDBtest results of the no-thickened-section pipe and expressed doubts aboutthe tensile strength of J-M’s existing PVC pipe (which was made from the same process and compound), Relator was removed from the No-Thickened-Section Project. Over the intervening year before the Project was completed, Will Fassler and K.C. Yang continued to keep Relator apprised ofthe status of the Project, includingthe results ofall of the testing performed since Relator was removed. 85. In the Spring of 2005, upon learning that J-M managers were about to recommend that J-M start to produce the no-thickened-section pipein spite of all the failing results, Relator raised a series of objections to J-M management. Amongother things, Relator cautioned that, at a minimum,the newly designed pipe should only be producedat the two plants that produced the passing results for UL and those two plants should use the same slow production rates and higher quality materials that they had used to specially produce the passing samples. Relator also insisted that, once it was produced andbefore it shipped, the new pipe must be subjected to a series of quality control tests to ensure its conformanceto the tensile strength requirements. Giventhe force and strength of Relator’s objections, some ofRelator’s managersultimately were persuadedto include Relator’s precautions in their recommendationsfor the production ofthe new no-thickened-section pipe. 86. On April 29, 2005, Will Fassler prepared an Internal Recommendation and/or Authorization (“IRA”) recommending that J-M begin preparations to produce the no-thickened- section pipe starting May 16. See Exhibit 20. By April 29, UL had given J-M oral approvalto start producing the no-thickened-section pipe in all sizes of Blue Brute DR 14 and DR 18, except for 12-inch DR 14, on May 16. Because J-M hadreceived so manyfailing test results in the 25 COMPLAINTFOR VIOLATION OF FEDERAL & STATE FALSE 8ACTS 0 Case 5:06-cv-00055-GW-PJW Document1 Filed 01/17/06 Page 29 of 50 Page ID #:29 o O O e S N D N T W B R W D N O = N y N O NY O NH N N Y D N K O R O R O R m O R m e e m e e e e l e ao a Y N H D A F F W Y H O =& — B D C O C O M S D R W H B B W H N O Y e C O processof obtaining the ULlisting, Mr. Fassler was careful to point out that the no-thickened- section pipe only passed the tests because of “suitable materials and workmanship” and therefore those same materials and level of workmanship mustbe used as J-M begins to produce the newly designed pipe. 87. Barry Lin and Kaushal Rao, J-M’s Director and Assistant Director ofProduction, were equally cautious in their approvals of the new pipe. Both men gave their approvalon the condition that J-M would take certain precautionsto protect againstthetensile strength failures that the UL qualification testing had revealed. In the block provided on the IRA forhis authorization and signature, Mr. Lin wrote “In consideration of severaltest failures to non-thick- section project do propose to have PWI [J-M’s Wilton, Iowa plant] & PFO [J-M’s Fontana, California plant] to produce non-thick-section product first. After both plants successfully produce C-900 product, then do will apply to all plants.” Exhibit 20. Similarly, in his signature/authorization block, Mr. Rao wrote “R&D should also concentrate on one plant & test the pipe produced underdifferent conditions such as regrind material used in prod.; various speeds & production rates for production & test the pipe on a continuousbasis.” Id. 88. On May 16, 2005, ignoring the reservations expressed by the three managers, J-M’s President Walter Wang authorized production of no-thickened-section pipe for J-M’s Blue Brute PVCpipe in size DR 18 at all of J-M’s 11 PVC producingplants starting June 1, 2005. See Exhibit 20. Despite explicit advice from Will Fassler, Barry Lin and Kaushal Rao, President Wangdid not limit the production to the two plants that had successfully produced the passing specimens. Nordid he seek to ensure that the pipe is produced using the same materials and processing that J-M had used in producing the qualifying specimens or make any provision for testing the new pipe as it is being produced to monitor quality. Despite the fact that its new pipe hadfailed manyofthe qualifying tensile strength tests, J-M began manufacturingthe new pipe without implementing a single safeguard. 5. UL’s Qualification of J-M’s No-Thickened-Section Pipe 89. On May 19, 2005, UL issued J-M its formal written “Notice of Authorization to Apply the UL Mark.” Exhibit 22, incorporated herein. In this authorization, UL expressly states 26 COMPLAINT FOR VIOLATION OF FEDERAL & STATE FALSE 629." ACTS Case 5:06-cv-00055-GW-PJW Document 1. Filed 01/17/06 Page 30 0f 50 Page ID #:30 c o O o NH N BD O A N R F W D Y e N y N H D N N N N N Y D O N R m e a e s o o N D U N F F W N - § S G O o O o N D R H D H B P W P B — & O O thatits authorization to apply the UL Listing Markonly extends to those products that are constructed in an identical mannerto the subject models that were submitted to UL forthis investigation. Id. The letter goes on to say “Products that bear the UL Mark shall be identical to those that were evaluated by UL andfound to comply with UL’s requirements. If changes in construction are discovered, appropriate action will be taken for products not in conformance with UL’s requirements and continued use of the UL Mark may be withdrawn.” Id. 90. J-M began producing its Blue Brute DR 18 pipe on June 1, 2005. Although UL also had authorized J-M to apply the UL Mark to its Blue Brute PVCpipein all sizes of DR 14 except for 12-inch, J-M decided to wait until it received UL authorization for the remaining size beforeit commenced production of any DR 14 pipe. In October 2005, UL provided J-M withits authorization for 12-inch DR 14 pipe and J-M began producingall sizes of no-thickened-section DR [4 immediately thereafter. 91. Having refused to adopt any of the precautions recommendedbyits managers, J-M began producing the new pipe using the same “cost cutting” measures it had employed withits existing pipe. As the varioustest results revealed, pipe created using inferior ingredients, accelerated production rates and impropertooling fails tensile strength testing more than 50 percent of the time. Had it been awareofthe failing test results and J-M’s tampering with the testing, UL would not have given the pipe ULlisting in the first place and would have withdrawn any ULlisting had it known that the precautions that had been taken to produce the passing results (slowing production rates and substituting higher quality ingredients) were not being taken with the everyday productionof the pipe. C. J-M’s False Representations Regarding UL Listing and UL Compliance 92. Despite its knowledge (beginning atleast in 1997) that well over half of its PVC pipe failed to meet the longitudinal tensile-strength requirements of UL 1285 andits knowledge(as of at least June 1, 2005) that its new no-thickened-section pipe had a similar failure rate, J-M continued to representto its distributors and customers, including Real Parties, that its PVC pipe is ULlisted. In its catalogs, J-M states for both its Blue Brute and Big Blue PVCPipethatit “is Underwriters Laboratories Listed” and hasa tensile strength of 7,000 psi. Exhibit 23, 27 COMPLAINT FOR VIOLATION OF FEDERAL & STATE FALSE CLAIMS ACTS 030 Case 5:06-cv-00055-GW-PJW Document1 Filed 01/17/06 Page 310f50 Page ID #:31 “u n & Ww W W b O o C O ~ I B n 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 incorporated herein. In the previous versionofits website (dated 9/8/05), J-M statedthatall classes of both its Blue Brute and Big Blue pressure pipe “are UL listed for water mains.” Exhibit 24, incorporated herein. Except for those pipes painted purple for Reclaimed Water or green for Sewer, J-M hascontinued to markthe outside surface of each length ofits Blue Brute and Big Blue pipe with the UL Mark. See Exhibit 25, incorporated herein. 93. J-M also has continued to provide certifications to its individual customersthatits Blue Brute and Big Blue PVCpipe has been manufactured in accordance with the requirements of UL 1285. Exhibit 26, incorporated herein, contains examples ofcertification letters J-M provided its customers regarding Blue Brute’s and Big Blue’s compliance with the UL Standard andlisting. 94. At all times relevant to this Complaint, Real Parties, like other governmentalentities and waterdistribution systems, have required that all pipes for use in undergroundfire service systems be UL 1285 listed. Exhibit 27, incorporated herein, contains examples ofspecifications from various governmententities in which ULlisting is required for pipe used in fire services. In addition to requiring ULlisting for PVC pipe used in fire services, many ofthe Real Parties, like other governmentalentities and water distribution systems, also require that all PVC pipe for use in their water distribution mains or water transmissionlines shall be approved by Underwriters Laboratories, Inc. and marked with the UL logo. Exhibit 28, incorporated herein, contains examplesof specifications from governmental entities, including some Real Parties, for UL listing ofPVC pipe used in water mains and transmissionlines. VI. J-M’S SALE OF SUBSTANDARD PVC PIPE THAT DOES NOT MEET AWWAREQUIREMENTS 95. The American Water Works Association (“AWWA”), an organization in which J-M has always been a member, has promulgated standards governing the physical and chemical properties, including required tensile strength, ofPVC Pressure Pipe for water transmission and distribution. AWWAStandard C900applies to 4-inch through 12-inch diameter PVC Pressure Pipe usedfor water distribution, and AWWA C905applies to 14-inch through 48-inch diameter PVCPressure Pipe used for water transmission and distribution. See Exhibit 12. 28 COMPLAINT FOR VIOLATION OF FEDERAL & STATE FALSE Oa ACTS , Case 5:06-cv-00055-GW-PJW Document1 Filed 01/17/06 Page 32 of 50 Page ID #:32 e C S& S N D O m B P W Y B O N H N O N O N O N O N Y N O N O O m m m m m m m e e t a o N Y D n A F P W D H O F & DO D O D f F I H D WN W B F W H N O K F C O 96. Atall times relevant to this Complaint, Real Parties, like other governmentalentities with water distribution systems, have required that all PVC pressurepipe foruse in their water distribution systems comply with or exceed the standards described in AWWAStandards C900 and C905. See Exhibit 29, incorporated herein. AWWAStandardsare the universal standard applied in the water distribution system industry. Compliance with AWWArequirements is so consistent and widespread in this country that the requirement ofAWWA complianceis understood by domestic purchasers and sellers of water works products regardless ofwhetheritis stated expressly. 97. Relator is unaware of any domestic PVC pipe manufactureror distributor who openly offers to sell PVC pipe in sizes DR14, DR18, DR25, DR32.5, DR41 and DR51 for use in a water distribution system that does not comply with AWWAStandard C900 or C905. Noris Relator aware of any domestic waterdistribution system that knowingly permits the purchase ofPVC pipe for water transmission ordistribution that does not comply with the tensile strength requirements ofAWWA C900 or C905. Real Parties would never have knowingly purchased PVCpipe for use in their water distribution systems that did not comply with AWWAstandards. 98. To be AWWAcompliant, PVC pipe used for water distribution or transmission must satisfy certain strength andextrusion-qualitytests set forth in AWWA C900 and C905, including without limitation (1) Cell Class Testing, (2) HDB Testing, (3) Sustained Pressure Testing, (4) Quick Burst Testing and (5) Acetone-Immersion Testing. Broadly described, the purpose of these tests is to ensure PVC pipe will withstand varying pressures over both short and long periods without leaking. However, becauseofits “cost cutting” and “productivity” measures described in section IV above, J-M hasrepeatedly failed eachofthesetensile strength tests from at least 1997 to the present. A. Cell Class Testing 99. PVC compoundsareidentified by a numerical classification system in which each number correspondsto a cell ina Table that identifies the particular property and the minimum required value for that property. AWWAStandards C900 and C905 both require that the compound from which PVC pipe is made shall “equal or exceed cell class 12454-B as defined in 29 COMPLAINT FOR VIOLATION OF FEDERAL & STATE FALSE CLAIMS ACTS Case 5:06-cv-00055-GW-PJW Document1 Filed 01/17/06 Page 33 of 50 Page ID #:33 - W W W N m o C o s D N W N 10 1] 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 ASTM D1784.” Exhibit 12. In describingthe classification system, ASTM D1784statesthat the third numberin the designation correspondsto the compound’stensile strength requirements. See Exhibit 30, incorporated herein. For cell class 12454-B, the third numberofthe designation is 4, which translates to a required tensile strength of 7,000 psi. Id. 100. In addition to providing the physical properties that each cell class must have, ASTM D1784also prescribes the method by which the specimensfortesting compliance with these requirements shall be prepared. Until February 1997, ASTM D1784 only provided one way of preparing the specimensand that was by compression molding. See Exhibit 31, incorporated herein. To prepare a sample by compression molding, separate sheets ofPVC compoundorpipe are pressed together between two metal drums to form a laminate. 101. However, beginning in February 1997, ASTM D1784 was revised to include two additional specimen preparation methods. Instead ofjust compression-molded specimens, ASTM D1784 provided that compliance with thecell classification requirements “shall be determined with compression-molded, extruded, or injection-moldedtest specimensfor. . . tensile strength.” Exhibit 32 at Section 10, incorporated herein. 102. Inthe Spring of 1997, Doug Boitz, J-M’s former Product Assurance Manager, contacted members ofASTM D20.15, the Committee responsible for amending ASTM D1784, for guidance regarding the properinterpretation of the amendments to Section 10, the section on specimen preparation. Following his consultation with the Committee members, Mr. Boitz wrote an internal memorandum to Barry Lin, J-M’s Director of Production, discussing what he had learned. See Exhibit 33, incorporated herein. 103. In this memo, dated May 5, 1997, Mr. Boitz states that the Committee’s intent for the change is “to create the ability for manufacturers of extrudedor injection molded products to have samples of materials for testing that are representative of the products, which they are producing.” Exhibit 33. In other words, the Committee intended that manufacturers of extruded products use an extruded sample for testing, while manufacturers of compression-molded products use a compression-molded test sample. The Committee’s reasoning, Mr. Boitz said, was“that the processing can greatly affect the properties and quality of the material or 30 COMPLAINT FOR VIOLATION OF FEDERAL & STATE FALSE CLAIMS ACTS 033 Case 5:06-cv-00055-GW-PJW Document1 Filed 01/17/06 Page 34 of 50 Page ID #:34 - Ww W W N a o “S N D N W N \ o 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 compound.” Id. Since J-M producesits PVC pipe by extrusion, Boitz concluded that ASTM 11784 now required J-M also to prepare its specimens by extrusion “so that the results obtained from finished products are not significantly different than the tested specimens.” Id. At the end of the memo, Mr. Boitz recommends to Mr.Lin that J-M’s Research and DevelopmentDivision _ be notified ofthis issue so that it can amend J-M’s sample preparation methods to include extruded samples. Id. 104. Despite this clear statement from the ASTM Committee Membersthat J-M, as a manufacturer of extruded pipe, must use extruded specimens for purposesofcell classtesting, Relator has information and believes that J-M has continued to use compression molding as the exclusive means of sample preparation forits cell class testing from February 1997 through the present. The reason for J-M’s allegiance to the compression-molded specimensis that its J-M 90 compound performsbetter and yields highertensile strength results under the compression- molding process than can be obtained via extrusion. With the use of compression-molded samples, J-M wasableto artificially boost its tensile strength results and thereby conceal the fact that its actual tensile strengths are below the minimum 7,000 psi required by AWWA C900 and C905. 105. Twothird-party certifiers, International Association of Plumbing and Mechanical Officials (“IAPMO”) and NSF International (“NSF”), require J-M to submit to annual cell class testing, which includes tests to confirm that J-M’s PVC pipe meets a minimum tensile strength of 7,000 psi. By contrast, AWWA,which operates on an honor system, does not require manufacturers to submit to testing or audits. Relying on the good faith of the manufacturers, AWWAoperates on the assumption that a manufacturer that representsits parts as being AWWaA-compliant will have regularly performed the necessarytests listed in AWWA C900 and C905 to ensure that its parts comply and will only sell compliantparts. 106. In preparingits samples for the annual JAPMOand NSFcell class testing, J-M followed many of the same practices it had used in preparing samples for UL qualification ofits no-thickened-section pipe. That is, J-M followed a manufacturing process that was not representative of the actual conditions under which its PVC pipeis ordinarily made. J-M had 31 COMPLAINT FOR VIOLATION OF FEDERAL & STATE FALSE CLAIMS ACTS 034 Case 5:06-cv-00055-GW-PJW Document1 Filed 01/17/06 Page 35 of 50 Page ID #:35 S Y D n W w B P W W N 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Will Fassler, a senior engineerin its Research and Development Department, specially prepare the samples using compression molding, as opposed to extrusion, with an extraordinary degree of care and precision. As with its UL qualification testing of the no-thickened-section pipe, J-M prepared multiple specimens from each lot andsent a subset of these samplesto outside laboratories to confirm that when IAPMOorNSFtested the other samples they would meetthe required minimum tensile strength of 7,000psi. 107. Even with the advantages gained by special preparation and use of compression- molded samples, J-M only barely met the minimum requirementof 7,000psi in the 2005 annual cell class test performed for IAMPO andhadfailed tensile strength in previous years’ annual IAMPOand NSFtesting. Exhibit 34, incorporated herein,is a copy ofa test report from CRT Laboratories, Inc. describingcell class testing performed for IAPMOin June 2005 on J-M compression-molded samples. While the samples were found to meet the minimum cell class requirements of cell class 12464, the tensile strength results of 7,081 psi were only slightly above the minimum requirementof 7,000 psi. Exhibit 34. 108. On multiple occasions, including as recently as September 13, 2005, K.C. Yang, J-M’s former Corporate Quality Control Supervisor, told Relator that, without the benefit of compression molding and special preparation, J-M’s PVC pipe compoundactually has a maximum tensile strength of approximately 6,700 psi. Yang cited “extrusion conditions”(i.e., J-M’saccelerated production rate and impropertooling and maintenanceofits extruders) as the reason for J-M’s inability to satisfy the tensile strength requirements ofcell class 12454, Exhibit 35 (Relator’s notes dated 9/13/05), incorporated herein. B. HDBTesting 109. As described herein at section V.B. (FJ 50-58), to qualify J-M’s new, no-thickened- section pipe for ULlisting, UL required J-M to satisfy the hydrostatic design basis (“HDB”) requirements specified in Section 4.3.2.2(b) ofAWWA C900 and C905. As described herein at section V.B.1. (f¥ 50-70) and section V.B.4 (ff 84-88), J-M began producing no-thickened- section pipe on June 1, 2005 despite the fact that it had test results showingthat the pipefailed the HDBtesting required by AWWA C900 and C905 more than 50 percent of the time. Asa 32 COMPLAINT FOR VIOLATION OF FEDERAL & STATE FALSE CLAIMS ACTS 035 Case 5:06-cv-00055-GW-PJW Document1 Filed 01/17/06 Page 36 of 50 Page ID #:36 o O O o N D A W F F W Y L H = N H N N N O N H N O N O Y N D R N w w m m m e e s Q o X N DB D F D F F W Y Y N - § DB D O o O o ND T D A Ww W B R W D H O |& § CO C result, it is more likely than not purchasers of J-M’s no-thickened-section Blue Brute PVCpipe, including Real Parties, have receivedpipe that fails to comply with the HDB requirements of AWWAC900 and C905. 110. J-M’s difficulties with satisfying the HDB requirements predate the production of its no-thickened-section pipe. J-M also hashaddifficulty satisfying the HDB requirements of AWWAC900 and C905 underits original pipe design (i.e., J-M’s thickened-section Blue Brute and Big Blue PVCpipe). For instance, as discussed in paragraph 59, on November14, 2003, Will Fasslercited as one of the impediments to the success of the No-Thickened-Section Project the fact that J-M had been experiencing failures in the HDBtesting onits existing(i.c., thickened-section) pipe. See Exhibit 16. Relator has information andbelieves that despite these failing test results, J-M has never rejected or scrapped a PVCpipe for having failed HDBtesting. 111. Inthe 1980s, the Plastic Pipe Section of Johns-Manville, the predecessor company to J-M, promulgated a series ofproduct specifications, many of which were morestringentthan applicable industry standards and customerspecifications. Johns-Manville included assurances of adherence to these companyspecificationsin its express warranty. Whenit was founded in 1982, J-M continued to maintain the companyspecifications Johns-Manville had created and included them in its warranty. 112. One ofthese product specifications, J-M Specification No. PL-25 for 4-inch through 12-inch PVC Plastic Blue Brute pipe, required the pipe to meet a minimum quick burst stress of 7,200 psi, which wassignificantly higher than AWWA C900’s requirementof 6,400psi. Oneofthe primary reasonsfor the more stringent requirement was to ensure that J-M’s PVC pipe would meet the required HDBtensile strength category. In other words,if the PVC pipe withstood a stress of 7,200 psi during the 60-second Quick Burst Test, it would be morelikely to pass the required HDB category of 4,000 psi during the subsequent HDBtesting. As described in paragraphs 60 through 61 above, since the Quick Burst testing always precedes the HDBtesting, the Quick Burst results can provide an early indication of whether the pipe will pass HDB. 113. However, on November 19, 2004, J-M revised Specification No. PL-25 to lower the short-term burst pressure requirementto the 6,400 psi required by AWWA C900 becauseit 33 COMPLAINT FOR VIOLATION OF FEDERAL & STATE FALSE CLAIMS ACTS 036 Case 5:06-cv-00055-GW-PJW Document1 Filed 01/17/06 Page 37 of 50 Page ID #:37 o N D N A O R P W D L Y O o 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 could no longer meetthe higher J-M pressure requirementof 7,200 psi. Exhibit 36, incorporated herein,is a red-lined copy of Specification No. PL-25 reflecting the revision to the lower 6,400 psi requirement. J-M madethis revision knowingthat by lowering the quick burst pressure requirementit would no longer be able to meet the HDBtest requirements ofAWWA C900 and C905. Despite this knowledge, before making this revision, J-M did not perform any testing to determine its effect on HDB. C. Sustained Pressure Testing 114. Asdescribed herein at section V.B.2. ({§ 71-76), to qualify J-M’s new, no- thickened-section pipe for UL listing, UL required J-M to demonstrate the pipe could pass the Sustained Pressure Test specified in Section 18 ofUL 1285. As further described in section V.B.2. ((f{] 71-76), J-M was only able to pass this test by resorting to the following fraudulent practices: (1) preparing its samples using materials and processing conditions that were vastly superior to those J-M actually used in its day-to-day manufacturing of pipe; (2) cherry picking samplesfrom lots that had produced passing HDBtestresults to increase the likelihood they will passin front of UL;and (3) concealing these facts from UL,other standards andcertifying organizations and J-M’s distributors and customers. Despite the fact it had improperly manipulated the test materials and conditionsof the Sustained Pressure Testing to mask the underlying tensile strength problems with the pipe, J-M began producing no-thickened-section pipe on June 1, 2005. 115. The Sustained Pressure Test contained in Section 18 of UL 1285is substantively identical to the Sustained Pressure Test required by sections 4.3.3.1 and 5.1.3 ofAWWA C900. See Exhibits 6 & 12. Accordingly, in addition to violating UL 1285, J-M also violated AWWA C900 whenit engaged in the three fraudulentpractices described above while performing the Sustained Pressure Test on its new, no-thickened-section pipe. As a result of these practices, since June 1, 2005 (the date J-M began producing no-thickened-section pipe),it is more likely than not purchasers of J-M’s no-thickened-section Blue Brute PVC pipe, including RealParties, have received pipe that (whentested properly with representative samples) fails to comply with the Sustained Pressure Test requirements ofAWWA C900. 34 COMPLAINT FOR VIOLATION OF FEDERAL & STATE FALSE CLAIMS ACTS 037 Case 5:06-cv-00055-GW-PJW Document 1. Filed 01/17/06 Page 38 of 50 Page ID #:38 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 o F s N D O H 116. Over a year before it performedthe Sustained Pressure Tests described aboveonits no-thickened-section pipe, J-M had received reports ofits existing (i.e., thickened-section) PVC pipe failing AWWA C900 Sustained Pressure Testing performed for NSF. Asdiscussed in paragraph 59, on November14, 2003, Will Fassler cited as one of the impediments to the success of the No-Thickened-Section Project the fact that “{r]ecently, pipe from somefacilities has failed sustained pressure testing at NSF.” Exhibit 16. Relator has information andbelieves that despite these failing test results, J-M has never rejected or scrapped a PVCpipefor having failed Sustained Pressure Testing. D. Quick Burst Testing 117. Asdescribed herein at section V.B.3. ({{] 77-83), to qualify J-M’s new, no- thickened-section pipe for UL listing, UL required J-M to demonstrate the pipe could pass the Quick Burst Test specified in Section 4.3.3.2 ofAWWA C900. As further described in section V.B.2. (({] 71-76), J-M failed several of the Quick Burst Tests andultimately was only able to passthis test by resorting to the following fraudulentpractices: (1) preparing its samples using materials and processing conditions that were vastly superior to those J-M actually used inits day-to-day manufacturing ofpipe; (2) cherry picking samples from lots that had produced passing HDB andSustained-Pressure-Testing test results to increase the likelihood they will pass in front of UL;and (3) concealing these facts from UL,other standards and certifying organizations and J-M’s distributors and customers. Despite the fact it had improperly manipulated the test materials and conditions of the Quick Burst Test to mask the underlying tensile-strength problems with the pipe, J-M began producing no-thickened-section pipe on June 1, 2005. Asa result, it is more likely than not purchasers of J-M’s no-thickened-section Blue Brute PVCpipe, including RealParties, have received pipe that fails to comply with the Quick . Burst requirements ofAWWA C900. 118. Well over a year before it performed the Quick Burst Tests described aboveonits no-thickened-section pipe, J-M had knowledgethatits existing (i.¢., thickened-section) PVC pipe wasfailing the Quick Burst Tests performed daily for purposes ofAWWA C900at eachofits 11 PVCpipe plants. By atleast early 2004, Relator, K.C. Yang, and Will Fassler began to receive 35 COMPLAINTFOR VIOLATION OF FEDERAL & STATE FALSE CLAIMS ACTS 038 Case 5:06-cv-00055-GW-PJW Document 1. Filed 01/17/06 Page 39 of 50 Page ID #:39 & W w b d o O C o ~ ~ D H A 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 word from the Quality Control Supervisors at J-M’s 11 Plants producing PVCpipe thattheir respective Plant Managers wereoverriding reject tags and sending out PVC pipethat the Quality Control Supervisors hadrejected for failing the daily Quick Burst tests required by AWWA C900. Relator personally had received three such complaints from Michael Henderson,the Quality Control Supervisorat the Butner, North Carolina Plant, Armondo Martinez, the Quality Control Supervisorat the Fontana, California Plant, and Joe Soliz, the Quality Control Supervisor at the Wharton, Texas Plant. 119. To try and address this and other burgeoningquality-control problems, K.C. Yang, at that time J-M’s newly appointed Corporate Quality Control Supervisor, called a meetingofall of the Quality Control Supervisors from each of J-M’s 11 PVC-pipe Plants. In addition to K.C. Yangand the 11 Quality Control Supervisors, the other attendees were Relator, Kaushal Rao, Will Fassler, and Beryl Nadia and Lenor Chang, both of whom workedfor Fassler. At this meeting, which washeldat J-M’s Pueblo, ColoradoPlant in the Spring of 2004, the Quality Control Supervisors told stories of having rejected PVC pipe forfailing daily Quick Burst Tests and then being instructed by their respective Plant Managers to continuetotest the pipe until they get a passing result. Since a pipe’s tensile strength and other properties gradually increase or stabilize asit is allowed to cool and harden,it often took the Quality Control Supervisors several days and repeated testing to achieve a passing result. However, such repeated testing of individual samples is expressly prohibited by Section 5.1.4 ofAWWA C900, which providesthat specimensare to be tested “at the beginning of production of each specific material and each size” and thereafter every 24 hours. Exhibit 12. | 120. Once a passing result was obtained, the Quality Control Supervisors said the Plant Managers would instruct them to release and ship the pipe despite the fact that it may have failed four out of five Quick Burst Tests. J-M Plant Managers, whose bonusesare based on the amount of pipe the plant produces, are loath to reject pipe since rejected pipe cannotbe includedin the plant’s production figures andtherebyhasthe effect of taking moneyoutoftheir pockets. 121. At the Pueblo meeting, K.C. Yang and Frank Padilla provided the Quality Control Supervisors with a review ofthe proper test methodsto be followed when performing the daily 36 COMPLAINT FOR VIOLATION OF FEDERAL & STATE FALSE ones ACTS 9 Case 5:06-cv-00055-GW-PJW Document 1 Filed 01/17/06 Page 40 of 50 Page ID #:40 oO o O o N D R O W B R W D V Y N O D P NH N K B NH N B P K H K N R O m m e m m m l l e o N D N D U F F W D H O = DB D OB O C O Y Q D R W H B B W O N H K F C O Quick Burst Test contained in AWWA C900. (AWWA C900,in turn,states that the testing must be performed in accordance with ASTM D1599.) This presentation focused on the method prescribed in ASTM D1599 for determining the amountoftest pressure to apply to the pipe samplein orderto achievethe required 6,400 psi of quick-burststress in the pipe wall (hereafter “Calculated Test Pressure”). To determine the Calculated Test Pressure, Yang emphasizedthat ASTM D1599required the Quality Control Supervisors to measure the minimum wallthickness of the actual pipe sample. See Exhibit 37, incorporated herein. 122. After setting out these requirements, Yang quickly learned that except for Frank Padilla, Quality Control Supervisor at the Pueblo, Colorado Plant, the Quality Control Supervisors at the remaining 10 Plants were all doing the calculation wrong. Instead of measuring the wall thickness of the actual pipe sample, the Quality Control Supervisorsat the other 10 plants were simply relying on the minimum wallthicknesses listed in Table 1 ofAWWA C900 for a generic pipe of the same size and pressure class as the sample. However,the wall of the pipe J-M produces invariablyis thicker than that of a generic pipe listed in Table1. Therefore, by relying on the measurement supplied in Table | instead of actually measuring the wall thickness of the pipe sample, the Quality Control Supervisors of the 10 plants were subjecting the samples to a smaller Calculated Test Pressure than whatis required by ASTM D1599. 123. When K.C. Yang informed the Quality Control Supervisorsthat they could no longer rely on the minimum wall thicknesses supplied in Table 1 and had to measure the actual pipe samples being tested, they strenuously objected. The Quality Control Supervisors admitted they had enough trouble achieving the required 6,400 psi of stress in the pipe wall even with the benefit gained from the smaller Calculated Test Pressure. If they performedthetests correctly (i.¢., and measured the minimum wall thickness of the actual pipe samples), the Quality Control Supervisors complained, they wouldstandlittle to no chance ofachieving 6,400 psi and passing the Quick Burst Tests. As the comments of the Quality Control Supervisors make clear, J-M routinely caused PVCpipe to be shippedto its customers, including Real Parties, that failed to meet the requirements of the Quick Burst Testing specified in AWWA C900. 37 COMPLAINT FOR VIOLATION OF FEDERAL & STATE FALSE CLAIMSACTS 040 Case 5:06-cv-00055-GW-PJW Document 1 Filed 01/17/06 Page 41 0f50 Page ID #:41 o O O o S N D H A BR B W N Y N O NY O N Y N Y N O N O H N H N R O m m m m e o o 4 D n n A F& F W Y N Y S K C S O O C O I T D R H W B& B W H N K F C 124, Following this meeting, K.C. Yang soughtto change the managementstructure to have the Quality Control Supervisors report to the Corporate Quality Control Supervisor instead oftheir respective Plant Managers. By so doing, Yang hoped to makeitless likely that the Plant Managers wouldbeable to override decisions by the Quality Control Supervisors to reject non- conforming pipe. Yang’s request was denied. Despite the considerable problemsraised by the Quality Control Supervisorsat the Pueblo meeting regarding the short-term tensile strength ofits PVCpipe, J-M did not take any steps to address the root cause of the problem and curbthe“cost cutting” measures described herein at section IV. Yangleft J-M in October 2005 out of frustration for repeatedly being stymied in his efforts to improve the quality of J-M’s products. E. Acetone Immersion Testing 125. AWWA C900 and C905 both require manufacturers to subject their PVC pipe to routine acetone-immersiontesting as specified in ASTM D2152. Exhibit 12. Broadly described, Acetone-Immersion Testing measures “extrusion quality,”i.e., how well the extruder processed the PVC compoundin formingthe pipe. Id. Under ASTM D2152,the pipe sample is required to be immersed in acetonethatis at least 99.8 percent pure. See Exhibit 38, incorporated herein. If the sample has been processed well, the acetone will not attack it. However, if the sample has been processed poorly, the acetone will causeit to flake. A sample that showsat least 50 percent attack of the inside, outside, or mid-wall surface of the sample or at least 10 percent attack on more than one surface of the sample hasfailed the test. Id. 126. Because it rapidly absorbs moisture from the air, acetone can quickly become diluted if it is left out in an unsealed container and exposedto air. As acetoneis diluted,its ability to attack pipe samples decreases. ASTM D2152 requiresthat the acetone used fortesting contains no more than 0.2 percent water by mass. Exhibit 38. Ifa particular container of acetone has morethan twopercent water, the excess water can be removed with a drying agent. 127. J-M did not take adequate safeguards to ensure the integrity of the acetone used in its routine Acetone-Immersion Tests. For instance, J-M regularly stored its acetone in drums with the lids off. Instead of having no more than twopercent water, the acetone J-M regularly used forits testing contained an excessive percentage of water. Although J-M easily could have 38 COMPLAINTFOR VIOLATION OF FEDERAL & STATE FALSE CLAIMS ACTS 041 Case 5:06-cv-00055-GW-PJW Document1 Filed 01/17/06 Page 42 of 50 Page ID #:42 NS N H n O n f f c o 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 used a drying agent to removethe excess water, the Plant Managerstypically did not wantto spend the money for such reagents. Instead, by testing with diluted acetone, J-M wasable to obtain passingtest results for specimens that would have failed had they beentested using undiluted acetone. 128. Even with the benefit gained by using diluted acetone, J-M routinely failedits Acetone-Immersion Tests. At the Pueblo meeting described above, many of the Quality Control Supervisors reported repeated instances of their Plant Managers overriding reject tags and sending out PVC pipe that the Quality Control Supervisors had rejected for failing the routine Acetone-Immersion Tests required by AWWA C900 and C905. Relator has information and believes that despite these failing test results, J-M has never rejected or scrapped a PVC pipe for having failed Acetone Immersion Testing. F, J-M’s False Representations Regarding AWWA Compliance 129. As the world’s leading supplier ofPVC pipe, J-M is acutely aware ofthe importance ofAWWAcomplianceto its customers, including Real Parties. In its product catalogs andsalesliterature and on its website, J-M repeatedly describes its PVC pipe as meeting AWWArequirements and a longitudinaltensile strength of 7,000 psi. In the section ofits catalog dedicated to its Blue Brute PVC pipe, J-M references Blue Brute’s compliance with AWWA C900 four times. On the cover page for this section, beside the words Blue Brute, J-M states “Meets AWWA C900.” Exhibit 23. Thefirst line of the first page states “J-M’s Blue Brute Pipe conforms to the AWWA C900specification ...” Id. That same page has a box that prominently states “MEETS AWWAC900.” Finally, in a table entitled “Typical Physical and Chemical Properties and Capacities,” J-M cites AWWA C900 as the standard governing its Blue Brute PVCPipe and notes AWWA C900’stensile strength requirement of 7,000 psi. The section of J-M’scatalog relating to its Big Blue PVC pipe follow an identical format to Blue Brute’s except that it references Big Blue’s conformance with AWWAC905as opposed to C900. 