Customs Outsmarts Itself – Possibly – In Section 592 Penalty Case

Having sought civil Customs penalties against an importer under Section 592 of the Tariff Act on grounds of fraud, the government could not, in suing to recover those penalties in the United States Court of International Trade, allege in the alternative that the violations occurred by means of gross-negligence or negligence, the Court recently held.  The decision at least raises the possibility that the government may have outsmarted itself in pursuing the penalty.

The defendant in United States v. Toth, Slip Op. 06-61 (June 20, 2016) was charged with evading antidumping duties on imported crawfish tail meat by misclassifying it as langostino. Customs brought administrative proceedings against the defendant and his company under Section 592 of the Tariff Act of 1930, as amended [19 U.S.C. §1592], charging them with evading duties by means of fraud. After administrative proceedings failed to produce a result, the government brought suit to collect the Section 592 penalties, charging fraud, and in the alternative, alleging that the violations occurred by means of gross negligence, or simple negligence.

The defendants moved to dismiss the counts of the complaint claiming gross negligence and negligence, citing the Federal Circuit’s 2015 decision in United States v. Nitek Electronics, Inc. In Nitek, the Federal Circuit ruled, in a surprising but welcome decision for importers, that Customs was limited, in bringing suit, to pursuing penalties for the level of culpability charged administratively. Since the government had charged Toth with fraud administratively, and since Toth’s defense before the agency had been addressed to a fraud charge, Customs was limited to pursuing judicial relief based on the fraud allegations. The agency had not exhausted administrative remedies as to gross negligence or negligence claims.

The Court’s ruling in the Toth case left the government with a heavy burden to meet in order to collect a penalty.

Section 592 of the Tariff Act provides for the imposition of civil penalties on persons who, by means of fraud, gross negligence or negligence, enter or attempt to enter merchandise into the United States by means of false and material statements or acts, or by means of material omissions. The maximum penalty depends on the loss of revenue and the level of culpability. In cases of simple negligence, the maximum penalty is twice the loss of revenue; in gross negligence cases, four times the loss of revenue; and in cases of fraud, an amount equal to the domestic value of the merchandise concerned. In no case, however, may a Section 592 civil penalty exceed the domestic value of the merchandise.

In cases to collect a Section 592 penalty, the Court of International Trade does not simply enforce the agency’s claim. Instead, it makes findings de novo, on the basis of the record before the court, concerning whether the violation and claimed level of culpability has been proven, and what, if anything, the amount of the penalty should be.

In addition to a sliding scale of penalties, Section 592 also provides different allocations of the burden of proof in CIT cases to collect a penalty. Where simple negligence is alleged, the government need only establish the facts claimed to constitute the violation; the burden rests on the person charged to show that the violation did not result from negligence – a failure to use the level of care expected of a reasonably prudent person.  In cases claiming gross negligence – a “wanton disregard” for one’s obligations under the Customs laws – the government has the burden of proving the violation, and the gross negligence by a preponderance of the evidence.

Fraud cases confront the government with the most difficult road to secure a penalty. Fraud claims must generally be pleaded “with particularity”, and the government bears the burden of proving the fraud through “clear and convincing evidence”.

Following the CIT’s Toth decision, the government now faces the hefty burden of pleading and proving fraud. It runs the risk that, if the evidence only shows a grossly negligent violation, it will walk away empty-handed. It might be unable to recover any penalties, nor establish the predicate for forcing to importer to repay any “withheld duties”.

Typically, the government’s motivation for charging fraud is to seek a higher penalty, especially in cases where the conduct is egregious, or undermines an important trade policy, such as enforcement of antidumping orders. But the “greater culpability = higher penalty” rationale does not always hold true in cases involving antidumping duties, which are frequently set at 100% ad valorem or higher.  When a duty rate is 100%, for example, the greatest penalty which could be collected under Section 592 is one time the loss of revenue – less than the maximum penalty for cases arising out of simple negligence.  So charging a greater level of culpability in such cases would not bring the government a higher penalty.

The government might therefore have outsmarted itself in the Toth case – charging a higher level of culpability and assuming a greater burden of proof than it might have needed to in order to secure the maximum penalty and recovery of withheld duties.

Perhaps the government will carry the day with its fraud charge in the Toth case. Had the government merely charged simple negligence, they might have been exposed to a defense of “it wasn’t negligence, it was intentional fraud”, but this seems unlikely. But facing a higher burden of proof – and with a claim of misclassification, which is often a matter of negligence – the government has exposed itself to the possibility that the defendant in Toth might walk away scot-free.

Apparently realizing this possibility, the government asked the Court to remand the Toth case to Customs, presumably so the agency could conduct administrative proceedings to charge a penalty at a lesser level of negligence or gross negligence. Saying the request “showed great chutzpah”, the court denied the request, pointing out that there was no final agency decision respecting negligence to remand.

Before the Federal Circuit’s Nitek decision, the government assumed it could sue for penalties, asserting the different levels of culpability in the alternative. That is no longer the case, and as a consequence, the stakes for the government to charge a violator carefully have increased dramatically.

 

Negotiators Agree on Trans-Pacific Partnership (TPP Agreement)

This week in Atlanta, the United States and 11 of its trading partners around the Pacific Rim – Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam – announced that they had reached agreement on the Trans-Pacific Partnership (TPP), a plurilateral agreement which, if adopted, will eliminate tariffs and service trade barriers in trade between nations accounting for as much as 40% of the world’s economic output.

There is much work to do before TPP actually becomes law. The United States will need to have Congress adopt implementing legislation, which promises a bruising political battle, and the other member countries will need to ratify the agreement as well. A Congressional vote on TPP will not occur until 2016, and implementation in 2017 appears realistic.

The text of the Agreement will not be available for several weeks, and its negotiation was accompanied by unusual (and controversial) secrecy. There are a few things we do know about the deal, however, as it applies to trade in goods.

