United States v. Nitek Electronics, Inc. ( 2015 )

United States Court of Appeals
for the Federal Circuit
______________________
UNITED STATES,
Plaintiff-Appellant
v.
NITEK ELECTRONICS, INC.,
Defendant-Appellee
______________________
2015-1166
______________________
Appeal from the United States Court of International
Trade in No. 1:11-cv-00078-JMB, Senior Judge Judith M.
Barzilay.
______________________
Decided: December 1, 2015
______________________
STEPHEN CARL TOSINI, Commercial Litigation Branch,
Civil Division, United States Department of Justice,
Washington, DC, argued for appellant. Also represented
by JEANNE E. DAVIDSON, PATRICIA M. MCCARTHY,
BENJAMIN C. MIZER; ERIC PAUL DELMAR, Office of the
Assistant Chief Counsel, United States Customs and
Border Protection, El Paso, TX.
ROBERT CLIFTON BURNS, Bryan Cave LLP, Washing-
ton, DC, argued for appellee. Also represented by
MICHAEL ZARA, Santa Monica, CA.
______________________
2 US v. NITEK ELECTRONICS, INC.
Before NEWMAN, CLEVENGER, and O’MALLEY, Circuit
Judges.
CLEVENGER, Circuit Judge.
The United States appeals from a decision of the
United States Court of International Trade dismissing the
Government’s penalty claim based on negligence for
failure to exhaust the administrative remedies under 19
U.S.C. § 1592. United States v. Nitek Elecs., Inc., 844 F.
Supp. 2d 1298 (Ct. Int’l Trade 2012), recons. denied, 2012
WL 3195084 (Ct. Int’l Trade Aug. 7, 2012). Specifically,
the Government argues that it should not be barred from
seeking a penalty claim in court at a culpability level that
is lower than that administratively asserted by U.S.
Customs and Border Protection (“Customs”). Because the
statutory framework of § 1592 does not allow the Gov-
ernment to change the culpability level that Customs
alleged in the penalty claim, we affirm.
BACKGROUND
Between June 14, 2001 and March 22, 2004, Nitek
Electronics, Inc. (“Nitek”) entered thirty-six shipments of
pipe fitting components used for gas meters, which in-
cluded gas meter swivels and gas meter nuts, into the
United States from China. Customs issued a letter to
Nitek on April 1, 2004, claiming that the merchandise
was misclassified under the U.S. Harmonized Tariff
Schedule (“HTSUS”). Accordingly, Customs demanded
payment for lost duties under 19 U.S.C. § 1592(d) that
resulted from the alleged misclassification. Customs
further alleged that the misclassification was also subject
to antidumping duties. On March 21, 2005, Customs
issued a pre-penalty notice to Nitek alleging that Nitek
“entered or attempted to enter pipe fittings into the
commerce of the United States by means of material false
statements and documents, and/or omissions.” The notice
stated that the tentative culpability was gross negligence.
US v. NITEK ELECTRONICS, INC. 3
Concurrently, other importers of gas meter swivels
and gas meter nuts challenged the antidumping duty
order in the Court of International Trade. See Sango Int’l
L.P. v. United States, 429 F. Supp. 2d 1356 (Ct. Int’l
Trade 2006). Customs agreed to stay the penalty proceed-
ings pending resolution of Sango International’s challenge
in exchange for Nitek subsequently waiving the statute of
limitations. This Court later issued a final decision in
Sango International on June 4, 2009, which sustained the
anti-dumping duty order. Sango Int’l L.P. v. United
States, 567 F.3d 1356 (Fed. Cir. 2009).
On February 24, 2011, Customs issued Nitek a final
penalty claim and again stated that the tentative culpa-
bility was gross negligence. Nitek responded by letter
opposing the penalty claim for gross negligence stating
that it had not acted with wanton disregard for the law
when dealing with the classification issues. Nitek also
offered to pay all duties owed. Customs then referred the
matter to the United States Department of Justice
(“United States” or “Government”) to bring a claim
against Nitek in the Court of International Trade to
enforce the penalty under its jurisdiction in 28 U.S.C.