130. As alleged in detail above, the statements in J-M’s catalogs, websites and sales literature regarding compliance with AWWAstandards andthetensile strength requirement of 7,000 psi were patently false. At no time did J-M ever distribute a catalog or sales or advertising 39 COMPLAINT FOR VIOLATION OF FEDERAL & STATE FALSE CLAIMS ACTS 042 Case 5:06-cv-00055-GW-PJW Document1 Filed 01/17/06 Page 43 of 50 Page ID #:43 - W w b d o O o S N D N W N 10 ll 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 literature that revealed its substandardtensile strength results in over halfofthetensile strength tests performed since 1997. Nor did J-M otherwiseinform its customers, including Real Parties, of its substandardtensile strength. VII. EMPLOYMENT DISCRIMINATION FORACTSIN FURTHERANCE OF FALSE CLAIMS ACT ACTION 131. Relator began working for J-M on July 8, 2002 as an engineerin its Product Assurance Department with an annual salary of $45,000. From July 2002 until he started complaining to his superiors about the impropriety ofthe fraudulent practices described above, Relator was regularly commendedby his superiors on his job performanceand received regular pay raises and good performance reviews. 132. For instance, in the Summerand Fall of 2003, Relator received considerable praise and notice from his superiors, including J-M’s President Walter Wang,for his workin proposing a design changeto J-M’s two most popular products, Blue Brute and Big Blue, that would save J-M $3,000,000 a year in materials costs and allow J-M toincreaseits efficiency and output. Throughout the early stages of his work on the design change, dubbed the “No Thickened Section Project,” Relator’s currency within J-M as a rising star continued to grow. 133. However, by 2004, as J-M received results from the first round of full-blown HDBtesting on the no-thickened-section pipe, Relator began to raise concernswith his superiors aboutthe pipe’s excessive swelling andinability to pass the HDB testing morethan 50percent of the time. After questioning what these results meant for the tensile strength of J-M’s thickened- section pipe, which was made from the same materials and process, Relator was removed from the Project in early 2005 and began to experience a dramatic change in his employment conditions. Where previously he had been treated as part of the team, Relator suddenly was being shunned byhis co-workers. For instance, Relator’s access to testing and other sensitive information wasseverely restricted. Barry Lin instructed staff in J-M’s Research and Development and Corporate Quality Control Departments notto provide Relator any documents without first getting approval from Lin. 134. Overthe intervening months, Relator becameincreasingly aware that J-M’s 40 COMPLAINTFOR VIOLATION OF FEDERAL & STATE FALSE CLAIMS ACTS 043 Case 5:06-cv-00055-GW-PJW Document1 Filed 01/17/06 Page 44 of 50 Page ID #:44 o 7 S ~ I T N 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 tensile strength problems werenotthe result of inadvertence but rather were part of a larger schemeto defraud its customers by implementing cost-cutting measures that decreasedits pipe’s tensile strength and then manipulating test methods, specimens and data to concealthese strength problemsfrom its customers and third-party certifiers and standards organizations like UL, NSF, IAPMO, AWWAand ASTM.Throughoutthis time, Relator continued to raise concernswith his superiors about the propriety of J-M’s fraudulent practices. As the strength of his objections grew, Relator was met by J-M with increasingly adverse employmentaction. 135. Forinstance, in December 2004,at the sametime Relator wasraising concerns with his superiors aboutthe tensile strength of J-M’s UL-listed products, an opening became available in Relator’s Departmentfor the position of Product Assurance Manager. This position, whichinvolved overseeing the handling of claims and lawsuits against J-M for non-conforming PVC pipe, had greater pay and responsibilities than Relator’s current position. With a masters degreein structural engineering, associates and bachelors degreesin civil engineering, bachelors degree in management and twoyears of experience handling PVC pipe claims and lawsuits for J- M,Relator was well-qualified for the job. 136. Relator was only oneoftwo internal J-M candidates being considered for the job. The other candidate, Mai Huynh, had no engineering degreesor other formaltraining relevant to the job description and no experience with claims and lawsuits or PVC pipe. At the time he was being considered for the position, Mr. Huynh had only worked one yearat J-M on tooling issues relating to J-M’s high density polyethylene (“HDPE”)pipe, the sales of which represent a small fraction of J-M’s business. Despite his short tenure at J-M and complete lack of experience, J-M gave the position ofProduct Assurance Manager to Mr. Huynh. 137. In the Summerof2005, Relator objected strongly to his managers’ instructions that he deny a claim brought by customer SheldonSite Utilities (“Sheldon”) for defective Blue Brute pipe that had pinhole leaks and failed whenit was pressurized. After sending samples from the two problem pipes to CRT Laboratoriesfor testing, Sheldon presented J-M with test results showing that both sampleshadtensile strengths below the minimum requirementof 7,000 psi. See Exhibit 9. Despite Relator’s recommendationthat it should pay the Sheldon claim, Kai 41 COMPLAINT FOR VIOLATION OF FEDERAL & STATE FALSE CLAIMS ACTS 044 Case 5:06-cv-00055-GW-PJW Document 1 Filed 01/17/06 Page 45 of 50 Page ID #:45 S a D N W n & W D W O 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Cheng,J-M’s Director of Product Assurance, and Barry Lin, J-M’s Director of Production, instructed Relator to deny the claim on the groundsthatthe test results did not show thatthe pipe failed to comply with AWWA C900. Cheng and Lin argued that the CRTtest results showing substandard tensile strengths were not valid because,as they interpreted it, AWWA C900 requiredthattensile strength testing be performed on specimensprepared from PVC compound, not finished PVC pipe, and the CRTtesting had been performed on finished pipe. On July 19, 2005, Relator sent Sheldona letter stating that “Since no manufacturing defect or non- conformance with the AWWA C900standard was found within the samplessent to us or to CRT Labs weare regretfully denying your claim.” Exhibit 39, incorporatedherein. 138. Sheldon responded to J-M’s denial by threatening to sue J-M for supplying defective productif it did not reconsider and agree to pay Sheldon’s claim for $36,707.61. In discussing how to handle Sheldon’s renewed claim, Kai Cheng and Barry Lin again sought to minimize J-M’s responsibility by interpreting AWWA C900as requiring thattensile strength testing be performed on samples prepared from PVC compound anddeclaring the CRTtests invalid because they were performed on finished PVC pipe. Stating that the CRT results were “not sufficient enough to conclude the failure of pipe sample reason to be 100% fall on J-M,” Mr. Cheng recommendedoffering Sheldon a maximum of $10,000. See Exhibit 10. 139. Relator, however, recommendedthat J-M settle the claim for $30,000 based on the findings of CRT. Relator argued that even if Cheng and Lin’s interpretation ofAWWA C900 wascorrect, J-M could not ignore the fact that UL 1285 expressly states that tensile strength testing is to be performedonfinished pipe. At a minimum, Relator concluded, the CRTtest results show that J-M’s Blue Brutepipe failed to meetthe tensile strength requirements of UL 1285. In his Internal Recommendation and/or Authorization (“IRA”) discussinghis recommendation for how to handle the Sheldon claim, dated October 28, 2005, Relator listed as his basis for settling the claim for $30,000 that “CRT conducted testing on the pipe and found that the tensile strength of the pipe was below that required by the UL Listing Mark on the pipe on all samples tested.” Exhibit 10. 140. On November1, 2005, two business days after Relator distributed his IRA, Kai 42 COMPLAINTFOR VIOLATION OF FEDERAL & STATE FALSE CLAIMS ACTS 045 Case 5:06-cv-00055-GW-PJW Document 1. Filed 01/17/06 Page 46 of 50 Page ID #:46 b e Ww W b N o C O ~ H D W G 10 il 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Chengcalled Relatorinto his office and reprimanded Relator for portraying J-M’sliability for the Sheldon claim in his IRA as being “black and white”insteadoftrying to find a wayto denythe claim or pass the blame to Sheldon. See Exhibit 11. Mr. Cheng faulted Relator for not supporting Barry Lin’s argumentthat the CRTtesting was invalid under AWWA C900becauseit was performed on samples prepared from finished PVC pipe as opposed to PVC compound. Id. WhenRelator tried to defend his position, Mr. Cheng told Relator that if he “could not find a way to deny the claim and follow his [Cheng’s] thoughts that J-M is not responsible even if wefail the test, and offer alternative theories as to the causeoffailure for this case, then you needto find anotherposition in J-M where you will listen and follow instructions given and not disagree.” Id. 141. The next day, Mr. Cheng again called Relator into his office to follow up on the previous day’s discussion. See Exhibit 40 (Relator’s contemporaneousnotes dated 11/2/05), incorporated herein. Mr. Cheng advised Relator that he needed to be “more political” and to try harder to make morefriends at J-M “by avoidingsensitive issues where conflict may occur such as wasthe case yesterday.” Id. Mr. Cheng warnedRelatorthat taking a close-mindedposition on issues, as he had done in the IRA on the Sheldon claim, was not appropriate and to be successful in J-M andin life Relator needed to “open his mindto all the possibilities, listen to others in the company more, regardless if he thinks they are right or wrong, and avoid conflicts by not questioning their judgments and actions.” Id. 142. Two dayslater, on November4, when Relator refused to follow Mr. Cheng’s advice and change his recommendation on the Sheldon claim, Mr. Cheng informed Relator that J-M wasconducting an investigation into purported allegations that Relator had accepted kickbacks from Billy Sheldon, the owner of Sheldon Site Utilities, in exchange for Relator’s increasing the amount he recommended J-M should pay Sheldon for his claim. Mr. Chengsent Relator home andinstructed him notto report to work until the investigation was complete. That sameday, in responseto these charges, Relator provided J-M with a four-page statement denying his involvement in any such improprieties. See Exhibit 41, incorporated herein. However, three business days later, on November 9, J-M terminated Relator for the stated reasonthat it had concludedthat the allegations against Relator were “credible, sustainable and substantiated.” 43 COMPLAINT FOR VIOLATION OF FEDERAL & STATE FALSE CLAIMS ACTS 046 Case 5:06-cv-00055-GW-PJW Document 1 Filed 01/17/06 Page 47 of 50 Page ID #:47 _ Ww W “ O N o o 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Exhibit 42, incorporated herein. 143. As these circumstances clearly demonstrate, the reason J-M gavefor terminating Relator — that Relator had increased the amount he recommendedJ-M paytosettle a claim as a result of having received a bribe from the claimant -- was a pretext. The real reason J-M fired Relator — as is belied by the close proximity between Relator’s IRA stating that the J-M PVC pipe involvedin the Sheldonclaim had tensile strength below that required by the UL Listing Mark onthe pipe and J-M’s charges of Relator accepting bribes from a claimant — wasin retaliation for his investigating and raising concerns about J-M’s fraudulentpractices of knowinglyselling PVC pipe with substandardtensile strength while falsely representingthatit complies with industry standards. COUNTI . Substantive Violations of Federal False Claims Act 31 U.S.C. §§ 3729(a)(1), (a)(2) and 3732(b) 144. Relator realleges and incorporates by reference the allegations made in Paragraphs 1 through 143 of this Complaint. 145. This is a claim for treble damages and forfeitures under the Federal False Claims Act, 31 U.S.C. §§ 3729 et seq., as amended. 146. Throughthe acts described above, defendant J-M,its agents, employees and co- conspirators, knowingly presented and causedto be presented to the United States, including without limitation the Armed Forces ofthe United States and the federal military entities listed on Exhibit 2, (collectively “United States”) andits officials false and fraudulent claims, and knowingly failed to disclose material facts, in order to obtain payment and approval from the United States and its contractors, grantees, and other recipients of its funds. 147. Throughthe acts described above, defendant J-M,its agents, employees and co- conspirators, knowingly made, used and caused to be madeand usedfalse records and statements, which also omitted material facts, in order to induce the United States andits contractors and grantees to approve and payfalse and fraudulent claims. 148. The United States, unaware ofthefalsity of the records, statements, and claims made and submitted by defendant J-M,its agents, employees, and co-conspirators, and asa result 44 COMPLAINTFOR VIOLATION OF FEDERAL & STATE FALSE CLAIMS ACTS 047 Case 5:06-cv-00055-GW-PJW Document 1. Filed 01/17/06 Page 48 of 50 Page ID #:48 u n > » W Y b v o C O A T N H 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 thereof, paid moneythatit otherwise would not havepaid. 149. By reason of the payment madeby the United States, as a result of defendantJ-M’s fraud, the United States has suffered millions of dollars in damages and continuesto be damaged. COUNTII Substantive Violations of California False Claims Act Cal. Gov't Code §§ 12651(a)(1) and (a)(2) 150. Relator realleges and incorporates by referencethe allegations made in Paragraphs 1 through 149 of this Complaint. 151. This is a claim for treble damagesandforfeitures under the California False Claims Act, Cal. Gov't Code §§ 12650et seq. 152. Throughtheacts described above, defendant J-M,its agents, employeesand co- conspirators, knowingly presented and caused to be presented to the State of California and any political subdivision thereof that purchased J-M PVCpipe between 1997 andpresent, including without limitation the California political subdivisions listed on Exhibit 1, (collectively the “California Real Parties”) and their officials false and fraudulent claims, and knowingly failed to disclose material facts, in order to obtain paymentand approval from those California Real Parties andtheir contractors, grantees, and otherrecipients of their funds. 153. Throughthe acts described above, defendant J-M,its agents, employees and co- conspirators, knowingly made, used, and caused to be made and usedfalse records and statements, which also omitted material facts, in order to induce the California Real Parties (and each of them) and their contractors, and grantees to approve and payfalse and fraudulentclaims. 154. The California Real Parties, unaware of the falsity ofthe records, statements, and claims made and submitted by defendant J-M,its agents, employees, and co-conspirators, and as a result thereof, paid moneythat they otherwise would not have paid. 155. By reason of the payment made by the California Real Parties, and each of them,as a result of defendant J-M's fraud, the California Real Parties, and each ofthem, have suffered hundredsofmillions of dollars in damages and continue to be damaged. 156. The California Real Parties, and each of them,are entitled to the maximum penalty of $10,000 for each and every false or fraudulent claim made, used, presented or caused to be 45 COMPLAINT FOR VIOLATION OF FEDERAL & STATE FALSE CLAIMS ACTS 048 Case 5:06-cv-00055-GW-PJW Document 1 Filed 01/17/06 Page 49 of 50 Page ID #:49 & Ww W b v o O e o N N D H W N 10 ll 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 madeused or presented by defendant J-M. COUNTIII Substantive Violations of California False Claims Act Cal. Gov't Code § 12651(a)(8) 157. Relator realleges and incorporates by reference the allegations made in Paragraphs 1 through 156 of this Complaint. 158. This is a claim for treble damagesand forfeitures under the California False Claims Act, Cal. Gov't Code §§ 12650et seq. 159. Through the acts described above, defendant J-M,its agents, employees and co- conspirators became the beneficiaries of the inadvertent submissionoffalse claims to California Real Parties and subsequently discovered the falsity of the claims. 160. Defendant J-M failed to disclose the false claims to California Real Parties, or any of them, within a reasonable time after discovery that the claims were false. 161. By reason of defendant J-M's failure to disclose the false claims to California Real Parties, those Real Parties, and each of them, have suffered hundredsofmillions of dollars in damagesand continue to be damaged. 162. The California Real Parties, and each of them, are entitled to the maximum penalty of $10,000 for each and every false or fraudulent claim made, used, presented or caused to be made used or presented by defendant J-M. COUNT IV Substantive Violations of Delaware False Claims And Reporting Act 6 Del. C. §§ 1201(a)(1) and (a)(2) 163. Relator realleges and incorporatesby reference the allegations made in Paragraphs 1 through 162 of this Complaint. 164. This is a claim for treble damagesand penalties under the Delaware False Claims And Reporting Act, 6 Del. C. §§ 1201 et seq. 165. Throughthe acts described above, defendant J-M,its agents, employees and co- conspirators, knowingly presented and caused to be presented to the State of Delaware and any 46 COMPLAINTFOR VIOLATION OF FEDERAL & STATE FALSE CLAIMS ACTS 049 Case 5:06-cv-00055-GW-PJW Document1 Filed 01/17/06 Page 50 of 50 Page ID #:50 u o f e N D N H B S 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 political subdivision thereofthat purchased J-M PVCpipe between 1997 and present, including withoutlimitation the Delawarepolitical subdivisions listed on Exhibit 1, (collectively the “Delaware Real Parties”) and their officials false and fraudulent claims, and knowingly failed to disclose material facts, in order to obtain payment and approval from those Delaware RealParties and their contractors, grantees, and otherrecipients of their funds. 166. Throughthe acts described above, defendant J-M,its agents, employees and co- conspirators, knowingly made, used, and caused to be made and usedfalse records and statements, whichalso omitted material facts, in order to induce the Delaware RealParties (and each of them)andtheir contractors, and grantees to approve and pay false and fraudulent claims. 167. The Delaware Real Parties, unawareofthe falsity of the records, statements, and claims made and submitted by defendant J-M,its agents, employees, and co-conspirators, and as a result thereof, paid money that they otherwise would not have paid. 168. By reason of the payment madebythe Delaware RealParties, and each of them, as a result of defendant J-M's fraud, the Delaware Real Parties, and each ofthem, have suffered millions of dollars in damages and continue to be damaged. 169. The Delaware Real Parties, and each ofthem, are entitled to the maximum penalty of $11,000 for each and every violation of 6 Del. C. § 1201 alleged herein. COUNT V Substantive Violations of Florida False Claims Act Fla, Stat. Ann. § 68.082(2)(a) and (2)(b) 170. Relator realleges and incorporates by reference the allegations made in Paragraphs 1 through 169 of this Complaint. 171. This is a claim for treble damages and penalties under the Florida False Claims Act, Fla. Stat. Ann. §§ 68.081 et seq. 172. Throughthe acts described above, defendant J-M,its agents, employees and co- conspirators, knowingly presented and caused to be presentedto the Florida State Government, including withoutlimitation the Florida State governmental entities listed on Exhibit 3, (collectively “Florida State Government”) andits officials false and fraudulent claims, and knowingly failed to disclose material facts, in order to obtain paymentand approval from the 47 COMPLAINT FOR VIOLATION OF FEDERAL & STATE FALSE 650. ACTS Case 5:06-cv-00055-GW-PJW Document 1-2 Filed 01/17/06 Page 1 of 50 Page ID #:51 O o O o S N DW N U N B& B W N H e o N H N Y N Y N N N R R D R e e e e i o o N O W N P F Ww W H N § — DO D G O H e H I D H A B R W H N Y & - C O Florida State Governmentandits contractors, grantees, and otherrecipients ofits funds. 173. Throughtheacts described above, defendant J-M,its agents, employees and co- conspirators, knowingly made, used, and caused to be made and usedfalse records and statements, which also omitted material facts, in order to induce the Florida State Government and its contractors, and grantees to approve andpayfalse andfraudulentclaims. 174. The Florida State Government, unaware ofthe falsity of the records, statements, and claims made and submitted by defendantJ-M,its agents, employees, and co-conspirators, andas a result thereof, paid moneythat it otherwise would not have paid. 175. By reason of the payment madebythe Florida State Governmentas a result of defendant J-M's fraud, the Florida State Governmenthas suffered millionsofdollars in damages and continues to be damaged. 176. The Florida State Governmentis entitled to the maximum penalty of $10,000 for each andevery violation of Fla. Stat. Ann. § 68.082 alleged herein. COUNTVI Substantive Violations of Massachusetts False Claims Law Mass. Gen. Lawsch. 12 §§ 5B(1) and 5B(2) 177. Relator realleges and incorporates by reference the allegations made in Paragraphs 1 through 176 of this Complaint. 178. This is a claim for treble damages and penalties under the Massachusetts False Claims Law, Mass. Gen. Lawsch. 12 §§ 5A et seq. 179. Through the acts described above, defendant J-M,its agents, employees and co- conspirators, knowingly presented and caused to be presented to the Commonwealth of Massachusetts and any political subdivision thereof that purchased J-M PVC pipe between 1997 and present, including withoutlimitation the Massachusetts political subdivisions listed on Exhibit 1, (collectively the “Massachusetts Real Parties”) and their officials false and fraudulent claims, and knowingly failed to disclose material facts, in order to obtain payment and approval from those Massachusetts Real Parties and their contractors, grantees, and other recipients of their funds. 180. Through the acts described above, defendant J-M,its agents, employees and co- 48 COMPLAINT FOR VIOLATION OF FEDERAL & STATE FALSE CLAIMS ACTS 051 Case 5:06-cv-00055-GW-PJW Document 1-2 Filed 01/17/06 Page 2 of 50 Page ID #:52 S o C O J T D H WN W B R W D H O = N O N Y K N Y P K N Y D R D R D R m m e e a s o o N B O A W F e Y E N K F G D O O R O A R O U D l r CO O conspirators, knowingly made, used, and caused to be made and usedfalse records and statements, which also omitted material facts, in order to induce the Massachusetts Real Parties (and each of them) andtheir contractors, and grantees to approve and payfalse and fraudulent claims. 181. The Massachusetts Real Parties, unawareofthe falsity of the records, statements, and claims made and submitted by defendantJ-M,its agents, employees, and co-conspirators, and as a result thereof, paid moneythat they otherwise would not havepaid. 182. By reason of the payment made by the Massachusetts Real Parties, and each of them,asa result of defendant J-M's fraud, the Massachusetts Real Parties, and each of them, have suffered millionsofdollars in damages and continue to be damaged. 183. The Massachusetts Real Parties, and each ofthem,are entitled to the maximum penalty of $10,000 for each andevery violation of Mass. Gen. Laws ch. 12 § 5B alleged herein. COUNTVil Substantive Violations ofMassachusetts False Claims Law Mass. Gen. Lawsch. 12 § S5B(9) 184. Relator realleges and incorporates by reference the allegations made in Paragraphs 1 through 183 ofthis Complaint. 185. This is a claim for treble damages and penalties under the Massachusetts False Claims Law, Mass. Gen. Lawsch. 12 §§ 5A et seq. 186. Through the acts described above, defendant J-M,its agents, employees and co- conspirators becamethe beneficiaries of the inadvertent submission offalse claims to the Massachusetts Real Parties and subsequently discovered the falsity of the claims. 187. Defendant J-M failed to disclose the false claims to the Massachusetts Real Parties, or any of them, within a reasonable time after discovery that the claims werefalse. 188. By reason of defendant J-M’sfailure to disclose the false claims to the Massachusetts Real Parties, those Massachusetts Real Parties, and each of them, have suffered millions of dollars in damages and continue to be damaged. 189. The Massachusetts Real Parties, and each of them,are entitled to the maximum penalty of $10,000 for each and every violation of Mass. Gen. Lawsch. 12 § 5B alleged herein. 49 COMPLAINT FOR VIOLATION OF FEDERAL & STATE FALSE CLAIMS ACTS 052 Case, 5:06-cv-00055-GW-PJW Document 1-2 Filed 01/17/06 Page 3 of 50 Page ID #:53 n a F b W Y W N o C O A T N H 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 COUNTVIII bstantive Violations of Nevada False Claims Act ev. Rev. Stat. Ann. §§ 357.040(1)(a) and (1)(b) 190. Relator realleges and incorporates by reference the allegations made in Paragraphs Sul N 1 through 189 of this Complaint. 191. This is a claim for treble damagesand penalties under the Nevada False Claims Act, Nev.Rev. Stat. Ann. §§ 357.010 et seq. 192. Through the acts described above, defendant J-M,its agents, employees and co- conspirators, knowingly presented and caused to be presentedto the State ofNevada and any political subdivision thereof that purchased J-M PVCpipe between 1997 andpresent, including withoutlimitation the Nevadapolitical subdivisions listed on Exhibit 1, (collectively the “Nevada Real Parties”) andtheir officials false and fraudulent claims, and knowingly failed to disclose material facts, in order to obtain payment and approval from those Nevada Real Parties and their contractors, grantees, and otherrecipients of their funds. 193. Throughthe acts described above, defendantJ-M,its agents, employees and co- conspirators, knowingly made, used, and caused to be made and used false records and statements, which also omitted material facts, in order to induce the Nevada RealParties (and each of them) andtheir contractors, and grantees to approve and pay false and fraudulentclaims. 194. The Nevada RealParties, unawareofthe falsity of the records, statements, and claims made and submitted by defendant J-M,its agents, employees, and co-conspirators, and as a result thereof, paid moneythat they otherwise would not have paid. 195. By reason of the payment made by the Nevada Real Parties, and each of them, as a result ofdefendant J-M's fraud, the Nevada Real Parties, and each of them, have suffered millions of dollars in damages and continue to be damaged. 196. The Nevada RealParties, and each ofthem,are entitled to the maximum penalty of $10,000 for each andevery violation ofNev. Rev. Stat. Ann. § 357.040 alleged herein. COUNT IX Substantive Violations of Nevada False Claims Act Nev. Rev. Stat. Ann. § 357.040(1)(h) 197. Relator realleges and incorporates byreference the allegations made in Paragraphs 30 COMPLAINT FOR VIOLATION OF FEDERAL & STATE FALSE CLAIMS ACTS 053 Case 5:06-cv-00055-GW-PJW Document 1-2 Filed 01/17/06 Page 4 of 50 Page ID #:54 N o u O o S N D O OD O e R Ww W 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 1 through 196 of this Complaint. 198. This is a claim for treble damagesandpenalties under the Nevada False Claims Act, Nev. Rev. Stat. Ann. §§ 357.010 et seq. 199. Through the acts described above, defendant J-M,its agents, employees and co- conspirators becamethe beneficiaries of the inadvertent submission offalse claims to the Nevada Real Parties and subsequently discovered the falsity of the claims 200. Defendant J-M failed to disclose the false claims to the Nevada Real Parties, or any of them, within a reasonable timeafter discovery that the claims werefalse. 201. By reason of defendant J-M’sfailure to disclose the false claims to the Nevada Real Parties, those Nevada RealParties, and each of them, have suffered millions ofdollars in damages and continue to be damaged. 202. The Nevada RealParties, and each ofthem, are entitled to the maximum penalty of $10,000 for each and every violation of Nev. Rev.Stat. Ann. § 357.040alleged herein. COUNT X Substantive Violations of Tennessee False Claims Act Tenn. Code Ann. §§4-18-103(a)(1) and (a)(2) 203. Relator realleges and incorporates by reference the allegations made in Paragraphs 1 through 202 of this Complaint. 204. This is a claim for treble damages and penalties under the Tennessee False Claim Act, Tenn. Code Ann. §§ 4-18-101 et seq. 205. Throughthe acts described above, defendantJ-M,its agents, employees and co- conspirators, knowingly presented and causedto bepresented to the State of Tennessee and any political subdivision thereof that purchased J-M PVC pipe between 1997 andpresent, including withoutlimitation the Tennessee political subdivisionslisted on Exhibit 1, (collectively the “Tennessee Real Parties”) and their officials false and fraudulent claims, and knowingly failed to disclose material facts, in order to obtain payment and approval from those Tennessee Real Parties and their contractors, grantees, and otherrecipients of their funds. 206. Throughtheacts described above, defendantJ-M,its agents, employees and co- conspirators, knowingly made, used, and caused to be madeand usedfalse records and $1 COMPLAINT FOR VIOLATION OF FEDERAL & STATE FALSE CLAIMS ACTS 054 Case S e W W b h O o O o S F D W W w 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 2:06-Cv-00055-GW-PJW Document 1-2 Filed 01/17/06 Page 5of50 Page ID #:55 statements, which also omitted material facts, in order to induce the Tennessee Real Parties (and each of them)andtheir contractors, and grantees to approve and payfalse and fraudulentclaims. 207. The Tennessee Real Parties, unaware of the falsity of the records, statements, and claims made and submitted by defendant J-M,its agents, employees, and co-conspirators, and as a result thereof, paid moneythat they otherwise wouldnot have paid. 208. By reason of the payment made by the Tennessee Real Parties, and each of them,as a result of defendant J-M's fraud, the Tennessee Real Parties, and each ofthem, have suffered millions of dollars in damages and continue to be damaged. 209. The Tennessee Real Parties, and eachofthem,are entitled to the maximum penalty of $10,000 for each and every violation of Tenn. Code. Ann. § 4-18-103 alleged herein. COUNTXI Substantive Violations of Tennessee False Claims Act Tenn. Code Ann. 4-18-103(a)(8) 210. Relator realleges and incorporatesby reference the allegations made in Paragraphs 1 through 209 of this Complaint. 211. This is a claim for treble damages andpenalties under the Tennessee False Claim Act, Tenn. Code Ann. §§ 4-18-101 et seq. 212. Through the acts described above, defendant J-M,its agents, employees and co- conspirators became the beneficiaries of the inadvertent submission offalse claims to the Tennessee Real Parties and subsequently discovered thefalsity of the claims. 213. Defendant J-M failed to disclose the false claims to the Tennessee Real Parties, or any ofthem, within a reasonable time after discovery that the claims werefalse. | 214. By reason of defendant J-M’s failure to disclose the false claims to the Tennessee Real Parties, those Tennessee Real Parties, and each of them, have suffered millions of dollars in damages and continue to be damaged. 215. The Tennessee RealParties, and each of them,are entitled to the maximum penalty of $10,000 for each and every violation of Tenn. Code. Ann. § 4-18-103 alleged herein. COUNT XII Substantive Violations of Virginia Fraud Against Taxpayers Act Va. Code Ann. §§ 8.01-216.3(a)(1) and (a)(2) 52 COMPLAINT FOR VIOLATION OF FEDERAL & STATE FALSE CLAIMS ACTS 055 Case > W W O o FS F S N D H 10 1] 12 13 14 i) 16 17 18 19 20 21 22 23 24 25 26 27 28 5:06-cv-00055-GW-PJW Document 1-2 Filed 01/17/06 Page 6 of 50 Page ID #:56 216. Relator realleges and incorporatesbyreference the allegations made in Paragraphs 1 through 215 of this Complaint. 217. This is a claim for treble damagesand penalties under the Virginia Fraud Against Taxpayers Act, Va. Code Ann. §§ 8.01-216.1 et seq. 218. Throughthe acts described above, defendant J-M,its agents, employees and co- conspirators, knowingly presented and causedto be presented to the Commonwealth of Virginia and any political subdivision thereof that purchased J-M PVCpipe between 1997 andpresent, including withoutlimitation the Virginia political subdivisionslisted on Exhibit1, (collectively the “Virginia Real Parties”) andtheir officials false and fraudulentclaims, and knowingly failed to disclose material facts, in order to obtain paymentand approval from those Virginia Real Parties and their contractors, grantees, and other recipients of their funds. 219. Through the acts described above, defendant J-M,its agents, employees and co- conspirators, knowingly made, used, and caused to be made andusedfalse records and statements, which also omitted material facts, in order to induce the Virginia Real Parties (and each ofthem) and their contractors, and grantees to approve and pay false and fraudulentclaims. 220. The Virginia RealParties, unaware ofthe falsity of the records, statements, and claims made and submitted by defendant J-M,its agents, employees, and co-conspirators, and as a result thereof, paid money that they otherwise would not have paid. 221. By reason of the payment madeby the Virginia Real Parties, and each of them, as a result of defendant J-M's fraud, the Virginia Real Parties, and each of them, have suffered millions of dollars in damages and continue to be damaged. 222. The Virginia Real Parties, and each of them,are entitled to the maximum penalty of $10,000 for each and every violationof Va. Code Ann § 8.01-216.3 alleged herein. COUNTXi Federal False Claims Act — Employment Discrimination 31 U.S.C. § 3730(h) 223. Relator realleges and incorporates by referencethe allegations made in Paragraphs 1 through 222 of this Complaint. 224, This is a claim for damages underthe Federal False Claims Act, 31 U.S.C. § 53 COMPLAINT FOR VIOLATION OF FEDERAL & STATE FALSE CLAIMS ACTS 056 Case & W w W N O o C O ~ ~ NH N W N 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 3:06-cv-00055-GW-PJW Document 1-2 Filed 01/17/06 Page 7 of 50 Page ID #:57 3730(h). 225. Through the acts described above and otherwise, defendant J-M discriminated against Relator in the terms and conditions ofhis employmentat J-M by, amongother things, denying him a promotion and terminating his employment. Defendant J-M’s stated reasonsfor terminating Relator regarding his accepting kickbacks from claimants were baseless and simply a pretext for the real reason for his termination — to retaliate against Relator for his investigation of defendant J-M’s fraudulent practices in preparation forfiling the above-captioned False Claims Act lawsuit. 226. By reason of defendant J-M’sactions, Relator has been damagedin the amountof many thousandsofdollars. PRAYER WHEREFORE,Qui Tam Plaintiff/Relator John Hendrix prays for judgmentagainst the defendant J-M as follows: 1. That defendant J-M cease and desist from violating 31 U.S.C. §§ 3729 et seq. and the counterpart provisions ofthe state statutes set forth above; 2. That the Court enter judgment against defendant J-M in an amountequal to three times the amount of damages the United States has sustained as a result of defendant J-M's actions in violation of the Federal False Claims Act, as well as a civil penalty of $11,000 for each violation of 31 U.S.C. § 3729; 3. That the Court enter judgmentagainst defendant J-M in an amountequalto three times the amount of damagessustained by the California Real Parties, and each of them, as a result of defendant J-M’s actions in violation of the California False Claims Act, as well as a civil penalty of $10,000 for each violation of Cal. Gov’t Code § 12651; 4. That the Court enter judgment against defendant J-M in an amountequalto three times the amount of damages sustained by the Delaware Real Parties, and each of them,as result of defendant J-M’s actions in violation of the Delaware False Claims And Reporting Act, as well as a civil penalty of $11,000 for each violation of 6 Del. C. § 1201(a); 5. That the Court enter judgment against defendant J-M in an amountequalto three 54 COMPLAINT FOR VIOLATION OF FEDERAL & STATE FALSE CLAIMS ACTS 057 Case S N N H W n & B W W p O 10 I] 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 9:06-cv-00055-GW-PJW Document1-2 Filed 01/17/06 Page 8 of 50 Page ID #:58 times the amount of damagesthe State of Florida has sustained because of defendant J-M’s actions in violation of the Florida False Claims Act, as well as a civil penalty of $10,000 for each violation of Fla. Stat. Ann. § 68.082(2); 6. That the Court enterjudgment against defendant J-M in an amountequalto three times the amount of damages sustained by the Massachusetts Real Parties, and each ofthem, as a result of defendant J-M’sactions in violation of the Massachusetts False Claims Law,as well as a civil penalty of $10,000 for each violation ofMass. Gen. L. Ch. 12 § 5B; 7. That the Court enter judgmentagainst defendant J-M in an amountequalto three times the amount of damages sustained by the Nevada Real Parties, and each of them, as a result of defendantJ-M’sactionsin violation of the Nevada False Claims Act, as well as a civil penalty of $10,000 for each violation ofNev.Rev.Stat. Ann. § 357.040(1); | 8. That the Court enter judgment against defendant J-M in an amount equalto three times the amount ofdamages sustained by the Tennessee Real Parties, and each of them, as a result of defendant J-M’s actions in violation of the Tennessee False Claims Act, as well as a civil penalty of $10,000 for each violation of Tenn. Code Ann. § 4-18-103(a); 9. That the Court enterjudgment against defendant J-M in an amount equalto three times the amount of damagessustained by the Virginia Real Parties, and each ofthem, as a result of defendant J-M’sactionsin violation ofthe Virginia Fraud Against Taxpayers Act, as well as a civil penalty of $10,000 for each violation of Va. Code Ann. § 8.01-216.3(a); 10. That Relator be awarded the maximum amountallowed pursuantto 31 U.S.C. § 3730(d) of the Federal False Claims Act, and the equivalent provisionsofthe state statutes set forth above; 11. That the Court enter judgment against defendant J-M asa result ofits actions in violation of 31 U.S.C. § 3730(h) as well asall relief necessary to make Relator whole, including reinstatement with the sameseniority status Relator would have had but for the discrimination, not less than two times the amountofback pay, interest on back pay, and compensation for any special damagessustainedas result of J-M’s employmentdiscrimination,including litigation costs and reasonable attorney’s fees; 55 COMPLAINT FOR VIOLATION OF FEDERAL & STATE FALSE CLAIMS ACTS 058 Case 5:06-cv-00055-GW-PJW Document 1-2 Filed 01/17/06 Page 9 of 50 Page ID #:59 1 12. That Relatorplaintiff be awardedall costs ofthis action, including attorneys’fees 2 and expenses; and 3 13. That the Real Parties, and each of them, and Relator receive all such other relief as 4 the Court deemsjust and proper. 