Composite Machines and Classification

One of the tricky things about classifying modern devices is that they often have more than one function. Is your smartphone a phone, a computer, a music player, or a device used primarily for whatever this is? That is the issue in McMesson Canada Corp. v. United States, in which the Court of International Trade classified a device that dispenses, packages, and labels medications in a way that helps to ensure accurate dispensing and patient compliance with medical instructions. Here is a promotional video of a related, if not the same, machine.

From McKesson

The machine is composed of a pill canister at the top. The lower part contains reels of plastic packing material and a printer. Based on input from the touch screen, pills are weighed on an internal scale and dispensed into plastic pouches, which are printed with patient information and a bar code. All of this is driven by Pacmed software running on a Windows computer.

This is how I envision Pacmed service technicians. And, this is why.

Customs & Border Protection classified the machines in 8479.89 as "other" machines having individual functions not specified elsewhere (2.5%). McKesson protested seeking classification in Heading 8422.40 as packing or wrapping machinery (Free).

Everything in this case starts from the premise that the Pacmed is a composite machine. That seems pretty unassailable. Note 3 to Section XVI tells us what to do with composite machines:

Unless the context otherwise requires, composite machines consisting of two or more machines fitted together to form a whole and other machines designed for the purpose of performing two or more complementary or alternative functions are to be classified as if consisting only of that component or as being that machine which performs the principal function.

Keep in mind that this Note only comes into play if there is no heading that describes all of the functions of the particular item. For example, a clock radio combines two distinct machines performing connected functions. If there were no heading that addressed both functions, the classification would be based on the principal function (which is a good discussion topic I often use in law school classes). Fortunately, 8527 covers radio receivers whether or not combined with a clock, making Note 3 inapplicable.

The question here is whether the principal function of this device is within the scope of 8422. The relevant language from that heading includes:

machinery for filling, closing, sealing or labeling bottles, cans, boxes, bags or other containers; machinery for capsuling bottles, jars, tubes and similar containers; other packing or wrapping machinery (including heat-shrink wrapping machinery)

The Pacmed machine does not fill an existing bottle, can, box or other container. So that cannot be its primary function. That leaves "other packing or wrapping machinery including heat-shrink wrapping." Note that the Explanatory Notes clarify that these machines may also label. Is that what we have here?

Customs does not think so. The Government's argument is that all of the various functions of the machine are equally as important to the primary function, which is the distribution of medication. According to the government, in the absence of a single primary function, the classification in last numerical order is applicable under GRI 3(c). Or, in the alternative, if the principal function is distribution, there is no heading covering that and the basket provision of 8477 is correct.

The Court did not buy the Government's argument. The Court noted that many (I might guess "most") packing machines have some capacity to store and measure quantities of the product to be packaged. They also have some capacity to physically deliver the material to the package and often label the package. The Court pointed out that Customs has reached a similar conclusion in prior rulings on, for example, machinery to fill pouches with milk (NY 879640 (Nov. 17, 1992)) and machines to fill pots and trays with planting soil (NY 866831 (Sep. 19, 1991)).

There was also some debate about whether the machine dispenses medication. Apparently, the Government's position that the machine is for the distribution of medicine is bolstered by the notion that it is a dispenser and dispensing is not a function listed in 8422. I guess because that sounds more "medical" than saying the pouches drop out the front and are picked up by a human being who then takes the medicine to the patient. In reality, this machine strikes me as an ATM for drugs. By the way, ATM's are classified as "automatic bank note dispensers" of 8472. Dispensing is what packing machines do. If they did not, the machines would create lots of convenient packages that no one could ever access or distribute.

Finally, the fact that the machine incorporates and works in conjunction with automatic data processing equipment does not change the classification. Chapter 84, Note 5(E) covers that. When machines work in conjunction with computers but are designed to perform a specific function other than data processing, the correct classification is based on that function. This is why ATM machines and modern gas pumps are not classified as computers; they have perform functions other than data processing.

Based on all of this, the Court reached an interesting conclusion. Without regard to Note 3, the Pacmed is a packing machine. All of the addition operations support packing. In other words, those operations are there to facilitate packing rather than as additional separate functions.

But, just to be complete, the Court provided the Note 3 analysis and found the principal function to be packing.

That's a win for McKesson and a reminder that I need to use more Star Trek references here. Future spoiler alert, the Red Angel is Wesley Crusher. There, I have taken a controversial stance. Now I will go see Captain Marvel to the ire of internet trolls everywhere.

