CUSTOMS FRAUD INVESTIGATIONS, LLC et al v. VICTAULIC COMPANY
MEMORANDUM AND/OR OPINION. SIGNED BY HONORABLE MARY A. MCLAUGHLIN ON 4/10/2015. 4/10/2015 ENTERED AND COPIES MAILED, E-MAILED.(kp, )
IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
UNITED STATES OF AMERICA
ex rel. CUSTOMS FRAUD
April 10, 2015
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
The Court will deny the motion because
amendment would be inequitable and futile.
CFI describes itself as a company that “conducts confidential
research and analysis related to potential customs fraud.”
Compl. ¶ 7. It is not clear from the record whether CFI
conducts research and analysis in contexts other than qui tam
litigation, or whether its sole purpose is to hunt for possible
FCA violations such as the one alleged in this case.
Background and Procedural History 2
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
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.
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
Marking Requirements and Marking Duties
The Tariff Act requires that, with some exceptions,
Most of the background and procedural history discussed here can
be found in the Court’s September 4, 2014 memorandum granting
Victaulic’s motion to dismiss. As an understanding of that
background is necessary for the disposition of CFI’s current
motion, the Court will recount much of it here.
“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).
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
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 an
importer comes to owe marking duties is disputed by the parties,
and will be discussed further below.
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.
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
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
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 site
Victaulic also moved to dismiss on the basis that the FCA’s
“public disclosure bar,” deprived the Court of jurisdiction.
See 31 U.S.C. § 3730(e)(4)(A). The Court held that the public
disclosure bar neither deprived the Court of jurisdiction nor
mandated dismissal of the complaint. The public disclosure bar
is not at issue in CFI’s current motion.
eBay from which CFI could allegedly determine that at least
seventy-five percent of the fittings were unmarked (CFI’s
Woodings Decl. ¶¶ 7-8 & 41.
CFI conducted its import analysis by examining
shipping manifests from 2003-2012 using a paid subscriber
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
Id. ¶ 27.
Spreadsheets underlying CFI’s analysis were
attached to Ms. Woodings’s declaration as exhibits.
Id. Exs. B-
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 estimated
sales 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
Using a higher estimate of $15.00 average cost
per pound, Victaulic’s foreign imports would represent eightytwo 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.
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
¶¶ 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.
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.
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).
Court was explicit with CFI about its assessment of the
CFI attached a table describing each of the 221 listings as
exhibit H to Ms. Woodings’s declaration. A review of the table
suggested that CFI purchased seven items—listed at picture
numbers 127, 140, 146, 150, 160, 200, and 221—three of which
were unmarked and four of which bore markings establishing that
they were made in the United States, even though the initial
review of the picture was unclear. Woodings Decl. Ex. H.
complaint, 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.”
During a later discussion about CFI’s product study, the
Court again remarked on the absence of factual detail in the
Id. at 39-40.
CFI responded that it believed its
complaint stated a claim but hoped to amend if the Court
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
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.
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.
CBP Form 7501
CFI alleged in its complaint that Victaulic failed to
disclose marking duties owed on unmarked merchandise in
connection with documentation filed with CBP such as CBP Form
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 duties, tariffs, or other fees required by law that
are due upon importation.
Id. ¶¶ 19-20.
At the hearing,
Victaulic provided the Court with a copy of CBP Form 7501 and
instructions for completing the form. 5
Hr’g Tr. at 15.
the form does not expressly require an importer to disclose
marking duties, CFI argued in its complaint and at the hearing
that an importer’s obligation to report “other” fees or charges
on the form applies to marking duties.
Compl. ¶ 20; Hr’g Tr. at
There are three locations on CBP Form 7501 where an
importer is required to report “other” fees or duties not
disclosed elsewhere on the form.
The instructions for column 29
of Form 7501 direct an importer to “identify any other fee,
charge or exaction that applies. Examples include the beef fee,
CBP Form 7501 and related instructions are available on CBP’s
website. See U.S. Customs and Border Protection, Dep't of
Homeland Security, Entry Summary CBP Form 7501, available at
01_0.pdf (“CBP Form 7501”); id., CBP Form 7501 Instructions
(updated July 24, 2012), available at
01_Instructions.pdf (“CBP Form 7501 Instructions”).
honey fee, pork fee, cotton fee, harbor maintenance fee (HMF),
sugar fee, and merchandise processing fee (MPF).”
Instructions at 16.
CBP Form 7501
For Block 34, the instructions direct the
importer to “[r]ecord the estimated duty, AD/CVD [Antidumping/Countervailing Duty], I.R. tax, and any other fees or
charges calculated . . . .”
Id. at 20.
Block 39 calls for a
summary of the “other fee[s]” owed by an importer.
instructions for that block require the importer to “[r]ecord
the total estimated AD/CVD or other fees, charges or exactions
paid,” i.e., “the amounts actually being paid.”
Id. at 22.
Also for Block 39, “[f]or entries subject to payment of AD/CVD
and/or any of the various fees, each applicable fee must be
indicated in this area, and the individual amount of each fee
must be shown on the corresponding line . . . . The applicable
collection code must be indicated on the same line as the fee or
other charge or exaction.”
Id. at 20-21.
provide collection codes for specific fees, none of which is for
The Court Dismisses CFI’s Complaint With Prejudice
On September 4, 2014, more than eight months after the
hearing, the Court issued a memorandum and order dismissing
CFI’s complaint with prejudice for failure to state a claim.
The Court explained that CFI’s initial complaint was comprised
almost entirely of unsupported conclusory allegations
insufficient to state a plausible claim under Rule 8(a) of the
Federal Rules of Civil Procedure.
U.S. ex rel. Customs Fraud
Investigations, LLC v. Victaulic Co., Civ. A. No. 13-2983, 2014
WL 4375638, at *14 (E.D. Pa. Sept. 4, 2014).
In accordance with
its previously-expressed intentions, the Court considered the
additional facts provided by CFI in connection with its briefing
to determine whether CFI should be permitted to amend its
complaint to incorporate those additional facts.
Id. at 1 n.1.
Even considering the facts set forth in Ms. Woodings’s
declaration, the Court found CFI’s allegations insufficient to
state a claim under the FCA.
That conclusion rested on two
First, even assuming that eBay constituted a
representative secondary market for Victaulic pipe fittings and
that the limited time period during which CFI performed its
product study could be extrapolated to draw conclusions about a
decade of imports, CFI failed to allege facts establishing that
any unmarked pipe fittings it observed on eBay were not U.S.made, as U.S.-made fittings need not be marked.
Id. at *15.
Second, even if Victaulic failed to mark or improperly marked
its foreign-made pipe fittings, those facts do not lead to the
conclusion that Victaulic knowingly concealed or avoided an
obligation to pay marking duties.
As an aside, the Court noted additional flaws in CFI’s
Id. at *15 n.22.
The study excluded listings
without photographs, potentially excluding any number of
Additionally, the sellers on eBay may
not have described the product or its country of origin
accurately, and their photographs may not have depicted the
areas where the products were marked.
Finally, if U.S.-made
products command higher prices, one would expect to observe more
U.S.-made products in the secondary sale market, which would
suggest that the unmarked products were U.S.-made.
As CFI failed to satisfy the pleading standard set
forth in Rule 8(a), the Court declined to address whether the
failure to pay marking duties constitutes a FCA violation.
