United States v. Ford Motor Company

Opinion

United States Court of Appeals for the Federal Circuit

05-1584

UNITED STATES,

Plaintiff-Appellee,

v.

FORD MOTOR COMPANY,

Defendant-Appellant.

David A. Levitt,Trial Attorney, Commercial Litigation Branch, Civil Division, United States Department of Justice, of Washington, DC, argued for plaintiff-appellee. With him on the brief were Peter D. Keisler, Assistant Attorney General, David M. Cohen, Director, and Patricia M. McCarthy, Assistant Director. Of counsel on the brief were Kathleen Bucholtz and Katherine F. Kramarich, Attorneys, Office of Associate Chief Counsel, United States Customs and Border Protection, of Chicago, Illinois.

Charles J. Cooper, Cooper & Kirk, PLLC, of Washington, DC, argued for defendant-appellant. With him on the brief were Vincent J. Colatriano, David H. Thompson, and Nicole Jo Moss. Of counsel on the brief were Robert B. Silverman, David M. Murphy, and Frances P. Hadfield, Grunfeld, Desiderio, Lebowitz, Silverman & Klestadt, LLP, New York, New York; and Paulsen K. Vandevert, Ford Motor Company, of Deaborn, Michigan.

Appealed from: United States Court of International Trade

Senior Judge Nicholas Tsoucalas United States Court of Appeals for the Federal Circuit

05-1584

UNITED STATES,

Plaintiff-Appellee,

v.

FORD MOTOR COMPANY,

Defendant-Appellant.

______________________

DECIDED: August 30, 2006 ______________________

Before NEWMAN, RADER, and GAJARSA, Circuit Judges.

GAJARSA, Circuit Judge.

Ford Motor Company appeals from a decision of the United States Court of

International Trade holding Ford liable for negligent misrepresentation of the value of

import entries and imposing a penalty of $17,151,923.60. United States v. Ford Motor

Co., 395 F. Supp. 2d 1190 (Ct. Int'l Trade 2005) ("Negligence Decision"). Ford timely

filed a notice of appeal on September 16, 2005. We have jurisdiction pursuant to 28

U.S.C. § 1295(a)(5). For the reasons stated herein, we affirm in part, reverse in part,

and remand for further proceedings in accordance with this opinion. BACKGROUND

Ford is a major importer of automobiles and automobile parts from all over the

world. This case deals with Ford’s importation practices, and specifically with its

methods for handling the declaration of value for imported goods the price of which is

subject to change after importation.

A. Assists and Direct Payments

Two concepts lie at the heart of the case. The first, "assist," is defined by statute

as "materials, components, parts, and similar items incorporated in the imported

merchandise" that is provided "free of charge or at a reduced cost, by the buyer of

imported merchandise for use in connection with the production or sale for export to the

United States of the imported merchandise." 19 U.S.C. § 1401a(h)(1). An "assist"

might consist of, for example, design or engineering work provided overseas by the

buyer/importer to the seller that is not factored into the invoice price. The value of the

assists is subject to import duties pursuant to 19 U.S.C. § 1401a(b)(1)(C).

The trial court found, and Ford does not dispute, that assists relating to a

particular model year vehicle or component typically occur long before entry of the

actual merchandise. Negligence Decision, 395 F. Supp. 2d at 1197. During the years

at issue, Ford maintained an internal program "whereby it gathered information about

assists at the time of importation and paid all duties related to such assists on the first

entry" of the related merchandise. Id. Despite this program, it appears that Ford failed

to report significant numbers of assists until years after the related merchandise entered

the United States. In 1992, Ford disclosed to what was then the United States Customs

05-1584 2 Service ("Customs")1 the existence of previously undisclosed assists relating to

numerous entries in the years 1987-1991. Id. at 1197-200.

The second concept is "direct" or "lump-sum" payments, which are payments of

money by the importer to the seller separate from—and usually subsequent to—the

payment of the original price but that relate directly to the purchase price of the imported

item. A typical lump-sum payment might represent amounts owed to the seller under a

variable-pricing clause, pursuant to which the final cost of the item varies with some

extrinsic index or factor, and requires a gross-up payment after the fact. Lump-sum

payments, like assists, are dutiable under the import laws as part of the "the total

payment . . . for imported merchandise" for purposes of 19 U.S.C. § 1401a(b)(4).

Ford's supply agreements with many of its overseas vendors "contained post-

importation price adjustments, which typically provided a per vehicle or vehicle

component base price subject to possible modifications." Id. at 1196. Ford knew that

the prices of imported merchandise, although "fairly firm" upon importation, could

change after importation pursuant to the supply agreements. During the years at issue,

Ford's internal compliance procedures stated that upon entry "[t]he invoice must be

priced so that the true value can be ascertained. In the event that the value is not

completely and correctly shown, a 'provisional' disclaimer is stated on the invoice,

thereby advising [C]ustoms" of the possibility that the entry price was non-final. Id. at

1203. The record indicates, however, that despite this policy Ford invoices in the

disputed period did not disclose the provisional nature of invoice prices.

1 The United States Customs Service is now part of the Department of Homeland Security, and is known as the Bureau of Customs and Border Protection.

05-1584 3 In 1988, Ford and Customs entered into an agreement that altered Ford's

reporting obligations relating to direct payments (the "Reconciliation Agreement"). The

Reconciliation Agreement permitted Ford to report all lump-sum post-importation

payments relating to a particular model year in a single disclosure filed at the end of the

model year in question. The exact scope of the Reconciliation Agreement, and the

timing of disclosures made pursuant to it, are the subject of dispute between the parties,

and are discussed in detail below.

