United States ex rel. Customs Fraud Investigations, LLC v. Victaulic Co.

UNITED STATES OF AMERICA ex rel. CUSTOMS FRAUD INVESTIGATIONS, LLC v. VICTAULIC COMPANY

CIVIL ACTION NO. 13-2983

UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA

April 10, 2015

MEMORANDUM

McLaughlin, J.

Customs Fraud Investigations, LLC ("CFI"), a company that conducts research and analysis on possible customs fraud, initiated this action against Victaulic Company ("Victaulic"), to recover damages and civil penalties on behalf of the United States as a qui tam relator pursuant to the False Claims Act, 31 U.S.C. §§ 3729, et seq. ("FCA").¹ In a September 4, 2014 memorandum and order, the Court dismissed CFI's complaint with prejudice because CFI failed to state a claim. CFI has filed a motion to alter or amend that judgment and for leave to file an amended complaint. The Court will deny the motion because amendment would be inequitable and futile.

I. Background and Procedural History²

On May 30, 2013, CFI filed a nine-page, conclusory complaint against Victaulic, a producer of iron and steel pipe fittings manufactured in the United States, China, Poland, and Mexico. CFI, a corporate stranger to Victaulic, alleged that Victaulic violated the FCA by failing to mark and improperly marking its foreign-made pipe fittings as required under the United States Tariff Act of 1930 ("Tariff Act"), 19 U.S.C. §§ 1304(a) and (c), and by falsifying customs entry documents such as CBP Form 7501, to avoid an obligation to pay "marking duties" owed on unmarked or improperly marked foreign products. Because unmarked pipe fittings are assumed in the industry to be U.S.-made, CFI surmised that Victaulic was importing unmarked foreign-made pipe fittings and passing them off as U.S.-made. Approximately two months after CFI filed its complaint, the United States declined to intervene, and the complaint was unsealed.

A. Marking Requirements and Marking Duties

The Tariff Act requires that, with some exceptions,"every article of foreign origin . . . imported into the United States shall be marked in a conspicuous place as legibly, indelibly, and permanently as the nature of the article . . . will permit in such manner as to indicate to an ultimate purchaser in the United States the English name of the country of origin of the article." 19 U.S.C. § 1304(a). The Act imposes specific marking requirements for pipe fittings, which "shall be marked with the English name of the country of origin by means of die stamping, cast-in-mold lettering, etching, engraving, or continuous paint stenciling." Id. § 1304(c)(1).

If imported goods are not marked with the proper country of origin in the prescribed manner, an importer may owe "marking duties" under 19 U.S.C. § 1304(i), which states in relevant part:

If at the time of importation any article . . . is not marked in accordance with the requirements of this section, and if such article is not exported or destroyed or the article . . . marked after importation in accordance with the requirements of this section . . . , there shall be levied, collected, and paid upon such article a duty of 10 per centum ad valorem, which shall be deemed to have accrued at the time of importation, shall not be construed to be penal, and shall not be remitted wholly or in part nor shall payment thereof be avoidable for any cause.

19 U.S.C. § 1304(i). The United States Bureau of Customs and Border Protection ("CBP") is responsible for collecting marking duties owed by an importer. The circumstances under which animporter comes to owe marking duties is disputed by the parties, and will be discussed further below.

B. Victaulic's Motion to Dismiss and CFI's Opposition

On October 10, 2013, Victaulic filed a motion to dismiss the complaint for failure to state a claim. Victaulic argued that the failure to pay marking duties does not constitute a FCA violation, and that CFI failed to satisfy the pleading standards of Federal Rules of Civil Procedure 8(a) and 9(b).³

In connection with its opposition to the motion, CFI submitted a declaration by its President, Rebecca L. Woodings, with numerous exhibits attached. Doc. No. 18-1 ("Woodings Decl."). Ms. Woodings's declaration revealed that CFI's claims concerning Victaulic's failure to mark its foreign products were entirely predicated on a comparison of two sets of data: (1) an analysis of shipping manifests allegedly establishing that Victaulic imports a significant portion of its pipe fittings (CFI's "import analysis"); and (2) a survey of 221 listings for Victaulic pipe fittings on the internet auction and sale siteeBay from which CFI could allegedly determine that at least seventy-five percent of the fittings were unmarked (CFI's "product study"). Woodings Decl. ¶¶ 7-8 & 41.

