Customs Update: Ford vs. Customs
[Published in the Journal of Commerce Online Sep 13, 2006]

In May ("Record what?", May 4) we wrote about a case brought by U.S. Customs seeking to recover nearly $42 million from Ford Motor Co.

Traders will remain vitally interested in the outcome of this case because if Customs prevails, it will turn NAFTA on its head and put a whole raft of previously unknown responsibilities on traders under this and every other trade preference program.

The case originated in an investigation initiated by El Paso (Texas) Customs in January, 2001. Readers may recall, as part of that investigation, Customs issued a demand that Ford provide its underlying NAFTA Certificates of Origin. Ford complied.

Customs then sought records maintained by Ford's Mexican supplier. In so doing, Customs issued a summons to Ford, instead of initiating a verification of the supplier as provided in NAFTA. Admittedly, Ford did not provide all the demanded records, only those the supplier volunteered, but rather than seek to enforce the summons by contempt proceedings, Customs opted instead to initiate a $41,931,997 record-keeping penalty against Ford. Not surprisingly, the automaker challenged Customs' choices and methods. When the parties could not resolve their differences, two lawsuits followed.

Acting first, Ford in October, 2005 filed in Detroit federal court seeking declaratory relief. Three months later, Customs filed in the federal court in El Paso, seeking recovery of the full penalty. As noted in the May column, Customs then sought to dismiss Ford's lawsuit claiming, in summary, that NAFTA was an agreement between three countries and so only the federal government could rely on it.

In its complaint, Ford argued that Customs acted in an arbitrary and capricious manner and contrary to law. Ford asserted it was not required to maintain the supplier's records. Ford also argued the (a)(1)(A) list (the records importers are required to maintain) conflicts with 19 C.F.R. 181.22 and that Customs failed to notify importers they were required to maintain and produce records relating to the country of origin and tariff classification of parts of NAFTA goods (not the goods being imported, but the parts and components the suppliers use to make those imported goods). Further, Ford argued Customs may not apply record-keeping penalties to goods entered before 2000 as it was only then that Customs finalized those penalties. Ford also urged that Customs not be allowed to assess a 1509 (record-keeping) penalty against an importer for failing to comply with a summons for records, that Customs failed to comply with the Administrative Procedures Act in promulgating the record-keeping regulations, and, finally, that Customs' failure to be sufficiently specific about the records importers are expected to maintain violates basic principals of due process.

In January, 2006 Customs filed its own case seeking to collect the penalty. Customs then sought dismissal of Ford's suit, or its transfer to the El Paso court where its own case was filed. The May column mentioned the Motion to Dismiss had been filed and a decision was pending. On August 23, the judge issued her decision.
 
While Customs' motion was granted, it was not for the NAFTA reasons asserted. First, the court held it did have subject matter jurisdiction, meaning it had the power to hear the case, despite the government's claims about NAFTA, because Ford was challenging the implementing regulations, not the agreement itself.

Several additional procedural and substantive objections were raised by Customs, but the one which seemed to have the most sway with the court claimed Ford filed suit first in order to be before the most favorable forum and so the race to the courthouse should not be favored in this instance (although the first to file usually succeeds in fending off later filings in other jurisdictions).

At the same time, the court found Customs filed suit in El Paso because that is where the matter arose, where its employees and attorneys are located and where the summons was issued. Put another way, the court found Customs did not arbitrarily pick a geographic location which was inconvenient for Ford, but rather El Paso was a natural one given the surrounding facts. The court also seemed impressed by the fact Ford filed suit in anticipation of Customs' filing its own case.

Additionally, the court held the issues raised by Ford in the Michigan lawsuit could just as easily be interposed as defenses in the Texas case. So, in the end, Customs won simply because it was the natural plaintiff (the party most likely to bring suit) and because it picked a reasonable forum. It is important to keep in mind that Customs has only won Round One -- where the lawsuit will be heard. It is a long way from succeeding on the merits of the case.

For traders, the implications of the case are profound. Can you imagine now having to receive your suppliers' proprietary information about sourcing, input costs, labor and overhead costs and the like before making entry just to be sure you qualify? If that becomes the standard for American traders, we will quickly be out of the free trade agreement business for good!