A federal appeals court whose jurisdiction spans some of the busiest ports in the United States has cleared the way for whistleblower cases based on customs fraud — a reminder of why consulting a skilled customs fraud whistleblower attorney can be so important.
The 9th U.S. Circuit Court of Appeals, which is based in San Francisco and covers the West Coast, affirmed a district court’s judgment in which a jury found a company liable for knowingly lying on customs forms to sidestep tariffs on pipe fittings from China.
Importantly, the case (Island Industries Inc. v. Sigma Corp.) was brought by a private whistleblower — in this instance, a company — on behalf of the U.S. government under the qui tam provision of the False Claims Act, one of the nation’s oldest and strongest whistleblower laws.
The decision, filed June 23, resolves some lingering legal questions, bolstering the foundation for similar cases in the future.
Competitor is the whistleblower
Island sued competitor Sigma on behalf of the United States, alleging that it knowingly evaded tariffs for years. A sales manager had researched import regulations after consistently seeing Island’s prices undercut by products from China.
The United States imposes “antidumping duties” to prevent importers from flooding the market with underpriced goods, thus harming domestic companies. The Department of Commerce determines covered products and rates; the importer is supposed to file an entry with Customs and Border Protection declaring the merchandise value, classification and rate of duty, and typically depositing estimated duties at the time of entry.
The final figuring of duties is called liquidation; generally, it’s assumed complete after a year passes, though the Commerce Department can later pursue duties and penalties through litigation before the U.S. Court of International Trade (CIT) if it discovers problems.
Sigma imported what are called “welded outlets” from China and marketed them as such. But Sigma described the merchandise to U.S. Customs as steel couplings, which are not subject to antidumping duties.
Island pursued the FCA case against its competitor without federal intervention, as the qui tam provision allows, and a jury found Sigma liable for violating the FCA. The jury determined that Sigma owed more than $8 million in unpaid tariffs, an amount that would be tripled under the FCA to cover damages and penalties. (FCA whistleblowers are eligible for up to 30 percent of recoveries as an incentive to uncover fraud against the government.)
Notably, the 9th Circuit determined that it has jurisdiction in the case, even though the U.S. government is supposed to initiate such lawsuits in the CIT. That’s because, although Island brought suit on behalf of the government, it is not the government.
FCA applies to customs law
One of Sigma’s arguments was that the FCA doesn’t apply; rather, a law used for customs enforcement would. Under the customs law (19 U.S.C. § 1592), only the government can initiate legal action, though it may reward a whistleblower up to $250,000. But the court said the FCA spans all types of fraud against the U.S. government (excluding IRS matters), and the customs law never states that it is the only option to recover payments. While the two statutes overlap, they don’t irreconcilably conflict.
“One statute should be read to impliedly repeal another only if there is irreconcilable conflict between the two,” the court stated.
Doesn’t matter if government asks for customs duties
Sigma also argued that, because the Commerce Department never asked for payment through the liquidation process, the government didn’t lose any money (and thus, the FCA doesn’t apply). And even now, as the Commerce Department pursues additional duties from recent years, it is not pursuing older payments based on its interpretation of the complicated regulations.
The court rejected the argument, saying neither the regulations nor their implementation mean the duties were never owed.
“In sum, an importer cannot evade duties, wait until its entries are liquidated, and then assert based on that liquidation that its actions did not deprive the government of money,” the decision stated.
Fraud was committed knowingly
A key requirement in determining whether the FCA was violated is proving whether fraud was committed knowingly. That can mean with actual knowledge, in deliberate ignorance, or by recklessly disregarding the truth.
Island alleged that:
- Sigma knowingly falsely declared that it didn’t owe antidumping duties on its products.
- Sigma knowingly misrepresented its products as steel couplings.
Sigma argued that a reasonable person could have believed that no duties were owed, so it shouldn’t be liable under the FCA. By that logic, the court stated, “an FCA defendant would always prevail if a hypothetical reasonable person could have believed the defendant’s statements were true, regardless of any evidence that the real-life defendant had actual knowledge of, was deliberately ignorant of, or recklessly disregarded the falsity of its statements.”
Besides, the court stated, Sigma’s actions offer sufficient evidence of knowledge: Its declaration that it didn’t owe duties; ignoring that antidumping duty orders are common on products from China, especially steel products; failure to look into whether it owed the duties before it declared that it didn’t; and labeling of its product differently depending on whether it was communicating with Customs or customers.
How we can help customs whistleblowers
If you have information about fraud against the government, such as customs fraud, you can help stop it — and protect taxpayers and U.S. businesses. Keller Grover has a long history of helping whistleblowers expose wrongdoing. Speaking with an experienced customs fraud whistleblower attorney can help you understand your rights, strengthen your claim, and protect against retaliation. If you would like more information, or have a potential case, contact us for a free, confidential consultation.