Sunday, October 15, 2017

Blog Contest

I am back in the mix for the Expert Institute legal blog competition.

Do me a favor and vote here.

Ruling of the Week: Shark Tank and Customs

I never make an effort to watch Shark Tank. However, for some reason I am always running across it. I always get sucked in. I think the discussions of business valuation and strategy are interesting. I am certain they are very distilled through the editing process, but hearing successful investors critique an entrepreneur's pitch is fascinating to me.

Not long ago, I saw a guy pitch an iPhone case that has a monochrome screen affixed to the back. Using its own battery and Bluetooth connection to the phone, the second screen continuously displays updates, pictures, and other data.

The device is called a popSlate (review)


How would you classify that?

It turns out, not as a radio transmitter/receiver of 8517, which is where CBP previously classified smart watches that use Bluetooth to get updates from the phone. In this case, CBP held that the screen provides the essential character. As such, Customs classified it as an other machine or apparatus having individual function in 8543.

I have not spent any time reviewing this classification. It does strike me, though, that this might be described as an indicator panel of 8531. Anyone want to take up the challenge and tell me why that is wrong (or even right)?

Irwin Tools: Pliers are Still Pliers

Remember the Irwin Tools Case? That case considered whether certain locking pliers were properly classified as wrenches or as either pliers or clamps. The Court of International Trade held that the plaintiff had overcome the presumption that Customs correctly classified the pliers as wrenches. But, because Irwin had not moved for summary judgment, the Court could not give a final classification. Subsequently, Irwin moved for summary judgment and the government moved for reconsideration of the original decision. If you have not read my original post on this case, please do so.

The CIT has now handed Irwin a complete victory. The gist of the prior ruling is that a wrench has a head that fits snugly over or around the head of a fastener and a single handle that can be turned to apply torque. Pliers, on the other hand, have two handles and two jaws that pivot and must be squeezed to grasp an object. A clamp has a frame of some kind and two opposing surfaces that can be adjusted by a screw, lever, or similar device to hold an object firmly in place.

A motion to reconsider a prior judgment is directed to the discretion of the Court. The Court will grant a motion to reconsider when it finds that justice requires it to do so. Factors that may indicate justice requires reconsideration include a significant change in the controlling law or reason to believe that the court patently misunderstood the issues presented. A simple disagreement with the outcome will not do it. That was the case here and the judge denied the motion.

So where do we classify locking pliers? No surprisingly, as pliers. All of the locking pliers have two handles and two jaws that pivot relative to one another. This allows the user to squeeze the handles to close the jaws around an object to manipulate it.

The Court also found that the evidence before it did not establish that the locking pliers were classifiable as clamps. Rather than be tightened with a screw, lever or thumb nut, the locking pliers are closed by squeezing the handles. Further, the configuration of the two handles and a pivot is distinct from clamps.

Reading somewhat between the lines and possibly due to my own involvement with this issue, it strikes me that the government’s main argument was that this issue had already been decided. The CIT addressed this issue in 1983 in a case called Associated Consumers v. UnitedStates, 5 CIT 148, 565 F. Supp. 1044. Associated Consumers was affirmed by the Federal Circuit in a non-precedential decision without an opinion. Of course, the 1983 case was under the old Tariff Schedule of the United States. Furthermore, the decision of one CIT judge is not binding on another judge subsequently looking at the issue. The Court, after reviewing the physical nature of the various tools at issue and the standard definitions of pliers determined that these locking pliers are properly classified as pliers.

There is a bit of side issue in this case about use. Does the word “wrench” suggest a particular use, such as turning a nut or bolt? Does the word “clamp” imply a usage? Maybe. But, that was all addressed in the prior Irwin decision and the Court saw no reason to revisit it now.
Anyone curious about all the bankruptcy issues floating around? I'm on it. I'll try to get to that this week.

Uniform Practices and Treatments: Kent International

You may have noticed that I am not doing a particularly good job of blogging these days. I have no good excuse for that other than the fact that I have a job that is not blogging. But, I realize and am gratified to know that people read this blog and expect it to be up to date. I am making an effort to do that. I will have a lot of time in airplanes this week, so I’ll try and knock out some updates.

Kent International, Inc. v. United (Slip Op 17-123) addresses the question of whether Customs and Border Protection had an “established and uniform practice” or a “treatment” applicable to the classification of a product known as the “WeeRide Kangaroo” child bicycle seat. We talk about this product previously here. In the phase of the case we are discussing now, the United States has moved to dismiss the counts of Kent’s complaint alleging an established uniform practice and a treatment.
At this juncture, the question presented is whether Kent has alleged sufficient facts to suggest that it has a right to relieve that is more than speculative. In the current parlance of pleading, the allegation in the complaint must be “plausible on its fact,” assuming all the allegations to be true.

The gist of Kent’s complaint is that from 2005 on, Customs classified its bike seats under heading 8714 (10%) as parts of bicycles. But, according to Kent, from 2007 through 2011, Customs and Border Protection issued binding rulings to other importers classifying similar products in heading 9401 (free). The rulings remained unrevoked until 2014. See 48 Cust. B. & Dec. 29 (Jul. 23, 2014). During that time, CBP also approved Kent’s protests seeking duty-free entry under 9401. After the rulings were revoked, CBP denied a then-pending protest and liquidated Kent’s merchandise under the dutiable provision.

An established and uniform practice (“EUP”) is a statutory recognition that importers should be able to rely Customs’ established practice without risk of rate advances or penalties. The existence of an EUP is not easy to establish. It must be either “declared” or “de facto.” A declared EUP results from a formal administrative declaration and is a pretty rare thing.

