[Federal Register Volume 66, Number 60 (Wednesday, March 28, 2001)]
[Rules and Regulations]
[Pages 16850-16854]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-7659]


=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF THE TREASURY

Customs Service

19 CFR Parts 12, 113 and 141

[T.D. 01-26]
RIN 1515-AC45


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

[[Page 16851]]

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 Sec. 12.3 of the Customs Regulations (19 
CFR 12.3). Under Sec. 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 Sec. 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 Sec. 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 Sec. 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 Sec. 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 Sec. 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 
Sec. 113.62 of the Customs Regulations (19 CFR 113.62), the conditions 
of the basic custodial bond set forth in Sec. 113.63 of the Customs 
Regulations (19 CFR 113.63), the conditions of the international 
carrier bond set forth in Sec. 113.64 of the Customs Regulations (19 
CFR 113.64), the conditions of the commercial gauger and commercial 
laboratory bond as set forth in Sec. 113.67 of the Customs Regulations 
(19 CFR 113.67), and the conditions of the foreign trade zone operator 
bond as set forth in Sec. 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 
Sec. 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

[[Page 16852]]

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 
Sec. 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 Sec. 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 Sec. 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 Sec. 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 Sec. 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 Sec. 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

[[Page 16853]]

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 Sec. 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:


Sec. 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 Sec. 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 Sec. 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 
Sec. 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 Sec. 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 Sec. 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 Sec. 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 
Sec. 113.62(l)(1) of this chapter in the

[[Page 16854]]

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.
* * * * *


Sec. 113.62  [Amended]

    2. In Sec. 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''.


Sec. 113.63  [Amended]

    3. In Sec. 113.63, paragraph (h)(1) is amended by adding the words 
``or prohibited'' after the word ``restricted''.


Sec. 113.64  [Amended]

    4. In Sec. 113.64, the second sentence of paragraph (b) is amended 
by adding the words ``or prohibited'' after the word ``restricted''.


Sec. 113.67  [Amended]

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


Sec. 113.73  [Amended]

    6. In Sec. 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.


Sec. 141.113  [Amended]

    2. In Sec. 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.
[FR Doc. 01-7659 Filed 3-27-01; 8:45 am]
BILLING CODE 4820-02-P