Lawyers (those worth their price) relish when they get to remind enforcement officials that they are as obligated to follow the law as they are to enforce it. The government is constrained by due process considerations from manufacturing laws out of thin air. We are watchdogs against tyranny. Take, for example, appealing a failing grade on the customs broker exam. You might wonder how government overreaching can infect this seemingly esoteric area of the law, but a law is no longer esoteric when it affects you personally. Imagine if you invest considerable time and money to studying the customs broker exam, but you come up short, missing passing by a couple of points. Voilà! There is an appeals process afforded you in Title 19 of the Code of Federal Regulations. In fact, appeals are set out neatly in 19 CFR Sections 111.13 and 111.17. It’s all there. Just follow the regulations as officially set out by the agency, and you’ll get a fair and square review of your appeal. If only it were that simple. US Customs and Border Protection’s website has additional, and some (like me) would say different and arbitrary requirements. Suddenly appellants face an additional layer of bureaucracy not found in the regulations. CBP did not publish these new requirements in the Federal Register to allow the public to comment. Here is the most alarming part. CBP automatically rejects an appeal for any of the following: An incomplete application.
How shall I begin? CBP reserves to itself the power to automatically reject your appeal for an infraction of any of the arbitrary requirements. Automatically? CBP fabricates arbitrary, vague rules, and people don’t even get to first base if they don’t follow those rules? CBP will automatically reject your appeal if it’s incomplete, which begs the question, what does a complete appeal look like? By “incomplete erasures or insufficient markings”, I assume that CBP is referring to the ovals on the standardized answer paper sheet that test-takers must fill in with a No. 2 pencil. Ghosts of the hanging chads! CBP can’t be really asserting that people can’t confirm that CBP accurately recorded their test results. Here is the real kicker: “if the application includes any arguments written by another person.” This requirement is an audacious arrogation. CBP is saying that the person filing the appeal must not have anyone assist in preparing the appeal. The appeal has to be in your own words. There is nothing in the regulations or under statute that forbids a person from having someone help you with your appeal. There could not be. The customs broker exam is over. The person appealing is not obligated to prove additional mastery of customs brokerage, and especially not by drafting clever expositions to try to impress CBP. The customs broker exam is standardized to remove all subjectivity from the process. If one person gets credit for his or her answer, all other test-takers who answered the same automatically deserve equal consideration regardless of who wrote the appeal, and regardless of whether everyone uses identical arguments to appeal. I venture to guess that CBP conjured up this requirement to discourage people from collaborating on their appeals. A group of smart people might punch holes in CBP’s carefully-crafted exam. CBP may even want to discourage people from hiring lawyers to help with their appeal. As I said earlier, lawyers tend to force honesty upon government officials. If these unworthy motives are driving CBP, then the agency would do well to reconsider. CBP should want would-be customs brokers to work with others to follow the laws as written, even when this kind of rare integrity inflicts a little discomfort upon a bureaucrat or two.
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US CBP often asks importers to sign a statute of limitations waiver (usually two years) in penalty and liquidated damages cases, or when the importer is filing a prior disclosure. CBP is trying to preserve its rights to sue the importer before the statute of limitations runs out. Once the deadline comes and goes, the Government will not able to sue unless there is some sort of equitable tolling.
