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After the Lumber Liquidators “60 Minutes” Report – Protecting Your Company From the Fallout

Gil Boyce Partner Kutak Rock LLP Gilbert.Boyce@KutakRock.com

Elise Dieterich Partner Kutak Rock LLP Elise.Dieterich@KutakRock.com

Liz Levinson Partner Kutak Rock LLP Liz.Levinson@KutakRock.com

Presented March 20, 2015

International Wood Products Association Convention

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CARB Phase 2 – What does it actually require?

►CARB = California Air Resources Board

►CARB Rules apply only in California

►The CARB Rule at issue in the Lumber

Liquidators case regulates “Formaldehyde

Emissions from Composite Wood Products”

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CARB Phase 2 – What does it actually require?

►EPA is in the process of enacting nationwide

rules, but none are in effect yet

− HUD has formaldehyde rules for manufactured

housing

− RV industry has standards for composite wood

products used in RVs

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CARB Phase 2 – What does it actually require?

►CARB Phase 2 − Sets formaldehyde emission limits for:

Hardwood Plywood (HWPW-VC and HWPW-CC)

Particle Board (PB)

Medium Density Fiberboard (MDF and Thin MDF)

− Laminate Flooring must be made with CARB-compliant core

− Laminate Flooring is subject to documentation requirements NOT

specific emission limits

− Composite wood products used in laminate must

meet emission limits

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CARB Phase 2 – What does it actually require?

►CARB Phase 2 Rules Apply to: − Manufacturers of HWPW, PB, and MDF

− Fabricators that use HWPW, PB, or MDF in Finished Goods

(including laminate flooring)

− Distributors of HWPW, PB, and MDF, and Finished Goods containing

those materials

− Importers of HWPW, PB, and MDF, and Finished Goods containing

those materials

− Retailers of HWPW, PB, and MDF, and Finished Goods containing

those materials

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CARB Phase 2 – What does it actually require?

►CARB Phase 2 Rules Says:

− “…no person shall sell, supply, offer for sale, or

manufacture for sale in California any composite

wood product which, at the time of sale or

manufacture, does not comply with the emission

standards…”

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CARB Phase 2 – What does it actually require?

►Compliance with CARB Phase 2 Rules

requires: − Manufacturers of HWPW, PB, and MDF

Must ensure their products meets the emission standards; AND

If using resins containing formaldehyde, compliance must be verified by a third party certifier (TPC) approved

by the California Air Resources Board

− Product must be labeled with: Manufacturer name

Lot or batch number

TPC number

Marking denoting compliance with CARB Phase 2

− Bill of Lading or Invoice must have: Statement of compliance with CARB Phase 2

TPC number

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CARB Phase 2 – What does it actually require?

►Compliance with CARB Phase 2 Rules

requires:

− Manufacturers of HWPW, PB, and MDF

Must keep detailed records

Must have plants inspected by TPC

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CARB Phase 2 – What does it actually require?

►Compliance with CARB Phase 2 Rules

requires:

− Fabricators that produce laminated products do

not need to comply with the manufacturer

requirements, but must source HWPW, PB, and

MDF from TPC certified manufacturers

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CARB Phase 2 – What does it actually require?

►Compliance with CARB Phase 2 Rules

requires:

− Fabricators of Finished Goods using HWPW, PB,

and MDF

Must ensure HWPW, PB, or MDF is compliant

Properly label Finished Goods

Keep detailed records

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CARB Phase 2 – What does it actually require?

►Compliance with CARB Phase 2 Rules

requires:

− Importers, Distributors, and Retailers of HWPW,

PB, and MDF and Finished Goods containing

those materials

Must take “reasonable prudent precautions” to ensure

that composite wood products comply with the CARB

Phase 2 emission standards

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CARB Phase 2 – What does it actually require?

►Compliance with CARB Phase 2 Rules

requires:

− Importers, Distributors, and Retailers of HWPW,

PB, and MDF and Finished Goods containing

those materials

Must take “reasonable prudent precautions” to ensure that

composite wood products comply with the CARB Phase 2

emission standards

Must ensure product is properly labeled

Must include statement of compliance with CARB

Phase 2 on the bill of lading or invoice

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CARB Phase 2 – What does it actually require?

►Compliance with CARB Phase 2 Rules

requires:

− “Reasonable prudent precautions” include:

Instructing suppliers that composite wood products

must comply

Obtaining written documentation from suppliers that

products comply

Keeping detailed records

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CARB Phase 2 – What does it actually require?

►Testing alone does not establish CARB

compliance!

− All of the TPC, labeling, and documentation

requirements under CARB must also be met

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Lumber Liquidators – What are the lawsuits about?

►Legal liability can arise for representing that

product is CARB compliant, but not having

the documentation to prove it

− This is true even if the product meets the

formaldehyde emission limits

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What are the lawsuits about?

►Lawsuits to date regarding the sale of non-

compliant laminate flooring allege:

− False advertising

− Unfair and deceptive business practices

− Breach of warranty

− Negligence

− Fraud

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What are the lawsuits about?

►Toxic tort claims are also a risk

− Hard to establish what is a “safe” level of

formaldehyde emissions

− Therefore, emission levels that exceed CARB

Phase 2 standards are likely to be viewed as

unsafe

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How can companies protect themselves?

►Take pro-active steps to avert or prepare for

lawsuits

− 1. Legal hold letter (advising clients to

preserve documents regarding and

communications with suppliers of product)

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How can companies protect themselves?

►Take pro-active steps to avert or prepare for

lawsuits

− 2. Message to employees advising that while

the company knows of no intentional wrongdoing,

acting in prudence and with regard to the

possibility of government inquiry or civil

litigation, documents and communications must

be preserved

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How can companies protect themselves?

►Take pro-active steps to avert or prepare for

lawsuits

− 3. Management should appoint a small

committee to oversee and to handle internal

communications and work with counsel (outside

or inside)

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How can companies protect themselves?

►Take pro-active steps to avert or prepare for

lawsuits

− 4. Draft press releases and statements should

be prepared; all inquiries should be directed to a

single designated source

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How can companies protect themselves?

►Take pro-active steps to avert or prepare for

lawsuits

− 5. Advise employees that inquiries, whether

government, press, or customer communications

should be directed to the committee

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How can companies protect themselves?

►Take pro-active steps to avert or prepare for

lawsuits

− 6. Review inventory and isolate product

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How can companies protect themselves?

►Take pro-active steps to avert or prepare for

lawsuits

− 7. Prepare a statement to retail customers

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How can companies protect themselves?

►Take pro-active steps to avert or prepare for

lawsuits

− 8. Review insurance policies

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How can companies protect themselves?

►Take pro-active steps to avert or prepare for

lawsuits

− 9. Retain counsel to conduct internal

investigation (Interview employees involved in

purchasing and selling suspect products)

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How can companies protect themselves?

►Take pro-active steps to avert or prepare for

lawsuits

− 10. Document all remedial measures!

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How can companies protect themselves?

►Expect and prepare for inquiries by state

and/or federal regulatory agencies

►Confer with counsel before meeting with, or

responding to, ANY inquiry from regulators

or Attorney General’s office

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Contact

►Washington, DC Office 1101 Connecticut Avenue, NW Suite 1000 Washington, DC 20036

(202) 828-2400

Liz Levinson Partner Kutak Rock LLP Liz.Levinson@KutakRock.com

Elise Dieterich Partner Kutak Rock LLP Elise.Dieterich@KutakRock.com

Gil Boyce Partner Kutak Rock LLP Gilbert.Boyce@KutakRock.com