                                           Slip Op. 18–29

               UNITED STATES COURT OF INTERNATIONAL TRADE
____________________________________
                                     :
UNITED STATES,                       :
                                     :
            Plaintiff,               :
                                     :
      v.                             :
                                     :
AEGIS SECURITY INSURANCE             :  Before: Richard K. Eaton, Judge
COMPANY,                             :
                                    :   Consol. Court No. 11-00388
            Defendant,               :
                                     :
      and                            :
                                     :
TRICOTS LIESSE 1983, INC.,           :
                                     :
            Third-Party Defendant.   :
____________________________________:

                                           OPINION

[Tricots Liesse 1983, Inc.’s motion for summary judgment is granted in part.]

                                                                            Dated: March 26, 2018

       Chad A. Readler, Acting Assistant Attorney General, for plaintiff. With him on the brief
were Jeanne E. Davidson, Director, Patricia M. McCarthy, Assistant Director, and Stephen C.
Tosini, Senior Trial Counsel, Department of Justice, Civil Division, Commercial Litigation
Branch, of Washington, DC. Of counsel on the brief was Matthew C. Landreth, Office of the
Assistant Chief Counsel, U.S. Customs and Border Protection, of Buffalo, NY.

       Frances Hadfield and John Brew, Crowell & Moring LLP, of New York, NY, for third-
party defendant.

       Eaton, Judge: One case, in this consolidated action, was brought by plaintiff the United

States (“plaintiff” or the “Government”) against Tricots Liesse 1983, Inc. (“third-party defendant”

or “Tricots”) to recover civil penalties and unpaid duties pursuant to 19 U.S.C. § 1592(c) and 19
Consol. Court No. 11-00388                                                                    Page 2


U.S.C. § 1592(d) (2012).1 See Compl., Court No. 16-00066, ECF No. 2 (“Court No. 16-00066

Compl.”). Plaintiff commenced this case as Court No. 16-00066 on April 25, 2016. Court No. 16-

00066 Compl. On August 3, 2016, it was consolidated with another case brought by plaintiff

against Aegis Security Insurance Company (“Aegis”) (Court No. 11-00388) that contests similar

issues.2 See Order dated Aug. 3, 2016, ECF No. 68.

         Before the court is Tricots’ motion to dismiss plaintiff’s complaint in Court No. 16-00066,

pursuant to USCIT Rules 12(b)(1) and 12(b)(6), on the grounds that (1) the court lacks subject

matter jurisdiction because United States Customs and Border Protection (“Customs”) failed to

exhaust its administrative remedies that, the company argues, are prerequisites for the initiation of

penalty claims under 19 U.S.C. § 1592(e) and duty claims under § 1592(d); or (2) for the same

reasons, plaintiff has failed to state a claim upon which relief can be granted. See Tricots’ Mem.

Supp. Mot. Dismiss, ECF No. 77 (“Tricots’ Br.”); Tricots’ Reply Pl.’s Resp. Mot. Dismiss, ECF

No. 84 (“Tricots’ Reply”). Plaintiff opposes the motion. See Pl.’s Opp’n Tricots’ Mot. Dismiss

and Cross Mot. Partial Summ. J., ECF No. 89 (“Pl.’s Br.”). Aegis has not filed a response to

Tricots’ motion to dismiss.

         Since both Tricots and the Government have presented, and the court has relied on, extra-

pleading material to support their claims with respect to the exhaustion of administrative remedies




         1
                All references to the United States Code are to the 2012 edition, unless otherwise
noted.
         2
               The case against Aegis is also for the recovery of unpaid duties pursuant to 19
U.S.C. § 1592(d) for alleged violations of 19 U.S.C. § 1592(a). See Compl., Court No. 11-00388,
ECF No. 2 (“Court No. 11-00388 Compl.”) ¶ 3. Aegis is a surety company that issued a bond to
third-party defendant Tricots to secure duties owed on entries of imported fabric. In its answer,
Aegis asserted, inter alia, a third-party claim against Tricots. See Answer, Court No. 11-00388,
ECF No. 13 (“Aegis Answer”) ¶ 4.
Consol. Court No. 11-00388                                                                   Page 3


issue, Tricots’ motion has been converted into one for summary judgment. USCIT R. 12(d).

Because Customs failed to exhaust its administrative remedies and thus failed to perfect its penalty

claim, Tricots’ motion for summary judgment is granted in part, and the court awards summary

judgment in favor of Tricots on plaintiff’s penalty claim.


                                        BACKGROUND

       Tricots is a manufacturer and exporter of circular knitted fabric that is located in Montreal,

Quebec, Canada. Tricots’ Br. Ex. B, at 1, 2. Tricots purchases yarn and other raw materials from

both North American Free Trade Agreement (“NAFTA”)3 territory suppliers, and non-NAFTA

territory suppliers. All of Tricots’ knit fabrics are manufactured in its plant in Montreal. Fabrics

produced by Tricots are then shipped to U.S. apparel manufacturers. Tricots’ Br. Ex. J, at 1, 4.

Between November 9, 2005 and December 23, 2008, Tricots claimed, on its entry papers, that the

yarn used to produce certain entries of its fabric originated from NAFTA territories, and therefore,

that they were eligible for duty-free treatment under NAFTA Rules of Origin. Court No. 16-00066

Compl. ¶¶ 3, 4; Tricots’ Br. Ex. A, B, D. As a result, approximately eight hundred seventy-five of

the entries were liquidated duty free and free of the merchandise processing fee (“MPF”)4 on May

5, 2010. Johnson Decl., ECF No. 89-10, ¶ 18.


