01-7659. Assessment of Liquidated Damages Regarding Imported Merchandise That Is Not Admissible Under the Food, Drug and Cosmetic Act

AGENCY:

Customs Service, Department of the Treasury.

ACTION:

Final rule.

SUMMARY:

This document adopts as a final rule, with some changes, a proposed amendment to the Customs Regulations intended to discourage the illegal sale of imported food. This amendment provides for the assessment of liquidated damages equal to the domestic value of the merchandise in the case of merchandise that is not admissible under the provisions of the Food, Drug and Cosmetic Act and that is not treated or otherwise disposed of in accordance with that Act. The document also adopts, without change, proposed amendments to various provisions of the Customs Regulations pertaining to customs bonds to provide, as a general rule when a different amount is not prescribed by law or regulation, for liquidated damages of three times the appraised value of the merchandise in the case of merchandise that is prohibited from entry. Finally, the document adopts a proposed editorial correction within one of the sections of the Customs Regulations pertaining to customs bonds. The substantive changes reflected in this final rule document will enhance the effectiveness of the affected regulatory provisions by increasing and clarifying the potential liability for the payment of liquidated damages by principals and sureties on customs bonds.

EFFECTIVE DATE:

April 27, 2001.

FOR FURTHER INFORMATION CONTACT:

Jeremy Baskin, Penalties Branch (202-927-2344).

SUPPLEMENTARY INFORMATION:

Background

Section 801 of the Food, Drug and Cosmetic Act, as amended (21 U.S.C. 381), and the regulations promulgated under that statute, provide the basic legal framework governing the importation of foodstuffs into the United States. Under 21 U.S.C. 381(a), the Secretary of Health and Human Services is authorized to refuse admission of, among other things, any article that is adulterated or misbranded or that has been manufactured, processed or packed under insanitary conditions. The Secretary of the Treasury is required by section 381(a) to cause the destruction of any article refused admission unless the article is exported, under regulations prescribed by the Secretary of the Treasury, within 90 days of the date of the refusal or within such additional time as may be permitted pursuant to those regulations.

Under 21 U.S.C. 381(b), pending decision as to the admission of an article being imported or offered for import, the Secretary of the Treasury may authorize delivery of that article to the owner or consignee upon the execution of a good and sufficient bond providing for the payment of liquidated damages in the event of default as may be required pursuant to regulations of the Secretary of the Treasury. In addition, section 381(b) allows the owner or consignee in certain circumstances to take action to bring an imported article into compliance for admission purposes, under such bonding and other requirements as the Secretary of the Treasury may prescribe by regulation.

Based upon the above statutory authority, imported foodstuffs are conditionally released under bond while determinations as to admissibility are made; see § 12.3 of the Customs Regulations (19 CFR 12.3). Under § 141.113(c) of the Customs Regulations (19 CFR 141.113(c)), Customs may demand the return to Customs custody of most types of merchandise that fail to comply with the laws or regulations governing their admission into the United States (also referred to as the redelivery procedure). The condition of the basic importation and entry bond contained in § 113.62(d) of the Customs Regulations (19 CFR 113.62(d)) sets forth the obligation of the importer of record to timely redeliver released merchandise to Customs on demand and provides that a demand for redelivery will be made no later than 30 days after the date of release of the merchandise or 30 days after the end of the conditional release period, whichever is later. Failure to meet the obligation to redeliver contained in § 113.62(d) will create a potential liability for the payment of liquidated damages under the terms of the bond.

Proposed Regulatory Change Regarding Use of the Domestic Value Standard for Liquidated Damages

In an April 1998 report to the Chairman of the Permanent Subcommittee on Investigations, Committee on Governmental Affairs, U.S. Senate, on the subject of food safety, the United States General Accounting Office (GAO) determined that federal efforts to ensure the safety of imported foods were inconsistent and unreliable. Among its specific conclusions, the GAO report indicated that a weakness existed in the customs bond structure in that liquidated damages arising from breach of obligations to redeliver merchandise for which admission was refused did not represent a deterrent to the importation of unsafe products. The GAO reported that liquidated damages of three times the entered value (the existing standard) may not discourage the illegal sale of imported food because the value of the food on the domestic retail market (“domestic value”) may be far greater than three times the entered value.

