Tuesday, May 07, 2019

Clash with a Titan

Being an importer is fraught with legal peril. It just is. Often, importers are unaware of legal requirements. In other cases, the importer doesn't care and assumes that its small or infrequent transactions are unlikely to get noticed. That might have been a viable (if not compliant) strategy 20 years ago. Back in the day, the biggest risk to the non-compliant importer was that a Customs Officer would actually open a container and find something amiss. Today, Customs and Border Protection operates in the era of big data. Using targeting algorithms, CBP computers can find discrepancies based on country of origin, country of export, classification, and value. A little data mining based on those factors can pluck the enforcement needled from the haystack of international trade. So, the baseline advice for importers is: know the law, be compliant, and don't assume you will not be caught.

That would have been good advice for a company called Titan Metals Corporation, which is the subject of a recent (OK, I admit it, recent-ish) decision from the Court of International Trade.

Titan's business is to collect scrap metal in the US and sell it to India. On one occasion, it imported a steel flange from India. At the time of entry, Titan filed a normal type 01 consumption entry. However, there is an antidumping duty order covering Forged Stainless Steel Flanges from India. On top of that, Titan made a GSP claim for duty-free treatment, which means it doubled down on India as the country of origin. Customs inquired as to why Titan had not made a Type 03 entry and deposited antidumping duties. 

What followed is a series of shifting explanations. First, Titan asserted that the flange was not finished and was, therefore, outside the scope of the order. Later, Titan claimed that the flange was actually a US product that was mistakenly shipped to India and returned. Regarding the latter theory, Titan provided some supporting documentation but CBP found the weights and values of the export and subsequent improt did not match sufficiently to prove that the imported flange was the same item that had been exported to India.

Complicating matters was testimony from Titan's president that the declaration of origin made at the time of entry was false. He apparently went on to testify that he knew it was false at the time of the entry.

Customs issued a penalty notice seeking $146,368.64 in unpaid antidumping duties and a penalty of $283,969.97. That penalty is the statutory maximum for a violation based on simple negligence. I realize the math does not work out exactly. Two times the unpaid duty would be $292,737.28. The penalty amount is capped at the domestic value of the merchandise, which is the amount Customs sought. It appears the lesser amount should have been the maximum penalty. On the other hand, I went to law school to avoid doing significant math. I may be missing something.

The interesting thing about this case is that the Court had to grapple with the penalty amount. Lately, a lot of these cases have been default judgments, leaving the Court little to work with. Here, Titan made several arguments that, despite admitting to a knowing material false statement, the penalty should be reduced.

First, Titan pressed that there is an open question of fact as to whether the goods are actually subject to the ADD order. Specifically, whether the goods were of U.S.-origin. Customs countered that Titan did not follow the regulatory requirements to make a claim for U.S. Goods Returned. It did not provide a Foreign Shipper's Declaration. It did not produce a declaration by the owner, importer, or consignee certifying the basis of the claim. See 19 CFR 10.1 for the details of how to do this properly.

Titan's reasons for failing to provide the documentation were not sufficient to create a triable question of fact. Basically, the mere denials of facts or conclusory statements that a dispute exists are not sufficient to create a genuine dispute Titan failed to produce anything concrete. Accordingly, the Court found no genuine issue of fact regarding the origin and, therefore, that the case can be resolved on summary judgment.

This is an important practice point. Penalty cases are decided by the Court of International Trade de novo on the basis of the record made before the Court. That leads some lawyers to assume that they will be able to start fresh in Court with witnesses explaining away the violation in a scene ripped from an old episode of LA Law. That can happen, but it is a rare event. To get to a trial, the importer can't just say, "I promise, we can prove that there is no violation." Prior to that, in its Answer and in the response to the inevitable motion for summary judgment, the defendant needs to put concrete facts on the record that establish a genuine dispute as to what happened.

There might also be a genuine dispute regarding facts relevant to setting the penalty. If, for example, the defendant seeks mitigation on the basis of prior good behavior or inexperience, it needs to get those facts on the record to create a genuine issue. Otherwise, as happened here, the case will be resolved on the pleadings and the briefs.

Turning to the penalty amount, the Court noted the 14 Complex Machine Works factors generally considered when setting a penalty. We have discussed those previously. The Court has a lot of discretion here. The existence of mitigating factors does not preclude the maximum penalty. On the other hand, the government's claim for the maximum is not entitled to any special deference. In other words, the Court has to make an independent penalty determination based on the evidence.

