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Customs Fraud Investigations, LLC v. Victaulic Co.

United States District Court, E.D. Pennsylvania

September 9, 2019

CUSTOMS FRAUD INVESTIGATIONS, LLC, et al
v.
VICTAULIC COMPANY

          MEMORANDUM

          KEARNEY, J.

         Unlike the discretion afforded district courts in reviewing an award of fees to prevailing parties in civil rights cases, Congress requires we award reasonable attorney's fees and expenses to parties who recover money for the United States under the False Claims Act. While courts may discount the amount of reimbursed hours invested in a False Claims Act case after specific findings of unreasonable time invested on clearly frivolous or arguably unsuccessful results compared to the initial scope of the case based on the judge's experience with counsel, we are not aware of courts denying reimbursement for reasonable and adequately described hours and expenses invested in developing a claim before discovery even when the initial fact basis is abandoned but the initial theory proves to have arguable merit in discovery resulting in a sizable settlement approved by the Department of Justice before trial. As today, a business may decide to pay $600, 000 to settle a False Claims Act lawsuit when it views its potential liability exceeding a billion dollars. But its perspective of getting a deal does not allow us to deny a fee award of reasonable rates based on comparables in this District for adequately described hours. We also today award established undisputed reasonable rates for work performed by a Supreme Court advocate entirely before the Supreme Court in successfully defeating a certiorari petition. As agreed by the relator, we deny fees and expenses for travel and a press release.

         I. Facts

         Customs Fraud Investigations, LLC suspected Victaulic Company failed to pay marking duties to the United States by knowingly importing unmarked foreign-made pipe fittings without telling United States Customs. In August 2012, Customs Fraud began a "product study" on Victaulic by examining photos of 221 eBay listings of Victaulic products and purchasing nine products from eBay with only one of those products made and marked in China. It looked at each product individually to determine a marking with a country of origin. The product study led Customs Fraud to believe Victaulic failed to mark its products with country of origin in a visible location when the product is in use and failed to use proper methods of marking under 19 U.S.C. § 1304®.

         Counsel's efforts to proceed into discovery.

         Although Customs Fraud did not produce a retainer agreement, the parties do not dispute Customs Fraud retained attorneys with the law firm Tycko & Zavareei LLP ("Tycko") located in Washington, D. C., on or around October 19, 2012.[1] The parties also do not dispute Customs Fraud agreed to pay Tycko a fee awarded by the Court if successful if obtaining recovery. Tycko investigated Customs Fraud's theories, including holding meetings with Customs Fraud's principals, reviewing documents, analysis, and conducting research on relevant legal issues. Tycko also invested time preparing a disclosure statement for the Department of Justice and researched the "best circuit to bring" this case.[2]

         By May 2, 2013, Customs Fraud began looking for potential local counsel in this District. Tycko asked Manko Gold Katcher Fox LLP ("Manko Gold") to assist as local counsel at some unknown point. On May 24, 2013, attorneys at Manko Gold began recording time in reviewing a draft complaint. It then assisted in representing Customs Fraud. In total, it billed $372, 519 in fees and incurred costs of $15, 2014.90. We do not have a retainer agreement under Pennsylvania law with either of the law firms. We do not know what Customs Fraud agreed to pay. We do not know whether Customs Fraud paid Manko Gold, if anything.

         Customs Fraud then filed this case under seal on May 30, 2013, alleging Victaulic knowingly imported foreign-made pipe fittings lacking a mark indicating their country of origin, violating the Tariff Act and False Claims Act. Customs Fraud sought to recover marking duties which could, with treble damages, exceed $920 million along with penalties of $14.3 million on pipe-fitting products imported from China and Poland from 2003 until 2012. It also alleged ongoing conduct which Victaulic evaluated as a potential risk of another approximate $847 million in liability. Victaulic viewed the United States' possible recovery exceeded $1.760 billion. Tycko and Manko Gold invested 201.3 hours into investigating the case based, in some part, on the eBay product study of photographs and nine purchases.

         On August 7, 2013, the United States declined to intervene. Customs Fraud then unsealed and served the Complaint. Victaulic moved to dismiss the Complaint. Customs Fraud conducted research, drafted and filed briefs opposing the motion to dismiss, and prepared for a hearing. After extensive oral argument, Judge McLaughlin found the thirty-five-paragraph complaint to be "bare bones" and dismissed the complaint with prejudice.[3] Customs Fraud moved for leave to amend with an attached first amended Complaint detailing facts which it argued overcame Judge McLaughlin's concerns. Judge McLaughlin denied Customs Fraud's Motion for leave finding it untimely and Customs Fraud could not state a reverse False Claims Act claim based on the failure to pay marking duties because they are too attenuated and contingent to qualify as obligations to pay money covered by the False Claims Act.

