The Expanding Use of the Federal False Claims Act to Police Trade and Export Compliance

By Mary Carter Andrues and Kay Georgi Arent Fox LLP

The US government’s $45 million settlement with the Japanese company Toyo Ink SC Holdings Co., Ltd. and its affiliates, including companies in New Jersey and Illinois (collectively, “Toyo”) is perhaps the most high-profile recent example of the government’s rapidly-expanding use of the False Claims Act (“FCA”) in the international trade arena.  The case arises from a qui tam lawsuit filed by one of Toyo’s domestic competitors, John Dickson.  Dickson’s nearly $8 million recovery most certainly will encourage the use of the FCA’s whistle-blower provisions by companies wishing to police the international trade regulatory practices of their competitors.¹

Dickson originally filed the lawsuit in 2009, alleging that Toyo, a leading manufacturer of printer ink, had violated the FCA by misrepresenting the origins of products it imported to the United States to avoid anti-dumping fees and countervailing duties as well as customs duties.² As a result of antidumping and countervailing orders on Carbazole Violet Pigment 23 (CVP-23) from China and India, importers are obligated to pay extra duties if their CVP-23 imported product originates in China and India.³ The complaint alleged that Toyo misrepresented to the government that relevant shipments of ink originated in Japan and Mexico, as opposed to The People’s Republic of China and India.⁴ Essentially, the complaint alleged that the finishing processes in Japan and Mexico which converted the “Crude Violet” form of CVP-23 (originating in China) into the “Finished Violet” form did not constitute the “substantial transformation” necessary to make the “Finished Violet” originate in Japan or Mexico for purposes of the antidumping and countervailing duty orders, or (with respect to Mexican shipments) for purposes of NAFTA duty free treatment. Dickson also alleged that Toyo was responsible for false statements made to conceal its misrepresentations and conspired to avoid paying duties.⁵ In April 2012, the government intervened, and it announced the $45 million settlement eight months later, on December 17, 2012.⁶

Although the FCA is commonly associated with the government’s efforts to recover ill-gotten federal money or property, such as fraud and abuse by defense contractors, Medicare benefits, federal subsidies, and payments on contracts for goods and services, the government is expanding the use of the FCA to trade and export violations. Prior to the Toyo case, the government settled a FCA case against Rocky Mountain Instrument Company (RMI) for $1 million, after learning that RMI had provided controlled technical data to foreign national employees and foreign subsidiaries in violation of the International Traffic in Arms Regulations (ITAR).⁷ The government’s civil FCA case alleged that RMI had submitted claims for payment to various defense prime contractors, who had, in turn, had claimed reimbursement for optical and laser products manufactured overseas using sensitive technical data exported by RMP in violation of the International Traffic in Arms Regulations (ITAR).  The FCA settlement followed a parallel criminal investigation that focused on RMI’s failure to obtain export licenses prior to exporting technical data for ITAR controlled lenses to be produced by its foreign affiliates outside the United States for various US defense contractors for US Government contracts.⁸

The FCA imposes liability on any person who “knowingly makes, 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."⁹ The FCA also imposes liability on any person acting with "reckless disregard.”¹⁰ Companies can incur liability for submitting false claims to intermediary government contractors, distributors and brokers as well.¹¹ Such violations carry severe penalties—a person found liable for violating the FCA may be ordered to pay civil penalties up to $11,000 per false claim and three times the government’s actual damages.¹² FCA allegations can also spawn parallel criminal investigations, which can result in the imposition of additional criminal penalties and jail time for individuals.

The staggering awards obtained under the FCA reveal why the statute is a favorite tool of the government. From 2009 to 2012, the government has secured roughly $13.3 billion from FCA claims, which is the largest four-year total in history.¹³ In fiscal year 2012 alone, the government obtained judgments and settlements totaling $4.9 billion from FCA cases.¹⁴ This record amount is over $1.7 billion more than any sum previously secured during a single year.¹⁵

The government’s vigorous use of the FCA since 2009 is a product, in part, of the FCA’s qui tam, or whistleblower, provisions. The FCA provides that lawsuits can be initiated by a whistleblower, who, as was the case for Toyo, may be a company’s competitor.¹⁶ The whistleblower must first file an action under seal to allow the government an opportunity to investigate the claims confidentially.¹⁷ The government may choose to intervene and prosecute the case, intervene and dismiss the case, or allow the whistleblower to proceed alone.¹⁸ If the government intervenes and proceeds with the action, whistleblowers can receive up to 30 percent of the government’s recovery.¹⁹ In 2012 alone, the government secured more than $3.3 billion as a result of 647 FCA actions initiated by whistleblowers.²⁰

The government’s unprecedented commitment to pursuing FCA claims and the whistleblower’s opportunity for pecuniary gain continue to raise the stakes of regulatory compliance.  Indeed, Dickson’s success may spur an increase in competitor-initiated FCA claims, particularly with regard to the payment of customs and antidumping/countervailing duties, fees, and other surcharges.  The FCA clearly provides a strong incentive for whistleblowers to scour the trade and export compliance practices of their employers and competitors in search of FCA violations, such as those seen in the Toyo and RMI cases.

Robust compliance programs, including employee training and hotlines established to address employees’ concerns about the company’s compliance with government regulations, are the best defense to an FCA investigation.  Rigorous compliance programs not only help to prevent violations, but they also increase a company’s ability to mitigate exposure by investigating allegations and making voluntary disclosures when warranted. 
 

¹ http://www.justice.gov/opa/pr/2012/December/12-civ-1504.html

² http://www.justice.gov/opa/pr/2012/December/12-civ-1504.html

³ Id.

⁴ Id.

⁵ See Complaint, United States ex rel. Dickson v. Toyo Ink. Manufacturing Co. Ltd., No. 09-cv-438 (W.D.N.C. Oct. 9, 2009), ECF No. 2.

⁶ See http://www.justice.gov/opa/pr/2012/April/12-civ-523.html

⁷ http://www.justice.gov/opa/pr/2010/October/10-civ-1233.html

⁸ Prior to the $1 million civil FCA settlement, on June 22, 2010, RMI had agreed to a $1 million criminal forfeiture and was placed on five years probation after entering a guilty plea for exporting ITAR controlled technical data on various occasions without Department of State licenses in United States v. Rocky Mountain Instrument Company, 10-cr-00139-WYD-01 (D. Colo.).

⁹ See 31 U.S.C. § 3729(a)(7)

¹⁰ Id.

¹¹ See, e.g., Allison Engine Co. v. United States ex rel. Sanders, 553 U.S. 662 (2008)

¹² See 31 U.S.C. § 3729(a)(7)

¹³ http://www.justice.gov/opa/pr/2012/December/12-ag-1439.html

¹⁴ http://www.justice.gov/opa/pr/2012/December/12-ag-1439.html

¹⁵ http://www.justice.gov/opa/pr/2012/December/12-ag-1439.html

¹⁶ See 31 U.S.C. § 3730(d)(1)

¹⁷ See 31 U.S.C. § 3730(d)(1)

¹⁸ See 31 U.S.C. § 3730(d)(1)

¹⁹ See 31 U.S.C. § 3730(d)(1)

²⁰ http://www.justice.gov/opa/pr/2012/December/12-ag-1439.html