[00:00:01] Speaker 00: Case number 16 down 5118, Epsilon Electronics Inc. [00:00:05] Speaker 00: Appellant versus United States Department of the Treasury Office of Foreign Assets Control at L. Ms. [00:00:10] Speaker 00: Taylor for the appellant, Mr. Yellen for the appellees. [00:01:10] Speaker 01: Good morning. [00:01:11] Speaker 01: Good morning, Your Honors. [00:01:13] Speaker 01: Teresa Taylor for Appellant Epsilon Electronics. [00:01:17] Speaker 01: I would like to reserve three minutes of my time for rebuttal, please. [00:01:20] Speaker 01: Epsilon requests that this court reverse the District Court's decision and OFAC's penalty for three reasons. [00:01:27] Speaker 01: First, the penalty violates the APA as there is no evidence that any of Epsilon's 39 shipments to Dubai were actually re-exported to Iran, which is a critical element of provision 560-204 [00:01:41] Speaker 06: Second, even if actual stop for a second, that depends on your interpretation of the regulation, right? [00:01:48] Speaker 06: You interpret the regulation is requiring a determination that goods went to Iran. [00:01:58] Speaker 01: Yes, we do have that position, but we believe that the facial construction of the statute supports that as well as yes, I understand. [00:02:06] Speaker 01: Yes. [00:02:11] Speaker 01: Second, if actual exportation to Iran is not a required element, the 4 million penalty is still unconstitutional, as there is no evidence of any harm caused by Epsilon's conduct. [00:02:22] Speaker 01: And finally, OFAC did not give adequate notice of its factual and legal basis underlying the penalty assessment and the pre-penalty notice in violation of Epsilon's due process rights. [00:02:33] Speaker 06: I hear from it. [00:02:34] Speaker 06: This was an informal adjudication, right? [00:02:37] Speaker 01: Yes. [00:02:38] Speaker 01: This was not a formal adjudication. [00:02:41] Speaker 01: I'm sorry. [00:02:44] Speaker 01: You're referring to OFAC's adjudication. [00:02:48] Speaker 01: I'm sorry. [00:02:48] Speaker 06: Are you familiar with the Administrative Procedure Act differences between informal adjudication? [00:02:54] Speaker 01: Yes, I'm sorry. [00:02:55] Speaker 06: This is informal. [00:02:56] Speaker 06: This is informal, right? [00:02:57] Speaker 06: Yes. [00:02:58] Speaker 06: Didn't the Supreme Court in the LTV case hold that reversing the Second Circuit, that an agency doesn't have to [00:03:08] Speaker 06: provide pre-notice of exactly its position before it comes out with an adjudication. [00:03:15] Speaker 06: Now, there may be an exception there that I will deal with your opponent. [00:03:21] Speaker 06: But isn't that true? [00:03:24] Speaker 01: I'm not recalling that case, your honor. [00:03:27] Speaker 01: But if that is true, whether that's true or not, I'd like to take a moment to review that case and get back to you on rebuttal. [00:03:35] Speaker 01: But here, Epsilon did not have an opportunity beyond the issuance of the final penalty notice to then seek any further redress with the agency. [00:03:47] Speaker 06: Well, that's what was true in an informal education. [00:03:51] Speaker 01: Well, under the law, [00:03:57] Speaker 06: You don't, typically in informal education, you don't have an opportunity to, unless the statute provides, for redress before the agency. [00:04:12] Speaker 06: Now your argument in this case involving a penalty raises different issues. [00:04:20] Speaker 01: Your honor, I'm sorry, I'm not understanding where you're going. [00:04:23] Speaker 01: Go ahead, counsel. [00:04:24] Speaker 01: I don't mean to confuse you. [00:04:26] Speaker 01: I'm sorry. [00:04:27] Speaker 01: I apologize. [00:04:30] Speaker 01: So turning to the first point, provision 560-204 of the Iranian transaction sanctions regulations broadly prohibits all U.S. [00:04:37] Speaker 01: exports to Iran, including indirect exports to Iran through third countries, where the U.S. [00:04:45] Speaker 01: exporter had reason to know that such exports were specifically intended for Iran. [00:04:49] Speaker 06: Didn't you take, or don't you, isn't a reading of the OFAC's opinion or decision that they did find that the goods went to Iran? [00:05:05] Speaker 01: OFAC did find that the goods went to Iran, and they specifically stated that... Are you so sure about that? [00:05:12] Speaker 01: In their internal memoranda supporting their pre-penalty notice and then their final penalty notice, they specifically state and listed out as enumerated two elements that they found that exports went to Iran. [00:05:26] Speaker 01: It's in Appendix 196 that exports went to Iran and then that there was reason to know that those exports were intended for Iran. [00:05:41] Speaker 06: finding that the goods went to Iran. [00:05:43] Speaker 06: I thought that's what your brief was arguing. [00:05:48] Speaker 06: There is no finding that the goods went to Iran. [00:05:50] Speaker 01: There's no evidence. [00:05:51] Speaker 06: There's no evidence. [00:05:52] Speaker 06: No, no. [00:05:52] Speaker 06: There's a finding that the goods went to Iran. [00:05:56] Speaker 06: Oh, fact. [00:05:58] Speaker 06: I think Vegas makes the point, but you don't. [00:06:03] Speaker 01: I'm sorry. [00:06:04] Speaker 06: I read the government of saying [00:06:13] Speaker 06: There's only evidence that tends to show that goods went to Iran. [00:06:19] Speaker 06: I don't see that there is a finding that the goods went to Iran. [00:06:26] Speaker 06: that the goods went to Iran? [00:06:29] Speaker 01: There's no evidence that the exports went to Iran, that any exports went to Iran, yes, but when you look back in the record and OFAC's determination prior to issuing the pre-penalty notice and prior to issuing their final penalty notice, they specifically state that as their reasoning one and two, and they specifically listed out the elements that exports went to Iran, and they list that as number one, and that's an Appendix 196 supporting their pre-penalty notice and their final. [00:06:54] Speaker 06: Council, that is not what it says. [00:06:57] Speaker 06: And this is in your interest, which is why I'm really mystified. [00:07:03] Speaker 06: As I, let me see, I've read, it says that they tend to show the goods went to Iran. [00:07:09] Speaker 06: There is no finding that the goods went to Iran. [00:07:13] Speaker 06: That's your argument. [00:07:15] Speaker 01: Do you see the point? [00:07:17] Speaker 01: Your Honor, I understand what you're saying, but we respectfully contend that OFAC was very specific in their reasoning for issuing the pre-penalty notice. [00:07:29] Speaker 06: I understand what you're saying about their reasoning, but that only supports their statement. [00:07:37] Speaker 06: There's a tendency to show that the goods went to Iran. [00:07:41] Speaker 01: I'm sorry, can I clarify, are you talking about appellants? [00:07:45] Speaker 01: Brief, are you talking about OFAC's determinations below in the record? [00:07:50] Speaker 06: I'm talking about OFAC's determination, which you're challenging. [00:07:54] Speaker 01: Yes, I would like to. [00:07:55] Speaker 01: Can you direct me specifically where you are, please, on the record? [00:08:02] Speaker 01: Let's see if I can find it. [00:08:03] Speaker 03: I thought your argument in part was that the agency took the position that, as it was interpreting the statute and its own regulation, [00:08:14] Speaker 03: that it had to show the goods went to Iran? [00:08:17] Speaker 01: Yes, Your Honor. [00:08:18] Speaker 03: All right, that's your argument. [00:08:19] Speaker 03: They didn't show that, you're saying. [00:08:22] Speaker 01: No, we're not saying that they showed that, but we're saying that they came to that conclusion when there was no evidence. [00:08:30] Speaker 01: Below, they came to that conclusion based on solely the reason to know. [00:08:33] Speaker 05: You're saying they made a finding that the goods went to Iran, but there was no substantial evidence to support that finding. [00:08:39] Speaker 05: Is that your argument? [00:08:39] Speaker 01: Yes. [00:08:40] Speaker 01: We say there's no evidence to support that. [00:08:42] Speaker 01: What they did was they conflated the two elements and used the reason to know as evidence of actual re-exportation to Iran. [00:08:51] Speaker 06: I see, I see. [00:08:52] Speaker 01: I apologize for any confusion there. [00:08:54] Speaker 06: I see that you're making, that you have, or you're certainly suggesting, a better argument than you're now articulating now. [00:09:04] Speaker 06: If you look at the penalty notice, [00:09:07] Speaker 06: It says multiple facts tend to show that the goods exported to us were sent to Iran. [00:09:17] Speaker 01: That's in the penalty notice, yes. [00:09:19] Speaker 01: What I was referring to earlier, I'm sorry, was the memorandum. [00:09:22] Speaker 06: Ah, but it's the penalty notice that we have before us. [00:09:24] Speaker 06: Yes. [00:09:25] Speaker 06: And that doesn't say the goods went to Iran. [00:09:29] Speaker 06: It says only [00:09:31] Speaker 06: that there was multiple facts tend to show that the goods exported to us were sent to a ring. [00:09:37] Speaker 01: Yes. [00:09:38] Speaker 01: Yes, Your Honor. [00:09:39] Speaker 01: And that is what we're arguing here, is that in the end there was no evidence. [00:09:43] Speaker 06: There is no finding here that the goods went to a ring. [00:09:45] Speaker 01: Exactly. [00:09:45] Speaker 01: Yes. [00:09:47] Speaker 01: I apologize. [00:09:48] Speaker 01: I should have made the distinction. [00:09:50] Speaker 06: You've got the confusion between the