Appeals Court Rejects $38 Million Penalty for Union Pacific for Drugs Found on Mexican Trains
The U.S. Court of Appeals for the Eighth Circuit affirmed on Dec. 12 a lower court ruling against CBP’s imposition of nearly $38 million in penalties on Union Pacific for contraband found in Mexican trains crossing the border. CBP had imposed the penalties after finding illegal drugs on trains brought to the U.S. border by Ferrocarril Mexicano and Kansas City Southern de Mexico, even though Union Pacific didn’t control the trains until after the CBP inspections. The Nebraska U.S. District Court rejected the penalties in 2012, in part because Union Pacific had no reasonable way of preventing cartels from putting drugs on other companies’ trains. The 8th Circuit mostly agreed with the circuit court, vacating only a court order to issue regulations related to the standard of care required of common carriers.
Sign up for a free preview to unlock the rest of this article
Export Compliance Daily combines U.S. export control news, foreign border import regulation and policy developments into a single daily information service that reliably informs its trade professional readers about important current issues affecting their operations.
CBP found the drugs on 38 occasions between 2001 and 2006. When trains cross from Mexico to the U.S., CBP takes custody of the Mexican trains, inspects them, sends to Mexican crews back to Mexico, then allows the U.S. railroad company to take control of the trains. During its inspections of trains set for transfer to Union Pacific, CBP found drugs hidden in railcar “spines,” in exposed chutes, under exterior plates, or inside tank cars.
Despite conceding that Union Pacific had no knowledge of the drugs, CBP proposed fines against Union Pacific ranging from $16,579 to over $8.2 million per incident. CBP even fined Union Pacific $655,215 for an incident in 2004 when Union Pacific itself found illegal drugs CBP had missed during its inspection. When Union Pacific disputed the penalties, CBP told the railroad that it had failed to provide for basic railroad inspections in Mexico.
Union Pacific pointed out that it was not reasonably possible for Union Pacific employees to inspect Mexican trains in Mexico -- even the U.S. Department of Agriculture, which used to inspect some U.S.-bound trains on the Mexican side of the border, has withdrawn its personnel due to safety concerns. CBP countered that it wasn’t asking for a police force, but only that Union Pacific provide for basic railcar inspections in Mexico. It said the railroad was guilty of not exercising the “highest degree of care and diligence in preventing the drug smuggling in its railcar.” Union Pacific filed suit at the Nebraska U.S. District Court in 2008.
In March 2012, the district court found in favor of Union Pacific. The standard relied on by CBP --the “highest degree of care and diligence” -- comes from the Anti-Drug Abuse Act of 1988. Specifically, the portion of the law codified at 19 USC 1584(a)(2) exempts carriers from penalties for transporting drugs as long as the carrier couldn’t know about the drugs even if it exercised the highest degree of care and diligence. But the law doesn’t exactly define the phrase. In fact, it ordered CBP to issue regulations to define it. And in the two decades since the law was enacted, CBP still hasn’t issued those regulations. As such, the court said it owed no deference to CBP’s preferred definition as “leaving no stone unturned.” Instead, Union Pacific was only required to take the steps a reasonable carrier would take, said the district court, and Union Pacific met that standard.
On appeal, the 8th Circuit agreed with the lower court’s reasoning and found Union Pacific passed the “reasonable carrier” test with flying colors. The railway spends nearly $2.4 million every year on salary and benefits for its security teams at the Texas, California, and Arizona borders. It was the first railroad to enter CBP’s Land Border Carrier Initiative Program and Customs-Trade Partnership Against Terrorism (C-TPAT).
“Under the common law standard, [Union Pacific] actually did more than enough on the trains it did not control inside a country in which it has no operations: [Union Pacific] pressured Ferromex to ensure each U.S.-bound railcar, [Union Pacific] owned or not, is searched at least twice by the Mexican Military,” said Circuit Judge William Riley in his opinion. “CBP cannot reasonably expect private personnel hired by UP to outperform the Mexican military in what amounts to a warzone … .”
The appeals court cited an 1876 Supreme Court ruling to support its position that the phrase ‘highest degree of care and diligence” means simply that the carrier must act reasonably. In Horst, the Supreme Court said “highest degree of care and diligence” does not mean “all the care and diligence the human mind can conceive of.’ Instead, it requires everything “reasonably consistent with the business of the carrier, and the means of conveyance employed,” the Supreme Court said. “By demanding that Union Pacific achieve what the Mexican military has been unable to accomplish -- prevent murderous drug cartels from hiding illegal drugs in Mexican trains -- CBP is holding [Union Pacific] to an unachievable standard expressly rejected by the Supreme Court,” said Judge Riley.
Although the 8th Circuit found the district court correctly found the penalties to be illegal, it rejected an injunction issued by the lower court to require CBP to issue regulations to define the “highest degree of care and diligence” before it issues any similar penalties. Courts can’t make an agency do something for noncompliance with a statutory deadline unless the statute contains a consequence for noncompliance, said the court. And in any case, the penalties were illegal because CBP violated the “highest degree of care and diligence” standard itself, and not the law requiring CBP to issue regulations. CBP is free to issue a regulation or, “if CBP wishes to continue ignoring Congress’ express directive,” it can apply the “reasonable carrier” standard found in common law, said the appeals court.
(Union Pacific Railroad Company v. Department of Homeland Security, 8th Circ. No. 12=2143, dated 12/12/13)