Privilege & Waiver & Complaints: Oh, My!
To understand this, you need to know about the first chapter. Optrex is an importer of liquid crystal display devices. It ran into a classification problem and received a notice of penalty from Customs. So far, this is fairly routine. What makes it interesting is that Optrex claimed that there should be no penalty because it had relied on advice of counsel, which is evidence of reasonable care. Hearing that, Customs said, "prove it" and asked to see the advice. Optrex declined citing attorney-client privilege.
Obviously that put Customs in a bind. It could not make any kind of reasonable care decision simply on the basis of Optrex's assertion that it sought the advice of counsel. At the same time, Optrex has a right to assert the privilege. It also has a right to waive the privilege; either on expressly or through its actions. In Court last year, Judge Barzilay held (slip op. 04-79) that by asserting the advice from counsel as a defense, Optrex made the substance of the advise an issue in the litigation. Like it or not, Optrex waived the privilege. So, the advice came into Court and Customs got a look at it.
There was another discovery side show involving the proposed deposition of a CBP lawyer. The question there was whether that lawyer was giving legal advice to Customs, which would be privileged, or whether he was acting as an investigator. In that case, his communications with others in CBP or ICE would not be privileged. See, this privilege stuff is important and can be tricky.
Now that everyone has read the advice of counsel it seems that what Optrex did was get advice and not follow it. Insert voice of Homer here: D'Oh.
Consequently, Customs asked the Court of International Trade for permission to amend its complaint to assert a higher level of culpability: gross negligence and fraud rather than simple negligence. The effect of that would be to at least double the potential penalty and, in the case of fraud, extend the statute of limitations.
Normally, amending a complaint is fairly routine. But, the Court has discretion and should look at a number of factors including the prejudice to the defendant--in this case, Optrex. In her most recent decision (slip op. 05-160), Judge Barzilay denied the motion to amend the complaint.
She based her decision principally on the fact that Customs is required to tell the importer the level of culpability in the notice of penalty. This allows the importer to respond properly at the administrative stage. Without this opportunity, the importer might not have the ability to resolve the matter administratively before going to Court. A more ominous interpretation would permit Customs to always claim simple negligence in the penalty notice and up the ante whenever the importer refuses to pay and decides to go to Court.
The CIT's decision is in line with the normal rule that both sides to an administrative process must go through the entire process before jumping into Court. There are some cases in which the Courts have waived this requirement, but Judge Barzilay held that this is not one because the administrative process is set by statute.
The last point in the case involves the statute of limitations. This is the rule that if Customs wants to bring a penalty case claiming negligence or gross negligence, it must do so within five years from the date of entry. Customs argued that because the evidence was concealed, it could not have made a gross negligence claim and it wants to do so now. The Court disagreed and said that the five-year limit is firm. But, she noted that the period for fraud cases does not begin to run until the fraud is discovered. So, the government retains the opportunity to make a fraud case provided it runs through the proper administrative process.
All of which is quite interesting. At least to me.