two, the pre-penalty notice and the notice. [00:09:55] Speaker 01: Yes. [00:09:55] Speaker 06: I see. [00:09:56] Speaker 06: I see your problem. [00:09:58] Speaker 01: OK. [00:09:58] Speaker 01: Yes. [00:09:58] Speaker 01: I apologize. [00:10:00] Speaker 01: So I want to be – I do want to be clear that we say there's no evidence – OFAC had no evidence that any shipments went to Iran. [00:10:07] Speaker 06: And what happened – You have a better argument that you've implied. [00:10:11] Speaker 06: There is no finding that the goods went to Iran. [00:10:15] Speaker 01: Yes, Your Honor, and that they received a $4 million penalty as a result, even though there was no finding that any goods went to Iran. [00:10:23] Speaker 01: And an appellant council raises for the first time a post hoc rationalization that the only element needed is reason to know. [00:10:35] Speaker 01: This is not an argument that they have raised at any point along the way. [00:10:42] Speaker 06: This is an interpretation of the regulation, right? [00:10:44] Speaker 01: Yes, it is, Your Honor. [00:10:45] Speaker 06: Don't you think it's fair to say the regulation is ambiguous as to whether or not [00:10:52] Speaker 06: The reason to know is subordinate to the first part of the regulation requiring a determination that goods went to Iran. [00:11:02] Speaker 01: I would argue that it's not ambiguous. [00:11:04] Speaker 06: Your argument is that the second part is subordinate to the first, and you don't get the reason to know unless there's a finding that goods went to Iran. [00:11:14] Speaker 01: Yes. [00:11:14] Speaker 06: You're not willing to say that's ambiguous? [00:11:17] Speaker 01: No, Your Honor, we contend that it's not ambiguous. [00:11:20] Speaker 01: And looking at the facial construction of the statute, one, first it talks about exports to Iran, and it doesn't get to reason to know until those exports are through a third country and they're trans-shipped. [00:11:33] Speaker 01: And so then, at that point, when you already have exports to Iran, then you look back at the reason to know to establish whether there was liability. [00:11:41] Speaker 06: The government argues that [00:11:43] Speaker 06: even though the issue comes up first in this litigation, they're entitled to deference for the proposition that the reason to know is an independent requirement and the government does not have to show [00:12:03] Speaker 01: Well, we argue that that's not the case in the situation where that post hoc rationalization is not supported by the agency's view at the time of issuing the penalty or by any prior agency action. [00:12:18] Speaker 01: Epsilon knows of no prior enforcement actions under provision 204 where any company has been penalized for based solely on reason to know where there hasn't been evidence [00:12:32] Speaker 01: or a finding of exports to Iran. [00:12:36] Speaker 06: Why can't the agency do this for the first time in this case? [00:12:43] Speaker 01: the law supports that it should not where it fails to give adequate warning of massive liability, which is the situation here. [00:12:55] Speaker 01: It's switching it up and changing the game here on appeal, and this is grossly unfair to Epsilon. [00:13:02] Speaker 01: And not only does it impose massive liability on Epsilon for these shipments at issue, but [00:13:11] Speaker 01: The broader implication here of finding that this is the case in the statute is far-reaching for several U.S. [00:13:21] Speaker 01: companies exporting to third countries that do business with Iran. [00:13:27] Speaker 01: And exporting to a third country that has business with Iran, especially now following the nuclear deal, is not in and of itself liability, whereas this would expose and drastically increase the liability for U.S. [00:13:41] Speaker 01: companies that are doing lawful business with foreign distributors who do have a share of business with Iran. [00:13:56] Speaker 05: What is OFAC supposed to do when they go to the website and see that Asra distributes to Iran and their photos of your goods in Iran? [00:14:10] Speaker 05: What are they supposed to do? [00:14:11] Speaker 01: I have a couple comments to that. [00:14:14] Speaker 01: And the first one is that when you look at the timeline here of the photos that they looked at, the photos that they used to rely on of Epsilon photos or sound stream pictures of products in Iran, supposedly in Iran as well, are copywritten 2006. [00:14:34] Speaker 01: And they use that as a basis to then imply that that's evidence of actual exports that don't occur until 2008 to 2012. [00:14:42] Speaker 01: Then, later, they download pictures of ASER's website, of a supposed shared website, in 2013, which is after the fact of all of the exports at issue. [00:14:54] Speaker 01: There's no way, we have no evidence that that website looked like that [00:14:58] Speaker 01: back at the time of the exports at issue between 2008 and 2012. [00:15:02] Speaker 05: Didn't your website have a category for Iran? [00:15:07] Speaker 05: A gallery for Iran? [00:15:08] Speaker 01: I'm not sure if it had a gallery for Iran. [00:15:11] Speaker 01: It did have a gallery of sound stream products, pictures that were up, that showed some pictures of trade shows in Iran. [00:15:21] Speaker 01: And when Epsilon contends that they were not aware that that was up, they do business [00:15:26] Speaker 01: in many different countries, and they weren't maintaining their website. [00:15:31] Speaker 01: They are a small, family-owned company, and they have multiple different lines of products distributing in multiple different places around the world. [00:15:38] Speaker 01: Less than 2% of all their business was with the Middle East. [00:15:42] Speaker 01: They were relatively new to exporting there in that area. [00:15:47] Speaker 06: And there's... Would you agree, Bouncer, if Asra, for whom you ship, only shipped to Iran? [00:15:57] Speaker 06: it would be fair for our OFAC to conclude that you met the standard of shipping to Iran. [00:16:07] Speaker 01: Well, there are a couple things I want to point out in that comment as well. [00:16:11] Speaker 06: Well, that was a question to which you can give an answer. [00:16:16] Speaker 01: Epsilon did not ship any products to Asra Electronic in Iran. [00:16:19] Speaker 01: It shipped it to Asra International in Dubai. [00:16:21] Speaker 06: No, no. [00:16:22] Speaker 06: If the evidence established that Asra in Dubai [00:16:27] Speaker 06: sent only to America. [00:16:38] Speaker 01: We would still have to go – I'm not really sure. [00:16:41] Speaker 01: That is not – we don't have any situation here like that at all. [00:16:44] Speaker 01: But we do have 39 shipments of a bunch of different shipments that went that are alleged. [00:16:49] Speaker 01: The government then said all of those shipments went to Iran. [00:16:52] Speaker 01: I'm not sure that if Epsilon had had knowledge that Epsilon – that Aswar International in Dubai shipped only to Aswar – in electronic in Iran. [00:17:03] Speaker 01: the government would then have a stronger case. [00:17:05] Speaker 01: But that's not the situation here. [00:17:07] Speaker 03: No, but the argument in part, at least to the 34 shipments, is – not the argument, but the question, as I understand it – is if you're shipping to someone whose only business dealings are to export goods to Iran, [00:17:26] Speaker 03: isn't that sufficient circumstantial evidence that you knew or had your client knew or had reason to know that the products were going to Iran? [00:17:37] Speaker 01: I would say under that situation, that would probably constitute reason to know, but that's not what we have here as our international. [00:17:43] Speaker 06: They would do two things. [00:17:59] Speaker 06: went to a trans shipper who only shipped to Iran. [00:18:03] Speaker 01: Yes, we have none of that evidence here. [00:18:07] Speaker 06: Is there some circumstantial evidence on that? [00:18:11] Speaker 03: So is your argument that ASRA [00:18:15] Speaker 03: shipped to others as well? [00:18:17] Speaker 01: Yes. [00:18:18] Speaker 01: And we have, yes, and there's evidence in the record that supports that. [00:18:21] Speaker 01: And specifically for the five egregious shipments, the evidence in the record shows specifically that reason to know is that these products were shipped with a specific purpose to be distributed outside Iran. [00:18:33] Speaker 01: Well, that's different. [00:18:35] Speaker 01: Yeah. [00:18:35] Speaker 06: Is the five egregious different than the previous group? [00:18:39] Speaker 01: We would contend no. [00:18:40] Speaker 01: So they asked for international and the evidence that Epsilon provided to a fact during its two-year investigation and BIS, mind you, which both said there's no evidence of anything being reshift to Iran. [00:18:52] Speaker 06: Your effort to ensure that ASRA distributed elsewhere, and your email from ASRA on that effect, [00:19:03] Speaker 01: I have two points, if you can let me get this out directly to that. [00:19:08] Speaker 06: Well, that's not necessary. [00:19:12] Speaker 01: What happened was, so Epsilon had a computer crash, and so it wasn't able to provide emails during that time period. [00:19:20] Speaker 01: The computer crash happened way before the first administrative subpoena was ever received or any contact by AFAC, but all of the shipping documents [00:19:27] Speaker 01: All of the bills, the payments, bank records, everything supports that every shipment during that time period for the non-egregious shipments went to Asra International in Dubai. [00:19:38] Speaker 