United States: "Inc." No Longer A Shield? – Federal Circuit May Expand Officer/Shareholder Liability Resulting From US Customs Violations

On March 5, 2014, the US Court of Appeals for the Federal Circuit agreed to constitute an en banc panel to reconsider a decision issued by the court in Trek Leather Inc. et al. v. United States.¹ The entire court will reconsider a July 30, 2013 decision issued by a three-judge panel holding that the government had to prove officers and/or shareholders had aided or abetted fraud, or otherwise took actions that justified piercing the corporate veil, in order to hold them personally liable for US customs law violations committed by a corporate entity.² If the full court overrules the three-judge panel, the benefits of incorporation would be mitigated with respect to an officer or shareholder's actions that result in US customs law violations.

Trek Leather arose from Trek Leather Inc.'s ("Trek") importation of men's suits between February 2, 2004 and October 8, 2004. The customs violation at issue is Trek's failure to include "assists"³ in the value it declared to US Customs & Border Protection ("CBP"). By undervaluing the merchandise, Trek underpaid customs duties. Trek was the importer of record for all relevant import transactions, but also implicated in this case is Trek's president and sole shareholder, Harish Shadadpuri.

In Trek Leather the government sued both Trek and Shadadpuri in the Court of International Trade ("CIT"), seeking a penalty of $2.3 million against the company and Shadadpuri personally. In 2011, the CIT ruled largely for the government and held Shadadpuri "jointly and severally" liable for $534,420 in civil penalties as an individual, after which Shadadpuri filed the appeal to the Federal Circuit.⁴

Civil penalties for customs violations are typically imposed under 19 U.S.C. § 1592. That statute was also relied on in Trek Leather. The statute prohibits improperly entering merchandise into the United States by fraud, gross negligence or negligence, and authorizes civil penalties to be imposed for violation:

Without regard to whether the United States is or may be deprived of all or a portion of any lawful duty, tax, or fee thereby, no person, by fraud, gross negligence, or negligence—

19 U.S.C. § 1592 (a)(1). The civil penalties, in turn, are provided in 19 U.S.C. § 1592(c). Section 1592 is primarily used to target importers of record for improper entries, because related statutes under Title 19 directly impose a duty of reasonable care on parties acting in such capacity.⁵ When an importer of record is a corporation, personal liability can be pursued under an "aiding and abetting" theory, or based on the common law principle of "piercing the corporate veil."

One key fact in Trek Leather is that Shadadpuri conceded that his conduct in connection with the customs violations constituted "gross negligence"; the government therefore dropped all fraud claims and proceeded on a "gross negligence" theory of liability alone. Relying on the Federal Circuit's prior finding that, as a matter of law, only a fraud theory may support "aiding and abetting" liability, Shadadpuri argued that the government must prevail on piercing the corporate veil before he can be held personally liable as an officer of Trek. The government declined the invitation to pursue the common law theory for personal liability. Instead, it countered that section 1592 refers to any "person," not "importer of record," in setting forth the prohibited conduct, so the parties against which penalties may be assessed should not be so limited too.

The CIT sided with the government. However, its decision was reversed on appeal by a three-judge panel of the Federal Circuit. In a split opinion issued in July 2013, the panel majority rejected the expansive reading of section 1592 advanced by the government, finding that personal liability may be premised only on ancillary liability on the basis of fraud (i.e., as an "aider and abettor") or that the officer is an alter ego of the importer of record ,which merits piercing the corporate veil.

In October 2013, the government requested an en banc rehearing by the Federal Circuit, arguing that the original decision could have "exceptionally far-reaching consequences" and could encourage "widespread evasion of the customs laws." In an order dated March 5, 2014, the Federal Circuit granted the government's request for en banc rehearing and vacated the July 2013 decision. In requesting a new round of briefing on the key legal issue identified above, the court formally opens the possibility of a precedential ruling that section 1592 should be read broadly to impose liability beyond importers of record for import violations that are merely "negligent," independent of a finding on the appropriateness of piercing the corporate veil.

Civil penalties imposed under 19 U.S.C. § 1592 are significant.⁶ If personal liability based on negligent conduct become common, the risk to a company's officers and shareholders would increase exponentially. A reversal by the full court would greatly ease the government's burden in establishing the personal liability of these individuals and would be likely to lead to increased enforcement actions.

Footnotes

1 Order on Petition for Rehearing En Banc, Trek Leather Inc. et al. v. United States (Mar. 5, 2014) ("the Order").

2 Trek Leather Inc. et al. v. United States, No. 09-CV-0041 (Fed. Cir. July 30, 2013), vacated by the Order.

3 As explained by the CIT, "assists" include any materials and components incorporated in the imported merchandise that are supplied directly or indirectly by the buyer of such merchandise, without adequate compensation, for use related to the production or the sale for export to the United States. United States v. Trek Leather, No. 09-00041, slip op. at footnote 4 (Ct. Int'l Trade June 15, 2011) (citing 19 U.S.C. § 1401a(h)(1)(A)) ("Trek Leather I").

4 See Trek Leather I.

5  19 U.S.C. §§ 1484, 1485.

6 19 U.S.C. § 1592(c) provides that a civil penalty for fraud-based violation is only capped by the domestic value of the merchandise; that for gross negligence is normally up to four times the unpaid duties, taxes, and fees; that for negligence is normally up to two times the unpaid duties, taxes, and fees.

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