CAFC Questions Importer's Argument on US' Failure to State a Claim in Customs Penalty Suit

Federal Circuit judges cautioned counsel for importer Katana Racing against arguing whether the U.S. actually stated a claim for which relief can be granted, despite the fact that the Court of International Trade dismissed the case due to an expired statute of limitations. During the June 7 oral argument in the customs penalty suit, Judge Alvin Schall pointed out that the CIT judge did not decide the failure to state a claim issue, while Judge Todd Hughes said he thought it was "very unwise" to make this claim, seeing as argument over the issue would be precluded at the trade court if the appellate court were to rule on it (U.S. v. Katana Racing, Fed. Cir. # 22-1832).

Akin Gump's Pratik Shah, an attorney who was brought on by Neville Peterson to act as co-counsel for the oral argument, acknowledged Hughes' point, ultimately shifting to address the statute of limitations argument. On this point, Shah recognized that the trade court committed an error in its opinion, as pointed out by the DOJ's Emma Bond, by considering extrinsic evidence while dismissing the case for running out the statute of limitations, though Shah said that the error was a harmless one.

"The problem is that the government did not object to reliance on that evidence at the CIT," Shah said. "It didn't object to it in its opening appeal brief. It's not until its appeal reply brief that it says the court improperly relied on extrinsic evidence." In its reply brief to the motion to dismiss, the government says it does not object to the consideration of these exhibits, the attorney added. "It can't not object, agree to the consideration, then come here on appeal and say the court has jumped the gun and improperly considered this extrinsic evidence," Shah said.

In response, Hughes said that even if the government did not object, the trade court still had to convert the motion to dismiss to a summary judgment if it were to consider the evidence. To this, Shah said that if this is the only error, what the parties are left with is "uncontroverted evidence." Katana's counsel added that the trade court merely did what the government invited since the U.S. said it doesn't object to consideration of the exhibits, leading the court to consider them.

The case involves 386 entries of tires between 2009 and 2012 that Katana claims were the result of identity theft, arguing that suppliers used identifying information to falsely declare the company as the importer of record. Following the 2009 imposition of safeguard tariffs on tires from China, Katana says it was persuaded by Chinese suppliers to enter into a delivered duty paid contract, which obligated the suppliers with all necessary legal compliance including the payment of import duties. Katana proceeded without suspicion until 2012, when CBP’s Regulatory Audit Division at the Port of Seattle contacted Katana in order to conduct a “Quick Response Audit” on 61 entries. After internally investigating, Katana theorized that it had been the victim of fraud and notified CBP via a voluntary prior disclosure.

In April 2013, CBP issued a report finding that duties had been underpaid on the 61 entries in the aggregate amount of $792,053. In May 2014, Katana executed a two-year waiver of the statute of limitations period in response to CBP’s request. In 2016, CBP issued a revised duty demand, requesting payment of a revenue loss of $5.7 million. Katana submitted another waiver of the statute of limitations, good through July 15, 2019. CBP said in 2019 that it would be preparing a Section 1592(d) duty demand, and with just 25 days remaining in the waived limitations period, issued a summary demand for payment of duties. In response, Katana revoked its 2016 waiver of the statute of limitations, saying that the waiver had been procured under “false pretenses” and that CBP hadn't intended to conclude an administrative proceeding. The trade court upheld this as a reasonable justification of the revocation, dismissing the case (see 2203280047).