Nitek and the Penalty Process

There is a lot on my plate at the moment, but I want to be sure to squeeze this in for you. There goes my lunch-time walk up Michigan Avenue.

United States v. Nitek Electronics is an important decision of the United States Court of Appeals for the Federal Circuit. Go read it. The gist is all you will get from me today.

The gist is that when the United States commences a penalty action in the United States Court of International Trade, the point of the action is to collect on the same penalty claim Customs and Border Protection asserted in the administrative process. In Nitek, Customs' claim was based on a finding that the importer had acted with gross negligence. When Justice filed the case in the CIT, it asserted that the violation occurred as a result of (un-gross) negligence. Nitek moved to dismiss on the grounds that Customs never made a claim based on negligence and, therefore, that claim was not properly before the Court. The CIT agreed and dismissed the case.

On basically the same reasoning, the Court of Appeals has affirmed.

The reason this is important is that it means that Customs' administrative process limits the Justice Department's ability to define the case against the defendant. In the old days, it was generally understood that once Customs imposed a penalty, DOJ could handle it any way it wanted in Court. That is no longer true, if it ever was.

Nitek is consistent with a prior case called Optrex in which the Court said that Justice may not amend a complaint to assert a higher level of culpability than was contained in Customs' penalty claim. There, the Court of International Trade found the lack of notice concerning the higher potential penalties and the different facts that must be proven precluded pursing an elevated penalty in Court.

This case is different because Justice asserted a lower level of culpability in Court. When challenged, it analogized to the criminal law concept of the lesser included offense. Under that doctrine, if I kill a man I can be charged with murder as well as manslaughter because manslaughter requires all the same facts as murder. To prove murder, the prosecutor will need to show the additional aggravating factor of premeditation (or whatever it is they say on Law & Order). In Nitek, the CAFC refused to accept the analogy and said there is no such thing as a lesser included offense in customs penalty cases.

This might have a lasting impact on the practice. Initially, I expect Customs to be much more scrupulous about detailing the facts and conclusions at each level of culpability that may apply. This is effectively administrative pleading in the alternative to preserve the alternatives for later litigation. But, administratively, Customs cannot try and collect in the alternative. At some point, it makes a claim and that claim demands that the allegedly liable party pay one amount as a penalty for some specific set of facts. It is possible that the alternative pleading will merge into the final "bill" Customs put to the defendant. That remains to be see.

Deemed Liquidation and Notice

[UPDATE: Sometimes, Congress fixes things. That is the case here. The Trade Facilitation and Trade Enforcement Act of 2015 includes, at § 911 a fix for the issue discussed in this post. The relevant amendment changes the existing law "by striking 'on which notice of the original liquidation is given or transmitted to the importer, his consignee or agent' and inserting 'of the original liquidation'.” This should make the relevant date the date on which the deemed liquidation occurs, not the date of notice, which is how it should be (if you ask me).]

The second recent case from the Court of International Trade involves the deemed liquidation of an entry. It is United States v. Great American Insurance Company of New York. This is a collection case in which the United States is seeking $50,000 from a surety for unpaid antidumping duties, plus pre-judgment and post-judgment interest.

For purposes of my own time management, I am just going to give you the take-aways. If you want more detail, read the decision.

The first question is whether Customs and Border Protection can reliquidate a deemed liquidation within the 90-day period set in 19 USC 1501. A deemed liquidation occurs when Customs fails to liquidate an entry within the time allotted by statute. In the ordinary case, this is one year from the date of entry. See § 1504(a). Under 1504(d), an entry that has been suspended is deemed liquidated if not liquidated within six months of the lifting of the suspension. In this case, the defendant argues that Customs cannot reliquidate an entry deemed liquidated under § 1504(d). The Court of International Trade disagreed, noting that since 2004, § 1501 has specifically referenced § 1504. That reference covers deemed liquidations under both § 1504(a) and § 1504(d).

