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Union Pacific Railroad Co. v. United States Dept. of Homeland Sec.

United States Court of Appeals, Eighth Circuit

December 12, 2013

UNITED STATES DEPARTMENT OF HOMELAND SECURITY; Rand Beers, in his official capacity, Defendants-Appellants United States of America, Plaintiff-Appellant
Union Pacific Railroad Company, Defendant-Appellee United States of America, Plaintiff-Appellant
Union Pacific Railroad Company, Defendant-Appellee.

Submitted: May 14, 2013.

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[Copyrighted Material Omitted]

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Christine Noel Kohl, argued, Washington, DC (Robert Mark Loeb, on the brief), for Appellant.

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James Scott Ballenger, argued, Washington, DC (William Maxwell Lamson, Jr., Rebecca B. Gregory, Omaha, NE, on the brief), for Appellee.

Before RILEY, Chief Judge, MELLOY and SHEPHERD, Circuit Judges.

RILEY, Chief Judge.

On thirty-eight occasions between 2001 and 2006, United States Customs and Border Protection (CBP), a component of the U.S. Department of Homeland Security (DHS), found illegal drugs secreted on trains brought to the U.S. border by Ferrocarril Mexicano S.A. de C.V. (Ferromex) or Kansas City Southern de Mexico S.A. de C.V. (KCSM), both Mexican railroads. Although the Union Pacific Railroad Company (UP) did not control the trains before their arrival at the U.S. border [1] or even during the time CBP inspected the trains at the border, CBP imposed almost $38 million in penalties against UP— not Ferromex or KCSM— under the Tariff Act of 1930, as amended, 19 U.S.C. § 1584(a)(2). CBP's shifting explanations make it difficult to decipher precisely why CBP thinks it has the power to impose these penalties against UP, but the government's present position appears to be that UP is liable because UP (1) owned some of the individual railcars in which CBP found illegal drugs and (2) forwarded electronic manifest information to CBP, which does not accept electronic manifests directly from Mexican railroads.

After exhausting its administrative remedies, UP challenged the penalties in the district court below, invoking the Fifth and Eighth Amendments to the Constitution, and the Administrative Procedure Act (APA), 5 U.S.C. § 706(2)(A). The government separately filed enforcement actions, which were consolidated with UP's suit in the district court. UP moved for summary judgment, and the government moved for judgment on the administrative record. Finding CBP lacked statutory authority to penalize UP and the penalties were arbitrary and capricious, the district court ruled in UP's favor and enjoined the government from penalizing UP for smuggled drugs until the agency " properly promulgated" regulations authorizing such penalties.

The government appeals. We reject CBP's constitutionally suspect contention that the Tariff Act authorizes the heavy fines at issue in this case. The statute does not authorize penalties against UP for drugs found on railcars UP neither owns nor controls. And the statute certainly does not authorize CBP to require UP, as a common carrier, to do more than reasonably possible to prevent Mexican drug cartels from hiding drugs on trains UP does not control in a country in which UP has no operations. However, the district court's imprecise injunction must be corrected. Having jurisdiction under 28 U.S.C. § 1291, we affirm in part, vacating only the injunction.


A. Facts

UP is an Omaha, Nebraska, based common carrier with no railroad operations inside Mexico, no control over the Mexican railroads [2] that bring trains to the U.S. border, no power to direct these Mexican railroads' employees, and no legal authority to secure or search trains inside Mexico. Nor can UP search trains at the border before CBP conducts its inspection: CBP refuses to allow such searches by UP.

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Instead, CBP takes custody of Mexican trains at the border, inspects them, sends the Mexican locomotives with their Mexican crews back to Mexico, and, when this process is completed, allows UP to take custody of the trains. UP, as a common carrier, accepts these trains and delivers them to their destinations in the United States.

