Recently, On Discovery

This has nothing to do with Michael Burnham or tardigrades.

Discovery disputes are pretty uncommon in the Court of International Trade, and for good reason. Most CIT cases, these days, are “on the record” reviews of antidumping and countervailing duty decisions from the Department of Commerce or International Trade Commission. Those cases do not involve discovery about which to have a dispute. Most customs cases are tariff classification cases in which there is not often a real dispute about the nature of the imported product. That means the cases turn on questions of law, not fact, thereby limiting the genuine (if not perceived) need for discovery.

Penalty cases area a whole different world. In penalty cases, the Department of Justice is often trying to figure out what happened and, more important, what it can prove. That means penalty cases often involve a lot of discovery requests from the government directed at the defendant and its personnel. For its part, the defendant often wants to know what the government THINKS happened and what the government THINKS it can prove. As a result, the defendant often seeks discovery of, among other things, Customs and Border Protection’s or Homeland Security Investigation’s Report of Investigation, which is the extremely tedious document that details the government’s investigation into the alleged violation. While the defendant is at it, the defendant will usually request any other relevant documents it thinks might exist and illuminate what has been happening.

The CIT Rules permit the use of the same discovery tools as are available in any U.S. District Court. Among those are depositions (Rule 30), interrogatories (Rule 33), and requests to admit (Rule 36). A party that believes a request has exceeded the permitted scope of discovery may move for a Protective Order to halt or limit the allege discovery abuse (Rule 26(c)).

Two recent decisions from the Court of International Trade have waded into the scope of permitted discovery. Both decisions are in the case United States v. Greenlight Organics, Inc. (slip op. 17-167 and 17-168).

The first decision involves Greenlight’s motion to compel the United States to produced 145 documents over which the government has asserted privilege. As background, the United States produced 2,861 documents, withholding 145. For those 145, as required by Rule 26(b)(5)(A), it provided a privilege log identifying the document along with its sender, recipient, date, subject, and the privilege claimed.

In this case, the government asserted the “deliberative process” and “law enforcement” privileges. These privileges protect the deliberations of agency officials from disclosure and encourage frank discussions of legal and policy matters related to the law enforcement decision-making process. Once the government successfully asserts the privileges, the burden shifts to the requesting party to show a “compelling need” to overcome the privilege.

To make a successful claim of these executive privileges, the government must do more than merely assert it. Following a decision of the U.S. Court of Appeals for the DC Circuit, Landry v. F.D.I.C., the Court of International Trade held that the government must:

1.       Make a formal claim of privilege via the head of the agency or his or her delegate;

2.       Submit an affidavit showing “actual personal consideration by that official;” AND

3.       Provide a detailed explanation of what the document is and why it falls within the scope of the privilege.

In this case, the government failed to submit the required affidavit. Having failed to do so, the United States has failed to successfully assert the privilege. Consequently, the Court ordered the United States to do so before ruling on the merits of the privilege claim.

Given the lack of a fully asserted claim for privilege, the Court found it premature to rule on Greenlight’s request for in camera review of the documents. In camera review is where the judge requires the party to produce documents for her private review so that the judge can make a fully informed decision on the merits of the claim of privilege and the other party’s need for production. The Court also declined to act on Greenlight’s motion to compel production.

The second Greenlight decision involves two competing motions. In the first, the United States seeks to compel responses to several discovery requests. The second involves Greenlight’s motion for a protective order preventing much of this inquiry by the government.

Here, I am going to cut to the chase so that I can discuss the underlying issue, which is, to my mind more important for the average reader of this blog. The government’s requests go to the personal involvement of the two corporate principals in the classification and valuation of the imported merchandise. In other words, the requests appear directed at determining whether those individuals were responsible for the alleged fraud or negligence. The requests also go to the personal finances of those individuals.

This should send a shiver of concern up the spine of corporate officers and compliance personnel. Greenlight Organics is the defendant in this case, not the individual officers. However, as a reminder, the dustup surrounding the 2014 Federal Circuit decision in Trek Leather means that “any person” can be liable for a violation of Section 1592, the customs penalty law. Thus, the individuals, acting as agents for the actual importer Greenlight, might be personally liable for their actions related to the alleged violation.