 

When will we see the text of the Agreement?

President Obama has indicated that the text of the TPP will remain confidential for at least 30 days after it is presented to Congress, so that “corrections” can be made. The text of the agreement must be available to the public for at least 60 days before Congress is allowed to vote on it.  Members of Congress have indicated that the most recent version of TPP they have seen is dated, and the final text probably differs greatly.

 

What rules of origin will be used to qualify goods for duty-free treatment?

TPP will include a uniform set of rules of origin, which will be based on “tariff-shift” principles. In addition, some goods will be subject to a “regional value content” requirement, based on the “build down” method of appraisement.

There was considerable debate concerning preference rules of origin for textile and apparel products, with a “yarn forward” rule of origin ultimately being selected. [Vietnam had pressed for a “fabric forward” rule, but was rebuffed].

Reportedly, the parties have agreed on a rule of origin for automobiles which will include a 45% regional value content requirement – less than the 62.5% requirement currently provided in NAFTA. Japan had argued for a more liberal rule of origin, so it can continue to source parts from China and other non-agreement countries in its supply chain.

 

How will origin claims be verified?

Certifications of “originating” status will be accepted not only from exporters (as is the case with NAFTA), but also from producers and importers of goods. Origin claims will be subject to verification by governments of the exporting and importing companies?

 

What is the schedule for tariff eliminations?

Duties will likely be eliminated immediately, in the case of countries with which the United States already has a free trade agreement. Schedules for other duty eliminations remain to be determined. It is likely that some tariffs for sensitive goods (rice and beef imported into Japan, dairy and poultry goods imported into Canada) will be eliminated more slowly. In some cases, duty-free access will be quota-limited. Canadian officials have indicated, for example, that the TPP gives foreign countries access to 3.25% of its dairy market and 2.1% of its poultry market.

 

What’s going to happen to NAFTA?         

If TPP is ratified and adopted, it will replace NAFTA. While broadly based on NAFTA, the TPP is likely to be different in many respects. For instance, we can expect the controversial “NAFTA Marking Rules”, which apply for non-preferential purposes, to become a thing of the past. Hopefully, some of the restrictions on duty drawback imposed under NAFTA, which have hurt American importers, will be eliminated.

We can also expect TPP to replace a number of United States FTAs currently in effect with other TPP countries, including the agreements with Australia, Chile, New Zealand, Peru, and Singapore.

 

Will TPP affect government procurement rules?

According to the United States Trade Representative (USTR), the answer is no. The United States will continue to handle government procurement issues using the rules of the World Trade Organization (WTO) Agreement on Government Procurement. Eight of the other signatories to TPP are members of the procurement agreement as well.

 

What’s NOT in TPP?

While some legislators wanted rules on currency manipulation, these are not a feature of the TPP.  In addition, while the Agreement contains an investor-state dispute settlement (ISDS) mechanism, there will be a “tobacco carve out” to prevent tobacco companies from using it to sue governments over tobacco policy, as has occurred with a number of other trade agreements.

 

What has to be done to implement TPP in the United States?

TPP is a trade agreement, not a treaty, so it does not become law upon adoption or ratification. Congress will need to enact implementing legislation to reflect TPP’s provisions in United States law. Because the President has been granted “fast track” trade negotiating authority, Congress must approve or disapprove the TPP package, but cannot make changes to it.

Once implementing legislation is done, Customs and other agencies will need to draft implementing regulations.

This information is necessarily preliminary, but TPP will make for a very busy 2016 in the Customs and trade field. 

CUSTOMS TAKES ANOTHER CRACK AT EXPANDING THE FORM 5106 IMPORTER IDENTIFICATION STATEMENT

Last year, U.S. Customs and Border Protection (CBP) caused quite a stir when it proposed amendments to Form 5106, the basic form typically filed by a Customhouse broker to provide basic information concerning an importer of record – name and address, type of entity and taxpayer ID/importer number. Stung by a number of identity thefts perpetrated with the use of CBP’s Automated Commercial System (ACS), CBP proposed a huge expansion of the information gathered on the CF 5106, requesting the names and titles of individuals within the company with knowledge of the company’s import operations and financial dealings – as well as these persons’ Social Security numbers or passport information.

Members of the trade community filed more than a score of comments with CBP, making it perfectly clear that under no circumstances did they want their individual identification information loaded into CBP’s notoriously insecure ACS system.

Now, CBP is back with another alteration of CF 5106, and is seeking public comments through August 27, 2015. But the proposed form still raises significant questions and problems.

Under the proposal, Customs Form 5106, would be renamed the Create/Update Importer Identity Form, and would still require greatly expanded information concerning importers, particularly corporate ones. The form still has a place for individuals Social Security Numbers or passport data, but Customs now says that providing this information is optional. But the importer would still need to provide the names of officers or employees having “importing and financial business knowledge of the company”.

The form 5106 would be required to be signed with a certification of accuracy, and an acknowledgment that submission of false information can subject the company to a felony under 28 U.S.C. §1001 for providing false statements to a government officials.

The requirement that an importer identify “officers” having “importing and financial business knowledge” of corporate operations is both vague and overbroad, because of the coupling of “importing” and “financial business” knowledge. In a large corporation, it is possible that an officer of the company may have a tangential knowledge of importing operations, but not an in-depth knowledge. At the same time, the officer may have extensive knowledge of the financial and business structure of the company. Linking “importing and financial business knowledge” together in this way is problematic.

Secondly, the document is required to be signed with a certification of truth, and that if the information is not accurate, the company could be liable for a felony under 28 U.S.C. §1001 (providing false statements to a government officer). There is clearly the concern that, if names of company officials are provided in the CF 5106 under the terms currently provided, they would become immediate “targets” in any Customs investigation of import violations, and could be used by Customs as leverage against the company.

