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U.S. Court of Appeals for the Third Circuit Issues Landmark Decision Holding that Failing to Properly Mark Imports with their Foreign Country of Origin Can Give Rise to False Claims Act Liability

In an important case of first impression, the United States Court of Appeals for the Third Circuit yesterday ruled that if a company knowingly evades customs duties by importing goods that are not properly marked with their foreign country of origin, that company is subject to being sued by whistleblowers under the False Claims Act. This ruling should help prevent deceptive marketing and sale of foreign imports as having been made in the United States.  “Yesterday’s ruling is a victory not only for our client, but also for American industry, American consumers, and American taxpayers,” said one of the whistleblower’s lawyers who argued the case before the Third Circuit. “The country-of-origin marking requirements protect American manufacturers and their employees, as well as American consumers who prefer to purchase American-made goods.  And the bulk of any recovery in this case will go the United States treasury, for the benefit of all taxpayers.”

U.S. law requires that imported goods be marked with their country-of-origin so that customers and consumers know where the goods were manufactured. If a company imports foreign-made goods in violation of that requirement, then the company is liable to the government for “marking duties,” which are extra duties equal to 10% of the value of the goods.

The defendant in the case, Victaulic Company, manufactures and sells iron and steel pipe fittings (devices used primarily in commercial and industrial settings to join lengths of pipe). Victaulic originally was a significant part of the Pennsylvania steel industry, and had multiple manufacturing plants in the United States.  However, in recent years, Victaulic closed or significantly scaled-back its manufacturing operations in the United States, laying off large numbers of American workers and opening new plants overseas in China, Mexico and Poland.

The lawsuit was brought under the False Claims Act. Under that law, a private citizen with knowledge of fraud being committed on a government agency or government program may blow the whistle by bringing a lawsuit on behalf of the government, a type of lawsuit known as a “qui tam” lawsuit.  Successful qui tam whistleblowers can receive substantial awards, ranging from between 15% to 30% of the amount recovered for the government.

The opinion issued yesterday addresses an issue that had not previously been addressed by any appellate court in the country, namely, whether a company that violates the country-of-origin marking requirement, and fails to pay marking duties, may be sued under the current version of the False Claims Act. The lower court had dismissed the complaint, reasoning, in part, that even if Victaulic had engaged in the alleged wrongdoing, it could not be held liable under the False Claims Act.  In yesterday’s decision, the Court of Appeals reversed, holding that False Claims Act liability “may attach as a result of avoiding marking duties.”

Customs fraud is an ever-present problem in the United States. Customs and Border Patrol, the agency responsible for customs enforcements, inspects only about 1-2% of the shipments that come through this country’s ports, and those inspections focus primarily on security and law enforcement matters rather than country-of-origin marking.  “This provides the potential for unscrupulous importers to evade customs duties,” stated Anna Haac, another attorney for the whistleblower in the Third Circuit case.  “Because the False Claim Act provides for treble damages and statutory penalties, it can serve as a powerful enforcement mechanism for rooting out customs fraud.” Ms. Haac further explained, “adherence to country-of-origin labeling requirements by importers is critical to ensuring a functioning customs regime because it allows inspectors and competitors to monitor trade flows and confirm compliance with antidumping and countervailing duties, as well as ordinary duty requirements. In addition, many regulations and government contracts require American-made components to be used for government-funded projects. When imports aren’t properly marked with their foreign country of origin, these requirements are easier to evade without detection.”

The U.S. Government has recently shown an increased interest in pursuing customs fraud cases, and the United States Department of Justice filed an amicus curiae (friend of the court) brief in the case in support of the whistleblower’s position on the question of whether marking duties could be recovered under the False Claims Act. In the Third Circuit case, the relator (the technical term for the qui tam whistleblower under the False Claims Act) is Customs Fraud Investigations, LLC, which was formed by two individuals with significant knowledge of the pipe industry. The relator is represented by Jonathan Tycko and Anna Haac of Tycko & Zavareei LLP and Suzanne Ilene Schiller of Manko, Gold, Katcher & Fox LLP

“We hope that others with information about violations of country-of-origin marking requirements will come forward to help us as we continue this fight,” said Mr. Tycko. “Strong enforcement of U.S. customs laws is good for American workers, American consumers, and American taxpayers.  It’s also to the benefit of the vast majority of U.S. importers that play by the rules. The integrity of our trade laws and trade agreements rely on effective customs enforcement.”

Although yesterday’s ruling by the Court of Appeals does not decide whether the relator’s allegations have been proven, regardless of the eventual outcome of this case, the ruling sets a landmark legal precedent.

The opinion is captioned United States ex rel. Customs Fraud Investigations, LLC v. Victaulic Company, No. 15-2169 (3d Cir. Oct. 5, 2016), and is available on request, or for download at http://www.ca3.uscourts.gov/opinions-and-oral-arguments.

© 2017 by Tycko & Zavareei LLP

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About this Author

Jonathan K. Tycko, Civil Litigation Attorney, Tycko Zavareei Law firm
Partner

Mr. Tycko has represented clients in numerous qui tam whistleblowing cases, in areas including Medicare fraud, government contracts fraud, and tax fraud. In addition, with the 2010 passage of the Dodd-Frank Act, Mr. Tycko’s practice has expanded into representation of whistleblowers in the areas of securities and commodities, and violations of the Foreign Corrupt Practices Act.

Mr. Tycko focuses his practice on civil litigation, with special concentrations in whistleblower cases, consumer class actions, unfair competition litigation, employment litigation and housing litigation. He...

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