ALM Properties, Inc.
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Testing Their Armor
A Japanese textile company that could be on the hook for hundreds of millions of dollars in a fraud suit is vigorously fighting the U.S. Department of Justice and a whistle-blower, setting up the potential for a rare trial under the False Claims Act.
Consumer protection lawyers from the Justice Department and attorneys for the company, Toyobo Co. Ltd., said in court papers filed in Washington in March that there have been no settlement discussions. The company appears headed for trial in a case that it has been fighting for eight years.
The dispute is rooted in the manufacture of the synthetic fiber Zylon, which is used in body armor. Government lawyers contend that Toyobo knew that Zylon, which has been used in bulletproof vests, provided less protection than company officials claimed. Body armor companies and weavers of ballistic fabrics have settled fraud claims with the government for more than $60 million.
But Toyobo, represented by a team from Weil, Gotshal & Manges, sounds ready for battle. "Our client strongly believes in its product," says Weil product liability partner Konrad Cailteux. "It would rather spend money fighting the case than pay the government a ransom to settle a case where it believes it didn't do anything wrong."
Top Justice officials called the False Claims Act "the most powerful tool that we have to deter and redress fraud," and the government last year set another record in recovering nearly $5 billion in settlements and judgments. But attorneys who represent companies contend that the department is aggressively trying to stretch legal theories to expand the reach of the law, which allows triple damages for submissions of fraudulent claims to the government.
The purpose of the False Claims Act, Cailteux says, is to allow recoveries from people who sold products under false pretenses. "The Justice Department is now going after a raw material supplier that did not warranty or certify anything to the government," he says. "We are three removed from the entities that designed, manufactured, and sold the product the government alleges was faulty."
Toyobo's legal team and Justice lawyers said in a March 1 filing in Washington federal district court that "the parties have significantly different views of the applicable law and relevant facts in this case." Toyobo failed to convince U.S. District Judge Richard Roberts to dismiss the suit. At press time no trial date had been set.
Stephen Kohn of the Washington firm Kohn, Kohn & Colapinto, which represents the whistle-blower in the action against Toyobo, says the case highlights the Justice Department's willingness to "go out and fight" beyond the pursuit of the "easiest target." The suit against Toyobo is about "accountability through the supply chain," Kohn says. "It's not just about the vendor who sells the defective product. It's about the company that manufactured the underlying material."
Toyobo supplied synthetic fiber to Second Chance Body Armor Inc., a Michigan-based manufacturer of bullet-resistant vests. Second Chance filed for bankruptcy in 2004 amid a flood of litigation over allegedly defective vests. The company conceded liability of more than $300 million, Kohn says.
In 2005 Justice intervened in Second Chance whistle-blower Aaron Westrick's suit in the U.S. District Court for the District of Columbia. Second Chance sold tens of thousands of Zylon-made vests to law enforcement agenciesincluding the federal governmentbetween 1998 and 2004. The government's chief allegation is that Toyobo knew about "significant manufacturing and degradation problems" stemming from exposure to high heat and humidity.
Its lawyers point out, however, that Toyobo didn't sell any raw materials to the United States. The evidence, Cailteux says, "will show that Toyobo never presented any false claims to the government or that it caused any false claims to be presented to the government."
Whistle-blower lawyers said that it's rare for a company to defend a whistle-blower suit after the Justice Department has intervened. A Gibson, Dunn & Crutcher report, published in January, said that more than 99 percent of the $4.9 billion recovered under the False Claims Act last year came in cases in which the government either directly filed a suit or joined a whistle-blower's complaint.
Department lawyers continue "to advocate novel recovery theoriespushing the envelope past the statute's historic roots," the Gibson report said. "Theories of FCA liability continue to expand, as the [Justice Department] selectively and surgically seeks test cases through which to envelop the entire government contracting processfrom bid through performance."
Whistle-blower lawyer Robert Vogel of Washington's Vogel, Slade & Goldstein says that Toyobo can be found liable if it caused Second Chance to submit false claims to the government in contracts for body armor. The key questions for Toyobo, says Vogel, are: "What did they know about what the government was buying, and what did they tell the people they were selling to?"
The risk for Toyobo at trial, Kohn says, extends well beyond potential damages. If they lose, "Toyobo will be hit three timesthey will lose and pay all that money; they've paid a fortune in attorney fees; and their reputation will be tarnished."
A version of this story appeared in The National Law Journal, a sibling of Corporate Counsel.