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United States ex rel. Osmose, Inc. v. Chemical Specialties, Inc.

United States District Court, W.D. New York

January 22, 2014

THE UNITED STATES OF AMERICA, ex rel. OSMOSE, INC., Plaintiff,
v.
CHEMICAL SPECIALTIES, INC., and VIANCE, LLC, Defendants

Decided: January 19, 2014.

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[Copyrighted Material Omitted]

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For The United States of America, ex rel. Osmose, Inc., Plaintiff: Daniel C. Oliverio, John Leonard Sinatra, Jr., Joseph V. Sedita, LEAD ATTORNEYS, Hodgson Russ LLP, Buffalo, NY; Gretchen L. Wylegala, LEAD ATTORNEY, U.S. Attorney's Office, Buffalo, NY; Jonathan K. Tycko, LEAD ATTORNEY, Andrea R. Gold, PRO HAC VICE, Tycko & Zavareei LLP, Washington, DC.

For Chemical Specialties, Inc., Defendant: James P. Nonkes, LEAD ATTORNEY, Harris Beach PLLC, Pittsford, NY; Terrance P. Flynn, LEAD ATTORNEY, Harris Beach LLP, Buffalo, NY; Joseph D. West, PRO HAC VICE, Samuel Everett Dewey, Gibson, Dunn & Crutcher LLP, Washington, DC; Peter S. Modlin, PRO HAC VICE, Gibson, Dunn & Crutcher, LLP (SF CA), San Francisco, CA.

For Viance, LLC, Defendant: James P. Nonkes, LEAD ATTORNEY, Harris Beach PLLC, Pittsford, NY; Joseph D. West, Samuel Everett Dewey, LEAD ATTORNEYS, PRO HAC VICE, Gibson, Dunn & Crutcher LLP, Washington, DC; Peter S. Modlin, LEAD ATTORNEY, PRO HAC VICE, Gibson, Dunn & Crutcher, LLP (SF CA), San Francisco, CA; Terrance P. Flynn, LEAD ATTORNEY, Harris Beach LLP, Buffalo, NY.

OPINION

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DECISION AND ORDER

WILLIAM M. SKRETNY, Chief United States District Judge.

I. INTRODUCTION

Relator Osmose, Inc., filed this qui tam action on behalf of the United States in May 2009, alleging violations of the False Claims Act (" FCA" [1]), 31 U.S.C. § 3729, et seq . Osmose asserts that Defendants Chemical Specialties, Inc., and Viance, LLC, have violated the FCA by knowingly selling a defective fire retardant chemical formula to wood treating companies, thereby causing these companies to present fraudulent claims for payment to the United States for the purchase of fire retardant treated wood and plywood products. Defendants move this Court to dismiss the Second Amended Complaint pursuant to section 12(b)(6) of the Federal Rules of Civil Procedure. For the reasons that follow, Defendants' motion is granted in its entirety.

II. BACKGROUND

As alleged in the Second Amended Complaint, Defendant Chemical Specialties, Inc. (" CSI" ), is a leading supplier of chemicals for treating wood. (Sec. Amend. Compl. ¶ ¶ 18-19, Docket No. 46.) In October 2006, CSI and the Rohm and Haas Company[2] entered into a joint venture agreement for the purpose of, among other things, manufacturing and selling fire retardant chemical formula and process for wood treatment. (Id. ¶ ¶ 2, 19-20.) That joint venture was formed as Viance LLC. (Id. ¶ ¶ 20.) Defendant Viance is, as relevant, a manufacturer of D-Blaze®, a chemical and treatment process for creating fire retardant treated wood (" FRTW" ) and fire retardant treated plywood (" FRTP" ). (Id. ¶ ¶ 2-3, 8.) As the manufacturer, Viance would obtain the necessary code approvals and evaluation reports, such as testing samples of its FRTW or FRTP products at Underwriters Laboratory (" UL" ) to confirm that the samples meet fire retardant standards. (Id. ¶ ¶ 8, 51-53.) Successful testing results in the manufacturer's right to use a

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" UL" stamp or mark, which is placed on each piece of code-compliant material. (Id. ¶ 54.) Wood treaters and distributors primarily use manufacturer-created literature in the sale of FRTW and FRTP products. (Id. ¶ 60.)

