190 F.3d 729 (6th Cir. 1999), 98-3889, Amer. Textile Mfg. v The Limited

Docket Nº:98-3889
Citation:190 F.3d 729
Party Name:American Textile Manufacturers Institute, Inc., Plaintiff-Appellant, v. The Limited, Inc., et al.; Tarrant Apparel Group, et al., Defendants-Appellees.
Case Date:September 14, 1999
Court:United States Courts of Appeals, Court of Appeals for the Sixth Circuit

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190 F.3d 729 (6th Cir. 1999)

American Textile Manufacturers Institute, Inc., Plaintiff-Appellant,


The Limited, Inc., et al.; Tarrant Apparel Group, et al., Defendants-Appellees.

No. 98-3889

United States Court of Appeals, Sixth Circuit

September 14, 1999

Argued: August 12, 1999

Appeal from the United States District Court for the Southern District of Ohio at Columbus, No. 97-00776--Sandra S. Beckwith, District Judge.

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Douglas N. Letter, Richard A. Olderman, U.S. DEPARTMENT OF JUSTICE, CIVIL DIVISION, APPELLATE STAFF, Washington, D.C., for Amicus Curiae.

Paul D. Cullen, Diana E. Stein, Joseph Black, CULLEN LAW FIRM, Washington, D.C., Ann Lugbill, James B. Helmer, Jr., HELMER, LUGBILL, MARTINS & MORGAN, L.P.A., Cincinnati, Ohio, for Appellant.

John T. Boese, FRIED, FRANK, HARRIS, SHRIVER & JACOBSON, Washington, D.C., David J. Young, SQUIRE, SANDERS & DEMPSEY, L.L.P., Columbus, Ohio, Michael J. Canter, VORYS, SATER, SEYMOUR & PEASE, Columbus, Ohio, for Appellees.

David J. Young, Squire, Sanders & Dempsey, L.L.P., Columbus, Ohio, for Defendantg-Appellee Tarrant Apparel Group.

Before: KEITH, BOGGS, and CLAY, Circuit Judges.


BOGGS, Circuit Judge.

The American Textile Manufacturers Institute filed a qui tam action against several defendants, alleging that the defendants submitted false claims to the government to avoid payment of fines, duties, and liquidated damages for the illegal transshipment of imported textiles. A United States District Judge dismissed the complaint for failure to state a claim, but later recused himself because of his prior representation by a member of the firm representing one of the defendants. A second judge took over the case and declined to vacate, alter, or amend the prior judgment. ATMI appealed, and we affirm.


In September 1996, the American Textile Manufacturers Institute ("ATMI") filed a complaint in the United States District Court for the Central District of California, naming as defendants The Limited, Inc. and several subsidiary corporations (referred to as the "Limited defendants"), Tarrant Apparel Group and a subsidiary corporation (the "Tarrant defendants"), and two California citizens, principal shareholders of the Tarrant Apparel Group. ATMI sued on behalf of the United States, claiming that the defendants violated 31 U.S.C. §3729(a)(7), a provision of the False Claims Act. The government declined to intervene.

ATMI, the national trade association of the domestic textile industry, complained that the defendants engaged in transshipping and mislabeling of the country of origin of textile and apparel products. ATMI alleged that its investigations revealed that the defendants

engaged in a pattern or practice of trade pursuant to which articles of apparel produced in the People's Republic of China have been transhipped to Hong Kong or Macau; have been falsely labeled as the products of Hong Kong or Macau; and have been knowingly represented to be the products of Hong Kong or Macau in official entry documents submitted to Customs by or on behalf of said Defendants.

ATMI contended that the defendants filed false entry documents "used to enter or introduce textile and apparel products into the commerce of the United States that were not entitled to admission [because of textile quotas] and were not marked with the true country of origin."

ATMI alleged that the defendants' practices exposed them to liability under

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the following statutes, and that the filing of false documents concealed from the government the defendants' liability:

1) 18 U.S.C. §545, prohibiting the smuggling of goods into the United States, the importation of illegal goods, and the use of false customs documents.

2) 19 U.S.C. §1595a(b), penalizing those persons who assist in the importation of goods "contrary to law."

3) 19 U.S.C. §1592, penalizing the making of negligent, grossly negligent, or fraudulent material omissions or false material statements in connection with the importation of any merchandise into United States commerce.

4) 19 U.S.C. §1623 (and the implementing regulations in 19 C.F.R. Part 113), governing customs bonds, and requiring the return of improperly-marked merchandise, and permitting the United States to obtain liquidated damages for violations of the bonds. See 19 C.F.R. §113.62(l).