Should importers sign these waivers? CBP tends to make vague but alluring promises (which never seem to be get reduced to writing) about how signing a waiver will help convince the agency about the importer’s intention to cooperate. It is the “we’ll play nice if you play nice” strategy. CBP has a couple of regulatory tools to coerce importers into signing statute of limitations waivers, including speeding up its decision on the penalty. If there is less than one year left and the importer has not signed a waiver, CBP can reduce the deadline from thirty days down to seven days for an importer to respond to a pre-penalty notice, and the period can in reality be shorter if CBP sends the notice by mail, which it is allowed to do. CBP can also deny an importer’s ability to file a supplemental petition. It seems that most consultants and customs attorneys (no one in our firm) go out of their way to appease CBP, including having customers/clients automatically sign waivers. Perhaps this is out of fear of litigation. While we do not hold an absolute view, our firm considers CBP’s waiver requests with suspicion and we do not automatically advise that our clients sign waivers. It does not make sense that CBP takes more than five years or six to decide whether to sue or not. The statutes of limitations are generous under customs law when compared to most other areas of law. In addition, memories fade and evidence dissipates with time, making it harder to prosecute a penalty case and sometimes even to defend against one. By signing a statute of limitations waiver, the importer is drawing out the administrative proceedings and litigation, which, of course, can be very expensive in the long run and can prevent the importer from moving forward. CBP’s promise to “play nice” if the importer signs a statute of limitations waiver often rings hollow. By definition, CBP stopped playing nice when it issued a penalty or liquidated damages notice, thus forcing the importer into a defensive posture. The only way that CBP can start playing nice again is if it drops its penalty case (the agency almost never admits error) or greatly mitigates the penalty/liquidated damages claim. Waivers should be irrelevant to mitigation. CBP’s Mitigation Guidelines do not, and probably could not, condition mitigation on the importer signing of a statute of limitations waiver. CBP cannot also refuse to consider any substantive arguments or claims the importer timely offers. CBP cannot say, “we won’t listen to you if you don’t sign this statute of limitations waiver.” See United States v. Jean Roberts of Cal., Inc., 30 C.I.T. 2027 (2006) (“The demand by Customs that defendant waive the applicable statute of limitations for a two-year period in return for any consideration of these two claims for relief was neither justified under the applicable statute and regulations nor consistent with principles of equity and fairness”). Thus, whether to sign a statute of limitations waiver is a question that is more complicated than traditionally perceived. It is, as always, fact and context specific, an option to be weighed in the course of seeking to settle an administrative case or a lawsuit to the importer’s benefit. What are the risks, who holds the advantage, and who is likely to blink? These questions are always present as parties contemplate litigation. An importer may prefer not to sign a waiver to force CBP’s hand, perhaps thinking that the agency will accept a tender that is smaller than it desires. The importer may bet on the reluctance by the US Department of Justice, the agency that must sue in the Court of International Trade to collect the penalty or liquidated damages claim, to expend prosecutorial and political capital on a piddly customs penalty case when the world offers so many more sexy and prominent opportunities. Even if it is sued, the importer may be confident that it will win before the Court of International Trade, the dispassionate tribunal that must review all the facts and law anew. If you are an importer or are involved in the importing business, you know that Post-entry Amendments (PEAs) are used to correct import data errors with US Customs and Border Protection (CBP). From my perspective, PEAs are risky. Customs (not CBP, but Customs, as it was known at the time) launched the PEA program eleven years ago. It was a test program then and it remains a test program today. It was to last for one year, but Customs extended the program several times. Not only is it a test program, it is voluntary and CBP (the new Customs) has not issued any PEA regulations. Yes, I know. CBP has issued countless notices and instructions, but these are not the same as regulations. The PEA program is thus not a real program and importers are free to ignore it. My last sentence is a bit of a farce, isn't it? Importers are pretty much expected to participate, and they are doing so in growing numbers with never a thought as to the risks involved. Why worry? You file and pay electronically. CBP is happy and importers are happy. For all I know, there is an iPhone/Android app on the horizon. You may ask, who, except a persnickety Luddite, would have a problem when an otherwise cumbersome bureaucracy uses technology to cut through red