Sunday, December 14, 2014

Another Loss for Customs Trolls

It has been said, possibly only by me, that every object will become the object of obsession for at least one person. In the Internet age, people who share an interest or passion for something mundane can find one another and form tribes of fellow aficionados willing to obsess over their chosen totem. Here are a few examples: spoons, fishing lures, antique bottles, pepper mills, and my personal favorite old computers (that's the first computer I ever purchased). It turns out, that there are also pencil aficionados (here, here, and here), one of whom was the unnamed plaintiff in United States ex rel. John Doe v. Staples, Inc. et al.

Let's backtrack a bit. The False Claims Act is an 1863 law enacted to fight fraudulent claims for reimbursement by the government following the Civil War. Under the FCA, the government can bring a case against anyone making a false claim seeking payment from the government and against anyone who makes a false statement to avoid making a payment to the government. Technically, the latter is a "reverse false claim," but it works the same way.

In cases where an individual has information that would support an FCA case that the government has not brought, the individual can commence the case in the name of the government. If the government can then decide whether to take up the case. If, for whatever reason, the government decides not to take the case, the individual, known as the "relator," can continue to press the case on its own, though legally in the name of the United States. If the defendant is found to have violated the FCA, it can be liable for treble damages. The successful relator can be awarded up to a third of the recovery, making a substantial incentive to start these cases.

But, there are limits built into the FCA to discourage opportunistic lawsuits filed by individuals without any direct independent knowledge of the alleged fraud. In the customs law context, I have dubbed these individuals "customs trolls." The main impediment to customs trolls is that the case must not be built around information or allegation that have previously been publicly disclosed. Sources of public disclosure include the news media and administrative reports. An exception to public disclosure is where the relator is an original source of the information with direct and independent knowledge.

In this case, the relator is an unnamed pencil aficionado who claims to be an industry insider. He claims to be able to spot a Chinese made pencil from a number of physical characteristics. Noting that there is an antidumping duty order on pencils from China, this person was smart enough to realize that there is an incentive for pencil importers (or their suppliers) to falsely state that the origin of their pencils is other than China. This would avoid the imposition of antidumping duties and would also violate the FCA.

Source: Art Discount UK

Like the customs troll in Victaulic, this relator also undertook some PIERS data mining to see how major pencil importers were reporting the country of origin to Customs and Border Protection. Using that data and the relator's personal expertise to spot Chinese-origin pencils, the relator alleged fraud on behalf of Staples and others.

The United States District Court for the District of Columbia dismissed the case on the basis of the public disclosure doctrine. In this Appeal, the United States Circuit Court of Appeals for the District of Columbia affirmed that dismissal.

There are two parts to a successful qui tam action, as private FCA cases are known. The first is proving that a claim has been made. The second is that the claim is false, which is proved by showing the true facts. To be barred by the public disclosure doctrine, both parts must have been disclosed. In this case, the PIERS data showed the claims: the country of origin asserted at the time of entry. PIERS is a media source of information that qualifies, for a limit group of trade and logistics geeks, as "news." Thus, the PIERS data was publicly disclosure.

The second part of the claim is establishing the true origin of the pencils. In this case, the relator identified a number of physical characteristics that are unique to Chinese-origin pencils including a distinctive method of joining the halves of the pencil, off-center leads, low quality erasers, inferior paint, and loose ferrules (those metal bands joining the pencil and the eraser). The problem for the relator is that many of these characteristics were also listed in the International Trade Commission report. The relator argued that these elements were obvious and should have been enough to alert the importer to the actual origin of the pencils and to alert the government to the false claims.

Unfortunately, that argument cuts against the relator's claim that the information was not publicly disclosed. The ITC report identified the relevant characteristics. The ITC report is an administrative report that constitutes a public disclosure. Furthermore, the fact that the physical characteristics should have alerted both the government and the importers to the actual origin of the pencils, indicates that the public disclosure was effective (which is not even a requirement). The Court of Appeals, therefore, found that "Relator has thus pled [sic] himself out of court."

Using some satisfying language, the Court went on to say (emphasis is mine):

Under Relator’s theory, however, anyone armed with the information in the ITC reports could troll the aisles of any office-supply store for pencils with loose ferrules or off-center leads. The would-be plaintiff could then determine whether the retailer had paid the required antidumping duties by reference to other public information, and if it had not, then voilĂ , the plaintiff would be entitled to millions of dollars in qui tam compensation. But these sorts of lawsuits, brought by “opportunistic plaintiffs who have no significant information to contribute of their own,” are precisely the kind the public disclosure bar seeks to prevent.

So, is this the end of customs trolls? Not likely. This case only controls in the DC Circuit. Other Circuits may take a different approach until the Supreme Court says otherwise. What it does is make customs-related FCA cases harder for individuals outside of the import supply chain (i.e., the trolls). Individuals who work within the supply chain, including importers and brokers, are direct and independent sources of information that might still support FCA claims. My guess is that the next step for customs trolls is to start renting hotel conference rooms to hold seminars on how compliance people can make millions by signing on as relators.

Epilogue: What is with the crappy erasers? I find I am forever running into terrible erasers on pencils. Many do more damage to the page than they succeed in removing mistakes. I have here a Dixon Oriole and a Spider-Man wrapped novely pencil labeled "Made in China." Both have hard and smooth erasers that make a mess of the page. Rather than erase the offending line, the Oriole seems intent on spreading it out so that I end up with a wide swatch of graphite on my page. The Spider-Man pencil doesn't so much remove the pencil mark as it does create an apparently permanent blot of pink particles embedded on the page. In contrast, a Staedtler 134-HB cleanly erases the mark without leaving an additional residue on the page. I am similarly happy with a Dixon Ticonderoga HB 2, which seems to remove more of the mark. A second Oriole seems to work just fine. What gives, are the erasers inherently bad or do they go bad over time?

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