If importers did not have enough to worry about in the new trade protectionist environment – higher duties from dumping, subsidy, section 201 and section 232 cases and increased enforcement – now they also may have to contend with the increased risks of whistleblower cases brought under the False Claims Act (FCA). 31 U.S.C. §§ 3729-33. The FCA has been around for more than 150 years, but recently, has been successfully used to allege underpayment of duties. Actions under the FCA can be brought directly by the Department of Justice (DOJ) or by a private party, known as a relator, seeking recovery on behalf of the U.S. government in a qui tam action. There are strong incentives for relators to file qui tam suits in light of the statute’s treble damages and penalties and its provision allowing relators to receive a share of up to 30 percent of any recovery. Qui tam actions are filed under seal, and before the case is unsealed to the public, the government is given an opportunity to investigate and determine whether or not it will intervene in the action. In some cases, the government’s investigation can last not just months but years, often involving extensive one-sided discovery that DOJ is granted under the FCA. And, even when the government declines to intervene, a relator can still independently proceed with the litigation. Only if the government affirmatively moves to dismiss the qui tam could the relator not proceed, something that DOJ has historically been extremely reluctant to do.
Traditionally, FCA suits have been based on allegations that a party improperly received payment from the government, but importers must also be aware of the potential exposure associated with the “reverse” FCA provision of the statute, which imposes liability on any person who “knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the Government.” 31 U.S.C. § 3729(a)(1)(G). Under the statute, the knowledge element can be established by (1) actual knowledge (2) deliberate ignorance; or (3) reckless disregard. See § 3729(b)(1).
Importers have become targets of reverse FCA claims associated with duty evasion in part because a recent case from the Third Circuit. United States ex rel. Customs Fraud Investigations, LLC v. Victaulic Co. The Third Circuit held that a failure to mark country of origin could be actionable under a reverse FCA theory of liability if a company knowingly imported unmarked products in an effort to evade custom duties. 839 F.3d 242 (3d Cir. 2016). The court found that Victaulic had an established obligation under 19 U.S.C. § 1484(a)(1) to disclose to Customs and Border Protection (CBP) the fact that its goods were unmarked or improperly marked and if Victaulic knowingly failed to notify the CBP of its pipe fittings’ non-conforming status, this could give rise to reverse false claims liability for the unpaid marking duties. In May 2017, Victaulic filed a petition for a writ of certiorari but the Supreme Court denied the petition this past October, leaving Victaulic to defend itself in the district court. While that case has not reached a judgment, the concern for importers is clear given the court of appeals’ validation of such a theory under the FCA.
Other recent cases have targeted companies importing goods that are subject to antidumping and countervailing duties. In 2016, Z Gallerie LLC paid $15 million to settle whistleblower FCA allegations that it masked the type of furniture it imported from China in order to avoid extra dumping duties. Basset Mirror Company paid $10.5 million to settle a similar case on furniture from China just this past month. The rise in FCA cases related to import duties was highlighted in the recent Wall Street Journal article, in which it stated that the DOJ collected $4.7 billion in fiscal 2016 and $3.7 billion as a result of False Claims suits brought by whistleblowers in fiscal 2017.
These cases, combined with increased duties as a result of numerous unfair trade proceedings, create a perfect storm – encouraging both FCA plaintiffs’ lawyers and whistleblowers alike to cash in on a company’s failure to comply with import laws. FCA claims are not limited to marking or dumping matters. Cases may be brought if importers incorrectly value or classify imported goods, or make incorrect duty free claims based on a free trade agreement.
With all this troubling news, there are steps that importers may take to mitigate the risks or defend against an FCA claim. First, importers should establish strong internal compliance programs. Even if internal controls fall short of ensuring 100% compliance with import laws, a strong compliance program can be important evidence if an importer is forced to defend an FCA suit because the plaintiff (whether DOJ or a relator) must establish that an importer acted with the requisite knowledge—i.e., the plaintiff must show that the noncompliance occurred because the importer acted with actual knowledge or at least reckless disregard. The existence of robust internal controls could be essential in helping an importer overcome a finding of reckless disregard. Second, and related to having a strong compliance program, taking steps to investigate, identify, and disclose to the government any errors made could foreclose FCA liability in other ways, too. For instance, if a company makes a disclosure concerning a potentially improper practice and the agency response is to take no formal action, that may show that the practice is not material to the government’s decision to pay or the potential obligation for the company to pay (in the case of import duties).
The materiality of alleged false statements or claims has been receiving enormous scrutiny recently in the wake of the Supreme Court’s landmark FCA decision in 2016 in Universal Health Services v. Escobar, 136 S. Ct. 1989 (2016), with agency approval or failure to disapprove of allegedly fraudulent conduct repeatedly being cited in dismissing actions for failing to show materiality. Moreover, if a company discloses to the government their practices or interpretations with respect to regulations they are subject to, what is known as the government knowledge bar can also foreclose a finding of FCA liability. In short, while there is often no sure-fire way to avoid mistakes in transactions involving government dollars, there are various proactive measures a company can take to help prevent mistakes from turning into a case of alleged fraud.