August 1, 2005
In two recent decisions, the U.S. Court of International Trade (“CIT”) and the Court of Appeals for the Federal Circuit fined the Ford Motor Company over $20 million for civil violations of 19 U.S.C. § 1592 in connection with a series of importations in the late 1980s and early 1990s for under-claiming the value of their importations.
In the first decision, U.S. v. Ford Motor Company, 436 F. 3d 1286 (Fed. Cir. 2006), the CAFC affirmed the CIT decision to fine Ford $3 million, concluding that the company was grossly negligent in not presenting proper value information to Customs at the time of entry. The Court stated that these omissions were the result of recklessness and utter lack of care of the company’s statutory obligations.
In the second decision, U.S. v. Ford Motor Company, 463 F. 3d 1267 (Fed. Cir. 2006), the CAFC affirmed the CIT decision to fine $17,151,923 for negligence, concluding that the company did not establish that it exercised reasonable care in failing to declare the value of more than $350 million of merchandise in a five-year period, despite the fact that it had a Customs compliance program.
Ford I: U.S. v. Ford Motor Company, 463 F. 3d 1286 (Fed. Cir. 2006) Affirming United States v. Ford Motor Co., 387 F. Supp. 2d 1305 (Ct. Int’l Trade 2005)
In the first decision, Customs sought collection of duties and penalties for the importation of 11 entries of dies for automotive parts made by Ford in 1989. Customs sought $184,495 for unpaid duties, and civil penalties in the amount of $21,314,111 if Ford’s conduct was found to be fraudulent; $3,497,080 if Ford was grossly negligent; or $1,748,540 if Ford was negligent. The total amount of lost duties was $874,270, but only $184,495 remained unpaid because a portion of the duties had been tendered earlier as part of a prior disclosure submission.
Ford’s defense was that the merchandise at issue was entered at the value known at the time of entry and, thus, the company did not violate any Customs law. Customs, on the other hand, alleged that Ford:
- Failed to notify Customs that the prices declared at entry were provisional and subject to adjustment;
- Certified on the entries that the prices declared were true and correct when, in fact, the invoices failed to include the cost of known engineering changes, and
- Failed to notify Customs “at once” when post-importation information was received indicating that the declared prices needed to be increased due to the engineering changes.
After a 10‑day trial, the Court held that Ford’s conduct constituted gross negligence, and assessed the company a penalty of three times the duties and fees of $3 million, plus interest. The company was also ordered to pay $184,495 in unpaid duties.
In reaching this decision, the Court noted that, although Ford had an informal procedure to advise Customs that invoice prices were provisional and not final, there was a lack of communication between Ford’s internal units about the provisional value policy and when to use it. Further, the Court held that the company’s failure to notify Customs of the engineering changes was a material omission and breach of its duty under 19 U.S.C. §1484 to present Customs “true and accurate” information at the time of entry. Finally, the Court held that Ford’s failure to notify Customs “at once” of the engineering purchase orders was a material omission, in violation of 19 U.S.C. §1485.
In assessing the penalty, the Court determined that these violations did not constitute fraud, but did rise to the level of gross negligence under 19 U.S.C. §1592. The Court found that Ford’s omission of information from entry documents was reckless and illustrated an utter lack of care about the company’s statutory obligations at the time of entry. The Court also rejected Ford’s prior disclosure claim because Customs was already investigating the dies, and the company “knew or should have known” it was being investigated by the time it disclosed the violations. Taking all of these factors into account, including the gravity of Ford’s conduct, the Court determined that $3 million was a just penalty in this case.
Ford II: U.S. v. Ford Motor Company, 463 F. 3d 1267 (Fed. Cir. 2006) Affirming United States v. Ford Motor Co., 395 F. Supp. 2d 1190 (Ct. Int’l Trade 2005)
The second decision involved many of the same issues in Ford I. In this parallel case, Customs sought to collect duties and penalties arising out of entries of vehicles and components imported between 1987 and 1992. Customs alleged a loss of revenue of $8,644,133.80, of which $68,178 remained unpaid; penalties were sought in the amount of $34,576,559 for gross negligence, or in the alternative of two times the duties and fees for $17,288,279 for simple negligence.
Again, Ford’s problems were the result of omissions in the entry process. Specifically, the company provided assists but failed to declare them on its entry documents. Further, contrary to the requirements of 19 U.S.C. §1484, Ford failed to declare on its entry documents that the values stated therein were not final because the company was obliged to make lump sum payments to its vendors after entry. Finally, Ford failed to report these payments to Customs as soon as they were known, as required by 19 U.S.C. §1485.
The Court noted that while Ford had mechanisms in place to enable it to comply with its statutory obligations to properly enter merchandise, and that it made a good-faith effort to follow its internal compliance measures with respect to these entries, the company failed to follow through on its processes, and, thus, the company was negligent under 19 U.S.C. §1592.
The Court considered all of the mitigation factors in the case, including Ford’s allegation that it made consistent efforts to comply with its statutory obligations. In the end, the Court concluded that there was overwhelming evidence that Ford failed to declare the correct transaction value at entry for more than $350 million of merchandise entered during the five-year period in question. Accordingly, the Court assessed the statutory maximum penalty for negligence under 19 U.S.C. § 1592 of $13,288,279.
In both cases, Ford’s problems were caused in large measure because of internal communication problems regarding assists and supplemental payments. In the second case, the Court noted that Ford had compliance measures in place to handle the issues discussed above, but its employees did not follow the company’s own compliance manual to report those assists and supplemental payments to Customs.
Both decisions demonstrate the high standard of care expected by the Court and Customs when making entry. In particular, importers are required to declare the total correct value (inclusive of assists and supplemental payments) at the time of entry for known costs.
If the total correct value is not known at the time of entry, then the importer is expected to use Customs’ Entry Reconciliation program to subsequently declare unknown costs at the time of entry.
If the company is not using the Entry Reconciliation program, they are expected to advise Customs that the entry values are provisional and to immediately report to Customs increases in those values when they occur. Finally, importers are expected to have adequate procedures in place within the company to report transactions that may affect the value in a timely manner to Customs.
Our office will provide companies with copies of these decisions on request, and answer any questions you may have regarding them and their impact on a company’s Custom compliance program, including accepted methods to identify and advise Customs of provisional values, and to report value changes through Customs’ Entry Reconciliation program.
If you wish further information, contact George R. Tuttle at (415) 288-0425 or firstname.lastname@example.org or George R. Tuttle III at (415) 288-0428 or email@example.com.
George R. Tuttle and George R. Tuttle, III are attorneys with the Law Offices of George R. Tuttle in San Francisco. The information in this article is general in nature, and is not intended to constitute legal advice or to create an attorney-client relationship with respect to any event or occurrence, and may not be considered as such.
Copyright © 2006 by Tuttle Law Offices.
All rights reserved. Information has been obtained from sources believed to be reliable. However, because of the possibility of human or mechanical error by our offices or by others, we do not guarantee the accuracy, adequacy, or completeness of any information and are not responsible for any errors, omissions, or for the results obtained from the use of such information.