tape? Me. While I may not exactly qualify as a Luddite (a group not known to blog), I confess that I am alarmed by government programs that lack safeguards. PEAs are not the only CBP program that is both alluring and risky. Take C-TPAT, for example. It is a voluntary program from CBP of roughly the same age as PEAs, which means it’s been around for quite a bit. And yet, there are no reported court cases interpreting C-TPAT. If you helped as many companies with C-TPAT as I have, you know that the lack of case law cannot be attributed to elegant program design or user-friendliness. CBP is not Apple. More likely, the lack of litigation means that aggrieved parties find no statute or regulation to invoke in their defense. CBP has huge discretion in deciding who to let in, at what level, and who to kick out. What happens when CBP makes a mistake? Sure, the program has an appeal process, but the ultimate arbiter is C-TPAT itself. I have a problem when federal programs assume that all the mistakes will be made only by citizens. I also grow suspicious when a government program, like PEAs, never seems to grow past the “test” phase. Dr. Phil might diagnose CBP as having commitment issues. CBP can penalize you if it does not like your PEAs? CBP warned people of this potential when it launched the PEA test program eleven years ago. In its Federal Register notice, CBP said, "The test is open to all importers who elect to follow the procedures set forth in this document for correcting already filed entry summaries prior to liquidation. However, a participant making and amending entries under these procedures will be subject to the usual penalties, liquidated damages, and other administrative sanctions for any Customs law violations." Will CBP penalize you? If so, when? Always. Never. Sometimes. Who knows. The unbridled potential for penalties is why I prefer prior disclosures over PEAs, at least when an importer owes duties in any substantial amount. Prior disclosures protect you against penalties and against overreaching by CBP. More precisely, an importer is likely to see any penalty greatly reduced when it files a properly drafted and timely prior disclosure. You may challenge CBP all the way to the Court of International Trade and beyond if necessary. PEAs offer no protection and no such opportunity. You are left to CBP’s whims. At this point, some people will say something like: If you have nothing to hide, you should not mind PEAs. Here is my reply: To a carpenter wielding a hammer, everything looks like a nail. In case this metaphor went over your head, the nail is the importer filing PEAs and the carpenter is CBP. Wham! I am not suggesting that CBP has an evil intent. I am saying that it is an enforcement agency, built to collect duties and penalties. It carries out this mandate automatically and instinctively (if it didn’t, taxpayers wouldn’t be getting their money’s worth). CBP and importers often disagree on what qualifies as a penalty or duty, and importers often win out through or because of the court system. Even in there is no litigation, the threat of litigation keeps CBP honest. The agency knows that it can be corrected by a superior, impartial authority, which explains why CBP loves when importers hire lawyers. In case that last statement went over your heard, I was being snarky. No government agency anywhere on earth likes to deal with attorneys, which explains and justifies the worth and merit of my fine profession. It also explains why ours is the only profession mentioned in the US Constitution. But I digress. CBP should not complain when importers file prior disclosures instead of PEAs, and the agency should never, ever penalize an importer for doing so. In its informed compliance publication on prior disclosures, CBP breathlessly exclaims: "The official policy of CBP is to encourage the submission of valid prior disclosures!" Did you notice the exclamation mark? It’s no minor flourish. I can’t recall CBP or other government agency ever using an exclamation point. It is as much out of character as an emoticon (like (:^)) and reflects CBP's official enthusiasm for prior disclosures. CBP does not stop there. It recognizes that the filing of voluntary disclosures is a mitigating factor for an importer facing a penalty. CBP also dangles an enhanced voluntary disclosure procedure to entice importers to enlist in the Importer Self-Assessment (ISA) program. Unlike PEAs, voluntary prior disclosures are not a test program. They are codified in real, made-in-the-USA regulations and statutes. Sometimes CBP says things like, "we do not penalize an importer for filing PEAs." The funny thing is that CBP never reduces this promise to writing or regulation. It certainly has never withdrawn its threat to penalize importers when they file PEAs. Until the agency takes these steps, prior disclosures are often a better, safer option. Prior disclosures rock!!!! :-) One of the best ways for an importer to save money is to reduce the duties it pays on imported merchandise to US Customs and Border Protection (CBP). A company can save thousands or even millions of dollars by classifying its merchandise under a heading with a lowest duty rate possible under the Harmonized Tariff Schedule of the US (HTSUS).
