State of the Union

For discussion:

I will go anywhere in the world to open new markets for American products. And I will not stand by when our competitors don’t play by the rules. We’ve brought trade cases against China at nearly twice the rate as the last administration – and it’s made a difference. Over a thousand Americans are working today because we stopped a surge in Chinese tires. But we need to do more. It’s not right when another country lets our movies, music, and software be pirated. It’s not fair when foreign manufacturers have a leg up on ours only because they’re heavily subsidized. 

Tonight, I’m announcing the creation of a Trade Enforcement Unit that will be charged with investigating unfair trade practices in countries like China. There will be more inspections to prevent counterfeit or unsafe goods from crossing our borders.And this Congress should make sure that no foreign company has an advantage over American manufacturing when it comes to accessing finance or new markets like Russia. Our workers are the most productive on Earth, and if the playing field is level, I promise you – America will always win.

 President Obama, January 25, 2012
State of the Union

The Urge to Merge

In case you have not heard (which is a fancy way of saying that I am catching up on this), the President wants congressional authority to merge several key trade-related functions into a single agency. Most of these are not enforcement agencies and, therefore, do not show up in this blog space often. On the other hand, they are trade promotion agencies. The agencies under consideration for merger are:

U.S. Department of Commerce’s core business and trade functions
The Small Business Administration
The Office of the U.S. Trade Representative
The Export-Import Bank
The Overseas Private Investment Corporation
The U.S. Trade and Development Agency.  

Here is the White House fact sheet on the proposal. I do not know whether Commerce's "core business and trade functions" include Import Administration and, therefore, dumping and countervailing duty cases.

Grammar Question

In my last post, I referenced the internet in the lower case. The spell checker built into Blogger wanted me to capitalized it. That is consistent with the spell checker in Word. This may generate as much controversy as the apostrophe in Customs'.

According to Grammar Girl, my go-to source for these things, "Internet" is a proper noun referring to a specific network. Hence, it is properly capitalized. That advice is apparently consistent with several style manuals. The Grammarist goes the other way.

I don't think of the internet as a single network anymore, even though it is technically interconnected. Rather, it is now a medium for the dissemination of of information. Like radio and television. That is no longer a proper noun, but a common noun. No capitalizing "internet" for me.

I'm with the Grammarist. How about you?

Blockbuster Decision for Estee Lauder

Estee Lauder is a Court of International Trade case involving the tariff classification of the plaintiff's "Blockbuster" cosmetics kit. This kit consists of an outer case, several cosmetics (e.g., lipsticks and eye shadows), a cosmetics case, cosmetics brushes, and a brush case. All of it was imported together in a gold carton. If the internet is working properly, this is a picture of what we are talking about:

There were no questions as to what the merchandise is, so the court decided this on a motion for summary judgment, which means this is entirely a legal question. The government proposed to classify these kits as separate items while Estee Lauder argued that the kits qualify as retail sets under the Harmonized Tariff Schedule. In the alternative, the Government argued that if the kit is a retail set, then the essential character is imparted by the case, which puts the entirety in the a tariff provision in Heading 4202 with a 20% rate of duty. Cosmetics, on the other hand, are duty free. You do the math.

The Government's first argument is interesting. Recall that the General Rules of Interpretation are to be applied in order to arrive at a classification for the imported good. Nothing in GRI 1, which requires classification according to the legal text of the HTSUS, addresses collections of goods. Consequently, the Government argued that GRI mandates that each item be classified separately. This is actually consistent with the text and something I have considered in the past.

The problem with this argument is that there would never be a way to classify kits as retail sets because there is always a way to classify the parts individually. That would effectively mean that nothing would ever be classified as a set. Rather, as the Court of International said in the decision, Customs and Border Protection must move beyond GRI 1 when the resulting classification does not take into consideration the whole of the product. Interestingly, the Court gives no citation for this proposition, but it makes complete sense and avoids the absurd result of never having retail sets.