         Customs Fraud appealed the denial of its Motion to amend and dismissal with prejudice. It met with attorneys from the Department of Justice and Customs. On appeal, our Court of Appeals reversed Judge McLaughlin's denial of leave to amend. Our Court of Appeals found Customs Fraud's proposed first amended Complaint included "details that address at least some of the concerns that the District Court had expressed in its opinion. Of particular import, the [first amended Complaint] details the rationale behind [Customs Fraud's] investigation of Victaulic and discusses the methodology [Customs Fraud] used to develop its claims."[4] The Court of Appeals described Customs Fraud's investigation as involving "a multifaceted analysis ...consisting of.. .analysis of shipping manifest data [and].. .a study of listings from the online auction site eBay for Victaulic products."[5] The Court of Appeals further found Customs Fraud bolstered its first amended Complaint by attaching an expert declaration opining Customs Fraud now provided "overwhelming evidence" of Victaulic improperly marking its pipe fittings with attached examples. It instructed motions to amend "should be granted" and the court has "rarely upheld dismissal with prejudice of a Complaint when the Plaintiff has been given no opportunity to amend."[6] Victaulic moved for rehearing. Our Court of Appeals denied rehearing. Victaulic answered the first amended Complaint and the parties began discovery.

         Victaulic then petitioned for certiorari. Someone (presumably on Customs Fraud's behalf) asked Public Citizen Litigation Group of Washington, D.C., a non-profit public interest law firm, to assist in opposing Victaulic's petition for certiorari. We do not have a retainer agreement under Pennsylvania law and no basis to confirm Customs Fraud agreed to pay Public Citizen and when. Scott Nelson, an experienced advocate and former law clerk of Justice White, along with a Supreme Court fellow Nick Sansone, completed most of the work on the response to Victaulic's certiorari petition. Public Citizen worked 44.5 hours from July 11 until July 31, 2017. Public Citizen now seeks $27, 973.90 for these 44.5 hours. The Supreme Court denied Victaulic's petition on October 2, 2017.

         Discovery efforts.

         While awaiting the Supreme Court's decision on Victaulic's certiorari petition, the parties began discovery planning in this Court with Judge Stengel. During discovery, Customs Fraud deposed Victaulic's Global Trade and Compliance Manager Allen Roberts, responsible for overseeing Victaulic's compliance with country-of-origin marking requirements.[7] Customs Fraud concluded Mr. Roberts' sworn testimony confirmed Victaulic knew of its unmarked products. Customs Fraud argued Victaulic became aware of parts made in Poland not marked with country of origin but continued to import unmarked products from Poland and China. Customs Fraud argued Victaulic marked their products using methods, such as an "ink stamp," not permitted in the United States. Customs Fraud understood Mr. Roberts to admit the use of ink stamps.[8]Customs Fraud pursued discovery hoping to show Victaulic avoided its marking duties and thus, evaded their legal obligation to pay marking duties. Customs Fraud argued Customs and Border Protections notified Victaulic of its failure to mark products via a "Notice to Mark" regarding failure to mark steel flanges from China with a country of origin.

         Customs Fraud propounded interrogatories and document requests on Victaulic. Its counsel engaged in face-to-face meetings and negotiations between counsel, prepared Customs Fraud's initial disclosures, drafted a Joint Status Report, and prepared documents for production. Victaulic began a rolling production of about 475, 000 pages of documents.

         Customs Fraud retained two additional attorneys to conduct an initial review of Victaulic's records. Customs Fraud conducted depositions of Victaulic employees, defended depositions taken by Victaulic's counsel, served discovery requests on Customs and Border Protection, analyzed import data provided by Victaulic, drafted and served a Rule 30(b)(6) notice on Victaulic, and retained experts.

         Victaulic responded by, among other steps, asking Kelli R. Thompson, a former employee at Customs and Border Protection, to explain the Customs and Border Protection's enforcement process. Ms. Thompson's expert report contradicted several of Customs Fraud's claims. While Customs Fraud alleges country of origin markings must be visible when the product is in use, Ms. Thompson claimed there is no such rule. Ms. Thompson opined the marking must only be in a conspicuous place.[9] Ms. Thompson opined the so-called "unlawful" methods of marking presented by Customs Fraud are acceptable because "they are the equivalent of paint stenciling."[10]Ms. Thompson also opined there is no Customs and Border Protection "form or other document... in which an importer is required to, should, or can, declare special marking duties" disputing Customs Fraud's theory Victaulic intentionally avoided payment.[11] Victaulic stridently maintained its innocence, claiming Customs Fraud's theories lacked evidentiary support.

         Settlement efforts.

         Upon Chief Judge Stengel's retirement from our Court, the Clerk of Court reassigned this case to Judge Smith.[12] The Clerk of Court then reassigned the case to us a couple weeks later.[13]We scheduled the close of discovery for December 21, 2018 with trial set for April 22, 2019.[14]

         On September 21, 2018, Customs Fraud began settlement negotiations. The settlement process involved meetings with Victaulic's counsel and negotiating an agreement to be signed by both parties. The parties reached agreement on December 11, 2018 but waited for the Department of Justice to approve the settlement. The parties jointly moved to extend the trial deadline while they pursued settlement and we extended the trial date until June 3, 2019.[15]

         The Department of Justice approved the $600, 000 settlement.

