Sunday, June 03, 2018

Last Stand for Active Frontier

The saga of the Active Frontier penalty case has been going on since 2011. The CIT has just issued a default judgment against the company, ending this phase of the litigation.

For background, start with this post.

The important take-away from this case is how the Court set the penalty amount. The alleged material false statement in this case is the country of origin. Under the circumstances, this is a non-revenue violation and the maximum penalty is 20% of the value of the goods. 19 USC 1592(c)(3). The United States sought the maximum allowable penalty, which was about $80,000.

Despite the defendant not showing up to refute the claims or assert any mitigating factors, the Court did not say it was bound to assess the maximum penalty. On the contrary, it noted that the penalty is to be set de novo by the Court on the basis of the available information. Here, the Court noted that the true bills of lading clearly showed the true origin of the merchandise. Defendant, exercising even minimal effort could have determined and reported the correct country of origin. On that fact, the Court found it appropriate to assess the maximum penalty for a negligent violation.

OMG, a Dispatch from the Benelux

Antwerp is a lovely city in which to spend a few days talking about trade law, European privacy regulations, and eating everything in sight. There were also more than a few Belgian beers involved.

I am now on a train from Antwerp to Amsterdam. On the way, I figured I would read OMG, Inc. v. United States. "Why?," you might reasonably ask. [Is that remotely the correct way to punctuate that sentence?] Well, it is what I do for you.

Despite the caption, OMG is not about internet-age acronyms. Nor is it about products intended for teenage girls in poorly written CW dramas. [Note: I don't actually know that teenage girls on CW dramas ever say "OMG," but I feel like they might.] Rather, it is about the scope of the antidumping duty order on steel nails from Vietnam. The scope of that order states, in part:

The merchandise covered by the Orders is certain steel nails having a nominal shaft length not exceeding 12 inches.  Certain steel nails include, but are not limited to, nails made from round wire and nails that are cut from flat-rolled steel.  Certain steel nails may consist of a one piece construction or be constructed of two or more pieces.  Certain steel nails may be produced from any type of steel, and may have any type of surface finish, head type, shank, point type and shaft diameter.  Finishes include, but are not limited to, coating in vinyl, zinc (galvanized, including but not limited to electroplating or hot dipping one or more times), phosphate, cement, and paint.

OMG imported zinc anchors into the United States. The Court described the zinc anchors as follows:

Each Zinc Anchor consists of two components: (1) a zinc alloy body, which comprises approximately 62% of the total weight of the complete Zinc Anchor; and (2) a zinc plated steel pin, which comprises approximately 38% of the Zinc Anchor’s total weight.  The zinc body and zinc plated pin are produced in Vietnam, and then assembled together in Vietnam, resulting in a one-piece article of commerce: a Zinc Anchor. While it may be physically possible to separate the zinc body from the steel pin after the Zinc Anchor has been created, disassembly is not commercially realistic, in light of the Zinc Anchor’s cost and use, as well as the likelihood that the components will be damaged and rendered useless by the disassembly process.
The controversy here surrounds the zinc-plated steel pin. The pin is arguably a nail, though it seems unlikely that the pin will be separated from the remainder of the anchor. The value of the pin is about 17% of the value of the anchor.  Based on the OMG website, I am pretty certain this is what we are talking about:

This item is used to fasten things to masonry walls. The assembly is inserted into a pre-drilled hole. The pin is then struck with a hammer. The force of the hit, moves the pin deeper into the shaft, which then widens to accommodate the pin. This works as a fastener because the body expands in the hole, not because the nail bites into wood or any other material.

In 2017, the Department of Commerce held that this item is unambiguously within the scope of the relevant order. OMG challenged that decision in the Court of International. On review of a scope determination, the CIT must uphold the decision unless it is unsupported by substantial evidence or otherwise not in accordance with law.

The Court started its analysis with the language of the order. The critical question is what constitutes a nail. The Court concluded that "nail" unambiguously refers to a slim, usually pointed fastener to be inserted by impact. The Court then noted that he pin, which is only part of this fastener, is not itself a fastener. It is initially inserted into a pre-drilled hole and, after hammering, does not grip the material into which it has been inserted. Instead, it expands the zinc body, which then grips the sides of the pre-drilled hole. Furthermore, industry practice is not to refer to these anchors or the pins as nails, although they may be called, for example, "drive nail anchors."

The Court of International Trade, therefore, held that the OMG anchors (and their steel pins) are not nails within the scope of the order. As a result, it remanded to scope determination to the Department of Commerce to complete a revised scope determination consistent with this decision. In other words, Commerce should come back with an order finding these anchors and pins to be outside the scope of the order.

Saturday, May 19, 2018

Country of Origin for Dumping Orders

I have trying to get to this one, and now is the time. Bell Supply Co, LLC v. United States is an important decision from the Court of Appeals for the Federal Circuit.

The issue presented is whether, when making a scope determination, Commerce should apply the traditional substantial transformation test to determine the origin of the merchandise that was partially manufactured in a country subject to the order and partially manufactured outside that country. In this case, the question was whether unfinished oil country tubular goods initially fabricated in China and finished in Indonesia are within the scope of the order covering OCTG from China.

