In my last post, we covered the mechanical aspects of evasion investigations conducted by U.S. Customs and Border Protection. These are cases CBP may initiate on its own, but which seem to more usually be initiated following an allegation by a domestic producer that an importer has evaded the payment of antidumping duties, countervailing duties, or both. The most common means of evasion is transshipping a product subject to an AD or CV duty order through a country not subject to the order and misidentifying the country of origin.
In this post, I want to run through some of the concerns that have been expressed by importers (and their lawyers) dealing with EAPA cases. You'll see that these cases require a whole new approach to customs enforcement. Because judicial review in EAPA is limited to facts in the agency record with a very deferential standard of review, these look a lot more like antidumping and countervailing duty cases minus the safeguard of complete information disclosure to the parties. As you'll see below, a lot of this feels unjust to customs lawyers who are used to a being able to deploy standard litigation tools including discovery and witness testimony to prove their case.
As an example, you should take a look at Leco Supply, Inc. v. United States, but similar to the last post, I am not going to review that decision in detail. It is just a good example of the issues importers are raising. The underlying issue in Leco was as challenge to CBP's finding that Leco has evaded antidumping duties on wire hangers from Vietnam by declaring that the hangers originated in Laos. The evidence in the case indicates, among other things that the supplier provided potentially counterfeit certificates of origin and payment records.
First, and separate from the specific legal issues, an often-unstated frustration is the very practical concern that importers can only do so much. I wrote about this for Law360. For decades, importers have generally understood their obligation to be to exercise reasonable care in reporting accurate and complete information to Customs. That includes the country of origin of merchandise and whether the imports are subject to an antidumping or countervailing duty order. Customs has, for years, talked about taking a risk-based approach to enforcement. Customs, for example, "uses risk-based analysis and intelligence to pre-screen, assess and examine 100 percent of suspicious containers." The office formerly known as Regulatory Audit "uses a risk-based approach to assess compliance with trade laws and regulations . . . ."
For importers, compliance risk management generally starts with gathering information from a potential supplier. That information will include the physical nature of the merchandise in sufficient detail to allow the importer to determine the tariff classification. Sometimes, that information comes from the importer, who may have designed the item or provided a detailed specification to the seller. In cases where the importer is buying an existing product, it can examine the merchandise and make its own determination as to its physical characteristics. Or the buyer/importer can specify the exact nature of the product in the purchase order and other documents, making the exporter contractually responsible for supplying merchandise that matches the order.
Because customs value is usually (but not always) based on the price to the buyer in the United States, value is also something importers can usually report with a degree of confidence. Value is, however, sometimes a problem for importers who are not familiar with the complex valuation rules. Value is also complicated by factors such as related party transactions, imports that are not subject to a sale, and the application of first sale for value.
Origin is a much tougher risk to manage. First, there are multiple and inconsistent rules at play. Second, the standard substantial transformation test based on a change in name, character, or use has become overly burdened with additional factors including the so-called "essence test" and whether the imported parts have a pre-determined end use. While there is some indication that the Courts may add clarity, for now, clarity is not abundant.
The underlying assumption in most commercial transactions is that the seller is not lying to the buyer. Buyers assume that sellers who do not deliver merchandise matching the order understand they are not likely to receive subsequent orders. That also applies to merchandise quality, on time delivery, price, and other elements of the deal.
On top of the business and economic considerations, importers who are smart and worried about compliance take additional steps to confirm that they are getting the merchandise ordered and that the purchase does not create other risks. In this context, the "additional risks" might include, for example, the presence of forced labor in the supply chain, a determination that the merchandise is subject to Section 301 duties, or that it is subject to AD/CV duties due to its actual country of origin. Methods reasonable importers employ to limit those risks include:
- Contract terms (up to and including indemnification for losses)
- Certificates of origin
- Certificates of conformity, test reports, mill certificates, and other quality documents
- Supplier codes of conduct
- Third party audits
- Site visits to observe manufacturing and confirm that the equipment, materials, and personnel exist in sufficient quantity to make the goods
All of the documentation depends on the trustworthiness of the supplier. Third party audits are of varying quality and not always possible given local laws. Site visits are great but are not always practical and even they can be manipulated by an unscrupulous supplier.
This relates to evasion cases because it is likely that the supplier not the importer is doing the "evasion." See, for example, the allegedly counterfeit documents in the Leco case. The importer has probably sought out a new supplier or worked with the old supplier to move production with the intention of managing duty liability and reducing compliance risks by avoiding rather than importing goods from the subject country. The importer has no interest in evading an order that it honestly believes it is legally avoiding. Duty avoidance, as opposed to evasion, is legal and prudent.
What is happening in these cases that is causing so much heartburn for importers?
First, there is a perceived lack of transparency. An EAPA determination is subject to judicial review on the record CBP compiled during the investigation. That record is likely to contain confidential business information. Unlike the antidumping law, EAPA and the implementing regulations do not require that Customs use a protective order to allow the importer or its lawyers to review confidential information upon which CBP may have based the decision.
