Emerging False Claims Act Risk in Trade: Recent False Claims Act Developments Increase Trade Exposure (Part II)

I. Effect of FERA Amendments on Trade-Related FCA Actions

As discussed in our prior Alert, FCA actions alleging violations in the import or export context are known as “reverse false claims” because the alleged violation resulted in the retention of money that should have otherwise been paid to the government. Stated differently, the violation prevented the government from collecting what it was owed. Third-party-initiated trade FCA actions via a reverse false claim have become more common since the FERA Amendments analyzed in Part 1 of this series. Notably, no longer needing an affirmatively false statement or record, but only “mere knowledge and avoidance of an obligation,” for a viable reverse FCA claim has enlarged the scope of not only possible violations but also possible whistleblowers for FCA actions in the international trade context.

For example, in Customs Fraud Investigations LLC v. Victaulic Co., the U.S. Court of Appeals for the Third Circuit vacated the district court’s dismissal of an FCA action against a global manufacturer and distributor of pipe fittings for failure to properly mark its goods with the country of origin, as required by 19 U.S.C. § 1304, and therefore pay applicable marking duties for unmarked or mismarked goods.¹ In doing so, the appellate court reasoned that the complaint, which was based on publicly available information, such as manifest data and pictures found on eBay of Victaulic’s products, and an expert’s declaration alleged plausible conduct to which FCA liability could attach.

The Third Circuit’s interpretation of the FERA Amendments in Victaulic, and the evidence needed to allege a reverse FCA claim, expands the possible universe of whistleblowers. Import data such as entry number, date of entry, and invoice details is typically confidential, accessible only by certain of the importer’s employees or agents. By allowing a reverse FCA allegation to be brought based on publicly available information such as manifest data or images on the internet, the pool of possible whistleblowers swells from a limited number of insiders to a much broader pool that will include other employees, employees of affiliates, business partners, or others in the industry or supply chain with knowledge of the import and production activity, potentially including competitors.

Additionally, a survey of recent FCA trade cases indicates two trends: (1) The trade-related violations alleged remain fairly consistent (misrepresentation of country of origin to avoid antidumping and/or countervailing duties (AD/CVD) or import quotas, misclassification for a more advantageous duty rate, undervaluation for lower overall duties, etc.); and (2) the whistleblower recoveries are getting larger.

For example, Linde GmbH, a multinational industrial engineering company, and its U.S. subsidiary, Linde Engineering North America, agreed to pay $22.28 million to settle FCA allegations for import violations — one of the largest trade-related FCA settlements to date.² The whistleblower, a veteran employee of Linde, which imports materials for use in the construction of natural gas and chemical manufacturing plants, alleged that the company underpaid duties, including AD/CVD, by misidentifying and misclassifying merchandise and failing to include assists in the declared value of its goods from 2011 to 2017. Specifically, stainless steel pipes from China were described and classified as carbon steel pipes (upon which there is no AD/CVD), and the cost of foreign raw materials used in the production of the pipes was not included in the declared value. Apparently, the company had submitted a voluntary prior disclosure identifying some of these issues with a tender of $15 million, but the whistleblower alleged that the disclosure was not complete and accurate. The whistleblower received $3.78 million from the settlement with Department of Justice (DOJ).

Similarly, a holding company, CWD Holdings LLC (CWD), paid $8 million to resolve allegations that it violated the FCA by knowingly avoiding tariffs on imported brake parts.³ CWD, a supplier of brake and chassis components for passenger vehicles and trucks, allegedly classified the goods as unmounted brake pads, which enter the United States unconditionally duty free, when they were in fact mounted brake pads, which carry a 2.5% ad valorem duty rate. The decade long misclassification scheme to avoid the 2.5% duties was brought to the DOJ’s attention via two separate whistleblower lawsuits. The two whistleblowers shared $1.48 million from the settlement for their role in exposing the violations.

Most recently, four jewelry importers agreed to pay more than $860,000 to settle allegations that they violated the FCA by failing to pay customs duties on silver earrings imported from China.⁴ From 2015 to 2018, the companies allegedly imported display cards of sterling silver earrings for resale at department stores, which often included multiple pairs of earrings. The importers declared the number of display cards imported rather than the number of individual earrings. By under declaring the quantity of earrings, the importers improperly declared the value of the merchandise and the subsequent duties owed.

In each of these three settlements, the whistleblowers received approximately 18% of the recovered amount for violations of the FCA. Comparing this percentage of whistleblower recovery in 2020 to that of 2015, where the average whistleblower recovery in three cases was approximately 17%, indicates an increase in the portion of the FCA settlements provided to whistleblowers in the international trade context for bringing an FCA case.⁵

II. Conclusion

This survey of recent FCA trade-related actions demonstrates not only the breadth of FCA cases alleging customs violations that have been brought since the FERA Amendments in terms of the type of illicit actions to which FCA liability may attach, such as misrepresentation of origin, misclassification, under valuation, and inaccurate quantity reporting in entry declarations, but also that the recovery by whistleblowers in these cases is growing larger. The possibility of receiving a bigger piece of the settlement pie may encourage would-be whistleblowers. The greater incentive to be a whistleblower, coupled with the expanded pool of possible whistleblowers in view of case law interpreting the 2010 Amendments explored in our prior Alert, caution corporate counsel for importers to pay particular attention to FCA risks. Taken together, these factors foreshadow an increase in trade-related FCA actions in the near future.

In our next and last Alert in this series, we will explore how recent changes in international trade law have heightened the risk of FCA enforcement, and offer steps companies can take to mitigate these risks. 

¹ CMI, 839 F.3d 242 (3d Cir. 2016).

² United States ex rel. Johnson v. Linde AG, et al., Case No. 17-cv-1012. https://www.justice.gov/opa/pr/multinational-industrial-engineering-company-pay-22-million-settle-false-claims-act.

³ United States ex rel. Jeffrey Hawk v. CWD Holdings LLC, et. al., case no. 17-12225 (E.D. MI), and United States ex rel. Steven Hughes v. CWD Holdings, LLC, Case No. 19-cv-7089 (C.D. CA). https://www.justice.gov/usao-edmi/pr/cwd-holdings-pay-8-million-resolve-false-claims-act-allegations-relating-unpaid-import#:~:text=CWD%20and%20its%20subsidiaries%20provide,for%20passenger%20vehicles%20and%20trucks.&text=The%20allegations%20claim%20that%20CWD,payment%20of%20the%202.5%25%20tariff. 

⁴ https://www.justice.gov/usao-ma/pr/importers-pay-more-860000-resolve-false-claims-act-allegations-concerning-unpaid-customs.

⁵ See United State ex rel. Valenti v. Tai Shan Golden Gain Aluminum Products Ltd., et al., Case No. 11-cv-368 (M.D. Fla), available at https://www.justice.gov/opa/pr/three-importers-pay-over-3-million-settle-false-claims-act-suit-alleging-evaded-customs; United States ex rel. Valenti v. Tai Shan Golden Gain Aluminum Products Ltd., et al., Case No. 11-cv-368 (M.D. Fla), available at https://www.justice.gov/opa/pr/two-individuals-agree-pay-435000-settle-false-claims-act-suit-alleging-evaded-customs-duties.