Court of International Trade Upholds Dismissal of Customs Negligence Penalty

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This month the U.S. Court of International Trade denied the Government’s motion for reconsideration of the Court’s prior dismissal of a Customs penalty claim based on negligence.  The dismissal was based on failure to exhaust the administrative remedies.

As the doctrine indicates, before proceeding to court to recover on a penalty claim, Customs has to “perfect” each penalty claim that the Department of Justice pursues recovery on in the Court of International Trade.  If Customs fails to do so, the Court lacks jurisdiction over the claims that are not “perfected” administratively.

In U.S. v. Nitek Electronics, Inc., Case No. 11-00078, the Government argued in its motion for reconsideration that the Court clearly erred in its prior decision to dismiss the negligence penalty claim.  Prior to addressing the arguments, the Court noted that “mere repetition of unsuccessful arguments is an improper use of [a motion for reconsideration] and a needless delay to finality.”

The Court rejected the Government’s primary argument that because penalty actions are brought de novo, the fact that Customs did not impose a negligence level penalty in the administrative proceedings is not a bar to bringing the claim in court for the first time.  The Court immediately pointed out that the Government raised this same argument in its response to Nitek’s motion to dismiss.  The Court was no more receptive to the argument the second time around.

The Court explained that § 1592(e)(1) allows it to decide the appropriate remedy “without being tethered to the claim imposed below,” and that the statute merely “indicates the lack of deference the Court affords Customs’ penalty determinations.”  It went on to explain (again) “that § 1592 creates a cause of action for the government not to impose a penalty claim but to recover a penalty already imposed at the administrative level.”  This means that “[t]he precise penalty claim Customs imposed for one of these three levels of culpability is thus central to the Court’s review,” citing prior decisions that held the scope of de novo review is limited to those issues considered in the proceedings before Customs.

The Court reviewed a long line of Customs penalty decisions that showed exhaustion of administrative remedies is routinely required before proceeding in the Court of International Trade.  This led the Court to find the Government “is simply incorrect in asserting lack of any controlling law on the issue of exhaustion in de novo proceedings.”

The Court also rejected (for a second time) the Government’s “lesser included offense” argument.  The Government argued that it met the statutory requirements and that Nitek was on notice of a negligence penalty claim because the elements of that claim are included in the Government’s claim for gross negligence.  But the Court noted that the Government could still not cite to any authority “that demonstrates that the criminal doctrine of lesser-included culpability applies to the (vastly distinguishable) context of civil penalties imposed pursuant to § 1592.”

Finally, the Court rejected the argument that its decision to dismiss the negligence level claim encroached on the Department of Justice’s ability to “independently evaluate Customs’ penalty claim prior to instituting § 1592 actions.”  The Court’s response to this argument was predictably simple: “It seems, however, that the predicament DOJ faced could have been avoided had Customs imposed a claim for gross negligence and negligence, thereby perfecting each claim.  The Court has entertained § 1592 actions to recover penalties Customs imposed for alternative levels of culpability.”  In other words, Customs should have known better and asserted alternative culpability level claims administratively so the Justice Department could bring seek to recover on those claims.

This decision makes it almost certain that companies and other culpable parties for Customs penalty cases will see Fines, Penalty & Forfeiture asserting (“perfecting”) alternative culpability level claims administratively with more regularity.  While fraud and gross negligence penalty cases certainly have “shock and awe” value, Customs risks losing those claims altogether if the Justice Department determines the evidence is not sufficient to prove them.

Therefore, Customs will need to perfect a negligence level penalty claim administratively in nearly every case to avoid outcomes like Nitek.  In some instances, this could help importers facing Customs penalty liability because it brings into play a lower penalty level exposure which might be more attractive, at times, than having to defend against the risk of a higher level penalty even if the evidence does not appear to overwhelmingly favor Customs.  Interesting strategy scenarios may play out where FP&F does not assert a negligence level penalty administratively.  Does this open the possibility for the importer’s counsel to suggest or even negotiate the inclusion of a negligence level penalty?



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