Tuesday, March 20, 2018

Patience You Must Have, Young Lawyer

Always two there are, no more, no less. A name for the thing and a use for it. How to classify, you must choose. Choose wrong, and unbalance the tariff law.

Such was GRK Canada. The Court of Appeals chose the use-side, it did. Told the lower court to consider use, even when to the thing a name the tariff gives. Two masters of the tariff struggled for the name-side they did, but the Court went to the use-side.

But a Chosen One there is. Bring balance to the law, the Honorable Circuit Judge Reyna did.

[I'm done, being Yoda is surprisingly exhausting.]

My point is that, in my opinion, the prior decision of the Court of Appeals for the Federal Circuit in GRK Canada, Inc. v. United States, upset the normal course of classification by inserting considerations of use into the analysis of eo nomine tariff provisions.

The case involves the tariff provisions for wood screws (7318.12) and for self-tapping screws (7318.14). Both are eo nomine classifications, though the names suggest a use. In its first ruling on this issue, the Court of International Trade focused on the physical characteristics of the merchandise and of products commonly and commercially known as wood screws and self-tapping screws. The CIT gave no weight to evidence of use in making its determination.

On appeal, the Federal Circuit held that the CIT was incorrect to essentially ignore use. The Court instructed that when an eo nomine tariff classification suggests a particular use, evidence of use consistent with that eo nomine designation is relevant and should be considered. The Federal Circuit sent the case back to the CIT for reconsideration.

On remand, the trade court took note of the evidence of use and reiterated the physical differences between wood screws and self-tapping screws. The Court then held that the proffered evidence of use, while taken into consideration, did not overcome the evidence of physical characteristics consistent with the name of the product.

Now, the Federal Circuit has decided the second appeal in this case. This time, Circuit Judge Reyna, who, along with Judge Wallach, had dissented in the previous decision to deny a rehearing of the case, drafted the opinion for the panel. I do not often name specific judges in these posts. In this case, it is relevant that Judge Reyna had dissented. It is also relevant that both Judge Reyna and Judge Wallach come from a trade background.

This time, the Federal Circuit acknowledged that the CIT had followed its instructions to consider evidence of use. The Court then held:

For the reasons set forth in the Court of International Trade’s opinion, we find these common and commercial meanings of “other wood screws” and “self-tapping screws” to be amply supported by the source material of record without further elaboration.  We thus hold that (1) the common and commercial meaning of “other wood screw” under HTSUS 7318.12 is “a screw that forms its own thread by compressing surrounding material designed to fasten wood to wood or other fibrous material,” and (2) the common and commercial meaning of “self-tapping screw” under HTSUS 7318.14 is a “specially hardened screw, that meets minimum torsional strength requirements, that can cut away material to form a mating thread in non-fibrous material, and is designed to fasten nonfibrous materials, such as metal, to either fibrous or nonfibrous materials.”

Then, the Court performed a Judicial mind trick that can only be accomplished with a lifetime appointment and a high concentration midichlorians: it said, "We decline to accept the Government’s invitation to elevate the role of use in our interpretation of the eo nomine provisions at issue here." I realize the Court means "elevate the role of use above a mere consideration," but it certainly looks to me like that invitation came from the Court. The Government just accepted it.

This is a good decision. While it leaves the original GRK decision in place, it literally restores the balance to the Force, I mean to the law. Use is something the CIT (and presumably Customs and Border Protection) can look at. But, based on this decision, it seems clear that objective physical characteristics will carry the day when interpreting eo nomine tariff language.

Sunday, March 11, 2018

Default Penalties

I have spent considerable time trying to summarize United States v. Rupari Food Services. I have now come to the conclusion that we are all better off if I just don't. You can read it.

When you do, you will see that for a significant time during the litigation of this matter, I served as co-counsel to the defendant along with my friend Peter Quinter of GrayRobinson. At approximately the time that Rupari filed for bankruptcy protection, we were discharged by the client. The Court entered a default judgment on the basis of the facts asserted in the complaint and for the full amount claimed by the United States.

