Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca13-15-01166/USCOURTS-ca13-15-01166-0/pdf.json

Parties Involved:
Nitek Electronics, Inc.
Appellee
United States
Appellant

Document Text:

United States Court of Appeals 

for the Federal Circuit ______________________ 

UNITED STATES,

Plaintiff-Appellant

v.

NITEK ELECTRONICS, INC.,

Defendant-Appellee

______________________ 

2015-1166

______________________ 

Appeal from the United States Court of International 

Trade in No. 1:11-cv-00078-JMB, Senior Judge Judith M. 

Barzilay.

______________________ 

Decided: December 1, 2015

______________________ 

 STEPHEN CARL TOSINI, Commercial Litigation Branch, 

Civil Division, United States Department of Justice, 

Washington, DC, argued for appellant. Also represented 

by JEANNE E. DAVIDSON, PATRICIA M. MCCARTHY,

BENJAMIN C. MIZER; ERIC PAUL DELMAR, Office of the 

Assistant Chief Counsel, United States Customs and 

Border Protection, El Paso, TX.

 ROBERT CLIFTON BURNS, Bryan Cave LLP, Washington, DC, argued for appellee. Also represented by 

MICHAEL ZARA, Santa Monica, CA.

______________________ 

Case: 15-1166 Document: 43-2 Page: 1 Filed: 12/01/2015
2 US v. NITEK ELECTRONICS, INC. 

Before NEWMAN, CLEVENGER, and O’MALLEY, Circuit 

Judges.

CLEVENGER, Circuit Judge. 

The United States appeals from a decision of the 

United States Court of International Trade dismissing the 

Government’s penalty claim based on negligence for 

failure to exhaust the administrative remedies under 19 

U.S.C. § 1592. United States v. Nitek Elecs., Inc., 844 F. 

Supp. 2d 1298 (Ct. Int’l Trade 2012), recons. denied, 2012 

WL 3195084 (Ct. Int’l Trade Aug. 7, 2012). Specifically, 

the Government argues that it should not be barred from 

seeking a penalty claim in court at a culpability level that 

is lower than that administratively asserted by U.S. 

Customs and Border Protection (“Customs”). Because the 

statutory framework of § 1592 does not allow the Government to change the culpability level that Customs 

alleged in the penalty claim, we affirm. 

BACKGROUND

Between June 14, 2001 and March 22, 2004, Nitek 

Electronics, Inc. (“Nitek”) entered thirty-six shipments of 

pipe fitting components used for gas meters, which included gas meter swivels and gas meter nuts, into the 

United States from China. Customs issued a letter to 

Nitek on April 1, 2004, claiming that the merchandise 

was misclassified under the U.S. Harmonized Tariff 

Schedule (“HTSUS”). Accordingly, Customs demanded 

payment for lost duties under 19 U.S.C. § 1592(d) that 

resulted from the alleged misclassification. Customs 

further alleged that the misclassification was also subject 

to antidumping duties. On March 21, 2005, Customs 

issued a pre-penalty notice to Nitek alleging that Nitek 

“entered or attempted to enter pipe fittings into the 

commerce of the United States by means of material false 

statements and documents, and/or omissions.” The notice 

stated that the tentative culpability was gross negligence. 

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US v. NITEK ELECTRONICS, INC. 3

Concurrently, other importers of gas meter swivels 

and gas meter nuts challenged the antidumping duty 

order in the Court of International Trade. See Sango Int’l 

L.P. v. United States, 429 F. Supp. 2d 1356 (Ct. Int’l 

Trade 2006). Customs agreed to stay the penalty proceedings pending resolution of Sango International’s challenge

in exchange for Nitek subsequently waiving the statute of 

limitations. This Court later issued a final decision in 

Sango International on June 4, 2009, which sustained the 

anti-dumping duty order. Sango Int’l L.P. v. United 

States, 567 F.3d 1356 (Fed. Cir. 2009). 

