Trade Court OKs Fraud, Gross Negligence Counts in Customs Penalty Case

The Court of International Trade in a Feb. 27 decision denied importer Crown Cork & Seal USA's bid to dismiss fraud and gross negligence claims in a customs penalty case. Judge M. Miller Baker ruled that, contrary to Crown Cork's characterization, the fraud claim is sufficiently specific and both claims clear the notice requirements of Rule 8 as set in the Bell Atlantic v. Twombly and Ashcroft v. Iqbal cases.

The case concerns metal can lid imports, valued at around $51 million, entered between 2004 and 2009. Baker said that it is "undisputed" that Crown Cork misclassified the lids under the Harmonized Tariff Schedule and underpaid around $1.3 million in duties. During this same time, the importer entered metal can lids from related companies in Canada and properly classified them since the North American Free Trade Agreement exempted those entries from paying duties.

Crown Cork copped to the misclassification, and the government subsequently filed a customs penalty case, even though 10 years had passed since the importer admitted to the misconduct. The government brought counts alleging three different levels of culpability against Crown Cork, each carrying a different penalty: a fraud allegation with a $18.1 million penalty, a gross negligence count carrying a $5.2 million penalty and a negligence count with a $2.6 million penalty.

Crown Cork moved to toss the fraud and gross negligence counts, arguing that they fail to clear the particularity requirements set under CIT Rule 9(b), which says that “[i]n alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a person’s mind may be alleged generally." Baker ruled that the importer's claim "sweeps too broadly" since this rule does not apply to the gross negligence claim.

As for the fraud claim, the court agreed with the government that the claim was sufficiently specific. The U.S. addressed the "who, what, when, where, and how" pleading requirements by listing the entries at issue and two Crown Cork companies as the responsible parties. "That the government is, or may be, in possession of more detailed information is not by itself sufficient to demand that the government use that information in its amended complaint," the opinion said. "... Thus, the government is correct that issues relating to what was gleaned from its investigation are matters for discovery and possible summary judgment motions."

Crown Cork further argued that the fraud and gross negligence counts fall short of the notice requirements as established in Twombly and Iqbal. These two cases moved away from a pure notice-pleading system. Now, a complaint must provide fair notice and alleged "factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Baker ruled, though, that the complaint in the present case doesn't just highlight the misclassification of the imports, but invokes the properly classified imports from Canada.

"That additional allegation tends to exclude the possibility that Crown Cork innocently misclassified its European imports and therefore nudges Count I over 'the line between possibility and plausibility of entitlement to relief' for purposes of Rule 8," the opinion said. As for the gross negligence count, the "relevant regulation defines gross negligence as 'an act or acts ... done with actual knowledge of or wanton disregard for the relevant facts." The judge said that the government's use of the Canadian imports also nudges the count "across the line between possible and plausible."

(United States v. Crown Cork & Seal USA, Slip Op. 23-25, CIT # 21-00361, dated 02/27/23, Judge M. Miller Baker; Attorneys: Jackson Toof of ArentFox Schiff for defendants led by Crown Cork & Seal USA; William Kanellis for plaintiff U.S. government)