It is now more than twenty-five years since 'reasonable care' became the ubiquitous benchmark of importer conduct under US customs law. This article explores the impact of the reasonable care standard on US importers since its inception in 1993 as part of the 'Customs Modernization Act'. The statutory and regulatory basis for reasonable care is examined, as is the evolution of the relationship under reasonable care between US Customs and Border Protection (CBP) and importers. The closely related effects of the companion tenets of reasonable care introduced by CBP – 'shared responsibility' and 'informed compliance' – are also discussed. This article then examines with specificity recent section 592 caselaw from the US Court of International Trade and the Court of Appeals for the Federal Circuit that has clarified the scope and meaning of reasonable care. Also addressed are troubling developments, separate from but closely tied to reasonable care, concerning the expansion of personal liability under section 592 found in the recently promulgated judicial standard regarding the 'introduction' of goods into the United States.
Keywords: Smiszek, Trek Leather, reasonable care, Mod Act, Customs Modernization Act, Section 592, Trade Facilitation and Trade Enforcement Act, first sale valuation, 19 U.S.C. § 1592, 19 C.F.R. § 171
1. THE ADOPTION AND EVOLUTION OF REASONABLE CARE
1.1. The Customs Modernization Act
The Customs Modernization Act,1 implemented late in the first year of the Clinton administration, brought about fundamental changes in the relationship between US Customs and Border Protection (CBP)2 and the importing community. As perhaps the most broadly impactful customs-related law since the infamous Smoot–Hawley Tariff Act of 1930,3 the Mod Act overhauled numerous aspects of customs activities (such as entry processing, recordkeeping, drawback, and enforcement, among others), repealed several obsolete statutes, and provided statutory authority for the modernization of customs procedures, operations, and IT infrastructure – all with an eye toward reducing paper documents and enabling CBP to efficiently and consistently handle the anticipated increases in trade volume and trans- actional complexity.
The Mod Act promised – and generally delivered – tangible benefits for both importers and CBP. Over the course of twenty-five years importers have enjoyed greater simplicity and consistency and thus fewer headaches and delays in the entry process, while CBP has seen fewer entry errors because of a more accountable and better- informed importing community. And both sides reaped significant gains from the automation innovations that grew out of the Mod Act, like remote entry filing and electronic payment capabilities.4
But the Mod Act's most enduring legacy is the omnipresent reasonable care standard that obligates an importer to assume a greater level of knowledge and hands-on responsibility for customs compliance than had been required previously.5 Before the Mod Act it was common practice for an importer to show relatively little daily interest in the compliance aspects of its imports because CBP bore the ultimate responsibility for entry accuracy (and thus for protecting the federal government's revenue). Quite often an importer was not even the official importer-of-record (IOR) – its customs broker served as the IOR – hence its incentive to devote resources to customs compliance was minimal. Indeed, it was common practice in the pre-Mod Act world for an importer to blindly rely upon the expertise of its broker. But the Mod Act changed everything – for trade compliance practitioners of a certain age it is remembered, first and foremost, as the statute that mandated the reasonable care standard. It is a standard that underpins literally every customs-related decision made (or not made) by an importer.6
1.2. Reasonable Care in Laws and Regulations
Despite the ubiquitous influence of reasonable care throughout the importing process and its status as a statutorily mandated benchmark for importer conduct, an unequivocal definition of reasonable care cannot be found in any customs statute or regulation. Our examination of reasonable care will benefit from a recitation of the civil law in which it is mentioned.7 Section 637 of the Mod Act amended 19 U.S.C. § 1484(a)(1):
Entry of merchandise
(a) Requirement and time
(1) Except as provided in sections 1490, 1498, 1552, and 1553 of this title, one of the parties qualifying as 'importer of record' under paragraph (2)(B), either in person or by an agent authorized by the party in writing, shall, using reasonable care—
(A) make entry therefor by filing with [CBP] such documentation or, pursuant to an authorized electronic data interchange system, such information as is necessary to enable [CBP] to determine whether the merchandise may be released from custody of [CBP];
(B) complete the entry, or substitute 1 or more reconfigured entries on an import activity summary statement, by filing with [CBP] the declared value, classification and rate of duty applicable to the merchandise, and such other documentation or, pursuant to an electronic data interchange system, such other information as is necessary to enable [CBP] to—
- properly assess duties on the merchandise,
- collect accurate statistics with respect to the merchandise, and
- determine whether any other applicable requirement of law (other than a requirement relating to release from customs custody) is met. (emphasis added)
Reasonable care is not specifically mentioned in the primary statute governing civil penalties for customs violations (19 U.S.C. § 1592)8 – but it is codified in the adjunct statute that addresses special circumstances regarding textile and apparel imports, 19 U.S.C. § 1592a(a)(4)(B)9:
If [CBP] determines that merchandise is not from the country claimed on the documentation accompanying the merchandise, the failure to exercise reasonable care ... shall be considered when [CBP] determines whether the importer of record is in violation of section 1484(a) of this title. (emphasis added)
