In United States v. Nitek Electronics, Inc., decided December 1, 2015, the U.S. Court of Appeals for the Federal Circuit upheld a U.S. Court of International Trade decision that limited the government's powers in seeking to recover penalties from importers. At issue in this case were 36 entries of Chinese gas meter components, which U.S. Customs and Border Protection ("CBP") determined had been misclassified upon entry and for which Customs sought to impose penalties under a gross negligence level of culpability as well as to recover regular and antidumping duties.
The court dismissed the penalty claim brought by the Department of Justice in court because it was based on a different level of culpability (negligence) than had been alleged by CBP administratively, and therefore the government had failed to exhaust its administrative remedies. It found that "penalty claims based on fraud, gross negligence, or negligence are separate claims, and the Department of Justice cannot independently enforce a penalty claim in court for a culpability level that was not pursued administratively by Customs."
The government had argued in its appeal that unlike a prior case, which found that the government could not pursue in court a penalty claim at a level of culpability higher than that pursued administratively by CBP, negligence is merely a lower-level allegation of gross negligence, and therefore Nitek should have been on notice that even though the administrative penalty claim was based on a gross negligence level of culpability, DOJ intended to seek penalties for negligence. The Federal Circuit disagreed, effectively ruling that the three statutory levels of culpability (fraud, gross negligence, and negligence) constitute separate, independent claims.
How CBP will adapt its approach in response to the court's decision is, as yet, unclear. Whatever the eventual approach adopted by Customs, its officials will need to ensure that their allegations are closely tailored to the specific circumstances of each case so that the same level of culpability can be alleged at both the administrative and judicial stages of a penalty enforcement proceeding. Otherwise, the court has demonstrated that it will not hesitate to foreclose the DOJ's seeking penalties where the level of culpability alleged in court against an importer diverges from that alleged by Customs.
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