Imports and the False Claims Act: Recent Ninth Circuit decision reflects trends in increased import fraud enforcement and litigation

The DOJ lists trade and customs fraud as “high impact” enforcement priority for its Criminal Division

On May 12, 2025, the DOJ's Criminal Division released a memorandum titled “Focus, Fairness, and Efficiency in the Fight Against White-Collar Crime” in which it designated trade and customs fraud, among other areas, as a “high-impact” enforcement priority for the administration. As customs fraud matters have historically been handled by CBP and the DOJ's Civil Division, this directive shifts import violations towards the criminal enforcement realm.¹ The DOJ also revised its Corporate Whistleblowers Awards Pilot Program to include “trade, tariff, and customs fraud” as an approved subject matter for submission eligibility. These changes, in conjunction with the Ninth Circuit decision discussed below, will incentivize corporate whistleblowers to bring forward allegations of customs fraud.

These developments also increase the importance of trade compliance by U.S. importers of record and companies that purchase from and sell to U.S. importers of record. U.S. importers, foreign exporters, and foreign manufacturers all now face greater potential criminal scrutiny for alleged trade and customs fraud resulting from tariff evasion, misclassification, or undervaluation. By highlighting the “America First Investment Policy,” the DOJ's enforcement memorandum seems specifically to target foreign companies, with a particular focus on China. Therefore, those importing products from Chinese companies, in particular, should employ diligent compliance procedures to avoid both criminal and civil liability.

CBP announces increased focus on duty evasion

In conjunction with the DOJ's recent prioritization of customs fraud, CBP has also highlighted its focus on this area in public announcements. In a press release from May 22, 2025, CBP stated that declaring incorrect values on customs forms is considered trade evasion and that the agency will “pursue any violations to the fullest extent possible” – providing a link to CBP's trade violation reporting system portal. In a LinkedIn post the following day, CBP stated that it “targets and combats duty evasion at every level” and will punish bad actors “to the fullest extent of the law.”

The FCA and the Island Industries litigation

In 2017, Island Industries (Island) filed a sealed complaint under the FCA alleging that a business competitor, Sigma, and others made false statements on customs forms to avoid antidumping (AD) duties on welded outlets imported from China, resulting in a deprivation to the U.S. government of approximately US$200 million since 2004.²

The FCA prohibits certain acts of fraud against the government and imposes treble damages and penalties as an enforcement mechanism. It allows private parties called “relators” to sue on behalf of the United States to recover the money owed, also known as “qui tam” actions. Qui tam cases are often sealed, so business may not immediately know that they are the target or an affected party in an FCA action. The FCA incentivizes relators by awarding them up to thirty percent of the damages from successful suits.

The DOJ also uses the FCA to pursue companies that avoid paying customs duties by knowingly misclassifying imported products, undervaluing imported products, and misrepresenting their country of origin. A “knowing” violation of the FCA can be shown where the defendant acts with deliberate ignorance or reckless disregard of the truth or falsity of a record or claim. In recent months, the DOJ has signaled its intent to increase its use of the FCA to prosecute customs and tariff fraud, stating in a press release about a customs evasion FCA settlement that “[f]raud in international commerce deprives the United States of vital revenue and creates an unfair advantage over businesses that operate legitimately.” In addition to targeting importers of record, the conspiracy provision of the FCA allows the DOJ to target upstream foreign exporters and suppliers, as well as downstream U.S. companies, for conspiring to commit FCA violations.

Island, a Sigma competitor, alleged in its qui tam case that Sigma (1) falsely declared that the products it was importing were not subject to AD duties, and (2) described them as steel couplings on customs forms despite marketing them as welded outlets. In 2021, the jury issued a verdict in favor of Island, finding that Sigma violated the FCA and owed over US$8 million to the U.S. government before trebling. Sigma then filed a post-trial motion for judgement as a matter of law, or in the alternative for a new trial. U.S. District Judge Gary Klausner denied the motion, instead ordering Sigma to pay US$24.2 million in damages and US$1.8 million in civil penalties. Sigma appealed to the Ninth Circuit, which stayed the proceeding pending the Federal Circuit's decision on the underlying scope ruling discussed below.

The Department of Commerce scope ruling

Soon after the FCA suit was filed, Sigma requested a scope ruling from the U.S. Department of Commerce (DOC), presumably to avoid potential FCA liability pursuant to Island's lawsuit. Specifically, Sigma argued that its welded outlets fell outside the scope of the 1992 AD Order covering certain carbon steel butt-weld pipe fittings from China (which would mean it did not evade paying customs duties).