Moving from statutes to regulations, we find the 'general standard' for reasonable care in 19 C.F.R. § 171, Appendix B(D)(6). It is significant to note, however, that despite being published in the Code of Federal Regulations this appendix does not carry regulatory weight10:
All parties, including importers of record or their agents, are required to exercise reasonable care in fulfilling their responsibilities involving entry of merchandise. These responsibilities include, but are not limited to: providing a classification and value for the merchandise; furnishing information sufficient to permit [CBP] to determine the final classification and valuation of merchandise; taking measures that will lead to and assure the preparation of accurate documentation, and determining whether any applicable requirements of law with respect to these issues are met. In addition, all parties, including the importer, must use reasonable care to provide accurate information or documentation to enable [CBP] to determine if the merchandise may be released. [CBP] may consider an importer's failure to follow a binding Customs ruling a lack of reasonable care. In addition, unreasonable classification will be considered a lack of reasonable care (e.g., imported snow skis are classified as water skis). Failure to exercise reason- able care in connection with the importation of merchandise may result in imposition of a section 592 penalty for fraud, gross negligence or negligence. (emphasis added)
In 19 C.F.R. § 171, Appendix B(C)(1), negligence is directly tied to the failure to exercise 'reasonable care and competence'11:
Negligence. A violation is determined to be negligent if it results from an act or acts (of commission or omission) done through either the failure to exercise the degree of reasonable care and competence expected from a person in the same circumstances either: (a) in ascertaining the facts or in drawing inferences therefrom, in ascertaining the offender's obligations under the statute; or (b) in communicating information in a manner so that it may be understood by the recipient. As a general rule, a violation is negligent if it results from failure to exercise reasonable care and competence: (a) to ensure that statements made and information provided in connection with the importation of merchandise are complete and accurate; or (b) to perform any material act required by statute or regulation. (emphasis added)
And in 19 C.F.R. § 171, Appendix B(D)(7), CBP counsels that even the 'unintentional repetition of a clerical mistake over a significant period of time or involving many entries could indicate a pattern of negligent conduct and a failure to exercise reasonable care' (emphasis added).
1.3. Interpretation of Reasonable Care
How should an importer interpret the reasonable care mandates in these statutes and regulatory guidelines? Importers are required to exercise reasonable care, and are warned that failure to do so may result in a section 592 penalty, but the line denoting acceptable conduct remains indistinct – even after a quarter century under the reasonable care standard.12 Reasonable, by definition, is an ambiguous word. The Oxford Dictionary defines it with words that are themselves ambiguous: 'having sound judgment; fair and sensible'.13 The same source defines reasonableness as 'the quality of being based on good sense'. Each of us has our own subjective concept of reasonableness, which is necessarily calibrated by our personal sense of ethical conduct and thoroughness; hence, effort that may seem reasonable to you in a given situation may seem too much (or too little) to someone else. CBP has struggled with it, too, admitting in 1997 that 'there is a general consensus that a "black and white" definition of reasonable care is impossible, inasmuch as the concept of acting with reasonable care depends upon individual circumstances'.14 And in 2017 in an Informed Compliance Publication (ICP) called Reasonable Care: An Informed Compliance Publication,15 CBP candidly spoke to the subjectivity of reasonable care:
Despite the seemingly simple connotation of the term reasonable care, this explicit responsibility defies easy explanation. The facts and circumstances surrounding every import transaction differ – from the experience of the importer to the nature of the imported articles. Consequently, neither [CBP] nor the importing com- munity can develop a foolproof reasonable care checklist which would cover every import transaction.
This ICP suggested a number of basic checklist questions that an importer ought to ask in pursuit of reasonable care, but CBP frankly pointed out that these questions have 'no legal, binding or precedential effect'.
A customs attorney, Sandra Liss Friedman, examined in 2008 the text of a different ICP that illustrated the subjectivity of reasonable care.16 Friedman questioned whether a recently published valuation ICP, Determining the Acceptability of Transaction Value for Related Party Transactions, expanded the intent of reasonable care to a standard that was difficult, if not impossible, to achieve.17 She suggested that the commonly held presumption that an importer satisfies its reasonable care obligations by demonstrating a good faith effort to achieve compliance, irrespective of whether CBP ultimately agrees with the importer's decision, seemed to have been displaced in this ICP by the implication that reasonable care requires an importer to reach the same conclusion that CBP would reach. Anything less apparently is negligence.18
So one might ask, How can an importer be held to a reason- able care standard for which neither Congress nor CBP offers an unequivocal definition? But any quest for the answer to this question is a fool's errand. A better question – How can importers achieve reasonable care? – is more to the point because, despite the frustrating ambiguity of the term, reasonable care is now a bedrock principle that governs the behaviour of a generation of importers, brokers, consultants, lawyers and judges. Resistance is futile.