01: Nothing indicated that anything was reshipped to Iran after that. [00:19:43] Speaker 01: Nothing. [00:19:43] Speaker 01: No mention of Iran. [00:19:45] Speaker 01: Nothing found that OFAC would usually use as actual evidence that something was reshipped. [00:19:50] Speaker 05: But you're saying if you would go to Asra International's website at that time, [00:19:53] Speaker 05: I'm sorry. [00:19:54] Speaker 05: But didn't Astra International website at that time show that it delivered, that it shipped to Iran? [00:20:02] Speaker 01: No. [00:20:02] Speaker 01: In fact, all there was was, and mind you, the government downloaded pictures in 2013 of Astra's website, not before. [00:20:11] Speaker 01: The pictures that it found before in 2007 were only of a few items from a trade show. [00:20:16] Speaker 01: Mind you, those items could have gotten there from anybody. [00:20:18] Speaker 01: Anybody could have walked into a retail store in Dubai or anywhere because Epsilon ships [00:20:23] Speaker 01: and multiple different countries and regions, and taken those into Iran. [00:20:27] Speaker 01: There are lots of pictures of basically the same types of odd items only at trade shows, and those were only before any of the shipments at issue. [00:20:36] Speaker 05: So my notes, correct me, I may be wrong here. [00:20:38] Speaker 05: My notes say that on Epsilon's own website, there was a photo gallery labeled Iran. [00:20:47] Speaker 05: Is that wrong? [00:20:48] Speaker 05: Am I wrong on that? [00:20:48] Speaker 01: Your Honor, I'd have to get back and look at the record if that is specifically [00:20:52] Speaker 01: Correct. [00:20:54] Speaker 01: My understanding is that it was a web gallery of some items, a few items at a trade show as well, in the Soundstream Gallery, which is one line of Epsilon's products. [00:21:08] Speaker 01: And the first subpoenas went to Power Acoustics, which is a separate line. [00:21:14] Speaker 01: The shipments to Asra International in Dubai support that all of those products went to Dubai and then were redistributed elsewhere, but nothing was intended for Iran. [00:21:28] Speaker 03: All right, I understand perhaps your argument as to the five after receiving the 2012 letter, that the emails show that this retail store was opened in Dubai. [00:21:43] Speaker 03: and arguably that the goods were going to that retail store in Dubai. [00:21:48] Speaker 03: What I want to focus on is the 34. [00:21:52] Speaker 03: As I understand OPEC's argument as to its evidence, it's that your client had that 2008 shipment. [00:22:03] Speaker 03: And then after that, there were these wire transfers that led the agency to do some investigation. [00:22:14] Speaker 03: It issued a subpoena. [00:22:17] Speaker 03: And then its own research led it to ASRA's website, where [00:22:28] Speaker 03: And I didn't catch this 2013 point you're talking about, but the agency took the position that that website showed that ASRA was dealing only with companies in Iran. [00:22:47] Speaker 03: So whatever went to it, [00:22:50] Speaker 03: Therefore, it was reasonable to assume your client knew or should have known that the goods were going to go into Iran. [00:23:02] Speaker 01: And that's assuming that ASRA International in Dubai and ASRA Electronic in Tehran are the same company. [00:23:09] Speaker 03: Well, they're both on ASRA International's website. [00:23:14] Speaker 01: ASRA Electronic, not ASRA International. [00:23:17] Speaker 01: In fact, there's an email. [00:23:18] Speaker 03: No, it shows it. [00:23:20] Speaker 01: There's an email, if I could explain for a second. [00:23:22] Speaker 03: No, I saw the email that says we're not the same company, that in fact ASRA Electronics is simply Iran. [00:23:30] Speaker 01: Your honor, there's an additional email of 2012 from Ask for International, stating it doesn't have its website up yet. [00:23:37] Speaker 01: It's developing a website and asking if it could post a link to its website. [00:23:41] Speaker 01: The only thing on the website connecting the two... [00:23:45] Speaker 01: Excuse me. [00:23:46] Speaker 01: Isn't that too late? [00:23:49] Speaker 01: In 2012? [00:23:50] Speaker 01: We don't know what if Astro International had a website prior. [00:23:53] Speaker 01: The government downloaded the Astro website pictures in 2013, which is after all of the non-egregious shipment. [00:24:00] Speaker 01: So we don't know what it looked like. [00:24:01] Speaker 01: When it used the Wayback Machine, it used the Wayback Machine only on Epsilon's website for the sound stream photos. [00:24:06] Speaker 01: But at no time, [00:24:07] Speaker 01: We know that even looking at Asra's website that the government uses, there is only a connection between the two on the contact page. [00:24:15] Speaker 01: And it specifically lists two different addresses, one in Dubai and one in Tehran. [00:24:20] Speaker 01: Even were they affiliated, this in and of itself is not evidence that at the time of the shipment of, if we're talking about just the 33, 34 non-aggregates, at the time of those shipments, that is not evidence that they were specifically intended for Iran. [00:24:37] Speaker 01: In fact, all of the other evidence that OFAC looked at, and BIS, mind you, and internally, in the memos from OFAC, it states that neither OFAC enforcement nor BIS found any connection whatsoever in any of those shipments, any of those bank records, any payments of anything being reshipped to Tehran. [00:24:58] Speaker 01: So all we have is an About Us page that they downloaded after the non-aggregious payments, I mean shipments, I'm sorry, of ASRA International with a Dubai address and ASRA Electronic with a Tehran address. [00:25:13] Speaker 01: That's the only reference to ASRA International in Dubai from that website. [00:25:21] Speaker 01: That in and of itself doesn't warrant a $4 million fine and evidence that every single one of the 39 shipments actually ended up in Iran. [00:25:31] Speaker 01: Now, even reason to know, if they had reason to know that the, you know, that ASRA had some kind of affiliate, if you look at the transshipment guidance for the statute, there was a situation where a U.S. [00:25:43] Speaker 01: manufacturer... [00:25:48] Speaker 03: All right, why don't we hear from counsel for the government and we'll give you some time on rebuttal. [00:26:10] Speaker 02: Good morning, Your Honors, May it please the Court. [00:26:12] Speaker 02: I'm Louis Yellen from the Department of Justice. [00:26:14] Speaker 02: I'm here today on behalf of the Office of Foreign Assets Control. [00:26:17] Speaker 02: If I may begin by addressing some of the circumstantial evidence that was in the record and response specifically to questions that Judge Silverman and Rogers asked. [00:26:27] Speaker 06: May I ask you a question at the outset before you get to the evidence? [00:26:29] Speaker 06: Yes, Judge. [00:26:30] Speaker 06: You point out in your brief, this is an interesting administrative law question, that you're entitled to our deference. [00:26:40] Speaker 06: Our or Chevron, whatever you want to call it, but our definitely. [00:26:43] Speaker 06: Interpretation of your regulation, even in an adjudication. [00:26:48] Speaker 06: And even if you advance it for the first time. [00:26:52] Speaker 06: And that's generally correct, but there's a big exception, isn't there? [00:26:55] Speaker 06: And going back to Gates and Fox, which Judge Scalia wrote 30 or so years ago here, [00:27:10] Speaker 06: ambiguous regulation that can be interpreted one of two ways. [00:27:16] Speaker 06: You don't impose a penalty without a prior indication as to what your interpretation of that regulation is. [00:27:25] Speaker 06: We have a whole string of cases, as I said, starting with Scalia's opinion in Gates of Oz and going through, I think, the one that is most prominent is one Judge Edwards wrote in the Chrysler case. [00:27:40] Speaker 02: I had forgotten about them. [00:27:43] Speaker 02: I take Your Honor's point. [00:27:44] Speaker 02: I don't think we need our deference. [00:27:46] Speaker 02: And if I might explain why. [00:27:48] Speaker 02: You are good for it. [00:27:50] Speaker 02: I understand. [00:27:50] Speaker 02: And I take Your Honor's point, which you're reminding me now of the line of cases that say our deference is not necessarily appropriate if an agency, right. [00:28:01] Speaker 02: And I take that point. [00:28:03] Speaker 02: And I'd like to explain why our deference is not necessary in this case. [00:28:07] Speaker 02: Opposing Council Epsilon relies throughout its brief on a document called the transshipment guidance. [00:28:14] Speaker 02: That's an OFAC interpretation, a policy interpretation. [00:28:17] Speaker 02: The citation is at page 12 of our brief. [00:28:20] Speaker 02: That policy interpretation has two bullet points explaining. [00:28:26] Speaker 02: The second bullet point, which was issued in 2002, the second bullet point says [00:28:32] Speaker 02: And if I may read this, it's one sentence. [00:28:34] Speaker 02: The prohibitions include exportation to a person in a third country, undertaken with knowledge or reason to know that such goods, technology, or services are intended specifically for supply, transshipment, or re-exportation directly or indirectly to Iran or the Government of Iran. [00:29:01] Speaker 06: necessary for own fact to find. [00:29:04] Speaker 02: that the goods went to Iran? [00:29:06] Speaker 02: With respect, Your Honor, I don't think that's correct, and if I might explain why. [00:29:10] Speaker 02: The bullet points set out two, excuse me, the