The US Court of International Trade (“CIT”) recently denied a government motion for summary judgment and dismissed charges brought against a CEO in a penalty case involving a corporation that made inaccurate statements on a single customs entry form and repeatedly ignored US Customs and Border Protection (“CBP”) requests for clarification. While the CEO escaped personal liability, his business remains embroiled in litigation arising from what appears to have been avoidable errors. Although there was just one entry at issue, the case illustrates several fundamental lessons for US import compliance. A brief timeline is informative:
- March 24, 2002—Tip Top Pants, Inc. (“Tip Top”) makes a single entry containing 954 dozen men’s denim shorts and 960 dozen boys’ denim shorts, through the port of Laredo, Texas, with a total entered value of $215,398. The merchandise normally would be subject to a general duty rate of 16.8% ad valorem. However, Tip Top’s entry summary form claims duty free treatment under subheading 9802.00.9000, HTSUS, for apparel assembled in Mexico from US components.
- November 19, 2002—CBP issues a request for information on Tip Top's March entry. CBP states that “Due to the fact that this office is already reviewing your invalid claims” the regulations for prior disclosure to protect against a potential penalty no longer can be used. Tip Top does not respond.
- January 13, 2003—CBP issues Tip Top a notice of proposed action stating its intent to revoke Tip Top’s claim for duty-free treatment (and to bill for duties) because of Tip Top’s failure to respond to CBP's information request. The notice warned, “Your firm has made false claims . . . and is subject to possible penalties.” Tip Top is given twenty days to respond. Tip Top does not respond.
- May 7, 2003—CBP issues a pre-penalty notice to Tip Top citing “material false statements, acts and/or omissions” and proposing a penalty of $55,636.90, twice CBP’s potential lost revenue from the entry. CBP’s sole factual allegation is Tip Top’s failure to respond to the November 2002 request for information.
- June 26, 2003—Tip Top responds to CBP’s pre-penalty notice, arguing that the clothing on the suspect entry was eligible for duty-free treatment under NAFTA.
- June 30, 2003—Tip Top files a protest and request for further review at CBP Headquarters contesting CBP’s denial of duty-free treatment.
- October 6, 2003—Denying the June 2003 NAFTA argument, CBP issues a penalty in the amount of $55,636.90 alleging that Tip Top “entered or caused to be entered merchandise into the commerce of the United States by means of material false statements, acts and/or omissions.” Again, CBP’s sole factual allegation is Tip Top’s disregard of the November 2002 request for information.
- November 4, 2003—Tip Top, through counsel, files a petition seeking cancellation or mitigation of CBP’s penalty, arguing that its freight forwarder bore the responsibility of responding to CBP’s request for information. CBP did not rule on the petition as required by 19 U.S.C. § 1592(b)(2).
- February 2004—CBP contacts counsel that filed the petition and asks for a conference and for a waiver of the statute of limitations on the penalty case. Counsel advises that Tip Top is no longer a client and provides the last known contact information.
- June 2006—Apparently admitting its error regarding the duty free claim for the original shipment, Tip Top pays CBP $33,842.45 of the $36,186 in duties owing.
- May 18, 2007—The government files a complaint in the CIT against Tip Top and its Chairman and CEO, Saad Nigri. For Mr. Nigri, the government alleges only that he was Tip Top’s Chairman and CEO “[a]t all times relevant to the matters described in the complaint.” Two days later, the government moves for summary judgment against both Tip Top and Mr. Nigri, and for a civil penalty of $55,636.90 plus unpaid duties and interest.
- June 9, 2009—Defendants move to dismiss the complaint as to Mr. Nigri for failure to state a claim upon which relief can be granted.
- January 13, 2010—The CIT denies Defendants’ motion to dismiss Mr. Nigri from the case since it is too late. However, on its own motion (“sua sponte”), the court dismisses the government’s complaint as to Mr. Nigri. The court explained that while it is true that “officers of a corporation, in some factual circumstances” are liable for these types of penalties, nonetheless, the complaint provided “no facts upon which a charge against Mr. Nigri could be based.”
The Moral(s) of the Story
The government’s hurriedness here also afforded Tip Top quite a bit of good fortune.
First, Tip Top was fortunate that the government never issued a formal decision on its petition. This does not happen often, to say the least. If there had been even a brief decision, the government’s motion for summary judgment here may very well have succeeded, although we will never know for sure. But, if that had happened, Tip Top now would be facing a collection order from the court. Instead, Tip Top now can keep fighting which means it has the option to continue. Unfortunately for Tip Top, this also means additional rounds of expensive litigation.
Second, Mr. Nigri was fortunate in this case. Although his motion to dismiss was untimely, the CIT held that the government’s rush to prosecute Mr. Nigri individually included a failure by the government to investigate and discover facts sufficient to allege personal liability. Had the government spent a bit more time preparing its case, it seems likely that the CIT would not have reached out and dismissed the allegation against Mr. Nigri.
Third, even in 2002, US Customs seemed in a rush to find there was a violation here, saying that it was “already reviewing Tip Top’s invalid claims.” This was an attempt by the government to prevent Tip Top from filing a prior disclosure to protect against penalties. However, faced with this language, Tip Top should have at least considered a prior disclosure. It is not clear from the “already reviewing” language that the government had yet commenced the type of formal investigation necessary to preclude a successful disclosure. Nevertheless, Tip Top could at least have tried to file a disclosure, told its side of the story, and positioned itself as making a good faith effort to fix its error. Moreover, while filing a disclosure would involve paying the duties owing (which Tip Top ultimately did in 2006), it might have at least shown the port officials that the importer was not trying to evade the laws. Tip Top would have at least had some basis for arguing that it had made an innocent mistake and asking the local port officials to use their discretion and simply skip the penalty case.
Finally, and most importantly, the entire chain of events was worsened at every step by Tip Top's failure to respond to the first two notices from CBP. Regular importers should make certain they have some system in place for reviewing all correspondence from CBP and taking timely action when necessary. Even if the time frame seems short, or about to pass, or has recently passed, a call to the CBP port official who issued the notice with a polite request for additional time can work wonders. The call may also win a few insights into what is concerning the local official. The key point to remember is that US law places all import compliance responsibilities on the importer, not on the brokers or freight forwarders. CBP still largely corresponds by US mail. Importers should regularly confirm that the address on file with US Customs is up to date (and check mailboxes at past addresses) so that notices from CBP always will reach a person in the company with the authority to take action. If an importer has such notices sent to the customs broker, the instructions for handling the notice should be clear and thoroughly discussed. The importer should periodically confirm that the broker has no uncertainty about the person in the importer’s company to whom all such notices should be sent. The company should always be involved in any response, rather than leaving the matter entirely to the broker. If CBP is unsatisfied with the response, the duties and penalties are still the responsibility of the importer and the importer’s ability to make any claim against the broker is often strictly limited by contract terms.
In sum, Tip Top might have been able to blunt this entire situation by promptly and thoroughly responding to CBP’s November 2002 request for information. Instead, nearly a decade later, Tip Top still faces penalties of over 25% of the value of the goods and the company continues to spend time and money on litigation against the government with no particular end apparently in sight.
The CIT’s decision is available at: http://www.cit.uscourts.gov/slip_op/10-5.pdf.