Bell purchased "green tubes" from China and sent them to Indonesia where they were heat treated and finished. In 2014, the Department of Commerce issued a scope ruling finding that the OCTG shipped from China as green tubes and then finished in third countries remain products of China for purposes of the application of the antidumping duty order. To get there, Commerce applied the substantial transformation test. Contrary to Customs and Border Protection rulings on similar facts, Commerce found that heat treating and finishing did not change the country of origin of the merchandise.

Bell challenged that decision in the Court of International Trade. There, it argued that the antidumping laws have a regulatory process designed to resolve exactly this kind of question. That process is a "circumvention" inquiry, which does not involve substantial transformation. 19 USC 1677j(b).

The Court of International Trade agreed. It held that the circumvention analysis is the specific standard for determining whether foreign producers are trying to evade an AD order by completing merchandise in a third country. The CIT remanded the matter to Commerce for the application of the circumvention analysis.

On remand, Commerce took a closer look at the language of the order, which is always a good thing. There, it noticed that the order covers unfinished OCTG from China. Commerce divined in that language guidance that unfinished OCTG exported from China is always unfinished OCTG, even when sent to Indonesia to become finished OCTG.

The Court of International disagreed again and remanded. On the second remand, Commerce found that finished OCTG imported from Indonesia were outside the scope of the order. First, it found no indication that the order covered unfinished OCTG from China finished in a third country. Second, it found that the operations in Indonesia did not constitute circumvention. The CIT sustained this conclusion.

Two questions were presented to the Court of Appeals. First, does the order cover unfinished OCTG from China that are finished in a third country? On this, the Federal Circuit held that absent language to the contrary, the order should be applied to merchandise at importation. In this case, the imported merchandise is not unfinished OCTG from China. It is finished OCTG. Thus, to the extent the order applies to unfinished OCTG from China, that does not describe the applicable merchandise.

The next question was whether the merchandise was finished OCTG from China. To decide that, the Court was asked to pick between substantial transformation and circumvention as the appropriate analysis. The Federal Circuit did not take that bait.

Rather than pick one means of analysis, the Federal Circuit instructed Commerce and the Court of International Trade to use both. Substantial Transformation should be used first to determine the country of origin of the imported article. Using that test, Commerce would seek to determine whether the subsequent processing results in an article of commerce with a new name, character or use. In doing so, Commerce can consider (1) the class or kind of merchandise; (2) the nature and sophistication of processing in the country of exportation; (3) the properties, essential components, and end-use of the product; (4) the cost of production compared to the value added; and (5) the level of investment.

If it turns out that the merchandise is not of the country subject to the order, the question remains whether it should be treated as within the scope of the order. That is the function of the circumvention test. Commerce can find the merchandise to be in scope if:

(1) “the process of assembly or completion in the foreign country . . . is minor or insignificant,” (2) the value added in the country subject to the AD and CVD order is a significant portion of the total value of the merchandise, and (3) “action is appropriate under this paragraph to prevent evasion of such order or finding.”  § 1677j(b)(1)(C)–(E).
If the merchandise is from a country not covered by the order but the further processing meets the circumvention test, then the goods remain in scope.

Based on this reasoning, we now know that origin for scope purposes is a two part test. First, use substantial transformation to determine whether subsequent processing changed the country of origin. If so, and assuming the second country is not covered by the order, determine whether the further processing is circumvention. If not, then the imported product is not subject to the order.

The Federal Circuit vacated the decision of the Court of International Trade and remanded.

Sunday, May 13, 2018

CBP Sued Over Currency Seizure Practice

[Note: Updated to properly identify the organization supporting the litigation.]

I often tell students and other lawyers that the great thing about my practice is the lack of human drama. In most cases, getting to the right result in a dispute with Customs and Border Protection is about knowing the law and making sure everyone applies it properly to the facts. Usually, no one cries and rarely is anyone subject to imprisonment.

But, that is not always the case. One thing we do in my office is help people with currency seizures. Just to be 100% clear on this: It is illegal to bring over $10,000 in or out of the country without declaring it to Customs. This is very useful information for law enforcement on a number of fronts. The money might be from illegal activity, it might be going to support terrorist organizations, it might be part of a money laundering scheme.

When entering the country, there is an obvious time and place to make this declaration. If you are using a paper declaration form, it is right there as 13: "I am (We are) carrying currency or monetary instruments over $10,000 U.S. or foreign equivalent. Yes. No." On the other hand, when leaving the country, no one asks that question. Many people do not know there is an obligation to report when leaving the country. Those who do may find it hard to find the actual CBP office where the declaration needs to be made and get there in close proximity to the time for a departing flight.

What you need is a FinCEN 105 form. According to the instructions, travelers "shall file FinCEN Form 105 at the time of entry into the United States or at the time of departure from the United States with the Customs officer in charge at any Customs port of entry or departure." If this is relevant to you, call the general number at the port you will be transiting and ask for the correct location to make the declaration. Then, ask yourself why you feel the need to carry a bundle of cash.

I have seen this process cause grief several times. In most cases, if the traveler can prove a legal source of the funds, he or she can secure the release of much of the seized funds. But, not always. If the evidence of lawful sources is unclear or if there are aggravating factors such as efforts to conceal the currency or lying to Customs, the funds or a portion of them may be forfeited.