The second question was when the 90-day clock starts to run for the voluntary reliquidation. The defendant asserted the entirely reasonable position that it starts to run on the date of the deemed liquidation. That would make the reliquidation in this case untimely, and therefore void. The Court found the statute specifies that the relevant date is the date of notice, not the date of liquidation. In this case, the notice was provided some 10 months after the liquidation date. Using the notice as the start date, the reliquidation was timely. Further, the 10-month delay was not unreasonable.

If you were in law school, taking notes on this decision, that is what you would write down.

Withdrawal Not As Easy As Expected

The second recent Court of International Trade decision of interest primarily to lawyers is United States v. International Trading Services, LLC and Julio Lorza. In this case, the lawyer representing International Trading Services and Mr. Lorza tried to withdraw from his representation of the corporate defendant while apparently continuing to represent the individual.

It is not very easy to fire a client in the middle of litigation. The CIT's Rule 75(d) requires that an appearance by an attorney may only withdrawn by order of the Court. It requires that the lawyer make a motion and that the motion be served on the client. Here, the corporate defendant dissolved pursuant to Florida law before counsel was hired by Mr. Lorza to represent both the defunct company and the individual. Counsel seeks to withdraw from representing the corporation on the entirely reasonable grounds that it no longer exists. Consequently, according to counsel, he has no corporate client to represent.

The United States opposed the motion.

Florida Bar rules state that a lawyer may only withdraw when "withdrawal can be accomplished without material adverse effect on the interests of the client" or for "other good cause." In other words, clients cannot be abandoned mid-matter without some really good reason. Also working against withdrawal is CIT Rule 75(b)(1). which requires that corporations appear in the Court represented by counsel.

What this comes down to is the question: If there is no corporation, why does it need representation? The answer is that under Florida law, ITS remains amendable to suit and is still part of the case. As such, it can only appear in Court through counsel. Without substitute counsel to represent the interests of the defunct company, withdrawal will result in adverse effects on ITS.

We should not confuse the question of whether ITS can continue as a defendant and whether Customs and Border Protection will be able to collect from it. Enforcing a judgment against a dissolved corporation raises numerous legal issues. The status of the company is controlled by state law. In some states, the dissolved corporation continues to exist for purposes of winding up and also for prosecuting or defending any actions. However, once the assets are distributed to creditors, there remains the question of whether Customs can collect from the presumably bloodless turnip.

Of course, as an individual, Mr. Lorza does not have the ability to simply dissolve. He still needs a lawyer.

Duped "Importer" Liable for Customs Fraud

There have been several recent cases at the Court of International Trade that merit discussion. Two, in particular, are primarily of interest to lawyers. They show the truth of the old adage that bad facts make bad law.

The first is United States v. Jeanette Pacheco. In this case, the United States of America is pursuing Ms. Pacheco to the tune of $2.6 million for her "role" in a customs fraud scheme. The "scheme" went like this: A licensed customs broker named Dionicio Bustamante approached Pacheco in a nightclub. He offered her a way to make some fast cash and gave her $200 to sign a customs power of attorney. It is not clear that Pacheco had any additional contact with Bustamante thereafter.

After that, Bustamante began making entry of dried peppers, declaring the value to be $0.11 per kilogram. It turns out that a legally correct value was $3.75 per kilogram. When Customs and Border Protection queried Pacheco about the value, she failed to respond. To complicate matters, the FDA declared the peppers adulterated, refused entry, and demanded redelivery. Pacheco failed to redeliver the peppers to Customs and Border Protection. That resulted in a liquidated damages claim of $184 thousand.

CBP issued penalty and pre-penalty notices to Pacheco. Eventually, the government sued her to collect the penalty and she failed to respond. In this decision, the Court of International Trade imposed a default judgment on Pacheco.

Pacheco's failure to appear in Court acts as an admission of liability. But, the Court of International Trade must still determine the amount of the penalty to be imposed. In doing so, the Court noted that "by providing her identity to Bustamente for $200 so that he could conduct customs business on his own behalf, Pacheco aided and abetted his fraud upon Customs." That emphasis is mine. The Court also noted that as the principal in the relationship, Pacheco can be held liable for the acts of the agent, meaning the broker Bustamente.

