When last we considered the tariff classification of Ugg Classic Crochet boot, the Court of International Trade held that the boots are "of the slip-on type" and, therefore classifiable in HSTUS item 6404.19.35. Ugg appealed to the Court of Appeals for the Federal Circuit, which has now affirmed the CIT.
First, a note on usage. The Federal Circuit almost uniformly refers to the Court of International Trade as the "Trade Court." I wonder why that is. I am not aware of any practitioners who appear before that Court using that phrase. I think the common usage is either "CIT" as the shorthand or "Court of International Trade" in full. But, I like "Trade Court" and think I will adopt it (within the limits of satisfying Google that this is a place to find information on the Court of International Trade). Second, in this case, the majority decision decided to refer to HTSUS item 6404.19.35 as "subheading 19.35"). That is very much in line with the practice in which patent numbers are truncated for simplicity. I kind of like that approach, but would add an apostrophe as they do in patent practice. Thus, I would say "defendant argued for classification in subheading '19.35." Of course, that only works when you are talking about subheadings in a single heading.
The legal question here was whether the Ugg boots are "of the slip-on type that is held to the foot without the use of laces or buckles or other fasteners."
Deckers contended that slip-on footwear covers shoes, presumably loafers, slippers, and similar non-laced shoes that the wearer steps into without much in the way of assistance. Further, Deckers argued that the boots were not "slip-on" because getting into them requires that they be pulled on with the hands.
On the first point, the Court noted that the general term "footwear" is broader than shoes and, on its face, would cover boots as well as shoes. According to the Court, had Congress intended only to cover slip-on shoes and not boots, it would have said so. Further, the Court said that the definition of slip-on footwear in Treasury Decision 93-88 includes boots and, because it has been consistently applied, was persuasive.
Deckers argued that the term "slip-on" is not used in the industry to refer to boots. In an important bit of analysis, the Federal Circuit reviewed a number of retail web sites as examples of common and commercial usage. This is important because the Court did so in an effort to cite "reliable sources" of the meaning of the term. The reason this is important is that classification cases sometimes get bogged down on questions relating to the admissibility of evidence showing usage because it is very difficult properly lay a foundation for an advertisement. Typically, an ad is not a business document of the importer, the author is unknown, and the ad does not run in a publication that is known to be authoritative and reliable. So, one side or the other might object on the grounds that anything said in the ad is inadmissible hearsay.
It's not. The reason it is not is two fold. First, this is not evidence of a fact that is in dispute. In the context of this case, it is not important whether the particular shoe or boot being advertised might in fact be slipped on one's foot. Rather the issue is whether the term "slip-on" is commonly and commercially used in connection with boots. Because we are not using an out-of-court statement to prove the truth of the matter asserted, it is not hearsay. Second, the Court decides the scope of the tariff terms as part of its task of construing the law. In my view, there really should not be disputes over these sorts of examples of usage. The only real question should be whether the Court deems the example to be reliable. In other words, when making decisions as to the meaning of the law, the Court is not relying on evidence in a legal sense but on its understanding of the English language.
Deckers' next argument was that a boot that must be pulled on using the hands cannot be "slipped-on." Unfortunately, the Court of Appeals noted that many articles of clothing that are consider to be slip-on require the use of the hands. The best example is gloves, which require some effort to get on.
Related to this is a grammar argument over the words "that is" in the tariff language. The question is whether the words "that is" in the phrase "of the slip-on type, that is held to the foot without the use of laces or buckles or other fasteners" signal that "held to the foot without the use of laces or buckles or other fasteners" defines "slip-on type." In that interpretation, "that is" means i.e. and should have been set off by commas before and after. On the other hand, if the second phrase merely qualifies "slip-on," then to be classifiable in this provision the footwear must be BOTH slip-on and without fasteners. That is an interesting question.
In the Court's view, Congress should have inserted commas. Otherwise, according to the Court, other language in the tariff becomes meaningless. For example, the heading covers footwear with open heels. These are obviously slip-on and would be included in '19.35 (see how well that works?) without the need to specify that they have open heels. While that makes sense, I am not sure I see how it resolves the argument about what "that is" means. In fact, I think the dissent is right on this point.
The case includes one final interesting (at least to me) bit of procedure. This is a decision on a motion for summary judgment. That means that one party, in this case the government, believed that the only open question was the proper interpretation of the tariff and that no material facts were disputed. The Federal Circuit agreed that there are no disputes as to the material facts regarding the physical nature of the boots; leaving only a question of statutory interpretation. In that context, the Federal Circuit said that the Court of International Trade "may examine many resources to ascertain the common meaning or commercial understanding of a particular tariff term . . . . a court may consult dictionaries, scientific authorities . . . and lexicographic and other materials." This again is a good statement as to the job of the Court of International Trade in these cases and the fact that the Trade Court (see that?) is pretty free to roam where it wants to find the meaning of the tariff. Deckers, unfortunately, did not present enough evidence to refute the agreed-upon facts and, as a result, the Court of International Trade granted the government's motion for summary judgment over Deckers' assertion that, if a trial were held, it could present more contrary evidence.
As has been the case recently, I like the dissenting opinion here. Judge Dyk believes that if Congress had intended the subheading to cover all slip-on footwear defined as footwear without laces or buckles or other fasteners, then there would be no need for the HTSUS to add the phrase "slip-on," because that would be co-extensive with footwear lacking laces, etc. According to Judge Dyk's dissent, the subheading covers footwear that can be slipped on without external assistance (such as the use of the hands) AND that lack fasteners. A slip-on shoe with fasteners would be excluded.
