Wednesday, January 23, 2013

Third Time is the Charm in Active Frontier

Before you jump into this update on Active Frontier, you might want to refresh yourself here and here.

You will recall that this is a case where the United States is trying to get a default judgment against an importer who falsely declared the country of origin of apparel on the entry documents. Customs and Border Protection assessed a penalty based on negligence and moved in the Court of International Trade to collect 20% of the value of the goods.

In the first decision in this matter, the Court denied the claim because the pleadings did not establish that the false statement of origin was material. Materiality is required by the penalty statute, 19 USC 1529. The Court gave plaintiff the opportunity to amend the complaint to assert facts showing that the statement of origin was both false and material. The government undertook two motion to amend, the first of which was denied and the second was withdrawn. This opinion focuses on the third amended complaint.

In this motion, the government asserts that each entry contained merchandise subject to quota and, therefore, the false statement of origin was material. The important unstated argument here is that the quota for a given country of origin can get used up and imports outside of the quota are typically subject to extremely high rates of duty. As a result, a false statement as to origin would prevent the government from properly managing quota. Further, a false statement of origin might circumvent the import controls implemented via the quota and avoid the payment of extremely high out of quota duties. That, according to the government, would be material because it would impact the treatment of the imported goods and the management of the quota system.

It is important to make two notes here. First, that was my summary of the apparent argument rather than a summary of what is in the opinion. Second, not ALL of the merchandise on every entry was subject to quota. However, every entry had SOME merchandise subject to quota.

The Court rejected the notion that a false statement of origin on an entry is necessarily material with respect to all of the merchandise on the entry. Rather, the Court said that it "sees no reason why a false origin designation could not be material with respect to some merchandise on a given entry, such as merchandise subject to quota, and on the particular facts presented be immaterial with respect to other merchandise on the same entry . . . ."

The Court then noted that the proposed new complaint was too vague to allow it to determine tariff classifications and, therefore, the materiality of origin with respect to quota. The mere assertion that the goods were classified by the importer in HTSUS item 6204.63.3090, was not deemed sufficient for the Court to accept it as true.

Nevertheless, a single sentence saved the complaint. The complaint stated: "By misstating the country of origin of these articles, Active Frontier allowed them to be entered into the country without having them count toward the quota on these goods." Drawing all reasonable inferences from this sentence, as the Court is required to do, the Court found this to be an assertion that the apparel was classifiable in 6204.63.3090 and, therefore, subject to quota. That was apparently enough for the Court to use as a peg on which to hang its judicial hat.

Thus, the third amended complaint was accepted.

Those of you who are not lawyers but work in the compliance and brokerage field are surely scratching your heads. Yes, that is the world in which I live.

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