transshipment guidance has two bullet points, one for each of the prongs of the regulation. [00:29:19] Speaker 02: It describes the prohibition. [00:29:21] Speaker 02: The first prohibition in the first bullet point is exportation to Iran. [00:29:27] Speaker 02: The second bullet point, I think it's quite critical, it starts off, the prohibitions include [00:29:33] Speaker 02: exportation of a person in a third country [00:29:58] Speaker 06: don't have the problem with ambiguity. [00:30:00] Speaker 02: I do believe it has, Your Honor, and I believe the tends-to-show language, which Your Honor quoted, is another way of articulating preponderance of the evidence. [00:30:08] Speaker 06: You know what? [00:30:09] Speaker 06: There's a problem with that. [00:30:10] Speaker 06: It doesn't say that. [00:30:11] Speaker 06: I wish it did. [00:30:12] Speaker 06: Your Honor, if I might read it expressly. [00:30:15] Speaker 06: Mobile facts tend to show the goods exported to Assad were sent to Iran. [00:30:23] Speaker 06: Now, if that had [00:30:32] Speaker 06: fact didn't say it. [00:30:34] Speaker 06: And your brief, which is very well written, sees that and sort of slides off. [00:30:43] Speaker 02: Your Honor, we do not believe that the standard requires a showing of exportation to Iran or a finding of exportation to Iran. [00:30:50] Speaker 06: No, I'm not concerned about, first of all, what I'm concerned about is what is the reasoning [00:30:57] Speaker 06: in the opinion before, it's not the brief. [00:30:59] Speaker 06: I totally understand your honor, I'm just trying to explain. [00:31:01] Speaker 06: And I'm trying to figure out what the devil the OFAC meant when it says mobile facts tend to show that the goods exported to Assad were sent to Iran. [00:31:13] Speaker 06: That does not look to me to be a finding that the goods went to Iran. [00:31:18] Speaker 02: With respect, Your Honor, I think asking for talismanic words like we find that, this is, if you look, this is the key finding which Epsilon relies on in its green. [00:31:29] Speaker 06: You know why this is, I'm afraid it's not talismanic. [00:31:33] Speaker 06: If you go back and look at the prior internal memorandums, the staff recognized [00:31:42] Speaker 06: that the goods went to Iran? [00:31:44] Speaker 02: No, Your Honor, if I may correct you on that. [00:31:45] Speaker 02: The staff recognized that they don't have direct evidence, such as weigh bills. [00:31:51] Speaker 02: Staff concluded repeatedly, and I can point you to pages in the appendix, that there was circumstantial evidence. [00:31:57] Speaker 02: And I was going to start with that. [00:31:59] Speaker 06: I think that's a fair point. [00:32:00] Speaker 06: They do argue about that. [00:32:01] Speaker 06: But that's not what the agency said in the finding. [00:32:04] Speaker 02: Again, with respect, Your Honor. [00:32:05] Speaker 06: In a formal adjudication, you can get by with a couple of paragraphs. [00:32:14] Speaker 06: And I don't see that there's a clear finding here that the goods went to Iran. [00:32:21] Speaker 02: Mobile facts tend to show. [00:32:23] Speaker 02: is not a finding. [00:32:25] Speaker 02: Part of the penalty determination was based on the theory that Epsilon's shipment to Asra added $3.4 million to the Iranian economy. [00:32:35] Speaker 02: That was an express rationale for the penalty determination. [00:32:39] Speaker 06: That further is... Yeah, but that could have come indirectly out of Asra's inventory. [00:32:46] Speaker 06: I'm sorry, Your Honor? [00:32:46] Speaker 06: That could have come indirectly out of Asra's inventory, if that was true. [00:32:50] Speaker 06: I'm not sure what. [00:32:51] Speaker 02: You said if it added to the Iranian economy, you could have. [00:32:54] Speaker 02: No. [00:32:55] Speaker 02: Epsilon's shipment to Asra added $3.4 million to the Iranian economy. [00:33:01] Speaker 02: And that was a finding that in the OFAC administrative determinations as part of the penalty calculation. [00:33:08] Speaker 06: Well, I'm looking at this paragraph here. [00:33:12] Speaker 06: And I give you all the deference you can. [00:33:16] Speaker 06: I can, but I'm missing that finding. [00:33:19] Speaker 03: In other words, in reading the record, it appeared there was this statement to which Judge Silberman has focused. [00:33:28] Speaker 03: And then there's a leap in the penalty that assumes the finding has been made. [00:33:36] Speaker 03: And I thought in your brief, you acknowledged that there wasn't such a finding in effect by saying, well, predominantly, use that adverb, [00:33:48] Speaker 03: the goods went to Iran. [00:33:50] Speaker 03: And I thought, well, that doesn't even cover all 34. [00:33:53] Speaker 02: So if I may, we defended the agency's understanding that actual exportation is not required by the regulation. [00:34:01] Speaker 02: We do believe that the agency further, at page 31 of our brief and page 11 of our brief, we expressly say that the agency also did find the thing that we don't think is necessary, but that is an actual finding. [00:34:13] Speaker 03: But we're focusing on the point, we don't see that finding. [00:34:17] Speaker 02: And I think the tends to show language is a finding of preponderance of the evidence. [00:34:25] Speaker 03: This tends to show you have on a brown jacket. [00:34:28] Speaker 03: Do you have a brown jacket on or not? [00:34:31] Speaker 02: With respect, Your Honor, if a male man... Incidentally, is there a brown jacket? [00:34:36] Speaker 06: I was going to say... She's right, it tends to show, but I'm not sure that is brown. [00:34:42] Speaker 02: At any rate, yes. [00:34:43] Speaker 02: I'd like to remind the Court, this is rational... The question is whether there's a rational basis in the record to support a finding of the agency. [00:34:51] Speaker 02: The question here is whether there was an actual finding, and if I may start... [00:34:58] Speaker 06: The thing is, the two issues interrelated. [00:35:02] Speaker 06: The first question is whether you have to make a finding. [00:35:07] Speaker 06: And I think the regulation is quite ambiguous. [00:35:13] Speaker 06: I would agree if you had sent out an interpretive rule that said you can be held in violation whether or not there's an actual [00:35:24] Speaker 06: the goods went to Iran, if you have reason to believe that they did go to Iran. [00:35:31] Speaker 06: I would say, okay, that's a legitimate interpretation. [00:35:35] Speaker 06: But I find it hard to accept that interpretation first in a case in which you impose a penalty. [00:35:41] Speaker 06: And then I look and see that whoever was doing the drafting of this may well have had this problem in mind because [00:35:49] Speaker 06: The internal memorandums indicate we don't have evidence of a bill of lading, so we say multiple facts tend to show [00:36:02] Speaker 02: If I may read from the agency counsel's, or sorry, enforcement officer's evaluation, I think what I'm about to read juxtaposes direct evidence with circumstantial evidence and says there is no direct evidence such as bills of lading, but we do have indirect evidence. [00:36:20] Speaker 02: No, I agree. [00:36:21] Speaker 02: I agree. [00:36:22] Speaker 06: But the thing that we reviewed before us [00:36:24] Speaker 02: is your actual penalty notice. [00:36:27] Speaker 02: But what I'm hoping to show, Your Honor, is that the actual penalty notice uses the exact same language as in the enforcement. [00:36:34] Speaker 06: At page 178... Well, that's a double problem. [00:36:38] Speaker 02: Well, listen to it in context, if I may, Your Honor, on page 178 of the appendix. [00:36:43] Speaker 02: Enforcement does not have copies of waybills or other shipping documents to show that the goods were re-exported to Iran. [00:36:50] Speaker 02: However, multiple facts tend to show that the goods were sent to Iran and that Epsilon knew or had reason to know that the goods would be sent to Iran. [00:36:58] Speaker 02: First, on one occasion, Epsilon, acting as power acoustic, attempted to send a package through DHL directly to Asra's address in Iran. [00:37:08] Speaker 02: Second, Asra's website indicates that it served the Iranian market and does not suggest... I see what you're saying. [00:37:13] Speaker 06: I don't think it quite establishes your point, but I see what you're arguing. [00:37:16] Speaker 06: Now let me ask you this question. [00:37:18] Speaker 06: Suppose under this interpretation, [00:37:22] Speaker 06: I, as the exporter, send goods to someone in Dubai. [00:37:31] Speaker 06: And there's reason to believe that I'm aware that the person I'm sending it to sends to Iran. [00:37:40] Speaker 06: The ship sinks. [00:37:43] Speaker 06: Am I in violation of the regulation? [00:37:45] Speaker 06: You could well be in violation. [00:37:47] Speaker 06: Wait a minute. [00:37:48] Speaker 06: Am I in violation or not? [00:37:53] Speaker 02: The reason I was hedging, Your Honor, without giving you a direct answer is because your question assumes certain facts which are critical. [00:38:02] Speaker 02: For example, the percentage. [00:38:03] Speaker 02: If we have — if you want to assume the example here — I'm asking the question, but I'm giving you those hypotheticals. [00:38:09] Speaker 06: I know, but — I have reason to know — Oh, I'm sorry. [00:38:12] Speaker 06: I missed that part. [00:38:13] Speaker 06: I have reason to know the goods will go — I beg your pardon. [00:38:16] Speaker 02: — unequivocally — But the shift sinks. [00:38:17] Speaker 02: The shift sinks. [00:38:18] Speaker 06: — unequivocally, because among other