In a decision that highlights the overlap of international trade obligations and False Claims Act (FCA) jurisprudence, a federal judge recently dismissed an FCA suit because the whistleblower’s claims, against an importer of steel pipe manufactured in China, were already the subject of a U.S. Customs and Border Protection (CBP) administrative proceeding to recover penalties for the same conduct. This is the first time a federal court has directly addressed the question of whether a penalty proceeding under the Tariff Act of 1930, 19 U.S.C. § 1592, qualifies as an “administrative civil monetary penalty proceeding” for purposes of the so-called government action bar in the FCA, 31 U.S.C. § 3730(e)(3).

The decision, Schagrin v. LDR Industries, LLC, No. 1:14-cv-09125 (N.D. Ill., May 23, 2018), arises from an unusual strategy for collecting duties under the Tariff Act: invoking the whistleblower provisions of the FCA. Traditional forms of enforcement for violations of U.S. trade laws, such as investigations coordinated between CBP, the Department of Justice (DOJ), and U.S. Immigration and Customs Enforcement (ICE), or sanctions imposed by the Bureau of Industry and Security (BIS), are more common and familiar. But violations of the Tariff Act can also serve as a basis for liability under the reverse false claims provision of the FCA, 31 U.S.C. § 3730(a)(1)(G), and actions for violations of that section of the Act can be brought by private citizens.

Reverse False Claims Provision Applies to Customs Duties

In 2009, Congress expanded the scope of the reverse false claim provision of the FCA in two ways:

  • Imposing on anyone who “knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the Government;” and
  • Defining “obligation” to include “an established duty, whether or not fixed, arising from an express or implied contractual, grantor-grantee, or licensor-licensee relationship, from a fee-based relationship or similar relationship, from statute or regulation, or from the retention of any overpayment.”

See 31 U.S.C. §§ 3729(a)(1)(G), 3730(b)(3).

For purposes of international trade, the reverse false claims provision of the FCA may be implicated when an importer knowingly avoids paying duties by making false statements about tariff classification, entered valuation, country of origin, Free Trade Agreement or trade preference program eligibility, or the applicability of antidumping or countervailing duties.

Schagrin v. LDR Industries

In Schagrin, the plaintiff alleged that the defendant companies imported steel pipe from China without paying the associated antidumping and countervailing duties. The complaint asserted that the federal government imposed duties of between 30 and 620 percent on circular welded steel pipe imported from China beginning November 2007. The defendants allegedly imported steel pipes into the U.S. to be sold to retailers without paying the corresponding duties. While shopping at a Home Depot store in 2010, the plaintiff, an attorney with experience in international trade, noticed that the defendants’ steel pipe was being sold at a very low price. Plaintiff believed that anyone in the industry who was familiar with the applicable regulations would know the low price signaled the importer had not paid the required duties. He reported the issue to CBP in 2012.

Following the plaintiff’s report, CBP opened an investigation and determined defendants’ conduct resulted in over $14.3 million in lost revenue to the United States. The CBP assessed penalties of more than $38.8 million pursuant to 19 U.S.C. § 1592. However, CBP ultimately billed defendants only $6.7 million, later reduced to $4.85 million, for unpaid duties on steel pipe shipments in 2011 and 2012. Due in large part to the CBP penalties, the defendants filed for bankruptcy in September 2014. The plaintiff filed his FCA suit in November 2014, and CBP filed a proof of claim in the bankruptcy proceeding in February 2015, detailing its findings and assessment of penalties pursuant to its authority under 19 U.S.C. § 1592. When the bankruptcy court entered its October 2016 order approving defendants’ Chapter 11 plan, it noted the plan incorporated terms of a settlement between defendants and CBP as “full and complete satisfaction” of disputed CBP claims for over $58.7 million.

Given that history, defendants moved to dismiss Schagrin’s FCA case, arguing that the court lacked jurisdiction under the government action bar.

The Government Action Bar

The government action bar applies where the “allegations or transactions” are the subject of a “civil suit or an administrative civil money penalty proceeding in which the Government is already a party.” 31 U.S.C. § 3730(e)(3). To succeed on a motion to dismiss under this provision, the defendants must show that substantially the same allegations or transactions are, or were, the subject of a previous civil money penalty proceeding involving the U.S. Government.

The plaintiff argued the government action bar did not apply because CBP did not pursue an “administrative civil money penalty proceeding” under 19 U.S.C. § 1592(b), but instead merely sent the defendants “a bill for duties,” followed by a claim in bankruptcy. Schagrin, Slip. Op. at 5.

Rejecting this argument, the court recognized that the key to determining whether 31 U.S.C. § 3730(e)(3) bars a subsequent FCA suit is whether the government has already imposed a “penalty” against the defendants. Id. The court noted the proof of claim filed with the bankruptcy court said CBP’s findings supporting the claim “are the result of the penalty pursuant to 19 U.S.C. § 1592.” Id. The court also observed that CBP initially pursued a penalty amount greater than the amount ultimately billed to the defendants.

The court also rejected the plaintiff’s argument that his suit was not based on “allegations or transactions” that CBP had alleged in a pleading or other document. Relying on the Seventh Circuit’s reasoning in United States ex. rel. Absher v. Momence Meadows Nursing Ctr., Inc., 764 F.3d 699 (7th Cir. 2014), the court held that an FCA suit is barred when either the allegation of fraud, or the critical elements of the fraudulent transaction themselves, are the subject of a governmental civil action or penalty proceeding. Slip Op. at 7 (citing Absher, 764 F.3d at 707). Recognizing that the critical elements of a transaction include the misrepresentation underlying the alleged fraud, the Schagrin court pointed to misclassification of the imported pipe to avoid customs duties as the misrepresentation “at the heart of both” the CBP penalty assessment and the pending FCA suit. Id.

Rejection of “Original Source” Argument

Finally, the court rejected the plaintiff’s assertion that he should be permitted to proceed because his complaint was not a parasitic attempt to copy the earlier CBP proceeding, inasmuch as the plaintiff himself had tipped off the CBP to the allegations before that proceeding began. While the court acknowledged that the plaintiff might well qualify as an “original source” of the allegations for purposes of the public disclosure bar of the FCA, original source status would not help the plaintiff overcome the government action bar, which incorporates elements different from the public disclosure provisions in the FCA. Where the elements of the government action bar apply, the second suit must be dismissed regardless of the plaintiff’s ability to claim “original source” status.

A Lesson for Importers

FCA claims in the customs arena pose a real risk. The FCA plaintiffs’ bar is highly motivated, sophisticated, and well-organized, and the failure to pay appropriate tariff obligations can give rise to FCA liability. While the plaintiff in Schagrin could have reported the conduct to CBP under 19 U.S.C. § 1619, CBP’s trade-specific whistleblower statute, he could have received only 25 percent of the government’s recovery up to a maximum of $250,000. For most plaintiffs, the prospect of an uncapped 15 to 30 percent recovery of treble damages and penalties due under the FCA is more enticing.

Schagrin illustrates one way FCA qui tam suits can be defeated on a motion to dismiss where the government has already taken its bite of the apple. The lesson for importers may be to consider prior disclosure to CBP upon discovery of underpaid tariffs or customs duties. While the risk of qui tam complaints cannot be eliminated altogether with such a strategy, an early prior disclosure reduces that risk, and could form the basis for an argument that enforcement under the FCA is unnecessary.