In U.S. v. Nitek Electronics, Inc., the Federal Circuit constrained the Department of Justice’s ability to seek import penalties based on a culpability level different than the level alleged by the Customs and Border Protection during the administrative penalty process.
Generally, when pursing penalties for lost import duties due to misclassification of goods under 19 U.S.C. § 1592, the Government must demonstrate a material false statement or omission amounting to fraud, gross negligence, or negligence. Based on the level of culpability alleged by the Government, the burden of proof for the Government shifts significantly from clear and convincing evidence for fraud, proving the elements for gross negligence, and the mere burden of proving the act or admission (with the burden shifting the the importer to show that the act was not negligent) under a negligence theory.
In Nitek, the importer of gas valves disputed the CBP’s allegations of grossly negligent conduct during the course of the administrative penalty proceeding. The matter was subsequently referred to the DOJ which pursued an enforcement action based on a negligence theory. The Court of International Trade held that the DOJ could not pursue penalties against an importer based on a different level of culpability than the level alleged by the CBP during the administrative proceeding. The Federal Circuit affirmed the Court of International Trade’s decision, finding that the Government had not exhausted administrative remedies when it pursued an ‘independent’ claim based on negligence which was not present in the administrative proceeding.
Those close to the case are hailing the decision as a significant victory for importers who, in the past, have been unfairly forced to defend penalty actions brought under multiple theories by multiple agencies. As the CBP is now likely to take additional care when investigating and selecting the theory which the government will pursue during the administrative proceeding, mounting a robust defense from the very outset of any administrative action is now an absolute imperative for importers.