Recent court decisions have made an already scary importing environment even scarier. Companies may be well-advised to consider protecting their import personnel.
Your company’s long-serving import manager edges nervously into your office with an unusual request; she would like the company to provide her with an indemnity and hold harmless agreement. She also wants the company to agree to pay for her legal fees to defend Customs penalty claims.
“Is there a specific problem you’re concerned with?” you ask.
“No, I just don’t want to be held liable for penalties or Customs duties that might arise if the company is found to be negligent in importing.”
“Why would that happen?” you ask. “The corporation is the importer of record, wouldn’t Customs look to the company to pay duties and penalties?”
Well, yes. But that might not be the end of the story. By law, Customs duties are the personal debt of the “importer of record” of imported merchandise, who must be the “owner” or “purchaser” of the goods. In virtually all commercial transactions, the importer of record is a corporation. Moreover, the importer of record is tasked with the legal duty to exercise “reasonable care” to ensure that information appearing on Customs entries is not only factually accurate, but legally correct as well. Indeed, your corporation probably hired its import manager as part of its effort to exercise “reasonable care”, and protect the company from penalty and duty liability.
So why does your import manager need a personal indemnity when she only works on corporate transactions? The answer lies in a recent, controversial decision of the United States Court of Appeals for the Federal Circuit – one which the U.S. Supreme Court recently declined to review.
The Trek Leather/Shadadpuri Case – Expanding Liability for Civil Customs Penalties
The controversial en banc decision of the Federal Circuit in United States v. Trek Leather, Inc., held that employees and officers of corporate importer may be held liable, either individually or “jointly and severally” with their corporate employers, for penalties arising under Section 592 of the Tariff Act of 1930 [19 U.S.C. §1592] resulting from corporate negligence or gross negligence in importing transactions. No intent is required on the part of the employee or the corporation. Nor, the Federal Circuit held, was there any need to “pierce the corporate veil” before proceeding against the individual.
Since Customs penalties under Section 592 are among the harshest provided in American law – with penalties being set at multiples of the duties allegedly withheld from the government or even the value of the merchandise itself – the Trek Leather case has been keeping import managers awake at night for some time now.
Trek Leather could be the poster child for the old saying “bad facts make made law”. It started simply enough, as an undeclared “assists” case, before metamorphosing into a procedural mess. Trek Leather, a New York corporation, ordered mens’ suits from a foreign manufacturer. It provided the manufacture, free of charge, with the fabric used to make the suits. By law, the value of the fabric “assist” thus provided was required to be included in the dutiable value of the imported suits. Trek failed to do this, declaring to Customs only the charges shown on the “cut, make & trim” (CMT) invoice from the manufacturer, thereby understating the amount of duties owed to the government.
Customs charged both Trek Leather and its President, Harish Shadadpuri, with violating Section 592 of the Tariff Act by entering goods by means of false statements or material omissions. The defendants were charged with violating the law, in the alternative, by negligence, gross negligence and intentional fraud. Before the Court of International Trade, Trek Leather agreed to be held liable for gross negligence; Shadadpuri did not. The Court, however, held both company and individual liable “jointly and severally” for hundreds of thousands of dollars in gross negligence penalties.
Shadapuri appealed, arguing that since Trek Leather was the corporate importer, the government could not hold him liable as an owner of officer without first “piercing the corporate veil”, which the CIT had not done. A divided 2-1 panel of the Federal Circuit agreed, dismissing the charges against Shadapuri.
Not so fast, said the full Federal Circuit. The Court vacated the panel’s decision, and indicated that it would hear the appeal en banc (with all active Circuit judges participating), without a hearing. The court solicited briefs on three issues – none of which, as it turned out, featured at all ‘’ in the decision the en banc court finally issued.
In its en banc decision, the Federal Circuit artfully ducked the issues of “piercing the corporate veil”,by deciding the case on a basis nobody had suggested or argued. It held that, while Trek Leather had “entered” the goods by means of false statements or material omissions, Shadadpuri was separately and individually liable for “introducing” the merchandise by means of false statements. The act constituting the unlawful “introduction”? He had provided Trek’s Customhouse broker with the negligently incomplete invoices.
Therein lies the reason for your import manager’s concern. “I provide documents to our Customs broker ever day”, she is probably thinking. It is not unusual for Section 592 penalties to total hundreds of thousands or millions of dollars for a single violation. “If I provide an invoice that’s incorrect or incomplete – unintentionally – could I be held personally liable for penalties and duties on the company’s imports?”
According to the Federal Circuit, the answer is “yes”. And since was decided, the government has filed at least one penalty suit against a corporate importer, indicating that, while it investigated two of the company’s officers, it is – for now – electing not to name them as defendants, but reserves the right to do so.