Absent a declared EUP, the Court of International Trade can find that Customs has made uniform liquidations over time that the importer can rely on that past practice until it is formally changed. For lawyers, this is kind of like detrimental reliance and estoppel but since estoppel generally does not apply to the federal government, we get it via the EUP.

For there to be a de facto EUP, the plaintiff needs to show evidence of a practice of liquidations that, in the absence of notice of a change, would lead a reasonable importer to expect Customs to follow the practice. What the importer needs to have is evidence of a high number of consistent liquidations, at a high number of ports, over an extended period of time, and no reason to suggest a different classification would apply (i.e., no uncertainty).

Remember, at this stage Kent only needs to allege facts that make a its case plausible. Kent can show its own entries at multiple ports. It also has the approved protests and the rulings issued to other importers. From this, the Court of International Trade concluded the Kent’s allegation of an EUP was sufficiently probable to proceed.

A “treatment” is a little different. It is also statutory. Under 19 USC 1625(c), if CBP proposes an interpretive ruling or decision that has the effect of “modifying the treatment previously accorded by [Customs and Border Protection] to substantially identical transactions, Customs must publish the decision in the Bulletin. The notice must provide at least 30 days for notice and comment. The final decision, changing the practice, shall be effective 60 days after notice of CBP’s final decision is published.

A “treatment” is defined in the regulations as an actual determination by a CBP officer regarding substantially identical transactions and that decision was consistently applied for a two-year period. 19 CFR 177.12(c). The plaintiff also needs to show that the current action is an “interpretive ruling or decision” that would have the effect of modifying the previous treatment.

Kent has alleged that CBP liquidated the entries of three other importers of substantially identical merchandise between 2007 and 2014, when CBP issued a formal revocation. Moving to dismiss, Customs argued that Kent cannot produce sufficient evidence of consistent CBP treatment over a two-year period, nationwide.

That, however, is not the standard Kent must meet at this point. According to the Court, Kent only needs to allege facts that, if true, would make a plausible case for a treatment. Based on the complaint before the Court, Kent has done that. As a result, the Court denied Defendant’s motion to dismiss the two counts.

Monday, September 18, 2017

The Great Bulb Debate

Our next case to discuss in The Gerson Company v. United States, which involves the tariff classification of artificial candles in the form of tea lights and candles. These are “artificial” because rather than being consumable candles with a wick that burns, they are translucent plastic or wax with a battery that powers an LED that simulates the appearance of a burning wick. You have probably seen these at a million restaurants that drop the tea lights into decorative holders on the table to create artificial ambiance.

Customs classified these items in Heading 9405, which covers lamps and lighting fittings including search lights and spotlights, and parts thereof, not specified elsewhere. The importer’s primary argument was that the faux candles are classifiable in Heading 8543 as electrical machines and apparatus, having individual functions, not specified or included elsewhere in Chapter 85. Specifically, the importer claimed the correct classification was as electric luminescent lamps. Plaintiff had three alternative classifications all in Chapter 85. 8541 covers, among other things, light emitting diodes.

On its face, this is an odd situation in which there are two tariff provisions that appear describe the same merchandise. These candles are “lamps” in that they are devices the principle purpose of which is to provide illumination, albeit minimally. They might also be electric luminescent lamps.
Getting to the bottom of this requires a pretty detailed analysis of the tariff language. [As an aside, the tariff does not get to electric luminescent lamps until below the heading level, which means it is not a comparable provision. But, it does indicate an intention that some lamps belong in 8543.]

Regarding Chapter 94, “light fittings” are designed to be attached to another surface, such as a wall. These are not that. If they are in Chapter 94, they are “lamps.” According to Chapter 94, Note 1(f), Chapter 94 does not cover lamps of Chapter 85.

So, are these “lamps” of Chapter 85?

The Court rejected classifying these items as LEDs or semiconductor devices of Chapter 85 because it determined that the complete faux candles as a whole are not described as the discrete constituent components. This used to be called a “more than” analysis, but under the HTSUS that terminology has fallen out of use.

Regarding 8543 (“Electrical machines and apparatus, having individual functions, not specified or included elsewhere in this chapter . . . .”), the “lamps” provided elsewhere in Chapter 85, including lighting for motor vehicles, flashlights, electrical signaling equipment, and incandescent lamps, are distinct from the faux candles. With the exception of flashlights and similar product, all of these items are components intended to be used as parts of a larger device.

The Court concluded that the “lamps” of Chapter 85 are components or otherwise intended to be used in conjunction with other devices. Lamps of Chapter 94, to the contrary, are independent and fully functional stand-alone devices. The flashlights of Chapter 85 are an inexplicable exception. Further, reading Chapter 85 to cover all electric lamps, which is the logical consequence of plaintiff’s argument, leaves Chapter 94 to cover only lamps powered by kerosene, alcohol, whale oil, and other non-electrical means. That must be wrong given that the Explanatory Notes to Chapter 94 note that it covers lamps and lighting fittings using any source of light, including electricity.

So, what gives with Chapter 85?

The bottom line here is that this problem is uniquely American in nature. The Harmonized System is an international nomenclature that occasionally sneaks in an Anglicism. In this case, the Explanatory Notes make it clear that Chapter 85 covers electrical goods not generally used independently, but used as components, for example “lamps.” Given the normal American connotation that lamps sit on desks, side tables, and floors as complete items, this is difficult to parse. Unless, you read “lamps” in the European (and also engineering sense) of “bulb.”

