In recent decision, the Court of International Trade entered a $1.6 million award against shoe importer, Sterling Footwear, Inc. (“Sterling”), for what it found to be grossly negligent product misclassification. Granting the U.S. Government’s motion for summary judgment in part, the Court left open the possibility of additional penalties of up to $20.8 million once the liability of Sterling’s owner and a related company are determined at trial.
The Court found that in 337 entries between 2007 and 2009, Sterling had misclassified footwear as “rubber tennis shoes” under subheading 6402.91.40 of the Harmonized Tariff Schedule of the United States (“HTSUS”) which covers footwear for which 90% of the exterior of the shoe or boot is covered with rubber or plastic. When U.S. Customs and Border Protection (“CBP”) examined samples from the entries, it found that the shoes had rubber soles but that the upper part of the shoes were made of fabric and connected by a foxing band (a strip of material that covers and secures the joint between the upper and lower part of the shoe). Therefore, the shoes were not properly classified under subheading 6402.91.40 and were subject to a higher duty.
CBP sent several notices to Sterling regarding the misclassification. CBP also met with Sterling leadership and their broker to explain the basis of their conclusions with regard to classification. Despite these communications with CBP, Sterling took no action to amend their entries or defend its classification, prompting CBP to undertake a comprehensive investigation of Sterling’s voluminous entries. The Court found that — despite their assertions to the contrary — Sterling’s leadership had instructed its brokers as to how the shoes should be classified and disregarded the broker’s input. Significantly, Sterling took no efforts to change the classification of its products after CBP’s notices of misclassification.
In light of the Court’s finding that the misclassification was the result of gross negligence, Sterling and the other defendants face a potential penalty totaling four times the actual and potential losses to the government. In this case, $1.6 million in actual loss (mitigated down from $2 million through protests and surety payments) has already been awarded; however, $3.2 million in potential losses from misclassified entries have been identified by the government. The $5.2 million penalties for actual and potential losses, which can be quadrupled in light of the grossly negligent conduct, leaves a potential penalty of $20.8 million still to be determined.
While proper classification of goods is every importer’s goal, this case illustrates that one must heed the instructions of CBP with regard to classification. If you dispute CBP’s position there are avenues to challenge classifications both retrospectively and prospectively. Doing nothing in response to CBP notices, however, is simply not an option. Proper counsel can help you navigate classification issues before entries arrive in the U.S. and are essential if you receive a notice from CBP.