That's very likely the end to what is a monumentally sad case.

March Madness

March is always a busy travel month for me. Despite having just returned from Washington, DC, I am presently on my way to San Diego. The ICPA conference, which starts this evening, also explains why half of the customs lawyers who practice in Chicago are on this flight. If anything bad happens to this plane, there will be a lot of openings for customs lawyers in Chicago.

This flight also gives me a long overdue opportunity to post about a few relevant cases. The first of which is Moen Inc. v. United States, which addresses the seemingly mundane question of the legal and existential nature of the humble toilet paper holder.

As we shall see, this decision is a clean sweep for the plaintiff who should be congratulated for effectively wiping up a victory. I am certain counsel for the plaintiff is flush with pride. The Government, which found no relief, may feel some urgency to an appeal.

Moen believes the TP holders are properly classified as base metal mountings of Heading 8302. Customs and Border Protection believes the correct classification to be as other articles of zinc including toilet and sanitary wares in Chapter 79. One item is composed primarily of steel and was classified as such by Customs in Chapter 73.

The Court of International Trade started its analysis by determining the scope of Heading 8302. That heading covers:

Base metal mountings, fittings and similar articles suitable for furniture, doors, staircases, windows, blinds, coachwork, saddlery, trunks, chests, caskets or the like; base metal hat-racks, hat-pegs, brackets and similar fixtures; castors with mountings of base metal; automatic door closers of base metal; and base metal parts thereof:

First, zinc is a base metal as defined by Section XV, Note 3.

The next question the Court considered is the meaning of the phrase “base metal hat-racks, hat-pegs, brackets and similar fixtures . . . .” Because the merchandise at issue is neither a hat-rack, nor a hat-peg, the question seems to have been whether it is “similar” to those items. Or, the merchandise might actually be “brackets.” Defining these terms, the Court found that hat-racks, hat-pegs, and brackets have similar characteristic in that they are affixed to a wall or similar structure and used to hang, hold, or support some other item, which, frankly, sounds a lot like a toilet paper holder.

The Government’s counterargument was based on two propositions. First, that the toilet paper holders differ from hat-racks and pegs in that they include a mechanism to secure the roll that is not found in racks and pegs. The first problem with that argument appears to have been that it was not true for all of the models at issue. Still, if the distinction were meaningful, it might have lead to a different result for some of the items. The Court did not find it meaningful.

The second argument is that hats, coats, towels and similar items are removed from their respective racks as an entirety rather than in segments as is the case with toilet paper. First, had this been my case, I would have asked the Judge to take judicial notice of the fact that the ability to take a reasonable portion of toilet tissue for the job at hand is not universal and is almost entirely absent from humans under the age of 10. But, I digress. More important, the Court finds this distinction lacking in the text and also countered by the example of paper towels which are both towels and doled out in segments.

I do have a slight question about how this part of the analysis was framed. The Court was trying to find the defining common characteristics of racks, pegs, and brackets. That exercise, under the principle ejusdem generis, is not textual. I am not balking at the result here. I just wonder whether the right approach might have been for the plaintiff to point to racks that have a similar function. I am thinking, for example, of the racks that hold rope, wire, and chain in hardware stores and are used to dole out portions for sale. I have no idea where those would be classified, but they same similar in function. Textiles and ribbons are displayed in a similar manner.
Turning to the Government’s proposed classification, the Court noted that Note 2 to Section XV excludes articles of Chapters 82 and 83 from Chapters 72 to 76 and 78 to 81. Given that the Court had just concluded that these products are properly classified in Heading 8302, it follows that they cannot be classified in Chapter 79 as articles of zinc or in Chapter 73 as articles of steel.

Ipso facto, the Government’s argument goes down the drain.

Thursday, March 08, 2018

Steel and Aluminum Proclamations

Here is the lowdown on President Trumps action on steel and aluminum.

