More Private Party-Initiated Trade Enforcement Actions

Dear Friends,

We are writing to let you know about two recent court actions, both of which involve allegations of companies evading antidumping duties evasion on imports of wooden bedroom furniture.  They are as follows:

  • The U.S. Department of Justice (“DOJ”) announced last week than a California importer of wooden bedroom furniture, Z Gallerie LLC (“Z Gallerie”) agreed to pay $15 million to settle allegations that it violated the False Claims Act (“FCA”) by underpaying antidumping duties.  The underlying complaint, initiated by a competitor, alleged that between 2007 and 2014, Z Gallerie purposefully misclassified bedroom furniture on import-related documentation in order to avoid paying antidumping duties to U.S. Customs and Border Protection (“CBP”) upon importation.  A copy of the DOJ press release is available here.
  • The American Furniture Manufacturers Committee for Legal Trade and domestic manufacturer Vaughan-Bassett Furniture Co. (collectively, “the Petitioners”) filed a lawsuit in the Court of International Trade (“CIT”) on Tuesday, alleging that the Department of Commerce (“Commerce”) failed to properly investigate allegations that a Chinese exporter of wooden furniture acted as a “funnel” for other Chinese manufacturers to avoid anti-dumping duties on bedroom furniture exported to the United States. Specifically, the underlying complaint alleged that the Chinese exporter, which had been afforded a separate (and significantly lower) antidumping duty rate of ~7% on exports of wooden bedroom furniture, purposefully put its name on other Chinese manufacturers’ wooden bedroom furniture exports to help those manufacturers avoid being subject to the (much higher) PRC-wide entity rate of ~216%.  The complaint alleged that the Petitioners had alerted Commerce to several suspicious furniture shipments in 2015, but Commerce neither alerted CBP, nor initiated its own investigation.  A copy of the complaint is attached.

These cases are significant for several reasons.

First, they underscore the continued trend of private parties initiating their own trade enforcement actions.  While private party-initiated trade compliance actions are already common (as evidenced by our emails below), the types of private parties initiating such actions is expanding.  Here, these cases were initiated by an e-commerce retail competitor and a U.S. trade group, respectively.

Second, they highlight the government’s continued interest to prosecute antidumping and countervailing duty evasion (particularly when the case is served up to them).  In announcing the Z Gallerie settlement, CBP Commissioner R. Gil Kerlikowske stated that “[u]nder the new Trade Facilitation and Trade Enforcement Act, CBP will likely see an increase in these types of settlements as the streamlined processes take effect concerning allegations of duty evasion.  The Act reinforces CBP’s existing authorities and tools to collect and investigate public allegations of duty evasion improving the overall effectiveness and enforcement of CBP law enforcement actions concerning illicit trade activity, specifically in the area of antidumping and countervailing duty evasion schemes.”

Finally, they illustrate that all companies, regardless of size or sophistication, could find themselves entangled in these types of costly enforcement actions if they lack proper internal controls.  In response to its settlement, Z Gallerie released a statement stating that its “intent was never to defraud the government or evade customs duties.  As a small company navigating a complex set of import rules and trade laws, there is confusion about how the government’s anti-dumping order applies to certain categories of wooden bedroom furniture imported from China”.

With good internal controls, most companies will be able to protect themselves from these types of costly enforcement actions.  If you have any questions, or if you would like to discuss these issues further, please let us know.

Best regards,

Ted

Government Procurement Rule of Origin-Related Qui Tam Action

We are writing to let you know about the settlement of a False Claims Act (“FCA”) case, involving country of origin claims for construction contracts funded by the U.S. government.

Earlier this week, the U.S. Department of Justice (“DOJ”) announced that a U.S. manufacturer of glass space frames agreed to pay $3 million ($500,000 criminal fine, $2.5 million civil fine) to resolve allegations that it improperly used foreign materials on construction projects involving federal funds.  A copy of the DOJ press release is available here.

As you know, contracts funded by the U.S. government are generally subject to laws requiring the use of domestic materials (e.g., the Buy America Act, the Federal Transit Administration’s Buy America provision, §1605 of the American Recovery and Reinvestment Act, etc.).  Here, the underlying complaint alleged that from 2004 to 2013, the Company knowingly – and in violation of its contractual obligations – used noncompliant foreign materials on several federally funded construction projects.  More specifically, the complaint alleged that the Company repackaged materials and falsified documents relating to certain federally funded construction projects in order to hide that the materials used were noncompliant foreign materials.