In this case, the Court noted a lack of prior violations, that this was a one-time import, and that Titan is a small business. It has just five employees including the president's daughter. Titan is not a "repeat player familiar with the customs laws and regulations." Apparently, it had never hired a customs broker prior to this importation because it is in the business of exporting, not importing. On the other hand, Titan's president testified in a deposition that the company made a knowing false statement regarding origin and antidumping status. That is a bad act and the penalty should be sufficiently high to deter future lawbreakers. Based on these and the other Complex Machine Works factors, the Court imposed a penalty of 50% of the statutory maximum.

Thursday, May 02, 2019

Humbug from the Federal Circuit

We have discussed the classification of so-called festive articles many times on this blog. See, for example here, here, and here. The last of those links goes to my analysis of the Court of International Trade's decision to classify a well-made Santa suit as articles of apparel rather as duty-free festive articles. The Federal Circuit has now affirmed that decision in Rubie Costume Company v. United States.

In terms of law, there is not much new in Rubies. The issue turns on whether a particularly well-made Santa suit is "fancy dress." If so, it is excluded from Chapter 95, which covers festive articles, by the action of Chapter 95, Note 1(e). "Fancy dress" is not defined in the tariff. The Federal Circuit did define it in a previous Rubies' case as encompassing costumes that are classifiable as wearing apparel. A costume is wearing apparel if it is not flimsy and poorly constructed. A costume is not flimsy if it has features like finished edges, zippers, inset panels, darts, and hoops.

Even though the merchandise is obviously a Santa costume that is obviously associated with the Christmas holiday, the well-sewn costume was sufficiently durable to be cleaned and worn multiple times. Based on its durability and construction, the Federal Circuit held it is fancy dress and, therefore, precluded from classification in Chapter 95.

So far so good. I have no qualms about the decision and generally like to see these things resolved with a fairly well-defined rule to be applied by importers, Customs & Border Protection, and the courts going forward. This also provides a decent road map for future exercises in tariff engineering. Future Santa suits will be less likely to feature linings, zippers, finished pockets, and other indicia of quality.

What I do want to focus on is an important piece of dicta in this opinion. On page 11, the Federal Circuit makes a shocking finding:

There is no dispute that the Santa Suit is a costume traditionally worn in conjunction with the celebration of Christmas, a festive occasion, to portray Santa Claus, a fictional jolly character that significantly contributes to the festivity of the occasion

Look, Christmas has no religious significance and little cultural weight for me. I don't care whether Santa is any more real than the Mongolian death worm. But doesn't this off hand statement about the fictional status of Santa fly in the face of the important legal precedent set in the bench trial depicted in the documentary film Miracle on 34th Street (1947)? That case established the legal principle of "Quis est verus, qui accipit mail," meaning roughly "He that receives mail is real." Also, the Federal Circuit has ignored the hard hitting investigative journalism of the New York Sun's 1897 in response to a reader inquiry from one Virginia O'Hanlon. While not necessary to resolve the matter before it, the Federal Circuit seems to have gone out on a limb to make a factual determination with significant cultural impact. My only hope is that the members of this particular three-judge panel are soon visited the specters of law clerks past, present and future who will show them the value of judicial restraint when it comes to shattering the hope and dreams of future litigants.

Now go get me that prize turkey from the window in the butcher shop.

Wednesday, April 17, 2019

On Juries, Customs Penalties and Prog Rock

I really don't mind if you sit this one out. I'll make it quick.

Although defendants in customs penalty cases are entitled to a jury trial on whether or not they are liable for a violation, the amount of the penalty is not a question for the jury.

So says the Court of International Trade in United States v. Univar USA, Inc. That is the penalty case involving allegedly Chinese saccharine.

The gist of this case is that 19 USC 1592(e)(1) state that all issues in the case, including the amount of the penalty are to be tried de novo before the Court of International Trade. But, that does not say anything about who is the finder of fact and on what issues. Nothing is easy, is it?

For that answer, we turn to the Seventh Amendment to the Constitution, which preserves the right to a jury trial in common law actions where the amount in controversy exceeds $20. That means the question before the Court as whether the amount of a civil penalty in a case commenced by the United States is analogous to a common-law cause of action at about the time of the American Revolution for which a jury would have been permitted. That is an exercise of living in the past.

