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Epsilon Electronics, Inc. v. United States Department of Treasury

United States Court of Appeals, District of Columbia Circuit

May 26, 2017

Epsilon Electronics, Inc., Appellant
United States Department of the Treasury, Office of Foreign Assets Control, et al., Appellees

          Argued November 9, 2016

         Appeal from the United States District Court for the District of Columbia (No. 1:14-cv-02220)

          Teresa N. Taylor argued the cause and filed the briefs for appellant.

          Eric S. Volkman was on the brief for amicus curiae JPM Legal Advisors Worldwide Limited in support of appellant.

          Lewis S. Yelin, Attorney, U.S. Department of Justice, argued the cause for appellees. With him on the brief were Benjamin C. Mizer, Principal Deputy Assistant Attorney General, and Douglas N. Letter and Sharon Swingle, Attorneys.

          Before: Rogers and Griffith, Circuit Judges, and Silberman, Senior Circuit Judge.


          Griffith, Circuit Judge

         In 1995, President Clinton imposed trade sanctions against Iran that are enforced by the Office of Foreign Assets Control within the Department of the Treasury. OFAC is authorized to impose civil penalties against any person who exports goods to a third party who it has reason to know intends to send them to Iran. The principal question raised by this appeal is whether OFAC must also show that the goods actually ended up in Iran. We agree with the agency that the government need not make that showing and affirm the district court on that ground. But we also conclude that OFAC did not adequately explain parts of its determination that the exporter here had reason to know that its shipments would be sent on to Iran.


         When the President identifies an "unusual and extraordinary threat" to the American economy, national security, or foreign policy that originates from abroad, see 50 U.S.C. § 1701, the International Emergency Economic Powers Act authorizes him to declare a national emergency and address the threat by regulating foreign commerce, see id. § 1702. In 1995, President Clinton determined that Iran's "support for international terrorism, its efforts to undermine the Middle East peace process, and its efforts to acquire weapons of mass destruction" represented a national emergency, see Iranian Transactions Regulations, 77 Fed. Reg. 64, 664, 64, 664 (Oct. 22, 2012), and, invoking his authority under the Act, imposed comprehensive trade sanctions on Iran by executive order, see Exec. Order No. 12, 959, 60 Fed. Reg. 24, 757, § 1 (May 6, 1995).

         OFAC implemented the President's executive order in September 1995 by promulgating the Iranian Transactions and Sanctions Regulations, see 60 Fed. Reg. 47, 061 (Sept. 11, 1995), which are now codified, as amended, at 31 C.F.R. pt. 560. Among other prohibitions, the regulations forbid "the exportation, reexportation, sale, or supply, directly or indirectly . . . of any goods, technology, or services to Iran" by United States individuals and businesses, including exportation to a third country with "knowledge or reason to know" that the goods are "intended specifically" for reexportation to Iran. See 31 C.F.R. § 560.204.

         The agency has invoked that prohibition against appellant Epsilon Electronics, a California-based wholesaler of sound systems, video players, and other accessories for cars. The company's wares can be found across the globe, from Latin America to Africa and the Middle East. Asra International Corporation, a distributor based in Dubai, has been one of Epsilon's trading partners. Between 2008 and 2012, Epsilon sent thirty-nine shipments of consumer goods to Asra, valued at about $3.4 million.

         OFAC began investigating Epsilon in 2011, when the agency learned about a 2008 shipment from Epsilon's California headquarters to an address in Tehran, Iran. In response to an administrative subpoena, Epsilon's president denied knowledge of the shipment and suggested that a lower- level employee had sent the package without the company's knowledge.

         Later in 2011, OFAC also learned that Epsilon had received multiple wire transfers from a Dubai bank, made on behalf of Asra International. The agency examined Asra's website, which touted the company's success in the Iranian market, contained a directory of dealers who were all located in Iran, and displayed photos from trade shows in various Iranian cities. Some of these photos also appeared on Epsilon's website. OFAC suspected that the company's shipments to Asra were "destined for Iran, " and opened a second investigation on Epsilon in December 2011. The agency issued an administrative subpoena to Epsilon's bank, seeking information about the company's transactions with Asra.

         In the meantime, OFAC decided to close its investigation of the 2008 shipment. In January 2012, the agency sent Epsilon a letter explaining that the shipment appeared to have violated OFAC regulations, and warning that those regulations "prohibit virtually all" American trade with Iran. Appellant's App. [A.A.] 94. OFAC explained that it would not penalize Epsilon for the shipment but that the agency could take this apparent violation into account in any future case.

         But OFAC did not close its parallel investigation of Epsilon's dealings with Asra. In May 2012, the agency sent Epsilon another administrative subpoena, requesting further details on the company's transactions with Asra and with Iran. Epsilon responded that it had no dealings with Iran and that none of its shipments to Asra were intended for Iran. The company submitted invoices chronicling thirty-four shipments to Asra.