Importers commonly request that CBP classify items using the binding ruling request process. CBP publishes its rulings online (CBP’s Customs Rulings Online Search System or CROSS), an extraordinarily convenient and helpful service to the trade community, especially given the size of CBP’s electronic database (which consists of tens of thousands rulings). However, often CBP’s classification rulings can read like perfunctory edicts with little or no rationale. Sometimes rulings contradict each other, and it is not at all clear which ruling wins (although interested parties are allowed to report and challenge inconsistent rulings). Importers are often left to guess at CBP’s logic, to seek a pattern, to argue the merits of a preferred tariff classification, and to hope for the best. There is also an unstated but obvious clash of interests between importers and CBP. Importers seek to classify their imported merchandise under HTSUS headings that impose the lowest duty rate possible. CBP is generally motivated in the opposite direction and, as a result, it can produce rulings that do not always correspond to the clear intent of the HTSUS or court precedent. What happens if you don’t like CBP’s classification ruling? You can ask that CBP reconsider the ruling, but once you run out of administrative remedies, the question becomes: should you sue, as is your right, in the Court of International Trade? Bringing a lawsuit made a lot more sense after the US Supreme Court rendered in 2002 its decision in Mead Corporation vs. U.S. The case is remarkable on many levels, including that the U.S. Supreme Court chose to hear an import/customs case, a true rarity. Writing for the majority, Justice Souter said that the courts should not use the Chevron standard (which requires an appellate court to generally defer to the administrative agency) when deciding a tariff classification appeal. Courts should instead use the watered-down standard of Skidmore vs. Swift. Justice Souter wrote: Under Skidmore, a classification ruling receives a measure of deference proportional to its "power to persuade." That power to persuade depends on the thoroughness evident in the classification ruling, the validity of its reasoning, its consistency with earlier and later pronouncements, the formality attendant the particular ruling, and all those factors that give it power to persuade. In addition, Customs' relative expertise in administering the tariff statute often lends further persuasiveness to a classification ruling, entitling the ruling to a greater measure of deference. While this court therefore recognizes its responsibility to accord a classification ruling the degree of deference commensurate with its power to persuade, this court also recognizes its independent responsibility to decide the legal issue regarding the proper meaning and scope of the HTSUS terms. This court construes a tariff term according to its common and commercial meanings, which it presumes are the same. To discern the common meaning of a tariff term, this court consults dictionaries, scientific authorities, and other reliable information sources. The Skidmore standard provides importers with an enhanced opportunity to challenge CBP’s tariff classifications. The federal courts give CBP’s tariff classifications only the “power of persuade” deference, reviewing the arguments and evidence nearly as if presented for the first time. The importer, in essence, almost gets a mulligan or a do-over. As a result, there is now a healthy compilation of written opinions on tariff classification from the federal courts applying the General Rules of Interpretation and other canons of construction. These judicial edicts force greater transparency, logic, and predictability upon CBP’s tariff classification rulings. Importers can hold CBP accountable for incorrect tariff classifications. It is surprising how few importers actually challenge CBP’s tariff classifications in light of the potential savings. There is, of course, no guarantee that filing a lawsuit will produce the desired tariff classification, and the merits and prospects for success of each case vary widely, but clearly challenging CBP should clearly be a possibility that importers may want to explore. Tomorrow I am giving a speech at the International Trade Center of San Antonio, Texas. It is part of the NAFTA Audits Conference featuring leading NAFTA audit experts from all three countries. My topic is Recent NAFTA Developments.
Here is a preview: I will go over NAFTA developments over the past year or so, starting with federal initiatives and finishing with court cases. New Online Free Trade Agreement/Tariff Tool Don’t know whether your item qualifies for a Free-Trade Agreement (FTA), including the NAFTA. The US Trade Representative has created an online tool that it claims will allow you to easily find whether your items qualify for any of the seventeen FTAs, including imports into the USA, and will even help you classify your item. There is even an 8 minute video describing the online program. How-To NAFTA Certificate of Origin Videos Thanks to the Department of Commerce, you can now watch how-to videos on NAFTA certificates of Origin. The videos are short and easy to follow. Mexican Trucks Get Long-Haul Access Some years back, the USA reneged on and violated (according to a NAFTA Arbitration Panel) its obligation under NAFTA to allow Mexican trucks to drive in the interior of our country. Mexico retaliated, as it was allowed to under NAFTA, by