Setting aside the questionable wisdom of holding corporate employees individually liable for negligence committed in a corporate tax return (Customs entry) filed by the corporation and involving corporate property, the Trek Leather/Shadadpuri decision puts both corporations and employees in a difficult position. A corporate import manager or Customs compliance director knows all the strengths and weaknesses of a company’s import activities. It is not difficult to imagine a situation where the government might use the thread of a personal assessment against a corporate employee as an incentive for the employee to testify against its employer. An employee who is uncertain whether the corporation will support her, financially and otherwise, might be more tempted to testify against her employer.
The Explosion in Customs-Related Whistleblower Litigation
Another trend which makes the world of importing a scary place is the dramatic increase in “whistleblower” litigation involving Customs and trade issues. Corporate insiders and outsiders have been filing qui tam cases under the “reverse false claims” provisions of the Federal False Claims Act, charging companies with evading Customs duties – both ordinary and special (antidumping and countervailing) duties.
In some cases, the claims are filed by competitors – for example a claim against Toyo Ink Corporation, alleging that the company had evaded antidumping duties on imports of a dye chemical, resulted in a $45 million settlement – with over $7 million of that recovery going to the whistleblower. In other cases, corporate insiders have initiated these cases. For example, in 2014, the former import manager of Colorado-based Otter Products LLC., upset that the company refused to disclose to Customs some dutiable “assists”, initiated a whistleblower case that the company settled for approximately $4 million. In another recent case, a company called Customs Fraud Investigations, Inc. – apparently formed solely to hunt out Customs violations – failed in an effort to have Victaulic, Inc., penalized for the alleged failure to mark imported pipe fittings. But no doubt, the importer’s costs of defending the case were substantial.
Customs-related whistleblower cases will not stop soon. Virtually every industry which has petitioned for the imposition of antidumping or countervailing duty duties has a heartfelt belief that Customs is not collecting the proper amount of such duties. Many domestic companies believe that their importing competitors are evading duties or engaged in other unlawful actions. Whistleblower suits have been filed, all under seal, at least initially. The government has the choice to prosecute each case itself, or to decline to take the case, and let the relator unseal its complaint and prosecute the case itself. In either case, the relator – the whistleblower – receives a share of any amounts recovered.
This brings us back to your corporate import manager or Customs compliance director, who needs to operate in this strange and scary new environment. He or she is privy to all of the company’s Customs and trade secrets and risks, and now has reason to be concerned about personal liability for corporate Customs penalties. If the employee has the benefit of a corporate indemnity, he or she is less likely to be subject to Customs threats. And he or she is less likely to become the whistleblower many companies fear.
Elements of an Indemnity Agreement
Importing companies who elect to provide key employees with indemnity against Section 592 penalties and withheld duty claims will need to give careful consideration to the terms of any such indemnity. Will it cover only penalties and duties, or will it cover the employee’s legal costs? The possibility of “joint and several” liability places companies and their importing employees in a position of potential conflict of interest should Customs initiate a Section 592 investigation. What duties of cooperation will be placed on the employee? If the corporation is found guilty of an intentional violation of Section 592, will it cover the employee if the employee is found to have “aided and abetted” such violation? [In light of the Trek Leather decision, there would seem little need for Customs to pursue “aiding and abetting” claims if it can hold employees directly liable for violating the “introduction” provisions of Section 592].
An indemnity must also be structured in such a way that the corporation retains the right to terminate the employee if she is not performing her duties correctly. A corporation can only act through its agents and employees, and there will certainly be cases where a claim that Section 592 was violated by means of negligence or gross negligence will be based on improper or incorrect behavior by particular corporate employees.
Some in-house Customs compliance employees are also licensed Customhouse brokers. Where the conduct of these employees come under scrutiny, there may be additional concerns that Customs will take action to suspend or revoke the employee’s license – another issue which indemnity agreements need to address.
And of course, a corporation’s retained outside Customs brokers also have a duty to exercise “reasonable care” with respect to a client’s imports. Brokers submit corporate documents to Customs all the time, without being able to verify the accuracy of the documents beforehand. They are just as subject to a Section 592 assessment as is the importer or the importer’s in-house import manager. Brokers using the National Customs Brokers and Forwarders Association of America (NCBFAA) standard terms and conditions of service have already placed indemnity clauses in their contracts.
Customs officials may publicly promise restraint in bringing Section 592 cases against corporate employees or agents, but they are better judged by the statements the agency made to the courts in the Trek Leather/Shadapuri litigation, where the agency took the position that individual liability is direct, not subject to corporate veil-piercing and absolute.
Corporate employees working in import operations are increasingly subject to external pressures and liability concerns. Their employers ignore these conditions at their peril. The next few years are likely to see a significant redefinition of employer-employee and principal-agent relations in these circumstances.