CAFC Defines "Optical"

Is something "optical" if you can't see it and it does not affect your vision? That is the basic question in ADC Telecommunications, Inc. v. United States, a recent decision of the Court of Appeals for the Federal Circuit.

The merchandise involved is telecom optical network equipment. The equipment uses light to move data through fibers. This particular network operates in the infrared end of the light spectrum, meaning the actual light involved is invisible to human eyes.

This is probably what comes to mind when you think about optical fiber.

This is what comes to my mind, but that is a personal issue. I think what we are actually talking about is something like this:

Customs & Border Protection classified the equipment in 9013.80.90 as optical appliances and instruments. The importer believes the correct classification to be 8517.62.00 as "Machines for the reception, conversion and transmission or regeneration of voice, images or other data, including switching and routing apparatus." On their face, either seems reasonable.

The Court of Appeals started its analysis with 9013. Everyone seemed to agree that as a factual matter, the equipment operated at the infrared, and therefore invisible, end of the spectrum. To qualify as an optical appliance or instrument, the item has to incorporate one or more optical elements that do not serve a subsidiary purpose. Chapter 90, Note 3. So a compass that includes a small magnifier to make the needle more visible is a compass and not an optical appliance.

Unfortunately, that does not tell us what the word "optical" means in this context. When that happens, the Court looks to the common and commercial meaning of the term as illustrated in, among other places, dictionaries. It turns out that there are a variety of definitions. These range from "acting on light in some desired way" to "of or pertaining to sight." Taking a step back, the Court noted that "optics" is the science of light (but it is also the science of sight). Thus, we are about to enter a battle of the definitions.

Looking to prior decisions and as far back as the 1929 Summary of Tariff Information, the Court found a useful set of meanings (note that is plural) for optical. According to prior cases, something is optical where: (1) the device acts on or interacts with light, (2) the device permits or enhances human vision through the use of one or more optical elements, or (3) the device uses the optical properties of the device in something more than a ‘subsidiary’ capacity. These are separate factors for consideration and no one is necessary for the item under consideration to be optical.

Here the Court found that the optical network equipment interacts with light. It also uses the light in a way that is more than subsidiary. Consequently, 9013 applies.

What about 8517? Unfortunately, chapter XVI, Note 1 excludes goods of Chapter 90 from the Section and, therefore, from Chapter 85. Following that guidance, the Court of Appeals affirmed the Court of International Trade and upheld CBP's classification.

The Key to Classification

The tariff classification of assembled items is usually not that hard because the item has a single definable form and function even though it consists of multiple components. A refrigerator, for example, is a refrigerator despite also being a compressor, an evaporator, and other components. There are actually rules in the Harmonized Tariff Schedule that would lead you to that conclusion. Perhaps the refrigerator is a composite good to be classified based on essential character under General Rule of Interpretation 3(b). Perhaps it is a composite machine classified on the basis of principal function under Section XVI, Note 3. More likely, it is a machine composed of multiple components each contributing to a clearly defined function. Either way, we end up with the refrigerator being classified as a refrigerator, which is an eo nomine classification.

That kind of intuitive classification methodology by which we ignore some features and components to get to the result that seems most logical often feels like an efficient use of prior experience. Unfortunately, it can also lead to errors. The General Rules of Interpretation require that we follow the process, in order. We start with GRI(1) and determine whether the headings and legal notes produce a result before we move on to 3(b). What I did above, reversed that order.

Sometimes, though, we strain to classify based on GRI(1) when the text in not really that clear. This is the point the Court of Appeals for the Federal Circuit is making in Home Depot USA, Inc. v. United States. My post on the Court of International Trade decision is here.

The merchandise in question is entry knobsets from the Defiant line of products. These are interior knobs, exterior doorknobs with key cylinder, latch mechanism, strike plate, and mounting hardware. Customs & Border Protection classified them as door locks of 8301.40.60. Home Depot argued that they were better classified as base metal fittings of 8302.41.60. The CIT held in favor of the United States and classified them as locks. According to the Court, the knobsets are classifiable under GRI 1 and that the knobs are merely part of the locking mechanism. The Court also held that the knobsets do not constitute composite goods requiring the applicable of GRI 3. [Side note: I don't know how these items are packaged but it seems like someone should have asked whether they might be retail sets, though the outcome would be the same.]

This is an image of the Defiant Hartford knobset from the Home Depot website. It think it is a good illustration of what it at issue. There was no discussion in the case of the deadbolts (to the right), so I assume they were entered or classified separately.

