Full Federal Circuit Court of Appeals Finds Customs Civil Penalty Statute Applies to Corporate Employee
In an important precedent, the Court of Appeals for the Federal Circuit (CAFC), sitting en banc (i.e., the full court rather than the typical three-judge panel), held that corporate employees who engage in a broad variety of pre-importation actions that facilitate the formal entry process, including individuals who provide “critical documents (such as invoices indicating value),” may be held liable for penalties imposed under 19 U.S.C. § 1592(a) and unpaid duties under 19 U.S.C. § 1592(d).
Historically, U.S. Customs and Border Protection (CBP) has not imposed direct personal liability for civil penalties on employees of a corporate importer for negligent or grossly negligent acts involved in importing goods. Instead, it has limited the assessment of civil penalties to the company that acted as importer of record. The only exception was for officers or employees that aided or abetted wrongful acts and, even then, the courts historically have allowed “aiding and abetting” liability only with regard to fraudulent conduct.
CBP’s primary civil penalty statute, 19 U.S.C. § 1592(a)(1), provides that “no person,” by “fraud, gross negligence, or negligence” may “enter, introduce, or attempt to enter or introduce” merchandise into the United States by means of any affirmative submission of a document, data, or information (written or oral) that is “material and false,” or through any “omission” that is “material.” The statute provides civil penalties for a “person” who violates this provision, or who may “aid or abet any other person” to violate this provision.
The facts in United States v. Trek Leather focused on the actions of the company’s owner and president, Mr. Harish Shadadpuri, in order to determine whether he had violated the provisions of 19 U.S.C. § 1592(a). The key facts were that Mr. Shadadpuri transferred ownership of merchandise, while in transit to the United States, to a company he chose to be the importer of record and provided the customs broker with commercial invoices that understated the value of the merchandise by failing to include the value of certain “assists,” resulting in underpayment of duties. Mr. Shadadpuri was aware of the assists, as he had provided them to the foreign manufacturers through his other corporate entities, and this was not the first time CBP had found one of his companies to have failed to include assists in the valuation of imported merchandise.
CBP issued a penalty notice against Trek Leather and Mr. Shadadpuri, with duties and penalties calculated. However, some of the duties and all of the penalties were not paid. Thus, the government filed a complaint in the Court of International Trade (CIT) against both Trek Leather and Mr. Shadadpuri seeking recovery of the unpaid duties and penalties pursuant to Section 592. Trek Leather conceded gross negligence and Mr. Shadadpuri conceded that he “had the responsibility and obligation to examine all appropriate documents including all assists within the entry documentation and to forward these assists to his customs broker.” The CIT ultimately found both Trek Leather and Mr. Shadadpuri to be jointly and severally liable for gross negligence and entered judgment ordering payment of the unpaid duties and civil penalties.
In a July 2013 opinion, a divided three-judge CAFC panel reversed the CIT’s decision holding Mr. Shadadpuri “jointly and severally liable” for customs penalties. The CAFC panel reasoned that where the importer of record was a corporation, the president/owner of the corporation could not be held personally liable unless: (1) the government either “pierced the veil” of the corporation; or (2) the president/owner personally aided and abetted fraud by the corporation. In March 2014, however, the CAFC vacated the July 2013 panel opinion, and ordered the parties to file new briefs to the CAFC en banc.
The court dismissed arguments that Section 592 generally was intended to apply only to the importer of record, and did not reach corporate employees or officers where the importer of record is a corporation. The court held that the term “person” in the statute should be given its ordinary meaning, and therefore could apply to any individual who engaged in the conduct proscribed in the statute, not just the subset of “persons” who actually enter merchandise as importer of record.
The court further explained that it did not need to decide whether Mr. Shadadpuri “entered” the merchandise at issue, and relied upon a 1913 Supreme Court decision to find that the he “introduced” the imported merchandise even if he did not individually act as the importer of record. That Supreme Court precedent established that the term “introduce” is a “flexible and broad term added to ensure that the statute was not restricted to the ‘technical’ process of ‘entering’ goods.” The court added that the term “is broad enough to cover, among other things, actions completed before any formal entry filings made to effectuate release of imported goods.” Although the court disclaimed any attempt to define the outermost boundaries of the term, it stated that “the term covers actions that bring goods to the threshold of the process of entry by moving goods into CBP custody in the United States and providing critical documents (such as invoices indicating value) for use in the filing of papers for a contemplated release into United States commerce even if no release ever occurs.”
As a result, the court concluded that the government did not have to “pierce the corporate veil” to directly assess liability against the president/owner of the corporation. The president/owner was aware of the assists, sent manufacturers’ invoices to the customs broker for the broker’s use in completing the entry filings without including the value of the assists, and “did everything short of the final step of preparing the CBP Form 7501s and submitting them and other required papers to make formal entry.” Thus, the court held that Mr. Shadadpuri “introduced” the merchandise in question into U.S. commerce and his “own acts” came within the language of Section 592, leaving no need to pierce the corporate veil. Similarly, because Mr. Shadadpuri directly violated the statute, the court did not have to decide whether negligent or grossly negligent conduct could give rise to the “aiding and abetting” subsection of the statute.
In affirming the CIT judgment, it must be noted that the CAFC left in the place the lower court’s assessment of liability for unpaid duties against Mr. Shadadpuri pursuant to 19 U.S.C. § 1592(d). Thus, in addition to civil penalties, liability for duty payment could fall on an individual if they are found to have violated 19 U.S.C. § 1592(a). As set out in the CIT opinion, “the ‘language and structure of § 1592 indicates that subsection (d) is not limited to only importers and their sureties, but is intended to apply to further the mandatory recovery of unpaid duty from any party liable under subsection (a).’”
The CAFC’s broad interpretation of the terms “person” and “introduce” for purposes of 19 U.S.C. § 1592(a)(1) seemingly could place import managers and customs compliance personnel at greater risk of being individually assessed penalties for “introducing” goods into the United States in violation of Section 592, since they often are responsible for the same or similar actions for which Mr. Shadadpuri was held liable in Trek Leather. Officers and shareholders of larger companies, who are less likely to be involved directly with import operations, are unlikely to be at risk under this ruling.
It is important to keep in mind, however, that the CAFC’s holding may have been heavily influenced by the egregious set of circumstances surrounding Mr. Shadadpuri’s malfeasance and his concession of the facts supporting the violation. Although the lower court dismissed the fraud count, perhaps the CAFC was anxious to see that this conduct resulted in some penalty under a gross negligence level of culpability. Thus, we believe that this case should not be read as meaning that import compliance professionals will now be exposed to individual liability for all corporate violations of 19 U.S.C. § 1592(a). Instead, an individual must, at a minimum, have been negligent in their own acts or omissions related to the introduction of the merchandise. Therefore, the government still faces a significant burden in establishing personal liability under Section 592.
Recognizing that there is some risk that local CBP authorities could start expanding their enforcement activities to include trade compliance employees of corporate importers, this case serves as a wake-up call for increased diligence with respect to customs compliance and stronger consideration for the use of the voluntary prior disclosure mechanism to avoid the imposition of penalties under 19 U.S.C. § 1592(a) for both the corporate importer and its employees. Accordingly, it may be prudent to include additional language in voluntary prior disclosures to cover the individuals involved in the import transactions being disclosed, at least until it becomes clearer going forward how broadly the CAFC’s holding in Trek Leather will be applied. In the interim, the use of a prior disclosure could be an effective tool for mitigating the potential individual liability in the same way it has traditionally been used to protect the importer of record.