For the average person, the requirements and then the civil asset forfeiture process can be difficult to navigate. And, honestly, the Customs people who are the front line on this issue are not always as clear and respectful as one would hope.

Another problem is that CBP will not release the seized currency unless the traveler signs an agreement stating that it will not take any legal action against CBP. This is called a hold harmless agreement. According to CBP practice, if the traveler fails to sign the hold harmless agreement, CBP will start administrative forfeiture procedures. Translated to English, that means CBP will use the money as leverage to get itself out of any potential legal jeopardy.

The problem is that the seizure may have actually violated the rights of the traveler. Signing the hold harmless agreements means the traveler gives up the ability to challenge the seizure or seek damages for an unlawful seizure. That means, for example, waiving arguments that the seizure was an unconstitutional taking, violated the fourth amendment's protection against unlawful seizure (but see this discussion), or was otherwise unlawful. Moreover, it means that if CBP delays or otherwise fails to return the money in a timely manner, the traveler gives up his or her first amendment right to petition the government for redress of that claim.

This is the issue in a recently filed class action law suit challenging the requirement for a hold harmless agreement. Thanks to Clif Burns'  Export Law Blog for the tip.

The case is brought by the Institute for Justice. According to its website, "IJ litigates to limit the size and scope of government power and to ensure that all Americans have the right to control their own destinies as free and responsible members of society." Here is the IJ description of the case.

The underlying seizure involved a passenger heading to Nigeria who failed to disclose that she was carrying a little over $41,000. The passenger was a nurse who had saved much of the money to open a clinic in Nigeria. The remainder was from family sources and was to be delivered to her family in Nigeria. Not that is matters, but she was born in Nigeria and became a U.S. citizen in 1994.

Customs seized the currency and gave her a Civil Asset Forfeiture election form on which she could tell CBP whether she abandoned the currency, would pursue an administrative process, or wanted the case referred to the Office of the U.S. Attorney for judicial proceedings. She requested the latter.

The U.S. Attorney did not act on the case within the time permitted. The legal consequence of this is that the money is to be returned to the traveler promptly. See 18 USC 983(a)(3)(B). Rather than promptly returning the funds, CBP sent the hold harmless agreement and informed her that the money would be returned in full when she signed and submitted the agreement. Rather than do that, she brought this action:

to put CBP’s policy or practice to an end, to void any Hold Harmless Agreements signed by class members as a result of this policy or practice, to recover [the named plaintiff's] seized cash and any other seized property that has not been returned to class members because they did not sign Hold Harmless Agreements, and to stop CBP from targeting her for additional, intrusive screening without giving her an adequate opportunity to challenge her classification.
One of the interesting things that is likely to come out of this case is some data on how often these seizures happen. More important, how often does CBP make a seizure that the U.S. Attorney does not pursue?

This latter question is of practical importance to lawyers who deal with seizures. If it turns out that Assistant U.S. Attorneys more often than not do not pursue civil forfeitures, then maybe it does not pay to go through the CBP administrative forfeiture process. That process is slow and it is not always clear who is making or influencing the decision. There is also the perception (and it may just be the perception) that once the seizure train starts, it is very hard to stop before it arrives at a forfeiture. There are lots of reason for this including some degree of CBP deference to port-level enforcement.

The problems are often more acute when merchandise other than currency is seized. This is because it is not always easy to figure out what storage fees might be incurred. At some point, storage can be more expensive than the value of the merchandise and the expense of hiring counsel who is familiar with the process. Importers will often cut their losses by abandoning the merchandise rather than fight what might be an unjustified seizure.

This is a case to watch. The fact that it is being brought as a class action and supported by a non-governmental partisan entity means it is less likely to go away with a quiet settlement. This case is clearly addressed to a bigger picture idea. CBP could, of course, make it go away by issuing the refund and by changing its practice.

I also think there is an issue here for Congress. As long as the law requires the declaration, there should be a clear means of doing so. Congress should require that ports (including the domestic terminals of airports from which international flights leave) prominently post the requirement to report. Furthermore, the airlines, cruise lines, and other carriers should be required to distribute the forms. In the alternative, CBP and FinCEN (the Financial Crime Enforcement Network) should make it possible to file the form online some reasonable time before departure. Seriously, we don't need people getting caught up in this for no reason other than a lack of knowledge. Moreover, we do not need to have knowledgeable travelers wandering around airports trying to find a CBP office to submit the form.

That may not fit with the Institute for Justice goal of limited government, but that's not my goal here.

Saturday, May 12, 2018

Digital Border Searches

Sometimes, the most interesting customs cases are not litigated at the Court of International Trade. They are in the U.S. district courts and involve important constitutional and administrative law principles not related to duties and penalties. Two of those deserve note here. This post will cover the first.

And, yes, I know there are more routine CIT and CAFC cases to address. Someone [a former government official who, despite this crack, I still like] event recently chastised me for being behind here. I promise you that my self-appointed obligation to the trade community weighs heavily on me. I will try to catch up.

But first is U.S. v. Kolsuz. This case involves CBP's suspicion-less search of a cell phone.

