Federal Appeals Court Holds Employee Directly Liable for Penalties and Duties Related to Negligently Declared Goods - What are the Implications?
On September 16, 2014, the Court of Appeals for the Federal Circuit published its long-awaited decision in United States v. Trek Leather Inc., and its opinion may have created an unintended level of concern among compliance professionals and import departments.
Trek Leather is an importer of men’s suits. Its business plan called for the importer to supply at no cost to the foreign producer, the raw materials used in the production of the finished goods. The delivery of input raw material at no cost to the producer is not unlawful, but the law requires that – at the time of entry – the cost or value of the input material must be added to the international transfer price to arrive at a correct dutiable value. The delivery of merchandise at no cost or at a reduced cost is known in this area of law as an “assist.”
In 2002, the president/shareholder (the “Corporate Officer”) of the importer failed to advise his import broker of the assists used in the production of the imported wearing apparel. This error was identified by U.S. Customs, but resolved with the payment of additional duties and without ancillary enforcement proceedings. In 2004, however, the same importer, through the same Corporate Officer, again failed to declare the assists, and this time – in addition to the collection of duties – Customs instituted enforcement proceedings against both the importer and the Corporate Officer, alleging grossly negligent conduct.
Customs proceeded against the importer and Corporate Officer under 19 U.S.C. § 1592, which provides that no “person” may “enter or introduce or attempt to enter or introduce” merchandise into the United States negligently, grossly negligently or fraudulently, and enumerates the penalties available for each level of misconduct. The position of U.S. Customs was that the Corporate Officer and importer were both liable for introducing or entering the merchandise into the United States with an incorrect declaration of dutiable value. The critical question raised in the enforcement proceedings was whether the United States could seek the imposition of penalties against the Corporate Officer personally, since he was not the importer of the goods; did not make the false “declaration” supporting entry; and had no personal obligation to pay the duties allegedly due.
In the Court of International Trade (“CIT”) proceedings, the corporate defendant (Trek Leather) conceded liability for grossly negligent conduct, but the Corporate Officer argued that the statute did not extend to him personally because he was neither the importer of the goods nor the party legally obligated to pay the duties. The CIT nonetheless sustained the position of the United States and held that both the importer and the Corporate Officer could be held jointly and severally liable, not simply for the penalties relating to the grossly negligent conduct, but also for the duties themselves. The Court of Appeals for the Federal Circuit initially reversed the CIT as to the personal defendant, and the United States sought an en banc review. The en banc panel vacated the Federal Circuit’s holding and held that the United States could properly pursue the officer because the officer qualified as a “person” under the statute. In addition, the en banc panel conceded that the Corporate Officer did not make entry, but also noted that the statute extended not only to those who “entered” merchandise (which might be read to apply only to the importer of record), but also to those who “introduce” such merchandise, which could extend to a broader class. Finally, in dictum that will be sure to cause concern in all importing companies, the en banc panel specifically declined to affix liability to the Corporate Officer because of his legal status as an officer, but rather held the Corporate Officer liable because the evidence demonstrated that he committed the acts complained of. In short, the Federal Circuit had the opportunity to limit the breadth of its decision by pointing to officer, director or fiduciary status, but declined to do so.
The Federal Circuit’s opinion will likely cause concern among the compliance and supply chain professionals and other mid-level employees in Customs and International Trade departments of importing companies. Under the rationale of this decision, these employees may be subject to higher individual risks than they would have previously anticipated, including fines and penalties, in addition to duties due on the imported merchandise. To ensure that company employees who now operate in a higher-risk environment are given the support of their management, companies may have to review policies on assumption of liability, indemnification, and even absorption of attorneys’ fees and court costs. Similarly, while this decision may have resulted in Customs having a new vehicle for enforcing compliance against individual company employees, Customs will have to adopt its own policies to ensure that these individual employees – though technically now at risk – will not be indiscriminately pursued.