District Court Allows Whistleblower’s Customs Fraud Suit to Proceed

The U.S. District Court for the Southern District of New York on January 26, 2024, declined to dismiss a False Claims Act (FCA) civil lawsuit filed by a whistleblower, which alleges that their employer misclassified imported footwear to avoid customs duties and that they were constructively discharged in retaliation for objecting to the employer’s illegal practices. The case will now proceed to trial.

Facts of the Case

Devin Taylor (plaintiff) originally filed a complaint alleging violations of the FCA against her employer, GMI USA Corp., in 2016. In 2023, the U.S. government partially intervened in the case, filing a complaint against Samsung C&T America Inc., i.e., the importer of record of the subject footwear. The government alleged that Samsung intentionally misclassified imported footwear under the Harmonized Tariff Schedule (HTS), which resulted in evading customs duties owed. A settlement was reached with Samsung agreeing to pay $1 million to the U.S. government, 21% (i.e., $210,000) of which was awarded to Taylor. Samsung admitted that during the period May 2016 - December 2018, it “and GMI provided [Samsung]’s customs brokers with invoices and other documents and information that purportedly reflected the classification of the” footwear, which Samsung had reason to know were inaccurate. As a result, the footwear was entered at a lower duty rate than would have been applicable had the footwear been properly classified and Samsung paid less than the full amount of the customs duties owed.

Shortly after the Samsung settlement, the plaintiff filed an amended complaint adding Belovefine (a GMI sister company located at the same address) and its owner/CEO as defendants, along with GMI. The amended complaint asserts three causes of action: (1) reverse false claims (i.e., claims under the FCA where an entity has prevented the government from collecting what it is owed); (2) conspiracy to commit reverse false claims; and (3) whistleblower retaliation. In August 2023, the defendants filed a motion to dismiss the case for failure to state a claim. 

Misrepresentations in Footwear Declarations  

Merchandise entering the U.S. must have a filed Customs & Border Protection (CBP) Entry Summary (CBP Form 7501) and an invoice containing sufficient information about specific characteristics of the merchandise. Additionally, according to CBP regulations, the invoice for footwear must be accompanied by supplemental information contained in an “International Footwear Association Footwear Retailers of America Interim Footwear Invoice” (Footwear Declaration). This Footwear Declaration is typically prepared by the foreign manufacturer and later sent to the importer, and it contains descriptions of the footwear materials, type, construction and other characteristics. 

The defendants are accused of causing the foreign manufacturers to falsify the Footwear Declarations or altering them, misrepresenting at least 11 characteristics of footwear shipments, with most having a directly contradictory pairing. Among the false characterizations is the description of footwear soles of which the greatest portion in contact with the ground is comprised of rubber from plastic materials, when in fact, the majority of the footwear’s sole in contact with the ground was comprised of textile materials. The first amended complaint references an appendix from the U.S. government complaint, which listed 312 Form 7501 entry numbers where duties were underpaid by the defendants utilizing the above scheme. 

Decision of the Court

In its ruling, the Court noted that the fact none of the defendants served as the importer of record for the allegedly undervalued footwear imports is irrelevant for purposes of establishing liability under the FCA. The Court also found that Taylor’s allegations (regarding all three causes of action) met the standard required to plead their claim with particularity and plausibility, the heightened pleading standard for violations of an anti-fraud statute. In particular, the Court recognized that the plaintiff has first-hand knowledge of many of the alleged facts, some of which were confirmed by the entry documents used in the government complaint and admitted by Samsung in their settlement, including the defendants’ involvement and knowledge of the misconduct. 

The matter is currently pending trial. 

BDO Insight

This case highlights the potential risks and consequences of engaging in Customs duty fraud under the FCA and is especially precautionary with regard to the personal liability of the owner/CEO, which could lead to corporate penalties and have personal costs as well. 

Moreover, the case also illustrates the likely repercussions of tariff classification errors. Compliance with CBP laws and regulations when declaring imported merchandise is necessary to avoid legal and financial consequences. For example, companies should exercise “reasonable care” in identifying the proper tariff classification and communicate with their customs brokers in a timely manner to confirm that the proper classification is being declared to CBP. Beyond the immediate issue of classification, there is an overall responsibility for compliance and due diligence for companies as they conduct their operations, including in their dealings with suppliers and service providers. 

The Samsung settlement also foreshadows likely outcomes for this issue, especially in terms of how the settlement may consider defendants’ roles or actions that directly contributed to the noncompliance. However, the concern here is that the government might be "double dipping" by pursuing penalties or settlements from multiple parties for the same compliance issue, which raises questions about fairness and the legal basis for pursuing additional penalties or settlements from the owner/CEO, GMI and Belovefine.

How BDO Can Help

BDO’s Customs and International Trade Services can proactively assist clients in reviewing and classifying merchandise under the Harmonized Tariff Schedule of the United States to avoid potential misclassifications and resulting noncompliance with CBP laws and regulations. In addition, if any classification errors are identified on previous entries, BDO can assist with corrective actions, e.g., post-summary corrections, protests and prior disclosures as applicable, to avoid (or mitigate) potential penalties.