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February 14, 2017
by John M. Peterson, guest columnist
Two recent cases brought under the federal False Claims Act (FCA) underscore how risky importing can be in this era of whistleblower lawsuits. One case won in court. The other seemed to have failed, only to get a second chance. Both whistleblowers used trade data to make their cases.
In November, a settlement in United States v. Hostmann-Steinberg Inc. was announced by the US Attorney in Charlotte, N.C.
The settlement obliges the importer to pay to Customs some $2 million in withheld duties and penalties for alleged misclassification of imported ingredients for inks. Of this money, some $175,000 goes to the “relator” who blew the whistle and brought the suit
John Dickson, Nation Ford Chemical Co. president, filed the original claim against Micro Inks (now part of hubergroup) claiming it violated the FCA by misclassifying pigments imported from India as inks to avoid paying the higher duties on pigments.
In its defense, Micro Inks argued that US Customs rulings affirmed the classification the company was using.
Representing the official position of Customs, Customs rulings are binding on all Customs officials. However, Customs regulations hold that a ruling is valid only if all relevant information was properly reported, and only if the imported merchandise faithfully matches that described in the ruling request.
Dickson’s complaint asserted the Micro Inks Customs rulings were obtained under false pretenses. Citing data from Datamyne and other sources of manifest information, the whistleblower persuaded the government that the importer had not provided full and truthful information in its ruling request.
Customs took on prosecution of the suit, driving it to its $2-million resolution — which was signed off on by officials at the highest levels of CBP.
To the north, in Philadelphia, the Federal Third Circuit Court of Appeals has been wrestling with the question of what constitutes a plausible whistleblower complaint in a Customs matter.
The case that raises the question is Customs Fraud Investigations LLC v. Victaulic Company.
Customs Fraud Investigations, or CFI, is in the business of researching potential whistleblower cases. CFI used trade data from Datamyne and other sources to document a complaint against Victaulic, an importer of pipe fittings.
The complaint alleges that Victaulic failed to have imported fittings properly marked with country of origin as required by law. As a result, the complaint goes on, Victaulic brought into the US products which should have been excluded. The importer also avoided paying special duties of 10% ad valorem that are imposed on unmarked or mismarked goods.
But, because manifest data is considered published information, trade data alone is not enough to sustain an FCA lawsuit. To support its claim, CFI also provided photos from the eBay website that show Victaulic pipe fittings for sale. The photos, argued CFI, indicated that 93% of the allegedly imported pipe fittings were not marked with country of origin.
This time, the government was not persuaded to take up the case. So CFI served suit against Victaulic. The importer promptly moved to dismiss the case on the ground that the complaint did not make a “plausible” claim. The Federal District Court in Philadelphia agreed and dismissed the case, finding that CFI’s complaint did not contain sufficient allegations which, if accepted as true, would make a plausible case that Victaulic had violated the marking law.
The court also denied CFI’s request to amend the complaint, saying that it would be futile.
But CFI v. Victaulic doesn’t end there.
CFI appealed and, in October 2016, the Third Circuit Court of Appeals, by a 2-1 vote, reinstated the case, and granted the whistleblower leave to amend its complaint to flesh out its allegations.
Key to the majority opinion is the notion that permission to amend defective complaints should be freely given: the lower court abused its discretion in denying CFI a “second bite at the apple”.
Judge Fuentes, who voted against reinstating the case, filed a blistering dissent. The CFI complaint was based on unsupported assumptions and numerical guesswork, according to the dissent. Federal rules require that fraud be alleged with “particularity”, the dissent goes on, while the complaint is founded on 10 years of raw import data. The dissent also found CFI’s use of the eBay photographs to be inaccurate and based on repeated assumptions.
Victaulic has now asked the Third Circuit to reconsider the case en banc, with all active judges participating. The question of what makes a plausible claim remains at issue.
More cases initiated by whistleblowers on Customs and trade issues are to be expected. These two recent cases furnish powerful clues on how such suits can best be structured.
Both show that manifest data is an important element in supporting a complaint. However, the way in which published trade data is matched to private intelligence is the key to building a credible FCA claim.
About John M. Peterson
John M. Peterson is a Partner at Neville Peterson LLP, New York City, Washington D.C. and Seattle. He can be reached at (212) 635-2730 or at mailto:[email protected].
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