3rd Circuit Finds Marking Duties Subject to Whistleblower Cases, Reviving Suit From 'Fraud Investigation' Company

False Claims Act whistleblower lawsuits may be filed for failure to pay marking duties on unmarked or improperly marked imports, the U.S. Court of Appeals for the 3rd Circuit said Oct. 5 as it resurrected a whistleblower lawsuit filed by a company founded to investigate customs fraud (here). Reversing the dismissal of Customs Fraud Investigations’ (CFI) lawsuit against pipe fitting importer Victaulic by the U.S. District Court for the Eastern District of Pennsylvania in September 2014 (see 1504290070), the Appeals Court sent the case back down with instructions to allow CFI to amend its complaint to include new evidence of Victaulic’s alleged fraud.

Uncommonly for False Claims Act “qui tam” whistleblower lawsuits, Maryland-based CFI has no employees that have ever worked for Victaulic, though it is “made up of former insiders from the pipe fitting industry” that “have worked on numerous trade investigations involving pipe and tube products” and “provided direct support to senior officials” at the International Trade Commission and Commerce Department, the Appeals Court said. The company has described itself as an entity that “conducts confidential research and analysis related to potential customs fraud” (see 14091119). A federal court in Chicago recently unsealed a second case brought by CFI alleging antidumping duty evasion by Mueller Industries, a pipe importer (see 1609260027).

The 3rd Circuit held that the District Court was mistaken in finding False Claims Act cases can’t be brought against importers that evade marking duties, agreeing with a brief filed by the U.S. government, which otherwise declined to participate in the case. Amendments to the False Claims Act in 2009 broadened the law’s applicability to anyone who “knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money to the government,” whether fixed or contingent. An early version of the underlying bill explicitly named marking duties before the Senate decided the language unnecessary because marking duties were already covered by the broader changes to the law, the 3rd Circuit said.

Though the lower court dismissed the case because the allegations in CFI’s complaint weren’t specific enough, the 3rd Circuit ruled CFI should have been allowed to amend its complaint, as CFI had requested, to include new details. Though “skeptical” of “CFI’s unusual procedure of reviewing eBay listings” to demonstrate Victaulic didn’t adequately mark its pipe fittings, dismissing the case at such an early stage is premature, it said. CFI’s amended complaint would include “details that address at least some of the concerns that the District Court had expressed in its opinion,” including the “rationale behind CFI’s investigation of Victaulic” and “the methodology CFI used to develop its claims,” the 3rd Circuit said. It also included an “expert declaration stating that CFI’s analysis 'provides "overwhelming evidence" that Victaulic is not properly marking its pipe fittings,'” the Appeals Court said.

The decision was not unanimous, with Circuit Judge Jane Roth dissenting on the basis that the eBay listings relied on by CFI could in no way prove a broader scheme involving all pipe fittings imported by Victaulic. “My common sense tells me that a plaintiff cannot plausibly allege a ten-year scheme to defraud the government on the basis of 221 eBay postings,” she said in the dissent. “At most, the eBay study provides evidence consistent with fraud. It does not provide any evidence more plausibly suggesting that fraud actually occurred.”

The decision sets a “landmark” legal precedent that “should help prevent deceptive marketing and sale of foreign imports as having been made in the United States,” said the law firm representing CFI, Tycko & Zavareei, in a press release issued Oct. 6 (here). "We hope that others with information about violations of country-of-origin marking requirements will come forward to help us as we continue this fight," said Jonathan Tycko, a lawyer with the firm. "Strong enforcement of U.S. customs laws is good for American workers, American consumers, and American taxpayers. It's also to the benefit of the vast majority of U.S. importers that play by the rules. The integrity of our trade laws and trade agreements rely on effective customs enforcement." Victaulic's lawyer did not comment.