However, the Court expressed doubt that CBP Form 7501 gives rise
to an obligation to report marking duties owed on unmarked
goods, as well as uncertainty as to when “Victaulic could
plausibly be said to have knowingly concealed or avoided an
obligation to pay marking duties, or made a false statement or
deliberate omission in connection with its alleged avoidance.”
Id. at *13.
CFI’s Motion and Proposed First Amended Complaint
In response to the dismissal, CFI filed a motion to
alter or amend judgment and for leave to file an amended
As with the initial complaint, the first amended
complaint submitted with the motion (“FAC”) alleges that
Victaulic either misrepresented to CBP that no marking duties
were owed on its unmarked or improperly-marked foreign imports
or failed to declare the marking duties owed, thereby avoiding
and concealing an obligation to pay the Government in violation
of the FCA.
FAC ¶¶ 1, 11 & 110-13.
The FAC is primarily based on the theory that
Victaulic has been sneaking unmarked, foreign-made pipe fittings
into the country in order to pass them off as U.S.-made to take
advantage of higher prices for U.S.-made merchandise and
opportunities limited to U.S.-made merchandise.
FAC ¶¶ 87-91.
CFI’s allegation that Victaulic does not mark its foreign-made
fittings is predominately predicated on a comparison of its
import study (from which CFI concluded that Victaulic’s foreignmade pipe fittings account for a majority of its U.S. sales) to
its product study (from which CFI concluded that a majority of
Victaulic pipe fittings in the secondary sale market were
FAC ¶¶ 5, 8 & 55.
The FAC describes CFI’s import
analysis and product study essentially in the manner set forth
in Ms. Woodings’s declaration, but with additional factual
With regard to the product study, CFI reviewed
listings for Victaulic pipe fittings on eBay and eliminated
listings that were for “old stock” or that were not for
FAC ¶ 66.
CFI then eliminated
approximately twenty percent of the relevant listings, because
those listings did not incorporate any photographs of the
products for sale.
FAC ¶ 67.
Of the 221 remaining listings,
approximately eighty-two percent included at least one
photograph that CFI characterized as “clear,” from which CFI
could allegedly “determine with 95% confidence whether a marking
was present or not.”
FAC ¶¶ 68 & 70.
CFI notes that it was
able to view some of the photographs with a “zoom” option, and
that it copied and enlarged other photographs to view the image
FAC ¶ 68.
The FAC alleges that forty listings (approximately
eighteen percent) contained limited or unclear photographs.
CFI purchased ten products from nine of those listings
for physical examination.
FAC ¶¶ 74-75.
One of the items
purchased did not contain a Victaulic logo and was excluded from
the study, four items were unmarked, four items bore U.S.markings, and one item “was packed with a U.S. origin label, but
did not appear to have a permanent origin marking.”
FAC ¶ 75.
CFI also purchased one of the three Chinese-marked products it
identified in its product study to inspect the marking.
Based on its review of the 221 listings from seventy-five
sellers and the purchase of nine products from among those
listings, CFI concluded that at least seventy-five percent of
Victaulic pipe fittings sold on eBay were unmarked and less than
two percent (a total of three
products) bore foreign country-
FAC ¶¶ 7, 56, 76-77 & Ex. 8.
describing the 221 listings, which was provided with Ms.
Woodings’s declaration, is attached as an exhibit to the FAC.
FAC Ex. 8.
CFI also attached as exhibits copies of 196 of the
listings and many of the photographs underlying its product
FAC Ex. 9.
In an effort to bolster its conclusion that Victaulic
is failing to mark its foreign-made pipe fittings, CFI attached
to the FAC a declaration of Abraham J. Wyner, a Professor of
Statistics, and incorporated many of Wyner’s conclusions into
the factual allegations of the FAC.
FAC ¶ 57 & Ex. 7 (Wyner
Wyner opined that, based on the results of CFI’s
product study, he “would be more than 99.9% confident that
Victaulic is improperly marking a significant portion of its
Wyner Decl. ¶ 12.
That opinion is based on two
assumptions: (1) that imported pipe fittings have comprised a
significant portion of Victaulic’s U.S. sales in the last
decade, and (2) that “the slice of the secondary market for
Victaulic pipe fittings represented by eBay contains a
proportion of imported products at least approximately similar
to the proportion of imported products among all U.S. sales and
that any significant deviation is caused only by chance.”
Decl. ¶¶ 10-11; FAC ¶ 57.
Wyner acknowledged that the second
assumption might not hold true if, for example, the eBay market
were heavily favored toward U.S. products.
Wyner Decl. ¶ 11.
CFI also alleges that a witness “who has worked for
many years in the pipe and tube industry, recalls a customer
procuring Victaulic pipe fittings that the company represented
were 100% U.S. manufactured.”
FAC ¶ 83.
The witness allegedly
observed that none of the pipe fittings were marked with a
foreign country-of-origin, but a packing list “at the bottom of
one box of Victaulic inventory . . . indicated that the
products had originated from Poland.”
FAC ¶ 83.
Although CFI’s primary theory of liability is that
Victaulic failed to pay marking duties on unmarked foreign
merchandise, the FAC also alleges Victaulic has evaded payment
of marking duties owed on improperly-marked foreign merchandise.
CFI claims that two of the Chinese-marked pipe fittings it
observed on eBay had markings that appeared to be a stamp or
stencil, but not a die stamp or continuous stenciling as
required by the Tariff Act.
FAC ¶ 73. For one of those items,
which CFI purchased, the marking was on the interior wall of a
coupling, such that it was allegedly insufficiently conspicuous
because the marking would not be visible when the coupling is in
Id. CFI further contends that the picture Victaulic
submitted at the hearing on its motion to dismiss reflected that
Victaulic is improperly marking its pipe fittings because the
word “China” appears inside the fitting (which is allegedly
insufficiently conspicuous) and because the marking “appears to
be a single stenciled marking, not a continuous stencil as
required by U.S. law.”
FAC ¶ 84.
CFI contends that Victaulic was obligated to pay
marking duties on its unmarked and improperly marked pipe
fittings at the time of importation, and that Victaulic was
obligated to disclose those marking duties to CBP in
documentation such as CBP Form 7501.
FAC ¶¶ 92-101.
physically inspects only a tiny fraction of shipments arriving
in the United States,” CFI contends that, by failing to disclose
marking duties to CBP, Victaulic is able to evade paying marking
duties owed on its noncompliant merchandise.
FAC ¶ 100.
According to CFI, the very fact that unmarked or improperlymarked foreign-made pipe fittings have entered into U.S.
commerce establishes that Victaulic failed to disclose marking
duties and violated the FCA because, upon proper disclosure, CBP
would have ordered proper marking, destruction, or exportation
of the merchandise.
FAC ¶¶ 99 & 102.
Standard of Review
When a plaintiff files a timely motion to alter or
amend judgment pursuant to Rule 59(e) seeking leave to file an
amended complaint, the motion is governed by the standard set
forth in Federal Rule of Civil Procedure 15(a).
Milberg Factors, Inc., 662 F.3d 212, 230-31 (3d Cir. 2011).
Although Rule 15(a) generally favors amendment, a district court
may deny leave to amend upon a finding of undue delay, bad
faith, dilatory motive, prejudice to the non-moving party, or
U.S. ex rel. Schumann v. Astrazeneca Pharm. L.P., 769
F.3d 837, 849 (3d Cir. 2014).
