DHL Airbus
DHL Airbus (Adrian Pingstone/Wiki)

A federal notice provision requiring challenges in shipping-rate disputes to be brought within 180 days is trumped by the False Claims Act, the U.S. Court of Appeals for the Second held Wednesday.

Saying adherence to the notice provision would undermine the purpose of the act because any notice would tip off alleged violators, the Second Circuit reversed a lower court and reinstated the case of Grupp v. DHL Express (USA) Inc., 12-3829.

Kevin Grupp and Robert Moll, owners of a company that served as an independent contractor for DHL, filed a qui tam action under the act claiming that DHL, an international packaging company, billed the General Services Administration, the Department of Defense and the Department of Homeland Security for jet-fuel surcharges and diesel-fuel surcharges regardless of whether shipping was done by air or on the ground.

In their complaint as “relators” under the act, they alleged three specific instances where the jet-fuel surcharge was billed but the shipment was by ground, and they also claimed the jet-fuel surcharge was routinely billed regardless of the mode of delivery.

The fraudulent billing of government agencies alleged occurred from 2003 to 2008.

DHL moved to dismiss in November 2011, arguing the plaintiffs had failed to comply with 49 U.S.C. §13710(a)(3)(B), which requires shippers to contest bills before the Surface Transportation Board of the U.S. Department of Transportation within 180 days of the receipt of the bill.

Failure to comply with the notice requirement prevents any challenge to the shipping charge.

Western District Judge John Curtin granted the motion to dismiss and Grupp and Moll appealed to the circuit.

Judges Ralph Winter, Jose Cabranes and Debra Ann Livingston heard oral arguments on March 21.

The panel also received an amicus curiae brief from the federal government, which argued in favor of the supremacy of the False Claims Act over the 180-day notice requirement.

The government’s argument was that requiring notice would undermine two aspects of the act—one that requires a relator’s complaint to be filed in camera and remain under seal for a minimum of 60 days, and maybe longer if good cause is shown, and a second that sets a six-year statute of limitations period of six years after the violation or three years after U.S. officials knew or should have known of the violation.

“We agree,” Winter wrote for the court. “The purpose of the sealing provisions is to allow the government time to investigate the alleged false claim and to prevent qui tam plaintiffs from alerting a putative defendant to possible investigations.”

The “relatively generous” statute-of-limitations period, Winter said, “serves a similar purpose, ensuring that the government need not rush to file a complaint when such a filing would alert a defendant to an ongoing criminal or civil investigation.”

DHL had argued that the notice provision was not inconsistent with the False Claims Act’s statute of limitations, because, as long as the notice requirement is met, relators still don’t have to file suit for up to six years.

But Winter cited a 1986 U.S. Senate report when he said “this argument ignores the purpose of the act’s tolling provision,” for when Congress amended the act in 1986 to include the tolling provision “it provided the following justification: ‘[F]raud is, by nature, deceptive [and] such tolling …is necessary to ensure the Government’s rights are not lost through a wrongdoer’s successful deception.’”

“Application of the 180-day rule would completely nullify the tolling allowance inasmuch as the Government is often unlikely to become aware of fraud immediately following the violation,” he said.

Finally, the court rejected an argument by DHL that the 180-day rule should prevail because it is more specific than the False Claims Act.

“We reject the contention that Section 13710 is the more precisely drawn of the two statutes,” Winter said. “Although Section 13710 addresses shipping-rate disputes specifically, it does not address fraudulent claims to the government or qui tam actions.”

John Sinatra of Hodgson Russ in Buffalo argued for the relators.

“We’re very pleased with the Second Circuit’s decision and we are looking forward to engaging in discovery to quantify the extent of DHL’s false claims and their resulting damages,” Sinatra said.

Sinatra said the damages are difficult to estimate at this point, “but we believe they will be significant because this was nationwide and lasted from five to six years,” he said, noting that there are treble damages under the False Claims Act as well as penalties of up to $11,000 per claim.

Lawrence Vilardo of Connors & Vilardo argued for DHL.

Vilardo issued a statement Wednesday saying DHL believes it will prevail in the lower court.

“The court did not reach the more basic and stronger issue, that DHL did nothing that was false or deceptive,” Vilardo said. “So while we are disappointed that this case will not be dismissed on technical grounds, we are confident that we will be able to obtain the same result for substantive reasons.”