The Court of Appeals first determined the scope of goods covered by Heading 8301. That Heading states:

Padlocks and locks (key, combination or electrically operated), of base metal; clasps and frames with clasps, incorporating locks, of base metal;

The Court concluded that the locking mechanism in these knobsets is "operated" by a key. From there, the Court held "that the subject articles consist in part of 'key-operated lock.'" Note the "in part," that will be important later.

Turning to the Heading 8302, the Court asked whether the knobsets are "fittings and similar articles suitable for . . . doors." Everyone involved acknowledged that non-locking door knobs and simple interior locking knobs are similar to fittings for doors. They are classifiable in 8302. Home Depot's position is that keyed exterior doors are, for classification purposes, no different. Looking for guidance in the Explanatory Notes, the Court found that 8302 clearly covers knobs separate from locks but that the Notes are unclear with respect to knobs containing locks.

The Court of Appeals found that keyed entry knobsets are not excluded from 8302. That sets up a situation in which 8301 and 8302 both prima facie include the subject merchandise. To resolve that conflict, the Court turned to GRI 3.

GRI 3(a) states that when two heading describe an item, the heading providing the more specific description prevails. But, this only works when both headings refer to the item as a whole. Recall that the knobset is "in part" a lock. That means 3(a) does not settle the classification.

GRI 3(b) addresses composite goods, which are combinations of different components that, as a whole, cannot be classified by the application of 3(a). Composite goods are classified according to the single material or component that imparts the essential character. So are retail sets.

When 3(a) and 3(b) fail, such as when no single material provides the essential character, the item is classified in the last tariff heading in numerical order. So says GRI 3(c).

Here, the Court held 3(a) to be inapplicable because neither the description as fittings nor as locks describes the whole item. In particular, the Federal Circuit rejected the holding of the CIT that the knobs are part of the locking mechanism in that they facilitate turning the latch. Instead, the Court held that the classification requires the application of GRI 3(b) to determine which component, the knob fitting or the lock, provides the essential character.

That determination is a question of fact. Here, there are not sufficient undisputed facts to allow the Federal Circuit to classify this product. Consequently, the Court remanded the case back to the CIT for further proceedings. Essential character is determined on a number of factors including the relative value of parts, the bulk and quantity of parts, and the role the parts play in the use of the product. That will now have to be explored in more detailed to permit the CIT to make a decision on the classification of keyed entry knobsets.

Sports Shoes Re-Do?

For years, the Deckers Corporation has fought to have its rugged sandals classified as sports footwear, specifically training shoes. In two previous decisions, the Court of International Trade held that the open toes and heels present in the Teva-brand sandals precluded classification as athletic shoes of 6404.11. Rather, the Court classified them as footwear with open toes or open heels in 6404.19. This result was affirmed by the Court of Appeals for the Federal Circuit, which ultimately also denied a request for a rehearing by the entire court. One would think this is a settled matter.

But, that is not how customs law works. The Court of International Trade has once again classified sports sandals in 6404.19.

Under the 1927 ruling in a Supreme Court decision known as United States v. Stone & Downer, judicial decisions on the classification of a product do not preclude subsequent litigation by the same party on the same question. Thus, as is the case here, where the importer does not believe the Court of International Trade or the Court of Appeals for the Federal Circuit properly classified the merchandise, the importer can select a different denied protest and start over litigating the issue. Read more about that here.

This does not often happen. Typically, it is clear from the court's opinion that the decision turns on the interpretation of the tariff language and no new presentation of the facts is going to change that legal conclusion. But, occasionally, there is reason to believe that a different or better presentation of the case might produce a different result. That seems to be the case here.

On the surface, the parties are arguing about the extent to which the shoes cover the heels and toes. Really, what the plaintiffs want is to get back to the Court of Appeals to press a more general argument about the proper interpretation of the tariff schedule as applied to these shoes.

Here is an example of what is at issue. It is the Terra Fi style.

To get there, plaintiff has made a motion to compel the Government further explain its expert's statement that some training shoes have openings in the uppers. For its part, the Government has made a motion to compel a clear statement of facts supporting the position that the sandals are training shoes.

The Government also filed a motion for summary judgment seeking to dispose of the case in its entirety on the facts available. Plaintiff contends that a trial is necessary to establish disputed facts.

The Court would have none of that. Rather, it found that previous litigation on this issue established, as a matter of law, the proper construction of the relevant tariff provisions. That construction requires shoes to have enclosed uppers to qualify as athletic trainers.

