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Expansion of Corporate Officer Liability From Trek Leather Decision Sends Industry Into Upheaval, AAEI Tells Supreme Court

A recent court decision holding the owner of apparel importer Trek Leather responsible for his company’s negligent omissions on entry documentation would subject import compliance managers to “massive penalties,” casting the entire importing industry into upheaval, said the American Association of Exporters and Importers in a brief submitted to the Supreme Court. The amicus brief, filed on March 16 by John Peterson of Neville Peterson on behalf of AAEI, argues that the Supreme Court should hear the case and overturn the Court of Appeals for the Federal Circuit’s ruling.

By holding Harish Shadadpuri liable for gross negligence for his company’s failure to declare assists, even though the company, and not Shadadpuri, served as importer of record on the entry, the Federal Circuit put import compliance professionals “at risk that their personal assets may be held to answer for an act of negligence attributable to a customs entry by their corporate employer,” said the amicus brief. CAFC ruled in September that, although he didn’t enter the apparel, Shadadpuri committed gross negligence related to “introducing” the merchandise when he sent manufacturers invoices that omitted the assists to Trek Leather’s customs broker (see 14091703). Shadadpuri, represented by Al Daniel in New York, appealed the decision to the Supreme Court in February (see 1502190022).

While corporate officers may be subject to penalties for aiding and abetting fraudulent customs violations under 19 USC 1592, the court’s holding that they may be subject to penalties for negligence lowers the bar for finding them liable for customs violations, said AAEI’s brief. Liability for negligence carries a “relaxed burden of proof” for the government, unlike aiding and abetting fraud, which requires proof that the violation is intentional and that the corporate officer knows that fraud is taking place. On the other hand, corporate officers in negligence cases face the burden of proving that the omission did not occur as a result of negligence, said the AAEI brief.

The Federal Circuit relied on a novel and overbroad interpretation of what it means to “introduce” merchandise to find Shadadpuri liable for a customs violation, said AAEI’s brief, noting that the court came up with the theory on its own without hearing any such arguments from the government. The submission of invoices to the customs broker for valuation purposes is not the “introduction” of merchandise, but rather is directly related to the “entry” process, said the brief. Although the invoices did accompany the merchandise when it was physically “introduced” at the port, the omissions on the invoices were related to valuation and entry, not introduction, it said. No violation occurred related to the “introduction,” said AAEI.

By including the transmission of invoices to the customs broker as an act related to the “introduction” of merchandise, the Federal Circuit has created a situation where “every negligent entry by a corporate importer will always be accompanied by a negligent introduction by the importer’s employees or agents because a corporation can only act through natural persons,” said the brief. “Corporate importers employ thousands of import managers, customs compliance directors, and logistics professionals to make entry of their merchandise. While acting on behalf of their corporate employers, these individuals routinely perform the type of acts for which Shadadpuri was held personally liable, such as sending invoices to customs brokers for use in completing entry,” said AAEI.

If the Federal Circuit’s ruling is allowed to stand, and compliance employees find themselves potentially subject to “massive civil penalties,” they are likely to “seek employment in a less dangerous profession,” said AAEI. “It is conceivable that those individuals would demand risk premiums or indemnification to protect against exposure that had not previously existed, but the companies themselves might find the costs prohibitive, and would be hesitant to comply while the issue remains unsettled before this Court,” it said. Another outcome could be that American importers “simply elect to let their foreign suppliers act as non-resident importers of record, secure in the knowledge that those firms and their employees, while legally covered by the prohibition of § 1592(a), are outside of Federal jurisdiction, and CBP cannot enforce penalty claims against them,” said the brief. “Either of these outcomes would be perverse.”

Email ITTNews@warren-news.com for a copy of the filing.