“A District Court has discretion
to deny a plaintiff leave to amend where the plaintiff was put
on notice as to the deficiencies in his complaint, but chose not
to resolve them.”
Krantz v. Prudential Invs. Fund Mgmt. LLC,
305 F.3d 140, 144 (3d Cir. 2002).
“An amendment is futile if the amended complaint would
not survive a motion to dismiss for failure to state a claim
upon which relief could be granted.”
107, 121 (3d Cir. 2000).
Alvin v. Suzuki, 227 F.3d
To survive dismissal for failure to
state a claim, “a complaint must contain sufficient factual
matter, accepted as true, to ‘state a claim to relief that is
plausible on its face.’”
Ashcroft v. Iqbal, 556 U.S. 662, 678
(2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570
In deciding whether dismissal is appropriate, a court
may consider the allegations of the complaint, exhibits attached
to the complaint, matters of public record, and “document[s]
integral to or explicitly relied upon in the complaint.”
Schmidt v. Skolas, 770 F.3d 241, 249 (3d Cir. 2014) (internal
quotations omitted) (emphasis omitted).
Although a court must
accept any well pled factual allegations as true, it need not
credit legal conclusions couched as factual allegations. Iqbal,
556 U.S. at 678.
CFI Unduly Delayed Seeking Amendment
Victaulic argues that CFI unduly delayed seeking
amendment by waiting until after the Court entered final
judgment despite having been on notice of the defects in its
complaint from the time Victaulic moved for dismissal.
According to Victaulic, a finding of undue delay is further
supported by the fact that the FAC does not rely on newlydiscovered information.
“Delay may become undue ‘when a movant has had
previous opportunities to amend a complaint’ but instead ‘delays
making a motion to amend until after [judgment] has been granted
to the adverse party,’ . . . .”
Jang v. Boston Scientific
Scimed, Inc., 729 F.3d 357, 368 (3d Cir. 2013) (quoting Cureton
v. Nat’l Collegiate Athletic Ass’n, 252 F.3d 267, 273 (3d Cir.
2001)) (alteration in original).
In determining whether a party
has unduly delayed seeking amendment, a district court should
consider the reasons for the delay.
Cureton, 252 F.3d at 273.
A district court may also consider “whether new information came
to light or was available earlier to the moving party.”
Adams Golf, Inc., Sec. Litig., 381 F.3d 267, 280 (3d Cir. 2004).
Additionally, “[d]elay becomes ‘undue,’ and thereby creates
grounds for the district court to refuse leave, when it places
an unwarranted burden on the court . . . .”
Whitetail Resort, L.P., 550 F.3d 263, 266 (3d Cir. 2008).
CFI’s failure to seek amendment until after entry of
final judgment, despite having been notified that the Court was
considering a dismissal with prejudice, constitutes undue delay.
CFI was on notice of the defects in its complaint once Victaulic
moved for dismissal.
See Schumann, 769 F.3d at 849.
importantly, the Court was explicit with CFI at the hearing
about the defects in its initial pleading.
The Court twice
referred to the complaint as “bare bones” and indicated that the
complaint failed to state a claim under governing precedent.
Hr’g Tr. at 5-6, 39.
CFI was also on notice that the Court was
considering a dismissal with prejudice depending on whether CFI
could satisfy the pleading standard based on the additional
factual information set forth in Ms. Woodings’s declaration and
further developed at the hearing.
Id. at 4.
CFI expressed an intention to amend in the event of
dismissal, but it never filed a motion with a proposed amendment
in the eight months that passed before the Court entered final
Hr’g Tr. at 40.
Instead, CFI stood on its complaint,
its briefing, and the record from the hearing, and waited for
the Court to rule.
The Court effectively considered CFI’s
verbal request for amendment by ruling on the sufficiency of the
complaint as pled and as potentially amended to include the
other information in the record.
Only after the Court found
that amendment would be futile did CFI seek leave to amend and
present the Court with an amended pleading. 6
Such a “wait-and-see approach to pleading” is disfavored in
this Circuit and weighs against amendment.
Jang, 729 F.3d at
368; see also Ca. Pub. Employees’ Ret. Sys. v. Chubb Corp., 394
F.3d 126, 165 (3d Cir. 2004) (leave to amend was not required
when “Plaintiffs chose at their peril not to heed the District
Court's guidance and avail themselves of an opportunity to
rectify the deficiencies of the Amended Complaint”); In re Adams
Golf, Inc., Securities Litig., 381 F.3d at 280 (“Plaintiffs
relied at their peril on the possibility of adding to their
complaint, but in doing so they clearly risked the prospect of
the entry of a final dismissal order.”).
The Court has already
In light of the Court’s consideration of the additional factual
information provided in CFI’s briefing and at the hearing, the
FAC is essentially CFI’s second effort at amendment.
spent considerable resources evaluating CFI’s claims and
thinking through whether any deficiencies in the complaint could
By waiting for the Court to rule and then filing for
leave to amend after the entry of final judgment, CFI is
imposing an unwarranted burden on the Court by requiring the
Court to waste judicial resources revisiting issues that could
have been addressed earlier.
In that regard, a finding that CFI’s delay is undue is
bolstered by the fact that the FAC rests almost entirely on
information that was already before the Court or that CFI could
have presented to the Court prior to dismissal.
CSX Corp., 1 F.3d 1406, 1414 (3d Cir. 1993).
See Lorenz v.
The FAC reasserts
the same factual allegations set forth in Ms. Woodings’s
declaration and relies on many of the same exhibits.
the FAC is more specific and incorporates a majority of the eBay
listings and photographs underlying CFI’s product study, that
information could have been included with CFI’s initial filing,
its opposition to Victaulic’s motion to dismiss, or in response
to the Court’s concerns after the hearing.
The only potentially new information included in the
FAC is a lone allegation concerning a witness who allegedly
observed conduct consistent with CFI’s theory of liability.
is not clear when CFI learned of that information, although it
is apparent that CFI’s investigation into Victaulic is ongoing.
However, it was CFI’s choice to file this action when it did, on
the apparent belief that it had a sufficient factual basis to
justify a FCA action against Victaulic based on its import
analysis and product study.
CFI’s misjudgment of the strength
of its case does not justify its belated effort at amendment.
CFI contends that amendment would not be inequitable,
despite any delay, because Victaulic cannot establish prejudice.
However, a finding of undue delay is not dependent on a finding
See Estate of Olivia ex rel. McHugh v. New
Jersey, 604 F.3d 788, 803 (3d Cir. 2010).
CFI has offered no
cogent reason for the delay, and any “misplaced confidence” in
its assessment of its case does not justify its failure to seek
amendment in the face of clear notification from the Court that
dismissal with prejudice was a likely possibility. 7
In re Adams
Golf, Inc. Securities Litig., 381 F.3d at 280; see also CMR D.N.
Corp. v. City of Phila., 703 F.3d 612, 629 (3d Cir. 2013) (“[W]e
have refused to overturn denials of motions for leave to amend
where the moving party offered no cogent reason for the delay in
seeking the amendment.”).
