Friday, February 15, 2019

Sports Shoes Re-Do?

For years, the Deckers Corporation has fought to have its rugged sandals classified as sports footwear, specifically training shoes. In two previous decisions, the Court of International Trade held that the open toes and heels present in the Teva-brand sandals precluded classification as athletic shoes of 6404.11. Rather, the Court classified them as footwear with open toes or open heels in 6404.19. This result was affirmed by the Court of Appeals for the Federal Circuit, which ultimately also denied a request for a rehearing by the entire court. One would think this is a settled matter.

But, that is not how customs law works. The Court of International Trade has once again classified sports sandals in 6404.19.

Under the 1927 ruling in a Supreme Court decision known as United States v. Stone & Downer, judicial decisions on the classification of a product do not preclude subsequent litigation by the same party on the same question. Thus, as is the case here, where the importer does not believe the Court of International Trade or the Court of Appeals for the Federal Circuit properly classified the merchandise, the importer can select a different denied protest and start over litigating the issue. Read more about that here.

This does not often happen. Typically, it is clear from the court's opinion that the decision turns on the interpretation of the tariff language and no new presentation of the facts is going to change that legal conclusion. But, occasionally, there is reason to believe that a different or better presentation of the case might produce a different result. That seems to be the case here.

On the surface, the parties are arguing about the extent to which the shoes cover the heels and toes. Really, what the plaintiffs want is to get back to the Court of Appeals to press a more general argument about the proper interpretation of the tariff schedule as applied to these shoes.

Here is an example of what is at issue. It is the Terra Fi style.

To get there, plaintiff has made a motion to compel the Government further explain its expert's statement that some training shoes have openings in the uppers. For its part, the Government has made a motion to compel a clear statement of facts supporting the position that the sandals are training shoes.

The Government also filed a motion for summary judgment seeking to dispose of the case in its entirety on the facts available. Plaintiff contends that a trial is necessary to establish disputed facts.

The Court would have none of that. Rather, it found that previous litigation on this issue established, as a matter of law, the proper construction of the relevant tariff provisions. That construction requires shoes to have enclosed uppers to qualify as athletic trainers.

Consequently, the Court of International Trade was able to look at the shoes and make a classification decision. The shoes in question have either open toe, open heels or both. As such, the CIT held them to be classified in 6404.19.35.

That, however, is not necessarily a loss for the plaintiffs. This case seems fully intended to be the launch pad for the argument on appeal. That argument will be that the Federal Circuit misconstrued the statute and that training shoes have some defining characteristic other than enclosed uppers and heels. Plaintiff will argue, for example, that the Court of International Trade should be permitted to look at how rugged the sole is and whether it seems designed for traction, whether there is ankle support, or the ability to drain and dry quickly . . . whatever might define the shoes as athletic.

The problem for Deckers is that when the CIT opted to decide the case as a matter of law, it precluded Deckers from adding to the factual record with, for example, expert testimony on the meaning of "athletic" and the actual use of these styles. That is a problem because the Federal Circuit will not consider new facts. Thus, the appeal may initially focus on whether the CIT was correct to decide the case on summary judgments. If it decides the case with no new factual record, then the value of Stone & Downer is significantly undercut and customs litigants will lose some of the safety net the option to re-litigate has provided.

There is certainly more to follow on this case.

Thursday, February 07, 2019

Hearsay Strikes Back

Aero Rubber Co. v. United States is a short decision on a motion to strike evidence from the record. The ultimate question is the classification of printed silicone rubber bands that are larger than the wristbands you often see on teenagers and Stephen Colbert.

These are larger and appear to be used to bind or secure various items while providing space for branding or advertising. I don't know that for certain, but this image from the Aero Rubber website gives an idea of sizes and at least one use.

The classification of these goods depends on whether the printing is "not merely incidental to the primary use of the goods." If the printing is incidental, the goods are classified as articles of plastic in Chapter 39. If the printing is not merely incidental, the goods are classified as printed products of Chapter 49. 

As evidence of the primary use of the goods and, presumably, how the printing impacts that the use of the bands, plaintiff sent questionnaires to customers and attached those questionnaires to its brief. Citing CIT Rule 12(f), the Department of Justice moved to strike the questionnaires.

The Court initially noted that 12(f) is not really applicable to this dispute as it relates to pleadings and not to briefs in support of motions. On top of that, striking matter submitted by a party in support of its claims is an extraordinary remedy that judges should only employ where there has been a flagrant disregard of the rules. That is not the case here.

On the other hand, evidence submitted in support of or against a motion for summary judgment must be in a form that would be admissible in court. CIT Rule 56(c)(2). According to the Government, the questionnaires are inadmissible both because they are irrelevant and because they are hearsay.

