Locally based Sensient Flavors LLC will pay a smaller fine in exchange for agreeing to reduce the amount of a chemical it uses at its Indianapolis plant, as part of a settlement it has reached with state regulators.

The agreement, which the state signed off on Friday, settles a federal lawsuit Sensient brought against the Indiana Occupational Safety and Health Administration over intense government scrutiny of health risks at the plant.

The flavorings manufacturer, a subsidiary of Milwaukee-based Sensient Technologies Corp., sued in December 2011 IOSHA and the National Institute for Occupational Safety and Health.

The 31-page suit, which also named three NIOSH employees and two IOSHA compliance officers, claimed Sensient had been “harassed and intimidated” and “subjected to enormous intrusions” that violated its constitutional rights.

The dispute stemmed from the company’s use of diacetyl, a compound used in microwave popcorn, margarine and other products to create a buttery taste.

Diacetyl has created a firestorm of controversy in recent years, as health regulators and scientists assess its risks. Some U.S. factory workers with prolonged exposure to diacetyl have developed a rare, life-threatening lung condition—dubbed popcorn lung—for which there is no cure.

As part of the settlement, Sensient has agreed to reduce its usage of diacetyl 20 percent and, where feasible, will eliminate its usage of the ingredient altogether by the end of this year.

“IOSHA acknowledges that the administrative and engineering controls represent a good faith effort by Sensient to reduce employee exposures and that these controls will represent a significant cost to Sensient,” IOSHA said in the settlement.

Sensient executive James McCarthy said in a November 2011 letter to NIOSH that his company already has excellent engineering controls to minimize diacetyl exposure. He said additional controls at the Indianapolis plant to meet the proposed standards would cost $4 million to $6 million.

Sensient had faced state fines totaling $323,500 for violating IOSHA standards. The amount, however, has been reduced to $99,000, according to the terms of the settlement. Sensient executives were not available for comment on Wednesday.

Sensient Flavors’ Indianapolis plant, 5600 W. Raymond St., has been in the spotlight since 2008, when the International Brotherhood of Teamsters Local 135 asked NIOSH to conduct a formal health hazard evaluation. The Teamsters represent more than 100 production and maintenance workers at the plant.

NIOSH, part of the Atlanta-based Centers for Disease Control and Prevention, still had questions after inspecting the plant in May 2008. But when it requested a second look, the company sued, arguing that no new information had emerged that would entitle it to go through the highly invasive process again.

A federal judge shot down that argument in 2009, asserting that it was premature for the company to sue NIOSH while its investigation was ongoing.

Things turned worse for Sensient the following year. In June 2010, NIOSH publicly released a health-hazard report on the Indianapolis plant that found the prevalence of abnormal lung functioning among employees was several times higher than would be expected in the overall U.S. population.

In its lawsuit filed in December 2011, Sensient said the report was “grossly inaccurate and is based upon process, methodology, findings and conclusions which amount to bad science and a clear abuse of agency discretion.”

The parties agreed to settle, recognizing that “the costs and expenses of proceeding with litigation to resolve this dispute may be substantial and that the outcome of such litigation is uncertain," according to the settlement agreement.