11th Circuit Case Signals Split on Law vs. Regulation vs. … Contract?

Feb 25, 2013   

Decision holds interesting repercussions for trade violations and penalty amounts

On February 22, 2013, the U.S. Court of Appeals for the Eleventh Circuit vacated the smuggling and conspiracy convictions of two importers of allegedly tainted cheese products in the case of United States of America v. Yuri Izurieta and Anneri Izurieta (Case No. 11-13585). The decision created a circuit split over the scope of U.S. Customs and Border Protection (CBP) import bond regulations, yet also raised the possibility of a new line of attacks against CBP import penalties and liquidated damages.

With the highly respected U.S. Court of International Trade Judge Jane A. Restrani sitting with the 11th Circuit by special designation, a three-member panel found that a certain class of U.S. import regulations are civil rather than criminal in nature. Therefore, the criminal convictions of the husband and wife failed for lack of subject matter jurisdiction.

The case focused on the actions of the Izurietas and their Miami-based company, Naver Trading, Corp. Over several years, the company imported several large shipments of cheese and other dairy products into the United States. The shipments were “conditionally released” upon importation, that is, CBP and the U.S. Food and Drug Administration (FDA) allowed the shipments to move to Naver’s warehouse, but ordered the merchandise to be held at the warehouse pending further review and testing by the FDA. When the FDA tests came back indicating that the products were contaminated with Salmonella, E. coli and Staphylococcus aureus, the FDA ordered the products to be either destroyed or re-exported under the supervision of CBP.  The Izurietas failed to do so, however, and admitted that almost 5,000 kilograms of imported cheese that contained both E. coli and Staphylococcus aureus had been sold into the United States.

The FDA Office of Criminal Investigation, aided by special agents from U.S. Immigration and Customs Enforcement (ICE) investigated and referred the case for criminal prosecution to the U.S. Department of Justice. The Izurietas were tried, convicted, and sentenced in June 2011.

The defendants appealed to the 11th Circuit arguing violations of their Sixth Amendment rights to confront witnesses, improper statements made by the prosecutor over the course of trial, and faulty calculations underlying their sentences. The Appeals Court, however, saw a different issue in the case, which it raised sua sponte.

Six of the seven counts in the original indictment against the Izurietas alleged violation of 18 U.S.C. § 545, which is the statute barring smuggling into the United States. The operative language of the statute reads:

Whoever fraudulently or knowingly imports or brings into the United States, any merchandise contrary to law, or receives, conceals, buys, sells, or in any manner facilitates the transportation, concealment, or sale of such merchandise after importation, knowing the same to have been imported or brought into the United States contrary to law. . .
Shall be fined under this title or imprisoned not more than 20 years, or both. (18 U.S.C. § 545 (emphasis added).)

In this case, the “law” alleged to have been violated was a CBP regulation governing the conditional release of food, drug, device, cosmetic and tobacco products. Section 141.113 of Title 19, Code of Federal Regulations, allows for the conditional release of such products; however, subsection (c)(3) requires:

If FDA refuses admission of a food, drug, device, cosmetic, or tobacco product into the United States, or if any notice of sampling or other request is not complied with, FDA will communicate that fact to the CBP port director who will demand the redelivery of the product to CBP custody. … [A] failure to comply with a demand for redelivery made under this paragraph (c) will result in the assessment of liquidated damages equal to three times the value of the merchandise involved[.] (19 C.F.R. § 141.113 (c)(3).)

The court held that the regulation at issue “sets forth the terms of the contract between the importer and Customs by delineating the obligations of the importer upon conditional release and the damages for a breach of those contractual obligations.” When the Izurietas breached their contract with the Customs, the court held that criminal charges could not arise because “that law is civil only, and in particular reflects contractual requirements.” The court went on to state, “While some regulations may fall under the criminal prohibitions of 18 U.S.C. § 545, the text of 19 C.F.R. § 141.113(c) along with the comments issued during its promulgation certainly indicate to the average person that liability is strictly civil and monetary, capped at most at three times the value of the merchandise secured by bond, and is not aimed at punishment.”

Having found that only civil, contractual violations occurred, the 11th Circuit vacated the criminal convictions of the Izurietas under the smuggling charges, and vacated the accompanying conspiracy charge noting, “The indictment was sufficiently unclear as to whether any crime was charged such that the average person could easily read [the conspiracy count] as actually charging only a conspiracy to commit non-criminal acts.”

“We disagree with the conclusion of our sister circuit …”

The Izurieta case is noteworthy in many respects, not least of which is that the court’s opinion sets up a split among the Circuits regarding the interpretation of the “contrary to law” provision of 18 U.S.C. § 545.

The 11th Circuit panel referred to a Ninth Circuit case in which that court adopted a relatively narrow interpretation of the smuggling statute. The court in United States v. Alghazouli, 517 F.3d 1179 (9th Cir. 2008), decided that regulations are included within the definition of a “law” for purposes of 18 U.S.C. § 545 only if there is a statute (a “law”) that specifies that violation of that regulation is a crime. Alghazouli, 517 F.3d at 1187.

