Importers Consider Indemnification, Insurance for Employee Liability in Wake of 'Trek Leather'

The past year’s court rulings on corporate employee liability for customs violations has sparked deliberation in the trade community over what Trek Leather means for import compliance professionals. Customs lawyers warn of the possibility that unsuspecting corporate officers and compliance managers could find themselves subject to penalties and fines, although some attorneys say those concerns are overstated. Trade associations are busy deciphering how importers should address any liability arising from the case, including whether they should offer employees indemnification or insurance. However, creating insurance covering employee liability for customs violations is fraught with difficulties, and lawyers and insurers interviewed said no such policies exist as of yet.

A hot topic for years in the importing world, the Supreme Court finally brought the Trek Leather case to its conclusion in late May, declining to hear an appeal of the controversial ruling from the Court of Appeals for the Federal Circuit (see 1505260016). In September 2014, the Federal Circuit had found Harish Shadadpuri, owner and president of Trek Leather, was personally liable under 19 USC 1592 for omitting the value of assists from invoices, notwithstanding the fact that his incorporated company served as importer of record (see 14091703).

Crucially, the government did not allege that Shadadpuri personally aided and abetted his company’s fraud, nor did it attempt to “pierce the corporate veil” by arguing Trek Leather was simply a front for Shadadpuri’s illicit acts. Instead, it found that even though Shadadpuri did not “enter” the merchandise as importer of record, he did “introduce” it through negligent acts by providing the invoices to Trek Leather’s customs broker. Because all corporate activities are carried out by the actions of its employees, the Federal Circuit’s ruling means any negligent entry by a corporate importer of record corresponds with the negligent “introduction” by an employee, argued the American Association of Exporters and Importers in a brief filed with the Supreme Court.

Many see the Trek Leather decision as a watershed for the trade industry. “The Supreme Court's decision to let the Federal Circuit's Trek Leather decision stand makes the world of importing a scary place for those who work there,” said John Peterson of Neville Peterson, who represented AAEI and filed the Supreme Court brief. “A corporate import manager or Customs compliance director has to think, ‘If I provide a negligently incorrect or incomplete invoice to our company's Customs broker -- the acts Mr. Shadadpuri was found to have committed -- can I be jointly and severally liable for hundreds of thousands, or millions of dollars, worth of penalties?’ Companies have to be concerned that Customs might charge their employees in cases of corporate negligence, then try to "flip" the employees into testifying against the company,” said Peterson.

Others see the decision as more of the same. “To me, this just means CBP is reverting to what it used to do,” said Su Kohn Ross, a lawyer at Mitchell Silberberg. “If you are a small company, the involved manager or officer gets named jointly and severally with the importer fairly routinely,” she said. For large companies, “CBP is much more cautious about doing so,” said Kohn Ross.

At the very least, it resolves a question that had been unsettled for some time. “In the aftermath of Trek, we all know that the law permits penalty cases against employees, officers and third parties,” said a customs lawyer. “Unless there is a change in the law, the question now is whether Customs and DOJ continue to act reasonably in wielding that authority,” he said. “Now, we need to advise our corporate clients that their executives and managers can be held personally liable for corporate violations. The best we can say now is that DOJ is most likely to proceed only in the case of direct personal involvement and egregious conduct, but we certainly cannot promise that will be the case,” said the lawyer.

Given that possibility, some importers are beginning to take the lessons of Trek Leather into account. Joel Junker of Junker & Nakachi says he has already seen the president of one company faced with an CBP audit over antidumping duties give formal notice to its directors and officers insurance carrier of a potential claim, despite being advised that individual liability “was not certain or even likely.” At a minimum, “some importers seem to be taking no chances associated with CBP’s enforcement discretion,” said Junker.

Nonetheless, many importers are taking a wait-and-see approach. “I really haven’t seen much activity with regard to companies actually doing anything for their employees yet,” said customs attorney George Tuttle III. Nor has Tuttle seen any employees asking for indemnification, said Tuttle. “That doesn’t mean that there isn't still a lot of people asking questions about it,” he said.