Defendants sell D-Blaze® to wood treaters " as a code-compliant fire retardant product." (Id. ¶ 43.) Purchasers of D-Blaze® pressure treat this wood with the liquid chemicals in accordance with manufacturers' instructions for the purpose of reducing the spread of flames and decreasing smoke development in the event of a fire. (Id. ¶ ¶ 27, 37, 43, 58.) " The amount of chemicals infused into the wood -- or the 'retention level' -- is determined by calculating the 'gauge retention' during the treatment process. The 'gauge retention' is the weight of the chemicals per cubic foot of wood, based on the total weight of chemicals retained and the total volume of wood treated. Retention levels are measured in 'pounds per cubic foot' or 'pcf.'" (Id. ¶ ¶ 34-35 (internal paragraph numbering omitted).)

As explained by Relator Osmose, the generally accepted standard for testing fire retardancy, denominated " ASTM E 84," was developed by ASTM International and is practically identical to UL's test, " UL 723." (Id. ¶ ¶ 62-70.) Compliance with these tests has been incorporated into code requirements created by the International Code Council (" ICC" ) and the United States Department of Defense. (Id. ¶ ¶ 71-85.) FRTW/FRTP chemical solutions pass these tests when the resulting treated wood has a flame spread index of 25 or less based on the initial 10-minute portion of a test; the flame does not progress more than 10.5 feet in the full 30-minute period, and the wood does not show evidence of significant progressive combustion during the 30-minute period. (Id. ¶ 76.) Chemicals solution that result in products meeting these requirements are permitted to exhibit a UL stamp that includes a designation of " FR-S." (Id. ¶ ¶ 54-55.) Further, where treated wood meets military specifications, the manufacturer may apply for the product to be included on a Department of Defense qualified product list, which is " an important marketing device for FRTW/FRTP manufacturers and suppliers." (Id. ¶ ¶ 86-87.)

D-Blaze® is available in a variety of different products. D-Blaze® fire retardant treated wood products include Douglas Fir, Southern Yellow Pine, Alpine Fir, Jack Pine, White Fir, Balsam Fir, Western Hemlock, Red Pine, Ponderosa Pine, Hem/Fir, White Spruce, Spruce-Pine-Fir, Lodgepole Pine, Red Spruce, Black Spruce, Engelmann Spruce, Basswood, and Red Oak. (Id. ¶ 45.) D-Blaze® fire retardant treated plywood products include Southern Yellow Pine (" SYP" ), Douglas Fir, and Lauan. (Id. ¶ 46.) Relator Osmose alleges that, " [a]ccording to a June 1, 2004 Legacy Report produced by the Evaluation Service of the International Code Council, UL conducted ASTM E 84 tests of D-Blaze® SYP plywood on October 29, 1984. The results of those tests were relied upon by the ICC Evaluation Service as evidence that D-Blaze® treated lumber and plywood complied with [ICC] Building Codes." (Id. ¶ ¶ 116-117.) These tests also resulted in the listing of D-Blaze® products on the Department of Defenses's Qualified Products List. (Id. ¶ ¶ 79, 119.)

" In 2007, [Relator] Osmose created a 'copycat' formula based upon the D-Blaze® patent and other publicly-available descriptions, which Osmose called FR-2." (Id. ¶ 90.) Although Defendants' specified retention level for D-Blaze® SYP plywood was 0.8 to 1.1 pcf, Osmose had UL test its copycat's compliance with the relevant standards on SYP plywood at retention levels of 1.0 and 1.5 pcf. (Id. ¶ ¶ 90-94.)

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The SYP plywood treated with the copycat formula at 1.0 pcf failed twice, but the plywood treated at a retention level of 1.5 passed. (Id. ¶ ¶ 92-96.) UL conducted additional tests on SYP plywood treated with Osmose's copycat formula in April and June of 2008. (Id. ¶ ¶ 97-100.) The treated plywood failed in tests with retention levels of 1.39 pcf and passed at 1.61 pcf. (Id. ¶ ¶ 98-102.)

In August 2008, UL commenced an investigation of D-Blaze® and informed Viance of its investigation. (Id. ¶ ¶ 121.) " Upon information and belief," UL tested samples of D-Blaze ® fire retardant treated plywood at that time, and those samples failed to comply with the certification standards reflected in the ICC and Department of Defense specification codes. (Id. ¶ ¶ 121-122.)

Relator Osmose subsequently contracted with at least two separate private companies in November 2008 and March 2009 to obtain and test additional samples of SYP plywood, and all samples tested failed to be ATSM E 84 compliant. (Id. ΒΆ ...


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