Canada-U.S. Blog Trade Lawyers Cyndee Todgham Cherniak and Susan K. Ross

The Government Generally Gets Its Way

Posted in Corporate Counsel, Criminal Law, Customs Law, Legal Developments

Originally published by the Journal of Commerce in January 2012 –

The Government Generally Gets Its Way

Did you see the press coverage in August 2011 surrounding the raid by Fish + Wildlife and Homeland Security (ICE) Investigators on Gibson Guitar’s facilities in Nashville and Memphis, TN? As that case proceeds, one is forced to contemplate its relationship to the November 2009 seizure of woods which involve claims Gibson purchased ebony in violation of Indian law. It has proceeded to the forfeiture stage, meaning the Government is seeking to dispose of the seized wood, and Gibson is fighting to get it back. Now, the Government has asked the judge to stay the November and August cases while it decides about possible criminal charges, Look for those criminal charges to be filed in the near future, given the context for the stay request.

While Gibson has mounted a vigorous defense in both cases, it is impossible to read the press reports and underlying pleadings and not come away with certain impressions. The over-arching one being – if you tick off the government enough, it will bring its considerable resources to bear in order to get its way – otherwise known as flunking the attitude test!

The November 2009 case involves claims Gibson imported Indian ebony in violation of local laws. The supporting Fish + Wildlife affidavit states there was a violation of 16 U.S.C. 3372(a)(2) which makes it illegal to “to import, export, transport, sell, receive, acquire, or purchase in interstate or foreign commerce — (A) any fish or wildlife taken, possessed, transported, or sold in violation of any law or regulation of any State or in violation of any foreign law; … “ So, if Fish + Wildlife is correct, and the ebony was obtained and shipped in violation of Indian law, Gibson would be liable under U.S. law, even if it did not know about the impropriety.

Underlying the August 2011 search warrants are claims the ebony and rosewood Gibson purchased was exported illegally from Madagascar.  Assuming this allegation to be true, Gibson would again be in violation of U.S. law.  In both instances, the exports originated in Germany, the importer was a third party customer and the ultimate consignee was Gibson.

In both cases, Fish + Wildlife makes a big deal about the wood not being properly classified when exported by the seller, and again when imported by the middleman. These missteps, if correct, are being used to infer Gibson and its business partners were trying to hide the true identity of the woods so as to evade the Lacey Act requirements. A critical point to Gibson’s defense centers on claims the wood came from suppliers which abide by the Forrest Stewardship Council principles. FSC members issue certificates attesting the wood being shipped was not illegally harvested and is not in violation of traditional or civil rights.  Even if Gibson’s statements are true, the company could have been duped through the issuance of phony FSC certificates. Even if the certificates were issued by an FSC legitimate source, they could still not be correct. If not, the Lacey Act is a strict liability law, meaning Gibson could be in violation, even without knowing it.

If the Government relying on supposedly wrong export and import data to infer bad intentions sounds familiar, it should. We saw a similar splash a few years ago when the melamine in the pet food case was making its way through the court system. In that case, Chemnutra was the importer of record. Emails were exchanged with the supplier questioning the tariff number stated on the export documents. Of course, Chemnutra was exercising reasonable care in order to validate the classification it declared at time of entry.  That case was resolved with guilty pleas to misdemeanor FDA violations, laws which are also strict liability, i.e., holding the violator liable even without any knowledge or intention to violate the law.

The August 2011 case is still very new. From reading the search warrant, it is clear the issuing judge relied on the interpretation of Madagascar law provided by the Fish + Wildlife agent. There was similar reliance back in 2009 on the agent’s explanation of Indian law. In neither case was a copy of the foreign law provided with the search warrant affidavit, only a summary of its purported contents.  Gibson has an affidavit from the relevant Indian authorities refuting Fish + Wildlife’s position on the first case. It is understandable the Government does not like being publicly embarrassed and so would be looking for other ways to undermine Gibson’s position (should we be honest and call it seeking to intimidate Gibson?). Hence, the second raid. Gibson has produced its evidence regarding the Indian shipments to the court.  It is too soon in the process for similar evidence to be due regarding the Madagascar woods, but it seems reasonable to expect similar efforts by Gibson to get those goods back.