Saturday, February 24, 2018

On 4202: Legal Briefs, Boxer Briefs, and Boxer Dogs

Back when I was a young law clerk at the U.S. Court of International Trade, I was occasionally inspired to lobby my judge to insert a clever phrase or literary allusion into an otherwise dry opinion. I specifically recall trying to insert the phrase "second thwack at the piñata" where "second bite at the apple" would have been the more common usage. In a case involving the tariff classification of fruit preserves, I tried to convince the judge to use phrases like "the defendant is in a jam," "Customs squeezed the importer," "the fruits of this effort," etc. None of that made it into the published opinion.

It appears that Judge Katzmann of the U.S. Court of International Trade has a much more liberal view of drafting, or possibly a much more persuasive law clerk. I gather that from reading Quaker Pet Group, LLC v. United States. The decision opens with this scene:

Catching sight of three tiny orphaned kittens wandering in a battlefield tent, President Abraham Lincoln directed Colonel Bowers of General Grant’s staff:  “Colonel, I hope you will see that these poor little motherless waifs are given plenty of milk and treated kindly.” Some eighty years later, President Harry Truman is famously said to have remarked,“[i]f you want a friend in Washington, get a dog.” It would certainly have been beyond the contemplation of the 16th or 33rd Presidents that their animals might be categorized as items or personal effects.  Yet, the determination of that categorization under the domestic tariff scheme is central to the question presented by the case before this court: how should cloth pet carriers be classified for the purposes of determining what tariff rate should apply to their importation?

 The issue in the case is whether cloth pet carriers are classifiable as similar to sport and travel bags in HTSUS Heading 4202 or as other made up articles of textile in Heading 6307. What we are talking about is something like this:

This item clearly shares many characteristics of the basic gym bag, which would be classifiable in Heading 4202, which covers:

Trunks, suitcases, vanity cases, attaché cases, briefcases, school satchels, spectacle cases, binocular cases, camera cases, musical instrument cases, gun cases, holsters and similar containers; traveling bags, insulated food or beverage bags, toiletry bags, knapsacks and backpacks, handbags, shopping bags, wallets, purses, map cases, cigarette cases, tobacco pouches, tool bags, sports bags, bottle cases, jewelry boxes, powder cases, cutlery cases and similar containers, of leather or of composition leather, of sheeting of plastics, of textile materials, of vulcanized fiber or of paperboard, or wholly or mainly covered with such materials or with paper:…
   With outer surface of sheeting of plastic or of textile materials:...

But, the item to be contained in this bag is not sweaty socks and wicking t-shirts. It is a living, breathing, and potentially annoying little dog. Does that matter?

It does, because of Additional U.S. Note 1 to Chapter 42, which states (emphasis added), “the expression ‘travel, sports and similar bags’ means goods, other than those falling in subheadings 4202.11 through 4202.39, of a kind designed for carrying clothing and other personal effects during travel, including backpacks and shopping bags of this heading, but does not include binocular cases,
camera cases, musical instrument cases, bottle cases and similar containers.” Because dogs and cats are not clothing, for this bag to be a travel, sports or similar bag, the contained pet must be "personal effects."

The meaning of "personal effects" is not clear except that it applies to inanimate objects generally worn or carried on one's person. Examples include keys, wallets, watches, and similar items. Coco the rambunctious schnauzer and Fluffy the aloof tabby are not similar items. According to Judge Katzmann, "Pets are living beings, and thus not things or items."

Looking at the items specifically mentioned in Heading 4202, one thing is clear: there are no trunks, bags, cases, or other containers in that list that are intended to transport, organize, carry and protect living creatures. Under the legal principle of ejusdem generis,  when a general word or phrase follows a list of specifics, the general word or phrase will be interpreted to include only items of the same class as those listed. The class of goods listed in 4202 is designed to help travelers, commuters, and others in transit tote their personal effects, whether that be legal briefs or boxer briefs, but not boxer dogs.

On this record, the Court was able to conclude as a matter of law that the pet carriers are not similar to the items listed in Heading 4202.

What remains to be done is figure out where these carriers are classified. Heading 4202 is now off the table. At this preliminary stage of the case, there is insufficient evidence before the Court to make a determination as to the correct classification. Consequently, one of two things are going to happen.