Suppose, for example, an official says that he or she has knowledge of the “importing and financial business” of a company.  Assume, further that one afternoon, a Customs official stopped by to quiz this person on a particular Customs issue the importer is being investigated for. If the official says (honestly) “I have no idea what you’re talking about”, would  Customs take this as evidence that the importer made a false statement when it signed the CF 5106 and claimed the person had knowledge?  The proposed terms of the certification language are simply too broad for comfort.

It also seems likely that any individuals identified in the proposed form would be subject to interviews, depositions and potentially to liability in the event Customs investigates or even audits the importer.

Of course, in a dynamic company, as people change positions, the importer would be compelled to update the CF 5106 form more frequently than it does today.

Other questions on the proposed CF 5106 also appear to be unnecessary. This includes, for example, the requirement to provide “principal banking information”(Box 3G). Since Customs does not have a statutory lien on the company’s assets, there is no need for divulging the location of financial assets. Similar, information concerning articles of incorporation (Boxes 3H and 3I) are readily searchable public records.

The requirement for an entry self--filer to furnish its filer code (Box 3D) could be confusing if a company will both self-file and file under various broker codes. The requirement that the filer provide information regarding “related businesses” (Box 3F) would be incredibly unwieldy for many large, publicly-traded companies,  which may have hundreds of related entities, many of which may themselves file CF 5106, and would have to repeat the same information.

Customs is accepting public comments through August 26, 2015. We would be happy to prepare comments on behalf of interested parties. 

Update to Retroactive Renewal of the Generalized System of Preferences (GSP)

Effective July 29, 2015, Congress and President Obama reinstated the Generalized System of Preferences (GSP), which provides duty-free treatment for selected goods from “beneficiary developing countries.” 

H.R. 1295, The Trade Preferences Extension Act of 2015 (“the Act”), was introduced in the House on March 14, 2015, and extends the GSP, the African Growth and Opportunity Act (AGOA) and duty preferences for Haiti. The Act states that notwithstanding section 1514 (19 U.S.C. 1514) or any other provision of law, any entry of a covered article eligible for preferential treatment under title V of the Trade Act of 1974 that was made after July 31, 2013 and before the effective date of the Act which is July 29, 2015, shall be liquidated or reliquidated as though such entry occurred on the effective date of the Act.

The Act, as passed and signed by the President, reinstates GSP through December 31, 2017. U.S. Customs and Border Protection has recently provided for an application and automation process for retroactive renewal of GSP.  If an ABI entry summary was filed with payment of estimated duties using the Special Program Indicator (SPI) for GSP (with the letter "A," "A+," or "A*") as a prefix to the tariff number, no further action by the filer is required; filings with the SPI "A," "A+," or "A*" will be treated as confirming requests for refunds. If an ABI entry summary was filed with payment of estimated duties without the use of the SPI "A," "A+," or "A*" as a prefix to the tariff number, a refund of duties deposited must be requested in writing as described below for non-ABI entry summaries.

Non-ABI filers must request a refund in writing from the Port Director at the port of entry by December 28, 2015, regardless if they previously designated a refund on the Customs Form 7501 by using the SPI "A," "A+," or "A*" code. The request may cover either single entry summaries or all entry summaries filed by an individual filer at a single port. To expedite refunds, CBP recommends the following information be included in each letter:

1.     A statement requesting a refund, as provided by section 201 of Title II of the Trade Preferences Extension Act of 2015;

2.     An enumeration of the entry numbers and line items for which refunds are requested; and

3.     The amount requested to be refunded for each line item and the total amount owed (not including interest) for all entry summaries.

Customs also noted that GSP reauthorization provides retroactive benefits only to goods from a country that is a beneficiary of the GSP program as of July 29, 2015. Retroactive application of GSP does not apply to countries such as Bangladesh and Russia that lost eligibility between July 31, 2013 and July 29, 2015.

We recommend that your company identify any records which might be necessary for Customs to locate or reconstruct subject entries so that retroactive refunds can be claimed at once through a letter application if needed.  NPLLP would be happy to make these applications on your company’s behalf.

Please do not hesitate to contact us if you have any questions.

 

THE MYSTERY OF THE MISSING LEGAL DOCTRINE

The CIT’s latest penalty decision is another headscratcher.

Call it the Mystery of the Missing Legal Doctrine – a whodunit worthy of Sherlock Holmes and John Watson.  And we’re talking the contemporary Benedict Cumberbatch/Martin Freeman Holmes and Watson. This missing doctrine was in plain sight during the time of Conan Doyle’s Victorian Holmes, and even when Basil Rathbone portrayed the great detective on film during the 1940s. But the doctrine – still on the legal books, basically unchanged in 2015 – seems to be disappearing in 2015.

One can almost hear the sleuths discussing it as Holmes reads the letter he’s received from his American correspondent:

“A missing legal doctrine, Sherlock?” Watson inquires, looking over his colleague’s shoulder at the email scrolling down the screen. “Surely something esoteric that’s maybe just hard to discern?”

“Elementary, John!” Holmes responds. “Perhaps the most elementary rule in American customs law, the one that affords importers the most protection from arbitrary government actions – the rule of finality of liquidation of entries! And it appears to have vanished!”

[Cue intro music and credits; the scene moves to the sandwich shop next to 221B Baker Street, while Holmes pores over a printout].

"It’s all here, John – Customs has one year to liquidate an entry of merchandise, making its final determination as to classification, rate and amount of duty. Once the entry is liquidated, it’s final as to both Customs and the importer. Unless, that is, Customs reliquidates the entry within 90 days, or the importer files a protest within 180 days.”

“No exceptions, then?”

"Just one. Section 592(d) of the Tariff Act says that if revenue was lost by means of a false and material statement or document, or by means of a material omission – which resulted from negligence, gross negligence or fraud – Customs can recoup “withheld duties” going back up to five years. But first Customs has to prove a violation of law, of Section 592(a) of the Tariff Act, occurred.”