The next interesting question was whether the components of the kit are "put up together to meet a particular need or carry out a specific activity." This is a tougher call. Customs and Border Protection says that parts of a kit must be so related to one another as to be clearly intended for use together. Thus, a sandwich, chips, and a drink are a used together or in conjunction to one another and would be a set. But, tins of shrimp, pate de foie, and cocktail sausages would not be a set because the individual items are not used together or in conjunction. At least that is what CBP says. In this case, it appears the Government pointed out that the cosmetics in the kit are not used closely together. This makes some sense as nail polish, lipstick, and eye shadow are not used on the same surfaces or mixed together.

On the other hand, Estee Lauder said that the contents of the kits were selected to allow the consumer to create "looks." Everything I know about makeup I learned from watching Face Off on Syfy. But, this makes sense to me. I suppose there is some level of color coordination between eyes, cheeks, lips, and nails. If that is what constitutes "a look," then I see the point. So did the Court, which held that the collection is a set.

That leaves the final question, which was which item in the kit imparts the essential character and, therefore, controls the classification. The CIT found it "obvious" that the essential character comes from the makeup, which is consistent with what the Court viewed as the particular need or purpose served by the kit.

The Government, however, disagreed and argued that the 4202 cases must be taken into consideration. First, the Government noted that the cases and cosmetics are not mutually complementary or adapted to one another. This analysis, however, is not relevant to the status of the collection as a retail set. Rather, according to the Court, this is the analysis for composite goods of two or more materials combined into a single unit (think teddy bear with a radio in its belly). Second, consistent with some prior Customs and Border Protection rulings, the Government argued that the case was not closely configured to contain the cosmetics and, therefore, should not be considered part of the set. The Court rejected this argument as being inconsistent with the language of the HTSUS and not based on a very consistent application by Customs.

Consequently, the Court held that the cosmetics impart the essential character to the set, which includes the cases. That is likely a big win for Estee Lauder. As far as the development of the law, it may be a useful decision (if it holds up). It is based squarely in the text and there are lots of situations where cases are part of a set. Thus, I suspect the Federal Circuit will get the last word on this.

Crickets . . . Crickets . . .

I realize it has been very quiet here the past couple weeks. That is generally a sign that I have been busy with client work and life. If you need it, please be reassured that I am alive and well and plan to catch up shortly. On my plate are two Court of International Trade Cases and Customs and Border Protection's proposal to change the way it views transfer pricing in transaction value scenarios.

Be back soon.

This is Encouraging

One of the issues I have long had with Customs' enforcement activities is what I perceive to be a lack of effort to differentiate between counterfeit goods, which should be seized, and unauthorized parallel imports, which are usually (but not always) perfectly admissible. Parallel imports, also known as gray market goods, are legitimate goods that are purchased abroad and imported without the authorization of the U.S. trademark or copyright holder. Image finding a case of expensive brandy at a fire-sale price in Iceland. If you think you can make a buck reselling the goods in the U.S., buy the goods, and import them, you are a parallel importer (and there is nothing wrong with that). Unless, as is often the case, the goods really are counterfeit and you are being duped, but that is not what we are talking about here.

The problem is that when your brandy arrives at the port, Customs and Border Protection has to decide whether you are entitled to import the goods. As a general matter, goods bearing American trademarks cannot be imported without the authorization of the trademark holder. So, CBP has the right (and duty) to ask whether you have proof of authorization to import (with an exception discussed below). When the importer can't show authorization from the trademark holder, Customs is, in my experience, apt to declare the merchandise to be counterfeit and force the importer to prove that it is not. That can be very hard to do. You are faced with trying to prove that a case a brandy, handbag, watch, or other product is genuine. Think about that. Better yet, go to your kitchen cabinet and pull out any box or can. Now, ask yourself what it would take to prove that the product in your hand is not a very good counterfeit. The fact that you bought it at the grocery store does not prove that the grocery store was not selling counterfeits (it happens). If you know what you are doing, you know to look for good printing, good grammar, consistent ingredients, and other factors that indicate that the merchandise is legitimate. But, it is hard. I suspect it is not uncommon for parallel importers to lose merchandise to seizures because they cannot provide evidence that the product is not counterfeit.