[CONFLICT WARNING: This case is being litigated by my law firm. And, I personally did the first successful litigation on this issue in a case called Firstrax, so what follows might be viewed as biased.]

The parties can continue with formal discovery in which the plaintiff will produce facts showing that the carriers are textile items. Then, plaintiff will move for summary judgment, produce that evidence to the Court and hopefully win the case. For the government to win, it will need to show that the carriers are not classifiable in 6307 either because they are not textile products or there is a better alternative classification. That could happen, I just don't happen to see it.

The alternative is that the parties will trade evidence until the government agrees that the carriers are textile products and that 6307 is the best classification other than its preferred 4202. At that point, the parties should be able to enter into an agreement to stipulate these cases in favor of the plaintiff. That might not happen if the government believes the Court of International Trade is wrong in its reading of 4202 and wants to appeal to the Federal Circuit, which I can only hope is packed full of pet lovers.

Tuesday, January 23, 2018

The Unbearable Unambiguity of Laws

Someday, when I am done practicing and looking for a final way to stay engaged, I would like to teach Administrative Law to JD students. I often tell student that, for what I do, the single most important class I took in law school was not any class with "international" in the course description. It was Administrative Law. My practice is all about what the federal government can and cannot require of importers and exporters and what must be required of the federal government. That is administrative law.

Two recent decisions from the Court of Appeals for the Federal Circuit put this nicely in focus.

The first is Capella Sales & Services Ltd. v. United States. This is one of those cases with a relatively straight-forward analysis that leads to a bad result. Capella entered aluminum extrusions from China. At the time its entries liquidated, Commerce had determined the countervailing duty deposit rate to be 374.15%. Capella did not challenge the rate and, as a result, there was no injunction preventing the liquidation. Subsequently, other importers did challenge the rate, which was found to be grossly incorrect. The correct rate was determined to be 7.37%. After that decision, Commerce, as it is required to do, published a notice of the judicial determination "not in harmony with" its determination. Subsequent liquidations would be at the lower rate.

If you have any empathy, you feel for Capella. It had terrible timing. Earlier imports might have escaped the preliminary determination entirely. Later imports would have benefited from the lower rate. More legally, it appears that Customs and Border Protection liquidated entries at a rate that was determined to be unlawful. Surely, Capella should have some way to recoup the difference.

Unfortunately, that is not how the law is written. The statute requires that entries be liquidated in accordance with the determination of the Commerce Department. 19 USC 15106a(c)(1). The only exceptions are (1) where a court has ordered an injunction against liquidation and (2) where the entry is after the Federal Register Notice of a decision contrary to Commerce's determination. Alternatively, (3) an interested party can request an administrative review of the applicable rate under 19 USC 1675(A)(2)(C). There is no factual dispute that Capella's entries do not fit into one of these categories.

Capella basically argued for a writ of rachmones. It asked the court to take note of the unusual circumstances of a 375% deposit rate compared to a roughly 7% assessment rate. In light of that, it asked the Court to find that the statutory scheme was ambiguous, giving the Commerce Department discretion (and presumably a mandate) to liquidate at the lower, "correct" rate. The textual basis for that conclusion was reed thin.

Citing the Chevron doctrine, Court noted that where Congress has specifically addressed a question, the Court's role is to give effect to the law as written. Here, it found that Congress made no exception for the bad circumstances of this case despite knowing exactly how to draft such exemption. Given the lack of ambiguity, the Federal Circuit affirmed the liquidations at the higher rate.

The second case is Glycine & More, Inc. v. United States. Here, the issue is whether Commerce can change the meaning of a regulation by publishing an informal interpretation in a "guidance" document. The regulation at issue is 19 CFR 351.213(d)(1) which explains what Commerce is supposed to do when an interested party requests an administrative review and subsequently withdraws the request.

The regulation states:

The Secretary will rescind an administrative review under this section, in whole or in part, if a party that requested a review withdraws the request within 90 days of the date of publication of notice of initiation of the requested review. The Secretary may extend this time limit if the Secretary decides that it is reasonable to do so.

