Trade Troll’s FCA Case Dismissed

Dear Friends:

We are writing to let you know about the recent dismissal of a customs-related False Claims Act (“FCA”) suit.

Last week, a U.S. district court judge dismissed an FCA suit brought against a U.S.-based producer of iron and steel pipe fittings.  The underlying complaint alleged that the U.S. company (1) purposefully failed to mark its foreign-made pipe fittings to hide the country of origin, and (2) falsified entry documents to avoid having to pay marking duties.  In dismissing the suit, the judge found that, while the alleged violations could rise to a claim under the FCA, the relator “provide[d] no basis for its wholly conclusory allegations that [the U.S. company] had falsified its customs entry documents or knowingly avoided paying any required marking duties.”

This case is interesting for a couple of reasons.

First, the case was initiated by a relator that had no relationship to the target company.  The relator in this case, Customs Fraud Investigations, LLC (“CFI”), is a company started for the specific purpose of analyzing potential customs fraud, filing FCA suits against companies, and recovering financial incentives resulting from the settlements of those suits (it is interesting that CFI’s principal is also a trade consultant for a major Washington, DC law firm).  CFI did not appear to have any insider knowledge of alleged violations and instead filed the complaint based on assumptions it made based on publicly available data.  This is the first instance we are aware of where the relator is a corporate entity that has no relation to the target (i.e., is not a former employee, competitor, etc.).  The intellectual property space has seen ‘non-practicing entities’ (also referred to as ‘patent trolls’) bring claims against companies for years and it appears that we may be seeing a similar model emerge on the trade side.

Second, if the government declines to intervene in an FCA action, it generally means that the case is a clunker.  Once the relator files its complaint, the government is given the opportunity to investigate and decide whether to step in and take the case over.  In most situations where the government steps in, the cases settle shortly thereafter.  If the government decides not to intervene, the relator can still prosecute the case, but, as with the situation here, that is usually a signal that the case is not very likely to succeed.

We hope that this is helpful.  If you have any questions about this case, or if you would like to discuss the issues raised here further, please let us know.

Best regards,

Ted

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