Emerging False Claims Act Risk In Trade: Recent False Claims Act Developments Increase Trade Exposure

II. Enforcement Trends

Since 1986, the Department of Justice (DOJ) has recovered over $64 billion through the FCA, including $2.2 billion in FY2020 alone.¹ While the majority of this recovery has come from healthcare- and defense-related claims, the United States and private FCA relators have increasingly relied on the FCA to allege customs duty fraud. In fact, in its 2020 end-of-year report, the DOJ highlighted the FCA’s use to “safeguard American businesses and workers by promoting compliance with customs laws [and] trade agreements.”² DOJ specifically noted a $22 million recovery against multinational chemical company Linde GmbH for allegedly making false statements to avoid paying import duties.³

Over the past decade, federal FCA recoveries have averaged approximately $3 billion annually,⁴ reaching as high as $5 billion to $6 billion in some years.⁵ While recoveries dipped to $2.2 billion in 2020, we expect that to be an aberration owed at least in part to the impact of COVID-19 on the enforcement landscape. Additionally, as Vice President, Joe Biden oversaw the government’s vigorous implementation of the Fraud Enforcement & Recovery Act of 2009 (FERA), and we expect a similar commitment to FCA enforcement under his administration.

In addition to more vigorous enforcement action in the years to come, we also expect legislative action to expand the FCA’s reach and foreclose some defenses. Sen. Charles Grassley, R-Iowa, one of the FCA’s most staunch advocates and former Chairman of the Senate Committee on Finance, has been vocal that legislation is needed to course-correct both courts and the DOJ from, in his view, misinterpreting congressional intent concerning the standards for materiality and DOJ’s dismissal authority, and he has announced intentions to do so in the near future. In the meantime, earlier this year, the Senator insisted that the FCA must “come down with a sledgehammer” on those who commit fraud against the United States, signaling strong support for the Biden administration to aggressively pursue such actions.

III. Recent Amendments to the FCA

While yet-additional changes to the FCA may be on the horizon, courts are still unpacking the 2009 and 2010 amendments to it, passed as part of FERA and the Patient Protection and Affordable Care Act (ACA), respectively. Courts have only recently begun to grapple with the meaning of the 2010 amendments in particular, as those changes were not retroactive to preamendment conduct.⁶ Case law developments, however, make clear that both sets of amendments carry implications for trade-related cases, including an expansion of the reverse false claim and a tightening of the public disclosure bar.

A. Reverse False Claims

A reverse false claim is so named because it “reverses” the source of FCA liability. Rather than wrongfully claiming money owed by the government, the violator is instead alleged to have wrongfully claimed to owe less than it actually owed to the government. The reverse false claims doctrine bears special significance to companies that import or export goods to or from the United States and may owe taxes, duties, or other fees on those imports and exports. A failure to pay, or to pay the correct amount, could invite FCA scrutiny under this provision.

Prior to FERA, a reverse false claim required a “false record or statement.” Specifically, the FCA held liable anyone who “knowingly [made], use[d] or cause[d] to be made or used, a false record or statement to conceal, avoid, or decrease an obligation to pay or transmit money or property to the Government.”⁷ The 2009 FERA amendments eliminated use of a “false record or statement” as a necessary prerequisite to liability. Instead, FERA expanded reverse false claim liability to anyone who “knowingly makes, uses, or causes to be made or used, a false record or statement material to an obligation to pay or transmit money or property to the Government, or knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the Government.”⁸

The FERA amendments also defined “obligation” for the first time under the act, as “an established duty, whether or not fixed, arising from an express or implied contractual, grantor-grantee, or licensor-licensee relationship, from a fee-based or similar relationship, from statute or regulation, or from the retention of any overpayment.”⁹

FERA thus undid judicial decisions that had construed “obligation” narrowly as applying only to those obligations “that gave rise to actions of debt at common law for money or things owed.”¹⁰ The Senate committee report accompanying FERA clarified that “obligation” includes “obligations such as tariffs on imported goods.”¹¹ Elsewhere, the report confirmed that the definition also applied to “customs duties,” including those “for mismarking country of origin.”¹²