5) 19 U.S.C. §1304(h), imposing a ten percent ad valorem marking duty on goods bearing false country-of-origin markings.

6) 15 U.S.C. §§45(m), 70a(a) & 70b(b)(4), branding as unfair competition the importation of misbranded textile fiber, and subjecting violators to civil penalties of up to $10,000 per violation.

ATMI contended that each count adequately alleged a violation of 31 U.S.C. §3729(a)(7), which imposes liability on a 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." If the defendants had truthfully disclosed the country of origin, ATMI reasoned, they would not face liability for violating the six statutes listed in the complaint. Thus, according to ATMI, the False Claims Act applied, because the defendants made false statements to avoid the "obligations" to pay money (fines, liquidated damages, and duties) arising from their violations of the customs laws.

The defendants sought to change venue to Columbus, Ohio, the principal place of business for most of the defendants. The defendants also moved to dismiss the complaint for failure to state a claim, arguing, inter alia, that the False Claims Act referred to existing obligations to the United States, and not to as-yet-unproved violations of statutes. In June 1997, District Judge Harry Hupp granted the motion to transfer venue to the United States District Court for the Southern District of Ohio, where the court permitted the parties to supplement their briefing to concentrate on Sixth Circuit--rather than Ninth Circuit--law. The United States filed an amicus curiae brief to argue that the comprehensive administrative scheme of the customs laws did not preempt private causes of action under the False Claims Act.

On November 13, 1997, District Judge Holschuh granted the defendants' motion to dismiss the complaint. After discussing ATMI's claims and the meaning of "obligation" as used by the False Claims Act, Judge Holschuh concluded that 31 U.S.C. §3729(a)(7) did not "encompass a claim based on the submission of false records to avoid payment to the United States of forfeitures or fine." "So drastic an expansion in the scope of the False Claims Act, through the use of language which strongly implies that there be some type of financial relationship between the defendant and the United States which is subject to being affected by an act of concealment or avoidance, could not reasonably have been intended [by Congress]."

On November 28, 1997, ATMI moved to disqualify Judge Holschuh and to vacate the order of dismissal, and, in the alternative, to alter or amend the judgment. In the motion to disqualify, ATMI explained that it learned on November 14 that James E. Arnold, a partner with Vorys, Sater, Seymour and Pease, had represented Judge Holschuh in a state proceeding in May 1997. Other attorneys from Vorys,

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Sater represented The Limited in ATMI's action under the False Claims Act.

On December 22, 1997, Judge Holschuh issued an order concluding that a reasonable person with knowledge of the surrounding circumstances would believe that the judge had acted impartially in the proceedings. Nevertheless, Judge Holschuh decided voluntarily to recuse himself. He refused to vacate, alter, or amend the judgment, however, although he urged the new judge to review de novo the defendants' motion to dismiss. Judge Beckwith assumed responsibility for the case, ruled that Judge Holschuh's recusal did not mandate that she vacate his judgment, and held that ATMI did not show that Judge Holschuh's November 1997 order worked a manifest injustice or contained a clear error of law. See United States ex rel. American Textile Mfrs. Inst., Inc. v. The Limited, Inc., 179 F.R.D. 541 (S.D. Ohio 1997). Thus, she denied the motion to alter or amend the judgment. ATMI appealed, and the United States participated at oral argument as amicus curiae. We turn to the merits of the appeal.



Congress passed the original False Claims Act in 1863 to respond to Civil War fraud. The statute prohibits the knowing submission of false "claims" to the government, and the Supreme Court has given the statute an expansive reading. See, e.g., United States v. Neifert-White Co., 390 U.S. 228, 232-33 (1968). The Act covers "all fraudulent attempts to cause the Government to pay out sums of money." Id.at 233. In 1986, Congress amended the Act; the amendments included a provision to extend the Act to cover "reverse false claims." See31 U.S.C. §3729(a)(7). The new language prohibits the use of false statements or records to "conceal, avoid, or decrease an obligation to pay or transmit money or property to the Government." Ibid. Now, the Act declares that any person who:

(1) knowingly presents, or causes to be presented, to an officer or employee of the United States Government or a member of the Armed Forces of the United States a false or fraudulent claim for payment or approval;

(2) knowingly makes, uses, or causes to be made or used, a false record or statement to get a false or fraudulent claim paid or approved by the Government;

(3) conspires to defraud the Government by getting a false or fraudulent claim allowed or paid;

(4) has possession,...

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