Given that, the Court looked at the circumstances to determine the amount of the penalty to be imposed. The Court found some aggravating factors including failing to respond to a request for records and the fact that the importations threatened the public health and safety. Also, although it is not clear when it happened, it appears that Pacheco lied to Customs about whether the peppers were hers. On all of these facts, the Court imposed a penalty in the full amount requested by Customs: $2,651,312.

I hate this case. Not because it is wrong, but because it is probably right. Pacheco did so many things wrong here that she basically sealed her fate. But, there is another story that can be told. It appears that Pacheco made the very stupid choice of signing a power of attorney without any understanding of what that means. She did so for a quick $200, which ended up costing her (at least on paper) $2.6 million.

But, was she really the principal in this transaction? She was legally, because she signed the POA allowing Bustamante to make entry on her behalf. But, it also does not appear that she had any knowledge of the importations, she did not decide to undervalue the goods, she did not know the goods were adulterated. When she "lied" to Customs that the goods were not hers, I suspect she had no idea that the goods were being imported in her name. The peppers probably were not hers as far as she was concerned. As far as I can tell, she did not order them, did not pay for them, and did not take delivery of them.

I'm not even sure she was the principal. In agency law, the agent works for the principal. Here, the agent was working entirely for himself (or so it appears). He duped her into signing the document and then used her identity to make fraudulent imports. I don't see why that is not a mitigating circumstance. My assumption is that Bustamante is the subject of his own penalty case and may even be subject to criminal prosecution. I don't know what happened to him.

This is a bad set of facts. Obviously, Pacheco should never have signed the POA. She should have responded to CBP. She should have responded to the penalty notices. She should have thrown Bustamante under the first bus she could find. But, despite all those mistakes, what we seem to have is identity theft with the victim now on the hook for $2.6 million. While that is probably legally correct, that seems wrong.

Ruling of the Week 2015.25: No Refund for CPSC Restricted Goods

[UPDATE: I changed the title of this post to more accurately reflect the content, and to not look like an idiot.]

Like a lot of other lawyers who do administrative law, I have lately been thinking about Customs and Border Protection's efforts to wrangle its partner government agencies into using the Automated Commercial Environment to submit data to Customs. If you have been dealing with Customs for the last year or so, you have probably seen this image.

What is happening is the mandatory use of Customs' ACE system for electronic filing of data for other agencies. Previously, this data might have gone to Customs on paper or in a different electronic system. If this works, it will be great. If you are an importer, make sure your broker is up to speed and has invested in the software and training necessary to keep up with these changes.

One of the agencies that is moving toward ACE implementation is the Consumer Products Safety Commission. CPSC regulates and enforces product safety. Products that do not satisfy existing CPSC standards or are shown to be unsafe can be deemed inadmissible. Customs' role is to ensure that importers have the necessary documentation to prove that the products meet any applicable safety standards (e.g., lead content, choking hazards, etc.).

Which brings me to the Ruling of the week: HQ H239257 (Jul. 25, 2013). The importer entered some lighters, which Customs released. However, the CPSC asked Customs to issue a Notice of Redelivery because the importer had failed to file a pre-importation report with CPSC. In this case, the importer actually redelivered the goods to Customs and subsequently exported them to Canada. [Side note to Canada: Be on the lookout for potentially dangerous lighters from America.]

After exporting the goods, the importer asked Customs for a refund of the duties it paid. Note, this is not a drawback claim. The importer just wants its money back and pointed to 19 USC 1558. Under that statute, duties cannot be refunded after the release except for certain circumstances. Relevant to this situation, Customs can refund duties paid "[w]hen prohibited articles have been regularly entered in good faith and are subsequently exported or destroyed pursuant to a law of the United States and under such regulations as the Secretary of the Treasury may prescribe." (I added the emphasis.)

The problem is that when federal agencies interpret their regulations, they sometimes give very specific and technical meanings to terms. Here, the rub is the word "prohibited." The lighters could have been entered into the United States had the importer properly documented them with the CPSC. Consequently, the lighters were not "prohibited," they were merely "restricted." Prohibited merchandise cannot lawfully be imported under any circumstances. Restricted merchandise, on the other hand, can be imported when the importer proves it has satisfied the legal requirements for entry.

