The Tariff Act of 1930 was enacted by Congress to raise revenue, regulate commerce with foreign countries and protect American labor. One of the requirements of the Tariff Act is that articles imported into the United States from foreign countries must be properly marked with their country of origin. If an importer releases unmarked or improperly marked goods into the United States, the improper is fined 10% on the improperly marked goods. On October 5, 2016, the U.S. Third Circuit Court of Appeals considered whether a U.S. importer who allegedly imported millions of pounds of improperly marked pipe fittings was liable for a “reverse false claim” under the False Claims Act. See United States ex rel., Customs Fraud Investigations, LLC v. Victaulic Company, No. 15-2169 (3rd Cir. Oct. 5, 2016).
The whistleblower in Victaulic was not an individual, but instead was a company - Custom Fraud Investigations, LLC (“CFI”). CFI is a Maryland-based company consisting of various professionals from the pipe fitting industry. CFI’s employees had worked on prior trade investigations regarding pipe and tube products and provided direct support to several U.S. government agencies. Through its qui tam complaint against Victaulic, CFI alleged that for over a decade Victaulic imported millions of pounds of improperly marked pipe fittings without disclosing that the fittings are improperly marked. Id. at *5. CFI further alleged that because the improper markings were never discovered by U.S. Customs officials, Victaulic avoided paying marking duties on tens of millions of pounds of pipe fittings. Id.
CFI’s primary theory of liability against Victaulic was that the company had engaged in a “reverse false claim.” In 2009, Congress passed the Fraud Enforcement and Recovery Act (“FERA”). In passing FERA, Congress expand reverse false claims to include “knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the government.” That language provides the essence of a reverse false claim – the failure to pay the government monies owed. False claims often arise when a company bills the government for goods or services that were never provided. Reverse false claims, on the other hand, create liability where a company or individual has an obligation to pay the government, but fails to do so.
CFI alleged in Victaulic that the company knew its goods were not marked properly and therefore knew that its imported pipe fittings should not have been released from government custody. Id. at *23. According to CFI, Victaulic made a choice – it allowed its goods to come into the United States with improper markings. If the unmarked goods were discovered, the company would have to pay a 10% marking duty, but if the goods entered the country undetected, Victaulic remained silent and did not have to pay the government money it would otherwise owe. As CFI alleged, “once the pipe fittings cleared Customs, Victaulic knew it owed marking duties that accrued on importation but did not pay them.”
Under the reverse false claim theory, CFI argued that Victaulic’s liability arose due to its failure to notify the Bureau of Customs and Border Protection of the company’s pipe fittings non-conforming status. By not notifying the government, the company’s pipe fittings were released into the U.S. and marking duties which should have been paid were never collected by the government. The district court found that the allegedly fraudulent conduct by Victaulic was immaterial and therefore did not rise to the level of a reverse false claim under the False Claims Act. Id. at *24.
On appeal, the Third Circuit reversed, noting that under the 2009 enactment of FERA, a false statement was no longer required in order to establish a false claim. Instead, under FERA all that is required is “mere knowledge and avoidance of an obligation … without the submission of a false record.” Id. Applying FERA’s amendments to the False Claims Act, the Third Circuit found that “Victaulic need not have made any express statement to the government to give rise to reverse false claim liability.” Id. Instead, if the company failed to disclose to the government that its goods were unmarked or improperly marked, despite its statutory obligation to do so, Victaulic would be liable under the False Claims Act.
Jason Cornell is an attorney who represents whistleblowers with the law firm Clark Fountain LaVista Prather Keen & Littky-Rubin. Clark Fountain represents plaintiffs in various matters throughout the United States. If you have questions regarding the issues addressed in this or other posts, you can reach Jason at firstname.lastname@example.org.