The hearsay argument is easier to deal with, so let's start there. Hearsay is an out of court statement used as evidence to prove the truth of that matter. It is generally inadmissible under the Federal Rules of Evidence. We have discussed hearsay recently, so I will not rehash it hear. Go read this if you are unfamiliar with the concept. 

In the context of a motion for summary judgment, the Court is permitted to consider a hearsay statement if the statement could be reduced to admissible evidence at trial or reduced to admissible form. Presumably, Aero could call as witnesses the people who completed the questionnaire. The Court left it at that and moved on to relevance.

Aero claims that the questionnaire responses are "obviously relevant to the plaintiff's continuing assertion that 'printing is indeed important to all of Aero's customers.'" The bands are, after all, fundamentally advertising. The question is whether anything a customer has to say about its particular use of a particular band is relevant to the resolution of this case. 

Evidence is relevant where it has any tendency to make a fact more or less probable than it would be without the evidence and that fact has consequences to the outcome of the case. 

To judge the relevance of the questionnaires, the Court pointed to Section VII, Note 2. The Note reads:

Except for the goods of heading 3918 or 3919, plastics, rubber and articles thereof, printed with motifs, characters or pictorial representations, which are not merely incidental to the primary use of the goods, fall in chapter 49.

According to the Court, this indicates that "the inquiry regarding whether printing is incidental turns on an assessment of the specific merchandise in question, not the feedback of customers who purchased distinct merchandise from the manufacturer. Accordingly, questionnaires providing customer feedback on entirely separate silicone bands do not make any material facts 'more or less probable than it would be without the evidence.'" Thus, while the Court did not strike the questionnaires, it held that it would not consider them when deciding the merits.

I have questions and thoughts.

First, how would this have come out if the questionnaires had been directed specifically to the customers who purchased the very bands at issue? Is the actual purchaser's use of the product and interest in the writing more relevant than that of purchasers of similar bands? Intuitively, I think the answer is yes. That would be evidence of the impact of the printing that has a tendency to make the importance of the printing more or less probable. It may not be much evidence and may not be enough to sway the outcome, but it seems to me to get past the relevancy bar.

Next, if that is true, why is evidence from users of apparently similar but not identical bands irrelevant? Let's say the merchandise covered by the customs entries before the Court was printed with the words "Customs Law Blog." Let's further assume I purchased them to use as advertising swag at trade shows and wrap them around copies of my book. [See what I did there?] Fine, my goods are technically at issue. I guess I could testify as to why I wanted the bands to be printed.

Assume Jill down the street runs Java Jill's coffee roaster and she puts a band around each gift box she ships. Each band is printed with the words "Java Jill" and a web address. Is her use and the printing any less relevant? Yes, it is less relevant. But, is it irrelevant?

Use is usually determined not on the basis of the use of the specific product but on the use of the class or kind of the product. This is not a use provision, but use is relevant to determining whether the printing is more than incidental. If 10 people say the printing on large rubber bands is not incidental (or, for that matter that it is incidental), that strikes me as relevant to the question before the Court.

My other question has to do with the nature of the Court of International Trade and classification cases. The reason for the hearsay rule is to prevent unreliable evidence from coming before the trier of fact. The Federal Rules of Evidence probably assume that will usually be a jury of lay people. That is not the case here. It seems to me that the relevance bar should be very low where there is no jury and the fact finder is a judge with specialized expertise in classifying merchandise. It seems to me that there is little prejudice to letting this in with the judicial caveat "for what, if anything, it is worth."

Of course, this is entirely theoretical. I have no idea what evidence there is before the Court on the merits. Samples of the merchandise will be very powerful witnesses. So will Aero's advertising, which indicates what it expects people are doing with these bands. In other words, the impact on the outcome of the case may be minimal. 

Wednesday, February 06, 2019

For Scope, An Assembly is Not a Set

MacLean Power LLC v. United States sets right a very troubling scope decision from the Department of Commerce concerning helical spring lock washers ("HSLW") from China. The scope of that order is here.

MacLean makes assembled pole line hardware used for building electrical transmission and distribution substations. Pole line hardware consists of various configurations of products. You can get a feel for the range of these products at the company's website. What is important to know is that MacLean imported complete assemblies. Some of these assembled items include HSLW from China.

For some reason, MacLean felt it was wise to ask the Department of Commerce for a scope ruling to confirm that the HSLW integrated into these assemblies were outside the scope of the corresponding order. It is possible an inquiry from Customs and Border Protection prompted the ruling request. It is also possible that MacLean was just being cautious. Either way, the result was not good.


