FedEx vs. Department of Commerce: Compliance Comes in Small Packages

On June 24th of this year, FedEx filed a suit against the Department of Commerce “seeking to enjoin the US Department of Commerce from enforcing prohibitions contained in the Export Administration Regulations.”

In its filing FedEx stated that it “believes that the EAR violates common carrier rights to due process under the Fifth Amendment of the US Constitution as they unreasonably hold common carriers strictly liable for shipments that may violate the EAR without requiring evidence that the carriers had knowledge of any violations.  This puts an impossible burden on a common carrier such as FedEx to know the origin and technological make-up of contents of all shipments it handles and whether they comply with the EAR.”

This suit is brought about by the circumstances in which FedEx and similar small package carriers work.  Various exporters turn over packages to FedEx containing all sorts of merchandise and destined for consignees all over the world.  Many of these exporters are knowledgeable in export controls and work with FedEx to make sure the articles can be legally shipped to the destination and end user, and that any license or license exceptions are properly declared.  Other exporters are not as knowledgeable and rely on FedEx to make sure the exports are properly handled. 

This situation has been made more difficult and riskier by recent actions of Department of Commerce to place 68 Huawei companies in 26 countries on the Entity List.  This means that any shipments to these companies are either prohibited or subject to an export license requirement.  Many exporters know this and screen their shipments to make sure that no illegal exports take place.  Other exporters will place articles for export in a box or envelope, seal the top, and turn them over to FedEx, or similar carrier, without a thought of export prohibitions or controls – or maybe they believe that FedEx will let them know if there is a problem.

Under the Foreign Trade Regulations of the Bureau of Census, the responsibility for properly declaring an export normally belongs to the US Principal Party in Interest (USPPI).  Under the Census regulations, the USPPI is “the person or legal entity in the United States that receives the primary benefit, monetary or otherwise, from the export transaction.”  In a FedEx transaction that would generally be the party that turns the package or envelope over to FedEx (there are certain exceptions to this of course).

So – what is the role of FedEx or similar small package carrier?  FedEx believes it is being held responsible for scanning thousands of packages (sealed by the shipper) to ensure that there are no illegal exports. FedEx feels it is being held liable for an impossible task and that situation violates the Fifth Amendment.

In a statement in response to the FedEx suit, Commerce Secretary Wilbur Ross stated that FedEx is misinterpreting the regulations.  Secretary Ross said that “What the regulations simply say is that neither FedEx nor any other common carrier can knowingly carry goods that are in violation of the rules — knowingly. That means they have to know that they are in violation.” 

So – FedEx believes that it is being saddled with the responsibility of screening all export shipments to make sure they are not in violation of the export regulations.  Department of Commerce believes that FedEx (and other carriers) only has the responsibility to stop shipments that it knows are in violation. 

Part of the dispute may hinge on what is meant by the word “know.”   In an export compliance situation Department of Commerce has stated many times that an exporter cannot “self-blind” – in other words look the other way.  The Department has also held that “know” includes indications that the exporter should have known that a violation has taken place (or was in the process of taking place).  The possible difficulty with these interpretations is that they normally apply to exporters and not to carriers.

What would “know” or “knowingly” mean in a FedEx transaction? If the air waybill on one of 10,000 shipments out of a hub is addressed to Huawei does FedEx “know” that it is in violation?  If it is a violation, is FedEx or the exporter (or both) liable?   These are some interesting issues for the lawyers and courts to argue. 

Stay tuned!