B. Customs' Investigation and Complaint

Customs initiated "Operation Hat Trick" in the early 1990s "to identify undeclared

assists and indirect payments" made by the Big Three automakers, to "determine the

level of culpability of parties responsible for the failure to declare the assists/payments,"

and to "refer cases for criminal and civil action as appropriate." Negligence Decision,

395 F. Supp. 2d at 1193. On May 23, 1991, Customs notified Ford by letter that a

formal investigation was underway "concerning the proper declaration of assists and

indirect payments in imports of vehicles and vehicle component assemblies." Id. at

1194. On June 7, 1991, at Ford's request, the parties met to clarify the meaning of

"indirect payments" as it was used in the notice of investigation. Id. The substance of

the discussions held at the meeting are the subject of dispute in this appeal. The trial

court concluded that, following the meeting, "Ford knew or should have known that the

term 'indirect payment' . . . included all payments that impacted the final price paid by

Ford for the merchandise in question," including payments made directly by Ford to

foreign suppliers. Id. at 1195. The trial court also found as fact that "Ford was advised

by Customs that the investigation would encompass entries made between 1987

05-1584 4 through the 1991 model year," but would not include entries for model years 1992 or

later. Id. at 1196. Both of these findings are discussed in detail below.

The government filed its complaint in the Court of International Trade on January

29, 2002, charging Ford with violation of 19 U.S.C. § 1592, which provides that "no

person, by fraud, gross negligence, or negligence," may enter any merchandise into the

commerce of the United States by means of any document, information, statement, act,

or omission which is "material and false." 19 U.S.C. § 1592(a)(1). The government’s

allegations center on alleged omissions from Ford’s entry documents under 19 U.S.C. §

1484, which requires importers to file with Customs information about entered

merchandise, including "the declared value, classification and rate of duty applicable to

the merchandise, and . . . such other information as is necessary to enable the Customs

Service to . . . properly assess duties on the merchandise." 19 U.S.C. § 1484(a)(1)(B).

The government alleges that Ford’s entry documents were materially false to the extent

that they assigned to merchandise a concrete value that Ford knew was likely to change

pursuant to variable-pricing provisions in the sale contracts. The government further

alleges that, regardless of whether Ford had an affirmative duty to disclose the

provisional nature of its pricing, it had an affirmative obligation to inform Customs "at

once" when it became aware that the declared values were incorrect, but failed to do so.

19 U.S.C. § 1485(a) (stating that every importer making an entry under § 1484 shall

make "a declaration under oath," stating, inter alia, "[t]hat the prices set forth in the

invoice are true," that "all other statements in the invoice or other documents filed with

the entry, or in the entry itself, are true and correct," and that "he will produce at once to

the appropriate customs officer any invoice, paper, letter, document, or information

05-1584 5 received showing that any such prices or statements are not true or correct") Ford

denied the allegations and counterclaimed for a refund of duties it allegedly overpaid.

The Court of International Trade conducted a bench trial, after which it found that

Ford was guilty of negligent (but not grossly negligent) violation of both § 1484 and

§ 1485 and assessed a penalty of more than $17 million—the maximum penalty

permitted by statute in the circumstances. In reaching that decision, the trial court

concluded that § 1484 included an affirmative requirement that entry prices indicate the

existence of any provisional pricing arrangements that might render the invoice price

non-final; that Ford violated that requirement; and that because Ford had knowledge of

the requirement, it could be held liable for the violation consistent with due process.

Negligence Decision, 395 F. Supp. 2d at 1208-13. The Court of International Trade

further held that Ford failed to satisfy the Reconciliation Agreement's requirements for

reporting direct payments, thereby violating that agreement and, by extension, § 1485.

Id. at 1213-15. It also dismissed Ford's counterclaim for a refund of overpaid duties. Id.

at 1222. Finally, the court assessed the maximum penalty permitted by the statute in a

case involving negligence: double the amount of revenue lost to the government, for a

total of $17,151,923.60. Id. at 1221-22; see also 19 U.S.C. § 1592(c)(3) (setting forth

the maximum civil penalty for negligent violation of § 1592). In so doing, the court

considered various mitigating factors proposed by Ford but concluded that because

Ford "failed to make a good faith effort to meet its obligations," and "inexplicably" failed

to follow its own compliance procedures, the penalty did not warrant mitigation.

Negligence Decision, 395 F. Supp. 2d at 1221.

05-1584 6 On appeal, Ford challenges all of the trial court's legal rulings. It argues that 19

U.S.C. § 1484 does not require importers to disclose the existence of provisional

pricing, or, in the alternative, that such a requirement could not be imposed on Ford

consistently with due process of law. It argues that the Reconciliation Agreement

modified its obligation to disclose modified price information "at once" and that Ford

complied with all the requirements in that agreement. It also claims that even if it

violated §§ 1484 and 1485, the trial court erred in finding its conduct negligent for

purposes of liability under § 1592. Ford further asserts that several of its submissions

detailing direct payments constituted "prior disclosures" under 19 U.S.C. § 1592(c),

subjecting Ford to less rigorous penalties. Finally, Ford argues that the trial court erred

in its calculation of the final penalty of $17,151,923.60. Ford timely appealed to this

court, and we have jurisdiction pursuant to 28 U.S.C. § 1295(a)(5).

STANDARD OF REVIEW

We review the Court of International Trade's legal determinations without

deference. United States v. Hitachi Am., Ltd., 172 F.3d 1319, 1326 (Fed. Cir. 1999)

("Hitachi II"). We review findings of fact, including findings relating to a party's intent, for

clear error. Id. at 1327. Where, as here, Congress has delegated to the judiciary

discretion to determine the amount of civil penalties under a statute, we review the trial

court's calculation of such penalties for abuse of discretion. See, e.g., Sierra Club v.

Cedar Point Oil Co., Inc., 73 F.3d 546, 573-74 (5th Cir. 1996) (reviewing district court's

penalty determination under 33 U.S.C. § 1319(d) for abuse of discretion); see also Atl.

States Found., Inc. v. Tyson Foods, Inc., 897 F.2d 1128, 1142 (11th Cir. 1990)

05-1584 7 (reviewing district court's penalty determination under 33 U.S.C. § 1319(d) for abuse of

discretion).

DISCUSSION

I. 19 U.S.C. § 1484

Section 1484 of Title 19 sets forth the procedures for the entry of imported

merchandise. It requires, among other things, that importers file with the Customs

Service "the declared value, classification and rate of duty applicable to the

merchandise," and "such other information as is necessary to enable the Customs

Service to . . . properly assess duties on the merchandise." 19 U.S.C. § 1484(a)(1)(B).

The United States alleges, and the trial court found, that Ford's omission of information

about assists and lump-sum direct payments from its entry documents constituted

"materially false" omissions of information required by § 1484.