Friday, May 10, 2013
Saturday, May 04, 2013
Victoria's Secret is Tariff Classification
Remember my post on the question of whether a fit model can testify on the question of whether a shelf bra provides support for her bosom? Sure you do, it's a classic of the customs blog genre.
The Court of International Trade has now decided the relevant cases, which are Lerner New York, Inc. v. United States and Victoria's Secret Direct v. United States.
Starting with Victoria's Secret, the issue was whether the article of clothing was properly classified as tank top or similar garment, which is the classification proposed by Customs and Border Protection. Plaintiff argued that the top was either a brassier or an unspecified "other garment." The garment was described on the invoice as a "basic tank" with "shelf bra." I am no expert on fashion, but a little time on Bing leads me to believe that this is similar to the garment in question:
Getting to that conclusion involved two interesting arguments. The first had to do with the fact that the importer described these garments as tank tops on the invoices and in marketing literature. Typically, that would lead to the conclusion that they are classifiable eo nomine as tank tops in Heading 6109. But, that is not always the case. The Court made the important statement that:
The reason this is important is that it goes to the heart of one of the problems in customs tariff litigation. Usually, the case is decided on a question of law. In this case, the question presently under review is the scope of Heading 6109. The fact that a Victoria's Secret might call this product a tank top does not make it legally so. Moreover, statement is just a fact that does not change the legal scope of the heading. If it did, Victoria Secret should start invoicing all of its products as "duty-free millstones" because that would make them classifiable in 6804.10.00 and duty free. Rather, as the Court noted, it is up to the Court to make the legal determination as to the meaning of the tariff term.
The reason I say this points to a problem in tariff litigation is that both sides spend a lot of time trying to find examples of the importer or Customs calling a product one thing or another, depending on their perspective. But, as the Court said here, that really does not mean much of anything. Again, if a witness for the importer refers to its pencil as a fork, all we know is that the witness said this, not that the item is legally a fork.
The other interesting argument raised by the government was that the shelf bra tank top is an improved version of the standard tank top and is, therefore, included in 6109 under the eo nomine provision for tank tops. Usually, this is a compelling argument. The tariff schedule is intended to cover newly invented items and improvements on old items. Maybe this is just a fancy new tank top. The Court, however, noted that its conclusion that 6109 does not cover support garments and does not cover outerwear effectively eliminates this garment from being classified as an improved tank top. In other words, even though the plaintiff calls it a tank top, the plaintiff is legally incorrect and this is an article of outerwear with support features.
Given all that, the question remained as to the correct classification. The plaintiff first argued that the merchandise should be classified as a brassier or similar article. The Court concluded that brassieres are undergarments and that sports bras are the adaptations of brassieres for use as sportswear. According to the Court, this garment was neither. That left the goods to be classified in 6114 as an other garment, knitted or crocheted. Given that 10.8% is a lot lower than 16.5%, that seems like a victory for Victoria.
The Court of International Trade has now decided the relevant cases, which are Lerner New York, Inc. v. United States and Victoria's Secret Direct v. United States.
Starting with Victoria's Secret, the issue was whether the article of clothing was properly classified as tank top or similar garment, which is the classification proposed by Customs and Border Protection. Plaintiff argued that the top was either a brassier or an unspecified "other garment." The garment was described on the invoice as a "basic tank" with "shelf bra." I am no expert on fashion, but a little time on Bing leads me to believe that this is similar to the garment in question:
According to the Court:
The shelf bra is formed from two pieces of fabric (front and back) that are sewn together and that together extend around the entire upper, inner portion of the garment. The fabric immediately above the elastic band is gathered by the band. The top of the shelf bra is attached to the body of the garment only at the upper hem of the garment and is attached around the entire circumference of the upper hem.
The legal issue here seems to revolve around the fact that this garment provides the wearer with the support of a bra and an article of outerwear in one garment. In the words of one witness, "It was a top that provided the support of a bra."
The government asserted that this garment should be classified in Heading 6109, which covers "T-shirts, singlets, tank
tops and similar garments, knitted or crocheted." Tariff classification in the proper subheading of this heading would have resulted in a duty rate of 16.5% Classification as a brassier as put forward by the plaintiff would result in a rate of 6.6%. The plaintiff's alternative classification as an other garment of Heading 6114 carried a rate of 10.8%
In this context, and relying on the Explanatory Notes, the Court of International Trade found that articles in this heading are of the kind normally worn as undershirts. The fact that T-shirts may be printed with pictures and words for use as outerwear does not change that conclusion because the garments remain derived from or similar to t-shirts used as undershirts. Similarly, the fact that some tank tops are worn as outerwear does not mean that they are not similar to the sleeveless, light-weight garments often worn by men as undershirts. A lot of this has to do with the difference between American and British English and the meaning of the term "vests," which does not appear in the U.S. version of the HS. The Court further found that women's garments that provide support, such as brassieres and corsets, are not included in Heading 6109. Because the garment in question was both outerwear and provided support, it was not properly classified in Heading 6109.
