False Claims Act Case Over Customs Duties Near Settlement

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When the Department of Justice reported its Fiscal Year 2013 results, it put the use of the False Claims Act to fight health care fraud front and center.  Whistleblowers are not limited to bringing lawsuits against hospitals and drug companies, however.  The False Claims Act applies broadly to fraud against the government.  A number of companies operating outside the health care industry, including J.P. Morgan, have found that out.  Symantec, for example, recently reported potential liability of $145 million under a False Claims Act investigation.  Another wasn’t even providing services to the government under a contract.  Instead, it violated the False Claims Act by underreporting the value of imported products for customs duties.

When companies import products, they must pay duties according to the value of the imported merchandise.  The customs value is not merely the material costs of manufacturing.  It also includes the value of additional materials and services involved in making the imported merchandise, known as assists.  The value of an assist is apportioned across all of the products manufactured with the assist.  If a company intentionally excludes the assist from the value reported to U.S. Customs and Border Protection, it violates the False Claims Act.

OtterBox, a maker of smartphone and tablet cases, is now in settlement talks in the False Claims Act lawsuit brought against it by Bonnie Jimenez in 2011, according to court documents providing additional time to finalize a settlement.  Jimenez, the former Supply Chain Director at OtterBox, accused OtterBox of understating the value of imported items to Customs from 2007 to 2011.  As a result, OtterBox paid lower customs duties to the U.S. Government on imported smartphone cases.

As Otterbox would import smartphone cases from a Chinese manufacturer, it did not report engineering and tooling costs performed overseas in the value of its products.  In one example cited in the lawsuit, Otterbox imported 3,000 cases for Blackberry phones at a cost of $2.13 from a Chinese manufacturer in April 2010.  The additional value was estimated at between $2,500 and $12,000 per mold, which should have been apportioned across the manufactured products.  Because it did not report the additional value of the assist, it did not pay the proper amount of import taxes.

Any settlement must be approved by the Department of Justice, the U.S. Attorney’s Office and the Department of Homeland Security.   United States Customs and Border Protection is a division of the Department of Homeland Security.