On appeal, Ford raises two primary arguments challenging the trial court's

decision. First, it argues that the Court of International Trade misread this court's

decision in Hitachi II to require disclosure of provisional pricing information. Second, it

asserts that even if such a requirement existed, the 1988 Reconciliation Agreement

satisfied it. The government counters that the trial court correctly applied Hitachi II and

that the Reconciliation Agreement is inadequate to satisfy the § 1484 disclosure

obligation, because the agreement did not "identify specific entries, if any, to which it

applied," and therefore could not put Customs on notice of which entries were subject to

change.

In the Hitachi litigation, the Court of International Trade ruled that § 1484 requires

importers to disclose the existence of variable-pricing provisions that have "a potential

05-1584 8 impact on the correct duty" owed on an entry. United States v. Hitachi Am., Ltd., 964 F.

Supp. 344, 387 (Ct. Int'l Trade 1997) ("Hitachi I"). It also concluded, however, that it

could not penalize Hitachi for the violation "because the duty to report escalation

clauses on entry documents was rendered turbid" by the publication of conflicting

Customs Service guidance on the subject, which prevented importers from having

notice of the requirement. Id. In the absence of such notice, the trial court held, an

importer could not be penalized consistently with due process of law. Id. On appeal,

this court affirmed in part, reversed in part, and remanded. Hitachi II, 172 F.3d at 1338.

The parties disagree about the consequence of this court's ruling for the Court of

International Trade's analysis of § 1484: The government argues that our decision in

Hitachi II "expressly acknowledged that § 1484 includes the duty to disclose price

adjustment information that may be relevant to the final price." Ford submits that

Hitachi II upheld only the trial court's due process ruling, while "stressing that section

1484 itself contains no requirement to disclose that entered prices are subject to

change."

We conclude that Hitachi II neither affirmed nor reversed the trial court's

conclusion that § 1484 requires importers to disclose the existence of variable pricing

provisions relating to entries. Hitachi did not appeal that conclusion, and it was not

before this court.2 See Corrected Brief of Defendant/Cross Appellant Hitachi America,

Ltd., Hitachi II (Nos. 97-1431, -1437, -1452). Ford's position is based upon language in

2 In fact, it is not wholly clear that the trial court itself ever ruled on the liability question. Its opinion declares that "importers are required to disclose escalation clauses in entry documents," but makes no explicit finding either that Hitachi violated that requirement or that it did so negligently. See Hitachi I, 964 F. Supp. at 388.

05-1584 9 Hitachi II that, read in isolation, can be construed to question the viability of the trial

court's ruling:

[I]t is not clear under section 1484 whether an [escalation] clause, which represents payments that are not definitively known at the time of importation, must be referred to at that time in order to disclose the price accurately. After all, the statute never even mentions escalation clauses or what should be done about payments that cannot be precisely known at the time of importation.

Hitachi II, 172 F.3d at 1331. That language, however, occurs in the court's discussion

of the due process issue—not the liability issue, which was not before us—and was

directed to the government's argument that "[t]he statute alone is sufficient to provide

notice to an importer that it must declare millions of dollars of escalation payments,"

such that penalizing Hitachi would not violate due process. Brief of Plaintiff-Appellant

United States at 43, Hitachi II (Nos. 97-1431, -1437, -1452). This court's view that a

statute on its face does not provide notice of a legal obligation is not equivalent to a

decision that the statute imposes no obligation.

It appears, then, that this court has never ruled on the question presented by

Ford here: whether § 1484 imposes upon importers an obligation to disclose the

existence of variable pricing agreements relating to entries. We conclude that the

statute requires that importers disclose not only the "declared value" of entered

merchandise but also "such other information as is necessary to enable the Customs

Service to . . . properly assess duties on the merchandise." 19 U.S.C. § 1484(a)(1)(B).

The duties owed on merchandise are in part a function of the value of that merchandise.

The proper assessment of duties, therefore, depends on the proper assessment of

merchandise's final entry value. A declared value that is non-final is one upon which

Customs cannot "properly assess duties." The existence of a contract provision

05-1584 10 rendering the declared value non-final, therefore, constitutes "information . . . necessary

to enable" Customs to assess such duties and thus must be disclosed by the importer

under § 1484.

Nevertheless, we also conclude—as we did in Hitachi II—that the Fifth

Amendment's due process clause precludes penalizing Ford for violating this

requirement. At the time of the entries at issue here, Ford was subject to the same

statutory and regulatory scheme that faced Hitachi.3 The government admits that, as of

2005, "Customs has not promulgated a regulation specifically addressing anticipated

price changes," and although it asserts that Customs "has always required that such

information be disclosed on entry records," it cites no evidence for that assertion. As

was true in Hitachi, the government introduced no evidence suggesting that the duty to

disclose was well known in the trade or that "actual Customs practice required

disclosure." Hitachi I, 964 F. Supp. at 361. The Court of International Trade, in ruling

that the due process clause did not preclude penalizing Ford, offered only the

conclusory statement that "Ford has failed to establish that its duties were nebulous in

the present case." Negligence Decision, 395 F. Supp. 2d at 1212. Neither the Court of

International Trade nor the government has offered any substantive basis for

distinguishing Ford's circumstances vis-a-vis notice from Hitachi's. To the extent that

the trial court’s decision rested on the notion that Ford’s internal compliance program—

3 Ford claims, falsely, that its entries "were made during the same timeframe as the Hitachi entries." In fact, the entries at issue in Hitachi occurred from June of 1984 through June of 1988. See Hitachi I, 964 F. Supp. at 376. The Ford entries at issue occurred from January of 1987 through December of 1992. Negligence Decision, 395 F. Supp. 2d at 1193. The government has not identified any relevant changes in the statutory or regulatory scheme from 1988 to 1992 that would require a different analysis.

05-1584 11 which appears to have required disclosure of provisional pricing at entry—constituted

evidence that Ford had actual knowledge that provisional pricing must be disclosed, we

disagree. To hold otherwise—at least in the absence of other evidence of actual

knowledge—would effectively require the courts to punish companies for establishing

internal procedures that are more robust than the law requires. If the existence of a

particular internal procedure creates an inference that the defendant knew the

procedure to be required by law, companies will have a strong disincentive to adopt

internal compliance procedures. In the circumstances presented here, there is no basis

for creating such a rule.