Looking at it through this lens, the Court concluded that Chapter 85 lamps are components, often “bulbs” and similar devices while Chapter 94 lamps are complete devices in the American sense of the word.  This leaves the flashlight as the inexplicable problem child. Perhaps, if we called them “torches,” this would be easier to sort out. [Actually, it wouldn’t, but I wanted to say that anyway.]

Based on this analysis, the complete battery-operated faux candles are classifiable in 9405 as lamps. I gather that if imported separately, the LED’s would not be Chapter 94 lamps. They would be electroluminescent lamps, meaning “bulbs.” That’s confusing. In the end, the Court of International Trade classified these items in 9405.40.80 as other electric lamps.

The Great Unmasking

As we know from my previous post, XYZ is the pseudonym of a company that imports Duracell batteries through channels that are not authorized by Duracell. That makes XYZ a “parallel importer” or “gray market importer.” Putting the best possible spin on its business model, XYZ finds opportunities to bring quality products to consumers at lower prices by taking advantage of imbalances in Duracell’s global pricing. In this model, Duracell has been fully and completely compensated through its foreign sale and is trying to thwart XYZ only to keep its U.S. price high. So, XYZ is arguably the champion of the common consumer.

XYZ is, of course, operating in the realm of many righteous warriors for freedom and justice who have adopted a nom de guerre or “code name” to protect their identity from evil doers. Young Bruce Wayne could only do so much to protect Gotham. Batman, on the other hand, can operate at (or well passed) the edge of legality to take on the enemies of justice. Spider-Man has greater power and, therefore, greater responsibility than does Peter Parker. But, there are always those who seek to unmask our heroes. Sometimes, even other good guys.

Apologies to DC Comics and Warner Bros.
XYZ started this battle hoping to prevent Duracell from securing what is known as “Lever Brothers Protection” for its batteries. If you are not familiar with gray market imports and the Lever Brothers rule, go read the earlier post.
Initially, this case was between XYZ and the United States government. XYZ is exercising its rights as an importer to challenge an administrative action by Customs and Border Protection. No other parties are necessary for ZYX to do that. Duracell, however, rightly wanted an opportunity to state its case in support Lever Protection. To accomplish that, Duracell moved to intervene, which the Court permitted. 
Once part of the case, Duracell challenged the designation of the identity of the plaintiff as confidential and subject to a judicial protective order. To protect its anonymity, XZY did something called a motion for an order to show cause why XYZ’s true identity should not remain confidential. This is effectively a request that the Judge make the other side explain its position so that the judge can make a ruling. Here is the decision from the Court of International Trade.
For its part, XYZ believes that it risks business and legal retaliation from Duracell. That is entirely reasonable. XYZ is competing against Duracell with Duracell’s own products (note these are not identified as counterfeits; they are genuine Duracell batteries). If XYZ were unmasked, Duracell might bring an action against it for trademark infringement. The merits of that claim are beyond the scope of this blog, but Duracell might have problems with that claim if the goods XYZ imports are identical in all material ways to the batteries Duracell sells in the U.S. Duracell might take other commercial actions such as working to undercut XYZ with its customers or otherwise discouraging sales by XYZ. XYZ naturally wants to avoid those problems.
But, XYZ’s desires do not necessarily comport with the law. The applicable protective order allows for XYZ to keep certain designated categories of information confidential. The relevant category here is “proprietary, business, financial, technical, trade secret, or commercially sensitive information.” The Court noted a lack of evidence concerning this designation and held that XYZ had failed to meet its burden on this front.
Nevertheless, the Court may exercise its discretion to maintain the anonymity of the plaintiff. Anonymity is not favored. The Rules of the Court require that every case be prosecuted in the name of a real party. This is an important principle in that it allows the parties to know the identity of the opposition. It also forms an important part of the public record, allowing the public to know the facts surrounding public judicial proceedings. The Court is required to balance the desire for anonymity against the public interest and any potential unfairness to the opposing party.
Cases in which anonymity was permitted have included facts such as the risk of personal violence, deportation, and arrest. Take, for example, Roe v. Wade, in which the plaintiff proceeded under the pseudonym “Jane Roe.” Clearly, the real Norma McCorvey was taking public position for which she might fairly have risked violence and intimidation. 
Here, the plaintiff’s concern is that it might end up on the wrong side of a trademark infringement suit. That is a legitimate concern, but it is not enough. According to the Court of International Trade, protecting the party’s economic or professional life is not a sufficient reason to overcome the presumption that the name of a litigant in a U.S. court is a matter of public record.
Thus, XYZ has been unmasked leaving it with the question of whether to proceed under its own name or to give up the case and preserve its identity. More on that shortly.
Now, just to be sure that I am being even handed, I want to be clear that my effort to use a superhero metaphor should not be interpreted as taking a side. Duracell has a point. A company with multinational distribution and sales often wants to control who sells its products and where. There are lots of reasons for that including protecting the company’s good will and its distributor relationships. On the goodwill front, a company like XYZ is not going to get complaints if the batteries fail for whatever reason. The consumer is going to see Duracell on the label and complain to it. Duracell might rightly respond, “Sorry, that package of batteries was never intended to be in the U.S. We did not sell it to the store where you bought it. You are out of luck.” Most companies won’t do that. Rather, they might take the return or otherwise accommodate the unhappy customer. That means XYZ has cost Duracell a sale to the retailer and Duracell took on the added expense making someone who was not even its customer happy. That’s not fair to Duracell. 
Also, Duracell might have distribution agreements in place that give retailers exclusive geographic rights. I don’t know if this is true, I am just giving a hypothetical example. If Duracell limits its distribution channel, it has agreed to give a retailer certain business opportunities. A company like XYZ comes along and starts to sell in competition with that retailer, which undercuts the value of the authorized relationship with Duracell.
Lastly, these batteries might not be exactly what the U.S. consumer expects of a Duracell product. Perhaps they were formulated and manufactured to work in the cold of Greenland and won’t work as well in the comparatively balmy U.S. market. Or, perhaps, batteries sold in New Zealand have to be slightly larger than their U.S. equivalents to prevent choking in kiwis (the birds, not the people). If the American consumer buys a Duracell battery, it should get what it expects from the Duracell trademark.
For companies that sell branded products, parallel imports are a serious problem. That is why Duracell is exercising its legal rights to secure Lever Brothers Protection.

