Customs Trolls and the False Claims Act
Want to see the tip of the spear of a new aspect of the practice of customs law? Take a look at United States of America ex rel. Customs Fraud Investigations, LLC v. Victaulic Company. This is a decision of the United States District Court for the Eastern District of Pennsylvania.
What we have here is a False Claims Act case brought by a private company calling itself Customs Fraud Investigations, LLC. CFI scoured through ships manifest data to find products it believed might be lacking correct country of origin markings. It then compared the import data to pictures of the products it found on eBay to confirm its suspicions. Armed with that data and the possibility of a financial windfall, CFI filed a case against Victaulic in the federal district under the False Claims Act. I hereby dub this the birth of the customs troll. Compare that to the patent troll and you will see why.
In the end, CFI lost (at least so far), but how we got to that point is interesting.
The False Claims Act is designed to permit the government to levy civil penalties against companies and individuals who make false claims for governmental benefits. Common examples of this kind of fraud are health care providers who submit claims to Medicare for reimbursement related to services that never happened or were unwarranted. As you can imagine, there are a lot of other programs that pay money to claimants that can be abused. For each of those, there are False Claims Act defendants.
An interesting thing about the FCA is that it deputizes regular folks to also bring the case to by filing a claim in a federal district court. The claim is filed under seal to protect the identity of the "whistleblower." The Justice Department then reviews the case and decides whether it want to take over and pursue the defendant. If the Justice Deparatment decides not to intervene, then the original whistleblower, who is known as the "relator," can proceed on his or her own, technically on behalf of the United States.
Why would someone do this? There is money to be had. The relator gets a portion of the recovery, and a larger portion if the Department of Justice does not intervene. This incentivises medical clerk, government contract administrators, and others who might see shenanigans to report them. It also gives an incentive to lawyers to find and pursue these cases, which can include a recovery of attorneys fees, which is always nice.
To the best of my knowledge, Customs Fraud Investigations LLC is the first entity set up for the purpose of identifying cases of customs fraud for a profit. That is similar to a company that looks to acquire patents not for purposes of exploiting the technology but rather to sue potential infringers. Those folks are patent trolls or in the parlance of the trade "Non-Practicing Entities." So CFI is a 'Non-Importing Entity."
What CFI LLC did was an exercise in mining big data to find potential customs violations. To the best of my knowledge, CFI was not a business partner, employee, or competitor of Victaulic.
The substance of the case is interesting. CFI has a couple problems. The first has to do with the public disclosure exemption. Under this rule, a plaintiff may not successfully bring a FCA case if the information on which it is based has already been publicly disclosed in the news media or certain other outlets. In this case, much of the underlying data came from Zepol. According to the Court, Zepol is a news media outlet. But, that was not enough to bar the action. Although CFI LLC relied in part on Zepol data, it needed the eBay information to complete its analysis. EBay, according to the Court, is not a media outlet covered by the act. As a result, the public disclosure bar did not apply.
The second issue was whether CFI LLC had provided enough facts in its complaint to plausibly establish that Victaulic had imported improperly marked goods. On this point, the Court found that CFI LLC had shown a lot of imports and had shown that there are unmarked Victaulic in the secondary marketplace. CFI LLC had, however, not been able to make the link between the unmarked products for sale on eBay and the imports. CFI LLC needed to also show that the unmarked products were the imports rather than being products of the U.S. not subject to a marking requirement.
Because CFI LLC failed to plead facts making that connection, the Court dismissed the case.
One additional point is worth noting. The underlying alleged false claim here was not just that the goods were unmarked at the time of entry. It was that as a result, Victaulic was liable for marking duties of 10% of the value of the merchandise. By failing to mark the goods, Victaulic avoided marking duties and, therefore, made what is called a reverse false claim. That is, rather than receiving a payment as a result of the claim, Victaulic allegedly avoided having to make a payment.
There are problems with this theory. First of all, Customs need not impose marking duties in all cases of mismarked goods. It can, for example, seek redelivery and then pursue liquidated damages if the goods are not returned to Customs. There is also a question of whether the failure to mark is a "claim" if the entry documentation properly identifies the country of origin. Because of the pleading issues, the Court did not have to address these interesting questions.
Mark my words, the False Claims plaintiff's bar is going to start talking to compliance people looking for wrongdoing. In-house counsel and compliance managers should review how they respond to internal reports of potential violations and complaints. You need to address them quickly, fully, and with the utmost respect to the party raising the issue. The last thing you want is a disgruntled employee with CFI LLC on his or her speed dial.
