United States v. Callanish Ltd.

Slip Op. 13-43
UNITED STATES COURT OF INTERNATIONAL TRADE
UNITED STATES,
Plaintiff,
Before: Timothy C. Stanceu, Judge
v.
Court No. 03-00658
CALLANISH LTD.,
Defendant,
OPINION
[Awarding judgment by default on plaintiff’s claim to recover civil penalty]
Date: March 28, 2013
Domenique Kirchner, Senior Trial Counsel, Commercial Litigation Branch, Civil
Division, U.S. Department of Justice, of Washington, DC, for defendant. With her on the brief
were Stuart F. Delery, Assistant Attorney General, and Jeanne E. Davidson, Director. Of
counsel on the brief were Kevin B. Marsh, Assistant Chief Counsel, and Karen R. Hiyama,
Assistant Chief Counsel, U.S. Customs and Border Protection, of New York, NY.
Stanceu, Judge: Plaintiff United States seeks to recover a civil penalty under section 592
of the Tariff Act of 1930, 19 U.S.C. § 1592 (2006) (“section 592”), from Callanish Ltd.
(“Callanish”), a British corporation with a business address in Scotland. Plaintiff alleges that
Callanish, by means of fraud, unlawfully “introduced or aided or abetted another to enter or
introduce, or attempt to enter or introduce” capsules of evening primrose oil (“EPO”) into the
commerce of the United States on fifty-two consumption entries made between
September 1, 1988 and March 24, 1992. Second Am. Compl. ¶¶ 4, 18 (Dec. 22, 2010), ECF
No. 25.
Court No. 03-00658 Page 2
Before the court is plaintiff’s renewed request for a judgment by default, in which
plaintiff seeks a civil penalty of $9,943,249.12, an amount equal to the appraised domestic value
of the merchandise, as determined by U.S. Customs and Border Protection (“Customs” or
“CBP”), on the fifty-two merchandise entries. Pl.’s Notice of Filing of New Appraisal &
Renewed Req. for Default J. as to Callanish Ltd. (May 1, 2012), ECF No. 34 (“Pl.’s Req.”). For
the reasons stated in this Opinion, the court will award a civil penalty in the amount sought by
plaintiff, the statutory maximum permitted under section 592 for a violation occurring by fraud.
I. BACKGROUND
Background information on this case is included in the court’s previous opinions. See
United States v. Scotia Pharmaceuticals Ltd., 33 CIT __, __, Slip Op. 09-49, pp. 3-6
(May 20, 2009) (“Scotia Pharamaceuticals”), United States v. Callanish Ltd., 34 CIT __, __,
Slip Op. 10-124, pp. 2-5 (Nov. 2, 2010) (“Callanish I”), and United States v. Callanish, 36 CIT
__, __, Slip Op. 12-15, pp. 2-5 (2012) (“Callanish II”). Supplementary background information
is provided herein.
In Scotia Pharmaceuticals, the court denied plaintiff’s initial request for a default
judgment against Callanish because plaintiff’s original complaint failed to allege any acts or
omissions by Callanish that, if presumed true, would amount to a fraudulent violation of section
592. Scotia Pharmaceuticals, 33 CIT at __, Slip Op. 09-49, at 9. In Callanish I, the court
declined to award a default judgment upon plaintiff’s first amended complaint, ruling that this
complaint, in alleging that the domestic value of the merchandise on the fifty-two entries was
$17,734,926, “lacks any well-pled fact concerning the domestic value of the merchandise or how
that value was determined.” Callanish I, 34 CIT at __, Slip Op. 10-124, at 6-7. In Callanish II,
the court noted that plaintiff’s second amended complaint (the “Complaint”), although alleging
Court No. 03-00658 Page 3
that the merchandise had been appraised according to law, stated that the merchandise had been
appraised simply by doubling the entered value of the merchandise, a method the court held not
to satisfy the requirements of § 162.43(a) of the Customs regulations (19 C.F.R. § 162.43(a)
(2011)). Callanish II, 36 CIT at __, Slip Op. 12-15, at 6. The court ordered Customs to conduct
“a new appraisal to determine the domestic value of the merchandise on the fifty-two entries at
issue in this case” and “[held] in abeyance any ruling on plaintiff’s application for a default
judgment pending resolution of the appraisement.” Id. at __, Slip Op. 12-15, at 11. On
May 1, 2012, plaintiff submitted an appraisal estimating the domestic value of the merchandise
to be $9,943,249.12 and a renewed request for a default judgment awarding a civil penalty in that
amount. Pl.’s Req. 1-2. In a letter dated August 10, 2012, the court requested that plaintiff file a
copy of a Customs Directive, “Appraising Seized Property,” CBP Directive No. 5240-001A
§ 5.11 (Nov. 13, 2005), to which plaintiff had directed the court for a description of the
procedure it used in the new appraisement. Plaintiff filed the requested document on
August 14, 2012. Pl.’s Not. of Filing of Redacted Doc. (Aug. 14, 2012), ECF No. 36.
