In Island Industries Inc. v. Sigma Corp., the Ninth Circuit is set to address whether federal district courts have subject matter jurisdiction over customs fraud cases in actions initiated under the qui tam provisions of the False Claims Act (“FCA”). The FCA allows private parties (“relators”) to file suits on behalf of the government so that the Department of Justice (“DOJ”) can investigate the claims and decide whether to intervene in the action.

FCA cases have historically involved actions brought against procurement and healthcare companies, but in recent years, there has been a significant rise in the number of cases brought against U.S. importers. For example, in January, the U.S. Attorney’s Office for the Southern District of New York announced that an importer of vitamins and nutritional supplements paid $22.8 million to settle allegations that the company misclassified its products under the Harmonized Tariff Schedule in order to avoid paying customs duties. The relator in that case, a former employee of the importer, received a relator’s share of $4.5 million for whistleblowing.

While importers have long faced the risk of an enforcement action to collect duties, importers must now contend with the possibility of getting sued under the FCA by internal whistleblowers or competitors. In Island Industries, the relator was a domestic manufacturer of pipe fittings and alleged that its competitor, Sigma Corp., was making false statements to avoid paying duties owed in connection with a 182.9% anti-dumping duty order for piping imported from China. The trial court held Sigma Co. had violated the FCA and was liable for more than $24 million in damages and penalties. Sigma subsequently appealed and asked the Ninth Circuit to reverse the judgment.

Although the question of subject matter jurisdiction was not raised on appeal, a judge on the panel raised the issue during oral arguments and inquired whether the district court had subject matter jurisdiction over the suit. The uncertainty around this issue stems from the Ninth Circuit’s earlier decision in U.S. v. Universal Fruits and Vegetables Corp., where the Ninth Circuit held that an FCA action brought by the government based on an importer’s use of fraud to evade antidumping duties fell within the exclusive jurisdiction of the CIT because the action was “commenced by the United States[] … to recover customs duties.” U.S. v. Universal Fruits and Vegetables Corp. 370 F.3d 829 (9th Cir. 2004); 28 U.S.C. § 1582(3). However, after the case was transferred, the CIT concluded that it did not have jurisdiction over the suit because an FCA suit does not seek to recover customs duties, but rather imposes liability in the form of damages and penalties for a defendant’s fraud on the government. See U.S. v. Universal Fruits & Vegetables Corp., 433 F. Supp. 2d 1351 (Ct. Int’l Trade 2006). The issue of FCA jurisdiction has not come before the CIT since the 2006 Universal Fruits decision.

In the nearly twenty years since the Ninth Circuit’s decision in Universal Fruits, relators and the DOJ have largely side-stepped this precedent by drawing a distinction between cases brought directly by the government and those cases initiated by qui tam relators. To date, district courts have agreed with relators and the DOJ that a case brought under the qui tam provision is not “commenced by the United States” and courts have consistently held that such actions do not fall within the CIT’s exclusive jurisdiction under § 1582. See, e.g., U.S. ex rel. Huangyan Imp. & Exp. Corp. v. Nature’s Farm Prods., Inc., 370 F. Supp. 2d 993, 997-98 (N.D. Cal. 2005). This reasoning has allowed qui tam relators to continue to file suit in courts within the Ninth Circuit.

This distinction between government-initiated cases and qui tam actions is now the subject of scrutiny in Island Industries. Following oral arguments, the court invited the parties to submit supplemental briefing on the question of whether the district court had subject matter jurisdiction over the qui tam suit. As of February 21, the parties have submitted supplemental briefing with the DOJ noting that the court would “effectively create a customs-related exception to the FCA within this circuit” if the court were to extend Universal Fruits to actions initiated by qui tam relators. Such a ruling could have a ripple effect in other jurisdictions across the country making the Ninth Circuit’s forthcoming opinion a case worth watching for importers in the Ninth Circuit and beyond.