In response to this study, Customs on August 2, 1999, published a notice of proposed rulemaking in the Federal Register (64 FR 41851) to amend § 12.3 of the Customs Regulations (19 CFR 12.3) by designating the existing text as paragraph (a) and adding a new paragraph (b) that referred specifically to the assessment of liquidated damages with regard to any food, drug, device or cosmetic that is not redelivered into Customs custody or otherwise treated or disposed of within the time period prescribed by law after the merchandise has been found to be inadmissible pursuant to the provisions of the Food, Drug and Cosmetic Act. This proposed new paragraph (b) provided for the assessment of liquidated damages in an amount equal to the “domestic value” of the merchandise at the time of entry as if it had not been refused admission or otherwise found to be noncompliant. For purposes of calculating the liquidated damages, the new paragraph (b) text specifically referred to § 162.43(a) of the Customs Regulations (19 CFR 162.43(a)) which defines “domestic value” as “the price at which such or similar property is freely offered for sale at the time and place of appraisement, in the same quantity or quantities as seized, and in the ordinary course of trade.”

Customs also notes that a Presidential memorandum dated July 3, 1999, directed the Secretaries of the Treasury and Health and Human Services to undertake a comprehensive plan to better protect the American consumer from unsafe imported foods. One of the recommended actions involved increasing the amount of the bond posted for imported foods when necessary to deter premature and illegal entry into the United States. Although the preamble portion of the August 2, 1999, notice of proposed rulemaking did not specifically discuss this recommendation, the stated reason behind the proposed new paragraph (b) text of § 12.3 was entirely consistent with that recommendation.

Proposed Regulatory Change Regarding use of the “Three Times” Value Standard for Prohibited Merchandise

The conditions of the basic importation and entry bond set forth in § 113.62 of the Customs Regulations (19 CFR 113.62), the conditions of the basic custodial bond set forth in § 113.63 of the Customs Regulations (19 CFR 113.63), the conditions of the international carrier bond set forth in § 113.64 of the Customs Regulations (19 CFR 113.64), the conditions of the commercial gauger and commercial laboratory bond as set forth in § 113.67 of the Customs Regulations (19 CFR 113.67), and the conditions of the foreign trade zone operator bond as set forth in § 113.73 of the Customs Regulations (19 CFR 113.73) prescribe, as a consequence of default, the assessment of liquidated damages equal to three times the appraised value of the merchandise involved in the default if that merchandise is “restricted merchandise or alcoholic beverages.” Similar language is also used in § 141.113(h) of the Customs Regulations (19 CFR 141.113(h)), which recites the liquidated damages that may be assessed for failure to comply with a demand for return of merchandise to Customs custody.

A question had arisen whether the “three times” standard for liquidated damages would be appropriate when the merchandise involved in the default is prohibited from entry. While it remained Customs position that the regulatory provisions referred to above permitted the assessment of three times the appraised value of the merchandise when the merchandise involved in the default was prohibited, the August 2, 1999, notice of proposed rulemaking proposed to amend each of those regulatory provisions to provide explicitly for the assessment of three times the appraised value of the merchandise when the merchandise involved is restricted “or prohibited.”

Proposed Editorial Correction

Finally, the August 2, 1999, notice of proposed rulemaking included a proposed editorial correction to the first sentence of § 113.62(l)(1), (19 CFR 113.62(l)(1)), which sets forth the consequences of default. This correction involved the addition of a reference to condition “(k)” of § 113.62 in the exceptions to the general rules regarding the amount of liquidated damages that may be assessed (that is, the value of, or three times the value of, the merchandise involved in the default), because a different level of liquidated damages (that is, $100 per thousand board feet of the imported lumber) is prescribed for condition (k) in paragraph (l)(5) of that section.

