United States: A Timely Reminder About Untimely Petitions: CBP Changes to Liquidated Damages Guidelines Have Increased the Cost of Slow Responses

Last Updated: June 21 2013
Article by Gregory S. McCue and Victoria E. Murphy

In January of this year, US Customs and Border Protection ("CBP"), updated its guidelines for cancellation and mitigation of claims for liquidated damages when companies  are late in filing claims for relief.  These new guidelines limit the circumstances under which a late petition will be accepted by CBP, and also change the formula for calculating additional payments required when petitions are filed late.  In the past, it may have been possible for an importer that had missed the filing deadline to contact the local port officials and "beg for mercy."  But, it appears that this will no longer be possible under the new guidelines.  As a result, now it is even more important for importers to have concrete procedures in place for company personnel and brokers to react quickly to any correspondence from CBP and to get a CBP notice in the hands of the right company decision-maker promptly.  For companies that respond quickly, it still will be possible to manage liquidated damages expenses at minimal levels.  For companies that do not respond quickly, in light of CBP's new guidelines, the overall cost of these cases likely has gone up.

Liquidated Damages (the other enforcement tool) and Petitions for Mitigation

Most companies are aware that, if actions taken with CBP are performed incorrectly, there is some possibility for penalties.  (See our previous advisory for one example of the penalty process.)  However, CBP has another enforcement tool:  liquidated damages.  Liquidated damages are based on CBP's rights under a bond.  Many companies interacting with CBP are required to use a bond in various situations.  For example, importers must maintain a continuous entry bond to ensure timely and accurate filing of documents and duty payments.  Similarly, carriers often must post a bond in order to guarantee bonded shipments or the payment of certain fees.  Companies obtain these bonds by paying a premium to a licensed surety company, approved by the US Treasury Department.  The surety promises to pay CBP if the company makes an error in its import procedures, such as late filing of entry documents or missed deadlines for fees.  The surety receives its premium payment (and sometimes collateral) and a contractual guarantee of indemnification from the company.  CBP gets a guarantee of payment from the surety and a potential enforcement tool.  The importer is permitted to conduct business before CBP, which it could not do without posting the bond.

If a company makes an error, usually a procedural error, such as late filing of entry documents, CBP is likely to issue a claim for liquidated damages.  Such a claim means that, if the company does not pay the amount listed by CBP, then CBP will collect that amount from the surety and the surety, in turn, will demand (or sue) to get that amount back from the company, plus any expenses incurred by the surety.  Accordingly, it is usually in a company's interest not to let the matter get that far and instead, to deal directly with CBP to resolve the liquidated damages claim before CBP demands any amount from the surety.

Fortunately, companies have the right to file a petition with CBP in response to a claim for liquidated damages.  In the petition the company may request cancellation or mitigation of the amount, for good cause.  The CBP Regulations provide that a petition for relief from liquidated damages may be filed within 60 days from the date of mailing of the notice of liquidated damages (see CBP Regulations at Part 172.3(b)).  Requests for extension of time to file a petition may be granted by the local Fines, Penalties and Forfeitures ("FP&F") Officer in its discretion, if such an extension is requested during the 60-day period available for filing a petition (see CBP Regulations at Part 172.3(c)).

When CBP issues a claim for liquidated damages, it typically lists an "Option 1" amount and an "Option 2" amount.  By taking Option 1, a company gives up its right to petition or otherwise contest the issue.  Option 1 usually is a much smaller amount than Option 2.  For most inadvertent, technical errors, companies usually find that the Option 1 amount is a quite appealing way to resolve the matter.  Most importantly, Option 1 typically is only available if the company responds within 60 days of the issuance of the liquidated damages notice.  If the notice is held up for some reason, and not acted upon promptly by authorized company personnel, Option 1 may be no longer available.  This is one of many reasons why it is critical for companies to have effective procedures in place so that all correspondence from CBP is sent promptly to the company's authorized decision-makers.  Timely action on these liquidated damages notices can save time, effort and real expense.

If the company does not take Option 1, it is left with the much larger Option 2 amount.  The company still retains its right to file a petition requesting cancellation or mitigation of the proposed liquidated damages amount under Option 2.  That usually involves some effort to write up an explanation of the circumstances that led to the error and why the situation is one where the local officers should choose to exercise discretion and reduce the amount. 

CBP's guidelines for when and how to grant mitigation of the liquidated damages amount was updated in 2002.  One objective of these guidelines was to reduce court litigation over liquidated damages claims by allowing parties to file petitions after the deadline, but prior to the initiation of collection actions.  The 2002 guidelines left decisions on late petitions largely up to the discretion of the local FP&F Officers.  This resulted in less litigation (as local FP&F Officers allowed more late filings), but CBP also saw an increase in late-filed petitions.  In response, CBP elected to update its guidelines earlier this year, updating not only when untimely petitions will be accepted, but also the formula through which the amount owing is calculated after a late petition is filed.

