CFI is an entity established to conduct research and analysis with the apparent goal of identifying customs fraud. The ultimate goal of which appears to be to profit by bringing False Claims Act cases against alleged fraudsters. Nice business model.
In the case of Victaulic, CFI claimed that the company was not labeling its products consistent with the country of origin marking laws and regulations. While doing so, Victaulic also allegedly failed to notify Customs and Border Protection of the violation and deposit marking duties. As a result, according to CFI, Victaulic has committed customs fraud and, by making a false claim, deprived the U.S. government of lawful revenue. CFI claims it should be able to maintain a False Claims Act case on this basis and receive a portion of the revenue eventually paid to the U.S.
As previously discussed, CFI based this assertion on a comparison of Victaulic's publicly available ships manifest data and pictures of Victaulic products offered for sale of eBay. CFI claims that the pictures lack any country of origin markings or in some cases lack adequate country of origin marking. From that CFI concludes, and asked the U.S. District Court for the Eastern District of Pennsylvania to conclude, that it can state a cause of action under the False Claims Act.
As you know, the Court previously dismissed this case with prejudice because it found CFI had failed to state a claim. CFI is back in Court seeking to file an amended complaint. In its decision denying the motion, the Court recounts the history of this case and the application of the marking laws to the False Claims Act. The Court notes that there is no spot on the customs entry summary (CBP Form 7501) where an importer is required to disclose a liability for marking duties potentially imposed under 19 U.S.C. § 1304(i).
In this phases of the case, CFI has argued that is should be permitted to amend its complaint to state a cause of action. What follows in the opinion is larger procedural and primarily of interest to lawyers. So, I will get it out of thew way to make room for the more interesting point.
First, CFI waited too long to move to amend the complaint. CFI did not move to amend until after the Court entered final judgment against it. That was despite knowing that the Court was skeptical of the "bare bones" complaint and was contemplating a dismissal. The Court waited eight months between the hearing and the dismissal, giving CFI time to move to cure the defects in its complaint. This delay weighs against granting a motion to amend now.
More important, the Court found that any effort to amend the complaint would be futile because there does not appear to have been a violation of the False Claims Act. This is because an importer does not owe marking duties at the time of importation. That obligation arises only if unmarked or improperly marked goods enter the U.S. and are not subsequently remarked, exported, or destroyed. An importer is simply not permitted to preemptively say to CBP, "these goods are not properly marked, so here is my 10% marking duty." That's not how it works. Because the obligation does not arise at the time of importation, Victaulic did not make a false statement by failing to disclose the lack of payment of marking duties, which were not yet owed and may never be owed.
The more interesting question presented here is what will CFI or other FCA plaintiffs have to do to make a FCA case involving customs fraud? Federal Rule of Civil Procedure 9(b) requires that a complaint "state with particularity the circumstances constituting fraud." The complaint must contain more than evidence of the mere opportunity for fraud. In that context, the Court made an interesting observation that:
It is worth noting that CFI is essentially a stranger to Victaulic. It has no inside information, unlike the typical qui tam relator, who has usually seen direct or indirect evidence of a fraudulent scheme. A current or former employee of a defendant, or an individual who is otherwise in a position to have inside information about a defendant's practices and conduct, bears some level of reliability when he acts as a qui tam relator because he was in a position [to] have observed the alleged fraud through personal experience. . . . When a relator is a complete stranger to the defendant who has constructed a case of fraud entirely from the outside, his allegations do not necessarily bear the same reliability. That is not to say that a corporate outsider cannot function as a relator. However, any outside investigation into a private company's fraud must, in accordance with Rule 9(b), supply the Court with a level of reliable information that strongly supports an inference a FCA violation occurred.
That is a pretty strong statement that prospective customs trolls will need to meet a high burden of pleading fraud. We should keep in mind that this is a decision from one district court. There have been and will be other efforts to bring FCA cases involving customs fraud. Some of those will succeed. So, this remains a developing area of law.
One thing that continues to be certain is that companies should request that their import data be treated as confidential. That will help prevent the kind of data mining CFI has undertaken. You can get started on that here.