FCA Alert

FCA Alert

Dismissal Of Relator Action Held To Be Without Prejudice Against Government

Posted in Relator Issues

The Western District of Virginia found that dismissal of a relator’s suit based on collateral estoppel and failure to prosecute does not prejudice the United States’ ability to subsequently pursue the same FCA claims, notwithstanding an earlier decision not to intervene. U.S. ex rel. Prince v. Virginia Resources Authority, No. 5:13CV00045, 2014 WL 3405657 (W.D. Va. July 10, 2014).

Relator Mark W. Prince alleged, on behalf of the United States, that the Virginia Resources Authority (“VRA”) and others violated the False Claims Act by knowingly presenting, or causing to be presented, a false or fraudulent claim for payment for approval related to federal subsidies and tax exempt status for certain bonds through the Build America Bonds program. The VRA successfully moved to dismiss Prince’s allegations based on a collateral estoppel defense arising from a Final Order issued in an action between the two parties in Shenandoah County Circuit Court.

The United States maintained that the action giving rise to collateral estoppel was inapplicable to the Government because it was not a party to that action and thus, it did not result in a valid, final judgment against the United States. The court agreed. The court further found that the dismissal for failure to prosecute was without prejudice to the Government because “[s]uch a dismissal is the result of [relator’s] failure to act, not any fault on the part of the United States, and is furthermore not a dismissal on the merits.”

 

FEMA Unable to Avoid 30(b)(6) Deposition Based on Touhy Regulations

Posted in Decisions Interpreting FCA Elements, Relator Issues

In U.S. ex rel. Touhy v. Ragen, 340 U.S. 462, 468 (1951), the Supreme Court held that federal government agencies may promulgate regulations requiring litigants to make a “Touhy request” to obtain documents or testimony from a federal agency or federal agency employees during discovery where the government is not a party.  In In Williams v. C. Martin Company Inc., et al., No. 07-5692, 2014 U.S. Dist. LEXIS 91802 (E.D. La. July 7, 2014), the district court reversed the Magistrate Judge’s decision and granted the defendant’s motion to compel the Federal Emergency Management Agency (“FEMA”) to produce a witness for a 30(b)(6) deposition.

Relator, Robyn Williams, filed a qui tam action on behalf of the United States to recover damages under the FCA against two groups of defendants, the Medley Jarvis Defendants (“MJI”) and the C. Martin Defendants (“CMC”).  The claims arise out of two contracts awarded by FEMA to CMC.  On November 14, 2012 CMC filed a Touhy request with FEMA seeking documents related to the contracts, and on December 4, 2012 MJI filed its own Touhy request with FEMA.  On April 21, 2014 the United States produced over 26,000 pages of documents related to the contracts. 

On May 22, 2014, CMC requested a 30(b)(6) deposition of FEMA pertaining to the 26,000 pages of documents FEMA produced.  FEMA invoked its Touhy regulations and notified CMC that it would not appear for the deposition.  CMC responded with a Motion to Compel.  FEMA, in an attempt to avoid attending the deposition, argued that in order to challenge FEMA’s decision to withhold a witness from a deposition, sovereign immunity requires litigants to follow the Administrative Procedures Act (“APA”).  The district court held that it has jurisdiction to compel FEMA’s compliance with CMC’s subpoena, reasoning that “nearly every court faced with this issue has determined that sovereign immunity does not insulate a federal agency from complying with a Rule 45 subpoena.”  The district court further held that FEMA’s decision to decline sitting for the deposition was arbitrary and capricious.  FEMA argued that the deposition would be unduly burdensome because the United States was not a party, but the district court held: “While it is technically true that the United States is not a party to a FCA case in which it declines to intervene, it is beyond dispute that the United States is the real party in interest in this matter.  The FCA provides that the government is entitled to at least 75% of the proceeds of this action. 31 U.S.C. § 3730(d).”  Thus, the district court granted the motion to compel and ordered FEMA to appear for the deposition.