Despite these limitations, UP works to prevent Mexico's drug cartels from smuggling drugs into the United States. Throughout its railroad network, UP employs more than 200 commissioned police officers, 300 contract security officers, and nine canine drug detection teams. At the Texas, California, and Arizona international borders alone, UP spends approximately $2.4 million annually on salary and benefits for its security teams. At its own cost, UP has built numerous buildings for CBP's use, including camera and inspection towers and an office building, and installed advanced screening machines at the border. UP was the first railroad to enter CBP's " Land Border Carrier Initiative Program" and " Customs-Trade Partnership Against Terrorism," and is also a member of various other partnerships between the federal government, state and local governments, and private transportation firms. UP has persuaded Ferromex to increase its security measures in Mexico, even though drug related safety concerns in Mexican border towns drastically limit Ferromex's ability to protect U.S.-bound trains.[3]

In spite of these facts, CBP imposed almost $38 million in fines against UP after finding illegal drugs hidden on Mexican trains arriving at the U.S. border. According to CBP, UP was liable for the illegal drugs even though UP had no control over the trains until after CBP discovered the illegal drugs. By UP presenting the Mexican manifests in the United States, CBP asserts UP " is responsible for [the manifests'] accuracy," and " it is incumbent upon [UP] to ensure that the railcars are inspected in Mexico." CBP concedes UP had no knowledge of the drugs, which were hidden in railcar " spines" (i.e., an area outside the locked cargo hold), in exposed chutes, under exterior plates, or inside tank cars. Although UP may have owned as many as eleven [4] of the numerous railcars involved, these railcars were pulled by Mexican locomotives and the trains were crewed by the Mexican railroads' employees.

CBP's proposed fines against UP ranged from $16,579 to more than $8.2 million per incident. CBP even fined UP $655,215 for

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an incident on March 30, 2004, in which UP itself, working with U.S. Immigration and Customs Enforcement (ICE) agents, found illegal drugs that CBP missed. That morning, a Ferromex train reached the U.S. border at Calexico, California, and CBP personnel conducted their routine inspection: they found nothing, cleared the train, and left. But a UP police officer who was working with an ICE agent decided, based on a tip, to inspect the train's non-pressurized tank cars. The UP officer, seeing signs that someone had tampered with one of the tank cars' domes, obtained a wrench to open the dome. Inside, the UP officer and the ICE agent found two large bags of marijuana weighing 37.15 kilograms (81.73 pounds). The ICE agent contacted CBP, which dispatched two officers to the train. The UP officer and one of the CBP officers then removed the bags from the train and placed them in CBP custody. Despite UP's diligence, CBP imposed a fine against UP. CBP has never explained why UP's active role in uncovering the marijuana was not enough to absolve UP of liability.

B. Administrative Proceedings

UP initially sought an administrative remedy, challenging CBP's authority to impose the penalties and, alternatively, requesting complete mitigation of all penalties. In a series of boilerplate decisions, CBP reaffirmed its power to impose the penalties but, with little explanation, offered to reduce the penalties by 90-95% if UP paid within 60 days. See 19 C.F.R. § 171.22. CBP concluded UP must " ensure railcar inspection in Mexico."

UP explained it was not reasonably possible for UP employees to inspect Mexican trains inside Mexico. Safety risks in Mexico are so severe that the U.S. Department of Agriculture, which formerly inspected U.S.-bound trains on the Mexican side of the border, has withdrawn its personnel from Mexico for security reasons and ceased inspections. If UP dispatched its security personnel into Mexico, they " would not be permitted to carry firearms for protection, would not be permitted to make arrests, and could even risk arrest themselves— if they f[ound] drugs— for possessing the drugs." Because local Mexican police are often at the mercy of violent drug cartels, it is likely any UP efforts on the Mexican side of the border would be thwarted by local police. [5]

CBP countered that it " does not expect [UP] to create a police force in Mexico equal to its force in the U.S.[, and] [i]nstead ... ask[s] that [UP] provide [ ] for basic railcar inspections in Mexico, utilizing [CBP] training on the subject." " If [UP] alone cannot achieve this objective," CBP said, " then [UP] should work in conjunction with its business partner, Ferromex, or hire a third-party security contractor." Security concerns in Mexico are so severe— and local police so ineffective in the face of heavily armed drug cartels— that Ferromex must rely on the Mexican military to prevent drug smuggling on its trains. Ferromex trains bound for the United States are searched two or three times by the Mexican military before reaching the border. None of CBP's administrative decisions explain how UP, the Mexican railroads, or " a third-party security contractor" could accomplish what the Mexican military cannot.

