On June 23, 2025, the Ninth Circuit issued a long-awaited decision in Island Industries Inc. v. Sigma Corp. affirming a $26M False Claims Act (“FCA”) judgment against the defendant importer. Sigma had appealed the judgment after a jury found the company violated the FCA by failing to pay customs duties owed to U.S. Customs and Border Protection (“CBP”). The Ninth Circuit’s decision addresses an important jurisdictional issue and illustrates the significant financial exposure importers can face under the FCA at a time of increased tariffs and enforcement by the government.
Background
The case was initiated in 2017 when Island Industries (a domestic manufacturer of pipe fittings) filed a sealed lawsuit as a relator against six competitors, including Sigma, under the FCA’s qui tam provisions. The relator alleged that defendants made two types of false statements on customs forms to evade antidumping duties of 182.9% for welded outlets imported from China—i.e., (1) the defendants falsely declared that the products they were importing were not subject to antidumping duties and (2) the defendants falsely described the products as steel couplings (a product not covered by the anti-dumping order) rather than welded outlets (a covered product). After investigating the allegations, the Department of Justice (“DOJ”) declined to intervene, and the case was unsealed. Island nevertheless moved forward with the lawsuit and eventually settled with three of the defendants before trial. The claims against two other defendants were stayed when they filed for bankruptcy, leaving Sigma as the sole defendant at trial.
In 2021, a jury returned a verdict finding that Sigma had violated the FCA by knowingly making false statements to avoid an obligation to pay money to the government. As for damages, the jury found that Sigma had misclassified its products on CBP Form 7501 in connection with 205 entries, resulting in $8,085,546 in underpaid duties between 2010 and 2018. The court trebled the damages ($24,256,638) and assessed penalties for each of the 205 false entry summary forms for a penalty total of $1,824,145. In addition to this total judgment of $26,080,783, the district court awarded more than $2.7M to the relator for attorneys’ fees and costs. In 2022, Sigma appealed and asked the Ninth Circuit to reverse the judgment.
The Jurisdictional Question Before the Court
During oral argument, one of the judges on the panel raised the question of whether the district court had subject matter jurisdiction over the suit. The uncertainty around this issue stemmed from the Ninth Circuit’s earlier decision in U.S. v. Universal Fruits and Vegetables Corp., where the Ninth Circuit held that an FCA action brought by the government based on an importer’s fraudulent conduct to evade antidumping duties fell within the exclusive jurisdiction of the Court of International Trade (“CIT”) because 28 U.S. Code § 1582 gives the CIT exclusive jurisdiction over civil actions arising out of an import transaction and “commenced by the United States” to recover customs duties or to recover civil penalties arising under specified sections of the Tariff Act. U.S. v. Universal Fruits and Vegetables Corp. 370 F.3d 829 (9th Cir. 2004). However, after the case was transferred, the CIT concluded that it did not have jurisdiction over the suit because an FCA suit does not seek to recover customs duties but rather imposes liability in the form of damages for a defendant’s fraud on the government. See U.S. v. Universal Fruits & Vegetables Corp., 433 F. Supp. 2d 1351 (Ct. Int’l Trade 2006). In the nearly twenty years since the Ninth Circuit’s decision in Universal Fruits, relators have largely side-stepped this precedent by drawing a distinction between cases brought directly by the government and those cases initiated under the FCA’s qui tam provisions.
Following oral argument, the Ninth Circuit invited the parties to submit supplemental briefing on the question of whether the district court had subject matter jurisdiction. The Ninth Circuit also ordered the parties and the United States to file supplemental briefs addressing whether 19 U.S.C. § 1592 provides the exclusive means for recovering antidumping duties that an importer has fraudulently evaded or whether the FCA can also be used to recover such duties.
The United States was not a party to the litigation because the DOJ had not intervened in the qui tam action, but the United States remained the real party in interest, and the DOJ submitted supplemental briefing in which it argued that the Ninth Circuit would “effectively create a customs-related exception to the FCA within this circuit” if the court were to extend Universal Fruits to actions initiated by qui tam relators.
9th Circuit Confirms Subject Matter Jurisdiction
In issuing its opinion, the Ninth Circuit agreed with the DOJ’s position that § 1582 poses no jurisdictional obstacle to a relator’s FCA action in federal district court to recover customs duties. Specifically, the court reasoned that § 1582 applies only to those circumstances where a civil action is “commenced” by the United States by filing a complaint to recover customs duties. In contrast, when initiating a qui tam action, it is the relator (and not the United States) that commences the lawsuit. Not explicitly addressed in the opinion is whether § 1582 would bar the United States from filing a complaint-in-intervention in an action previously commenced by a qui tam relator.
Section 1592 is Not the Exclusive Means for Recovering Fraudulently Avoided Customs Duties
The court also rejected Sigma’s argument that § 1592 of the Tariff Act—which allows the United States to recover fraudulently avoided customs duties—displaces a relator’s ability to bring claims under the FCA for the underpayment of duties. The Ninth Circuit acknowledged the overlap between the FCA and § 1592, but applying the statutory interpretation canon against implied repeal, the court reasoned that the two statutes were capable of co-existence and therefore the court had to consider each to be effective. Moreover, the court reasoned that the legislative history confirmed that Congress specifically intended the two statutes to coexist because Congress had amended the FCA in 2009 by changing the definition of “obligation” to make clear that the FCA reaches customs duties even though the precise amount due may not be fixed at the time of entry. According to the court’s reasoning, Congress’ enactment of that amendment to the FCA when § 1592 already provided a pathway for recovering fraudulently avoided customs duties demonstrates that Congress did not intend § 1592 to be the sole avenue for recovering such duties.