       3
                NAFTA was enacted into U.S. law on December 8, 1993, for the purpose of further
promoting the free flow of goods between the United States, Canada, and Mexico. See 19 U.S.C.
§ 3312 (1994); Corrpro Companies, Inc. v. United States, 433 F.3d 1360, 1362 (Fed. Cir. 2006).
To accomplish this goal, the agreement provides for the elimination of most tariffs collected on
goods originating from the three countries. Corrpro Companies, 433 F.3d at 1362. Preferential
tariff treatment is not automatic, however, and an importer must make a written declaration that
the goods qualify for NAFTA treatment based on a “complete and properly executed original
Certificate of Origin . . . .” 19 C.F.R. § 181.21(a) (2008).
        
       4
              MPFs are administrative fees owed on most imports into the United States. Under
19 C.F.R. § 24.23(b), “merchandise that is formally entered or released is subject to the payment
to [Customs] of an ad valorem fee.” 19 C.F.R. § 24.23(b)(1)(i). The fee “is due and payable to
[Customs] by the importer of record of the merchandise at the time of presentation of the entry
Consol. Court No. 11-00388                                                                     Page 4


       Following liquidation, on May 28, 2010, Tricots sought prior disclosure treatment under

19 U.S.C. § 1592(c)(4) or (c)(5),5 and notified Customs that several entries of knitted fabric were

incorrectly declared as eligible for duty-free treatment as NAFTA-originating goods. Tricots’ Br.

Ex. B, at 2; see also Tricots’ Br. Ex. I. Tricots stated, however, that the entries, nonetheless,




summary and is based on the value of the merchandise as determined under 19 U.S.C. 1401a” and
“shall not exceed $425 and shall not be less than $25.” 19 C.F.R. § 24.23(b)(1)(i)-(ii). Entries
originating in a NAFTA country are not charged this fee, but entries that qualify for duty-free
treatment under the Tariff Preference Level Quota Program are assessed an MPF.
 
       5
               Title 19 U.S.C. § 1592(c)(4) provides an opportunity for self-reporting of errors
on the importation of goods into the United States, and reads, in pertinent part:

       If the person concerned discloses the circumstances of a violation of subsection (a)
       of this section before, or without knowledge of, the commencement of a formal
       investigation of such violation, with respect to such violation, merchandise shall
       not be seized and any monetary penalty to be assessed under subsection (c) of this
       section shall not exceed . . . if such violation resulted from negligence . . . the
       interest (computed from the date of liquidation at the prevailing rate of interest
       applied under section 6621 of title 26) on the amount of lawful duties, taxes, and
       fees of which the United States is or may be deprived so long as such person tenders
       the unpaid amount of the lawful duties, taxes, and fees at the time of disclosure, or
       within 30 days (or such longer period as the Customs Service may provide) after
       notice by the Customs Service of its calculation of such unpaid amount.

19 U.S.C. § 1592(c)(4). Under 19 U.S.C. § 1592(c)(5):

       [a]n importer shall not be subject to penalties under subsection (a) of this section
       for making an incorrect claim for preferential tariff treatment under section 3332 of
       this title if the importer—

               (A) has reason to believe that the NAFTA Certificate of Origin (as defined
                   in section 1508(b)(1) of this title) on which the claim was based
                   contains incorrect information; and

               (B) in accordance with regulations issued by the Secretary, voluntarily and
                   promptly makes a corrected declaration and pays any duties owing.

19 U.S.C. § 1592(c)(5).
Consol. Court No. 11-00388                                                                        Page 5


qualified for duty-free treatment under the NAFTA Tariff Preference Level (“TPL”) Quota

Program.6 Tricots’ Br. Ex. B, at 1.

       On December 1, 2010, for the purpose of “complet[ing] the prior disclosure” and

“provid[ing] information concerning the amount of [MPF] which would have been due had the

entry been made correctly,” Tricots supplemented its May 28, 2010 letter with a second letter that

calculated the fees owed on its imports under the TPL program as being $44,683.35. Tricots’ Br.

Ex. D, at 2. Following this letter, Customs notified Tricots’ counsel that it had reviewed the

company’s submission, and although Tricots had accounted for the MPF that was due, the

company had “not accounted for the Duty due,” and, moreover, that “[Customs’] policy is that if

a company has failed to present Certificates of Eligibility by the time of final liquidation, this

precludes that company from receiving the duty preference under TPL.”7 Tricots’ Br. Ex. F, at 2.

Following a subsequent telephone conversation8 between a Customs official and Tricots’ counsel


       6
               According to Tricots:

       NAFTA TPL rules allow duty free treatment on knitted fabrics produced in Canada
       from non-NAFTA yarns that do not meet the NAFTA [Rules of Origin], up to a
       certain quantity per year. TPL limits for the subject imports have never been met
       and for the subject period were between only 27 and 54 percent filled (including
       Tricots’ TPLs). The Government of Canada, Department of Foreign Affairs and
       International Trade, has the sole authority to issue certificates of eligibility for TPL
       for both imports into Canada and exports to the U.S. TPL provisions are provided
       for in Additional U.S. Notes 3-6 and Statistical Note 5 to Section XI of the HTS.
       [MPF] are owed on NAFTA TPL imports, which [at] a minimum is $25.00 and at
       a maximum is $485.00 per shipment.