Getting to that conclusion involved two interesting arguments. The first had to do with the fact that the importer described these garments as tank tops on the invoices and in marketing literature. Typically, that would lead to the conclusion that they are classifiable eo nomine as tank tops in Heading 6109. But, that is not always the case. The Court made the important statement that:
the record fact that plaintiff identified the Bra Top in various communications as a “tank” or “tank top” is not an admission by plaintiff that the garment at issue is a “tank top” within the meaning of that term as used in the heading 6109 article description. The meaning of a tariff term is a question of law and, therefore, cannot be the subject of a factual admission by a party; instead, the court has the “independent responsibility to decide the legal issue of the proper meaning and scope of HTSUS . . .
The reason this is important is that it goes to the heart of one of the problems in customs tariff litigation. Usually, the case is decided on a question of law. In this case, the question presently under review is the scope of Heading 6109. The fact that a Victoria's Secret might call this product a tank top does not make it legally so. Moreover, statement is just a fact that does not change the legal scope of the heading. If it did, Victoria Secret should start invoicing all of its products as "duty-free millstones" because that would make them classifiable in 6804.10.00 and duty free. Rather, as the Court noted, it is up to the Court to make the legal determination as to the meaning of the tariff term.
The reason I say this points to a problem in tariff litigation is that both sides spend a lot of time trying to find examples of the importer or Customs calling a product one thing or another, depending on their perspective. But, as the Court said here, that really does not mean much of anything. Again, if a witness for the importer refers to its pencil as a fork, all we know is that the witness said this, not that the item is legally a fork.
The other interesting argument raised by the government was that the shelf bra tank top is an improved version of the standard tank top and is, therefore, included in 6109 under the eo nomine provision for tank tops. Usually, this is a compelling argument. The tariff schedule is intended to cover newly invented items and improvements on old items. Maybe this is just a fancy new tank top. The Court, however, noted that its conclusion that 6109 does not cover support garments and does not cover outerwear effectively eliminates this garment from being classified as an improved tank top. In other words, even though the plaintiff calls it a tank top, the plaintiff is legally incorrect and this is an article of outerwear with support features.
Given all that, the question remained as to the correct classification. The plaintiff first argued that the merchandise should be classified as a brassier or similar article. The Court concluded that brassieres are undergarments and that sports bras are the adaptations of brassieres for use as sportswear. According to the Court, this garment was neither. That left the goods to be classified in 6114 as an other garment, knitted or crocheted. Given that 10.8% is a lot lower than 16.5%, that seems like a victory for Victoria.
Post-Entry NAFTA Claims: Is Reconciliation a Waiver?
As you likely know, Ford Motor Company has been battling with Customs over whether it is entitled to duty refunds pursuant to post-entry NAFTA claims it made without submitting a completed NAFTA Certificate of Origin from the exporter within the required one-year period. This issue has been the subject of a number of prior posts. To catch up on it, read here, here, and here.
This case follows the remand to the Court of International Trade, in which that Court considered the specific NAFTA-based requirements that an importer provide a copy of the certificate of origin with a post-entry claim made under 19 USC 1520(d). Ford had argued that is can make the claim without the certificate of origin and provide it subsequently because 19 CFR 10.112 provides:
On the first point regarding 19 CFR 10.112, the Federal Circuit agreed with the Court of International Trade that the NAFTA rules creating specific requirements for the filing of post-entry claims trump the more general regulation on duty-free documentation. There is nothing really new there.
It is worth noting that Judge Newman wrote a very persuasive dissent on this point. According to Judge Newman:
As a result, she would have found that by failing to amend 10.112 when implementing NAFTA, the government effectively stated that it is applicable to the NAFTA claims. This is, in my opinion, a wise and well-justified opinion. Alas, it did not carry the day.
But, Ford did not lose the appeal. Instead, the majority of the Federal Circuit addressed the question of whether the ACS Reconciliation Program has a legal impact on this case. Under Customs and Border Protection's ACS Reconciliation Program, an importer can electronically flag an entry to notify Customs that some aspects of the information initially reported is subject to later correction. While "Recon" us most often used for value, it can also be used to make a post-entry NAFTA claim. An important point is that for Recon claims, the importer need not submit a paper CO at the time of the post-entry claim.
This raises an important question. If both manual claims and Recon claims are Customs and Border Protection's effort to implement the section 520(d) process, how come only manual claims require a paper CO? Is it possible that by implementing the post-entry process via Recon, Customs also effectively waived the requirement for a NAFTA CO in the post-entry environment?
That is a good question. Unfortunately, we do not have an answer. Neither Customs nor the Court of International Trade explained why the same statutory provision has two different implementations and two different requirements with respect to the paper CO. As a result, the Federal Circuit remanded the case (again!) to the CIT for further proceedings.
That means we will likely be writing about this case again in a few months.
This case follows the remand to the Court of International Trade, in which that Court considered the specific NAFTA-based requirements that an importer provide a copy of the certificate of origin with a post-entry claim made under 19 USC 1520(d). Ford had argued that is can make the claim without the certificate of origin and provide it subsequently because 19 CFR 10.112 provides:
Whenever a free entry or a reduced duty document, form, or statement required to be filed in connection with the entry is not filed at the time of the entry or within the period for which a bond was filed for its production, but failure to file it was not due to willful negligence or fraudulent intent, such document, form, or statement may be filed at any time prior to liquidation of the entry or, if the entry was liquidated, before the liquidation becomes final.The Court of International Trade held that this regulation does not help Ford because the more specific and subsequently passed NAFTA regulations require that the CO be filed with the claim. The Court of Appeals for the Federal Circuit has now had the opportunity to review that decision. The CAFC opinion is here.