Under this test, Univar absolutely has a right to a jury on the question of liability. But, according to the CIT, it does not have a right to have the jury decide the amount of the penalty. The amount is fixed, within a specified range, by Congress. Congress, therefore, delegated that task to the judge. Unlike a question of damages, the amount of the penalty is not a determination of a fact. Rather, it is a discretionary calculation of multiple factors that is traditionally performed by a judge. This follows from a decision of the Supreme Court in a similar case involving penalties under the Clean Water Act, but not involving an Aqualung. See Tull.

Note: Sometimes, I just write to amuse myself. Any useful legal analysis is a byproduct.

Coming to Grips with Use

Customs and Border Protection and the U.S. Department of Justice have strenuously defended the position that locking pliers should be classified as wrenches. They found support for this in a 1983 decision of the Court of International Trade in which the Court found that items (possibly incorrectly) described as "Vise Grips" were used to twist, or "wrench" items and, therefore, were classified as wrenches under the old Tariff Schedules of the United States.

In Irwin Industrial Tool Co. v. United States, the Court of International Trade held that under the Harmonized System, pliers are versatile two-handled tools with jaws that pivot to squeeze an object. A wrench, on the other hand, is a tools with a head, jaw or socket that snugly fits around the head of a fastener and that provides leverage to turn the fastener. Applying these definitions, locking pliers like the ones below are not wrenches even though they can be used (or misused) to "wrench" a stuck bolt or similar item.

The United States appealed. The Federal Circuit has now affirmed.

This seems remarkably straight-forward. Tariff language is interpreted consisted with its common and commercial meaning. These items are commonly and commercially known as locking pliers (although there is some evidence to the contrary). That should resolve the dispute.

But, tariff classification is often not that easy. The question here, complicated by cases such as GRK Canada, is whether we are dealing with purely eo nomine classifications or whether use is relevant to the classification. The government took the position that a wrench is a tool used to twist an object. Locking pliers, according to the government, are designed to allow for continuous pressure while applying torque, as one would with a wrench.

The Court first held that the term "pliers" is eo nomine and not defined by use. The Court looked at dictionary definitions and industry standards to identify pliers as two-handled tools with a pivoting jaw. A similar analysis showed that "wrench" is an eo nomine term defined by physical characteristics that adapt the tool to snugly engage the head of a fastener. Importantly, the Court of Appeals held that "Even though the record suggest that the tools may be designed for a particular use, we determine that the language of the particular headings here does not imply that use or design is a defining characteristic." 

I do not disagree with this at all. In fact, I emphatically agree.

But, I am left confused about when a tariff term will suggest a use and when, therefore, evidence of use consistent with that suggestion is relevant for classification purposes. This is the GRK problem. "Wrench," after all, is also a verb. The way to clear this up is to backtrack from the notion that evidence of use is relevant without specific language in the tariff heading indicating that use is contemplated as part of the meaning. In Irwin, the Federal Circuit notes that the language of these two headings does not contain signals suggesting a specific use. As examples, it noted "articles of a kind normally carried in the pocket . . ." and "preparations therefor." 

I can see "preparations for" something indicating an intended use. If something is prepared for a sauce, it seems that evidence of use in a sauce is relevant to the classification. On the other hand, the fact that something is normally carried in the pocket is a little removed from its actual use as few things are useful simply by virtue of being carried in the pocket. That thing in my pocket is a key, wallet, or phone all of which have distinct uses. It strikes me that the feature of normally being carried in the pocket points to design and physical criteria more than use.

The drafters of the HTS know how to signal a use provision. Here are some examples:

0504.00.00 Guts . . . for use as sausage casing
3401           Organic surface-active products and preparations for use as soap
8483.40.30 Gear boxes . . . imported for use with machines for making [paper products]

This is distinct from terms such as "suitable for use with" or "designed for use with." These phrases indicate, to me at least, that the proper inquiry remains with the physical characteristics of the product. Something is suitable for use with something else if its physical characteristics allow it to be used in that way, regardless of whether it is so used. Of course, there is an outer limit at which it becomes absurd. A crankshaft is suitable for use as an anchor but doing so is not economically rational. "Designed for use" also indicates, to me, that the Court should be looking at the features and characteristics of the item that indicate a design intention. If there is some feature that prevents or significantly interferes with the identified use, then the item is not designed for that use. 

