Friday, September 07, 2012

Pleading in Default Cases

One might reasonably assume that if Customs and Border Protection sues a company in the United States Court of International Trade to collect a penalty and the defendant company never shows up to defend itself, that it would be a slam dunk for the U.S. Usually, it is not too difficult to get a default judgment. But, sometimes it is. That was the case in United States v. Active Frontier International, Inc.

The case involved allegedly false declarations of origin on apparel imports. Customs asserted a penalty under section 592 of the Tariff Act of 1930 (19 USC 1592). AFI did not respond to the pre-penalty notice or the subsequent penalty notice. When it was sued in the Court of International Trade, AFI did not respond to the summons and complaint. That allowed the United States to seek a default judgment against AFI.

The problem for the U.S. was that to collect a penalty, the United States needed to assert that AFI had made a material false statement or omission in connection with the entries. The Court looked at the pleading for some facts to support a finding that the misstatement of origin was material. This is in an interesting question because compliance professionals are likely to simply assume that the country of origin is a material fact. But, the Court is essentially asking the government to at least assert in a pleading why that might be true.

In this case, the goods came from China. Initially, the government defined that false statement of origin as material because it prevented Customs from making a proper determination as to origin. The Court found this to be too circular to serve as a basis for finding the statement to be material. And, it was not enough for the government to simply state that the origin might affect the admissibility of the merchandise. In other words, the Court rejected implication from the pleadings and from Customs' Informed Compliance Publication that a false statement of origin is per se material.

For a statement to be material, it must be of "such a nature that knowledge of the [fact] would affect a person's decision-making; essential." For that U.S. to collect a Customs penalty it needs to show that the false statement was material, meaning it would affect Customs' decision-making. And, even in a motion for default judgment, the Court of International Trade will require that the United States plead facts showing why the allegedly false statement is material.

So, as we have said before, don't assume that a mistake is a violation and don't assume that Customs can collect duties or a penalty for every mistake. The details matter.

4 comments:

Carla said...

I haven't seen the complaint nor how the CBP pled its claims but did they not explain why making a proper determination is so material and significant? I.e. anti-dumping, concerns of safety/quality of the country, embargoes, etc.? Would adding a more in-depth explanation as to why making the proper determination have met the satisfaction of the court?

Larry said...

Carla, the sorts of things you mention in your comment are exactly what the Court was looking for. At least that is what I think it wanted. Because the default was denied without prejudice, I suspect the U.S. will cure the defect and ultimately get what it wants.

Ida_Human said...

Larry,

As a 1L who has worked in the international compliance field for over 10 years, I really enjoyed reading this case. Thank you for sharing it and your analysis.

James said...

Larry,

As a 1L who has worked in the international compliance field for over 10 years, I really enjoyed reading this case. Thank you for sharing it and your analysis.