CFI conducted its import analysis by examining shipping manifests from 2003-2012 using a paid subscriber database. The analysis led CFI to conclude that Victaulic imported approximately eighty-three million pounds of pipe fittings from China and Poland by ship during that time period, with 15.2 million pounds imported annually from 2010-2012. Woodings Decl. ¶¶ 20 & 22. Using Victaulic's 2011 General Price List for the Americas and accounting for standard industry discounts, CFI estimated the average price of Victaulic's pipe fittings in 2011 to be $10.00 per pound at a minimum. Id. ¶ 26. CFI multiplied that estimate by Victaulic's estimated annual imports for 2011 to conclude that, at minimum, the sales value of Victaulic's imports from China and Poland in 2011 was $152 million. Id. ¶ 27. Spreadsheets underlying CFI's analysis were attached to Ms. Woodings's declaration as exhibits. Id. Exs. B-G.

As Victaulic is privately held, CFI could not find any direct information from the company concerning its sales. Accordingly, CFI estimated from "other sources" that Victaulic's annual sales are between $250 million and $281.1 million. Woodings Decl. ¶ 27. CFI divided the $152 million in estimatedsales for 2011 by the high and low estimates for Victaulic's annual sales, to conclude that, at minimum, Victaulic's foreign imports represent fifty-four to sixty-one percent of its national sales. Using a higher estimate of $15.00 average cost per pound, Victaulic's foreign imports would represent eighty-two to ninety-one percent of its national sales.

CFI conducted its product study by tracking advertisements for pipe fittings for secondary sale (i.e., for resale, not for sale by Victaulic itself) on eBay from August to September 2012, and from November 2012 to February 2013. Woodings Decl. ¶ 35. Ms. Woodings's declaration provided various reasons why she believed eBay should be considered a valid source of secondary U.S. sales for Victaulic pipe fittings, and explained CFI's efforts to control for incorrectly listed products and older products. Id. ¶¶ 32-33 & 39.

After eliminating from consideration those listings that did not contain any photographs of the listed product, CFI reviewed 221 eBay listings for "new" iron and steel Victaulic pipe fittings that contained at least one photograph of the product being sold. Woodings Decl. ¶¶ 38 & 41. Primarily by observing those photographs and supplementing with product purchases, CFI concluded that only three pipe fittings had foreign country-of-origin markings and that at least seventy-five percent of the Victaulic pipe fittings were unmarked.⁴ Id. ¶¶ 41 & 44. According to CFI, in light of Victaulic's significant imports from China and Poland, one would expect to see a higher percentage of pipe fittings bearing foreign country-of-origin markings in the listings it reviewed if Victaulic were complying with the Tariff Act. Id. ¶ 9. CFI also concluded that two of the three pipe fittings on eBay containing foreign country-of-origin markings were marked in a manner that did not comply with the Tariff Act. Id. ¶¶ 42-43.

C. Hearing on Victaulic's Motion to Dismiss

On January 23, 2014, the Court held a hearing on Victaulic's motion to dismiss. At the outset of the hearing, the Court explained that, although it could not consider Ms. Woodings's declaration and attached exhibits in determining whether the complaint stated a claim, it would consider the information "in deciding, if [the Court] do[es] decide the complaint should be dismissed, whether that [dismissal] should be with or without prejudice." Hr'g Tr. 4 (Doc. No. 28). The Court was explicit with CFI about its assessment of thecomplaint, twice stating that the pleading was "bare bones," and observing that it was based on "conclusory kinds of facts that . . . under Twombly and Iqbal really don't carry the day." Id. at 5-6. During a later discussion about CFI's product study, the Court again remarked on the absence of factual detail in the complaint. Id. at 39-40. CFI responded that it believed its complaint stated a claim but hoped to amend if the Court disagreed. Id. at 40.

In an effort to demonstrate the limitations of CFI's product study, Victaulic presented the Court with four photographs of one of its pipe fittings, each taken from a different angle. Id. at 13. The fitting was marked as originating from China on the inside rim of the product, but the marking was only visible in one of the four pictures. Id. at 13-14. Accordingly, Victaulic argued that, even if the eBay listings examined by CFI contained two or three pictures of a product for sale, the images do not necessarily reveal whether the product was marked. Upon viewing the photographs presented at the hearing, CFI took the position that the marking on the product was unlawful because it was not done in one of the five means required by the Tariff Act. Id. at 34-36.

D. CBP Form 7501

CFI alleged in its complaint that Victaulic failed todisclose marking duties owed on unmarked merchandise in connection with documentation filed with CBP such as CBP Form 7501. Compl. ¶¶ 20 & 27. That form, which is part of the paperwork an importer files with CBP to enable proper assessment of duties owed on imported merchandise, requires an importer to report any...