Case 2:10-cv-00534-RAJ Document 29

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Hon. Richard A. Jones

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IN THE UNITED STATES DISTRICT COURT WESTERN DISTRICT OF WASHINGTON AT SEATTLE

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UNITED STATES OF AMERICA, 12 Plaintiffs, 13 v. 14 BERTRAM SACKS, 15 Defendant. 16 17

) No. C10-534-RAJ ) ) ) ) ) UNITED STATES’ ) SUPPLEMENTAL BRIEF ) ) )

Plaintiff, the United States of America, by and through Jenny A. Durkan, United States

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Attorney for the Western District of Washington, and Robert P. Brouillard, Assistant United

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States Attorney for said District, hereby submits its Supplemental Brief as directed by the Court

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in its Order dated August 9, 2011 (Dkt. No. 27).

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In its Order, the Court directed the United States to “show cause why the court should not

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dismiss this action because it is untimely or dismiss it for failure to raise the claims asserted in a

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compulsory counterclaim in the 2004 litigation.” Order at 9. For the reasons stated below, the

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United States submits that neither res judicata nor any statute of limitations would be a valid

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basis upon which to dismiss the above-captioned action.

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1. This Action is not Barred by Res Judicata.

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Where there is a final judgment on the merits, res judicata bars further claims by parties

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or their privies based on the same cause of action. Montana v. United States, 440 U.S. 147, 153 UNITED STATES’ SUPPLEMENTAL BRIEF - 1 (No. C10-534-RAJ)

UNITED STATES ATTORNEY 700 Stewart Street, Suite 5220 Seattle, Washington 98101-1271 (206) 553-7970

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(1979). Res judicata bars “all grounds for recovery which could have been asserted, whether

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they were or not, in a prior suit between the same parties . . . on the same cause of action if the

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prior suit concluded in a final judgment on the merits.” International Union of Operating

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Engineers v. Karr, 994 F.2d 1426, 1429 (9th Cir. 1983). In order for res judicata to apply, there must be: (1) an identity of claims, (2) a final

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judgment on the merits, and (3) identity or privity between parties. Western Radio Servs. Co v.

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Glickman, 123 F.3d 1189, 1192 (9th Cir. 1997) (citing Blonder-Tongue Lab. v. University of Ill.

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Found., 402 U.S. 313, 323-24 (1971)). To determine whether successive claims are identical or

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represent the same cause of action, the Ninth Circuit considers whether the two suits arise out of

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the same transactional nucleus of facts. International Union, 994 F.2d at 1430; see also C.D.

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Anderson & Co. v. Lemos, 832 F.2d 1097, 1100 (9th Cir. 1987) (second claim barred by res

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judicata solely on the ground that it arose out of the “same transactional nucleus of facts” as the

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original suit); Western Sys., Inc. v. Ulloa, 958 F.2d 864, 871 (9th Cir. 1992), cert. denied, 506

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U.S. 1050 (1993) (holding that “the test for whether a subsequent action is barred is whether it

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arises from the same transaction, or series of transactions as the original action”). Res judicata does not bar a future suit for failure to assert a compulsory counterclaim

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where the defendant in the prior action did not file a responsive pleading. “Rule 13(a) only

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requires a compulsory counterclaim if the party who desires to assert a claim has served a

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pleading.” MRW, Inc., v. BIG-O Tires, LLC, 2008 WL 5113782, slip op. at *10 (E.D. Cal. Nov.

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26, 2008), citing U.S. v. Snider, 779 F.2d 1151, 1157 (6th Cir. 1985); Lawhorn v. Atlantic

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Refining Co., 299 F.2d 353, 356-57 (5th Cir. 1962); Martino v. McDonald’s System, Inc., 598

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F.2d 1079, 1082 (7th Cir. 1979). A Rule 12 motion to dismiss is not a pleading, see

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Fed.R.Civ.P. 7(a), and, therefore, is not a pleading for purposes of Rule 13(a). Bluegrass

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Hosiery, Inc., v. Speizman Industries, Inc., 214 F.3d 770, 772 (Sixth Cir. 2000); Mellon Bank v.

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Ternisky, 999 F.2d 791, 795 (4th Cir. 1993); Martino v. McDonald’s System, Inc., 598 F.2d at

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1082.

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In the 2004 litigation, the United States was never required to file and answer or other pleading in response to Sacks’ Complaint. Its only response to the Complaint was the Motion to UNITED STATES’ SUPPLEMENTAL BRIEF - 2 (No. C10-534-RAJ)

UNITED STATES ATTORNEY 700 Stewart Street, Suite 5220 Seattle, Washington 98101-1271 (206) 553-7970

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Dismiss, based on Rule 12(b)(6), filed on April 16, 2004 (Dkt. No. 8). Accordingly, res judicata

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does bar the instant collection action. See Mellon Bank, 999 F.2d at 795 (“Rule 13(a) does not

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come into play when a defendant files only a motion to dismiss, instead of a pleading.”); see also

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Lawhorn v. Atlantic Refining Co., 299 F.2d at 356.

