Ninth Circuit Revisits Jurisdiction Over FCA Claims Based on Alleged Customs Violations

In a pending case, Island Industries Inc. v. Sigma Corp., the US Court of Appeals for the Ninth Circuit is poised to decide whether district courts have subject matter jurisdiction over False Claims Act qui tam actions that are based on alleged avoidance of customs duties.

Federal district courts generally have jurisdiction over False Claims Act (FCA) claims brought by either the United States or a qui tam relator. 31 USC § 3732(a). However, in FCA cases based on violations of customs laws and regulations—which are appearing with increasing frequency—that general grant of jurisdiction clashes with 28 USC § 1582(3), which provides that the “Court of International Trade (CIT) shall have exclusive jurisdiction of a civil action which arises out of an import action and which is commenced by the United States . . . to recover customs duties.”

As the typical allegation in FCA cases based on violations of customs laws is that the defendant committed a reverse false claims violation (under FCA Section 3729(a)(1)(G)) by avoiding payment of customs duties, this jurisdictional conflict has major import for the litigation—and potentially for the viability—of these cases. Now, for the first time in nearly 20 years, a federal circuit court of appeals is poised to address it.

Pending before the US Court of Appeals for the Ninth Circuit is Island Industries Inc. v. Sigma Corp., Case No. 22-55063 (9th Cir.), a non-intervened qui tam action in which the relator, Island Industries, alleged that business competitors—including defendant Sigma Corp.—committed FCA violations by failing to pay antidumping duties on certain imported pipe fittings. At trial in the US District Court for the Central District of California, the jury returned a verdict against Sigma and found $8 million in damages based on the avoided duties, after which the district court entered judgment for $26 million (treble damages plus statutory penalties).

Sigma appealed to the Ninth Circuit, which held oral argument in January 2023. [1] At argument, the government—which had filed an amicus curiae brief in support of Island Industries—was allotted time to argue. Although jurisdiction was not argued in any of the appellate briefing, one of the panel members asked the government to address subject matter jurisdiction in light of the Ninth Circuit’s 2004 decision in United States v. Universal Fruits and Vegetables Corp., in which the court had held that the district courts lack jurisdiction over FCA cases brought by the government seeking unpaid customs duties because the Court of International Trade had exclusive jurisdiction over such actions. Following the argument, the court directed the parties and the government to brief this question. The final supplemental briefs on this question were filed on February 21, 2023.

Not surprisingly, Sigma is arguing that the Universal Fruits rationale naturally and properly should be extended to qui tam cases brought in the name of the United States, since the government remains the real party in interest whether or not it intervenes in the action. For its part, the government contends that Universal Fruits is “wrongly decided” but recognizes that only an en banc court can reverse its holding. As a result, the government is urging the Ninth Circuit to limit its application to affirmative FCA actions commenced by the United States. The government and the relator point out that, in Universal Fruits, the Court of International Trade later dismissed the action, finding that it lacked jurisdiction over FCA cases. As such, the question is raised as to whether any federal court has jurisdiction over an FCA action based on unpaid customs duties, meaning that the government’s only remedy is to pursue recovery under the customs laws in the Court of International Trade.

It is somewhat surprising that the Universal Fruits holding has not been frequently raised as a jurisdictional defense in FCA cases, especially in the Ninth Circuit. While the appellate court in Sigma could bypass the question by finding that Universal Fruits does not apply to qui tam cases, it is possible it will issue a decision that could have enormous consequences for FCA cases in this area. The government aptly summarized the import of this issue in its recent filing:

If this Court accepts Sigma’s invitation to extend Universal Fruits and hold that district courts also lack jurisdiction over both customs-related qui tam suits and suits initiated by the United States, it will effectively create a customs-related exception to the FCA within this circuit.

BACKGROUND

1. In 2004, the Ninth Circuit held that the CIT has exclusive jurisdiction over actions, including FCA actions, brought by the United States based on unpaid customs duties.

In 2004, the Ninth Circuit held that an FCA lawsuit by the United States based on unpaid customs duties was a lawsuit to “recover customs duties” and thus fell within the exclusive jurisdiction of the CIT. United States v. Universal Fruits & Vegetables Corp., 370 F.3d 829, 833-37 (9th Cir. 2004). The court reasoned that “at least part of the government’s damages” in the FCA case—if it prevailed—“will be ‘customs duties,’ namely the antidumping tariffs it claims Universal fraudulently evaded.” Id. at 835. So, no matter how the government “creatively fram[es]” the complaint, an FCA case is still a suit for customs duties. Id. at 836. [2] As a result of this holding, the court reversed the district court’s merits holding and remanded with instructions to transfer the case to the CIT. Id. at 837.

