Hartford Business Journal

16 Hartford Business Journal • April 27, 2015 www.HartfordBusiness.com courts have largely sided with Omega Flex and the company has booked some high-profile wins: In December, Pennsylvania's Supreme Court vacated a trial court's $1 million ruling that TracPipe was defective and responsible for causing a house fire following a lightning strike. The high court's ruling, which sent the matter back to trial court, set new precedent in Pennsylvania product liability law, which experts say will make it more difficult to pur- sue such lawsuits in the Keystone State. "It was a big deal," Tim Scanlan, Omega Flex's general counsel, said of the Supreme Court victory. "We do feel vindicated." The Pennsylvania trial court's initial ruling has been the only verdict against Omega Flex to date. Momentum shifts in legal saga Besides gas piping, Omega Flex makes piping and hose products for solar hot water systems, vehicle engines and industrial uses. The company was spun out of Westfield, Mass.-based Mestek in 2005. Omega Flex established its corporate headquarters in Middletown in 2007. Its legacy TracPipe product first hit the market in the late 1990s, marketed as a cheaper and safer alternative to black iron gas pipe. Despite the barrage of lawsuits, Omega is enjoying success, booking record sales in 2014, which the company attributed to an increased demand for its products and the recovery of the construction sector. Even still, the legal challenges are a headache. Insurers and homeowners have filed fed- eral lawsuits against Omega Flex in at least 21 states since 2010. Six of them have been in Connecticut, including the most recent: a suit this month filed by Travelers related to a 2013 house fire in Woodbury. Most suits are subrogation actions, in which insurers seek to recover costs paid out for a customer's claim. Besides the Penn- sylvania verdict, Omega Flex won dismissals of federal class action suits in Florida and Ohio last year, and in 2013, the company won jury verdicts against Nationwide Mutual Insurance in Con - necticut and Ameri- can Automobile Insurance in Missouri. Omega's Scanlan said momentum is build- ing from the company's court victories. He said insurers and attorneys began ramp- ing up lawsuits against Omega Flex and other manufacturers of corrugated stainless steel tubing (CSST) after Omega settled an Arkan- sas class action case in 2006 for $8.4 million. Scanlan, who has coordinated the compa- ny's legal strategy from Middletown with law firms from around the country, said CSST suits have since become a legal cottage industry. "The claims are very similar," Scanlan said. "What plaintiffs are asking is to believe a product should be immune from an act of nature like a lightning strike." Omega Flex CEO Kevin Hoben was more blunt, saying the lawsuits are based on "junk science." "They're a nuisance. They're an annoy- ance," Hoben said of the suits. He hopes his company's recent legal victo- ries will deter insurers from filing more suits. "The fact that we're now winning these things…the plaintiffs' lawyers are losing their taste for this because they haven't made money like they thought they would," he said. Because it's expensive to litigate, Hoben said it has been a smarter decision to settle certain suits. Omega Flex is insured against general liabil- ity, but must pay between $25,000 and $250,000 in deductibles for judgments, the company dis- closed in filings. If it began to lose cases, Omega would risk being unable to purchase affordable insurance, but it says that has not happened. Omega Flex wouldn't disclose its total set- tlement payouts, but Hoben said the company is still ready to fight. "The really big [suits], we'll go to the mats," he said. With 14 cases still open, including the recent Travelers complaint, the company may get the chance. Travelers declined to comment on pend- ing litigation. Mark Utke, a Pennsylvania attorney who represented American Auto- mobile as well as the plaintiffs in the Penn- sylvania Supreme Court case and the lower- court victory that led to it, did not return a call seeking comment. Omega Flex's court victories could also be important to the approximately 10 other U.S. companies that make CSST, which is seen as easier to work with and safer than traditional black iron pipe. A number of those competitors were also named as defendants in the 2006 Arkansas class action case, including Titeflex and Ward Manufacturing, each of which has faced similar product liability suits since. Omega Flex discontinued TracPipe in 2011 in favor of a new version of its product with a thicker plastic jacket to protect piping from light- ning strikes. At least one lawsuit — which was ultimately dismissed — pointed to the product transition as acknowledgment by Omega Flex that there was something wrong with TracPipe. But the company said the switch was vol- untary, and that the new product — TracPipe CounterStrike — reduces the chances that contractors will install it incorrectly. Con- tractors' failure to properly bond TracPipe to grounding equipment, in order to protect it from electrical surges, was part of Omega Flex's legal defense in a number of suits. A Strong Recovery Despite the myriad suits, the publicly traded company is doing better than ever. Omega Flex has been profitable every year since it was spun out by Mestek in 2005. Omega Flex reported record annual sales of $85.2 million in 2014. That