Tuesday, August 29, 2017

GSP and Sets

Here's a question. Assume pots and pans from Thailand individually qualify for duty-free entry into the United States under the Generalized System of Preferences ("GSP"). That means they have 35% of their value derived from Thai-origin materials or costs and are shipped directly from Thailand to the U.S. So far, so good. Now assume that glass lids for the pots and pans are added to the imported goods and those lids are from China, which is not a GSP-eligible country. Do the pots and pans continue to qualify for duty-free entry under GSP or is the entire set disqualified due to the presence of the lids from China?

That is the question presented in Meyer Corporation US v. United States. The tricky thing about this situation is keeping separate tariff classification rules, entry documentation, and GSP eligibility. The classification of the pots and pans plus the lids is controlled by General Rule of Interpretation 3(b), under which the retail set is assigned a single classification based on the one item in the set that imparts the essential character. In this case, that was the pots and pans. As a result of this rule, the entire retail set is usually assigned a single rate of duty.

Following a 1991 Treasury Decision (T.D. 91-7), Customs argued that the 35% value added test must be applied to the entire set, including the lids. According to Customs, the mere packaging of the lids with the pots and pans was not sufficient to substantially transform them into articles of Thailand, making them count against the 35% requirement.

Rather than focus on the Treasury Decision, the Court of International Trade looked at the GSP statute. In 19 U.S.C. 2463, Congress extended GSP benefits to "any eligible article which is the growth, product, or manufacture of a beneficiary developing country" if that article satisfies the other statutory requirements. The pots and pans, individually, are eligible articles. The set, as a whole, is not.

According to the Court, the GSP statute extends to the individual articles that make up the contents of the set, not the set itself. The fact that GRI 3(b) produces a single rate of duty applicable to the retail set does not collapse the contents of the set into a single article for GSP purposes. Thus, the pots and pans arguably retain their individual GSP status. That is the legal conclusion. Whether the facts establish that to be true or not, is not decided in this preliminary decision.

There are other related issues to be settled. For example, if the pots and pans get duty-free status under GSP, does that mean that the lids are dutiable as products of China? If so, at what rate, the rate applicable to the pots and pans, which provide the essential character or at the rate applicable to glass lids from China? The Court did not resolve that and noted that further briefing is necessary to do so.

Next, the plaintiff asserted that the proper valuation for purposes of entry and, therefore, the GSP calculation should be the sale price of the lids from the Chinese manufacturer to the company in Thailand. This is first-sale valuation under Nissho Iwai (Fed. Cir. 1992). To determine whether the first sale is a bona fide sale for purposes of appraisal, Customs looks to the level of profitability of the "firm." In this case, CBP treated the firm as the parent of the importer. There is a debatable question of whether that is a reasonable data point for comparison. The Court also noted that the first sale might be influenced by China's status as a non-market economy. In the end, the Court determined that there are not sufficient facts available to make a decision on this point.

As a result, the Court ordered the parties to confer and propose how to proceed.

The legal decision here should not be lost in the details. This case holds that combining GSP-eligible and non-GSP-eligible items in a retail set does not strip the benefit of the GSP from the eligible articles in the set. That is the takeaway and is big, if it holds up on appeal.

There is a practical question of how entry will be made. A footnote in the decision discusses the possibility of separate line items or even separate entries of the items within the set. The resolution of that also remains to be seen. But, keep in mind that the contents of retail sets must be itemized on the entry anyway. This is the X/V reporting requirement contained in the instructions (see page 14) for completing the 7501. One would assume that adding the A prefix to the HTSUS number at the V-line level would take care of that (if more than one Special Program Indicator can be applied). If not, a new SPI covering both V and A might need to be added to the system.

Monday, August 21, 2017

Ford Analysis

Since I promised and because it is important, here is my more detailed analysis of the Court of International Trade decision in Ford Motor Co. v. United States, Slip Op. 17-102.

The background is pretty well known at this point; here is the short version. Since the 1960's there has been a 25% duty assessed on motor vehicles for the transport of goods (i.e., trucks). This is the result of U.S. retaliation in a trade spat over European duties on U.S. chicken. As a result, the 25% duty on trucks is known as the "chicken tax." The rate generally applicable to motor vehicles for the transport of people (i.e., cars, passenger vans, and SUVs) is 2.5%. That difference creates an opportunity, which Ford has tried (so far successfully) to exploit. What if you were to import a passenger van, pay 2.5% duty, and then convert it to a cargo vehicle prior to delivery to the dealer or customer? Would that be legal?