Also, first thing tomorrow, make sure that your company has requested that U.S. Customs and Border Protection not publish you import data. You can do that under 19 CFR 103.31(d). Do it. It can prevent your data from being mined by a customs troll.
What we have here is a False Claims Act case brought by a private company calling itself Customs Fraud Investigations, LLC. CFI scoured through ships manifest data to find products it believed might be lacking correct country of origin markings. It then compared the import data to pictures of the products it found on eBay to confirm its suspicions. Armed with that data and the possibility of a financial windfall, CFI filed a case against Victaulic in the federal district under the False Claims Act. I hereby dub this the birth of the customs troll. Compare that to the patent troll and you will see why.
In the end, CFI lost (at least so far), but how we got to that point is interesting.
The False Claims Act is designed to permit the government to levy civil penalties against companies and individuals who make false claims for governmental benefits. Common examples of this kind of fraud are health care providers who submit claims to Medicare for reimbursement related to services that never happened or were unwarranted. As you can imagine, there are a lot of other programs that pay money to claimants that can be abused. For each of those, there are False Claims Act defendants.
An interesting thing about the FCA is that it deputizes regular folks to also bring the case to by filing a claim in a federal district court. The claim is filed under seal to protect the identity of the "whistleblower." The Justice Department then reviews the case and decides whether it want to take over and pursue the defendant. If the Justice Deparatment decides not to intervene, then the original whistleblower, who is known as the "relator," can proceed on his or her own, technically on behalf of the United States.
Why would someone do this? There is money to be had. The relator gets a portion of the recovery, and a larger portion if the Department of Justice does not intervene. This incentivises medical clerk, government contract administrators, and others who might see shenanigans to report them. It also gives an incentive to lawyers to find and pursue these cases, which can include a recovery of attorneys fees, which is always nice.
To the best of my knowledge, Customs Fraud Investigations LLC is the first entity set up for the purpose of identifying cases of customs fraud for a profit. That is similar to a company that looks to acquire patents not for purposes of exploiting the technology but rather to sue potential infringers. Those folks are patent trolls or in the parlance of the trade "Non-Practicing Entities." So CFI is a 'Non-Importing Entity."
What CFI LLC did was an exercise in mining big data to find potential customs violations. To the best of my knowledge, CFI was not a business partner, employee, or competitor of Victaulic.
The substance of the case is interesting. CFI has a couple problems. The first has to do with the public disclosure exemption. Under this rule, a plaintiff may not successfully bring a FCA case if the information on which it is based has already been publicly disclosed in the news media or certain other outlets. In this case, much of the underlying data came from Zepol. According to the Court, Zepol is a news media outlet. But, that was not enough to bar the action. Although CFI LLC relied in part on Zepol data, it needed the eBay information to complete its analysis. EBay, according to the Court, is not a media outlet covered by the act. As a result, the public disclosure bar did not apply.
The second issue was whether CFI LLC had provided enough facts in its complaint to plausibly establish that Victaulic had imported improperly marked goods. On this point, the Court found that CFI LLC had shown a lot of imports and had shown that there are unmarked Victaulic in the secondary marketplace. CFI LLC had, however, not been able to make the link between the unmarked products for sale on eBay and the imports. CFI LLC needed to also show that the unmarked products were the imports rather than being products of the U.S. not subject to a marking requirement.
Because CFI LLC failed to plead facts making that connection, the Court dismissed the case.
One additional point is worth noting. The underlying alleged false claim here was not just that the goods were unmarked at the time of entry. It was that as a result, Victaulic was liable for marking duties of 10% of the value of the merchandise. By failing to mark the goods, Victaulic avoided marking duties and, therefore, made what is called a reverse false claim. That is, rather than receiving a payment as a result of the claim, Victaulic allegedly avoided having to make a payment.
There are problems with this theory. First of all, Customs need not impose marking duties in all cases of mismarked goods. It can, for example, seek redelivery and then pursue liquidated damages if the goods are not returned to Customs. There is also a question of whether the failure to mark is a "claim" if the entry documentation properly identifies the country of origin. Because of the pleading issues, the Court did not have to address these interesting questions.
Mark my words, the False Claims plaintiff's bar is going to start talking to compliance people looking for wrongdoing. In-house counsel and compliance managers should review how they respond to internal reports of potential violations and complaints. You need to address them quickly, fully, and with the utmost respect to the party raising the issue. The last thing you want is a disgruntled employee with CFI LLC on his or her speed dial.
Also, first thing tomorrow, make sure that your company has requested that U.S. Customs and Border Protection not publish you import data. You can do that under 19 CFR 103.31(d). Do it. It can prevent your data from being mined by a customs troll.
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