Because of this legal reality, the government asserted that its questions about the two individuals were related to the case against Greenlight and also to the possibility of claims against the individuals. The first part makes sense. If an officer or employee of Greenlight made a material false statement or omission, then Greenlight is liable for the violation. If that person made the false statement knowing it to be false, then Greenlight would potentially be liable for fraud—the highest level of culpability under the statue. Consequently, the Court allowed the inquiry into the personal involvement in the suspect decisions.

But what about claims against the individuals and the requests for personal financial information? Greenlight objected to these questions because the two individuals are not defendants in the case. The complaint, which sets out the plaintiff’s claims, does not allege individual wrongdoing or individual liability. According to Greenlight, that makes this line of inquiry outside the scope of the complaint and, therefore, outside the scope of appropriate discovery.

The Court disagreed. Citing Supreme Court precedent, the Court of International Trade noted discovery rules are liberally interpreted to permit discovery on any matter that may bear on an issue that is or may be an issue in the case. Discovery, in other words, is not limited to the complaint. According to the government, that is the point. It explicitly stated that it wanted the discovery “to assist it with determining whether to amend its complaint to include charges of individual liability against Greenlight’s officers.” According to the Court, this falls within the liberal nature of discovery and is, therefore, appropriate.

Because of all this, Greenlight’s motion for a protective order preventing much of this effort was denied.

So what is the take away from this? First, it is a reminder that the government can and will pursue charges against individuals for corporate imports. That underscores the importance of compliance generally and, for compliance personnel, the importance of documenting efforts to correct non-compliance by, when necessary elevating the issue to upper management. Second, these decisions are an important reminder that in a de novo penalty case, the original complaint does not fix the scope of the claims that can be brought by the United States.

But, is that the right result? A couple things make me wonder. First, Rule 26 sets out the scope of discovery. As presently constructed, the Rule allows discovery:

regarding any nonprivileged matter that is relevant to any party’s claim or defense – including the existence, description, nature, custody, condition, and location of any documents or other tangible things and the identity and location of persons who know of any discoverable matter. For good cause, the court may order discovery of any matter relevant to the subject matter involved in the action. Relevant information need not be admissible at the trial if the discovery appears reasonably calculated to lead to the discovery of admissible evidence.

I have always read the Rule’s focus on claims and defenses as limiting discovery to joined issues. That means claims and defenses as reflected in the complaint and the answer. That is, of course, inconsistent with the result here, so it is not legal advice. I thought discovery was only permitted on  matters related to the subject matter of the action but not related to a claim or defense “for good cause.” Again, that appears to be an incorrect reading.

It is worth noting that the U.S. Federal Rules of Civil Procedure used in the districts courts modified the corresponding FRCP 26 to remove the good cause test and also removed the condition that “information need not be admissible at the trial if the discovery appears reasonably calculated to lead to the discovery of admissible evidence.” See FRCP 26. The CIT rules will probably make a similar change at some point. What, if any, impact that has on the future application of CIT Rule 26 remains to be seen. It appears to indicate that the focus remains on claims and defenses while laying on top of that a condition that the request be proportional to the stakes of the case. 

A second issue has to do with the nature of the action. A penalty case in the Court of International Trade is not an empty hook on which the United States can hang any theory of liability against the importer and the individuals involved. Rather, it is a collection case in which the United States seeks to recover the penalty Customs already assessed in the administrative process. Absent a perfected administrative claim against an individual or entity, there is no claim to assert in Court. The only de novo aspects are that the Court decides whether the United States has proven in court the facts necessary to substantiate the already asserted claim. Based on the facts proven in court, the CIT can order the defendant to pay the full claim, a lesser amount, or nothing at all. This is the rule of exhaustion of administrative remedies in a penalty case as explained in United States v.Nitek Electronics, Inc., and UnitedStates v. Optrex America, Inc.

Discovery is a preliminary stage of litigation. A lot can and still might happen in this case as it proceeds. If new claims are brought, the Court may be asked to address the question of whether the claims were properly perfected at the agency level. There may also be questions of whether the statute of limitation has expired on any new claims. This could come in the form of a motion to dismiss or motion for summary judgment.

For now, we know that the discovery rules are to be liberally construed and that Greenlight will likely have to turn over the requested information. We also have a stark reminder of the importance of legal compliance both for corporate entities and for individuals. The rule of Trek Leather is that Customs need not pierce the corporate veil to assert liability against individuals who were personally involved in making material false statements or omissions. Continue to document your compliance efforts and push back wherever you perceive potential non-compliance.

There is certainly more to follow in this case.