Wednesday, May 17, 2017

The "It's May? I Better Catch Up" Edition

There have not been many specifically customs-related cases from the courts of late. There have been plenty of rulings, in fact there have been rulings every week. I just have not had a chance to blog them. That is why things have been slow here. I have been tossing out the occasional tweet on agency actions and newsworthy developments. If you are not doing so already, please follow my Twitter feed @customslawblog or check it in the box on this page.

In the meantime, the Court of International Trade issued an opinion in United States v. International Trading Services. This decision is fairly uncomplicated decision the defendant in this penalty case failed to show up and defend itself. If you recall the earlier decision in this matter, you will understand why. The corporate client dissolved, leaving the lawyer, in his mind, without a client to represent. The lawyer tried to formally withdraw from the case but was rebuffed by the Court which held that the legal entity remained subject to suit under Florida law and, therefore, still needs a lawyer.

The underlying penalty here has to do with the incorrect classification of sugar on eight entries. The error resulted in just under $300 thousand in unpaid duties. The United States, on behalf of Customs and Border Protection, moved to collect the duties and a penalty of two times the unpaid amount. The defendant did not respond. As result, there was no real doubt that the Court would impose a penalty. The question was how much.

This is a good decision to read because it very logically walks through the process the Court of International Trade undertakes to assess a penalty. The first question is whether there was a material false statement or omission in connection with the entry of merchandise. A statement or omission is material if it would tend to alter Customs' appraisement or the importer's liability for duties. An incorrect classification that results in the underpayment of duty is material. Once the Court identifies a material false statement or omission, the defendant has the burden of proving that it did not result from negligence, gross negligence or fraud. As the defendants did not respond, the facts asserted in the motion are treated as true. That means there was no question as to liability.

Customs was seeking to recover about $691 thousand in penalties. But, setting the penalty amount is the responsibility of the judge, not Customs. The Court, therefore, walked through the 14 factors set out in a case called Complex Machine Works, which is worth a read for background. Here, Judge Barnett took the very helpful step of grouping those 14 factors into five broader categories. Those are:


  1. The defendant's character
  2. The seriousness of the offense
  3. The practical effect of the imposition of the penalty
  4. The economic benefit gained by the defendant
  5. Public policy concerns
The Court made a couple very important points. First and foremost is that the statutory maximum is not the default starting point for the penalty. The Court must consider the case on a clean plate. Starting at the maximum stacks the deck against the defendant by forcing it to argue down from the most severe penalty rather than having the Court consider the evidence to reach an appropriate result. The Court suggests starting at the midpoint and adjusting up or down as the evidence indicates.

Next, regarding cooperation, potential defendants should recognize that this is more than being pleasant through the course of the investigation. Customs' guidelines suggest mitigation where the defendant has exhibited "extraordinary cooperation beyond that expected from a person under investigation." Note that the CBP guidelines are not binding on the Court, although it did note their existence and apparently gave them some weight.

Related to this, the Court undercut somewhat the common argument that an importer had prior good behavior. This case involved eight separate entries. The Court characterizes this as defendant "serially misclassif[ying] entries accruing to Defendants a significant economic benefit." Does this mean that only the first entry would benefit from prior good behavior? My concern here is that in many cases the importer would not know about the error until several, possibly many, entries took place. Most errors are systematic in nature, not individual. My inclination would be to treat the error as the substantive decision rather than the entry and extend the benefit of good behavior regardless of the number of entries involved. Of course, that is only one of 14 factors, so the impact may be minimal.

Taking all of this into consideration, the Court found the maximum penalty to be appropriate. On top of that, the Court found it appropriate to grant prejudgment interest to the United States. 

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