Classification is a legal analysis. It is, at the same time, also performed every day by thousands of non-lawyers who are engaged in making compliance decisions for importers large and small. Even licensed brokers are not always fully aware of the details of the legal analysis of tariff language. Bright line tests are necessary to facilitate trade and to avoid creating traps for the average importer, for whom the statute is allegedly written in the language or ordinary commerce.

Tuesday, March 26, 2019

CIT Upholds Constitutionality of 232 Duties

Here is a quick take on the decision of the Court of International Trade in American Institute for International Steel v. United States. This is the case challenging the constitutionality of Section 232, under which President Trump imposed duties on steel and aluminum products in furtherance of national security. Plaintiff's theory of the case is that the statute is facially unconstitutional because it violates the constitutional requirement for separation of powers.

The starting point for this that Congress, not the President has the power to regulate trade. In Section 232, Congress delegated some of that power to the President so that he may make adjustments to trade to protect the national security. AIIS argued that the powers given to the President are unbounded by an "intelligible principle," meaning he can exercise legislative powers that are reserved to Congress. That would be unconstitutional. If, on the other hand, the President can only act within a defined set of parameters, then the delegation is constitutional.

This case was heard by a three-judge panel of the CIT. While not common, three-judge panels are often convened at the CIT when a constitutional question is raised. Importantly, three-judge district court decision are immediately appealable to the Supreme Court. 28 U.S.C. 1253. As far as I know, the ability to directly appeal from a three-judge district court should be applicable to the Court of International Trade, which has all the powers of a district court and is generally treated as a district court.

The decision in this case was unanimous, although there is an interesting separate opinion that deserves some attention.

The majority opinion details prior cases raising a similar challenge. Most relevant is Federal Energy Admin. v. Algonquin in which the Supreme Court held that Section 232 easily passes the intelligible principle test for constitutional delegation. Basically, that is all you need to know. Once the Supreme Court has declared the statute to be facially constitutional, there is not much a lower court can do. 

The main opinion does add some caveats. Most interesting is the recognition by the Court that imposing duties under the authority of Section 232 for some reason unrelated to national security would constitute an unconstitutional exercise of legislative authority. Nevertheless, the Court lacks a mechanism to review the President's subjective motives making that review a practical impossibility.

Despite that concern, the Court upheld the President's exercise of delegated authority and the 232 duties on steel (and aluminum) remain in place.

Writing separately, CIT Judge Katzmann issued an opinion dubitante. First, I have no doubt that the entire customs and trade bar spent considerable time on the interesting footnote explaining the nature of an opinion dubitante. Personally, I love this kind of legal arcana. An opinion dubitante is one that agrees in the result but expresses grave concerns with that result.

The gist of Judge Katzmann's opinion is that the facts of the President's exercise of Section 232 authority may be so unlike previous uses of the law that Algonquin and the earlier cases may not apply. He points, for example, to the opinion of the Secretary of Defense that U.S. steel and aluminum production is sufficient to meet the national security requirements. He also notes that Algonquin includes the following:

Our holding today is a limited one.  As respondents themselves acknowledge, a license fee as much as a quota has its initial and direct impact on imports, albeit on their price as opposed to their quantity.  As a consequence, our conclusion here, fully supported by the relevant legislative history, that the imposition of a license fee is authorized by  § 232(b) in no way compels the further conclusion that any action the President might take, as long as it has even a remote impact on imports, is also so authorized.
This is an important limitation, although it goes more to the nature of the adjustment imposed than the basis for the adjustment.

Judge Katzmann goes on to say:

[Under Section 232, the] President is not bound in any way by any recommendations made by the Secretary, and he is not required to base his remedy on the report or the information provided to the Secretary through any public hearing or submission of public comments.  There is no rationale provided for how a tariff of 25% was derived in some situations, and 10% in others.  There is no guidance provided on the remedies to be undertaken in relation to the expansive definition of “national security” in the statute – a definition so broad that it not only includes national defense but also encompasses the entire national economy.
My take on this it that Judge Katzmann seems troubled not so much by Section 232 per se but by the President's use of it in this particular case. Perhaps, it seems, the present circumstances show a previously unanticipated expansive reading of 232 through which the President is able to manage the economy beyond adjusting imports for national security purposes, which is a power the Constitution vests in Congress.