"Sounds easy enough to remember. What’s the problem?”

“Well, John, liquidation of an entry is perhaps the most important action an American Customs officer can perform. Back about 25 years ago, however, U.S. Customs decided they were too busy to keep up with all their workload, so they decided to put most liquidations on “bypass” – meaning that most entries liquidated the way the importer presented them, without Customs actually looking at them.”

”Sounds daft!”

“Indeed. Customs decided they’d enforce the law through post-liquidation audits. Customs auditors would find errors in classification or appraisement, and tally up the amount owed.  But the auditors’ grins would turn to frowns when importers reminded them that, without a violation of Section 592, the duties claimed in respect of liquidated entries simply weren’t owed. Customs had changed the way it worked, but the law hadn’t changed. If Customs couldn’t make up a penalty claim, they were out of luck on collecting the duties. “

“Well, Sherlock, negligence doesn’t sound so hard to prove.”

“True enough, but the Customs Modernization Act indicates that if an importer can show it exercised “reasonable care” in making entry, that’s a defense to a penalty claim.”

“So when did the doctrine go missing?”

“It all seems to have come to a head Friday, June 24, 2015, at the Court of International Trade in New York City.”

[Cue flashback sequence; Holmes voiceover].

“The case of United States v. Horizon Products International Inc. was before the Bailey. Horizon had imported hardwood flooring. Some of the flooring had an outer layer which qualified it for duty free treatment. Most of the flooring, however, had an outer layer which attracted an 8% duty rate. Horizon and its Customhouse broker had entered all of the goods under the duty free provision.

“Customs timely liquidated some of the entries with a duty increase, which Horizon paid. But the agency then billed Horizon for a substantial amount of duty in respect of entries that had already been liquidated and made final, and demanded Section 592 penalties as well. Horizon declined to pay those. The case proceeded to Court, the government bringing suit for penalties and withheld duties.

“The government charged Horizon with negligence. But the company contested that, claiming that it had exercised ‘reasonable care’ by relying on the classification advice of a Customhouse broker. The government demanded summary judgment, but Judge Leo Gordon said no, there were triable issues of material facts concerning whether Horizon had been negligent. He bound the case over for trial, saying –

[Guest star Jeremy Irons voicing Judge Leo Gordon]:

“The Government would like the court to infer that all the responsibility for the erroneous entries rests on the shoulders of Horizon, but the court could just as easily infer that the customs broker shares a portion (if not all) of the responsibility. Customs brokers, after all, have statutory and regulatory responsibilities to classify merchandise correctly. E.g., 19 C.F.R. § 111.29 (requiring customs brokers to “exercise due diligence . . . in preparing or assisting in the preparation and filing of records relating to any customs business matter”); see also 19 C.F.R. § 152.11 (“Merchandise shall be classified in accordance with the [HTSUS] . . . .”); 19 U.S.C. § 1641(d) (allowing Customs to penalize a broker who “has violated any provision of any law enforced by [Customs] or the rules or regulations issued under any such provision”); United States v. Santos, 36 CIT ___, ___, 883 F. Supp. 2d 1322, 1327-30 (2012) (sustaining as reasonable a § 1641 penalty on a motion for default judgment against broker who allegedly misclassified imported goods).

“Drawing all reasonable inferences in Horizon’s favor, the court determines that genuine issues remain about whether Horizon exercised reasonable care in making its entries. Accordingly, the Government’s request for summary judgment on this issue is denied.”

 “Well, Sherlock” Watson interjected, “it would appear that the judge made the correct decision. If there are questions about whether Horizon was negligent – or its broker – then trial would appear to be appropriate!”

“True, Watson – except for what went before.”

 “What’s that?!”

 "The judge granted summary judgment against Horizon for the duties!”

 [Again, Jeremy Irons, voicing Judge Gordon]:        

"Horizon concedes that it misclassified the entries at issue in this action and that it is therefore liable to the Government for $70,254 in unpaid duties. Def.’s Resp. at 16; 19 U.S.C. § 1592(d) (“[I]f the United States has been deprived of lawful duties, taxes, or fees as a result of a violation of [§ 1592(a)], the Customs Service shall require that such lawful duties, taxes, and fees be restored, whether or not a monetary penalty is assessed.”). Accordingly, the court will order Horizon to pay the Government $70,254 in unpaid duties.”

 

[Holmes and Watson, back at the Baker Street flat]:

 “You see the problem, Watson?”

 “I’m not sure, Sherlock.”

“Horizon had not admitted to negligence, and thus had not admitted to a violation of Section 592 of the Tariff Act! The Court is going to hold a trial to determine if Horizon was negligent. Yet, the Court has already held Horizon liable for the duties!"

“But the duties are only recoverable if the United States was deprived of them as a result of a violation of §1592(a), and the Court has not yet decided whether there was a violation of that statute, or who, if anyone, was the violator! It’s going to hold a trial on that issue!”

 “But Sherlock, the Court said that Horizon had conceded that it was liable to the Government for unpaid duties . . .   .”

“No, Watson, Horizon conceded that the goods were misclassified, not that it had violated Section 592 of the Tariff Act – that remains to be seen, as the Court itself admits! The finding that the duties were owing was the Court’s!”

“But Sherlock, what if the Court holds a trial and finds that Horizon did exercise “reasonable care” – then there would be no basis to find a violation by Horizon!”

“And therefore no basis to collect the withheld duties! Exactly, John!”

“So the doctrine of finality of liquidation – “

"Seems to have vanished, John! Vanished in that courthouse on July 24, 2015! The Court seems to have uncoupled Customs’ ability to overcome finality of liquidation from the requirement to prove a violation of Section 592(a)!”