* The author is Director of Global Trade Compliance for a multinational high-tech manufacturer. During his thirty-five-year career in corporate trade compliance he has managed compliance organizations in large technology and energy companies. Email: email@example.com or through LinkedIn. The views expressed by the author are solely his own, and do not reflect the views, experiences, or practices of any other person or entity.
1. The Customs Modernization Act – commonly known as the Mod Act – became law as Title VI of the North American Free Trade Agreement (NAFTA) Implementation Act, Pub. L. 103–82, Title VI, 107 Stat. 2057 (8 Dec. 1993). According to House Report 103–361(I), 106 (15 Nov. 1993), the Mod Act was 'intended to improve compliance with customs laws and provide safeguards, uniformity, and due process rights for importers'.
2. In 2003 the US Customs Service was moved from the Treasury Department, where it had resided for over two hundred years, to the new Department of Homeland Security, and it was renamed as the Bureau of Customs and Border Protection. The name was again tweaked in 2007 to US Customs and Border Protection (CBP). For ease of reference in this article, CBP is used in all contexts.
3. Tariff Act of 1930, Pub. L. 71–361, 46 Stat. 590 (17 June 1930). This law, as amended numerous times, continues to be the statutory basis for US customs activities.
4. The benefits were less evident for customs brokers, which were forced to achieve the automation capabilities demanded by both CBP and importers. An unprecedented consolidation of brokerage firms occurred in the wake of the Mod Act, as many smaller firms that found it harder to compete under the new rules were acquired by larger firms. Consolidation was an inevitable result of innovations like remote entry filing, which eliminated the need to have a physical office at a port of entry and thus effectively ended the era of the single-port mom-and-pop brokerage house. And even some of the larger regional brokerage firms were courted by potential suitors. The big small- package delivery firms, FedEx and UPS, understood what the Mod Act meant to their business models; brokerage had always been a weak link in their door-to-door global cargo business, so what better way to strengthen their competitive advantages than to purchase two of the larger regional brokers (Tower and Fritz, respectively) to anchor their in-house US brokerage activities.
5. It is not hyperbolic to suggest that the Mod Act was perhaps the single most important factor in the elevation of global trade compliance as a necessary corporate function staffed by dedicated compliance experts.
6. To be clear, Congress did not invent reasonable care in the Mod Act. In 1974, for example, an internal CBP memorandum noted that 'negligence can be established by [ ... demonstrating] with facts and/or documents that the alleged violator failed to exercise that degree of care which a prudent person would have practiced in a similar situation'. Minimum Evidence Guidelines for Establishing Violation of 19 USC 1592, INV 8–01 I:F (11 June 1974). And a decade before the Mod Act we find that reasonable care was included in the new penalty guidelines of 19 C.F.R. § 171, App. B. Penalties and Penalties Procedures, 49 Fed. Reg. 1672 (13 Jan. 1984). Indeed, many federal agencies have long been bound by different standards of reasonableness. The Supreme Court has addressed on many occasions the concept of reasonableness in various contexts – see as one early example Dunlop v. Munroe, 11 U.S. 242 (1812) – but the exact first appearance of reasonable care as a discrete ideal cannot be pinpointed.
7. This article does not address the customs-related criminal statutes in 18 U.S.C. §§ 541–55. It is, however, a relevant preview of our discussion in s. 3.2 to note that one of these statutes, § 542, begins with: 'Whoever enters or introduces, or attempts to enter or introduce'.
8. In United States v. Ford Motor Co., 463 F.3d 1267 (Fed. Cir. 2006), the Court of Appeals for the Federal Circuit (CAFC) referred to the statute governing burden-of-proof findings in the Court of International Trade (CIT), 19 U.S.C. § 1592(e)(4), noting that '[s]tatutory negligence under § 1592, unlike common-law negligence, shifts the burden of persuasion to the defendant to demonstrate lack of negligence. ... That is, [CBP] has the burden merely to show that a materially false statement or omission occurred [but then] the defendant must affirmatively demonstrate that it exercised reasonable care under the circumstances'.
9. § 1592a was created by the Uruguay Round Agreements Act of 1994, Pub. L. 103–465, Title III, §333, 108 Stat. 4809 (8 Dec. 1994).