5 JURY DEMAND 6 Pursuant to Rule 38 of the Federal Rules of Civil Procedure, Relator hereby 7 demandstrial by jury. 8 9 Dated: January 13, 2006 PHILLIPS & COHEN LLP 10 goo . 11 By: CxUl Eric R. Havian 12 Attorneys for Qui Tam Plaintiff/Relator John 3 Hendrix 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 56 COMPLAINT FOR VIOLATION OF FEDERAL & STATE FALSE CLAIMSACTS 059 Case 5:06-cv-00055-GW-PJW Document1-2 Filed 01/17/06 Page 10 of 50 Page ID #:60 A 060 Case 5:06-cv-00055-GW-PJW Documenti-2 Filed 01/17/06 Page 11 of 50 Page ID #:61 Cities & Public Water Agencies (Listed Alphabetically by State/(Commonwealth) That Purchased J-M PVC pipe between 7/3/03 and 8/31/05 California Adelanto, City of Alameda County Water District American Canyon, City of Antioch, City of Atwater, City of Aubum,City of Bakersfield, City of Beaumont-Cherry Valley Water District Benica, City of Blythe, City of Brentwood,City of BuenaPark, City of Buttonwillow County Water District Calexico, City of Camarillo, City of Carlsbad, City of . Carpinteria Valley Water District Castaic Lake Water Agency Ceres, City of Chico, City of Chino, City of Chowchilla, City of Clovis, City of Coachella, City of Coachella Valley Water District Colton, City of Contra Costa Water District Corcoran, City of Corona, City of Costa Mesa, City of Cotati, City of Crescent City, City of Daly City, City of Davis, City of Delano,City of Desert Hot Springs, City of Diablo Water District Discovery Bay, Town of Dublin San Ramon Services District East Bay Municipal Water District Eastern Municipal Water District EXHIBIT 1 061 Case 5:06-cv-00055-GW-PJW Document 1-2 Filed 01/17/06 ‘Page 12 of 50 Page ID #:62 California (Continued) E] Centro, City of El Toro Water District Elk Grove Water Serivce Elsinore Valley Municipal Water District Elsinore Water District Escondido,City of Eureka, City of Fairfield, City of Folsom, City of Fowler, City of Fresno, City of Fullerton, City of Galt, City of Greenfield, City of Greenville, Town of Guadalupe,City of Hanford, City of Hayward,City of Helix Water District Hemet, City of Hesperia, City of Hi-Desert Water District Huntington Beach, City of Imperial, City of Indian Wells Valley Water District Indio, City of Irvine Ranch Water District Jackson, City of Kerman,City of Kingsburg,City of La Habra,City of Laguna Beach County Water District Lathrop, City of Lemoore, City of Lincoln, City of Live Oak, City of Livermore,City of Livingston, City of Lompoc,City of Los Angeles County Water Works Los Banos,City of Madera,City of Manteca, City of Merced,City of -2- EXHIBIT1 062 Case 5:06-cv-00055-GW-PJW Document 1-2 Filed 01/17/06 Page 13 of 50 Page ID #:63 California (Continued) Modesto, City of Moulton Niguel Water District Murrieta County WaterDistrict National City, City of Needles, City of Newhall County Water District Norco, City of North Marin Water District Oakdale, City of Oceanside, City of Ojai, City of Olivenhain Municipal Water District Orange Cove,City of Otay WaterDistrict Oxnard, City of Padre Dam Municipal Water District Palmdale Water District Paradise Irrigation District Parlier, City of Paso Robles, City of Patterson, City of Perris, City of Pittsburg, City of Placer County Water Agency Pleasanton,City of Pomona,City of Port Hueneme,City of Portola, City of Poway, City of Quartz Hill Water District Rancho California Water District Red Bluff, City of Redding,City of Redlands, City of RedwoodCity, City of Ripon, City of Riverbank,City of Riverside, City of Roseville, City of Sacramento, City of Sacramento County Water Agency _San Anselmo, Town of San Bernardino,City of San Bruno,City of ~3- EXHIBIT1 063 Case 5:06-cv-00055-GW-PJW Document 1-2. Filed 01/17/06 Page 140f50 Page ID #:64 California (Continued) San Clemente,City of San Diego,City of San Jose, City of San Juan Capistrano, City of San Leandro, City of San Ramon,City of Sanger, City of Santa Ana,City of Santa Barbara, City of Santa Cruz, City of Santa Fe Springs, City of Santa Maria, City of Santa Paula, City of Santa Rosa, City of Shafter, City of Simi Valley, City of Soledad, City of South Coast Water District South Tahoe Public Utility District Stanton, City of Stockton, City of Sweetwater Authority Tehachapi, City of Thousand Oaks, City of Tracy, City of Trukee Donner Public Utility District Turlock, City of Ukiah, City of Vacaville, City of Vallejo, City of Ventura, City of Ventura County Water Works Victorville, City of Vista Irrigation District Watsonville, City of West Sacramento, City of Western Municipal Water District Whittier, City of Willows, City of Woodland, City of Yountville, Town of Yuba City, City of -4- EXHIBIT 1 Case 5:06-Cv-00055-GW-PJW Document 1-2 Filed 01/17/06 Page 15 of 50 Page ID #:65 Delaware Bethany Beach, Town of Bridgeville, Town of Cheswold, Town of Dagsboro, Town of Delmar, Town of Dover, City of Felton, Town of Frankford, Town of Laurel, Town of Lewes,City of Middletown, Town of Milford, City of Millsboro, Town of Millville, Town of Milton, Town of Newark, City of Ocean View, Town of Odessa, Town of Rehoboth Beach, Town of Selbyville, Town of Smyrna, Town of Townsend, Town of Massachusetts Auburn, Town of Bellingham, Town of Canton, Town of Dighton Water District East Longmeadow, Town of Easton, Town of Hamilton, Town of Hyannis, Village of Kingston, Town of Mashpee, Town of Scituate, Town of Swansea Water District Nevada Big Bend Water District Boulder City, City of Carson City, City of Las Vegas Valley Water District -5- EXHIBIT 1 065 Case 5:06-cv-00055-GW-PJW Document 1-2 Filed 01/17/06 Page 16 0f 50 Page ID #:66 Nevada (Continued) North Las Vegas, City of Pahrump, Town of Truckee Meadows Water Authority Vigin Valley Water District Tennessee Columbia, City of Lawrenceburg,City of Springhill, City of White House Utility District Virginia Accomac, Town of Ashburn, Town of Bedford, City of Bowling Green, Town of Buchanan County Public Service Authority Charlottesville, City of Chesterfield, County of Colonial Beach, Town of Dickenson County Public Service Authority Dumfries, Town of Fredericksburg, City of Loudoun, County of Louisa, Town of Mount Jackson, Town of Newport News Waterworks Norfolk, City of Orange, Town of Portsmouth, City of Pulaski, Town of Richmond,City of Round Hill, Town of Suffolk, City of Surry, Town of Virginia Beach, City of Warrenton, Town of West Point, Town of Williamsburg, City of Windsor, Town of Wise County Public Service Authority Wytheville, Town of -6- EXHIBIT1 066 Case 5:06-cv-00055-GW-PJW Document 1-2. Filed 01/17/06 Page 17 0f 50 Page ID #:67 Virginia (Continued) York, County of -7- EXHIBIT1 067 Exhibit B Confidentia 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA WESTERN DIVISION THE HON. GEORGE H. WU, JUDGE PRESIDING United States of America, et al., CERTIFIED COPY Plaintiff, vs. No. EDCV 06-55-GW J-M Manufacturing Company, Inc., et al., Defendants. REPORTER'S TRANSCRIPT OF PROCEEDINGS Los Angeles, California Monday, June 6, 2011; 9:37 A.M. Wil S. Wilcox, CSR 9178 Official U.S. District Court Reporter 312 North Spring Street, # 432-A Los Angeles, California 90012 Phone: (213) 290-2849 068 SMRHO00057 Confidential 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 APPEARANCES OF COUNSEL: FOR THE PLAINTIFF: FOR THE PLAINTIFF: FOR THE PLAINTIFF: FOR THE PLAINTIFF: FOR THE DEFENDANT: DAY PITNEY LLP BRENT NELSON RUSHFORTH DOREEN KLEIN ELIZABETH J. SHER {Telephonic] STUART M. RENNERT [Telephonic] JONATHAN I. HANDLER [Telephonic] Attorneys at Law 1100 New York Avenue NW Washington, DC 20005 202-218-3917 Fax: 202~218-3910 PHILLIPS & COHEN CLAIRE SYLVIA Attorney at Law 131 Steuart Street Suite 501 San Francisco, CA 94105 415-836-9000 Email: erh@pcsf.com LITMAN LAW FIRM HARRY P. LITMAN [Telephonic] Attorney at Law One Oxford Centre 34th Floor Pittsburgh, PA 15219 412-456-2000 Fax: 412-456-2020 Email: Harry.Litman@verizon.net OFFICE OF THE NEVADA ATTORNEY GENERAL Susan K. Stewart [Telephonic] Attorney at Law 100 North Carson Street Carson City, NV 89701-4717 775-684-1217 Fax: 775-684-1108 Email: sstewart@ag.nv.gov SHEPPARD MULLIN RICHTER & HAMPTON LLP D. RONALD RYLAND CHARLES L. KREINDLER BRYAN D. DALY Attorneys at Law 333 South Hope Street 48th Floor Los Angeles, CA 90071 213-620-1780 Fax: 213-620-1398 Los Angeles, California; Monday, June 6, 2011; 9:37 A.M. 069 SMRHO0058 Confidential 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 APPEARANCES OF COUNSEL: {Continued) FOR THE INTERVENOR PLAINTIFF: JOAN C. ARNESON [Telephonic] Attorney at Law BOWIE ARNESON WILES AND GIANNONE 4920 Campus Dr Newport Beach, CA 92660 949-851-1300 Fax: 949-851-2014 Email: jarneson@bawg.com FOR THE INTERVENOR PLAINTIFF: SAN DIEGO CITY ATTORNEYS OFFICE R. CLAYTON WELCH [Telephonic] Attorney at Law 1200 Third Avenue Suite 1100 San Diego, CA 92101 619-997-7613 Fax: 619-533-5856 Email: cwelch@sandiego.gov Los Angeles, California; Monday, June 6, 2011; 9:37 A.M. 070 SMRHO00059 10 11 12 14 15 16 17 18 19 20 21 22 23 24 » 25 Confidential APPEARANCES OF COUNSEL: (Continued) FOR THE INTERVENOR PLAINTIFF: FOR THE INTERVENOR: BEST BEST & KRIEGER LLP MELISSA W. WOO [Telephonic] Attorney at Law 655 West Broadway 15th Floor San Diego, CA 92101-3542 619-525-1300 Fax: 610-233-6118 Email: melissa.woo@bbklaw.com SAN JOSE CITY ATTORNEYS OFFICE MALGORZATA LASKOWSKA [Telephonic] Attorney at Law 200 East Santa Clara Street San Jose, CA 95113 408-535-1990 Fax: 408-998-3131 Email: cao.main@sanjoseca.gov Los Angeles, California; Monday, June 6, 2011; 9:37 A.M. 071 SMRH00060 1 LOS ANGELES, CA.; MONDAY, JUNE 6, 2011; 9:37 A.M. 2 -000- 3 THE COURT: Let me call the matter of 4 United States versus J-M Manufacturing. 5 Let me have appearance of counsel on the 6 telephone. 7 MS. SHER: Elizabeth Sher of Day Pitney for the 8 relator and various other entities, and with me are my 9 colleagues Stu Rennert and Jonathan Handler. 10 THE COURT: All right. 11 MR. LITMAN: This is Harry Litman for the same 12 entities. 13 THE COURT: All right. 14 MS. STEWART: Susan Stewart for the State of 15 Nevada, 16 MS. LASKOWSKA: Malgorzata Laskowska for the City 17 of San Jose. 18 MS. WOO: Melissa Woo for Best Best & Krieger on 19 behalf of various California water district interveners. 20 MS. ARNESON: Joan Arneson for Irvine Ranch Water 21 District. 22 MR. WELCH: Clay Welch for the City of San Diego. 23 THE COURT: All right. In court we have for the 24 plaintiffs? 25 MR. RUSHFORTH: Your Honor, Brent Rushforth. Good Los Angeles, California; Monday, June 6, 2011; 9:37 A.M. Confidential 072 SMRH00061 Confidential 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 morning, Judge Wu, from Day Pitney. And I have with me Claire Sylvia from Phillips and Cohen and Doreen Klein from Day Pitney. THE COURT: All right. MR. RYLAND: Your Honor, Ronald Ryland, Sheppard Mullin Richter & Hampton. I'm the general counsel. With me is Mr. Kreindler who, of course, is counsel along with Mr. Daly in this case. And back in the corner, should you have any questions, is our partner from Santa Barbara, Jeff Dinkin. THE COURT: All right. We are here on a motion to disqualify Sheppard Mullin from this matter that was brought by South Tahoe Public Utility. Let me just ask. The counsel for South Tahoe is? MR. RUSHFORTH: We are counsel for South Tahoe. THE COURT: Okay. All right. And let me indicate, I have prepared a tentative ruling on this matter. And I presume everybody's seen it? MR. RUSHFORTH: Yes, Your Honor, we have. MR. RYLAND: Yes, Your Honor. THE COURT: Does anybody want to argue anything? MR. RUSHFORTH: We would like to, and I would imagine that the other side would like to as well. THE COURT: All right. Let me just ask. What more would South Tahoe want to argue? Los Angeles, California; Monday, June 6, 2011; 9:37 A.M. 073 SMRHO00062 Confidential 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 MR. RUSHFORTH: Well, Claire Sylvia will be speaking for South Tahoe, Your Honor. MS. SYLVIA: Thank you, Your Honor. We would just like to address the two points you raised at the end of the opinion since we obviously agree with the first six pages. THE COURT: Okay. Are you talking about Footnote 6? MS. SYLVIA: Well, on the last page you raise two questions that you would like to hear from counsel on. THE COURT: Oh, okay. MS. SYLVIA: And so we'd like a minute to address that. THE COURT: All right. Are you going to give me case citations? MS. SYLVIA: Well, I can't give you case citations because there are very few cases raising any of these issues. The two issues that you present are, one, does it matter that South Tahoe is only one of multiple parties in this case, and as you correctly point out, there aren't cases like that. THE COURT: Well, none that we could necessarily find, but we thought that with the expanded efforts of counsel for South Tahoe and also Sheppard Mullin you guys might find something that we've overlooked. MS. SYLVIA: We don't believe you've overlooked Los Angeles, California; Monday, June 6, 2011; 9:37 A.M. 074 SMRHO00063 8 1 anything. As the court in Flatt pointed out, there are very 2 few concurrent representation cases to begin with. That 3 rarely occurs. 4 THE COURT: But there are tons and tons and tons 5 | of disqualification motions. 6 MS. SYLVIA: There are tons and tons of 7 disqualification motions, but concurrent representation 8 motions are unique because they present a unique concern, 9 which is the duty of loyalty, and that's a duty that’s 10 required by every lawyer and they owe it to every client, 11 whether they are small or they are large or they are in the 12 same case as many other people. 13 THE COURT: I understand all of that. That's in 14 the tentative. 15 Let me do this. Let me have Sheppard Mullin 16 people speak first because depending on what they say, 17 obviously, the court will consider what it should do next. 18 All right. Let me hear from -- 19 MR. RYLAND: Ronald Ryland, Your Honor. 20 THE COURT: yes. 21 MR. RYLAND: Clearly, we would like the 22 opportunity for further briefing. I mean, this would be a 23 very -- 24 THE COURT: But it would be limited to the two 25 issues that I've talked about. I'm not going to obviously Los Angeles, California; Monday, June 6, 2011; 9:37 A.M. Confidential 075 SMRHO0064 Confidential 10 il 12 13 14 15 16 17 18 19 20 21 22 23 24 25 allow rebriefing of the principal contentions because both sides have gotten an opportunity to do that already. MR. RYLAND: No. Understood. We want that, of course, because of what this would mean to J-M. I can tell you, as an officer of the court, that particularly in the bankruptcy arena where you have either conflicts between debtors or more commonly conflicts between debtors and a multitude of creditors, for example, four dozen, you will see conflicts of counsel and that's in an arena where the courts are particularly scrupulous and indeed the court's supervise the appointment. THE COURT: I understand the courts are scrupulous, but what happens in bankruptcy stays in bankruptcy. MR. RYLAND: Well, my point being is not only do you have to follow the ethical rules, you have to have your employment as the lawyer for the debtor approved by the judge. So we would ask for leave to brief those two issues. THE COURT: All right. MR. RYLAND: Would you entertain at least a brief comment or two on the tentative? THE COURT: Sure. Well, what I would entertain with the further briefing is the two issues. MR. RYLAND: Understood. THE COURT: In other words, the stuff that is Los Angeles, California; Monday, June 6, 2011; 9:37 A.M. 076 SMRHO00065 10 1 otherwise contained in the tentative, argue now or forever 2 hold your peace. 3 MR. RYLAND: Understood. 4 THE COURT: All right. 5 MR. RYLAND: Okay. You appreciate the harshness, 6 you appreciate how much work has been done. I won't belabor 7 that. The court knows that better than I. 8 We do talk about the delay, and I understand Your 9 Honor focuses not on any knowledge on the part of the 10 district, but plaintiff's counsel says we learned about this 11 in January and we are here today in June and at least 12 Judge Alsup up in the Northern District, my hometown, in an 13 Openwave said that was too much, that the delay a few months 14 in a case of this magnitude is too much. 15 Secondly, let me, if I may, the Zador case is 16 clearly a serious case in California jurisprudence. It was 17 a case where the waiver was much more specific. But in that 18 case, the lawyer for a while defended this man. When that 19 Man revealed to the lawyer that he had lied, the lawyer then 20 turned around and sued him. 21 So one would expect that a waiver when one 22 represents a party for a while in a very same lawsuit and 23 then says you've told me you've lied, I'm now suing you on a 24 cross-complaint, that the waiver would be scrutinized and 25 held to a very high standard. Los Angeles, California; Monday, June 6, 2011; 9:37 A.M. Confidential 077 SMRHO00066 P “ 1 In Concat, indeed, the court found in favor of the 2 client. But in that case, that particular person had come 3 to the lawyer and said will you do my estate plan. Incident 4 to that estate plan, had disclosed the IP that underlay his 5 wealth, underlay his life's work, and the IP that was the 6 subject of the subsequent lawsuit. 7 And I contrast that interrelationship with do you 8 want to give up your rights of loyalty for your will 9 preparation when it involves the very IP that's been your 10 life's work in comparison to 2002 when this public agency 11 with a general counsel has a decision to make with regard to 12 labor counsel. 13 And the labor counsel says I've changed law firms. 14 I'm happy to do your work, but we would like an advanced 15 waiver and he lays it out in a three-page document in 2002, 16 signed up again in 2006. 17 And let's think about that dialogue, and I 18 appreciate this is not perfect, but when one talks about 19 Flatt, one talks about the duty of loyalty as the 20 expectations of the client. What did the client reasonably 21 expect? Is it fair to that person, particularly a 22 layperson, as it was in Flatt or even a sophisticated 23 layperson as it was in the case of Concat with a public 24 agency? > 25 Had we been prescient and in 2002 said, hey, maybe Los Angeles, California; Monday, June 6, 2011; 9:37 A.M. Confidential 078 SMRH00067 Confidential 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 in a decade some whistleblower will come up with a case involving plastic pipe. You have plastic pipe. You might join with 48 other parties in a lawsuit involving plastic pipe. We would seek your agreement that if that happens, we can defend that plastic pipe manufacturer. Now, clearly, we didn't have that prescience, but I suggest to you that if one looks at reasonable expectations or whether you think it would be an imposition -- THE COURT: Let me stop you. The problem that I have with that line of argument is that it's not up to the court to set what the standards are. It's not up to the court to set the results that necessarily should transpire. While the court has some degree of discretion, however, the general rule is that if there is representation that is immediate and adverse, it is not to go forward. And so that's the problem that the court has. I'm not blaming, necessarily, Sheppard Mullin for the situation, but once the situation arises, the normal course is for the firm to, let's put it this way, step aside at that point in time because of the conflict. MR. RYLAND: And I appreciate, Your Honor, and I won't belabor this. But Flatt even in the footnote says that it contemplates the possibility of a waiver. The ABA rule in Comment 22 contemplates a waiver. The California Los Angeles, California; Monday, June 6, 2011; 9:37 A.M. 079 SMRH00068 Confidential 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 13 jurisprudence decided that. THE COURT: The problem is the waiver has to be specific, either specific or so obviously general that it applies -- it's clear to the layperson, be it a governmental entity or whatever, that in fact they cannot expect this duty of loyalty and they are going into this relationship with their eyes open. MR. RYLAND: Well, I would respectfully suggest that in 2002 when the waiver even says, look, by doing this, by allowing us to be adverse to you in all of these things, you may even be criticized by your constituents. That's a pretty detailed, pretty fine disclosure. It's better than the model -- it's better than the DC thing, better than the ones that the plaintiffs use. Finally, and I will -- I appreciate I'm imposing on the court. THE COURT: Oh, no. Your client is a taxpayer like everyone else, hopefully. | MR. RYLAND: When one looks at the duty of loyalty -- and I agree, the courts, I think, should enforce the reasonable expectations of clients. I don't have any problem with that. I don't have any problem with Concat in terms of its result. But look at this case. Action speaks louder than words. While this very motion was pending, the good people Los Angeles, California; Monday, June 6, 2011; 9:37 A.M. 080 SMRHO00069 Confidential 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 14 at the district are calling Mr. Dinkin for advice. They don't think of him as disloyal. And in the context of a waiver when the client itself, when the people down at the district are calling up for advice, when the general manager who signed the waiver is notably silent, then I would respectfully suggest that their reasonable expectations are being honored, and particularly when the result is so harsh. But with that, if all I can do is respond to ‘the two points that Your Honor has raised, we would ask for time to do that. THE COURT: All right. Let me ask the plaintiffs' counsel to respond to these two points that were raised by defense counsel. First, as to whether or not this is similar to the situation that Judge Alsup had in regards to delay and also, two, why the waiver, in particular the 2002 waiver doesn't cover this situation. MS. SYLVIA: With' respect to the Openwave decision by Judge Alsup, this is nothing like that. In this case, counsel indicates that there's been a delay from January to June. But during that period, what was going on? There were extensive discussions between counsel for South Tahoe and counsel for J-M. The letters that we included in the record show that we wrote to them and we raised the question, we asked Los Angeles, California; Monday, June 6, 2011; 9:37 A.M. 081 SMRH0O0070 15 1 what's the explanation, gave them a week to respond. They 2 responded. We asked them again. We explained that that did 3 not really respond to the issue. We gave them another week. 4 There was a period of meet and confer in April and some 5 additional information. 6 THE COURT: Let me ask this other question then. 7 If this breach of the duty of loyalty is so sacrosanct here, 8 why is the agency still calling Sheppard Mullin's employment 9 guy for advice? 10 MS. SYLVIA: Well, it's not the agency. It's one 11 employee in the agency. The agency itself which is governed 12 by a board and by the general manager actually authorized 13 this motion, that an employee called up the attorney that 14 she's used to calling up does not mean that the agency 15 itself doesn't think that the duty of loyalty has been 16 violated. 17 THE COURT: All right. And then what about the 18 language of the waiver? 19 MS. SYLVIA: Language of the waiver in 2002 isn't 20 much more specific than the one in 2006, as we pointed out 21 in our brief. And it is true that waivers, prospective 22 waivers can be upheld, but the overriding issue is whether 23 the waiver is informed. And neither the 2006 nor the 2002 24 | waiver indicate that the client is informed. 25 Simply saying that your constituencies may be Los Angeles, California; Monday, June 6, 2011; 9:37 A.M. Confidential 082 SMRHCO071 Confidential 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 16 upset with you if you sign this waiver does not give the client the sense of what kind of conflict could arise in the future. And even the ABA opinions on which J-M relies make Clear that a lawyer can't just say the coast is clear because they have a general waiver that was signed at some earlier point. It's the lawyer's obligation to make sure that that consent is informed. And almost always it's a general waiver that doesn't talk about the specific kinds of conflicts that could arise. Not necessarily the pipe case, but cases of that nature, and almost always a second informed waiver will be required. THE COURT: Let me ask this other question, and maybe this one should be directed more to the defense rather than plaintiffs' counsel, but let me ask you this first: At the time that Sheppard Mullin came in, it was clear that South Tahoe was a party in this case as plaintiff, right, against J-M? MS. SYLVIA: That's correct. THE COURT: And so a client conflict check could have easily discovered the fact that South Tahoe would create a problem insofar as concurrent representation in this situation? MS. SYLVIA: That's also correct. THE COURT: All right. Los Angeles, California; Monday, June 6, 2011; 9:37 A.M. 083 SMRH00072 17 1 MS. SYLVIA: As I understand it, the law firm did 2 do a conflict check and they did discover that they had 3 concurrent representation, and then they didn't tell anyone, 4 including not even their lawyer representing South Tahoe. 5 So that's exactly right that a conflict check would have 6 discovered it. And they did discover it, they just didn't 7 tell anyone. 8 THE COURT: All right. Thank you. 9 Let me ask. Anything else from defense? 10 MR. RYLAND: Just forty-five seconds, because in 11 Openwave during those months, they actually litigated the 12 conflict question in France, as I recall. So I think it was , 13 litigated at least as actively in Openwave as it was here. 14 And I think that the waiver that talks about 15 litigation, administrative -- litigation, arbitrations, 16 audits, examinations, inquiries, administrative appeals, and 17 other adversary proceedings, informed the client in 2002, 18 the client was told affirmatively that this could have an 19 effect on loyalty and vigor, confidentiality was mentioned 20 and appearance to constituency and risk of requirement to 21 withdraw was all disclosed. But that's before, Your Honor. 22 Thank you. 23 THE COURT: All right. Let me ask. How long is 24 it going to take? I presume -- let me do it this way. Let 25 me have the supplemental brief, the first one, come from the Los Angeles, California; Monday, June 6, 2011; 9:37 A.M, Confidential 084 SMRH00073 18 1 defense, and then I will give the plaintiffs an opportunity 2 to respond. 3 How long is it going to take for you to do this? 4 MR. RYLAND: Twenty days, Your Honor. 5 THE COURT: Twenty days. So that would be 6 something filed by the 27th. That's fine. Let me have a 7 response from the plaintiff by the 6th of July. 8 Is that doable? 9 MS. SYLVIA: It's definitely doable. We think 10 that a much shorter period of time is all that's required. 11 There's already been arguments that there's been tremendous 12 delay. We don't think it's that hard to respond to these. 13 THE COURT: All right. I will shorten the time a 14 little bit then. I will give the defense counsel until the 15 22nd of June and served on that day. And let me give the 16 plaintiff's counsel to the 1st of July and I will have you 17 guys back here on the 7th of July, and that will be at 8:30. 18 Thank you. 19 MS. SYLVIA: Thank you. 20 MR. RUSHFORTH: Thank you, Judge. 21 THE COURT: All right. 22 UNKNOWN SPEAKER: Judge. 23 THE COURT: Yes. 24 UNKNOWN SPEAKER: I'm just wondering what happens 25 in the interim time. We have numerous hearings, Los Angeles, California; Monday, June 6, 2011; 9:37 A.M, ~onfidential 085 SMRHO0074 ~onfidential 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 19 meet-and-confers, papers to be filed. I assume we are just going to go forward. THE COURT: I presume you are going to go forward until I rule. UNKNOWN SPEAKER: All right. Thank you, Your Honor. THE COURT: Unless I hear something otherwise. MR, RUSHFORTH: Your Honor, I'm Brent Rushforth. Can I be heard for 15 seconds? THE COURT: Sure. MR. RUSHFORTH: The reason that dividing off of South Tahoe is not going to work and we are not going to find any cases on the issue is because Sheppard Mullin will still be adverse to South Tahoe whether they are divided off or not. THE COURT: That might very well be true in the end. I agree with you. But let me just ask. In the larger scheme of things, I presume that the discovery that's going forward is general discovery. It's not discovery -- in other words, if there is discovery, for example, if somebody was being deposed from South Tahoe, I can understand, but if it's just general, for example, depositions that they are defending as to J-M's PMKs or something of that sort, you know. MR. RUSHFORTH: Well, but here's the problem, Los Angeles, California; Monday, June 6, 2011; 9:37 A.M. 086 SMRH00075 20 1 Your Honor. We had a meet and confer a week ago or four or 2 five days ago on how we bifurcate this case. And you can 3 ask defendants themselves, they propose a bifurcation where 4 they will make summary judgment motions on issues that cover 5 all parties in the case. 6 THE COURT: Well, and I agree, that is, to my 7 mind, one of the problems that I can see of trying to 8 bifurcate out South Tahoe. 9 MR. RUSHFORTH: South Tahoe's interest will by 10 definition be implicated in Sheppard Mullin's defense of 11 their client. 12 THE COURT: Well, who knows, maybe between now and 13 then the case will settle as to South Tahoe. It's already 14 been settled as to other entities so maybe the matter will 15 be settled out. 16 MR. RUSHFORTH: One could only hope, Your Honor. 17 THE COURT: I'm counting on it. Anything else? 18 MR. RUSHFORTH: Thank you, Judge Wu. 19 MR. RYLAND: Thank you, Your Honor. 20 21 (At 9:57 a.m. proceedings were adjourned.) 22 23 24 25 Los Angeles, California; Monday, June 6, 2011; 9:37 A.M. Confidential 087 SMRH00076 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 ~onfidential --900-- CERTIFICATE I hereby certify that pursuant to Section 753, Title 28, United States Code, the foregoing is a true and correct transcript of the stenographically reported proceedings held in the above-entitled matter and that the transcript page format is in conformance with the regulations of the Judicial Conference of the United States. Date: June 10, 2011 WIL S. WILCOX U.S. COURT REPORTER CSR NO. 9178 Los Angeles, California; Monday, June 6, 2011; 9:37 A.M. 088 SMRHO0077 Exhibit C IN THE ARBITRATION BEFORE JAMS SHEPPARD, MULLIN, RICHTER & REF. NO. 1220045609 HAMPTON,LLP, Arbitrators: Hon. Gary L. Taylor (Ret.) Claimant and Cross- Hon. Charles S. Vogel (Ret.) Respondent, James W.Colbert, III, Esq. V. J-M MANUFACTURING COMPANY,INC., D/B/A/ JM EAGLE, Respondent and Cross- Claimant. EXPERT REPORT OF PROFESSOR LAWRENCEC. MARSHALL September30, 2013 I have been asked to prepare a report setting forth my opinions,as an expert in the field of legal ethics, on whether the actions of Sheppard, Mullin, Richter & Hampton LLP (“Sheppard Mullin”) with regard to its representation of J-M Manufacturing Company,Inc.(“J-M”) give rise to disgorgement of fees Sheppard Mullin has been paid by J-M orforfeiture of fees J-M still owes Sheppard Mullin for professional services rendered.!” I. My Credentials as an Expert I am a Professor of Law at Stanford Law Schoo! where I regularly teach in the field of legal ethics and professional responsibility. Since joining the Stanford faculty in ' With regard to the issues I address here, there is no difference between the governing standardsfor fee forfeiture and disgorgement.I have,thus, used the termsinterchangeably throughout this Opinion. 089 2004, I have taught such courses on manyoccasions. Duringthis upcoming year, I will teach two such courses: one for the 50 international graduate students pursuing LLM degrees and one for JD students. Because so many Stanford students choose to remain in California after graduation, I am careful to incorporate a focus on California rules and principlesof legal! ethics into my teaching. Prior to my appointment to the Stanford faculty, I served on the faculty of Northwestern University School of Law in Chicago for 17 years. During that period,I taught courses in legal ethics or professional responsibility approximately 15 times. Like my courses at Stanford, I taught the material from a national perspective, but always being sure to discuss any different approaches that governed in the three jurisdictions most relevant to Northwestern students: I!linois, New York and California. In addition to my regular teaching load at Stanford, I also served as an Associate Dean from the time of my arrival in 2004 until several months ago. In that capacity,I directed the Mills Legal Clinic, which employs approximately 20 attorneys/faculty and works with approximately 150 law students each year throughits ten clinical programs. In that position I was responsible for, among other things, working with the lawyers and students to resolve the numerousethical issues that arose in the course of their practice. This-required extensive familiarity-with the-California Rules of Professional Conduct, _ - state and federal precedents regarding California professional responsibility issues, and the broader spectrum of nationalrules, decisions and literature. I] began my career in law teaching in 1987, after completing clerkships with Supreme Court of the United States Justice John Paul Stevens and Chief Judge Patricia Wald of the United States Court of Appeals for the District of Columbia Circuit. From 090 1987 to 2004, I was a professor at Northwestern University School of Law in Chicago, Hlinois. During the mid-1990s, while serving on the Northwestern faculty, I was appointed to serve as the Reporter to the Illinois Supreme Court’s Committee on Professional Responsibility for two years. That Committee has responsibility for proposing changes and reviewing changes others propose to the Illinois Rules of Professional Conduct. In addition, over the past two decades, I have served as a consultant to scores of law firms facing ethical dilemmas and have been disclosed as an expert witness in approximately 20 cases. Many of these have involved California law and ethical principles. About 40% of the time my opinions have found fault with the attorneys’ conduct, and about 60% of the time I have opined that the lawyers complied with their professional duties. There have been many occasions in which I have declined invitations to serve as an expert because I did not agree with the position of those who contacted me. During the later 1980s and 1990s, I served as Of Counsel to the Chicago law firm of Mayer, Brown & Platt. Since January 2013, I have been serving as Of Counselto the law firm of Kirkland & Ellis, through its Chicago headquarters. One of my primary responsibilities with Kirkland & Ellis is to work with the firm’s General Counsel on particularly thorny ethical issues. Both Mayer, Brown & Platt and Kirkland & Ellis have had substantial California offices during the periods in which I have worked with them. ' 091 I. General Introduction After reviewing the many pleadings, documents and declarationsrelevant to this case, as well as the governingrules, cases and authorities, it is my considered opinion that nothing about Sheppard Mullin’s conduct comesclose to supporting disgorgement or fee forfeiture. Indeed, it is my opinion that, given Sheppard Mullin’s relationships and conflict-waiver-agreements with both IM and the South Tahoe Public Utility Districts (“the District”), Sheppard Mullin acted in full accordance with the governing ethical rules and principles. But even were oneto disagree with that conclusion, it would by no means follow that disgorgementor forfeiture of fees has any role here. California courts have madeit clear that those severe sanctions are reserved for clear and egregious misconduct of the sort that equitably supports condemning an entire representation as worthless or fraudulent. Thus, the relevant question here is whether Sheppard Mullin engaged in any egregious misconduct through which it unambiguously and intentionally violated the governing ethical principles and its established duties to its clients. It is my opinion, offered without reservation,that it did not. No California case (or other case I have found) has ever held that a law firm forfeits its right to the fees it has earned when the evidence showsthat the firm had a reasonable, good faith basis to believe its: conduct was proper. This pointis dispositive here. Even today, it is my view, as indicated above and described below, that the waivers upon which Sheppard Mullin relied were valid and that Sheppard Mullin acted properly in concludingit had no disabling conflicts with regard to its representation of the District or J-M. But one need not accept that conclusion to recognize that disgorgement and fee forfeiture are not relevant here. For even if one were to decide that application of the 092: multi-pronged and murky factors used to assess the validity of advance conflict waivers supports a conclusion that the waivers executed by the District and/or J-M wereinvalid, there would still be no basis to conclude that Sheppard Mullin presciently knew that the waivers would be drawn into question and knowingly and intentionally breached any clear ethical rule to any client. Disgorgement and forfeiture are not mild remedies that follow from lawyers’ good faith mistakes or even from ordinary violations of ethical rules—they are dramatic weapons designed to deter pernicious misconduct. In my Opinion, this case does not comeclose. Indeed, although there has been considerable litigation around the validity of various advance waivers, and although some of those cases have held a specific waiver invalid in the context of the particular case, no court has to my knowledge ever ordered disgorgementor fee forfeiture as a result of a firm’s misjudgmentabout the validity of an advance waiver. | It also follows, necessarily, that because Sheppard Mullin was entitled to trust that it held a valid waiver from the District, there was no needor reason for Sheppard Mullin to inform J-M at the outset of the representation that there was a risk the District might move to disqualify the firm. Any firm in Sheppard Mullin’s shoes would have been justified_in concluding. this was not a material risk. In this regard,this.is one ofthose areas in whichreading judicial opinions can provide a skewedsense of the on-the-ground realities. There are, to be sure, several decisions analyzing the validity of advance waivers; in some contexts they have been upheld andin others they have been invalidated. But for every one case in which an advance waiver has been challenged, there are thousands in which they have not. Advance waivers have becomeabsolutely the norm in 093 law firms’ retention agreements and, with rare exceptions, clients who have so consented readily accept the agreements into which they have entered and voice no objection to the law firm taking on a new matter in accordance with the terms of the waiver. For this reason, there was simply no reason for Sheppard Mullin to anticipate any material risk that the District would decide to challenge the validity of the waivers it had executed based on fully informed consent. III. General Principles of Disgorgement and Fee Forfeiture. There is clearly established law that an attorney or law firm that has engaged in clearly unethical conduct tantamount to fraud or to a profound corruption of the attorney— client relationship is not entitled to collect fees for services renderedto its client. It is just as Clearly established, though, that disgorgement or fee forfeiture cannot be imposed where the alleged unethical behaviorfalls short of this sort of egregious misconduct. In this case, Sheppard Mullin's alleged breachesare not the type that any court has ever held warrants disgorgement or fee forfeiture. Sheppard Mullin proactively took affirmative efforts to comply with the conflicts of interest principles through securing an advance waiver. To deprive Sheppard Mullin of millions of dollars of fees it has fully earned based on what, at most, amounts to a mistaken judgment call about how the factors regarding the validity of advance waivers would be balanced by a later court ortribunal, would be plainly disproportionate to the nature of Sheppard Mullin's conduct. This is particularly true given the lack of any dispute here that Sheppard Mullin’s fees were reasonable and that Sheppard Mullin provided value to J-M. To meaningfully set forth my expert opinions aboutthis matter, it is necessary to spend sometime describing thestate of California law on disgorgementand fee forfeiture. 