A Japanese textile company that’s potentially on the hook for hundreds of millions of dollars in a fraud suit is vigorously fighting the U.S. Justice Department and a whistleblower, setting up the potential for a rare trial under the False Claims Act.
DOJ consumer protection lawyers and the attorneys for Toyobo Co. Ltd., represented by a team from Weil, Gotshal & Manges, said in court papers filed in Washington this month that there has been no discussion about a settlement of claims rooted in the manufacture of the synthetic fiber Zylon for use in body armor.
Government lawyers contend Toyobo knew that Zylon, which had 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. Toyobo appears headed for trial in a case the company has fought for eight years.
"Our client strongly believes in its product," Weil products liability partner Konrad Cailteux said. "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 DOJ 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 DOJ 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 said, 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 said. "We are three removed from the entities that designed, manufactured and sold the product the government alleges was faulty."
Toyobo’s legal team and DOJ lawyers said on March 1 in a 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. No trial date has been set.
Stephen Kohn of the Washington firm Kohn, Kohn & Colapinto, which represents the whistleblower in the action against Toyobo, said the case highlights DOJ’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 said. "It’s not just about the vendor who sells the defective product. It’s about the company that manufactured the underlying material."
THEORIES OF LIABILITY
Toyobo supplied synthetic fiber to Michigan-based bullet-resistant vest manufacturer Second Chance Body Armor Inc., which filed for bankruptcy in 2004 amid a flood of litigation over allegedly defective vests. The company conceded liability to more than $300 million, Kohn said. In 2005, DOJ intervened in Second Chance whistleblower Aaron Westrick’s suit in U.S. District Court for the District of Columbia.
The government’s chief allegation is that Toyobo knew about "significant manufacturing and degradation problems" stemming from exposure to high heat and humidity. Second Chance sold tens of thousands of Zylon-made vests to law enforcement agencies — including the federal government — between 1998 and 2004.
Toyobo, a foreign manufacturer, however didn’t sell any raw materials to the United States. The evidence, Cailteux said, "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."
Whistleblower lawyers said it’s rare for a company to defend a whistleblower suit after DOJ 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 whistleblower’s complaint.
DOJ lawyers continue "to advocate novel recovery theories — pushing the envelope past the statute’s historic roots," the Gibson report said. "Theories of FCA liability continue to expand, as the DOJ selectively and surgically seeks test cases through which to envelop the entire government contracting process — from bid through performance."
Whistleblower lawyer Robert Vogel of Washington’s Vogel, Slade & Goldstein said Toyobo can be found liable if it caused Second Chance to submit false claims to the government in contracts for body armor. "What did they know about what the government was buying and what did they tell the people they were selling to?" Vogel said.
The risk for Toyobo at trial, Kohn said, goes beyond any potential damages. "At the end of the day Toyobo will be hit three times — they will lose and pay all that money; they’ve paid a fortune in attorney fees; and their reputation will be tarnished."
Mike Scarcella can be contacted at firstname.lastname@example.org.