In contrast, antidumping and countervailing duty investigations involve a lot of highly proprietary business information that is disclosed to interested parties subject to a detailed protective order. This allows the parties to understand the basis for the determination and, as necessary, rebut that information. In the EAPA context, without a protective order, Customs provides a public summary of the confidential information. Customs also provides redacted (or "bracketed") versions of documents in the record.
Lawyers have had a bad reaction to this process. We generally believe that those subject to an enforcement action that can result in a significant liability should have access to all the relevant information on which the government has relied in making that decision. That access to information may allow parties to refute the claim and provides confidence that the process was fair.
The problem is that a visceral and negative reaction based on principle and practice in a related but distinct process is not a legal basis on which to challenge a decision. The argument has been that the lack of access to the full record violates the importer's due process rights under the
fifth amendment to the Constitution. Also, EAPA cases are not penalty cases (at least initially). This is about duty collection, so the interests are not the same.
Due process comes in two forms. Procedural due process requires that the importer be given notice of the claim against it and a meaningful opportunity to be heard. Substantive due process relates to circumstances in which the plaintiff has been deprived of "life, liberty, or property without due process." Engaging in international trade is not a right that is a protected liberty or property interest. On the procedural claim, the Courts have so far held that as long as the public summaries are sufficiently detailed to permit the importer to understand the substance of the information, the importer has an adequate opportunity to respond and, therefore, to be heard. Thus, the issue turns on the risk that the undisclosed information would have changed the outcome of the investigation versus the government's interest in performing its function with reasonable burdens. That is a fairly high bar for those challenging the public summary process. So far, that has not been successful.
The next issue is that EAPA is being interpreted as a strict liability statute. We covered this in the
previous post. Let's just reiterate that while "evasion" sounds like a purposeful or at least a negligent act, it is not according to the law as interpreted to date. All that matters is that merchandise subject to an AD or CV duty order was imported without the deposit of the corresponding duties. As it stands, even where the importer exercises "reasonable care," the EAPA process can result in a significant bill for unexpected duties possibly because the
supplier misunderstood the law or lied about the facts.
"At least," you might be thinking, "this only relates to the currently unliquidated entries, not the past five years as in a penalty case." I have bad news for you: nothing prevents Customs from commencing a penalty case on the basis of information it gathers during the EAPA process. While the importer might have a meritorious defense of reasonable care, that case is going to be hard to mount after CBP has already determined that the importer is evading the AD/CV duty order.
Next is the standard of review. The Court will uphold an EAPA determination that is not arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law. This standard is deferential to Customs. The Court need not actually agree with the outcome as long as CBP has provided a reasonable explanation that comports with the evidence in the record that both supports and detracts from the conclusion.
"Arbitrary and capricious" is a big departure for customs lawyers who are used to penalty cases and denied protest cases being subject to de novo review. That standard of review means that the Court makes an independent decision based on the admissible evidence presented to it in open court (or in the paper equivalent). I recognize the irony of arguing for a protective order process to emulate the information disclosure in a trade case while also arguing that the standard of review should be de novo as it is in a customs case. That is cake I would both like to have and to eat.
Related to this, as the Court recently stated in
Sky View Cabinets, in EAPA cases is there are no rules that prevent Customs from considering hearsay evidence as part of its administrative determination. As a reminder, hearsay is an out of court statement introduced to prove a fact. In a traffic accident case, an example of hearsay would be "John told me that the driver was texting when the accident happened." Whether the driver was texting is an important fact and John's out of court statement is hearsay. Unless one of the many exceptions applies, John needs to show up in Court and make that statement under oath and subject to cross examination.
In a penalty or denied protest case, hearsay rules apply and keep out that kind of unreliable evidence. That is the context in which customs law usually happens. But, in an EAPA case, Customs can consider hearsay evidence up to and including statements and information from domestic producers that might be based on third party reports commissioned by the domestic party.
From the perspective of the importer, there is a lot to complain about in the EAPA process. The lack of complete disclosure and the deferential standard of review stack the deck toward the domestic industry. While that may seem to be a reasonable measure to enforce AD/CV duty orders, the result may be serious unexpected liability for importers who genuinely believed they engaged in reasonable diligence to ensure that that they were complying with the law. When Customs concludes that the importer is wrong about the origin or nature of the goods and that evasion has occurred, it does not matter to the United States that the supplier may have mislead the importer either as the result of a genuine misunderstanding of the law or out of simple dishonesty. Under this law, the importer has no defense based on its efforts at compliance.
It is a very hard time to be an importer. Supply chain visibility is the new currency of trade compliance. Importers need to know what goes into their products, where it comes from, and who processed it. That is true for forced labor compliance, the application of Section 301 duties, antidumping and countervailing duties, and other trade remedy measures. Not all importers are honest, but when conscientious importers are led astray by bad information or diligence that in hindsight was inadequate to identify deception, the risks are enormous. Nothing in the EAPA statute or enforcement process recognizes that.
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