reasons — Your shift sinks unequivocally? [00:38:23] Speaker 02: No, no, no, there's a violation of the regulation unequivocally. [00:38:27] Speaker 02: But that assumes, of course, you don't have to make a finding that goods went to America. [00:38:33] Speaker 02: So, Your Honor, I think that's not necessarily right either for the following reason. [00:38:37] Speaker 02: What? [00:38:37] Speaker 02: Export means shipment from the United States. [00:38:40] Speaker 02: It does not necessarily mean receipt in. [00:38:43] Speaker 02: the foreign country. [00:38:44] Speaker 02: As a matter of just general commerce law, an import is a receipt in a country. [00:38:49] Speaker 02: An export is the act of shipment from this country. [00:38:53] Speaker 02: So once the ship leaves the dock for Iran, and on your hypothetical sinks in the middle of the ocean, the export has been completed, even if the import hasn't been completed. [00:39:05] Speaker 06: So in other words, you read the regulation as not required. [00:39:10] Speaker 02: receipt in Iran, as long as there is evidence of actual export with the necessary frame of knowledge. [00:39:24] Speaker 06: is not subordinate to the first clause. [00:39:27] Speaker 02: No, Your Honor, because even the first clause, export to Iran, as I thought your hypothetical included. [00:39:33] Speaker 02: Oh, to Iran. [00:39:33] Speaker 02: Right. [00:39:33] Speaker 02: So even if you're exporting directly to Iran, once the ship leaves the dock, if the ship sinks, and let's imagine for the hypothetical that you have that OFAC has a way bill showing that the export was going to Iran. [00:39:45] Speaker 06: I see. [00:39:45] Speaker 06: I see your point. [00:39:46] Speaker 06: That's right. [00:39:49] Speaker 02: Okay, so that hypothetical doesn't really help. [00:39:51] Speaker 02: But it does help with the subsidiary clause because the point, the subsidiary clause doesn't say export to Iran. [00:40:01] Speaker 02: It says export to a third country with knowledge. [00:40:05] Speaker 02: Yes, I see. [00:40:07] Speaker 02: And so it does help in that context as well. [00:40:10] Speaker 02: It doesn't say anything about receipt in Iran. [00:40:13] Speaker 06: You, in your own brief, [00:40:15] Speaker 06: pointed out that there's ambiguity we should defer even in litigation. [00:40:21] Speaker 06: And what you ignored was a line of cases indicating that there's an ambiguity in the regulation. [00:40:32] Speaker 06: I take that point your honor, but it's also a point that epsilon didn't make and so I would suggest that that actually has been waived for purposes of this litigation And in fact, you know what the problem is you raised it [00:40:50] Speaker 06: So we have case after case where the petitioner doesn't raise a point, but the respondent raises it. [00:40:59] Speaker 06: So you end up, you raise the points yourself. [00:41:01] Speaker 02: We raised the hour difference point. [00:41:03] Speaker 02: We didn't raise the exception to the hour point. [00:41:05] Speaker 02: Well, when you raise the hour difference point, then the question arises in my mind, [00:41:09] Speaker 02: What about the objection? [00:41:10] Speaker 02: Well, I obviously, it's the court's judgment as to whether or not the issue was properly raised. [00:41:15] Speaker 02: I guess what I would wish to emphasize to the court is in the context of, if the court focuses on the enforcement memos to the director of OFAC and looks at the language and the juxtaposition of the absence of direct evidence but the existence of indirect evidence, and then looks at the penalty notice, which uses the identical language describing the circumstantial evidence, [00:41:39] Speaker 02: And if I may, I think it's quite critical. [00:41:41] Speaker 02: I hoped to start this colloquy by reciting the evidence that was before OFAC. [00:41:47] Speaker 02: And I really think it's important to focus. [00:41:48] Speaker 03: I do, too. [00:41:49] Speaker 03: And I'd just like to hear your take on it. [00:41:51] Speaker 02: Thank you, Your Honor. [00:41:52] Speaker 02: So the following – I think it can be distilled to five points. [00:41:56] Speaker 02: The following five facts were in the record, as found by OFAC. [00:42:00] Speaker 02: First, Epsilon doing business as power acoustic previously shipped goods directly to Asra in Iran, resulting in a cautionary letter that – That's the 2008 shipment. [00:42:10] Speaker 02: Yes, ma'am, the 2008. [00:42:12] Speaker 02: In 2011, Epsilon received a copy of an administrative subpoena that OFAC sent to Epsilon's bank concerning the payments Epsilon received for goods Epsilon shipped to Asra in Dubai for re-exportation to Iran. [00:42:28] Speaker 02: That's on page 88 of the appendix. [00:42:31] Speaker 02: Epsilon acknowledged the receipt of that on page 91. [00:42:35] Speaker 02: That 2011 notice [00:42:37] Speaker 02: specifically put Epsilon on notice that OFAC was investigating its shipments to Asra and said that OFAC believed that the shipments to Asra were being forwarded to Iran. [00:42:51] Speaker 02: Subsequently, after that subpoena, Epsilon then made the five subsequent shipments to Asra, which were the basis for the egregiousness determination. [00:43:02] Speaker 03: On that, let me ask you, though, but at that point, there's evidence in the record that this retail store had been opened in Dubai and that these goods were going there to remain at this retail store in Dubai. [00:43:21] Speaker 03: So why isn't that consistent with a non-violation, if I can put it this way? [00:43:28] Speaker 02: OFAC chose not to credit that evidence in the record for a number of reasons. [00:43:33] Speaker 02: First, it found that the pictures of the shop didn't indicate whether it was a commercial shop or a dealer. [00:43:39] Speaker 02: Astrod, generally, is a dealer. [00:43:43] Speaker 02: It doesn't directly sell its products. [00:43:45] Speaker 03: Yeah, but it has two arms. [00:43:46] Speaker 03: I mean, so it has a retail shop. [00:43:48] Speaker 03: I can understand why. [00:43:50] Speaker 03: the agency might not have, but I just need to be clear, it took the position that having received the 2012 letter, any shipment to OSRA, no matter what OSRA's, I'll say, corporate form might have been at that stage, [00:44:12] Speaker 03: was a violation. [00:44:14] Speaker 02: I think that's not correct, Your Honor. [00:44:15] Speaker 02: I think OFAC, if you look at the internal agency memoranda, OFAC specifically considered this evidence and chose not to credit it, not only because of, as I said, there wasn't specific evidence that it was a commercial shot, but also because OFAC found suspicious the timing that this was after OFAC. [00:44:36] Speaker 03: No question about it, but the question I had in my mind was, [00:44:42] Speaker 03: Necessarily, it followed the 2012 letter. [00:44:48] Speaker 03: And it seems that the agency took the position, no matter what happens after 2011, if you ship to Dubai to Austria, it's a violation. [00:45:01] Speaker 02: Again, Your Honor, I don't think that the necessarily... No, no, no, but I'm just trying to think of this. [00:45:05] Speaker 03: Suppose it's Coca-Cola, you know, and they're shipping to this Dubai retail store. [00:45:13] Speaker 03: And that's the intent. [00:45:16] Speaker 03: And the regulation talks about specifically intended. [00:45:23] Speaker 03: All right? [00:45:24] Speaker 03: And there's evidence now there's this retail store. [00:45:27] Speaker 02: But this is against the background. [00:45:29] Speaker 03: I know, but my point is, once guilty, always guilty seems to be the argument. [00:45:34] Speaker 02: With respect, Your Honor, if you look at the agency's evaluations, I really don't believe that was it. [00:45:39] Speaker 02: I think the agency evaluated the evidence, considered its probative worth, and concluded that the slender evidence that Epsilon had identified in the emails, especially when coupled with the fact that there was no- But look at it from this point of view. [00:45:53] Speaker 03: Why on earth? [00:45:55] Speaker 03: would they do this and risk this type of penalty after the 2012 letter? [00:46:06] Speaker 02: Your Honor, that is why OFAC found them reckless. [00:46:09] Speaker 02: That is precisely why. [00:46:11] Speaker 03: So what they had to do was cut off [00:46:13] Speaker 03: all shipments to Asra, even if Asra was now Coca-Cola. [00:46:21] Speaker 02: I think at that point, given the history here, given... But the answer is yes, isn't it? [00:46:27] Speaker 03: That they had a course of conduct before 2012, and it really didn't matter what they did afterward. [00:46:34] Speaker 02: know your honor they could have put into place compliance procedures to verify given the long history and one of the things OFAC considers is whether a business that has some notice. [00:46:46] Speaker 03: So once you get the 2012 letter, the burden is on [00:46:52] Speaker 03: The company. [00:46:53] Speaker 03: And I was going to raise that with counsel for a moment. [00:46:55] Speaker 02: To undertake due diligence and to ensure that you've put in compliance procedures to make sure that your products are not ending up in Iran. [00:47:04] Speaker 02: All right. [00:47:04] Speaker 03: So just going through this, you've got the 2008, you've got the subpoena to the bank with the copies directed. [00:47:10] Speaker 02: In 2011, that's right. [00:47:11] Speaker 02: Right. [00:47:11] Speaker 02: Then you've got. [00:47:11] Speaker 02: The five further shipments. [00:47:13] Speaker 02: The five shipments. [00:47:14] Speaker 02: And then the last two