However, the DOC ruled that Sigma's welded outlets fell within the scope of the Order and therefore were subject to AD duties. Sigma challenged this ruling in the Court of International Trade (CIT), which remanded the case back to the DOC with instructions to revisit aspects of the scope ruling. On remand, the DOC reached the same result, concluding again that Sigma's products fell within the scope of the Order. Sigma appealed the remand determination, and the CIT and Federal Circuit ultimately affirmed the DOC's scope ruling.

The Ninth Circuit decision in Island Industries Inc. v. Sigma Corporation

In its June 23, 2025 opinion, the two-judge Ninth Circuit panel found that it had jurisdiction over the action as an FCA suit to recover customs duties. Distinguishing the Circuit's earlier decision in United States v. Universal Fruits & Vegetables Corp, 370 F.3d 829 (9th Cir. 2004), in which the panel held that import-related FCA cases initiated by the United States must be brought exclusively in the CIT, the court held that the qui tam action could proceed in U.S. district court despite dealing with import transactions. Contrary to Sigma's position, the panel also held that the customs penalty provisions of Section 1592 of the Tariff Act do not displace the FCA by providing a mechanism for the U.S. to recover fraudulently avoided customs duties. The panel found that Section 1592 overlaps with the FCA, rather than displacing it. Therefore, Section 1592 does not bar relators from bringing qui tam suits in district courts under the FCA.

The panel also rejected Sigma's argument that Sigma did not have an “obligation” to pay the AD duties, as defined in the FCA, at the time it entered the goods into the U.S. Contrary to Sigma's claim, the panel held that Sigma as an importer became liable to pay AD duties as soon as the foreign merchandise arrived in the United States. This liability became an “obligation” under the FCA at the time of the welded outlets' arrival, even though the amount due was not yet fixed through the liquidation process.

Sigma further argued that it was not liable under the FCA because the government sustained no damages if the DOC lacked authority to assess duties retroactively on older entries, an issue that turned on Sigma's interpretation of complex restrictions in the DOC's scope proceeding regulations. The court rejected this argument, explaining that damages in an FCA suit are measured by the difference between what should have been paid to the government and what was actually paid at the time of the imports' entry. Because Sigma should have paid AD duties when it imported its welded outlets but falsely declared that no duties were owed, it deprived the government of money and therefore caused damages.

Lastly, Sigma defended its actions on the grounds that a reasonable person could have believed that no AD duties were owed, and in the alternative, that there was insufficient evidence to show that it misrepresented its products as steel couplings. The court rejected Sigma's objective reasonableness defense, clarifying consistent with the Supreme Court's decision in United States ex rel. Schutte v. Supervalu Inc. that the FCA may be triggered by either knowledge or subjective beliefs about the fraudulent acts, regardless of what a reasonable person would have known. Further, the court found that evidence presented at trial was plainly sufficient to establish Sigma's material, false claims on customs forms and that Sigma acted with either deliberate ignorance or reckless disregard in making these false claims.

Consequently, the Ninth Circuit affirmed the district court's denial of Sigma's motion for summary judgement or a new trial and upheld the US$26 million dollar penalty against Sigma for its FCA violations.

Impact of the decision and recent government statements

As reflected in the Island Industries decision, companies involved in importing activity are facing a new enforcement landscape. Combined with the DOJ's and CBP's prioritization of customs fraud enforcement, the ruling is likely a harbinger of increased trade-related FCA investigations and ensuing litigation as companies navigate new and evolving tariff regimes. At the same time, companies may face criminal scrutiny stemming from the DOJ Criminal Division's increased focus on trade-related fraud. Companies both downstream and upstream from U.S. importers will need to take preventative measures to avoid and detect potential trade violations, especially in light of the sealed filing provisions of the qui tam provisions of the FCA. Those provisions mean that businesses may not be immediately aware that they are an affected party.

Next steps

Companies should take care to examine and strengthen their current trade compliance programs to identify points of potential liability. They should also revisit their voluntary self-disclosure policies because CBP maintains a disclosure process to report violations, and self-reporting can be a major mitigating factor in both civil and criminal proceedings. Finally, companies should contact counsel immediately in the event that they receive a subpoena or inquiry from the DOJ's Civil Frauds section or a United States Attorneys' Office because this may be an indication that a sealed FCA action has been filed.

Authored by Joshua Kurland, Jonathan Diesenhaus, Jonathan Stoel, Mitch Lazris, Evans Rice, Michael Theis, Matthew Sullivan, and Stephanie Yonekura.

Summer associate Emma Donahue contributed to this report