[Mrs. Stubbs, Holmes’ landlady, appears at the doorway with a serving of tea]

“I’m told you boys are wrestling with the disappearance of an American legal doctrine! I thought you might want some tea!”

“Thank you, Mrs. Stubbs” says Sherlock. “Very thoughtful!”

“Why don’t the Americans just take it up with their courts, then? Why call in British detectives?!”

“That’s the problem. It appears the Americans’ courts are complicit in the disappearance!”

[Closing credits. Resolving this disappearance must wait for another day, and perhaps another court. But importers across the United States should be very worried.]

SHOULD YOUR COMPANY INDEMNIFY ITS IMPORT MANAGER?

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.  

Retroactive Renewal of the Generalized System of Preferences (GSP)

On June 29, 2015, Congress and President Obama reinstated the Generalized System of Preferences (GSP), which provides duty-free treatment for selected goods from “beneficiary developing countries.”  The GSP had previously expired on July 31, 2013.

The new legislation provides for retroactive refunds of duties paid on GSP-eligible goods for the two years the program had lapsed.  

H.R. 1295, the Trade Preferences Extension Act of 2015 (“the Act”), renews GSP through December 31, 2017 and also extends the African Growth and Opportunity Act (AGOA) and duty preferences for Haiti[1].

Retroactive Refund Provisions

The Act states that notwithstanding section 1514 (19 U.S.C. 1514) or any other provision of law, any entry of a covered article eligible for preferential treatment under title V of the Trade Act of 1974 that was made after July 31, 2013 and before the effective date of the Act which is July 29, 2015, shall be liquidated or reliquidated as though such entry occurred on the effective date of the Act. The enactment date for purposes of the Act is June 29, 2015 and the effective date is 30 days after which is July 29, 2015[2]

Section 201(b)(B) of the act indicates that  a specific written request must be made for retroactive GSP refunds within 180 days after the effective date of the act, i.e., on or before December 26, 2015.  The request must contain sufficient information to enable Customs –

(i)              To locate the entry; or

(ii)            To reconstruct the entry if it cannot be located.

As of this date, Customs has not issued a directive or procedure for making such refund claims. In previous administrative messages, (CSMS 14-326 and 14-286)  Customs has indicated that importers could continue to use Special Program Indicator (SPI) “A” to claim GSP on their entries,  so that in the event of a retroactive renewal, CBP could process refunds automatically.  However, it is not yet known what procedure will be used for refund claims.  We will alert clients when the new procedure is known.

The law provides that refunds of duty deposits will be paid, without interest, within 90 days after liquidation or reliquidation of GSP-eligible entries, so an entry-by-entry liquidation or reliquidation scheme is clearly contemplated.

Amendments to GSP

The Acts also  amends GSP to allow the designation of certain cotton articles as eligible articles, but only if made in “least developed developing countries” (LDDCs). The affected provisions are HTSUS Subheadings 5201.00.18, 5201.00.28, 5201.00.38, 5202.99.30, or 5203.00.30, as GSP eligible, but only if made in “least developed developing countries” (LDDCs). 

Moreover, the law authorizes the President to designate certain luggage and travel articles as GSP-eligible, specifically items classified under HTSUS Subheadings 4202.11.00, 4202.12.40, 4202.21.60, 4202.21.90, 4202.22.15, 4202.22.45, 4202.31.60, 4202.32.40, 4202.32.80, 4202.92.15, 4202.92.20, 4202.92.45, or 4202.99.90, and articles classifiable under statistical reporting number 4202.12.2020, 4202.12.2050, 4202.12.8030, 4202.12.8070, 4202.22.8050, 4202.32.9550, 4202.32.9560, 4202.91.0030, 4202.91.0090, 4202.92.3020, 4202.92.3031, 4202.92.3091, 4202.92.9026, or 4202.92.9060. As of this writing, no such designations have been made.

GSP Reviews

As a consequence of reinstatement of the GSP, the United States Trade Representative (USTR) will need to undertake an expedited review of “competitive need limitation” removals and waivers for the GSP, with results due by October 1, 2015. The competitive need limit provides for articles to lose GSP eligibility when certain import volumes are reached. The President has power to waive these limitations, and allow products to continue as GSP eligible, under certain conditions.

USTR will also undertake its statutory annual review of GSP, accepting petitions to designate new articles as eligible, or remove articles from eligibility. The final results of this review will be due on July 1, 2016.

Conclusion

Pending receipt of Customs’ instructions on how retroactive refunds should be applied for, companies  will want to identify any records which might be necessary for Customs to locate or reconstruct subject entries so that retroactive refunds can be claimed once the GSP re-authorization takes effect.  Our firm will be happy to make these applications on your company’s behalf.

Please do not hesitate to contact us if you have any questions.

 

[1] The law also reauthorizes Trade Adjustment Assistance programs, and makes technical changes to the antidumping and countervailing duty laws.

[2] This means that Customs will not accept duty free entries for GSP-eligible items until July 29, 2015. 

Possible Retroactive Renewal of the Generalized System of Preferences (GSP)

After a nearly two-year hiatus, Congress appears ready to reinstate the Generalized System of Preferences (GSP), which provides duty-free treatment for selected goods from “beneficiary developing countries”.  Moreover, Congress appears ready to make the renewal retroactive to July 31, 2013, when it expired, and to provide a mechanism for importers to receive retroactive refunds of duty deposits.

H.R. 1891, introduced by House Ways and Means Committee Chairman Paul Ryan (R-WI), would extend the GSP, the African Growth and Opportunity Act (AGOA) and duty preferences for Haiti. It is expected to be joined with legislation providing the Administration with “fast track” trade negotiating authority, and forwarded to the President for signing.