There are several key takeaways from this settlement.

First, this settlement underscores the government’s continued interest (and willingness) to prosecute government procurement rule of origin violations.  In announcing this settlement, the U.S. Attorney reiterated that “domestic preference statutes are designed to promote American businesses and to protect U.S. economic interests.  When companies subvert those interests by violating ‘Buy American’ provisions…and when they undertake efforts to conceal that they have done so…the U.S. Attorney’s Office will pursue all appropriate criminal and civil sanctions”.

Second, this case underscores the growing trend of private parties initiating their own trade enforcement actions.  Here, the suit was initiated by a former employee, who provided evidence regarding the knowing use of noncompliant foreign materials on several specific federally-funded projects.  The former employee stands to receive approximately $400,000 from the settlement.

Third, as part of the settlement agreement, the Company agreed not to contest debarment from federally funded projects.  While the Company stated that Buy America requirements applied to only a small part of its business, such a disbarment could have severe consequences for companies whose business includes a meaningful amount of government procurement sales/contracts.

To that end, it is more important than ever that companies have documented controls of their government sales.  With good internal controls, most companies will be able to protect themselves from these types of costly enforcement actions.

We hope this is helpful.  We have regularly advise clients on compliance with government procurement related rules of origin (including implementing effective controls to prevent situations like the one described above).  If you have any questions about the settlement or these issues more broadly, please let us know.

Best regards,

Ted

Another Customs-Related Qui Tam Action

Dear Friends,

We are writing to let you know about the settlement of a False Claims Act (“FCA”) case, involving the payment of antidumping duties on imports of wooden bedroom furniture.

Earlier this week, the U.S. Department of Justice (“DOJ”) announced that a U.S. furniture company (and its general partner) (“the Company”), agreed to pay $15 million to settle allegations that it knowingly evaded the payment of antidumping duties on wooden bedroom furniture from China.  The underlying complaint alleged that between 2009 and 2012, the Company purposefully misclassified bedroom furniture as office furniture (and other types of furniture not subject to antidumping duties), and falsified invoices and other documents in order to import the Chinese-manufactured furniture without raising a flag with U.S. Customs and Border Protection (“CBP”).  A copy of the DOJ’s press release is found here.

This case is important for a couple of reasons.

First, the case is part of a growing trend of private parties initiating their own trade enforcement actions.  Here, this suit was initiated by a U.S. competitor.  After being underbid on several large-scale contracts, the competitor launched its own investigation (which included attending tradeshows, pretending to be an client, and engaging in email correspondences discussing how antidumping duties could be avoided on purchases, etc.).  The competitor handed all of the evidence it gathered over to the DOJ, and was awarded $2.25 million as its share of the settlement.

Second, this settlement displays the government’s continued willingness to prosecute trade compliance violations under the FCA.  In announcing this settlement, the U.S. Attorney stated that “companies that cheat by fraudulently mislabeling their imports undermine U.S. manufacturers and others that obey the rules, and hurt consumers and taxpayers”.  Principal Deputy Assistant Attorney General Benjamin C. Mizer, head of the DOJ’s Civil Division, echoed the U.S. Attorney’s statement and declared that “[the DOJ] will zealously pursue those who seek an unfair advantage in U.S. markets by evading duties owed on goods imported into [the U.S.]”.  Although, as noted previously, one wonders if the government really collected as much as it could/should have here (particularly, given that intentional actions appear to have been involved here).

The increase in the number of private party-initiated trade compliance FCA actions, coupled with increased enforcement by the government agencies involved, should provide significant incentive for companies to review their internal controls — particularly with respect to antidumping and countervailing duty issues — and ensure that they are working effectively.   Otherwise, companies may find themselves embroiled in expensive enforcement actions, like the one described above.  Similarly, if you are aware of non-compliance by others that is unfairly tilting the playing field (e.g., a competitor not paying antidumping duties rightfully owed to get a competitive advantage), there are steps you can take to address it, even if the responsible agency has not done so.

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

Second Update on Recent Civil Penalties Action

Dear Friends,

We wanted to share with you a brief update on a court case that will impact how U.S. Customs and Border Protection (CBP) and the U.S. Department of Justice (DOJ) pursue penalty claims in the future.