         The parties signed a formal settlement agreement on April 10, 2019. Victaulic agreed to pay $600, 000 to the United States. Victaulic also agreed the United States could pay $174, 000 of the $600, 000 settlement amount to Customs Fraud.[16] Congress, through the False Claims Act, allows only thirty percent of the total settlement amount be awarded to the relator. The United States awarded twenty-nine percent of the $600, 000 to Customs Fraud.

         By April 26, 2019, the parties jointly reported a completed settlement on the merits but no agreement on Customs Fraud's requested attorney's fees.[17] The parties agreed to mediate the attorney's fees issues with Judge Heffley's assistance and, if unable to resolve, file memoranda seeking an award of attorney's fees. The parties could not resolve the attorney's fees.

         II. Analysis

         Unable to resolve the attorney's fee demand, Customs Fraud now moves for reasonable attorney's fees and expenses under 31 U.S.C. § 3730(d)(2). It requests reimbursement of attorney's fees of $1, 522, 331.20 plus expenses of $46, 832.78 for Tycko; $370, 262.00 plus expenses of $15, 204.90 for local counsel Manko, Gold; and $24, 863.50 for Public Citizen related to opposing the petition for certiorari. Customs Fraud argues the False Claims Act requires it be awarded reasonable attorneys' fees and expenses.

         Victaulic raises several objections but focuses most of its challenge on relitigating the merits of Customs Fraud's claims, particularly challenging the work effort before the discovery period. It essentially argues Customs Fraud's claims lacked merit and should be considered frivolous. It repeatedly argues Custom Fraud abandoned the eBay product study and should not be compensated for work which it later conceded did not relate to their proof. But it concedes paying $600, 000 to the United States to resolve these claims. The day to challenge the merits has largely passed except to the extent we find the number of billed hours to be unreasonable.

         Congress allows us to award a person initiating a False Claims Act claim recover reasonable expenses necessarily incurred plus reasonable attorney's fees and costs to be awarded against the government contractor.[18] Under the False Claims Act, we must award reasonable attorney's fees "when a [False Claims Act] suit results in a settlement in which the Defendant agrees to pay money."[19]

         Our analysis begins with our Court of Appeals' recent direction in United States ex rel. Palmer v. C&D Technologies, Inc.[20] A contractor objected to attorneys' fees arguing the relator received "very modest results" of a $1.7 million settlement representing "about six percent of the relator's demand in the second amended Complaint." Judge Pratter reduced the fee by ten percent after otherwise addressing the contractor's challenges.[21] Judge Pratter also approved the Community Legal Services' ("CLS") rates at the mid-point of the rates for a reasonable hourly rate, disallowed travel time, reduced recovery for depositions, and applied a lower multiplier for the hours billed in preparing a reply brief.[22] Judge Pratter limited fees recoverable for time at depositions of two attorneys given her noticed concern as to the number of counsel attending depositions and limiting recoverable preparation time to one attorney and up to maximum of 1.75 hours per hour of documented deposition time. The relator appealed arguing Judge Pratter erred by reducing the billable rates and portions of the fee award relating to motions, depositions and travel expenses beyond the contractor's specific challenges. The relator argued our discretion is limited to the amount the contractor contends is reasonable. Our Court of Appeals disagreed, affirming Judge Pratter's reduction of the relator's fee by more than the contractor sought. The Court of Appeals held we cannot sua sponte reduce fees without an objection and cannot decrease a fee award based on factors "not raised at all" by the adverse party.[23] But objections allow us to review the merits of the objection even if the amount required to be deducted exceeds the specific objection. The Court of Appeals affirmed Judge Pratter again reminding contractors of the substantial discretion afforded to district courts to determine reasonable attorneys' fees given our better position to evaluate the underlying litigation in awarding attorneys' fees.[24] Our obligation is to provide a concise but clear explanation of our reasons for the fee award.[25]

         A. Customs Fraud is entitled to fees for efforts resulting in a $600, 000 settlement.

         Victaulic asks we substantially reduce the requested attorney's fees essentially equal to the percentage of the reduction from the demand in the first amended Complaint to the $600, 000 settlement. Among other arguments, it argues we should consider cases in which a court awarded fees to the contractor based upon the frivolous nature of the relator's complaint, including citing a case where a court considered seventy-three cases filed into a multidistrict litigation all of which included "clearly frivolous claims."[26] Victaulic argues we should revisit the merits of Customs Fraud's claims, decide they are baseless and then either substantially reduce or eliminate most or all of the billed hours as unreasonable. Victaulic argues the fee, regardless of the hours expended, should be equal to the percentage of the settlement to the demand: the ratio between $920.66 million and $1, 769 billion in damages which Victaulic believes Customs Fraud sought and the $600, 000 settlement. In other words, award .034 percent to ...


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