Consequently, the Court of International Trade was able to look at the shoes and make a classification decision. The shoes in question have either open toe, open heels or both. As such, the CIT held them to be classified in 6404.19.35.

That, however, is not necessarily a loss for the plaintiffs. This case seems fully intended to be the launch pad for the argument on appeal. That argument will be that the Federal Circuit misconstrued the statute and that training shoes have some defining characteristic other than enclosed uppers and heels. Plaintiff will argue, for example, that the Court of International Trade should be permitted to look at how rugged the sole is and whether it seems designed for traction, whether there is ankle support, or the ability to drain and dry quickly . . . whatever might define the shoes as athletic.

The problem for Deckers is that when the CIT opted to decide the case as a matter of law, it precluded Deckers from adding to the factual record with, for example, expert testimony on the meaning of "athletic" and the actual use of these styles. That is a problem because the Federal Circuit will not consider new facts. Thus, the appeal may initially focus on whether the CIT was correct to decide the case on summary judgments. If it decides the case with no new factual record, then the value of Stone & Downer is significantly undercut and customs litigants will lose some of the safety net the option to re-litigate has provided.

There is certainly more to follow on this case.

Hearsay Strikes Back

Aero Rubber Co. v. United States is a short decision on a motion to strike evidence from the record. The ultimate question is the classification of printed silicone rubber bands that are larger than the wristbands you often see on teenagers and Stephen Colbert.

These are larger and appear to be used to bind or secure various items while providing space for branding or advertising. I don't know that for certain, but this image from the Aero Rubber website gives an idea of sizes and at least one use.

The classification of these goods depends on whether the printing is "not merely incidental to the primary use of the goods." If the printing is incidental, the goods are classified as articles of plastic in Chapter 39. If the printing is not merely incidental, the goods are classified as printed products of Chapter 49. 

As evidence of the primary use of the goods and, presumably, how the printing impacts that the use of the bands, plaintiff sent questionnaires to customers and attached those questionnaires to its brief. Citing CIT Rule 12(f), the Department of Justice moved to strike the questionnaires.

The Court initially noted that 12(f) is not really applicable to this dispute as it relates to pleadings and not to briefs in support of motions. On top of that, striking matter submitted by a party in support of its claims is an extraordinary remedy that judges should only employ where there has been a flagrant disregard of the rules. That is not the case here.

On the other hand, evidence submitted in support of or against a motion for summary judgment must be in a form that would be admissible in court. CIT Rule 56(c)(2). According to the Government, the questionnaires are inadmissible both because they are irrelevant and because they are hearsay.

The hearsay argument is easier to deal with, so let's start there. Hearsay is an out of court statement used as evidence to prove the truth of that matter. It is generally inadmissible under the Federal Rules of Evidence. We have discussed hearsay recently, so I will not rehash it hear. Go read this if you are unfamiliar with the concept. 

In the context of a motion for summary judgment, the Court is permitted to consider a hearsay statement if the statement could be reduced to admissible evidence at trial or reduced to admissible form. Presumably, Aero could call as witnesses the people who completed the questionnaire. The Court left it at that and moved on to relevance.

Aero claims that the questionnaire responses are "obviously relevant to the plaintiff's continuing assertion that 'printing is indeed important to all of Aero's customers.'" The bands are, after all, fundamentally advertising. The question is whether anything a customer has to say about its particular use of a particular band is relevant to the resolution of this case. 

Evidence is relevant where it has any tendency to make a fact more or less probable than it would be without the evidence and that fact has consequences to the outcome of the case. 

To judge the relevance of the questionnaires, the Court pointed to Section VII, Note 2. The Note reads:

Except for the goods of heading 3918 or 3919, plastics, rubber and articles thereof, printed with motifs, characters or pictorial representations, which are not merely incidental to the primary use of the goods, fall in chapter 49.

According to the Court, this indicates that "the inquiry regarding whether printing is incidental turns on an assessment of the specific merchandise in question, not the feedback of customers who purchased distinct merchandise from the manufacturer. Accordingly, questionnaires providing customer feedback on entirely separate silicone bands do not make any material facts 'more or less probable than it would be without the evidence.'" Thus, while the Court did not strike the questionnaires, it held that it would not consider them when deciding the merits.

I have questions and thoughts.

First, how would this have come out if the questionnaires had been directed specifically to the customers who purchased the very bands at issue? Is the actual purchaser's use of the product and interest in the writing more relevant than that of purchasers of similar bands? Intuitively, I think the answer is yes. That would be evidence of the impact of the printing that has a tendency to make the importance of the printing more or less probable. It may not be much evidence and may not be enough to sway the outcome, but it seems to me to get past the relevancy bar.