imposing stiff tariffs on ninety products we export to Mexico, and also increased the use of NAFA audits. The Obama Administration is proposing to finally give Mexican trucks access to the interior of our country. The DOT calls is a “pilot program” that will last for three years. Mexican carriers would go through a three-phase process and fill out a 28-page application and other requirements, Stage 1 lasts three months. The Mexican motor carrier’s vehicles and drivers are inspected each time they enter the United States. Stage 2 lasts 18 months. The Mexican motor carrier’s vehicles would be still be inspected, but at a comparable to other Mexico-domiciled motor carriers that cross the United States-Mexico border. Mexican truckers have provisional authority under Stage 1 and Stage 2. If, after the 180 provisional period, the Mexican motor carrier has a relatively clean record, it gets bumped up to permanent authority under Stage 3. Mexican trucks and drivers would still be subject to all U.S., state and local laws. If the Mexican motor carrier has a questionable record of failed inspections after the 180 trial period, it can be removed from the program and its USA driving privileges revoked. USA motor carriers would have mirror rights in Mexico, and Mexico has agreed to remove the tariffs. Court Cases Ford Motor vs. U.S. This is an legal opinion from the United States Court of Appeals for the Federal Circuit decided on March 21, 2011. CBP renders most NAFTA decisions that affect importers. An importer can appeal a decision to the US Court of International Trade, and then appeal from there to the US Court of Appeals for the Federal Circuit. It is possible to appeal to the US Supreme Court, but there’s more chance that Donald Trump will be elected President than your appeal will be heard by the US Supreme Court. Pretty much, it ends at the US Courts of Appeals for the Federal Circuit. Thus, this case is an appeal from the Court of International Trade. Ford imported auto parts from Canada. It didn’t claim NAFTA outright at importation, but instead tried to claim a refund of duties paid on those auto parts under NAFTA. This is called a post-entry refund and its allowed under 19 USC 1520(d). There are a few conditions that an importer must meet to get a refund, including filing the refund request within a year of importation and supplying CBP with a copy of the supporting NAFTA certificates. Ford filed its refund request within a year, but did not submit the NAFTA certificates until after the one year deadline. CBP denied the refund claim because the certificates were late, Ford filed a protest with CBP which CBP rejected for the same reason, and then Ford appealed to the Court of International Trade, and the CIT agreed with CBP. In fact, the CIT said it did not even have jurisdiction to consider the appeal because it was not as if CBP had rejected Ford’s protest on the merits; CBP just said it did not meet the procedural requirements. We beg to differ, said the US Court of Appeals for the Federal Circuit upon receiving and reviewing Ford’s appeal. The Appeals Court decided that CBP had functionally denied Ford’s protest and, therefore, the CIT did have jurisdiction to hear Ford’s appeal. The Appeals Court then remanded the case back to the CIT and ordered the CIT to decide whether CBP was required to accept Ford’s late-filed NAFTA certificates of origin under 19 C.F.R. § 10.112, which basically allows importers when they are claiming reduced duty rates or free entry to file documentation late as long as there is no willful negligence or fraudulent intent and as long as it was filed before liquidation. Thus, it is possible for an importer to file its NAFTA certificates late on a refund request as long as the importer as there is no willful negligence or fraudulent intent and as long as it was filed before liquidation. De La Cruz v. Gulf Coast Marine & Associates, (ED TX-Lufkin March 7, 2011), 2011 U.S. Dist. LEXIS 23026 - An accident on a mobile drilling rig and oil production platform in Mexican territorial waters killed and injured a bunch of Mexican workers. The workers or their decedents sued Schlumberger, Baker Hughes, Vetco Gray, Halliburton, and others on various grounds, including NAFTA, claiming that the defendants violated international labor law, international safety standards, and pollution controls of NAFTA. The court did not agree and dismissed the NAFTA part of the lawsuit because NAFTA forbids private causes of actions. Adusumelli vs. Steiner, 740 F Supp 2d 582 (SD NY Sept. 29 2010) - This court was much more amenable to Mexican nationals. Twenty-six Mexican pharmacists had secured green cards under NAFTA to emigrate to the USA legally. They set up shop and secured temporary pharmacist licenses in New York where they practiced. New York then changed its laws to disallow any aliens, whether legal or not, to practice pharmacy in the state. The Court agreed with the Mexican pharmacists that this was unconstitutionally discriminatory and permanently enjoined the state of New York from enforcing its law against green card holders. Hitachi Home Elecs., Inc. v. United States, 704 F. Supp. 2d 1315 (Court of International Trade, April 30, 2010) - This case is relevant if you are an importer who is always fighting with CBP over the amount of duties you have to pay. Hitachi imported plasma TVs, which CBP liquidated at a duty rate of 5%. A 5% tax is a big deal, so Hitachi filed several protests claiming that the TVs are duty-free