 

Claims for Non Federal Money Do Not Trigger FCA Liability

Posted in Rule 9(b) Decisions

The Fifth Circuit held that the False Claims Act does not extend to claims submitted under the Education Rate (E-Rate) Program, which is administered by the Universal Service Administrative Company (USAC) with funds from the Universal Service Fund (USF), because there were no federal funds involved and the USAC is not a governmental entity.  See U.S. ex rel. Shupe v. Cisco Systems, Inc.

Relator Rene Shupe brought a qui tam action, alleging that defendant telecommunication companies violated the False Claims Act in connection with contracts to install and operate communications networks for school districts and libraries throughout South Texas, which was partially funded by the E-Rate program.  Shupe alleged that the defendants “tampered with the competitive bidding process, engaged in the ‘gold-plating’ of equipment provided, and substituted E–Rate ineligible products for eligible ones.”  

As set forth in the decision, in 1996 the Federal Communications Commission (FCC) designated the USAC, an independent, not-for-profit corporation owned by an industry trade group, to serve as the administrator of the USF.  The money in the USF is collected from private telecommunication providers under a mandate from Congress and the FCC and distributed in accordance with FCC regulations.

But, the Fifth Circuit held that this regulatory interest was insufficient to establish a claim under the FCA because the government was not in a position to lose money due to the alleged fraud.  Moreover, the FCC’s power over the fund indirectly, and through its oversight of the USAC, did not call for a different result because the government has no actual control over the fund.  Thus, “[b]ecause there are no federal funds involved in the program, and USAC is not itself a government entity,” the Government did not “provide any portion of the requested money under the FCA,” and the relator had no claim under the FCA.

 

Supreme Court to Decide Two Important False Claims Act Issues

Posted in Decisions Interpreting FCA Elements, Statute of Limitations

On July 1, 2014, the Supreme Court granted certiorari in Kellogg Brown & Root Services, Inc., et al. v. United States ex. rel. Carter, which raises two issues central to False Claims Act litigation involving, respectively, the FCA’s first-to-file bar and statute of limitations.   

Benjamin Carter, a former employee of Kellogg Brown & Root (KBR) filed a qui tam action against KBR, alleging that the company had fraudulently billed the United States for services provided to the U.S. military in Iraq in 2005.  After prior versions of his complaint were dismissed for procedural defects, Carter filed an amended complaint in 2011.  The district court dismissed Carter’s 2011 complaint with prejudice on two grounds.  First, the district court held that the complaint had been filed beyond the FCA’s six-year statute of limitations, and that the Wartime Suspension of Limitations Act (WSLA)—which would have tolled the statute of limitations—did not apply.  Second, the district court held that it lacked subject matter jurisdiction over Carter’s claims under the FCA’s first-to-file rule because his allegations substantially overlapped with a previously-filed suit that was dismissed shortly after Carter filed his 2011 complaint.  The Fourth Circuit reversed on both grounds.

The WSLA tolls the statute of limitations for “any offense” involving fraud against the federal government “[w]hen the United States is at war.”  18 U.S.C. § 3287.  The Fourth Circuit held that the Act applies to all civil actions, including FCA claims brought by private relators in which the United States has declined to intervene.  The Court also held that the Act “does not require a formal declaration of war,” reasoning that such a requirement “would be an unduly formalistic approach that ignores the realities of today[.]”  Accordingly, the Court held that Carter’s claim was not time-barred.  Petitioners argue that this holding effectively repeals the statute of limitations for civil fraud claims and authorizes an indefinite tolling of FCA claims pursuant to the WSLA. 

The first-to-file bar provides that “[w]hen a person brings an action under [the FCA], no person other than the Government may intervene or bring a related action based on the facts underlying the pending action.”  31 U.S.C. § 3730(b)(5).  The Fourth Circuit joined the Seventh and Tenth Circuits in holding that the rule bars duplicative qui tam suits only during the period that a related, previously-filed suit remains “pending,” and permits the duplicative suit to proceed once the prior action has been resolved.  Petitioners argue that, as held by the First, Fifth, Ninth, and D.C. Circuits, the first-to-file rule bars new suits even if the initial action is no longer pending.  Petitioners contend that the fundamental purpose of the first-to-file rule is satisfied “even when an earlier-filed case has been dismissed” because the earlier case “alerted the government to the essential facts of an alleged fraud[.]”