Sunday, March 24, 2019

IPad Covers are Not Furniture

The Court of International Trade has determined the classification of plastic Smart Covers for iPads in Apple Inc. v. United States. These are the covers in question (or similar enough for our purposes). They provide a protective and decorative cover for an iPad 2 and, through engineering magic and origami, also serve as stands for the device because Apple has not yet perfected the kickstand.

Along the way, a few interesting issues surfaced, at least in my brain.

Apple sued the U.S. government following unsuccessful protests addressing plastic and leather Smart Covers for iPads. Customs & Border Protection classified the plastic covers in 6307 as other made up articles, which are dutiable at 7%. Customs classified leather Smart Covers in 4205 as other articles of leather, which is duty free from the get go. Apple asserted that the correct classification is as an accessory to a computer in 8473 (free). CBP subsequently issued a ruling classifying the plastic Smart Covers in 3926 as other articles of plastic (5.3%).

Let's start with the procedural issue. In litigation, there needs to be something the plaintiff can ask the court to fix. In customs litigation, that is almost always (but not always always) a refund of duties, taxes, and fees paid. For the leather Smart Covers, that presented a problem. The merchandise was liquidated as duty free. There was no issue with respect to Harbor Maintenance Tax, Merchandise Processing Fee or any other tax, duty, or fee. Despite that, Apples argued that the Court should reclassify the leather Smart Covers to ensure uniformity with the classification of the plastic Smart Covers. Furthermore, if the Smart Covers are misclassified, the Census data is incorrect, causing a public harm and potentially upsetting business planning. Finally, classification of the merchandise in 4205 might lead to additional administrative expenses relating to admissibility.

The Court determined that Apple had not presented a case or controversy for decision. Apple's main contention appears to have been that different classifications for plastic and leather Smart Covers will increase compliance demands and add cost. Apple, however, did not quantify that cost. The dispute was, according to the Court, an abstract proposition in which Apple has not suffered any damages that the Court can remedy. The injuries posited by Apple were broad and non-specific. Thus, the Court did not decide the classification of the leather Smart Covers.

This raises interesting issues for future litigants. Sometimes, a classification triggers other compliance requirements such as additional paperwork. Often, such as with dumping and countervailing duties, the classification is not determinative but is used by Customs to identify merchandise that needs review. For example, if the leather Smart Covers were actually made of endangered reptile skins, Apple would need to secure appropriate documentation showing that it had complied with the U.S. requirements under CITES. Maybe there are Lacey Act or textile labeling requirements. If those costs can be quantified, and the classification really matters to the legal treatment, there might have been something for the Court to order as relief, although it seems like the relief would have to be in the form of an injunction order CBP to act consistent with the outcome. Clearly, this is one of those questions that seems legally important but will only get resolved by a motivated litigant with the right set of facts. That might be Apple. We'll have to see.

It also raises broader questions. If there is no case or controversy without a potential refund, then is the protest process futile? It certainly seems to have been futile for Apple with respect to the leather Smart Covers. Does that mean that Apple could pursue this same issue through a different kind of case? Specifically, in customs matters, where a protest is futile, plaintiffs can often proceed in the Court of International Trade on the basis of the 28 U.S.C. 1581(i), which provides the Court with "residual jurisdiction." The remedy, again, would seem to be an injunction requiring classification. This is theoretical as the plaintiff would still need to show both injury and that there can be a judicial remedy.

Regarding the plastic Smart Cover, Apple wanted the merchandise classified in 8473 as an accessory to a machine of 8471, in this case an iPad, which is classifiable in 8471. The full language is:

Parts and accessories (other than covers, carrying cases and the like) suitable for use solely or principally with machines of headings 8470 to 8472
Looking to dictionary definitions, the Court found that an "accessory" is an item that is related directly to some other item but serves a secondary or subordinate functions to the thing being accessorized. The Smart Cover is clearly that. It is designed specifically for the iPad and provides subordinate functionality including acting as a stand, providing protection, and cleaning the display.

Unfortunately, 8473 specifically excludes "covers, carrying cases, and the like." On this front, the Court again turned to dictionaries. Among the relevant definitions of "cover" are "a protective overlay" and "an overlay or outer layer, especially for protection."
The Explanatory Notes provide the following guidance:

But the heading excludes covers, carrying cases and felt pads; these are classified in their appropriate headings. It also excludes articles of furniture (e.g., cupboards and tables) whether or not specially designed for office use (heading 94.03). However, stands for machines of headings 84.70 to 84.72 not normally usable except with the machines in question, remain in this heading.
The exclusion of covers is consistent with the tariff heading language. The next two sentences, on the other hand, are problematic. First, we learn that articles of furniture are excluded even when specially designed for office use. The third sentence is the complicated one. It indicates that stands for computers of 8471 that are not normally usable with other devices remain classifiable as accessories to the machine. The Smart Cover is a stand. Does that resolve this in Apple's favor?