In this case, a party that requested review submitted a notice of the withdrawal and requested an extension of the 90 days to complete the request after the 90-day period had run. Commerce refused to extend the period and, therefore, continued the reviews. The requesting party refused to participate and was assigned a 453.79% deposit rate on the basis of facts otherwise available and an adverse inference. That certainly hurt.

Commerce did so based on an interpretive notice from 2011 stating that Commerce will not grant extensions "unless the requestor demonstrates that an extraordinary circumstance has prevented it from submitting a timely withdrawal request." The Court of International Trade held that Commerce's interpretation of its regulation was unreasonable and defeated the purpose of the regulation.

On appeal, the Federal Circuit applied the same analysis it applies to an agency interpretation of a statute, which is what we discussed above. If the regulation is clear, "it is the duty of the courts to enforce it according to its obvious terms and not to insert words and phrases so as to incorporate therein a new and distinct provision."

The Federal Circuit found no ambiguity. It found that prior to the 2011 Notice, the regulation was understood to provide Commerce with wide discretion to exercise its judgment to grant extensions in reasonable circumstances. After the 2011 Notice, the regulation was interpreted to limit that discretion to "extraordinary circumstances." No such limitation exists in the text. According to the Court, that is an "incompatible departure from the clear meaning of the regulation." Commerce cannot re-write the regulation through an informal guidance notice. It must follow the formal notice-and-comment rulemaking process.

Consequently, Commerce must reconsider its denial of the requested extension as if the 2011 Notice did not exist.

And that is an administrative law two-for-one post.

Wednesday, January 10, 2018

The Case of the Substitute Radical

While I had big plans for this post, time and work have intervened. I will skip the chemistry lesson and tell you what you need to know. This is the upshot from the CAFC decision in Chemtall.

The classification issue boils down to whether acrylamide tertiary butyl sulfonic acid ("ATBS") is an amide or a derivative of an amide. An amide is a class of chemicals that is defined by a carbon atom double bonded to an oxygen atom and to a nitrogen atom. The carbon atom is bonded to a radical designated R1. The nitrogen atom is bonded to two radicals designated R2 and R3. That makes for molecule that looks like this:

The issue here is the composition one of the radicals. Is the product still an amide if one of the radicals is bonded to the sulfur compound SO3H? If so, the product is classifiable in 2924.19.11 as an amide (3.7%). If not, it is classifiable in 2924.19.80 (6.5%).

Here's the answer: most secondary chemistry resources define amides as having only hydrogen or hydrocarbyls bonded to the nitrogen. The sulfur compound is neither. Furthermore, Chemtall's expert testimony that an amide can contain a substituted radical was not, according to the Court, persuasive. The non-binding Explanatory Notes were not clear on this point. Thus, Chemtall failed to convince the Court that the CIT decision was incorrect. The Federal Circuit affirmed, leaving the classification as 2924.19.80.

Two interesting asides appear in the decision, both of which reinforce fundamental points of tariff classification law. The first is that a dictionary definition is most persuasive if it appears close in time to the promulgation of the statutory language. In this case, the 1986 edition of two dictionaries were favored because they were closest in time before the 1989 enactment of the HTSUS. Second, the two-digit statistical suffix forming the 9th and 10th digits of the tariff item (and corresponding language) are not relevant to the interpretation of the tariff. This decision will probably be cited for those two propositions more than anything else.

Yes, the title of this post is intended to sound like a Sherlock Holmes mystery. If I did not have a real job, this post would follow suit.