The Court therefore concludes that
Victaulic also argues that amendment should be denied because
CFI has acted in bad faith by improperly including an expert
declaration as an exhibit to its FAC and misrepresenting
Victaulic’s statements at the hearing. The Court disagrees that
CFI’s inclusion of an expert declaration or its discussion of
the hearing reflect bad faith that would preclude amendment.
CFI’s delay in this case was undue, but will also decide whether
amendment would be futile.
Amendment Would be Futile
Victaulic also contends that amendment would be futile
because the alleged failure to pay marking duties on unmarked or
improperly marked merchandise does not constitute a FCA
Alternatively, Victaulic argues that amendment would
be futile because the factual allegations in the FAC do not cure
the defects in CFI’s initial pleading.
The Court agrees that
amendment would be futile.
Victaulic’s Alleged Failure to Pay Marking Duties
Does Not Violate the FCA
CFI’s theory of liability is predicated on its
allegations that unmarked or improperly marked merchandise is
subject to marking duties at the time of importation, and that
any marking duties owed on such merchandise must be disclosed in
entry documentation such as CBP Form 7501.
FAC ¶¶ 92-108.
Victaulic relies on American Textile Manufacturers Institute,
Inc. v. The Limited, Inc., 190 F.3d 729 (6th Cir. 1999)
(“ATMI”), for the proposition that the FAC does not state a
claim because any obligation to pay marking duties arose after
the alleged false statements were made.
Victaulic also argues
that no false claims could have been made in this case because
nothing in Customs law or CBP Form 7501 requires an importer to
report marking duties at the time merchandise is imported.
Marking Duties Accrue After Importation
When and under what circumstances an importer owes
marking duties is not necessarily straightforward.
Victaulic Co., Civ. A. No. 13-2983, 2014 WL 4375638, at **1-2.
However, after reviewing the Tariff Act, Customs regulations,
and relevant case law, the Court concludes as a matter of law
that an importer does not owe marking duties upon importation of
unmarked or mismarked merchandise.
To the contrary, an
obligation to pay marking dues arises only if unmarked or
improperly marked goods are entered into the country and are not
subsequently remarked, exported, or destroyed.
To understand how an importer comes to owe marking
duties, a basic understanding of the process by which imported
merchandise enters the country is necessary.
arriving by ship is considered “imported” on the date the ship
arrives at a U.S. port with the intention to unload the
19 C.F.R. § 101.1.
To clear the merchandise
through CBP, an importer must “make entry” upon or shortly after
importation by filing entry documentation with CBP so that CBP
can assess the duties owed on the merchandise prior to releasing
See 19 U.S.C. § 1484(a); 19 C.F.R. § 141.0a(a)-(b).
same time or shortly after “making entry,” an importer must file
an “entry summary,” which includes CBP Form 7501 or an
19 C.F.R. §§ 141.0a(b), 142.2 & 142.11.
An importer is obligated to use reasonable care in connection
with the entry process.
19 U.S.C. § 1484(a)(1).
In general, entry documentation requires an importer
to provide information such as the value of the products
imported and the country of origin to allow for an accurate
assessment of duties owed at the time of importation.
U.S.C. § 1484(a); 19 C.F.R. § 141.1(a).
An importer generally
deposits estimated duties owed to CBP at the time entry summary
documentation is filed.
141.101(a) & 141.103.
See 19 U.S.C. § 1505(a); 19 C.F.R. §
Upon receipt of the relevant
documentation and an importer’s deposit of estimated duties, CBP
will release the merchandise.
Although CBP has authority to
examine the goods, it may release them without inspection and
later request samples or additional examination of released
See 19 C.F.R. § 151.1; 19 C.F.R. § 151.11; see also
United States v. So’s USA Co., No. 97-05-00922, 1999 WL 675408,
at *2 (Ct. Int’l Trade Aug. 26, 1999).
Entries remain open or
“unliquidated” for a period of time during which CBP or the
importer can review and revise the entry information if
Absent any revisions, the entry will “liquidate” at
the duty rate estimated by the importer.
See 19 U.S.C. §
1504(a); 19 C.F.R. § 159.11(a).
In the event CBP discovers before release that
imported merchandise is not properly marked with country-oforigin information, it will require proper marking, exportation,
or destruction of the merchandise.
19 C.F.R. § 134.51(a).
if CBP conditionally releases the merchandise to the importer,
it may request redelivery for proper marking, export, or
destruction within a limited time period if it is later revealed
that the merchandise was not marked.
19 C.F.R. §§ 134.3(b)
141.113(a)(2); see also 19 C.F.R. §§ 141.0a(i).
If an article is not marked in accordance with marking
requirements at the time of importation, “and if such article is
not exported or destroyed or . . . marked after importation,”
then “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.”
19 U.S.C. §
Although marking duties are “deemed to have accrued at
the time of importation,” they are only “levied, collected, [or]
paid” if the unmarked article is not exported, destroyed, or
marked after importation.
A CBP regulation confirms that
“[a]rticles not marked as required . . . shall be subject to
additional duties of 10 percent of the final appraised value
unless exported or destroyed under Customs supervision prior to
liquidation of the entry . . . .”
19 C.F.R. § 134.2 (emphasis
Case law supports this interpretation of the statute
and regulations. 8
Marking duties are therefore not a duty owed to the
Government upon the importation of foreign merchandise.
are, rather, additional duties imposed after the fact on
noncompliant merchandise that has been erroneously released into
the stream of commerce.
Indeed, an importer arriving at a U.S.
port with unmarked merchandise does not have the option of
paying marking duties to enter that merchandise into the
See Pentax Corp. v. Robison, 125 F.3d 1457, 1463 (Fed. Cir.
1997)(“ The act of culpably mismarking goods cannot be said to
have deprived the government of the 10 percent ad valorem duty
assessed under 1304(f). To the contrary, but for the mismarkings
(followed by the failure to export, destroy, or remark the
articles in accordance with section 1304), the duty could not
have arisen.”), amended on reh’g by, 135 F.3d 760 (Fed. Cir.
1998); Frontier Ins. Co. v. United States, 185 F. Supp. 2d 1375,
1379 (Ct. Int’l Trade 2002) (“As Customs correctly concludes, §
1304 mandates the assessment of a 10% marking duty when (1) at
the time of importation an article is not marked in accordance
with the provisions of § 1304(a) and (2) the merchandise is not
exported, destroyed or re-marked under the supervision of
Customs prior to the liquidation of the entry.”); United States
v. Golden Ship Trading Co., No. 97-09-01581, 2001 WL 65751, at
*3 (Ct. Int’l Trade Jan. 24, 2001) (“Plaintiff correctly notes
that 19 U.S.C. § 1304 requires that marking duties accrue if
merchandise has been mismarked and has entered into the commerce
of the United States.”); United States v. Pentax Corp., 69 F.
Supp. 2d 1361, 1363 (Ct. Int’l Trade 1999) (“Had the mismarking
been discovered before release by Customs, the goods would not
have been admitted as marked. Remarking, exportation, or
destruction, would have been required. If none of these measures
were accomplished and if the mismarking had been discovered
before liquidation, marking duties would have been assessed.”
(citations and footnote omitted)).
Rather, as discussed above, the importer will be
obligated to remark, export, or destroy the merchandise.
when none of those three things occurs does an importer’s
obligation to pay marking duties arise.
CFI appeared to embrace this understanding of marking
duties at the hearing.
