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Narcotics Fines Against Railroad Carrier Overturned in District Court

Monday, December 26, 2011
Sandler, Travis & Rosenberg Trade Report

A federal district court ruled last week that U.S. Customs and Border Protection exceeded its authority by imposing fines and seizing railcars in response to the discovery of narcotics crossing the border from Mexico. The court vacated 38 penalty cases totaling more than $37 million and stated that “CBP should be enjoined from seizing railcars under 19 USC 1594 in circumstances similar to those presented in this case.”

In a Dec. 19 decision in Union Pacific Railroad Company v. U.S., the court said that the imposition of monetary penalties against UP and the seizure of its railcars are “actions that are outside the authority delegated by Congress” to CBP. The court explained that CBP’s actions in this case “effected a final, binding and substantive change to its past practices with regard to penalties and seizures under the Tariff Act” and “unilaterally and arbitrarily rejected” a previous agreement with UP, both without explanation. The court added that “UP has undertaken numerous measures to discover, combat and prevent drug smuggling” and that CBP “has not presented evidence, or even argument” that UP’s efforts fell short of industry standards or commercial practices in this area.

Even if the CBP penalties were authorized, the court said, their imposition in this case would be arbitrary and unreasonable. The text and structure of 19 USC 1584 and 1594 show that these sections trigger penalties and forfeitures “only on a showing of some greater degree of culpability than ordinary negligence,” which CBP acknowledges is all UP is liable for with respect to the narcotics smuggling at issue. These provisions also show that Congress “did not envision that an entity lacking any control over the subject conveyance would be subject to penalties,” and CBP “never addressed UP’s argument that it had no control over the railcars” before they entered the U.S. from Mexico. In addition, the Trade Act of 2002 entitles UP to submit information from third parties (e.g., the Mexican rail carrier from which it accepted the railcars) on the basis of what it reasonably believes to be true.

UP had already secured a mitigation of the penalties earlier this year when it reached an agreement with CBP under which it will spend $50 million to directly enhance the U.S.-Mexico rail supply chain. However, the rail carrier continued with this suit to challenge CBP’s authority to impose the penalties in the first place. The court’s decision could open the way for other carriers to challenge similar narcotics-related penalties.

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