Sunday, January 07, 2018

Contain Yourself

The Container Store v. United States has an interesting history. It involves the tariff classification of elfa "top tracks" and "hanging standards." Top tracks are the horizontal mounting members that can be affixed to a wall. The hanging standards are vertically connected to the top tracks. The hanging standards have slots that can be used for mounting attachments such as shelves, baskets, and drawers allowing consumers to build customs storage solutions. I am pretty sure this is what we are talking about:

This may ring a bell with you, because we have been down this road before. We discussed the CIT decision in this case here. And, before that, we addressed the same question in a case called storeWALL

The reason this issue is back before the Court of Appeals for the Federal Circuit is that in customs law, few things are ever final and beyond subsequent question. Each time an importer has a classification dispute with Customs and files a protest, the denied protest can be the basis of a separate lawsuit. For reasons of history and Supreme Court precedent (that might be worth a second look), a CIT decision stating the classification of the merchandise does not preclude either party from challenging the decision again and re-litigating it. For the lawyers reading this, despite what you may have learned in Civil Procedure, normal rules of res judicata do not apply to customs litigation. 

In the first Container Store case, Judge Ridgway followed the Federal Circuit decision in storeWall and concluded that the merchandise is classifiable in Heading 9403 as parts of unit furniture. Apparently, the United States government was not happy with that result, and re-litigated the issue. This time, the case landed on the desk of Judge Barnett who reached a different conclusion. According to Judge Barnett, the metal components at issue here differ from the plastic storeWall products. He found that Chapter 94 Note 1(d) excludes the merchandise, which he found to be "parts of general use." Accordingly, they should be classified in Heading 8302. 

Heading 8302 covers:

Base metal mountings, fittings and similar articles suitable for furniture, doors, staircases, windows, blinds, coachwork, saddlery, trunks, chests, caskets or the like; base metal hat racks, hat-pegs, brackets and similar fixtures; castors with mountings of base metal; automatic door closers of base metal; and base metal parts thereof:
Heading 9403, on the other hand, covers "Other furniture and parts thereof . . . ."

Note 2 to Section XV states that parts of general use include "[a]rticles of heading  . . . 8302." Container Store does not dispute that parts of general use of Heading 8302 are excluded from Heading 9403. It argued, however, that the merchandise is not parts of general use. Spoiler: The Federal Circuit agreed with The Container Store.

Relevant here are the Explanatory Notes to the Harmonized System. With respect to Heading 8302, the Notes state:

This heading covers general purpose classes of base metal accessory fittings and mountings, such as are used largely on furniture, doors, windows, coachwork, etc. Goods within such general classes remain in this heading even if they are designed for particular uses (e.g., door handles or hinges for automobiles). The heading does not, however, extend to goods forming an essential part of the structure of the article, such as window frames or swivel devices for revolving chairs.
According to the Federal Circuit, the top tracks and hanging standards form the indispensable structural framework of the modular storage unit. Based on the Explanatory Note, these items are excluded from classification in 8302. That means, the goods are not excluded from Heading 9403.

This should not be seen as upending the law on parts of general use. It remains true that parts of general use are to be classified as such even if they are specialized to a specific task. The Federal Circuit addressed this in its discussion of its prior Honda decision. That case involved the classification of an oil bolt, which is a specialized fastener that also includes features allowing it to transfer oil. Honda argued that it was classifiable as a vehicle part, not a bolt. The Federal Circuit disagreed. The difference here is that there was no reason to exclude the oil bolts from the classification for fasteners. Here, the Explanatory Notes indicate that structural components are not included in Heading 8302.

Because the top tracks and hanging standard are not classifiable in 8302, they are not parts of general use. Because they are not parts of general use, they are not excluded from 9403. Having reached that conclusion, and consistent with storeWall, the Federal Circuit concluded that this merchandise is best classified in 9403.90.80 as parts of unit furniture.

Note that this does not follow directly from storeWALL as a matter of stare decisis. This is related to but different than the lack of res judicata mentioned above. Stare decisis is the legal principle that cases should be decided based on precedent. This is a fundamental characteristic of the common law system used in the U.S., Canada, the U.K., and other jurisdictions. But, stare decisis only applies to the legal determinations and not to the questions of fact nor to legal determinations not part of the prior holding. In a classification case, whether the item fits in a particular heading is a question of fact. So stare decisis does not apply to the final classification determination. And, storeWall did not address the question of parts of general use and Heading 8302. So, while the result is the same as storeWALL, that decision did not dictate the outcome.