points are, at the time, Asra's website listed dealers only in Iran, [00:47:20] Speaker 03: The only website you have is a 2013. [00:47:25] Speaker 02: So this goes to the last point Epsilon's own website from 2006. [00:47:31] Speaker 02: contained pictures which were identical from the OSRA website. [00:47:37] Speaker 02: And so we know, at least as 2006, the same websites that, sorry, the same pictures that appear in the 2013 website from OSRA appear in- But, counsel, in all due respect, these websites, who knows what's on them is accurate. [00:47:54] Speaker 03: All I'm saying is they were 2006 photos. [00:47:58] Speaker 02: which were identical to the 2013 photos from the ESRA. [00:48:01] Speaker 03: So whoever set up the website just took those photos and put them on Epsilon's website. [00:48:07] Speaker 02: I'm just saying is that... Under a gallery labeled Iran, Your Honor. [00:48:11] Speaker 03: But when you say gallery, it has the flag. [00:48:13] Speaker 02: It had the flag and you clicked on it and it came up with pictures of Epsilon's own products at exhibits in Iran. [00:48:21] Speaker 03: In 2006? [00:48:24] Speaker 02: Yes, Your Honor. [00:48:25] Speaker 02: In the 2006 website, Epsilon website, it had the exact same photos that later appeared in the 2013 website from Asra that exhibited all of Epsilon's products in Iran. [00:48:38] Speaker 03: And so that ties... So it was reckless. [00:48:40] Speaker 02: It was absolutely reckless. [00:48:42] Speaker 02: And that was the agency's finding. [00:48:43] Speaker 02: And that was all that was required. [00:48:46] Speaker 02: And I'd hasten to add, of course, this is a question in the first instance for the agency to decide. [00:48:51] Speaker 03: No, no, I understand. [00:48:52] Speaker 03: Yeah. [00:48:52] Speaker 03: But I just want to understand what the agency, because when I took notes, I wrote down everything I thought the agency was relying on. [00:49:00] Speaker 03: And I missed this point about, I got the point that the copy of the subpoena letter was sent to Epsilon. [00:49:09] Speaker 03: But that was being relied on. [00:49:13] Speaker 02: Yes. [00:49:13] Speaker 02: Yes, Your Honor. [00:49:14] Speaker 02: It was absolutely relied on, in part because at that point, from that point on, Epsilon was on notice that its business dealings with Asura were highly problematic. [00:49:24] Speaker 02: It should at the very least undertake a compliance process to ensure that none of its products, knowing that OFAC has substantial concern that its products are being sent, [00:49:34] Speaker 02: on to Iran, to undertake a compliance program, a number of emails from an Oscar representative saying, oh, no, we've opened up a new store, and OFAC's determination was not sufficient to satisfy them. [00:49:46] Speaker 03: So it's not enough to raise a red flag, as Amicus argues, that there used to be this inventory exception [00:49:57] Speaker 03: in the Libyan situation. [00:49:59] Speaker 03: But that's not the exception that's in the Iran situation. [00:50:03] Speaker 02: The OFAC has never recognized something that appellant and amateurs are calling an inventory exception. [00:50:09] Speaker 03: Except if it's a first, what I'll call a first offense, and the business notifies the agency. [00:50:13] Speaker 02: That's a mitigating factor. [00:50:15] Speaker 02: If I may just address the inventory exception. [00:50:18] Speaker 02: Under that conception of the world, [00:50:20] Speaker 02: If a U.S. [00:50:22] Speaker 02: person ships its goods to a third country and the merchandise becomes part of the general inventory and then the person in the third country subsequently ships to Iran, the U.S. [00:50:31] Speaker 02: person is blameless. [00:50:32] Speaker 02: Well, under that theory, imagine that the person in the third country ships 90% of its goods to Iran. [00:50:39] Speaker 02: Under the inventory exception so described, the person would be blameless. [00:50:44] Speaker 02: That's not the test OFAC uses. [00:50:46] Speaker 02: The test OFAC uses is whether the individual U.S. [00:50:49] Speaker 02: person knew or should have known that the person... Suppose it's 75%. [00:50:54] Speaker 02: So these are very fact-specific inquiries, Your Honor, and, for example, I could imagine a situation where it's 75%, but the U.S. [00:51:03] Speaker 02: person has a very stringent compliance standard, because, again, OFAC has to demonstrate that the specific goods that the U.S. [00:51:10] Speaker 02: person sends [00:51:11] Speaker 02: are intended for Iran. [00:51:15] Speaker 02: And so if there's a compliance program, for example, that demonstrates beyond speculation that the goods, in fact, didn't go to Iran, but the goods went to Tajikistan or some other place, then there would be no liability. [00:51:30] Speaker 02: It's all a question of the facts in the particular case. [00:51:34] Speaker 02: Here, the facts, as OFAC found them, were that there were that [00:51:38] Speaker 02: Asra did its dealings only in Iran at the time of the events in question here. [00:51:45] Speaker 03: And you know that based on its 2013 website? [00:51:50] Speaker 02: Based on the 2013 website. [00:51:52] Speaker 02: And again, the website, the content of the website, which OFAC credited, the content of the website said, we've been doing business in Iran for 10 years. [00:52:03] Speaker 02: And so again, these were all determinations that OFAC made in its judgment as the fact finder in this case. [00:52:12] Speaker 02: And it was only the combination of all of the circumstantial evidence that led to the conclusion. [00:52:17] Speaker 02: There was never, and that is why you have language like tend to show, because it was a circumstantial determination, not a determination based on direct evidence. [00:52:27] Speaker 06: If there was a determination. [00:52:29] Speaker 02: Yes, Your Honor. [00:52:30] Speaker 02: The government's view is that, in fact, there was a determination. [00:52:33] Speaker 02: And that, if I might say just one last time, the language of the penalty notice tracks the exact language of the evaluation in the agency's internal memoranda, which juxtaposed the direct and the indirect. [00:52:45] Speaker 03: So am I incorrect that in your brief you referred to predominantly? [00:52:49] Speaker 02: That is part of the regulation, Your Honor. [00:52:55] Speaker 03: I thought you were saying, well, even if they didn't [00:52:58] Speaker 03: show that all 34 are 30? [00:53:00] Speaker 03: Oh, no, no. [00:53:02] Speaker 02: I'm sorry, Your Honor. [00:53:03] Speaker 02: No, predominantly goes to the question about whether or not a person should have known. [00:53:09] Speaker 02: And one of the factors that the agency considers is whether the person in the third country predominantly or exclusively trades with Iran. [00:53:17] Speaker 02: So that would just be a factor for consideration. [00:53:19] Speaker 02: It absolutely would not be. [00:53:21] Speaker 03: So in my hypothetical, I'm Coca-Cola, and I'm shipping throughout the Middle East. [00:53:26] Speaker 03: And once I know, [00:53:28] Speaker 03: or I get this cautionary letter, then I have to show all kinds of things. [00:53:35] Speaker 02: That you've undertaken a compliance process to make sure that your product actually doesn't go to Iran, that the third person in the third person, excuse me, in the third country has set up procedures to make sure that when Coke is received from the United States, it doesn't get mixed into any deliveries going to Iran, and so forth. [00:53:51] Speaker 06: You're imposing a pretty sophisticated burden on a little company. [00:53:58] Speaker 02: I'm sorry, Your Honor, it's every company's obligation to obey United States law. [00:54:08] Speaker 02: But again, Your Honor, I believe that we have. [00:54:10] Speaker 02: And at the initial 2011 subpoena – actually, the initial 2008 cautionary letter made abundantly clear that there is severe danger in dealing with any company that does business with Iran. [00:54:25] Speaker 02: And again, we believe that the record here shows that Epsilon should have known that Osra did dealings with Iran. [00:54:32] Speaker 06: And it acted at least – [00:54:34] Speaker 06: These sanctions are still in effect after the nuclear deal? [00:54:38] Speaker 02: Yes, Your Honor. [00:54:39] Speaker 02: They are still in effect today. [00:54:40] Speaker 02: They were at the time of these transactions, and they are in effect today. [00:54:43] Speaker 02: They remain in effect today. [00:54:45] Speaker 02: So again, I appreciate Your Honor's point about it being a small business, but it received warning in 2008. [00:54:51] Speaker 06: No, that's a fair point. [00:54:53] Speaker 06: I'd feel more comfortable if you had actually made the finding that you think is implicit. [00:54:59] Speaker 06: Well, again, I don't mean to be discutative, but we think it's... [00:55:04] Speaker 06: the ambiguity in the regulation. [00:55:06] Speaker 06: But you make an interesting point that you raised it rather than, in a sense, rather than the appellant here. [00:55:17] Speaker 06: So we'll have to ask for that question. [00:55:21] Speaker 03: And what about the arguments regarding the penalty itself? [00:55:27] Speaker 02: Which argument in particular does Your Honor have in mind? [00:55:30] Speaker 03: Well, grossly disproportionate, and they point out to your case summaries, and you say, well, that's not the whole picture. [00:55:36] Speaker 02: So I think, Your Honor, in our view, what Epsilon has done is picked out a case where the government gave a reduction for first offense. [00:55:48] Speaker 