                                         Slip Op. 05-160

                UNITED STATES COURT OF INTERNATIONAL TRADE


______________________________
                              :
UNITED STATES,                :
                              :
                  Plaintiff,  :
                              :
v.                            :              Court No. 02-00646
                              :              Before: Judge Judith M. Barzilay
OPTREX AMERICA, INC.,         :
                              :
                  Defendant. :
______________________________:



                         MEMORANDUM OPINION AND ORDER

[Plaintiff’s motion requesting leave to amend its complaint to add new counts is denied.]

                                                                       Dated: December 15, 2005

Peter D. Keisler, Assistant Attorney General; David M. Cohen, Director, (Patricia M.
McCarthy), Assistant Director, Commercial Litigation Branch, Civil Division, U.S. Department
of Justice (Stephen C. Tosini); Frederick B. Smith, Assistant Chief Counsel, Bureau of Customs
and Border Protection, of counsel, for the plaintiff.

Sonnenberg & Anderson (Steven P. Sonnenberg and Michael Jason Cunningham) for the
defendant.



Barzilay, Judge:   In this 19 U.S.C. § 1592 penalty action, Plaintiff, the United States Bureau of

Customs and Border Protection (“Customs” or “government”), moved for leave to amend its

complaint pursuant to USCIT Rule 15(a). Plaintiff seeks to add two additional claims against

Defendant, Optrex America, Inc. (“Optrex”). Specifically, the government wants to charge

Optrex with higher levels of culpability than initially claimed – gross negligence and fraud. In
Court No. 02-646                                                                           Page 2


connection with these new claims, the government also seeks to add new entries. For the reasons

outlined below, the court DENIES Plaintiff’s motion.

                                        BACKGROUND

       Customs initiated its penalty proceedings against Optrex in May 2002, issuing a pre-

penalty notice pursuant to 19 U.S.C. § 1592(b)(A), which alleged that Optrex’s negligence

resulted in a violation. The pre-penalty notice charged Optrex with providing insufficient

information in the entry documents to enable Customs to determine the correct classification of

its imported liquid crystal display (“LCD”) products. In response to the pre-penalty notice,

Optrex claimed that it had exercised reasonable care by consulting its counsel, its broker, and

Customs about the correct classification. Ex. H10 at 5-9, 12. Optrex furnished Customs with a

“decision tree,” a classification scheme that reflected the company’s classification policies. Ex.

H10 at 7. Customs rejected Optrex’s reasonable care defense on the basis “that reliance on a

broker or exporter alone may not be sufficient to show that an importer exercised reasonable

care.” Ex. H12 at 5 (citing United States v. Golden Ship, 25 CIT 40 (2001)). Customs noted that

it did not have “persuasive evidence that during the subject time period the petitioner sought or

received expert advice from any of the outside sources it identified.” Ex. H12 at 6. Customs was

also “unaware of any persuasive evidence establishing what specific advice these sources

allegedly provided the petitioner.” Ex. H12 at 6-7. It concluded that the alleged misclassification

amounted to more than a professional disagreement given the “[n]umerous customs rulings,

courts decisions, and informed compliance publications issued regarding the classification of

LCDs.” Ex. H12 at 6. It also believed that Optrex developed the decision tree after filing the
Court No. 02-646                                                                           Page 3


entries and only for the purpose of satisfying Customs, since “the petitioner has not produced any

evidence that the decision tree method was ever used by anyone at Optrex to determine a

classification.” Ex. H12 at 6-7. The final penalty claim against Optrex was based on

negligence.

       The government initiated this action in October 2002, claiming that between October 12,

1997, and June 29, 1999, Optrex introduced into the commerce of the United States certain LCD

products by means of negligent material false statements in violation of 19 U.S.C. § 1592.

Plaintiff’s original complaint was premised on the theory of negligent misclassification of the

LCD products under HTSUS heading 8513, instead of HTSUS heading 9013, in violation of the

Federal Circuit’s decision in Sharp Microelecs. Tech., Inc. v. United States, 122 F.3d 1446 (Fed.

Cir. 1997). See Compl. ¶¶ 10-12.