The notice of proposed rulemaking invited the submission of public comments on the proposed amendments, and the public comment period closed on October 1, 1999. A total of 13 commenters responded to the solicitation of comments. A discussion of those comments follows.

Discussion of Comments

Comment

One commenter suggested that proposed paragraph (b) of § 12.3 should be incorporated into the bond cancellation standards that were published in T. D. 94-38. The commenter also suggested that the conditional release language of the bond should be eliminated inasmuch as it does not comport with commercial reality.

Customs Response

Customs does not believe that the suggestions of this commenter should be adopted. Elimination of the conditional release period falls outside the scope of this rulemaking action. Additionally, the bond cancellation standards to which the commenter referred do not govern liquidated damages assessment. Liquidated damages amounts are included in bond terms and conditions which are prescribed in Part 113 of the Customs Regulations.

Comment

Numerous commenters indicated that assessment of liquidated damages in an amount equal to the domestic value of merchandise refused admission might actually serve to reduce the amount of liquidated damages assessed. One of these commenters indicated that Customs has historically calculated domestic value of merchandise to be two times the entered value plus the duty. As such, the proposed regulation will actually reduce liquidated damages amounts. Such an anomalous result would serve to undermine the purpose of the proposed regulation. Another commenter suggested that, to correct this problem, Customs should reword the regulation to provide for the assessment of liquidated damages of up to three times the value or the domestic value of the refused product, whichever is greater.

Customs Response

Customs agrees with the commenters that the proposed language might actually serve to reduce liquidated damages, clearly contrary to the intent of the GAO and the Presidential memorandum of July 3, 1999, as discussed above. Accordingly, in this final rule document a new paragraph (b) has been added to the revised § 12.3 text and proposed paragraph (b) has been modified and redesignated as paragraph (c) in order to provide for a bond, and thus the assessment of liquidated damages, either in an amount equal to the domestic value of the merchandise or in an amount equal to three times the (appraised) value of the merchandise.

Comment

One commenter was of the view that Customs has mistakenly considered merchandise that has been refused admission by the Food and Drug Administration (FDA) to be considered “prohibited or restricted merchandise” for purposes of liquidated damages assessment. The commenter would like to see the rule clarified to indicate that restricted or prohibited merchandise does not refer to merchandise refused admission by the FDA.

Customs Response

Customs disagrees with the commenter. By definition, merchandise that has been refused admission by the FDA is prohibited merchandise and should be treated as such.

Comment

Several commenters stated that proposed paragraph (b) of § 12.3 substantially increases liquidated damages assessments without providing sureties sufficient information to determine the amount of their increased exposure. As a consequence, all importers likely will be charged increased amounts for bonds. Numerous other commenters claimed that the proposed regulation was an undue burden on trade, and they also concluded that increased charges to importers will unnecessarily result because of the proposed change. These commenters stated that the majority of compliant importers will be forced to subsidize the costs incurred because of a very few recalcitrant importers. One of the commenters additionally noted that the GAO report adopted the position that bonds were inadequate as a result of anecdotal evidence that certain foods were resold at prices up to 15 times their entered value. The commenter argued that this anomalous situation should not be the basis for raised potential liquidated damages for all.

Customs Response

Customs acknowledges that the majority of importers of FDA-regulated merchandise comply with the laws governing the importation of food, drugs and cosmetics. In recognition of that fact and in response to the concerns raised by the commenters with regard to the incurring of risk and with regard to the potential economic impact of the regulation on compliant importers as proposed, the text of new paragraph (b) of § 12.3 as mentioned above gives the port director a choice as regards the bond amount to be prescribed (that is, an amount based on either the domestic value standard or the three-times-the-value standard), with the choice to be made according to the circumstances of the individual case. The bond amount thus would be importer-specific rather than being standard for all importers of FDA-regulated products. Sureties would then be in a better position to evaluate their risk and Customs would be better able to adjust the bond amount for those importers whose track records would require a higher bond.

