Can Fedex beat US government?
How much responsibility should Fedex and other carriers bear for customers making illegal shipments?
The Memphis logistics giant’s lawsuit against the U.S. Department of Commerce over export restrictions brings that question, a familiar one among those in the export business, to the forefront.
In June, Fedex filed a lawsuit seeking to stop the Department of Commerce from enforcing certain regulations against it. Specifically, the “Entity List” that’s part of Export Administration Regulations (EAR) restricts U.S. firms from doing business with listed companies. Fedex says that places “an impossible burden” on common carriers like itself.
Fedex said the regulations, which have received heightened attention after Chinese tech company Huawei’s listing, “unreasonably hold common carriers strictly liable for shipments that may violate the EAR without requiring evidence that the carriers had any knowledge of any violations.”
The case will draw “a lot of interest” due to the parties affected, said Bruce Leeds, senior of counsel for Braumiller Law Group PLLC, which specializes in
“Fedex’s point is, ‘We can’t police all our customers.’ … They point out the only way they can play it safe is by rejecting shipments.” Jon Yormick, an international business and trade attorney at Phillips Lytle LLP
export and import compliance issues. Fedex’s regulatory gripes center on the challenge of policing prohibited items being shipped through the carrier, he said.
Oftentimes shippers expect transportation companies like Fedex to figure out if their shipment is an export violation instead of figuring it out themselves, Leeds said, even if they are legally responsible. But when the carrier handles millions of packages daily, that’s not an easy task, he added.
“DHL and UPS are going to have the same issue: The volume of what they process every day is difficult to control,” he said.
Still, getting the Department of Commerce to concede and relax enforcement of the entity list that includes supposed national security threats will be an uphill battle, said Jon Yormick, an international business and trade attorney at Phillips Lytle LLP.
“It may prove very difficult, I think, for Fedex to get the relief that it’s seeking,” Yormick said.
CEO, Commerce head spar over regulations
The party ultimately responsible for making sure the item is legally exported is the “exporter of record,” typically the seller of the product being shipped, Yormick said. Fedex is arguing the way regulations are structured, the carrier is on the hook for export violations just as much as the party exporting the item is, he added.
“Fedex’s point is, ‘We can’t police all our customers,’ ” Yormick said. “…They point out the only way they can play it safe is by rejecting shipments.”
In a Fox News interview shortly after Fedex filed the lawsuit, CEO Fred Smith emphasized the burden Fedex takes on with export regulations and trying to make sure the contents of all its packages comply with them.
“If we make an error on any one of them without a trial, without any due process, we can be fined $250,000 per piece,” Smith said.
In 2017, Fedex paid a $500,000 penalty plus interest after being charged with 53 violations from the Department of Commerce’s Bureau of Industry and Security, according to the company’s lawsuit.
Commerce Secretary Wilbur Ross countered Smith’s claims in his own Fox News interview the following day. He said Smith is “misinterpreting” the regulations and Fedex just needs to not knowingly carry goods in violation of the regulations or conspire to avoid them.
Fedex has the mechanisms to comply with the regulations and has done so “pretty well” in the past, he added.
“We’re not asking Fred (Smith) or anyone else to be a policeman, we’re just asking them not to conspire with people to avoid the things,” Ross said on Fox News. “So we look forward to dealing with that matter in the litigation. I think it’s unfortunate that he has misinterpreted the rules. The courts will not misinterpret.”
However, Yormick said most EAR violations are “strict liability violations,” which means even an unknowing violation is one that faces penalties. Most EAR penalty settlements, such as Fedex’s, fall into the strict liability category, he added.
Tracking illegal shipments a task for many
Fedex says it would have to figure out the origin and technological makeup of all the items in the shipments it handles in order to keep track of every Ear-related violation. The company handles some 15 million packages a day.
The EAR’S entity list prevents a U.S. company from exporting to anyone listed directly or indirectly without obtaining an export license. Leeds said it applies even for innocuous shipments and there aren’t many obstacles to the Department of Commerce placing an entity on the list as long as there’s justification for it, like national security concerns.
The U.S. has that very concern about Huawei and has, for now, placed it on the entity list. Fedex mishandled Huawei packages on at least two occasions since it was blacklisted, and China is investigating Fedex on the matter. Smith maintains the issue goes back many years and is separate from the Huawei situation.
The Bureau of Industry and Security often relies on common carriers finding shippers that fail to follow the list because its enforcement arm (the Office of Export Enforcement) “doesn’t have the resources to go out and find” all the items in violation, Leeds said.
The government does have tools available to help companies meet compliance, but it remains a burden for smaller, resource-bare companies shipping through Fedex to stay up-to-date, Yormick said.
“It’s a bit like playing Monopoly,” he said of exporting. “If you’ve never played Monopoly before, there’s a lot of rules to the game. You want to make sure someone explains the rules to you or you read and understand them, otherwise you shouldn’t be playing.”
Max Garland covers Fedex, logistics and health care for The Commercial Appeal. Reach him at max.garland@commercialappeal.com or 901-5292651 and on Twitter @Maxgarlandtypes.