       In this motion, Plaintiff avers that it unearthed evidence establishing a basis for fraud and

gross negligence claims under section 1592 following this court’s order compelling Optrex to

reveal certain of its attorney-client communications. See United States v. Optrex, Slip Op. 04-79

(CIT July 1, 2004) (“July 2004 order”); Pl.’s Mot. Requesting Leave Amend Compl. at 3. Based

on the discovery of this new evidence, the government now seeks leave to amend its complaint to

plead penalties for fraud and gross negligence and to reach back to capture entries made by

Optrex starting in January 1997. The government argues that prior to this discovery, it attempted

to obtain information concerning the substance of the legal advice that Optrex received from its
Court No. 02-646                                                                            Page 4


counsel in order to evaluate Optrex’s reasonable care defense.1 Optrex apparently withheld such

information until the court’s July 2004 order.

       At an evidentiary hearing held on February 17, 2005, the government proffered three

letters from Optrex’s counsel to Optrex containing legal advice on the LCD products

classification and the deposition of a former Optrex employee stating that Optrex consistently

chose to classify its products under lower tariffs. See Ex. H1, Ex. H2, Ex. H3. The government

avers that this evidence forms a basis for its belief that 1) Optrex disregarded its counsel’s

advice, 2) Optrex had knowingly misclassified the subject entries of LCD products and kept a

separate account upon its books and records based on the amount of duties that it should have

paid, 3) the “decision tree” was created as a cover up. The government claims that Customs did

not have sufficient basis to pursue the claims of gross negligence and fraud during the

administrative proceedings because this information was not discoverable in the administrative

proceedings, and, therefore, it should be allowed to add two additional counts for gross

negligence and fraud against Optrex.




       1
         For its reasonable care defense, Optrex claimed that it consulted with an attorney having
expertise about the subject merchandise. The legislative history to the North American Free
Trade Agreement Implementation Act, Pub. L. No. 103-182, 107 Stat. 2057 (1993), noted that in
seeking advice for a classification issue, an importer is expected to consult with an attorney
having technical expertise, provide the expert with full and complete information sufficient for
the expert to make entry or to provide advice as to how to make entry. H. Rep. No. 103-361(I) at
120 (1993), as reprinted in 1993 U.S.C.C.A.N. 2552, 2670. The Ways and Means Committee
noted that “an honest, good faith professional disagreement as to correct classification of a
technical matter shall not be lack of reasonable care unless such disagreement has no reasonable
basis.” Id.
Court No. 02-646                                                                             Page 5


                                          DISCUSSION

       USCIT Rule 15(a) provides that the court should grant a party’s motion for leave to

amend its complaint “freely . . . when justice so requires.” USCIT R. 15(a). The court decides

such motions on a case-by-case basis, considering a variety of factors, including “(1) the

timeliness of the motion to amend the pleadings; (2) the potential prejudice to the opposing

party; (3) whether additional discovery will be necessary; [and] (4) the procedural posture of the

litigation.” Budd Co. v. Travelers Indem. Co., 109 F.R.D. 561, 563 (E.D. Mich. 1986) (citation

omitted). In this case, Plaintiff is seeking to amend its complaint to add two additional claims

against Defendant, maintaining that it did not have a basis to pursue higher levels of culpability

at the administrative level. In this case, the threshold issue turns on whether the Department of

Justice can bring a “civil penalty” action pursuant to 19 U.S.C. § 1592(e) to recover a penalty

claim for a type of violation – namely, gross negligence or fraud – not made before the agency.

See 19 U.S.C. § 1592 (2004). Because section 1592 provides for specific administrative

proceedings prior to the commencement of a recovery action before the court, this inquiry

directly concerns the court’s exercise of jurisdiction over penalty claims that were not pursued at

the administrative level. The court has “exclusive jurisdiction of any civil action which arises

out of an import transaction and which is commenced by the United States . . . to recover a civil

penalty under [19 U.S.C. § 1592].” 28 U.S.C. § 1582. In a section 1592 action, the court must,

“where appropriate, require the exhaustion of administrative remedies.” 28 U.S.C. § 2637.