As background, you need to know that the law has been clear for decades that Customs and Border Protection is allowed to search cargo and the personal effects of arriving passengers without a warrant and without even particularized suspicion that they might contain evidence of a crime. In other words, as a general matter, your fourth amendment protections from unreasonable search and seizure do not apply at the border. There are lots of reasons for that. Primarily it relates to the ability of a sovereign nation to control who and what cross its borders (both entering and leaving).

There are a lot of things that are not permitted into the country whether or not it is a crime to import the item. CBP protects the health and safety of the public by interdicting, for example, unsafe consumer products, equipment that does not meet environmental standards, the products of endangered species, and agricultural pests. Every now and then, it finds illegal Mongolian horse meat and genitals. CBP could not do its job if it needed a warrant or even suspicion to check whether an arriving passenger has some contraband. Similarly, there are also many things that may not leave the country without prior approval. By crossing the border, the passenger and cargo become subject to inspection for any reason or no reason whatsoever. But note that if the "inspection" were by a street cop away from the border, it would be a "search" and would require a warrant if not incident to an arrest. Remember that the next time you arrive at the border.

An issue that has been percolating for some time is whether this principle extends to the contents of your digital devices. Can CBP review the contents of a passenger's cell phone or computer? That is a potentially far more personally invasive search than is poking around in the wet bathing suits and uninvited beach sand that is in many carry-on bags arriving with passengers. People have been arguing that a search of data should require grounds beyond simply being at the border. Lately, this argument is getting some traction.

You should note that Kolsuz had previously been stopped for illegally exporting firearm parts, so he was on Customs' radar. In this case, he was at Dulles airport in Virginia attempting to board a flight to Turkey when CBP searched his luggage and found firearm parts. Under the International Traffic in Arms Regulations, the weapons can only be exported with a license, which Kolsuz did not have. After finding the weapons, CBP conducted an on-the-spot manual search of his mobile phone. After that, CBP conducted a more detailed forensic search of his phone. That search produced a report showing his contacts, emails, instant messages, photographs, browsing history, physical locations and other personal information. The full report was almost 900 pages long and took a month to compile using specialized software.

Kolsuz moved to suppress the introduction of evidence taken from the forensic search of his phone. He did not challenge the manual search.

The Fourth Circuit noted that the law has long upheld warrantless and suspicion-less routine border searches. However, the law also requires that enforcement agents have individualized suspicions before conducting "highly invasive," non-routine searches. In the past, this has generally applied to physically, personally invasive searches of, for example, body cavities where the "dignity and privacy" of the person are at stake or searches that destroy or unreasonably damage personal property.

In Kolsuz's favor is a recent U.S. Supreme Court decision called Riley v. California. In Riley, the Supreme Court held that cells phones may only be searched incident to an arrest with a warrant based on probable cause to believe the phone contains evidence of a crime. Riley was not a border search, but it did set a bar for local police indicating that the search of a cell phone is not the same as a pat down intended to protect the arresting officer and preserve evidence.

Kolsuz's first argument was that once the phone was taken from him (for a month) and he was in custody, the rationale for the border search exception dissipated and  warrant became necessary. This makes some sense. To the extent the border search exists to allow the United States to control its borders and interdict incoming or outbound contraband, it has already served its purpose. Subsequent investigation, which involved the detailed search of personal data, should, according to this argument, require a warrant. The Court disagreed and held that because the search began as a border search and involved a transnational crime, it remained connected to the border and the border search exception applies.

The defendant's next argument was that a month-long forensic deep dive into a personal cell phone is "highly invasive" and not the kind of routine search permitted at the border without a warrant. The Court agreed that the forensic search should be considered "non-routine," involving a threat to the dignity and privacy of Kolsuz. The factors the Court found persuasive include:
  • the shear amount of data stored on a modern smart phone, which greatly exceeds what could be hand carried or packed into a car if printed, and 
  • the uniquely personal nature of the data on a smart phone including contacts, email, physical locations and web history.
However, it does not follow that an invasive, non-routine search at the border requires a warrant. This is where things start to fall apart for Kolsuz. The Court noted that even after Riley, there is no binding precedent holding that an invasive forensic search of a cell phone at the border requires a warrant. Rather, the CBP officers involved reasonably relied on the current understanding that a non-routine search may be conducted on the basis of reasonable suspicion. Having previously found firearm parts in his bags, CBP had reasonable and individualized suspicion that Kolsuz's phone might contain evidence of a crime. Thus, the search was permissible.

There are other similar cases making their way through the courts. Eventually, this will end up at the Supreme Court. In the meantime, travelers take note. I have read lots of advice about encryption and burner phones and leaving all sensitive data in the cloud. I'm not going to give legal advice on this. You need to do what is appropriate. If you have concerns, talk to a lawyer.

Traveling lawyers should keep in mind that their phones and other personal devices may contain privileged information that needs special attention if stopped by CBP (or any police agency). Finally, corporate compliance policies should take this into consideration for traveling employees.

Hat tip to Peter Quinter of GrayRobinson.

Sunday, April 15, 2018

Are You Exhausted?

Cases in which U.S. Customs and Border Protection asks the U.S. Court of International Trade to impose a civil penalty have evolved over the years I have been in practice. It used to be understood that if Customs went through the entire administrative penalty process and moved to litigation, all bets were off. The notion was that because the Court would hear the case de novo and make a decision based on the evidence presented in Court, everything was starting from scratch.