§ 1582. The United States then brought suit against Nitek
to recover lost duties, antidumping duties, and a penalty
based on negligence under 19 U.S.C. § 1592 in connection
with the Nitek’s misclassification of gas meter parts.
Nitek filed a motion to dismiss the case under two
theories. First, Nitek moved to dismiss for lack of subject
matter jurisdiction under USCIT Rule 12(b)(1) because
the Government failed to exhaust all administrative
remedies before filing suit in the Court of International
Trade. The court denied dismissal on this ground because
it found that exhaustion was not a jurisdictional matter
and can be waived. Alternatively, Nitek moved to dismiss
for failure to state a claim for which relief may be granted
under USCIT Rule 12(b)(5) (now 12(b)(6)). The court
denied dismissal of the claims to recover lost duties and
4 US v. NITEK ELECTRONICS, INC.
antidumping duties. However, the court did dismiss the
Government’s claim for a penalty based on negligence.
The court reasoned that since Customs had only issued a
penalty based on gross negligence, the Government could
not bring a penalty claim in court based on negligence.
The negligence claim was “an entirely new claim” that
had not been pursued by Customs at the administrative
level. Thus, the court found that the penalty claim was
not properly before the court because the Government had
failed to exhaust all administrative remedies by not
having Customs demand a penalty based on negligence,
instead of gross negligence.
The Government then moved for reconsideration, but
the court reaffirmed its reading of the statute and denied
reconsideration. The court explained that “for the Court to
have any role, there must exist a claim for a specified
violation of § 1592(a)—namely, a material false statement
or omission amounting to ‘fraud, gross negligence, or
negligence’—for which the government is seeking recov-
ery, thereby limiting the scope of the government’s § 1592
action to the administrative claim Customs imposed
below.”
On September 23, 2014, the parties stipulated that
the United States is entitled to recover $47,884.27 from
Nitek for the lost duties and antidumping duties. The
parties also stipulated that they could not appeal their
agreement on these counts. Accordingly, the court ordered
a final judgment on October 1, 2014, for the United States
for the above amount.
The United States then timely appealed the dismissal
of the penalty claim based on negligence to this Court. We
have jurisdiction pursuant to 28 U.S.C. § 1295(a)(5).
DISCUSSION
We review the Court of International Trade’s legal de-
terminations de novo, including the court’s dismissal for
US v. NITEK ELECTRONICS, INC. 5
failure to state a claim for which relief can be granted.
Bell/Heery v. United States, 739 F.3d 1324, 1330 (Fed.
Cir. 2014). “To survive a motion to dismiss, a complaint
must contain sufficient factual matter, accepted as true,
to ‘state a claim to relief that is plausible on its face.’”
Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell
Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). The
trade court’s finding on exhaustion of administrative
remedies is reviewed for abuse of discretion. Itochu Bldg.
Prods. v. United States, 733 F.3d 1140, 1145 (Fed. Cir.
2013) (reviewing the district court’s dismissal for failure
to exhaust for abuse of discretion); Corus Staal BV v.
United States, 502 F.3d 1370, 1381 (Fed. Cir. 2007) (re-
viewing the trade court’s finding of no exhaustion of
administrative remedies for abuse of discretion).
The issue in this case is whether the court properly
dismissed the Government’s penalty claim for failure to
state a claim because the underlying administrative
penalty was based on gross negligence, not negligence.
This requires a close examination of the statutory scheme
in 19 U.S.C. § 1592, which governs this penalty claim.