See Hr’g Tr. at 23-27, 31-32.
CFI acknowledges in its current briefing that “the only
circumstance in which an importer actually pays marking duties
is if the importation of unmarked goods is detected after-thefact, and after Customs has the ability to require marking,
destruction or re-export.”
Doc. 37 at 11.
also takes the position that marking duties are owed upon
importation and suggests that the Court must defer to its
factual allegation as to when marking duties are owed.
When and the circumstances under which an importer
The Tariff Act provides that “[n]o imported article held in
customs custody . . . shall be delivered until such article . .
. , whether or not released from customs custody, shall have
been marked in accordance with the requirements of this section
or until the amount of duty estimated to be payable under
subsection (i) of this section [i.e., marking duties] has been
deposited.” 19 U.S.C. § 1304(j); see also 19 C.F.R. § 134.3(a).
That language arguably suggests marking duties may be paid in
lieu of marking. To the contrary, that provision does not
afford an importer a choice to either pay marking duties or
surrender the merchandise for proper marking, exportation, or
destruction. See Globemaster, Inc. v. United States, 340 F.
Supp. 974, 977 (Cust. Ct. 1972); see also Hr’g Tr. at 17-18, 2327; FAC ¶ 99.
owes marking duties is dictated by statute and regulations.
is a legal issue rather than a factual matter, and the Court
owes no deference to CFI’s legal conclusions.
U.S. at 678.
See Iqbal, 556
CFI ignores the statutory provisions and
regulations discussed above and appears to rely exclusively on
the language that marking duties are “deemed to have accrued at
the time of importation.”
19 U.S.C. § 1304(i).
statute does not say that marking dues are “owed” or “due” upon
importation, but rather “deems” them “to have accrued at the
time of importation.”
That language accords with the notion
that marking duties accrue after importation absent remarking,
exportation, or destruction, but are retroactively “deemed” to
have accrued at importation, presumably to fix a point in time
at which to value the imported merchandise so as to calculate
the ten-percent marking duty.
CFI’s interpretation that marking duties are owed at
the time of importation cannot be squared with the language of
the statute and regulations.
If marking duties were owed upon
importation, as CFI alleges, an importer would owe marking
duties on noncompliant merchandise even if that merchandise were
subsequently remarked, exported, or destroyed in connection with
the entry process or after entry.
To the contrary, as explained
above, marking duties are additional duties owed on noncompliant
merchandise that has not been remarked, exported, or destroyed
after entry into commerce.
See 19 U.S.C. § 1304(i).
CBP Form 7501 Does Not Require an Importer to
Report Marking Duties
As noted in the Court’s earlier opinion, nothing in
CBP Form 7501 requires an importer to report marking duties that
may be owed on unmarked merchandise.
2983, 2014 WL 4375638 at *13.
Victaulic, Civ. A. No. 13-
The form and its instructions do
not mention marking duties at all.
Furthermore, the location on
the form where an importer is instructed to summarize “other”
fees requires the importer to denote the “applicable collection
code” from a list of codes provided in the instructions.
supra § I.D.
None of those collection codes refers to marking
There is simply no location on the form where an
importer is required to disclose marking duties in accordance
with the form instructions.
CFI’s construction of Form 7501 is not only
inconsistent with the language of the form and related
instructions, but it makes no sense in light of when marking
duties are owed.
Under CFI’s interpretation, an importer would
be obligated to disclose marking duties owed on merchandise
before any marking duties had in fact accrued.
If CBP were
notified upon entry—via Form 7501 or in connection with other
entry documentation—that imported merchandise did not comply
with marking requirements, it would order remarking,
exportation, or destruction of the merchandise prior to
Hr’g Tr. at 31.
CFI acknowledges that fact.
FAC ¶ 102; see also
In that case, however, the importer would not
owe marking duties because no obligation to pay marking duties
would have accrued.
Any prior disclosure of marking duties, to
the extent one was made, would have therefore been erroneous.
CFI nevertheless claims that deference is due to its
factual allegation that an importer must disclose marking duties
on Form 7501.
The FAC explicitly relies on form 7501 in
connection with its allegation that Victaulic is falsifying
FAC ¶ 96.
Accordingly, the court may
properly consider the form in deciding whether the FAC states a
See Schmidt, 770 F.3d at 249.
To the extent a document
properly before the court “contradict[s] the Complaint's factual
allegations, the document will control.”
Goldenberg v. Indel,
Inc., 741 F. Supp. 2d 618, 624 (D.N.J. 2010) (citing ALA, Inc.
v. CCAIR, Inc., 29 F.3d 855, 859 n. 8 (3d Cir. 1994)).
Accordingly, no deference is due to CFI’s erroneous allegation
that Form 7501 requires disclosure of marking duties.
Victaulic’s Alleged Failure to Pay Marking Duties
Does Not Give Rise to a Claim Under the FCA
Prior to 2009, the FCA imposed liability on whoever
“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.”
U.S.C. § 3729(a)(7).
Claims brought pursuant to that provision
were known as “reverse false claims” because they concerned use
of a false record to reduce or avoid a monetary obligation to
pay the government rather than fraudulent efforts to cause
payment on a false claim.
U.S. ex rel. Schmidt v. Zimmer, Inc.,
386 F.3d 235, 242 (3d Cir. 2004).
In its current form, the FCA
imposes liability on whoever “knowingly makes, uses, or causes
to be made or used, a false record or statement material to an
obligation to pay or transmit money or property to the
Government, or knowingly conceals or knowingly and improperly
avoids or decreases an obligation to pay or transmit money or
property to the Government.”
(effective May 20, 2009).
31 U.S.C. § 3729(a)(1)(G)
The amended version of the reverse
false claim provision applies to conduct that occurred after its
enactment on May, 20, 2009.
See U.S. ex rel. Ahumada v. NISH,
756 F.3d 268, 280 n.7 (4th Cir. 2014) (citing Fraud Enforcement
and Recovery Act of 2009, Pub. L. No. 111-21, § 4(f), 123 Stat.
The Sixth Circuit’s opinion in ATMI, supra, is
particularly relevant to whether CFI can state a cognizable
claim under the FCA based on Victaulic’s alleged failure to pay
The defendants in that case were alleged to
have mismarked merchandise by labeling articles produced in
China as having been produced in Hong Kong, and misrepresenting
the country of origin in paperwork filed with Customs to avoid
The relator claimed that the defendants’
conduct subjected them to fines, liquidated damages, and marking
duties, and that their filing of false documentation concealed
those monetary obligations in violation of the pre-2009 version
of the FCA’s reverse false claim provision.
The Sixth Circuit relied on two basic principles to
conclude that the allegations vis-à-vis marking duties did not
state a claim.
First, “a plaintiff may not state a reverse
false claim unless the pertinent obligation attached before the
defendant made or used the false record or statement.”
Second, “[w]here an obligation arises if and only if a
defendant makes a false statement or files a false claim . . . ,
an action under the False Claims Act will not lie . . . .”
After looking to relevant case law on marking duties, the Sixth
Circuit concluded that “the marking duty applies only when a
defendant engages in conduct that the statute defines as
wrongful” and rejected the reverse false claim on that basis.
Id. at 741.
Additionally, the relator’s claims failed as a
matter of law because any false statements were necessarily made
before any obligation to pay marking duties attached.
