Importer Files Broad Court Challenge to Legality of CBP Penalties for Trafficking in Counterfeit Goods

“We’re proposing to shut down Section 526(f) of the Tariff Act, which imposes civil penalties on companies which are involved in the 'trafficking' of counterfeit goods, on the ground that Customs has not enacted regulations defining how the penalties are to be calculated,” said John Peterson of Neville Peterson, who is representing Jindeli.

According to the complaint, Jindeli in 2010 imported 35 cartons of costume jewelry into John F. Kennedy Airport in New York. CBP detained and later seized the merchandise based on a determination that the jewelry infringed Chanel’s trademark on its “interlocking C” design. The seizure notice said the shipment contained base metal jewelry with a domestic value of $293.61. Jindeli says the jewelry didn’t violate Chanel’s trademark. But the company didn’t fight CBP’s seizure and forfeiture because of the low value of the merchandise, says the complaint.

Nearly a year later, CBP came back to Jindeli with a notice assessing a $139,350 penalty for trafficking in counterfeit goods under 19 USC 1526. Jindeli petitioned the CBP Fines, Penalties, and Forfeitures Division for relief. It said the jewelry didn’t violate any trademarks, and even if it did, Chanel’s recordation with CBP expired in 2008.

But in any case, CBP didn’t have the authority to assess penalties for trafficking in counterfeit goods, said Jindeli's request for relief. The penalty provisions of 19 USC 1526(f), added by Congress in 1996, mandate a fine set at the “manufacturer’s suggested retail price” (MSRP) of the genuine good for a first offense, to be determined under future CBP regulations. The regulations eventually issued by CBP at 19 CFR 133.27 never defined how the agency would arrive at MSRP, said the complaint. They mirrored the language of the statute, setting the penalty at “the value the merchandise would have had if it were genuine, according to the manufacturer's suggested retail price.”

In response, CBP told the Jindeli it would waive the penalty if the company paid $27,870 by Jan. 13, 2014. Justifying its ability to impose penalties for trafficking in counterfeit goods, CBP said it clarified its procedure for calculating penalty amounts in Treasury Decision 99-76, “Guidelines for the Assessment and Mitigation of Civil Fines Under 19 U.S.C. 1526(f),” published on Oct. 27, 1999, in Customs Bulletin Vol. 33, No. 43.

Jindeli and its lawyer Peterson thought the case a good chance to challenge CBP penalties for counterfeit goods as a whole, and took the case to federal court. “We selected this as the ‘test case,’ since the penalty in question is so extreme, relative to the value of the merchandise, and the appraisement of the merchandise raises so many issues,” said Peterson. For example, CBP didn’t explain whether it determined MSRP based on the jewelry’s actual composition of tin and steel, or based on the value of the jewelry if it were made of precious metals like gold, silver, and platinum. Jewelry in general doesn’t even usually have an MSRP, said Peterson.

The issue of how CBP determines MSRP is a broader one that can cause problems for other types of products too, said Peterson. An MSRP only exists when a manufacturer has control over downstream prices, but most manufacturers don’t have that control, he said. And to arrive at the value a good “would have had” if genuine requires a determination of the value of the trademark in question, an issue that in trademark cases often requires expert testimony, said Peterson. “In the absence of regulations providing definitions for the various situations which might arise, any penalty assessment Customs might make runs the risk of being excessive.”

The complaint says the guidelines CBP issued in the Customs Bulletin didn’t clarify the issue. And they don't satisfy the legal requirement that CBP issue regulations because they weren’t subject to notice and comment requirements, it said.

“If there were regulations addressing this, and they had been upheld as valid, there might be a guidepost for Customs or the courts to address in determining whether the penalty was within the statutory limit, said Peterson. “Absent such regulations, there is a possibility that any penalty imposed by Customs under this statute might be arbitrary and capricious -- or possibly an ‘excessive fine,’ in violation of the Eighth Amendment to the Constitution.”

Jindeli is requesting that the District Court hold that CBP cannot impose penalties under 19 USC 1526(f) until it issues regulations on how it calculates MSRP. It also wants the court to declare the CBP guidelines “null and void” because they aren’t the regulations that were required by law. Finally, Jindeli wants the penalties CBP assessed against it vacated.

“We’re seeking an injunction to block CBP from enforcing the penalty against Jindeli,” said Peterson. “Whether a judge wants to enjoin Customs nationwide remains to be seen. We’ll certainly ask for it if we get a favorable decision,” he said. “But I would counsel firms facing their own penalties to perhaps consider initiating their own lawsuits.”

The Justice Department and the U.S. Attorney’s Office for the Eastern District of New York declined comment on the case. CBP did not immediately return a request for comment.

Email ITTNews@warren-news.com for a copy of the complaint.