Developments in customs penalties in the Court of International Trade in 2012.

Author:Tosini, Stephen C.
Position:2012 International Trade Review
  1. Background A. The Court of International Trade's Jurisdiction B. Affirmative Civil Enforcement Statutes 1. Section 592 2. Broker Penalties 3. Recovery on Bonds or of Customs Duties II. Affirmative Civil Enforcement A. Exhaustion: Nitek, Landweer, and Millenium Lumber 1. Nitek 2. Landweer 3. Millenium Lumber 4. Analysis B. Default: Active Frontier, Callanish, and Country Flavor 1. Active Frontier. Rejection of Complaint in Context of Default Judgment 2. Callanish and Country Flavor. Calculations Underpinning Complaint C. Transportation and Exportation: Carrier Liability D. Attempt to Enjoin Related District Court Matter: Sweet Little Mexico III. Conclusion I. BACKGROUND

    1. The Court of International Trade's Jurisdiction

      The Court of International Trade possesses exclusive subject matter jurisdiction to entertain the discrete group of cases identified in 28 U.S.C. [section][section] 1581-1584. Section 1582 confers jurisdiction to the court for all actions initiated by the government " (1) to recover a civil penalty under section 592, 593A, 641 (b) (6), 641 (d) (2) (A), ... of the Tariff Act of 1930; (2) to recover upon a bond relating to the importation of merchandise ...; or (3) to recover customs duties."

    2. Affirmative Civil Enforcement Statutes

      1. Section 592

        The Court of International Trade's customs penalty statute, commonly known as section 592, (1) provides for the recovery of civil penalties in association with the importation of merchandise. Section 1592 provides for the imposition of "[p]enalties for fraud, gross negligence, and negligence" in the entry of merchandise into the United States.

        [N]o person by fraud, gross negligence, or negligence--(A) may enter, introduce, or attempt to enter or introduce any merchandise into the commerce of the United States by means of--(i) any document or electronically transmitted data or information, written, or oral statement, or act which is material and false, or (ii) any omission which is material.... (2) Penalties are set forth in [section] 1592(c), which provides a range for the monetary penalty based upon the violator's culpability. A negligent violation is punishable by a civil penalty in an amount not to exceed the lesser of the domestic value of the merchandise or two times the lawful duties, taxes, and fees of which the government is or may be deprived, or if the violation did not affect the assessment of duties, twenty percent of the dutiable value of the merchandise. (3) All penalties are capped at the merchandise's domestic value. Moreover, all unpaid duties, taxes, or fees must be paid whenever there is a violation of [section] 1592 (a), whether or not a penalty is assessed. (4)

        To prove fraud, the government must establish the violation by a preponderance of the evidence, and must demonstrate fraud by clear and convincing evidence. (5) "A finding of gross negligence would require a willful, wanton, or reckless disregard in [the importer's] failure to ascertain both the relevant facts and the statutory obligation to report ... payments." (6) To establish negligence, the government need only prove the violation, and the statute then shifts the burden to the defendant to show that the violation did not occur as a result of negligence. (7) Lastly, unlike most of the court's matters in which the government is defending an administrative determination, section 592 matters are reviewed de novo. (8)

      2. Broker Penalties

        Sections 641(b)(6) and 641(d)(2)(A) of the Tariff Act of 1930 (9) impose penalties related to customs brokers. Section 641 (b) (6) imposes poses a penalty of up to $10,000 on "[a]ny person who intentionally transacts customs business, other than solely on the behalf of that person, without holding a valid customs broker's license." Section 641(d)(2)(A) enforces sanctions against licensed customs brokers, under which a "license or permit [can] be revoked or suspended" after an administrative proceeding, including notice and the opportunity for a hearing. That provision also allows the imposition of a penalty up to $30,000.