Tricots’ Br. 3 n.2 (citations omitted).
       7
                Although this response to the December 1, 2010 letter is referred to in Tricots’
subsequent administrative submissions, there is no mention of the date or the nature of this
response (e.g., whether it was a written response) in the record.
 
       8
                While this telephone conversation is referred to in Tricots’ subsequent submissions,
there is no date for the conversation in the record.
Consol. Court No. 11-00388                                                                     Page 6


concerning “Customs’ interpretation of the statute requiring the payment of duties,” both parties

determined that Tricots should submit a “written position paper” on the issue to Customs, which

it did on January 5, 2011.9 Tricots’ Br. Ex. F, at 2. No further action was taken by either party until

May 23, 2011, when Customs sent a letter to Tricots notifying the company that after “carefully

review[ing Tricots’] correspondence, the information [Tricots’] office provided, and each of the

entries at issue,” Customs had concluded that Tricots owed $2,249,196.04 in lost revenue,

representing $2,206,596.05 in unpaid duties and $42,599.99 in unpaid fees. Tricots’ Br. Ex. E. No

explanation regarding Tricots’ arguments in the written position paper was given. See Tricots’ Br.

Ex. E. The letter also notified Tricots that, following its deposit of the full amount owed, the

company could seek review of Customs’ calculations pursuant to 19 C.F.R. § 162.74(c). Tricots

was given until June 24, 2011 to tender the amount, which for Customs, would perfect the prior

disclosure.10 Tricots’ Br. Ex. E; 19 U.S.C. § 1592(c)(4), (5).


       9
                Specifically, Tricots’ January 5, 2011 “written position paper” argued that
“Customs Directive 3550-085 covers claims under TPL and supports Customs’ position” that TPL
Certificates of Eligibility must be submitted before final liquidation, but that the issue in this case
“does not revolve around a claim by the importer for treatment under TPL but revolves around the
specific wording of the statute which provides that the United States will require any lawful duties,
taxes, and fees of which it was deprived to be restored. This then becomes the critical issue in the
analysis.” Johnson Decl. Ex. 6, at 3. Moreover, Tricots argued that “[t]he problem with Customs’
position in this matter is that the issue of [§ 1592(d)] duties is separate and distinct from an issue
of the final liquidation of an entry. Under [§ 1592(d)], Customs is attempting to recoup those
lawful duties, taxes, and fees for which it was deprived. It has no nexus to the issue of a claim for
TPL treatment. In fact, 1592(d) operates outside of the constraints of 19 U.S.C. § 1514.” Johnson
Decl. Ex. 6, at 3. Therefore, Tricots took the position that “the government must prove that [it]
would have collected the duties but for the false statements or omissions,” which Tricots
maintained Customs could not do. Johnson Decl. Ex. 6, at 5.
 
       10
               Under 19 C.F.R. § 162.74(c) (2011), in order to perfect a prior disclosure, “[a]
person who discloses the circumstances of the violation shall tender any actual loss of duties, taxes
and fees or actual loss of revenue. The disclosing party may choose to make the tender either at
the time of the claimed prior disclosure, or within 30 days after [Customs] notifies the person in
writing of [Customs’] calculation of the actual loss of duties, taxes and fees or actual loss of
revenue.”
        
Consol. Court No. 11-00388                                                                    Page 7


       As Customs had previously notified Tricots’ counsel, Customs decided that the subject

entries were not eligible for duty-free treatment under the TPL program because, pursuant to

Customs Directive 3550-085, Tricots was required to submit its TPL Certificates of Eligibility

prior to the May 5, 2010 final liquidation of the entries. According to Customs, Tricots did not

submit the Certificates of Eligibility prior to the May 5, 2010 final liquidation or take other steps

to preserve eligibility.11 Tricots’ Br. Ex E, at 2; see also Johnson Decl. Ex. 9 (“Thus, an importer

whose entries are eligible for TPL treatment but does not file the certificates at entry may 1) submit

the certificates any time before final liquidation; 2) file a protest within 90 days of liquidation;

3) request extension of liquidation.”).

       On June 22, 2011, Tricots submitted its first offer in compromise pursuant to 19 U.S.C.

§ 1617 and tendered $85,199.98, representing twice the amount of the unpaid MPFs it claimed

were due on the entries. Tricots’ Br. Ex. F, at 8.12 In response, on December 7, 2011, Customs sent

a letter stating that Tricots’ entries did not qualify for prior disclosure treatment under 19 U.S.C.

§ 1592(c)(4) or (5) because the company “did not tender the total amount owed by [June 24, 2011]”

and therefore did not “perfect its prior disclosure.” Tricots’ Br. Ex. I.

       Subsequently, on February 16, 2012, pursuant to § 1592(b)(1)(A), Customs issued a pre-

penalty notice to Tricots (the “Pre-Penalty Notice”), alleging that Tricots negligently entered goods



       11
               According to Customs Ruling HQ 229504, “an importer ha[s] until liquidation to
supply the Certificates of Eligibility, and the opportunity to request delay of liquidation if
necessary.” Johnson Decl. Ex. 9, at 5.
         
       12
               Meanwhile, on May 18, 2011, May 31, 2011, and June 9, 2011, Customs issued
duty demands to Tricots’ surety, Aegis. Court No. 11-00388 Compl. ¶ 21; Aegis Answer ¶ 21.
Aegis did not respond to any of those demands. Court No. 11-00388 Compl. ¶ 21; Aegis Answer
¶ 21. On September 27, 2011, Customs filed suit to recover duties against Aegis pursuant to 19
U.S.C. § 1592(d). See Court No. 11-00388 Compl. Aegis later impleaded Tricots. Tricots executed
a number of waivers, and thus, Customs did not sue Tricots itself until April 25, 2016. Tricots’ Br.
Ex. C; see also Court No. 16-00066 Compl.
Consol. Court No. 11-00388                                                                    Page 8


into the United States without paying duties, and notified Tricots that Customs was

“contemplating” a $2,249,196.04 monetary penalty. Tricots’ Br. Ex. G; see 19 U.S.C.