The bill would reinstate GSP through December 31, 2017.  It would also provide retroactive application for certain entries liquidated and/or reliquidated without GSP treatment.  Retroactive GSP treatment may be granted only if a request for GSP treatment is filed with U.S. Customs and Border Protection (CBP) within 180 days after the effective date of the act.  The request must contain sufficient information to enable Customs –

(i)              To locate the entry; or

(ii)            To reconstruct the entry if it cannot be located.

Upon approval of an application, Customs will liquidate or reliquidate the entry with duty free GSP treatment. Refunds of duty deposits would be paid, without interest, within 90 days after such liquidation or reliquidation.

The bill would also amend GSP to allow the designation of certain cotton articles as GSP eligible, but only if made in “least developed developing countries” (LDDCs).

We will monitor the progress of the bill and report. In the meantime, your company may want to identify any records which might be necessary for Customs to locate or reconstruct subject entries so that retroactive refunds can be claimed once the GSP re-authorization takes effect.

Please do not hesitate to contact us if you have any questions. 

Customs Centers of Excellence and Expertise (CEEs): Program Directives and Evolution of Responsibilities

I.                INTRODUCTION 

Numerous importers have recently raised questions concerning Customs’ initiative regarding the establishment of Centers of Excellence and Expertise (CEEs) to handle transactions in discrete industry-defined areas of responsibilities. This memorandum provides background information on CEEs and their current operational status.

CEEs are an attempt by Customs to centralize decision-making, on an industry-specific basis, regardless of the ports of entry at which imports are made. The intent is to harmonize and centralize decisions concerning the admissibility, classification, appraisement and regulation of goods on an “industry-specific” basis, rather than on a “port-by-port” basis, as has historically been the case.

For now, the CEE program is supposedly voluntary and account-based, and is being implemented on a “test” basis. Assuming the test is successful, however, Customs intends to make the CEEs a model for future processing of commercial transactions by large accounts, and, possibly, all importers.

II.              BACKGROUND 

Historically, the Tariff Act of 1930 has distributed decisionmaking to local Customs officials at the port of entry where goods are imported. Entry documents must be filed at the port where the goods arrived, or are being entered for consumption. Port officials control decisions relating to release of the merchandise, as well as determining the classification, appraisement, and rate and amount of duty owing on individual entries of goods at the port of entry.

Similarly, protests against liquidation of merchandise are filed with, and typically decided by, Customs officials at the individual port(s) of entry.  Import Specialist teams at dozens of service ports divide responsibility for the classification and appraisement of various categories of goods (and often exhibit different levels of expertise in the commodities for which they are responsible).

Although the Constitution mandates that duties be assessed uniformly throughout the United States, the result of the “port-specific” processing system has been anything but. It is not uncommon for identical or similar goods, being imported through different ports of entry, to be classified or appraised differently, or for Import Specialists to make inconsistent decisions at the time entries are liquidated, or when protests are submitted.

The automation of Customs processes has provided an opportunity to for the agency to de-couple entry processing from geography.  Remote location filing has largely eliminated the need for importers to retain Customs brokers in each port where they make entry, and electronic platforms allow Customs to distribute work among officials in various locations.

The idea behind the Centers for Excellence and Expertise (CEEs) is to centralize post-entry, and ultimately entry, work, for industry groups, in a single team of specialists. At present, the teams are “headquartered” in various locations, but Customs officials at ports of entry are “detailed” to work with various CEEs.  The Existing CEEs are as follows:

Agriculture & Prepared Products, coordinated from Miami, specializes in agriculture, aquaculture, animal products, vegetable products, prepared foods, beverages, alcohol, tobacco or similar industries.

Apparel, Footwear & Textiles, coordinated from San Francisco, specializes in wearing apparel, footwear, textile mill, textile mill products, or similar industries.

Automotive & Aerospace, coordinated from Detroit, specializes in automotive, aerospace, or other transportation equipment and related parts industries.

Base Metals, coordinated from Chicago, specializes in steel, steel mill products, ferrous and nonferrous metal, or similar industries.

Consumer Products & Mass Merchandising, coordinated from Atlanta, specializes in household goods, consumer products, or similar industries and mass merchandisers of products typically sold for home use.

Electronics, coordinated from Los Angeles, specializes in information technology, integrated circuits, automated data processing equipment, and consumer electronics.

Industrial & Manufacturing Materials, coordinated from Buffalo, specializes in plastics, polymers, rubber, leather, wood, paper, stone, glass, precious stones and precious metals, or similar industries.

Machinery, coordinated from Laredo, specializes in tools, machine tools, production equipment, instruments, or similar industries.

Petroleum, Natural Gas & Minerals, coordinated from Houston, specializes in petroleum, natural gas, petroleum related products, minerals, and mining industries.

Pharmaceuticals, Health & Chemicals, coordinated from New York, specializes in pharmaceuticals, health-related equipment, and products of the chemical and allied industries.

For now, participation in the CEE program is voluntary, and is done on an account basis. Each importer can associate only with one CEE.  Thus, for example, if a petroleum importer were associated with the Petroleum, Gas and Minerals CEE in Houston, but imported t-shirts, the post-entry work associated with the t-shirts would be handled by the Petroleum, Gas & Minerals CEE.

There are no laws or regulations governing the operation of CEEs. For the time being, the work of the CEEs is probably exempt from rulemaking, since it involves Customs’ internal allocation of work among its employees. However, if CEEs become the principal mode for Customs operations, changes to the Tariff Act and implementing regulations are likely to be required.

 

III.            PROGRESSION OF WORK TO CEES

Customs is phasing in the operation of CEEs over time. At present, CEE participants continue to file entries at individual ports of entry, and release decisions are made by local Customs officials at the ports. Post-entry work, such as the liquidation of entries, and issuance of Form 28 requests for information and Form 29 Notices of Action, is being handled by the industry-specific CEEs.