Next, if that is true, why is evidence from users of apparently similar but not identical bands irrelevant? Let's say the merchandise covered by the customs entries before the Court was printed with the words "Customs Law Blog." Let's further assume I purchased them to use as advertising swag at trade shows and wrap them around copies of my book. [See what I did there?] Fine, my goods are technically at issue. I guess I could testify as to why I wanted the bands to be printed.

Assume Jill down the street runs Java Jill's coffee roaster and she puts a band around each gift box she ships. Each band is printed with the words "Java Jill" and a web address. Is her use and the printing any less relevant? Yes, it is less relevant. But, is it irrelevant?

Use is usually determined not on the basis of the use of the specific product but on the use of the class or kind of the product. This is not a use provision, but use is relevant to determining whether the printing is more than incidental. If 10 people say the printing on large rubber bands is not incidental (or, for that matter that it is incidental), that strikes me as relevant to the question before the Court.

My other question has to do with the nature of the Court of International Trade and classification cases. The reason for the hearsay rule is to prevent unreliable evidence from coming before the trier of fact. The Federal Rules of Evidence probably assume that will usually be a jury of lay people. That is not the case here. It seems to me that the relevance bar should be very low where there is no jury and the fact finder is a judge with specialized expertise in classifying merchandise. It seems to me that there is little prejudice to letting this in with the judicial caveat "for what, if anything, it is worth."

Of course, this is entirely theoretical. I have no idea what evidence there is before the Court on the merits. Samples of the merchandise will be very powerful witnesses. So will Aero's advertising, which indicates what it expects people are doing with these bands. In other words, the impact on the outcome of the case may be minimal. 

For Scope, An Assembly is Not a Set

MacLean Power LLC v. United States sets right a very troubling scope decision from the Department of Commerce concerning helical spring lock washers ("HSLW") from China. The scope of that order is here.

MacLean makes assembled pole line hardware used for building electrical transmission and distribution substations. Pole line hardware consists of various configurations of products. You can get a feel for the range of these products at the company's website. What is important to know is that MacLean imported complete assemblies. Some of these assembled items include HSLW from China.

For some reason, MacLean felt it was wise to ask the Department of Commerce for a scope ruling to confirm that the HSLW integrated into these assemblies were outside the scope of the corresponding order. It is possible an inquiry from Customs and Border Protection prompted the ruling request. It is also possible that MacLean was just being cautious. Either way, the result was not good.

From https://www.wclco.com/

Commerce looked at the assemblies as combinations of in-scope and out-of-scope merchandise. Earlier cases on "mixed media products" focused on sets containing, for example, in-scope nails and out-of-scope tools. In those cases, principally Mid Continent Nail Corp. and Walgreen Co., Commerce first looked at whether the merchandise in question is within the literal terms of the order. Here, the order covers HSLW and HSLW are parts of the imported product. So, arguably, the are within the terms of the order. Next, Commerce looked at whether the goods in their imported condition were excluded by the terms of the order. Here, Commerce found no basis to exclude the HSLW. That makes them in-scope, right?

This did not fly.

Looking to customs law, the Court started with the proposition that the merchandise in question is whatever crossed the border, "in the condition in which it is imported." From that perspective, the Court noted that "Commerce provides no support for its failure to treat the pole line hardware as unique manufactured products." Furthermore, while nothing in the order excludes assembled products, the Court found that the order "makes no mention of the importation of HSLWs as assembled components of larger products."

Really, the failure of the government's argument goes way beyond the text of the order. This is a textbook example of reasoning that leads to absurd results. It is overcome via reductio ad absurdum. Do you know where you can find helical spring lock washers? In all manner of mechanical devices. Anywhere there is a reason to ensure tension between a bolt and a surface, you can find a lock washer. As MacLean argued in its brief, HSLW are in refrigerators, automobiles and airplanes. Commerce's analysis would make all of these assembled HSLW in-scope despite not being the article of commerce entering the U.S.

[Side note: here is an interesting Reddit discussion on whether HSLW actually do anything that can't be accomplished by a regular washer. Spoiler alert . . . NASA seems to think the answer is no.]

In the end, the Court found that "Commerce failed to support by substantial evidence the determination that the pole line hardware were not unique products." The Court found that Commerce erred when it treated washers that are parts of assemblies as if they were loose items in a tool kit. They are not. Instead, the HSLW "are assembled into clamps and studs, interact with the other parts of the clamps and studs, and are not sold for use independent of the other component pieces."