§ 1592(b)(1)(A). The Pre-Penalty Notice also included a demand for the outstanding duties and

MPFs, totaling another $2,249,196.04, resulting in a total demand of $4,498,392.08. Tricots’ Br.

Ex. G; see 19 U.S.C. § 1592(d).

       On April 16, 2012, Tricots submitted a written response to Customs’ Pre-Penalty Notice

claiming that, because a “valid prior disclosure was filed,” Tricots was only responsible for

$42,599.99 in unpaid MPFs. Tricots’ Br. Ex. H, at 12. Notwithstanding the Pre-Penalty Notice’s

statement that Tricots “ha[s] the right to make an oral . . . presentation within 30 days of the date

of this notice as to why a claim for monetary penalty should not be issued in the amount proposed

or that the loss of duties is less than the amount demanded,” the record does not contain any

evidence that Tricots requested a face-to-face meeting with Customs prior to the issuance of the

written penalty claim. See Tricots’ Br. Ex. G, H.

       On May 3, 2013, a representative13 of Tricots participated in a telephone conversation with

Customs’ Acting Director for Trade Policy and Programs. Leonard Decl., ECF No. 89-15 ¶ 8;

Labuda Decl., ECF No. 88 ¶ 12. During the telephone call, the Tricots representative explained

that Customs “should accept [Tricots’] offer in compromise because there was no loss of revenue.”

Labuda Decl. ¶ 12; see also Leonard Decl. ¶ 10 (“During the course of our communications and

conversations, [the Tricots representative], on behalf of Tricots, sought to inform and influence



       13
                According to the record, the representative involved in the May 3, 2013, and August
3, 2013, telephone calls is not an attorney and is not licensed to practice law in any jurisdiction,
nor is the representative a licensed Customs broker. Rather, the representative was “retained . . .
as a consultant to assist [Tricots] regarding [Customs’] claims” by “determin[ing] who within
[Customs] might be best positioned to gauge [Customs’] willingness to accept [Tricots’] offer in
compromise.” Labuda Decl., ECF No. 88 ¶¶ 8-10.
Consol. Court No. 11-00388                                                                    Page 9


senior [Customs] staff . . . about the penalty that [Customs] initially proposed against Tricots, and

the penalty that [Customs] later issued to Tricots . . . .”).

        Thereafter, Customs sent a letter dated May 9, 2013, to Tricots that (1) again informed the

company that, notwithstanding its April letter, Tricots still did not qualify for prior disclosure

treatment; (2) rejected Tricots’ June 22, 2011 offer in compromise; and (3) issued Tricots a written

penalty claim (the “Notice of Penalty”) for $4,498,392.08 (i.e., a $2,249,196.04 monetary penalty

plus $2,249,196.04 in lost revenue). Tricots’ Br. Ex. I (“As previously notified by letter dated

December 7, 2011, [Tricots] does not qualify for prior disclosure treatment under 19 U.S.C.

§ 1592(c)(4) or (c)(5).”); see 19 U.S.C. § 1592(b)(2).

        On July 15, 2013, Tricots submitted a written response to Customs’ Notice of Penalty in

the form of a petition and second offer in compromise (the “Petition”).14 Tricots’ Br. Ex. J. The

Petition once again stated Tricots’ position that “a valid prior disclosure was filed” and therefore,

that the company owed no duties and was only responsible for $42,599.99 in unpaid MPFs.

Tricots’ Br. Ex. J, at 15. In addition, Tricots’ second offer in compromise increased the amount of

its first, tendering $160,000 to Customs “in order to settle th[e] matter in a manner acceptable to

all parties.” Tricots’ Br. Ex. J, at 15.

        On August 3, 2013, the same Tricots representative made another telephone call to

Customs and spoke with Customs’ Assistant Commissioner of Trade and Customs’ Acting




        14
               Under 19 U.S.C. § 1592(b)(2), following the issuance of a pre-penalty notice and
any representations made by the importer regarding the propriety of such a penalty, “[i]f the
Customs Service determines that there was a violation, it shall issue a [Notice of Penalty] to such
a person,” and the importer “shall have a reasonable opportunity under [19 U.S.C. § 1618] to make
representations, both oral and written, seeking remission or mitigation of the monetary penalty.”
Section 1618 provides, in pertinent part, that any person who has incurred or is alleged to have
incurred any penalty may file “a petition for the remission or mitigation of such . . . penalty.” 19
U.S.C. § 1618.
Consol. Court No. 11-00388                                                                 Page 10


Director for Trade Policy and Programs. Labuda Decl. ¶ 13. During this conversation, the Tricots

representative “explained that [Customs] should accept [Tricots’] second offer in compromise

($160,000) as a policy matter because there was no loss of revenue and the goods qualified for

NAFTA under the existing TPL.” Labuda Decl. ¶ 13. The Customs agents “indicated that

[Customs] would get back to [the Tricots representative] on whether or not the second offer in

compromise was acceptable.” Labuda Decl. ¶ 13. On June 13, 2014, Customs rejected Tricots’

second offer in compromise by letter. Tricots’ Br. Ex. K.