094 I will then relate that law backto the facts presented here and the ways in which these specific legal principles have informed myopinions. The general parameters of the law of disgorgementor fee forfeiture based on alleged attorney misconduct were set out well by the court in Sullivan v. Dorsa, 128 Cal. App. 4th 947 (2005). In that case, appellants sought to bar attorneys from securing fees based on a finding they had operated under a conflict of interest. The conflict involved the law firm’s representing a referee overseeing a partition sale to a buyer even though the law firm had an ongoing relationship with the buyer, The court began its discussion by reiterating the principle that “while an attorney's breach of the rules of professional conduct may negate an attorney's claim for fees,” this is by no means automatically the case. Jd. at 965 (emphasis in original) (quoting Pringle v. La Chapelle, 73 Cal. App. 4th 1000, 1005 (1999)). Only particularly serious violations give rise to these remedies, such as instances "where the representation involved elements of fraud, unfairness, acts in violation or excessive authority, acts inconsistent with the character of the profession, or acts incompatible with the faithful discharge of the attorney's duties." Ibid. (quoting Pringle, 73 Cal. App. 4th at 1006). In the case before it, the court in Sullivan saw no evidence that the alleged conflict of interest was of the sort that rose to this level of egregious misconduct... a ~— an Asindicated, the court in Sullivan referred several times to a 1999 decision by the Court of Appeal in Pringle. In that case, the court explained that the rule demanding serious misconductas a predicate to disgorgementor fee forfeiture is consistent, not only with California law, but with general ethical principles. The court cited the then-proposed 095 final draft of the Restatement, which is in line with the Final Draft released in 2000, and which remainscurrent today. According to the Restatement, A lawyer engaging in clear andserious violation of duty to a client may be required to forfeit some orall of the lawyer's compensation for the matter. Considerations relevant to the question of forfeiture include the gravity and timing ofthe violation, it's willfulness, its effect on the value of the lawyer's work for the client, any other threatened or actual harm to the client, and the adequacy of other remedies. RESTATEMENTOF THE LAW (THIRD), THE LAW GOVERNING LAWYERS§37, at 270 (2000). Of great significance to assessing the question of disgorgementorfee forfeiture relating to Sheppard Mullin, the Restatement also provides an example of where forfeiture should nor be applied: "The sanction offee forfeiture should not be applied to a lawyer who could not have been expected to know that conduct was forbidden, for example when the lawyer followed one reasonable interpretation of a client—lawyer contract and another interpretation waslater held correct." Jd. at 273, Comment d. This is - in keeping with the Restatement’s reference to the law of agency as providing thatit is a “willful and deliberate breach” that supports forfeiture. /d. at Commentb. See also id at Comment d (“Forfeiture is generally inappropriate when the lawyer has not done anything willfully blameworthy . .”). The courts in Sullivan and Pringle also referred to a leading treatise on legal ethics, which ‘explains thatforfeitureiis a “sanction for a gross;abuse by the‘lawyer|of obligationsto the client, or other serious violations of the law of lawyering." J. HAZARD & W. HODES, THE LAW OF LAWYERING §1:5 at 108 (1998 Supp.). In Frye v. Tenderloin Housing Clinic, 38 Cal. 4th 23 (2006), the California Supreme Court incorporated the factor of uncertainty aboutapplication ofthe law into its reasoning about why fee forfeiture was inappropriate despite a violation of the governing 096 ethical principle. Frye involved the failure of a non-profit legal corporation to register with the State Bar. The Court held this was a violation ofthe rules andethical principles, but also recognized that violations ofrules do not automatically give rise to disgorgement. In considering the propriety of that remedy, the Court noted there was widespread uncertainty about whether such registration was required and that "only five of the hundreds of non-profit organizationsthat offer legal services in this state have registered with the State Bar." Jd at 49. Given that (and other circumstances surrounding the misconduct), the Court declared, "the remedy of disgorgementis grossly disproportionate to the asserted wrongdoing." Jd. at 50. The decision in Mardirossian & Assoc. v. Ersoff, 153 Cal. App. 4th 257 (2007), is also quite instructive here. In that case, the attorney was accused of having represented two clients with conflicting interests, despite not having secured a waiver. The court recognized that, "under certain circumstances," fee forfeiture can be an appropriate remedy for violations of conflict of interest principles, but thé court refused to order forfeiture of fees in the absence of egregious misconduct, which was not shown in that case. /d. at 278 (“Althoughthe breach ofthe rules of professional conduct may warrant a forfeiture of fees, forfeiture is not automatic but depends on the egregiousness of the In analyzing the propriety of disgorgement, many courts have also considered whether the client suffered any injury as a result of the alleged attorney misconduct—an > As demonstrated by the decisions just discussed (Sullivan, Pringle, Frye, and Mardirossian), as well as the other cited authorities, California law by no means imposes any presumptive (muchless, automatic) rule that renders “illegal” (and thus unenforceable or rescindable) every contract that involves legal services later deemed to be inconsistent with the rules of professional conduct. There is always a focus on the particular behavior and culpability of the attorney. 097 violation.").7. issue of considerable relevance to this case (especially given the fact that J-M is not seeking compensation for any costs associated with its transition to new counsel in the qui tam case). In Frye, for example, the California Supreme Court observed that the attorneys’ violation of the rule “was not a cause of any injury," and requiring disgorgement of fees would be “disproportionate to the wrong." Frye, 38 Cal. 4that 48. Similarly, in Slovensky v. Friedman, 142 Cal. App. 4th 1518 (2006), the court summarily rejected a claim for disgorgement based on an alleged violation of conflict of interest tules. The court declared, "although disgorgementof fees is a recognized remedy for breach of fiduciary duty,it is available only if the alleged misconduct caused damage." Jd. at 1527. And in Olson v. Cohen, 106 Cal. App. 4th 1209 (2003), the court rejected a claim of disgorgement based ona firm's failure to register with the State Bar. The court observed that the client was not able to show that the attorney’s services had been “negligently rendered” in any way.Id. at 1216.9 In sum,the law is clear that showing a violation of a rule or duty is only the jirst step in addressing whether disgorgementorforfeiture of fees is in order. If thatfirst step is satisfied, the focus turns to the egregiousness of the attorney misconduct, and the proportionality of forfeiture or disgorgementto the nature of the violation and theextret of the resulting harm. Althoughthis is the approach that has been applied consistently, there is language in some decisions suggesting a more automatic triggering of disgorgement or fee 7 In Fair v. Bakhtiari, 195 Cal. App. 4™ 1135 (2011), the court imposed no injury requirement, but affirmatively noted that the attorney in that appeal had cited no authority for the proposition that damageto the client is a required predicate for disgorgement or fee forfeiture. Id. at 1153-1154. Indeed, the briefs filed in Fair confirm that noneof the cases discussed above (Frye, Slovensky or Olson), or any other case holding that injury is a required element, was ever brought to the court’s attention. Given the court’s observation that the attorney had failed to raise the issue properly, Fair cannot be said to hold generally that there is no injury requirement for disgorgementor fee forfeiture. 10 098 ae gg eu pi ne ne te ts forfeiture when any violation is shown, including a violation of conflict-of-interest principles. Despite this broad language, examining the actual holdings in those cases demonstrates they are entirely consistent with the principles described above; each and every one of these cases involves very obvious and serious violations of the operative ethical principles. The body of California precedents demonstrates that showing a violation of a rule or ethical principle is a necessary, but not sufficient, predicate for imposing disgorgementor fee forfeiture. Where such a violation is shown,the focus then turns to the key issues of whetherthe violation is of a nature and magnitudethatjustifies that drastic sanction, and whetherthe equities of the situation support such action. What emerges, then,is that no court in the history of California (or, as far as I can tell, any other state) has ordered disgorgementor fee forfeiture in instances in which the attorneys made a reasonable and good faith effort to comply with the rules. (As will be discussed below,this is a critical fact given the specific efforts Sheppard Mullin made to conform to the rules—by securing the waivers—and given the reasonableness of Sheppard Mullin's reliance on the advance waiversin the context ofthis case.) The following cases illustrate the limited types of misconduct that have led California courts to order disgorgementorfee forfeiture. Clark v. Millsap, 197 Cal. 765 (1926). The attorney had developed a fraudulent scheme wherebyhis client would transfer property to the attorneyto be held in the client’s benefit, but the attorney would then appropriate the property to the attorney himself and to the attorney’s wife. The Court described the attorney’s conduct as “intermingled with fictitious and fraudulent acts.” Jd. at 785. Goldstein v. Lees, 46 Cal. App. 3d 614 (1975). The longtime attorney for a corporation, who held manysecrets of the corporation, took on representation of a minority shareholder in a proxy fight for control of the corporation. The attorney secured the retention by holding himself out as having special insights into the facts that a stranger to the corporation would not have. The court found that this was “clearly” a conflict. Jd. at 619, 621. 11 099 Jeffry v. Pounds, 67 Cal. App. 3d 6 (1977). The law firm was representing a client in a personal injury action but nonetheless, without any effort to secure consent, commenced representing the client’s wife in her divorce action against the firm’s client. The court cited authority for the proposition that this obvious breach constituted a “reprehensible breach of loyalty.” Jd. at 12 n. 5 (quoting Grievance Comm.ofBar ofHartford County v. Rottner, 203 A.2d 82, 85 n.4 (1964)). In re Fountain, 74 Cal. App. 3d 715 (1977). The lawyer failed to file a timely appeal for the client in a criminal case and then, while continuing to represent the client, sought to deflect blame from himself and shift responsibility to the client. The court characterized the attorney’s behavioras “egregious.” Id. at 718. Day v. Rosenthal, 170 Cal. App. 3d 1125 (1985). The attorney had given clients advice about investments for which the attorney was receiving kickbacks. The attorney also advised the clients to put money in investments he knewto be shams, commingled client’ funds, and engaged in other fraudulent conduct. The court described this as a “brazen plot” involving “numerous, blatant and egregious violations of attorney responsibility.” Jd. at 1146-1147. The concurring Judge wrote that the record disclosed a “course of conduct pursued by a votary of greed, who wasinsatiate in his avaricious appetite, lamentable in his judgment, and who engaged in a constant and deliberate usurpation of his noble office.” Jd. at 1180 (Arabian,J., concurring). Cal Pak Delivery v. United Parcel Service, 52 Cal. App. 4th 1 (1997). The attorney had soughtto “sell out” his clients by asking his adversary for a secret $8 to $10 million personal payoutin return for which the attorney would abandonhis clients and the case. The court found counsel’s misconduct “egregious,” and describedit as a “colossal misdeed” and “indefensible betrayal.” Jd. at 9, 13. AI. Credit Corp. v. Aguilar & Sebastinelli, 114 Cal. App. 4th 1072 (2003). The law firm had represented an individual for manyyears in a wide variety of matters, which provided the firm with information about the location of the client’s various assets. The firm later agreed to represent a new client who wished to locate assets through which to satisfy a judgmentit had secured against the firm’s formerclient. The firmwas hiredbecause the clientunderstoodthat1thefirmknew__ what madeits formerclient “tick.” Jd. at 1080. The court foundthat, despite the unmistakable and profound conflict involved, the law firm had made noeffort whatsoever to secure a waiver. Jd. at 1079. Fair v. Bakhtiari, 195 Cal. App. 4th 1135 (2011). The attorney entered into numerous business transactions with his client in which it exercised “undue influence” on the client. Jd. at 1166. In addition, the attorney had madenoeffort to comply with the Rule of Professional Conduct requiring a lawyer to advise a client in writing that the client may seek the advice of an independentlawyer of the client’s choice,” and the rule requiring that the client be given a reasonable opportunity to seek such advice. In addition, the attorney representedclients with 12 100 conflicting interests, and never made any effort to secure waivers. The court affirmed the trial court’s ruling that due to the “nature or seriousness” of the various breaches, the case fit the description of a “serious violation of ethical tules,” making the remedy offorfeiture appropriate. /d. at 1156. These cases demonstrate the, type of indefensible, egregious misconduct that has given rise to disgorgementand fee forfeiture.’ As will be seen, the undisputed actions of Sheppard Mullin in this case are a far cry from anyofthe conductinvolved in these cases. IV. Sheppard Mullin’s Conduct With these principles in mind, it is my expert opinion that nothing in Sheppard Mullin’s conduct constitutes the kind of misconduct that has everjustified disgorgement or forfeiture of fees. Unlike all of the cases in which such remedies have been ordered, this is a case in which Sheppard Mullin made an affirmative effort to comply with the governing Rules of Professional Conduct—it secured an advance waiver that was in keeping with common practice among hundreds of major law firms. Based on my experience with law firm’s engagementletters and advance waivers, virtually identical waivers are secured andrelied upon in thousands of cases each year.’ It borders on the unthinkable to suggest that a law firm relying on such a waiveris guilty of egregious misconduct. — “In a different line of cases involving prohibited fee-splitting agreements, the courts have refused to enforce such agreements on the groundthat doing so would implicate the courts in facilitating a prospective violation of the rules by affirmatively forcing an attorney to do the very act the rules prohibit—splitting fees in noncompliance with the rules. See Chambers v. Kay, 29 Cal 4th 142, 156-158 (2002). This principle has no relevancehere, as there is no rule that remotely prohibits an attorney from being paid for work that was performed(evenifit is later found that the attorney was laboring under some form of conflict). °The use of these waivers is truly ubiquitous among law firms, but even if one assumes (very conservatively) that only 200 firms are routinely using them, and even if one then assumes (very conservatively) that each of those firm takes on only 100 newclients each year, that would equal 20,000 times the waivers are being executed every year. 13 101 It is my opinion that the waivers executed by the District and J-M were,in fact, valid under the governing law and principles. It is true, of course, that a judge eventually declined to enforce the advance waivers the District had executed. As I explain below,it is my view (although my opinion does not hinge on this view) that this disqualification order was based on a view of advance waiversthat is not in keeping with the governing principles. Regardless, though, that decision on disqualification is obviously not a decision on fee forfeiture or disgorgement—justas a judicial decision on disqualification does not govern the independent question of whether a lawyer is subject to professional discipline. See generally Great Lakes Construction Co, v. Burman, 186 Cal. App. 4th 1347, 1356 (2010) (issues of disqualification and discipline are distinct). The reason a decision on disqualification does not resolve a question about whether there has been an actual violation of the governing rulesis straightforward. Somejudges, in an abundance of caution in order to avoid even a possible appearance of impropriety, may choose to disqualify counsel without necessarily finding that any rules have actually been violated, It would be wholly improper to then take that disqualification order and treat it as a determination that there has been a violation, much less that a drastic measure such as disgorgement or fee forfeiture is in order. And, of course, Judge Wu’s decision most certainlydoes not_begin to.determinethecentral _issuerelatingtodisgorgementorfee_ an forfeiture: whether Sheppard Mullin had a reasonable, good-faith belief at the time it undertook the representation of J-M that the District’s waiver was valid. ° * Given Judge Wu’s efforts to find creative ways for Sheppard Mullin to remain in the case, it is difficult to imagine that he saw this as someblatant conflict for which Sheppard Mullin should be punished to the tune of several million dollars. 14 102 As for the waiver J-M executed, no judge or authority has ever found this waiver to be invalid, and the caseforits validity is, in many ways, even stronger than with regard to the waiver the District executed. In any event, as with the District’s waiver, even if one were to conclude ultimately that the J-M waiver is unenforceable, that would not take away from the fact that Sheppard Mullin made agood-faith, reasonable effort to comply with the rules when it discussed the waiver with J-M’s General Counsel and CEO and agreed onits terms with them, which was in keeping with industry best practices, and that Sheppard Mullin proceeded with the representation only because of the waiver. Noneof this behavior is remotely close to the kinds of misconduct that have triggered disgorgementandfee forfeiture. A. The Role of Waivers Based on Informed Consent . A large law firm often finds itself facing a dilemma when asked to represent a new client. On the one hand,the firm hasaninterest in representingclients ofall sorts, and the client most certainly has an interest in securing the kind of high quality legal services the firm can provide. On the other hand, though, the law firm is understandablyreluctant to take on a client in some instances (particularly on small matters) if that might preclude every lawyer in the firm (including those in remote offices) from taking on some major -—__....matter inthe futurebecauseit is adverse in.somerespect totheinterestsof the clientitis__ representing on some wholly unrelated matter. See generally Flatt v. Superior Court, 9 Cal. 4th 275, 284-286 (1995) (discussing rule against simultaneous representation of clients with adverse interests); CALIFORNIA RULE OF PROFESSIONAL CONDUCT 3-310 (c)(3) (lawyer maynot “[rJepresenta client in a matter and at the sametime in a separate 15 103 matter accept as a client a person or entity whoseinterest in the first matter is adverse to the client in the first matter”). This is aparticular problem with regard to smaller clients or clients with small matters (such as the District here)—as firms are hesitant to take on those kinds of representation when they would create a conflict that might preclude significant new business in the future. And it is a particular problem with regard to large law firms. Sheppard Mullin, for example, has 600 lawyers in 15 offices, including seven California offices, three other United States offices (Washington, D.C., New York, and Chicago), two offices in Europe (London and Brussels), and three offices in Asia (Beijing, Seoul, and Shanghai). Unlike a smal] practice where a currentclient might preclude a handful of lawyers from taking on some new matters, each currentclient in a large firm affects whether many hundreds (and in some major law firms, well more than a thousand) of lawyers are precluded from representing certain new clients. In addition, when a firm is handling cases (like the qui tam action here) with scores or hundreds ofparties, the specter of being conflicted out is a fundamental concern. As indicated above, this is not simply a problem that impacts large firm’s ability to take on new matters. It has deep implications for clients who very much wantto retain a firm. but. are..precluded_from doing .so. because_of the firm’sconcermabout_potential ©8s conflicts of interest, even on matters unrelated to the firm’s work for the putativeclient. For the past decade or more, many law firms and clients have resolved this problem through clients’ informedconsentto allowing the firm to take on a particular category of matters, despite the conflicts that would exist in the absence of the informed consent. These waiverstypically have nothing to do with conflicts of interest posed by the law 16 104 firm working on cases substantially related to the work the firm is doing for theclient executing the waiver. Instead, they involvethe client agreeing to waive conflicts arising from the firm taking on a representation that is completely unrelated to the work the firm is doing for that client and implicates no confidences the firm learned in representing that client. There are real benefits for clients in these agreements—asthey are able to secure high quality counsel who would otherwise chooseto forego the representation. Advance waivers also serve an importantinterest in facilitating a client’s consent in instances where the firm would otherwise be legally and ethically precluded from later securing contemporaneous consent from its clients. For example, if a new prospective _ client approachesa firm asking it to confidentially research the possibility of filing suit against one ofthe firm's current clients, the firm would be unable to ask its currentclient for consent given the confidential nature of the inquiry it received. Initially, many courts and ethics committees were somewhatresistant to the idea of clients waiving future conflicts that could not yet be specifically identified. Views about these waivers have evolved significantly, however, over the past two decadesor so. Reflecting this change, in 2002 the American Bar Association adopted Comment 22 to MOpELRULE OF PROFESSIONAL CONDUCT1.7. That Commentstates, in relevant part, as follows: = |. a foe Se The effectiveness of such [advance] waivers is generally determined by the extent to which the client reasonably understands the material risks that the waiver entails. The more comprehensive the explanation of the types of future representations that might arise and the actual and reasonably foreseeable adverse consequencesofthose representations, the greater the likelihood that the client will have the requisite understanding. Thus, ifthe client agrees to consent to a particular type of conflict with which the client is already familiar, then the consent ordinarily will be effective with regard to that type of conflict. If the consent is general and open-ended, then the consentordinarily will be ineffective, becauseit is 17 105 not reasonablylikely that the client will have understood the materialrisks involved. On the other hand, if the client is an experienced user of the legal services involved and is reasonably informed regarding the risk that a conflict may arise, such consent is more likely to be effective, particularly if, e.g., the client is independently represented by other counsel in giving consent and the consent is limited to future conflicts unrelated to the subject of the representation. In any case, advance consent cannot be effective if the circumstances that materialize in the future are such as would make the conflict nonconsentable under paragraph(b). Comment 22 to MopEL RULE1.7 (emphasis added).’ This Commentcreates parallel inquiries: one test governs agreementswith clients whoare “experienced user[s] of legal services”(particularly if the client is represented by independentcounsel with regard to the agreement); and onetest applies to clients who do not fit that description. The less sophisticated the client, the more elaborate the required disclosure. The more sophisticated the client, the less elaborate the required disclosure. This, of course, makes great sense. There is no need totell a sophisticated client what it already knows; while there is a need to spell things out more carefully for those who are fess sophisticated. In a 2005 Formal Opinion, the American Bar Association drove homethis point, explaining that Comment 22 “support[s] the likely validity of an ‘open-ended’ informed ‘consentif the client is an experienced user of legal services, particularly if, for example, the client has had the opportunity to be represented byindependentcounselin rele such consent and the consent is limited to matters not substantially related to the subject of the prior representation.” AMERICAN BAR ASSOCIATION FORMAL ETHICS OPINION 05- 7 Although California has not adopted the ABA Model Rules, California courts recognize that these rules “may serve as guidelines” that illuminate the meaning of California law. See City and County ofSan Francisco v. Cobra Solutions, 38 Cal. 4th 839, 852 (2006). 18 106 436, Informed Consent to Future Conflicts ofInterest (2005) (withdrawing 1993 Opinion that was morerestrictive on the permissibility of advance waivers). The Restatement adopts a similar approach. It endorses “a client’s open-ended agreementto consentto all conflicts” if the “client possesses sophistication in the matter in question and has had the opportunity to receive independent legal advice about the consent.” RESTATEMENT § 122, commentd. (It is often the case, of course, that the firm is working with the client’s inside counsel or that the client is using outside counsel, which means the client does have independentrepresentation.) This position reflects a strong trend toward increased acceptance of the need for, and value of, advance waivers. The decision earlier this year of the United States District Court for the Northern District of Texas in Galderma Laboratories v. Actavis Mid Atlantic, 927 F. Supp. 2nd 390 (N.D. Tex, 2013) is a good example of courts’ acceptance of these waivers when they are the . productof informed consent. See also Macy’s Inc. v. J.C. Penny Corp., 968 N.Y.S.2d 64 (App. Div. 2013). This general approach has been accepted in California since at least 1989, when the State Bar of California Standing Committee on Professional Responsibility and Conduct issued FORMAL OPINION 1989-115 on the subject of client waivers. The - ~-_Committee. explained that waiversarenotinvalid simply because they involve matters or details that cannot be fully explained to the client. The Committee recognized the possibility that, despite a waiver, a conflict so severe could arise that it becomes impossible for a firm to continue on both matters. But, of great significance to this case, the Committee looked at a lawyer “simply representing two clients in entirely unrelated matters,” to be an example ofa conflict that was thoroughly amenable to advance waiver. 19 107 See generally Zador Corp. v. Kwan, 31 Cal, App. 4" 1285, 1301 (1995) (endorsing Formal Opinion 1989-115). California law has developed in ways that confirm Sheppard Mullin’s good faith belief in the validity of the advance waivers the District and J-M had executed. The leading case on the subject is Visa U.S.A. Inc. v. First Data Corp., 241 F. Supp. 2d 1100 (N.D. Cal, 2003) in which the federal court applied California law and declared, “Tajn advance waiverof potential future conflicts * * * is permitted under California law, even if the waiver does not specifically state the exact nature of the future conflict.” Jd. at 1105. The key, the court explained, is whether the waiver followed communication of information “reasonably sufficient to permit the client to appreciate the significance of the matter in question.” Jd at 1106 (quoting AMERICAN BAR ASSOCIATION FORMAL OPINION 93-372). This standard grew out of the California Supreme Court’s landmark decision in Maxwell v. Superior Court, 30 Cal. 3d 606 (1982), in which the Court rejected the view that informed waivers of conflicts “must separately explore each foreseeable conflict and consequence”and that the “waiver may extend only to matters discussed in detail.” Jd. at 621. In approachingthis issue, California courts have recognized that it is not only . lawyers whobenefit from enforcing informed consents, but that clients benefit as well. As the court in Zador Corp. v. Kwan, 31 Cal. App. 4th 1285 (1995) explained: “Giving effect to a client’s consent to a conflicting representation might rest either on the ground of contract freedom or on the related ground of personal autonomyofa client to choose whatever champion the client feels is best suited to vindicate the client’s legal 20 108 entitlements.’” Jd, at 1295 (quoting C. WOLFRAM, MODERN LEGAL ETHICS § 7.2 at 337 (1986)). The court in Visa U.S.A. identified a series of factors as among those relevant to the informed consent inquiry, but the court never suggested that these factors are the only relevant inquiries or constitute a checklist of which some specific number of considerations need be satisfied. Rather, the inquiry always focuses on the ultimate question of whether, in light of the sophistication of the client and the role ofits independent counsel, the client had sufficient information to understand the scope of the waiver. B. The District’s Waiver 1. The Waivers Turning to the waivers executed by the District, there are two documentsatissue here. Thefirst is the 2002 letter, which spelled out the details surrounding the waiver and many ofthe pros and consin relation to the District’s decision on whether to consent to waivers for “all present and future engagements.” The second document is the 2006 agreement, which included basically the same waiver, but did not repeat all of the particular details that had been transmitted in 2002. Bothof these documents are relevant ____to theinquiry. Indeed,inhis analysis,Judge Wulooked to bothofthese documents.See. __ United States ofAmerican ex re. Hendricks v. J-MManufacturing Co., No. EDCV 06-55, Ruling of June 6, 2011, Doc. 428 at 4 (C.D. Cal. 2011). To the extent that a proper disclosure was made in 2002, that information had been conveyed to the client and necessarily informed the 2006 waiver. There is no requirement that the lawyer repeat the same information each time a functionally identical waiver is executed. 21 109 Sheppard Mullin provided the District with unusually extensive disclosures about the risks and benefits of the proposed waiver. Indeed, these disclosures appear to be more elaborate than any of those that have been considered by any California court or federal court applying California law-—including those courts that have held advance waivers to be valid. And the information conveyed is more extensive than that set out in various model waiver forms that several state and local ethics committees have endorsed. Moreover, these disclosures are not buried in some long boilerplate of a retention agreement that a lay client might gloss over. Rather, the entiretyof the three-pageletter, titled "Consent to Representation of Parties Adverse to the District," is about the nature of the consent and the risks and benefits associated with it, and theletter is drafted in an easily comprehensible manner geared to a non-lawyerclient. (This factor is significant with regard to the District—where the correspondence was with lay District officials. As will be seen, though,it is not significant with regard to the waiver with J-M, given that those waivers were reviewed and executed by sophisticated independent counsel.) The letter begins by making it clear that it governs the District’s general engagement of Sheppard Mullin with respect to employment matters, and applies “to all present and future engagements." Theletter then explainsthat the requested consent only involves matters “not. substantially. related to any District Engagement.” And, unlike many waivers that simply refer to general adversity, the letter enumerates the specific kinds of representations adverse to the District that Sheppard Mullin might undertake. It specifies that Sheppard Mullin might represent other parties in cases that involve seeking discretionary or ministerial approvals by the District or affiliated agencies or authorities in connection with land use, building, construction or other matters; appearances before governing body ofthe District, or regulatory or administrative agencies regarding political, 22 110 legislative, administrative, enforcement and tax matters; representation of plaintiffs or defendants in civil actions; representation of defendants in civil or criminal enforcement actions; tax matters; and transactions betweenPrivate Parties and the District such as preparing and negotiating agreements, licenses, releases or other documents. SMRH mayalso represent Private Parties in litigation, arbitration, audits, examinations, inquiries, administrative appeals, and other adversarial proceedings in whichthe interests of the Private Parties are adverse to the interests of the District. 