Ninth Circuit Rejects Arguments that Sigma Did Not Act Knowingly
On appeal, Sigma also argued that it was entitled to judgment as a matter of law because it lacked the requisite scienter needed to establish that it knowingly made a false statement when it declared that no antidumping duties were owed on its products. Scienter under the FCA encompasses actual knowledge, deliberate ignorance, and reckless disregard. 31 U.S.C. § 3729(b)(1)(A). Sigma relied on an objective-reasonableness defense, arguing that a reasonable person could have believed that no duties were owed. But not long after Sigma argued its appeal, the Supreme Court issued its decision in United States ex rel. Schutte v. SuperValu, Inc. concluding that the FCA’s scienter element refers to a defendant’s subjective knowledge and beliefs, which the Ninth Circuit held foreclosed Sigma’s objective-reasonableness defense.
The Ninth Circuit also rejected Sigma’s argument that there was insufficient evidence to support a finding that it acted with the requisite scienter. Noting that the scienter element encompasses the ostrich-type situation where an individual has buried his head in the sand and fails to make simple inquiries, the Ninth Circuit cited the record evidence showing that Sigma did not make any inquiry into whether it owed duties on its welded outlets before stating that it did not on the entry summary forms. Moreover, Sigma’s vice president overseeing import operations testified that Sigma had never seen the applicable antidumping order—which was issued in 1992—until 2017 or 2018. The executive further testified that he did not recall anyone at Sigma looking at the International Trade Commission’s periodic antidumping reviews or inquiring with the Department of Commerce or CBP as to whether its imports were subject to antidumping duties.
The Ninth Circuit contrasted Sigma’s lack of diligence with the testimony from the relator. Specifically, a sales manager from Island Industries testified that he had researched import regulations because Island’s prices kept being undercut by products from China. Even though the sales manager lacked any specialized experience in trade law, within 24 hours he was able to determine that Sigma’s welded outlets were likely subject to antidumping duties by running some Google searches and contacting an analyst at Commerce.
Furthermore, the jury heard evidence that Sigma referred to the products as welded outlets in its product catalog and on its website but referred to them as steel couplings on customs forms. Based on all of this evidence in the record, the Ninth Circuit found that a reasonable jury could conclude that Sigma knowingly misrepresented its products as steel couplings to avoid antidumping duties.
Existence of an Obligation to Pay is Independent of Any Liquidation
Actions involving customs fraud are brought under the “reverse” false claim provision of the FCA at §3729(a)(1)(G), which establishes liability for any person who:
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.
In the context of customs cases, the obligation to pay duties to CBP arises at the time of importation. On appeal, Sigma argued that it did not have an obligation to pay duties on the entries at issue, because (after the qui tam suit had been filed) Sigma had requested a ruling from the Commerce Department as to whether Sigma’s welded outlets fell within the scope of the antidumping order, and Commerce’s subsequent scope ruling focused on the collection of duties from recent years but not on the earlier time period covered by the FCA suit. But the Ninth Circuit found that this ruling turned on Commerce’s interpretation of its regulations, which limited the government’s ability to impose additional duties on liquidated entries. The Ninth Circuit reasoned that even if the duties could not be reached through the normal liquidation process this did not mean that Sigma did not owe the duties at the time of initial entry. Moreover, the Ninth Circuit pointed to the fact that § 1592 allows the government to collect underpaid duties on liquidated entries if the underpayment was the result of fraud or negligence. The Ninth Circuit reasoned that this further supported the conclusion that an importer’s obligation to pay duties is independent of the liquidation process.
Key Takeaways
Absent any further appeals, after years of responding to a government investigation and the expense of litigating against the relator, Sigma must now pay a sizable judgment. This outcome is a cautionary tale of the growing risk to U.S. importers as the FCA is increasingly used as an enforcement tool for the underpayment of duties. Indeed, earlier this year, the DOJ announced plans to “aggressively” enforce the FCA with a particular focus on “illegal foreign trade practices” in conjunction with the administration’s expansive use of tariffs. Given these increased enforcement risks, below are some key takeaways for U.S. importers in light of the Island Industries decision:
- Due to resource limitations, CBP has historically only been able to inspect a small percentage of the entries into the country, but relators have significant incentives to supplement CBP enforcement because a successful relator in an FCA qui tam action can receive as much as 30% of the amount recovered by the United States—e., the relator’s share in Island Industries could be as high as $7.8M.
- Companies are increasingly seeing the FCA as a formidable tool in the business litigation toolbox when they learn that a competitor may be undercutting them on price by avoiding the payment of applicable duties. In Island Industries, not only will the relator receive a share of the judgment against Sigma, but three of the remaining defendants entered into settlements with Island Industries and the other two declared bankruptcy.
- Lack of actual knowledge is not a complete defense. At trial, the relator did not put on evidence that Sigma had actual knowledge that it violated the law when it stated on its entry summary forms that no antidumping duties were owed. Rather, to satisfy the FCA’s scienter element, it was sufficient to show that Sigma had acted with deliberate ignorance or reckless disregard for the truth or falsity of its customs forms. Here, the Ninth Circuit found that Sigma failed to make what would have been a simple inquiry into whether it owed duties on its welded outlets. Accordingly, importers should consider assessing their current trade compliance programs, including their valuation, country of origin, and classification practices. Moreover, to avoid finding themselves in Sigma’s position, companies should consult counsel to understand the applicability of tariffs and anti-dumping duties in today’s constantly evolving trade environment.
For further information, please contact:
Jason M. Crawford, Partner, Crowell & Moring
jcrawford@crowell.com