under NAFTA. A couple of years passed, but CBP took no action whatsoever on Hitachi’s protests. It did not deny or approve them. Why didn’t CBP take any action? Maybe because there were other protests and other cases pending regarding the plasma TV issue and CBP wanted to see how it all played out, but Hitachi grew impatient and filed a lawsuit in the CIT claiming that its protests are deemed denied by operation of law, i.e., automatically and that, therefore, the CIT could decide the merits of the protests. The CIT disagreed and concluded, “neither the statute nor the regulations specifies any consequences for the failure to allow or deny a protest within the two-year period. As has long been held, the time period is not mandatory.” In a not to subtle dig, the CIT suggested that if Hitachi wanted to have its protest heard quickly by the CIT, then Hitachi should have used something called the accelerated disposition procedure and, if CBP hadn’t decided within thirty days, the protest would have been deemed denied and then Hitachi could have appealed to the CIT. JFE Shoji Steel America, Inc., CBP Ruling N151495 (March 30, 2011) - This is not a court case, but a CBP ruling. The importer imported a “rectangle cut for a transformer.” I am not absolutely clear what that is, but it is classified under “8504.90.9540” for electronic transformers. The rectangle cut for a transformer was made entirely of Japanese material. CBP knew that this thing did not belong in the first two categories under 19 CFR 102.11, the rules setting the hierarchy for determining whether a good is NAFTA originating. It was not (1) wholly obtained or produced, or (2) produced exclusively from domestic material. That left category (3) and, therefore, the question was whether each foreign material in the goods went through a tariff shift. CBP found that there was a tariff shift and, therefore, the item qualified under NAFTA, that the country of origin was Mexico, and, therefore, the importer could avoid paying the 2.4 duty. Incoterms and International Sales Contracts
Incoterms are all the rage right now because the International Chamber of Commerce issued its latest version called Incoterms 2010. Incoterms are shorthand in international sales contracts, namely risk of loss and responsibility for delivery. If the merchandise is lost at sea, for example, who bears the loss? Where are you supposed to deliver the merchandise to? Who is handling export and customs clearance, and things like that. These issues are important, but they are seldom litigated because Incoterms do not deal with the transfer of title of the goods. They do not deal with who owns the goods or issues like whether the goods are conforming or whether you even get paid. These issues are dealt with by the sales contract, which can and should include Incoterms if you have them. Incoterms are also not law. They are not treaty. They are conventions or suggestions. You are allowed and encouraged, when you do use them, to modify them and supplement them to suit your particular transaction. Let’s see how Incoterms actually were litigated in a 2002 court case out of the federal district court, Southern District of New York. The case is St. Paul Guardian Insurance Company. vs. Neurod Medical Systems. A US company bought medical equipment from a German manufacturer. The parties agreed on an ocean shipment, but the medical equipment was damaged during the ocean voyage. The insurance company paid the US purchaser $285,000 because of the damages, and as subrogee, the insurance company sued the German producer to recover that amount. The German company said it did not owe the money because this was a CIF shipment, which placed the risk of loss was on the buyer. The insurance company argued, incorrectly, that the German supplier had to pay because the German company still owned the medical equipment when it was damaged. The Court warned against confusing risk of loss with title. Incoterms only deal with risk of loss, not title. You can own a shipment and, depending on the Incoterms you choose, the risk of loss is on the other party, as was the case here. The court concluded that the insurance company didn’t have a case and dismissed the lawsuit. The biggest problem with Incoterms is that people confuse them with ownership rights. Incoterms can provide a false sense of security that all the important issues in an international sale have been dealt with. The Federal District Court, Southern District of New York, just decided a lawsuit called
Hanwha Corp. v. Cedar Petrochemicals (January 18, 2011) by applying the U.N. Convention on Contracts for the International Sale of Goods ("CISG"). This case reveals the dangers to parties of a contract when they fail to agree on terms, especially when the court relies on the CIGS. Often a court will look to industry standards or how the parties reached a meeting of the minds in the past in order to achieve a reasonable resolution in the present, to fill in the blanks, if you will. But sometimes, the court will find that the parties did not even have a contract and, of course, if there is no contract, the parties cannot sue, and certainly cannot collect, for breach of contract. Before this lawsuit, Hanwha had ordered and purchased twenty shipments of petroleum products from Cedar Petrochemicals, and all these transactions went off without a hitch. On the twenty-first shipment, Hanwha ordered 1,000 metric tons of Toluene at $640 a ton. The parties, as was their practice, offered