Marking Duties Not Subject to False Claims Act Whistleblower Suits, Says District Court

Customs Fraud Investigations (CFI) filed an amended complaint against Victaulic Company after its initial case was dismissed in September (see 14091119). CFI added more detail to the complaint, which was based off claims that Zepol manifest data showed most Victaulic pipe fittings were imported while pictures of Victaulic products from eBay purportedly showed they were not marked. According to CFI, Victaulic had failed to properly mark the country of origin of pipe fittings it imported from China, Poland and Mexico, resulting in the obligation to pay marking duties that it failed to pay or report on its Form 7501 Entry Summary, said CFI.

The District Court found fault with CFI’s theory as to marking duties and denied CFI’s motion to reverse the previous dismissal based on the amended complaint. Marking duties are not owed at the time of importation, instead accruing only if improperly marked goods have been entered into the country and are not subsequently remarked, exported, or destroyed, it said. Marking violations found before release of imported goods must be corrected, either through marking, exportation or destruction of the goods, said the court. Under 19 USC 1304(i), a 10 percent marking duty is only owed if that correction subsequently fails to occur, it said.

Because marking duties only accrue after importation, an importer is not able to report any marking duties it owes on Form 7501 because at the time it submits the form it owes none, said the court. Indeed, while Form 7501 includes a field for “other fees,” the list of “applicable collection codes” does not include a code for marking duties, it said. “Under CFI's interpretation, an importer would be obligated to disclose marking duties owed on merchandise before any marking duties had in fact accrued,” said District Judge Mary McLaughlin in the opinion. “If CBP were notified upon entry — via Form 7501 or in connection with other entry documentation — that imported merchandise did not comply with marking requirements, it would order remarking, exportation, or destruction of the merchandise prior to releasing it,” she said.

The court also rejected CFI’s complaint because marking duties aren’t subject to the False Claims Act, said the ruling. The 6th Circuit U.S. Court of Appeals ruled in 1999 that “reverse false claims,” where a false statement is used to avoid an obligation to the government, have to be related to an obligation that existed before the false statement was made. False Claims Act allegations also can’t relate to obligations that result from the false statement itself, said the Appeals Court in a case that found marking duties weren't subject to a false claims suit. In Victaulic’s case, the failure to mark directly resulted in the marking duties, so those duties couldn’t be the basis for a False Claims Act suit, said the District Judge McLaughlin.

CFI plans to appeal the ruling to the U.S. Court of Appeals for the 3rd Circuit, said CFI's lawyer, Jonathan Tycko of Tycko & Zavareei. The appeal will focus on the District Court's interpretation of the marking duties statute, as well as its finding that CFI did not sufficiently demonstrate that Victaulic had been importing pipe fittings not properly marked with the country of origin.

Tycko said he can't speak of CFI's future plans to bring similar cases against other companies, but said that the company's principals "are people with substantial experience in international trade and customs matters, and they are interested generally in the issue of customs fraud, as is our law firm." The use of False Claims Act to pursue companies that violate customs laws is "at the cutting edge" of both customs law and False Claims Act law, said Tycko, adding he would be "happy to talk to" other people with information about similar types of customs fraud.

(U.S. ex. rel. Customs Fraud Investigations, LLC. v. Victaulic Company, E.D. Pa. 13-2983, dated 04/10/15, Judge McLaughlin)