Tariff Cheaters Beware: This Week's $24 Million Wake-Up Call
Earlier this week, the Ninth Circuit Court of Appeals issued a decision in Island Industries v. Sigma Corp that delivers a clear warning to companies attempting to evade U.S. trade duties: your competitors are watching, and the consequences of cheating can be staggering.
This case highlights how the False Claims Act (FCA) is emerging as a formidable tool in trade enforcement, empowering private entities to take action where government oversight may fall short.
The Case: A Competitor's Vigilance Pays Off
Between 2010 and 2018, Sigma Corporation allegedly attempted to dodge antidumping duties on welded outlets imported from China using two deceptive tactics:
- False Declarations: Sigma asserted on customs forms that no antidumping duties were due.
- Product Misidentification: While selling the items as "welded outlets," Sigma labeled them "steel couplings" on import documents to sidestep applicable duties.
Island Industries, a direct competitor, grew suspicious after repeatedly losing business to cheaper Chinese imports. After a quick online search and a call to the U.S. Department of Commerce, Island's sales manager discovered that Sigma's products were clearly covered under a 1992 antidumping order on carbon steel butt-weld pipe fittings from China.
The Power of Private Enforcement
Armed with this information, Island Industries filed a qui tam lawsuit under the False Claims Act (FCA), effectively stepping into the role of a private attorney general on behalf of the U.S. government.
The outcome for Sigma was severe:
- A jury verdict awarding over $8 million in damages, which was trebled to more than $24 million under the FCA's penalty provisions.
- Years of protracted and costly litigation.
- Reputational harm within the industry.
This case underscores a critical reality: competitors can—and increasingly do—bring FCA actions against companies that evade tariffs. And when they do, the consequences can be swift, severe, and highly effective.
Why the "Ostrich Defense" Failed
Sigma's primary defense was ignorance. They claimed they didn't know antidumping duties applied. But the Ninth Circuit made one thing clear: willful blindness offers no protection under the FCA."
The court found Sigma had shown:
- No effort to determine whether duties applied
- No review of Commerce Department orders or ITC reports
- No outreach to Customs or Commerce for clarification
- No internal compliance measures, despite importing Chinese steel products—a category well-known for frequent duty orders
This "deliberate ignorance" or "reckless disregard" was more than enough to establish liability under the FCA.
The Univar Case: A $62.5 Million Customs Lesson
This case mirrors one from our law firm's own experience. We represented several parties who alerted the government to trade violations committed by Univar USA Inc. Their tips exposed an illegal transshipment scheme that led to a massive U.S. government enforcement action.
From 2007 to 2012, Univar allegedly routed Chinese-origin saccharin through Taiwan and falsely declared it as Taiwanese to avoid a 329 percent antidumping duty. The U.S. government ultimately recovered $62.5 million in penalties and disgorgement—the largest recovery ever under 19 U.S.C. § 1592 in the Court of International Trade. Explaining the significance of the settlement, Assistant Attorney General Jody Hunt of the Department of Justice's Civil Division stated: "We enforce our laws against importers who fail to take all reasonable steps to vet their suppliers and determine the true country of origin of their merchandise."
Together, the Univar and Sigma cases reinforce several key truths:
- Competitors are highly motivated: Industry insiders are well positioned to spot duty evasion. Not surprisingly, our international trade lawyers have seen a massive uptick in calls from companies interested in pursuing qui tam claims against their competitors. See DDP
- Government resources are limited: U.S. government agencies increasingly rely on whistleblowers to uncover violations.
- Whistleblower rewards are significant: FCA relators can receive up to 30 percent of any government recovery, providing a major financial incentive.
Legal and Strategic Implications for Importers
This decision against Sigma creates several legal precedents.
1. Federal District Courts Have Jurisdiction
The Ninth Circuit ruled that FCA claims involving customs fraud can be heard in federal district court—not just the U.S. Court of International Trade. This expands access to whistleblower suits.
2. FCA Supplements Existing Customs Law
The court ruled that customs enforcement mechanisms can proceed in parallel, increasing risk for violators.
3. Subjective Intent Matters
The court confirmed that FCA liability turns on what a defendant actually believed—not just on what a hypothetical "reasonable person" might have thought. This shuts the door on excuses rooted in bad advice or willful ignorance.
Practical Takeaways for Importers
Conduct thorough due diligence:
- Review relevant antidumping and countervailing duty orders
- Consult trade counsel before classifying products
- Maintain detailed internal records of how import classifications were determined"
Expect competitor scrutiny:
- Competitors have strong incentives to monitor and report YOUR misconduct
- Any pricing advantage from duty evasion will raise red flags
Consider voluntary disclosure:
- Self-reporting under 19 U.S.C. § 1619 may reduce your penalties
- A timely disclosure can prevent FCA claims entirely
The Future of Trade Enforcement
The Sigma case highlights a new era where private actors are central to trade enforcement. Armed with the FCA's promise of treble damages, attorney's fees, and whistleblower rewards, competitors are stepping up as de facto enforcers of U.S. trade law.
For importers, the message is clear:
Tariff compliance is no longer just about avoiding government scrutiny—it's about avoiding being exposed by your competitors. Quietly gaming the customs system is over. If you're not compliant—you're a target.
The Bottom Line
Fix your import practices now—or prepare to be the next cautionary tale in a multi-million-dollar enforcement action.
For more on tariffs, check out:
- Buyer Beware: The Hidden Risks of Unpaid Tariffs Under DDP
- Why Following Your Chinese Supplier's Tariff Advice Could Land YOU in Jail: Part 2, It Will Likely Be Your DDP Deal That Will Put You There
- THE Guide for LEGALLY Avoiding Today's and Tomorrow's U.S. Tariffs
Tariff Cheaters Beware: A $24 Million Reminder That YOUR Competitors Are Watching
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