Against this background, there is one important point left to mention – it is entirely possible the Government is wrong. There have certainly been numerous recent cases where that has been the outcome, the Government has lost, being left with little or no evidence to support its original claims. One involved an Australian national who was charged with multiple felony counts claiming violations of Chinese cultural property laws, enforced in the U.S. due to international treaties regarding importations of dinosaur artifacts. That case settled with a guilty plea to a misdemeanor regarding supposed country of origin marking irregularities!

Another instance was the dismissal of charges when the government rested in the Laurie Stevens case. There, the FDA brought charges against the attorney for obstruction of proceedings, falsification and concealment of documents, false statements, and aiding and abetting. The agency did not like the legal advice she gave but was humiliated in court.

Another recent example involves the San Diego customs broker where CBP sought to revoke its filer code without any due process. Customs lost at every turn, including the ignominy of preparing and filing the notice of resolution with the court! Many of CBP’s claims rested on assertions arising out of the broker’s supposedly improper relationships with unlicensed parties and drugs found in goods. In the end, there was no evidence to support any of its claims. It also appears the local Broker Management team may not even be aware that CBP has authorized commission payments to unlicensed parties, see HRL H135395 issued in March 2011.

Another publicly embarrassing example of the Government stepping on its pepperoni is the Lindsey case, where the indictments and subsequent convictions for Foreign Corrupt Practices Act violations were widely touted by the Dept. of Justice, only to have those convictions overturned by the judge due to prosecutorial misconduct. Our conclusion in that case was:

While the Government is free to bring its considerable resources to bear against a violator, your best defense is to redouble your efforts to ensure that your compliance program is solid up and down your supply chain.  Nothing can stop a determined prosecutor, but even so, why give them any leg to stand on?

 

Then there was the recent loss by CBP to Union Pacific Railroad. With UP, there were 38 rail cars seized and later released due to drugs found on board. The proposed penalties totaled more than $37 million. In each case, CBP agreed to mitigate, but ignored UP’s legal and factual defenses. CBP’s position was the manifest was wrong since it did not state the drugs were in the railcars at time of submission. As is typical with CBP, its view is carriers are strictly liable for the contents of their conveyances, regardless of whether or not the carrier has control over the conveyance at the relevant times. CBP insisted UP had a duty to convince its Mexican partners to inspect the railcars and ferret out the drugs or get third parties to do so. As such, CBP hinged its position on the concept that UP did not exercise the highest degree of care. This is really a strict liability situation. No matter what UP did, if drugs were found in one of its rail cars, CBP was going to hold it liable.

Against this backdrop, the court found CBP read the law wrong. It did not have the legal authority to either seize the railcars or impose penalties. The court held Congress instructed CBP to enact regulations which defined the standard of care imposed on common carriers and failed to do so. The court also found CBP’s approach of “leave no stone unturned” had been rejected by Congress. In short, dealing with common carriers, there has to be some degree of responsibility or knowledge. CBP simply cannot say if we found drugs, you are automatically liable.

The court went on to find CBP’s actions to be arbitrary and capricious as liability was imposed on UP without any showing of culpability.  Demanding that UP have its Mexican business partners conduct inspections or have them conducted by a third party was found to be beyond CBP’s authority. The court held CBP cannot demand security be imposed in a third country when the American party has neither employees nor operations in that foreign country.

In the end, CBP’s arrogance in not addressing and analyzing the legal issues UP raised during the mitigation process totally undermined the agency’s position with the court. The outcome was the penalties imposed were vacated, cancelled and found to be unenforceable.

About 95% of all cases settle. Given the acrimony on both sides, it is not clear settlement is possible between Fish + Wildlife and Gibson. Only time will tell, but Gibson’s travails serve as a reminder – you have to be careful how you confront any Government agent.  Individual agents often proceed with little oversight. U.S. Attorney’s Offices work closely with those agents and are loathe to turn down their cases, so being careful is important and can be the difference between a resolution and a costly trial. Of course, sometimes a good fight is the only way to prove them wrong! Just ask Lindsey Manufacturing,  Keith Lindsey and Steven Lee who had to endure their own version of hell, through a conviction on multiple counts grounded in Foreign Corrupt Practices Act violations, only, as noted above, to have those convictions overturned by the judge due to prosecutorial misconduct! Let’s hope the sole remaining U.S. based guitar manufacturer isn’t put through that same brand of retribution!