The Reasonable Care Standard for Importers: Does consultation with a broker negate a negligence penalty?

In 1993, the Customs Modified and Informed Compliance Act (“Mod Act”) vastly altered the relationship between importers and Customs and Border Protection (CBP), shifting legal responsibility for declaring value, classification, and rate of duty to the importer. In addition to this duty comes the obligation to exercise reasonable care with import transactions, pursuant to 19 U.S.C. §1484. If an importer demonstrates negligence in such a transaction, CBP may impose penalties under 19 U.S.C. § 1592. This article discusses the reasonable care standard, summarizes recent interpretations, and explains how one company is attempting to argue against a negligence claim.

The Reasonable Care Standard

When the reasonable care requirement was added to 19 U.S.C. §1484 by the Mod Act, the drafting committee of the Mod Act provided that “consulting with a customs expert” is one way an importer may establish evidence of proper compliance with the reasonable care requirement.[1]   However, the broker consultation must be in writing.  Negligence claims may be brought when an import violation is the result of a lack of reasonable care, and so the exercise of reasonable care is a defense to a negligence claim under 19 U.S.C. §1592.[2]    CBP may also bring gross negligence and fraud claims under §1592, and consultation with a customs expert will not vitiate these claims.  Under 19 U.S.C. §1641(b)(4) customs brokers have the duty to exercise responsible supervision and control over the customs business they conduct, and they may be subject to penalty for failure to uphold this duty.

According to a 2006 Court of International Trade (CIT) case United States v. Optrex America, Inc. Slip Op 06-73, if an importer can establish that it consulted with professionals, and made a good faith analysis prior to classification, they will have passed the reasonable care test, regardless of whether or not a correct decision is reached. But what happens if the company, in consulting with a customs broker, is advised to file an incorrect classification, and the broker does not catch the mistake?

United States v. Horizon

On July 24, 2015 the Court of International Trade (CIT) denied the government’s motion to impose penalties on Horizon Products International, Inc. (Horizon) for “negligently” importing a piece of plywood.[3]   (United States v. Horizon Prods. Int’l, Inc., Slip Op. 15-80). The government argues that in misclassifying and importing the plywood as duty free (when it fact it was subject to an 8% duty rate) Horizon acted negligently and should be fined $324,540 (pursuant to 19 U.S.C. §1592(a)).[4]   Horizon admits to the misclassification, however, denies that it was negligent. According to the standard set forth in United States v. Ford Motor Co., when the government argues for negligence penalties in an import case, the burden of proof lies on the alleged violator to demonstrate that they “exercised reasonable care” under the circumstances.[5]

In this particular case, Horizon makes an interesting reasonable care argument.  They argue that evidence of consultation with a customs broker, “using the best possible tariff classification” to the knowledge of the co-owner of Horizon, establishes reasonable care negating the government’s claim of negligence. Horizon subsequently provided evidence of various communications with the broker in which it appears that they instructed the broker to use the incorrect duty-free heading, and the broker failed to review the classification any further. However, the court reviewed the evidence of correspondence between Horizon and their customs broker, and admits that “the court [could] conclude that the customs broker shares a portion (if not all) of the responsibility” for the erroneous entries.[6]

The government argues that the involvement of a customs broker in the misclassification does not shield Horizon because they have not provided sufficient evidence that they consulted with the broker in good faith to ascertain the correct classification.  The court has concluded that there is still a genuine issue of fact as to whether Horizon exercised reasonable care in making its entries. In the event that the government prevails on this issue at trial, Horizon could face penalties that double the amount of the unpaid duties.

Compliance Tips

What lessons may be learned from the cases above, and in particular, the arguments made in the Horizon case? It is hard to say what the CIT will do when the issue of negligence goes to trial, but if the manner in which they dealt with the evidence set forth in the summary judgment motion is any predictor, Horizon may have a chance to avoid negligence penalties. What will this mean moving forward? Will importers be subject to less stringent standards? Will customs brokers be subject to a higher standard of care? Keep an eye out for future rulings on this issue, but remember to always do the following in import transactions to ensure compliance with the reasonable care standard.

In general, make sure you:

  • Establish reliable company procedures that ensure compliance with Customs laws and regulations, especially in the priority trade issues of classification, value, anti-dumping/countervailing duties and free trade agreement qualifications;
  • Consult with a Customs expert and provide them with full, complete, and accurate information about your import transactions;
  • Review the Customs documentation internally before submitting it through your broker, and always personally retain copies of documents submitted on your behalf including entry documents under the (a)(1)(A) recordkeeping list for a period of five (5) years after entry.

 

By: Jennifer Horvath, Associate Attorney