Our decision in Hitachi II governs our decision here, and due process

considerations preclude the imposition of penalties on Ford for violation of the duty to

disclose provisional pricing under § 1484.

II. 19 U.S.C. § 1485

The trial court ruled that Customs established, by a preponderance of the

evidence, that Ford had "made assists between 1987 through 1992, which it failed to

declare on its entry documents or 'at once' thereafter," and that the failure was

negligent. Negligence Decision, 395 F. Supp. 2d at 1208. It also ruled that Ford failed

to comply with the "at once" requirement with respect to lump-sum direct payments, or,

more precisely, with the filing requirements set forth in the Reconciliation Agreement

that modified its obligations under 19 U.S.C. § 1485. Id. at 1213-15. Ford challenges

both of these rulings, arguing that (a) the Reconciliation Agreement applies to both

assists and direct payments, and (b) it complied with the terms of the Reconciliation

05-1584 12 Agreement, which, it claims, specified the 60-day filing period as a "target," rather than

a deadline.

A. Assists

The Court of International Trade found that Ford violated § 1485 because it

"failed to 'at once' notify Customs that the entry values" relating to certain entries were

inaccurate because of "tooling assists provided for certain vehicles and vehicle

components," and that its failure was negligent. Id. at 1209-10. The trial court made no

express ruling that the Reconciliation Agreement did not apply to assists, but its

discussion of the issue implies that conclusion. Ford, in its initial brief, makes no

argument relating directly to the question of reporting the assists under § 1485. In its

reply brief, however, it argues that the Reconciliation Agreement did apply to assists,

and that its claimed compliance with the Reconciliation Agreement therefore constituted

compliance with § 1485 for assists as well as for direct payments.

Arguments raised for the first time in a reply brief are not properly before this

court. See, e.g., Novosteel SA v. United States, 284 F.3d 1261, 1274 (Fed. Cir. 2002)

("a party waives arguments based on what [does not] appear[] in its brief"); see also

United States v. Nealy, 232 F.3d 825, 830-31 (11th Cir. 2000) (stating the same

proposition and citing numerous cases). Ford therefore waived this argument by failing

to raise it in its opening brief. Ford's opening brief contains no argument asserting that

the Reconciliation Agreement is relevant to its compliance with § 1485. In fact, it is

devoid of any argument relating to the application of § 1485 to assists, except for its

contention that there was a complete failure of proof on that issue. Even its reply brief

raises the issue in cursory fashion, limiting its discussion to a single three-sentence

05-1584 13 footnote. It is unfair to consider an argument to which the government has been given

no opportunity to respond. We therefore affirm the trial court's conclusion that Ford's

failure to report assists "at once" negligently violated § 1485.

B. Direct Payments

Ford argues, and the trial court agreed, that an importer is not in violation of

§ 1485 if arrangements have been made with Customs to report changes in declared

entry values, and that the Reconciliation Agreement constituted such an arrangement.

Negligence Decision, 395 F. Supp. 2d at 1213. The trial court further concluded,

however, that Ford failed to comply with the terms of the Reconciliation Agreement, thus

effectively violating § 1485 itself. Id. On appeal, Ford challenges that conclusion.

The Reconciliation Agreement consists of two documents: a proposal letter sent

to Customs by Ford on October 14, 1988, and a response letter from Customs dated on

or about August 29, 1989. The Ford letter described a "lump sum billing proposal"

(modifying a previous agreement) in which Ford offered to "track all lump sum billings

throughout each model year . . . and report the dutiable expenses associated with each

import program." Under the proposal, "An annual reconciliation report will be prepared

for each import program and filed with the Detroit customs district within 60 days after

the close of each model year (July 30) to enable us to follow up and capture all relevant

model year expenses." (emphasis original). Customs' response letter stated that

Customs approved the proposal "with two modifications," one of which stated that "[t]his

policy applies to withheld duties on entry summaries which have been liquidated."

The Court of International Trade concluded that "[u]nder the plain language of the

Reconciliation Agreement, Ford was required to submit [reports of lump sum payments]

05-1584 14 within 60 days after the close of each model year," and that "Ford did not rebut with

credible evidence the specific language of the agreement which set the 60-day time-

frame as a fixed deadline." Negligence Decision, 395 F. Supp. 2d at 1213. Finding the

testimony of Ford's witnesses on this point "incredible" based upon their demeanor, and

further finding that with a single exception "Ford failed to submit its reconciliation reports

to Customs within the 60-day deadline," the court concluded that Ford had violated

§ 1485. Id. at 1214.

On appeal, Ford raises three arguments. It asserts, first, that Customs' response

letter implicitly eliminated the 60-day deadline in favor of a simple reasonableness

standard; second, that "[n]o one from Ford or Customs ever took the position that a

strict 60-day deadline applied to Ford's reconciliation obligations"; and third, that the

parties' course of practice establishes that Customs never treated the 60-day period as

a firm deadline.

First, Ford argues that Customs modified the agreement to eliminate the 60-day

requirement. It bases this argument on the fact that its initial proposal, which included

the 60-day requirement, applied to both liquidated and unliquidated entries. Customs'

modification of the proposal to apply only to liquidated entries, Ford maintains, is

incompatible with the existence of such a deadline, because regulations provided that

Customs had up to four years to liquidate entries, and Customs at that time was running

a 90-day liquidation cycle. In light of that evidence, Ford reasons, a 60-day reporting

deadline is nonsensical, because very few if any entries from the relevant model year

will have been liquidated within the 60 days.

05-1584 15 We disagree. First, we note that there is no discussion of this argument in the

trial court's decision, and it is not clear that it was raised at trial. If it was not raised at

trial, it is waived. In addition, it is not clear that—contrary to Ford's argument—Ford's

original proposal was intended to apply to both liquidated and unliquidated entries. The

letter makes no explicit statement to that effect, and Customs' response—"This policy

applies to withheld duties on entry summaries which have been liquidated"—does not

unambiguously demonstrate that Ford's proposal would have applied to unliquidated

entries. If, in fact, Ford's initial proposal was itself intended to be limited to "withheld

duties on entry summaries which have been liquidated," Ford's argument about the

consequence of Customs' modification loses force.