That is the question addressed and decided by the Court of International Trade.

The vehicles at issue are Ford Transit Connects. You no doubt have seen these driving around as urban delivery vehicles (think florists, bakeries, plumbers, and similar businesses). You also see them, though less often, as taxis, hotel shuttles, and family wagons. As imported, all the Transit Connects have swing out front doors, second row sliding doors with windows, and swing out rear doors. As imported, they also have a second row seat with seat belts; child locks in the rear doors; lights in the front, middle and rear of the vehicle; a full-length cloth headliner; and coat hooks in the second row.

Importantly, the second row of seats, as imported, does not have certain features. Specifically, the seats do not have headrests, a tumble forward lock mechanism, or accompanying labels. Over time, Ford found ways to reduce the cost of the rear seat. Later versions lacked certain structural wires that make it more comfortable for passengers and were wrapped in a "cost reduced" fabric. There are many other relevant facts stated in the opinion, which is worth reading. But, this is enough for our purposes.

The reason the Transit Connect may not be just a passenger van with a lousy rear seat is what happens after importation. After CBP clearance, but still within the confines of the Port, a Ford contractor unbolts and removes the rear seats and safety equipment. The rear footwells (dips in the floor where passengers would put their feet) are filled to create a flat cargo floor. Sometimes, Ford also removed the rear windows and replaced them with solid metal panels. The result is a cargo van with no rear seats. There is no dispute that had the cargo van been imported, it would have been subject to the 25% chicken tax.

There is another variation of the Transit Connect that has better rear seats and other passenger-related features. These vehicles, identified as the Transit Connect 9, are sold as imported and remain passenger vehicles. These were not re-classified and are not subject to this litigation. But, they illustrate the difference between passenger vehicles intended for the market and those Ford knows at he time of importation will be converted to cargo vans.

The question raised in this case is whether Ford's process of importing passenger vehicles knowing that they will be converted to cargo vehicles is permissible tariff engineering.

The starting point for this analysis is the legal principle that goods are classified in their condition as imported. This goes back at least as far as a 1881 when the Supreme Court held that it was permissible for an importer to darken refined sugar to avoid the higher duty applied to lighter sugar. In that case, the Supreme Court said "So long as no deception is practised, so long as the goods are truly invoiced and freely and honestly exposed to the officers of customs for their examination, no fraud is committed, no penalty is incurred." In a case called United States v. Citroen, 223 U.S. 497 (1912), the importer purchased a string of pearls in France. Prior to importation, the importer unstrung the pearls and imported them with the lower rate of duty applicable to pearls "in their natural state." The Supreme Court found no fraud and upheld the application of the lower rate of duty despite it being clear that the pearls were to be restrung into a necklace after importation.

Those cases and the ones that followed establish that an importer is free to structure its products to achieve the lowest legally available rate of duty. But, there is a caveat. Importers cannot escape an applicable duty by resort to "artifice or disguise." That means that an importer cannot hide the true nature of the imported article. For example, an importer got into trouble when it hid high quality (and high duty) tobacco in a bale of low quality (and low duty) tobacco. Assuming the importer did not properly declare both grades of tobacco, that is fraud; it might actually be smuggling.

Is Ford's process an unacceptable artifice or disguise? According to CBP, the as-imported passenger vehicles with low-cost rear seats were never intended to be sold. That makes them fictional, temporary products that have no real purpose other than avoiding the chicken tax. Customs contended that is a disguise or artifice.

The Court of International  Trade disagreed. First, Customs' approach is inconsistent with the general premise that importers are permitted to fashion their merchandise to achieve lower rates of duty. Second, the Court held that asking (or permitting) CBP to inquire as to the subsequent processing of merchandise and the genuineness of the imported product would impair the timely and sound administration of the entry process. Most important, the cases that have found disguise or artifice do so where the appearance, rather than physical characteristics, are changed. Merritt, the sugar case, involved adding molasses to darken light sugar. But, the tariff applicable in 1881 classified sugar based on its color (i.e., its appearance) rather than physical characteristics. That means changing the color of the sugar was changing the physical parameter that controlled classification.

This would seem to decide the issue. The Transit Connects were presumably properly invoiced and reported to Customs. Customs had the opportunity to inspect them and make a determination as to the correct classification. Furthermore, the vehicles as imported had actual rear seats and other passenger-related components.

But, there was more to this. The question remained whether the as imported vehicle has features that satisfy the requirements for classification as a vehicle for the transportation of persons rather than cargo. In other words, did Ford build a real passenger vehicle with what appears to have been an epically lousy rear seat? Or, do the physical characteristics of the as-imported vehicle indicate that it is really a cargo van? According to the Court of International Trade, "That Ford ultimately removes that seat after importation is immaterial." For our purposes, that is the decisive utterance of this case.

Having established that the as-imported condition is what matters for classification, the Court next turned to the classification question. The relevant case for that analysis is Marubeni America Corp. v. United States. In that case, the Court identified a number of structural features that differentiate passenger from cargo vehicles. Many of these are features that interfere with loading cargo or that add comfort for passengers. Looking at the Transit Connect, the Court found numerous similarities to the Transit Connect 9, which remains a passenger vehicles after importation. The only question was whether the cost-reduced rear seat was sufficiently inadequate for passengers to prevent the classification of the vehicle as for the transport of people.

