Revenge of the Hobgoblin

UPDATE: A kind reader let me know I misattributed the quote. It is not from Thoreau as originally reported. Thanks for the feedback. 


There is a saying, attributed to Ralph Waldo Emerson that “Foolish consistency is the hobgoblin of little minds.” The point of that seems to be that doing something the same way solely for the reason of maintaining consistency is a poor strategy.

For trade compliance that is often true. The fact that a manager who retired from accounting in 1995 once said that none of your company’s tooling expenses are dutiable is not a solid reason for failing to report dutiable assists in 2023. Maybe in 1995 all the tooling was in the U.S., and it is now all over the globe. Consistency for the sake of consistency is not a good enough reason to maintain a compliance process. There should be some underlying reason to believe the process is legally correct.

On the other hand, inexplicable inconsistency can be evidence of fraud. An ongoing penalty case in the Court of International Trade is a good example. The case is United States v. Crown Cork & Seal USA, Inc.

The case contains a good overview of the penalty statute (19 USC 1592) and the levels of culpability it defines. Relevant here is a complaint asserting that “Crown” engaged in fraud or gross negligence when it entered some metal can lids from Europe as other articles of iron or steel in HTSUS item 7326.90.10 (free). The government asserts that the correct classification is in 8309.90.00 (2.6%) as stoppers, caps, and lids of metal. As a result of this misclassification, Crown allegedly underpaid $1.3 million in duties.

Photo by Pamela Callaway on Unsplash


The issue in this preliminary ruling is whether the complaint contains sufficient detail to plausibly show that the defendant committed fraud or gross negligence. As a general matter, a complaint must be sufficiently detailed to allow a reasonable inference that the defendant is liable for the misconduct alleged. It is not enough to merely state facts that, if true, are consistent with finding the defendant liable. The possibility of liability is not enough; the complaint must show that liability is plausible. One way to move from mere possibility to plausibility is to allege facts excluding the possibility of the defendant’s alternative theory. This all comes from two Supreme Court cases called Iqbal and Twombly.

The parties in this case agree that the classification Crown used at entry was incorrect. Crown contends that the complaint does not plead a plausible set of facts indicating either fraud or gross negligence. As a result, the defendant moved the Court to dismiss those two counts of the amended complaint. This is where the hobgoblin of consistency comes into play.

It turns out that Crown had also been importing metal can lids from Canada. These lids were duty free under NAFTA. The unfortunate fact for Crown is that it inconsistently classified its metal can lids. It classified the European lids in the duty-free provision in Heading 7326 while classifying similar lids from Canada in Heading 8309, which would be dutiable but for the NAFTA. Moreover, the complaint asserts that Crown did not rely on its customs broker (or presumably anyone else) for classification advice, making it impossible that it was following outside advice.

This inconsistent classification was beneficial to the importer, visible to the importer, and enough to elevate the complaint into the realm of plausibility. Thus, the Court denied the motion to dismiss for both negligence and gross negligence.

Crown also argued that the amended complaint fails to satisfy the special pleading rule applicable to fraud and mistakes. Under U.S. CIT Rule 9(b), which is similar to the Federal Rule of Civil Procedure, the facts constituting fraud or mistake must be stated with particularity showing the circumstances of the fraud or mistake. The defendant pointed out that the complaint does not identify any of its employees or employees of the broker who were responsible for the alleged fraud. Instead, according to the Crown, the complaint was “speculative and unsubstantiated.”

The Court did not agree. According to the Court, the Rule requires that the complaint state the “who, what, where, when and how” of the fraud. The amended complaint identified the two Crown Cork & Seal companies that were the importers. The amended complaint also identified 543 entries of metal lids with incorrect classifications. The Court held that was sufficient for purposes of Rule 9(b) and refused to dismiss the fraud count.

The defendant made the same Rule 9(b) argument about the gross negligence count. The Court addressed this quickly by noting that the rule applies only to “fraud or mistake” and not to “gross negligence.”  The Court cited a case from the Southern District of New York for this. It is true that “gross negligence” is not stated in the rule.

Personally, I wonder about the scope of “mistake” as used in the Rule and whether it might include a negligent or grossly negligent misclassification. I do not recall this having come up. In customs penalty cases, a “mistake” is not enough to constitute a violation of section 1592. Negligence requires the lack of the degree of care expected of a reasonably prudent importer. But if a mistake is not a violation, Rule 9 seems to require more specific pleading for a case involving no violation and less specific pleading for a negligent violation. That seems anomalous.

A side point in this case is that it took a long time to get to this point. Customs appears to have been aware of the alleged violation for a decade and to have investigated for six years. Crown, likely wanting to cooperate in the process, provided a waiver of the statute of limitations. Very often, this is the correct thing to do. It allows both sides to fully investigate the matter and permits settlement discussions. Sometimes, it just delays the inevitable. Whether and when to waive the SOL is a difficult question that should not be taken lightly. Be sure to consult with counsel on that.

The key lesson from this is that Customs and Border Protection has import data and knows how to mine it for enforcement. Importers should do the same internally for compliance. If two parts have similar descriptions, functions, and composition, but are assigned different tariff classifications, that should be investigated. The different classifications should either be explained (and documented) or resolved. That may prompt a prior disclosure to CBP or, if there is no violation, just a correction for unliquidated and future entries. Again, that is a conversation to have with counsel.

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