Over time, entry and post-entry work will likely be migrated to CEEs. If the project is successful, it will likely become the principal model for Customs’ handling of commercial transactions.

In this regard, two recent developments affect CEEs, particularly three of them --  Electronics in Los Angeles, Pharmaceuticals and Chemicals in New York, and Petroleum and Minerals in Houston.

On September 11, 2014, CBP Commissioner Kerlikowske issued a Delegation Order [Exhibit A] which gave the directors of the CEEs the same powers as Port Directors of Customs, with certain exceptions. The CEE Directors and Port Directors will exercise this authority concurrently. While decisions relating to the control, movement, examination and release of merchandise will remain with the Port Director at the port where goods were imported, authority for post-entry functions – such as issuing demands for redelivery, handling post-entry processing, decisions regarding country of origin marking, stamping, packing, classification and appraisement of merchandise, and the processing of petitions, protests, post-entry amendments, recordkeeping matters, financial matters and the like.

On January 28, 2015, Customs announced its “Phase I accelerated rollout” under which the CEE Directors of the Electronics, Pharmaceuticals and Petroleum CEEs were given the trade authority over subject entries previously handled by port directors at various ports listed in Exhibit B.

 

IV.             CEEs: WHO’S DOING WHAT?

The transition of port activities to CEEs is confusing. Customs prepared a March 2014 Centers of Excellence and Expertise Trade Process Document, which summarizes the tasks currently being conducted by CEEs, as opposed to ports.  The document can be summarized as follows:

Activity

Port Responsibilities

CEE Responsibilities

Entry and Release Processes

Receives and processes CF 3461 entry, makes release decisions

None

Entry Summary Processes

Handled by CEEs for participating accounts. Entry summaries filed by ACS or ACE; will issue “docs required” message and process electronically (email)

Duty Payment

Receives duty payment, together with cashier copy of CF 7501

Processes entry summaries with no duty due

Quota entries

Processed by ports

Census warnings

Processed by CEE

CF 28 Request for Information

Issued by CEE, response to CEEs

CF 29 Notice of Action

Issued by CEE

AD/CVD Entries

Entry summaries processed by CEE, along with non-reimbursement statements

FTZ Entries

Responsible for physical supervision of zones

Process all FTZ entry summaries after account is accepted into CEE

TIB Entries

Processed by CEE. If entry filed before CEE account accepted, CEE will still handle post-entry work

Trade Fair Entry Summaries

Processed by CEE

Liquidation of Entries

Performed by port. Bulletin notice of liquidation at port

Post-Summary Corrections

If payment being made, copy of amended 7501 and payment to port of entry

Processes the PSC

Internal Advice Requests

Transmitted electronically to the CEE

Protests and Petitions

If filed in paper, file with the port, scanned copy to the CEE

If filed electronically, note port of entry and CEE, and will be processed by CEE

Reconciliation Entries

Continue to file with reconciliation port

Enforcement processes (seizures, penalties, etc.)

Handled by the ports, who will coordinate with the CEEs

Prior disclosures

May be filed with port

May be filed with CEE

Drawback

File with one of the 4 drawback processing centers

Bear in mind that these processes apply for now, only to companies which have started CEE accounts and are participating voluntarily in the program.

That being said, we have noted cases where post-entry work for companies not enrolled in the CEE program is being handled by CEE teams. Decisions are rendered through the ports, so that there is no visibility of this to the importer.

Transactions for industries which do not have CEEs, and for non-participating companies, will continue to be handled by the ports where the entries are filed.

Please do not hesitate to contact us if there are any questions concerning CEEs or their operation.

NEW CIT Decision Eliminates "Liberal Reading" of Protests

Liberal treatment of communications with Customs as constituting a “protest” may be a thing of the past, for in Ovan International Limited v. United States, Slip. Op. 15-17 (February 23, 2015), the CIT held that, in order to be considered a valid protest, a document must be labeled as such, and must contain all the information required by the Customs laws and regulations.

At a Georgetown Law School conference last week, Customs Headquarters officials  gleefully embraced the new decision and indicated that they will begin applying it aggressively.

Historically, the courts have ruled that protests do not require detailed precision, but merely need to advise Customs of the nature of the importer’s objection, such that the Customs officer can undertake an inquiry and correct any errors made in liquidation of an entry.

Importers wishing to protest a Customs decision will need to pay special attention to ensure that protests are complete and valid, and should consider using only the Customs and Border Protection (CBP) Form 19 Protest, or its electronic equivalent.

One Entry, One Article, One Claim – What Wasn’t Clear?

Carriage House Motor Cars, the owner of a 1958 Rolls Royce Silver Sea Cloud automobile, exported the vehicle to Europe for sale at an auction.  When the vehicle failed to sell, the company re-imported the vehicle, claiming duty-free entry under Harmonized Tariff Schedule (HTS) subheading 9801.00.25.  After seeking information from the vehicle importer and its broker, Customs on February 22, 2013 liquidated the entry, classifying the car under HTS Subheading 8703.23.00, and assessing duties at the rate of 2.5% ad valorem.  

On April 9, 2013—46 days after liquidation –  Carriage House submitted to Customs an Affidavit of its owner, together with a number of exhibits, clearly contesting the assessment of duty.  When Customs did not respond to this filing (surprise!), the importer filed a protest on CBP form 19, albeit 189 days after liquidation.  This protest was denied as untimely.

Before the CIT, the importer alleged that its April 9, 2013 Affidavit and exhibits should be treated as a “protest”.  In this regard, the importer noted that the Courts have long employed a rule of liberally construing filings as protests, requiring “only that the protest be distinct and specific enough to show that the objection was taken… was at the time of filing the protest in the mind of the importer and sufficient to notify the collector of its true nature and character to the end that he might then ascertain the precise facts and have adequate opportunity to correct mistakes and cure defects”.  [citing United States v. M. Rice & Co., 257 U.S. 536, 539-40 (1922)]. There was one car, one Customs entry, one issue – how could Customs not understand that the duty assessment was being protested?