       The government claims that section 1592 does not prevent it from bringing claims before

this Court for increased culpability levels because the relevant provisions of the law provide for a
Court No. 02-646                                                                             Page 6


de novo standard of review in penalty actions.2 “[S]o long as the United States commences a

section 1592 action, there is no limitation upon the “issues” addressed or the “amount of the

penalty.” Pl. Br. 11-12 (emphasis in original). Plaintiff thus maintains that the level of

culpability is one of the issues that this Court decides independent of the administrative

proceedings underlying each penalty action. The court, however, disagrees with the

government’s reading of section 1592 with respect to its definition of a “penalty claim.”

1. Section 1592

       Section 1592 delineates the administrative procedural requirements for Customs’ penalty

proceedings. See 19 U.S.C. § 1592(b) (2004). When it has “reasonable cause to believe that

there has been a violation,” Customs has to first issue a pre-penalty notice “of its intention to

issue a claim for a monetary penalty.” Id. The pre-penalty notice must:

       (i) describe the merchandise;
       (ii) set forth the details of the entry or introduction, the attempted entry or
       introduction, or the aiding or procuring of the entry or introduction;
       (iii) specify all laws and regulations allegedly violated;


       2
        19 U.S.C. § 1592(e) states:
       Notwithstanding any other provision of law, in any proceeding commenced by the
       United States in the Court of International Trade for the recovery of any monetary
       penalty claimed under this section--
       (1) all issues, including the amount of the penalty, shall be tried de novo;
       (2) if the monetary penalty is based on fraud, the United States shall have the
       burden of proof to establish the alleged violation by clear and convincing
       evidence;
       (3) if the monetary penalty is based on gross negligence, the United States shall
       have the burden of proof to establish all the elements of the alleged violation; and
       (4) if the monetary penalty is based on negligence, the United States shall have the
       burden of proof to establish the act or omission constituting the violation, and the
       alleged violator shall have the burden of proof that the act or omission did not
       occur as a result of negligence.
Court No. 02-646                                                                           Page 7


       (iv) disclose all the material facts which establish the alleged violation;
       (v) state whether the alleged violation occurred as a result of fraud, gross
       negligence, or negligence;
       (vi) state the estimated loss of lawful duties, taxes, and fees if any, and, taking
       into account all circumstances, the amount of the proposed monetary penalty; and
       (vii) 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.

§ 1592(b)(1)(A) (emphasis added). “After considering representations, if any” made by the

importer, upon Customs’ determination that a violation has occurred, Customs has to issue a

“penalty claim,” which “specif[ies] all changes in the information provided under clauses (i)

through (vi) of paragraph (1)(A).” § 1592(b)(2)

       Following the mandatory issuance of a “written penalty claim,” the importer is afforded

an opportunity to “make representations . . . seeking remission or mitigation of the monetary

penalty” under 19 U.S.C. § 1618. Id. Finally, Customs provides the importer with a written

statement “which sets forth the final determination and the findings of fact and conclusions of

law on which such determination is based.” 19 U.S.C. § 1592. If the liable importer fails to

petition for relief or to pay the penalty, Customs can then refer the case to the Department of

Justice. See 19 C.F.R. § 162.32.

       The language of section 1592 evidences that the level of culpability forms the core around

which the government must construct each penalty claim it wishes to bring: Each level of

culpability generates a new separate claim. Subsection 1592(b) makes the level of culpability an

essential element of the “violation” for which a “penalty” is claimed. See § 1592(b)(1)(A)(v).

Subsection 1592(c) sets out the maximum monetary penalty for each type of violation –

negligence, gross negligence, and fraud – treating each as a different “civil penalty.” See
Court No. 02-646                                                                           Page 8


19 U.S.C. § 1592(c). In addition, reading section 1592(e) in pari materia3 with section 1592(b),

the language “any monetary penalty claimed” before this Court refers back to the “written penalty

claim” issued in the administrative proceedings, suggesting that it is the same claim. The term

“recovery” underscores that a 1592 action before this Court is an enforcement suit allowing the

government to recover on a claim that it perfected in the administrative proceedings.4 See

19 U.S.C. § 1592.

       The government argues that the “notwithstanding any other provision of law” clause

combined with the de novo review provision enforces its argument that “as long as the United

States commences a section 1592 action, there is no limitation upon the ‘issues’ addressed or the

‘amount of the penalty.’” Pl. Br. 11-12. The “notwithstanding any other provision of law” clause



