Federal Court Dismisses Whistleblower Lawsuit on Misclassified Pipes

A federal court recently dismissed a whistleblower lawsuit filed over pipes imported from China that were allegedly misclassified in order to avoid antidumping and countervailing duties. The May 23 decision in U.S. District Court for the Northern District of Illinois Eastern Division was highlighted in a Hogan Lovells blog post. The False Claims Act (FCA) lawsuit was filed by Roger Schagrin, a lawyer with experience in international trade and the steel industry, in 2014 against LDR Industries. Plaintiffs in successful whistleblower lawsuits involving defrauding the government are allowed to receive a portion of the recovered funds.

Prior to Schagrin's whistleblower lawsuit, he reported to CBP his observation of notably low LDR steel pipe prices at Home Depot. Schagrin's report to CBP led to an investigation and the agency assessed more than $38.8 million in penalties under Section 1592, though it billed the company only $6.7 million. LDR subsequently filed for bankruptcy and "when the bankruptcy court entered its October 2016 order approving defendants’ Chapter 11 plan, it noted the plan incorporated terms of a settlement between defendants and CBP as 'full and complete satisfaction' of disputed CBP claims for over $58.7 million," Hogan Lovells said. LDR then asked the court to dismiss the FCA suit on the basis of the "government action bar," a provision that prevents FCA suits from being filed based on allegations that are already part of an administrative civil penalty proceeding in which the government is a party.

Schagrin characterized CBP's "pursuit of payment from LDR as 'a bill for duties [that] is quite different from a penalty proceeding,'" the court said. Despite the claims that CBP "merely sent LDR 'a bill' for unpaid duties, the proof of claim shows that U.S. Customs pursued a penalty amount far greater than the $6.7 million for which LDR was allegedly 'billed,'" the court said. Schagrin's argument that his FCA claim differed from CBP's allegations was also not persuasive, as the misclassification of the pipes is "at the heart of both" CBP's penalty proceeding and Schagrin's suit, the court said. The FCA case was dismissed as a result.

Hogan Lovells noted that Schagrin could have reported the conduct to CBP under the agency's own whistleblower statute for trade issues. That statute, though, allows the whistleblower to get only 25 percent of the recovered funds up to a maximum of $250,000. "For most plaintiffs, the prospect of an uncapped 15 to 30 percent recovery of treble damages and penalties due under the FCA is more enticing," the law firm said. This case is one method toward defeating an FCA claim and "the lesson for importers may be to consider prior disclosure to CBP upon discovery of underpaid tariffs or customs duties," it said. "While the risk of qui tam complaints cannot be eliminated altogether with such a strategy, an early prior disclosure reduces that risk, and could form the basis for an argument that enforcement under the FCA is unnecessary."