Although some of CBP's decisions purported to tie UP's liability to its electronic transmission of manifests from Ferromex and KCSM, CBP also said " [t]he pertinent

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question in this case is not who was responsible for presenting the manifest, but rather, whether, as the carrier, UP[ ] exercised the highest degree of care and diligence in preventing the drug smuggling in its railcar[s]." (Emphasis added). The phrase " highest degree of care and diligence" comes from 19 U.S.C. § 1584(a)(2), which exempts from penalty certain common carriers who exercise it. Although § 1584(a)(2) does not define the term, in 1988 Congress expressly directed the relevant agency to explain what the phrase means:

By no later than the date that is 120 days after the date of enactment of this Act and after an opportunity for public comment, the Secretary of the Treasury shall prescribe regulations which set forth criteria for use by the owner, master, pilot, operator, or officer of, or other employee in charge of, any common carrier in meeting the standards under sections 584(a)(2) and 594(c) of the Tariff Act of 1930 (19 U.S.C. 1584(a)(2) and 1594(c)) for the exercise of the highest degree of care and diligence to know whether controlled substances imported into the United States are on board the common carrier.

Anti-Drug Abuse Act of 1988, Pub.L. No. 100-690, § 7369, 102 Stat. 4181, 4481 (emphasis added). More than two decades later, neither the Secretary of the Treasury, who in 1988 was the cabinet official responsible for CBP's predecessor agency, nor the Secretary of Homeland Security (Secretary), who now oversees CBP, has complied with Congress's express directive.[6]

C. Article III Proceedings

On July 31, 2008, having exhausted its administrative remedies, UP filed a complaint in the District of Nebraska against DHS and the Secretary (collectively, the government). UP sought a judgment declaring the penalties void and enjoining DHS and its components from imposing new penalties against UP. On March 17, 2009, the government filed a complaint in the Southern District of Texas seeking a judgment of $4,128,000 in penalties against UP for one of the thirty-eight incidents at issue in this case. On March 18, 2009, the government filed a complaint in the Southern District of California seeking a judgment against UP for $33,595,112 in penalties for the other thirty-seven incidents at issue in this case. In November 2010, the government's cases were transferred to the District of Nebraska and consolidated with UP's case.

UP moved for summary judgment, and the government moved for judgment on the administrative record. On March 14, 2012, the district court granted UP's motion and denied the government's motion, concluding that " CBP's actions were outside the authority granted to the agency by Congress and must be set aside." The district court primarily relied on its conclusion that the agency's failure to comply with its statutory obligation to define the phrase " highest degree of care and diligence," as used in 19 U.S.C. § 1584(a)(2), meant the agency received no deference for its contention that meeting this standard required UP to " ‘ leave no stone unturned.’ " Instead, the district court looked

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to the common law definition and concluded " a common carrier must only use the degree of skill a reasonable common carrier would use under similar circumstances." (Emphasis added). The district court noted " the agency acknowledge[d] that UP has undertaken numerous measures to discover, combat, and prevent drug smuggling." Because " CBP ha[d] not presented evidence, or even argument, with respect to industry standards or commercial practices with respect to drug interdiction by common carriers," the district court " f[ound] that CBP's actions were ultra vires. "

In the alternative, the district court found " that CBP's interpretation and application of the Tariff Act [were] arbitrary and unreasonable" for three reasons. First, CBP wholly failed to " address[ ] UP's argument that it had no control over the railcars in Mexico, had no controlling interest in the Mexican railroad, and could not exercise any degree of care and diligence until the point at which the railcars were under its control." Second, " CBP's suggestions that UP either force Ferromex to take action or hire a private security force ... [were] not only arbitrary, but capricious, in that they [were] essentially impossible for UP to accomplish." Third, ...

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