2002 ConsentLetter at 2. This extensive delineation of the kinds of conflicts that might arise goes a long way toward ensuring the client understands the types of adverse representation to which it is consenting. (As discussed, this is very significant with regard to the District, but not with regard to J-M.) The consent letter then proceeds to explain the general concernsa client might have with its lawyer accepting representation adverse to the client’s interest, even on wholly unrelated matters. The letter states: concurrently representing more than one client with interests adverse to each other, although separate and unrelated matters, may have disadvantages to each other. Performance of the attorney's duties of loyalty, confidentiality and competence might be affected adversely, or may be perceived to be affected adversely, if the attorney represents a client in one matter while at the same time representing anotherclient in a different matter. The interests of the multiple clients may vary, and as a result the attorney may be subjected to divided loyalties or have difficulties "serving more than one master. Even had the consent letter stopped there and provided no further information,it still would have contained more discussion about the potentially negative effects of waiving conflicts than virtually all consent letters I have seen. In fact, though,the letter goes well beyond that general discussion. It sets forth five particular considerations the District should take into account in deciding whether to consent. 23 111 First, the letter contains a paragraph discussing the "Possible Effect on Loyalty and Vigor.” This section explains that “{rjepresentation of multiple clients may result in less vigorousassertion or protection of one client's separate interests than if the attorney were to representonly that particularclient." Second, the next paragraph ofthe letter addresses the issue of “Confidentiality,” explaining that although the firm will continue to maintain any confidencesit learns in the course of representing the District, "our possession of such information may work to the disadvantage of the District if we represent Private Parties in matters in which the interests of the District are adverseto the interests of the Private Parties.” Theletter does not stop there—it provides an extremely directillustration: “For example, knowledge of the District and its personnel and procedures may be useful in representing a Private Party evenif no confidence of the District is disclosed.” Third, the letter contains a lengthy paragraph on the “Risk of Requirement to Withdraw.” This paragraph discloses the possibility that, despite the waiver, a conflict could develop in a manner that would require the firm to withdraw from representing the District. In that case, the letter explains, "the District might incur additional expense, delay or other prejudice in connection with obtaining new counsel. The District agrees to _ourwithdrawalundersuchcircumstances." Fourth, the letter contains a paragraph on "Appearance to Constituencies," explaining, "the District may be in a position, now orin the future, whereits ability to respond to administrative or public constituencies is hampered by our representation of Private Parties in other matters. In other words, the appearance to constituencies may be 24 112 better if the District were represented by independent counsel who has nootherclient with an interest adverse to the District." Fifth, the letter contains a paragraph entitled "Representation Adverse to District," that reiterates that in representing other clients on unrelated matters adverse to the District, "we will be bound to vigorously represent the interests" of those clients."even if that is adverse to the interests of the District." The letter further informs the District that the firm “would not be representing the interests of the District in any such Unrelated Matter." Tn response to Sheppard Mullin’s request for a written acknowledgmentthat these disclosures were madeand that the District was waiving these conflicts, the General Managerofthe District signed theletter. In so doing, he “acknowledge[d] the disclosures and grant[ed] the consents requested as set forth in the foregoing letter." This was all in keeping with the California Rule’s requirement that the informed consent be in writing. Andit bears noting that the District employed outside General Counsel throughoutthis period. | As mentioned above,these three pages of detailed disclosures about the nature of possible adverse representations and the various risks associated with consenting to such _ Tepresentations are quite remarkable in their specificity and style. They provided more than enough information, in my opinion, to sufficiently apprise the client of the nature of the conflicts it was waiving and the reasons it might choose to decline such consent. Sheppard Mullin sent the 2006 document to the District "to confirm our engagement by South Tahoe Public Utility District (the "District") to represent it in connection with general employment matters." This letter deals primarily with issues of 25 113 fees, and also contains one paragraph pertaining to “Conflicts with Other Clients,” which contains the basic points spelled out in more detail in the 2002 Consent Letter that applied to all “present and future engagement.” Specifically, the 2006 letter informs the District that Sheppard Mullin “maycurrently orin the future represent one or more other clients” in pursuing interests adverse to the District so long as that representation does not involve materssubstantially related to the firm’s work for the District and so long as the firm never obtained any confidential information from the District that relates to representation of the other client. Theletter is specific in stating that this representation may include “appearance on behalf of another client adverse to the District in litigation,” as well as examining or cross-examining District personnel in such cases. The letter further mentions that consent is needed because of the “possible adverse effect on performance ofourduties as attorneys to remain loyal and available to those other clients and to renderlegal services with vigor and competence.”In addition, the letter explains that “if an attorney does not continue any engagement or must withdraw therefrom, the client may incur delay, prejudice or additional cost such as acquainting new counsel with the matter.” The General Managerofthe District signed this letter, again in a context in which the District was employing an outside General Counsel. 2. Thevalidity ofthe waiver It is my opinion that the District gave informed written consentto the specified conflicts.* The consent cameafter elaborate, detailed disclosure that specified the kinds * It is quite telling that the District had also executed a waiver with the law firm representing it in the qui tam action—the same law firm that fought for Sheppard Mullin’s disqualification based on the invalidity of such waivers. Doc. # 409-3, at 28. In fact, unlike the waiver with Sheppard Mullin, the District’s waiver with its gui tam counsel contained none of the discussion about costs and benefits of waiving conflicts or the precise ways in which the firm may finditself adverse to the District. When confronted with this awkwardness, the District’s qui tam counsel put forth the somewhatbizarre claim that 26 114 of contexts in which Sheppard Mullin might be adverse to the District and described in accessible language whatrisks the District would be incurring by waiving these kinds of conflicts. In other words, this was precisely the sort of waiver thatsatisfies the governing standard of being the product of communication “reasonably sufficient to permit the client to appreciate the significance of the matter in question.” Visa U.S.A., 241 F. Supp. 2d at 1106. As mentioned above, I have seen hundreds of advance waiver agreements over the years, but I do not believe I have ever seen one that containsthe level ofclearly presented detail and information as the one the District signed. Even as it sought to invalidate the waiver, the District never claimed it misunderstood what it had signed. I reach this view notwithstanding Judge Wu’s decision to disqualify Sheppard Mullin in the gui tam action. I have great respect for Judge Wu, but I believe that Judge Wu’s holding was out of step with the weight of authority and reflected a once prevalent—but no longer controlling—view that advance waivers are inherently problematic and discouraged. In my view, the factors the court identified in Visa U.S.A confirm this conclusion. Reasonable people could differ on this conclusion, as evidenced by Judge Wu’s decision. But Judge Wu never concluded—nor could he have reasonably concluded—that these _ factors unmistakably would have put any lawyer onnotice that the waiver was invalid. Indeed,it is clear to me that most other judges assessing these same factors would have it never really intended to rely on that waiver it had made part ofits retention agreement. Doc. # 410 at 13 . n. 5. 27 115 reached the exactly opposite conclusion about the validity of the waiver.’ Under these circumstances, even if one were to agree thoroughly with Judge Wu’s ruling, that would not suggest that Sheppard Mullin acted in some improperor unethical way, or even thatit was misguided or unreasonable, in believing the waiver was valid. Sheppard Mullin’s confidence that any court would uphold the waiver was obviously misplaced, given the way that Judge Wu chose to weigh the various considerations. But a lawyer’s miscalculation of that sort (and failure to anticipate such a ruling) is light years away from the kind | of misconduct that is a necessary predicate for fee forfeiture of disgorgement. a. The breadth ofthe waiver Turning to the factors mentioned in Visa U.S.A., the first consideration is the breadth of the waiver. Here the waiver was,in one sense, quite broad—asit included all kinds of potential adverse representation in numerous specified contexts. On the other hand, though,the breadth of the waiver was significantly limited in that it did not include a waiverofall conflicts. With regard to matters substantially related to work the firm had ever done for the District, the District was not allowing Sheppard Mullin to ever represent interests adverse to the District (even if the District was no longera firm client). Nor wasthe District allowing the firm to ever represent adverse interests if the firm had © learned confidential information while representing the District that could be relevant to its representation of the other party. In these ways, the waiver avoided the core conflicts involving client confidences, but only waived the more ephemeral interest some clients * Indeed, I believe there is a very good chance that, had an appeal been possible, an appellate court would have concluded that the waivers were valid and that no conflict existed. Asit is, though no such appeal waspossible. 28 116 have in preventing their lawyers from being adverse to them on any matterat all. See infra at 43-45 (discussing difference between categories of conflicts). b. The temporal scope ofthe waiver The second factor mentioned in Visa U.S.A. is the temporal scope of the waiver. In this case, the time limit on the waiveris that it only applied during the period in which the firm continued to represent the District. This is identical to the structure of virtually all advance waivers that are executed in California and throughout the country. As such, this factor most certainly does not cut against the validity of the waiver. Indeed, Judge Wudid not rely on this factor as supporting his decision. C. The quality ofthe conflicts discussion The third consideration mentioned in Visa U.S.A. is the "quality of the conflicts -discussion between the attorney andthe client." Given the extremely extensive consent letter in which the firm elaborately spelled out so many of the implications of the waiver, this factor strongly weighs in favor of the waiver's validity. As mentioned above, this was not some legal jargon buried in nine-point type in the footnotes of a long boilerplate document. It was a letter that focused exclusively on conflicts and advised the District in the clearest terms about the implications of executing the waiver. Theletter also invited the District to ask the firm any questions. That the District felt no need to dothat is indicative of the letter’s clarity and cannot reasonably treated as evidence of less than informed consentor the absence of any “discussion.” d, The specificity ofthe waiver With regard to the fourth Visa U.S.A. factor—the specificity of the waiver—there are ways in which the waiver was extraordinarily specific and other ways in which it was 29 117 not. Asdiscussed above, the waiver was very specific with regard to the different types of contexts in which the firm might become adverse to the District. Critically for purposes of this case, that list explicitly included litigation. On the other hand, this was not a situation in which a client was being asked to waive conflicts vis-a-vis a particular identified potential adversary. There have been instances in which such identifiable matters and adversaries have been the focus of the waiver, but the law is clear that a lawyer's inability to specify the particular conflicts that mightarise in the future does not damn a waiver. See Maxwell, 30 Cal. 3d at 621 (informed consent does not require particularized description so long as it generally apprises the client about the nature of the conflicts). To the contrary, the value and importance of advance waivers is precisely because future conflicts cannottypically be identified at the time the firm is requesting a waivervis-a-vis cases that mightarise in the future. é. The nature ofthe actual conflict The Visa U.S.A. court next considered the "nature of the actual conflict (whether the attorney sought to represent both clients in the same dispute or in unrelated disputes)." Visa U.S.A., 241 F. Supp. 2d at 1106. There is no doubt that this factor strongly supports the validity of the waiver here. This was a classic case in which the firm would be representing a party adverse to the District (such as J-M in the qui tam action) in a matter that had absolutely nothing to do with the (employment) work the firm had been doing for the District. This is precisely the kind of conflict that is most amenable to waiver, and Judge Wu agreed that this factor weighed in favor of the legitimacy of the waiver. 30 118 I OThe sophistication ofthe client The court in Visa U.S.A next considered the "sophistication of the client.” Ibid. This factor mirrors the one discussed extensively in the ethics literature and opinions, whereit is recognized that there is no reason for a court to question the adequacy of the informed consentprovidedby a sophisticated client. See supra 17-20.In consideringthis factor, Judge Wu wrote that "the ‘sophistication ofthe client’ factor favors neither side— although South Tahoe is a government entity and is therefore presumably somewhat sophisticated,it also clearly lacks the type of sophistication First Data enjoyed in Visa." June 6, 2011 Op. at 4 n.6. This observation about the comparison with the client in Visa U.S.A. is quite perplexing. Given Judge Wu's conclusion that South Tahoe is "somewhat sophisticated," it is difficult to understand whyit should matter whetherit is every bit as sophisticated as the Fortune 500 company involved in Visa U.S.A. Nothing in the Visa U.S.A. decision or any other decision has ever suggested that only clients as sophisticated or more sophisticated than First Data are capable of executing an advance waiver. The key here, then, is Judge Wu's conclusion about the sophistication of the District —a conclusion buttressed by the fact that the District is a governmentalentity that employs over 100 workers andretains a variety offirmsto serve its various legal needs. Indeed, mostsignificantly, the District has long employed the services of a law firm to act as its General Counsel. See Jeffrey A. Dinkin Declaration, Doc. No 409-1 at 6; Charles Kreindler Declaration, Doc. 409-2 at 2. See generally RESTATEMENT § 22, commendd (looking at whether client has meaningful opportunity to receive independent legal advice). Giventhis finding, this factor is not neutral; it weighs forcefully in favor of the waivers’ validity. 31 119 Z. Theinterests ofjustice The final factor mentioned in Visa is the “interests of justice." Judge Wu acknowledgedthat this factor supported Sheppard Mullin's position that the waiver was valid. In the context of this case, that conclusion seems beyond reasonable dispute. This was a case in which the District was a tiny player in a huge matter.It is undisputed that the District was one of almost two hundred real parties in interest and apparently had purchased just .0004% of the J-M pipesat issue in the case. In addition, Sheppard Mullin had donevery little recent work for the District; it had billed the District a total of 12 hours from March 2010 to July 2011 and had done no workat all for the District between November 2009 and March 2010. Theinterests of justice mostcertainly weighed against disqualifying Sheppard Mullen—which had been deeply immersedin the qui tam case for at least 18 months and had been providing what Judge Wu characterized as able representation. See Decision on Disqualification at 7. Indeed, to this day, there is not a whiff of any alleged conflict having affected Sheppard Mullin’s conduct for or against any party in the case. J-M hasstipulated that is not the case. 3. Conclusions regarding the waiver Givenall these factors, it is my opinion that Sheppard Mullin was not acting unreasonably in believing it had secured a valid waiver from the District that negated any concern about a conflict of interest in its representation of J-M. It has been suggested in some of the pleadings that, even if one assumes the validity of the waiver, Sheppard Mullin was.required to approach the District and secure consent onceit was contemplating representing J-M in the gui fam action. This argument ignores the point of an advance waiver, which is to eliminate the process of 32 120 contemporaneous consent, unless the new matter is outside the scope of the informed consent the client earlier provided. If a lawyer is bound to seek consent from the client each time a conflict emerges, there is no point to ever securing the advance waiver in the first place. Rather, the purpose of the advance waiver is to deal with the fact that the lawyeris only willing to representthe client (in this case, the District) if the client agrees aheadoftime to waive the enumerated types of conflicts. Otherwise, the firm can find itself in precisely the position it was so adamant to avoid: having taken on ‘client a’ and having secured a valid advance waiver only to find that client a is refusing contemporaneous consent and is (despite the advance waiver) precluding the firm from representing a whole array of other clients with interests adverseto client a. The point here is to recognize that advance waiversare just that: they are waivers. They reflect informed consent. There is no duty to follow up a valid advance waiver with a new request in real time (which, in many cases simply cannot be done because ofthe duty to protect confidences, see supra’ at 17). Of course, in cases in which the initial advance waiver is deemednotto have provided sufficient information about the nature of conflicts being waived, courts have turned their focus to whether a second contemporaneous waiver was secured. See, e.g., Concat v. Unilever, 350 F. Supp. 2d 796, . 821 (N.D. Cal. 2004). But the need for a new waiveronly arises if the advance waiveris deemed deficient in some manner. For all of these reasons, it is my view that Sheppard Mullin committed no misconduct and breached no fiduciary duties when it relied upon the District’s waiver and concludedthatits representation of the District posed no obstacle to representing J-M in the qui tam action. Looking back to the time that Sheppard Mullen agreed to take on 33 121 the representation of the District, Sheppard Mullen had no incentive to use a waiverit believed to be invalid or consideredrisky. If the validity of the waiver was in any doubt, Sheppard Mullen could easily have declined to represent the District, which was a quite minorclient. Sheppard Mullin clearly was willing to accept the District as a client only because the firm was securing informed consent in a manner that generated great confidence that such representation would not create disqualifying conflicts. See Kreindler Decl., Doc. # 409-1 at 3. This fact further supports the conclusion that Sheppard Mullin was acting in utter good faith when it determined the waivers were valid." J-M also claimsthat, aside from breaching duties to the District by relying on the informed consent, Sheppard Mullin breachedits duties to J-M even before J-M retained the firm by not warning J-M ofthe risk that the District might secure Sheppard Mullin’s disqualification by claiming the District’s advance waiver was void. It is my opinion that this claim is without support in the governingrules andprinciples. A lawyer has a duty to communicate “significant information” to a client or prospective client. California Rule of Professional Conduct 3-500. But a lawyer who honestly and reasonably believes an issue to be insignificant has no duty to raise it with a prospective or actualclient. '° The District also suggested that Sheppard Mullin’s work for J-M was,in fact, “substantially related,” to work Sheppard Mullin had performed in representing the District. This contention was based on the premise that Sheppard Mullin’s request for public records from the District in the course of Sheppard Mullin’s representation of J-M was “substantially related” to Sheppard Mullin’s work for the District, which included having advised the District several times on how to respond to public records requests in various unrelated employment matters. This argumentdistorted the “substantial relationship”test beyond recognition.It is akin to saying that because a firm once represented a company in responding to discovery, the firm is forever barred from seeking any discovery from that company—no matter how disconnected the subject matters of the cases. This is most certainly not the law. See generally H.F. Ahmanson & Co. v. Salomon Brothers, 229 Cal. App. 3d 1445 (1991) (“substantial relationship” test focuses on the similarities between the substantive subject matters of the representations). Judge Wu never suggested this claim had any merit. 34 122 As described above, there are many thousands of advance waivers betweenclients and lawyers andit is, in my experience, an exceedingly rare occurrence in which clients raise any questions about their validity. One must rememberthat judicial opinions only emerge from those (few) cases in which conflicts about waivers’ validity arise; reading those opinionsalone does not provide an accurate reflection of the commonplacereality. Law firms proceed every day with well-founded assurance that such waiversare valid. To be sure, there is always some remote risk that a challenge will be forthcoming, but lawyers are hardly obliged to warn clients about every possible contingency that the lawyer honestly perceives to be remote and conjectural. For example, there is always some risk (no mater how remote) that a formerclient that is now an adverse party will make a far-fetched claim that the work the firm is now doing is “substantially related” to work the firm did for it or that client confidences are implicated. But a lawyeris not boundto disclose to its new client that there is a remoterisk that a challenge—whichthe lawyer reasonably views as unlikely and unreasonable—could conceivably be advanced. Given the widespread use of advance waivers and the great detail in the waiver the District had executed, Sheppard Mullin wasentirely justified in believing just that. Cc, J-M’s Waiver Turning to the waiver that J-M executed (a subject that Judge Wu never had occasion to address), the inquiry once again turns on whether the client was given sufficient information with which to make an informed decision on whether to consent. As many ofthe authorities discussed above explain, the nature of this inquiry is deeply affected by the sophistication of the client and, particularly, whether the client is represented by independent counsel in making the decision about consent. When the 35 123 A D P ow client is not so represented,it is critical to look carefully at the details of the disclosure and the variousother factors that inform the question of meaningful consent. Bycontrast, when the client is represented by independentcounsel in reaching the agreement (as J-M washere), the law recognizes that this counsel’s participation is strong evidence of true informed consent. For this reason, the emphasis of the inquiry into the validity of the J-M waiveris somewhat different than the inquiry with regard to the District's waiver. With regard to the J-M waiver, the evidence showsthat the terms of the retention agreement(in which the waiver provision is found) were negotiated through a give-and-take with J-M's in- house General Counsel, Ms. Camilla Eng, in which she also consulted with J-M’s CEO. Indeed, the General Counsel insisted on a numberof substantive changesto variousparts of the agreement. With regard to the waiver provision, though, the General Counsel accepted it without reservation. This is hardly surprising given the prevalence of such provisions in the modern marketfor legal services. L. The waiver ' The waiverprovision in the engagementletter with J-M states as follows: Conflicts with other clients. Sheppard, Mullin, Richter & Hampton LLP has many attorneys and multiple offices. We may currently or in the future represent one or more otherclients (including current, former, and future clients) in matters involving the Company. We undertake this engagement on the condition that we may represent another client in a matter in which we do represent the Company, even if the interests of the other client are adverse to the Company (including appearance on behalf of another client adverse to the Company in litigation or arbitration) and can also, if necessary, examine or cross-examine Company personnel on behalf of that otherclient in such proceedings or in other proceedings to which the Company is not a party provided the other matter is not substantially related to our representation of the Company and in the course of representing the Company we have not obtained confidential information of the Company material to representation of the other client. By 36 124 consenting to this arrangement, the Companyis waiving our obligation of loyalty to it so long as we maintain confidentiality and adhere to the foregoing limitations. We seek this consent to allow our Firm to meet the needs of existing and future clients, to remain available to those other clients and render legal services with vigor and competence. Also, if an attorney does not continue in engagement or must withdraw therefrom, the client may incur delay, prejudice or additional costs such as acquainting new counsel with the matter. Engagement Letter of March 4, 2010, executed by J-M General Counsel Camilla M. Eng and Bryan Daly of Sheppard Mullin. 2. Validity ofthe waiver This provision fits squarely into the category of lawyer-to-lawyer agreementsin which there is no inequality of bargaining power or reason to fear that the waiver was either forced uponornot fully understoodby the client. One ofthe primary roles ofan in- house general counsel’s office is to negotiate the terms of retention for outside counsel and, in this case, J-M’s General Counsel interviewed several different firms as candidates to take over the case and negotiated aggressively on the terms of the engagement. As always, the question comes back to the fundamental issue of whether the client had sufficient information about the nature of what it was waiving so as to constitute an informed consent. Plainly that is the case here. And, yet more plainly, even if one disagrees with that conclusion, Sheppard Mullin’s reliance on the J-M waiver cannot be characterized as gross or egregious misconduct, of misconductofanysort. As discussed above, the court in Visa U.S.A. listed some of the considerations to be considered in assessing whethera client provided informed consent. Thesefactors are valuable tools, but it is essential to avoid falling into a trap ofinsisting that x number of them besatisfied. Rather, the inquiry is a holistic one that looks at the entire context. That said, analysis of the Visa U.S.A. factors provides support for the conclusion that the J-M 37 125 waiver wasvalid, and certainly that Sheppard Mullin was not guilty of any misconduct for believing it was (even if that belief is determined to have been erroneous). a. The breadth ofthe waiver With regard to the first consideration—the breadth of the waiver—the language of the provision is undoubtedly broad inasmuchasit appliesto all kinds of matters. Butit is narrowedsubstantially by its exclusion of conflicts involving matters substantially related to the Firm's work for J-M or matters in which confidences the firm learned in the course of representing J-M mightbe implicated. b The temporal scope ofthe waiver As for the second consideration—the temporal scope of the waiver—there is no time limit here except that it only has force during the time in which the Firm continues to represent J-M. As mentioned above, though,this is true for virtually every advance waiver I have ever seen. It would be highly unusual for an advance waiver to set a specific expiration date on the validity of the client consent (other than having it apply only while the client remains a “current client”). Indeed,it is difficult to understand the reasoning that would lead anyparties to adoptthat limitation. The purpose of the advance waiveris for a firm to know that, by accepting the instantclient, it is not foreclosingitself from taking on other matters adverse to this client. Given that goal, why would an artificial time limit of x years be adopted? Why would a client be willing to say, “I will waive myright to loyalty for the next x years, but after that I insist that you refrain from representing any clients in pursuing interests adverse to mine?” Atleast in the case of a sophisticated client being represented in the retention negotiations by experienced independent counsel, this factor has very little significance. 38 126 Lae U S E E E Cc. The quality ofthe conflicts discussion With regard to the third factor—"the quality of the conflict discussion between the attorney and the client"—the role of J-M's General Counsel is dispositive here. See generally RESTATEMENT § 122, Comment c(i)(in-house counsel qualifies as independent counsel). As evidenced by the laborious details the firm provided to the District when it secured the District’s informed consent, the firm understood that when dealing with a lay client directly there is more of a need to spell out the nuanced ramifications of a waiver. But, in keeping with commonsense and the clear message of the ethics literature, the kinds of disclosures necessary when dealing with a client’s independent counsel are far more relaxed. It is simply unnecessary to engage in that kindof detailed series of explanations and extensive disclosure of risks and benefits when the person with whom the firm is negotiating is a lawyer whoisclearly and fully aware of the implications of the waiver. Indeed, given the frequency with which lawyers in corporate general counsel offices deal with retention agreements, those lawyers are frequently better versed in issues relevant to advance waivers than are the individual law firm lawyers. As the comments to the ABArulesexplain, In determining whether the information and explanation provided are reasonably adequate, relevant factors include whether the client or other person is experienced in legal matters generally and in making decisions of the type involved, and whether the client or other person is independently represented by other counsel in giving the consent. Normally, such persons need less information and explanation than others, and generally a client or other person whois independently represented by other counsel in giving the consent should be assumed to have given informed consent. 39 127 AMERICAN BAR ASSOCIATION MODEL RULE OF PROFESSIONAL CONDUCT 1.0, Comment 6). See generally Visa U.S.A., 241 F. Supp. 2d at 110 (emphasizing that First Data has a substantial legal department that “routinely hires top-tier national law firms” and thus “should be expected to fully understand the full extent of whatit waived”); Zador, 31 Cal. App. 4th at 1301 (noting that client had independentcounsel in deciding whetherto consent). d. The specificity ofthe waiver Focusing on the fourth Visa U.S.A. consideration—the specificity of the waiver— the waiver here is quite specific in disclosing to J-M that Sheppard Mullin may represent both current and future clients that are adverse to J-M inlitigation. (Although, as with the District waiver, there was no delineation of specific clients who the firm might represent.) For purposes of this case, then, this was a specific waiver vis-a-vis the adversity that later materialized. (This factor might play out differently were Sheppard Mullin to undertake representation adverse to J-M in other contexts, but that is not at issue in this case.) e. Natureofthe actual conflict With regard to the next factor, the “nature of the actual conflict,” it is quite obviousthat the conflict here, if any, was far from a severe one. In the context ofthis case, with the District being such a minorplayer, and being such a minorclient,it is quite far-fetched to believe that Sheppard Mullin would be pulling punchesin its representation of J-M because it felt some need to advance the interests of the District. (This is especially true given Sheppard Mullin’s good faith belief that it had a valid waiver from the District.) The fact that J-M aggressively fought in District Court to continue to be 40 128 represented by Sheppard Mullin (evenafter it learned of the conflict), and the fact that even today, J-M doesnot claim any flaw, much less disloyalty, in Sheppard Mullin’s representation, furtherattests to the relatively inconsequential nature of any conflict. This factor most assuredly weighs heavily in favor ofthe validity of the waiver J-M executed. f The sophistication ofthe client The fifth factor—the "sophistication of the client"—is, in my opinion, very significant here, as discussed in detail above. This is particularly true when combined with the active role of the General Counsel in negotiating the agreement. As indicated above, there are compelling reasons to conclude —as many authorities have—that this factor is itself sufficient to prove that the client provided fully informed consent in waiving the conflicts. See supra at 16-18. This case is dramatically different than those involving individual clients, such as the client in Concat, where the firm gavea brief boilerplate waiver to an individual seeking estate planning advice. The client in Concat was, of course, neither sophisticated in navigating the law nor represented by independent counsel in signing the waiver. See Concat, 350 F. Supp. 2d at 801-802, 821. g. The interests ofjustice The final factor that Visa U.S.A. mentions—the “interests of justice"—also weighs heavily in favor of the waiver's validity. It is significant, in this regard, that J-M’s earlier positions indicate its lack of concern that it would be prejudiced by any conflict, During the qui tam litigation, J-M itself took the position that Sheppard Mullin’s advance waiver with the District was thoroughly valid. J-M, moreover, fought for the Tight to continue to be represented by Sheppard Mullin even after J-M became aware that the 41 129 Firm wasalso representing the District on unrelated employment matters.!! Clearly, J-M was not concerned that Sheppard Mullin’s unrelated representation of the District (through different lawyers in different offices) might have any negative impact on Sheppard Mullin’s zeal, loyalty or aggressiveness in representing J-M. It goes without saying that the "interests of justice" would hardly be promoted by allowing J-M to now challenge the validity of a waiver which is at least as strong, if not stronger, than the waiver it fought to uphold. Noris it consistent with the “interests of justice” for J-M to now challenge the validity of its own waiver with Sheppard Mullin in light of J-M’s having strenuously argued that there wasno conflict here atall. In this regard, many courts and authorities have commented on the risk that parties will seek to disqualify opposing counsel for strategic reasons. There is surely at least as much of a risk that a party will use a claimed conflict to seek a windfall of disgorgement or fee forfeiture—even when the party, as is the case here, has no complaint with the quality of legal services the firm provided. The “interests of justice” would not seem to be advanced by allowinga client to contest the validity of a waiver as part of that strategy. 3. Other arguments advanced in supportofthe conflict claim J-M also advances the argument that, even if J-M’s general waiver was valid, Sheppard Mullin was duty-boundat the time JM retained Sheppard Mullin to inform J-M "Tl understand that J-M was far into the litigation at that point and had interests, for that reason, in proceeding with Sheppard Mullin. But those reasons surely would not have trumped genuine concern that J-M would receive subpar, disloyal representation from Sheppard Mullin by virtue of the Firm’s representation ofthe District. And, of course, J-M hasstipulated it has no complaints with the quality of the services it received from Sheppard Mulling, despite the alleged conflict. 42 130 that Sheppard Mullin wascurrently representing the District.'