Spin the Wheel of Standards

UPDATE: Don't Be Fooled. Read this too!

We all know that importers are ultimately responsible for the legal accuracy of their entries. In most cases, it seems that Customs generally looks to the importer no matter how egregious the broker error. But, that is not always the case. Brokers are sometime the subject of enforcement actions. That is what Judge Carman’s case U.S. v. UPS Customhouse Brokerage, Inc. is about and brokers are not going to like the outcome.

Here is what you need to know: In 2000, CBP hit UPS with three pre-penalty notices for its alleged failure to properly supervise and control the customs business it conducts. Eventually, Customs issued penalty notices and UPS paid $15,000 in penalties. CBP followed up with an additional five pre-penalty notices, which became five penalty notices and a demand for an additional $75,000. UPS refused to pay and got itself sued. So far, so good. This looks like a normal penalty case. But, it is not because brokers are not importers.

Brokers, it turns out, believe they are protected from penalties in excess of $30,000 for all violations occurring prior to the issuance of a pre-penalty notice. This comes from 19 U.S.C. § 1641 (d)(2)(A) which states in, relevant part, that “the appropriate customs officer
shall serve notice in writing upon any customs broker to show cause why the broker should not be subject to a monetary penalty not to exceed $30,000 in total for a violation or violations of this section.”

I am going to skip the big fight about whether UPS properly pled it claim for a refund of $10,000 it paid to CBP as a penalty. That is a technical side show that distracts from the bigger issues. But note that UPS wants that money back because it thinks it can only be subject to one penalty for all violations prior to the pre-penalty notice. Hence, it should only have paid on the first of the three $5,000 penalties, not the full $15,000 on all three. Seems to me it should really be arguing that it should only be paying on the last pre-penalty notice for all prior violations; but that is not important.

UPS reads § 1641 as meaning that there can only be one pre-penalty notice for all violations prior to the date of the notice and that the maximum liability for all those violations is $30,000. In the alternative, it argues that the total liability for all pre-penalty notices is limited to $30,000. The government, naturally disagreed. It says all that is required is that each penalty action start with a pre-penalty notice and that no single action seek more than $30,000 in penalties. This should set up a straightforward question of statutory construction in which the Court decides who is reading the law correctly. Hold on, because that is not exactly what happened.

In most customs cases before the CIT, the Court makes its decision based on the evidence and arguments submitted to it rather than what was submitted to Customs. That is called “de novo review” to make it sound impressive. The Court said this is a de novo review case. That means that the Court looked at the issue on its own; it was not limited to the agency record. So, this was not an agency review case. Remember that for later.

On questions of law, the court is the final arbiter of the meaning of the statute. But, it does not ignore the interpretation Customs applied. That, according to the Supreme Court, would not give proper deference to the agency Congress has designated as the primary enforcer of the law. In other words, Customs gets some deference from the Court on the meaning of the law. The amount of deference was subject to debate until the Supreme Court decided Mead and held that Customs’ decisions are entitled to deference proportional to their power to persuade. In other words, the Court should look at what Customs said, whether it is consistent with the statute, prior decisions, and logic before deciding whether to follow Customs’ lead. This is called Skidmore deference after Skidmore v. Swift & Co., 323 U.S. 134 (1944), which I cannot find free online.

In this case, the government argued for Chevron deference on the meaning of the law. Under that standard, the Court first decides if the statute is clear. If so, it applies the statute as written. However, if there is any ambiguity, the Court looks at the agency interpretation. If the agency interpretation is “permissible,” which can be read as “reasonable,” the Court will defer to the agency, even if it disagrees with that interpretation.

Here, however, Judge Carman rummaged through the U.S. Code and apparently (nudge, nudge) landed on the Administrative Procedure Act. This law governs judicial review of most administrative actions by federal agencies. To be fair to the Judge, the APA standard of review has been applied by the CIT in prior similar cases. But, I don’t see why. This is a de novo case. It should be decided on the record developed before the Court and on the Court’s interpretation of the statute with due deference to Customs. Perhaps someone can explain to me why the APA popped up. If so, feel free to add a comment.

So, the Court said (nudge again) it would apply the APA’s “arbitrary and capricious” standard. This is probably the most deferential standard available in American law. It means, the agency’s decision stands unless it is not rational.

But, then the Court went on to issue its decision. Guess what, the first thing it did was look for ambiguity in the statute. In other words, it said APA (wink, wink) whilst it applied Chevron. The Court found the language to be ambiguous, possibly purposefully so. Then, it looked at the implementing regulations and other Customs’ materials and found the agency interpretation to be reasonable.

Why, oh why, honorable Judge, did you tease me with the APA? Moreover, was any consideration given by the parties or the Court to whether Skidmore was the proper standard? I gather Skidmore is inapplicable because the Court viewed the broker penalty implementing regulations as at issue and entitled to full blown Chevron deference.

Thus, the Court held under Chevron that the government is not limited to a single pre-penalty notice for multiple violations and the $30,000 limitation applies only to each individual notice. This is likely a tremendous blow to the broker community and an appeal is almost certain. If Chevron applies, this is probably (weasel word intended) the right result. It would be wrong if Customs' interpretation is contrary to some unambiguously expressed Congressional intent or, if some less deferential standard of review applies. Holding out the possibility that my firm might get involved in this case, I will not venture an opinion on the ultimate decision.