02: Well, it took your summaries. [00:55:50] Speaker 02: No, I understand that, Your Honor. [00:55:53] Speaker 02: In this case, OFAC found seven aggravating factors, and I'm sorry, I'm- Right, right, I'm with you. [00:56:01] Speaker 02: Lapsing three or four mitigating factors. [00:56:03] Speaker 03: And it came up to a net zero. [00:56:05] Speaker 02: A net zero, despite the disparity. [00:56:07] Speaker 03: So no aggravation, no mitigation. [00:56:09] Speaker 02: Right, and as to any one of the mitigating factors, you can find a case where OFAC gave a mitigation because of one of those factors. [00:56:18] Speaker 03: So what about the pullback on harm? [00:56:22] Speaker 03: in your brief? [00:56:23] Speaker 02: I don't believe we have pulled back on harm. [00:56:25] Speaker 02: We recognize that OFAC made a determination that $3.4 million were added to the Iranian economy, and that was a harm to U.S. [00:56:36] Speaker 02: sanctions interests. [00:56:38] Speaker 02: Again, this goes to whether the colloquy we've been having about whether OFAC made such a finding. [00:56:44] Speaker 02: But in any event, I would propose, Your Honor, that a violation of [00:56:48] Speaker 02: any sanctions regulation undermines the purposes of the sanctions regardless. [00:56:56] Speaker 02: And OFAC did make that determination. [00:56:58] Speaker 02: So I apologize if our brief gave the impression we were pulling back from it. [00:57:01] Speaker 02: We most certainly are not. [00:57:03] Speaker 03: I had one other question. [00:57:05] Speaker 02: Yes, Your Honor. [00:57:05] Speaker 03: You point out that in response to Appellant's argument that this will bankrupt the company. [00:57:17] Speaker 03: Just for my curiosity, if that's true, are there, quote, arrangements that can be made with OFAC and its regulatory system, or it's just tough luck? [00:57:31] Speaker 02: I honestly don't know the answer to that question, Your Honor. [00:57:34] Speaker 02: What I would like to point out, Your Honor, is that that representation was not made to the agency. [00:57:38] Speaker 03: No, that's the point you made in the brief, but it has net [00:57:43] Speaker 03: what net, is it gross 66 million annual and it says this 4.3 is basically going to bankrupt it. [00:57:55] Speaker 03: I just said if it's true, no recourse except this court. [00:58:01] Speaker 02: I have no knowledge beyond the record on this point, Your Honor, what I can do. [00:58:05] Speaker 03: No, I was just asking about whether you had general knowledge and you're telling me you did not. [00:58:11] Speaker 02: But I would like to point out one thing. [00:58:12] Speaker 02: At page 199 of the appendix, the penalty notice itself says, you must pay this penalty or arrange for installment payments of the penalty within 30 days. [00:58:22] Speaker 03: I know, but installment doesn't really help here. [00:58:24] Speaker 02: Well, I don't know. [00:58:25] Speaker 03: It depends on the nature of... Well, all I'm saying is these case summaries point out that in other situations, there were major reductions that were allowed. [00:58:33] Speaker 03: And even in this case, this client was eligible for a first offender. [00:58:38] Speaker 02: Your Honor, in all of those other cases, those were settlements where the government didn't have to go to the further burden of administrative adjudication because the party chose to settle. [00:58:47] Speaker 03: And as Your Honor knows... And the burden here is the subpoenas? [00:58:51] Speaker 02: No, Your Honor. [00:58:52] Speaker 03: And reading the documents. [00:58:53] Speaker 02: After the pre-penalty evaluation, there was further adjudication within the agency. [00:58:57] Speaker 02: And now all of this litigation. [00:59:00] Speaker 02: As Your Honor knows, there's always a trade-off when there's a settlement. [00:59:03] Speaker 02: And every single case but one, the Blue Robin case that Epsilon cites, was a settlement. [00:59:09] Speaker 02: And had Epsilon chose to settle this matter, it might have received a reduction as well. [00:59:15] Speaker 02: That might have been less onerous than the current burden. [00:59:18] Speaker 02: But Epsilon chose not to settle. [00:59:20] Speaker 02: And with respect, that's a litigation choice that Epsilon itself has made. [00:59:31] Speaker 02: If the Court has no further questions. [00:59:35] Speaker 02: Thank you, Your Honors. [00:59:45] Speaker 01: I have a lot of comments to all of that. [00:59:47] Speaker 01: The first is that it's flat out not true that Epsilon did not want to settle. [00:59:50] Speaker 01: In fact, they reached out to the government to do so several times and they were denied the opportunity. [01:00:20] Speaker 06: whether or not there was a separate requirement that goods be determined to have arrived in Iran and a separate requirement that the party involved have reason to believe or reason to know that the goods were to be in Iran. [01:00:40] Speaker 06: And I asked, well, [01:00:43] Speaker 06: Normally, we have a whole series of cases. [01:00:47] Speaker 06: You don't get deference with respect to ambiguity in a regulation if you're applying it first in a case in which you impose a penalty. [01:00:57] Speaker 06: And counsel said, finally, even if that's true, that issue was not raised by petitioners. [01:01:08] Speaker 01: Your Honor, I would contend that we raise the opportunity to challenge the penalty. [01:01:14] Speaker 01: I would like to, you know, I cannot recall specifically what... No, no, no, that's not the point. [01:01:20] Speaker 01: Okay, I'm sorry. [01:01:21] Speaker 01: Can you repeat the point, please, so that I can try to recall? [01:01:24] Speaker 06: This is an administrative law point. [01:01:26] Speaker 01: Okay. [01:01:27] Speaker 06: Council argues that even if there's an ambiguity in the regulation, that is to say, it is not clear whether regulation requires both [01:01:37] Speaker 06: a determination that the goods arrive in a range, and two, that the individual or the company at stake had reason to know they would go for two separate requirements, insofar as that may be ambiguous because of the wording [01:02:01] Speaker 06: that that is not the proper reading of the regulation. [01:02:05] Speaker 06: That is to say, if you have reason to know, it doesn't matter whether the goods ever arise in the rain. [01:02:12] Speaker 06: And I was troubled about the fact that that is being articulated for the first time in a penalty case, which according to a whole string of our cases is not appropriate. [01:02:24] Speaker 06: And he said, well, even if that's true, that is not an argument [01:02:29] Speaker 06: the appellant has made in this case, or petitioner has made in this case. [01:02:33] Speaker 01: Well, Your Honor, this was not, opposing counsel's argument here was not raised until on appeal. [01:02:41] Speaker 01: So the reading of the statute was not an issue before, and so I don't see that how deference now to the ambiguity of the- It's not the statute, it's the regulation. [01:02:56] Speaker 01: I'm sorry. [01:02:57] Speaker 01: I misspoke. [01:02:59] Speaker 01: The ambiguity of the regulation was not clear. [01:03:03] Speaker 01: In fact, we specifically raised below how the inventory exception and the statute should be interpreted, and we made arguments below concerning the different elements here and specifically why this penalty was disproportionate to agency action and why this case stands out apart from prior agency action. [01:03:24] Speaker 06: I get your answer. [01:03:26] Speaker 01: I would like to say also that opposing counsel is standing up here, conflicts actual knowledge with reason to know. [01:03:36] Speaker 03: Well, can I just go back to this point? [01:03:38] Speaker 03: In your reply brief, you do make the argument that the agency's new interpretation imposes massive liability without fair warning. [01:03:50] Speaker 03: That's not the point Judge Silberman's making. [01:03:53] Speaker 03: It's close. [01:03:54] Speaker 03: But it's in the ballpark. [01:03:57] Speaker 06: Yeah, it is in the ballpark. [01:03:58] Speaker 06: That's a fair point. [01:03:59] Speaker 06: I know where you got it. [01:04:00] Speaker 06: You got it from the Amiga Street, because you didn't have it in your opening brief, which raises a separate problem. [01:04:07] Speaker 03: Well, but it's responsive. [01:04:08] Speaker 03: It's an argument. [01:04:09] Speaker 03: It is. [01:04:10] Speaker 06: You could make the argument that the government itself raised this point by saying we should get deference, even if it's in the first case, but you didn't raise it. [01:04:22] Speaker 01: I would like an opportunity to address that, and if we could submit something to the court on that so I can go back and review the information to make sure that I am specifically addressing your concern, if that would be possible. [01:04:39] Speaker 03: You mean judge the woman's question? [01:04:41] Speaker 01: Yes. [01:04:42] Speaker 03: Because I'm not sure that- I just thought it was just a question of whether you raised [01:04:46] Speaker 03: the point that our deference does not apply in your case because the government is imposing a penalty. [01:04:55] Speaker 03: And the closest I could come was the fair warning notice argument that you made, which is different, but it's in the ballpark, as we're saying. [01:05:08] Speaker 01: Well, I apologize that I am not 100% following where you are. [01:05:13] Speaker 01: If I'm close, I'm glad to hear that I'm close. [01:05:16] Speaker 01: And so I do, you know, Epsilon does contend that the agency's post-hoc rationalization