We thought it was odd that our client’s Mercedes-Benz dealer was threatening to sue him for wrongfully exporting his car in violation of his agreement that he would not do so, exposing him to substantial liquidated damages. As we got into the case, we learned that this was a really big deal across the United States.

Luxury-car manufacturers (Mercedes-Benz, BMW, Land Rover, Porsche and Lexus) are worried about a growing U.S. cottage industry that buys their new cars in the U.S. — and then promptly exports them to Asia, Russia and other parts of the world.

The U.S.-based exporters are taking advantage of a huge arbitrage opportunity.

For example, a base-price BMW X5 sells for about $55,000 in the U.S., while the same car sells for about $155,000 in China. A lot of the price differential is certainly attributable to tariffs, taxes, fees and other increased costs, but there is undoubtedly a substantial additional profit margin built in. The manufacturers are able to command higher prices in these countries, and they do. The U.S.-based exporters chip away at that.

This is a growing industry that involves more than an estimated 35,000 cars. An Internet search will take you to several sites that say: “Click here, and we’ll teach you how you can make money at this, too.” It’s kind of a fledgling support industry.

The manufacturers have responded by riding herd on their dealers, pressuring them to refrain from selling new cars to exporters — and creating their own blacklists for this purpose. One of their efforts has been to require their dealers to force their customers to sign agreements such as the one our client signed.

Making a federal case

The manufacturers have found a strong ally in the U.S. government. The Secret Service and the Department of Homeland Security launched investigations, and prosecutions and forfeiture actions have been filed against exporters in at least six states. The charges are based upon violations of U.S. Customs rules, mail fraud and wire fraud.

So far, there has been only one successful prosecution, in New Hampshire. From 2009 to 2012, the New Hampshire defendants ran a California company that purchased and exported 93 luxury vehicles to China.

As is typically done, the cars were actually purchased by straw buyers solicited on Craigslist, who were each paid less than $1,000 for their services.

The defendants secured phony driver’s licenses and addresses in New Hampshire for themselves and their straw buyers. That allowed them to title the vehicles in New Hampshire to take advantage of the lack of sales tax and mandatory insurance requirements in that state, which kept their business costs low. While the cars were being titled in New Hampshire, they were transported to Long Beach, CA, for shipment to China, which occurred as soon as the titles were received.

The defendants pleaded guilty, but they are not expected to serve any jail time.

Customs rules

Customs laws and regulations quite clearly show that U.S. citizens are free to export used cars. However, to do so, they must submit a variety of required information about the car, such as title, VIN, data about the car and so on. The prosecutions have claimed that the freshly bought foreign luxury cars are really new cars.

“It’s illegal for anybody other than an original equipment manufacturer to export new cars overseas,” said BMW’s Ken Parks in a Forbes magazine article. Oddly, though, U.S. Customs laws and regulations don’t really seem to say that.

In fact, U.S. Customs laws and regulations say nothing about exporting new cars.

One could argue that the used-car rules make exporting them legal, so everything else must be illegal, but there isn’t much support for that. The used-car rules were adopted pursuant to the Motor Vehicle Theft Enforcement Act of 1984, the goal of which was to reduce trafficking in stolen cars. That doesn’t seem like a mandate for any broad interpretation of illegality.

Under current U.S. Customs regulations, a used car is defined as one whose title has been transferred to an ultimate purchaser. All of the exported cars have been titled in the name of the purchasers — and have then been exported using their state-issued certificates of title. The prosecutions are based upon the theory that they are really new cars just made to look used on paper, as the straw purchaser and exporter are not “ultimate purchasers.”

Ely Goldin, a partner in New York-based Fox Rothschild LLP, is defending several of these cases, and he points out that this interpretation is contrary to rulings of the U.S. Customs and Border Protection Agency.

In 2013, an exporter had asked for a ruling that new cars purchased specifically for export in this manner were properly classified as “new.” The agency twice ruled that the cars were used because they had been titled. As far as they were concerned, that made the title holder the “ultimate purchaser” for purposes of the Customs rules, and the cars were used.

Looking for a jury

Jed Silverman, a Houston attorney who is defending cases in Texas, South Carolina and New York, can’t wait to get to a jury. These issues have yet to be considered by a jury, and Silverman doesn’t think a jury will find any violation of law.

“Our clients have no criminal history and are legitimate businesspeople. The government, in my opinion believes … that this is connected to international terrorism,” Silverman said.

Goldin concurs that a jury will not believe that these are new cars. That flies in the face of common sense. These cars have been driven off the dealers’ lots and titles have been issued. People know cars go from new to used once their tires touch public pavement.

A big setback

The U.S. government suffered a major setback on March 31, 2014, when a federal judge in Ohio ordered the federal government to return the money and cars it had seized in a forfeiture case. The judge ruled that there was no probable cause that the cars and money were the products of illegal activity. The U.S. Attorney’s office was said to be “reviewing its options.”

As a result, Goldin contends that “the government will have to abandon the new-car/used-car distinction.” He predicted that future prosecutions will be limited to cases like the New Hampshire case, where the exporters use fraudulent licenses and residency documents — or other clearly illegal conduct.

Goldin also said that a 2013 U.S. Supreme Court case involving books could support the proposition that there is nothing illegal about exporting these cars.

In the book case, a naturalized U.S. citizen from Thailand figured out that identical English-language college textbooks were sold in other countries at substantially lower prices than in the U.S.

Seeing an arbitrage opportunity, he had his relatives in Thailand buy books in local bookstores and send them to him. He then resold them, mostly on eBay, at a good profit. The Supreme Court ruled that, even though the textbooks contained a notice that they were authorized for sale only in the other countries and could not be exported, no copyright violation existed. Under the “first sale doctrine,” once the books were legally sold, the buyer was free to do with them as the buyer pleased.

Where’s the crime?

So just where, in all of this, do we find a federal crime? It doesn’t seem likely that any Customs laws are being violated. There does not seem to be any legal prohibition against exporting new cars, so violations could be based only upon filing false documents that misrepresent new cars as used cars, which doesn’t really seem to be the case.

There are many examples of federal convictions for mail and wire fraud based upon the use of the mail and telephones for illegal activities. In these cases, there is no doubt that the exporters and their straw buyers are misrepresenting their intentions to car dealers when they buy cars that would otherwise not be sold to them. But they are paying full value for the cars, so can it really be fraud? Or is it simply a civil matter?

Wasting taxpayers’ money

Please indulge “Legal Files” and allow a personal opinion. Just why is our government wasting taxpayers’ money on these ridiculous prosecutions? Without question, the exporters are frustrating the car manufacturers’ schemes to maximize profits by charging higher prices in markets where they are able to do so. But that is just the manufacturers’ chosen business model, and it is their problem if enterprising people can easily thwart their business model. It is simply not appropriate for our government to use our criminal laws to safeguard the profits of foreign automobile manufacturers.

We’ll keep track of this topic, and look for updates in a future issue. ♦

John Draneas is an attorney in Oregon. His comments are general in nature and are not intended to substitute for consultation with an attorney. He can be reached through www.draneaslaw.com.


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