Ninth Circuit Considers Whether False Claims Act Applies to Customs Violations

In a recent development in Island Industries, Inc. v. Sigma Corp.—a nonintervened False Claims Act (FCA) qui tam action based on an alleged failure to pay antidumping duties—the Ninth Circuit, post–oral argument, ordered supplemental briefing on the threshold question of whether FCA violations can be predicated on a violation of customs laws or whether Congress instead intended the recovery of customs duties fall within the exclusive province of the customs enforcement regime. We examine arguments made by Sigma, Island Industries, and the United States, as the Ninth Circuit grapples with this important question.

This latest briefing follows separate supplemental briefing on the related question of whether district courts have jurisdiction over qui tam actions based on customs violations.

The Ninth Circuit on May 26, 2023 ordered the parties in Island Industries v. Sigma Corp., Case No. 22-55063 (9th Cir.), to brief “whether 19 U.S.C. § 1592 provides the exclusive means for recovering antidumping duties that an importer has fraudulently evaded paying through false statements on customs forms, or whether the False Claims Act may also be used to recover such duties.” Section 1592(d) states that, “if the United States has been deprived of lawful duties, taxes, or fees . . ., the Customs Service shall require that such lawful duties, taxes, and fees be restored, whether or not a monetary penalty is assessed.” [1]

In briefing completed on July 12, 2023, Sigma—the defendant below—argues that Section 1592 provides the exclusive means of recovering the antidumping duties that were the subject of the district court judgment. Island Industries—the business competitor/relator and prevailing party below—supported by the United States as an invited amicus, argues the opposite: that the statutes are not in irreconcilable conflict, and thus relators may still pursue claims under the FCA based on fraud in connection with customs duties.

Argument in Favor of Section 1592 as the Exclusive Remedy

Sigma argues that Title 19 created a detailed, comprehensive legal regime with specific remedies for customs fraud—a scheme that is designed to ensure nationwide uniformity in all customs districts. Sigma argues further that Congress reinforced this goal by granting the Court of International Trade (CIT) exclusive jurisdiction over actions to recover customs duties and directing that liquidations—the final computation or ascertainment of duties—are final and binding on all persons.

According to Sigma, Congress already created a fraud enforcement mechanism in the customs laws by enacting a specific exception to the otherwise nonreviewable “final and conclusive” nature of liquidation, 19 USC § 1514(a). Per 19 USC § 1592(d), in cases involving fraudulent failure to pay antidumping duties, the exception to Section 1514 liquidation finality applies.

Sigma argues that the presence of this exception implies that any statute that does not include the same explicit mention of Section 1514 does not allow for any review of the liquidation process. As such, because Congress did not provide an exception to Section 1514 in the FCA, a party cannot use the FCA to restore “final and conclusive” duties.

Moreover, pointing to Ninth Circuit decisions supporting the concept, Sigma argues that the remedies available under the customs laws are more specific to this precise situation, and thus the more general FCA cannot be used to provide alternative means to get at the same remedy.

Finally, Sigma argues that because FCA damages would be measured, at least in part, on the avoided “customs duties,” allowing an FCA remedy to acquire those damages also would conflict with the Ninth Circuit’s holding in United States v. Universal Fruits and Vegetables Corp., 370 F.3d 829, 835–36 (9th Cir. 2004), that the government cannot recast withheld duties as damages and sue for them under the FCA.

Argument Against Section 1592 Being the Exclusive Remedy

Island Industries argues that the customs remedies are not exclusive, and that the FCA provides a complementary mechanism for addressing customs fraud. Also citing Ninth Circuit decisions, Island Industries asserts that (1) the FCA and the customs law are capable of co-existence, (2) the FCA was meant to supplement any existing mechanisms to recover for fraud against the government, and, (3) unlike the customs laws, the FCA provides for a private cause of action.

In its amicus brief, the United States notes that repeals by implication are not favored and one statute cannot displace another one without clear and manifest congressional intent. The United States stresses that the legislative history associated with the 2009 amendments to the FCA—which mention “fixed, unliquidated obligations such as tariffs on imported goods” and “customs duties . . . fall[ing] within the new definition of the term ‘obligation’”—evidence congressional intent to allow alleged customs violations to serve as the predicate for FCA claims.

The United States and Island Industries also note that the FCA exempts other claims from its coverage (such as for tax fraud) in a way that is not present in the customs law and point to post-2009 decisions holding that failure to pay customs duties can be the basis for an FCA claim.

The United States’ observation that there are several other situations where fraudulent conduct may lead to enforcement under multiple statutes and argument for co-existence of the FCA and customs law enforcement schemes are of note. While the United States argues that the FCA is the more specific statute in the sense of determining how to navigate parallel enforcement mechanisms, it also asserts that when the government already has initiated an action under another enforcement scheme, such as Section 1592, a private person cannot pursue a qui tam FCA action based on the same allegations or transaction.

However, if the private person files the FCA claim first, then the government can elect to pursue the FCA claim or a separate administrative proceeding under Section 1592 as an “alternative remedy” under 31 USC § 3730(e)(3). Even so, the United States asserts that where the government has not initiated any proceeding on the conduct, nothing in the FCA prevents a private person from bring an FCA claim. Thus, the United States argues, nothing about applying the FCA would “nullify” the customs law enforcement mechanism.

Finally, in response to Sigma’s argument and the Ninth Circuit’s holding in United States v. Universal Fruits and Vegetables Corp., the United States claims that FCA actions premised on alleged customs violations do not seek recovery of avoided customs duties but instead seek statutory damages.

Key Takeaways

The Ninth Circuit’s request for briefing on this topic, along with its prior sua sponte question regarding jurisdiction, signal its willingness to question the generally accepted view that FCA suits can be based on the failure to pay duties in accordance with customs laws. A decision that district courts lack jurisdiction or that the FCA suits are not allowed at all in this space would have enormous impact and reverberations even beyond the Ninth Circuit, given the growing number of FCA suits predicated on this fact pattern.

The United States’ brief indicates that, even absent any change in existing law from the Ninth Circuit, an FCA action would be (1) precluded if a customs enforcement action was initiated before the qui tam suit or (2) subject to dismissal if such an enforcement action was commenced after suit, leaving the relator to pursue recovery from the government under the FCA’s alternate remedy provision.

FCA defendants facing claims based on customs violations should consider preserving these defenses and emphasizing that Congress intended that enforcement in this space be controlled by customs officials charged with creating and implementing a uniform system in the national interest, a goal that would be jeopardized by allowing private relators to enforce customs laws through the FCA.

In raising these arguments, FCA defendants can note that, even though the United States now claims that customs duties are not sought through FCA actions, the United States previously said the opposite in United States v. Universal Fruits & Vegetables Corp., 30 C.I.T. 706, 709 & n.5 (2006) (noting the United States argued the CIT had jurisdiction over an FCA action because it was “to recover customs duties”), and the United States’ acknowledgement that FCA actions and customs enforcement actions are “alternatives” (and cannot be pursued simultaneously) contradicts that claim, as does the fact that FCA statutory treble damages in such matters are based on the avoided customs duties amount (i.e., the single damages).