and countered offer regarding the applicable law even as they proceeded to finalize the letter of credit. Hanwa wanted Singapore law to determine any disputes between the parties, and Cedar Petrochemicals wanted New York law. Hanwha emailed Cedar Petrochemicals saying that there would be no contract unless Singapore law controlled. Cedar Petrochemicals then informed Hanwha that the deal was off and proceeded to sell the shipment to another party for $790.50 a ton, considerably more than Cedar Petrochemicals was going to pay. The court decided that CISG must determine the outcome because the parties never agreed which law to apply. This, by itself, is significant because US courts tend to shy away from the CISG when given the chance. Then the court reviewed Article 19(1) of the CISG which reads "[a] reply to an offer which purports to be an acceptance, but contains additions, limitations or other modifications is a rejection of the offer and constitutes a counter-offer." Parties and courts can easily use 19(1) to kill contracts when the parties are dithering. The court granted summary judgment in Cedar Petrochemical's favor and dismissed the lawsuit, concluding that the parties' inability to agree on the choice of law meant there was no contract. The court concluded that choice of law was material or essential to the parties. This decision could have easily gone the other way. The parties had agreed on price, produce, and delivery, as they had done twenty times before. That is usually sufficient to get you into court and keep you there (assuming there is sufficient evidence) on a breach of contract theory. When parties do not clearly set out the choice of law, courts usually resort to canons of construction and other means to apply the correct law. In fact, the court in this lawsuit did that when it concluded that CISG would control the outcome of the lawsuit. Although the court does not say this, Hanwha's "no deal" email was what probably torpedoed its chances of recovery. The lawsuit offers some valuable lessons. First, a working, consister history between buyer and seller is no substitute for making sure that your contracts are ironclad. Contracts become issues only when a party breaches, and if you have not protected yourself properly in a final, written form, you risk losing the deal and paying court costs. Second, if you are still negotiating and haggling, then you probably don't have a contract. Proceeding as if you do have a contract only invites tragedy. Finally, US courts are increasingly applying the CISG to international commercial disputes. If you do not know how the CISG works and you buy or sell over national borders, now is time to find out. If you have ever exported, you know that the regulations are horribly written, overlapping, and open to a great deal of subjective interpretation. President Obama has been claiming for some time now that our export laws need revamping, and last week he took his first concrete steps towards realizing this goal by issuing a slew of new changes in export regulations. He calls his effort the Export Control Reform Initiative.
One of the most important proposed revisions is the creation of a new license exception called Strategic Trade Authorization (STA). A license exception is exactly what is sounds like. If the Export Administration Regulations require an export license to ship to a particular destination, there are a few loopholes available. This latest proposal seeks to create the most sweeping license exception ever. STA appears to be a license exception that swallows up the current licensing scheme for many controlled items. It effectively removes a bunch of items from the Commerce Control List so that an export license is required only for the most sensitive items. The interesting part is that President Obama is making these changes through executive fiat, by amending the regulations. Obama, like a couple presidents before them, just can’t convince Congress to amend the export statutes (good luck with the IRS code). The problem is that when presidents bypass Congress, sometimes they get called on the carpet, they can get challenged, especially by those who stand to suffer from the changes in the law. But maybe I’m not giving the President sufficient credit. It is hard to imagine that many exporters will argue against this huge liberalization of US export controls that this proposed amendment would make. Exporters must report to the BIS whenever they invoke the STA exception, which is different and an additional step from most license exceptions. Exporters also have to go back and forth with the consignee regarding some information, a new wrinkle in terms of license exceptions. STA will also require a special Destination Control Statement on your export documents. The exporter informs the consignee of certain information, including the ECCN. The exporter can ship after the consignee provides a written acknowledgment, a written commitment to comply with the EAR, and a promise to furnish information about the transaction if the US Government ever asks. People have until February 7, 2011 to submit comments to the BIS. I recently read all the advisory opinions that the Department of Justice posts online (there are dozens) in regards the Foreign Corrupt Practices Act (FCPA) [as you may appreciate, this was client-related, not recreational]. The FCPA makes it illegal to bribe foreign officials. I could find no advisory opinion where the DOJ said that a transaction violated the FCPA.