On the first point regarding 19 CFR 10.112, the Federal Circuit agreed with the Court of International Trade that the NAFTA rules creating specific requirements for the filing of post-entry claims trump the more general regulation on duty-free documentation. There is nothing really new there.
It is worth noting that Judge Newman wrote a very persuasive dissent on this point. According to Judge Newman:
In entering into the NAFTA, and as ratified and codified, neither the executive nor the legislative bodies nor any historical documentation we have found reflected an intent to remove the benefit of the pre-existing general regulatory provision of § 10.112. I have unearthed no hint of an intent to add this burden and rigor to trade with Canada and Mexico. The entirety of this history shows a contrary intent, to facilitate such trade.
But, Ford did not lose the appeal. Instead, the majority of the Federal Circuit addressed the question of whether the ACS Reconciliation Program has a legal impact on this case. Under Customs and Border Protection's ACS Reconciliation Program, an importer can electronically flag an entry to notify Customs that some aspects of the information initially reported is subject to later correction. While "Recon" us most often used for value, it can also be used to make a post-entry NAFTA claim. An important point is that for Recon claims, the importer need not submit a paper CO at the time of the post-entry claim.
This raises an important question. If both manual claims and Recon claims are Customs and Border Protection's effort to implement the section 520(d) process, how come only manual claims require a paper CO? Is it possible that by implementing the post-entry process via Recon, Customs also effectively waived the requirement for a NAFTA CO in the post-entry environment?
That is a good question. Unfortunately, we do not have an answer. Neither Customs nor the Court of International Trade explained why the same statutory provision has two different implementations and two different requirements with respect to the paper CO. As a result, the Federal Circuit remanded the case (again!) to the CIT for further proceedings.
That means we will likely be writing about this case again in a few months.
Sunday, April 21, 2013
The Problem with Test Cases: Deckers
The Court of International Trade has a few unique rules of practice. Chief among those is Rule 84, which permits a party to designate an action as a "test case" and suspend other cases pending the outcome of the test case. In customs litigation, this can be a handy tool. As you might imagine, most importers do not have a single entry or even a single protest worth bringing to Court. Typically, it is hard to justify litigation unless there are many entries at issue. Obviously, that may take time to pile up and all the while the statute of limitations is running. Also, it is usually highly inefficient to have to litigate each denied protest separately if the same issue of law and facts are presented.
The test case procedure can even be used by an unrelated party importing similar merchandise. That, by the way, is a very cost-efficient way to challenge Customs and Border Protection. The second importer can effectively ride the coat tails of the first importer who is pursuing the case. Of course, the downside is that you have little control over how the case is presented. And, if the plaintiff in the test case loses, the second importer may have trouble getting out from under it.
I am thinking about test cases because of Deckers Corp. v. United States. That case involved the tariff classification of athletic sandals. The test was case decided in 2007 and affirmed in 2008. I am shocked to say that I apparently did not do a post on the test case. I find that very hard to believe.
In the new decision, the United States has moved to dismiss a suspended case on the basis of the decision in the test case. According to the United States, consistent with the earlier decisions, the athletic sandals are "shoes" but are not "tennis shoes, basketball shoes, gym shoes, training shoes and the like" for purposes of tariff classification because they have open toes and open heels. Consequently, the government maintains that as a matter of law the sandals cannot be classified in 6404.11.80, no matter how useful they may be in athletic endeavors.
Faced with the decision in the test case that sports sandals are not like the listed exemplars in 6404.11.80, the Court of International Trade turned to the motion to suspend the current case under the test case. In that motion, the plaintiff stated that the "test case involves the same plaintiff, the same defendant, the same class or kind of merchandise, i.e., sports sandals, and the same claims."
Thus, the Court of International Trade found that the controlling law and these representations did not permit the plaintiff to recover. Consequently, it dismissed the case.
That is a cautionary tale about the test case/suspension process.
There are alternatives for plaintiffs. One possibility is to only suspend cases when it becomes necessary to take some action after filing a summons (which is usually 18 months). See Rule 83. This can avoid putting all of your denied protest eggs in one test case basket. Should the importer lose the first test case, it can (within limits) pursue the remaining cases as if the test case never happened. That is because, unlike possibly any other court in the country, the Court of International Trade does not accept the legal notion of res judicata. That means, as long as the case is not frivolous, either side can bring up the same issue again. At some point, stare decisis kicks in and the plaintiff risks seriously annoying the Court. But, as a technical matter, serial litigation of the same issue is possible and sometimes beneficial at the Court of International Trade.
If you are interested in the background on res judicata in the Court of International Trade, at least from the perspective of a Department of Justice Lawyer, take a look at this paper from the 15th Judicial Conference of the Court.
The test case procedure can even be used by an unrelated party importing similar merchandise. That, by the way, is a very cost-efficient way to challenge Customs and Border Protection. The second importer can effectively ride the coat tails of the first importer who is pursuing the case. Of course, the downside is that you have little control over how the case is presented. And, if the plaintiff in the test case loses, the second importer may have trouble getting out from under it.
I am thinking about test cases because of Deckers Corp. v. United States. That case involved the tariff classification of athletic sandals. The test was case decided in 2007 and affirmed in 2008. I am shocked to say that I apparently did not do a post on the test case. I find that very hard to believe.
In the new decision, the United States has moved to dismiss a suspended case on the basis of the decision in the test case. According to the United States, consistent with the earlier decisions, the athletic sandals are "shoes" but are not "tennis shoes, basketball shoes, gym shoes, training shoes and the like" for purposes of tariff classification because they have open toes and open heels. Consequently, the government maintains that as a matter of law the sandals cannot be classified in 6404.11.80, no matter how useful they may be in athletic endeavors.