On February 24, 2011, Customs issued Nitek a final 

penalty claim and again stated that the tentative culpability was gross negligence. Nitek responded by letter 

opposing the penalty claim for gross negligence stating 

that it had not acted with wanton disregard for the law 

when dealing with the classification issues. Nitek also 

offered to pay all duties owed. Customs then referred the 

matter to the United States Department of Justice 

(“United States” or “Government”) to bring a claim 

against Nitek in the Court of International Trade to 

enforce the penalty under its jurisdiction in 28 U.S.C. 

§ 1582. The United States then brought suit against Nitek 

to recover lost duties, antidumping duties, and a penalty 

based on negligence under 19 U.S.C. § 1592 in connection 

with the Nitek’s misclassification of gas meter parts. 

Nitek filed a motion to dismiss the case under two 

theories. First, Nitek moved to dismiss for lack of subject 

matter jurisdiction under USCIT Rule 12(b)(1) because 

the Government failed to exhaust all administrative 

remedies before filing suit in the Court of International 

Trade. The court denied dismissal on this ground because 

it found that exhaustion was not a jurisdictional matter 

and can be waived. Alternatively, Nitek moved to dismiss 

for failure to state a claim for which relief may be granted 

under USCIT Rule 12(b)(5) (now 12(b)(6)). The court 

denied dismissal of the claims to recover lost duties and 

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4 US v. NITEK ELECTRONICS, INC. 

antidumping duties. However, the court did dismiss the 

Government’s claim for a penalty based on negligence. 

The court reasoned that since Customs had only issued a 

penalty based on gross negligence, the Government could 

not bring a penalty claim in court based on negligence. 

The negligence claim was “an entirely new claim” that 

had not been pursued by Customs at the administrative 

level. Thus, the court found that the penalty claim was 

not properly before the court because the Government had 

failed to exhaust all administrative remedies by not 

having Customs demand a penalty based on negligence, 

instead of gross negligence. 

The Government then moved for reconsideration, but 

the court reaffirmed its reading of the statute and denied 

reconsideration. The court explained that “for the Court to 

have any role, there must exist a claim for a specified 

violation of § 1592(a)—namely, a material false statement 

or omission amounting to ‘fraud, gross negligence, or 

negligence’—for which the government is seeking recovery, thereby limiting the scope of the government’s § 1592 

action to the administrative claim Customs imposed 

below.” 

On September 23, 2014, the parties stipulated that 

the United States is entitled to recover $47,884.27 from 

Nitek for the lost duties and antidumping duties. The 

parties also stipulated that they could not appeal their 

agreement on these counts. Accordingly, the court ordered 

a final judgment on October 1, 2014, for the United States 

for the above amount. 

The United States then timely appealed the dismissal 

of the penalty claim based on negligence to this Court. We 

have jurisdiction pursuant to 28 U.S.C. § 1295(a)(5).

DISCUSSION

We review the Court of International Trade’s legal determinations de novo, including the court’s dismissal for 

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US v. NITEK ELECTRONICS, INC. 5

failure to state a claim for which relief can be granted. 

Bell/Heery v. United States, 739 F.3d 1324, 1330 (Fed. 

Cir. 2014). “To survive a motion to dismiss, a complaint 

must contain sufficient factual matter, accepted as true, 

to ‘state a claim to relief that is plausible on its face.’” 

Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell 

Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). The 

trade court’s finding on exhaustion of administrative

remedies is reviewed for abuse of discretion. Itochu Bldg. 

Prods. v. United States, 733 F.3d 1140, 1145 (Fed. Cir. 

2013) (reviewing the district court’s dismissal for failure 

to exhaust for abuse of discretion); Corus Staal BV v. 

United States, 502 F.3d 1370, 1381 (Fed. Cir. 2007) (reviewing the trade court’s finding of no exhaustion of 

administrative remedies for abuse of discretion).

The issue in this case is whether the court properly 

dismissed the Government’s penalty claim for failure to 

state a claim because the underlying administrative 

penalty was based on gross negligence, not negligence. 

This requires a close examination of the statutory scheme 

in 19 U.S.C. § 1592, which governs this penalty claim. 