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Furthermore, the United States submits that the government’s claim for judicial

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enforcement of its civil penalty was not a compulsory counterclaim in the 2004 litigation. As

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noted by the Court in its Order, Rule 13 of the Federal Rules of Civil Procedure provides in

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pertinent part that

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“[a] pleading must state as a counterclaim any claim that - at the time of its service - the pleader has against an opposing party if the claim: (A) arises out of the transaction or occurrence that is the subject matter of the opposing party’s claim; and (B) does not require adding another party over whom the court cannot acquire jurisdiction.”

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Fed.R.Civ.P. 13(a). The only response to Sacks 2004 Complaint was the government’s motion

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to dismiss filed on April 16, 2004. Assuming, arguendo, that the motion to dismiss could be

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deemed a “pleading,” the United States had, as of that date, no claim against Sacks based upon

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failure or refusal to pay the civil penalty.

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As a factual matter, the United States at that time had no reason to believe that an

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affirmative collection action would ever be necessary. Sacks did not challenge the imposition or

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amount of penalty under the APA. Indeed, there is no dispute that he traveled to Iraq without

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permission and that the amount of the penalty is consistent with applicable regulations. Rather,

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his challenge was based on constitutional and international law grounds, as well as on the ground

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that administrative collection by a government contractor was not allowed. Given the bases of

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these challenges, wholly unrelated factually to whether he traveled to Iraq without permission,

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there remained the possibility, if not the expectation, that Sacks would voluntarily pay the

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penalty upon losing his challenge, as has been the case with numerous other individuals who

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have challenged civil penalties imposed under the Iraq Sanctions. It was not until the Ninth

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Circuit ruled in 2006 that Sacks’ substantive challenges were finally rejected. At that time, the

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United States reasonably expected Sacks to pay the civil penalty.

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UNITED STATES’ SUPPLEMENTAL BRIEF - 3 (No. C10-534-RAJ)

UNITED STATES ATTORNEY 700 Stewart Street, Suite 5220 Seattle, Washington 98101-1271 (206) 553-7970

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The Court’s Order appears to suggest that in every action challenging a civil penalty

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assessed by a federal agency, the United States must, under Rule 13, assert a counterclaim for

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collection or compliance. The implications of this suggestion are broad and troubling. Under

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such a regime, the United States would be required to counterclaim for affirmative relief (be it

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collection of a monetary penalty or injunctive relief) every time an agency action is challenged in

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Court. That is not how the United States has ever proceeded in this matters and there is no basis

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in law of which the government is aware for such a significant departure from current practice.

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In fact, such a change would lead to the filing of thousands of counterclaims that merely assume

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that the party challenging the agency action will not pay the penalty, or eventually capitulate, in

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the event a court challenge is unsuccessful. It simply makes no sense, in terms of judicial economy or the efficient use of government

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resources, for the government to presume that a civil penalty will not be paid once judicial

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challenges are resolved in favor of the United States. In the 2004 litigation, Sacks reserved the

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right to challenge the civil penalty under the APA in the event the Courts did not rule in his

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favor. See Opposition to Motion to Dismiss dated May 10, 2004 (Dkt. No. 10) in Bertram Sacks

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v. Office of Foreign Assets Control, United States Department of the Treasury, et al. (case no.

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C04-108-JLR). Similarly, the United States reserved the right to seek judicial enforcement of

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the penalty if Sacks ultimately refused to pay it.

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Finally, it is significant that in the 2004 litigation, neither the district court nor the Ninth

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Circuit ruled, or even implied, that the government would be precluded from referring the matter

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to the Justice Department for collection due to the lack of a counterclaim for judicial

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enforcement. Sacks certainly never made such an argument. Accordingly, the United States

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respectfully submits that when it responded to the Sacks’ 2004 Complaint, it had no

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counterclaim for judicial enforcement that could be considered compulsory and, therefore, the

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instant action should not be barred by the doctrine of res judicata.

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2. This Action is not Barred by any Statute of Limitations.

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In the 2004 litigation, the district court held that OFAC commenced “an action, suit or

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proceeding” for the enforcement of the civil penalty within the meaning of 28 U.S.C. § 2846 no

UNITED STATES’ SUPPLEMENTAL BRIEF - 4 (No. C10-534-RAJ)

UNITED STATES ATTORNEY 700 Stewart Street, Suite 5220 Seattle, Washington 98101-1271 (206) 553-7970

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later than May 1, 2002, when OFAC issued the Penalty Notice to Mr. Sacks. See Sacks v. Office

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of Foreign Assets Control, Case No. C04-108JLR, Order at 8 (Oct. 22, 2004), citing 3M Co. v.

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Browner, 17 F.3d 1453, 1457-59 (D.C. Cir. 1994); Federal Election Comm. v. Williams, 104

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F.3d 237, 240 (9th Cir. 1996). Having commenced the action within the five year limitations

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period, OFAC should not now be barred from attempting to collect the penalty. See U.S. Dept.