Both changes have significant implications for importers and exporters. First, “mere knowledge and avoidance of an obligation is [now] sufficient, without the submission of a false record, to give rise to liability.”¹³ For instance, an importer could be charged with failing to disclose (i.e., concealing) information it is otherwise legally required to provide for the government to determine whether and/or how to release and tariff imported goods.¹⁴ Exporters required to disclose information relevant to the assessment of fees or other taxes may face similar liability for knowingly withholding such information. “Avoidance” may also contemplate circumstances beyond a failure to disclose. Indeed, one district court has interpreted “avoidance” to “include[ ] behavior where an individual is put on notice of a potential issue, is legally obligated to address it, and does nothing.”¹⁵

Second, the amount of the obligation no longer needs to be precise and predetermined at the time of the alleged violation.¹⁶ Whereas some courts previously excluded certain obligations from the act’s ambit because the amount was not fixed at the point of obligation,¹⁷ such fees or taxes, including tariffs or customs duties, are now actionable under the FCA.¹⁸ Importantly, however, courts continue to interpret “obligation” as an amount that must be paid at the time of the violation; the obligation may not be contingent on future discretionary action.¹⁹ As such, potential obligations, or circumstance in which government officials are afforded discretion over whether to charge a fee or penalty, are still considered “contingent” and beyond the scope of the statute.²⁰

B. Public Disclosure Bar

The FCA’s public disclosure bar prohibits qui tam suits premised on publicly available information disclosed through certain enumerated channels. In 2010, the ACA narrowed the circumstances in which the bar may be used. The changes come in three flavors, two of which have unique implications for the trade industry.

First, the 2010 amendments rendered the bar an affirmative defense rather than a jurisdictional requirement.²¹ This procedural shift may make it harder for qui tam defendants to obtain early dismissals; defendants no longer have the benefit of jurisdictional discovery, and courts may be more inclined to let parties litigate the public disclosure issue alongside the merits rather than staging the issues seriatim.

Second, the ACA narrowed certain enumerated channels that trigger the bar. Pre-ACA, the bar included three channels of disclosure: “a criminal, civil, or administrative hearing, in a congressional, administrative, or Government Accounting Office report, hearing, audit, or investigation, or from the news media.”²² Most relevant here, the ACA replaced the term “administrative” in the second clause with “other Federal,” thereby eliminating qualifying disclosures through nonfederal channels.²³ This change could affect pre-ACA case law that had developed favorably to importing companies.

Prior to the ACA, some courts held that online commercial databases that gathered and disseminated shipping and customs data collected and maintained by federal agencies were an enumerated channel under the public disclosure bar. For instance, one district court concluded that the online PIERS database, and related reports, was a qualifying form of “news media” while also noting that the shipping and customs data underlying PIERS was an “administrative report” available from Customs and Border Protection (CBP).²⁴ Another court relied on this reasoning to conclude that Zepol, a similar searchable database containing import information, was a qualifying disclosure because Zepol provided data and analysis to media outlets, and the data Zepol collected and distributed was also available and maintained by CBP.²⁵ This court, too, described the data as “news media,” “administrative reports,” or “federal reports.”²⁶

While an “administrative report” is no longer a qualifying channel, qui tam defendants may still invoke the “federal report” and “news media” channels as described above. However, at least one court has come to narrow the meaning of “federal reports” in response to the 2010 amendments, questioning whether “information available through [a particular] Government[] automated system … was a ‘report’ for purposes of the FCA” and suggesting that some level of summary, compilation, or synthesis of the underlying information may be necessary to qualify.²⁷ Another court has separately sought to curtail the meaning of “news media” in the wake of the 2010 amendments, particularly as it had been applied to online resources or data.²⁸ Defendants in both cases pursued appeals. The first case remains pending while the Ninth Circuit ducked the public disclosure question in the second, ordering instead the case dismissed on narrow pleading grounds.²⁹ Should the Ninth Circuit squarely address the public disclosure issue in the remaining appeal and affirm the lower court, that would likely negatively affect treatment of trade-related databases under the post-ACA bar.

Third, the ACA expanded who may qualify as an original source — a relator entitled to continue a qui tam action despite application of the public disclosure — by eliminating the firsthand knowledge requirement. Previously, an original source needed “direct and independent” knowledge of the fraud.³⁰ As amended, a relator needs only “knowledge that is independent of and materially adds to the publicly disclosed” information.³¹ Aside from generally increasing the potential pool of relators, this change could take on additional significance were courts inclined to disqualify online databases or reports disclosing shipping and customs data as enumerated sources. In that scenario, potential relators may be better positioned to source and bring qui tam actions based on widely available information.