In any case, we find Ford's argument unpersuasive. Customs' letter makes no

reference to the 60-day deadline, and Ford's argument of repeal-by-implication is, at

best, strained. Ford's argument rests heavily on the implication that the parties knew

that Customs was then running a 90-day liquidation cycle, and that they therefore

understood that Customs' modification necessarily eliminated the 60-day deadline. That

implication, however, conflicts with the testimony of Ford employee P.B. Kruzich, who

proposed the 60-day deadline, and who testified that it was just a "target," but one that

he "thought . . . was reasonable at the time." If, in fact, Ford was aware that the

liquidation cycle took 90 days, and if Ford intended its proposal to apply to both

liquidated and unliquidated entries, it seems unlikely that it would have proposed—and

underlined for emphasis—a 60-day "target" for filing its reconciliations.

Finally, Ford's primary evidence for its position is the testimony of former

Customs officer and later Ford employee Manns—testimony that the trial court found to

05-1584 16 be "incredible" for demeanor-related reasons, a credibility determination that this court

will not second-guess. Negligence Decision, 395 F. Supp. 2d at 1213-14.

Ford's second and third arguments present a more difficult question. Ford points

to considerable evidence in the record suggesting that, although Ford consistently failed

to file its reconciliation reports within the 60-day time-frame, "Customs never

complained that any of Ford's numerous reconciliation submissions filed after the

supposed 60-day deadline were 'late.'" Indeed, the trial court accepted this as fact.

See id. at 1197. Nevertheless, the parties' course of performance is insufficient either to

read out the 60-day deadline from the Reconciliation Agreement or to estop the

government from enforcing that deadline. Course of performance evidence in most

circumstances is relevant to interpretation of an instrument only if the terms of that

instrument are ambiguous. See, e.g., Barron Bancshares, Inc. v. United States, 366

F.3d 1360, 1375-76 (Fed. Cir. 2004) (noting that evidence of course of dealing is parol

evidence, and therefore inadmissible in the absence of contractual ambiguity); see also

Restatement (Second) of Contracts § 203(b) (1981) (stating that "express terms are

given greater weight than course of performance"). The Court of International Trade

held that the Reconciliation Agreement was not ambiguous on this issue, and we agree.

We will not address whether they may be a circumstance in which course of

performance may override an unambiguous term in the contract. See Cruz-Martinez v.

Dep't of Homeland Sec., 410 F.3d 1366, 1371 (Fed. Cir. 2005). We are satisfied that no

such circumstance exists here.

As for estoppel, the government correctly points out that estoppel is available

against government actors only in cases involving "affirmative misconduct." Rumsfeld

05-1584 17 v. United Techs. Corp., 315 F.3d 1361, 1377 (Fed. Cir. 2003); Henry v. United States,

870 F.2d 634, 637 (Fed. Cir. 1987). Ford has not alleged any affirmative misconduct

here, and indeed has not pled the elements of an equitable estoppel case at all.

Therefore, there is no basis on which estoppel might prevent the government from

enforcing § 1485 against Ford.

There remains the question of negligence. Statutory negligence under § 1592,

unlike common-law negligence, shifts the burden of persuasion to the defendant to

demonstrate lack of negligence. 19 U.S.C. § 1592(e)(4). That is, Customs has the

burden merely to show that a materially false statement or omission occurred; once it

has done so, the defendant must affirmatively demonstrate that it exercised reasonable

care under the circumstances. The trial court concluded that Ford failed to rebut the

prima facie case of negligence, although it did not explain in detail why. Negligence

Decision, 395 F. Supp. 2d at 1215. Ford argues that Customs’ consistent acceptance

of late filings suggests the reasonableness of Ford’s conduct. It also points to Customs’

new “Reconciliation Prototype” program, which allows importation up to 21 months after

entry to file reconciliations. Ford’s reliance on Customs’ pattern of accepting its late

filings is simply a reiteration of its estoppel argument, rejected above. The fact that

Customs today—fifteen years after the events in dispute here—may regard twenty-one

months to be a reasonable reconciliation period has little bearing on what constituted

reasonable care for Ford, which was subject to a requirement that it file its

reconciliations within 60 days.

We therefore affirm the trial court’s conclusion that Ford negligently violated

§ 1485.

05-1584 18 III. Prior Disclosures

Section 1592(c)(4) of title 19 provides a safe harbor for "prior disclosures"—

disclosing import law violations "before, or without knowledge of, the commencement of

a formal investigation" of the violation. Making such a prior disclosure limits the

available penalty to interest on the amount of duties, taxes, and fees of which the

government was deprived by the violation. 19 U.S.C. § 1592(c)(4)(B). A formal

investigation is considered to have commenced "with regard to the disclosing party and

the disclosed information on the date recorded in writing by the Customs Service as the

date on which facts and circumstances were discovered or information was received

which caused the Customs Service to believe that a possibility of a violation" existed.

19 U.S.C. § 1592(c)(4). The importer has the burden of proof in establishing lack of

knowledge of commencement of the investigation.

Ford claims that it made valid prior disclosures of "all of Ford's post-entry direct

payments to foreign vendors," because "direct payments were not part of Operation Hat

Trick." It points out that the report of investigation ("ROI") commencing the operation

stated that it was "a special operation targeted at undeclared assists and indirect

payments"; that internal Customs correspondence announcing the start of the

investigation described it as "targeted at undeclared assists and indirect payments"; that

Customs' initial notice of investigation to Ford referred only to "assists and indirect

payments"; that four of the five attendees at a meeting scheduled to clarify the meaning

of "indirect payments" testified that the parties left the meeting without a clearer

understanding of how the investigation used the term; and that the other witness's

contrary testimony is contradicted by the ROI he wrote to memorialize the meeting.

05-1584 19 The Court of International Trade, faced with these same arguments, concluded

that "Ford knew or should have known that the term 'indirect payment,' as used by

Customs in its notification to Ford of the investigation, included all payments that

impacted the final price paid for the merchandise in question," whether direct or indirect.