         Between February and May 2012, while OFAC's investigation continued, Epsilon sent Asra five more shipments. During this period, Epsilon managers corresponded by email with an Asra manager, Shahriar Hashemi, who described plans to launch a Dubai retail store under "Asra's flag." A.A. 118. The emails record Hashemi and Epsilon negotiating several orders, and show Hashemi mentioning plans for his showroom, complaining about another Dubai shop selling Epsilon products, worrying about whether Epsilon products could endure Dubai's heat, and anticipating sales to African and Central Asian customers. An Epsilon manager promised Hashemi that the Dubai retail market was "all yours." See A.A. 119.

         In May 2014, OFAC tentatively concluded that all thirty-nine of Epsilon's shipments to Asra violated 31 C.F.R. § 560.204 because each was made with knowledge, or reason to know, that Asra intended to reexport the goods to Iran. The agency sent Epsilon a Prepenalty Notice, declaring its intent to impose a civil monetary penalty of $4, 073, 000, subject to Epsilon's response. OFAC arrived at that dollar amount by applying its penalty guidelines, which required the agency to determine whether any of the violations were voluntarily disclosed and whether any were "egregious." See generally 31 C.F.R. pt. 501, App. A. OFAC found that none of Epsilon's violations was voluntarily disclosed, and that the last five shipments, made after Epsilon received OFAC's January 2012 cautionary letter, were egregious. Though the agency has authority to depart upward or downward from the guideline penalty, it decided not to do so after balancing the aggravating and mitigating factors.

          In July 2014, OFAC issued a final Penalty Notice, formally imposing a $4, 073, 000 civil penalty. The agency had not been persuaded by Epsilon's response to the Prepenalty Notice, which again denied any knowledge or reason to know that Asra distributed Epsilon's products in Iran. The Penalty Notice explained that "multiple facts tend to show that the goods exported to Asra were sent to Iran and that Epsilon knew or had reason to know that the goods were intended specifically for supply, transshipment, or reexportation, directly or indirectly, to Iran." Although the Notice recited much of the evidence against Epsilon, it never mentioned the emails between Epsilon management and Hashemi.

         The issuance of the Penalty Notice was final agency action. See 31 C.F.R. § 560.704. In December 2014, Epsilon sued OFAC in district court. Epsilon's complaint sought declaratory and injunctive relief against enforcement of the civil penalty. On March 7, 2016, the district court granted summary judgment in favor of the government. See Epsilon Elecs., Inc. v. U.S. Dep't of Treasury, 168 F.Supp.3d 131, 147 (D.D.C. 2016).[1]

         Epsilon timely appealed. We have jurisdiction under 28 U.S.C. § 1291, and review de novo the district court's entry of summary judgment in favor of the government. Islamic Am. Relief Agency v. Gonzales (IARA), 477 F.3d 728, 732 (D.C. Cir. 2007). As the Administrative Procedure Act requires, our review is "highly deferential" to the agency, meaning we may set aside OFAC's action "only if it is arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law." IARA, 477 F.3d at 732 (quoting 5 U.S.C. § 706(2)(A)). Under that standard, we will uphold agency findings that are supported by substantial evidence, even if we might have reached a different conclusion in the first instance. See, e.g., United Steel Workers Int'l Union v. Pension Benefit Guar. Corp., 707 F.3d 319, 325 (D.C. Cir. 2013). That deference has a caveat: although the APA does not permit us to substitute our judgment for the agency's, we must ensure that the agency has "articulate[d] a satisfactory explanation for its action including a 'rational connection between the facts found and the choice made.'" Motor Vehicle Mfrs. Ass'n of the U.S. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983) (quoting Burlington Truck Lines, Inc. v. United States, 371 U.S. 156, 168 (1962)).

         Epsilon asks us to set aside these fundamental doctrines of administrative law by reviewing OFAC's decision de novo instead of under the APA's arbitrary-and-capricious standard. We have described de novo review in an APA case as "extraordinary and rare, " so rare, in fact, that we have never done so. Zevallos v. Obama, 793 F.3d 106, 112 (D.C. Cir. 2015). Although dicta in one of our cases left the door open to such scrutiny where the agency's factfinding procedures are "severely defective, " Nat'l Org. for Women v. Soc. Sec. Admin., 736 F.2d 727, 745 (D.C. Cir. 1984) (Mikva & McGowan, JJ., concurring), we need not decide what such an analysis would entail, because Epsilon failed to preserve any argument for de novo review before the district court. See Mem. Supp. Pl.'s Mot. in Opp'n to Defs.' Mot. Summ. J. 9, Epsilon, 168 F.Supp.3d 131 (No. 14-2220 (RBW)), ECF No. 19-1 [hereinafter Epsilon Mot. Summ. J.].[2] Accordingly, we will adhere to the "arbitrary [and] capricious" standard set out in 5 U.S.C. § 706(2)(A).


         Epsilon offers three challenges to the civil penalty that OFAC imposed. First, the company contends that none of its thirty-nine shipments to Asra were in violation of the Iranian Transactions and Sanctions Regulations. Second, Epsilon claims that the amount of the penalty assessed is not only arbitrary and capricious, but also an "excessive fine" forbidden by the Eighth Amendment. Third, the company argues that its due process rights were violated because it had insufficient notice of the evidence that OFAC intended to rely on.