Commerce looked at the assemblies as combinations of in-scope and out-of-scope merchandise. Earlier cases on "mixed media products" focused on sets containing, for example, in-scope nails and out-of-scope tools. In those cases, principally Mid Continent Nail Corp. and Walgreen Co., Commerce first looked at whether the merchandise in question is within the literal terms of the order. Here, the order covers HSLW and HSLW are parts of the imported product. So, arguably, the are within the terms of the order. Next, Commerce looked at whether the goods in their imported condition were excluded by the terms of the order. Here, Commerce found no basis to exclude the HSLW. That makes them in-scope, right?

This did not fly.

Looking to customs law, the Court started with the proposition that the merchandise in question is whatever crossed the border, "in the condition in which it is imported." From that perspective, the Court noted that "Commerce provides no support for its failure to treat the pole line hardware as unique manufactured products." Furthermore, while nothing in the order excludes assembled products, the Court found that the order "makes no mention of the importation of HSLWs as assembled components of larger products."

Really, the failure of the government's argument goes way beyond the text of the order. This is a textbook example of reasoning that leads to absurd results. It is overcome via reductio ad absurdum. Do you know where you can find helical spring lock washers? In all manner of mechanical devices. Anywhere there is a reason to ensure tension between a bolt and a surface, you can find a lock washer. As MacLean argued in its brief, HSLW are in refrigerators, automobiles and airplanes. Commerce's analysis would make all of these assembled HSLW in-scope despite not being the article of commerce entering the U.S.

[Side note: here is an interesting Reddit discussion on whether HSLW actually do anything that can't be accomplished by a regular washer. Spoiler alert . . . NASA seems to think the answer is no.]

In the end, the Court found that "Commerce failed to support by substantial evidence the determination that the pole line hardware were not unique products." The Court found that Commerce erred when it treated washers that are parts of assemblies as if they were loose items in a tool kit. They are not. Instead, the HSLW "are assembled into clamps and studs, interact with the other parts of the clamps and studs, and are not sold for use independent of the other component pieces."

The Court ordered Commerce to reconsider and issue a scope determination finding the HSLW imported as parts of pole line hardware of excluded from the scope of the order.

Wednesday, January 23, 2019

Two Defaults and a Surety Payment

Lately, more customs penalty cases (at least among those making it to the Court of International Trade) seem to be ending in defaults. Such is the case with United States v. Selecta Corporation, LLC and also United States v. Six Star Wholesale, Inc.

In Selecta, the United States sought a $51,102 penalty (plus interest). The defendant failed to respond to the complaint. Under the Court's Rule 55, a plaintiff can expedite a default judgment by showing through an affidavit (or otherwise) that the defendant failed to defend itself. When such a showing is made, the Clerk of the Court must enter the default. After the default is entered, the remaining party (typically the plaintiff) may apply to the Court for the entry of a default judgment. That's an interesting piece of rules trivia.

Here, plaintiff did not do that and the Court (i.e., the judge) ordered the default. To secure a default judgment, against which the United States can try to collect, the Court is to consider three factors:

  • Will denial of the motion prejudice the plaintiff?
  • Does defendant have a meritorious defense?
  • Did defendant's culpable conduct contribute to the default?

The Selecta penalty stems from two prior disclosures Selecta made in 2009 relating to incorrect classifications and values on entries of medical scrubs and lab coats. Selecta calculated and tendered a loss of revenue of nearly $835 thousand. The $51,102 at issue in this case represents the interest penalty assessed by Customs after Selecta completed the otherwise successful disclosure.

This is an important reminder for importers contemplating a prior disclosure. It is incorrect to say that a disclosure prevents a penalty. Technically, there can be a penalty of an amount up to the interest accrued on the unpaid duties, taxes, and fees.

Given the facts presented and the failure of Selecta to respond, the Court of International Trade ordered Selecta to pay the interest plus post-judgment interest (i.e., interest on the interest) and costs.  All in all, assuming Selecta still exists, it would have been cheaper to pay because the interest is continuing to add up. Selecta had already made disclosures, thereby admitting the violations. Unless there was an intervening bankruptcy or dissolution of the business, I'm not sure why this ended up as a default rather than an out of court settlement.

Six Star concerns an effort by the United States to collect unpaid duties of $243 thousand and a penalty of $496 thousand. Here, the underlying violations relate to improperly classifying merchandise and failing to deposit antidumping duties on wire hangers and polyethylene retail carrier bags. After considering the three factors above, the court moved on to determining the liability.

The Government sought the maximum penalty of two-times the lawful duties owed as the penalty. Regardless of the amount sought, even in a default, the Court must determine the appropriate penalty in its discretion. When doing so, the Court does not presume that the maximum is appropriate starting point for consideration. Rather, the Court is to start by looking at all the available facts.