Earlier this week, the U.S. Court of Appeals for the Federal Circuit (Federal Circuit) issued its decision in United States v. Nitek Electronics, Inc.  You may recall that we first brought this case to your attention back in August 2012.  The case involved the enforcement of a CBP penalty in court.  In short, the case involved the question of DOJ’s role in the civil penalty context, and more specifically, whether DOJ’s role was to enforce CBP’s administrative decision, or whether DOJ was free to frame the case without regard to what was asserted at the administrative level.  The issue arose because CBP alleged that the importer acted with gross negligence (and only gross negligence) at the administrative level, but DOJ choose to pursue a penalty based on negligence in court.  Nitek argued that the Government had failed to exhaust its administrative remedies as to the negligence claim (since it was never raised at the administrative level) and that the Government was barred from doing so now by the statute of limitations.  The trial court agreed.  Now, so has the Federal Circuit.  A copy of the Federal Circuit decision can be found here.  It is worth a quick read.

We expect that any future CBP penalty actions involving gross negligence or civil fraud, will also now include the lesser levels of culpability as well to preserve the Government’s options in any future litigation (e.g., a penalty notice based on gross negligence will also allege negligence as an alternative level of culpability).  The case also serves as a reminder that companies should carefully consider whether to voluntarily waive the statute of limitations in any CBP proceeding.  CBP routinely requests importers to voluntarily waive the statute of limitations when prior disclosures are filed, at the outset of audits, etc.  It often does not explain very well (or at all) the consequences of providing such a waiver and can make it seem like doing so is required.  It is not (it is a voluntary act by the company) and, as Nitek shows, whether to do so should be considered carefully.

We hope this is helpful.  If you have any questions, please let us know.

Best regards,

Ted

DOJ Settlement Related to Lacey Act Violations

Dear Friends:

We are writing to let you know about the recent settlement of a Department of Justice (“DOJ”) investigation related to violations of the Lacey Act.

As background, the Lacey Act is the oldest wildlife protection statute in the United States, and it protects against the trade of certain plants, fish and wildlife.  In short, the Lacey Act makes it unlawful to:

  • Trade in plants or wildlife products that are taken, possessed, transported, or sold in violation of the laws of the United States, a State, Indian Tribe, or any foreign law protecting plants;
  • Falsify or submit falsified documents, accounts or records of any plant covered under the Lacey Act; and
  • Import plants/plant products without an import declaration.

Last week, Lumber Liquidators announced that it will pay a $10 million settlement to the Environment and Natural Resources Division of the DOJ related to the Company’s import of timber used to make hardwood flooring.  More specifically, the DOJ alleged that Lumber Liquidators violated the Lacy Act by importing timber from foreign suppliers that harvested timber in excess of approved amounts, and falsifying the country of origin and type of timber on its import declarations to conceal the illegality.  A copy of Lumber Liquidator’s press release is available here.

There are several important take-a-ways from this case.

First, despite unsuccessful prosecution attempts in the past, this settlement shows that the DOJ has not lost interest in enforcing the Lacey Act against U.S. importers.  In fact, its worth noting that the DOJ launched its initial inquiry against Lumber Liquidators (that included factory raids) back in 2013.

Second, as illustrated above, the prohibitions of the Lacey Act require companies to exercise due care throughout all levels of the supply chain (i.e., companies are required to have supply chain visibility beyond just purchases from sellers/distributors).  In publicly announcing the settlement, Jill Witter, Lumber Liquidators’ Chief Compliance and Legal Officer revealed that the Company will work with the DOJ to develop a Lacey Act compliance plan to ensure “an unbroken and verified chain of custody and documentation of…products from the store all the way to the forest”.

Finally, in addition to the $10 million settlement, the allegations involved in this investigation have produced an on-going securities fraud claims action (filed in in Virginia federal court) as well as two false advertising complaints (filed in March in California and South Carolina federal courts).  Therefore, this settlement should provide significant incentive for companies to review their products – particularly with respect to purchases/imports of plants and wildlife products – and review their internal controls to ensure they are working effectively.  Otherwise, companies may find themselves embroiled in expensive (and varied) enforcement actions.

We hope that this is helpful.  We have significant experience advising clients with regards to Lacey Act compliance and developing/implementing corresponding compliance plans.