Changes to When a Late Petition Will be Accepted

The 2002 guidelines allowed for acceptance and review of untimely petitions at the sole discretion of the local FP&F Officer, provided that the petition was not filed after the commencement of sanctioning action against the bond principal or the issuance of a notice against the surety.  In contrast, CBP states that the new mitigation guidelines represent an "attempt to tighten requirements so as to encourage the timely filing of petitions for relief and to promote timely resolution of liquidated damages claims."  Under the new guidelines, untimely petitions will be accepted or considered by the FP&F Officer only if "extraordinary circumstances" prevented the petitioner from timely filing the petition or timely seeking an extension of time.  Extraordinary circumstances could include an "intervening event beyond the petitioner's control resulting in a justifiable inability to timely address or respond to the claim."  Under these new guidelines, the local FP&F Officer will continue to exercise his or her discretion as to whether to accept and review untimely petitions, but now that discretion will be used only to determine whether "extraordinary circumstances" prevented a filing on time. 

The new guidelines go on to say that, in any event, no petition will be accepted under any circumstance if it is filed:

  1. more than 180 days after mailing of the notice of claim to the bond principal, or mailing of the first demand on surety;
  2. after the petitioner has previously submitted a petition and/or been offered mitigation in the same case, and such mitigation amount was not paid within the required period;
  3. after the claim has been referred for collection action;
  4. after the commencement of sanctioning action against the bond principal; or
  5. after the issuance of a notice to show cause against a surety. 

However, exceptions will be made for untimely petitions for relief of liquidated damages claims issued for (a) the late filing of an entry summary; (b) the late payment of estimated duties (including late payment of duties under the periodic monthly statement test); (c) the late payment of passenger processing fees; or (d) late filing or late payment of reconciliation entries.  In these situations, late petitions may be accepted without regard to the limitations expressed in items 1 and 2 above at any time prior to the circumstances described in items 3-5 above, irrespective of extraordinary circumstances.

Petitions that are untimely filed and are not accepted for consideration under the new guidelines will be rejected.  A party responsible for a rejected liquidated damages claim may submit an offer in compromise to CBP pursuant to 19 U.S.C. § 1617 and 19 CFR 161.5.  In such a case, the company essentially makes a settlement offer to CBP.  Whether to accept such an offer is entirely at CBP's discretion.

Changes to the Formula for Mitigated Amounts

Under the 2002 guidelines, the FP&F Officer considered an untimely petition as though it had been timely filed, and then determined the amount of mitigation that would have been afforded if timely.  Using that determination as the "base amount," the FP&F Officer then charged an additional amount in excess of that base amount, calculated by adding an additional tenth of a percent (.001) to the base amount for each calendar day the petitioner is late in filing for relief.  No additional amount added onto the base amount for a late petition could be less than $400.

Under the new guidelines, the FP&F Officer will start by determining the "base amount."  However, CBP then will multiply the original full assessed amount of the claim by a tenth of one percent (.001) and then multiply by the number of days the petition is late to determine the "additional mitigation amount."  This additional mitigation amount, which will in no case be less than $400, will then be added to the base amount to produce the mitigated amount applied to the untimely filed petition.  The main difference between the old calculation and the new is that the number of days that the petition is filed late is multiplied by one-tenth of a percent of the full assessed amount of the claim under the new formula, rather than one-tenth of a percent of the mitigated amount under the old formula.

CBP states that exceptions to this formula will be made for untimely petitions in response to liquidated damages claims for: (1) the late filing of an entry summary; (2) the late payment of estimated duties (including late payment of duties under the periodic monthly statement test); (3) late payment of passenger processing fees; or (4) late filing or late payment of reconciliation entries.  In these cases, the additional mitigated amount calculation will be based upon the "assessed amount" of double the duties, taxes, and fees, or $1,000, whichever is greater, rather than the actual liquidated damages assessed amount as described above.  CBP will determine the "additional mitigation amount" in these cases by multiplying two times the duties, taxes, and fees (or $1,000, whichever is greater) due in payment by a tenth of a percent (0.001) and then multiplying by the number of days the petition is late.  In no case will the additional mitigated amount be less than $400.

Quick Action Costs Less

It has always been true that quick action benefits companies that receive liquidated damages claims from CBP.  The Option 1 amount is often an attractive option to dispense with the claim for liquidated damages quickly and finally.  However, response to a claim requires review of the claim and some sort of response to CBP in a timely manner.  If companies fail to act in a way that is timely, the cost of resolving liquidated damages claims is now, broadly speaking, higher because of CBP's new guidelines.  This change is an excellent reminder for companies to review how correspondence from CBP is identified and forwarded to the appropriate company officers for fast action.  In some instances CBP correspondence may be sent to the customs broker, as the agent of the company.  In any case, no matter where the correspondence is sent, the company is responsible to CBP.  And the company can usually save real time, effort, and expense by making sure that any notices from CBP are properly – and promptly – routed to the necessary company decision-makers.

Unlike a change to CBP's regulations, the amendment to CBP's internal guidelines went into effect upon publication, without the need for any public comment, and applies to any late petitions filed on or after January 9, 2013.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Gregory S. McCue
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