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

• Decision Date: 05 October 2016
• Docket Number: No. 15-2169,15-2169
• Parties: United States ex rel. Customs Fraud Investigations, LLC., Appellant v. Victaulic Company
• Court: U.S. Court of Appeals — Third Circuit

839 F.3d 242

United States ex rel. Customs Fraud Investigations, LLC., Appellant

v.Victaulic Company

No. 15-2169

United States Court of Appeals, Third Circuit.

Argued on February 11, 2016

Filed: October 5, 2016

Anna C. Haac, Jonathan K. Tycko [Argued], Tycko & Zavareei, 1828 L Street, N.W., Suite 1000, Washington, DC 20036, Suzanne I. Schiller, Mako, Gold, Katcher & Fox, 401 City Avenue, Suite 901, Bala Cynwyd, PA 19004, Counsel for Appellant

Michael S. Raab, Henry C. Whitaker [Argued], United States Department of Justice, Civil Division, 950 Pennsylvania Avenue, N.W., Washington, DC 20530, Counsel for Amicus Appellant

Stephen S. Asay, Jeetander T. Dulani, Thomas C. Hill [Argued], Pillsbury, Winthrop, Shaw & Pittman, 1200 17th Street, N.W., Washington, DC 20036, Brian R. Tipton, Esquire, Florio Perrucci Steinhardt & Fader, 235 Broubalow Way, Phillipsburg, NJ 08865, Counsel for Appellee

Before: FUENTES, KRAUSE and ROTH, Circuit Judges

OPINION

ROTH

, Circuit Judge:

Customs Fraud Investigations, LLC (CFI), the relator in this qui tam action, appeals the District Court's dismissal of its complaint with prejudice and the court's denial of CFI's subsequent motion for leave to amend its complaint. We hold that the District Court erred in denying CFI's motion to amend its complaint on futility grounds. Consequently, we will vacate that order and remand this case for further proceedings.

I.

Victaulic Co., the defendant in the District Court and the appellee in this matter, is a Delaware corporation with its headquarters in Easton, Pennsylvania. It is a global manufacturer and distributor of pipe fittings. CFI, a limited liability company based in Maryland, is made up of former insiders from the pipe fitting industry. According to CFI, although none of its employees worked for Victaulic, CFI's principals have worked on numerous trade investigations involving pipe and tube products and have provided direct support to senior officials at the U.S. International Trade Commission and the U.S. Department of Commerce on issues in the industry.

To better understand CFI's allegations, it is helpful to explain the regulatory environment in which Victaulic operates. Pipe fittings, such as those Victaulic manufactures, are the subject of specific, non-discretionary import regulations set forth in the Tariff Act of 1930.¹ Pipe fittings must, with limited exceptions, be marked with the English name of the country of origin by means of one of five methods.² Only if it is technically or commercially infeasible to mark an article by one of the five enumerated methods may a pipe fitting be marked in another manner. Under no circumstances may an article of foreign origin be completely unmarked.³ If an importer releases unmarked or improperly marked goods into the stream of commerce in the United States, the importer owes a duty of 10 per centum ad valorem on the improperly marked goods.⁴ This duty, known as a “marking duty,” is deemed to have accrued at the time of importation and must be paid in addition to any other duty imposed by law.⁵

This is not to say, however, that an importer may bring improperly marked goods into the United States merely by paying a marking duty. Instead, if improperly marked goods are imported and discovered by customs officials, an importer has three options: (1) re-export the goods, (2) destroy them, or (3) mark them appropriately so that they may be released from the custody of the United States for sale in the domestic market.⁶ Customs officials at United States ports of entry are unable to inspect every import; they rely primarily on the importers themselves to self-report any duties owed and any goods that are unmarked or improperly marked. In those instances where improperly marked goods enter the stream of commerce in the United States, the marking duty is due, retroactive to the time of importation.⁷ Imposition of the duty is non-discretionary since, by statute, such duties “shall not be remitted wholly or in part nor shall payment thereof be avoidable for any cause.”⁸ In setting forth this regulatory scheme, Congress specifically noted that marking duties “shall not be construed to be penal” and are to be considered similar to any other customs duty owed.⁹

