It is rare that a case involving U.S. customs laws and regulations finds its way to the U.S. Supreme Court. Undeterred by long odds and what appeared to be “bad facts,” the president and sole shareholder of an importing company (the “Importer of Record” or “IOR”) filed a petition for a writ of certiorari earlier this year, seeking review of an en bancdecision of the U.S. Court of Appeals for the Federal Circuit (the “CAFC”) in a civil penalty case under 19 U.S.C. § 1592 of the Tariff Act of 1930, as amended.
On May 26, 2015, the U.S. Supreme Court denied the petition for certiorari filed by Harish Shadadpuri, the president and shareholder of Trek Leather, Inc.1 The denial of certiorari leaves intact the broad interpretation by the CAFC of the terms “person” and “introduce” in the customs penalty statute, raising the potential for individuals to be held liable for gross negligence and negligence penalties.
The case against Harish Shadadpuri began in January 2009 when the U.S. Department of Justice (the “DOJ”) filed an action in the U.S. Court of International Trade (the “CIT”) against Trek Leather, Inc. and its president and sole shareholder, Shadadpuri.2 The action was brought under the customs civil penalty statute3 to recover lost duties and a civil penalty. The DOJ alleged that the defendants were jointly and severally liable for civil penalties for fraud, gross negligence, or negligence on 72 entries of men’s suits into the U.S. The complaint sought the maximum penalty for fraud—the domestic value of the imported merchandise—of nearly $2.4 million and lost duties of just over $45,000. Alternatively, the DOJ alleged that the defendants were liable for the maximum penalty under the gross negligence standard (more than $534,000) or negligence (more than $267,000).
Trek Leather was the IOR on each of the 72 entries. The alleged liability arose from the failure of the IOR to include the value of “assists” when filing the entry paperwork with U.S. Customs and Border Protection (“CBP”). An “assist” includes, among other things, materials, parts, and components incorporated into the imported merchandise, as well as tooling, dies, molds and the like used in the production of the imported goods.4 The value of an “assist” must be included with the “price actually paid or payable” for the imported merchandise to comply with the customs valuation law.5 Under the customs penalty statute, liability for penalties and losses of revenue arise if a party enters, introduces, or attempts to enter or introduce any merchandise into U.S. commerce by means of a material false statement or material omission, or aids and abets another in a violation.
The “bad facts” in Trek Leather show that CBP had investigated the failure to declare “assists” in connection with previous imports made by another company in which Shadadpuri had a 40 percent ownership interest. At that time, CBP explained to Shadadpuri that “assists” had to be included in the declared value at the time of importation. The company paid additional duties as a result of the increased value of the imported goods following from the CBP investigation. However, CBP did not pursue a penalty against Shadadpuri personally. When CBP confronted Shadadpuri in connection with the failure to declare “assists” regarding the 72 entries made by Trek Leather, he conceded that the value of the “assists” should have been included in the declared value at the time of entry. This time, CBP pursued an administrative penalty against Shadadpuri and Trek Leather which led to the CIT complaint being filed when the administrative fraud penalty and additional duties were not paid.
In June 2011, the CIT granted summary judgment in favor of the government and found Shadadpuri and Trek Leather liable for gross negligence in connection with the 72 entries. Judgment was entered against them, jointly and severally, in the amount of $534,420.32 for the civil penalty and more than $45,000 in unpaid duties.6 Only Shadadpuri appealed the CIT judgment to the CAFC, meaning the issue of direct personal liability under the customs penalty statute was front and center.
