Saturday, December 14, 2013

UP Penalty Unconstitutional

Union Pacific Railroad has been fighting the good fight with U.S. Customs and Border Protection over whether it is liable for penalties for illegal drugs imported via railcars that were being used by unrelated Mexican railroad companies. UP's role was to forward the electronic manifest data to CBP and pick up the railcars after CBP clearance. Keep in mind that CBP does not accept electronic manifest transmissions from Mexican railroads. In an interesting opinion, the Eighth Circuit Court of Appeals has held that CBP lacks the authority to penalize UP for the actions of Mexican drug cartels on railcars UP neither owned nor controlled.

According to the opinion, UP has no railroad operations in Mexico and no control over the Mexican railroads involved. It has no ability to control employees of the Mexican railroads and no authority to secure or search trains inside Mexico. When a train arrives at the border, CBP inspects it and sends the Mexican locomotive and crew back to Mexico. When CBP releases the train, UP hooks up a locomotive and carries the railcars on to their destination.

UP has taken steps to prevent smuggling in its network. It has 200 police officers and 300 security contractors on that job. At the border crossings, UP spends $2.4 million per year on this effort. It also built facilities for CBP including inspection towers. UP is also a member of C-TPAT and other partnerships with law enforcement.

Despite that effort, it turns out that there have been illegal drugs in railcars carried by UP in the U.S. after entry from Mexico. As a result, and despite all those facts above, Customs and Border Protection has sought to impose a $38 million penalty on UP. The theory for the penalty collection is that UP failed to include the illegal drugs, which it did not load and did not know were present, on the electronic manifests. Included in the total of the penalties is $655,215 for drugs UP found after CBP inspected and released the railcar. UP notified Immigration and Customs Enforcement about the drugs, which CBP then decided to treat as a violation by UP.

For its part, during the administrative process, CBP reasonably agreed to mitigate the penalties by up to 95% if UP ensured that railcars were inspected in Mexico. UP apparently rejected this offer on the grounds that it is impossible for UP to comply due to the lack of security for its personnel. Keep in mind, these officers would be operating in Mexico actively interfering with the operation of drug cartels. If UP police were assigned that task, they would not be able to carry firearms, could not make arrests, and, if they seized drugs, would technically be liable for possession under Mexican law. The Mexican railroads actually rely on the Mexican military for inspections because police authorities have been ineffectual.

CBP makes the not unreasonable point that UP has a business relationship with the Mexican railroads and, therefore, some leverage. It appears that CBP wants UP to use that leverage to force the Mexican railroads to implement a CBP-approved training program for inspecting the railcars. Unless adequately inspected, UP would not take the railcars from the Mexican railroads. This truly sounds reasonable enough. But, when you remember that neither the local police authorities nor the Mexican military has succeeded in stopping the drug cartels, it seems to be too much to ask.

Customs position is based on 19 U.S.C. 1584(a)(2), which Customs says requires that common carriers exercise the highest degree of care and diligence in preventing drug smuggling in railcars. According to the Court, in 1988 Congress required that Customs pass a regulation defining the highest degree of care and diligence. To date, Customs has not done so.

This case was brought under the Administrative Procedure Act. As such, CBP's decision to impose the penalties will be upheld unless it was arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law. Similarly, the penalties will be set aside if Customs acted in excess of statutory authority or short of its statutory requirements.

At the start of its analysis, the Court asked whether the penalties are constitutionally suspect. The Court noted that by imposing a sever penalty on a morally innocent actor, Customs may have violated the fifth amendment's due process clause. Further, despite an apparent argument from Customs, this penalty is not permitted by the common law of civil forfeiture because the monetary penalty is not a forfeiture, the railcars were not misused by UP, and UP was not negligent. Thus, there is a question as to the constitutionality of Customs' interpretation of the law.

Where one interpretation of a statute indicates that it is unconstitutional and another indicates that it is constitutional, the Court will adopt the latter. Thus, the Eighth Circuit next looked at what Congress intended the statute to mean. 

The Court noted that the law requires the "person in charge" of the vessel or vehicle to be responsible for properly reporting the cargo, including illegal drugs. CBP determined that UP was the person in charge because it electronically filed the manifests for the Mexican railroads. The Court, however, noted the other parts of the Tariff Act define the person in charge as someone on the vehicle or vessel such as a purser, master, pilot, or conductor. Under this meaning, UP was not in control of the trains when they entered the U.S. Further, although subject to some dispute, UP was not the owner of most of the railcars.

Further, the Court found that CBP's interpretation of the "highest degree of care and diligence" was not reasonable. On this point, the Court found no clear indication of congressional intent to "stretch constitutional limits." Accepting Customs' no-stone-unturned approach would require UP to accomplish what Mexican police and military authorities have failed to accomplish. This, the Court was unwilling to do.

Given the absence of the required regulatory definition,  the Eighth Circuit applied the common law meaning of the phrase, which is the "normal, elevated standard of care expected of any common carrier." This is not the familiar reasonable care imposed on importers. Rather, it is the "utmost care and diligence." But, that should not be translated to mean all the care possible or conceivable. It requires "everything necessary to the security . . . and reasonably consistent with the business of the carrier, and the means of conveyance employed." Under this standard, the Court found that CBP was holding UP to an unreasonable standard of care. UP, according to the Court, has done everything reasonably consistent with its business and the means of conveyance (actually more) to prevent illegal drugs from entering the U.S. given that it is not in control of the railcars when they reach the U.S.

Consequently, the Court found no reason to accept Customs' interpretation of the statute, which would raise serious constitutional questions. Rather, it interpreted the statute to require reasonable efforts consistent with the utmost care of a common carrier. That makes the penalties unlawful.

That is a big win for UP, which might have taken the mitigation deal and walked away. Instead, this case illustrates, in a fairly narrow circumstance, that Customs penalty claims must be carefully considered in the context of whatever law is being enforced. If the subject of the claim had no control over the circumstances and no ability to mitigate the risk of a violation, that penalty may be suspect. That is a valuable reminder.

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