The Supreme Court will address both issues on appeal.  Specifically, the Court will decide (1) whether the WSLA “applies to claims of civil fraud brought by private relators, and is triggered without a formal declaration of war;” and (2) whether the FCA’s first-to-file bar “functions as a ‘one case-at-a-time’ rule.”  The Court’s decision will resolve a significant circuit split on the first-to-file bar, and will carry important practical consequences regarding the scope of FCA liability.     

D.C. Circuit Grants Writ of Mandamus Reinforcing that Attorney- Client Privilege Applies to Internal Investigations

Posted in Investigations

On June 27, 2014, the D.C. Circuit Court of Appeals overturned a District Court’s decision which found that documents generated through an internal investigation were not protected by the attorney-client privilege in a qui tam action against a defense contractor brought under the False Claims Act. See In re Kellogg Brown & Root, Inc., 14-5055 (D.C. Cir. June 27, 2014).

The relator worked for Kellogg Brown & Root (“KBR”), a defense contractor, and alleged that KBR and various subcontractors, while administering military contracts in wartime Iraq, had engaged in a scheme to defraud the United States Government by using a subcontracting procedure that inflated costs and accepted kickbacks. See United States ex rel. Barko v. Halliburton Co., 1:05-CV-1276 (D.D.C. Mar. 6, 2014). The relator moved to compel KBR to produce documents relating to its internal investigation of the alleged misconduct. KBR argued that the internal investigation had been conducted for the purpose of obtaining legal advice, and therefore, was protected by the attorney-client privilege. After reviewing the disputed documents in camera, the District Court determined that the attorney-client privilege protection did not apply because, among other reasons, KBR had not shown that “the communication would not have been made ‘but for’ the fact that legal advice was sought.” The court found that the internal investigation was “undertaken pursuant to regulatory law and corporate policy rather than for the purpose of obtaining legal advice.”

Following the issuance of this discovery order, KBR asked the District Court to certify the privilege question to the Court of Appeals for interlocutory appeal and to stay the District Court’s order pending a petition for mandamus in the Circuit Court. The District Court denied those requests and ordered KBR to produce the disputed documents to the relator within a matter of days. KBR promptly filed a petition for a writ of mandamus in the Circuit Court.

In its decision regarding the petition for a writ of mandamus, the Court of Appeals found that the District Court had erred and employed the wrong legal test. The D.C. Circuit found that the but-for test applied by the District Court was not appropriate for attorney-client privilege analysis. Rather, under common law and Upjohn Co. v. United States, 449 U.S. 383 (1981), the attorney-client privilege applied to corporations so long as the communication involved was made “for the purpose of obtaining or providing legal advice to the client.” The D.C. Circuit held that, “[s]o long as obtaining or providing legal advice was one of the significant purposes of the internal investigation, the attorney-client privilege applies, even if there were also other purposes for the investigation and even if the investigation was mandated by regulation rather than simply an exercise of company discretion.”

The D.C. Circuit granted KBR’s petition for a writ of mandamus because the District Court’s erroneous privilege ruling could have potentially far-reaching consequences.

Government’s Case Against HMA Alleging Kickbacks Permitted To Go Forward

Posted in Articles, Decisions Interpreting FCA Elements

The U.S. District Court for the Middle District of Georgia found Plaintiffs alleged sufficient facts to support a False Claims Act case based on a violation of the Anti-Kickback Statute. The Court denied Defendants’ motion to dismiss on June 24, 2014. U.S. ex rel. Williams v. Health Management Associates, Inc., No. 3:09-cv-130 (CDL) (M.D. Ga.)

