Wednesday, November 10, 2010

The Primrose Path to Default

Pleading continues to be an issue in Court of International Trade litigation. In any other Court, that would not merit a comment. However, in the last two years or so, the CIT has issued several decisions focused on pleading, and that is a change from prior years.

In United States v. Callanish, Ltd., the United States alleged that the importer entered evening primrose oil without the required FDA approval. Because of this, Customs and Border Protection claimed the entries contained false or misleading statements or omissions, in violation of the penalty statute (19 USC 1592). Callanish, in particular, was the the manufacture of the product in Scotland and shipped the goods to the U.S. Apparently, the claim against Callanish is for aiding and abetting the allegedly fraudulent scheme.

After being served with an amended complaint, Callanish failed to defend itself. As a result, the United States moved for a default judgment to the tune of $17 million, the domestic value of the merchandise. The Court granted the default, but balked at entering judgment (which is technically two different things).

The issue for the Court was whether the government has pled facts sufficient to establish liability. It turns out that  the pleadings did not establish, to the Court's satisfaction, the domestic value of the merchandise. Rather, the complaint simply asserts that to be the value. Hence, the Court denied the motion for a default judgment but gave the U.S. 60 days in which to amend its complaint.

OK, so that is all technical and legal. An interesting aspect of the case for importers and compliance people is that CBP pursued this matter under 1592 as a penalty case. Typically, importers expect problems with FDA or other government agencies will be resolved via a Notice to Redeliver and then a liquidated damages case when the goods are not returned to Customs. The problem for Customs under those circumstances is the limited window in which it case demand redelivery. By proceeding under 1592, Customs can go back five years and, in the case of fraud, possibly collect the full value of the goods.

The lesson to be learned from that is that FDA imports (and goods regulated by other agencies) are not free and clear after the conditional release period ends. Like all imports, 1592 remains a viable enforcement tool.

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