First, § 1592(a) states that no one may enter mer-
chandise into the United States by presenting material
and false information by means of fraud, gross negligence,
or negligence. 19 U.S.C. § 1592(a)(1). If Customs believes
that there has been a violation of subsection (a), § 1592(b)
provides that Customs must first issue a pre-penalty
notice to the importer. The pre-penalty notice must “speci-
fy all laws and regulations allegedly violated” and “state
whether the alleged violation occurred as a result of
fraud, gross negligence, or negligence.” § 1592(b)(1)(A)(iii),
(v). Customs must also inform the accused importer “that
he shall have a reasonable opportunity to make represen-
tations, both oral and written, as to why a claim for a
monetary penalty should not be issued in the amount
stated.” § 1592(b)(1)(A)(vii). Next, if Customs determines
that there was a violation after considering any represen-
6 US v. NITEK ELECTRONICS, INC.
tations made by the accused importer, Customs must
issue a written penalty claim under § 1592(b)(2). The
penalty claim must specify any changes in the infor-
mation provided in the pre-penalty notice, including the
level of culpability that was initially stated. The importer
may then follow the procedures under 19 U.S.C. § 1618 to
seek remission or mitigation of the penalty. At the conclu-
sion of any such proceedings, Customs “shall provide to
the person concerned a written statement which sets forth
the final determination and the findings of fact and
conclusions of law on which such determination is based.”
§ 1592(b)(2).
Under § 1592(e), the United States can bring a claim
in the Court of International Trade “for the recovery of
any monetary penalty claimed under this section.” The
statute also states that “all issues, including the amount
of the penalty, shall be tried de novo,” § 1592(e)(1), and
sets out the burden of proof for each culpability level. For
fraud, the United States has to prove the violation by
clear and convincing evidence. § 1592(e)(2). For gross
negligence, the United States has the burden to prove the
elements of the violation. § 1592(e)(3). For negligence, the
United States has the burden to prove the act or omission
that caused the violation and the alleged violator has the
burden to prove that their actions were not negligent.
§ 1592(e)(4).
From the statutory framework, it is clear that
§ 1592(e) creates a cause of action for the United States to
recover penalty claims. Subsection 1592(b) states the
procedures that Customs must follow when making
penalty claims, including specifying the level of culpabil-
ity (fraud, gross negligence, or negligence). In contrast,
§ 1592(e) merely gives the United States the authority to
recover the penalty if the importer does not pay.
The Government argues that the three levels of cul-
pability are “varying degrees of the falsity of the state-
US v. NITEK ELECTRONICS, INC. 7
ment or omission underlying a violation,” not separate
claims. Appellant’s Br. 12. The Government contends that
the purpose of § 1592 is for Customs to identify the max-
imum penalty amount that can be collected for a violation.
Under this theory, the Government believes that § 1592(e)
allows the court to review the penalty determination de
novo, meaning that the Department of Justice can inde-
pendently assess the penalty claim issued by Customs
and assert a penalty claim at a different culpability level.
We do not agree.
The language of the statute and the legislative history
support a reading that penalty claims based on fraud,
gross negligence, or negligence are separate claims and
the Department of Justice cannot independently enforce a
penalty claim in court for a culpability level that was not
pursued administratively by Customs. The structure of
§ 1592 indicates that the proceedings in Customs are
separate from the proceedings in the Court of Interna-
tional Trade and the rules of one do not apply to the rules
of the other. Subsection 1592(b) details the procedures for
Customs whereas § 1592(e) addresses the court proceed-
ings. Subsection (b) enables Customs to determine the
level of culpability and requires Customs to inform the
importer if the culpability level changes throughout the
administrative process. This indicates that notice of a
penalty claim based on a specific culpability level does not
put the importer on notice of claims based on the other
culpability levels because Customs must inform the
importer if the culpability changes. This means that each
culpability level is a separate claim and Customs chooses
which culpability level or levels to assert against the
importer. Subsection 1592(e) states that the Government
can initiate an action in court “for the recovery of any
monetary penalty claimed under this section” and that all
issues will be tried de novo. This language specifies that
the court proceeding is an enforcement mechanism to be
used if the importer does not pay the penalty. Read to-
8 US v. NITEK ELECTRONICS, INC.
gether, the recovery language and the de novo review
mean that that the court can consider all issues de novo
that are alleged in Customs’ final penalty claim. Specifi-
cally, this means that if Customs determines that the
importer violated the statute based on negligence, the
court does not need to give any deference to Customs’
finding that the importer was negligent. However, the de
novo review does not give the Government power to
independently bring a claim that Customs did not allege.