Here, the Court provided some useful guidance for importers. It noted that importers must act with "reasonable care" in providing entry-related information to Customs and Border Protection. Reasonable care requires that the importer (or its agent) "review information regarding the nature and classification of the imported merchandise and information on the underlying transaction, including [a] review of available documentation, to ensure that the merchandise is properly classified and assessed with appropriate duties--including antidumping duties--upon entry." Unfortunately for Six Star, the Court concluded that "even a modicum of effort on the part of Six Star would have uncovered" the false statements and failure to make required deposits. Making matters worse, the Court's review of the administrative record showed no evidence of any steps by Six Star to ascertain the correct classification or applicable duties and no evidence of the kind of extraordinary cooperation that would result in mitigation of the penalty amount.

One further point the Court addressed is the impact of the surety's payment of part of the duties owed. The Court noted that the government collected $100 thousand from the importer's surety. That does not reduced the loss of revenue from the importer for purposes of calculating the penalty. It only goes to the duty collection. The Court further noted that collecting from the surety required time and effort to be expended by the government. Thus, as a matter of discretion, the Court imposed a civil penalty based on two times the remaining unpaid duties.

How the Court calculated the final penalty is a little confusing. If calculated on the government's asserted loss of revenue, the maximum penalty would be $486 thousand (2 x $243 loss of revenue). Given that the payment by the surety had made the government partially whole, the Court imposed a lesser penalty of $386,456. This amount was two time the still unpaid duties plus the duties paid by the surety or $143,228.02 x 2 (unpaid duty) + $100,000 (duties paid by surety). This means that the prior payment by the surety was not doubled in the resulting penalty, it was added just once, which recognizes that the government has had that money and benefits the defendant.

Monday, January 21, 2019

ICCS and Certification Marks

ICCS USA v. United States is the last 2018 decision of the Court of International Trade we will cover here. Technically, I am  timely because the pubic version of this opinion was posted in 2019. This is an interesting look at how Customs and Border Protection enforces certification marks at the border. It also illustrates some of the inner workings of Underwriters Laboratories, the private agency that issues the well-known UL in a circle mark.

ICCS imports butane canisters that were produced by a company in Korea called One Jung Can Mtf. Co. Ltd., ("OJC"). The canisters are marketed under the name "PREMIUM." As far back as 2001, OJC applied for and received UL certification for its "MEGA-1" model butane canisters. That certification was current through February 2017. Accordingly, OJC was authorized to place the UL mark on the MEGA-1 cylinders as a sign that they have been tested and conform to the UL safety standards.

This case is not about MEGA-1 canisters. In 2015, UL offered ICCS a service by which it will list multiple products made by a single company but marketed under different names. This is called a multiple listing. On October 7, 2015, ICCS agreed to participate in that service. However, prior to February 8, 2017, the online UL verification system listed only one ICCS butane canister; that canister was called "US BUTANE." After February 8, 2017, the system was updated to cover multiple canisters including PREMIUM. Keep that detail in mind.

The entry of PREMIUM canisters occurred on January 19, 2017. That was before UL updated its online verification system to include PREMIUM canisters. But, it is also after ICCS had contracted with UL to permit the certification of PREMIUM canisters. CBP initially held the merchandise and released it to the importers on January 30, 2017. Then, on February 23, 2017, CBP issued a Notice to Redeliver the merchandise, citing a trademark violation as the reason for the demand. ICCS was able to redeliver 29,008 of the 56,616 imported cylinders, which CBP seized on May 1, 2017. CBP assessed $41 thousand liquidated damages for the merchandise that was not redelivered.

Prior to receiving the notice of seizure, ICCS filed a protest challenging the redelivery notice. In the protest, ICCS argued that the redelivery notice was unlawful because it had properly applied the UL marking consistent with the multiple listing agreement.

So do we have a situation in which UL approved the use but failed to properly update its online verification system, which is apparently where CBP was getting its information? Or, do we have a situation where the importer had a right to apply to UL to add products to an approved listing and the importer failed to do so? The details will matter.

When the canisters were imported, CBP held them, released them, and then demanded that they be returned. It is not entirely clear what CBP did while the canisters were held nor whether the importer tried to present evidence of an active license prior to the delivery notice. The protest was deemed denied (which indicates that ICCS requested accelerated disposition).

The first question, as always, is whether the Court has jurisdiction. Here, that is straightforward. The CIT has jurisdiction over challenges to CBP denials of valid protests. 28 USC 1581(a). Decisions that are subject to protest are set out in 19 USC 1514, which specifically lists a demand for redeliver as protestable at (a)(4). Jurisdiction lies with the CIT.

Now comes the interesting question. What exactly is the CIT to review? There are two related but separate issues here. First is whether CBP's Notice to Redeliver was proper under the law. The second question is whether the merchandise was properly labeled.

According to the United States, only the first question is before the CIT. The scope and terms of the license are not before the Court. In other words, the way the government sees the issue, this case is entirely procedural and the only question is whether CBP acted according to required process.

