OtterBox moves to settle suit

FORT COLLINS – OtterBox is negotiating a settlement with a former employee who filed a whistleblower lawsuit alleging the cell-phone case maker underpaid federal import taxes on products it made in China.

Fort Collins-based Otter Products LLC, which sells OtterBox, the No. 1-selling smartphone case in North America, is taking steps to resolve the lawsuit filed by Bonnie M. Jimenez of Brighton.

Jimenez, who worked in customs compliance as OtterBox’s supply-chain director, contended the company failed to pay customs duties on the full value of its cell-phone cases, violating the False Claims Act.

“The settlement discussions are open and ongoing,” an OtterBox spokeswoman said in an email. “It would therefore be inappropriate for OtterBox to comment on them.”

OtterBox previously said it would vigorously contest the lawsuit and was confident it would see a “favorable outcome” in court. On Sept. 26, the company asked that the case be dismissed, saying that it already had notified the government of the shortcomings in its import-tax payments.

But in a Jan. 2 filing signed by an attorney for OtterBox, Michael Theis of Hogan Lovells US LLP in Denver, the company and Jimenez asked for a suspension of court proceedings so they could negotiate a settlement to “resolve this action once and for all.” Authorities of the U.S. Department of Homeland Security, U.S. Department of Justice and the U.S. Attorney’s Office must approve any deal.

Magistrate Judge Michael Watanabe agreed to the request, granting a stay on court proceedings through March 3.

Michael Porter, a Wheat Ridge attorney for Jimenez, said his client and OtterBox have reached an agreement, although he declined to disclose its terms. He hopes to seek government approval for the settlement before the suspension of court proceedings ends.

“It’s my sense that the settlement is fair to both sides,” Porter said. “However, if the government does not approve all aspects of it, the settlement is off and we’ll be back into litigating the case.”

A spokesman for U.S. Attorney John Walsh declined to comment.

Lawsuits often are settled to avoid the inconvenience and burden of litigation, said Frank Schuchat of Denver-based Schuchat International Law Firm LLC, which specializes in international law.

“It’s a prudent decision to get a client out of a nasty litigation,” he said. “Any time you can get yourself out of a court case on tolerable terms, that’s what you want to do.”

OtterBox fired Jimenez in 2010 and she sued in 2011. The lawsuit was under seal in U.S. District Court in Denver until Aug. 19, when U.S. District Judge Raymond Moore opened portions of the case. The Business Report first reported details of the lawsuit in October.

In the lawsuit, Jimenez contends that OtterBox did not pay customs duties on the value of tooling and engineering of cases manufactured in China. Companies must pay customs duties on the material costs associated with their products and for other work, such as design and engineering. Jimenez did not respond to a request for comment.

Jimenez, in court documents, says she told OtterBox founder Curt Richardson that the company was underpaying customs duties, but that Richardson disagreed and declined to pay the additional costs.

OtterBox responded to Jimenez’s lawsuit in late September, asking the judge to dismiss the case. In what is known as a “prior disclosure,” OtterBox said in a court filing that it admitted to the government before Jimenez sued the company that it had broken the law by not paying enough customs duties. Prior disclosure is a typical way a company can correct errors in its product valuation.

David Glynn, of counsel with Holland and Hart LLP in Denver, suspects the government will approve a settlement because OtterBox appears to have corrected its errors by repaying those customs duties.

“If the parties agree to settle, I don’t think the government’s going to walk in the middle of that,” he said.

Challenges to companies by whistleblower cases drive home that companies must ensure they follow federal customs requirements, Schuchat added. Violations of customs law can carry hefty fines and penalties.

He recommended that companies seek help from experts and develop internal policies on handling customs duties.

“It’s like doing your taxes,” he said. “You want to be accurate.”

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