       Following this second rejection by Customs, Tricots’ counsel sent a letter, on September

15, 2014, asking for a face-to-face meeting with Customs as provided for by statute. Tricots’ Br.

Ex. L (“September 15, 2014 Letter”); see 19 U.S.C. § 1592(b)(2) (“Such person [(i.e., a person

Customs has determined violated § 1592(a))] shall have a reasonable opportunity under section

1618 of this title to make representations, both oral and written, seeking remission or mitigation

of the monetary penalty.”). On October 30, 2014, Tricots’ counsel sent a follow-up email to a

senior attorney for Customs, asking if the September 15, 2014 Letter had been received and if there

would be a meeting before a final penalty determination15 was issued. Tricots’ Br. Ex. M. In

response, the senior attorney, on behalf of Customs, noted that he had not seen the September 15,

2014 Letter, but that “any meeting at this time would be premature” because the Government was

currently litigating a case with Tricots’ surety, Aegis,16 on the issue of retroactive TPL. Tricots’


       15
                Under § 1592(b)(2), following the issuance of the Notice of Penalty, and after
considering any representations made by the importer concerned regarding mitigation or remission
of the monetary penalty, 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” (i.e., a “final penalty determination”).
         
       16
               Prior to the consolidation of Court Nos. 11-00388 and 16-00066, Aegis asserted in
its answer that “the NAFTA treaty sets forth no cut-off date for the tender and a signatory’s
acceptance of a TPL certificate to qualify an entry for TPL duty relief,” and that “[t]here is no
United States Statute” or “[Customs] regulation that sets forth a cut-off date for the tender and
Consol. Court No. 11-00388                                                                     Page 11


Br. Ex. M. On or about November 21, 2014, an attorney representing Tricots spoke with the same

senior attorney on the telephone regarding the status of the case and again asked for a meeting with

Customs to review the Notice of Penalty. Tricots’ Br. Ex. Q (“Brew Aff.”) ¶ 7. Customs, however,

did not agree to meet with Tricots. Brew Aff. ¶ 7 (“[A Customs senior attorney] indicated to

[Tricots’ representative] during that telephone conversation [on or about November 21, 2014] that

because of the pending case with the surety, Aegis, that involved similar issues, Customs was

holding the administrative proceeding against Tricots and did not agree to meet with Tricots.”).

       On November 24, 2015, Customs issued a final penalty determination, denying Tricots’

July 15, 2013 petition for relief from the penalty. Tricots’ Br. Ex. N (the “Final Penalty

Determination”). In its Final Penalty Determination, Customs found that Tricots owed

$4,498,392.08, representing $2,249,196.04 in unpaid duties and $2,249,196.04 in penalties. Final

Penalty Determination at 11.

       On April 25, 2016, plaintiff filed its complaint in Court No. 16-00066. The complaint

increased the amount Customs sought by demanding $4,498,392.08 in monetary penalties under

19 U.S.C. § 1592(c) for negligence, representing two times the amount of lost revenue, which is

the statutory maximum under 19 U.S.C. § 1592(c)(3) (and double the amount Customs assessed

in its Final Penalty Determination) and $2,249,196.04 in lost duties pursuant to 19 U.S.C.

§ 1592(d), for a total demand of $6,747,588.12. See Court No. 16-00066 Compl. ¶ 1. On August

3, 2016, the court granted the parties’ consent motion to consolidate the case against Tricots (Court

No. 16-00066) and the Government’s case against Aegis (Court No. 11-00388). See Order dated

Aug. 3, 2016, ECF No. 68.



signatory’s acceptance of a TPL certificate,” and therefore, if Customs had accepted the required
certificates of eligibility, “the claim for loss of revenue in this civil action would be extinguished.”
Aegis Answer ¶¶ 3-5, 9.
Consol. Court No. 11-00388                                                                 Page 12


                                    LEGAL FRAMEWORK

       Under 19 U.S.C. § 1592(a), “no person, by fraud, gross negligence, or negligence . . . may

enter, introduce, or attempt to enter or introduce any merchandise into commerce of the United

States by means of” material and false documents, information, acts or by any omission which is

“material.” If Customs has reason to believe that a violation of § 1592(a) has occurred, “and

determines that further proceedings are warranted,” it must first issue a written pre-penalty notice

to any person concerned, stating “its intention to issue a claim for a monetary penalty.” 19 U.S.C.

§ 1592(b)(1)(A). The notice must contain several pieces of information provided for in § 1592(b),

including “whether the alleged violation occurred as a result of fraud, gross negligence, or

negligence,” “the estimated loss of lawful duties, . . . the amount of the proposed monetary

penalty,” and must also “inform such person that he shall have a reasonable opportunity to make

representations, both oral and written, as to why a claim for a monetary penalty should not be

issued in the amount stated.” 19 U.S.C. § 1592(b)(1)(A)(v)-(vii).

       Following the issuance of the pre-penalty notice, and after considering any oral and written

representations made by persons concerned regarding the monetary penalty, if Customs still finds

that a § 1592(a) violation occurred, it “shall issue a [notice of penalty] to such person,” which,

among other things, must “specify all changes in the information provided” in the pre-penalty

notice. 19 U.S.C. § 1592(b)(2). After the issuance of a notice of penalty, the persons concerned

again “shall have a reasonable opportunity . . . to make representations, both oral and written,

seeking remission or mitigation of the monetary penalty.” Id.