The Court ordered Commerce to reconsider and issue a scope determination finding the HSLW imported as parts of pole line hardware of excluded from the scope of the order.

Two Defaults and a Surety Payment

Lately, more customs penalty cases (at least among those making it to the Court of International Trade) seem to be ending in defaults. Such is the case with United States v. Selecta Corporation, LLC and also United States v. Six Star Wholesale, Inc.

In Selecta, the United States sought a $51,102 penalty (plus interest). The defendant failed to respond to the complaint. Under the Court's Rule 55, a plaintiff can expedite a default judgment by showing through an affidavit (or otherwise) that the defendant failed to defend itself. When such a showing is made, the Clerk of the Court must enter the default. After the default is entered, the remaining party (typically the plaintiff) may apply to the Court for the entry of a default judgment. That's an interesting piece of rules trivia.

Here, plaintiff did not do that and the Court (i.e., the judge) ordered the default. To secure a default judgment, against which the United States can try to collect, the Court is to consider three factors:

• Will denial of the motion prejudice the plaintiff?
• Does defendant have a meritorious defense?
• Did defendant's culpable conduct contribute to the default?

The Selecta penalty stems from two prior disclosures Selecta made in 2009 relating to incorrect classifications and values on entries of medical scrubs and lab coats. Selecta calculated and tendered a loss of revenue of nearly $835 thousand. The $51,102 at issue in this case represents the interest penalty assessed by Customs after Selecta completed the otherwise successful disclosure.

This is an important reminder for importers contemplating a prior disclosure. It is incorrect to say that a disclosure prevents a penalty. Technically, there can be a penalty of an amount up to the interest accrued on the unpaid duties, taxes, and fees.

Given the facts presented and the failure of Selecta to respond, the Court of International Trade ordered Selecta to pay the interest plus post-judgment interest (i.e., interest on the interest) and costs.  All in all, assuming Selecta still exists, it would have been cheaper to pay because the interest is continuing to add up. Selecta had already made disclosures, thereby admitting the violations. Unless there was an intervening bankruptcy or dissolution of the business, I'm not sure why this ended up as a default rather than an out of court settlement.

Six Star concerns an effort by the United States to collect unpaid duties of $243 thousand and a penalty of $496 thousand. Here, the underlying violations relate to improperly classifying merchandise and failing to deposit antidumping duties on wire hangers and polyethylene retail carrier bags. After considering the three factors above, the court moved on to determining the liability.

The Government sought the maximum penalty of two-times the lawful duties owed as the penalty. Regardless of the amount sought, even in a default, the Court must determine the appropriate penalty in its discretion. When doing so, the Court does not presume that the maximum is appropriate starting point for consideration. Rather, the Court is to start by looking at all the available facts.

Here, the Court provided some useful guidance for importers. It noted that importers must act with "reasonable care" in providing entry-related information to Customs and Border Protection. Reasonable care requires that the importer (or its agent) "review information regarding the nature and classification of the imported merchandise and information on the underlying transaction, including [a] review of available documentation, to ensure that the merchandise is properly classified and assessed with appropriate duties--including antidumping duties--upon entry." Unfortunately for Six Star, the Court concluded that "even a modicum of effort on the part of Six Star would have uncovered" the false statements and failure to make required deposits. Making matters worse, the Court's review of the administrative record showed no evidence of any steps by Six Star to ascertain the correct classification or applicable duties and no evidence of the kind of extraordinary cooperation that would result in mitigation of the penalty amount.

One further point the Court addressed is the impact of the surety's payment of part of the duties owed. The Court noted that the government collected $100 thousand from the importer's surety. That does not reduced the loss of revenue from the importer for purposes of calculating the penalty. It only goes to the duty collection. The Court further noted that collecting from the surety required time and effort to be expended by the government. Thus, as a matter of discretion, the Court imposed a civil penalty based on two times the remaining unpaid duties.

How the Court calculated the final penalty is a little confusing. If calculated on the government's asserted loss of revenue, the maximum penalty would be $486 thousand (2 x $243 loss of revenue). Given that the payment by the surety had made the government partially whole, the Court imposed a lesser penalty of $386,456. This amount was two time the still unpaid duties plus the duties paid by the surety or $143,228.02 x 2 (unpaid duty) + $100,000 (duties paid by surety). This means that the prior payment by the surety was not doubled in the resulting penalty, it was added just once, which recognizes that the government has had that money and benefits the defendant.