Negligence Decision, 395 F. Supp. 2d at 1216. In so concluding the court relied

primarily on testimony about a meeting that occurred on June 7, 1991, between

representatives of both Customs and Ford to clarify the scope of the term "indirect

payments" as used in the investigation. Gibson, a Ford witness, testified that at the

meeting, when asked to clarify their understanding of what "indirect payments" meant,

Customs employees Turner and Neckel provided Ford with a summons regarding

entries relating to the Mercury Capri and said "Here, this is what it means." Gibson also

stated that the Capri summons asked for records relating to "all payments," and that this

defined Customs' understanding of what "indirect payments" meant. Neckel testified

that at the meeting Customs "advised Ford that [the investigation] included the entire full

scope of their importations relative to certain vehicles and vehicle components."

Based on this evidence, one could reasonably conclude that, at the meeting,

Ford's representatives asked Customs to define the scope of payments included in the

category "indirect payments," and that Customs responded by indicating that the

payments referred to in the Capri summons—which, it is undisputed, sought information

with respect to "assists and payments," rather than to "indirect payments"—were the

kinds of payments at issue in the investigation. One could also reasonably conclude

that Ford's representative Gibson left the meeting with knowledge of Customs'

interpretation. Thus, the trial court's conclusion that after that meeting Ford "knew or

05-1584 20 should have known" that the investigation included all payments was not clearly

erroneous.

The question, then, is whether the scope of an investigation which, by its terms,

is limited to "assists and indirect payments," may be broadened by such informal

communications to include direct payments. Ford argues that it may not, because

under applicable regulations, "if Customs wished to expand the scope of its

investigation beyond the topics identified in the May 23, 1991 letter to Ford, it had to do

so expressly." It points to applicable regulations that, it claims, require that "in order to

commence a formal investigation, the circumstances and facts about a possible

violation had to be recorded in the investigatory record or the importer under

investigation had to be informed about the specific type or circumstances of the

suspected violation." The information provided to Ford, the company argues, "lacked

the level of specificity required by the regulations to put Ford on notice that Customs'

investigation also encompassed direct payments."

There is no question that, under the 1991 regulations, a formal investigation

relating to "assists and indirect payments" was commenced no later than May 23, 1991.

See 19 C.F.R. § 162.74(d) (1991). It also seems clear that, as of that date, Ford must

be presumed to have knowledge of that investigation. 19 C.F.R. § 162.74(f) (1991).

The question is thus whether the meeting of June 7, 1991, or other events served to

expand the scope of the investigation to include direct payments under 19 C.F.R. §

162.74(e), which in 1991 provided that:

A formal investigation is deemed to have commenced as to additional violations (outside the scope of the original investigation but committed by the same party) on the earliest of the following:

05-1584 21 (1) The date recorded in writing by the Office of Investigations in the investigatory record (including contemporaneous notes) as the date on which facts and circumstances were discovered or information was received which caused an investigating agent to believe that the possibility of a violation of 19 U.S.C. 1592 existed with respect to the additional violations; (2) The date on which an investigation agent, having property identified himself and the nature of his inquiry, had, either in person or in writing, made an inquiry of the person concerning the type of or circumstances of additional violations; or (3) The date on which an investigating agent, having properly identified himself and the nature of his inquiry, requested specific books and records of the person relating to the additional violations.

19 C.F.R. § 162.74(e) (1991).

The trial court performed no analysis under § 162.74(e) to determine whether an

enlargement had taken place, concluding instead that Ford had notice of the full scope

of the investigation when it received Customs' letter—referring only to "assists and

indirect payments"—on May 23, 1991. Negligence Decision, 395 F. Supp. 2d at 1216-

17. This was error. The trial court's own analysis states that Ford did not understand,

as of May 23, 1991, what "indirect payments" included, and came to that understanding

only after the meeting of June 7, 1991. Id. at 1216. We agree with Ford that the

evidence does not support a conclusion that, as of May 23, 1991, the investigation

applied to direct payments.

As we have discussed, however, the evidence does support the conclusion that

the June 7, 1991 meeting served to expand the scope of the investigation under

§ 162.74(e)(2) (1991), which states that the expanded investigation "commences" when

an investigating agent makes an inquiry of the importer "concerning the type of or

05-1584 22 circumstances of additional violations." The same meeting served to create a

presumption of Ford's knowledge of the investigation under § 162.74(f)(2) and 19

U.S.C. § 1592(c)(4). Ford has presented no evidence sufficient to rebut that

presumption. We conclude, therefore, that as of June 7, 1991, Customs' investigation

had been broadened to include not only assists and indirect payments but also direct

payments, and that Ford had knowledge of the broadened investigative scope. Any

violations disclosed after that date cannot constitute prior disclosures under

§ 1592(c)(4). We therefore affirm the Court of International Trade's conclusion that

none of the tenders cited by Ford constituted prior disclosures.

IV. Scope of Investigation

The trial court found as fact that "[i]mportations related to the 1992 model year

and thereafter were not within the scope of Customs' investigation." Negligence

Decision, 395 F. Supp. 2d at 1196. It based that finding entirely on the testimony of

Customs' own witness, Inspector Turner, who testified in his deposition that "[w]e told

Ford we were looking five years backward," and that importations occurring in 1992

"would be outside the scope" of the investigation. Id. He further testified at trial that the

investigation had to be "cut off" at some point because "the scope of the investigation

would only extend that far—we knew we couldn't extend the investigation forever."4

Despite that finding, in calculating Ford's penalty, the trial court appears to have

included tenders related to the 1992 and 1993 model years, including engines for the

1993 Taurus SHO (payment of $404,100); V-6 engines for the 1992 model year

4 Turner's trial testimony suggested that the cut-off could have been in 1992 or 1993, but he retreated from that position when presented with his deposition testimony, which stated that the investigation did not include importations occurring in 1992 or later.

05-1584 23 (payment of $695,874); and transmissions for the 1992 model year (payment of

$458,893). See id. at 1201-03. These tenders were outside the scope of the

investigation, Ford argues, and therefore should not have been included in the penalty.