The Court agrees with the logic of ATMI that a
defendant cannot be liable for a reverse false claim based
solely on conduct necessary to create the obligation that the
defendant allegedly avoided or concealed.
For liability to
attach under the pre-2009 version of the reverse false claim
provision, a defendant had to knowingly make a false statement
or use a false record to “conceal, avoid, or decrease an
obligation to pay or transmit money or property to the
31 U.S.C. § 3729(a)(7).
Under the current
version, a defendant is liable if it “knowingly conceals or
knowingly and improperly avoids or decreases an obligation to
pay or transmit money or property to the Government,” regardless
of whether a false statement is made.
In interpreting statutory language, a court should
determine the statute’s plain meaning, and may use a dictionary
to determine the ordinary meaning of the words.
Aleynikov v. Goldman Sachs Grp., Inc., 765 F.3d 350, 359 (3d
The word “avoid” means “to prevent the occurrence
or effectiveness of [something].”
http://www.merriam-webster.com/dictionary/avoid. “Conceal” is
defined as “to prevent disclosure or recognition of” or “to
place out of sight.”
The word “decrease” is defined
as “to grow progressively less (as in size, amount, number, or
intensity)” or “to cause to decrease.” Id. http://www.merriamwebster.com/dictionary/decrease.
When a course of conduct is necessary to create an
obligation to pay the Government, that same course of conduct
cannot also be said to “conceal,” “avoid,” or “decrease” the
obligation within the ordinary meaning of those words, even if
the conduct giving rise to the obligation is fraudulent.
Otherwise, the instant an obligation arises by virtue of a
defendant’s fraudulent conduct, the defendant could also be said
to have concealed, avoided, or decreased that same obligation
without doing anything else.
The ordinary meaning of the words
conceal, avoid, and decrease indicate that a defendant must take
some other action to prevent disclosure of or payment on the
obligation or to cause that obligation to decrease after the
CFI contends that “[i]f Victaulic has imported
unmarked fittings, then it concealed, withheld, and avoided an
obligation to pay the 10% marking duties on those imports,
including by failing to provide necessary documentation to CBP
for their release and failing to deposit the duties at or before
the time of release, as required by statute, as well as by not
marking the products in the first place . . . .”
Doc. 43 at 14;
see also FAC ¶ 102 (“[I]f Victaulic successfully imported and
distributed into the stream of commerce unmarked pipe fittings,
then it necessarily falsified information on its entry documents
and failed to pay marking duties owed.”).
As explained above,
there are no marking duties to report at the time of importation
or entry because an importer does not owe marking duties unless
he enters unmarked or improperly marked merchandise into the
country and that merchandise is not otherwise remarked,
exported, or destroyed.
Any obligation to pay marking duties
on Victaulic’s pipe fittings necessarily accrued after
importation and entry, such that there would be no duties to
report or deposit upon importation or entry.
Accordingly, Victaulic cannot be liable on a reverse
false claim based solely on the fact that it allegedly imported
unmarked or improperly marked merchandise because that conduct
is necessary to create the obligation in question.
importer comes to owe marking duties by negligently or
intentionally skirting marking requirements and entering
noncompliant merchandise into the country, the marking duties
would not be owed but for that conduct.
For the reasons
discussed above, the same conduct that gives rise to the
obligation to pay marking duties cannot also be said to avoid,
conceal, or decrease those duties so as to give rise to a
reverse false claim under either version of the statute.
Accordingly, amendment would be futile because CFI’s claims fail
as a matter of law. 10
The FAC Does Not Satisfy Rule 9(b)
Amendment would also be futile because the FAC fails
to satisfy Rule 9(b).
Federal Rule of Civil Procedure 9(b)
requires a party alleging fraud, including a relator in a FCA
action, to “state with particularity the circumstances
constituting [the] fraud.”
Fed. R. Civ. P. 9(b); U.S. ex rel.
Wilkins v. United Health Grp., Inc., 659 F.3d 295, 301 n.9 (3d
Victaulic also alleges that a failure to pay marking duties is
essentially a regulatory violation that does not give rise to a
claim under the FCA. Several courts, including the Sixth
Circuit in ATMI, held that, under the pre-2009 version of the
FCA, unassessed civil and criminal penalties for regulatory
violations were “contingent” obligations that could not form the
basis of a reverse false claim. 190 F.3d at 738; see also Hoyte
v. Am. Nat’l Red Cross, 518 F.3d 61, 67 (D.C. Cir. 2008); U.S.
ex rel. Bain v. Ga. Gulf Corp., 386 F.3d 648, 657 (5th Cir.
2004). The 2009 amendments to the FCA added a definition of
“obligation,” to include “an established duty, whether or not
fixed, arising . . . from statute or regulation.” See 31 U.S.C.
§ 3729(b)(3). It is apparent from the legislative history that
Congress considered “customs duties for mismarking country of
origin” to be encompassed within the new definition. S. Rep.
111-10, at n.10, S. Rep. No. 10, 111th Cong., 1st Sess. 2009,
2009 WL 787872, at *24. However, although certain contingent
obligations may now form the basis of a reverse false claim, it
is still not clear that an unassessed civil or criminal penalty
for a regulatory violation constitutes an obligation under the
statute. See John T. Boese, Civil False Claims and Qui Tam
Actions § 2.01[L] (citing 155 Cong Rec. S. 4539 (daily ed. Apr.
22, 2009) (statement of Sen. Kyl)). The Court declines to
address this issue, having resolved the matter on other grounds.
To satisfy Rule 9(b), a relator must “allege
‘particular details of a scheme to submit false claims [or
otherwise violate the FCA] paired with reliable indicia that
lead to a strong inference that claims were actually submitted
[or the FCA violated in the manner alleged].’”
Foglia v. Renal
Ventures Mgmt., LLC, 754 F.3d 153, 156 (3d Cir. 2014) (quoting
U.S. ex rel. Grubbs v. Kanneganti, 565 F.3d 180, 190 (5th Cir.
Although a relator need not plead “representative
samples” of fraudulent conduct “specifying the time, place, and
content of the acts and the identity of the actors,” he must
describe more than “a mere opportunity for fraud.”
Id. at 155 &
“In cases of fraud, Rule 9(b) . . . stand[s] as a
gatekeeper to discovery, a tool to weed out meritless fraud
claims sooner than later.”
Grubbs, 565 F.3d at 185.
particularity requirement is intended “to place the defendants
on notice of the precise misconduct with which they are charged,
and to safeguard defendants against spurious charges of immoral
and fraudulent behavior.”
Seville Indus. Mach. Corp. v.
Southmost Mach. Corp., 742 F.2d 786, 791 (3d Cir. 1984). “[A]
claim brought under the [FCA] that rests primarily on facts
learned through the costly process of discovery is precisely
what Rule 9(b) seeks to prevent.”
U.S. ex rel. Nathan v. Takeda
Pharm. N. Am., Inc., 707 F.3d 451, 456 (4th Cir. 2013) (internal
quotations and alterations omitted)).
CFI’s primary theory of liability is that, from 20032012, Victaulic failed to mark its foreign-made pipe fittings,
snuck those unmarked fittings into the country by failing to
disclose them to CBP, and passed them off as U.S.-made to
command higher profits. 11
That theory rests almost entirely on a
comparison of CFI’s import analysis to its product study and Dr.