First, § 1592(a) states that no one may enter merchandise into the United States by presenting material 

and false information by means of fraud, gross negligence, 

or negligence. 19 U.S.C. § 1592(a)(1). If Customs believes 

that there has been a violation of subsection (a), § 1592(b) 

provides that Customs must first issue a pre-penalty 

notice to the importer. The pre-penalty notice must “specify all laws and regulations allegedly violated” and “state 

whether the alleged violation occurred as a result of 

fraud, gross negligence, or negligence.” § 1592(b)(1)(A)(iii), 

(v). Customs must also inform the accused importer “that 

he shall have a reasonable opportunity to make representations, both oral and written, as to why a claim for a 

monetary penalty should not be issued in the amount 

stated.” § 1592(b)(1)(A)(vii). Next, if Customs determines 

that there was a violation after considering any represenCase: 15-1166 Document: 43-2 Page: 5 Filed: 12/01/2015
6 US v. NITEK ELECTRONICS, INC. 

tations made by the accused importer, Customs must 

issue a written penalty claim under § 1592(b)(2). The 

penalty claim must specify any changes in the information provided in the pre-penalty notice, including the 

level of culpability that was initially stated. The importer 

may then follow the procedures under 19 U.S.C. § 1618 to 

seek remission or mitigation of the penalty. At the conclusion of any such proceedings, Customs “shall provide to 

the person concerned a written statement which sets forth 

the final determination and the findings of fact and 

conclusions of law on which such determination is based.” 

§ 1592(b)(2).

Under § 1592(e), the United States can bring a claim 

in the Court of International Trade “for the recovery of 

any monetary penalty claimed under this section.” The 

statute also states that “all issues, including the amount 

of the penalty, shall be tried de novo,” § 1592(e)(1), and 

sets out the burden of proof for each culpability level. For 

fraud, the United States has to prove the violation by 

clear and convincing evidence. § 1592(e)(2). For gross 

negligence, the United States has the burden to prove the 

elements of the violation. § 1592(e)(3). For negligence, the 

United States has the burden to prove the act or omission 

that caused the violation and the alleged violator has the 

burden to prove that their actions were not negligent. 

§ 1592(e)(4). 

From the statutory framework, it is clear that 

§ 1592(e) creates a cause of action for the United States to 

recover penalty claims. Subsection 1592(b) states the 

procedures that Customs must follow when making

penalty claims, including specifying the level of culpability (fraud, gross negligence, or negligence). In contrast, 

§ 1592(e) merely gives the United States the authority to 

recover the penalty if the importer does not pay. 

The Government argues that the three levels of culpability are “varying degrees of the falsity of the stateCase: 15-1166 Document: 43-2 Page: 6 Filed: 12/01/2015
US v. NITEK ELECTRONICS, INC. 7

ment or omission underlying a violation,” not separate 

claims. Appellant’s Br. 12. The Government contends that 

the purpose of § 1592 is for Customs to identify the maximum penalty amount that can be collected for a violation. 

Under this theory, the Government believes that § 1592(e) 

allows the court to review the penalty determination de 

novo, meaning that the Department of Justice can independently assess the penalty claim issued by Customs 

and assert a penalty claim at a different culpability level. 

We do not agree. 

The language of the statute and the legislative history 

support a reading that penalty claims based on fraud, 

gross negligence, or negligence are separate claims and 

the Department of Justice cannot independently enforce a 

penalty claim in court for a culpability level that was not 

pursued administratively by Customs. The structure of 

§ 1592 indicates that the proceedings in Customs are 

separate from the proceedings in the Court of International Trade and the rules of one do not apply to the rules 

of the other. Subsection 1592(b) details the procedures for 

Customs whereas § 1592(e) addresses the court proceedings. Subsection (b) enables Customs to determine the 

level of culpability and requires Customs to inform the 

importer if the culpability level changes throughout the 

administrative process. This indicates that notice of a 

penalty claim based on a specific culpability level does not 

put the importer on notice of claims based on the other 

culpability levels because Customs must inform the 

importer if the culpability changes. This means that each 

culpability level is a separate claim and Customs chooses 

which culpability level or levels to assert against the 

importer. Subsection 1592(e) states that the Government 

can initiate an action in court “for the recovery of any 

monetary penalty claimed under this section” and that all 

issues will be tried de novo. This language specifies that 

the court proceeding is an enforcement mechanism to be 

used if the importer does not pay the penalty. Read toCase: 15-1166 Document: 43-2 Page: 7 Filed: 12/01/2015
8 US v. NITEK ELECTRONICS, INC. 