? This argument ignores the plain language ofthe waiver in which J-M,acting throughits counsel, agreed to waive andthen did waive any conflict arising from Sheppard Mullin’s having current clients whoare adverse to J-M. The second sentence of the conflict paragraph explicitly states, "We may currently or in the future represent one or moreotherclients (including current, former, and future clients) in matters involving” J-M (emphasis added). Despite the various revisions that J-M's General Counsel made to other parts of the agreement, including sections contained on the very page of the conflict provision, and despite the General Counsel’s consultation with J-M’s CEO and tough bargaining posture with Sheppard Mullin, J-M's General Counsel never sought to modify this provision or to inquire about the identity or specifics of any currentclients the Firm already represented. Given the nature ofthe type of conflicts being waived here, one can easily understand why J-M waswilling to agree to the waiver vis-a-vis both current and future Sheppard Mullin clients. The conflict involved here is not one associated with the duty of confidentiality that plays out differently with relation to different matters; rather it deals with a client’s generalized entitlement to insist that its lawyer be loyal and refrain from taking on any matters that are adverseto the client’s interests. See Flatt, 9 Cal. 4th at 282 (rule is designed to protect “client’s sense of trust and security”). Someclients care about '°T am assuming for purposesof this discussion that Sheppard Mullin was, in fact, representing the District at the time it agreed to represent J-M. This is not completely obvious. It appears that Sheppard Mullin had not done any work for the District for several months and had no open matters pending for the District at the time Sheppard Mullin wasretained by J-M. Onthe other hand, there is some precedent establishing that episodic recurring work for a client makes that client a “current client” until something (time or otherwise) severs the relationship. It is unnecessary to resolve this question, given Sheppard Mullen’s reasonable reliance on the District’s waiver. But even leaving the waiver aside, Sheppard Mullin may well have been within the zone of reasonableness were it to have concluded that the District was not a “currentclient” at the time J-M retained the firm. What is certain is that such a conclusion would not have constituted egregious misconductofthe sort that supports disgorgementorfee forfeiture. 43 131 . this particular aspect of loyalty and some do not (unlike concerns with confidentiality whichare of universal or near universal concern to clients). The waiver that J-M executed (and that thousandsof clients execute each year) reflected its willingness to tolerate that sort of relationship with its lawyers—one in which the firm would represent J-M in the qui tam case even though it was representing others who were adverse to J-M in unrelated matters. Hence, the waiver declares in no uncertain terms: "By consenting to this arrangement, the Company is waiving our obligation of loyalty to it so long as we maintain confidentiality and adhere to the foregoing limitations." Clients’ increased tolerance for its lawyers taking on representations adverse to them on unrelated matters reflects major changes in the ways in which legalservices are provided today. There wasa time (andstill is in some settings that are irrelevant here) in whichclient typically looked to their lawyers astheir all-purpose advocate and counselor and had a deep personal relationship with the lawyer. In that setting, a client might well fee] a sense of deep betrayal if its own lawyer was doing anything adverseto the client’s interest in any matter whatsoever. But in an era in whichfirmsare huge (so muchso that many lawyers in the firms have never even met), and in which clients will often employ dozensof firmson an a-la-carte, one-off basis, many clients have become more accepting of the idea that the law firm is a limited-purpose advocate and that the firm’s taking positions in unrelated cases against the client is no cause for concern and, certainly, no basis for disqualification. See generally UMG Recordings v. MySpace, 526 F. Supp. 2d 1026, 1061 (C.D. Cal. 2006) (Noting “ever-escalating frequency of attorneys shifting firms, firms merging or being acquired byotherfirms, firms opening offices in numerous 44 132 cities and foreign jurisdictions, and firms expanding into “mega-firm” size, sometimes with more than a thousand lawyers.”)'* Noneof this is to say that the law has abandonedprotectingclients’ interests in loyalty. It most certainly has not. Thus, absent a valid waiver, those interests continueto support concurrent representation conflicts. But these realities and the changes in the nature of legal practice do makeit easy to appreciate why manyclients arereadily willing to waive this particular kind of conflict. This bringsus to the point at hand: the waiver ofconflicts vis-a-vis current clients as well as future ones. Oncea client has decided to foregoits interest in generic loyalty,it matters not whether that deviation from absolute loyalty involves current clients, future clients, or both. So long as the adverse representations fit within the scope of the waiver—they do not involve matters substantially related to the work the firm is doing for the consenting client and do not implicate confidences of the consenting client—the timing of whether the other client is already on the firm’s roster or showsuplateris of no moment. 4. Conclusion regarding the validity ofthe J-M Waiver All this explains why J-M would have sensibly accepted the waivervis-a-vis both current andfuture clients. But regardless of whether one accepts this rationale, the plain fact is that J-M,acting through its General Counsel and CEO, did accept the waiver as so stated. J-M was not shy about demanding changes to the agreement and it could have insisted on learningthe identity of currentclients, or it could haveinsisted that the waiver '4 Indeed, 1 have heard from some companies that, becauseit is clear that some lawyerwill be taking on a matter adverse to the them,they actually prefer that it be a lawyer whomit has hired on a different matter as that provides some assurancethat the lawyeris an reasonable andethicalpractitioner. 45 133 vy = U b c gi ve ces exclude every class of currentclients altogether. There is nobasis, though,for it to have explicitly so agreed and now claim it was unaware that the Firm was then-currently representing any other clients who had interest adverse to J-M’s. Theplain termsof the agreement are wholly dispositive on this point. Nor is there a basis, given the explicit waiver signed by its General Counsel, for J-M to contend that it had made it clear to Sheppard Mullin that it was not the kind of client who tolerated conflicts even on unrelated matters. Again, the plain language of the agreementis dispositive. It is my opinion, then, that Sheppard Mullin wasjustified in proceeding with confidence that J-M had agreed to waive and then had waived any conflict inherent in Sheppard Mullin’s representation of the District on unrelated matters. But, as was the case with the District’s waiver, even were oneto weigh these various factors differently and conclude that the waiver was not enforceable, that would hardly show that Sheppard Mullin was guilty of any misconduct. And it would certainly not show that Sheppard Mullin was guilty of misconduct so egregious as to support the extreme measure of disgorgement or fee forfeiture. 4, Relationship to disgorgement andfeeforfeiture With regard to disgorgementorfee forfeiture, it also bears noting that this is not a case in which J-M is claiming it was damaged in any way by Sheppard Mullin having represented it while the District was a client on employment matters.!> The District was a minor player in the case—one of almost 200 real parties in interest overall—with a relatively miniscule financial interest as compared to virtually all of the other parties. It 'S To be sure, there may have been some costs associated with the transition to a new firm once Sheppard Mullin was disqualified. But that has nothing to do with disgorgementorfee forfeiture, and J-M has stipulated it is not pursuing relief for those costs in any event. 46 134 has never been suggested that the lawyers from Sheppard Mullin who were representing J-M actually held back in their zeal in fighting for J-M occasioned by another lawyerin the firm providing the District with sporadic employmentadvice. Indeed, Judge Wu recognized that Sheppard Mullin had been providing able representation (despite the fact it was representing the District in providing advice on employment law issues). Significantly, even after the disqualification order, Judge Wu was prepared to allow Sheppard Mullin to continue in the case if the District was separated out. Were there truly a concern with the impact that Sheppard Mullin's relationship with the District might have on its zeal in representing J-M, this remedy would have madeno sense (given the obvious implications the litigation would have on the District). Yet, the judge's endorsementof it is powerful proof that the conflict here (which was waived in any event) was not of the sort that impacted adversely on the representation J-M was receiving (and was not ofthe sort that supports drastic punitive measures). It bears repeating in this regard that J-M has stipulated that it received quality work from Sheppard Mullin throughoutthe representation. | According to some California courts, this absence of damages to J-M is dispositive on the question of disgorgement or fee forfeiture. See supra at 9-10. By contrast, some other courts have suggested that disgorgement and fee forfeiture are available as a sanction regardless of whether the client has been damaged. Ibid. Even under this latter view, though, the fact that no client was actually prejudiced by the alleged violation is a factor that goesto the intensity of the alleged breach and the extent to which it permeated the attorney-client relationship. Some of the courts that talk about disgorgement speak about the utter worthlessness of representation that is so deeply 47 135 So G R R E S E R o S a R tainted by profound misconduct. See, e.g, Day, 170 Cal. App. 3d at 162 (extensive misconduct rendered the attorney’s services “valueless”). The cases discussed above, supra at 11-13, make clear (and confirm the common sense conclusion) that disgorgementor fee forfeiture are extreme remedies to be imposedonly in casesof clear and severe misconduct. This was decidedly not the casehere. V. Conclusion It is my opinion, as an expert in the field of legal ethics, that Sheppard Mullin violated no ethical principles and committed no misconduct when it undertook the representation of J-M against a group of nearly 200realparties in interest, one of which wasthe District. Sheppard Mullin took on this representation only after assuringitself that both J-M andthe District had executed waivers to this type of conflict, and Sheppard Mullin had every reason to believe these waivers were valid and enforceable (which I also believe to be the case). But the decision on whetherJ-M is entitled to disgorgement or fee forfeiture does not require that the ultimate validity of one or both waivers be decided. All that matters is that it is impossible to conclude that, by relying on the legitimacy of these waivers, Sheppard Mullin wasguilty of willful, egregious misconduct of the sort that has always been demanded as a predicate for disgorgement or fee forfeiture. 48 136 E s M a e AFFIRMATION I confirm that, insofar as the facts stated in my Report are within my own knowledge, I have made clear which they are and I believe them to be true. I also confirm that the opinions I have expressed represent my true and complete professional opinion and are intended to assist the Panel in resolving the parties’ di aw Q, Ms Lawrence C. Marshall September30, 2013 49 137 S =z Exhibit D To: ‘Camilla Eng/Legal Department'[CamillaEng@JMEagle.com]; Bryan Daly[BDaly@sheppardmullin.com] Cc: "Walter Wang'[WalterWang@JMEagle.com] From: Charles Kreindler Sent: Tue 6/7/2011 2:17:37 PM Subject: RE: Discussion re Motion to Disqualify Walter/Camilla, Bryan did speak with our Executive Committee last night (as well as our general counsel) andall agree that the best approachfor us to take is for Sheppard Mullin to offer South Tahoe compensation in exchange for a waiver. The compensation would take the form of cash, some free labor law advice going forward, as well as an offer to use separate counsel to perform any discovery tasks (ortrial work) thatis directed specifically toward South Tahoe (at Sheppard Mullin's expense). We plan on makingthe offer immediately. Specifically with respect to your 4 options outlined below, Option 1 is off the table. Option 2 is a possibility if all else fails, but there is a relatively small chance of success. Option 3 would befine with us and the only way we could remain as counsel if South Tahoe refuses our offer. Option 4 is discussed above. Please jet us know if you have any other questions or concerns. We very much appreciate your support. Chuck Charles L. Kreindler 213.617.4118 jd 213.443.2824 df CKreindler@sheppardmullin.com | Bio SheppardMullin Sheppard Mullin Richter & Hampton LLP 333 South Hope Street 43rd Floor Los Angeles, CA 90071-1422 213.620.1780 | p www.sheppardmullin.com From: Camilla Eng/Legal Department [mailto:CamillaEng@JMEagle.com] Sent: Tuesday, June 07, 2011 12:13 PM To: Bryan Daly; Charles Kreindler Cc: Walter Wang Subject: Discussion re Motion to Disqualify nfidential 138 SMRH01316 Bryan and Chuck, This is to confirm ourin-person discussion yesterday with Walter at our offices. During our discussion, you presented us with the following possible options in resolving what Judge Wuhastentatively indicated as the firm's conflict issue: (1)JM settle with South Tahoe by compensating the agencyfor the pipe it bought during the relevant period which Sheppard estimates to be $97,000 in addition to 150 percent of what it would collect as a successful intervenor in the qui tam litigation. Bryan and Chuck indicated that this is their preferred course but confirmed that this would be only with the consent of JM. Such settlement would be public as South Tahoeis a public agency and wearestill uncertain as to whetherthis is appropriate; (2)Sheppard appeals Judge Wu's ruling through a writ process which would inevitably delay the Decembertrial date. Judge Wu mayissue a stay of the qui tam until this issue is resolved. Sheppard did indicate that they would foot the bill. (3)Bifurcation of South Tahoe which entails Sheppard refraining from defending JM against South Tahoe, and hiring conflict counsel for JM for such representation. This is proposalis discussed in Judge Wu'stentative, however, this method is not well-tested and is novel. There are not very many examplesof this approach in a qui tam action as it is more commonin class action suits. Bryan and Chuckindicated that this would not be their preferred course. (4)Purchase of a waiver from South Tahoe by Sheppard is what Chuck proposed. The group discussedthatthis is mostlikely the best approach asit would allow Sheppard to resolve its issue with South Tahoe without much involvement with JM. Bryanindicated this was a good idea and that he would speak to his executive committee that night. He further indicated that he would get back to us asto their decision and proposal. Please advise as to the outcomeof your subsequent research and discussions with your executive committee regarding option #4. Thanks, Camilla M. Eng General Counsel JM Eagle 5200 W. Century Boulevard Los Angeles, CA 90045 phone: 310.693.8200 email: camillaeng@jmeagle.com »nfidential 139 SMRH01317 S R R In a s s a ta tt it io ny t He JM Eagle supports green initiatives in the manufacturing, transportation,installation and use ofits products. infidential 140 SMRH01318 Exhibit E yN y D H W w & W Y b Y 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Gibson, Dunn & Crutcher LLP GIBSON, DUNN & CRUTCHER LLP KEVIN S. ROSEN, SBN 133304 krosen@gibsondunn.com HEATHERL. RICHARDSON,SBN 246517 hrichardson@gibsondunn.com 333 South Grand Avenue Los Angeles, CA 90071-3197 Telephone: 213.229.7000 Facsimile: 213.229.7520 Attorneys for Claimant and Cross-Respondent, Sheppard, Mullin, Richter & Hampton, LLP IN THE ARBITRATION BEFORE JAMS SHEPPARD, MULLIN, RICHTER & REF. NO. 1220045609 HAMPTONLLP, Arbitrators: Hon. Gary L. Taylor(Ret.) Claimant and Cross- Respondent, Vv. J-M MANUFACTURING COMPANY,INC., D/B/A/ JM EAGLE, Respondent and Cross- Claimant. Hon. Charles 8S. Vogel (Ret.) James W. Colbert, III, Esq. SUPPLEMENTAL DECLARATION OF BRYAN D. DALY SUPPLEMENTALDECLARATION OF BRYAND. DALY 141 s D 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Gibson, Ounn & Casteher LLP I, Bryan D. Daly, declare as follows: 1. I am an attorney admitted to practice law beforeall courts of the State of California. I am a partnerin the law firm of Sheppard, Mullin, Richter & Hampton LLP (“Sheppard Mullin”). I submit this Supplemental Declaration to provide additional information in responseto certain issues raised in the Opening Brief of J-M Manufacturing Company,Inc. (“J-M”) and the Declaration of Camilla Eng. Unless otherwisestated, the following facts are within my personal knowledge, and I can testify competently to them. 2. I have reviewed J-M’s Opening Brief and the Declarations of Camilla Eng and K. Luan Tran, as well as the exhibits submitted with those declarations. I also re-read Sheppard Mullin’s Opening Brief andall of the declarations and exhibits Sheppard Mullin submitted withits OpeningBrief. A. March 2010 Events 3. { take my responsibilities to myclients, including ethical obligations, very seriously. Myethics as a lawyer have never been questioned. I have never, and would never, conceal information from a client, especially information about potential or actual conflicts ofinterest. WheneverI have thought there was a potential conflict, I have always disclosed the situation and discussed it with the client. Therefore, | was dismayed to read J-M’s unfoundedassertionsthat I intentionally concealed an alleged conflict from them in March 2010. Thatis patently untrue. 4. In March 2010, when J-M sought to engage Sheppard Mullin to representit in the Qui Tam Action, I was confident there was no conflict that precluded Sheppard Mullin from accepting the engagement. Before weagreedto representJ-M,I had a conflict check run using Sheppard Mullin’s computer database. I learned that Sheppard Mullin had done some work for South Tahoe,oneofthe roughly two hundredreal parties in interest identified on Exhibit 1 to the Complaintin the Qui Tam Action.' Based on information from the conflict check, I learned that South Tahoe had executed an advance conflict waiver that permitted Sheppard Mullin to represent adverse parties in matters not substantially related to the labor and employment work it did for South Tahoe. I believed that this ' Ex. V. 1 SUPPLEMENTAL DECLARATIONOF BRYAN D. DALY 142 = x:& N oO o O o N DB D A F F Ww W 10 il 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Gibson, Ounn & Cruteher LLP advance waiver was fully enforceable. I also learned as part of the conflicts check that the last time Sheppard Mullin had done any work for South Tahoe was in November 2009, which was an engagementrelated to a labor and employment arbitration that had ended. There had been no time billed to South Tahoefor the five months between November 2009 and March 2010. Based on these facts, I did not believe that South Tahoe presented any issue regarding representing J-M in the Qui Tam Action. 5. Nevertheless, to confirm my assessmentthat it was permissible for Sheppard Mullin to represent J-M in the Qui Tam Action, I spoke with Sheppard Mullin’s General Counsel, Ronald Ryland. As I discussed at length in my prior Declaration, Mr. Ryland confirmedthatit was also his Judgment that Sheppard Mullin was notprecluded from representing J-M in the Qui Tam Action. 6. I understand from reviewing J-M’s submissionthat J-M’s currentposition is that J-M never would have hired any lawyersthat had previously done any work for an adverse party. That ‘positionis inconsistent with J-M’s behavior throughoutthe course of our representation of J-M in the Qui Tam Action for several reasons. 7. First, J-M agreed to a conflict waiver and never expressed concern to us about the work we had done for South Tahoeuntil July 13, 2011 when Ms. Eng informed us that J-M had decided to have Sheppard Mullin disqualified. In March 2010, Ms. Eng signed the advance waiverin the engagement agreement without question or concern. During our multi-day discussion ofthe draft engagement agreement, Ms. Eng nevertold methat J-M had concernsabout giving conflict waivers, or that J-M refused to work with any lawyers who were doing, or had done, unrelated (or any other) work for an adverse party. In March 2010, I had told Ms.EngthatI had a relationship with the Los Angeles Department of Water and Power (“LADWP”), which was adverse to J-M in the Qui Tam Action; that I had recently represented the LADWPin a False Claims Act case; and that I hoped to represent the LADWPagainin the future. However, she never expressed any concern whatsoever about that representation. Similarly, in April 2011, when Mr. Kreindler and I informed Ms. Eng that J-M hadthreatened a disqualification motion, Ms. Eng again did not express any concern about the fact that Mr. Dinkin had done work for South Tahoe. Again, in June 2011, when Mr. Kreindler andI told Ms. Eng that we wouldlike to obtain a supplemental conflict waiver from South Tahoe and that 2 SUPPLEMENTAL DECLARATIONOFBRYAN D. DALY 143 + s a A W N 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Gibson, Dunn & Cratcher LLP we would be offering free labor and employment work to South Tahoeaspart of the consideration, Ms. Engdid not express any concern about Sheppard Mullin offering to do additional work for South Tahoe while the Qui Tam Action was pending. Onthe contrary, she encouraged usto maketheoffer. 8. Second, J-M wasconstantly looking to develop contacts with current and former employees and representatives ofthe government entities that were real parties in interest. J-M believed thatif it could create constructive lines of communication with the government entities, it would provide J-M with an opportunity to dissuade them from intervening, to persuade them to withdraw their intervention, convince them to dismisstheir claims altogether, or otherwise to achieve a favorable resolution. In my experience in False Claims Actcases, this is a very common and productive defense strategy. Indeed, J-M hired several “public relations” consultants and former water district officials to attemptto create these contacts. Ms. Engrefersto this strategy in paragraph 5 of her Declaration in this Arbitration. Thus, it was my impression that, if anything, the fact that Sheppard Mullin had done labor work for South Tahoe (and certainly if South Tahoe was a current client as J-M has suggested) would have been viewed by J-Mas a positive fact and anotherattribute of Sheppard Mullin. 9. Third, when Sheppard Mullin was disqualified, J-M replaced Sheppard Mullin with Bird, Marella, Boxer, Wolpert, Nessim, Drooks & Lincenberg, P.C. (“Bird Marella”). Bird Marella already had been representing the distributors of J-M’s pipe that was directly at issue in the Qui Tam Action. Significantly, those distributors were potentially adverse to J-M. Thatis because the Qui Tam Action wasbased ontheallegation that J-M’s pipe was improperly manufactured, and oneof J- M’s possible damages defenses wasthat any problemswith its pipe were caused by improper storage ofthat pipe byits distributors. This defense also gave J-M an indemnity claim against the distributors, which Ms. Eng told me J-M plannedto assert at some point if necessary. When the relator’s counsel sent subpoenas to J-M’s distributors, we discussed the fact that because J-M’s indemnity claims and defenses gaverise to a conflict, separate counsel should represent the distributors. Bird Marella ultimately represented the distributors. Nevertheless, despite these conflicts with the distributors, Ms. Eng hired Bird Marella to replace Sheppard Mullin as its counsel in the Qui Tam Action. 3 SUPPLEMENTAL DECLARATION OF BRYAND. DALY 144 o O O O “ S N 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Gibson, Dunn & Crutcher LLP B. Communications with South Tahoe and the Disqualification Motion 10. In March 2011, Mr. Kreindler told methat he had received an inquiry from Mr. Rennert, oneof the lawyers representing the relator and several of the intervenors(including South Tahoe) in the Qui Tam Action, about work that Mr. Dinkin had done for South Tahoe. Mr. Kreindler told me that his reading of Mr. Rennert’s letter was that Mr. Rennert did not know about South Tahoe’s conflict waivers and that providing a copy of the advance waiver to Mr. Rennert should end his inquiry. Based on Mr. Kreindler’s description ofthe letter inquiry, I did not interpret Mr. Rennert to be threatening a motion for disqualification. I also confirmed thatthe letter did not say that. 11. L agreed with Mr.Kreindler’s assessment ofthe situation. Even though I had not been directly involved in any discussions or communications with Mr. Rennert, I was confident, given the text ofhisletter, that Mr. Rennert could not be aware of South Tahoe’s conflict waiver. Based on my experience, False Claims Act cases such as the Qui Tam Actionare typically lawyer-driven,like many consumerclass actions. Counselfor the relator develops a case theory, and heor she then attempts to persuade governmententities to intervene. That in turn drives up the value ofthecase. Theseintervening governmententities typically seek to avoid actively participating in the litigation. Because such intervenorstry to limit as much aspossible their involvementin the case, and because typically False Claims Act cases have a large numberofreal parties in interest and intervenors, the relator’s counsel such as Mr. Rennert usually does not have muchcontact with, or knowledgeof, the intervenororrealparty in interest. This is especially the case for intevenorsthat are small public municipalities with minor monetary claims such as South Tahoe in the Qui Tam Action. 12. Given whatI knew aboutthe extremely limited contacts lawyers like Mr. Rennert have with minorintervenors like South Tahoe,I thought that Mr. Rennert’s inquiries were uninformed and would be resolved simply by providing him a copy of South Tahoe’s waivers. J was therefore very surprised when Brent Rushforth, another lawyer representing the relator and several intervenors, emailed Mr. Kreindler and me on April 11, 2011 telling us for the first time that South Tahoe wasseriously contemplating a disqualification motion. Mr. Kreindler told me he had already sent twoletters to Mr. Rennert explaining South Tahoe’s conflict waiver, and so | thought this new 4 SUPPLEMENTAL DECLARATION OF BRYAN D. DALY 145 eea o n N a D o O 10 1 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Gibson, Dunn & Crutcher LLP request from a new lawyer wassimply theresult of a lack of communication between Mr. Rennert and Mr. Rushforth and nothing more. 13. In order to determine whether Mr. Rushforth’s position was based on full understanding of the relevant facts, which I fully expected was nof the case, I decided to participate in a conferencecall with Mr. Rushforth and Mr. Kreindler on April 19, 2011. That date of April 19 was the first date that worked for such a call amongthe three of us following Mr. Rushforth’s April 11 letter. I thoughtthat the April 19 call presented an opportunity to movepast the exchangeofletters and that a person-to-person dialogue moreeasily would confirm to Mr. Rushforth that this was a non- issue. I planned to explain simply to Mr. Rushforth that there was no issue because South Tahoe had waived anypotential conflict arising out of our representation of J-M in the Qui Tam Action and that Mr. Dinkin’s labor work for South Tahoe was completely unrelated to the Qui Tam Action. I also planned to mention to Mr. Rushforth that there was no confidentiality issue and that we had implementedan ethical wall as a courtesy to preempt any professed concern by Mr. Rushforth about confidentiality. 14, However, during that April 19 call, it became clear to me that Mr. Rushforth simply did notintendto honor South Tahoe’s conflict waiver. This was the first time I believed that there was any material chancethat a disqualification motion might be filed. Therefore, Mr. Kreindler emailed Ms. Eng the next day on April 20 to inform her about what we now believed was a material threatof a disqualification motion. 15. ] also understandthat J-M is asserting that we never suggested that J-M seek the advice of independent counsel after we notified Ms. Eng aboutthe disqualification motion. Thisis also not true. From the time we informed Ms. Eng (whowas,ofcourse, a lawyer representing J-M) about the disqualification motionall the way throughthe end of our engagement, Mr. Kreindler and | had several in-person and telephonic meetings with Ms. Eng and Mr. Wang aboutthat subject. During those conversations, we invited J-M to seek the advice of additional, outside counsel. We even told them that Sheppard Mullin was willing to pay for an outside attorney to provide J-M with a second opinion about our handling of the Qui Tam Action and the disqualification motion. I also was aware that Ms. Eng knew Thomas O’Brien of Paul, Hastings, Janofsky & Walker LLP and was 5 SUPPLEMENTAL DECLARATION OF BRYAN D. DALY 146 M M A R , A M S R E e t o n n N 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Gibson, Dunn & Crutcher LLP frequently in contact with him. Mr. O’Brien previously hadserved as the U.S. Attorneyfor the Central District of California. I therefore suggested to Ms. Eng at least once that she speak with him aboutthe disqualification motion as well. c. Responding To The Disqualification Motion 16. Ms. Eng and Mr. Wangboth encouragedusto fight the disqualification motion from the momentwefirst informed Ms. Eng aboutit all the way through the July 7, 2011 hearing. They did not evertell us during the briefing on the motion that they were concerned or upset regarding the labor and employment work Mr. Dinkin had done for South Tahoe. 17. Ms. Engassisted us in drafting the opposition to the disqualification motion and the supplementalbriefing that Judge Wu requested. She approved every documentbeforeit wasfiled, and she edited those documents significantly (including her own declaration). Ms. Eng’s suggestion in her declaration in this Arbitration that we pushed herto sign a declaration that was against J-M’s interests in the Qui Tam Action is untrue. Neither Mr. Kreindler nor ] ever pushed herto sign the declaration, and she was heavily involved in drafting that declaration. Ms. Eng significantly edited her declaration, as a simple comparison between the draft Mr. Kreindler sent to her and thefiled version shows(both of which are attached as Exhibit 9 to her declaration). Not only was Ms. Eng an active participantin the drafting of the briefs and declarations, she was also heavily involved in guiding our strategy in opposing the disqualification motion. 18. J-M’s briefing in this Arbitration makes much aboutthe issue of severance of South Tahoe’s claimsas part of Judge Wu’s ruling that would have denied the motion for disqualification. Such severance would have had no material impact on J-M. The Qui Tam Action was goingto be bifurcated anyway, as Mr. Kreindler and I repeatedly had informed Mr. Wang and Ms. Eng before March 2011. There already had been extensive discussions with plaintiffs’ counsel and the Court regarding bifurcation. The parties to the Qui Tam Action had agreed that the Qui Tam Action would be bifurcated because it would have been impossible to try the claims of roughly two hundred intervenors andreal parties in interest in one action. Before the disqualification issue, it had been discussed that the Qui Tam Action wasto betried througha series of bellwether cases focused on the claimsofselect intervenors. That is very common for False Claims Act cases. If J-M lost the initial 6 SUPPLEMENTAL DECLARATION OF BRYAN D. DALY 147 cliaaa oO o F & N N D B A F f 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Gibson, Dunn & Crutcher LLP bellwethercase, it would be bound by the negative ruling. That in turn typically allowed for a streamlinedtrial process for the remaining parties or, more frequently, settlement. If J-M won the initial bellwether case, the other intervenors could bring their own claims. But even then, a similar dynamic was applicable where that result would help to streamline the trial and precipitate settlement. Thus, severing South Tahoe’s claim would only preclude South Tahoe from being a bellwether plaintiff; it would notnegatively affect J-M. In fact, if South Tahoe’s claims were strong, precluding it from being a bellwetherplaintiff by bifurcating its claims would have been advantageous for J-M because South Tahoe would have been substantially less likely to pursue its claims. Moreover, J-M was also not facing any risk because Sheppard Mullin had agreed to pay for the cost ofconflicts counsel andto indemnify J-M for any negative outcome favoring South Tahoe. Consequently, when severance of South Tahoe’s claimslater was identified in Judge Wu’s tentative ruling (an outcome we had suggested in our opposition papers with Ms. Eng’s approval), there was really no negative impact on J-M. Thatis plainly why South Tahoe’s counsel(i.e., relator’s counsel) argued so strenuously against Judge Wu’s tentative ruling as reflectedin the transcript of the July 7 hearing. Thatalso is consistent with why, as reported to me by Mr. Kreindler, South Tahoe’s counsel was visibly upset after Judge Wu issued his ruling at that hearing. D. Potential Resolution Of The Disqualification Motion 19. While we wereactively opposing the disqualification motion at Ms. Eng’s direction and with herassistance, we also had a numberofconversations with Ms. Eng and Mr. Wang regarding potential ways to resolve the disqualification motion directly with South Tahoe. 20. Oneoption that Mr. Kreindler and I discussed with Ms. Eng and Mr. Wangwas to obtain South Tahoe’s agreementto a specific, supplemental conflict waiver in view of Judge Wu’s ruling regarding the advance waivers. We told Ms. Eng and Mr. Wangthat Sheppard Mullin would offer consideration that included somefree labor advice going forward to South Tahoe in exchange for the conflict waiver. We even confirmed in an email to Ms. Eng that we plannedto “offer South Tahoe compensation in exchangefor a waiver,” including “some free labor law advice going 7 SUPPLEMENTAL DECLARATION OF BRYAN D. DALY 148 a y D W N 28 Gibson, Dunn & Crulcher LLP forward.”? Ms. Eng and Mr. Wang encouragedus to makethis offer. Neither Mr. Wang nor Ms. Eng ever expressed any concern that the offer included labor work for South Tahoe while Sheppard Mullin would be defending J-M in the Qui Tam Action. Nordid they ever indicate that the offer was contrary to any J-M policy against waivers (or even suggest that J-M had such a policy). 21. A second option we discussed with Ms. Eng and Mr. Wangwas to fferto bifurcate (or really to sever) South Tahoe’s claims from the rest of the Qui Tam Action and to have South Tahoe’s claims defended by conflicts counsel. The only reason bifurcation was potentially not as desirable as obtaining a specific, supplemental conflict waiver from South Tahoe wasbecauseit would not immediately and conclusively resolve the disqualification motion, though that would not have hindered J-M’s defense of the Qui Tam Action. Indeed, when Ms. Engsentus an email suggesting that bifurcation was not a “preferred” option, Mr. Kreindler immediately emailed her back confirmingthat we “would be fine” with bifurcation? As I discussed above, because the Qui Tam Action wasgoingto be bifurcated irrespective of this issue, there really was no material difference to J-M if South Tahoe’s claims were bifurcated/severed. 22. Neither I nor Mr. Kreindler ever told Ms. Eng that it was not in J-M’sinterests to have South Tahoe’sclaims bifurcated/severed. To the contrary, I believed (and repeatedly informed Ms. Eng)that bifurcation of South Tahoe’s claims mighteliminate those claims altogether. South Tahoe was a very small intervenor with a relatively modestpotential recovery. South Tahoe also had not been actively involved in the Qui Tam Action. It did not have its own separate counsel representing it in the Qui Tam Action(it was represented by relator’s counsel). Therefore, it was a remote possibility, at best, that South Tahoe even would pursueits own separate litigation, in which case bifurcating South Tahoe’s claims (and precluding it from being a bellwether) would also be a benefit to J-M. And even if South Tahoedid pursue its own claims, Sheppard Mullin had agreedto fully indemnify J-M. 2 See Ex. RR. 3 Ex. RR. 8 SUPPLEMENTAL DECLARATIONOF BRYAN D. DALY 149 a A - & W w W N m o C o A D H 10 1] 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Gibson, Dunn & Crutcher LLP 23. When Judge Wuruled on July 7 that South Tahoe’s claims would be bifurcated (and thus without the need for providing consideration to South Tahoefor that waiver, as Sheppard Mullin previously had offered with the express knowledge and authorization of Ms. Eng and Mr. Wang), Mr. Kreindler and I considered this to be a positive outcome for J-M. Naturally, then, I was very surprised whenJ-M refused to accept Judge Wu’soffer regarding conflicts counsel and instead opted to force Judge Wuto disqualify Sheppard Mullin. Accepting Judge Wu’s conditions would not have placed J-M in any worse strategic position in the Qui Tam Actionfor the reasons I have discussed. In addition, Sheppard Mullin had agreed to indemnify J-M for the costs of any appeal by South Tahoe, the cost of conflicts counsel, and any negative outcomein favor of South Tahoein a severed action (as well as the fees associated with any severed action by South Tahoe). 24. | understandthat J-M is arguing thatits decision to decline Judge Wu’s offer regarding conflicts counsel was based on advice from James Houpt. I have reviewed Mr. Houpt’s memorandum (whichis attached as Exhibit 13 to Ms. Eng’s Declaration). His advice about the downsides of Judge Wu’s ruling reflects a misunderstandingofthe relevant facts and False Claim Act litigation. 