Faced with the decision in the test case that sports sandals are not like the listed exemplars in 6404.11.80, the Court of International Trade turned to the motion to suspend the current case under the test case. In that motion, the plaintiff stated that the "test case involves the same plaintiff, the same defendant, the same class or kind of merchandise, i.e., sports sandals, and the same claims."
Thus, the Court of International Trade found that the controlling law and these representations did not permit the plaintiff to recover. Consequently, it dismissed the case.
That is a cautionary tale about the test case/suspension process.
There are alternatives for plaintiffs. One possibility is to only suspend cases when it becomes necessary to take some action after filing a summons (which is usually 18 months). See Rule 83. This can avoid putting all of your denied protest eggs in one test case basket. Should the importer lose the first test case, it can (within limits) pursue the remaining cases as if the test case never happened. That is because, unlike possibly any other court in the country, the Court of International Trade does not accept the legal notion of res judicata. That means, as long as the case is not frivolous, either side can bring up the same issue again. At some point, stare decisis kicks in and the plaintiff risks seriously annoying the Court. But, as a technical matter, serial litigation of the same issue is possible and sometimes beneficial at the Court of International Trade.
If you are interested in the background on res judicata in the Court of International Trade, at least from the perspective of a Department of Justice Lawyer, take a look at this paper from the 15th Judicial Conference of the Court.
Saturday, April 20, 2013
INCOTERMS and Customs Valuation
Cutter & Buck, Inc. v. United States is one of those increasingly rare cases in which the Court of International Trade had to determine the value of imported merchandise. In this case, the question was whether Customs and Border Protection should have deducted international freight charges from the transaction value of imported merchandise.
The normal process for this importer was to have the goods shipped FOB, which means that the buyer takes delivery when the goods are delivered on the ship (the old phrase was across the rail). Under FOB shipping terms, the purchaser is responsible for the cost of international freight. As a result, the invoice price does not include international transportation.
The shipments at issue were not shipped in the ordinary course. Instead, they were late shipments under which the seller agreed to cover the cost of international freight. The relevant INCOTERM was CFR. Under this term, the seller is responsible for contracting for the freight necessary to bring the goods to the named point of destination. In this case, the named destination was in the U.S.
Apparently, when these transactions were shipped, the plaintiff paid the normal FOB price and subsequently sought a deduction for the cost of freight. Although it may not be obvious, this makes sense. Even if the invoice price for the merchandise was unchanged, the CFR shipments included the cost of transportation, which should not be included in transaction value. See 19 USC 1401a(b)(4).
Looking to the statute, the Court started from the premise that for a freight cost to be deducted from transaction value, it must be directly or indirectly paid by the buyer. The applicable INCOTERM is important evidence of whether transportation is included in the transfer price. Ordinarily, Customs will treat an FOB shipment as not including freight while it will ordinarily treat a CFR shipment as including freight. But, the applicable INCOTERM is not the sole consideration. Customs and Border Protection will always look to the actual circumstances of the transactions.
Here, the terms and conditions in the purchase order had two important clauses. First, if the shipment was 15-21 days late, "vendor pays air charge ground freight." This apparently means that the importer would only pay the ocean portion of the full cost of shipment. The second clause is that if the goods are 22-28 days late, "Vendor pays 100% [of] all freight via air using a freight company/forwarder of buyer's choice." After that, the seller was also required to reduce the price of the goods.
Looking at these clauses and the "totality of the facts," the Court noted a few additional points. First, many of the invoices associated with the relevant entries show FOB or FCA as shipping terms. These purchases would not include freight expenses. Although some of the relevant documents contained a hand written CFR notation, the Court of International Trade did not see that as dispositive. Moreover, the importer did not prove how the cost for freight was actually handled irrespective of the shipping terms shown on the documents. The importer failed to "present corroborating facts supporting its assertions, especially since C&B paid the same price it would have paid had the goods been timely shipped on an FOB (freight-exclusive) basis."
Thus, the Court found that the exclusive penalty for the late shipments was to relieve C&B, i.e., the importer, of the freight expenses it normally would have incurred for timely shipments. Based on this, the Court found that the evidence did not establish a basis for a freight deduction.
This, frankly, I do not understand, which is not to say it is not a correct result. I just do not follow that last bit of logic. If the importer was relived of the obligation to pay freight and yet the goods arrived, then someone paid that expense. The only party who could have done so is the seller. If the seller paid the freight and the out-of-pocket payment from the buyer to the seller remained the same, that means that the amount of money paid to the seller for the goods was reduced by the amount of the freight expense. That, at least, is how the seller will see it.
Another way to look at it is to ignore the INCOTERMs entirely and just follow the money. Assume I want to buy a fancy new sports car from Italy. It is $200,000 and I am on my own to get it from Italy to Chicago. The cost to me is $200,000 and the profit to the vendor is that less its cost of production and local shipment to the vessel where I take delivery. The transaction value reported to Customs will be $200,000. If I pay the same amount to the vendor but the vendor has to get the car to me, the cost to me is still $200,000. But, the profit to the seller is less than in the first transaction because it has the additional expense of shipping the car to me. As a matter of economics, it is rational to assume that the shipping expense is coming out of the $200,000 payments and is, therefore, included in the invoice price. After all, the seller is not running a charity shipping service. I think an economist or accountant would say the fact that the selling price remains fixed at $200,000 is a red herring. The price of the goods has been reduced by the cost of shipping, which is not subject to duty.