Best regards,

Ted

Third Settlement – Another Customs-Related Qui Tam Action

Dear Friends,

Further to our emails below, we wanted to let you know about a third settlement stemming from a False Claims Action (FCA) case that we brought to your attention back in 2013.

Since the initial November 2013 announcement, the U.S. Department of Justice (DOJ) has collected more than $4.58 million in settlement payments to resolve allegations that 5 companies and 2 individuals participated in schemes to intentionally file false customs declarations to avoid the payment of antidumping duties (ADD) and countervailing duties (CVD) on Chinese-origin aluminum extrusions.  As of February of this year, 4 of the 5 companies (but neither individual) had settled.

Last week, DOJ announced that the individuals named in its November 2013 press release had agreed to pay $435,000 to resolve allegations regarding their participation in these schemes (the individuals agreed to pay $385,000 and $50,000, respectively).  More specifically, the two individuals were alleged to have: (1) conspired with domestic importers to submit false information to evade the duties; and (2) formed a company to act as the importer of record for the goods in an attempt to shield the real importers from liability.  A copy of the press release can be found here.

The significance of this settlement is that it highlights the government’s willingness to prosecute not only companies for customs noncompliance, but the individual employees involved in the noncompliance as well (one of the individuals here was a U.S. sales representative).  In announcing this settlement, Principal Deputy Assistant Attorney General Benjamin C. Mizer confirmed that the DOJ is “pursuing claims against anyone involved in a scheme to seek an unfair advantage in U.S. markets by evading duties on imported goods, including individuals who make such evasion possible by the businesses that import the goods”.

We hope this is helpful.  If you have any questions, or would like to discuss these issues further, please let us know.

Best regards,

Ted

Government Procurement Rule of Origin-Related Qui Tam Action

Dear Friends:

We are writing to let you know about the settlement of a False Claims Act (“FCA”) case, involving country of origin claims for products sold to the U.S. government.

Earlier this week, the U.S. Attorney’s Office for the District of Maryland announced that a U.S. division of a Korean electronics manufacturing giant agreed to pay $2.3 million to settle allegations that it knowingly provided inaccurate country of origin information to the authorized resellers of its products.  This settlement stems from a qui tam suit filed in 2011 by a former employee.  A copy of the USAO’s press release if available here.

The underlying complaint alleged that from 2005 to 2013, the Company caused authorized resellers to resell certain products to the U.S. government under General Service Administration (“GSA”) Multiple Award Schedule (“MAS”) contracts in violation of the Trade Agreements Act (19 U.S.C.  § 2501, et. seq.) (“TAA”).  More specifically, the complaint alleged that the Company knowingly provided its resellers with false certifications regarding the origin of its products (i.e., certifications that its products were made in TAA-complaint countries, when in fact many of the products were produced in non-TAA countries, such as China).  The resellers relied on the Company’s certifications in making sales to the U.S. government under the MAS contracts.

There are a couple of key takeaways from this settlement.

First, this settlement underscores the Dept. of Justice’s interest in prosecuting government procurement rule of origin violations.  In announcing this settlement, Assistant Attorney General Stuart F. Delery reiterated that it “upholds important trade priorities by ensuring that the United States only uses its buying power to purchase from countries that trade fairly with us.”  Thus, while the FCA has evolved to address a variety of trade compliance violations, the importance of “guarding against abuse of federal procurement programs” has not fallen from the Dept. of Justice’s focus.

Second, given the increasing number of FCA-related trade cases being initiated by current/former employees (here the former employee who brought the case will be entitled to receive up to 30% of the $2.3 million), it is more important than ever that companies have documented controls over their government sales (whether direct, or indirect, as was the case).  The government procurement rules of origin can be confusing (to say the least) and, if this is a meaningful part of your business, steps should be taken to ensure that the certifications are being done correctly.  In addition, it is important that companies have:

(1)          a reporting structure for employees to report potential trade compliance issues to management;
(2)          procedures for management to review, investigate and address credible trade compliance issues; and
(3)          periodic audits to review the effectiveness of the substantive controls, as well as the employee reporting and management review procedures.

With good internal controls, most companies will be able to protect themselves from these types of costly enforcement actions.

We hope this is helpful.  If you have any questions, or if you would like to discuss these issues further, please let us know.

Best regards,
Ted