Industry groups are assessing what steps they should take in light of Trek Leather. AAEI “would try to get legislation to overturn the decision, but we really don’t have that ability with the current trade legislation moving with [Trade Promotion Authority],” said AAEI president Marianne Rowden. Currently, AAEI is conducting a survey of its members to determine whether they are seeking indemnification agreements from their employers, she said. The trade association is also “making inquiries with insurance companies about crafting a policy to protect trade compliance professionals,” said Rowden. The American Bar Association’s Customs Law Committee is also in early discussions about creating a working group to put together a member survey aimed at determining what the effects are, if any, from Trek Leather, said Tuttle.

One issue that has come up is whether individuals need to be named in prior disclosures of violations to CBP, said a customs lawyer familiar with the case. In cases where, for example, a manager gets a classification wrong, there is now an argument to be made that the manager should be named in order to be protected from an individual penalty, he said. Should the importer and manager in that situation decide to go that route, “the lawyers face an interesting question of potential conflicts of interest and joint representations,” said the lawyer. “Maybe the manager who made the mistake needs her own counsel.”

Companies and employees that want to secure themselves from individual liability for customs violations can take a number of steps, said Robert Stang of Husch Blackwell. Among the more ordinary activities an importer can undertake are improvements of compliance efforts, such as ensuring it is conducting required internal audits and reviews, updating compliance manuals, and conducting the proper training. Another much discussed possibility is indemnification, where the employer agrees to pay any costs related to charges of customs violations against an individual employee, said Stang.

Although insurance against liability for corporate and import compliance officers has also been discussed, it’s going to be difficult to put into practice, said Glenn Patton, regional vice president-Los Angeles for insurer Roanoke Trade. “To our knowledge, there is not a product available in the market to address this exposure,” he said. Covering liability for intentional customs violations by import compliance officers is off the table, said Patton, comparing the concept to buying insurance for speeding tickets. Coverage for gross negligence is also going to be nearly impossible, given the implication that the violation was more than a simple mistake, said Jason Odgers, vice president-client development at Roanoke.

Errors and omissions insurance has been suggested as one way to address this exposure, but those policies generally cover third-party claims, such as when an importer seeks to recover losses from a customs broker or transportation intermediary, said Odgers. The more likely avenue is expanding coverage of directors and officers (D&O) insurance to cover negligent customs violations by employees, he said. Either way, given the unique concerns raised by insuring an individual’s liability for fines and penalties, the insurance would have to be a tailored product negotiated with an underwriter and could not be an “off-the-shelf” policy, said Patton.

A major hurdle to overcome is the uncertainty surrounding the Trek Leather case. When offering insurance, the insurer needs to be able to quantify risk and assess the appropriate premium, said Patton. However, it remains to be seen how CBP and the Justice Department will apply the Trek Leather case. “There’s not an easy answer,” said Odgers. If an importer is concerned, “the best advice is to sit down with your insurance broker, identify the exposures, and ”put the [insurance] broker to work,” he said.

Importers discussing indemnification and insurance should be mindful of certain details, according to Andrew Moss of Reed Smith, a lawyer who represents companies and management in disputes with insurers. Indemnification laws may vary from state to state on both what companies are required to indemnify, as well as what they cannot. They also may differ based on the type of business organization and the size of the company. Illinois, where Moss is based, requires certain types of companies to indemnify their officers and directors, and permits but does not require other types of companies to provide indemnification.

Importers contemplating D&O insurance need to decide how far their policies should reach down the corporate hierarchy, said Moss. Some companies spell out what they consider a corporate officer in its bylaws, said Moss. But even if a company’s bylaws are silent, the issue will need to be decided with the insurance company, which typically will want to know in advance whether it will be insuring 50 or 500 officers, he said. Importers and their employees may also want to consider excess “differences-in-conditions” policies, which can serve as a backstop when a company cannot indemnify an employee and the liability isn’t covered by the company’s basic D&O policy, said Moss.

For the moment, however most importers seem to be staying put, monitoring the developing situation to inform their own decisions. “Folks want to be in the middle of the parade,” said Stang. “Nobody is quite sure right now exactly whether insurance would be necessary,” he said. “What we have seen is that a lot of folks are sitting back and looking to see what other companies or individuals are doing.”