II. DISCUSSION
The court has jurisdiction over this action according to section 201 of the Customs Courts
Act of 1980, 28 U.S.C. § 1582(1) (2006). Under section 592, the court determines all issues de
novo, including the amount of any penalty. 19 U.S.C. § 1592(e)(1). In evaluating an application
for judgment by default, the court accepts as true all well-pled facts in the complaint but must
reach its own legal conclusions. Nishimatsu Constr. Co., Ltd. v. Houston Nat’l Bank, 515 F.2d
1200, 1206 (5th Cir. 1975) (quoting Thomson v. Wooster, 114 U.S. 104, 113 (1885) (internal
quotations and other citations omitted)); 10A Charles A. Wright, Arthur R. Miller & Mary K.
Kane, Federal Practice and Procedure § 2688, at 63 (3d ed. 1998).
Court No. 03-00658 Page 4
Under section 592(a), 19 U.S.C. § 1592(a), it is unlawful for any person, by fraud, gross
negligence, or negligence, to enter, introduce, or attempt to enter or introduce any merchandise
into the commerce of the United States by means of material and false documents, statements, or
acts or material omissions, or to aid or abet another to do so. 19 U.S.C. § 1592(a)(1)(A), (B).
Penalty liability accrues “[w]ithout regard to whether the United States is or may be deprived” of
lawful revenue. Id. § 1592(a)(1). Accordingly, in ruling on plaintiff’s application the court must
determine whether the well-pled facts in the Complaint, if accepted as true, establish liability for
a violation of section 592(a) and if so, the amount of the civil penalty to be awarded.
The entries giving rise to this case occurred during a period in which EPO could not be
sold legally in the United States, the U.S. Food and Drug Administration (“FDA”) having
determined and having announced in a series of import alerts beginning in 1985 that EPO was
not approved for use as a drug or food supplement. Second Am. Compl. ¶¶ 5, 12-13, 16, 19, 86.
During that period, the FDA directed Customs to detain all shipments of EPO. Id. ¶ 5 (citing
Admin. R. Doc. Nos. 70-75).
The Complaint contains a complex set of allegations involving numerous parties in
addition to Callanish.1 However, the court is able to find within the complaint, construed as a
whole, sufficient factual allegations that, if presumed true, establish that Callanish has incurred
1
Not all of the allegations of false statements made upon entry allege that the statements
were made with fraudulent intent, and the court cannot conclude, absent additional allegations,
that all of the alleged false statements were material within the meaning of section 592. See, e.g.,
Second Am. Compl. ¶ 22 (Dec. 22, 2010), ECF No. 25 (alleging that the Netherlands was falsely
declared as the country of origin on several entries without alleging that the statements were
made to intentionally mislead Customs, without setting forth facts establishing materiality, and
stating, inconsequentially, that “[i]t is necessary for Customs to determine the true country of
origin as different countries receive different preferences.”). Although the complaint does not so
plead, and the court does not so conclude, the circumstances of the false country of origin
designation may have had the potential to conceal an unlawful import scheme.
Court No. 03-00658 Page 5
civil penalty liability for aiding or abetting a fraudulent violation of section 592 as to each of the
fifty-two entries identified in the complaint.
Callanish is alleged to have knowingly participated in a criminal scheme under which
EPO capsules were clandestinely imported into the United States on the fifty-two consumption
entries. The alleged scheme involved two importers of record, named in the complaint as Pine
Lawn Farms (“PLF”) and Genesis II of Mid-America (“Genesis II”). Second Am. Compl.
¶¶ 10, 12. Chester Lockhart, a resident of Missouri who served as the principal of Genesis II and
agent of PLF, pleaded guilty to a violation of 18 U.S.C. § 542 for fraudulently importing EPO by
means of those same fifty-two entries. Id. ¶ 14, App. A104-34. The criminal information,
incorporated by reference into the complaint, sets forth additional details of the fraudulent
scheme to conceal from Customs and the FDA the fact that the merchandise was EPO and that
the actual U.S. buyer of the merchandise was Health Products International, Inc. (“HPI”), an
entity known to the FDA and Customs as a marketer of EPO for sale in the United States as a
food supplement. Id.On fifty of the fifty-two entries, entry documentation falsely and variously described the
capsules as containing Vitamin E or as containing “Alpha-Tocopheryl” or “Alpha-Tocopherol,”
“Tocopherols,” or “derivatives” of tocopherols, all of which terms refer to forms of Vitamin E or
to names by which Vitamin E is known. Id. ¶¶ 26-46, 48-49, 51, 53-59, 60, 62-63, 65-84. For
two entries, the court is not able to conclude that a false merchandise description was used.
Documentation on one such entry described the merchandise as “Hard Gelatin Capsules
containing Vegetable Seed Oil,” id. ¶ 47, a description that the complaint characterizes as false
but that is true in a technical sense. For another entry, the complaint does not provide a
Court No. 03-00658 Page 6
merchandise description but alleges that the merchandise was entered without being identified as
EPO. Id. ¶ 60.
