June 14, 2006
Several recent administrative penalty cases and reported court decisions indicate that CBP (Customs and Border Protection) may be taking a more aggressive approach regarding the enforcement of the entry laws and the reasonable care defense that has been available to importers since the Modernization Act of 1993. Whether or not the apparent harder line regarding enforcement is a result of a change in national policy, the actions of CBP in some ports would appear to signal that importers may face civil penalties for classification mistakes, undervaluation, incorrect exemptions or preferences claimed, failure to maintain required records, and other entry-related requirements that in the past were informed compliance/reasonable care issues not resulting in penalties.
In some field offices, CBP coordinated these issues with special agents at ICE (Immigration and Customs Enforcement) to initiate a formal investigation under 19 U.S.C. §1592 for misclassification of goods, and preclude the submission of a valid prior disclosure. This concern regarding CBP-ICE “partnering” to enforce Section 1592 and other penalties was also raised by the trade at a recent COAC (CBP-trade advisory committee) meeting in Washington without any apparent answer. While reasonable care is a defense in cases involving misclassification or undervaluation, importers must be able to demonstrate that they took specific actions to determine the correct classifications or valuation, or followed the advice of a customs expert who understood the facts. The following recently published federal court cases demonstrate that importers should review their ongoing compliance procedures to declare the correct classifications, the value, the quantities, the exemptions and preferences claimed, and deposit of estimated duties at the correct rate, including antidumping and countervailing duties.
The Reasonable Care Defense and the Advice of Counsel in Optrex America
In United States v. Optrex America, Inc. , decided May 17, 2006, Slip Op. 06-73. the U.S. Court of International Trade (CIT) held that in response to a $6 Million penalty and lost revenue claim issued by CBP under 19 U.S.C. §1592, the importer failed to demonstrate that it exercised the level of reasonable care required by the Customs entry statute and regulations.
In its Prepenalty Notice to Optrex, CBP alleged that the company provided insufficient information on the entry documents to enable CBP to correctly classify certain importations of LCD panels and components, subject to classification under Heading 9013. The panels and components were classified under Heading 8531 on the entry documents. Optrex's defense was that it exercised reasonable care by consulting its legal counsel, its broker and CBP concerning the correct classification of the products. CBP rejected the reasonable care defense that reliance on the broker to classify the merchandise is sufficient to establish that an importer exercised reasonable care. The Government thereafter initiated the CIT action seeking unpaid duties of $2,033,562 and a negligence penalty of $4,067,124, after the importer refused to pay the alleged penalty and duties owing.
During discovery in the litigation, the Government located documents that demonstrated that Optrex sought, but disregarded, the express advice of its counsel to correctly classify the merchandise under Heading 9013, and that Optrex contemporaneously kept a separate account on its books and records reflecting the higher duty rate, while choosing to pay the incorrect lower rates. In a hearing involving discovery, the Government was allowed access to what otherwise would be considered “attorney-client” privileged documents because the Court required Optrex to waive the privilege as a condition of invoking the reasonable care defense (that it sought and relied upon the expert advice of customs counsel). The Court's order regarding the waiver of the attorney-client privilege is reported at Slip Op. 04-79, CIT Court No. 02-00646 , July 1, 2004, and it may be accessed at http://www.tuttlelaw.com/customs_material/slip_op04-79.pdf.
In one letter, counsel advised Optrex to follow a decision regarding the classification in Sharp Corporation Mfg. v. United States , wherein certain LCD panels were classifiable under Heading 9013; that letter further advised Optrex to seek a binding ruling to determine whether Sharpe affected all types of glass panels. In another letter, after CBP initiated its investigation, counsel provided Optrex with a “decision tree” to assist in classifying the merchandise.
However, Optrex chose to disregard the advice given by its Customs attorneys regarding the classification and entry of the subject merchandise, and then took the affirmative steps to cover up this fact during the CBP investigation and Court proceedings.
In its decision, the Court reviewed the requirements and burdens of proof for the assessment of civil penalties under Section 1592, noting that no scienter (specific knowledge) is necessary in a negligence case. CBP must establish by a preponderance of the evidence that material false acts or omissions occurred. Once shown, the importer has the burden of establishing that it exercised reasonable care under the circumstances, and that the alleged violation was not caused by negligence. The Court noted that CBP guidelines provide that reasonable care operates as a full defense to a penalty assessment and claim for additional duties.
As to the importer's allegations that it sought appropriate advice regarding its Customs transactions, the Court stated there was conflicting evidence as to whether or not the defendant consulted its customs broker. Further, the fact that an attorney was consulted was deemed to be “evidence of compliance,” but not in and of itself compliance. Other evidence may contradict that indication of compliance, including the fact that at least some of the entries were classified contrary to the legal advice given. Additionally, the Court noted that the attorney's advice regarding the so-called decision tree was not highly probative, because it was prepared after the administrative investigation had commenced.