10. The Appendix B guidelines in 19 C.F.R. § 171 are 'not regulatory in nature, but merely serve to inform the public about certain agency procedures and practices'. Guidelines for the Imposition and Mitigation of Penalties for Violations of 19 U.S.C. 1592, 65 Fed. Reg. 39087, 39093 (23 June 2000). When the Appendix B guidelines were first added to § 171, CBP noted in the Federal Register that '[CBP] does not consider the guidelines to be formal regulations; they are for instruction and guidance to [CBP] field officers. [CBP] is including the guidelines as an appendix to the regulations merely to advise the public of them'. Penalties and Penalties Procedures, supra n. 6, at 1673 (emphasis added). The CIT in United States v. Active Frontier International, Inc., 867 F. Supp. 1312 (Ct. Int'l Trade 2012) advised that the Appendix B guidelines 'cannot bind the judicial branch' but may be deemed persuasive under Skidmore deference (Skidmore v. Swift & Co., 323 U.S. 134 (1944)), the same standard of deference applied to binding rulings issued by CBP.
11. Prior to the Customs Procedural Reform and Simplification Act of 1978 (CPRSA), Pub. L. 94–410, 92 Stat. 888 (3 Oct. 1978), section 592 did not distinguish negligence from fraud. Section 110 of the CPRSA amended 19 U.S.C. § 1592 to include for the first time the three degrees of culpability we know today as negligence, gross negligence, and fraud. Legislative commentary on the Mod Act in House Report, supra n. 1 at 121, noted Congressional intent that 'as a general rule, a violation is determined to be negligent if it results from the offender's failure to exercise reasonable care and competence to ensure that a statement made is correct'. But this intent was not expressed with sufficient clarity in § 1592. One is left to wonder whether a lack of reasonable care correlates precisely to negligence, because Congress' affirmative inclusion of both terms in the statute is indicative, per the rules of construction, of materially different meanings for such terms. In one instance the CIT effectively equated the terms, noting in United States v. Ford Motor Co., 395 F. Supp. 2d 1190 (Ct. Int'l Trade 2005) that 'the evidence presented and facts found by the Court demonstrate that Ford failed to exercise reasonable care and, therefore, acted with negligence'.
12. House Report, supra n. 1, at 120–22, provides non-binding legislative history on the intended scope of reasonable care (as in the previous footnote), but this commentary does not resolve the inherent ambiguity of the standard. CBP had added to the confusion almost ten years earlier by suggesting a subjective double standard whereby 'experienced importers may be reasonably expected to exercise a higher degree of competence in ascertaining the facts stated in entry documents than the business novice or inexperienced importer'. Penalties and Penalties, supra n. 6, at 1673. This double standard was eliminated by the Mod Act's mandate, in 19 U.S.C. § 1484(a)(2)(C), of 'equal treatment of all [IORs]'.
13. Oxford English Dictionary, https://en.oxforddictionaries.com (accessed 31 Mar. 2019). It is also worth noting that § 1592 uses other ambiguous words, like 'introduce' (as discussed in s. 3.2) and 'material'.
14. Reasonable Care Checklist, 62 Fed. Reg. 64248 (4 Dec. 1997).
15. US Customs and Border Protection, Reasonable Care: An Informed Compliance Publication 7 (Sept. 2017), https://www.cbp.gov/sites/default/files/assets/documents/2018-Mar/icprescare2017revision.pdf (accessed 1 Apr. 2019). In the spirit of informed compliance, CBP publishes many ICPs on its website. This ICP is a revision of an earlier version.
16. Sandra Liss Friedman, The Reasonable Care Standard: Has Customs Raised the Bar? (Feb. 2008). Article published on Barnes, Richardson & Colburn letterhead. In questioning the intent of the ICP, Friedman reported that the 'ICP does not state that the reasonable care standard is satisfied if there has been a good faith analysis by the importer who believes the documentation is sufficient, to support a declaration of value. This could be interpreted to mean that an importer who has collected documentation it believes is sufficient to qualify a related party price under transaction value, but with whom Customs later disagrees, has prima facie failed to exercise reasonable care'.
17. US Customs and Border Protection, Determining the Acceptability of Transaction Value for Related Party Transactions (2007), https://www.cbp.gov/sites/default/files/documents/icp089_3.pdf (accessed 1 Apr. 2019).
18. In contrast to the apparent implication of this ICP, Justice Antonin Scalia, in Pierce v. Underwood, 487 U.S. 552, 588 (1988), noted that 'a position can be justified even though it is not correct, and we believe it can be substantially (i.e. for the most part) justified if a reasonable person could think it correct, that is, if it has a reasonable basis in law and fact'.
Originally published in the November 2019 issue of the Global Trade and Customs Journal.
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