Initially, that strategy paid off handsomely for Shadadpuri. In a 2-1 panel decision, the CAFC reversed the CIT, finding that “absent piercing Trek’s corporate veil to establish that Shadadpuri was the actual importer of record … or establishing that Shadadpuri is liable for fraud … or as an aider and abettor of fraud by Trek … we must reverse the penalty assessment against Shadadpuri.”7 Notably, the CAFC determined that the principle of the corporate veil would be upheld, observing that “the government has asked us to adopt a broad legal principle that would expose all corporate officers and shareholders to personal liability for negligent acts they undertake on behalf of their corporation. Absent an explicit statutory basis for doing so, we decline to believe Congress intended to supplant the common law so completely.”8Corporate officers and business owners of IORs, as well as customs counsel, breathed a sigh of relief.
But that victory was short-lived. The government requested and was granted a rehearing en banc to the disbelief of many in the customs bar. Concerns were quickly raised that direct, personal liability for customs penalties, without piercing the corporate veil or fraud, could follow. The worst fears were realized in September 2014 when the CAFC,en banc, unanimously held that by his actions, Shadadpuri had “introduced” merchandise into U.S. commerce by means of material omission in violation of the customs penalty statute and was directly liable for the gross negligence penalty imposed by the CIT.9
The CAFC focused on “introduce” in the customs penalty statute to find Shadadpuri liable, despite not requesting that the parties brief that issue. The Court did not find Shadadpuri liable under an “alter ego” theory of liability or find the facts supported a “piercing of the corporate veil.” CBP and the DOJ did not raise such allegations or theories. Instead, Shadadpuri was held liable “because he personally committed a violation of subparagraph (A).”10 The full CAFC found that in the penalty statute “introduce” is a flexible and broad term that includes acts and omissions that go beyond the “‘technical’ process of ‘entering’ goods.”11
IMPACT OF THE CAFC EN BANC DECISION
Because of its broad interpretation of “introduce” in the penalty statute, the CAFC en banc decision has raised significant concerns for company owners, officers and employees of U.S. importers involved in trade compliance, logistics, procurement and other functions related to import transactions. In his petition for a writ of certiorari, Shadadpuri pointed out that since the en banc decision, CBP has proposed an amendment to its Importer ID Input Record (CBP Form 5106) “in order to collect expansive and personal information from corporate officials[,]” arguing that the proposed amendment shows a “clear intent to take advantage of the en banc court’s expansive interpretation of 19 U.S.C. 1592(a)(1)(A).”12
The broad interpretation of “introduce” should also concern Non-Resident Importers (“NRIs”) (of which there are many, particularly in Canada), as well as foreign exporters because of their involvement in U.S. importation transactions. Clearly, officers, owners and employees act on behalf of an IOR (including NRIs), and their actions easily meet the expansive interpretation of the term “introduce” adopted in the Trek Leather en banc decision. Similarly, exporters act to “introduce” merchandise into the commerce of the United States by providing tariff classifications to U.S. IORs and their customs brokers, along with quantity, product descriptions, countries of origin, and price information on commercial invoices, bills of lading, packing lists and other documents used prior to the “technical process” of making entry into the United States.
Because the Supreme Court declined to hear Trek Leather, it remains unclear as to when CBP and the DOJ will pursue penalties against individuals for customs violations arising from gross negligence and negligence. Questions remain. For instance, will personal liability be pursued if the penalty case is against a “large company?” And will a “large company” be defined by its U.S. or worldwide revenues; the scope of its business operations; its volume of import activities; the U.S. Small Business Administration’s Small Business Size Standards, or some other factors? These concerns are genuine as reflected in a footnote found in a $17M customs penalty case recently filed by the DOJ, stating: “We are not currently initiating an action against the corporate officers but may do so should sufficient evidence warranting personal liability come to light.”13
Trek Leather raises the prospect that executives, owners, and other corporate personnel may be held personally liable for gross negligence and negligence customs penalties as a result of their pre-importationactivities that led to the introduction of merchandise into the commerce of the United States. As a result, U.S. and foreign companies that import into the U.S., and the individuals involved in importations, should review compliance procedures, review and verify the accuracy of information related to the imported goods, and specifically identify all individuals involved when submitting prior disclosures to CBP.