Many a board member, officer and compliance professional have begun to lose a little more sleep than usual as a result of the U.S. v. Trek Leather
case.1 In September 2014, the Court of Appeals of the Federal Circuit ("Federal Circuit") held that individuals "introducing" imported goods into the United States may be held personally liable for violations of the U.S. customs laws and regulations. The following provides a detailed analysis of U.S. v. Trek Leather
for those wanting a greater understanding of how this case may impact importers and the individuals that serve them.
The story began in 2004, when Trek Leather, Inc. began importing men's suits into the United States. Harish Shadadpuri was the President and sole shareholder of the company at the time. Mr. Shadadpuri, through Trek Leather and other companies that he owned, supplied fabrics to the foreign manufacturers which were used in the production of the suits. However, the cost of the fabrics and their transportation to the foreign manufacturers were not added to the dutiable value of the suits. The provision of the fabrics to the foreign manufacturers free of charge or at a reduced cost constituted an assist
under the U.S. customs valuation rules. Assists are one of the statutory additions that must be included in the dutiable value of imported goods. The failure to include such costs in the invoice value of the goods generally results in their undervaluation and the underpayment of duties owing to U.S. Customs and Border Protection ("CBP"). There were a total of seventy-two shipments of suits imported by Trek Leather into the United States that were undervalued in this manner.
The shipments were originally invoiced to Mercantile Electronics, a company that was 40% owned by Mr. Shadadpuri. He also served as the company's President. While the shipments were en route to the United States, Mr. Shadadpuri transferred ownership of the goods to Trek Leather. Trek Leather became the importer of record and the entry summaries (Customs Forms 7501) for the shipments were prepared and submitted by the customs broker based on information contained in the manufacturers' invoices, bills of lading, and other information provided by Mr. Shadadpuri or his employees. Because the invoice values failed to include the assists, Trek Leather underpaid the duties owing by more than $133,000. Mr. Shadadpuri apparently knew that assists were required to be added to the dutiable value of the suits as he had been informed of this fact by CBP officials during a previous investigation of his shipments two years earlier.
CBP issued a penalty notice to Trek Leather alleging fraud, gross negligence and negligence for the undervaluation and underpayment of duties. The company, however, failed to respond to that penalty notice. As a result, CBP filed a complaint in the U.S. Court of International Trade ("CIT"). CBP alleged that both Trek Leather and
Mr. Shadadpuri violated Section 1592(a) of the Customs Regulations because they had "entered or introduced, or attempted to enter or introduce, men's suits into the commerce of the United States by means of false acts, statements and/or omissions that understated the dutiable value of the merchandise and resulted in the underpayment of duties."2 CBP argued that Mr. Shadadpuri could be held individually liable since he was Trek Leather's President, directed its operations at the time that the import violations occurred, and was a "person" for purposes of the Section 1592(a) violations. Although the facts surrounding the charge of fraud were in dispute, both
Trek Leather and Mr. Shadadpuri were held liable for gross negligence. The CIT noted that any person who engages in activities that are prohibited by Section 1592(a) can be held liable regardless of whether or not that person is the importer of record. The CIT stated that Mr. Shadadpuri was responsible for reviewing documentation, including assists, within the entry records, and for forwarding assist information to the custom broker. The CIT entered judgment against both defendants. Mr. Shadadpuri appealed to the Federal Circuit.
In 2013, the Federal Circuit panel that heard the appeal reversed the CIT's decision, holding that Mr. Shadadpuri was not liable for ordinary or gross negligence because he was not the importer of record or an agent authorized to make entry.3 In order for him to be held liable, CBP would have had to have pierced the corporate veil, shown that he was liable for fraud, or shown that he had aided or abetted Trek Leather's fraudulent activities. CBP requested a rehearing of the panel's decision.
An en banc rehearing of the appeal was granted. On September 14, 2014, the Federal Circuit reversed the panel decision and held that Mr. Shadadpuri could indeed be held individually liable for the customs violations. First, there was no basis for narrowing the term "person" in the statute to exclude Mr. Shadadpuri. Rather, the language covered owners, importers, consignees, agentsand other persons
. The legislative history, even after a revision of the law in 1978, showed that there was no Congressional intent to narrow the meaning of that word.
The court then disregarded the entry
of the merchandise into the United States. Instead, the court looked closely at the introduction
of merchandise into U.S. commerce. The court found that the term "introduce" was broad enough to capture acts that bring goods to the point of entry, such as moving goods into CBP custody, and providing documents (such as invoices indicating value) for use in the entry process. Thus, the court found that Mr. Shadadpuri "introduced" the suits into the United States. CBP was therefore not required to pierce the corporate veil since Mr. Shadadpuri personally introduced merchandise into the United States in violation of Section 1592(a). While only importers of record or their authorized agents may be held liable for entry violations, the term "introduce" covers acts by other persons.
This case offers several key takeaways for the import community:
- Board members, officers, and employees who are actively involved in or have a hand in directing the company's day-to-day operations could be held liable for errors or omissions that occur with regard to imported shipments up to the point of entry of the goods into the United States. A solid compliance program, oversight by knowledgeable and experienced compliance personnel, and routine internal auditing mechanisms are key for reducing the likelihood of import errors.
- A thorough understanding of both the customs valuation rules and the potential consequences for non-compliance is critical for importers and their employees. Even though Mr. Shadadpuri purportedly knew that the assists should have been included in the dutiable value of the suits, he may not have understood or appreciated the potential penalties for these errors. Regular training and internal auditing is crucial for reducing the likelihood of errors and allowing for the timely correction of any errors that are discovered.
- Had Trek Leather timely responded to the original penalty notice that was issued, CBP would not have resorted to filing a complaint with the CIT. Upon receipt of penalty notices, importers are generally given sixty days to file a written petition responding to the allegations and presenting additional information that may be considered mitigating factors. In most cases, upon request, CBP will agree to grant extensions of time in which to submit the petitions. The CIT and Federal Circuit cases make no mention of the reasons why Trek Leather failed to respond to the original penalty notice; however, importers should view this case as a cautionary tale and establish formal processes for handling receipts of and submitting responses to penalty notices and other requests from CBP.
In February 2014, Mr. Shadadpuri filed a writ of certiorari requesting that the U.S. Supreme Court hear his case. It remains to be seen whether the Court will actually agree to hear it. Customs law cases are not frequently taken up by the Supreme Court. If the Supreme Court chooses not to hear the case, the import community will have to adopt a "wait-and-see" approach as to whether CBP will begin targeting individuals for their companies' customs violations. As the old cliché goes, the best offense is a good defense. Prudent importers should solidify their compliance programs, train their employees, establish robust auditing mechanisms, and erect swift escalation measures so that the appropriate corrective actions can be taken when and if issues arise.
 United States v. Trek Leather, Inc., No. 2011-1527 (Fed. Cir. 2014).
 United States v. Trek Leather, Inc., Slip Op. 11-68, 781 F. Supp.2d 1306 (Ct. Int'l Trade 2011).
 United States v. Trek Leather, Inc., 724 F.3d 1330 (Fed. Cir. 2013).
Melissa Miller Proctor is a Shareholder with Polsinelli, P.C. With significant experience in the customs laws and regulations, export controls, economic sanctions, and international trade, Melissa is committed to understanding companies' operations and providing assistance geared toward helping them reach their specific business and operational goals. She may be reached at (602) 650-2002 or via e-mail at firstname.lastname@example.org