Last week the Appellate Division of the Superior Court of New Jersey dismissed a lawsuit brought by pipe-maker JM Manufacturing Co. Inc. against former JM quality assurance engineer John Hendrix and his counsel. JM had accused Hendrix and his counsel of improperly using stolen trade secrets documents and other confidential information to launch a False Claims Act (FCA) case against the company. The FCA is a federal law that imposes liability on individuals and companies who defraud governmental programs. The Superior Court refused to revive the lawsuit, finding that those claims should have been raised in California federal court with the underlying FCA claim.
The New Jersey case stems from a qui tam whistleblower suit brought by former JM employee John Hendrix in 2006. Hendrix claimed that PVC pipes used across the country will rupture much earlier than expected because JM used shoddy manufacturing processes and substandard materials to produce them. Hendrix also claimed that JM lied about the quality of its pipes and failed to ensure that they met government standards.
In November 2013, a California federal jury concluded after a seven-week trial that JM knowingly made and sold substandard plastic pipe that was later used to build water and sewer systems across the country. This first-phase jury verdict found that JM would have to pay damages to Nevada, New Mexico, Virginia and 42 cities and water districts that joined the suit. Subsequent phases of that litigation remain pending.
Three months after the verdict, JM filed a lawsuit against Hendrix and his counsel in Middlesex County Superior Court of New Jersey. JM’s claim was that Hendrix’s case was based on stolen JM trade secrets. In June 2014 the New Jersey court dismissed the action and ruled that those trade secret claims belonged in California federal court as part of the ongoing qui tam case. The New Jersey appeals court affirmed this ruling last week, finding that that JM should not be allowed to “sidestep the employee protection the FCA gives Hendrix by filing its claim in New Jersey” or use this separate proceeding to indemnify itself. The appeals court added that: “Clearly, the New Jersey litigation is being pursued to gain unfair advantage and to engage in the very forum shopping that the entire controversy doctrine is intended to avoid.” Therefore, if JM still wants to file its countersuit against Hendrix and his counsel, the company’s only option is to do so in California federal court.