ICCS, as you might imagine, takes a broader view of what is before the Court. According to ICCS, the CIT must review the terms of the multiple listing agreement to determine whether the canisters were legally labeled.

Part of the support for the government's position is that to the extent some portion of this entry was actually seized, jurisdiction to challenge the seizure lies in the district court, not the CIT. That is true enough. But, this case is not about the seized goods, it is about the redelivery notice that preceded the seizure and the liquidated damages on the merchandise ICCS could not redeliver. If the redelivery notice was not valid, then the $41 thousand in liquidated damages is also not valid.

The government's argument is basically that it checked the UL validation system and saw that the PREMIUM canisters were not entitled to carry the UL label. Any permission to use the mark, according to CBP came after the date of entry.

ICCS counters that the online validation system was not properly updated to show that the PREMIUM was included in the multiple listing agreement. In other words, CBP erred by relying on the UL system without regard to ICCS' evidence of an actual agreement with UL. Lawyers will note that the UL system is the secondary statement or parole evidence of the existence of a contract. It is hearsay in the administrative process. The best evidence of the legitimacy of the marks is original documents, not the online summary or repetition.

Given that, the Court of International Trade dove into the terms of the contract between ICCS and UL. First, the Court noted that the contract includes a choice of law provision making Illinois law applicable to any effort to interpret the terms. The basic function of the contract is to give OJC, the "basic applicant," the ability to affix the UL label to ICCS canisters. At the time of the contract, ICCS only registered US BUTANE as its approved product. The contract allows it to add others, after UL approval through the "multiple listing request" process of adding, deleting, or editing listing. Products added to the listing must be essentially identical to the originally certified product in all but superficial ways. After UL confirms that requested products meet this criteria, UL adds them to the listing and the verification system. The contract expressly forbids using the UL label on additional products until authorized to do so.

According to the Court, ICCS did not add PREMIUM canisters to the listing until after importation. Thus, it did not have authorization at the time of importation. That means the marks were "spurious" at the time of entry and CBP had every right to demand redeliver. The Court granted the government's motion for summary judgment.

This case is a good primer on dealing with UL certified (or allegedly UL certified products). Importers should ask suppliers for confirmation that any UL mark on the product has been approved by Underwriters Laboratories. The supplier (or manufacturer) should be able to produce a certificate. On top of that, the importer should take the additional diligence step of using the publicly available UL verification system to confirm what the supplier is telling the importer. The UL system is available at Purchase orders should prohibit the use of certification marks without proof of qualification for the use of the label.

When purchasing UL labeled products, keep a few things in mind. First, UL's entire business model is built around the integrity of that mark. It has to strictly enforce its license agreements. Do not expect leniency. As noted in the ICCS decision, UL does not agree to retroactive licenses. It maintains a strict zero-tolerance policy. It will not consent to importation, exportation, obliteration or removal. An importer that has a spurious UL label on its product will lose the merchandise.

From Customs' perspective, the UL label is a reliable sign that the product is safe. That means CBP treats spurious marks as a risk to the public health and safety. Thus, CBP treats this as an important issue. Again, unless the importer can prove the merchandise is properly marked, it should expect to lose the merchandise.

As a buyer, you need to discuss these issues with suppliers up front. Suppliers may be more than happy to provide a UL label as an added service. They may know this is illegal. They may not have any idea what the UL mark means. Either way, the risk generally goes to the importer not the supplier.

Talk to your suppliers about all of the artwork on the packaging and on the product. Do not leave that up to the supplier. There are many similar certification marks in circulation today. Labels including Bluetooth, HDMI, USB, CD-ROM, DVD, Fair Trade Certified, Rainforest Alliance, Non-GMO, USDA Organic, and the various kosher and halal certifications are all certification marks. Lots of things you may think of as just information are actually certifications. When in doubt, check the Patent and Trademark Office and the CBP database of recorded marks.

Monday, December 31, 2018

Reflecting on 2018

This will be the last post of 2018. It was not a good year for the Customs Law Blog. It was a good and difficult year for customs lawyers and equally so for importers.

2018 gave us 232 duties on steel and aluminum products and a poorly implemented exclusion process. We also saw 301 duties imposed on billions of dollars of goods imported from China, plus a slightly better exclusion process. To make the year just that much more unpredictable, importers and exporters faced numerous threats by the US to withdraw from NAFTA and the release of the text of a substantially new North American free trade deal. All of that, and other factors, kept me from being able to update the blog as often or as substantively as I would have hoped. I hope you are all reading my Twitter feed to keep up with me and my short updates.

I am forever grateful to the readers of this blog. I appreciate your feedback and hope to continue to have opportunities to meet in real life at trade events throughout the year. 2019 will mark the 14th year of the Customs Law Blog, which is an unusually long life for a blog and in particular for a legal blog. I wish you all great success, health and happiness in 2019.

