September 10, 2024
SpecGrade LED Fined $337,252; Sues Importer Over Penalty
Company blames hefty U.S. Customs fine on classification errors by importer
SpecGrade LED, an Ohio-based maker and importer of LED lighting, is suing RL Swearer Co., Inc., its former customs broker, after receiving a $337,252 fine from U.S. Customs and Border Protection for import misclassifications. The lawsuit, filed in the U.S. District Court for the Southern District of Ohio, seeks damages, alleging that RL Swearer Co. improperly handled SpecGrade's customs filings, leading to costly penalties.
At the core of the dispute is SpecGrade’s claim that RL Swearer Co. failed to classify its imported products correctly under the Harmonized Tariff Schedule (HTS), a system used to determine the appropriate duties for goods entering the U.S. Between 2017 and 2022, RL Swearer Co. acted as SpecGrade’s customs broker, responsible for submitting accurate import documentation to U.S. Customs and Border Protection. According to SpecGrade’s complaint, RL Swearer Co. consistently used incorrect HTS codes, leading to underpaid duties and violations of U.S. Customs regulations.
SpecGrade claims that the financial burden of the fine nearly put the company out of business. Managing partner Rick Nathans and President Gerald Lauck were forced to loan personal funds to keep the business operational, with Nathans liquidating his 401(k) to cover the penalties. This personal financial loss is also cited in the lawsuit.
SpecGrade LED Investigated by U.S. Customs
In May 2021, U.S. Customs and Border Protection began investigating SpecGrade’s imports and identified widespread misclassifications. Products such as LED floodlights, high bay lighting fixtures, and related parts were incorrectly classified under broad HTS codes that applied a lower duty rate of 3.9%, instead of more specific codes that carried higher rates. For example, U.S. Customs and Border Protection found that certain products should have been classified under codes with duty rates of up to 7.6%.
As a result of these errors, SpecGrade was fined $337,252 by U.S. Customs and Border Protection for underpaying duties over a five-year period. SpecGrade asserts that RL Swearer Co.’s negligence in handling its import documentation directly led to these penalties.
Missteps in Customs Classification
The Harmonized Tariff Schedule (HTS) is a standardized system used to classify products for customs purposes. Each item imported into the U.S. is assigned a unique HTS code that determines its duty rate. SpecGrade alleges that RL Swearer Co. applied an incorrect HTS code—9405.40.8410, which refers to "other lighting sets"—to most of its entries, regardless of the specific products involved.
Above: Exhibits provided by SpecGrade LED show 5-year history of import records
In a 2022 letter to U.S. Customs and Border Protection, SpecGrade LED acknowledged the following:
- Misclassification of LED products: SpecGrade LED admitted to incorrectly classifying certain LED fixtures, including high bay lighting, wedge lighting, flood lighting, and projecting lighting, under HTS codes not aligned with U.S. Customs and Border Protection expectations. These misclassifications resulted in incorrect duty payments.
- Inclusion of incorrect parts classifications: The company acknowledged inadvertently grouping various lighting parts under incorrect classifications, such as HTS 9405.99.4090, and failing to assign the proper HTS codes to individual products. HTS codes are used to classify products for customs purposes and determine the applicable tariff rates.
- Incorrect handling of tooling assists: SpecGrade LED failed to properly declare tooling assists—costs related to equipment molds—as dutiable assists. They committed to paying the duties owed for these assists, valued at $6,589.
SpecGrade’s Legal Action
In response to the U.S. Customs and Border Protection fines, SpecGrade has filed a lawsuit against RL Swearer Co., accusing the customs broker of negligence, breach of contract, and unjust enrichment. The company contends that RL Swearer Co.’s repeated errors in classifying products not only led to the financial penalties but also caused operational disruptions and personal financial losses for SpecGrade's officers, who had to loan personal funds to cover the penalties.
The lawsuit seeks compensation for the U.S. Customs and Border Protection fines, legal fees, and additional costs incurred from reviewing and correcting the customs entries. SpecGrade claims that more than 85% of the entries handled by RL Swearer Co. during the five-year period were misclassified.
The case highlights the importance of accurate customs classification, particularly for businesses involved in international trade. If successful, SpecGrade could recover the substantial sums paid in fines and penalties, as well as compensation for the financial strain caused by RL Swearer Co.'s actions. The outcome may also serve as a reminder to companies about the risks of relying on third-party brokers to manage customs compliance without proper oversight.
