Flanges don’t get a lot of glory.
They’re one of those industrial parts I’ve vaguely heard of, but probably couldn’t pick out in a lineup of, say, gaskets, washers and fittings.
Which is why I did a double-take when I saw flanges were the subject of a new $31 million jury verdict for false advertising and unfair competition. There are flange ads? Did I miss the Super Bowl spot?
It turns out, flanges—which can range in diameter from half an inch to more than eight feet and are used to connect pipes, valves, pumps and other equipment in oil and gas pipelines—are really important.
In a pipeline, a flange’s “integrity and compliance with stated specifications can mean the difference between a well-functioning system and a catastrophic failure,” wrote lawyers from Norton Rose Fulbright on behalf of flange makers Boltex Manufacturing and Weldbend Corp. in a 2017 suit filed in the Southern District of Texas.
Along with co-counsel from Mayer Brown, they sued Ulma Piping, a Spain-based flange maker represented by Dechert partners Andrew Levander (named a Litigator of the Year by The American Lawyer in 2017) and Hector Gonzalez, the chair of Dechert’s global litigation practice.
Boltex and Weldbend alleged that the defendants “undersell and unfairly compete with plaintiffs by advertising their flanges as ‘normalized,’ when they are not.”
Normalization, I’ve now learned, is a big deal in the flange world. It’s an industrial heat treatment process that results in a “steel with a more fine-grained homogeneous microstructure and more predictable properties and machinability.” But it also makes the product more expensive.
When U.S.-based Boltex and Weldbend saw Ulma offering bargain-priced “normalized” flanges, they got suspicious.
“Something didn’t add up,” said Norton Rose partner Saul Perloff. After all, Ulma is based in Europe, not Asia. “The steel and labor and energy costs are all about the same” as in the U.S., Perloff noted. How could Ulma be selling normalized flanges so cheaply?
Based on this “seed of suspicion,” Perloff said his clients bought some of Ulma’s so-called normalized flanges.
They cut them open and had them examined under an electron microscope. Their conclusion: The flanges were not in fact normalized per industry standards and specifications.
“By avoiding the normalization step (and the associated expense), but nonetheless falsely and misleadingly describing their flanges as normalized, defendants can sell their products at a lower price than can plaintiffs,” the domestic flange makers alleged.
In court papers, Ulma countered that it uses a proprietary method of heat treatment that’s equivalent to normalization, and that all of its flanges “meet both clients’ and [industry standard] specifications.”
But the plaintiffs argued that wasn’t good enough. They questioned whether customers would have bought Ulma’s “normalized” flanges if they had known they were manufactured using an alternative method rather than the one laid out by the American Society of Testing and Materials to ensure uniformity in the industry.
The case went to trial on Sept. 16 in Houston federal court, with U.S. District Judge Andrew Hanen presiding.
Mayer Brown’s Zarlenga said the plaintiffs had two main themes. The first, hammered home mainly by co-counsel Perloff, was that Ulma did not perform the specific heat treatments required by industry standards to label its flanges as normalized—but nonetheless marketed and advertised them as being compliant.
The second, which Zarlenga stressed, was that after Boltex and Weldbend filed the suit, “Ulma faced a moment of truth.” The company had all the information it needed on hand, he alleged, to answer the question of whether or not it had performed the industry-standard normalization treatment.
Ulma’s response, Zarlenga said, “was to send a letter from the CEO to all customers denying everything. I shoved that letter down their throat as far as it would go.”
After a nine-day trial, the jury sided with Boltex and Weldbend on every question, concluding that Ulma falsely advertised its flanges and engaged in unfair competition.
Norton Rose’s trial team also included partner Marc Collier and counsel Kathy Grant and Bob Rouder, with additional support from Minneapolis senior counsel Leaf McGregor and Andre Hanson, Austin senior associate Nathan Damweber, as well as Houston associate Andrea Shannon.
At Mayer Brown, Zarlenga was assisted by associate Michael Lindinger.
The $31 million award is a special verdict, so the judge has extra time to evaluate it before it becomes final.
The bulk of the penalty—$26 million—is disgorgement of profits, which could be an issue.
Levander declined comment, but a spokesman for Ulma pointed to language in the Fifth Circuit’s decision in Retractable Technologies, Incorporated v. Becton Dickinson & Co. that might make the award vulnerable.
The appeals court held that in “many cases, disgorgement will not be equitable where few or no sales were ever diverted from the plaintiff to the defendant, because disgorgement in such contexts would grant the plaintiff an unjustified ‘windfall.’”
As for the customers who bought Ulma’s flanges, it’s not clear whether they’ll feel compelled to replace the parts—so far, they don’t seem inclined to do so, but it’s not what you’d call an easy fix—or will take legal action of their own.
Then again, if there was another a Deepwater Horizon-style disaster, how would it look if it came out that the flanges were manufactured using an alternative process?
In other words, this case may not be over yet.
Reprinted with permission from the October 1, 2019 edition of Litigation Daily © 2019 ALM Properties, Inc. All rights reserved. Further duplication without permission is prohibited.