Relator Ralph Williams, a former chief financial officer of HMA Monroe, a subsidiary hospital of Health Management Associates Inc. (“HMA”), initially brought the case. The Government intervened in this case and in seven other False Claims Act lawsuits against HMA, a company which operates 71 hospitals in 15 different states.

Plaintiffs alleged that Defendant hospitals paid illegal kickbacks to certain clinics in exchange for patient referrals. The clinics provide prenatal services to undocumented aliens. These patients are generally eligible for Medicaid emergency medical assistance when they deliver their babies, but are not eligible for regular Medicaid coverage. Relator Williams uncovered this alleged scheme when he started his employment at HMA Monroe in April 2009. Williams found a copy of an agreement between HMA Monroe and the clinics, which was allegedly approved by HMA. Under the agreement, HMA Monroe paid the clinics between $15,000 and $20,000 in exchange for the clinics’ Spanish translation and eligibility services. Williams investigated whether the clinics were actually providing interpreter services. Both the director of nursing services and human resources personnel allegedly told Williams they had no knowledge of the clinics rendering such services. Thus, Plaintiffs alleged that the agreement was a sham designed to conceal an underlying financial motive, which was the purchase of Clinic referrals by HMA Monroe.

The Anti-Kickback Statute, 42 U.S.C. § 1320a-7b(b), makes it a felony to offer to or pay “renumeration” to “any person to induce such person” to refer patients for services that will be paid “in whole or in part under a Federal health care program.” Plaintiffs alleged that when Defendants submitted their claims for Medicaid payment, they falsely certified that they complied with the Anti-Kickback Statute.

To establish an Anti-Kickback Statute violation, Plaintiffs must show that Defendants (1) knowingly and wilfully, (2) paid money, directly or indirectly to the clinics, (3) to induce the clinics to refer individuals to the hospitals for the furnishing of medical services, (4) paid for by Medicaid. According to the District Court, the Defendants and hospitals do not dispute that they actually paid money to the clinics or that the services rendered to the clinic patients were paid for by Medicaid, a federal health program. The Defendants argued that the when the hospitals contracted with the clinics to provide interpreters for Hispanic patients, the hospitals merely hoped that the clinics might refer patients to the hospitals. The Court rejected this argument. The Court further held that the complaint sufficiently alleged the Defendants paid for services that the clinics did not provide.

The Defendants did not dispute that under the Affordable Care Act, compliance with the Anti-Kickback Statute is a requirement for payment of a Medicaid claim, and thus can form the basis for a violation of the FCA. Rather, Defendants argued that for claims submitted before March 23, 2010 (the effective date of the Affordable Care Act), compliance with the Anti-Kickback Statute was a condition of participation in the Medicaid programs and not a condition of payment. Thus, any false certification of compliance with the Anti-Kickback Statute in connection with claims submitted before the passage of the act did not violate the False Claims Act. If compliance was a condition of participation, then the proper sanction would be restricted to penalties affecting their continued participation in the Medicaid programs, and they would not be exposed to False Claims Act penalties. The Court rejected Defendant’s argument.

The Georgia District Court held that a violation of the Anti-Kickback Statute can form the basis of a False Claims Act violation pre-Affordable Care Act.

 

Court Denies Motion to Dismiss in FCA Case Against Lance Armstrong

Posted in Decisions Interpreting FCA Elements, Relator Issues

On June 19, 2014, a memorandum opinion was issued in United States ex rel. Landis v. Tailwind Sports Corp., et al., No. 10-cv-00976 (RLW) (D.D.C.), refusing to dismiss the lawsuit against cyclist Lance Armstrong and a number of associations for alleged violations of the False Claims Act. The alleged violations arose in connection with two sponsorship agreements between the United States Postal Service (“USPS”) and the companies that owned and managed the professional cycling team on which Armstrong was the lead rider from 1999 to 2004. The plaintiffs alleged that members of the cycling team, including Armstrong, used performance enhancing drugs that were banned by the governing cycling organizations, in violation of the USPS sponsorship agreements, and that former team manager Johan Bruyneel (who is also named as a defendant) and Armstrong’s management company, Tailwind Sports, among others, knowingly flouted the sponsorship agreements.

