Since 1986, the U.S. government has fought malfeasance in the defense industry by allowing private citizens to file fraud suits against the alleged perpetrators on the government’s behalf and then collect a share of any damages.
Now, a major textile trade group is using that so-called “whistle-blower” law to spark a government crackdown on what it claims is the widespread illegal importing of apparel from China.
The suit, filed by the American Textile Manufacturers Institute (ATMI), alleges that retail giant The Limited Inc. and two of its suppliers, L.A.-based Tarrant Apparel Group Inc. and Andover, Mass.-based Mast Industries Inc., illegally brought hundreds of thousands of Chinese-made garments into the United States by labeling the items as made in Hong Kong.
The suit was filed in Los Angeles District Court under the False Claims Act, which allows individuals and associations to sue on behalf of the government in fraud cases; if successful, the plaintiffs can receive up to 30 percent of the awards.
The law, which has been used successfully to fight Medicare and defense contractor fraud, has never been used to address trade issues.
Tarrant declined comment. But Jack J. Quinn, an attorney with the downtown L.A. law firm Arnold & Porter who is representing The Limited in the suit, denied the charges and accused the ATMI of engaging in nothing more than protectionism.
“The ATMI continues to seek special interest legislation restricting the global sourcing of apparel in order to protect its members from competition,” Quinn said. “Having failed to achieve this politically, the ATMI has seized upon the False Claims Act as a new weapon in its protectionist trade war.”
The Limited also questions the appropriateness of filing the suit under the False Claims Act and has asked that the complaint be dismissed. Attorneys for the Columbus, Ohio-based company will make their case for dismissal at a June 30 hearing before U.S. District Court Judge Harry Hupp in Los Angeles.
The lawsuit filed by the ATMI alleges that The Limited and its suppliers attempted to circumvent import quota restrictions by purchasing garments made in China and filing false records with the U.S. Customs Service claiming that the merchandise was made in Hong Kong.
The suit comes after a year-long private investigation into the Hong Kong activities of the defendants, which turned up a number of questionable transactions, according to Carlos Moore, ATMI’s executive vice president.
Investigators, Moore said, “discovered plants that weren’t making anything. They were just changing labels.”
The group has seven boxes of “hard evidence,” including photographs, he added.
ATMI claims that the government could be owed millions of dollars in penalties by The Limited, one of the nation’s largest specialty retailers, whose subsidiaries include Victoria’s Secret, Abercrombie & Fitch, Lane Bryant and Express.
“Those illegal shipments hurt both U.S. companies and legal producers overseas in other countries,” said Moore. “We believe that (the lawsuit) will send a signal to companies that engage in this practice that they must stop illegal goods from entering the U.S. market.”
If successful, Moore said the organization will use its share of the award to finance investigations into other apparel importers it believes is violating U.S. Customs regulations by bringing in Chinese-made merchandise.
The lawsuit comes as the U.S. legislators are wrapping up a fierce, annual debate over whether to extend most-favored-nation trading status to China. Last week, the House of Representatives rejected attempts to sever normal trade relations with the country.
Like many U.S. manufacturing groups, the ATMI opposes extending favorable trade status to China. The opposition is based, according to Moore, on China’s history of violating international copyright and intellectual property laws, as well as its alleged use of child and prison labor.
Both The Limited and Tarrant are publicly traded companies, but the controversy over their import practices has caused nary a ripple on Wall Street. Despite a flurry of dueling press releases on the matter, both firms’ stock price has remained virtually unchanged as a result of the import flap.
“It’s not something that Wall Street really looks at in terms of valuing a stock,” said Karen Sack of S & P; Equity.