Because the lighters could have been imported into the United States if the importer satisfied CPSC requirements, they were merely restricted and not prohibited. As such, CBP refused to refund the duty deposits.

So, when will Section 1558 apply? What is truly prohibited merchandise? Here is CBP's helpful page for travelers. As you might imagine, illegal narcotics and child pornography are both prohibited merchandise. But, it is unlikely that the importer will have declared those goods to Customs and paid duty. Under certain circumstances, Absinthe is prohibited (keep that thujone level down, please) as are unsafe toys and items made of dog and cat fur. There are others including lottery materials from any other country.

One industry that I suspect might qualify for refunds under this provision is the makers and importers of smokers' wares that have been needlessly and cruelly labeled drug paraphernalia [probably NSFW by many standards], which is prohibited merchandise.

Finality of Liquidation and the Loss of Defenses

Most people assume that when sued by the United States for unpaid customs duties, taxes, fees, and interest, the defendant will have an opportunity to assert all available defenses to the claim against it. That is technically true. The question is which defenses are available. United States v. American Home Assurance Co., has made the answer to that question a bit clearer, but maybe not in a good way.

American Home ("AHAC") is the surety on a number of bonds covering the importation of mushroom and crawfish tail meat from China. Both of those products are subject to antidumping duty orders. Customs and Border Protection liquidated the entries and assessed antidumping duties. When the importer defaulted, the government tried to collect from AHAC and informed AHAC of its intent to seek post-judgment interest. AHAC protested the demands for payment of duties and interest. Customs denied the protests.  Therein lies the problem.

Section 1514 of the Tariff Act of 1930 (19 USC 1514) makes a liquidation final and conclusive on all parties including the United States, unless the someone files a valid protest. If the protest is denied, the importer or surety can file a summons in the Court of International Trade challenging the denial. Absent a summons, the denied protest renders Customs' decision final and conclusive. Finality is a bar to an importer's efforts to seek a refund of overpaid duties and also a bar to a duty recovery action by Customs. If there was a violation through fraud, gross negligence, or negligence, Customs can try to collect duties and interest going back five years, but that is the exception.

This case is a little different because the claim for interest was not asserted at liquidation. Rather, it came in the first demand for payment on the bond that CBP made to the surety, AHAC. AHAC attempted to defend the interest claim against it, but was shut down.

According to the Court, the interest assessment is a protestable charge or exaction. The decision to impose interest was not ministerial or automatic. Rather, Customs had to apply law and facts to determine whether AHAC might be held responsible for interest. Consequently, CBP made a protestable decision. The fact that the charge or exaction was first asserted after liquidation does not change the fact that it was protestable and, in fact, protested.

Because AHAC did not challenge the denied protests in the Court of International Trade, the denial became final and conclusive. As a result, according to the Court, AHAC must pay the interest claimed up to the value of the bonds.

This raises all kinds of hackles.

What this means is that an importer who is dissatisfied with a denied protest has no choice but to pay Customs or go to the Court of International Trade as a plaintiff. Normally, that is what one would expect and it is not a tremendous problem. However, there is a statute that requires that plaintiffs pay all of the disputed duties, taxes, and fees before commencing the action in the CIT. That means that if the protesting party cannot afford to pay the duties allegedly owed (as sometimes happens) and cannot file a lawsuit, the act of filing the unsuccessful protest will have waived any opportunity to assert defenses in the eventual collection action. That is a terrible result that hurts the importer coming and going.

In the long run, will this create a disincentive to file protests? It might. If my product is being improperly assessed at a high rate of duty but I don't have the money or wherewithal to litigate in the CIT, what is my best option? Previously, I might have filed a protest and then decided how to go forward if it were denied. Now, am I better off making entries at the lower rate of duty contrary to instructions from CBP, but with internal and external evidence of reasonable care? Eventually, CBP will make that into a penalty case in which I will be able to assert all of my defenses. Clearly, that is a risky strategy because the penalties will be more severe than the duties unless I have a rock-solid case of reasonable care. But, importers do disagree with Customs and Customs is not always right. In some (likely rare cases) that may be the best way to proceed.

