The opinion of the court was delivered by: Brieant, J.
Before the Court is a motion by defendants PepsiCo, Inc., PepsiCo Beverage North America, PepsiCo International, Inc., and Pepsi-Cola Sales & Distribution, Inc., (collectively "PepsiCo")*fn1 to dismiss the qui tam Relator's complaint, pursuant to Federal Rules of Civil Procedure 12(b)(1), 12(b)(6), and 9(b). (Doc.19).
Relator Scott Winslow (the Relator) brought this reverse qui tam action on November 1, 2005 pursuant to the False Claims Act, 31 U.S.C. § 3729 et seq. ("FCA"). The Relator claims that PepsiCo knowingly and fraudulently mis-classified soft drink concentrate that it imported from the Republic of Ireland, in order to avoid United States import duties.
PepsiCo classified its substance under customs classification HTS 3302.10.1000, which is entitled "Mixtures of Odoriferous Substances used in the Manufacture of Non-Alcoholic Beverages." Imports under a § 3302 classification are not subject to any customs duties. The Relator claims that the concentrate properly should have been classified under HTS § 2106.90.99, entitled "preparations for the manufacture of beverages." Imports under this classification are subject to an ad valorem duty of 6.4%. The Relator's Amended Complaint alleges that PepsiCo knew that the proper classification should have been under § 2106.90. The Amended Complaint claims that, in knowingly mis-classifying the imported concentrate, PepsiCo violated the "reverse false claim" provision of the FCA, which imposes liability on "any person" who "knowingly makes, uses, or causes to be made or used a false record or statement to conceal, avoid or decrease an obligation to pay... to the Government." 31 U.S.C. § 3729(a)(7).
The facts below are taken from Relator's Amended Complaint, unless otherwise specified, and are assumed to be true for the purposes of this motion only.
All goods imported into the United States are taxed according to the Harmonized Tariff Schedule of the United States ("HTS"). The system includes more than 10,000 possible legal classifications. United States Customs and Border Protection (CBP), the agency responsible for interpreting the HTS, states on its website that the HTS "provides duty rates for virtually every item that exists. Experts spend years learning how to properly classify an item in order to determine its correct duty rate." http://customs.gov/xp/cgov/import/duty_rates/determining.xml.
As the Government explained in its Statement of Interest submitted in this case, "CBP relies on importers to supply accurate information about imported merchandise- including the applicable HTS classification." The importer is required to declare under oath that, among other things, "all statements in the invoice or other documents filed with the entry, or in the entry itself, are true and correct." 19 U.S.C. § 1485(a)(3).
The imported substance in this case is a "concentrate product." In or about January 2003, PepsiCo began to manufacture its soda concentrate at a new facility at Cork, Ireland. This plant was, according to the complaint, part of a large initiative by PepsiCo called GCS:
"'GCS' stands for Global Concentrate Sourcing and represented the largest capital expenditure ever made by PepsiCo in the Ireland Concentrate Manufacturing Plant to the tune of $150 million . The PepsiCo Ireland Manufacturing Plant in Cork, Ireland produces Pepsi, Diet Pepsi, Pepsi Free and Mug Root Beer concentrate. All other concentrate is produced in other manufacturing plants located in the United States and worldwide." Am. Compl. ¶ 84.
From January 2003 until March 2005, PepsiCo imported and declared to Customs more than $1 billion worth of concentrate. Relator alleges that imported Concentrate is "sold to independent bottlers at a very high cost (between $15M-$20M per 55 gallon drum) as the.... formula for PepsiCo products." Am. Compl. ¶ 66.