But the CIT had other ideas. 

Protesting Parties Will be Held to the Rules

The CIT, per Senior Judge R. Kenton Musgrave, held that compliance with the Customs laws and regulations regarding protests was mandatory for a written submission to be treated as a valid protest.

The Court first noted that the governing statute, §514(c)(1)(2006) of the Tariff Act,  requires that a protest must set forth, distinctly and specifically:

(A).  Each decision described in subsection A of this section as to which protest is made;

(B).  Each category of merchandise effected by each decision set forth under paragraph (1);

(C).  The nature of each objection and the reasons therefore; and

(D).  Any other matter required by the secretary by regulation. [emphasis added]

The Court then went on to note the detailed requirements for protests established by Section 174.13(a) of the Customs Regulations, which require among other things, that a protest be captioned as such, provide the name and address of the protesting party, the importer number, the date of entry and liquidation of the entry, the existence of prior protests, and a declaration as to whether the merchandise has been the subject of a drawback claim [regulation reproduced below].

Holding that the requirements of the regulation are mandatory and binding, the Court noted the various failings of the protestant’s “Affidavit and exhibits” when compared to the requirements of the regulations.  It did not matter, the Court said, that the importer’s various discussions and interactions with Customs made it clear that the Customs officials knew what entry was involved, and the nature of the claim.  Setting out a strict new rule, the CIT concluded:

“In the past, the Court could have readily concluded that the . . . Affidavit constituted a valid protest, but at present, in order for it to be a valid protest the . . . Affidavit must have met all of the “straightforward” and “not difficult to satisfy” mandatory and regulatory requirements governing the validity of a protest, which it did not.”

Thus, despite the fact that only one entry, one article of commerce, one importer and one claim was at stake, and the fact that the Affidavit undoubtedly communicated to Customs the nature of the importer’s contention, the Court held that because this filing did not meet all regulatory requirements for protests, it could not be entertained as such.  The Court dismissed the lawsuit for lack of jurisdiction.

The Bottom Line: Use CBP Form 19

The lesson for importers is that the age of raising protests by means of letters, memos, and other submissions that do not meet the formal requirements of the Customs laws and regulations is over.  To have a submission treated as a valid protest, all of the numerous regulatory requirements must be satisfied.  

Customs Form 19, whether in paper form or electronic, contains fields for all of the required information.  If this form is used,  the only possible issues could be the clarity with which the claim is stated.  Trade practitioners should counsel their clients to set creativity aside when challenging decisions and just “use the form”. 

The Regulatory Requirements

The requirements for filing a valid protest are set out in Section 174.13(a) of the Customs Regulations, which provides:

§ 174.13   Contents of protest.

      (a) Contents, in general. A protest shall contain the following information:

(1) The name and address of the protestant, i.e. , the importer of record or consignee, and the name and address of his agent or attorney if signed by one of these;

(2) The importer number of the protestant. If the protestant is represented by an agent having power of attorney, the importer number of the agent shall also be shown;

(3) The number and date of the entry;

(4) The date of liquidation of the entry, or the date of a decision not involving a liquidation or reliquidation;

(5) A specific description of the merchandise affected by the decision as to which protest is made;

(6) The nature of, and justification for the objection set forth distinctly and specifically with respect to each category, payment, claim, decision, or refusal;

(7) The date of receipt and protest number of any protest previously filed that is the subject of a pending application for further review pursuant to subpart C of this part and that is alleged to involve the same merchandise and the same issues, if the protesting party requests disposition in accordance with the action taken on such previously filed protest;

(8) If another party has not filed a timely protest, the surety's protest shall certify that the protest is not being filed collusively to extend another authorized person's time to protest; and

(9) A declaration, to the best of the protestant's knowledge, as to whether the entry is the subject of drawback, or whether the entry has been referenced on a certificate of delivery or certificate of manufacture and delivery so as to enable a party to make such entry the subject of drawback (see §§181.50(b) and 191.81(b) of this chapter).

Best Key Textiles Co. v. United States

In Best Key Textiles Co. v. United States, No. 2014-1327 (February 3, 2015), the recipient of a ruling concerning the tariff classification of metalized yarn challenged Customs decision to revoke the ruling as being Arbitrary, capricious, an abuse of discretion, and not otherwise in accordance with law, in violation of the Administrative Procedure Act. The plaintiff contended that it had lost $200 million in customer orders as a result of the revocation, and asked the court to review both the substance of the ruling and the process by which it was revoked. The ruling recipient could not file a protest on the classification of its yarn, since the revocation ruling assigned it a lower rate of duty than applied to metalized yarn. The plaintiff=s damage was not in the payment of Customs duties, but in the loss of business, it contended.

After initially dismissing the case for lack of subject matter jurisdiction, the CIT reconsidered and reinstated the case, and upheld the revocation ruling. Best Key appealed to the Federal Circuit.

In its decision, the Federal Circuit ignored the merits of the plaintiffs claim altogether, and told the CIT to reinstate its earlier ruling dismissing the action for lack of subject matter jurisdiction. The plaintiff was not trying to vindicate its own rights, the appellate court said, but the rights of its customers who would be assessed with higher duties on garments made with the yarn. The plaintiff's remedy, the Court held, would be to go into the garment business, import garments and pay the higher duty, and then slog through the traditional protest procedure B a years-long undertaking which, in any event, would not lead to review of the contested ruling. The plaintiff did not have a case which could be heard under the CIT's 28 U.S.C. '1581(I) residual jurisdiction which, the Court indicated, must be strictly construed.The decision should be alarming to the trade community, since it suggests that Customs rulings, and their revocation or modification, are not judicially reviewable or perhaps reviewable only in the Federal District Courts.