One important final point: Although I am saying I don't like the result, I am not saying it is wrong. In fact, with a limited amount of time spent on research, I can't see why it might be wrong. I generally think that defendants have the right the right to assert all available defenses in civil actions brought by the United States. This case does not violate that principle. But, it limits the scope of available defenses where there is a denied protest. That seems like a big price to pay. But, the finality of liquidation is a shield as well as a sword. Often, an importer will seek refuge in the fact that the liquidation is final and cannot be revisited by Customs. This is the same principle, although it favors the U.S. There is a certain symmetry to that.

There is a Trial on the Horizon

Penalty cases are abundant these days.

In United States v. Horizon Products International, Inc., the government is seeking $394,794 in unpaid duties and penalties plus interest. The imported merchandise is plywood and the underlying issue is whether the wood was properly classified. Horizon conceded that the merchandise was misclassified and that it owes about $70,000 in unpaid duties. The issue is the remaining penalties and interest.

Regarding the pre-judgment interest on unpaid duties, the Court has the discretion to order or not order the payment of pre-judgment interest, which is intended to compensate the United States for the loss of the duties over time prior to payment. When deciding whether to award pre-judgment interest, the Court is supposed to provide full compensation while also considering several factors including:

• The degree of personal wrongdoing on the part of the defendant
• The availability of alternative investment opportunities for the plaintiff (i.e., the United States)
• Whether the plaintiff delayed in bringing the action to recover the duties
• Other considerations of fundamental fairness

 Here, the Court found no unreasonable delay by the United States and that the importer has not paid the outstanding duties. Thus, the Court ordered that Horizon pay prejudgment interest. I do have to wonder about the alternative investment opportunities. That factor essentially asks whether the U.S. would have done something useful or profitable with the money. I don't want to sound cynical, but I think that probably cuts against the U.S. getting interest, but that is just me.

Regarding the penalty amount, Horizon conceded the misclassification. That means there was a material false statement on the entry documents. My experience is that Customs and Border Protection will generally assume that means there was negligence or worse. That makes sense since the law puts the burden on the importer to show that it was not negligent. That's what this case is all about and why it is interesting. Horizon contends that there is an open question of fact as to whether it exercised reasonable care in making the entries.

What evidence does Horizon have that it exercised reasonable care? To start with, it used a reputable customs broker. Congress identified this as evidence of reasonable care in the legislative history to the Customs Modernization Act, but it is not a 100% defense.The government contends that Horizon has not shown this it actually worked with the broker in a "good faith effort" to ascertain the correct classification.

There are some records of communication with the broker in the form of faxes. [Side note: these entries are from 2006 and 2007, well past my presumed date of extinction for fax machines.] The faxes, according to the Court, "raise more questions than they answer . . . ."

The Court then makes a well received (by me) observation (the emphasis is mine):

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).

This is important. It shows an understanding by the Court that it can be reasonable for an importer to rely on a broker for classification advice. But, the facts matter. We need to know the relative involvement of the broker and the importer in the decision, the reasonableness of the broker's advice, and other factors that might indicate that the importer acted reasonably. The Court is wisely saying that where reliance on a broker is raised as evidence of reasonable care, it needs to look at the whole picture. It is not enough for CBP or the broker to fall back on the old saw that "the importer is ultimately responsible for the entry."

The Court, therefore, found a genuine issue of material fact in dispute. That means the case is not appropriate for summary judgment. It will, therefore, need to go to a trial if it is not settled.

There are two other issues worth a mention. First, Horizon made the argument that it should be excused from the penalty under the Small Business Regulatory Enforcement Fairness Act. This is a useful tool for small businesses that face a civil administrative penalty despite having acted in good faith. It does not apply here because Horizon has not paid the duties owed.