       The inclusion of the statutorily required material, and the provision of an opportunity to be

heard, are not trivial matters. As this Court explained in United States v. International Trading

Services:
Consol. Court No. 11-00388                                                                   Page 13


       Section 1592(b) states the procedures by which the United States must exhaust
       administrative remedies; to wit, “Customs must perfect its penalty claim in the
       administrative process . . . by issuing a pre-penalty notice and a notice of penalty.”
       The pre-penalty notice must include certain information. After considering
       representations made by the person to whom it was issued and upon finding a
       violation, Customs must issue “a written penalty claim” to that person. “Such
       person shall have a reasonable opportunity . . . to make representations, both oral
       and written, seeking remission or mitigation of the monetary penalty.” At the end
       of the proceeding, Customs must issue “a written statement which sets forth the
       final determination and the findings of fact and conclusions of law on which such
       determination is based.”

40 CIT __, __, 190 F. Supp. 3d 1263, 1269-70 (2016) (quoting United States v. Jean Roberts of

Cal., Inc., 30 CIT 2027, 2030 (2006)) (citations omitted).

       Following the issuance of a notice of penalty, and “[a]t the conclusion of any proceeding

under [19 U.S.C. § 1618],” 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” (i.e., a “final penalty determination”). 19 U.S.C. § 1592(b)(2). If

Customs does not receive the penalties and duties assessed following its final determination, the

Department of Justice may file suit in this Court under § 1592(e) “for the recovery of any monetary

penalty claimed under [§ 1592]” as well as the restoration of lawfully owed duties under § 1592(d).

19 U.S.C. § 1592(e), (d).



                                          DISCUSSION

       Tricots contends that “[b]ecause Customs must perfect a valid penalty claim at the

administrative level before seeking recovery of that penalty before this Court, this action must be

dismissed for failure to state a claim upon which relief may be granted pursuant to Rule 12(b)(6).”

Tricots’ Br. 23. In support of its position, Tricots cites evidence that, it argues, demonstrates “the

uncontested facts are that [p]laintiff did not provide Tricots with an opportunity for an oral penalty
Consol. Court No. 11-00388                                                                    Page 14


hearing, which is a statutory requirement for exhaustion,” and thus, the case must be dismissed.

Tricots’ Reply 9.

       Plaintiff, however, maintains that because Tricots’ representative conferred with Customs

officials over the telephone, the Government “should prevail as a matter of fact on this issue” and

Tricots’ Rule 12(b)(6) motion must fail. Pl.’s Br. 11.

       As an initial matter, because information outside the pleadings regarding exhaustion is

presented by both parties (i.e., Tricots and the Government), and because both parties have had

reasonable notice and opportunity to present pertinent material, the motion to dismiss under

USCIT Rule 12(b)(6) will be treated as one for summary judgment and disposed of as provided in

USCIT Rule 56.17 See USCIT R. 12(d); see also Groden v. Random House, Inc., 61 F.3d 1045,

1052-53 (2d Cir. 1995). In particular, the parties have presented all of the material facts

surrounding (1) Tricots’ request for a face-to-face meeting after the Notice of Penalty and

(2) Customs’ refusal to provide such a meeting. Thus, the court is in a position to grant summary

judgment as “the movant [has shown] that there is no genuine dispute as to any material fact and

the movant is entitled to judgment as a matter of law.” USCIT R. 56(a).




       17
                Specifically, the court put all parties on notice that it might convert Tricots’ motion
to dismiss into one for summary judgment in its May 5, 2017 Order: “The parties should keep in
mind that the court may convert third-party defendant’s motion into a motion for partial summary
judgment.” Order dated May 5, 2017, ECF No. 86 at 2. Moreover, both Tricots’ motion to dismiss
and plaintiff’s response in opposition to the motion rely on material outside of the pleadings in
support of their respective positions regarding exhaustion. See Collier v. City of Chicopee, 158
F.3d 601, 603 (1st Cir. 1998). In addition, following the May 5, 2017 Order, the court gave Tricots
an opportunity to submit extra-pleading material similar to that submitted by plaintiff that first
stated the content of the telephone conversations between representatives of Customs and Tricots
during the pre-penalty and penalty phases. Tricots had not previously submitted its own affidavit
regarding the substance of those telephone calls, but did so on January 19, 2018. See Order dated
January 12, 2018, ECF No. 87; see also Labuda Decl.
Consol. Court No. 11-00388                                                                   Page 15


       As to the merits, the court finds that the doctrine of exhaustion of administrative remedies

should be applied in this case, and that it is undisputed that Customs has failed to perfect its claim

for a monetary penalty. See 28 U.S.C. § 2637(d) (providing for requiring administrative exhaustion

“where appropriate”). The doctrine of exhaustion provides that “no one is entitled to judicial relief

for a supposed or threatened injury until the prescribed administrative remedy has been

exhausted.” Essar Steel, Ltd. v. United States, 753 F.3d 1368, 1374 (Fed. Cir. 2014). Moreover,

“[t]here is no doubt that the doctrine of exhaustion of administrative remedies applies to an agency

seeking enforcement of administrative action prior to the completion of the administrative

process.” United States v. Priority Prods., Inc., 793 F.2d 296, 300 (Fed. Cir. 1986) (citing Aircraft

& Diesel Equip. Corp. v. Hirsch, 331 U.S. 752, 767-68 (1947)). With regard to § 1592, this Court

has held that “[b]efore seeking to recover a penalty in the Court of International Trade, Customs

must perfect its penalty claim in the administrative process required by [§ 1592(b)].” United States

v. Jean Roberts of Cal., Inc., 30 CIT, 2027, 2030 (2006). As shall be seen, the facts demonstrate

that, despite Tricots’ efforts, Customs did not follow the statutory injunction to provide the

company with a “reasonable opportunity” to make oral representations “seeking remission or

mitigation of the monetary penalty” following issuance of the Notice of Penalty, and thus did not

provide Tricots with the statutorily required opportunity to be heard. See 19 U.S.C. § 1592(b)(2).