Wyner’s related statistical analysis. 12
According to CFI, one
can conclude that Victaulic is failing to mark its foreign-made
pipe fittings because a considerable portion of the Victaulic
products sold on the secondary market (eBay) are unmarked, such
that some of those products must be foreign-made in light of the
fact that imports account for a significant portion of
Although studies and statistics may be used to satisfy
Rule 9(b) in the FCA context, those studies and statistics must
Victaulic, pointing to its price list, suggests that it has no
motive for fraud because it charges the same price for its
foreign-made and U.S.-made products. However, the FAC explains
that certain legislation created a market for U.S.-made
products, which could provide a motive for the fraud alleged by
CFI. CFI also alleges that the price list is irrelevant, to
some extent, in light of industry discounts commonly provided on
Victaulic alleges that it was improper for CFI to submit an
expert report at this stage of the litigation, and that the
Court should not consider it. However, CFI’s claims fail even
taking Wyner’s declaration into account.
be reliable in the sense that they give credence to the
relator’s allegations of fraud.
See U.S. ex rel. Ge v. Takeda
Pharm. Co., Ltd., 737 F.3d 116, 123-24 (1st Cir. 2013)
(explaining that, in some contexts, a relator can satisfy Rule
9(b) by “providing factual or statistical evidence to strengthen
the inference of fraud beyond possibility without necessarily
providing details as to each false claim” (internal quotations
omitted)); U.S. ex rel. Thompson v. Columbia/HCA Healthcare
Corp., 125 F.3d 899, 903 (5th Cir. 1997) (relator’s allegations
based on statistical studies failed to satisfy Rule 9(b) when
there was “no indication . . . that [the] studies directly
CFI’s product study is insufficiently reliable to
support its conclusion that Victaulic failed to mark foreign
products because it uses unreliable methods.
unreliability of the product study stems from the fact that
CFI’s conclusions rest on the assumption that it was able to
discern from photographs on the internet whether a given product
Of the 221 listings considered by CFI, eighty-two
percent allegedly had one or more “clear” photographs (a
subjective assessment) from which CFI “was able to determine
with 95% confidence whether a marking was present or not.” 13
Nothing in the FAC or CFI’s briefing explains how CFI derived
its conclusion that, for the majority of listings, it could
But reviewing pictures on eBay, which are one-dimensional
rather than three-dimensional, does not reliably allow one to
draw a conclusion as to whether the depicted product is marked,
especially since there is no indication that sellers were making
an effort to display markings in the photographs.
alleges that it used a “zoom” option and otherwise enlarged
images to get a closer look at the products being sold, that
matters little if the country-of-origin marking simply is not
evident from the photograph.
CFI rejects the notion that it may have missed foreign
markings, in particular those located inside the rim of a
product (such as the marking displayed in the picture Victaulic
presented at the hearing), because it identified one foreign
marking inside a pipe fitting and because “approximately twothirds of the listings provide some view of the inside or rim of
Doc. 43 at 8.
But the fact that certain
photographs provided a view of the inside of a fitting does not
mean that each image illustrated the location where each product
was marked, especially since CFI reviewed different types of
products that may have been marked in different locations.
ascertain whether a depicted product was marked with ninety-five
percent confidence. That figure appears to be an assumption
based on CFI’s subjective assessment of its ability to make a
marking determination from a photograph rather than any data.
It is also not apparent from the spreadsheet attached to the FAC
each of the listings that CFI deemed “unclear.” Compare FAC ¶
74 with FAC Ex. 8.
CFI’s own allegations illustrate the limits of its
When CFI selected a sample of nine products to
purchase from the eighteen percent of photographs it designated
as “unclear,” one of the products purchased was not even marked
as a Victaulic product and had to be excluded from the study.
FAC ¶ 75.
Furthermore, upon purchasing items for sale, CFI
realized that “approximately half of the Victaulic pipe fittings
CFI purchased were, in fact, marked as made in the U.S.A.,
although they appeared from the eBay listings to be unmarked.”
FAC ¶ 76.
Although CFI adjusted its results based on that
finding, it does not inspire confidence about the majority of
its conclusions, especially since there is no apparent factual
basis for the ninety-five percent confidence level CFI
attributes to its ability to discern markings from the “clear”
It also does not appear as though CFI accounted
for the fact that several listings were for multiple products.
Even if CFI had accurately assessed whether a given
product sold on eBay was marked, its study still does not lead
to the conclusion that the unmarked products are foreign made,
rather than U.S.-made.
CFI alleges that eBay is a national
The only sufficiently reliable assessments of markings are
those made by CFI after purchasing the products from eBay. But
nine purchases are not a statistically significant sample from
which to conclude, by virtue of a comparison to Victaulic’s
imports over a decade, that Victaulic is failing to mark its
market that includes products from different channels of
distribution and a range of Victaulic products for sale.
62-65; Doc. 43 at 7.
But those allegations do not reliably
support an inference that one would expect to find foreign-made
and U.S.-made Victaulic products sold on eBay in the same ratio
sold by Victaulic.
Without a reliable basis for drawing such an
inference, CFI’s product study cannot plausibly establish that
Victaulic is failing to mark a significant portion of its
These inherent flaws in CFI’s study cast
considerable doubt on its conclusions and, by extension, Wyner’s
statistical analysis, rendering the study an insufficient basis
for satisfying Rule 9(b).
The only other factual allegation supporting CFI’s
theory that Victaulic failed to mark its pipe fittings relates
to a witness who worked in the pipe and tube industry.
witness allegedly “recall[ed] a customer procuring Victaulic
pipe fittings that the company represented were 100% U.S.
manufactured,” yet observed a packing list at the bottom of “one
box” of inventory suggesting that the unmarked products
originated in Poland.
FAC ¶ 83.
This allegation is closer to
the mark, as it lends support to CFI’s theory that Victaulic is
failing to mark imported merchandise.
However, the non-specific
allegations of one witness implicating one box of inventory for
an unknown customer at an unknown time does not “lead to a
strong inference” that Victaulic has perpetrated a massive fraud
involving millions of pounds of product imported over the course
of a decade, at least not without additional corroborating
Foglia, 754 F.3d at 158.
To conclude otherwise
would mean that a complete stranger to a company could run to
court and unlock the doors to discovery based solely on the nonspecific allegations of one witness.
More is required “for a
ticket to the federal discovery apparatus.”
Grubbs, 565 F.3d at
It is worth noting that CFI is essentially a stranger
It has no inside information, unlike the typical
qui tam relator, who has usually seen direct or indirect
evidence of a fraudulent scheme.
A current or former employee
of a defendant, or an individual who is otherwise in a position
to have inside information about a defendant’s practices and
conduct, bears some level of reliability when he acts as a qui
tam relator because he was in a position have observed the
alleged fraud through personal experience.
See Grubbs, 565 F.3d
at 191-92 (relator alleged scheme to improperly bill for patient
visits based on “first-hand experience” and direct
communications with other participants in the scheme); U.S. ex
rel. Heater v. Holy Cross Hosp., Inc., 510 F. Supp. 2d 1027,
1036 (S.D. Fla. 2007) (“Heater's personal experience with the
billing process can provide the ‘indicia of reliability’
required to survive Holy Cross's Motion to Dismiss.”)