The USPS had paid about $42 million in sponsorship fees under its sponsorship deal from 1996 to 2004. Armstrong won each Tour de France during that period.

As an initial matter, the court addressed whether, and to what extent, the tolling provision of the FCA Statute of Limitations (“SOL”) at 31 U.S.C. § 3731(b)(2) applied to relators. If the tolling provision did not apply to relators, then Relator Floyd Landis would be subject to the six-year SOL provided in section 3731(b)(1), and would not be able to recover against any defendant on allegedly false claims for payment that were submitted by the defendants to the USPS prior to June 10, 2004 (six years prior to the date on which relator filed his initial complaint). Conversely, if the court were to conclude that the tolling provision did apply to relators, then Landis could recover on alleged false claims or reverse false claims dating back ten years.

The court adopted the reasoning of the Fourth Circuit in U.S. ex rel. Sanders v. N. Am. Bus Indus., Inc., 546 F.3d 288 (4th Cir. 2008), which found that “[t]he government’s knowledge of ‘facts material to the right of action’ does not notify the relator of anything, so that knowledge cannot reasonably begin the limitations period for a relator’s claims.” Id. at 294. The court held “the statute’s express language demonstrates that Congress did not intend to apply the tolling provisions to relators” and that section 3731(b)(2) applies to lawsuits brought, or intervened in, by the United the States, such that the three-year SOL applies to the government’s knowledge – and not the relator’s knowledge. Op. at 28-30. (In adopting the Sanders approach, the court declined to follow the Ninth Circuit’s approach in U.S. ex rel. Hyatt v. Northrop Corp., 91 F.3d 1211 (9th Cir. 19996), under which Landis would not be able to satisfy the standard for tolling under section 3731(b)(2) because he had first-hand knowledge of the alleged doping as it allegedly occurred. Op. at 27.) Thus, the six-year limitations period applied to relator’s claims against all of the defendants, and relator’s FCA claims based on alleged fraudulent payments or reverse false claims that occurred prior to June 10, 2004 were dismissed with prejudice. Op. at 30. The court noted that “[b]ased on the current record, it appears that of the approximately $31 million paid under the 2000 sponsorship agreement, all except approximately $68,000 would be time-barred” under the six- year SOL. Op. at 26, n.19.

Armstrong and the other defendants, however, may still be liable for damages claimed by the government. The tolling provision applicable to the government’s FCA claim – section 3731(b)(2) – provides for up to a ten-year limitations period. The defendants argued that because the government did not independently investigate the doping allegations, its claims could not be tolled. The court decided it could not make a determination based on the present record whether the government should have conducted its own investigation sooner, and that if such an investigation had been undertaken, it would have uncovered doping. Accordingly, the court denied without prejudice the defendants’ motion to dismiss the government’s action as time-barred.

The court next examined the applicability of the Fraud Enforcement and Recovery Act Amendments (“FERA”) to the case, concluding that it was not appropriate to mechanically apply the statutory definition of “claim” in the FCA to the FERA amendment at § 4(f)(1), and holding that “claims under the False Claims Act” means a civil action or legal claim under Section 3729(a)(1)(B). The court thus held that FERA applied to the plaintiffs’ claims which were FCA actions based on false records or statements.