25. First, Mr. Houptasserts that the entire Qui Tam Action would be stayed pending South Tahoe’s appeal. He misunderstands Judge Wu’s ruling. Judge Wu’s ruling never mentions a stay of the Qui Tam Action. At most Judge Wu would havestayed only South Tahoe’s claims, but the rest of the Qui Tam Action would have proceeded. Based on my experience with False Claims Actcases and my familiarity with the Qui Tam Action, it was not surprising that Judge Wu wasnot suggesting a stay of a billion dollar case to await the appealofa decision unrelated to the subject matter of the case by a minorintervenor with only $97,000 at issue. Thus,that portion of Mr. Houpt’s analysis is wrongfactually, andit likewise reflects an unfamiliarity with how False Claims Actcases are handled. 26. Second, Mr. Houptcites as a downside the costs that J-M would incur in the appeal and bifurcated/severed action against South Tahoe. Apparently, he did not know that Sheppard Mullin had agreed to coverall of those costs, as I have noted above and in my earlier Declaration. 9 SUPPLEMENTAL DECLARATION OF BRYAN D. DALY 150 M E R S I N S e e ra nn is dl ay u i t 0 o t a O o cO o& N N D H 10 li 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Gibson, Dunn & Crutcher LLP 27. Third, Mr. Houptstates that South Tahoe would get a “secondbite at the apple.” This commentalso reflects Mr. Houpt’s unfamiliarity with False Claims Act cases. As | discussed above, the Qui Tam Action was going to be bifurcated, and South Tahoe was extremely unlikely to pursue its own claims. I declare underpenalty of perjury under the laws of the State of California that the foregoing is true and correct, and that this declaration was executed October”a 2013 at Los Angeles, California. 10 SUPPLEMENTAL DECLARATION OF BRYAND. DALY 151 pawsa,AWSUeHY Exhibit F 1] 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Gibson, Dunn & Crutcher LLP GIBSON, DUNN & CRUTCHER LLP KEVIN S. ROSEN, SBN 133304 krosen@gibsondunn.com HEATHERL. RICHARDSON, SBN 246517 hrichardson@gibsondunn.com 333 South Grand Avenue Los Angeles, CA 90071-3197 Telephone: 213.229.7000 Facsimile: 213.229.7520 Attorneys for Claimant and Cross-Respondent, Sheppard, Mullin, Richter & Hampton, LLP IN THE ARBITRATION BEFORE JAMS SHEPPARD, MULLIN, RICHTER & REF. NO. 1220045609 HAMPTON,LLP, Arbitrators: Hon. Gary L. Taylor (Ret.) Claimant and Cross- Hon. Charles S. Vogel (Ret.) Respondent, James W. Colbert, ITI Esq. v. SUPPLEMENTAL DECLARATION OF JEFFREY A. DINKIN J-M MANUFACTURING COMPANY,INC., D/B/A/ JM EAGLE, Respondent and Cross- Claimant. SUPPLEMENTAL DECLARATION OF JEFFREYA. DINKIN 152 10 ll 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Gibson, Dunn & Crutcher LLP I, Jeffrey A. Dinkin, declare as follows: 1. I am an attorney admitted to practice law before all courts of the State of California. I am currently a partnerin the law firm of Stradling, Yocca, Carlson & Rauth. I provide this declaration to supplement myprior declaration submitted in this action. Unless otherwisestated, the followingfacts are within my personal knowledge, and I can testify competently to them. 2. I understandthat in its Opening Brief in this Arbitration, J-M Manufacturing Company,Inc. (“J-M”) has suggested that Sheppard Mullin lawyers, including Mr. Ryland, “concealeda conflicts match” from me in March 2010 regarding the work I previously had done for South Tahoe and the work others were considering taking on in what has beencalled the Qui Tam Action in this Arbitration. J-M’s suggestion is factually inaccurate for two reasons: I did not believe (and do notbelieve) that anything was “concealed”from me, and in my view there was no“conflicts match.” In March 2010, I recall being contacted by the Office of the General Counselto discuss the advance waiver signed by South Tahoeasit pertained to a possible new matter in which South Tahoe was involved. I cannot recall at this time whether I had any specific understanding as to the nature of South Tahoe’s involvement. However, I knew ofthe advance waivers that South Tahoe had provided as I described in my earlier Declaration in this Arbitration and did not believe there was any problem if Sheppard Mullin was retained for a new matter in light of the advance waivers. I communicated the fact of the advance waivers to the Office of the General Counsel, and that wasrelying on the Office of the General Counsel’s advice regarding their enforceability. While I did not learn until muchlater that Sheppard Mullin had been retained and who at the Firm had been working onthat new matter, I do not agree that anything was concealed from me. The inquiry that was made to mein March 2010,and the confirmation of the execution ofan advance waivers by South Tahoe, was, in my experience, consistent with a conflict check inquiry. Also in my experience, I would not have expected people to follow up with me about the matter once it was determined that the Firm could proceed with the new matter, especially at such a large firm. For me, that was to be expectedin light of the advance waivers. l SUPPLEMENTAL DECLARATION OF JEFFREY A. DINKIN 153 1 I declare under penalty of perjury underthe laws of the State of California that the foregoing 2 is true and correct, and that this declaration was executed October 24, 2013 at Santa Barbara, 3 California. ‘ 1) { ) x 7 — 5 / J./ Jeffrey A. Dinkin 101581260.5 10 11 12 13 14 15 16 17 18 19 20 2) 22 23 24 25 26 27 28 Gibson, Dunn & Crutcher LLP 2 SUPPLEMENTAL DECLARATION OFJEFFREYA. DINKIN 154 _ Exhibit G 10 1] 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Gibson, Dunn & Crutcher LLP GIBSON, DUNN & CRUTCHER LLP KEVIN S. ROSEN, SBN 133304 krosen@gibsondunn.com HEATHERL. RICHARDSON,SBN 246517 hrichardson@gibsondunn.com 333 South Grand Avenue Los Angeles, CA 90071-3197 Telephone: 213.229.7000 Facsimile: 213.229.7520 Attomeys for Claimant and Cross-Respondent, Sheppard, Mullin, Richter & Hampton, LLP IN THE ARBITRATION BEFORE JAMS SHEPPARD, MULLIN, RICHTER & REF. NO. 1220045609 IIAMPTON LLP, Arbitrators: Hon. Gary L. Taylor (Ret.) Claimant and Cross- Hon. Charles 8. Vogel (Ret.) Respondent, James W. Colbert, III, Esq. Vv. SUPPLEMENTAL DECLARATION OF CHARLES L. KREINDLER J-M MANUFACTURING COMPANY,INC., D/B/A/ IM EAGLE, Respondent and Cross- Claimant. SUPPLEMENTAL DECLARATION OF CHARLESL. KREINDLER 155 1s ) i n “ S O D 28 Gibson, Dunn & Crutcher LLP I, Charles L. Kreindler, declare as follows: 1. I aman attorney admitted to practice law beforeall courts of the State of California. I ama partner in the lawfirm of Sheppard, Mullin, Richter & Hampton LLP (“Sheppard Mullin”). I have reviewed the Opening Brief of J-M Manufacturing Company,Inc.’s (“J-M”) and the declarations of Camilla Eng and K. Luan Tran. Thereafter, I reviewed again Sheppard Mullin’s Opening Briefandall of the declarations and documents submitted with it. Nothing I have read makes me question myprior testimony, and I provide this declaration solely to address misstatements made andissuesraised by J-M in connection with its Opening Brief. Nothing in this Declaration is intended to change anyofthe statements in my prior Declaration. The following facts are within my personal knowledge,and I can testify competently to them, unless I state otherwise. A. MyRole In March 2010 2. When I first became involved in the Qui Tam Action in March 2010, the Complaint had just been unsealed. Mr. Daly handledthe tasks associated with J-M’s retention of Sheppard Mullin in March 2010, which included running and evaluating the conflicts check, negotiating with Ms. Eng about the Engagement Agreement, and securing approval from firm managementfor the fee concessions Ms. Eng demanded. Consequently, I did not learn about anypotential issue involving South Tahoeat that time. B. The Morgan Lewis/Formosa Waiver 3. Early onin our representation of J-M,I recall discussing with Ms. Eng whether J-M should give a conflict waiver to the law firm of Morgan Lewis & Bockius LLP (“Morgan Lewis”) so that it could represent J-M’s co-defendant, Formosa Plastics Corp. (“Formosa”). Ms. Eng told me that J-M usedto be a subsidiary of Formosa, and during that time Morgan Lewis represented both of them. She also told me that Morgan Lewis had confidential information about J-M that was relevant to the Qui Tam Action because ofthat prior representation. Ms. Eng suggested to me that J-M was potentially adverse to Formosa and asked me what | thought. I told her that I agreed. I reminded Ms. Engthat Formosa wasnot interested in sharing defense counsel with J-M for precisely that reason. I also told her that, because Formosaprovided the rawmaterials used in J-M’spipe, at a minimum,J- M likely had an indemnification claim against Formosafor losses in the Qui Tam Action andthat this 1 SUPPLEMENTA] DECLARATION OF CHARLES J.. KREINDLER 156 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Gibson, Dunn & Crutcher _LP future indemnification claim could affect howthe partieslitigated the Qui Tam Action. In addition,I told Ms. Eng that the fact that Formosaprovided the raw materials used in J-M’s pipe wasa potential defense for J-M in the Qui Tam Action. Because Morgan Lewishad relevantconfidential information aboutJ-M, there was realrisk that that confidential information could be used to J-M’s detrimentin the Qui Tam Action. Ms. Engultimately declined to give Morgan Lewis a waiver. 4, Indeed, throughoutour litigation of the Qui Tam Action, Mr. Daly, Ms. Eng and I discussed howtotailor ourlitigation strategy to best preserve J-M’s potential indemnification claims against Formosa and J-M’s defense regarding Formosa having provided the raw materials usedin J- M’spipe. C. Marchand April 2011 Communications Regarding South Tahoe 5. In early March 2011, I receiveda letter from Stuart Rennert of Day Pitney. Prior to receivingthisletter, I hadlittle, if any, contact with Mr. Rennert. Hisletter asserted that Sheppard Mulhn had done work for South Tahoe and asked for information about the nature of that work. It also asked whether Sheppard Mullin had received a conflict waiver to represent J-M in the Qui Tam Action.’ Mr. Rennert was one of numerouscounsel who represented the Relator, Mr. Hendrix, and also numerous intervenors, including South Tahoe. In my experience with False Claims Actcases, counsel such as Mr. Rennert who representplaintiffs and intervenors do not have muchinstitutional knowledge abouttheir clients; nor do they have much contact with their clients. WhenI first read Mr. Rennert’s letter, my initial reaction wasthat there had to be a misunderstanding. 6. To respond to Mr. Rennert’s March 4, 2011 letter,I investigated what the connection wasbetween Sheppard Mullin and South Tahoe. I learned that a parmer in Sheppard Mullin’s Santa Barbaraoffice, Jeffrey Dinkin, had done some unrelated labor and employment work for South Tahoe. I also learned that South Tahoe had agreed to an advance conflict waiver. During my investigation,I did not learn anything substantive about the work that had been donefor South Tahoe, and certainly not any confidential information. ' Declaration of Luan Tran (“Tran Decl.”) § 4, Ex. 16 (Declaration of Brent Rushforth (“Rushforth Decl.”), Ex. E at 15). 2 SUPPLEMENTAL DECLARATION OF CHARLESL. KREINDLER 157 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Gibson, Dunn & Crutcher LLP 7. I obtained a copyofthe 2006 advance waiver from Sheppard Mullin’s Office ofthe General Counsel and reviewedit in detail. The plain, clear language of the advance waiver permitted Sheppard Mullin to represent clients in matters that were not substantially related to the labor and employment work Mr. Dinkin did for South Tahoe. Because the allegations of the Qui Tam Action had nothing to do with labor and employmentissues, I believed this waiver was enforceable and permitted us to represent J-M in the Qui Tam Action. I discussed all of this with Mr. Daly, who agreed with my assessment. 8. After I learned about the advance waiver, analyzedit, and was comfortable thatit applied in this case, | thought that educating Mr.Rennert about the waiver would satisfy him and promptly conclude his inquiry. But, to give Mr. Rennert further comfort, I also arranged for an ethical wall to be created between Mr. Dinkin and anyone else working on South Tahoe’s matters, on the one hand, and those of us working in the Los Angeles office on the Qui Tam Action, on the other hand. I did not think that an ethical wall was actually necessary because the lawyers who represented J-M and the lawyers whorepresented South Tahoe werein differentoffices; no individual lawyer worked for both clients; and the matters were totally unrelated. It was erected as an accommodation for Mr. Rennert. 9. I responded to Mr. Rennert’s March 4, 2011 letter on March 11, 2011.” In my response, I explained that South Tahoe had agreed to an advance waiver, and I sent Mr. Rennert a copy ofthe 2006 waiver. I also explained whythat waiver was enforceable and permitted Sheppard Mullin to represent J-M in the Qui Tam Action. 10. I received Mr. Rennert’s nextletter, dated March 17, 2011,’ which again askedfor the same information as his March letter, but also asked for additional information about the ethical wall. It seemed to me that Mr. Rennert had noteven read the advance waiver in South Tahoe’s engagement agreementthat ] sent him on March 11. It also seemed to methat his focus may have been to ensure that those of us working on the Qui TamAction had nothad accessto any ofthe > Declaration of Charles Kreindler (“Kreindler Decl.’’) 40, Ex. EE. > Tran Decl. 4] 4, Ex. 16 (Rushforth Decl. Ex. G at 18-19). 3 SUPPLEMENTAI, DECLARATION OF CHARLES L. KREINDLER 158 O o O F N N D H A W 10 1 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Gibson, Dunn & Crutcher LLP matters on which Mr. Dinkin had worked. In my March 24 response to Mr. Rennert’s March 17 letter,* I again explainedthe nature and import of South Tahoe’s advance waiverand provided additional information about the ethical wall. I believed that my March 24 letter would end Mr. Rennert’s inquiry. WhenI received no responseto thisletter, I believed that the issue had been resolved. Otherthanthese four letters, I had no communication regarding South Tahoe with Mr. Rennert or any of the lawyers representing South Tahoe until April 11, 2011. 11. On April 11, 2011, I received an cmail from a different lawyer representing South Tahoe and manyofthe other intervenors, Mr. Brent Rushforth, askingto discuss a potential disqualification motion that South Tahoe was “contemplating”filing.’ This was thefirst time I had heard anything abouta disqualification motion by South Tahoe. I was surprised by Mr. Rushforth’s email, but believed that he either didn’t know about or didn’t understand South Tahoe’s advance waiver. Like Mr. Rennert, I hadlittle if any contact with Mr. Rushforth during the litigation. Thus, I was confidentthat if he was fully informed of the facts, he would conclude that the advance waiver had addressed the issue andthat he could take comfort fromthe ethical wall we had erected. I also thought it would behelpful if Mr. Daly joined in any discussion that ensued. Accordingly, we scheduled a call with Mr. Rushforth for thefirst date that all of us (including Mr. Daly) were available — April 19, 2011. 12. When Mr.Daly andI had the call with Mr. Rushforth on April 19, 2011, he told us that he was aware of South Tahoe’s advance waiver, and that he nonetheless plannedto file the motion to disqualify. This was the first time that anyone from South Tahoe had mentioned disqualification where it was clear that they knew aboutbut had dismissed the advance waiverthat South Tahoe had signed. (Mr. Rushforth’s April 1] email did mention “contemplating”a disqualification motion,but it did not refer to the advance waiver.) Accordingly,it was onlyafter this April 19 call that I believed South Tahoe had made an informeddecision to file a disqualification * Kreindler Decl. § 40, Ex. FF. > ‘Tran Decl. § 7, Ex. 19. 4 SUPPLEMENTAL DECLARATION OF CHARLES L. KREINDLER 159 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Gibson, Dunn & Crutcher LLP motion, althoughI still believed strongly that the advance waiver was enforceable and that South Tahoe’s motion,if actually filed, would be denied.® 13. The next day (April 20, 2011), I told Ms. Eng via email that South Tahoe had threatened a disqualification motion.’ In a phone conversation around that same time, I also told Ms. Engthat she could seek advice fromother lawyers, or have themreviewthebriefing or declarations in Opposition to any such motion (she already had said, almost immediately, that she wanted us to oppose any such motion), if she or J-M wished. I also offered to have Sheppard Mullin pay forthis third party counselto advise J-M, and | repeated that offer periodically throughoutthe period before and during the pendencyofthe disqualification motion. In my July 8 Memorandum regarding the Court’s ruling,I reiterated this offer to Ms. Eng: “[i]f you have any questions or concerns about any of the analysis set forth above, Sheppard Mullin would be happy to pay for third party counsel to provide you with another analysis.”* 14. Between April 20 and May 9, 2011 (when South Tahoe filed its disqualification motion), Ms. Eng never expressed concem,disappointment, frustration, or outrage about the fact that Mr. Dinkin had done some labor work for South Tahoe. During thattime period,I explained to Ms. Eng the nature and frequency with which Mr. Dinkin had done labor work for South Tahoe. told her that Mr. Dinkin had handled a labor matter for South Tahoe that concluded in November 2009, and I told her that he had done a small amountof labor consulting beginning in late March 2010 and periodicallythereafter to as late as March 2011. Not once did Ms. Engever suggest that she had been ° T understandthat J-M is referring to the declaration of Brent Rushforth that was submitted in the Qui Tam Action for the proposition that I knew in March 2010 that “the conflict check showed South Tahoc to be an existing client.” (J-M’s Opening Brief, p. 7.) As I discuss above, | had no knowledge in March 2010 about any work that Sheppard Muilin had done for South Tahoe. By the time I had the conversation with Mr. Rushforth on April 19, 2011, I had investigated the situation and Jearned that Mr. Dinkin had done some labor work for South Tahoe that had concluded by November 2009. I told that to Mr. Rushforth. I also told him that Mr. Dinkin had done some very modestadditional labor work for South Tahoe since we had becomeinvolved in the Qui Tam Action. However, I did not refer to South Tahoeas an “existing”client, either in reference to March 2010 or April 2011. ” Declaration of Camilla Eng (“Eng Decl.”) § 15, Ex. 4. * Kreindler Decl. { 54, Ex. GGG. 5 ~~ SUPPLEMENTAL DECLARATION OF CHARLES L. KREINDLER. 160 S N D H A B R W W N 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Gibson, Dunn & Crutcher LLP or felt misled. Nordid she ever suggestthat the prior work for South Tahoe should have been disclosed to her in March 2010. Nordid she mention anypolicythat J-M had about not working with counsel who had done work or were working for another client that was adverse to J-M in an unrelated matter. D. Briefing On The Disqualification Motion 15. The disqualification motion was filed on May 9, 2011. Whenit wasfiled, we sent Ms. Eng a copy ofthe papers. | 16. Ms. Eng wasactively involved in all of the briefing on the disqualification motion.” She reviewed and approved every brief and declaration wefiled. She wasalso engaged in making strategic judgmentcalls about the positions we took in the brief. Ms. Eng wasalso involvedin drafting her own declaration. Although I put togetherthefirst draft of the declaration, Ms. Eng edited the draft significantly. 17. I have reviewed the two versionsof the declaration Ms. Eng attached as Exhibit 9 to her declaration in this Arbitration. The first version (numbered SMRH01284-85)is the version I drafted and sent to Ms. Eng. The second version (which has “Case No. 5:06-00055-GW-PJW” printed on the top) is the version that was filed. Ms. Eng madeall the changes between the draft I sent to her and the final version, without anyinput or advice from me. 18. Ms. Eng informed methat she discussed her draft and her changes with Mr. Wang, and they both approvedthe final version that was submitted to the Court.’ * T understandthatthe parties have entered into a Stipulation in this Arbitration regarding an accounting of the fees and costs billed, paid, and unpaid in connection with the Qui TamAction. Attached as Exhibit SSS to this declarationis a true and correct copy ofthat Stipulation. As I previously stated in myinitial Declaration (see Kreindler Decl. §§ 31-35), Sheppard Mullin did notbill J-M for anytimeit spenton the disqualification motion. I have confirmed that the amounts identified in the Stipulation are solely for work done by Sheppard Mullin to defend J-M in the Qui Tam Action. Noneofit relates to the disqualification motion. '© Kreindler Decl. J 43, Ex. WW. 6 SUPPLEMENTAI, DECLARATION OF CHARLESL.KREINDLERt—t—itsi—~C~™ 161 S N D N O O B& B W W W N 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Gibson, Dunn & Crutcher LLP E. Offer To Provide Additional Labor And Employment Advice To South Tahoe In Exchange For A Conflict Waiver. 19. Ms. Eng and Mr. Wang wereextensively involved in strategizing about howto resolve the disqualification motion as an alternative to an adjudication of that motion. The twoprincipal options Mr.Daly andI discussed several times with themincluded consideration to South Tahoe for a supplemental waiver and severing South Tahoe’s claims from thoseof the other intervenors, Neither option presented any material issue for J-M. Both Mr. Wang and Ms. Eng madeit abundantlyclear that they wanted Sheppard Mullin to continue representing J-M (calling us a “family”). 20. When Mr.Daly and J met with Mr. Wangand Ms.Engfollowing the first hearing on the disqualification motion (on June 6, 2011), we informed them that we thoughtthe best option to resolve the issue was for Sheppard Mullin to offer consideration to South Tahoe in exchange for a conflict waiver from South Tahoe. Webelieved this was the best option because it would immediately resolveall issues related to the alleged conflict. We specifically informed themthat Sheppard Mullin’s offer would include some free labor advice to South Tahoe. Neither Ms. Eng nor Mr. Wangexpressed any concern thatthe consideration we were goingto offer includedfree labor work for South Tahoe while the Qui Tam Action wasstill ongoing. To the contrary, they encouraged us to makethis offer as soon as possible. 21. Paragraph 21 of Ms. Eng’s Declarationstates that she had no idea that Sheppard . Mullin wasoffering free labor advice to South Tahoe in connection with a supplemental conflict waiver. Shestates: “Had JM or I known about such offer, we wouldnothave agreedto it. This is so because, as discussed, we would never agree to waive any conflict..., and certainly not for a significant caselike this...” That assertion is contrary to the facts — both what Ms. Eng and Mr. Wangsatd to me and email communications betweenus. 22. Not only did Mr. Daly and I discuss Sheppard Mullin’s offer of free labor advice to South Tahoe during our June 6 meeting with Ms. Eng and Mr. Wang,| also confirmedthatfact in an email to Ms. Eng the next day. That email specifically stated that Sheppard Mullin would be making 7 SUPPLEMENTAL DECLARATION OF CHARLESL. KREINDILER 162 S D 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Gibson, Dunn & Crutcher LLP the offer to South Tahoe, and again madeclear the offer would include free labor advice.!! Ina telephonecall the same day, Ms. Eng again encouraged me to makethe offer to South Tahoethat includedfree labor advice. She never expressed concern that Sheppard Mullin was offering to do labor work for South Tahoe. If she had, we never would have madetheoffer. F. Severance Of South Tahoe’s Claims And Bifurcation 23. Jn addition to our discussions about an agreement with South Tahoeregarding a specific conflict waiver, Mr. Daly and I discussed with Ms. Eng and Mr. Wangother possible options for resolution if South Tahoerefused our offer. Mr. Daly and | told Ms. Eng and Mr. Wangthat severing out South Tahoe’s claims in a separate proceeding(that would be handled byconflicts counsel] at Sheppard Mullin’s expense) would be the next best option with no real downsideto J-M. This advice wasconsistent with the offer already madein the opposition to South Tahoe’s disqualification motion (which Ms. Eng had reviewed and approved)that“the Court could sever South Tahoe’s claims” to mootthe conflict.'” 24. Contraryto her Declaration, I never told Ms. Eng that severance of South Tahoe’s specific claims was notin J-M’s “bestinterests,” or that severance of South Tahoe’s claims would negatively impact J-M. To the contrary, Mr. Daly and I explained to Ms. Eng and Mr. Wangthat severance of South Tahoe’s claims would not place J-M in any differenttactical or strategic position because the Qui Tam Action would haveto be bifurcated anyway. Mr. Dalyand I explained to Mr. Wang and Ms. Engthatall of the similar False Claims Act casesin our experience are bifurcated— meaning that some intervenors’ claims would betried first, and others would follow—andthat the Qui Tam Action similarly would be bifurcated. 25. Because of the numberof parties, False Claims Act casesare typically tried in a series of “bellwether” cases, in which individual intervenors are selected and their claimsaretried first. If the bellwether intervenorswin,all other intervenors can benefit fromthat favorable ruling. If the bellwether intervenorslose, other intervenors can bring their own separate cases (although as a "' Kreindler Decl. 46, Ex. RR. ' Tran Decl. 49, Ex. 21 (J-M’s Opposition to the Disqualification Motion,at 24). 8 SUPPLEMENTAL DECLARATION OF CHARLES. KREINDLER. 163 a A s S 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Gibson, Dunn & Crutcher LLP practical matter, this rarely happens). In essence, the vast majority of intervenors are bifurcated from the actualtrial. The only effect a severance of South Tahoe’s claims would have is that South Tahoe would notbe eligible to be a bellwether plaintiff—aresult that would have no adverse effect on the litigation or JM’s defense. Generally, the smaller intervenors havenointerest in becoming a bellwether intervenor becauseofthe greattoll it takes on the resources of the municipality. There are extensive discovery and generallitigation obligations to which bellwetherplaintiffs are subject. 26. Nor was there any “sudden push”for bifurcation as stated in Ms. Eng’s Declarationat paragraph 28. Ascarly as September 2010,the parties jointly advised the Court that the action needed to be bifurcated.’* In June 2011, the parties filed proposals regarding bifurcation.'* In December 2011, the Court issued an order that bifurcated both discoveryandtrial by issues. As I expected, the Court ultimately ordered a bellwethertrial of five claims(to be selected by the Plaintiffs). 27. Morcover, South Tahoe wasnotan active intervenor in the Qui Tam Action. It was represented by counsel that represented the relator and numerousotherintervenors. It never had anyoneattend hearings or case management conferences exclusively onits behalf: it did not propound its own discovery; andit did not correspond directly with us (except for responding to our Public Records Act request, as I discussed in my original Declaration). In stark contrast, other intervenors, like the State ofNevada, had their ownseparate counsel that appeared at hearings and case managementconferences, engagedwith usdirectly on discovery and case managementissues, and met with us to discuss potential resolution oftheir claims. Given that South Tahoe was not even 'S Attached hereto as Exhibit TTTis a true and correct copyofthe Joint Report Rule 26(f) DiscoveryPlanfiled on September 27, 2010 in the Qui Tam Action (Docket No. 275). This was obtained at my direction from thefiles of the United States District Court for the Central District of California and used by me throughout my work on the Qui TamAction. Attached hereto as Exhibit UUU isa true and correct copyof Defendant J-M Manufacturing Company,Inc.’s Position Re Case Management,filed on June 17, 2011 in the Qui Tam Action (Docket No. 432). This was obtained at my direction fromthe files of the United States District Court for the Central District of California. 'S Attached hereto as Exhibit VVVis a true andcorrect copyof the Order Addressing Bifurcation, entered on December7, 2011 in the Qui Tam Action (Docket No. 551). This was obtainedat my direction from the files of the United States District Court for the Central District of California. 9 SUPPLEMENTAL DECLARATION OF CHARLES L. KRFINDLER 164 “ S S 10 il 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Gibson, Dunn & Crutcher LLP actively litigating this case in which it was already plaintiff, it simply wasnotrealistic that South Tahoe would pursue its own independentclaimsif other intervenorslost irrespective of anything having to do with Sheppard Mullin. Finally, even if South Tahoe made the extremely unlikely decision to litigate its own claimsafter bellwetherintervenors had lost, we told Ms. Eng and Mr. Wangthat Sheppard Mullin would pay for any costs associated with this separate proceeding and would indemnify J-M for any damages awarded to South Tahoe. We madeit clear to Ms. Eng and Mr. Wangthat J-M would bearnofinancial cost orrisk. G. Analysis Of The Court’s July 7 Conditions 28. At the July 7 hearing, Judge Wuruled that Sheppard Mullin could remain as counsel to J-M in the Qui TamAction, subject to certain conditionsthat did not adversely affect J-M.!° 29. Following the July 7 hearing, Ms. Eng asked that I provide her with a memorandum analyzing Judge Wu’s conditions. I drafted this memorandumandprovidedit to her the next day. Inasmuchas Ms. Eng requested the memorandum,her characterization ofit as an effort to “basically implore JM”to keep Sheppard Mullin is false. It was exactly as she had requested. 30. As the memorandumreflects, I did not believe that there was any significant downside to any of Judge Wu’s conditions. Bifurcation of South Tahoe’s claims had no practical impact on J- M because,as discussed above, South Tahoe would beable to pursue its own claims anyway. And in anyevent, it was extremely unlikely that South Tahoe would do so. Moreover, J-M faced no financial risk because Sheppard Mullin had agreedto payforall of the costs of any separate proceeding by South Tahoe (the appeal, the separatetrial, etc.) 31. Ms. Eng later provided me with a memorandumpreparedfor her by another attomey, James Houpt, in which Mr. Houptopined that Judge Wu’sconditions were problematic for J-M. I strongly disagree with Mr. Houpt’s analysis and his conclusion. 32. Mr. Houptasserts that the Qui Tam Action—inits entirety—waslikelyto be stayed pending the resolution of any appeal of South Tahoe’s claims.'’ This was not going to happen. ‘© Kreindler Decl. 9 54, Ex. DDD. ” Eng Decl., Ex. 13 at SMRH00009. 10 SUPPLEMENTAL DECLARATION OF CHARLESL.KREINDLER OS™” 165 o y O o C O S D 28 Gibson, Dunn & Crutcher LLP Judge Wu’s Order did notoffer a stay of the Qui Tam Action;it only offered a stay of South Tahoe’s claims. Moreover,a billion dollar case simply would not have been stayed because of an appeal on a tuling that was irrelevantto the substance of the case by a minor intervenor with only $97,000at issue whose claims would not be foreclosed bythe rulings made during the pendencyofthat appeal. 33. Mr. Houptalso identifies the costs J-M would incurin the appeal andseparatetrial against South Tahoe asa reasonto decline Judge Wu’soffer.’® But Mr. Houpt apparently was unaware that Sheppard Mullin had agreed to coverall of those costs and to indemnify J-M against any damages awarded to South Tahoe. H. J-M’s New Counsel 34. After J-M decided to have Sheppard Mullin disqualified, J-M hired two different firms to representit in the Qui Tam Action: Paul, Hastings, Janofsky & Walker LLP (“Paul Hastings”) and Bird, Marella, Boxer, Wolpert, Nessim, Drooks & Lincenberg,P.C. (“Bird Marella”). 35. [understand that Paul Hastings had been informally involved in advising Ms. Eng regarding the Qui Tam Action before they became counsel of record. Ms. Eng had frequent contact with Tom O’Brien from Paul Hastings(the former U.S. Attomeyfor the Central District), and it was my understanding that she had consulted with him repeatedly about the Qui Tam Action and the disqualification motion. 36. Bird Marella hadalso previously been involved in the Qui Tam Actionas counselto J- M’sdistributors in responding to subpoenasfromthe plaintiffs. The distributors were potentially adverse parties whoseinterests in the Qui Tam Action mightnotalways be aligned with J-M’s interests. The distributors could have been sued for any defective pipe theydistributed and sought indemnity from JM, and vice-versa. Also, one of J-M’spotential responses to plaintiffs’ allegations about defects in J-M’s plastic pipe was that any defects were caused by the waythedistributors handled andstored the pipe. 'S Eng Decl., Ex. 13 at SMRH00010. ll SUPPLEMENTAL DECLARATION OF CHARLES L. KREINDLER- 166 10 ll 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Gibson, Dunn & Crutcher LLP L Sheppard Mullin’s Retention of Mr. Rosen 37. Two days before the July 7 hearing (on July 5), 1 informed Ms. Eng that Sheppard Mullin plannedto retain Kevin Rosen from Gibson, Dunn & Crutcher LLP. Mr. Ryland was unavailable to represent Sheppard Mullin at the July 7 hearing, so Mr. Ryland engaged Mr. Rosen to represent Sheppard Mullin in Mr. Ryland’s place. Mr. Rosen did not work on anyofthe briefing, which hadall been submitted by June 22, 2011 (before he wasretained). | 38. Although in my email to Ms. Eng about retaining Mr. Rosen,I inadvertentlystated that “we would like to hire Kevin Rosen... to represent JM,”I later clarified that Mr. Rosen was representing Sheppard Mullin. Ms. Eng told me she understood. Consistent with that understanding, she later emailed me: “Thanks for giving me the heads upon hiring Gibson. It’s your firm’s 19 Her Declarationin thisdecision, but givenit affects JM, I appreciate the advancenotice. Arbitration (paragraph 22) and J-M’s Opening Brief (page 2) confirm that Mr. Rosen washired to represent Sheppard Mullin. AndI introduced Mr. Rosen as counsel specially appearing for Sheppard Mullin at the July 7 hearing. 39, I caused to be filed a notice of substitution of counsel on July7, 2011, just before the hearing, to permit Mr. Rosen to appear on Sheppard Mullin’s behalf. This notice specified that Mr. Rosen was “specially appearing in this matter for the limited purpose of representing Sheppard, Mullin, Richter & Hampton LLP in connection with South Tahoe Public Utility District’s pending Motion to Disqualify.””° 40. Thefirst time I met Mr. Rosen in person was immediatelybefore the July7 hearing,in the hall outside Judge Wu’s courtroom. I introduced Mr. Rosen to Ms. Eng whenshewasinthehall. J observedthat Mr. Rosen and Ms. Eng had never met before, and they briefly exchanged "Attached hereto as Exhibit XXXis a true and correct copy of an email I received from Ms. Eng on July 5, 2011. (SMRHO01353.) This email is maintained in the ordinary courseofbusiness on Sheppard Mullin’s email servers and was used by me in connection with my work on the Qui Tam Action. 2° Attached hereto as Exhibit YYYis a true and correct copy of the Notice of Limited and Special Appearance on Behalf of Sheppard, Mullin, Richter & Hampton LLP,filed on July 7, 2011 in the Qui Tam Action (Docket No. 451). This was obtained at mydirection fromthefiles of the United States District Court for the Central District of California. 12 SUPPLEMENTAL DECLARATION OF CHARLEST..KREINDLER 167 = ia 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Gibson, Dunn & Crutcher LLP pleasantries; nothing more. Thethreeof us then entered the courtroom, though Mr. Rosen did not speak with Ms. Eng in the courtroom. After the hearing, Ms. Eng quicklyleft the courtroom without speakingto either me or Mr. Rosen. I did not observe Mr. Rosen have anysubstantive discussion at any time with Ms. Eng about the disqualification motion or the Qui Tam Action. J. The Disqualification Motion Did Not Cause Any Delay In TheTrial. 41. Neither the disqualification motion, nor the eventual disqualification of Sheppard Mullin, caused a delayin the trial of the Qui Tam Action. Shortly after Sheppard Mullin was disqualified, J-M represented in publicly-available court filingsthatits “clear preference would befor the parties to adhere to the December6, 2011 trial date.””” 42. Although J-M represented to the Court that it was ready fortrial in December 2011, there were several developments (unrelated to Sheppard Mullin’s disqualification) that ultimately delayed the trial. Among these developments were: (1) the pleadings as to Formosa werenot resolved until November 7, 2011, when the Court ruled on Formosa’s motion to dismiss the Fourth Amended Complaint”: (2) the Court did not rulc on the motionto retrieve the privileged documents that had been produced bythe vendor hired by McDermott until June 3, 2013”; and (3) the parties did not agree on how the case would be bifurcated until December 7, 2011.4 Thetrial of the bifurcated Qui Tam Action eventually commenced in September 2013.”° Attached hereto as Exhibit ZZZ is a true and correct copyofthe Joint Status Report, filed on August4, 2011 in the Qui Tam Action (Docket No. 464). This was obtained at mydirection from the files of the United States District Court for the Central District of California. » Attached hereto as Exhibit AAAA is a true and correct copy of the Orderre: (1) FPC-USA’s Motion to Dismiss Relator’s Fourth Amended Complaint, entered on November 7, 2011 in the Qui Tam Action (Docket No. 515). This was obtained at mydirection fromthefiles of the United States District Court for the Central District of California. Attached hereto as Exhibit BBBBisa true and correct copy of the Minutes of Post-Mediation Status Conference, dated June 3, 2013 (Docket No. 1014). This was obtained at mydirection fromthe files of the United States District Court for the Central District of California. ** Ex. VVV (DocketNo. 551). °° Attached hereto as Exhibit CCCCis a true andcorrect copy of the Minutes from the First Day of the Jury Trial (Docket No. 1640). This was obtained at mydirection fromthe files of the United States District Court for the Central District of California. 13 SUPPLEMENTAL DECLARATION OF GHARLESI, KREINDLFR. 