It is popular for white collar crime lawyers to insist that the FCPA has somehow morphed into a strict liability statute thanks to prosecutors’ expansive definitions. Crocodile tears. Maybe there is an argument that when the Securities and Exchange Commission (as opposed to the DOJ) enforces the FCPA’s bookkeeping requirements on publicly-traded companies, this comes close to strict liability. But even that is a stretch. While the mens rea standard is not been set in concrete, prosecutors generally must prove “willfulness” and “corruptly.” We would see more people going to prison if the FCPA did impose strict liability. FCPA prison sentences are exceedingly rare even as prosecutions and open investigations have boomed. Which got me to thinking: has the FCPA advisory opinion procedure ever resulted in an indictment? Is it even possible for prosecutors to prove mens rea against people requesting an advisory opinion from the DOJ? How can you “corruptly” intend a bribe if you first check with federal prosecutors? Has the DOJ ever decided that, no, this transaction just doesn’t pass muster? With over three decades of interpretation, you would think that there would be at least a few cases where that happened...unless there is something in the process of requesting an advisory opinion that inoculates the transaction against criminal liability. So, I emailed the DOJ’s Fraud Division the following: Dear DOJ: Do you publish any opinion procedure releases, or do they even exist, where you tell the party requesting the opinion that, no, the transaction does not pass muster and is illegal under the Foreign Corrupt Practices Act? It appears that all the releases conclude with a "we see no problem and do not plan to take any action." If there any releases that say the opposite or something different, please me where to find these releases. Thank you. Oscar Gonzalez, Attorney After a couple weeks of not hearing anything back, I emailed the DOJ again. And then again. My persistence finally paid off when last month the DOJ emailed me back the following: Dear Mr. Gonzalez – All of our opinions are available on the website. Releases under the prior procedure (pre-1988) are under a separate heading on the FCPA page. Because the opinion procedure involves consultation between the parties, the requestors generally have the opportunity to adjust the circumstances to ensure they are compliant with the FCPA. Thus, the Department has not yet had occasion to state that a transaction would violate the FCPA in an opinion. Sincerely, FCPA Coordinator Fraud Section, Criminal Division U.S. Department of Justice www.justice.gov/criminal/fraud/fcpa The DOJ conceded that it has never issued a written advisory opinion that concludes that a transaction violates the FCPA. Never. There are, of course, a few possibilities to explain this state of affairs. First, it is unlikely that someone who blatantly violates the FCPA will ever file a request for an advisory opinion with the DOJ. The FCPA is not the most complicated law on earth, and you pretty much know when you violate it. It is hard, for example, to accidentally bribe someone. The advisory opinion procedure is designed for borderline cases, and is probably taken advantage of mostly by requestors who think they are already on the “no violation” side of the risk analysis. Second, as the DOJ explained, the DOJ and requestors work out and eliminate potential violations during their collaboration and before the DOJ releases a written opinion. The DOJ is playing nice, in other words. I suspect there is a third factor at work: mens rea. The DOJ’s own regulations require that the transaction be an actual one. No hypotheticals accepted. 28 CFR 80.3. If the DOJ ever told a requestor “this is a violation,” then the DOJ might feel obligated to indict. Not only would that dissuade others from requesting written advisory opinions, but the DOJ would be shouldering a burden of proof and persuasion it would find nearly impossible to discharge. The DOJ (actually, the Attorney General) would be required to prove some level of bad intent, a huge hurdle given that the requestor came hat-in-hand to ask for the DOJ’s special guidance and blessing. Thus, the DOJ created a procedure that inoculates would-be violators against FCPA enforcement actions. How often does one see an enforcement agency divest itself of enforcement powers? All this makes me reconsider the worth of requesting a FCPA written opinion from the DOJ. |
Oscar Gonzalez
Principal and a founding member of GRVR Attorneys. Archives
September 2016
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