      3. Recovery on Bonds or of Customs Duties

        The government may initiate an action in the Court of International Trade "to recover upon a bond relating to the importation of merchandise" (10) or "to recover customs duties." (11) Contrary to section 592, which is the mechanism used in the court to collect duties on entries that were liquidated at an incorrect rate due to material misrepresentations, the primary cause of action to collect on bills issued at liquidation is 19 U.S.C. [section] 1505, which directs CBP to collect duties owed plus interest. Similarly, and unlike section 592, there are no administrative perquisites to duty collection actions. (12)

        In 2012, the government also availed itself of an infrequently used statute to collect duties owed by a carrier. (13) Under this provision and its implementing regulations, an importer may transport merchandise within the United States for the purpose of re-exportation without paying duties. These entries are called "transportation and exportation" or "T&E" entries. (14) Under section 553, the carrier must inform CBP that it intends to re-export the merchandise. Moreover, if requested by CBP, the carrier must demonstrate that any merchandise "entered for transportation in bond" (15) was, in fact, exported. Although the statute is silent on who is liable for duties, the implementing regulation explicitly holds the carrier liable for duties owed on merchandise that goes missing while in transit within the United States: "the carrier shall pay any internal-revenue taxes, duties, or other taxes ... on ... missing merchandise, together with all costs, charges, and expenses caused by the failure to make the required transportation, report, and delivery." (16)


    Two primary themes in affirmative civil enforcement jurisprudence emerge from the court's 2012 cases. First, the court has continued its recent trend of strictly requiring CBP to exhaust administrative remedies during penalty proceedings while, at the same time, acknowledging that there is no violation of due process rights arising from a failure to exhaust. Second, the court has begun to more closely scrutinize motions for default judgment in affirmative enforcement actions.

    1. Exhaustion: Nitek, Landweer, and Millenium Lumber

      Relying on its discretionary exhaustion statute, the court has required the government to demonstrate that CBP strictly followed all statutory and regulatory administrative procedures before the court will allow an action to go forward. By statute, "the Court of International Trade shall, where appropriate, require the exhaustion of administrative remedies." (17) Using this broad discretion, the court then continued to find exhaustion "appropriate" regardless of prejudice to the defendant or the lack of due process concerns. The court twice held an exhaustion requirement "appropriate" and declined to require exhaustion by the agency only where the administrative process was not mandatory.

      1. Nitek

        In Nitek, the court held that CBP was required to exhaust administrative remedies with respect to all levels of culpability alleged in a complaint, even lesser-included offenses. (18) Nitek allegedly misclassified gas meter swivels and nuts and also failed to pay antidumping duties. (19) CBP issued pre-penalty and penalty notices to Nitek under [section] 1592, notifying Nitek that it was liable for lost duties pursuant to [section] 1592(d), and assessing a gross negligence penalty. The Department of Justice filed a complaint alleging the same facts as the penalty notice, but sought a reduced penalty based on negligence rather than gross negligence. (20)

        Nitek sought dismissal, which the court granted in part by dismissing the penalty count of the complaint. (21) The threshold issue was whether the Department of Justice could initiate a section 592 penalty action alleging a level of culpability not explicitly contained in CBP's administrative penalty notice. (22) The court relied heavily on United States v. Optrex America Inc., (23) in which it previously denied a government request to amend a [section] 1592 negligence complaint to add counts alleging fraud and gross negligence based on information revealed during discovery. The court rejected the government's argument that, because the penalty statute subjects penalty claims to de novo review, (24) Nitek suffered no harm when the government advanced a claim at a reduced culpability level. Rather, the court reasoned that the government is barred from pursuing [section] 1592 penalty claims grounded on a lesser degree of culpability than that pursued by CBP in the pre-penalty and penalty notices issued during administrative proceedings. (25)

        The court further found it was "appropriate" (26) to require CBP to exhaust administrative remedies with respect to any level of culpability that the government asserts by issuing a penalty notice specifically at that level of culpability. (27) This was because, waiving exhaustion would force importers either to abandon the administrative opportunities for resolution that [section] 1592 affords or, in composing their administrative responses, to guess at whether the government will choose to allege a lesser level of culpability before the court or indeed alter any of the statutorily prescribed factors that must be included in the pre-penalty notice and penalty claim. (28)

        The government sought reconsideration, which the court denied in United States v. Nitek Electronics, Inc. (Nitek II), resolving the fact that the statute compels certain administrative procedures but affords de novo review in favor of defendants. (29)

        [The government's] position reflects an understandably confounding dichotomy in the Court's role in [section] 1592 actions. On the one hand, as Plaintiff notes, the statute directs that 'all issues, including the amount of the penalty, shall be tried de novo.'...

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