The court then addressed the reverse false claims count. The reverse false claims provision imposes liability on any person who “knowingly makes, uses, or causes to be made or used, a false record or statement to conceal, avoid, or decrease an obligation to pay or transmit money or property to the Government.” 31 U.S.C. 3729(a)(7) (2006). The court held that the term “obligation” under the pre-FERA reverse false claims statute (31 U.S.C. § 3729(a)(7) (2006)) “encompasses a breach of a government contract and the attendant obligation to repay the government.” Op. at 63. That said, every alleged breach of contract does not give rise to the type of obligation that would serve as the basis for a reverse false claim. Op. at 64. Rather, the allegations must be sufficient to show that the defendant owed the government “an obligation sufficiently certain to give rise to an action of debt at common law.” Id. (quoting Am. Textile Mfrs. Inst., Inc. v. The Ltd., Inc., 190 F.3d 729, 736 (6th Cir. 1999)). The court found that the team’s alleged doping activity would have been a “total breach” of the USPS sponsorship agreements, and as such, the USPS could have sought repayment of the sponsorship fees as a remedy. Op. at 68. Consequently, under both agreements, the defendants owed the government an obligation sufficiently certain to give rise to an action of debt at common law. Id.

Because plaintiffs had sufficiently pled that the defendants owed an obligation to “reimburse” the government due to the alleged breach of the sponsorship agreements as a result of the riders’ doping, the court denied defendants’ motions to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6). The court also refused to dismiss the reverse false claims count against Armstrong, finding that “[t]he government’s and relator’s complaints are rife with allegations that Armstrong had knowledge of the doping, and that he made false statements to conceal the doping.” Op. at 72.

See our earlier post on this case here.

Rejected Theories Of Liability Under The False Claims Act

Posted in Decisions Interpreting FCA Elements, Relator Issues

In United States of America and Brent M. Nelson v. Sanford-Brown, Limited, and Ultrasound Technical Services, Inc., Civil Docket No. 12-CV-775-JPS (E.D. Wisconsin June 13, 2014) the Eastern District Court of Wisconsin rejected theories of liability under the False Claims Act based on implied certification and an expanded definition of “conditions of payment.” The Court reminded the relator and the government that the FCA is not “a blunt instrument to police compliance with federal contracts, regulations and statutes.”

This case concerns claims against a for-profit higher education organization that provides career training programs in health care, criminal justice, and computer-related fields. The relator alleged that SB perpetrated fraud in connection with claims for federal subsidies under Title IV of the Higher Education Act. An institution is only eligible for participation in this program, and thereby eligible for these subsidies, if it complies with certain program participation requirements and the institution is required to enter into a “Program Participation Agreement.” See 20 U.S.C. §1094(a)(1)-(29).

An implied false certification theory of liability assumes that “every claim for payment submitted under Title IV constitutes an ‘implied certification’ of compliance with the PPA. The government argues that “[a] defendant’s nondisclosure, at the time payment is sought, of the fact that it failed to fulfill a previous promise upon which entitlement to payment is conditioned, is functionally equivalent to an explicit false representation or certification that it is entitled to payment.” Finding that the 7th Circuit has not adopted a theory of FCA liability based on implied false certification, the Court dismissed the relator’s claims for fraudulent certification.

A successful false claim in this context requires that the certification of compliance with statutory or regulatory requirements be a condition of or a prerequisite to government payment. The Court also rejected this theory because the Title IV restrictions were not conditions of payment. Conditions of participation were found insufficient to create liability.

 

Third Circuit Adopts Less Rigid Pleading Standard for FCA Claims

Posted in Rule 9(b) Decisions

In Foglia v. Renal Ventures Management, LLC, the Third Circuit reversed a New Jersey district court’s order dismissing an FCA case for failure to satisfy Federal Rule of Civil Procedure 9(b), holding that the court applied an overly demanding pleading standard to relator Thomas Foglia’s complaint.  The United States did not intervene in this case. 

In his complaint, Foglia claimed that his former employer, Renal Ventures, violated the FCA by falsely certifying to Medicare that it was in compliance with state regulations regarding quality of care, falsely submitting claims for reimbursement for the drug Zemplar, and reusing single-use Zemplar vials.  The district court held that Foglia failed to satisfy the “particularity” requirement of Rule 9(b) because his complaint did not provide a “representative sample” or “identify representative examples of specific false claims made to the Government.”