As a result of the 2009 and 2010 amendments, companies engaged in trade-related conduct have found themselves facing an increasing level of FCA exposure. In our next alert, we will explore recent bellwether cases in this space to understand how qui tam relators and the government have sought to leverage these amendments to obtain record-breaking penalties from companies that import goods to the United States.

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¹ https://www.justice.gov/opa/pr/justice-department-recovers-over-22-billion-false-claims-act-cases-fiscal-year-2020.

² Id.

³ Id.

⁴  In 2018, the DOJ collected approximately $2.9 billion. https://www.justice.gov/opa/press-release/file/1354316/download. 

⁵ In 2012 and 2016, the DOJ collected just above and below $5 billion, respectively; in 2014, the DOJ collected almost $6.2 billion. https://www.justice.gov/opa/press-release/file/1354316/download. 

⁶ Graham County Soil & Water Conservation District, et al. v. U.S. ex rel. Wilson, 559 U.S. 280, 283 n.1 (2010).

⁷ 31 U.S.C. § 3729(a)(7) (1994) (emphasis added). 

⁸ 31 U.S.C. § 3279(a)(1)(G) (emphasis added).

⁹ 31 U.S.C. § 3729(b)(3).

¹⁰ S. Rep. 111-10, at 14 (2009); U.S. ex rel. Customs Fraud Investigations, LLC v. Victaulic Company, 839 F.3d 242, 253 (3d Cir. 2016) (quoting American Textile Manufacturers Institute, Inc. v. The Limited, Inc., 190 F.3d 729, 735 (6th Cir. 1999)) [hereinafter CMI].

¹¹ S. Rep. 111-10, at 14 (2009). 

¹² S. Rep. 111-10, at 14, n.10 (2009).

¹³ CMI, 839 F.3d at 255. 

¹⁴ Id.

¹⁵ Kane ex rel. U.S. v. Healthfirst, Inc., 120 F. Supp. 3d 370, 394 (S.D.N.Y. 2015).

¹⁶ United States ex rel. Barrick v. Parker-Migliorini Int'l, LLC, 878 F.3d 1224, 1230–31 (10th Cir. 2017); see also U.S. ex rel. Simoneaux v. E.I. duPont de Nemours & Company, 843 F.3d 1033, 1037 (5th Cir. 2016).

¹⁷ Simoneaux, 843 F.3d at 1037.

¹⁸ S. Rep. 111-10, at 14 (2009).

¹⁹ Barrick, 878 F.3d at 1230-31; Simoneaux, 843 F.3d at 1037.

²⁰ Simoneaux, 843 F.3d at 1038-39.

²¹ Compare 31 U.S.C. 3730(e)(4)(A) (2009) (“No court shall have jurisdiction over an action under this section based upon the public disclosure …”) with 31 U.S.C 3730(e)(4)(A) (“The court shall dismiss an action or claim under this section …”).

²² 31 U.S.C. 3730(e)(4)(A) (2009).

²³ 31 U.S.C. 3730(e)(4)(A)(ii). The other primary change in this regard requires the government to now be a party to certain federal criminal, civil, or administrative hearings for those hearings to qualify. Id. 3730(e)(4)(A)(i). The third channel of disclosure — news media — was unaffected.

²⁴ U.S. ex rel. Doe v. Staples, Inc., 932 F. Supp. 2d 34, 40 (D.D.C. 2013).

²⁵ U.S. ex rel. Customs Fraud Investigations, LLC v. Victaulic Co., No. 13-2983, 2014 WL 4375638, at *10 (E.D. Pa. Sept. 4, 2014).

²⁶ Id. 

²⁷ U.S ex rel. Silbersher v. Allergan, No. 18-cv-03018, 2020 WL 7319407, at *21-22 (N.D. Cal. Dec. 11, 2020), appeal docketed, No. 21-15420 (9th Cir. Mar. 10, 2021).

²⁸ U.S. ex rel. Integra Med. Analytics LLC v. Providence Health & Servs., No. CV 17-1694 PSG (SSx), 2019 WL 3282619, at *12-15 (C.D. Cal. July 16, 2019).

²⁹ Integra Med Analytics LLC v. Providence Health & Servs., No. 19-56367, 2021 WL 1233378, at *4 (9th Cir. Mar. 31, 2021).

³⁰ 31 U.S.C. 3730(e)(4)(B) (2009).

³¹ 31 U.S.C. 3730(e)(4)(A).