There is no indication in the plain meaning of subsection
(e) that the Government may bring a claim based on a
different culpability level.
The legislative history of § 1592 states that one objec-
tive of the de novo standard was to relate the amount of
penalty to the culpability level and ensure due process for
the importer. S. REP. NO. 95-778, at *1 (1978). To ensure
fairness to the importer, Congress added the procedures
for Customs under § 1592(b). The changes also enabled
the court to review the amount of the asserted penalty,
which the prior version of § 1592 did not allow. The main
focus in the legislative history is that it is appropriate for
the court to review the amount of penalty. S. REP. NO. 95-
778, at *20 (“If an importer refuses to pay a [§ 1592]
monetary penalty and is sued by the United States in a
district court, all issues, including the appropriateness of
the penalty amount, would be considered by the court.”);
id. at *21 (“[T]he Committee emphasizes that the appro-
priateness of the amount of the penalty is a proper subject
for judicial review.”) However, the legislative history
nowhere suggests that the Department of Justice should
determine the level of culpability. It leaves this determi-
nation in the hands of Customs.
As we stated in United States v. Ford Motor Co., 463
F.3d 1286 (Fed. Cir. 2006), the Court of International
Trade has correctly defined the proper scope of the de
novo review provided for in § 1592(e). In Ford, we re-
viewed that court’s analysis in United States v. Optrex, 29
US v. NITEK ELECTRONICS, INC. 9
C.I.T. 1494 (Ct. Int’l Trade 2005), which concluded that
“the de novo standard [in § 1592(e)] refers to the issues in
the context of a specific claim based on one of three types
of section 1592 violations and does not allow the court to
review entirely new penalty claims.” Ford, 463 F.3d at
1298 (quoting Optrex, 29 C.I.T. at 1500). In Optrex, the
Government moved to amend its complaint for the penal-
ty claim to allege higher levels of culpability than Cus-
toms originally alleged in the administrative proceedings.
Optrex, 29 C.I.T. at 1495–96. The Government argued
that “as long as the United States commences a section
1592 action,” the de novo review of § 1592(e) puts “no
limitation upon the ‘issues’ addressed or the ‘amount of
the penalty.’” Id. at 1499. The court denied the motion to
amend, finding that the de novo review was limited to
reviewing penalty claims for culpability levels that Cus-
toms had asserted. Id. at 1500. The court reasoned that
the basic purpose of the statute is “to give an importer an
opportunity to resolve a penalty proceeding before Cus-
toms, before any action in [the Court of International
Trade].” Id. (citing S. REP. NO. 95-778, at *19–20 (1978)).
We are now faced with a similar issue and see no rea-
son to interpret § 1592 differently in this case. The Gov-
ernment tries to distinguish this case from Optrex by
noting that the Government in Optrex wanted to add
claims at higher culpability levels than what Customs
had asserted whereas in this case, the Government is
bringing a penalty claim for a lesser culpability level than
what Customs asserted. The Government argues that
“negligence is merely a lesser included offense within the
universe of gross negligence.” Appellant’s Br. 18. The
Government contends that Customs’ penalty based on
gross negligence gave Nitek notice that all lesser included
culpability levels (i.e., negligence) were included in the
gross negligence penalty notice. The Government cites to
criminal law cases for this proposition. Id. at 18–19 (citing
United States v. Stolarz, 550 F.2d 488 (9th Cir. 1977), and
10 US v. NITEK ELECTRONICS, INC.
Mildwoff v. Cunningham, 432 F. Supp. 814 (S.D.N.Y.
