Customs Law Advisory - US Court of Appeals Confirms the Long Reach of Customs’ Penalty Process

US Court of Appeals Confirms the Long Reach of Customs’ Penalty Process
In the recent case of United States v. Inn Foods, 04-1035, the US Court of Appeals for the Federal Circuit (“CAFC”) identified the date on which an importer is safe from a lawsuit to collect customs penalties after temporarily waiving the statute of limitations.  More importantly, the case illustrates the years of uncertainty, expenses and litigation that may arise when an importer does not pursue a vigorous customs compliance program.

US Customs and Border Protection (“Customs”) alleged that from 1987 to 1990, Inn Foods, Inc. (“Inn Foods”) made several entries in which the value of the merchandise was underreported.  US law provides a five-year statute of limitations (from the date of the alleged violation) on court action to collect unpaid duties and penalties when Customs finds an error to be negligent or grossly negligent.  Typically, if Customs discovers a potential violation nearing the five-year deadline, the agency will request that the importer waive the statute of limitations, or it will file a lawsuit in the US Court of International Trade (“CIT”).  Inn Foods agreed to several such waivers in 1993, 1995, 1997 and 1999.  The 1999 agreement waived the statute of limitations for a period of “two years, commencing on December 14, 1999.”  Apparently, Customs and Inn Foods could not reach agreement regarding the alleged violation because the agency filed a penalty lawsuit in the CIT on December 14, 2001.  Inn Foods moved to have the case dismissed as untimely, arguing that the last waiver began on December 14, 1999 and expired on December 13, 2001.  The CIT agreed with Inn Foods, but Customs appealed to the CAFC.  The CAFC reversed the CIT and found that the case was timely commenced because it was filed on the “anniversary date” of the commencement of the waiver, i.e., on December 14, according to the usual court rules for calculating similar time limits.  

In a narrow sense, this case demonstrates that an importer subject to a Customs penalty will not receive the benefit of the statute of limitations until the “anniversary date” of any waiver is fully past.  More broadly, it is important to notice that seventeen years after the first violation, this importer remains caught in a nightmare scenario of penalty liability and ongoing litigation expenses.  Even now, only the waiver issue has been resolved and the case will go back to the CIT to begin the valuation litigation.

Of course, Inn Foods may believe that its interpretation of the valuation law is correct and should prevail in the CIT.  However, the extremely long timeline in this case suggests that this situation likely could have been avoided at one of any number of points, such as:  (1) a periodic internal review to catch and correct valuation errors; (2) a prior disclosure, which, if properly filed, could protect the company from penalties; (3) a thorough petition for mitigation of the penalties; and (4) an offer in compromise to resolve Customs’ claim.  Importers should consider the case of United States v. Inn Foods when undertaking a cost-benefit analysis for customs compliance tasks.

If you have any questions regarding US Customs valuation or compliance procedures, please contact Greg McCue at 202-429-6421.