That is no longer the case. The current understanding is that civil penalty cases are collections cases in which Customs is attempting to collect the penalty it already assessed through the administrative process. This is a significant change. It means, for example, that if during the administrative process CBP only asserts that the importer was negligent , it cannot come into court asking the Court of International Trade to impose a penalty based on fraud. See, U.S. v. Optrex (CIT 2005) and U.S. v. Ford Motor Co. (Fed. Cir. 2006). By the same token, if the government goes all in and administratively asserts that the violation occurred as a result of fraud, and only fraud, it cannot fall back to gross negligence or negligence in Court. See U.S. v. Nitek Electronics, Inc. (Fed. Cir. 2015). There are no lesser included offenses in administrative penalty cases.

The reason for this is that CBP has failed to "exhaust" the administrative process. As a result, the future defendant has not had notice of the claim against it. Nor has the defendant had a full opportunity to respond to the claim. Absent that opportunity, CBP has not perfected its claim as required by the statute.

The fact that the Court of International Trade decides the matter de novo only means that the government must present admissible evidence of the violation to the Court. Defendants can then introduce admissible evidence showing either that no violation occurred or that it exercised the required degree of care. This is distinct from the "on the record" judicial review of other administrative matters in which the Court is limited to the record made in the administrative proceeding. The Court of International Trade also sets the penalty amount.

United States v. Aegis Security Insurance Co. and Tricots Liesse 1983, Inc., a recent decision of the Court of International Trade adds even more heft to the exhaustion requirement.

The underlying issue here is a messy series of NAFTA claims, a prior disclosure, followed by an offer in compromise, and a penalty notice. The critical issue is that the Pre-Penalty Notice included the statement that the importer had the right to make an oral presentation as to why the penalty should not be imposed. There were some telephone calls between non-lawyer representatives for the importer and Customs that appear to have been related to the offer in compromise and a subsequent offer in compromise.

Counsel for the importer then sent a letter to Customs seeking a face-to-face meeting concerning the penalty claim. Customs put off the proposed meeting while litigation was pending with the surety. No meeting occurred and CBP issued the final penalty determination. When the importer did not pay, the government filed a suit in the CIT seeking to collect the assessed penalty.

In Court, the defendant contended that Customs' failure to provide the requested meeting means that it had failed to perfect a valid penalty claim. As a result, the entire claim should be dismissed. For its part, the Government contends that the multiple phone calls were sufficient opportunity for the defendant to address the issues.

The Court found that the requirement for exhaustion applies to CBP civil penalty cases. Moreover, the Court found it to be "undisputed that Customs failed to perfect its claim for a monetary penalty." In holding that the phone calls between company representatives and Customs were insufficient to satisfy the statutory requirement, the Court said (citations omitted):

The record evidence demonstrates that this post Notice of Penalty telephone call was not conducted in the usual, more formal, manner in which Customs proceeds with penalty cases, and no officials from Customs’ Fines, Penalties & Forfeitures Office (the office generally charged with conducting any requested oral hearings during the pre-penalty and penalty phases of § 1592 claims) participated in the telephone call. In addition, it is undisputed that following the issuance of the Notice of Penalty, the August 3, 2013 telephone conversation, and Customs’ June 13, 2014 rejection of Tricots’ second offer in compromise, Tricots made requests for a § 1592(b) oral presentation on September 15, 2014, October 30, 2014, and November 21, 2014, more than one year before Customs issued its November 24, 2015 Final Penalty Determination. Moreover, Tricots signed waivers of the statute of limitations, “in order that [it] might obtain the benefit of the orderly continuation and conclusion of an administrative proceeding,” which effectively waived the statute of limitations through August 18, 2016. Notwithstanding Tricots’ requests and concerns, and a lack of urgency for Customs to make its Final Penalty Determination, Tricots was told that “any meeting at this time would be premature.”

This is consistent with the legislative history, which notes that the importer would have the right to make oral and written representations in a mitigation proceeding before the decision on mitigation is decided. The importer needs an opportunity to "fully resolve a penalty" before proceeding to court as a defendant. According to the Court of International Trade, that means the importer (or party charged in the penalty action) must have a meaningful opportunity for an oral presentation. The Court points to testimony characterizing this as a "hearing," which might be overstating the case, but it makes the point. The oral presentation requirement means there should be a formal meeting at which there is a full opportunity for the importer to be heard.

This is such an important part of the administrative process that the CIT did not require that the defendant show prejudice. The Court, therefore, granted summary judgment with respect to this portion of the case.

What do we learn from this? If you are in the private bar, ALWAYS ASK FOR A MEETING. If you are at CBP, ALWAYS GRANT A MEANINGFUL MEETING.

Saturday, April 14, 2018

On Trademarks, Seizures, and Due Process

As you might imagine, U.S. Customs and Border Protection has a lot of enforcement tools in its law enforcement quiver. One of those is to prevent an importer from securing the payment of duty and release of merchandise with a continuous entry bond and, instead, to require a separate bond for every single entry. Hence, the name "single entry bond." Securing a single entry bond is an administrative hassle for the importer.

