An Exhaustive Undertaking in U.S. v. Nitek

By George W. Thompson

Judicial decisions generally don’t make me crack a smile, but I did have that reaction to United States v. Nitek Electronics, Inc., recently issued by the U.S. Court of Appeals for the Federal Circuit. It applies the principle of exhaustion of administrative remedies that we see so often in international trade cases, but this time with an unusual twist.

CIT Dismissed Claim, But CBP Appealed

The case involves the government’s judicial prosecution of a penalty action under 19 U.S.C. § 1592. In the administrative proceedings, U.S. Customs and Border Protection (CBP) asserted that the importer, Nitek, had acted with gross negligence in entering goods by means of false statements. CBP’s action in the Court of International Trade (CIT), however, sought a penalty based on negligence, a lower level of culpability. The CIT dismissed that claim, and CBP appealed.

Federal Court Dismissed the Appeal

Here’s why I’m smiling. The Federal Circuit affirmed the claim’s dismissal.

According to the decision, the level of culpability (fraud, gross negligence or negligence) must be presented from the outset of CBP’s penalty proceeding, at the pre-penalty phase. CBP may resort to a CIT action, under 19 U.S.C. § 1592(e), if the importer fails to pay that penalty. The agency cannot prosecute such an action using a different level of culpability.

The Federal Circuit already had looked askance on CBP’s pursuit of a higher level of culpability than found in administrative proceedings in United States v. Ford Motor Co., 463 F.3d 1286 (Fed. Cir. 2006). In Nitek, it applied that principle to a lower level of culpability, seeing no difference between the two situations. In either event, the principle of exhaustion of administrative remedies precludes CBP from judicially pursuing a claim it had not brought in its own proceedings.

CBP Needs to Stop Inflating Culpability Level 

As I see it, CBP will have to give more attention to its administrative proceedings under 19 U.S.C. § 1592 to preserve its ability to later seek judicial collection of an unpaid penalty. The agency’s habit of inflating the culpability level to encourage a settlement, then following a more realistic theory in court, will no longer work. Whether CBP resorts to asserting that more than one level can be supported by the same set of facts remains to be seen.