1977)). However, there is nothing in the language of the
statute, legislative history, or treatment in the prior cases
to support importing that idea into this statutory frame-
work. In fact, the procedures under § 1592(b) strongly
suggest that the importer is not put on notice of lesser
included offenses because Customs must notify the im-
porter of any changes to the level of culpability through-
out the administrative proceeding.
The doctrine of exhaustion requires that all adminis-
trative remedies be exhausted before seeking enforcement
of administrative action. United States v. Priority Prods.,
Inc., 793 F.2d 296, 300 (Fed. Cir. 1986). 28 U.S.C.
§ 2637(d) provides that “the Court of International Trade
shall, where appropriate, require the exhaustion of ad-
ministrative remedies.” We have held that exhaustion is
not strictly a jurisdictional requirement and therefore the
court may waive the requirement at the court’s discretion.
See Priority Prods., Inc., 793 F.2d at 300. However,
§ 2637(d) “indicates a congressional intent that, absent a
strong contrary reason, the court should insist that par-
ties exhaust their remedies before the pertinent adminis-
trative agencies.” Corus Staal BV v. United States, 502
F.3d 1370, 1379 (Fed. Cir. 2007). Here, the Court of
International Trade found that § 1592 precludes a waiver
of exhaustion in this case. The court specifically points to
the requirements under § 1592(b)(1) and (2) that direct
Customs to articulate a level of culpability in the pre-
penalty notice and notify the importer of any changes to
that culpability level in the final penalty claim. Customs
must inform the accused importer before enforcing a
penalty claim for a different culpability level in court.
Since Nitek was not notified of changing the culpability
level from gross negligence to negligence, the court cor-
rectly found that the procedures under § 1592 were not
properly followed. Accordingly, the court found that the
Government did not exhaust its administrative remedies
US v. NITEK ELECTRONICS, INC. 11
because Customs could have changed the culpability level
in the administrative proceedings. If waiver of exhaustion
was allowed under these circumstances it would be con-
trary to the purpose of the statute, which is to provide fair
administrative opportunities for resolution of penalties.
Also, it would leave the importer guessing at what level of
culpability he was accused of in court and thus would not
properly put him on notice of the penalty claim.
We review a court’s dismissal for failure to exhaust
administrative remedies for an abuse of discretion. Itochu
Bldg. Prods., 733 F.3d at 1145. The court did not make
any error of law or clearly erroneous fact finding that
would warrant a finding of abuse of discretion in this
case. As discussed above, the court found that requiring
exhaustion in penalty recovery cases is consistent with
the statutory scheme set up in § 1592. The court properly
interpreted the statute and applied it to this case con-
sistent with our observation in United States v. Ford
Motor Co. Therefore, the court did not abuse its discretion
in finding that waiver of exhaustion was not appropriate
in this case.
CONCLUSION
The language of subsection (e) of § 1592—which vests
the United States with authority to pursue recovery of
penalty claims in the Court of International Trade—
clearly defines that authority. The United States, under
subsection (e), is charged with “the recovery of any mone-
tary penalty claimed under this section.” As noted above,
the structure of the statute identifies the monetary penal-
ty “claimed” under § 1592 as the claim made by Customs,
the agency which has first-hand knowledge of the facts of
the case and which is responsible for policing the statute.
Under subsection (e), the Department of Justice acts as
the litigating attorney for Customs, seeking to recover the
claim made by Customs. We reject the Government’s
preference that we read subsection (e) as authorization for
12 US v. NITEK ELECTRONICS, INC.
it to recover a monetary penalty claimed by the Depart-
ment of Justice in its discretion “under this subsection.”
We thus affirm the Court of International Trade’s in-
terpretation of § 1592. The court correctly found that the
Government did not exhaust its remedies by bypassing
Customs and independently asserting a penalty claim
based on a different level of culpability. The Government
cannot bring a penalty claim based on negligence in court
because such a claim did not exist at the administrative
level.
AFFIRMED