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of Labor v. Old Ben Coal Co., 676 F.2d 259, 261 (7th Cir. 1982) (“Old Ben”) (Holding 28

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U.S.C. § 2846 inapplicable to action to collect administratively-imposed civil penalty).

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Indeed, Judge Robart explicitly recognized that 28 U.S.C. § 2846 would not have barred

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OFAC from attempting to collect the penalty by using a collection agency more than five years

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after the events that gave rise to the penalty occurred, had OFAC’s then-applicable regulations

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permitted the use of such collection methods. Sacks v. Office of Foreign Assets Control, Case

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No. C04-108JLR at 8. There is no reason to treat a collection lawsuit differently from

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administrative collection measures in this context, and doing so would create perverse incentives

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by giving persons who have been assessed a civil penalty the ability to avoid payment simply by

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refusing to pay and by forcing the government to rush to initiate collection lawsuits, rather than

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taking advantage of other methods of collection. Moreover, Sacks is not prejudiced; “[t]he

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purposes behind a statute of limitations are to put the alleged violator on notice and to prevent

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the loss of evidence […and t]he administrative proceeding fulfilled these purposes.” Old Ben,

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676 F.2d at 261.

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In the alternative, if 28 U.S.C.§ 2846 applies to an action merely to collect a civil penalty

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that was previously administratively imposed, the limitations period should be deemed to run

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from the date on which the imposition of the penalty was determined with finality. See, e.g.,

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United States v. Meyer, 808 F.2d 912 (1 st Cir. 1987) (Five year limitations period under 28

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U.S.C. § 2846 for suit to enforce civil penalty under the Export Administration Act (“EAA”)

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runs from date of administrative determination of violation, and not date of the underlying

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offense); Old Ben, 676 F. 2d at 262 (“A statute of limitations cannot begin to run until there is a

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right to bring an action.”); but see United States v. Core Laboratories, Inc., 759 F.2d 480 (5th

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Cir.1985) (holding that action to enforce civil penalty under the EAA must be brought within

UNITED STATES’ SUPPLEMENTAL BRIEF - 5 (No. C10-534-RAJ)

UNITED STATES ATTORNEY 700 Stewart Street, Suite 5220 Seattle, Washington 98101-1271 (206) 553-7970

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five years of the date of the underlying offense). In this case, while the administrative penalty

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was imposed on May 1, 2002, its validity was not finally determined until the Supreme Court

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denied Sacks’ petition for writ of certiorari on April 16, 2007, Sacks v. Office of Foreign Assets

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Control, 549 U.S. 1338 (2007). The Complaint in this action was filed within five years of that

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date. 1

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CONCLUSION

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For the foregoing reasons, as well as those set forth in the United States’ Motion for

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Summary Judgment and United States’ Reply to Defendant’s Response to Motion for Summary

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Judgment, an order should be entered granting summary judgment in favor of the United States.

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DATED this 2nd day of September, 2011.

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Respectfully submitted,

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JENNY A. DURKAN United States Attorney

13 s/ Robert P. Brouillard ROBERT P. BROUILLARD, WSBA #19786 Assistant United States Attorney United States Attorney’s Office 700 Stewart Street, Suite 5220 Seattle, Washington 98101 Phone: (206) 553-7970 Fax: (206) 553-4067 E-mail: [email protected]

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If the court determines that 28 U.S.C. § 2846 applies and that it runs from the date of the imposition of the penalty, at the very least it should find that the limitations period was tolled while the litigation was pending from January 14, 2004, through April 17, 2007, and that the suit is therefore not barred. UNITED STATES’ SUPPLEMENTAL BRIEF - 6 (No. C10-534-RAJ)

UNITED STATES ATTORNEY 700 Stewart Street, Suite 5220 Seattle, Washington 98101-1271 (206) 553-7970

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CERTIFICATE OF SERVICE

2 The undersigned hereby certifies that she is an employee in the United States Attorney 3 Office for the Western District of Washington and is a person of such age and discretion as to be 4 competent to serve papers. 5 That on September 2, 2011, she electronically filed the foregoing with the Clerk of Court 6 using the CM/ECF system, which will send notification of such filing to the attorney(s) of record 7 for the Defendant(s): 8 9

Donald B. Scaramastra Email: [email protected]

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To the person(s) who are non CM/ECF participants, service will be made via U.S. postal service, addressed as follows:

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Kenneth S. Kagan Carney Badley Spellman, P.S. 701 5th Ave, Suite 3600 Seattle, WA 98104

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DATED this 2nd day of September, 2011.

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16 s/Tina Litkie TINA LITKIE Legal Assistant United States Attorney’s Office 700 Stewart Street, Suite 5220 Seattle, Washington 98101-1271 Phone: (206) 553-8639 Fax: (206) 553-4073 E-mail: [email protected]

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UNITED STATES’ SUPPLEMENTAL BRIEF - 7 (No. C10-534-RAJ)

UNITED STATES ATTORNEY 700 Stewart Street, Suite 5220 Seattle, Washington 98101-1271 (206) 553-7970