Chemical Seller Beware – Disclosure Is Mandatory

In Johns v. Eastman Chemical Company, a federal judge in West Virginia recently ruled that a case could go forward against the seller of a chemical to a chemical distribution company, based on alleged failures to disclose all of the hazards associated with the chemical.

The ruling is a reminder that chemical sellers should err on the side of disclosure, and not assume knowledge on the part of buyers, even those buyers that may appear to be sophisticated industry players.

Freedom Industries Spill

The case relates to the January 9, 2014 chemical spill at the Freedom Industries facility in West Virginia, which resulted in approximately 300,000 residents being advised not to use their tap water.  Freedom Industries filed for bankruptcy about one week after the spill, and eventually three members of Freedom Industries’ management and its environmental consultant pleaded guilty to federal criminal charges.

Trustee Alleges Failure to Disclose Corrosivity

The trustee in Freedom Industries’ bankruptcy sued Eastman, alleging failure to disclose that crude 4-methylcyclohexane methanol (“crude MCHM”) was corrosive and could not safely be stored in steel tanks.  The trustee alleged that this corrosion led to the catastrophic tank failure and that the failure to disclose the corrosivity of crude MCHM breached an implied warranty.

Eastman Requested Dismissal at a Very Early Stage

Eastman’s motion for early dismissal alleged that the trustee had not properly pleaded an implied warranty claim.  The judge ruled that the trustee had properly pleaded a claim for breach of implied warranty, because the trustee pleaded that the crude MCHM caused the tank failure, and pleaded that the failure could have been avoided had Eastman disclosed the corrosive properties of crude MCHM.

The ruling, which also addressed other procedural issues, came at a stage in the case when dismissals are rare.  The ruling will not prevent Eastman from seeking dismissal at a later time, when Eastman will probably assert that no evidence supports a claim that Eastman’s actions caused the spill.

Duty to Disclose if Typical Storage Is Not Safe

The ruling is a reminder that sellers generally have a duty to disclose when they sell materials that cannot be handled using typical techniques in the industry.  Moreover, the determination of what should have been disclosed may be based on hindsight, especially if the chemicals allegedly caused a major catastrophe, such as in this case.

Sellers should err on the side of disclosure.  They should also keep very low expectations of the knowledge of their buyers, even those that appear sophisticated.

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