Settlement further signals new surge of reverse False Claims Act cases related to customs fraud

The United States Department of Justice (DOJ) recently announced a significant settlement that underscores the federal government’s increasing appetite to rely on the False Claims Act to address alleged customs fraud.

Specifically, Evolutions Flooring, Inc. (Evolutions), a major importer of multilayered wood flooring, along with its owners, Mengya Lin and Jin Qian, have agreed to pay approximately $8.1 million to resolve allegations that they violated the False Claims Act by knowingly and improperly evading customs duties on imports of multilayered wood flooring from the People’s Republic of China (PRC).

Below, we provide an overview of the Evolutions settlement and discuss the federal government’s commitment to robust enforcement of the False Claims Act, as well as its willingness to deploy it more broadly.

Evolutions settlement

Importers in the United States are required to declare various details about their goods, including, among other things, the country of origin of the goods, the value of the goods, whether the goods are subject to duties, and the amount of duties owed. The United States Customs and Border Protection (CBP), an agency within the Department of Homeland Security, is responsible for collecting applicable duties, including antidumping and countervailing duties assessed by the Department of Commerce.

Evolutions, incorporated in December 2013, became the largest United States importer of multilayered wood flooring by 2019. However, between September 1, 2019 and July 31, 2022, Evolutions and its owners allegedly evaded customs duties on wood flooring manufactured in the PRC, including antidumping duties, countervailing duties, and Section 310 tariffs. The settlement alleges that Evolutions submitted false information to the CBP regarding the identity of manufacturers and country of origin of the imported multilayer wood flooring, falsely declaring the products as Malaysia-origin to avoid higher duties applicable to China-origin products.

This settlement resolves a lawsuit filed in the United States District Court in the Central District of California in August 2020, captioned United States ex rel. Urban Global LLC v. Struxtur Inc. et al., No. 2:20-cv-7217 (C.D. Cal.). Notably, the lawsuit was filed by a competitor in the industry (rather than a corporate insider) under the qui tam provision of the False Claims Act. The provision allows private plaintiffs (called “relators”) to file False Claims Act lawsuits on behalf of the United States. The relator will receive over $1 million in settlement proceeds as part of the settlement.

Implications for future False Claims Act enforcement

Traditionally, the False Claims Act has been considered as an enforcement mechanism against fraud by way of false claims for payment on government programs, particularly in the healthcare or government contracts spaces. It was first used during the Civil War to recover from contractors providing substandard goods and services to the Union Army. The False Claims Act also allows for recovery of reverse false claims if an entity “knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the government.”

A reverse false claim occurs when an entity essentially keeps money that it knows belongs to the government. In the wake of the Executive Orders and trade policies issued by President Donald Trump in the days following his inauguration, as well as the imposition of tariffs across a variety of sectors, we noted that the False Claims Act might also be deployed to combat perceived trade imbalances and unfair trade practices. For a fuller discussion of the prior Executive Orders suggesting new avenues for False Claims Act enforcement, please see our earlier client alert.

We could see an increase in cases similar to that of the Evolutions settlement. In addressing the settlement, Acting Assistant Attorney General Yaakov M. Roth of the DOJ’s Civil Division emphasized the Department’s commitment to pursuing fraud by companies and individuals evading the duties owed on goods imported into the United States from China. This statement further suggests a continued and possibly intensified focus on using the False Claims Act to address customs fraud and other trade-related violations.

For more information

If you have any questions about this action, please contact any of the authors or your DLA Piper relationship partner. We will continue to provide updates on this evolving area of enforcement.