2. The CIT subsequently held that it lacked jurisdiction over FCA actions.

After provisionally accepting transfer of the case given the plausibility of jurisdiction in the CIT, see United States v. Universal Fruits & Vegetables Corp., 387 F. Supp. 2d 1251, 1253 (CIT 2005), the CIT eventually held that it did not have jurisdiction over the government’s reverse FCA claim against the importer because it only had jurisdiction over the effort to recover “customs duties” and nothing else. United States v. Universal Fruits & Vegetables Corp., 433 F. Supp. 2d 1351 (CIT 2006). As a result, in the CIT’s view, the government’s decision to seek treble damages plus civil penalties under the FCA, rather than solely the duties owed (or the penalties allowed under customs laws), removed the case from the CIT’s jurisdiction. See id. at 712 (holding “this Court lacks the statutory authority to grant Plaintiff its requested relief,” i.e., its “claim for damages and penalties pursuant to the FCA”).

Despite that holding appearing to conflict with the Ninth Circuit’s decision that the CIT had exclusive jurisdiction over the case, the issue was never resolved by the Federal Circuit. The government originally appealed the CIT’s holding of no jurisdiction, but the parties later agreed to voluntarily dismiss the appeal under Federal Rule of Appellate Procedure 42(b), with the result that the appeal was dismissed with no opinion. See United States v. Universal Fruits & Vegetables Corp., 204 F. App’x 881 (Fed. Cir. 2006).

The case did not end there, however. Instead, after the appeal was voluntarily dismissed, the importer-defendant filed an application for attorneys’ fees and expenses under the Equal Access to Justice Act (EAJA) in the CIT. Additionally, in the EAJA litigation, it was suggested that the government commenced an FCA action—rather than a straightforward customs enforcement action—because direct customs actions were barred by the statute of limitations. However, consistent with its earlier ruling, the CIT held it lacked jurisdiction to impose attorney’s fees for the same reason it lacked jurisdiction over the underlying case. United States v. Universal Fruits & Vegetables Corp., 491 F. Supp. 2d 1313 (CIT 2007). The Federal Circuit then affirmed the denial of attorneys’ fees in a per curiam order with no reasoning at all. 263 F. App’x 901 (Fed. Cir. 2008). As a result, the Federal Circuit has never addressed the jurisdictional question of whether the CIT may adjudicate FCA cases based on unpaid customs duties.

As it stands, in the Ninth Circuit, district courts lack jurisdiction over FCA cases brought by the government that are based on alleged avoidance of customs duties. Notably, no other circuit court has addressed this question, and the Universal Fruits case itself has rarely been cited for its jurisdictional holding.

3. The Ninth Circuit’s current jurisdictional inquiry

As noted, after having raised the issue sua sponte at oral argument, the panel in Island Industries Inc. v. Sigma Corp. ordered the parties and the United States as an amicus to submit briefs “addressing whether the district court lacked subject-matter jurisdiction over th[e] suit” even though it was “prosecuted by a private relator.” Case No. 22-55063, Dkt. No. 59 (9th Cir. Jan. 23, 2023).

ARGUMENTS AGAINST PERMITTING A RELATOR TO PURSUE FCA LIABILITY BASED ON AVOIDANCE OF CUSTOMS DUTIES GIVEN THE CIT’S EXCLUSIVE JURISDICTION

As the United States recognized in its supplemental briefing, Universal Fruits is binding precedent absent en banc reversal. As such, the question before the panel is whether the holding should be extended to include customs-related FCA cases initiated by qui tam relators. Although no circuit court has addressed this precise question, there are ample grounds for holding that qui tam suits likewise are barred for lack of jurisdiction, including the well-established FCA principles that a qui tam relator stands in the shoes of the government and is acting on the government’s behalf with respect to substantive FCA claims.

For instance, the US Court of Appeals for the Eleventh Circuit recently held that the Eighth Amendment governs “non-intervened qui tam action[s]” because, in reality, it is the “United States that imposes” a fine. Yates v. Pinellas Hematology & Oncology, P.A., 21 F.4th 1288, 1307 (11th Cir. 2021). Even where “the United States is not a formal party in a non-intervened qui tam action, in such a case the relator prosecutes the suit in the name of the [United States],’” and is “a partial assignee of the United States’ damages claim.” Id. at 1309 (quoting § 3730(b)(1)). Put differently, an FCA relator is “a government actor” because the relator performs “a function which is traditionally the exclusive prerogative of the state.” Id. at 1310 (citation omitted).

The Supreme Court has described FCA relators in the same terms—as filing suit on behalf of the United States as the government’s “assignee.” Vermont Agency of Nat. Res. v. U.S. ex rel. Stevens, 529 U.S. 765, 773 (2000). The relator is the government’s stand in—and the United States remains at all times the real party in interest in FCA cases. See United States ex rel. Eisenstein v. City of New York, 556 U.S. 928, 934-36 (2009). Other federal appellate courts have made clear that “the United States is the real party in interest in any” FCA qui tam action. [3] Indeed, “the fact that the government delegates some portion of [its] power to private litigants does not change the governmental character of the power exercised.” Edmonson v. Leesville Concrete Co., 500 U.S. 614, 626 (1991). [4]

In addition, a rule that would enable the United States to escape the “exclusive jurisdiction” of the CIT via the FCA’s qui tam provisions invites mischief. As the relator’s brief in Island Industries notes, “as the law now stands, the United States cannot file FCA actions relating to customs duties in either the CIT or in any district court in the Ninth Circuit.” Permitting qui tam lawsuits in district court would upend that rule. Under this construct, and particularly if the jurisdictional bar also applies to intervened cases (which also has not been addressed at the appellate level), the government would be incentivized to decline intervention in a customs-related FCA qui tam case for fear that doing so would defeat jurisdiction. Thus, the intervention decision would not be driven by the merits or other valid considerations, but out of necessity for claim preservation. The rule would then enable the government to circumvent a jurisdictional bar in a manner that defies the express grant of exclusive jurisdiction to the CIT for all matters involving the recovery of customs duties.