Also, even if the goods are legitimate parallel imports, they can still be excluded from the commerce of the United States if they are materially different than the same goods sold in the U.S. The threshold for "material" is not very high, so even legitimate goods can sometimes be lost on those grounds.

You may be asking what about this is encouraging about this.

Over the last couple years, I have been at several public fora at which CPB representatives talked about the priority efforts they take to enforce intellectual property rights. At several of those events, I have asked whether Customs trains port personnel to release legitimate parallel goods and what steps Customs and Border Protection takes to facilitate legitimate parallel trade. In the past, the response was dismissive. More recently, Customs has recognized the rights of parallel importers and has stated that enforcement efforts must be sensitive their needs.

That is consistent with this document, which is recommendations from COAC concerning intellectual property enforcement. The recommendations include extending C-TPAT to cover intellectual property compliance. This seems to be a reaction to the lack of enthusiasm for the Importer Self Assessment program. Another thought is to use an ISF-style pre-arrival filing to identify legitimate goods. All of this depends on some presently non-existent robust database to identify legitimate goods. To me, the interesting thing is that the document makes several references to the rights of parallel importers. That seems to mean that Customs and Border Protection will continue its valuable efforts at intellectual property enforcement and will, I hope, do that while bearing in mind the rights of parallel importers.

We will have to watch how that develops.

Welcome to 2012

President Obama has signed the Presidential Proclamation authorizing the implementation of the World Customs Organization's 2012 update to the Harmonized Tariff Schedule. Here is a link to the source document. There are changes throughout the tariff schedule. However, they seem to cluster around food and agricultural products and products with an environmental impact (good or bad).

On that note, I wish you all a very happy, healthy, and successful 2012.

The Missing Post

There is a lot going on. Unfortunately, I am in the land of terrible internet access. Thus, I give you these two headlines and links.

Customs and Border Commissioner Bersin is leaving his post at the end of the month.

The Federal Circuit has ruled the U.S. law does not permit the application of CVD law to Non-Market Economies, including China.

More to follow.

Bioreactor: Hair Band or Lab Equipment?

"Bioreactor" sounds like a good name for a heavy-metal band, or possibly for a post-apocalyptic video game. But, in reality, it is a machine in which living organisms, typically bacteria, perform some useful chemical function. For example, you might want to feed complex carbohydrates like barley to yeast and end up with beer. For industrial purposes, you might be feeding bacteria something and ending up with an antibiotic. Applikon Biotechnology, Inc. v. United States is a Court of International Trade case about the tariff classification of bioreactors. For reference, here is a page full of the plaintiff's products, all of which look like props from a sci-fi movie except for the green one, which looks like it comes from Kang and Kodos of the Simpsons.

The question here was whether Customs and Border Protection properly classified the bioreactors in 8419 as machinery, plant or laboratory equipment for the treatment of materials by a process involving a change of temperature. The plaintiff wanted the goods classified in 8479, which is the basket heading for machines and mechanical appliances having individual functions not specified or included elsewhere in Chapter 84. Customs' position was supported by the fact that the merchandise includes a temperature control mechanism and requires a heating blanket, which is not imported with the merchandise.

The decisive finding by the Court of International Trade was that the temperature control function is subsidiary to the overall operation of the bioreactors. Apparently, the temperature control feature is not always used and the bioreactor can function without the heating blanket. More to the point (at least in my mind), the heating function is not intended to change the temperature of the culture. Rather, it is intended to maintain the temperature. These are not ovens, they are incubators. Based on that, the Court found that 8419 is inapplicable.

This conclusion was consistent with HTSUS Chapter 84, Note 2(e) which excludes from Heading 8419 machinery in which the change of temperature is subsidiary. And that was about it.