: In 9th Circuit fight over import duty fraud, False Claims Act gets new life

Reuters

3 days ago

June 26 (Reuters) - New tariffs have dominated headlines in recent months, but a key question has received far less attention: How does the U.S. government make sure importers — who collectively brought in $3.36 trillion worth of goods, opens new tab last year — actually pay the duties that they owe?
While inspectors can't look at every shipment, one way to keep importers honest is the threat of liability under the False Claims Act, or FCA, for customs duty evasion. It's an increasingly active area of law, lawyers tell me, and likely to get even hotter as President Donald Trump's tariffs kick in and the amount of money at issue skyrockets.
For the past 20 years, however, the ability of whistleblowers to bring cases alleging customs fraud has been under a cloud in the San Francisco-based 9th U.S. Circuit Court of Appeals, thanks to a 2004 decision that put the circuit's nine western states — and their busy ports — at odds with the rest of the country.
Earlier this week, a 9th Circuit panel offered new clarity, rejecting the notion that the Court of International Trade has exclusive jurisdiction over such actions. The panel also rebuffed arguments that the FCA conflicts with a customs statute that gives the government another pathway to recover fraudulently unpaid duties — but more on that later.
The decision, opens new tab 'opens the door for whistleblowers' to bring customs-related enforcement actions in federal district courts, said Mayer Brown partner Kelly Kramer, who represented pipe fitting maker Island Industries in bringing a so-called qui tam suit against competitor Sigma Corporation. 'It validates the whole concept.'
In a statement, Sigma said it 'strongly maintains that it did not intentionally violate any law,' and that it 'will continue to seek appropriate relief in this lawsuit.'
The case began in 2017 when Island sued Sigma (as well as five other importers who either settled or went bankrupt) in Los Angeles federal court under the FCA.
Island alleged that between 2010 and 2018, Sigma imported welded outlets used in fire protection systems that were subject to antidumping duties of 182.9%. (Such duties may be imposed on products exported to the United States at less than their fair value.)
According to Island, Sigma knowingly made false statements on customs forms to avoid paying the duties. As a qui tam relator, Island is entitled to pocket a share of any proceeds from the litigation.
The U.S. Department of Justice, which declined comment, typically intervenes in several dozen FCA cases each year, assuming control of the litigation from the relator.
That didn't happen here (though the feds weighed in on appeal as an amicus, opens new tab in favor of Island).
Island and its lawyers from Mayer Brown helmed the case, taking it to trial in 2021. A jury found Sigma liable for violating the FCA and that it owed $8 million ($24 million after trebling), plus $2.5 million in legal fees.
Sigma appealed the verdict to the 9th Circuit, and here's where things get a bit odd. After oral argument in 2023, the court asked for two rounds of supplemental briefing on issues that neither party had raised.
The first question was whether the case belonged at the Court of International Trade, or CIT.
The Manhattan-based court, which hears disputes involving international trade and customs laws, has taken on greater prominence of late after blocking most of Trump's tariffs in May, ruling that the president overstepped his authority. The decision is on hold pending appeal to the U.S. Court of Appeals for the Federal Circuit.
As for FCA suits, the 9th Circuit in United States v. Universal Fruits and Vegetables, opens new tab held in 2004 that litigation 'commenced' by the United States against an importer for evading customs duties must be brought in the CIT, concluding Congress gave it exclusive jurisdiction over such matters.
Or not. After the 9th Circuit transferred the case, the CIT held that it did not in fact have jurisdiction because the FCA provides for damages and civil penalties, not the recovery of customs duties.
But Universal Fruits is still on the books in the 9th Circuit. 'No matter how persuasive' the CIT's reasoning in declining jurisdiction, wrote Judge Michelle Friedland for the panel, 'we have no authority here to overrule an earlier decision of our court.'
She was joined by Judge Mark Bennett. The third member of the panel, Judge Paul Watford, left the court after the case was argued but before the decision was issued.
Rather than transferring the case like a jurisdictional hot potato to the CIT, the judges found a way around Universal Fruit. That is, the qui tam suit was not actually 'commenced' by the government because the United States didn't file the complaint – Island did.
Yes, relators 'stand in the shoes' of the United States when they pursue FCA suits, the panel said, but 'that metaphor does not mean that a statute's reference to 'the United States' can be read to include FCA relators.'
The judges also asked for briefing on whether a specific customs statute, section 1592, precludes actions under the FCA based on fraud in connection with customs duties.
Sigma argued, opens new tab that the FCA cannot be used to upset this 'carefully crafted and comprehensive customs legal regime' that lays out a specific process for the United States to recover customs duties.
The panel was not persuaded, writing that while section 1592 'undoubtedly overlaps with the FCA,' there was 'no irreconcilable conflict' between the two enforcement mechanisms.
The end result, said Jonathan Tycko, who penned an amicus brief, opens new tab for The Anti-Fraud Coalition siding with Island, will be to bring more fraud schemes 'otherwise invisible' to customs officers to light. The qui tam provision, he added via email, 'provides a necessary incentive for those whistleblowers to come forward.'