These factors weigh in favor of holding that, even when a relator initiates an FCA case, the suit “commences” on behalf of the United States and thus, when the FCA suit is based on alleged nonpayment of customs duties, the CIT has exclusive jurisdiction. Yates, 21 F.4th at 1309 (“Unlike a traditional private party, a relator does not initiate an FCA action to recover for an injury she herself suffered. She is instead filing suit on behalf of the United States, see § 3730(b)(1), for a fraud committed against the United States, see § 3730(a), and as a partial assignee of the United States' damages claim.”).

Nor should there be any concern that—in the absence of district court jurisdiction over FCA cases—the United States will be without a remedy or that potential whistleblowers would be discouraged. To the contrary, as the Ninth Circuit recognized in Universal Fruits, the customs laws enable the government to pursue customs duties remedies, including penalties and fines, where appropriate and provides a federal court forum in which such actions are litigated where contested. Moreover, customs-related whistleblowers remain incentivized to report potential fraud via the whistleblower reward provisions of 19 USC § 1619, which authorizes a recovery of “not to exceed 25%” to a person who provides information leading to a recovery of “any duties withheld.” As the government acknowledges, in the Ninth Circuit, for the last two decades, the United States has been precluded from commencing FCA actions based on avoidance of customs duties and, presumably, has pursued other available enforcement remedies for such violations.

ARGUMENTS IN FAVOR OF FINDING JURISDICTION OVER QUI TAM SUITS BASED ON AVOIDANCE OF CUSTOMS DUTIES

The Universal Fruits decision from 2004 has received very little attention in the last 20 years. As noted, there are no circuit court decisions citing to the court’s jurisdictional holding. Moreover, the Ninth Circuit has not, until now, had occasion to revisit the question, particularly following the Court of International Trade’s subsequent holding that it lacked jurisdiction over the government’s FCA claims in that case.

In its supplemental jurisdictional brief in the Sigma case, the government seized on these facts and argued that the Ninth Circuit’s 2004 decision was wrongly decided. The government pointed to the subsequent CIT history as well as the limited nature of the decision—applying only to actions commenced by the United States. Recognizing that the holding is binding in the Ninth Circuit in the absence of an en banc reversal, the government argued that the jurisdictional bar should not extend to cases brought by relators because those are not “commenced by the United States” within the meaning of the “exclusive jurisdiction” language of 28 USC § 1582. See U.S. ex rel. Felton v. Allflex USA, Inc., 989 F. Supp. 259, 262 (1997). [5]

The government also pointed to district court decisions finding jurisdiction over customs-related FCA cases initiated by relators instead of the United States. See US ex rel. Huangyan Import & Export Corp. v. Nature's Farm Products Inc., 370 F. Supp. 2d 993, 996–98 (N.D. Cal. 2005) (holding that the district court had jurisdiction over qui tam action commenced by the private plaintiff even though the government intervened in the case); see also US ex rel. Vallejo v. Investronica Inc., 2 F. Supp. 2d 330, 333 (W.D. N.Y. 1998) (“[T]his Court, and not the [Court of International Trade], has jurisdiction over plaintiff's [qui tam action] regarding import duties”).

In its submission to the Ninth Circuit, the relator made similar arguments. It argued that the phrase “commenced by the United States” requires the government, rather than a relator, to initiate the lawsuit. The relator highlighted the different procedures at the beginning and end of cases depending on whether they are initiated by the government or relators and invited the Ninth Circuit to distinguish between cases brought on behalf of the United States and cases initiated by the United States.

Finally, the relator argued that the Eleventh Circuit’s decision that an FCA penalty (even in a qui tam case) is a fine “imposed by the United States” in Yates (21 F.4th at 1308) does not support the position that the United States “commenced” the lawsuit in the first place. As a result, the relator argued that the result should be different in the FCA-customs context.

KEY TAKEAWAYS

• Through its sua sponte identification of a potential subject matter jurisdiction defect, the Ninth Circuit has resurrected an issue that has received little attention in the last 20 years—namely, whether any federal court has jurisdiction over FCA claims based on alleged avoidance of customs duties.
• Pending further action by an en banc Ninth Circuit, the current law in that circuit provides that no district court has jurisdiction over such FCA cases when they are brought directly by the government.
• Because the Sigma case is a non-intervened qui tam action, the Ninth Circuit is unlikely to revisit its decision in Universal Fruits but is likely to decide whether to extend that holding to FCA-customs cases initiated by relators.
• Because the Ninth Circuit’s Universal Fruits holding has not been addressed by any other circuit courts, defendants facing FCA suits based on customs violations should consider raising it as a defense.