On the other hand--and there is always an other hand--the issue in a transaction value case is the determining the price paid or payable by the buyer. It is not to determine the cost to the seller. Sellers are free to make bad deals that require them lose money. Assuming the seller is unrelated to the buyer, that does not change the valuation.
So, it strikes me that there is a real question here as to whether the seller included the CFR shipping costs in its selling price. If so, a deduction is appropriate. Maybe this case still has an underlying unanswered question of fact.
The normal process for this importer was to have the goods shipped FOB, which means that the buyer takes delivery when the goods are delivered on the ship (the old phrase was across the rail). Under FOB shipping terms, the purchaser is responsible for the cost of international freight. As a result, the invoice price does not include international transportation.
The shipments at issue were not shipped in the ordinary course. Instead, they were late shipments under which the seller agreed to cover the cost of international freight. The relevant INCOTERM was CFR. Under this term, the seller is responsible for contracting for the freight necessary to bring the goods to the named point of destination. In this case, the named destination was in the U.S.
Apparently, when these transactions were shipped, the plaintiff paid the normal FOB price and subsequently sought a deduction for the cost of freight. Although it may not be obvious, this makes sense. Even if the invoice price for the merchandise was unchanged, the CFR shipments included the cost of transportation, which should not be included in transaction value. See 19 USC 1401a(b)(4).
Looking to the statute, the Court started from the premise that for a freight cost to be deducted from transaction value, it must be directly or indirectly paid by the buyer. The applicable INCOTERM is important evidence of whether transportation is included in the transfer price. Ordinarily, Customs will treat an FOB shipment as not including freight while it will ordinarily treat a CFR shipment as including freight. But, the applicable INCOTERM is not the sole consideration. Customs and Border Protection will always look to the actual circumstances of the transactions.
Here, the terms and conditions in the purchase order had two important clauses. First, if the shipment was 15-21 days late, "vendor pays air charge ground freight." This apparently means that the importer would only pay the ocean portion of the full cost of shipment. The second clause is that if the goods are 22-28 days late, "Vendor pays 100% [of] all freight via air using a freight company/forwarder of buyer's choice." After that, the seller was also required to reduce the price of the goods.
Looking at these clauses and the "totality of the facts," the Court noted a few additional points. First, many of the invoices associated with the relevant entries show FOB or FCA as shipping terms. These purchases would not include freight expenses. Although some of the relevant documents contained a hand written CFR notation, the Court of International Trade did not see that as dispositive. Moreover, the importer did not prove how the cost for freight was actually handled irrespective of the shipping terms shown on the documents. The importer failed to "present corroborating facts supporting its assertions, especially since C&B paid the same price it would have paid had the goods been timely shipped on an FOB (freight-exclusive) basis."
Thus, the Court found that the exclusive penalty for the late shipments was to relieve C&B, i.e., the importer, of the freight expenses it normally would have incurred for timely shipments. Based on this, the Court found that the evidence did not establish a basis for a freight deduction.
This, frankly, I do not understand, which is not to say it is not a correct result. I just do not follow that last bit of logic. If the importer was relived of the obligation to pay freight and yet the goods arrived, then someone paid that expense. The only party who could have done so is the seller. If the seller paid the freight and the out-of-pocket payment from the buyer to the seller remained the same, that means that the amount of money paid to the seller for the goods was reduced by the amount of the freight expense. That, at least, is how the seller will see it.
Another way to look at it is to ignore the INCOTERMs entirely and just follow the money. Assume I want to buy a fancy new sports car from Italy. It is $200,000 and I am on my own to get it from Italy to Chicago. The cost to me is $200,000 and the profit to the vendor is that less its cost of production and local shipment to the vessel where I take delivery. The transaction value reported to Customs will be $200,000. If I pay the same amount to the vendor but the vendor has to get the car to me, the cost to me is still $200,000. But, the profit to the seller is less than in the first transaction because it has the additional expense of shipping the car to me. As a matter of economics, it is rational to assume that the shipping expense is coming out of the $200,000 payments and is, therefore, included in the invoice price. After all, the seller is not running a charity shipping service. I think an economist or accountant would say the fact that the selling price remains fixed at $200,000 is a red herring. The price of the goods has been reduced by the cost of shipping, which is not subject to duty.
On the other hand--and there is always an other hand--the issue in a transaction value case is the determining the price paid or payable by the buyer. It is not to determine the cost to the seller. Sellers are free to make bad deals that require them lose money. Assuming the seller is unrelated to the buyer, that does not change the valuation.
So, it strikes me that there is a real question here as to whether the seller included the CFR shipping costs in its selling price. If so, a deduction is appropriate. Maybe this case still has an underlying unanswered question of fact.
Friday, April 19, 2013
Burma and Laos in Line as Possible GSP Beneficiaries
The Office of the United States Trade Representative announced that it is initiating a review of Laos and Burma for possible designation as Beneficiary Developing Countries under the Generalized System of Preferences. The notice is here. Comments are due May 17 and there is a hearing scheduled for June 4. If successful, both countries would be designated as least developed countries and would be entitled to duty-free access to the U.S. market for designated products.
If you are looking strategically at your supply chain and wondering about increasing costs associated with production in China, this may be welcome news.
If you are looking strategically at your supply chain and wondering about increasing costs associated with production in China, this may be welcome news.