The court in Izurieta also took notice of a Fourth Circuit case, United States v. Mitchell, 39 F.3d 465 (4th Cir. 1994). In Mitchell, the court adopted a more expansive reading of 18 U.S.C. § 545, stating, “[i]t has been established in a variety of contexts that properly promulgated, substantive agency  regulations have the ‘force and effect of law.'” Mitchell, 39 F.3d at 468 (citing Chrysler Corp. v. Brown, 441 U.S. 281, 295-96 (1979)).  The 4th Circuit then went on to apply a three-prong test (under Chrysler) to determine whether the regulation at issue in Mitchell had the “the force and effect of law.”

Finally, the Eleventh Circuit gave a nod to the First Circuit, which addressed this issue in United States v. Place, 693 F.3d 219 (1st Cir. 2012). The Izurieta court noted, however, “Because the appellant in [Place] made only an “all-or- nothing” argument that no regulations could be included within the scope of  “law” under 18 U.S.C. § 545, the First Circuit decided not to address ‘this delicate point.'” Place, 693 F.3d at 228 n. 12.

Examining the sum of these precedents and calling to mind the deliberations of Goldilocks in the three bears’ house that day, the 11th Circuit decided in Izurieta to reject both the narrow reading of the 9th Circuit and the “sweeping result” which would occur from the “breadth of the Fourth Circuit’s three-prong approach, derived from a non-criminal context.” Instead the court decided – correctly, in our opinion – to examine the true nature of the regulation and opt for lenity, or kindness, “especially where a regulation giving rise to what would appear to be civil remedies is said to be converted into a criminal law.”

Important Ramifications for International Trade Enforcement Measures

In addition to the circuit split, the Izurieta case potentially opens the door for a new line of attacks on Customs’ and other regulatory agencies’ fines, penalties, and liquidated damages. In calling the CBP regulation “civil only” and contractual in nature, the question arises as to the applicability of the tenets of contract law to such governmental regulations.

The CBP regulation at issue in this case (19 C.F.R. § 141.113) is similar in language and intent to many other CBP and other government agency regulations. CBP regulations for import bonds under 19 C.F.R. § 113.62, et seq., has provisions such as “(a) Agreement to Pay Duties, Taxes, and Charges,” (f) Agreement for Examination of Merchandise,” and “(m) Consequence of default.” All of these provisions are very civil and very contractual in nature. In fact, most of the regulatory provisions for which CBP assesses “liquidated damages” – for violations of bond provisions, failure to files timely export information (15 C.F.R. § 30.24), violation of airport security regulations (19 C.F.R. § 122.181, et seq.) and violation of CBP-bonded warehouse and other customs-bonded facilities (Treasury Decision 99-29 and multiple regulations) – are decidedly civil and contractual in nature.

Thanks to Izurieta, it can now be argued by importers and others in the trade community in the Eleventh Circuit that violation of any of these types of civil, contractual regulations cannot result in criminal prosecution. Yet more interestingly, if these regulations are civil and contractual in nature would contract law provisions apply to the liquidated damages, fines and penalties that result from these provisions?

For example, if an importer enters incoming merchandise by filing entry documents with CBP, but is late in paying the duties that are due on that merchandise, the importer can be cited with a violation of the import bond provision (19 C.F.R. §§ 113.62(l)(4), and 113.62(a)(1)) and can be assessed liquidated damages in an amount of double the unpaid duties. In light of Izurieta, we would have to now ask, are these civil damages reasonable?

In a 2009 decision in the case of Country Inns & Suites By Carlson, Inc. v. Interstate Properties, LLC, 329 Fed. Appx. 220, No. 08-16850 (11th Cir., May 12, 2009), the Eleventh Circuit examined the validity of liquidated damages in a contract dispute arising under Florida law. The court held that the test under Florida law as to when a liquidated damages provision will be upheld should be applied to the case. Under Florida law, liquidated damages are enforceable when:

First, the damages consequent upon a breach must not be readily ascertainable. Second, the sum stipulated to be forfeited must not be so grossly disproportionate to any damages that might reasonably be expected to follow from a breach as to show that the parties could have intended only to induce full performance, rather than to liquidate their damages. (Lefemine v. Baron, 573 So. 2d 326, 328 (Fla. 1991).

In our hypothetical case of the late-paying importer above, CBP may assess liquidated damages of double the unpaid duties even if the duty payment is only one day late. Looking at the second prong of the test from Lefemine, the actual damages to CBP of a late duty payment are, at best, the opportunity costs of that late payment. In most contractual settings, such late payment fees are a small percentage (1% or 1½% per month) of the unpaid amount. In a duty bill of $100,000, however, the liquidated damages could equal to $200,000. Such CBP-levied damages clearly violate the Lefemine test and would be thrown out in a Florida court, and now apparently, in the 11th Circuit as well.

The implications for the potential application of Izurieta are enormous. The Eleventh Circuit includes the major international ports of Miami, Fort Lauderdale, Tampa, Jacksonville, Atlanta, and Savannah to name a few. The ports of the 11th Circuit saw over $150 Billion in imports during 2011, almost 10% of the total in the United States. The liquidated damages, fines and penalties to CBP arising from these ports are similarly great. The question after the holding in United States of America v. Yuri Izurieta and Anneri Izurieta is now whether these monetary damages can now be sustained.