Accordingly, Customs failed to perfect its penalty claim and thus is barred from bringing it.

       According to the timeline established by the evidence attached to the parties’ papers,

Customs issued its Pre-Penalty Notice on February 16, 2012, and Tricots submitted a written

response to that notice on April 16, 2012. Tricots’ Br. Ex. G, H. On May 3, 2013, a telephone call

took place between a Tricots representative and a Customs official regarding Tricots’ case.

Customs states that during the telephone call, the Tricots representative “sought to inform and
Consol. Court No. 11-00388                                                                    Page 16


influence senior [Customs] staff about the penalty that [Customs] initially proposed . . . .” Leonard

Decl. ¶ 10; Leonard Decl. Ex. B. Tricots’ affidavit fleshes out this characterization. Labuda Decl.

¶¶ 12-14 (“During the telephone conversation[s], [Customs representatives did not] raise[] issues

from the pre-penalty and penalty notices or petitions. . . . During my calls with [Customs] officials

I provided a high level policy overview of the matter. I am not an attorney and I did not raise legal

arguments or factual details related to the administrative documents (e.g., [the Pre-Penalty Notice]

or [the Notice of Penalty]).”). It does not appear that Tricots sought a face-to-face meeting

following issuance of the Pre-Penalty Notice.

        Thereafter, on May 9, 2013, Customs issued its Notice of Penalty. Tricots’ Br. Ex. I.

Following the Notice of Penalty, on July 15, 2013, Tricots submitted another written response, and

on August 3, 2013, a Tricots representative again participated in a teleconference with Customs

officials regarding the Tricots case. Leonard Decl. ¶¶ 9, 10; According to Customs, Tricots’

representative “provided a copy of the petition submitted by Tricots to [Customs] and presented

arguments designed to convince [Customs] to mitigate the penalty . . . and attempted to convince

us that Tricots’ false claims did not result in lost revenue to the United States.” Leonard Decl. ¶ 11.

Tricots’ affidavit sheds additional light on the extent to which issues regarding the Notice of

Penalty were discussed. See Labuda Decl. ¶ 13 (“On August 3, 2013, . . . I spoke with [Customs

officials]. . . . This call lasted between 5 and 10 minutes. I explained that [Customs] should accept

[Tricots’] second offer in compromise ($160,000) as a policy matter because there was no loss of

revenue and the goods qualified for NAFTA under the existing TPL. . . . During the telephone

conversation, [the Customs officials did not] raise[] issues from the pre-penalty and penalty notices

or petitions.”).
Consol. Court No. 11-00388                                                                   Page 17


       The record evidence demonstrates that this post Notice of Penalty telephone call was not

conducted in the usual, more formal, manner in which Customs proceeds with penalty cases, and

no officials from Customs’ Fines, Penalties & Forfeitures Office (the office generally charged with

conducting any requested oral hearings during the pre-penalty and penalty phases of § 1592

claims) participated in the telephone call. See Labuda Decl. ¶ 16; see also Leonard Decl. ¶¶ 8-9.

In addition, it is undisputed that following the issuance of the Notice of Penalty, the August 3,

2013 telephone conversation, and Customs’ June 13, 2014 rejection of Tricots’ second offer in

compromise, Tricots made requests for a § 1592(b) oral presentation on September 15, 2014,

October 30, 2014, and November 21, 2014, more than one year before Customs issued its

November 24, 2015 Final Penalty Determination. See Brew Aff. ¶¶ 4-8. Moreover, Tricots signed

waivers of the statute of limitations, “in order that [it] might obtain the benefit of the orderly

continuation and conclusion of an administrative proceeding,” which effectively waived the statute

of limitations through August 18, 2016. See Tricots’ Br. Ex. C. Notwithstanding Tricots’ requests

and concerns, and a lack of urgency for Customs to make its Final Penalty Determination, Tricots

was told that “any meeting at this time would be premature.” Tricots’ Br. Ex. M.

       The purpose of the opportunities for interested parties to make their case pursuant to 19

U.S.C § 1592(b) can be found in the legislative history and in this Court’s case law. See S. Rep.

No. 95-778, at 1-4 (1978), as reprinted in 1978 U.S.C.C.A.N. 2211, 2211-14; S. Rep. No. 95-778,

at 18-19, as reprinted in 1978 U.S.C.C.A.N. at 2230-31 (“The procedural provisions adopted by

the House are patterned after procedures in current Customs’ regulations and guidelines. . . . If the

customs officer issues a penalty claim and the importer petitions for mitigation under [19 U.S.C.

§ 1618], then the importer would have the opportunity to make written and oral representations to

the [Customs]. . . . This provision would enact into law existing practice with several changes: . . .
Consol. Court No. 11-00388                                                                    Page 18


the importer would have the right to make representations in a mitigation proceeding before any

decision on mitigation is made . . . .”) (emphasis added); see also United States v. Optrex Am.,

Inc., 29 CIT 1494, 1500 (2005) (“Finally, a meaningful interpretation of a statute must take into

account the statute’s basic purpose. The statute [(§ 1592)] was designed to give an importer an

opportunity to fully resolve a penalty proceeding before Customs, before any action in this

Court.”) (citation omitted) (emphasis added).