Tuesday, April 16, 2013
Expanding the Centers of Excellence and Expertise
There is an interesting piece by Tim Warren in yesterday's International Trade Today (subscription required). The article talks about Customs and Border Protection's plans to expand the Centers of Excellence and Expertise concept beyond trusted traders. Currently, trusted traders are importers participating in C-TPAT and ISA. The CEE's are envisioned as covering entire industries regardless of whether individual companies in the industry are trusted traders. To me, that makes a lot of sense and is consistent with calling these Centers of Excellence and Expertise. The issue for CBP will be finding incentives to get importers to participate in ISA and, to a lesser degree, C-TPAT.
8 Years and Still Running . . . Slowly
This blog is now eight years old. That is surprising even to me. As always, I feel guilty that things do not get here as quickly as they should. That is life with a job and a family. I'll do my best to keep up. I just printed three CIT cases to review.
My thanks for your continued readership. Watch this space for developments.
Larry
My thanks for your continued readership. Watch this space for developments.
Larry
Sunday, April 07, 2013
Welcome Back Cotterman. You are Under Arrest.
The scope of Customs and Border Protection's authority to search and seize digital devices including laptops and phones has been a matter of controversy for several years. The most recent detailed discussion of this from a federal court is in United States v. Howard Cotterman.
As with many of these cases, the facts are unpleasant. Mr. Cotterman drove from Mexico into the United States via the Lukeville, Arizona port of entry (formerly known as Gringo Pass). Lukeville has a population of 35.
Cotterman is a registered sex offender who was previously convicted of several child-sex related offenses. Because of that history, Cotterman's name was in Customs and Border Protection's database as someone who may be carrying child pornography into the country. A secondary inspection located two laptop computers and three digital cameras. The laptop contained many password protected files. After approximately six hours, Immigration and Customs Enforcement Agents took the laptops and one camera for further forensic investigation. After making a copy of the memory card and finding nothing incriminating on it, the digital camera was returned to Cotterman the next day. Another day later, forensic examination of one of the laptops disclosed 75 images of child pornography. These images were in unallocated space, meaning that they had been deleted or were temporary files previously viewed on websites. When Customs tried to arrange to have Cotterman come in, ostensibly to provide passwords, it was determined that he had boarded a flight to Mexico with his final destination being Australia. Shortly thereafter, ICE was able to access hundreds of images and videos depicting child pornography. Many of these images showed Cotterman engaging in sexual activity with the same girl over a two- to three-year period commencing when the victim was about seven. He was arrested in Australia and extradited to the U.S.
At his trial, Cotterman moved to suppress the electronic evidence on the grounds that it had been seized in violation of the Fourth Amendment. The district court agreed on the grounds that the search occurred 170 miles away from the border at the ICE office and that it was concluded at least 48 hours after the border crossing.
This is where we need to start talking about the law, rather than the sordid facts. The Fourth Amendment protects individuals from unreasonable search and seizure of their property. A search is usually considered to be unreasonable if the law enforcement officer does not have a warrant or a reasonable particularized suspicion of criminal activity. But, the law has long been that when someone presents themselves or their property at the border, a thorough (but not unconscionable) search of the person and the property is reasonable by virtue of the search taking place at the border. This is sort of the price of admission into the United States and is consistent with a sovereign nation's right to control its borders. Thus, the question put to the en banc Ninth Circuit Court of Appeals was whether the fact that this search was away from the border crossing both in distance and in time mean that the border search doctrine dis not apply.
A majority of the Ninth Circuit sitting en banc found that a "border search" need not be confined to be border either in time or space. Rather, the question is whether the individual would have a reasonable expectation that he or she or the property would be subject to a higher or lower level of privacy. In this case, the detention and seizure of the property began at the border at the time of the attempted entry when Cotterman should have known he was subject to a lesser degree of Fourth Amendment protection. More specifically, Cotterman and most of his property were never cleared for entry. Legally, he was still at the border although he was physically in the country. [Note, that last sentence is mine, not the Court's.]
That does not take care of the issue. It is still possible for a border search to be unreasonable in the absence of reasonable suspicion. In cases where the search is both comprehensive and intrusive, the Fourth Amendment will require reasonable suspicion. In this case, the uniquely sensitive nature of data stored on electronic devices and retained electronically after the "perceived point of erasure," creates a significant expectation of privacy. Thus, this search was more intrusive than the search of other forms of property.
That is a very significant finding. It differentiates between digital media and all other forms of property for purposes of Fourth Amendment review. That is likely to make it far more difficult for Customs and Border Protection to make digital media search decisions "on the fly" as passengers and others enter the country. While a "quick look" will almost certainly be permissible, Customs will have to determine both whether there is reasonable suspicion for a "comprehensive and intrusive" search as well as whether the particular search to be undertaken is unreasonably comprehensive and intrusive.
Certainly, CBP Officers have precisely the same ability to do this analysis as does any other law enforcement official who encounters suspicious activity. But, the unique nature of passengers and vehicles lining up for the usually short interchange with Customs and Border Protection will add difficulty to the job. Of course, that is not meant as a defense of a potentially unconstitutional search. It is only an observation of a practical reality. It is also a point made by a dissenting judge.
Under these facts, the en banc Ninth Circuit found that the intrusive search was, in fact, justified. The alert in the Customs system showing prior child-sex related convictions, frequent foreign travel, and the collection of electronic equipment created reasonable suspicion to justify the search. It made this finding despite an apparent government concession that there was no reasonable basis for suspicion.
