CIT Denies CBP $17M Default Judgment for 1592 FDA Fraud, Cites Lack of Info

In U.S. v. Callanish Ltd., the Court of International Trade ruled that an amended complaint¹ filed by U.S. Customs and Border Protection in May 2010, to recover a civil penalty of $17,734,926 under 19 USC 1592 (fraud), had not provided sufficient information to establish that this was the correct penalty amount.

At issue were a number of entries of evening primrose oil (EPO) capsules, a substance used as a food additive, which could not be lawfully imported at the time the entries were made due to a series of Food and Drug Administration Import Alerts¹.

CBP Claimed EPO Capsules Were Fraudulently Imported & “Double Invoiced”

CBP alleged that Callanish falsely entered 52 consumption entries between September 1, 1988 and March 24, 1992 of EPO capsules that could not be imported lawfully during that time period¹. Customs alleged that Callanish followed instructions by the real buyer Murdock Healthcare, a U.S. company doing business under several names including Health Products International (HPI). Callanish shipped the EPO capsules, without listing or identifying it to Chester Lochard, President of Pine Lawn Farms Inc., the straw buyer and importer of record in the U.S. Then Callanish allegedly provided two sets of invoices, one showing the buyer as Pine Lawn Farms used for entry purposes, and another showing the actual sale to HPI.

Callanish’s Failure to Defend Itself in Court Put It in Default

On May 17, 2010, Customs successfully effected service of process upon Callanish. However, Callanish was entered in default after it failed to appear before the Court and failed to plead or otherwise defend itself within twenty days of being served with the summons and amended complaint².

CBP’s Amended Complaint Lacked Sufficient Facts on Domestic Value of Entries

CBP’s amended complaintsought a penalty of $17,734,926, which it alleged to be the domestic value of the 52 entries of EPO capsules. However, the Court found that the complaint lacked any facts concerning the domestic value or how that value was determined. Customs provided only a statement that the stated amount was the domestic value.

“Doubling” Entered Value Appears to Have Been CBP’s Only Action to Arrive at Domestic Value

From exhibits in the case, it appeared to the Court that the domestic value was derived by doubling the amounts used for entered value on the consumption entries. Further, the Court stated that the mere allegation of an amount offered as the domestic value absent anything more, does not constitute a well-pled fact. As a result, the CIT ruled that the complaint did not contain facts sufficient to enter a judgment.

¹Beginning on February 12, 1985, FDA issued a series of import alerts announcing that EPO could not be sold lawfully in the U.S. without FDA approval, which this product did not have, and requiring all attempted imports be detained by Customs.

²The amended complaint was filed following an earlier decision by the CIT (U.S. v. Scotia Pharmaceuticals Ltd., Slip Op 09-49 dated May 20, 2009), in which the Court concluded that the government had not established its entitlement to a judgment by default against Callanish, but allowed additional time to file an amended complaint. In this earlier case, the CIT also dismissed all action against two other defendants, Scotia Pharmaceuticals Limited and Quantanova Canada, Ltd., because a complaint notice had not been served to either party.

(Slip Op 10-124, dated 11/02/10)