What to Take from 2018: Suppliers Lie

This is part 2 of the Univar discussion. For the evidence issues, see part 1.

If you know me or have ever heard me speak about customs penalty cases, you may know that I am forever frustrated by the disconnect between exporter dishonestly and importer liability. In my personal view, there are many cases in which a naïve or careless importer is left holding the penalty bag when an unscrupulous exporter lies about the true nature of the product or the relevant law. How many times does an importer need to ask the exporter to confirm the country of origin, composition, or other relevant fact before the importer can legally rely on those representations? In an age of on-line e-commerce transactions in which seller and buyer may never meet IRL, what is the responsibility of the importer?

Those are rhetorical questions because the law is clear on this. My frustration with the law is real, not rhetorical. Let’s look at the facts of United States v. Univar USA, Inc. (Slip Op. 18-157)
to see how it played out. What follows is my commentary on reasonable care; it is not intended to represent the Court’s analysis. It is the kind of analysis--fired by suspicion and powered by 20/20 hindsight--that CBP uses in enforcement actions.

Univar is the leading chemical distributor in the United States. Thus, it can be presumed to be familiar with the industry and the relevant regulations. Prior to 2003, it purchased and imported the sweetener saccharin from China.  In 2003, saccharin from the People’s Republic of China became subject to antidumping duties under case number A-570-878.

After the antidumping duties were imposed, Univar sought out a non-Chinese supplier of saccharin. This indicates that Univar understood the importance of country of origin with respect to the antidumping duties and the total landed cost of the product.

Univar eventually found a supplier claiming to make the product in Taiwan. It received a price quote including shipments from Taiwan. Univar also assisted the supplier in securing necessary FDA clearance to export saccharin to the US. The FDA registration listed an address in Taiwan as the point of production. In 2004, a representative of Univar visited Taiwan to inspect the supplier. The supplier stated that it owned a factory in Taiwan, but the Univar representative visited a factory in Taiwan owned by a different company at a different address. A month later, Univar started imports from the new supplier.

Sometime in 2004, Univar sought to have its saccharin certified as kosher. This process involves having a rabbi (technically, a mashgiach) visit the production site and inspect for compliance with kashrut. There was an apparently successful certification visit in 2005 to the location identified in the FDA documentation. On three subsequent rabbinical visits, the mashgiach was not permitted to inspect the plant for various reasons including a shut down, a flood, and construction, all of which seem suspiciously convenient.

This case involves 36 entries Univar made between 2007 and 2012. In each entry, Univar declared Taiwan to the country of origin. For each entry, it had a certificate of origin issued by the relevant chamber of commerce in Taiwan, as authorized by the Taiwan Board of Foreign Trade. Such certificates of origin are routinely issued without much effort at confirmation.

In 2008, Univar engaged a well-known licensed customs broker to undertake a compliance audit. In its report, the broker told Univar that it had a good culture of compliance and that a “good importer” need not visit a foreign supplier prior to purchasing from that factory.

If that were the entire story, would that pass muster as reasonable care? The supplier said it had a factory. It was visited at least once by the kosher certifying authority. The local Chamber of Commerce issued an officially sanctioned certificate of origin. Shipments to the US came from Taiwan. The broker hired to assess compliance was satisfied. The only problem seems to be that subsequent visits by rabbis were not successful.

Let’s add more context.

First, keep in mind that the antidumping duty order created an incentive for Chinese suppliers to transship and misrepresent the origin of their product. Univar is a large chemical company with experience in the trade and it was aware of the dumping order. That is important context.

Moreover, shortly after it started importing from Taiwan, a domestic producer notified Univar of its suspicions that the supplier was transshipping from China. When questioned, the supplier pointed to the 2004 site visit, which was actually to a different location operated by a different company. Next, Univar allowed the domestic company to conduct a chemical analysis of a sample. The domestic company concluded that the product had been made in China. Univar discounted this conclusion as based on a false understanding of what was happening in China.

Also in 2004, a representative from PepsiCo, a Univar customer, contacted the company questioning whether the saccharin was made entirely in Taiwan or was further processed from China-origin material. By 2006, Univar was aware of rumors that it was purchasing saccharin that originated in China. In 2007, a Univar employee asked a sourcing agent whether Univar might be receiving China-origin saccharin that was being repacked in Taiwan. Finally, in 2008, the president of another company trying to resell Univar’s saccharin reported to Univar that it was having trouble reselling the merchandise because the alleged producer did not actually manufacture in Taiwan.

Now what do you think? Was Univar acting with reasonable care throughout the period? Does any one of these facts represent a point at which Univar should have stopped claiming the product to be from Taiwan?