       The requirement that an oral opportunity be provided means a face-to-face meeting

between representatives of the party charged with a violation and Customs. This is what exporters

and importers have come to expect, and Customs has established procedures to fulfill its

responsibilities. Labuda Decl. ¶ 16 (“During my over 30 years of employment with [Customs], I

did not work for a [Customs] Fines, Penalties & Forfeitures (FPF) Office of Regulations and

Rulings, Penalties Branch. However, I am familiar with pre-penalty and penalty petitions and

procedures from my employment at [Customs]. There is a formal process for oral hearings for pre-

penalty and penalty cases, which are conducted by FPF Officials and attorneys from the Penalties

Branch.”) (emphasis added).

       As to plaintiff’s assertion that a defendant is required to prove substantial prejudice for this

Court to dismiss a penalty claim because of Customs’ failure to perfect under § 1592(b), the court

is not convinced. See United States v. Nitek Elec., Inc., Slip-Op. 12-105, 2012 WL 3195084 (CIT

Aug. 7, 2012) (“[T]he [§ 1592(b)] prerequisite at issue was not one of Customs’ own procedural

rules, . . . but a statutory mandate that Customs perfect claims for the applicable level(s) of

culpability prior to seeking recovery. Accordingly, a showing of prejudice was not required for the

court to dismiss on exhaustion grounds.”); see also id. (“PAM, S.p.A. and Dixon Ticonderoga [are]

not applicable to exhaustion requirements in § 1592.”).
Consol. Court No. 11-00388                                                                         Page 19


        Moreover, this Court has held that, although the requirements of § 1592(b) may not be

jurisdictional, they are nevertheless requirements that must be satisfied as elements of the

Government’s § 1582 cause of action. See, e.g., United States v. Nitek Elec., Inc., 36 CIT __, __,

844 F. Supp. 2d 1298, 1307-08 (2012) (“Nitek I”); cf. United States v. Robert E. Landweer & Co.,

36 CIT __, __, 816 F. Supp. 2d 1364, 1375 (2012) (“[T]he Government is required to demonstrate

in a collection action that Customs met ‘all other formal requirements of the [section 1641]

procedure.’”18 (quoting United States v. UPS Customhouse Brokerage, Inc., 34 CIT 96, 103, 686

F. Supp. 2d 1337, 1346 (2010)) (alterations in original)). “Given th[e] framework and the process

(including mitigation) that Congress has built into [the statute], the issues of a potential violation

of the statute and the determination of liability for a civil penalty for a . . . violation of [the statute]

must first be addressed and resolved administratively.” Landweer, 36 CIT at __, 816 F. Supp. 2d

at 1373 (citing Optrex, 29 CIT at 1500); see also United States v. Nitek Elec., Inc., 806 F.3d 1376,

1382 (Fed. Cir. 2015) (“[R]equiring exhaustion in penalty recovery cases is consistent with the

statutory scheme set up in § 1592.”); Nitek I, 36 CIT at __, 844 F. Supp. 2d at 1306 (“Section 1592

mandates that Customs perfect a penalty claim prior to seeking recovery in this Court . . . .”).

        Here, the facts material to the court’s discussion are (1) whether Tricots asked for a face-

to-face meeting after the final penalty determination, and (2) if Customs granted the request for

such a meeting. Since there is no dispute that the meeting was requested and the request was

denied, summary judgment is appropriate. See All Channel Prods. v. United States, 16 CIT 169,

173-74, 787 F. Supp. 1457, 1460-61 (1992).




        18
               Although Landweer involved a violation of 19 U.S.C. § 1641, as the Landweer
Court noted, “the penalty assessment procedures for a violation of section 1641 mirror those for a
section 1592 violation,” and therefore, the Court’s analysis is relevant here. Landweer, 36 CIT at
__, 816 F. Supp. 2d at 1374.
Consol. Court No. 11-00388                                                                 Page 20


       While Customs must perfect penalty claims administratively before bringing suit, cases

have held that a § 1592(d) claim seeking to recover lost duties creates an independent cause of

action. At least one case has held that a § 1592(d) claim may proceed even if the penalty portion

of the action is dismissed due to Customs’ failure to exhaust its administrative remedies. See Nitek

I, 36 CIT at __, 844 F. Supp. 2d at 1309. Here, however, the entries have been liquidated, and the

issues are so tangled up, that allowing the § 1592(d) cause of action to proceed before questions

having to do with the monetary penalty are resolved has the prospect of wasting both the parties’

and the court’s resources. Therefore, the Government’s § 1592(d) claim against Tricots for unpaid

duties shall be stayed until such time as the issues relating to the monetary penalty have been

finally resolved.



                                         CONCLUSION

       Accordingly, under the facts of this case, the court finds that applying the doctrine of

exhaustion in this case is consistent with § 1592’s statutory scheme and 28 U.S.C. § 2637(d)’s

mandate that the court require the exhaustion of administrative remedies “where appropriate”

before enforcing an administrative action. See 28 U.S.C. § 2637(d). By not exhausting its

administrative remedies, Customs did not perfect a valid penalty claim, and thus, the court grants

partial summary judgment in favor of Tricots on the plaintiff’s penalty claim. In addition, the

remainder of Court No. 16-00066 shall be stayed.


                                                                         /s/ Richard K. Eaton
                                                                        Richard K. Eaton, Judge

Dated: March 26, 2018
      New York, New York