gether, the recovery language and the de novo review 

mean that that the court can consider all issues de novo

that are alleged in Customs’ final penalty claim. Specifically, this means that if Customs determines that the 

importer violated the statute based on negligence, the 

court does not need to give any deference to Customs’ 

finding that the importer was negligent. However, the de 

novo review does not give the Government power to 

independently bring a claim that Customs did not allege. 

There is no indication in the plain meaning of subsection 

(e) that the Government may bring a claim based on a 

different culpability level. 

The legislative history of § 1592 states that one objective of the de novo standard was to relate the amount of 

penalty to the culpability level and ensure due process for 

the importer. S. REP. NO. 95-778, at *1 (1978). To ensure 

fairness to the importer, Congress added the procedures 

for Customs under § 1592(b). The changes also enabled 

the court to review the amount of the asserted penalty, 

which the prior version of § 1592 did not allow. The main 

focus in the legislative history is that it is appropriate for 

the court to review the amount of penalty. S. REP. NO. 95-

778, at *20 (“If an importer refuses to pay a [§ 1592] 

monetary penalty and is sued by the United States in a 

district court, all issues, including the appropriateness of 

the penalty amount, would be considered by the court.”); 

id. at *21 (“[T]he Committee emphasizes that the appropriateness of the amount of the penalty is a proper subject 

for judicial review.”) However, the legislative history 

nowhere suggests that the Department of Justice should 

determine the level of culpability. It leaves this determination in the hands of Customs.

As we stated in United States v. Ford Motor Co., 463 

F.3d 1286 (Fed. Cir. 2006), the Court of International 

Trade has correctly defined the proper scope of the de 

novo review provided for in § 1592(e). In Ford, we reviewed that court’s analysis in United States v. Optrex, 29 

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US v. NITEK ELECTRONICS, INC. 9

C.I.T. 1494 (Ct. Int’l Trade 2005), which concluded that 

“the de novo standard [in § 1592(e)] refers to the issues in 

the context of a specific claim based on one of three types 

of section 1592 violations and does not allow the court to 

review entirely new penalty claims.” Ford, 463 F.3d at 

1298 (quoting Optrex, 29 C.I.T. at 1500). In Optrex, the

Government moved to amend its complaint for the penalty claim to allege higher levels of culpability than Customs originally alleged in the administrative proceedings. 

Optrex, 29 C.I.T. at 1495–96. The Government argued 

that “as long as the United States commences a section 

1592 action,” the de novo review of § 1592(e) puts “no 

limitation upon the ‘issues’ addressed or the ‘amount of 

the penalty.’” Id. at 1499. The court denied the motion to 

amend, finding that the de novo review was limited to 

reviewing penalty claims for culpability levels that Customs had asserted. Id. at 1500. The court reasoned that 

the basic purpose of the statute is “to give an importer an 

opportunity to resolve a penalty proceeding before Customs, before any action in [the Court of International 

Trade].” Id. (citing S. REP. NO. 95-778, at *19–20 (1978)). 

We are now faced with a similar issue and see no reason to interpret § 1592 differently in this case. The Government tries to distinguish this case from Optrex by 

noting that the Government in Optrex wanted to add 

claims at higher culpability levels than what Customs 

had asserted whereas in this case, the Government is 

bringing a penalty claim for a lesser culpability level than 

what Customs asserted. The Government argues that 

“negligence is merely a lesser included offense within the 

universe of gross negligence.” Appellant’s Br. 18. The 

Government contends that Customs’ penalty based on 

gross negligence gave Nitek notice that all lesser included 

culpability levels (i.e., negligence) were included in the 

gross negligence penalty notice. The Government cites to 

criminal law cases for this proposition. Id. at 18–19 (citing 

United States v. Stolarz, 550 F.2d 488 (9th Cir. 1977), and 

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10 US v. NITEK ELECTRONICS, INC. 

