CIT Denies Dismissal Motion by Importer in $97 Million Penalty Case

Judge Gary Katzmann disagreed with Wanxiang's arguments that the government had failed to state a claim, ruling that the importer's failure to change its classification of subsequent entries after receiving a CBP notice of action could be considered negligence or gross negligence, even if the notice wasn't binding on the later entries. Katzmann also found that misclassifications could be construed as false statements subject to Section 1592 penalties, though he noted Wanxiang's "well-founded concerns" that mere classification disagreements shouldn't automatically rise to the level of a penalty.

Katzmann also declined to dismiss a count of negligence based on Wanxiang's arguments that a key scope ruling identifying the importer's goods as subject to antidumping duties hadn't been released.

Katzmann said the case raised important questions of fair notice and culpable intent in the face of civil administrative penalties but that Wanxiang's arguments didn't support dismissal at such a "preliminary stage." In his opinion, Katzmann noted that Wanxiang, when "confronted with regulatory uncertainty," had a number of options to limit that uncertainty but failed to do so.

Wanxiang America, a subsidiary of the Chinese multinational automotive components manufacturing company, Wanxiang Group Corp., imported parts and accessories for automobiles starting in 2007. The U.S. alleges those imports were negligently or grossly negligently entered, either by way of misclassification or without paying the required AD duties, and seeks $31 million in unpaid duties plus $66 million in penalties.

In its motion to dismiss, Wanxiang argued that misclassifications on their own cannot constitute false statements required for liability under 19 U.S.C. 1592. The importer said that the tariff classifications asserted in its entry paperwork are legal conclusions up for debate rather than statements of fact that constitute “false statements" as required for penalties.

Katzmann noted that a misclassification on the entry paperwork, by itself, is a false statement that may establish Section 1592 penalty liability, citing prior court decisions. However, the judge said that at its core, Wanxiang's argument that "reasonable disagreements" could subject importers to liability is a well-founded concern. While Wanxiang was "right to question the outer bounds of unlawful conduct," those concerns are checked by the need for the government to prove that a separate tariff subheading was correct and that Wanxiang failed to exercise reasonable care, Katzmann said.

Here, in each allegation, the complaint pleads either a proper alternative classification or a more specific reason for why Wanxiang's proposed classification doesn't apply. Those pleadings substantiate the allegations that Wanxiang "either failed to exercise reasonable care ... or acted with actual knowledge of or in wanton disregard of the applicable laws," Katzmann said.

Wanxiang also argued that a notice of action CBP sent it directing classification in a different subheading was not binding on subsequent entries, and the importer's failure to follow that classification on future entries was not negligence or gross negligence. Wanxiang argued that a notice of action "does not establish a legal requirement that an importer must follow for future entries."

But even though the notice of action didn't engender a duty, it did show a breach of conduct, Katzmann said. The allegation that Wanxiang continued to misclassify entries after receiving the notice creates a possible conclusion that its subsequent misclassifications resulted from "wanton disregard for the relevant facts and with indifference to or disregard for the offender’s obligations under the statute," he said.

Finally, Wanxiang said it had no fair notice of the time of the entries that the AD duty order on roller bearings applied to its wheel hub assemblies and that its interpretation of the order was reasonable at the time, making attempts to collect penalties a retroactive application of the law. It said its entries subject to AD duties came prior to a Commerce scope ruling that addressed the question of whether the goods were subject to duties.

Katzmann concluded that "to hold for Wanxiang now would bar the Government from enforcing § 1592 against importers that negligently fail to correctly identify their entries, so long as those importers show that there was some uncertainty in the applicable classification. That result could encourage gamesmanship in classifying entries and absolve importers from exercising reasonable care in taking the appropriate actions with Customs and Commerce to clarify the classification applicable to their entries."

(U.S. v. Wanxiang America, Slip Op. 23-115, CIT # 22-00205, dated 08/16/23; Judge: Gary Katzmann; Attorneys: Mikki Cottet for plaintiff U.S. government; Michael Roll of Roll & Harris for defendant Wanxiang America)