The Court further noted that Optrex's claim of cooperation was weakened because one of the in-house witnesses testified that she could not remember whether she consulted with CBP concerning the classification of merchandise, sought any advice, or read any Customs rulings.
Optrex also maintained that a “professional disagreement” regarding classification is not a breach of reasonable care, and that the published Customs rulings regarding LCD classifications were incomprehensible. On this point Optrex argued that it classified certain of the merchandise under Heading 8531, using an experienced customs broker and providing commercially acceptable invoices. However, the Government's position was that CBP consistently held that LCD panels were classifiable under Heading 9013, and testimony indicated the company ignored and did not abide by the Customs rulings or interpretation of the correct tariff headings. Finally, there was no testimony that demonstrates Optrex actually followed the procedures in the decision tree, which was based upon the process outlined in the Customs 2001 Informed Compliance publication regarding the classification of flat panel displays.
Because the Court's independent review of the record established that Optrex failed to demonstrate that were no general issues of material fact in the case, its motion for summary judgment asserting reasonable care was denied. A full copy of the opinion, decided May 17, 2006, may be accessed at http://www.tuttlelaw.com/customs_material/slip_op06-73.pdf.
Recordkeeping Requirements Under NAFTA And Ford Motor Company
The issue of informed compliance and reasonable care has also arisen in a case currently pending in U.S. District Court in the Eastern District of Michigan, Ford Motor Company v. U.S. Department of Homeland Security , No. 05-CV-73860. Ford commenced the action to challenge CBP's requirement that the company maintain and produce foreign production and financial records that are maintained in the normal course of business by the Mexican producer of NAFTA-originating goods. Although 19 U.S.C. §1484 provides that the importer of record shall use reasonable care in providing the necessary documentation to CBP to enable the agency to properly assess duties and make other entry determinations, in this case Ford took the position that the pertinent recordkeeping statutes do not require the importer to maintain and produce the production and financial records of the foreign vendor.
The American Association of Exporters and Importers (AAEI) filed an amicus curiae brief in the action, agreeing with Ford's position and noting that although the trade is responsible for exercising reasonable care when importing merchandise, the Mod Act also imposed a greater burden on CBP to provide publicly available information to the trade community regarding the importers' rights and responsibilities under the Customs and related laws. AAEI points out that if CBP does not carry out its informed compliance mandate and communicate the necessary information to the trade community, it is impossible for the trade community to exercise the level of reasonable care required by the statutes and regulations. Although pending decision in the District Court, this case demonstrates the importance of the importer ascertaining and implementing the appropriate recordkeeping procedures to ensure that all required documents are maintained for a period of five years, including the records of the foreign manufacturer or seller under any claimed trade preferences or exemptions.
Reporting Value Differences and Assists to CBP
Ford Motor Company is also involved in two other pending CIT cases in which it was fined over $20 million by CBP for Section 1592 violations for presentation of incorrect value information to the agency at the time of entry. In both cases, the Court found that Ford's omissions were the result of recklessness and utter lack of care regarding the company's statutory obligations under 19 U.S.C. §§1484 and 1485 regarding the value information it provided to CBP. These cases, U.S. v. Ford Motor Company (Slip Ops. 05-86 and 05-87), which were summarized in our newsletter of August 1, 2005, are on appeal before the Court of Appeals for the Federal Circuit. The appeals were filed on September 20 and 21, 2005, and our office will issue a publication once they are decided.
The cases demonstrate the importance of reporting to CBP the correct values at the time of entry, or utilizing CBP reconciliation procedures to report unknown values after the filing of the entries, to comply with the reasonable care requirement to declare the correct classifications, values, and duties at the time of filing entries, and maintain the appropriate records to support these declarations.
Although there may be some current uncertainty as to how CBP treats the reasonable care defense, prior disclosure continues to be a “safe harbor” by which importers may self-report errors or omissions in the entry process to CBP and significantly reduce the amount of Section 1592 penalties. Timing is often critical in prior disclosure cases, as a prior disclosure is valid only if it is filed before CBP initiates a formal investigation of the alleged wrongdoing, or before the disclosing party has knowledge of the formal investigation.
If you have any questions regarding the Optrex or Ford cases, reasonable care, the prior disclosure process, or compliance procedures, please feel free to contact George R. Tuttle at (415) 288-0425 or firstname.lastname@example.org, George R. Tuttle III at (415) 288-0428 or email@example.com, Carl D. Cammarata at (415) 228-0426 or firstname.lastname@example.org, Stephen S. Spraitzar at (415) 228-0277 or email@example.com, or Gary L.Graff at (415) 986-8780 or firstname.lastname@example.org.
George R. Tuttle, George R. Tuttle, III, Carl D. Cammarata, Stephen S. Spraitzar and Gary L. Graff are attorneys with the Law Offices of George R. Tuttle in San Francisco. The information in this article is general in nature, and is not intended to constitute legal advice or to create an attorney-client relationship with respect to any event or occurrence, and may not be considered as such.
Copyright © 2006 by Tuttle Law Offices.
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