         We first consider whether OFAC properly found Epsilon liable for thirty-nine violations of section 560.204 of the Iranian Transactions and Sanctions Regulations. In addressing that issue, we face a threshold question of regulatory interpretation. To hold a party liable for a breach of section 560.204, must OFAC prove that goods shipped by that party actually arrived in Iranian territory? Or can liability rest solely on a showing that the party shipped goods to a third party, with reason to know that the recipient specifically intended to reexport them to Iran?

         Epsilon advances the former position, and contends there is no substantial evidence that the thirty-nine shipments at issue ever entered Iran. OFAC responds that the regulation's plain text does not require such a showing. See Appellee Br. 29 ("Under the unambiguous terms of the regulation, actual reexportation to Iran by the person in the third country is not required for a violation."). The agency also urges us to defer to its interpretation if we find the regulation ambiguous. See Auer v. Robbins, 519 U.S. 452, 461 (1997). However, the reading of section 560.204 that OFAC has adopted is the same reading that we would have adopted in the absence of any agency interpretation. We therefore need not decide whether Auer deference would be appropriate in this instance.[3]


         We begin with the regulation's text. See In re England, 375 F.3d 1169, 1177 (D.C. Cir. 2004). Section 560.204 provides:

Except as otherwise authorized pursuant to this part . . . the exportation, reexportation, sale, or supply, directly or indirectly, from the United States, or by a United States person, wherever located, of any goods, technology, or services to Iran or the Government of Iran is prohibited, including the exportation, reexportation, sale, or supply of any goods, technology, or services to a person in a third country undertaken with knowledge or reason to know that:
(a) Such goods, technology, or services are intended specifically for supply, transshipment, or reexportation, directly or indirectly, to Iran or the Government of Iran . . . .

         The analysis at first glance appears straightforward. The regulation prohibits "the exportation [] of any goods [] to a person in a third country undertaken with knowledge or reason to know that [s]uch goods [] are intended specifically for [] reexportation [] to Iran." See id. That prohibition, on its face, has only two elements: (1) the exportation of goods to "a person in a third country" and (2) "knowledge or reason to know" that the third-country recipient plans to send the goods on to Iran. Id. The goods' actual arrival in Iran is not mentioned, meaning that proof of this event is not required for a liability finding under the prohibition on third-country exports.

         Epsilon, in response, points to the word "including." The rule just discussed is "includ[ed]" within a broader prohibition on "exportation . . . to Iran." See id. The company argues that the "word 'including' makes clear there is no separate prohibition on exports to third countries independent from re- exportation to Iran." Appellant Reply Br. 6. This argument relies on an unstated premise: that goods have not been exported "to Iran" until they actually reach Iranian territory. OFAC, by contrast, assumes that the phrase "to Iran" refers to the sender's intent, not the ultimate arrival of the goods. In other words, on OFAC's interpretation, goods have been "export[ed] . . . to Iran" when the exporter puts them in transit, with Iran as the intended final destination.[4]

         We think OFAC's reading more closely aligns with ordinary English usage. Suppose you put a birthday card in the mail, addressed to your brother. While the card is still en route, your mother asks you, "Did you send a card to your brother?" In line with OFAC's usage, you would respond, "I sent a card to him, but it hasn't arrived yet, " because you put the card in transit, intending it to reach him. Following Epsilon's usage, though, you would have to say, "I didn't send a card to him, " because the card has not yet arrived. (Stranger still, if you were uncertain whether the card had reached his mailbox, you might answer, "I don't know if I sent a card to him or not.") The first statement is more consistent with the way ordinary English speakers talk. Cf. Bond v. United States, 134 S.Ct. 2077, 2090 (2014) (rejecting a linguistic usage that "no speaker in natural parlance" would employ).

         The agency's argument draws further support from the definition of the word "exportation" in export rules that are closely related to OFAC's. The regulations in question are the Department of Commerce's Export Administration Regulations (EAR) which control the export of items that have both civilian and military uses. See 15 C.F.R. § 730.3. The Iranian transaction regulations do not expressly incorporate this EAR definition, but they often refer to the EAR. For example, OFAC's approval of some export activities is conditioned on compliance with the EAR. See, e.g., 31 C.F.R. §§ 560.530, 560.540. The EAR defines "export" as "an actual shipment or transmission of items out of the United States." 15 C.F.R. § 772.1 (2014). In other words, the occurrence of an "export" is not contingent on the goods' arrival at their final destination. See id. What's more, "the export or reexport of items subject to the EAR that will transit through [Country A] or be transshipped in [Country A] to [Country B] or are intended for reexport to [Country B], are deemed to be exports to [Country B]." Id. § 734.2(b)(6) (2014) (emphasis added).[5] Note the use of forward-looking language: the export of items "that will transit" or "are intended for reexport." If an exporter can say, "I have exported items to Country B that will transit through ...

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