All the descriptions of the capsules as containing some form of Vitamin E were false and
were material, as Customs would thereby be prevented from effectuating the FDA controls on
EPO importations. For the remaining two entries, the fact that the merchandise consisted of
capsules of EPO, a substance for which the FDA prohibited importation absent its approval, is a
material fact. Entry documents submitted to Customs are required to have “[a] detailed
description of the merchandise, including the commercial name by which each item is known.”
19 U.S.C. § 1481(a)(3) (1988). Therefore, entry documentation that omitted or concealed the
fact that the merchandise was EPO contained a “material omission” within the meaning of
section 592(a). From the allegations set forth, the court concludes that the complaint pleads facts
that, if presumed true, establish for all fifty-two entries of EPO that the importers of record
named in the complaint violated section 592(a) by entering the merchandise by means of
material false statements or material omissions.
The complaint pleads sufficient facts to establish that the two importers of record violated
section 592 by means of fraud on all fifty-two entries of merchandise. With respect to all of the
entries, Mr. Lockhart pleaded guilty to the criminal information, which recounts the intentional
use of the descriptions of the merchandise as forms of Vitamin E and other intentional steps
taken by Lockhart, HPI, and others to conceal from Customs and the FDA the true nature of the
merchandise and the identity of the buyer. Compl. ¶ 14, App. A104-34.
When fraud is alleged under section 592, “liability for aiding or abetting [that fraud]
requires . . . proof of knowledge of unlawfulness” or “intent to violate the law.” United States v.
Hitachi Am., Ltd., 172 F.3d 1319, 1338 (Fed. Cir. 1999). The complaint meets this standard. It
Court No. 03-00658 Page 7
alleges that from 1988 to 1992 Callanish was “the manufacturer and shipper of the EPO at all
times relevant to this complaint.” Compl. ¶ 8. It further alleges, for each of the fifty-two entries
at issue, that “Callanish shipped the EPO with knowledge that the importation of EPO into the
United States was illegal” and that the EPO “would be entered under cover of false documents.”
Id. ¶¶ 24-48, 53-57, 59, 61-63, 65-70, 72-84.
The civil penalty under section 592 cannot exceed the domestic value of the merchandise.
19 U.S.C. § 1592 (c)(1), (e). Pursuant to its own regulation, Customs is to determine the
domestic value of merchandise according to the price at which that or similar merchandise was
freely offered for sale in the ordinary course of trade. 19 C.F.R. § 162.43 (1988). Here,
however, Customs informs the court that there was no available information on the price at
which EPO would have sold in the relevant time period. Customs, therefore, appraised the
merchandise based on landed cost, according to a presumption that the importer would not have
sold the merchandise for less than what it cost to import the merchandise.2 Decl. of Yvonne P.
Williams ¶¶ 3-6, 10-11 (May 1, 2012), ECF No. 34-1; “Appraising Seized Property,” CBP
Directive No. 5240-001A § 5.11 (Nov. 13, 2005). The court considers this a reasonable
presumption in the circumstance presented, in which there was no legitimate market because sale
of EPO as a dietary supplement was unlawful at the time in question. The amount of the new
appraisal was $9,943,249.12. Id. ¶ 11. This court determines this appraisal of domestic value to
be reasonable, lawful, and sufficient to allow recovery of a civil penalty under section 592.
2
The appraising officer defined “landed cost” as “the cost of the merchandise when last
purchased, plus all duties, fees, broker’s charges, . . . unloading charges, and U.S. freight charges
to bring the property to the importer’s premises.” Decl. of Yvonne P. Williams ¶ 5
(May 1, 2012), ECF No. 34-1 (citing “Appraising Seized Property,” CBP Directive No. 5240-
001A § 5.11 (Nov. 13, 2005)).
Court No. 03-00658 Page 8
The amount of the penalty in a section 592 action is within the sound discretion of the
court, 19 U.S.C. § 1592(e)(1), but by statute, id. § 1592(c)(1), cannot exceed the domestic value
of the merchandise. See United States v. Ford Motor Co., 463 F.3d 1268, 1285 (Fed. Cir. 2006)
(“A trial court has considerable discretion to award civil penalties within the statutory range.”).
As an aggravating factor, the court notes that the defendant and importers of record resorted to a
scheme to circumvent an import control imposed by the FDA—an agency charged with
protecting public health and safety.3 There are no apparent mitigating circumstances that
convince the court to award a penalty in a lower amount. For these reasons, the court will award
a penalty in the amount sought by plaintiff.
III. CONCLUSION
Based on the well-pled facts in plaintiff’s Second Amended Complaint and plaintiff’s
revised appraisal of the domestic value of the merchandise, the court awards plaintiff a civil
penalty of $9,943,249.12 against defendant Callanish. The court will enter a default judgment in
this amount plus post-judgment interest as provided by law.
/s/ Timothy C. Stanceu
Timothy C. Stanceu
Judge
Dated: March 28, 2013
New York, New York
3
Since these entries occurred, U.S. Customs and Border Protection has recognized a
public health and safety violation as an aggravating factor to consider when determining the
amount of penalty for a violation of 19 U.S.C. § 1592. See 19 C.F.R. Part 171 App.
B(F)(2)(a)(ii) (2001).