The gravamen of CFI's allegations is that Victaulic has, over the past decade, imported millions of pounds of improperly marked pipe fittings without disclosing that the fittings are improperly marked. Since this improper marking was not discovered by customs officials, Victaulic avoided paying marking duties on these fittings. As support for its claims, CFI's complaint alleged that Victaulic imported approximately 83 million pounds of fittings from overseas between 2003 and 2013 and a miniscule fraction of Victaulic's pipe fittings for sale in the U.S. bear any indication of their foreign origin, with an even smaller percentage bearing country of origin markings compliant with the applicable statute. According to the complaint, “Victaulic is able to successfully (albeit unlawfully) import its unmarked pipe fittings into the United States by knowingly failing to pay or disclose to the CBP [Bureau of Customs and Border Protection] the marking duties the company owes ... by, among other things, falsifying its entry documents and otherwise concealing the foreign source of its pipe fittings such that CBP will not detect the company's fraud.”

These actions, according to CFI, give rise to the present qui tam action under the so-called “reverse false claims” provision in the False Claims Act (FCA).¹⁰ Typically, a claim under the FCA alleges that a person or company submitted a bill to the government for work that was not performed or was performed improperly, resulting in an undeserved payment flowing to that person or company. The FCA was enacted as a reaction to rampant fraud and price gouging by merchants supplying the Union army during the Civil War.¹¹ In this case, by contrast, the allegation is not that Victaulic is obtaining monies from the government to which it is not entitled, but rather that it is retaining money it should have paid the government in the form of marking duties. Wrongful retention cases such as these are known as “reverse false claims” actions.

CFI filed its initial complaint, under seal, on May 30, 2013, in the United States District Court for the Eastern District of Pennsylvania. On August 7, the United States declined to intervene in the matter. After being served, Victaulic filed a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(1) and 12(b)(6)

. Victaulic contested the District Court's jurisdiction by contending that CFI's complaint violated the FCA's ban on suits based primarily on publicly available information.¹² Victaulic alleged, in the alternative, that the complaint failed to present a plausible claim because it was too conclusory. Discovery was stayed pending the District Court's decision on the motion to dismiss.

When the District Court held a hearing on Victaulic's motion, argument focused on Victaulic's contentions that the FCA's public disclosure bar was jurisdictional and that all of the information in CFI's complaint was publicly available. In its subsequent opinion, the District Court rejected these arguments, holding that the FCA's public disclosure bar was not jurisdictional and, in any event, CFI's complaint was not based on publicly available information within the meaning of the FCA.

Then, turning to Victaulic's alternative argument that the claim was conclusory, the District Court held that CFI's complaint did not state a claim on which relief could be granted because it failed to cross the Twombly/Iqbal threshold from possible to plausible. In doing so, the District Court mentioned that it believed the FCA's reverse false claims provision did not cover failure to pay marking duties, but declined to rule on those grounds because the complaint was based on legal conclusions unsupportable by the facts alleged. The District Court dismissed the complaint with prejudice, without any discussion of why CFI should not be afforded the opportunity to amend its complaint to solve any perceived deficiencies.

CFI promptly moved for relief from judgment and for leave to amend its complaint, including a proposed First Amended Complaint (FAC) that contained substantially more detailed factual allegations. While the contours of the claim remains the same in both complaints, the FAC includes details that address at least some of the concerns that the District Court had expressed in its opinion. Of particular import, the FAC details the rationale behind CFI's investigation of Victaulic and discusses the methodology CFI used to develop its claims.

This investigation involved a multifaceted analysis before filing suit, consisting of two parts: (1) an analysis of shipping manifest data purporting to show that Victaulic imports the majority of its pipe fittings from overseas and (2) a study of listings from the online auction site eBay for Victaulic products that CFI used as a proxy for the Victaulic product market. Out of the more than 200 listings for Victaulic pipe fittings CFI reviewed, there were virtually no products for sale that CFI considers properly marked. Based on its analysis, CFI concluded that systematic fraud must be occurring, since the majority of Victaulic's products are imported but virtually no products for sale on the secondary market are properly marked with the foreign country of origin markings required by law.

CFI bolstered the FAC by attaching an expert declaration stating that CFI's analysis “provides ‘overwhelming evidence’ that Victaulic is not properly marking its pipe fittings,” and attached actual examples of the data on which CFI and its expert based their analyses. Moreover, the FAC included two allegations that did not appear in the original complaint: a statement from an unnamed witness who recalled a specific instance of obtaining improperly labeled Victaulic products, and a...