Another tool available to CBP is setting the bond amount. The higher the bond amount, the more up front cash the importer ties up and the harder it is for the importer to continue in business. At some point, the bond requirement can be so high that no surety will assume the risk as a price the importer can afford. That effectively puts the importer out of the importation business.

Why might CBP do this? Because they do not trust the importer. In the past, for example, enhanced bond requirements have been applied to ensure the collection of antidumping and countervailing duties.

Recently, CBP imposed a single entry bond requirement on a company called U.S. Auto Parts Network, which imports replacement grills for automobiles. According to CBP, U.S. Auto imported or attempted to import 30 shipments of grills that were contained counterfeit merchandise. In response, customs required single entry bonds valued at three times the value of the shipment. In other words, CBP said to U.S. Auto, "We don't think you are doing business in a manner consistent with the law, so we are going to make it very hard for you to continue."

Rather than roll over, U.S. Auto lawyered up and told CBP, "Well, come to think of it, we are not too happy about how you are doing business. In fact, we don't think you are doing business in a manner consistent with the law." The first salvo in this battle, at least at the Court of International Trade, is a motion for a temporary restraining order preventing CBP from imposing the single entry bond requirements. See U.S. Auto Part Network, Inc. v. United States (and a bunch of other named parties).

To understand the larger battle going on here, you need to understand the law regarding trademark enforcement at the border. The Lanham Act is the American trademark law. At section 42, the Lanham Act prohibits the importation any product that copies or simulates the name of a domestic manufacturer or registered trademark in such a way that causes confusion to the public regarding the true origins of the product. In contrast to our normal discussions around the Customs Law Blog, in this context "origin" means the producer or brand owner. Nike, for example, is supposed to be the origin of shoes bearing its swoosh mark. The Tariff Act follows suit and makes counterfeit goods subject to seizure and forfeiture. See 19 USC 1526.

A temporary restraining order is a big deal. It asks the Court to jump in with an order preventing a party from taking some action to prevent an irreparable harm to the movant. To succeed, the movant, in this case U.S. Auto, must show (1) that it will incur irreparable harm in the absence of such order or injunction; (2) that it is likely to succeed on the merits of the action; (3) that the balance of hardships favors the imposition of temporary equitable relief; and (4) that the requested temporary restraining order or injunction is in the public interest. This is the same standard we recently addressed in our Passover edition.

Irreparable harm is the kind of harm that cannot be fixed later through some other remedy such as money damages. Hence, the name (h/t to Brian Garner). According to U.S. Auto, it has not been able to find a surety willing to sign on to the risk of approximately $5 million per week. As a result, it cannot import and its business is effectively winding down. Although the Government characterized this as speculative harm, the Court found it to be a sufficient showing of irreparable harm.

Regarding the relative hardships, the Court balanced the potential end of U.S. Auto's business against CBP's significant expense in resources devoted to inspecting the imports, including the estimated thousands of hours necessary to inspect 90 containers currently at the port of entry. As between these two, the Court found the balance weighs in favor of U.S. Auto. After all, there is no chance of CBP going out of business despite the inconvenience.

The likelihood of success on the merits is, as you might imagine, what makes this interesting. U.S. Auto made four arguments. The first two revolve around the Administrative Procedures Act and the process CBP used to implement the single entry bond requirement. Under the APA, a final agency action can be overturned if, among other things, the action is arbitrary, capricious an abuse of discretion, or not in accordance with law. An agency action can also be overturned if it was taken without the required process.

According to the Court, the record establishes that 99% of U.S. Auto's imports were not suspected of being counterfeits. In other words : U.S. Auto was facing a corporate death sentence for 1% of its imports. That, according to the Court, is contrary to Customs' own mandate to set bond amounts to ensure compliance. And that is enough to show a likelihood of success on the merits of the APA claims.

U.S. Auto's third claim is that Customs' process did not permit the importer an opportunity to challenge the bond amount in a meaningful way. If true, this would be a violation of the fifth amendment requirement that no person is to be deprived of life, liberty, or property without due process of law. At it core, "due process" is notice and a meaningful opportunity to be heard. Although this may seem like a slam dunk, there is a problem. No one has a protected interest (either property or liberty) in continuing to engage in international trade. That precludes a showing of the likelihood of success on this count.

Turning to the public interest, U.S. Auto contends that allowing it to continue in operation while the case is decided on the merits is in the public interest. Specifically, it prevents the likely loss of over 350 jobs and provides the public with a source of cheaper replacement parts. The Government contends that the public is best served through the enforcement of the intellectual property laws and by allowing CBP to better allocate resources. The Court found the public interest favors enforcement of the trade laws.

Because only one of the four factors weighed in favor of the Government, the Court granted the TRO. Under the terms of the order, CBP may continue to require a single entry bond at three times the value of the portion of the shipment believed to be counterfeit merchandise. In other words, CBP may impose the enhanced bond requirement on the 1%, not the 99% of U.S. Auto's imports.

I'll tell you right now: this is an important and interesting case to watch. A related issue is being litigated in the Federal District Court in Delaware, where LKQ Corporation and Keystone Automotive Industries are challenging CBP's conclusion that replacement automotive grills are counterfeit. In that case, the importers are arguing that the doctrine of functionality prevents the grills from infringing trademarks.