Comment

Some commenters suggested that liquidated damages at the proposed domestic value amount are deterrents designed to punish violators, not to recompense the government for loss. They stated that section 1592 penalties are noted as being the appropriate vehicle to punish an importer who would attempt the importation of refused merchandise.

Customs Response

Customs disagrees with the commenters that assessment and collection of the liquidated damages claim amount of domestic value is punitive. When articles that have been refused admission by the FDA are not redelivered to Customs, but are distributed into commerce, the exact amount of damages incurred by the public is difficult to quantify. Customs takes the view that the domestic value standard of liquidated damages is reasonable under the circumstances. It is well settled that liquidated damages are not penalties if they are reasonable and the exact amount of the damages sustained would be difficult to prove. See, U.S. v. Imperial Food Imports, 834 F.2d 1013 (Fed. Cir. 1987); Fraser v. United States, 261 F.2d 282 (9th Cir. 1958); Ely v. Wickham, 158 F.2d 233 (10th Cir. 1946).

Comment

Numerous commenters objected to the use of “domestic value” as a method of determining an adequate bond amount. They claimed that this term is imprecise. They were of the view that the three-times-entered-value liquidated damages amount is clear and that reference to domestic value only confuses the issue.

Customs Response

Customs notes that the term “domestic value” is currently defined in, and has been successfully administered under, the Customs Regulations. Customs also believes that any objection to the domestic value standard will be mitigated by the fact that the regulatory texts adopted in this final rule document will not require all importers to post bonds based on a higher domestic value standard. Rather, as indicated above, it is anticipated that a higher bonding level will only be required of those importers who have a history of failing to redeliver or export, destroy or otherwise dispose of inadmissible imported food, drugs and cosmetics.

Comment

Numerous commenters claimed that the raising of liquidated damages amounts does not serve to stop unsafe products from entering the commerce. These commenters suggested that release of the products be withheld or that immediate delivery privileges be withdrawn.

Customs Response

The assertion of these commenters regarding the effectiveness of raising liquidated damages amounts appears to be at variance with the conclusions reached by the GAO as discussed above. Other remedies such as those suggested by these commenters fall outside the scope of this document.

Conclusion

Accordingly, based on the comments received and the analysis of those comments as set forth above, and after further review of this matter, Customs believes that the proposed regulatory amendments should be adopted as a final rule with certain changes as discussed above and as set forth below. Finally a number of additional minor, editorial-type changes have been made to the regulatory texts set forth in this final rule document. These changes principally involve the replacement of legalistic wording with simple or more direct phraseology, consistent with prevailing plain English drafting principles and without any substantive change.

Regulatory Flexibility Act and Executive Order 12866

Pursuant to the provisions of the Regulatory Flexibility Act (5 U.S.C. 601 et seq.), it is certified that these amendments will not have a significant economic impact on a substantial number of small entities. The regulatory amendments will not require any additional action on the part of the public, will affect only a small number of importers, and are intended to facilitate Customs enforcement efforts involving existing import requirements. Accordingly, the amendments are not subject to the regulatory analysis or other requirements of 5 U.S.C. 603 and 604. Furthermore, this document does not meet the criteria for a “significant regulatory action” as specified in E.O. 12866.

List of Subjects

19 CFR Part 12

• Bonds
• Customs duties and inspection
• Labeling
• Marking
• Prohibited merchandise
• Reporting and recordkeeping requirements
• Restricted merchandise
• Seizure and forfeiture
• Trade agreements

19 CFR Part 113

• Bonds
• Customs duties and inspection
• Imports
• Reporting and recordkeeping requirements
• Surety bonds

19 CFR Part 141

• Bonds
• Customs duties and inspection
• Entry procedures
• Imports
• Prohibited merchandise
• Release of merchandise

Amendment to the Regulations

For the reasons stated in the preamble, Parts 12, 113 and 141, Customs Regulations (19 CFR Parts 12, 113 and 141), are amended as set forth below.