       3
        Cf. Things Remembered, Inc. v. Petrarca, 516 U.S. 124, 127-28 (1995) (explaining
application of this rule of construction in interpreting two subsections of statute). “This [in pari
materia] principle of statutory construction provides that legislative intent ‘is to be deduced from
the whole statute and every material part of the same.’” Dal-Tile Corp. v. United States, 17 C.I.T.
764, 768, 829 F. Supp. 394, 397 (1993) (citations omitted).
       4
          Such interpretation views section 1592(e) as creating a cause of action for the United
States to enforce a penalty claim before this Court. Customs’ own regulations do not shed light
on how to interpret the statute, but refer to the proceedings before this Court as “civil
enforcement” of section 1592 claims:
        A monetary penalty incurred under section 592 . . . may be remitted or mitigated
        under section [19 U.S.C. § 1618] . . ., if it is determined that there are mitigating
        circumstances to justify remission or mitigation. . . . The guidelines below will be
        used by the Customs Service in arriving at a just and reasonable assessment and
        disposition of liabilities arising under section 592 within the stated limitations. . . .
        The assessed penalty or penalty amount set forth in Customs administrative
        disposition determined in accordance with these guidelines does not limit the
        penalty amount which the Government may seek in bringing a civil enforcement
        action pursuant to section 592(e).
19 C.F.R. Pt. 171, App. B (emphasis added).
Court No. 02-646                                                                            Page 9


generally “connotes a legislative intent to displace any other provision of law that is contrary to

the [statute].” Shoshone Indian Tribe of Wind River Reservation v. United States, 364 F.3d 1339,

1346 (2004). The “notwithstanding any other provision of law” clause in section 1592 modifies

each of the four subparagraphs that follow the clause: subparagraph (1) addresses de novo

review; subparagraphs (2) to (4) address the burden of proof for each type of violation. For

example, the modification of the de novo standard of review by the “notwithstanding” clause

emphasizes lack of deference to Customs’ final determination, including its findings of fact

under section 1592(b)(2).5 The court’s power to review penalty claims de novo under 19 U.S.C.

§ 1592(e) ensures that the defendant receives a hearing without any deference to the agency’s

findings, placing the burden of proof on the government. However, the de novo standard refers

to the issues in the context of a specific claim based on one of three types of section 1592

violations and does not allow the court to review entirely new penalty claims.

       Finally, a meaningful interpretation of a statute must take into account the statute’s basic

purpose. See Dole Food Co. v. Patrickson, 538 U.S. 468, 484 (2003). The statute was designed

to give an importer an opportunity to fully resolve a penalty proceeding before Customs, before

any action in this Court:


       5
          Section 1592(b)(2) provides for a mitigation procedure following the agency’s written
penalty claim and then final determination:
       The written penalty claim shall specify all changes in the information provided under
       clauses (i) through (vi) of paragraph (1)(A). Such person 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. At the conclusion of any
       proceeding under such section 1618, the Customs Service 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.
19 U.S.C. § 1592(b)(2).
Court No. 02-646                                                                            Page 10


       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 service. Notice of the
       final decision in a mitigation proceeding, including findings of fact and
       conclusions of law, would be required to be sent to the importer. This provision
       would enact into law existing practice with several changes: (1) the importer
       would have the right to make representations in a mitigation proceeding before
       any decision on mitigation is made, and (2) the service would be required to
       supply the importer with a detailed explanation of the factual and legal basis for
       its mitigation decision.
               If an importer refuses to pay a section 592 monetary penalty and is sued by
       the United States in a district court6, all issues, including the appropriateness of
       the penalty amount, would be considered by the court.


S. Rep. 95-778, at 19-20 (1978), as reprinted in 1978 U.S.C.C.A.N. 2211, 2230-31. Thus, the

legislative history supports the analysis that the administrative penalty claim underlies the suit

brought by the United States under section 1592(e).

2.     Exhaustion of Administrative Remedies

       The government alternatively argues that the Court should waive the exhaustion of

administrative remedies in this case and allow it to add its claims of gross negligence and fraud.