Ford further alleges that the trial court included in its calculation of tenders for

which "it was unclear to which model year the tenders related." Several tenders

included within the calculations related to both in-scope model years and out-of-scope

model years. See, e.g., id. at 1200 ¶ 54 (tender relating to "undeclared engineering and

tooling cost prior to 1993 model"); id. at 1200 ¶ 61 (tender relating to lump-sum

payments "for the 1991 and 1992 model year Festiva"); id. at 1203 ¶ 80 (tender relating

to transmissions imported "for the 1989 through 1992 model year"); id. at 1201 ¶ 67

(tender relating to 1993 Taurus SHO engines); id. at 1197-98 (tenders relating to tooling

assists and payments for model years 1987-1992). Ford asserts that "Customs' failure

to prove the extent to which the duties at issue under these disclosures related to

matters within the scope of Customs' investigation means that these tenders must be

excluded from any penalty calculations."

The government contends that the trial court's finding 18—which states that

entries relating to the 1992 model year were outside the scope of the investigation—

was "taken out of context and pertained only to the scope of the investigation at its

inception in mid-1991." It offers no support for this assertion, however, save citation to

the very pages of the transcript relied upon by the trial court in rendering its fact-finding.

The government also asserts that various documents in the record

"demonstrate[] the [Customs] agents' understanding that the scope of the investigation

included model year 1992 vehicles and parts even if the entries relating to the

05-1584 24 merchandise post-dated the June [7, 1991] meeting." We reject this attempt to overturn

the trial court's fact-findings, which the government has not appealed. The trial court

found, as fact, that importations related to the 1992 model year "were not within the

scope of Customs' investigation." Negligence Decision, 395 F. Supp. 2d at 1196. That

finding appears in a section of the opinion titled "Findings of Fact Relevant to the

Commencement and Scope of Customs' Investigation." Id. at 1193. The statement's

context and plain meaning are both unmistakeable: the scope of the investigation did

not include entries relating to any model year after 1991. The Court of International

Trade therefore erred when it included tenders relating to model years 1992 and later in

its penalty calculations. The tenders relating to post-1991 model years in paragraphs

67, 75, and 79 of the trial court's opinion should have been excluded from those

calculations.

With respect to tenders involving multiple model years, the question is more

complicated. Ford asserts that Customs had the burden of proving the extent to which

those disclosures related to matters within the scope of the investigation; the

government argues that Ford's tenders failed to satisfy the specific requirements for

prior disclosures set forth in 19 C.F.R. § 162.71(e) and § 162.74, and therefore cannot

claim the prior disclosure safe harbor from violations of 19 U.S.C. § 1592.

We agree that whether Ford's tenders relating to multiple model years qualified

as prior disclosures is irrelevant to whether the trial court properly included those

tenders in its penalty calculations. To the extent that those tenders included amounts

relating to model years outside the scope of the investigation, no "violation" was ever

alleged or proved with respect to them, and they have no need of the prior disclosure

05-1584 25 safe harbor. The appropriate remedy for this error is to remand the case to the Court of

International Trade for additional fact-finding as to which portion of the multi-year

tenders related to model years within the scope of the investigation.

V. Dutiability of Shortfall Payments

In 1988, Ford entered into a contract with Mazda Motor Corporation for the

purchase by Ford of Festiva cars for importation into the United States. Negligence

Decision, 395 F. Supp. 2d at 1217. That contract provided that Ford was committed to

purchasing 85,000 cars each year (the "Annual Volume Commitment"). The contract

also included a section 2.3, "Volume Price Adjustment," which stated that so long as the

Annual Volume Commitment remained unchanged, the purchase price for those cars

would be determined by a formula based on the percentage of the commitment total for

which Ford actually placed orders in a given year. The Volume Price Adjustment

section provided for different pricing if Ford ordered (A) more than 50%, but less than

90%, of the annual commitment; (B) less than 50% of the annual commitment; and (C)

more than 110% of the annual commitment. The contract also included an entirely

separate section 3, "Prices," which set forth "[t]he initial purchase price for each model

of Ford Vehicles" and a method for making annual adjustments to that price for new

model years. It appears that the formulas for Volume Price Adjustments in section 2.3

represent a function, in part, of the initial prices set in section 3.3.

Ford reported several direct payments resulting from Festiva orders of less than

85,000 units for the 1990, 1991, and 1992 model years. Id. at 1200 ¶¶ 55, 61. The

Court of International Trade concluded that "the lump sum payments made by Ford

pursuant to the Festiva Agreement are dutiable," reasoning that the payments "did not

05-1584 26 constitute a penalty," but "were related to the price actually paid or payable and,

therefore, were dutiable." Id. at 1219. It relied, in particular, on its conclusion that

"Ford's payments under the Festiva Agreement were not triggered by or based on a

purchase commitment or quota. Rather, the purchase price or transaction value of each

vehicle was adjusted depending on changing market conditions." Id. at 1218-19.

Therefore, the trial court included tenders relating to the Festiva contract in its penalty

calculations.

On appeal, Ford relies on the Court of International Trade's decision in Chrysler

Corp. v. United States, 17 C.I.T. 1049, 1053-55 (1993), in which that court concluded

that fees paid by the importer for its failure to purchase a minimum number of car

engines were not dutiable, because "[a]n expense arising from the failure to purchase

certain merchandise is not a component of the price paid for the acquisition of other

products," but is "a form of liquidated damages." The same reasoning, Ford asserts, is

applicable here: "Ford incurred expenses stemming from its failure to purchase enough

Festivas to fulfill its volume commitments. Under Chrysler, these fees simply cannot be

included as a component of the price paid for the Festivas that Ford did purchase."

The government counters, and the trial court ruled, that because the Volume

Price Adjustment is structured to "penalize" Ford for purchasing less than its

commitment not by imposing a direct penalty but by increasing the price of each car that

Ford does purchase, the holding in Chrysler does not apply.

