Excellent Opinion in Support of False Claims Act Case for Customs Fraud

The appeals court for the Pennsylvania-New Jersey-Delaware region recently issued an excellent ruling permitting claims of import fraud to proceed.  The ruling addressed several different issues, but this article will focus only on two – finding that sufficient details had been pled based on a credible methodology for alleging that a substantial percentage of the total amount of imported goods had not been properly marked and permitting a “reverse false claim” for an importer’s failure to pay required marking duties under the Tariff Act.  U.S. ex rel. Customs Fraud Investigations, LLC. v. Victaulic Co., 15-2169, 2016 WL 5799660 (3d Cir. Oct. 5, 2016)(“CFI”). This ruling should encourage anyone with knowledge of importers failing to properly mark their imported products with a “country of origin” to contact knowledgeable counsel about a possible False Claims Act (FCA) case.

Regulatory Requirements for Imported Products

The regulatory requirements are fairly straightforward – most goods imported from a foreign country are required to be marked with the English name of the country of origin.  19 U.S.C. §1304(a).  More specifically, “every article of foreign origin (or its container, as provided in subsection (b) hereof) imported into the United States shall be marked in a conspicuous place as legibly, indelibly, and permanently as the nature of the article (or container) will permit in such manner as to indicate to an ultimate purchaser in the United States the English name of the country of origin of the article.” Id.

Although there are various specific exceptions for certain products and broader exceptions for goods that cannot be readily marked (such as individual grains of salt) or where a marking would destroy the appearance or value of the good (perhaps an original work of art) or where marking the container in which the article arrives will be sufficient, id. at (a)(3), those issues do not often arise in connection with the importation of finished consumer products for sale in the United States.  The absence of a clearly marked country of origin on an article known to have been manufactured, grown, mined or otherwise produced outside the United States will warrant further scrutiny.

U.S. ex rel. Customs Fraud Investigations, LLC v. Victaulic Co. Ruling

The court’s ruling about the degree of evidence one must have to sustain claims for failure to pay marking duties is particularly significant because the FCA is governed by a rule of procedure that requires that facts be plead “with particularity.”  Fed. R. Civ. Pro. 9(b). Oftentimes someone who observes this type of wrongdoing by an importer will not have specifics in terms of dates, times, number of products, specific port of entry, etc.  For example, a likely whistleblower for a case like this could be someone who works somewhere along the chain of commerce that an imported article will travel once in the United States – the importer, a wholesaler, a retail operation.  A buyer for a retail chain could well know that certain products were imported, yet see that they are not marked with their country of origin.  This buyer might not have the details about the date and time of the shipments, however.  Under more stringent readings of the FCA, a court might dismiss a case that failed to allege those specific details, even though they could be determined later in the proceedings.  As the Third Circuit had explained in an earlier FCA case:

two approaches had emerged in the Courts of Appeals regarding how to comply with Rule 9(b) in a False Claims Act suit. Under one approach, “a plaintiff must show ‘representative samples’ of the alleged fraudulent conduct, specifying the time, place, and content of the acts and the identity of the actors.”  We adopted a second, more lenient approach, holding that “it is sufficient for a plaintiff to allege ‘particular details of a scheme to submit false claims paired with reliable indicia that lead to a strong inference that claims were actually submitted.’ ” We rejected the stricter alternative because, in our view, it would have required qui tam relators to offer a level of “detail at the pleading stage [that] would be ‘one small step shy of requiring production of actual documentation with the complaint, a level of proof not demanded to win at trial and significantly more than any federal pleading rule contemplates.’

Foglia v. Renal Ventures Management, LLC,   754 F.3d 153, 155 (3d Cir. 2014)(footnotes and citations omitted).

Of particular significance in the CFI ruling, the evidence consisted of a sampling of pipe products found for sale on eBay.  The whistleblower had analyzed the market for pipe sales in the United States and concluded that eBay was an “active and diverse secondary sales outlet for Victaulic products” and, in fact, provided a broader spectrum of total sales than a review of any given distributor.  CFI, 2016 WL 5799660 at *10. This conclusion and the reliability of the sample were supported by an expert report from a statistician. From a review of product pictures on eBay, they concluded that a substantial percentage of defendant’s pipe products were unmarked with a country of origin, even though it was alleged that the products had been imported.

Building on the foundation set in Foglia, the CFI ruling accepts that there can be sufficient supporting information and statistical evidence to allow a compelling inference that the alleged infringement occurred, even in the absence of a specific article being identified.  CFI, 2016 WL 5799660 at *11 (accepting that plaintiff had not alleged “which shipments, during which time periods, at which ports, were supposedly unlawful”).  Notably, there was a vigorous dissent, largely concluding that the statistical sampling, reliability of the eBay analysis and lack of detail about particular violations made the complaint unsustainable.  Id. at *13.

A second noteworthy ruling – and one that was reached unanimously by the three-judge panel, see id. at *13, n.2 (Fuentes, J., dissenting in part)  – was that the current version of the “reverse false claims provision” of the FCA permits a viable claim to be alleged based on an importer’s failure to pay the required marking duties or failure to disclose that the goods were illegally unmarked.  As the court explained, pursuant to the amendments to the FCA through the Fraud Enforcement and Recovery Act of 2009 (FERA), there is no longer a requirement that a defendant affirmatively makes a false statement or record in order for FCA liability to attach.  Instead, “mere knowledge and avoidance of an obligation is sufficient, without the submission of a false record.”  Id. at *9, citing 31 U.S.C. § 3729(a)(1)(G).  The court relied, in part, on the Senate Report on FERA, discussing the notion that customs duties for mismarking country of origin would fall within the reverse false claims provision as it was proposed to be amended.  CFI, 2016 WL 5799660 at *8, citing S. Rep. 111-10, at 14 (2009),  Pub. L. No. 111–21, 123 Stat. 1617 (2009).