At the hearing, by way of testimonial and documentary evidence, and through its submission of

supplemental documents, the government demonstrated that Customs did not have sufficient

bases to pursue fraud on the administrative level because it could not have discovered relevant

evidence prior to the court’s July 2004 order. After careful examination of the law, however, the

court declines to waive the exhaustion of administrative remedies because the remedies involved


       6
        The Customs Courts Act of 1980 substituted the text “proceedings commenced by the
United States in the Court of International Trade” for “proceedings in a United States district
court commenced by the United States pursuant to section 1604 of this title” in section 1952(e).
See Pub. L. 96-417
Court No. 02-646                                                                             Page 11


in this case are mandated by the statute.

       The relevant statute provides that “[i]n any civil action not specified in this section, the

Court of International Trade shall, where appropriate, require the exhaustion of administrative

remedies.” 28 U.S.C. § 2637. The government argues that by excluding section 1592 actions

from the mandatory exhaustion requirement, Congress intended that the Court not be constrained

by the penalty notice issued by Customs. Indeed, in some penalty actions, where “sufficient

compliance with the statutory procedures was found,” the courts have waived certain aspects of

administrative procedures under section 1592(b). United States v. Aegis Sec. Ins. Co., Slip Op.

05-278, at 3, 2005 WL 2740876 (CIT Oct. 24, 2005) (denying defendant’s motion to dismiss

duty collection suit despite pending administrative proceedings with respect to penalty claims,

finding that collection of duties may proceed whether or not penalties are assessed). Importantly,

with one exception, the exhaustion of administrative remedies has been waived regarding

procedural requirements under Customs’ regulations, not the statutory requirements of section

1592. See, e.g., United States v. Maxi Switch, Inc., 22 CIT 778, 785, 18 F. Supp. 2d 1040 (1998)

(finding that Customs’ premature referral of case to Department of Justice was harmless because

of importer’s untimely filing of its supplemental petition); United States v. Obron Atl. Corp., 18

CIT 771, 775-76, 862 F. Supp. 378, 382 (CIT 1994) (finding jurisdiction where Customs

improperly imposed seven-day response period because defendant was not deprived of

opportunity to be heard as it submitted materials and made oral representations following both

pre-penalty and penalty notices); United States v. Modes, Inc., 13 CIT 780, 785, 723 F. Supp.

811, 815 (1989) (finding jurisdiction where Customs did not respond to supplemental petition
Court No. 02-646                                                                            Page 12


because defendant was not deprived of opportunity to be heard as it made oral presentation and

was provided with written determination stating findings of fact and conclusions of law

supporting decision to mitigate).

       In one case, the Federal Circuit waived a statutorily prescribed administrative

requirement. See United States v. Priority Prods., Inc., 793 F.2d 296, 299 (Fed. Cir. 1986). In

Priority Products, the Federal Circuit found that, although the penalty claim in that case was

originally assessed against the company and not its shareholders personally, the shareholders

were on notice of the penalty assessed against their company and could be directly sued in the

penalty action. Id. The Federal Circuit concluded that “nothing in [§ 1592] or its legislative

history demonstrate [sic] that Congress intended to narrowly circumscribe the subject matter

jurisdiction of [this Court] to encompass only those suits brought by the Government against

parties expressly named in the administrative proceedings.” Id. Specifically, the Court of

Appeals stated that “so long as some ‘civil penalty exists’ the Court of International Trade can

assume jurisdiction over any complaint to recover that penalty, and the issue of who is ultimately

responsible for payment of the penalty is subject to de novo consideration.” Id. This case is

distinguishable, however, because the Federal Circuit considered how Customs could “preserve

its right to sue all possible parties” when pursuing a penalty action against a corporation. Id. at

300.

       In the pending case, the court declines the government’s invitation to waive statutorily

prescribed administrative procedures because no precedent supports waiving all statutory

requirements for a particular claim. Such a waiver would require the court to consider a claim
Court No. 02-646                                                                            Page 13


that did not go through administrative proceedings, vitiating the entire statutory framework.7

Additionally, bringing a new gross negligence or fraud claim would require more than just an

exhaustion of administrative remedies; it would result in denial of the protections afforded by the

statute of limitations.

