In a ground-breaking decision, the Court of Appeals for the Third Circuit on October 5, 2016 overruled a decision by the District Court for the Eastern District of Pennsylvania dismissing a qui tam reverse false claim suit filed by “knowledgeable insiders” in the pipe fittings industry. This decision should be closely reviewed by general counsel of importers because it provides a new, fertile ground for third-party qui tam actions where allegations of wrongdoing might be derived from an importer’s own shipping records. In the Victaulic case, the plaintiff inferred from data-mining shipping manifest data and Ebay auctions of Victaulic fittings that most of Victaulic’s fittings were allegedly illegally marked and the company failed to pay statutory marking duties.
Under the False Claims Act, as amended in 2009 by the Fraud Enforcement and Recovery Act, plaintiff claimed a qui tam recovery based upon 10% ad valorem marking duties which Victaulic allegedly should have paid for importing goods which were improperly marked. The District Court dismissed the action with prejudice even after plaintiff filed an amended complaint, finding that plaintiff untimely filed its motion to amend, and that even with the additional facts the complaint failed to state a claim. The district court held that Victaulic’s duty to pay the marking duties was too attenuated and contingent to qualify as the type of obligation upon which False Claims Act qui tam action could be based.
Keep in mind that in this situation, U.S. Customs and Border Protection had not itself investigated the marking of Victaulic’s pipe fittings. Indeed, the Department of Justice initially declined to participate in the action, though it did file a brief on appeal arguing that marking duty obligations are covered by the False Claims Act.
The Third Circuit overruled the District Court’s dismissal, stating clearly that failure to pay marking duties may give rise to reverse false claims liability. Because plaintiff’s amended complaint contained “just enough reference to hard facts” to allege a course of conduct to which liability could attach, the Third Circuit reinstated plaintiff’s qui tam case against Victaulic. The Third Circuit cited the legislative history to the 2009 amendments to the FCA, which clearly state that marking duties are the type of obligation which the act was meant to cover. This is a decision of first impression, and we expect other qui tam cases to be filed in response to this development.
In addition to acting to ensure their imports are being properly marked before import to the U.S., we recommend all importers carefully consider requesting confidential treatment for their vessel manifest data from U.S. Customs and Border Protection. If you have any questions in this area, contact the FisherBroyles Federal Regulatory team to discuss how this new interpretation of the False Claims Act in the Customs area impacts your business.