Mildwoff v. Cunningham, 432 F. Supp. 814 (S.D.N.Y. 

1977)). However, there is nothing in the language of the 

statute, legislative history, or treatment in the prior cases 

to support importing that idea into this statutory framework. In fact, the procedures under § 1592(b) strongly 

suggest that the importer is not put on notice of lesser 

included offenses because Customs must notify the importer of any changes to the level of culpability throughout the administrative proceeding. 

The doctrine of exhaustion requires that all administrative remedies be exhausted before seeking enforcement 

of administrative action. United States v. Priority Prods., 

Inc., 793 F.2d 296, 300 (Fed. Cir. 1986). 28 U.S.C. 

§ 2637(d) provides that “the Court of International Trade 

shall, where appropriate, require the exhaustion of administrative remedies.” We have held that exhaustion is 

not strictly a jurisdictional requirement and therefore the 

court may waive the requirement at the court’s discretion. 

See Priority Prods., Inc., 793 F.2d at 300. However, 

§ 2637(d) “indicates a congressional intent that, absent a 

strong contrary reason, the court should insist that parties exhaust their remedies before the pertinent administrative agencies.” Corus Staal BV v. United States, 502 

F.3d 1370, 1379 (Fed. Cir. 2007). Here, the Court of 

International Trade found that § 1592 precludes a waiver 

of exhaustion in this case. The court specifically points to 

the requirements under § 1592(b)(1) and (2) that direct

Customs to articulate a level of culpability in the prepenalty notice and notify the importer of any changes to 

that culpability level in the final penalty claim. Customs 

must inform the accused importer before enforcing a 

penalty claim for a different culpability level in court. 

Since Nitek was not notified of changing the culpability 

level from gross negligence to negligence, the court correctly found that the procedures under § 1592 were not 

properly followed. Accordingly, the court found that the 

Government did not exhaust its administrative remedies 

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US v. NITEK ELECTRONICS, INC. 11

because Customs could have changed the culpability level 

in the administrative proceedings. If waiver of exhaustion 

was allowed under these circumstances it would be contrary to the purpose of the statute, which is to provide fair 

administrative opportunities for resolution of penalties. 

Also, it would leave the importer guessing at what level of 

culpability he was accused of in court and thus would not 

properly put him on notice of the penalty claim. 

We review a court’s dismissal for failure to exhaust 

administrative remedies for an abuse of discretion. Itochu 

Bldg. Prods., 733 F.3d at 1145. The court did not make 

any error of law or clearly erroneous fact finding that 

would warrant a finding of abuse of discretion in this 

case. As discussed above, the court found that requiring 

exhaustion in penalty recovery cases is consistent with 

the statutory scheme set up in § 1592. The court properly 

interpreted the statute and applied it to this case consistent with our observation in United States v. Ford 

Motor Co. Therefore, the court did not abuse its discretion 

in finding that waiver of exhaustion was not appropriate 

in this case. 

CONCLUSION

The language of subsection (e) of § 1592—which vests 

the United States with authority to pursue recovery of 

penalty claims in the Court of International Trade—

clearly defines that authority. The United States, under 

subsection (e), is charged with “the recovery of any monetary penalty claimed under this section.” As noted above, 

the structure of the statute identifies the monetary penalty “claimed” under § 1592 as the claim made by Customs, 

the agency which has first-hand knowledge of the facts of 

the case and which is responsible for policing the statute. 

Under subsection (e), the Department of Justice acts as 

the litigating attorney for Customs, seeking to recover the 

claim made by Customs. We reject the Government’s 

preference that we read subsection (e) as authorization for 

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12 US v. NITEK ELECTRONICS, INC. 

it to recover a monetary penalty claimed by the Department of Justice in its discretion “under this subsection.”

We thus affirm the Court of International Trade’s interpretation of § 1592. The court correctly found that the 

Government did not exhaust its remedies by bypassing 

Customs and independently asserting a penalty claim

based on a different level of culpability. The Government 

cannot bring a penalty claim based on negligence in court 

because such a claim did not exist at the administrative 

level. 

AFFIRMED

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