Federal Circuit Holds Corporate Officer Personally Liable Under the Tariff Act, Overturns Panel Decision

Practical Law Legal Update 2-582-4425 (Approx. 6 pages)

Federal Circuit Holds Corporate Officer Personally Liable Under the Tariff Act, Overturns Panel Decision

by Practical Law Commercial

Background

The Tariff Act prohibits any person from:

Entering, introducing or attempting to enter or introduce any merchandise into US commerce by making a material false statement or omission, on customs forms or otherwise, with:
- fraud;
- gross negligence; or
- negligence
(19 U.S.C. § 1592(a)(1)(A).)
Aiding or abetting the entrance or introduction of prohibited merchandise into US commerce (19 U.S.C. § 1592(a)(1)(B)).

The widely accepted interpretation of Section 1592(a)(1) was that:

Only the importer of record can face direct liability for the conduct proscribed by subsection (A).
Individuals can only face personal liability under subsection (B), for aiding and abetting an importer of record that violated subsection (A).

Those involved with importing goods to the US, including employees, shareholders and foreign business partners in the supply chain, have operated under the assumption that Section 1592(a)(1)(A) only applies to the importer of record, because of:

Precedential case law. Specifically, in US v. Hitachi Am., Ltd., the Federal Circuit held, in part, that the prohibition against misleading documents in Section 1592(a)(1)(A) applies only to the importer of record and that it cannot apply to individuals who work for the importer of record, in their personal capacity (172 F.3d 1319 (Fed. Cir. 1999)).
US Customs and Border Protection (CBP) enforcement. CBP, which is responsible for enforcing the Tariff Act, had routinely enforced Section 1592(a)(1)(A) only against importers of record.

Trek I and En Banc Rehearing of Appeal

In Trek I, a Federal Circuit panel followed the widely held interpretation of Section 1592(a)(1) and held that an importer of record's corporate officer and shareholder cannot face liability under Section 1592(a)(1), unless CBP:

For subsection (A), pierces the corporate veil between the entity-importer and the officer-shareholder.
For subsection (B), establishes that the officer-shareholder aided or abetted the importer of record's violations of subsection (A).

The Federal Circuit granted CBP's request for an en banc rehearing of the appeal (Trek II). For a thorough discussion of the underlying facts and procedural history of Trek I, see Legal Update, Federal Circuit: Corporate Officer Not Personally Liable Under the Tariff Act for Negligent Misrepresentations Made in Customs Form: Background.

The issues on appeal in Trek II were whether Harish Shadadpuri, a corporate officer and shareholder of the importer of record, as an individual:

Qualifies as a person who can face direct liability under Section 1592(a)(1)(A).
Enters, introduces or attempts to introduce merchandise into US commerce through actions taken in an official corporate capacity for the importer of record.

Outcome

The Federal Circuit held that Section 1592(a)(1)(A), by its own terms, applies to persons. The definition of persons under Section 1592(a)(1) is not limited to importers of record and, under the plain meaning, includes any individual who violates the statute. This reading covers the importer of record's officers, shareholders and employees, but is not limited to persons who are employed by or directly connected to the importer of record. In reaching this conclusion, the Federal Circuit rejected previous interpretations that imposed the importer of record limitation on Section 1592(a)(1)(A) and focused on whether covered persons entered, introduced or attempted to introduce merchandise through false statements.

The Federal Circuit held that the term introduce covers:

Actions that bring goods to the threshold of the process of entry by moving goods into CBP custody in the US.
Providing critical documents for use in filing of papers for a contemplated release into US commerce.

Under the Federal Circuit's reading of Section 1592(a)(1), Shadadpuri:

Was covered as a person under the statute.
Acted to introduce merchandise with his role in Trek's submission of misleading customs forms.

Practical Implications

Anyone involved with an import transaction should be aware of the Federal Circuit's Trek II decision because of its potentially significant impact on the industry. Trek II reverses commonly held assumptions and could expand liability under Section 1592(a)(1)(A) to include:

Corporate officers.
Shareholders.
Managers whose business decisions have an impact on importing goods entering US commerce.
Employees or individuals who sign or certify bills of lading and customs-related forms.
Business partners in the supply chain, like manufacturers, regardless of location.
Individuals for activity outside of the US.

Importers of record that employ individuals need to review their basic procedures, policies and training so that all employees or individuals who have an impact on imported goods and merchandise comply with customs rules. Individuals and employees should explore professional insurance options and seek an indemnity from their employer for Section 1592 violations. Supply chain participants, including companies and individuals in business with importers of record, should:

Evaluate how their current agreements allocate risks similar to violations of Section 1592.
Consider Section 1592 violations when negotiating future agreements, especially when negotiating provisions like:
- indemnification;
- limitation of liability; and
- insurance requirements.

At a minimum, those involved in import transactions should evaluate any current liability and update their compliance procedures to avoid future liability because of Trek II.

Federal Circuit Holds Corporate Officer Personally Liable Under the Tariff Act, Overturns Panel Decision | Practical Law