It turns out it is not this rear seat is not so lousy that it does not qualify as a passenger seat. The seats fold forward, but do not lock. The inability of the seats to lock makes transporting cargo more difficult than it would be if the seats locked away. The lack of support wires in the seats did not make them unsuitable for human passengers and they remained compliant with safety requirements. In other words, the cheap seat is still a seat. That means the vehicle, as entered, has features that indicate it is designed for the transport of people.

There was one last issue. Does the post-importation use of the vehicles as cargo vans affect their classification? If the two competing headings are eo nomine classification, use would be largely irrelevant. The Federal Circuit decision in Marubeni did not treat Heading 8703 (covering vehicles principally designed for the transport of person) as a use provision.

But, recent Federal Circuit decisions have indicated that some eo nomine provisions suggest that evidence of use consistent with the eo nomine designation may be relevant and useful for classification. On this front, the CIT held no such inquiry was required. First, the distinction between passenger cars and trucks is not that challenging in light of the established Marubeni factors. Second, Heading 8703 does not suggest a use. Instead, the Heading indicates that design is the primary consideration.

Having walked through that analysis, the Court made a very important ruling that does not substantially change the law. The relevant time for classification remains the time of importation. Importers continue to have the right to fashion products in a manner to achieve the lowest legally applicable rate of duty. At the same time, importers must properly describe their products to Customs. A false statement about what is being imported or an effort to make merchandise appear to be something other than what it actually is at the time of importation will be an impermissible "artifice or disguise." And, finally, the way to distinguish between passenger vehicles and cargo vehicles is to look at whether the vehicle has design characteristics and features that, taken together, show it to be principally designed for the transport of persons (or cargo).

This is a huge win for Ford. More important, it is a huge win to the trade community as a whole. This decision continues the established law and maintains existing compliance obligations. It allows companies to continue to make changes to their products to manage their duty liability, even if those changes are temporary. There is a real question as to how the Court of Appeals will decide the inevitable appeal of this case. Given the dollar amounts that are likely to be at stake and the importance of the legal principal (remember, CBP thinks this is an unfair trade practice), this case might even see an effort to secure Supreme Court review. So, keep your eyes on this case.

Now, whenever you are driving around with someone, if you see a Transit Connect, you will have an interesting work-related story to tell. For all of you who, like me, have friends and family who have no idea what customs law is about, tell them this story. It may be the best example to come along since the debate over whether the X-Men are humans.

Monday, August 14, 2017

Chew on This

The important legal and possibly philosophical question to be answered in Mondelez Global LLC v. United States is whether the unflavored, and largely chemical, base for chewing gum is classified in HTSUS Heading 2106 as a food preparation or in Heading 3824 as a chemical preparation.

While that is an interesting question, the most interesting thing about his case may be the procedure used to get it this far. It appears that the United States made a motion for partial summary judgment to ask the Court to decide a question of law as early as possible. This makes sense when there is a possibly dispositive question of law that can be resolved without discovery or the introduction of factual evidence. The answer to that question of law might lead the parties to resolve the case by settlement or, at a minimum, the answer provides guidance on what are the important questions of fact.

Addressing the legal questions early, therefore, can be an efficient way to manage customs litigation. At least that is the theory I put forth here. Things may have gotten a little bollixed up because Mondelez opposed the motion for partial summary judgment on the question of law and then jumped in with both feet asking the court to grant full summary judgment on the whole case before the parties had engaged in discovery. That's its right, so I can't really complain, but this does not seem to have been a good test of my theory of tariff litigation.

On the merits, the first question is whether gum base is a "food preparation" of Heading 2106., as the government contends. If the Court finds that gum is a food and that the base is specially prepared for the manufacture of chewing gum, then even with just partial summary judgment on those questions, the government might well win the case because it would follow that the gum base is a food preparation.

But, Mondelez has a different thought. It contends that Heading 2106 only covers items that are themselves consumed as food and that gum base is not consumed as food. Mondelez also points out that gum base is not intended for human consumption and is not valued for its nutritional qualities.

On this question, the Court noted that the phrase in 2106 is "food preparation." That has a different meaning than the phrase "preparations for food." As written, preparations classifiable in 2106 must be food. According to the Court, "food" is a substance that is intended to be ingested or imparts flavor or nutritional value to something that is ingested. So tea leaves are presumably food preparations because they impart flavor to tea even though the leaves themselves not consumed. Something can be food without providing nutritional value, so long as it is ingested.

But, the government also argued that if it does deliver nutrition, the substance is food. At this early stage, the government has not explored whether the gum base is a means of delivering nutritional compounds, even if the base is not ingested. It turns out that gum bas includes a few components that arguably have nutritional value. Those are vegetable oil, calcium carbonate, lecithin, and triacetin.

In an effort to avoid a potentially costly scientific and expert analysis of this question, the government moved for partial summary judgment on the scope of 2106 without first investigating this question. Because of that, it asked the Court to refrain from deciding Mondelez's motion for summary judgment. The Court, not wanting to penalize the government for trying to be efficient, agreed and did not address that question.

Still on the table is whether chewing gum base is covered by Heading 3824 as a chemical preparation. Note 1(b) to Chapter 38excludes "mixtures of chemicals with foodstuffs or other substances with nutritive value, of a kind used in the preparation of human foodstuffs . . . ." Such goods, according to the note generally go in Heading 2106. The Explanatory Notes clarify that goods are not excluded from Chapter 38 by the mere presence of substances having incidental nutritive value. In other words, products of 2106 are "of a kind" used in the preparation of human food and which are valued for their nutritional content.

That means there is a necessary question of fact to be resolved: is gum base valued for its nutritional properties? That, according to the Court, is essentially the same question that must be answered to resolve the classification in Heading 2106.

