On July 8, the United States Court of Appeals for the District of Columbia upheld a lower court’s ruling dismissing a complaint from Federal Express Corporation (FedEx) and holding it liable for violating the Export Control Reform Act of 2018 (ECRA) even though the common carrier had been completely unaware of its violation. On appeal, FedEx unsuccessfully argued the Department of Commerce’s strict liability interpretation of 15 C.F.R. § 764.2(b) is ultra vires – a clear overstep of statutory authority.
The Appeals Court strongly held that Commerce’s strict liability regime was permissible pursuant to the statutory text, circuit precedent, and judicial deference to the executive branch on national security and foreign policy matters.
The Export Administration Regulations mirror ECRA language – provides that “[n]o person may cause or aid, abet, counsel, command, induce, procure, permit, or approve the doing of any act prohibited, or the omission of any act required by” export controls. No mens rea is prescribed by the statutory language. FedEx argued that the terms “aid” and “abet” are both terms of art that have “uniformly been understood by courts for decades to require mens rea, i.e., knowledge of improper conduct and intent to facilitate it.” The court disagreed.
For a successful ultra vires challenge, the agency action must be a “clear departure” from the agency’s statutory mandate or constitute “blatantly lawless” behavior. It is a very demanding standard to reach.
Here, Commerce’s regulations are identical to the statute’s language and the actions taken are in accordance with the statute’s verbiage and congressional intent. “A regulation that so faithfully hews to the statute it enforces is the antithesis of a facially ultra vires regulation,” said Judge Patricia Millet.
Additionally, the court reasoned that Commerce’s interpretation is within its authority because Congress expressly omitted mens rea for the civil violation from the statutory text. By contrast, it included the mens rea of “willfully” for criminal penalties. Further, when addressing similar civil penalties, Congress again chose to omit any state of mind requirement. According to the court, the legislative branch meticulously selected when to prescribe a mens rea requirement throughout the legislation. This helped the court conclude that Commerce’s actions were in line with Congressional goals rather than a “clear departure” from the statute’s mandate.
“To close the door even more firmly on FedEx’s ultra vires argument,” Congress’ expressly designated authority to Commerce when establishing standards for civil penalties under Section 4819(c) is “based upon factors such as * * * the culpability of the violator[.]” Congress effectively deputized Commerce with the power to determine required culpability.
The D.C. Circuit also cited its precedent to argue that Commerce’s interpretation of the statutory language is within its authority. In Iran Air v. Kugelman, the court held that “causing” – the first word in the string of verbs listed in 15 C.F.R. § 764.2(b) alongside “aid” and “abet” – an act is considered a strict liability offense. With that precedent, the court argued, it lacks a reason for why it should be able to attach strict liability to “causing,” but not “aid” or “abet.”
Finally, the court highlighted the “well-established rule” of judicial deference to the Executive Branch in matters that involve foreign policy and national security. The court cited “ample Supreme Court precedent” counseling courts to accord special deference to an agency construction of a statute “in the areas of foreign policy and national security” in light of “the volatile nature of [such] problems.”
Key Takeaways and Next Steps
The decision gives broad authority to government agencies for national security and foreign policy purposes. Even companies who unknowingly and unwittingly “cause or aid, abet, counsel, command, induce, procure, permit, or approve the doing of any act prohibited, or the omission of any act required by” export controls, can be held civilly liable and exposed to severe penalties.
This creates countless avenues of liability for companies even without prior knowledge of the underlying violation, and the fines associated with violations can be hefty. For example, ZTE, a Chinese technology company, paid $1 billion to lift a denial order issued in 2018 in response to export control violations. Companies should prioritize creating a robust compliance infrastructure based on a risk assessment. Following the assessment, companies can fund initiatives addressing the highest risk areas. This compliance framework should help companies identify and prevent sanctions violations.
The prospect of export violations without willingly or knowingly committing a violation is daunting. Organizations should commit to establishing robust compliance programs, employee training programs, and voluntary disclosures when appropriate. While even the best compliance program may not be enough to stop an export compliance violation under the strict liability standard the DC Circuit Court has upheld, such a program remains an exporter’s best defense.
For more information on this decision and its implications, please contact the author. The author would like to thank our law clerk Stephen Finan for his valuable contributions to this article.