Ignore Advice of Counsel at Your Own Peril
A decision earlier this month by the U.S. Court of International Trade ("CIT") reinforces the importance of following the advice of legal counsel on matters of tariff classification; the failure to do so can be a costly mistake.
In United States v. Optrex America Inc., Slip-Op 08-63 (June 9, 2008), the CIT awarded lost revenue and civil penalties that exceeded $2.3 million, almost the statutory maximum, to U.S. Customs and Border Protection ("CBP") when Optrex America ("Optrex") misclassified and failed to confirm the correct tariff classification of its Liquid Crystal Display ("LCD") glass panels, despite the advice of counsel to seek a ruling from CBP. The CIT held, "[b]ecause Optrex did not exercise reasonable care under the facts of this case, including the failure to follow the advice of counsel . . . it is subject to penalties."
Optrex America, a wholly owned subsidiary of the Optrex Corporation, a Japanese company that designs and manufactures custom flat-panel displays and other display components, imported and classified its LCD glass panels under Harmonized Tariff Schedule of the United States ("HTSUS") heading 8531 rather than HTSUS 9013. This decision allowed Optrex to avoid higher customs duties.
CBP argued, and the CIT held, that Optrex made the classification error despite clear judicial guidance under recent case law and advice from counsel. Previously, in Sharp Microelectronic Technology, Inc., v. United States. 122 F.3d 1446 (Fed. Cir. 1997), the U.S. Court of Appeals for the Federal Circuit had affirmed the classification of LCD glass panels with similar characteristics under HTSUS 9013. After the Sharp decision, Optrex’s outside customs counsel sent Optrex a letter (1) notifying the company of the Sharp decision; (2) advising Optrex to seek a binding ruling from CBP concerning the tariff classification of the type of LCD "glass only" displays that Optrex imported; (3) advising Optrex to review its product line to see if it imported any of the type of LCD glass panels of the same type in the Sharp ruling; and (4) advising Optrex to immediately begin classifying any of those products under HTSUS 9013.80.70, as required by the Sharp decision. Optrex chose not to follow the advice and continued to import and classify the LCD glass panels under HTSUS heading 8531.
The Government sued Optrex, alleging that Optrex violated 19 U.S.C. § 1592(a)(1) by negligently misclassifying its imports of LCD glass panels despite having been put on notice by its counsel. Under § 1592, CBP has the burden to establish that a materially false statement or omission occurred and the defendant then has the burden to prove that it exercised reasonable care.
In determining whether Optrex exercised reasonable care, the court noted that it was "particularly influenced by Optrex’s response to the 1997 Letter in which it advised the company to seek a binding customs ruling…" The court found that Optrex had "no justification" for failing to abide by the "well informed advice of its attorneys," and that the legal advice rendered to Optrex actually placed upon it an "affirmative duty to actively respond." Optrex’s failure to respond to the advice in the letter and its continued insistence on classifying the LCDs under HTUS 8531 constituted negligence.
This case highlights the importance of following legal counsel’s advice in customs classification matters, and by extension in all matters affecting customs duties, taxes and fees. By following such advice, companies can demonstrate the "reasonable care" required under 19 CFR § 1592.
The "First Sale" Rule, Cond. CBP Commissioner Basham’s Mea Culpa
On June 24, 2008, CBP Commissioner W. Ralph Basham testified before a Senate Finance Committee hearing on the "Oversight of Trade Functions: Customs and Other Trade Agencies". In Commissioner Basham’s prepared testimony, and during questioning from Chairman Max Baucus (D-MT) and Ranking Member Charles Grassley (R-IA), CBP Commissioner Basham admitted that CBP failed to consult sufficiently with Congress and the private sector before issuing its proposal to change the longstanding practice from the "first sale" rule to the "last sale" rule. CBP Commissioner Basham also confirmed that CBP will not proceed further on the "first sale" rule before January 1, 2011 at the earliest, and will not change its current practice without consulting with the Congress and the private sector, and without explicit approval of the Secretary of the Treasury.
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