That question is harder than it might seem. There was a long separation of events between 2004 and 2008. It is not clear exactly who in the company knew what and who was responsible for compliance. Was this information conveyed to the broker and to the internal compliance staff?

Add to that the fact that the address provided to the FDA for the factory turns out to be a residential apartment building. Given that fact, it is not clear how the first rabbinical visit was conducted. Finally, the government of Taiwan had not issued any required licenses to manufacture saccharin, though there is reason to believe at least one unlicensed producer was operating.

We’ll come back to compliance. At this point, it is fair to say that there was enough in the record to establish that a reasonable jury could find that Univar had made material false statements as to the origin of the saccharin. Consequently, the Court of International Trade denied the motion for summary judgment. Thus, the resolution of this case will likely require a trial.

The important point for compliance professionals is to learn from Univar and use it an example of how to respond to compliance concerns. What we know is that suppliers have incentives to lie and that the law punishes importers who do not act reasonably to ferret out the lies. Suppliers rarely have to worry about being subject to a penalty. Even is a civil suit against the supplier for commercial fraud in its home country is often impractical.

Below, with the benefit of hindsight and experience, are some things importers might consider when onboarding a new supplier and periodically re-certifying the supplier. None of these are technically required and not one alone would necessarily have prevented the penalty case against Univar. Nevertheless, when dealing with a product where there is an incentive to transship to avoid duty or quota, or where the exporter claims to be a legitimate exporter of branded merchandise, keep these points in mind.

  1. Understand how trade rules impact suppliers and assume suppliers will lie to take advantage of the rules. This applies particularly to origin but can also go to the identity of the producer and exporter (which is relevant for ADD/CVD deposit rates), the material used to make the item, the method of production, etc.
  2. Remember that transshipment is a common practice, especially when an antidumping or countervailing duty order is imposed. This also includes the 301 duties applicable to China. Suppliers in countries subject to the order who suddenly have a source in a country not covered by the order are likely lying.
  3. When switching to a supplier in a new country, check the trade data to see if there is a history of exporting the product to the US. If you are the first person to ever buy it from the new country, be doubly suspicious.
  4. Confirm the existence of the production facility. A site visit by an employee or agent is the best confirmation. As a starting point, also check the address in Google Earth or a similar service. Does it look to be a factory capable of making the product?
  5. Confirm that the business at that address is actually associated with the supplier. To do this ask to see business licenses, corporate documents, and other indicia of legal status.
  6. Once it is established that the business exists and is located at that facility, confirm it has the machinery, equipment, and personnel necessary to make the product. If the process requires machine tools, ask to see them either in a site visit or (at a minimum) in photographs. Digital photographs of machinery and equipment should confirm via metadata the date and location at which they were taken. You should confirm that the machines are functional, are owned by the supplier or at least held by long-term lease, and that workers know how to operate them.
  7. Ask to see records showing that there are sufficient production employees at the plant to make the product.
  8. While you are at it, you can check that the employees are there legally. They should be of the required age to work and not there as prison or forced labor. Do this by demanding to see identification and work papers as well as private conversations with employees.
  9. Confirm that the plant has an inventory or supply of the raw materials necessary to make the product. The inventory of raw materials should pre-date the production of exports to you and should be sufficient to make the material. A pound of steel wire in inventory is not a good sign if you ordered half a ton of wire hangers.
  10. Finally, if the goods are branded or have certifying marks (including, for example UL, HDMI, USB, Bluetooth, etc.), ask to see the license from the mark holder permitting the supplier to manufacture and export the product. It is not sufficient to get a letter saying that such a license exists. Remember, suppliers lie. If the supplier says it purchased the goods from a third party, get the identity of that third party and ask for confirmation that it is properly licensed. Many trademark holders have online means of verifying that marks are legitimate, use those resources. See, e.g., HDMI Adopters and UL Verify.

Sunday, December 30, 2018

A Sweet Lesson in Hearsay

United States v. Univar USA Inc., Part 1

This is another penalty case. It has two distinctly different discussions. The first has to do with several disputes concerning the admissibility of evidence. The second has to do with whether the importer exercised reasonable care. This is a 69-page opinion, so we will only hit the highlights, starting with the evidence questions.

The government’s claim in this case is that Univar imported saccharine from China allegedly transshipped through Taiwan and misrepresented the correct country of origin. As a result, Univar would have illegally avoided paying antidumping duties.

Defendant Univar made a motion for summary judgment arguing that the case should be dismissed as a matter of law. The Rules of the Court of International Trade require that the parties submit statements of facts about which there is no dispute to be tried. These statements must be supported by a citation to admissible evidence. See USCIT Rule 56(c). Regarding evidence, the defendant moved to exclude several categories of evidence from the court’s consideration. By and large, the question is whether this evidence was inadmissible hearsay.