168 10 ll 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Gibson, Dunn & Crutcher LLP I declare under penalty of perjury underthe laws ofthe State of California that the foregoing is true and correct, and that this declaration was executed October 25, 2013 at Los Angeles, California. Charles L. Kreindler 14 SUPPLEMENTAL DECLARATION OF CHARLESL. KREINDLER 169 AMAIAGERRI ee na Exhibit H IN THE ARBITRATION BEFORE JAMS SHEPPARD, MULLIN, RICHTER & REF. NO. 1220045609 HAMPTON,LLP, Arbitrators: Hon. Gary L. Taylor (Ret.) Claimant and Cross- Hon. Charles S. Vogel (Ret.) Respondent, James W. Colbert, II, Esq. Vv. J-M MANUFACTURING COMPANY,INC., D/B/A/ JM EAGLE, Respondent and Cross- Claimant. SUPPLEMENTAL EXPERT REPORTOF PROFESSOR LAWRENCE C. MARSHALL October 25, 2013 On September30, 2013, I submitted a Report setting forth my opinions, as an expert in the field of legal ethics, on whetherthe actions of Sheppard Mullin with regard to its representationofJ-M give rise to disgorgementoffees Sheppard Mullin has been paid by J-M or forfeiture of fees J-M still owes Sheppard Mullin for professional services rendered. I have now been asked to prepare a supplementto that reportin light of the Brief and accompanying materials submitted byJ-M in this matter on September 30, 2013. After carefully reviewing those materials, my conclusions remain the same: Nothing that Sheppard Mullin has done(oris alleged to have done) brings its conduct into the narrow category of egregious misbehavior thatjustifies the staggering penalty associated with disgorgementor feeforfeiture. Indeed, in my view, Sheppard Mullin did not breach any ethical duties. The suggestion that Sheppard Mullin ought to be deprived of approximately $4 million in 170 compensation for the more than 10,000 hours it worked—which all agree were performed properly and billed reasonably—hasnobasis in the governing law under the facts ofthis case. I. My Credentials as an Expert Mycredentials are set forth on pages 1-3 of my September30 Report.! II. Overview of Supplemental Report The purposeofthis Supplemental Report is not to repeat the various points covered in my September 30 Report. Rather, this Supplemental Report will address several issues raised in J-M’s recent submission. These subjects relate to three time periods:(1) the period surrounding J-M's decision to retain Sheppard Mullin; (2) the period between whenthe District informed Sheppard Mullin of its conflict of interest concerns and when Sheppard Mullin discussed the issue with J-M; and (3) the period between when the District filed its disqualification motion and when Sheppard Mullin’s representation of J-M ended. Before addressing those issues, however, there is an overarching principle set forth in theJ-Mfiling that bears comment. ThatBrief relies heavily on the claim that California law is “clear and unequivocal” in holding that any type of rules violation—no matter how minor, no matter whetherit was taken in good faith, no matter whethertheclient was prejudiced in any way—triggers automatic forfeiture ‘It is my understanding that counsel for J-M has inquired about the extent of my prior connections with Sheppard Mullin, or its counsel, Gibson, Dunn & Crutcher. The answerto that inquiry is as follows: I have had no connectionsin the past with Sheppard Mullin, either as co-counsel, client or party in a case in which I was involved as an attorney or expert witness. With regard to Gibson, Dunn & Crutcher, I have been contacted by that firm about serving as an expert witness on six occasions over the past 15 years or so. In four of those instances, I agreed with the positions the firm was advancing on behalf ofits client and 1 agreed to serve as an expert witness. In the twoother cases, I did not agree with the position the firm was taking on its client’s behalf, and I declined to becomeinvolved. 171 and disgorgement. See J-M Br. at 17. Asset forth in detail in my September 30 Report, this claim profoundly misstates California law, which follows the approach of the Restatementandotherjurisdictions and does not impose draconian sanctions for good-faith violations. See L. Marshall’s Sept. 30 Report at 6-13. This is, of course, the central point in my Report: Although one might reasonably argue that Sheppard Mullin could have and should have handled things differently, one cannot, in my view,reasonably conclude that Sheppard Mullin ever acted in so egregious way as to reduce the valueof the representation to nothing. Nor can one reasonably conclude that Sheppard Mullin’s conduct wasof a nature so intentionally antithetical to the core normsofthe profession that it would be unthinkable to allow it to recoverits fees for the servicesit provided. The ideaof per se disgorgement and forfeiture upon findingof any conflict, as J-M espouses, would meanthatin each and every case in which anylawfirm is ever disqualified from a case based on a conflict, it would be required to forfeit every pennyofthe fees it had earned over the course of the representation—which often spans many years.? This is absolutely not the law. One can survey the hundredsof reported cases disqualifying law firms and notfind any evidence that such orders trigger any presumption, muchless a conclusive ruling automatically establishing, that disgorgementor forfeiture of the fees the law firm earned follows as a matterof course(as J-M suggests it does). ? Imagine how such a rule would play out in advance waiver situations. A client could first agree to a waiver in order to secure the services of a law firm it wants, but could then challenge that waiverlater with the hope of securinga full refund if a court applying the various factors deems the waiver unenforceable.It goes without saying that such a result is unthinkable. Even if a court balances the relevant factors and declines to enforce a waiver, that does not transform the law firm into some awfulrule breaker deserving of sanctions as extremeas those imposed for many intentional criminal offenses. 172 Ill. The period surroundingJ-M's decision to retain Sheppard Mullin J-M accuses Sheppard Mullin of impropriety for not alertingit, at the time J-M retained Sheppard Mullin, that the firm did periodic work for the District. J-M makes this claim even though the District had executed waivers and J-M wasto execute a waiver as well. J-M contends it would never have agreed to retain Sheppard Mullin had it known aboutthe District, because it has a hard and fast rule against ever waiving any conflicts under any circumstances. There is a grave problem in invoking any such general corporate policy in order to accuse Sheppard Mullin of breaching its ethical duties. That grave problemis thatJ-M, acting through its General Counsel) and CEO, undeniably did affirmatively agree to waive certain categories of conflicts. The conflict involving Sheppard Mullin's representation of the District was exactly in the category that J-M explicitly waived.3 That waiver, moreover, specified more than once that the conflicts being waived involved "current" and “future” Sheppard Mullin clients. It goes without saying that, having reviewed andsignedthe waiver,J- M cannotnowclaim that it has a policy against ever waiving any conflicts, much less that Sheppard Mullin knew of that policy despite the explicit written waiver. See generally Desert Outdoor Advertising v. Superior Court, 196 Cal. App. 4th 866 (2011) (client is bound by provisions of retainer agreementit signed, especially whereit was provided to another of the client’s attorneys and corrections were made to various provisions). ? Indeed, as discussed below, J-M was willing to allow Sheppard Mullin to offer the District 40 hours of free legal services as part of the effort to secure a new waiver from the District. See infra at 13-14. 173 What Sheppard Mullin knew,then,was that there wasno issuevis-a-vis J-M objecting (or being entitled to object) to Sheppard Mullin representing the District because the District matter fell squarely into the waiver J-M was set to execute. Underthese circumstances,there can benobasis for arguing that Sheppard Mullin breached any responsibility by not specifically reporting to J-M that the District (a very minor player in the quit tam suit) was a periodic Sheppard Mullin client on unrelated employment-law matters. The other point J-M advances regarding the period of retention is that Sheppard Mullin never informed Jeffrey Dinkin, the partner representing The District on employment issues, that the District's name had come up during a conflict check on the J-M matter. J-M portrays this as evidence of some improper conduct. But this characterization ignores the nature and function of advance waivers. When the District’s name cameupin the conflict check, that necessitated examining whether anypossible conflicts had been waived by theDistrict. Sheppard Mullin determined they had been. As a result, there was no need to inform Mr. Dinkin or anyone else because there was no conflict that impacted Mr. Dinkin’s representation ofthe District or Sheppard Mullin's representationof J-M (given the waiver ]-M wasto sign). In any event, whether Sheppard Mullin, as an internal law firm matter, did or did not notify Mr. Dinkin (who played no role in the representation ofJ-M) has nothing to do with any duties Sheppard Mullin owedtoJ- M.4 4 J-M makesseveral arguments throughoutits Brief about Sheppard Mullin’s treatmentofthe District as a Client. As indicated in the text, those questions have no bearing one way orthe other on J-M’s claims for disgorgementandfee forfeiture. It is important to note, though, the deep problem with J- 174 So too, when J-M argues that the point of a conflict check is to inform the client, J-M is only half right. The point of the conflict check is to inform the clientif, upon inquiry, a conflict is spotted. If no conflict is identified, or if any possible conflict has been waived, there is no issue about whichto inform client. IV. The period betweenthe time the District informed Sheppard Mullin of its concernsandthe time Sheppard Mullin discussedthe issue with J-M. J-M argues that Sheppard Mullin also acted improperly during the period between March 4, 2011 and April 19, 2011, when, withoutfirst notifying J-M, Sheppard Mullin conferred with the District in order to allay the concerns the District had expressed about a conflict of interest. It was during this period that Sheppard Mullin reminded the District of the advance waiver to which it had agreed. Sheppard Mullin then had multiple conversations with the District in an effort to have the District understand that no conflict existed. Although Sheppard Mullin considered it clear from the District’s waiver that there was no impediment to representing J-M, Sheppard Mullin nonetheless made efforts to relax the District's lawyersby instituting a wall screening off any of the Los Angeles lawyers working on the J-M matter from the lawyer in Santa Barbara whoperiodically advised the District on employmentmatters. M’s suggestion that Sheppard Mullin “threw” the District "under the bus," when it fought the District's disqualification motion. To be sure,it is always unfortunate when client andits law firm are engaged in a dispute over disqualification. Butit is decidedly not the law that every time a client requests that a firm disqualify itself, that firm’s duty ofloyalty requires it to fold up its tent and acquiesce. Werethat the case, anyclient could secureits firm's disqualification simply by whispering the word. Litigating over a client's demandfor disqualification is by no means "throwing the client underthe bus." Nor did Sheppard Mullin breach anyduty to the District when,ina pleadingfiled with Judge Wu,it included the possibility of not representing the District as one of the many possible solutionsfor the judge and parties to consider. 175 There was, in my view, no ethical breach in Sheppard Mullin's having engaged in these conversations without involving J-M. As explained in my September30 Report, it was entirely reasonable for Sheppard Mullin to assume the validity of the advance waiver with the District and, for that reason, to assumethat the District would eventually concedeit had no grounds to complain. And the screen thatJ-M putinto place to increase theDistrict’s comfort level had no impact at all on anything to do with Sheppard Mullin’s representation of J-M. The key hereis that once it becameclear to Sheppard Mullin on April 19 that the District would, in fact, be moving forward to seek disqualification, Sheppard Mullin informed J-M the very next day. Examining the correspondence between Sheppard Mullin and theDistrict’s lawyers confirmsthat it did not becomeclear until April 19 that the District would actually file a motion to disqualify Sheppard Mullin. The original March 4 letter from Stuart Rennert simply asked for an explanation as to why noconflict existed. Sheppard Mullin responded on March 11,letting Mr. Rennert knowthatthe District had executed a waiver, and also reporting that an ethical wall had been set up to allay any conceivable concerns. Mr. Rennert responded on March17 asking for more information about Sheppard Mullin’s representation of J-M andthe ethical wall. At this point, there was still no suggestion of any planned judicial action to seek Sheppard Mullin’s disqualification. On March 24, Sheppard Mullin responded, by referencing the District’s waiver once again and describingtheethical wall, whichit made clear was “not required.” The next response on behalf of the District was from a different lawyer, Brent Rushforth, on April 11. Mr. Rushforth asked for a “meet and 176 confer” because the District was “contemplating”filing a disqualification motion. It wasonly at that “meet and confer” on April 19 that the District’s lawyer (for the very first time) revealed his intention to file for Sheppard Mullin’s disqualification. Upon learning that information, Sheppard Mullin informed J-M right away. Lawyers make judgment calls every day on whena concern rises to the magnitude of justifying or requiring consultation with the client. See generally OFFICIAL COMMENT TO CALIFORNIA RULE OF PROFESSIONAL CONDUCT 3-500 (Rule is intended to “make clear that while a client must be informed ofsignificant developments in the matter, a member will not be disciplined for failing to communicate insignificant or irrelevant information.”); CALIFORNIA BUSINESS & PROFESSIONS CODE § 6068(m) (lawyer is to keep client “reasonably informed of significant developments”); RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS § 20, Commentb. (“Tothe extentthatthe parties have not otherwise agreed, a standard of reasonablenessunderall the circumstances determines the appropriate measure of consultation.”) Sadly, the practice of law often entails communications from opponents and others in which they complain about lawyers’ conduct, whether by alleging conflicts of interest, discovery violations, or other potentially sanctionable conduct. In the overwhelming majority of such instances, the issue goes away when the lawyer provides the complaining party with an explanation, or when tempers calm. There is no rule to my knowledgethat requires a lawyerto contact the client every time such statementsor inquiries (or even threats) are made—and any such requirement would be wholly unworkable. Here, Sheppard Mullin achieved a reasonable balance: It tried, without involving J-M, to show the District that there 177 was no unwaivedconflict. Once it becameclear that this wasnoidle threat and that, even after both Mr. Rennnert and Mr. Rushforth were fully informed about the waiver, the District would be filing a disqualification motion, Sheppard Mullin immediately brought J-M into the discussions, Significantly, J-M does not appearto allege that it experienced any sort of injury or prejudice from not learning of Sheppard Mullin’s early efforts to derail any concern of a conflict. Once the Motion to Disqualify wasfiled, J-M fought it and worked to retain Sheppard Mullin as its counsel. There is no indication it would haveacted differently in the slightest had it known oftheDistrict’s inquiry in March, as opposedto April. It is far from clear, then, exactly how Sheppard Mullin's delay in informingJ-M adversely affected J-M in any way. Thatfact drives home theextentto which this wasnot anissue that required immediate client consultation. It is my view,then, that Sheppard Mullin did nothing improperin this regard. Even were one to differ with that conclusion, though, it seems unfathomable to conclude that the timing of Sheppard Mullin’s telling J-M about the District’s inquiries could giverise to forfeiture of more of $4 million in fees. Vv. The period between when the District filed its disqualification motion and when Sheppard Mullin’s representation of J-M ended. The crux of J-M’s claims about the period following the District’s filing the disqualification motion is that Sheppard Mullin acted improperly when, without advising J-M to retain it own independent counsel, Sheppard Mullin brought in attorney Kevin Rosen onJuly 5, 2011 to help argue for Sheppard Mullin at the July 7, 2011 hearing before Judge Wuon possible alternatives to disqualification. J-M does not claim there was anything improper about Sheppard Mullin bringingin its own 178 counsel on this matter.5 Nor doesJ-M claim it was ever confused aboutthefact that Mr. Rosen was appearing onits behalf, not on Sheppard Mullin's behalf. And J-M doesnot contendit was problematic for Sheppard Mullin to use any toolit could in the effort to help the firm and J-M achieve their mutualgoalof enabling J-M to be represented by Sheppard Mullin in the qui tam action. Rather, J-M's claim involves Sheppard Mullin not having advisedit explicitly to secure independent lega! advice.é This argumentignores onevital fact: J-M did have independent counselatall times. The law is clear that an in-house General Counsel is every bit as much a lawyer for the client as is counsel retained from the outside. As the California Supreme Courthasheld: A corporation represented by in-house counsel is in an agency relationship,ie., it has hired an attorney to provideprofessional legal services on its behalf. * * * The fact that in-house counsel is employed 5 At twopoints in its Brief, J-M speculates that, Sheppard Mullin "likely hired” Mr. Rosenat that time in order to help Sheppard Mullin defend against a potential malpractice action by J-M, and that Sheppard Mullin then proceeded to make decisionsin its own interest, rather than in the interests of J-M. J-M Br. at 2, 11. J-M suggests also that it was with this goal in mind that (even before Mr. Rosen becameinvolved) Sheppard Mullin secured a declaration from Ms. Eng aboutJ-M’s ongoing desire to go forward with Sheppard Mullin asJ-M’s counsel), From a legal standpoint, thereis no question thata conflict would exist were a lawyer to stop worrying abouthis client's best interests, and, to the client’s detriment, worry instead about his own. From a factual standpoint, though, there is nothing in J-M's filing that provides any support for an allegation that this occurred here. As J-M acknowledges, Mr. Rosen was brought in ontheeveofthe final hearing (following Judge Wu’s June 6 ruling and after the completionofall the briefing), a time in which J-M was aggressively supporting efforts to convince Judge Wuto allow J-M to go forward with Sheppard Mullin as its counsel. At that time,the interest of the firm and J-M (as established by its General Counsel—an experienced and sophisticated attorney) were aligned. It was only later, when J-M opted to decline the bifurcation proposal, terminate Sheppard Mullin, and begin to threaten Sheppard Mullin, that the interests of the two diverged. Once that happened,there is no suggestion that Sheppard Mullin was barred from working with Mr. Rosenat thatpoint. * The declarations of Charles Kreindler and Brian Daly state that they also explicitly invited Ms. Eng to consult with independent counsel. This, of course, further negates the claim that J-M is making.In forming my opinion, however, ] have not relied on any such conversations. Rather, the fact that Ms. Eng was representing J-M in the matter conclusively establishes that J-M was represented by independentcounsel. 10 179 by the corporation does not alter the fact of representation by an independentthird party. PLCM Groupv. Drexler, 22 Cal. 4th 511, 517 (2000). See also Restatement § 122 Commentc.1. (in-house counsel qualifies as independent counselfor the client). In this case, J-M's independent counsel knew that Mr. Rosen had been brought in as counsel for Sheppard Mullin to advance the interests that the firm shared with J-M (as defined by J-M’s in-house counsel): Allowing Sheppard Mullin to continue representing J-M in the qui tam action. J-M portrays the situation as it being an innocent, uninformed novice without capacity to have made a decision on whetherto sever with Sheppard Mullin or whetherto fight together with Sheppard Mullin for Sheppard Mullin to remain in the case. But this depiction thoroughly ignores the vital role that J-M's own lawyer (and General Counsel) was playing throughout andthe law’s treatmentofthat in-house counselas independentcounsel looking outfor J-M’s interests. This depiction also ignores the fact that the office of General Counsel is uniquely experienced and sophisticated in managing relationships with outside firms. And it ignores the fact that J-M founditself quite capable, when it chose, to secure the advice of two outside law firms and to terminate its relationship with Sheppard Mullin. J-M also voices concerns with several other aspects of Sheppard Mullin's handling of the disqualification issue. For example, it seems to complain that in April and May 2011 communications with J-M, Mr. Kreindler characterized the District’s concernsas a “tactical ploy," and predicted that its motion to disqualify would be denied. It is my opinion that there is nothing ethically troubling about those 11 180 characterizations. Indeed, had I been consulted by Sheppard Mullin at the time, I would have similarly concluded that the waiver with the District was valid and would be upheld.See L. Marshall September 30 Report at 21-35. In addition,J-M claims that Sheppard Mullin's July 2011 advice to J-M on the issue of severing the District from the trial is further evidence of impropriety. According to J-M, when thatidea first arose in early June, Sheppard Mullin advised J- M that it was not the preferred mannerofdealing with the disqualification issue, but that other choices (specifically, trying to provide consideration to the District in return for a waiver) were better. Yet, in early July, after the effort to secure the District's waiver had failed, and after Judge Wu had ruled that severance (sometimesreferred to as bifurcation) was the only way to avoid disqualification, Sheppard Mullin advised J-M that there was no downside to proceeding that way.J- M implies that this change of view is indicative of Sheppard Mullin's putting its interests ahead of J-M's. Again, it goes without saying, that were there any evidence that a law firm advised a client with the goal of promoting the lawfirm's interests to the client’s detriment, that would bea seriousethical breach. Butthere is nothing, in my view, about the fact pattern J-M describes that raises any hint of that having happened. From every indication, J-M and Sheppard Mullin shared the goal of proceeding with the representation. In June, when there were an array of possible approachesto effectuate that goal, it made sense for Sheppard Mullin to rank them and talk about which were morepreferred and less preferred. At that point, as indicated in June 7 e-mail from Mr. Kreindler to Ms. Eng, Sheppard Mullin advised 12 181 that the best of the four proposed approaches wasto seek to secure a waiver from the District. Mr. Kreindler then stated that one of the other four alternatives—what they called “bifurcation”—“would be fine with us” One of the other options was “off ‘the table,” and the other was“a possibility if all else fails, but there is a relatively small chance of success.” Based on that ranking, Sheppard Mullin approached the District and offered it value in return for a new waiver.Thateffort to pursue the “preferred” method failed. A month later, Judge Wu then narrowedthe available optionsto just one. At that point, there was no longer a question of ranking options from most-preferred to least-preferred—the only possible option was the one Sheppard Mullin had said at the outset would be “fine with us.” Sheppard Mullin's advice in July, therefore, that the severance approach had no downsideis entirely consistent with theits earlier advice and is hardly indicative of any motive other than the continuing one of seeking to effectuate J-M's desire to go forward with Sheppard Mullinasits counsel. Finally, J-M attacks Sheppard Mullin for having offered during June and early July to pay the District for a waiver of the conflict. These offers included cash payments and an offer that Sheppard Mullin would provide the District with up to 40 hoursoffree labor andemployment-law advice and services. Accordingto J-M,it was never told that Sheppard Mullin was offering to represent the District on unrelated matterand, had it known, it would never have agreed. With regard to this claim, I have reviewed a June 7, 2011 e-mail in which Mr. Kreindler reports to Ms. Eng that Sheppard Mullin would be contacting the District to make an offer that “would take the form of cash, somefree labor law advice going forward, as well as 13 182 an offer to use separate counsel to perform any discovery tasks (or trial work) that is directed specifically toward the District (at Sheppard Mullin's expense). We plan on making the offer immediately." Given that communication, it is difficult to understandJ-M's claim that it was never told about the offer and would never had agreed had it been told. But even had these exact terms of the offer not been conveyed, that would not have established any ethical breach. Consistent with the advance waiverJ-M had executed (and had nevercalled into question at that point), J-M was obviously willing to waive any conflict associated with Sheppard Mullin continuing to do unrelated work for the District. The suggestion that theoffer of free legal services to the District was a material fact that Sheppard Mullin had to communicate to J-M has noforce under these circumstances. As indicated, though, this question is quite theoretical, given the clear evidence that the information was, in fact, communicated. As with the other time periods, I see no evidence of impropriety here and certainly nothing that can come close to egregious misconduct to justify disgorgementorfee forfeiture. V. Conclusions For the reasons discussed in this Supplemental Report, and the ReportI submitted on September 30, 2013, it is my view that Sheppard Mullin violated no ethical principles and committed no misconductin its representation ofthe District. More essentially, for purposes of this proceeding, it is very obvious to me that Sheppard Mullin wasnot guilty of any willful, egregious misconductofthe sort that would justify disgorgementorfee forfeiture. 14 183 AFFIRMATION I confirm that, insofar as the facts stated in my Supplemental Report are within my own knowledge, I have madeclear which they are andI believe them to be true. I also confirm that the opinions I have expressed represent my true and complete professional opinion and are intendedto assist the Panel in resolving the parties’ dispute. Cra oC.|) October 25, 2013 Lawrence C. Marshall 15 184 Exhibit I 28 Gibson, Dunn & Crutcher LLP GIBSON, DUNN & CRUTCHER LLP KEVIN S. ROSEN, SBN 133304 krosen@gibsondunn.com HEATHER L. RICHARDSON,SBN 246517 hrichardson@gibsondunn.com 333 South Grand Avenue Los Angeles, CA 90071-3197 Telephone: 213.229.7000 Facsimile: 213.229.7520 Attorneys for Claimant and Cross-Respondent, Sheppard, Mullin, Richter & Hampton, LLP IN THE ARBITRATION BEFORE JAMS SHEPPARD, MULLIN, RICHTER & REF. NO. 1220045609 HAMPTONLLP, Arbitrators: Hon. Gary L. Taylor (Ret.) Claimant and Cross- Hon. Charles S. Vogel (Ret.) Respondent, James W. Colbert, IIT Esq. v. SUPPLEMENTAL DECLARATIONOFD. RONALD RYLAND J-M MANUFACTURING COMPANY,INC., D/B/A/ JM EAGLE, Respondentand Cross- Claimant. SUPPLEMENTAL DECLARATIONOF D. RONALD RYLAND 185 ta d 24 25 26 27 28 Gibson, Dunn & Crutcher LLP I, D. Ronald Ryland, declare as follows: }, I am the General Counsel of Sheppard, Mullin, Richter & Hampton LLP (“Sheppard Mullin” or the “Firm”). [am submitting this Supplemental Declaration in responseto arguments and issues raised by J-M Manufacturing Company,Inc. (“J-M”) in its Opening Brief and supporting declarations. If called as a witness, I could and would testify based on personal knowledgeas set forth herein. The terminology I use in this Supplemental Declaration follows both the terminology I used in myinitial Declaration and the terminology that was used in Sheppard Mullin’s Opening Brief to this Panel. 2. I have reviewed J-M’s OpeningBrief and the Declarations of Camilla M. Eng and K. Luan Tran, as well as all of the documents that accompanied J-M’s submission. In addition, in connection with preparing this Supplemental Declaration, I reviewed again the Declaration I executed that was submitted with Sheppard Mullin’s Opening Brief, as well as the Declarations of Bryan Daly, Charles Kreindler, and Jeffrey Dinkin that were submittedat that time as well. I hereby reaffirm whatI stated in my Declaration. | therefore will not repeat what I said there, some of whichis directly applicable and responsive to much of J-M’s argumentin its submission. The focusofthis Supplemental Declaration is simply to respond to some of what J-M hasstated. 3, 1 would like to begin by telling the Pane! something with as much conviction as J can convey in a written declaration where I am fully and consciously aware that 1 am under oath—an oath that I take very seriously. T absolutely did not “conceal” anything from J-M nor anyoneelse in connection with the Firm’s retention by J-M to handle the Qui Tam Action. There was no conspiracy or “scheme.” In March 2010, I understood that J-M was comfortable with, agreed to, and was prepared to sign, an enforceable advance waiver involving both “current” and “former”clients adverse to J-M so long asthe substanceoftheir matter was not substantially related to Sheppard Mullin’s work for J-M. It was (andis) clear to me that neither the labor arbitration that Mr. Dinkin had done 5 monthsearlier for South Tahoe, nor any future labor advice that Mr. Dinkin might provide, was substantially (or even marginally) related to the Qui Tam Action. As I have stated before, | knew South Tahoehad validly waived conflicts with other clients of Sheppard Mullin (including a waiverofthe duty of loyalty), a waiverthat 1 considered to be fully enforceable based on ] SUPPLEMENTAL DECLARATION OF D. RONALD RYLAND 186 O l - Ww W m o O o O o N N W N 1 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Gibson. Dunn & Crutcher LLP my experience and knowledgeofthe law. | also understood that there was no confidential information about J-M that was relevant to any labor work that Mr. Dinkin might do from a different Sheppard Mullin office (Santa Barbara) for South Tahoe. That was mygoodfaith judgment. I saw this as a classic situation for advance waivers because South Tahoe’s involvementin the Qui Tam Action as one of two hundred realparties in interest had nothing to do with the modest employment matters Mr. Dinkin had handled. Accordingly, my judgment wasthatthere was no conflict that affected Mr. Daly’s ability to represent J-M in the Qui Tam Action, and that there was nothing to disclose to J-M. For these same reasons, J-M’s suggestion that I “chose not to say anything” to Mr. Dinkin andthat I “concealed the conflict match”from Mr. Dinkin is also untrue. Based onthese facts, as with J-M, in my mind there was nothingto tell Mr. Dinkin. 4, I disagree with J-M’s suggestion on page 20 ofits brief that Sheppard Mullin opted to “throw [South Tahoe] under the busto save its own skin.” That is not how I viewed things for three basic reasons. First, whether Sheppard Mullin would handle any future matter for South Tahoeif asked was notpresented as afait accompli. | understood that when South Tahoefiledits disqualification motion, there was no pending matter that Mr. Dinkin was handling for South Tahoe, as paragraphs 14 and 15 of his Declaration in this Arbitration confirm. In that context, Sheppard Mullin stated in the opposition to the disqualification motion (Ex. 21! to Mr. Tran’s Declaration at page 24) that “if the Court believesit is necessary, Sheppard Mullin could terminate the agreement.” (emphasis added.)' Similarly, when South Tahoe approached Mr. Dinkin on May 12, 2011 about some employment advice, he noted the pending disqualification motion and deferred action pending its outcome. See Dinkin Declaration in this Arbitration, {15 & Ex. D. Second, South Tahoehad filed a disqualification motion in the Qui Tam Action, effectively renouncing the advance waiversit had signed and claiming that Sheppard Mullin was in violation of the Rules of Professional Conduct. ' [ understoodthatthe engagement agreements with South Tahoe expressly allowed either party to terminate the relationship. See Exhibits B and C to Mr. Dinkin’s Declaration and myinitial Declaration, especially paragraph 5 of Exhibit C. I also understood that this was Mr. Dinkin’s viewof those agreements, as he indicated in paragraphs8 and 9 of his Declaration in this Arbitration and in paragraph 11 of his Declaration submitted with the disqualification motion, which is attached as Exhibit 3 to the Declaration of K. Luan Tran submitted in this Arbitration by J-M. 2 SUPPLEMENTAL DECLARATION OF D. RONALD RYLAND 187 H S Y N D B A B P W H H Q o © 1 1 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Gibson, Dunn & Crutcher LLP Therefore, absent some mutual agreement, it was apparent to meatthat time that Sheppard Mullin would notlikely be doing new work for South Tahoe. Third, I understood that South Tahoe had outside general counsel who had handled labor work on its behalf—the Brownstein law firm-——which remained available to advise South Tahoe, as paragraph 3 of Mr. Dinkin’s Declaration in this Arbitration confirms. 5, On June 30, 2010, afterall of the briefing and supplemental briefing regarding South Tahoe’s disqualification had been completed, and affer I had attended the June 6 hearing before Judge Wu,I contacted Kevin Rosen at Gibson, Dunn & Crutcher LLPfor the sole purpose of assisting Sheppard Mullin with the July 7 hearing. I did so because [ knewthat I would be unable to participate in that hearing due to a scheduling problem, and South Tahoe’s counsel had declined to agree to a continuance. I did not retain Mr. Rosen to advise Sheppard Mullin in connection with any potential claims by J-M. I was not even contemplating any such claims. And to be clear, Mr. Rosen was hired by Sheppard Mullin only, and only to act on behalf of Sheppard Mullin, just as I had done at the June 6 hearing. | note that J-M’s brief acknowledgesthis at page 11, as docs Ms. Eng’s Declaration at paragraph 22 (both acknowledging that Sheppard Mullin “retained Kevin Rosen of Gibson Dunnto represent Sheppard at the July 7 hearing). | also note that Mr. Kreindler introduced Mr. Rosento Judge Wuatthe July 7 hearing as “specially appearing on behalf of Sheppard, Mullin for purposes of the disqualification motion .. .” as page 6 ofthe transcript of that hearing (Exhibit FFFto Mr. Kreindler’s Declaration) provides. Mr. Rosenalso referred to himself that way when he addressed Judge Wu,as page19 ofthat transcript confirms. It is simply not true that Mr. Rosen was hired because | or anyoneelse at Sheppard Mullin “was concerned aboutgetting sued by JM for malpractice and ethical breaches”or that he washired “to protect” Sheppard Mullin “against JM,”J- M’s unsupported statementto that effect notwithstanding. | declare under penalty of perjury underthe lawsofthe State of California that the foregoing is true and correct, and that this Declaration was executed on October 23, 2013 at cnicage, Illinois. SQ \ \ caeoe ReWN D. Ronald Ryland.“ SUPPLEMENTAL DECLARATION OF D. RONALD RYLAND 188 CERTIFICATE OF SERVICE I, Teresa Motichka, declare as follows: I am employed in the County of San Francisco, State of California, I am overthe age of eighteen years and am nota party to this action; my business address is 555 Mission Street, San Francisco, CA 94105-0921, in said County and State. On June 27, 2016, I served the following document(s): PLAINTIFF-RESPONDENT’S MOTION FOR JUDICIAL NOTICE; MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT THEREOF; DECLARATIONOF KEVIN S. ROSEN on the parties stated below, by the following meansofservice: SEE ATTACHED SERVICE LIST Unless otherwise noted on the attached Service List, BY MAIL: | placed a true copy in a sealed envelope or package addressed as indicated above, on the above-mentioned date, and placed the envelopefor collection and mailing, following our ordinary business practices. I am readily familiar with this firm’s practice for collecting and processing correspondence for mailing. On the same day that correspondenceis placed for collection and mailing, it is deposited with theU.S. Postal Service in the ordinary course of business in a sealed envelope with postage fully prepaid. I am aware that on motion of party served, service is presumedinvalid if postal cancellation date or postage meter date is more than one day after date of deposit for mailing set forth in this declaration. I declare under penalty of perjury under the laws of the State of California that the foregoingis true and correct. Executed on June 27, 2016, at San Francisco, California. Teresa Motichka SERVICE LIST Kent L. Richland Barbara W. Ravitz Jeffrey E. Raskin Greines, Martin, Stein & Richland LLP 5900 Wilshire Boulevard, 12th Floor Los Angeles, California 90036 Attorneysfor Defendant and Appellant J-M Manufacturing Co., Inc. Office of the Clerk of Court Los Angeles Superior Court 111 North Hill Street Los Angeles, CA 90012 Office of the Clerk of Court Court of Appeal Second Appellate District, Division Four 300 South Spring Street Los Angeles, CA 90013