Relator's Amended Complaint, while over seventy pages long, does not convey an easily discernable narrative of events and allegations.*fn2 Nevertheless, Relator's allegations with regard to PepsiCo's concentrate operations can be summarized as follows:
Relator Mark Winslow is a former employee of Defendant PepsiCo, Inc. He was hired by PepsiCo in 2002 to a position at its "Worldwide Concentrate Headquarters" in Valhalla, N.Y. During the period from July 2002 to mid-2004, when Winslow changed jobs within PepsiCo, Winslow was one of the PepsiCo employees responsible for PepsiCo's importation of its concentrate from the Cork facility. Am. Compl. ¶ 60. Winslow was terminated in early 2005 for alleged poor performance. The Complaint describes PepsiCo's concentrate operations as shrouded in secrecy, while at the same time riddled with incompetence:
"Relator found that concentrate operations were isolated from the rest of PepsiCo with its own policy and procedures. Despite other colleagues mentioning downsizing and cutbacks, Relator was told that Concentrate was immune to ups and downs of other areas of PepsiCo. The Concentrate executives appeared to have unlimited spending accounts and used Research and Development warehouse to store personal items and even used the concentrate supply chain to delivery [sic] wine to friends. There was a club like atmosphere on the second floor of the concentrate operations building. Doors to the Concentrate Boardroom and executive offices were always kept shut, few people ever saw or heard from the concentrate executives. When Relator met with his managers in the first floor concentrate operations office, they would usually ask him to close the door behind him." ¶ 131.
Relator claims that he came to be aware of the alleged concentrate importation fraud through a series of events. When the decision to move production of all Pepsi concentrate products to the Ireland plant was made, Relator was told that there would be a lot of "grunt" work to do, but that production in Ireland would secure "massive production tax advantages and duty free importation." ¶ 117. Around this time, Relator alleges that Michael Masucci, Relator's direct superior and at that time the Transportation Manager, told him "Scott, in concentrate operations we have the ability to shut down PepsiCo." ¶ 126.
During the first weeks of November 2002, Relator was informed that Vandegrift Forwarding Incorporated*fn3 had been selected as the customs broker for the concentrate. ¶ 132. Relator and Masucci were told to prepare an "import manual" for their meeting with Vandegrift President Mitch Scher. In that meeting, held on December 11, 2002, Relator claims that Customs classifications and import duties were discussed, and that Scher made the following statements: "The repetitive nature of this business is very helpful." "Please put together an import and compliance manual." ¶ 135. "Listen guys Customs is like the IRS- they only look at the top 1000." ¶139. "Do not rock the boat." ¶140. "Do not draw attention." ¶ 141. "Your delays will begin at the FDA and then followed at Customs." ¶ 142. "Scott you realize that this is all dutiable including not only the concentrate but the plant machinery, USA staff and Cork staff involved in the process." ¶ 147. "Your FDA coding will be odiferous substance." ¶ 150. "Your problem is you can not [sic] prove you are paying a small office in Ireland $30 million a week." ¶ 153. "If you get a US Customs audit you will need to show a transfer-debit-transaction-bank draft." ¶ 155. "You guys need to understand CUSTOMS 101 SHOW PROOF OF PAYMENT." ¶ 157.
Relator alleges that Vandegrift "acted as PepsiCo's attorney... filing FDA, Customs and relevant documentation for the importation of concentrate." Accordingly, Vandegrift stated on Customs Form 7501 that all of the prices, and all of the statements, contained in the invoice were true.
During a recall of a shipment of Diet Pepsi concentrate due to quality control concerns, Relator claims that his director, Mr. Molner, told him that the concentrate could be "'easily mixed' with carbonated water to produce the soda product sold to the U.S. Bottlers." ¶ 187. Defendant disputes this and asserts that further manufacturing steps are necessary beyond the mere addition of water.
On November 3, 2003, while employed at PepsiCo, Relator received a formal Request for Information ("RFI") from Customs, requesting a sample of concentrate from a shipment that was on hold in Charleston, S.C. Relator passed this information on to his manager Masucci. When Relator later asked Masucci about the status of the matter, Masucci stated that the PepsiCo executives "do not know what to do." Masucci also allegedly stated: " Scott, you know that request is really sending a shockwave through the PepsiCo executive, I even hear Treasury and Tax are getting involved in this... it is about time someone paid attention to what is going on in this business importing concentrate." ¶ 200. Masucci also told Relator that if he was asked about concentrate imports by someone outside of the company, to "play dumb" and reply, "I don't know". ¶ 203. Relator claims that the resolution of this RFI was "suspicious", because, according to him, PepsiCo never provided a sample to the government, but instead performed its own testing. ¶ ¶ 199-200.
Customs Classifications at Issue in this Case
Relator claims that PepsiCo knowingly and fraudulently entered and imported its concentrate under HTS subheading §3302.10. The Explanatory Notes to this section state that the "odoriferous substances" covered by the section are "essential oils, resinoids, ...