CEO Lynch Out, Fortunes Continue to Fall for Lumber Liquidators

Toano, VAThe optics were never good from the beginning. They never are, when the venerable CBS investigative unit 60 Minutes comes knocking at your door. That said, the optics keep going from bad to worse with the recent and abrupt resignation of Lumber Liquidators’ CEO in late spring. The resignation came just two weeks after announcing that the company was suspending sales of Lumber Liquidators toxic flooring sourced from China.

Lumber Liquidators was recently at the top of its game, importing and vending laminate and engineered flooring, a product with a widening market share and growing in popularity due to its capacity to mimic the look of real hardwood flooring at a fraction of the cost. Lumber Liquidators was also able to increase its margins by importing product from China.

However, trouble arrived with a vengeance when Anderson Cooper and a 60 Minutes television crew arrived. At issue were allegations that Lumber Liquidators was importing inferior product with a higher level of formaldehyde than what was allowed under California State Law (a statute that may serve as a template for the rest of the country in forthcoming regulations by the Environmental Protection Agency). Formaldehyde is used as an ingredient in the glue employed in the manufacture of engineered, composite flooring. Used sparingly, formaldehyde in this context is considered safe as the flooring itself “locks in” any toxicity stemming from the formaldehyde and prevents fumes from escaping.

Formaldehyde is a known carcinogen.

Problems began when consumers reported becoming sick and noticing a strong chemical odor originating from their flooring. Subsequent tests determined that levels of formaldehyde found in test samples were far higher than legal and safe limits.

60 Minutes got involved, sending various samples from different lots of the flooring to various independent labs for scrutiny. The result was that in the vast majority of samples, levels were higher than legal limits under California law and in some cases, dangerously so - as high as 13 times the safe and legal limit.

When confronted by 60 Minutes, then-CEO Robert M. Lynch said he had no knowledge of the problem and promised an investigation, maintaining all the while that Lumber Liquidators formaldehyde flooring was safe.

60 Minutes, meanwhile, had dispatched a crew to the manufacturing facility in China, where an unidentified official noted that formaldehyde levels varied according to the level of processing used in the manufacture of the products. A more expensive process employed an equally more expensive glue formula that employed less formaldehyde. A cheaper process, on the other hand, employed more of the less expensive formaldehyde.

The official at the plant also told the visiting journalists that boxes and shipping containers were mislabeled reflecting compliance with the California standard.

Lumber Liquidators responded with free testing kits for consumers to test the air quality in their homes. Most came back, the company claimed, with levels that were within safe limits. However, in early May, the company decided to suspend all sales of product imported from China - at least temporarily - until a review of its Chinese laminate flooring was complete.

“Despite the initial positive air quality testing results we have received, we believe it is the right decision to suspend the sale of these products,” Robert Lynch, Lumber Liquidators’ president and chief executive officer, said at the time in comments published in the New York Times (5/7/15). “We will work diligently to meet the needs of our customers and to ensure their satisfaction,” he added.

Two weeks later, Lynch was gone, having resigned “unexpectedly” and replaced, on an interim basis, by Thomas S. Sullivan, the original founder of Lumber Liquidators, according to the New York Times (5/21/15). Lynch had been on the job since 2012.

In the wake of the Lumber Liquidators toxic flooring scare, sales are down and company stock has dropped 30 percent.

Various Lumber Liquidators Formaldehyde flooring lawsuits allege toxicity in the flooring and an unsafe product. And now the first so-called “RICO” lawsuit has been filed against the company, alleging that Lumber Liquidators “has hired a mold lab to conduct formaldehyde gas emissions testing and is trying to lull its customers into a false sense of security with the accreditation and proficiency of its chosen lab,” according to the lawsuit.

The lawsuit names Building Health Check, LLC, and EDLab, a division of Pure Air Control Services, Inc., of Clearwater, Florida, as co-defendants. The lawsuit is the first case filed against Lumber Liquidators alleging violations of the Racketeer Influenced and Corrupt Organizations Act.