This sets up a problem for the Court. Mondelez moved for summary judgment and presented evidence that gum base is not valued for its nutritional properties. The U.S. was hoping to avoid this issue and moved to resolve the legal question of whether gum base is a food preparation (making chewing gum "food"). If the Court ruled it is not food, then 2106 would have been excluded. The Court could not answer that question on the record presented. If it acted on Mondelez's motion for summary judgment, it would be doing so on a less than complete record, putting the government at a disadvantage for having tried to get the case resolved efficiently.

The Court wisely refused to do so. Instead, it ordered the government to advise whether it wants time for discovery. If no discovery is needed, Mondelez will prevail on the basis of the uncontroverted evidence.

Saturday, August 12, 2017

XYZ and Lever Protection (Part 2)

This is a discussion of the jurisdictional merits of XYZ Corporation v. United States. If you are not up on the ins and outs of parallel (or "gray market") imports, read Part 1 of this post.

Remember what is happening here: Plaintiff, going by the pseudonym XYZ Corporation, wants a preliminary injunction to prevent Customs and Border Protection from granting Lever Rule protection to Duracell batteries imported in bulk or in retail packaging.

The first question the Court has to decide is whether it even has jurisdiction to resolve this dispute. The Court of International Trade, like all federal courts, is a court of special and limited jurisdiction. It can only act if Congress gave it the authority to do so. There are two possible bases of jurisdiction in this case.

The first is 28 USC 1581(h), which states in full (with my emphasis):
The Court of International Trade shall have exclusive jurisdiction of any civil action commenced to review, prior to the importation of the goods involved, a ruling issued by the Secretary of the Treasury, or a refusal to issue or change such a ruling, relating to classification, valuation, rate of duty, marking, restricted merchandise, entry requirements, drawbacks, vessel repairs, or similar matters, but only if the party commencing the civil action demonstrates to the court that he would be irreparably harmed unless given an opportunity to obtain judicial review prior to such importation.

The second basis is 28 USC 1581(i)(4), which is the residual provision giving the Court jurisdiction over actions against the United States challenging CBP decisions relating to, among other things, the administration and enforcement of duties and quantitative restrictions on the importation of merchandise.

These two bases for jurisdiction are mutually exclusive. The Court cannot exercise jurisdiction under section 1581(i) if it has jurisdiction under 1581(h). Thus, the question comes down to whether this challenge is properly heard in the CIT as a request for declaratory judgment under 1581(h).

The first factor is clear. This is a pre-importation review. The next question is whether the granting of Lever Rule protection to Duracell is a "ruling." In this context, a "ruling" is a determination as to the manner in which CBP will treat a completed transaction. Here, CBP has made a determination to grant Lever Rule protection against merchandise bearing the Duracell trademark, meaning it has decided how it will treat those future importations. Moreover, under Customs' own regulations, a ruling is a written statement, issued by Headquarters, published in the Customs Bulletin, interpreting the customs and related laws. The decision to grant Lever Rule protection satisfies those requirements and is, therefore, a ruling. Furthermore, it is a ruling about restricted merchandise, making it appropriate subject matter for declaratory judgment.

The next of the elements required to secure (h) jurisdiction is where things usually fall apart: irreparable harm. More often than not, a customs can be resolved with a refund of duties, taxes, and fees, plus interest. That means there is almost always a way to repair the harm, making (h) inapplicable. But, there are things a money judgment can't fix such as loss of goodwill, damage to reputation, loss of future business opportunities, etc. Here, XYZ  showed that it has lost sales and suffered damage to its business reputation as a result of the grant of Lever Rule protection to Duracell. It has shown through an affidavit and testimony that customers are concerned about potential repercussions from the owners of the Duracell mark. Plaintiff also faces great uncertainty regarding whether its shipments will be released. These are significant, non-monetary harms that cannot be remedied through a refund of duties or other money judgment.

As a result of these conclusions, the Court of International Trade found that it has 1581(h) jurisdiction to hear this challenge to the extension of Lever Rule protection. That means that is does not have jurisdiction under 1581(i).

The next set of questions has to do with whether the plaintiff in this case has standing to challenge the CBP determination. "Standing" is the legal requirement that the plaintiff have a legitimate interest in the litigation. It typically means that the plaintiff must be the party that was injured. You can't sue the driver who caused an accident if you were miles away and uninjured. Here, XYZ is an importer of the affected merchandise and has complained of an injury to its business as a direct consequence of CBP's action. It has standing to sue.

The last question is whether the issue is ripe for decision. Generally, federal courts will only review final agency action. Here, CBP issued its final notice and declared that Lever Rule protection would commence. That is a final agency action. Furthermore, the issue is ready for resolution; all the relevant facts are known and the legal issue can be decided.

All of which means that this case is properly before the Court of International Trade.

The Court has denied the requested preliminary injunction against enforcement of the Lever Rule protections. That is because the relief available under (h) us limited to declaratory judgment with prospective application to future imports.

But, this case is far from over. There is still the question of whether the grant of Lever Rule protection requires public notice and comment under the Administrative Procedures Act ("APA"). If it does, the grant of Lever Rule protection in this case, and potentially all prior cases, is void. That would be a big deal. The Court has ordered the parties to confer and submit a scheduling order for the resolution of the remaining issues. In other words, the Court will likely have to decide whether the regulations implementing the Lever Rule are consistent with the requirements of the APA and possibly the due process clause.