Circuit Courts disagree as to the what a plaintiff must show at the pleading stage for an FCA claim.  The Fourth, Sixth, Eighth, and Eleventh Circuits have held that a plaintiff must show “representative samples of the alleged fraudulent conduct, specifying the time, place and content of the acts and the identity of the actors.”  In contrast, the First, Fifth and Ninth Circuits have held that it is sufficient for a plaintiff to allege “particular details of a scheme to submit false claims paired with reliable indicia that lead to a strong inference that claims were actually submitted.” 

The Third Circuit joined the First, Fifth, and Ninth Circuits in their “more nuanced” reading of Rule 9(b).  The Court reasoned that “it is hard to reconcile the text of the FCA, which does not require that the exact content of the false claims in question be shown, with the ‘representative samples’ standard favored by the Fourth, Sixth, Eighth, and Eleventh Circuits.”  The Court further stated that “requiring this sort of detail at the pleading stage would be ‘one small step shy of requiring production of actual documentation with the complaint, a level of proof not demanded to win at trial and significantly more than any federal pleading rule contemplates.’”  The Court also cited a recent amicus brief filed by the Solicitor General in connection with a writ of certiorari, in which the Solicitor General stated that “the heightened or ‘rigid’ pleading standard required by the Fourth, Sixth, Eighth, and Eleventh Circuits is ‘unsupported by Rule 9(b) and undermines the FCA’s effectiveness as a tool to combat fraud against the United States.” 

The Third Circuit went on to hold that Foglia’s complaint satisfied Rule 9(b)’s requirements because it “suffice[d] to give Renal notice of the charges against it[.]”  This decision deepens the circuit split on the application of Rule 9(b) to FCA claims, and highlights the need for Supreme Court guidance on this issue.

Escalation of Customs-Related FCA Cases

Posted in Decisions Interpreting FCA Elements, Relator Issues, Settlements

DOJ press releases announcing FCA settlements indicate a possible trend involving alleged customs fraud.  In recent months, the government settled two noteworthy cases, United States ex rel. Krigstein v. Siouni and Zarr Corporation and United States ex rel. Jimenez v. Otter Products, LLC, which asserted claims under the FCA based on alleged false statements made to the U.S. Customs and Border Protection.

In Siouni and Zarr Corporation, on April 9, 2014, Dana Kay, Inc. and Siouni and Zarr Corporation, two importers of women’s apparel, settled an FCA suit alleging customs fraud for $10 million.  The case involved the alleged failure to pay millions of dollars in customs duties over an approximate ten-year period.  According to the DOJ’s press release, as part of the settlement, the defendants “have admitted, acknowledged, and accepted responsibility for:

  • presenting to the Government commercial invoices for women’s apparel being imported into the United States that reported less than the total value of the goods imported;
  •  paying apparel manufacturers an amount in excess of that recorded on the commercial invoice;
  • paying the excess amount pursuant to a second invoice referred to as a ‘debit note’; and
  • failing to disclose to the Government the amounts paid pursuant to the second invoices, instead reporting only the lesser amounts listed in the commercial invoices, which the Government then used to assess customs duties.”

(See http://www.justice.gov/usao/nys/pressreleases/April14/DanaKayandSiouniandZarSettlementPR.php?print=1).  The relator who brought this qui tam case under the FCA received approximately $2.1 million.

Otter Products, a company that imports and sells protective cases for phones and tablets, paid $4.3 million to settle an FCA suit alleging that Otter Product’s import practices violated the FCA and the Tariff Act of 1930.  Otter Products allegedly underpaid customs duties owed to the United States by undervaluing their imported goods.  Of the $4.3 million Otter Products paid to the United States, $830,000 was apportioned to relator, Bonnie M. Jimenez.  (See (http://www.justice.gov/usao/co/news/2014/apr/4-21-14.html).

These cases depict the government’s continuing interest in pursuing alleged fraud through FCA actions in more and more industries.  Companies with obligations under the customs laws need to be cognizant of the potential exposure under the FCA.

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