3.      Statute of Limitations

        The government suggests that due to Defendant’s concealment of information on the

administrative level, it was unable to obtain information to pursue a gross negligence claim. At

the evidentiary hearing, Customs demonstrated that it could not have discovered evidence of

gross negligence during the five-year window. However, this argument is not relevant in this

case because Congress specifically established a statute of limitations of five years from the date

of entry of subject merchandise for negligence and gross negligence claims. See 19 U.S.C. §

1621(1). The statute of limitations is designed to ensure that penalty proceedings are conducted

with reasonable dispatch and that penalty claims have finality after a certain date. This five-year



        7
          In connection with its fraud claim, the government’s proposed amended complaint also
seeks to add new entries of subject merchandise that were made in the first half of 1997. These
new entries were not part of the pre-penalty or penalty notices. As the court finds that section
1592 does not permit the government to add different levels of culpability not pursued on the
administrative level, addition of new entries in connection with the government’s fraud claim is
not an issue in this case. However, as with the level of culpability, the identity of each entry is a
central element of any penalty claim. See 19 U.S.C. § 1592(b) (requiring that Customs “set forth
the details of the entry or introduction” of subject merchandise in pre-penalty notice). The
government cannot bypass this unambiguous statutory provision as it ensures that an importer is
on notice of which entries it is responsible for in a section 1592 penalty enforcement action. Cf.
United States v. Rotek, Inc., 22 C.I.T. 503, 508, 509-10 (1998) (not reported in F. Supp.)
(retaining jurisdiction where importer claimed “shifting, inconsistent claims” in pre-penalty
notice, penalty notice, and mitigation decision, noting that items included in complaint were “the
exact items described in the penalty notice and the mitigation decision”).
Court No. 02-646                                                                                Page 14


statute of limitations for bringing a penalty action enables the government to complete full

administrative proceedings: conduct investigation, issue a pre-penalty notice, a notice of penalty

claims, and 19 U.S.C. § 1618 mitigation procedures. In this case, the importer refused to waive

the relevant statute of limitations of five years from the date of entry for negligence and gross

negligence claims in response to Customs’ request, and Customs was on notice that it would not

be able to pursue gross negligence after five years for all entries it investigated.

        Congress specifically has addressed cases where importers act in bad faith and conceal

information that is later discovered by providing that the statute of limitations for fraud claims

begins to run from the date of discovery of fraud. See 19 U.S.C. § 1621(2). Cf. US JVC Corp. v.

United States, 22 CIT 687, 691, 15 F. Supp. 2d 906, 911 (1998) (“The doctrine of equitable

tolling permits a plaintiff to avoid the bar of a statute of limitations, if ‘despite all due diligence,

[the plaintiff] is unable to obtain essential information concerning the existence of [his] claim.’”

(quoting Weddel v. Sec’y of Health and Human Servs., 100 F.3d 929, 931 (Fed. Cir. 1996)).

Thus, even if the government proves that it did not have access to certain information that led to

its discovery of a basis to pursue gross negligence until five years from the date of the last entry

at issue in this case, waiving the statute of limitations for gross negligence is not appropriate

where allegedly fraudulent concealment is involved and pursuing a fraud claim remains an

option. The discovery of fraud rule ensures that the government will not lose out on revenue

when fraud is involved. In this case, the government would have five years from the date it

discovered the alleged fraud to sue Optrex on that claim. However, prior to that it must perfect

its fraud claim by conducting the statutorily required procedures.
Court No. 02-646                                                                            Page 15


                                         CONCLUSION

       Section 1592 provides for a mandatory issuance of a “written penalty claim,” which

underlies a recovery action before this Court. The level of culpability is an inextricable part of a

particular penalty claim issued pursuant to section 1592(b)(2), and allowing the government to

amend its complaint to include penalty claims that have not been perfected through the

administrative process would be contrary to the statutory scheme and the statute of limitations.

Furthermore, despite the timing of the discovery of new evidence, this case does not merit a

waiver of administrative remedies. Therefore, it is hereby

       ORDERED that Plaintiff’s motion for leave to amend its complaint to add the culpability

levels of fraud and gross negligence and new entries is DENIED.




   December 15, 2005                                              /s/ Judith M. Barzilay
_____________________________                                 ______________________________
    New York, NY                                                 Judith M. Barzilay, Judge