was up 14 percent from 2007 — the year preceding the housing crash, which caused Omega's revenues to dip as low as $44 million before climbing back. Hoben said the company didn't lay off any workers during the recession. Instead, it launched new products that picked up the slack and helped it recover. Those efforts, as well as the continuing rebound of the con- struction market, paid off last year, he said. While Omega Flex is largely a Pennsylva- nia resident, Hoben said he has no plans to move the corporate office from Connecticut, barring state tax increases. n from page 1 Despite legal woes, Omega's sales climb and the General Administrations & Elections committees. "The overall approach is that you want to help small businesses overcome obstacles when they are really starting up," said State Rep. Chris Perone (D-Norwalk), co-chair of the Commerce Committee. "If you allow a business to get up on their feet, you will get more in economic impact than you would in fees at the beginning." The state of New York has a similar program called Start-Up New York where fledgling companies pay no state taxes for 10 years, provided they locate in one of the tax-free zones around New York colleges and universities. Not only does that program enable startups to avoid paying sales, use, corporate, property, and mobility taxes — along with waiving all state and local fees — the startups' employees don't have to pay personal income taxes either. "We had a number of proposals to include tax credits in [Connecticut's program]," said State Sen. Joan Hartley (D-Waterbury), co-chair of the Commerce Committee. "Because New York is a neighboring state, we monitor these programs." The Commerce Committee ultimately decid- ed the Learner's Permit program should waive only filings and fees — not taxes — because it is a first-year program. Committee members want to see how it works ini- tially and possibly add tax incentives in the future, Hartley said. "You have to crawl before you can walk or run," she said. Frantz introduced the Learner's Permit bill two years ago, but it never gained trac- tion, he said. Now, with the unanimous vote of two legislative com- mittees and support from both Republicans and Democrats, he is encouraged about its approval chances this year. "I run into people all the time who say, 'It is really hard to start a company in Con- necticut,'" Frantz said. "I hope [the Learner's Permit program] gets some traction around the country and people think Connecticut is a good place to start a business." Finding the money The Office of Fiscal Analysis (OFA) esti- mates the program will cost the state $27 mil- lion annually in lost fee revenue; other agencies like transportation and banking will lose $7 million annually. Because the Department of Economic & Community Development will be implementing the pro- gram it would have to spend $153,516 to hire two new workers. "The Achilles' heel will be the cost of doing this in a tough budget year," Hartley said. "Because it's a new program, it's going to have a steep hill to climb." The legislature is facing billion-dollar deficits in each of the next two fiscal years so finding money for new programs will be difficult, Hartley said. The OFA report assumes 25,000 startups launch in Connecticut every year, which Frantz believes is overinflated. Convincing the rest of the legislature of that, though, will create prob- lems in getting the program approved, he said. Waiving filings and fees will increase start- ups' survival chances because they will be able to spend more of their limited time and capital on developing their business, said Andrew Mar- kowski, Connecticut director for the National Federation of Independent Business. "This is exactly the type of discussion the legislature should be having," said Mar- kowski, who supports the Learner's Permit initiative. "Entrepreneurs are encouraged when they see a bill like this." Under the program, DECD will reimburse municipalities for their lost fees, so the cost will be entirely borne by the state. DECD's Office of Small Business Affairs will approve the two-year permits to entrepreneurs, allow- ing one permit per person. Possible filings that could be avoided include occupational or trade licenses from the Department of Consumer Protection, environmental use permits from the Department of Energy & Environmental Protection, and annual reports with the Sec- retary of the State. Frantz said details of the program are still being worked out and there will still probably be limited paperwork required. Startups, for example, would have to apply for their learn- er's permit and potentially register their com- pany with the Secretary of the State's office. "It will be something you can fill out in three minutes or less, instead of weeks or months," Frantz said. By freeing up their cash and time, the legislature wants startups to concentrate more on making their businesses successful, including doing research and development, marketing, and hiring, Perone said. "As a state, we really want to target small businesses in a bigger way," Perone said. n from page 1 Program would help startups avoid red tape Rep. Chris Perone (D-Norwalk) Sen. Joan Hartley (D-Waterbury) This photo of TracPipe was included in a 2013 class action lawsuit against Omega Flex in Florida. The suit was ultimately dismissed by a judge. P H O T O | C O N T R I B U T E D

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