When a relator is a complete stranger to the defendant
who has constructed a case of fraud entirely from the outside,
his allegations do not necessarily bear the same reliability.
That is not to say that a corporate outsider cannot function as
However, any outside investigation into a private
company’s fraud must, in accordance with Rule 9(b), supply the
Court with a level of reliable information that strongly
supports an inference a FCA violation has occurred.
reasons above, CFI has not done so here with respect to its
claim that Victaulic is failing to mark its foreign-made
See Ebeid ex rel. U.S. v. Lungwitz, 616 F.3d 993, 998
(9th Cir. 2010) (“To jettison the particularity requirement
simply because it would facilitate a claim by an outsider is
hardly grounds for overriding the general rule, especially
because the FCA is geared primarily to encourage insiders to
disclose information necessary to prevent fraud on the
In a secondary theory, CFI alleges that, even when
Victaulic marks its foreign-made products, those markings do not
technically comply with marking requirements because they are
done by an improper method and/or are not conspicuous.
theory is based on one foreign pipe fitting CFI purchased from
eBay in connection with its product study, a review of another
listing from eBay, and the picture of a Victaulic pipe fitting
that Victaulic submitted at the hearing.
FAC ¶¶ 9, 72-73, 84-85
& Ex. 10; Doc. No. 43 at 11; Doc. No. 37-19 at 6 & 29.
It is not clear that any of the products in question
fail to comply with the requirement that merchandise must be
marked “in a conspicuous place . . . 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.”
U.S.C. § 1304(a).
“The ‘ultimate purchaser’ is generally the
last person in the United States who will receive the article in
the form in which it was imported.”
19 C.F.R. § 134.1(d).
marking is “conspicuous” if it is “capable of being easily seen
with normal handling of the article or container” and if the
ultimate purchaser can easily find the marking and read it
19 C.F.R. § 19 C.F.R. §§ 134.1(k) & 134.41(b);
Customs Ruling No. N1 95078 (Dec. 15, 2011). 15
Whether a marking
is conspicuous is determined by looking at “the size of the
marking, the location of the marking, whether the marking stands
out, and the legibility of the marking,” although no factor is
conclusive on its own.
Customs Ruling HQ 734718 (Apr. 22,
The purpose of the marking requirements is so that “at
the time of purchase the ultimate purchaser may, by knowing
Customs rulings can be found online at http://rulings.cbp.gov/.
where the goods were produced, be able to buy or refuse to buy
them, if such marking should influence his will.”
v. Friedlaender & Co., 27 C.C. Pa. 297, 302 (C.C.P.A. 1940).
The markings with which CFI takes issue are visible on
the interior of the products.
However, they are not “hidden
from sight” as CFI alleges, as the black marking contrasts with
the orange color of the product.
Doc. No. 37-19 at 6 & 29.
FAC ¶ 84; see also FAC Ex. 10;
CFI further contends that Victaulic’s
markings do not comply with the Tariff Act because they would
not be visible when the product is “in use.” FAC ¶ 73.
But if a
marking is sufficiently conspicuous to convey to an ultimate
purchaser where the goods were produced, it is not clear why the
marking must also be visible when the product is in use to
comply with the law.
Cf. Customs Ruling No. NY N045657 (Dec.
24, 2008) (label inside neck on men’s garment was conspicuous).
CFI also claims that the three Victaulic products in
question are not marked by one of the five methods required by
the Tariff Act—die stamping, cast-in-mold lettering, etching,
engraving, or continuous paint stenciling.
19 U.S.C. §
According to CFI, the picture Victaulic produced at
the hearing reflects a product with a foreign marking that
“appears to be a single stenciled marking, not a continuous
stencil as required by U.S. law.”
FAC ¶ 84.
response to Victaulic’s assertion that the product in the
photograph was marked by a laser etching (which complies with
the Tariff Act), CFI admitted that the manner of marking “cannot
be determined simply by looking at the photograph.”
Doc 43 at
CFI’s allegation therefore does not provide a reliable
basis for concluding that Victaulic failed to mark this
particular product in a lawful manner. 16
In any event, given
CFI’s assertion that “the marking in [the] photograph is not
representative of Victaulic’s actual practices during the time
period covered by this case,” it is not clear why CFI would
point to the photograph in support of its FCA claim.
Doc. 43 at
The Court is left with two Chinese-made products—one
of which CFI purchased and one of which it viewed via a
photograph—that CFI contends are “stenciled or stamped in black
ink (not etched)” in a manner that does not comply with the
Doc. 43 at 11.
It is possible that, even if
Victaulic’s manner of marking does not technically comply with
the marking statute, CBP would accept the marking as compliant.
See Customs Ruling No. HQ 734795 (Oct. 26. 1994) (concluding
that ink stenciling “is sufficiently permanent that it is the
equivalent of paint stenciling and, therefore, meets the
That Victaulic’s foreign-made products may be marked by a
different method than its U.S.-made products is irrelevant if
the foreign markings comply with the law.
requirements of 19 U.S.C. 1304(c)”).
In any event, CFI’s
allegations that Victaulic has failed to correctly mark two of
its products do not support the vast fraudulent scheme alleged
in the FAC.
To the extent anything can be extrapolated from the two
products, they at most support an inference that some unknown
portion of Victaulic’s Chinese-made imports are not marked in
one of the five manners set forth in the Tariff Act.
allegations do not plausibly support CFI’s scheme that Victaulic
engaged in fraudulent conduct as to all of its Chinese and
Polish imports over the course of a decade. 17
marking foreign-made products does not provide an opportunity to
pass those products off as U.S.-made (as in the case of unmarked
products), which CFI contends is the motivation driving
In any event, even if CFI could fashion a
second amended complaint more narrowly tailored to its theory
that Victaulic is marking certain of its Chinese imports in a
manner that does not comply with the Tariff Act, amendment would
As CFI acknowledges that one of the Chinese-marked products it
viewed on eBay was properly marked, Victaulic’s alleged marking
failures do not appear to pervade every type of product
manufactured in China. Additionally, as Victaulic did not start
manufacturing in China until 2005, any alleged fraud with
respect to Chinese-made products could not have occurred before
then. See FAC ¶ 45. It is not appear as though CFI uncovered
any specific information concerning how Victaulic marks its
be futile because Victaulic’s failure to pay marking duties on
improperly marked products does not constitute a violation of
the FCA. 18
See supra § II.C.1.
For the foregoing reasons, the Court will deny CFI’s
motion to alter or amend judgment, and for leave to file an
Amendment would be inequitable because CFI
unduly delayed seeking amendment.
Amendment would also be
futile because the FAC does not allege a cognizable claim under
the FCA and, in any event, does not satisfy Rule 9(b)’s
requirement that fraud must be pled with particularity.
An appropriate order shall issue.
CFI asserts that it should not be required to plead with
particularity that Victaulic failed to pay marking duties
because that information is in the hands of Victaulic. In
Foglia, the Third Circuit, in a “close case,” held that when a
relator provided patient logs showing that the defendant was
using less of a certain medicine than would have been required
unless it complied with certain regulations, the court was
required to credit the allegation that the defendant failed to
comply with those regulations because the defendant “had access
to the documents that could easily prove the claim one way or
another.” 754 F.3d at 158. The allegations of fraud in that
case were far more reliable than the allegations here.
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