Note that the trademarks involved are the shape and configuration of the grills, not the corporate or model logo affixed to the car. BMW, for example, has a distinctive grill that is reminiscent of spread wings or of kidneys, depending on your sensibilities. That design is a registered trademark.

Source: Motor Trend
The doctrine of functionality holds that a product configuration cannot be treated as a trademark where the feature is essential to the function of the article or is competitively necessary to use the feature in the market place. The argument in this case is that an aftermarket replacement grill for a BMW, for example, must be shaped to fit the vehicle. Furthermore, no one would buy a replacement grill for a fancy BMW that did not look like the original. As such, the replacement grills are protected by the doctrine of functionality. That means they do not infringe the trademarks or the trademarks are invalid as applied to the replacement parts.

On the other hand, motor vehicle grills are immediately identifiable. That is why this vehicle sets off so much cognitive dissonance. You know that Rolls grill does not belong on that VW bug.

It is important to note that these cases are about the parts. This is not about some knock-off car manufacturer using the BMW grill on a car in a way that would confuse the car buyer of the source of the car. That would likely be infringement. Also, my assumption here is that the buyers of the replacement grills are not being led to believe that they are buying BMW OEM parts. That is a question of fact going to the way the sale is made and the products packaged.

Another important question is whether trademarks are even the proper tool to protect these parts. The LKQ complaint notes that design patents are available to protect the non-functional aspects of industrial design and that design patents have a limited life. That is a contrast to trademarks, which can be perpetual as long as they are used.

If the plaintiff's successfully show that there is no infringement, then the seizures are not legal and the plaintiffs should be free to continue their businesses without CBP interference. Of course, invalidating a trademark is a big deal. The rights holders will not take this threat to their business without a fight. Thus, this is shaping up to be a customs law case with major collateral impact. So, keep watching.

Also, I should point out that all three companies in both suits are represented by the same intellectual property boutique. So, this is a well coordinated strategy. That will also make this fun to watch.

As a side note to the plaintiffs' lawyers, should it come up, please go strong toward overturning the argument that there is no property interest in continuing an established business that depends on international trade. It seems that the government should not be able to effectively kill a company without the owners and beneficiaries of the enterprise having a constitutional right to be heard. Sometimes when something feels wrong, it turns out it feels that way for a reason.

Thursday, April 05, 2018

No Injunction Against 232 Duties

Yes, I know it has been a while. Trust me, I feel the guilt of not posting. At the Georgetown update last month, someone actually asked me "What happened to the Customs Law Blog?" That hurt. Like most people in the customs and trade field, it has been an extraordinarily busy time. But I digress and wallow in self pity.

The Court of International Trade has denied a motion for a preliminary injunction seeking to prevent the U.S. from imposing a 25% duty on imported steel under Section 232 of the Trade Expansion Act of 1962. The case is Severstal v. U.S. This is the first of what will likely be many challenges to the 232 duties in U.S. courts and at the WTO.

Under the Act, the Commerce Department studied whether imported steel presented a threat to U.S. national security. A similar study on aluminum was running on a parallel track. The report found that the availability of steel is important to national security and that the combination of imports and excess foreign capacity weakens the domestic economy. The report concluded that national security would be improved if U.S. steel production was running at 80% of capacity. To achieve that level of capacity utilization, Commerce recommended, among other things, tariffs on imported steel to encourage the consumption of domestic steel. That Commerce Department conclusion was despite a finding by the Department of Defense that U.S. steel production was sufficient to meet U.S. military needs.

Relying on the Commerce Department findings, the President announced duties in Proclamation 9711, which modified an earlier version of the order. The proclamation proposed to assess a 25% duty on certain steel products imported into the U.S. The duties came into effect on March 23, 2018. One of the reasons for the amended proclamation was to increase the number of exemptions from Canada and Mexico to those countries plus, South Korea, Australia, Argentina, Brazil and the EU.

The plaintiffs in this case are a Swiss steel trader and its related Miami-based affiliate. The Swiss entity is an exporter to the U.S. The Miami-based entity is an importer. Both companies are wholly owned by a Russian company. The company had entered into contracts to sell steel in the U.S. prior to the imposition of the duties. With the additional 25% duty, those contracts will be far less lucrative, if there is a profit at all.

There are a bunch of interesting legal problem for the plaintiffs in this case. The first is jurisdiction, which the Court quickly found it had under 28 USC 1581(i). That law gives the Court of International Trade exclusive jurisdiction over cases brought against the United States challenging "tariffs, duties, fees, or other taxes on the importation of merchandise for reasons other than the raising of revenue." Clearly this is that.

The next question is whether the plaintiffs had standing. In this case, standing is defined as a person who is “adversely affected or aggrieved by agency action within the meaning of section 702 of title 5." That is a reference to the Administrative Procedure Act. The government argued that there is no standing because the Supreme Court has held that the President is not an agency and his actions are not agency actions by which some can be aggrieved. The CIT rejected this argument and found that Congress, by granting exclusive jurisdiction to the CIT to review tariffs, must have also intended that a change in tariffs provide standing in the Court. Otherwise, there is an absurd result of the CIT having exclusive jurisdiction and the district courts being the only place where the plaintiff has standing.