The last point is whether the Court should mitigate the penalty below the demand by Customs. That involves a detailed analysis of the "Complex Machine Works" factors. These are 14 factors the Court is to consider when reviewing the amount of a penalty previously imposed by Customs. This is another reason why this case is not ready for summary judgment.

It appears that Horizon and the U.S. government are going to be squaring off in court soon.

Nominative Trademark Fair Use

Customs seized some televisions at the Port of Miami. The reason was an apparent counterfeiting of the trademarks HDMI and MHL, both of which are interface connections. You have probably seen HDMI cables and connectors. They look like big USB connectors and are present on may modern televisions, computers, and game consoles. MHL is the standard for Mobile High-Definition Link, which is a new standard designed to connect small devices such as smart phones to larger HD monitors. With an MHL connection, you can use your smartphone to stream content to your TV, which is a cool thing that can now be done via Chromecast or Miracast.

I don't usually write about simple seizures, but this one and similar seizures bug me.

Customs and Border Protection is in the habit of seizing electronics that identify electronic ports by type. For example, where a tablet has a USB port and labels it as such, CBP requires that the producer have a license to use the USB label, which is a registered trademark of the folks at the USB Implementers Forum, Inc. If the unit or the packaging has any of the familiar USB logos on it, CBP is entirely in the right to do so. Same goes for HDMI, MHL, DVD, and other standards that are associated with registered trademarks.

But, what if the unit or the box simply uses the letters HDMI to identify the port into which a compatible HDMI cable is to be inserted? What if the box says "4 HDMI ports" without ever using a trademarked logo associated with HDMI?

One might argue that because HDMI, USB, and similar designations are "word marks," any unauthorized use of the word is trademark infringement. That, however, would be wrong.

The point of a trademark is to ensure that the consumer knows the source of the product. If you buy shoes bearing a Nike swoosh, those shoes should come from Nike. Same goes for a Xerox machine, Hershey bar, Dell computer, and any other trademark. But sometimes, the use of the trademark is not to identify source and no consumer would be confused by its use. A computer service business would not be infringing if it stated that it is able to repair Dell computers. That is a description of a service, not an indication that Dell is the source of the service. Of course, that business could go too far and make a confusing claim indicating an actual affiliation with Dell.

In trademark law, there is a concept known as "nominative fair use." Nominative fair use is a limited exception to the exclusive rights of the trademark owner. It allows third parties to use the trademark to describe the product or service without indicating that the user is the origin of the product or service. This is both fair and necessary. It is fair because it does not interfere with the trademark owner's exclusive use of the mark as a designation of origin. It is also fair because it prevents the trademark owner from monopolizing a product category by making it impossible for anyone else to describe a similar or compatible product.

In some cases, it is necessary to allow a third party to describe something using a trademarked word or phrase. The alternatives would be too unwieldy. Assume, for example, that the standard sizing for batteries were subject to trademark (for all I know, it might be). If you make a flashlight that requires two AA batteries, how would you convey that to purchasers without using the AA designation? You could say: "This flashlight requires two 1.5v alkaline batteries that are 1 3/4 inches in length, and 1/2-inch diameter cylinders, with positive and negative poles at each end." That won't work and that is why we have nominative trademark fair use.

The courts have recognized this exception for some time. Customs and Border Protection has also recognized it. See HQ 472729 (Sep. 26, 2002). The concept does not seem to have trickled down to the ports.

Just to be clear, this particular seized merchandise may have been improperly festooned with HDMI logos and MHL logos without authorization from the trademark holders. In that case, CBP did its job properly. If, on the other hand, the use is consistent with nominative fair use, CBP should release the merchandise and increase the training for its personnel on this topic.

Also, I don't want anyone to think I am advocating that it import products containing HDMI, USB, MHL or similar connectivity without the manufacturer having a license to that technology. Doing so is very likely patent infringement and that raises different and very expensive problems. But, CBP does not enforce patents at the border without an exclusion order from the International Trade Commission or a federal court. Hardware and software should be properly licensed.

The only issue here is the use of descriptive labels in a nominative sense. That is a narrow exception to trademark law that needs to be better understood.