It is clear on the face of the contract that the price actually payable for Festiva

vehicles is a function, in part, of the number of such vehicles purchased by Ford in a

given model year. As the number of vehicles purchased rises, the price per vehicle

05-1584 27 drops. Payments made pursuant to the shortfall provision, therefore, are part of the true

economic cost to Ford of purchasing the vehicles, and are thus part of the "total

payment . . . made, or to be made, for imported merchandise" for purposes of

§ 1401a(b)(4)(A). The payments made by Ford pursuant to the shortfall provision were

dutiable under 19 U.S.C. § 1401a(b)(1) as part of the price "actually paid or payable" for

the cars.

This conclusion is supported by our precedent, which has emphasized that the

price "paid or payable" for imported merchandise includes all payments "made to the

seller in exchange for merchandise sold for export to the United States," even where

such payments "represent[ ] something other than the per se value of the goods."

Generra Sportswear Co. v. United States, 905 F.2d 377, 380 (Fed. Cir. 1990). The key

inquiry in determining whether a particular payment should be included in transaction

value is "the actual transaction between the buyer and the seller; if [the payments] were

transferred by the buyer to the seller, they are part of transaction value." Id.; see also

Luigi Bormioli Corp., Inc. v. United States, 304 F.3d 1362, 1367 (Fed. Cir. 2002) (citing

Generra Sportswear and noting that the "price actually paid or payable" should be

construed broadly). Our conclusion is also supported by section (b)(4)(B) of the statute,

which provides that "[a]ny rebate of, or other decrease in, the price actually paid or

payable that is made or otherwise effected between the buyer and seller after the date

of the importation of the merchandise into the United States shall be disregard in

determining the transaction value" of the merchandise. 19 U.S.C. § 1401a(b)(4)(B).

The statute's exclusion from transaction value post-importation decreases in the price

paid or payable suggests, by negative implication, that post-importation increases in the

05-1584 28 price paid or payable are presumptively includible in transaction value. Cf. Century

Imps., Inc. v. United States, 205 F.3d 1308, 1311-12 (Fed. Cir. 2000) (excluding from

transaction value post-importation reimbursements that decreased the actual price paid,

pursuant to § 1401a(b)(4)(B)).

Here, the disputed payments reflect the true economic cost of the merchandise

sold to Ford, and are therefore dutiable as part of the "actual transaction between the

buyer and the seller." Generra Sportswear, 905 F.2d at 380. The Court of International

Trade properly included the unpaid duties on such payments in calculating the penalty.

VI. Amount of Penalty

The Court of International Trade imposed the maximum penalty permitted by the

applicable statute—double the revenue lost to the government, for a total of

$17,151,923.60. Negligence Decision, 395 F. Supp. 2d at 1222; see 19 U.S.C.

§ 1592(c)(3). On appeal, Ford claims that the trial court’s action constituted "clear

error," both because it was not consistent with the court’s own findings of fact and

because the trial court failed to properly consider mitigating factors.

Ford’s allegation with regard to abuse of discretion is without merit. A trial court

has considerable discretion to award civil penalties within the statutory range. See

United States v. Valley Steel Prods. Co., 729 F. Supp. 1356, 1359 (Ct. Int'l Trade 1990).

We may overturn the trial court's determination only if it represents an abuse of

discretion, that is, if its decision was "clearly unreasonable, arbitrary, or fanciful," "based

upon an erroneous construction of the law," based upon fact findings that are "clearly

erroneous," or if the record contains no evidence upon which the trial court could have

rationally based its decision. Hughes Commc'ns Galaxy, Inc. v. United States, 271 F.3d

05-1584 29 1060, 1065-66 (Fed. Cir. 2001). Ford has identified no basis for a conclusion that the

trial court abused its discretion in awarding the maximum penalty.

With regard to mitigation, Ford asserts that the trial court failed to consider the

fourteen factors to be weighed in determining whether mitigation is warranted under the

Court of International Trade's decision in United States v. Complex Machine Works Co.,

83 F. Supp. 2d 1307 (Ct. Int’l Trade 1999). It points in particular to three factors: Ford's

"good faith efforts to comply with customs statutes and regulations," its history of

previous violations, and the relatively small benefit derived by Ford from the violations

relative to its total import volume.

Ford’s argument is without merit. The Complex Machine Works decision lists

fourteen non-exclusive factors that a trial court may consider relevant to mitigation. On

appeal, Ford makes specific reference to only three such factors that, it argues, run in

its favor. We cannot imagine a case in which the defendant could not find refuge in at

least one potentially mitigating factor. Ford’s position seems to be that if it can

demonstrate the applicability of any potentially mitigating factor, the trial court is

precluded from imposing a maximum penalty. We find no basis for that conclusion in

Complex Machine Works, the applicable statute, or our own precedent. Cf. Law v. U.S.

Postal Serv., 852 F.2d 1278, 1280 (Fed. Cir. 1988) (sustaining maximum penalty of

removal from employment despite existence of mitigating factors). We therefore

conclude that the trial court’s decision to impose the maximum penalty was within its

discretion.

We agree, however, that in adding up the lost revenues used to calculate that

penalty the trial court made several significant errors. Based on the record before us, it

05-1584 30 appears that the trial court incorrectly or inadvertently included in its damages

calculations tenders that did not violate § 1592. Specifically, the lump-sum payment

relating to the 1991 Capri reported on August 26, 1991, appears to have been disclosed

to Customs within the period allowed by the Reconciliation Agreement, and therefore

did not violate § 1485. Negligence Decision, 395 F. Supp. 2d at 1199 ¶ 50. The same

appears to be true for the payment relating to the 1993 Taurus SHO reported on

November 18, 1992. Id. at 1201 ¶ 70. The government does not dispute this. There

appears to be no basis, therefore, for the inclusion of these tenders in the penalty

determination.

In addition, as discussed in part IV above, the trial court appears to have

included in its calculations tenders that occurred outside the scope of the

investigation—specifically, tenders relating to model years 1992 and 1993. Those

tenders should have been excluded from the penalty calculation.

Finally, the penalty must be recalculated to reflect the absence of § 1484 liability

and any other adjustments required by parts I through VI of this opinion.

CONCLUSION

The trial court's judgment is hereby affirmed in part, reversed in part, and

remanded to the Court of International Trade for further consideration in light of this

opinion.

AFFIRMED-IN-PART, REVERSED-IN-PART and REMANDED.

No costs.

05-1584 31