concerning this statute is just that. [01:05:27] Speaker 01: It's a brand new interpretation. [01:05:29] Speaker 03: Well, the response, though, you heard earlier was that it doesn't need our deference. [01:05:37] Speaker 01: Well, I understand that it does, based on the case law that we cited. [01:05:42] Speaker 01: One is Smith-Kline. [01:05:44] Speaker 01: But where it's plainly inconsistent with the regulation, and there's reason to suspect that it doesn't reflect the agency's fair and consistent judgment on the matter, then it should not receive deference. [01:05:59] Speaker 06: I don't think it's inconsistent. [01:06:00] Speaker 06: I think the regulation should. [01:06:06] Speaker 06: That was my view. [01:06:08] Speaker 01: Well, Your Honor, I would like to, can I bring, can I address a few of the points that opposing counsel mentioned here in support of his arguments? [01:06:18] Speaker 01: One, he talked about a lot of different things that we, that Epsilon would contend is mixing up the practice here concerning exports. [01:06:28] Speaker 01: One, he contended that the second it leaves U.S. [01:06:31] Speaker 01: shores, then that's where liability is imposed. [01:06:35] Speaker 03: If there's evidence that you specifically knew or should have known that those goods were going to Iran, whether they get to Iran or not. [01:06:45] Speaker 01: Well, when you look at all the enforcement actions, as I mentioned before, there is not one enforcement action imposing liability under 204 for reason to know whether or not actual exports. [01:06:56] Speaker 06: And the percentage of business with the raw... Council, this is another question of administrative law that I'm not sure you're familiar with. [01:07:05] Speaker 06: But generally, the sanctions of an agency [01:07:31] Speaker 06: Well, Your Honor, Epsilon has fair warning. [01:07:41] Speaker 01: Your Honor, if Epsilon had fair warning of the basis that OFAC was relying upon, then it would have had an opportunity to respond and clear up any erroneous misunderstandings or conclusions. [01:07:52] Speaker 01: The cautionary letter on its face did not provide notice to Epsilon that, one, it wasn't goods. [01:08:00] Speaker 01: It was a small, tiny DVD part. [01:08:03] Speaker 01: a spare part and that the address was the same address as ASRA electronic. [01:08:09] Speaker 01: That was never disclosed. [01:08:11] Speaker 01: That spare part, the value of that spare part is extremely minor here. [01:08:18] Speaker 01: That information then that the agency was relying back on that cautionary letter was never disclosed to Epsilon either during the investigation of the 39 shipments. [01:08:27] Speaker 01: So it was not clear that that cautionary letter for that one spare DVD part back in 2008 ever had any connection to ask for international and to buy or even to ask for electronic in Tehran. [01:08:39] Speaker 01: The DHL slip was illegible. [01:08:42] Speaker 01: The employee name was not anybody from their employee list and the DHL is not [01:08:49] Speaker 01: a company that they use in their normal course of business. [01:08:52] Speaker 01: Had they had the opportunity to fully respond to all of the bases, the shared website that the two ASRAs are allegedly one company or even their affiliate, then they could have cleared up a lot of this and conducted their own information and provided evidence or a response to that. [01:09:09] Speaker 01: But they never had that opportunity. [01:09:10] Speaker 01: The only notice that they were given [01:09:12] Speaker 01: was that there was a sound stream gallery, of which then the government turned around and slapped them for taking down and said that they were trying to conceal this. [01:09:20] Speaker 01: The web gallery did not come down until after they already responded to the third administrative subpoena. [01:09:25] Speaker 01: And I don't understand what Epsilon should have done here. [01:09:28] Speaker 01: In fact, they took it down as a remedial measure. [01:09:30] Speaker 01: Leaving it up would have been far worse, worse interpreted by OFAC for sure. [01:09:37] Speaker 01: And to state that they had no compliance program, [01:09:41] Speaker 01: One, not having a compliance program doesn't equate to a maximum penalty and especially egregious violations going to a store in Dubai when all the evidence points to the fact that the intent is that it go to Dubai and stay in Dubai, that it's not be intended for a run. [01:09:59] Speaker 01: One of those shipments was for window tint films. [01:10:02] Speaker 01: when the email evidence on the record states that it's hot in Dubai and the window tint films will be good to use in Dubai and we could probably sell them. [01:10:12] Speaker 01: That was for $117 and they got slapped at the $250,000 fine for that. [01:10:17] Speaker 01: The reason to know here for the culpability for that is reason to know, which is the lowest level of knowledge. [01:10:23] Speaker 01: And the opposing counsel wants to talk about actual knowledge. [01:10:28] Speaker 01: The actual knowledge is provided in OFACS regulations and there's a strict liability here if there is an actual knowledge. [01:10:35] Speaker 01: That's not what we're talking about. [01:10:37] Speaker 01: Actual knowledge has a separate [01:10:39] Speaker 01: requirement here. [01:10:42] Speaker 01: And actual knowledge usually comes into play when there is a direct export to Iran. [01:10:48] Speaker 01: Reason to know the lower level of knowledge comes into play when something has gone through a third country trans ship by the very nature of what was known at the time that the shipments were exported. [01:11:01] Speaker 01: And if they're specifically intended for Iran or not at that time that they were exported. [01:11:06] Speaker 01: Regardless of whether a distributor does 90% of its business with Iran or not, it's not determinative of evidence that those shipments sent to that distributor were specifically intended for Iran and that actually ended up in Iran. [01:11:21] Speaker 01: So I think it's important here looking at also the Eighth Amendment analysis, the harm here. [01:11:27] Speaker 01: The government argues that this was under the statutory maximum. [01:11:32] Speaker 01: That is actually misleading because pursuant to OFAC's own regulations, it could not have fined Epsilon more than exactly what it did. [01:11:40] Speaker 01: So pursuant to Epsilon's own regulations, there is a schedule for the non-egregious violations that is capped at a certain amount based on the value of the shipments, which was exactly the penalty, if you add it up, exactly the maximum that they could have received. [01:11:58] Speaker 01: anything higher that they can tend. [01:12:00] Speaker 01: It is not the higher overall statutory maximum, which is for many, many different violations and intended for several different agencies. [01:12:10] Speaker 01: That in and of itself is misleading. [01:12:12] Speaker 01: And the egregious violations, the penalties that they receive for the five shipments, first I want to go back to compliance. [01:12:20] Speaker 01: Epsilon stopped shipping all [01:12:22] Speaker 01: It stopped all shipments to ask for international. [01:12:25] Speaker 01: In 2011, after it received the administrative subpoenas and did not ship again until it had redid its distribution agreement to specifically state that Epsilon International will comply with all US laws, and it listed out every single country that it could ship to that it was allowed to ship to. [01:12:43] Speaker 03: And was that filed with OFAC? [01:12:47] Speaker 01: I believe that they disclosed it. [01:12:49] Speaker 01: I'm not sure that they provided that distribution agreement to them. [01:12:52] Speaker 01: I would have to check on that. [01:12:56] Speaker 01: I cannot recall if they provided, in fact, with that specific distribution agreement. [01:13:01] Speaker 01: I do know that they responded and stated that Epsilon – I mean, ASRA International is not allowed to ship to Iran, that they have no knowledge of any of their products going to Iran. [01:13:14] Speaker 01: And mind you, the transshipment guidance here, the facts behind that transshipment guidance is exactly a situation where a company actually, they had actual knowledge that a few of those items ended up in a run. [01:13:24] Speaker 01: And still, OFAC said, that that is not reason to know for you to stop your business going forward. [01:13:30] Speaker 01: I find it hard to believe that here in this situation, with a few nearly obsolete defunct radio parts, we're talking subwoofers and window tint films, [01:13:40] Speaker 01: that defined that all of these types of products went to Iran and somehow damaged the sanctions programs by infusing $3.4 million worth of trade into the Iranian economy is warrant of massive fines. [01:13:56] Speaker 01: An egregious fine is usually given to like a defense contracting company that does have a robust compliance program and is selling maybe [01:14:04] Speaker 01: night vision goggles or something like that, that is a dual use item. [01:14:08] Speaker 01: These items have no specific technological classification or significance. [01:14:13] Speaker 05: Is that legally relevant under the regime? [01:14:16] Speaker 01: It's relevant to the behavior and the application of the mitigation factors, the mitigation guidelines, which OFAC is required to apply. [01:14:26] Speaker 03: Anything further? [01:14:31] Speaker 01: No, Your Honors. [01:14:32] Speaker 01: Thank you. [01:14:32] Speaker 03: Thank you. [01:14:33] Speaker 03: We will take the case under advisement.