By Jake Rossen
By Jesse Marx
By Michelle LeBow
By Alleen Brown
By Maggie LaMaack
By CP Staff
By Jesse Marx
Louisiana-Pacific's decision to permanently close the pulp mill forced the Forest Service to terminate the long-term contract, since the timber purchasing agreement was predicated on the year-round operation of the mill. When the Forest Service voided the contract, Louisiana-Pacific rushed to the federal claims court in Anchorage, where it filed suit against the government. In court papers, the company alleged that the termination of the contract resulted in a governmental "taking" of the economic value of the pulp mill. The suit sought $400 million in damages.
"This settlement is a tremendous victory for the cause of property rights," says Ron Arnold, director of the Center for the Defense of Free Enterprise, a Bellevue, Washington-based Wise Use group. "The Clinton administration has validated our contention that the environmental regulations imposed on Louisiana-Pacific clearly damaged the company economically. The lesson is that the government can impose the regulations on companies, but they cannot escape paying just compensation for doing so, plus damages for bad-faith dealing."
But most legal observers believe that Louisiana-Pacific's suit had little merit. Indeed, the suit sounds nearly frivolous on its face. It almost seems as if there was some prior arrangement between Louisiana-Pacific and the administration, and the suit itself was just a pretext to a financial bailout of a troubled company. The objective of Louisiana-Pacific for several years has been to shift toward the logging of lucrative old-growth trees without being burdened by the costly pulp mill operations.
Ironically, Alaska--where the logging scheme on the Tongass has been underwritten by Congress mainly as a rural jobs program--was exempted from the nationwide ban on the exportation of raw logs cut from federal lands. For the past 10 years, Louisiana-Pacific's biggest money-making enterprise in Alaska has come from exporting yellow cedar to Japan. The company pays the Forest Service about $1.50 per thousand board feet for the right to log the cedar off the Tongass. Then it sells the cedar logs to Japanese timber merchants for as much as $1,500 per thousand board feet, all without running a single cedar log through an Alaskan mill. The Japanese are willing to pay such high prices because the Tongass cedar closely resembles Hinoyki cedar, which is considered sacred.
"The Ketchikan Pulp Mill 50-year contract thus ends up as the most expensive timber sale in Forest Service history," according to forest economist Randal O'Toole. "The net loss from this one sale was close to a quarter billion dollars."
The infusion of federal cash couldn't have come at a better time for Louisiana-Pacific. It had been a turbulent three years for the timber giant. After experiencing record-setting profits in the early 1990s, Louisiana-Pacific was riding high, becoming a favorite of mutual fund managers and institutional investors. Then in 1993 the company was suddenly confronted with allegations that its executive offices resembled a kind of white-collar brothel. A long-time executive assistant to LP CEO Harry Merlo filed suit against the company charging widespread sexual harassment of female employees. According to the complaint, the company only hired top female assistants if "they were young, blond, strikingly attractive, and likely to acquiesce to sexual advances from the CEO."
The suit was largely ignored by Merlo and his hand-picked board, which that very same year rewarded him with a salary of $5 million and $48 million in company stock. But things were starting to fall apart in the company's Portland headquarters. The problems centered on one of Louisiana-Pacific's signature products, Oriented Strand Board, known as OSB. The company marketed the siding as an environmentally friendly replacement for plywood decking and siding for houses and apartments. According to LP's marketing, OSB is a "green product" because its manufacture does not require the logging of old growth. Instead, OSB can be constructed by chipping small diameter trees, including species that were previously considered to have little commercial value. The chips are then cooked up in a kind of toxic stew and pressed into siding panels.
The problem is that when exposed to moderate levels of moisture and humidity, OSB tends to disintegrate within two years. Moreover, as the OSB panels begin to break apart they release dangerous fumes from the glue used to hold the fiberboard together. This toxic phenomenon is known as out-gassing. It causes the insidious poisoning of people residing in houses sheathed in OSB. The ailments suffered by victims of Louisiana-Pacific's deteriorating siding range from headaches and nausea to seizures and partial paralysis. The company recently paid out nearly $500 million to settle class-action suits brought by homeowners who had purchased OSB products. Several states, including Oregon, Washington, and Florida, are pursuing criminal investigations against the company for fraudulent testing and marketing of OSB. Two former employees have alleged that the company falsified testing results on the durability and safety of the OSB from 1990 through 1994.
As the OSB scandal reached its climax, the Louisiana-Pacific board called an emergency meeting in Chicago. There Merlo was confronted with evidence that he had ordered the doctoring of proxy statements and SEC documents in an effort to conceal the extent of financial liabilities facing the company. After a hostile exchange, the board voted to remove Merlo from his position. The executive was escorted out of the meeting by armed security guards. Meanwhile, the locks on the doors of his penthouse office back in Portland, Oregon, were changed and his files seized by company investigators and outside auditors.