WASHINGTON, June 14 (Reuters) - Watts Water Technologies
Inc, a public company that settled a U.S. foreign bribery case
last year, sued its law firm and said the sanctions were a
direct result of the firm's legal mistakes.
The lawsuit, filed on June 6 and provided to Reuters on
Thursday, is one of the first malpractice lawsuits involving one
of the hottest areas for government enforcement, the Foreign
Corrupt Practices Act.
Lawyers at Sidley Austin vetted a Chinese acquisition for
Watts in 2005, but failed to inform the company about potential
corruption issues even though their review had uncovered a
suspicious document, according to the lawsuit, which was filed in District of Columbia Superior Court.
Last October Watts agreed to pay $3.7 million in sanctions
to resolve allegations from the Securities and Exchange
Commission that sales staff from that acquisition paid bribes to
government officials in China to influence how they awarded
certain contracts, in violation of the FCPA.
The 1970s era law, which bars bribes to officials of foreign
governments, has ensnared some of the largest U.S. companies,
from Wal-Mart to Avon Products, forcing them to conduct
investigations with legal tabs that run into the hundreds of
millions of dollars.
The Chamber of Commerce and other business groups have led a
campaign to amend the law and scale back its enforcement,
arguing a lack of clarity in the law has had a chilling effect
The new lawsuit could add fuel to their campaign, since it
involves a scenario wherein a company was forced to pay millions
to settle a case involving conduct that even a top-tier law firm
did not detect.
Under the law, companies are responsible not just for the
conduct of their own overseas employees, but also potentially
liable for the conduct of companies they later acquire.
When the SEC charged General Electric in 2010, for example,
over allegations that two companies it acquired paid kickbacks
under the U.N. oil-for-food program in Iraq, the head of the
agency's FCPA unit said: "corporate acquisitions do not provide
GE immunity from FCPA enforcement."
"It's a key area of exposure and concern. That's why
companies do hire competent FCPA counsel to supplement what
transactional M&A lawyers are doing," said Michael Koehler, a
professor at Butler University who studies the anti-bribery law.
The Massachusetts-based Watts, which makes water valves and
has around $1 billion in annual sales, is seeking through its
lawsuit damages of at least $100,000 and legal fees.
A lawyer for Watts declined to comment. A spokeswoman for
Sidley did not immediately respond to a request for comment.
WRITTEN "KICKBACK" POLICY
In 2004 Watts considered buying a Chinese company called
Changsha Valve Works in order to bid on contracts in the Chinese
infrastructure market and told Sidley to vet the legal risks of
the acquisition, according to the lawsuit, filed in state court
In the course of the due diligence, for which Sidley billed
the company $200,000, Sidley uncovered a document that detailed
the company's written policy of paying kickbacks to Chinese
government officials in order to secure government contracts,
the lawsuit said.
Sidley did not flag that document for Watts, it said.
Watts agreed to buy the company for $9 million in late 2005,
but said it wouldn't have moved forward on the deal if it had
known about the kickback policy.
In 2009 potential FCPA violations based on the kickback
policy came the attention of Watts' management, and Watts hired
another law firm, Paul Hastings, to conduct an investigation.
Sidley turned over its original due diligence files to that
investigation, and in them was that kickback policy, the
Paul Hastings also interviewed the Sidley lawyer, Zhengyu
Tang, who admitted the policy was a "red flag" that potentially
should have been disclosed, according to the lawsuit.
A spokesman for Paul Hastings declined comment. Tang did not
immediately respond to an emailed request for comment.
The case is Watts Water Technologies, Inc. v. Sidley Austin
LLP, Superior Court for the District of Columbia, Case No.
For Watts Water: H. Lamar Mixson, Bondurant, Mixson &
Elmore; Barry Nace of Paulson & Nace.
For Sidley Austin: Not immediately available.
(Reporting By Aruna Viswanatha and Nate Raymond; additional
reporting by Lily Kuo)