The first of the recent Ford cases does not come from the Court of International Trade. Rather it is from the U.S. District Court in Michigan. The case comes out of an action for declaratory judgment Ford filed ahead of Customs suing it in El Paso for recordkeeping violations relating to NAFTA entries. The plaintiff in a declaratory judgment case essentially asks the court to declare its rights relative to the defendant. When allowed, declaratory judgment often takes the wind out of a potential suit and result in settlement.
Ford assumes it is going to get sued for failing to produce backup documents supporting NAFTA certificates of origin for goods from a related party in Mexico. It assumes this based on the fact that it has received a mitigated recordkeeping penalty demand for $21,642,481, which it has not paid. Quite reasonably, Ford insists that it has no obligation to keep or produce documents that the supplier is required to produce in the course of a properly conducted NAFTA verification. Rather, according to Ford and everyone but the U.S. Bureau of Customs and Border Protection, importers are entitled to rely on a facially valid NAFTA C.O. and required to maintain it with its entry records for five years.
Not necessarily wanting to wait to become a defendant, it sued for a declaratory judgment in Michigan. Customs moved to dismiss the case on a number of grounds. A couple of the arguments are worth mention.
1. Does NAFTA Bare the Complaint?
The NAFTA has language in it designed to prevent anyone from going to any court claiming the U.S. is in violation of the text of the agreement. Here, the U.S. argued that the declaratory judgment act is a challenge to U.S. actions under the NAFTA and, therefore, barred. The court disagreed saying, basically, that the case is about the implementing regulations and the recordkeeping statute, not the NAFTA. So, the case is not barred.
2. Is Declaratory Judgment Proper?
Declaratory judgment is somewhat discretionary. The court does not have to entertain the case if the court thinks the action is best resolved in the pending action by Customs against Ford. On that front, the court looked at a number of factors.
A. Declaratory judgment will not lead to settlement. The court held that even if it declared that Customs could not assess a penalty as proposed, it could assess a penalty under the normal 1509 procedures. Frankly, I found this confusing and hope someone can explain it. It appeared that Customs was trying to apply the recordkeeping penalty process, so saying it could use that as an alternative left me scratching my head. Was the penalty issued under sec. 1592 for unsupported NAFTA claims?
B. Declaratory judgment will not clarify the law. If the court refuses to grant the declaratory judgment, what happens? Ford has to defend the penalty case. And, in the course of doing so, it gets to raise the same arguments as defenses to the penalty. So, declaratory judgment does not provide any additional clarity over waiting for the affirmative case to be decided. Plus, Ford faces no additional harm in waiting to defend the action in Texas.
C. Is this forum shopping? If the only reason the declaratory action was filed in Michigan is to gain "home court advantage," the court will not play along. Ford apparently did not have a particularly good explanation for why Michigan is the better location for the decision. The port of entry was El Paso and the investigation has been conducted there. Hence, the court found El Paso to be an appropriate forum and said this was an important factor in the final decision.
And that final decision was to dismiss the case in Michigan. That means the merits will be heard in El Paso and we are all going to have to wait for that decision. But, let's think ahead a bit.
Customs says Ford needs to produce backup records, including bills of material, for NAFTA imports from Mexico despite having produced NAFTA certificates. Let's ignore for the moment the fact that the NAFTA certificates were produced in response to an administrative summons and after the date of the claim. Let's also ignore the fact that we are talking about a related supplier, so Ford does have some say with respect to the records. Let's focus on the basic question: Who has to produce the backup documents?
Customs appears to be thinking that an importer exercising reasonable care would make an independent analysis of the C.O. to determine whether it is correct and valid. Failure to do so, would, therefore, violate sec. 1592 if the entry documents made based on the C.O. were materially false or had material omissions.
That's all well and good, but how does that fit with the regulations? The regulations provide for verifications. Barring a failed verification, the NAFTA claim is presumed to be valid. Verifications are focused entirely on the supplier or exporter who provided the certificate. There are four methods for conducting a verification:
- A letter requesting information from the Mexican or Canadian producer or exporter.
- A written questionnaire to the exporter or producer in Canada or Mexico.
- Visits to the producer or exporter in Canada or Mexico.
- Any other method which results in information from a Canadian or Mexican exporter or producer, including a Canadian or Mexican producer of a material, that is relevant to the origin determination.
Notice a theme? The information comes from the producer or exporter that completed the C.O.; not from the importer. Want more proof? Read the darn C.O., which says, in Field 11:
THE INFORMATION ON THIS DOCUMENT IS TRUE AND ACCURATE AND I ASSUME THE RESPONSIBILITY FOR PROVING SUCH REPRESENTATIONS. I UNDERSTAND THAT I AM LIABLE FOR ANY FALSE STATEMENTS OR MATERIAL OMISSIONS MADE ON OR IN CONNECTION WITH THIS DOCUMENT.
I AGREE TO MAINTAIN AND PRESENT UPON REQUEST, DOCUMENTATION NECESSARY TO SUPPORT THIS CERTIFICATE, AND TO INFORM, IN WRITING, ALL PERSONS TO WHOM THE CERTIFICATE WAS GIVEN OF ANY CHANGES THAT COULD AFFECT THE ACCURACY OR VALIDITY OF THIS CERTIFICATE.
The "I" in those two sentences is the producer or exporter, not the importer. Have we all been lulled into trusting these documents? Maybe. The Court in Texas will tell us. It is possible to stretch option 4 to include strong arming the U.S. importer into getting documents from the supplier.
It is worth noting that the newer free trade agreements like Australia and Chile flip this around and center the verification process on the importer. But, that is because the language of the agreements and the regulations is different. That should tell the Texas court something about what the U.S. expected to happen in these cases. Also, rumor has it that the Canadian authorities disagree with CBP on this point.
The folks at Ford have the curse of living in interesting times.
The other Ford cases are from the Federal Circuit. I'll get to those next.