PART 12—SPECIAL CLASSES OF MERCHANDISE

1. The general authority citation for Part 12 continues to read, and the specific authority citation for § 12.3 is revised to read, as follows:

Authority: 5 U.S.C. 301; 19 U.S.C. 66, 1202 (General Note 20, Harmonized Tariff Schedule of the United States (HTSUS), 1624.

* * * * *

Section 12.3 also issued under 7 U.S.C. 135h, 21 U.S.C. 381;

* * * * *

2. Section 12.3 is revised to read as follows:

§ 12.3

Release under bond; liquidated damages.

(a) Release. No food, drug, device, cosmetic, pesticide, hazardous substance or dangerous caustic or corrosive substance that is the subject of § 12.1 will be released except in accordance with the laws and regulations applicable to the merchandise. When any merchandise that is the subject of § 12.1 is to be released under bond pursuant to regulations applicable to that merchandise, a bond on Customs Form 301, containing the bond conditions set forth in § 113.62 of this chapter, will be required.

(b) Bond amount. The bond referred to in paragraph (a) of this section must be in a specific amount prescribed by the port director based on the circumstances of the particular case that is either:

(1) Equal to the domestic value (see § 162.43(a) of this chapter) of the merchandise at the time of release as if the merchandise were admissible and otherwise in compliance; or

(2) Equal to three times the value of the merchandise as provided in § 113.62(l)(1) of this chapter.

(c) Liquidated damages. Whenever liquidated damages arise with regard to any food, drug, device or cosmetic subject to § 12.1(a) for failure to redeliver merchandise into Customs custody or for failure to rectify any noncompliance with the applicable provisions of admission, including the failure to export or destroy the merchandise within the time period prescribed by law after the merchandise has been refused admission pursuant to the provisions of the Food, Drug and Cosmetic Act, those liquidated damages will be assessed pursuant to § 113.62(l)(1) of this chapter in the amount of the bond prescribed under paragraph (b) of this section.

PART 113—CUSTOMS BONDS

1. The authority citation for Part 113 continues to read in part as follows:

Authority: 19 U.S.C. 66, 1623, 1624.

* * * * *

§ 113.62

[Amended]

2. In § 113.62, paragraph (l)(1) is amended by removing the words “conditions (a), (g), or (i)” and adding, in their place, the words “conditions in paragraphs (a), (g), (i), or (k) of this section” and by adding the words “or prohibited” after the word “restricted”.

§ 113.63

[Amended]

3. In § 113.63, paragraph (h)(1) is amended by adding the words “or prohibited” after the word “restricted”.

§ 113.64

[Amended]

4. In § 113.64, the second sentence of paragraph (b) is amended by adding the words “or prohibited” after the word “restricted”.

§ 113.67

[Amended]

5. In § 113.67, paragraphs (a)(2)(i) and (b)(2)(i) are amended by adding the words “or prohibited” after the word “restricted”.

§ 113.73

[Amended]

6. In § 113.73, the second sentence of paragraph (a)(2) is amended by adding the words “or prohibited” after the word “restricted”.

PART 141—ENTRY OF MERCHANDISE

1. The authority citation for Part 141 continues to read in part as follows:

Authority: 19 U.S.C. 66, 1448, 1484, 1624.

* * * * *

Section 141.113 also issued under 19 U.S.C. 1499, 1623.

§ 141.113

[Amended]

2. In § 141.113, the first sentence of paragraph (h) is amended by adding the words “or prohibited” after the word “restricted”.

Raymond W. Kelly,

Commissioner of Customs.

Approved: March 8, 2001.

Timothy E. Skud,

Acting Deputy Assistant Secretary of the Treasury.