The Court noted that password protected files are commonly used by law-abiding citizens including business travelers to protect files. The presence of password protected files alone, therefore, would not be sufficient to create a reasonable suspicion of criminal activity. However, when combined with other evidence of possible criminal activity, the presence of password protected files may be considered by law enforcement in deciding whether to conduct an intrusive search.
The Ninth Circuit majority referred to this as a "watershed" case. It may well be. According to the dissent, it has created a split among the circuits. That means it may well be teed up for Supreme Court review.
The video of this oral argument is available on You Tube and embedded below. The audio is available here. It is a big deal case and worth a read.
As with many of these cases, the facts are unpleasant. Mr. Cotterman drove from Mexico into the United States via the Lukeville, Arizona port of entry (formerly known as Gringo Pass). Lukeville has a population of 35.
Cotterman is a registered sex offender who was previously convicted of several child-sex related offenses. Because of that history, Cotterman's name was in Customs and Border Protection's database as someone who may be carrying child pornography into the country. A secondary inspection located two laptop computers and three digital cameras. The laptop contained many password protected files. After approximately six hours, Immigration and Customs Enforcement Agents took the laptops and one camera for further forensic investigation. After making a copy of the memory card and finding nothing incriminating on it, the digital camera was returned to Cotterman the next day. Another day later, forensic examination of one of the laptops disclosed 75 images of child pornography. These images were in unallocated space, meaning that they had been deleted or were temporary files previously viewed on websites. When Customs tried to arrange to have Cotterman come in, ostensibly to provide passwords, it was determined that he had boarded a flight to Mexico with his final destination being Australia. Shortly thereafter, ICE was able to access hundreds of images and videos depicting child pornography. Many of these images showed Cotterman engaging in sexual activity with the same girl over a two- to three-year period commencing when the victim was about seven. He was arrested in Australia and extradited to the U.S.
At his trial, Cotterman moved to suppress the electronic evidence on the grounds that it had been seized in violation of the Fourth Amendment. The district court agreed on the grounds that the search occurred 170 miles away from the border at the ICE office and that it was concluded at least 48 hours after the border crossing.
This is where we need to start talking about the law, rather than the sordid facts. The Fourth Amendment protects individuals from unreasonable search and seizure of their property. A search is usually considered to be unreasonable if the law enforcement officer does not have a warrant or a reasonable particularized suspicion of criminal activity. But, the law has long been that when someone presents themselves or their property at the border, a thorough (but not unconscionable) search of the person and the property is reasonable by virtue of the search taking place at the border. This is sort of the price of admission into the United States and is consistent with a sovereign nation's right to control its borders. Thus, the question put to the en banc Ninth Circuit Court of Appeals was whether the fact that this search was away from the border crossing both in distance and in time mean that the border search doctrine dis not apply.
A majority of the Ninth Circuit sitting en banc found that a "border search" need not be confined to be border either in time or space. Rather, the question is whether the individual would have a reasonable expectation that he or she or the property would be subject to a higher or lower level of privacy. In this case, the detention and seizure of the property began at the border at the time of the attempted entry when Cotterman should have known he was subject to a lesser degree of Fourth Amendment protection. More specifically, Cotterman and most of his property were never cleared for entry. Legally, he was still at the border although he was physically in the country. [Note, that last sentence is mine, not the Court's.]
That does not take care of the issue. It is still possible for a border search to be unreasonable in the absence of reasonable suspicion. In cases where the search is both comprehensive and intrusive, the Fourth Amendment will require reasonable suspicion. In this case, the uniquely sensitive nature of data stored on electronic devices and retained electronically after the "perceived point of erasure," creates a significant expectation of privacy. Thus, this search was more intrusive than the search of other forms of property.
That is a very significant finding. It differentiates between digital media and all other forms of property for purposes of Fourth Amendment review. That is likely to make it far more difficult for Customs and Border Protection to make digital media search decisions "on the fly" as passengers and others enter the country. While a "quick look" will almost certainly be permissible, Customs will have to determine both whether there is reasonable suspicion for a "comprehensive and intrusive" search as well as whether the particular search to be undertaken is unreasonably comprehensive and intrusive.
Certainly, CBP Officers have precisely the same ability to do this analysis as does any other law enforcement official who encounters suspicious activity. But, the unique nature of passengers and vehicles lining up for the usually short interchange with Customs and Border Protection will add difficulty to the job. Of course, that is not meant as a defense of a potentially unconstitutional search. It is only an observation of a practical reality. It is also a point made by a dissenting judge.
Under these facts, the en banc Ninth Circuit found that the intrusive search was, in fact, justified. The alert in the Customs system showing prior child-sex related convictions, frequent foreign travel, and the collection of electronic equipment created reasonable suspicion to justify the search. It made this finding despite an apparent government concession that there was no reasonable basis for suspicion.
The Court noted that password protected files are commonly used by law-abiding citizens including business travelers to protect files. The presence of password protected files alone, therefore, would not be sufficient to create a reasonable suspicion of criminal activity. However, when combined with other evidence of possible criminal activity, the presence of password protected files may be considered by law enforcement in deciding whether to conduct an intrusive search.
The Ninth Circuit majority referred to this as a "watershed" case. It may well be. According to the dissent, it has created a split among the circuits. That means it may well be teed up for Supreme Court review.
The video of this oral argument is available on You Tube and embedded below. The audio is available here. It is a big deal case and worth a read.
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