This will be an interesting case to follow.

More to come. I am sitting on a penalty case and the important philosophical question of whether chewing gum is food. And, we might have to talk about bankruptcy law.

Friday, August 11, 2017

The XYZ Affair and a Quasi-War Over Gray Market Imports (Part I)

Every now and then a case shows up at the Court of International Trade that does not fit into the normal baskets of what tends to happen there. One such case is XYZ Corporation v. United States.

Here is some background. U.S. law says that only the trademark owner or someone authorized by the trademark owner can import products into the United States bearing the mark. That makes sense and it is how the law is usually described. But, it is also incomplete.

The law also provides that once someone buys the physical item bearing the mark, that person can do pretty much what he or she wants with it, including resell it and import it. That is the principal of trademark exhaustion. The idea is that through the authorized sale, the trademark owner has been fully compensated and has no lingering rights to control the further disposition of the product.

That creates an opportunity for entrepreneurs. If a company can find a good deal on shampoo, chocolates, or Mexican cola in some foreign market, it can import the goods into the United States and sell them here at a profit. This is the business model on which many discounters and on-line sellers operate. It is perfectly legal . . . up to a point.

The problem for parallel importers (or "gray market" importers) is that U.S. trademark law still does not allow the use of a trademark in a way that that is likely to cause confusion as to the attributes of the product. Assume you go into your local deep discount shop to buy a bar of Shield soap, because that is what you always buy and you expect it to work they way you like it to work. You see the familiar Shield label, grab a bar, and run home for a shower. Unfortunately, your shower is unsatisfying because the soap does not lather properly and maybe smells a little funny. What gives?

What happened is that you bought a perfectly cromulent bar of soap authorized by Lever Bros., the owners of the Shield trademark. It is just that the particular bar you bought at a steep discount was intended for some other country, not the U.S. It was formulated specifically for consumer preferences and conditions in that country and does not work well in the U.S. Lever Bros. never intended for it to be sold in the U.S. But, they lost control over that bar of soap when it was sold in an authorized channel abroad.

Those facts resulted in the famous Lever Bros. Co v. United States, a 1989 decision on the legality of parallel imports of authentic trademarked products. The upshot of that case is that parallel imports are generally legal. But, if the product is materially different than the product authorized for sale in the United States, then consumers may be deceived as to the nature of what they are buying. Consequently, U.S. trademark holders are permitted to seek the exclusion of imports that bear legitimate trademarks but are nonetheless materially different from the local versions. This is the Lever Rule.

Customs has implemented the Lever Rule in a kind of tricky way. First, it defines "restricted gray market goods" as "foreign-made articles bearing a genuine trademark or trade name identical with or substantially indistinguishable from one owned and recorded [with CBP] by a citizen of the United States or a corporation or association created or organized within the United States and imported without the authorization of the U.S. owner." 19 CFR 133.23(a). I say this is "tricky," because you will note that goods meeting this definition are not actually restricted; they will be prevented from entering the U.S. only in limited circumstances. The qualifiers are important.

Restricted gray market merchandise must have a trademark that was:
  1. Applied by licensee independent of the U.S. trademark owner (and, presumably, not under its control);
  2. Applied by the foreign trademark owner or under its authority, provided that the foreign trademark owner is not the U.S. trademark owner, its parent, its subsidiary, or otherwise under common control or ownership (again, note we are talking about a foreign party not under the control of the U.S. trademark owner); or
  3. Applied by the U.S. trademark owner or someone under its ownership or control but applied to goods that are materially different from the articles authorized for distribution in the U.S.
It's that last bit that we are worried about in this case.

A U.S. trademark owner can submit a request to Customs to exclude genuine but materially different restricted gray market goods. See 19 CFR 133.2(e). This is called Lever Rule Protection. But there is a caveat here. Remember that parallel imports of materially different products are restricted because consumers might be deceived (or at least confused) about what they are getting. The way to fix that is to label the product as not authorized for the U.S. market and materially different from the authorized product. No consumer confusion means the goods can be imported.

I am not 100% certain why companies seek Lever Rule Protection. One consequence is that it tells prospective importers to affix labels to the product to get them through Customs. Materially different but genuine products that are unlabeled are subject to seizure. I suspect that most importers don't know about the labeling option or don't bother to label, which makes the Lever Rule valuable. Also, seeking Lever Protection gets the trademark front and center with CBP for enforcement.

OK, all of that, leads up to the modern, as opposed to the historical, XYZ affair

In this case, Duracell asked for Lever Rule Protection for bulk and retail packaged batteries bearing genuine Duracell marks. Customs, following its regulations, published a notice of that request in the Bulletin on January 25, 2017. On March 22, 2017, CBP announced that it had granted Lever Rule Protection to Duracell but did so without permitting public comment. Customs' rationale was only that it determined the batteries to be materially different than their domestic counterparts.

This did not sit well with some company, which we must assume is a parallel importer of Duracell batteries. For purposes of this litigation, that company has a assumed the nom de guerre "XYZ Corporation." XYZ complained to Customs that restricting imports is a serious matter that affects the rights of third parties who should have an opportunity to comment before CBP takes action. XYZ also noted that the bulk batteries are not, in its estimation, materially different than Duracell's U.S. products. XYZ requested that CBP reconsider. XYZ then sued Customs seeking judicial review of the extension of Lever protection and an injunction preventing CBP from enforcing gray market restrictions on Duracell batteries. 

Shots fired.

Given that I still work for a living, I am going to call that Part I. I will finish this up soon.