The next question is whether the Plaintiffs could show that they are entitled to injunctive relief. Consistent with this being Passover, that raises four questions. To qualify for an injunction, the plaintiffs needs a "Yes" to the following:
  1. Will the plaintiffs suffer irreparable harm unless the Court grants the requested injunction?
  2. Are the plaintiffs likely to succeed on the merits of the case?
  3. Who will suffer the greater hardship?
  4. Is the requested relief in the public interest?
To succeed on the motion, the plaintiffs need not recline to the left nor dip their bitter herbs in salt water.

With respect to irreparable harm, the Court noted that the important considerations are the immediacy of the harm and whether the harm can be remedied by some subsequent award rather than an injunction. Here, Plaintiffs had steel on the water that would be subject to the 25% tariff when it arrived. Under its contracts, Plaintiffs were responsible for the duty. They lacked the assets to cover that additional expense and had to secure bank financing from the parent company. Plaintiffs also stopped taking orders for delivery to the U.S. in anticipation of the duties being imposed. 

From this, the Plaintiffs identified several possible harms. For example, effort to negotiate with customers to accept a portion of the tariff burden harmed their business relationships. They also lost out on contracts they would otherwise have made in the U.S. The Miami-based Plaintiff asserted that if forced to pay the duties and payback the loan, it would likely end up bankrupt.

The Court was skeptical of some of this. It specifically rejected the notion that having to pay the duties is itself irreparable harm because the importer has the ability to challenge the constitutionality of the assessment and secure a refund if successful. See the entire history of Harbor Maintenance Tax litigation.

However, the other business damage is not the kind of injury that can be remedied with a money judgment. Additionally, the exemptions made for major steel exporters creates further difficulty for the Plaintiffs in that they will not be competing with other producing countries on an equal footing. From all of this, the Court of International Trade found that the Plaintiffs had shown irreparable harm that was more then merely speculative.

Next up is the likelihood of success on the merits. To secure a preliminary injunction, the Plaintiffs need to show at least a fair chance of success on the merits of the claim. The greater the potential harm, the lower this burden. Here, the harm is pretty remote, making this a fairly high burden. This is where things get more interesting.

The Government argued that Plaintiff cannot win this case because the issue is a non-justiciable question of presidential discretion. That means that it is the kind of presidential decision that cannot be second guessed by the Courts. The CIT was unpersuaded. On the contrary, the Court found that Section 232 is a limited delegation of authority from Congress to the President to regulate trade. While the exact decision taken by the President may not be subject to review, the Court can determine whether the President so misconstrued the statute that he has exceeded the scope of his delegated authority. And that is the meat of this case.

Plaintiffs argued that the Congressional delegation of authority to the President limits his action to trade regulation in support of national security. According to Plaintiffs, the President misconstrued his authority when he equated national economic interests with national security. As the Court put it:

Plaintiffs . . . argue that the Section 1862 Steel Tariff is being used in trade negotiations to draw concessions from other countries unrelated to steel imports. Such a mismatch – harm to domestic industry (A) threatens to impair national security, import-restricting actions favoring domestic industry (A) are taken under Section 1862, such restrictions are then lifted in exchange for concessions favoring unrelated domestic industry (B) – would raise a credible question as to whether the President misapprehended the authority granted by Section 1862.
As evidence, the Plaintiff pointed to several statement from the President that point to economic rather than security considerations. For example, at one point, the President said "Tariffs on Steel and Aluminum will only come off if new & fair NAFTA agreement is signed." This is despite Canada and Mexico being significant exporters of steel to the U.S. Arguably, if national security were the issue, they would not be exempt. According to Plaintiffs' argument, national security is a pretextual peg on which the President has hung an economic hat. If so, that would mean he misconstrued his authority.

The problem for Plaintiffs is that the statute give Commerce many factors to consider including the overall economic health of the nation. According to the law:

In the administration of this section, the Secretary and the President shall further recognize the close relation of the economic welfare of the Nation to our national security, and shall take into consideration the impact of foreign competition on the economic welfare of individual domestic industries; and any substantial unemployment, decrease in revenues of government, loss of skills or investment, or other serious effects resulting from the displacement of any domestic products by excessive imports shall be considered . . . .
That means that the President can and should consider the general economic welfare and the welfare of specific industries. The Commerce report acknowledged these factors. Given the breadth of factors to be considered, the Court could not find that the President overstepped his limited delegation of authority.

That conclusion means that Plaintiffs are unlikely to succeed on the merits. 

That might have been enough to decide the case. Nevertheless, being thorough is always a good thing. The Court went on to find that the balance of hardship weighs in favor of the Plaintiffs. As discussed above, the Miami-based Plaintiff faces a risk of bankruptcy. The U.S., on the other hand, only risks a delay in collecting duties.

With respect to the public interest, the Court found the parties on an equal footing. National security is, of course in the public interest. So is the rule of law.

This is a preliminary ruling. The Plaintiffs did not succeed in securing a preliminary injunction. Now they must decide whether they want to press forward with a challenge to the duties. They might also seek an expedited appeal from the Federal Circuit. If this really is bet-the-farm litigation for the U.S.-based plaintiff, expect there to be more.