In a case decided on August 30, 2012 the Court of International Trade (“CIT” or “Court”) addressed the authority of the penalty guidelines found within Appendix B of 19 C.F.R. Part 171 of the Customs regulations. The case is interesting in that the Court uses the situation as an opportunity to remind the public that the Customs’ penalty guidelines do not have the strict force of law, but are instead taken into consideration according to certain parameters when adjudicating an issue. The guidelines are also used as an indication of how Customs may handle a case.

The case centers on Customs’ attempt to obtain an unpaid civil penalty from an importer. In U.S. v. Active Frontier International, Inc., the agency alleges that Active Frontier International, Inc. (“AFI”) falsely declared the country of origin of seven entries of apparel made during 2006 and 2007. Customs claims that the apparel was made in China, but that the entries filed with the government show the apparel’s country of origin to be Indonesia, South Korea or the Philippines, depending on the entry. In August 2010, Customs issued a pre-penalty notice advising AFI that it was considering issuing a civil penalty under 19 U.S.C. § 1592. The proposed penalty was 20% of the dutiable value of the apparel, or $80,596.40, based on a charge of negligence for stating the incorrect country of origin. AFI did not respond to this notice, nor the subsequent notice of penalty issued in September 2010. The government brought their current case against AFI in May 2011 to recover these penalties by having the Clerk of the CIT issue a default action. In December 2011, Customs filed an application with the Court to have a default judgment levied against AFI for the unpaid penalties, plus an award of post-judgment interest. In later supplemental briefs filed by Customs in June and August 2012 with the Court, the government clarified that not all of the merchandise in the seven entries was subject to a quota, but rather only a portion of each entry was subject to quota based on being made in China.

The key analysis in this case was based on the meaning of the word “materiality”, which is part of the definition in the 1592 statute for determining whether an act or omission rises to the level of negligence in a Customs case. To demonstrate an act of negligence, Customs must show that AFI brought the apparel into the country through statements that were “material and false”. The Court first looked to the 1592 statute to provide a definition for materiality, as a statute in the primary source of legal authority. However, the statute does not actually describe what makes an act or omission material. The CIT then reviewed the Customs regulations to see if a definition of materiality was codified, but only found that a definition exists in Appendix B to Part 171, which contains the penalty guidelines.

The CIT then assessed the validity of the penalty guidelines in providing authoritative guidance. It was noted that the appendix containing the guidelines were only added to the regulations after the notice and comment period had expired when the most recent version of the regulations were enacted. When these guidelines in Appendix B were issued, they were acknowledged as non-binding on Customs. Rather, they were disseminated only to provide internal agency guidance when reviewing these types of issues. Citing general administrative law principles, the Court noted that since the penalty guidelines are not a legislative rule, the judicial branch is not obligated to follow their guidance.

Even though the Court is not bound by the definition of “material” in the penalty guidelines, the guidelines may still hold some legal weight as they are deemed interpretative agency rulings. Such interpretative rulings can sway a court’s determination based on the finding in a leading federal circuit case, which instructs that courts may resort to this type of non-binding interpretative ruling to guide them in instances where certain factors in the case may render the ruling more persuasive. The CIT thus reviewed this pivotal case and its instructions according to the instant situation.

The CIT found that the factors in the AFI case did not result in the penalty guidelines being persuasive. In this situation, the Court stated that the definition of “material” found in the penalty guidelines was not persuasive, given that Customs was arguing that the sole act of a false statement of origin is categorically considered to be “material” under the 1592 statute. In this specific instance, Customs had not provided any evidence in its documents about the circumstances leading to the misstatement of the country of origin, and was charging that the fact there was a misstatement was the act constituting the materiality under the statute. The Court determined the mere act was not sufficient for a finding of materiality under the statute or penalty guidelines. In addition, the Court found that the penalty guidelines were not persuasive for a finding of materiality as their definition seemed to contradict the intent of the statute in this scenario.

The Court’s carefully nuanced opinion in the AFI case serves as a refresher in the general principles of administrative agency law and general guidance on the weight of interpretative rulings like the penalty guidelines. However, it is important to remember that the case does not mean that Customs cannot rely on rulings such as the penalty guidelines to legally support their decisions. Instead, the Court considered the specific facts in this situation and underwent a thorough reasoned analysis to reach its conclusion.