Hearsay is an out of court statement that is introduced to prove the truth of the matter asserted in the statement. Fed. R. Evid. 801(c). Thus, if I send an email to my friend saying that the light was green when I drove through, it would be improper to use that email as evidence of the color of the light. There are several exceptions to this rule. For example, if that were my dying declaration or it were against my own interest to make that statement, the email would be admissible.

The first group of documents to which Univar objected were emails sent by Univar employees to its agents or third parties. The government was using these emails, among other things, to show what Univar knew about the merchandise as a means of assessing its culpability for the alleged misrepresentations. In other words, the email was not used to show the origin of the saccharine. Rather, it was used to show the impact of the incorporated statements on Univar with respect to its business practices. In other words, if an email chain indicates to an importer that there is reason to doubt the truthfulness of the country of origin statement from the supplier, the email may not be admissible to prove the country of origin. It is, however, admissible to show that the company had reason to doubt the information it was reporting. The Court reached a similar decision with respect to emails to Univar from its agents and employees.

The third group of contested documents were internal Univar documents including trip reports, letters and PowerPoint decks. Under FRE 801(d)(2)(D), these documents are not hearsay because they are offered by an opposing party and were made by agents or employees. Moving on.

The fourth group of documents is a mixed bag including an appearance by a Rabbi hired to determine whether the saccharine is kosher, sections of Taiwan’s customs laws, and an affidavit from a Special Agent. The statement of the rabbi (more on this in the next post) was not introduced to prove the truth of his statement but rather how it should have impacted Univar’s compliance stance. Testimony about the existence and content of an exclusivity agreement was excluded both as hearsay and under the “best evidence rule,” which states that a document is the best evidence of the contents of the document and should be introduced rather than relying on testimony about the document.

Univar objected to the introduction of other documents. The Court engaged in a detailed analysis of each and applied the relevant evidence rules. It is worth a read because evidence questions do not come up all that often in customs cases. Nevertheless, I am going to move on to the substance.

That will be the next post.

Where is the Report of Investigation?

As we get to the end of 2018, I am trying to wrap up a lot of work and a few blog posts. Here is the first.

Greenlight Organics is not a particularly interesting decision on its own, at least not at this point. It involves a motion for summary judgment in a customs fraud case. The government is seeking approximately $3.5 million in unpaid duties and penalties from Greenlight. Because this is a fraud case brought under 19 USC 1592, the applicable statute of limitations in five years. See 28 USC 1621. The trick with a fraud case is that, unlike the standard negligence case, the five-year clock does not start to run until Customs and Border Protection first learns of the fraud.

Here, the government filed its complaint on February 8, 2017. Defendant contends that the government knew of the fraud in 2011, making the case time barred. The United States counters that it did not know of the fraud until sometime after February 8, 2012, making the case timely.

The Court of International Trade declined to grant summary judgment. According to the Court, determining the date of discovery of fraud is a fact-specific exercise that is rarely amenable to summary judgment. Looking at the elements of the fraud involved in this case, the Court did not see sufficient evidence of when the government might have first determined that the products were allegedly misclassified, that the importer was allegedly using double invoicing to fraudulently declare value, and that the importer acted with the intent to defraud the government. Consequently, these facts will have to be established through the introduction of evidence at trial.

I have zero reason to quibble with the legal analysis. The date of discovery rule is entirely well established and has been applied in customs cases. I also agree entirely that this phase of the case presents a question of fact that requires a review of the facts to answer the question presented.

My question (and it really is a question) is: What remains to be presented to the Court? In penalty cases, the United States has usually conducted a thorough investigation. The progress of that investigation is usually recorded by the investigating Agent in a document known as a Report of Investigation, or ROI. The ROI is often several inches thick and includes summaries of documents, lab reports, conversations with CBP personnel, and with witnesses. The ROI, assuming one exists, should contain a summary of what the government knows and when it knows it. That, by itself, might be sufficient to determine when the five-year period began to run and, possibly avoid a trial on this question and on the merits.

Reports of Investigation have been referenced in other cases as evidence of the facts surrounding a penalty case. For example, in United States v. Ford Motor Company, Ford pointed to the ROI as contradicting testimony concerning the scope of an investigation. In Clymore v. United States, the ROI was cited as evidence that Customs and Border Protection knew the identity of the owner of a seized truck.

There are several reasons why the ROI might not resolve this matter. Perhaps there is no ROI. I am not sure why that would be the case. Perhaps there is conflicting information in the ROI requiring a live person to clarify. It is possible that conflicting information has created a credibility issue that will be best resolved through live testimony. Judges have often said that the best way to judge credibility is by watching the person testify. If any of these possibilities is true, it makes sense to move this question to trial. Otherwise, one would think that the documents would be sufficient to tell the story of when CBP determined that there was evidence of fraud.