Not according to the Court, which reads the last sentence as a limitation on the second. In other words, the only stands that remain are stands that are also furniture. I gather that is the meaning taken from the conjunction "However," which joins the ideas. It makes the "stands" exception a limitation on the kind of furniture that is excluded from the heading. These stands, which do not rest on the floor or get affixed to a wall are not furniture and, therefore, are not exempted from the exclusion.

Another way to read the third sentence is a separate thought the meaning of which is that stands dedicated to use with a computer (whether or not they are also furniture) remain classified in 8473. The problem with that reading, as the Court sees it, is that it eliminates the need for the second sentence. The drafters could have just tossed "furniture" into the first sentence's list of exclusions. I guess that is true. There might be a better way to draft that, but I also think the third sentence can "stand" on its own.

Heading 6307 covers other made up articles of textile. This seems an incongruous possibility for what are described as "plastic Smart Covers." However, the products have a microfiber (i.e., "textile") lining that is in contact with the screen when the cover is closed. The lining provides functionality in that it buffs the screen clean of finger prints.

In addition to the plastic outer layer and the textile interior, the Smart Cover is composed of magnets and aluminum hinges. As a result, the Court could not classify it as either plastic or textile on the basis of GRI 1. Instead, the Court moved on to look for the essential character of the item pursuant to GRI 3(b).

The Court noted that the plastic provides the protective outer layer to which the textile is attached. The plastic also provides the base to which the hinges and magnets are attached. Finally, the plastic is the rigid part that allows the cover [l'm calling it a cover now] to act as a stand, but not as a stand that is furniture. Accordingly, the plastic provides the essential character, making 3926.99.90 the correct classification for plastic Apple Smart Covers, but not for leather ones.

I thought I would jump off from this to a discussion of the Microsoft Type Cover, which is a similar cover that incorporates a keyboard but does not function as a stand. But, this post is long enough and I am typing in a very uncomfortable plane seat. So, here is my quick and dirty analysis. There appear to be no rulings from CBP on this item. It seems clear that it is a composite good consisting  of a textile cover, internal bits and a fully functional keyboard. Without the benefit of facts or research, it strikes me that users buy these for the keyboard functionality. The keyboard is also the "active" part and is composed of numerous parts. The keyboard, therefore, should impart the essential character. That lands us at the duty free conclusion of 8471.60.20.

Tuesday, March 19, 2019

Ford Transit Argument

Last week, the Federal Circuit hear arguments in the classification case involving tariff engineering and the classification of the Ford Transit.

You can read my prior takes on this fascinating case here and here.

An audio recording of the argument is available here. Listen to the argument and let me know what you think.

The Court focused on the interesting question of whether the use of the vehicle after importation is relevant to its classification. This was not a general question of whether Ford was improperly skirting the chicken tax by disguising a cargo van as a passenger wagon. Rather, the question goes to the heart of interpreting tariff language.

The Court’s inquiry boils down to this: Is Heading 8703 (motor vehicles principally designed for the transport of persons) an eo nomine provision that describes merchandises solely on the basis of physical characteristics? Or, is it an eo nomine classification that also suggests a specific use? If either is true, the use of these vehicles to transport goods rather than people after importation would be evidence against Ford’s proposed classification. Moreover, is it possible that the “principally designed” language is sufficient to transform the Heading into a classification based on principal use provision?

Prior tariff engineering cases have not focused on classifications that are dependent on the use of the merchandise. In the argument, a Circuit Judge suggested that fact may be sufficient to distinguish the prior cases and make end use or design intention more relevant. The Judge's question suggests that if the rear seats Ford used in the 6 and 7 model Transits were never intended for passenger use (even if legal for that use), they might be a design feature that allows owners to use the Transit as cargo vehicles.

Another issue that caught the attention of the Court seems to be whether the timing of the conversion matters. The panel asked whether it would matter if the conversion to a cargo vehicle were done by dealers after delivery? The government appeared to concede that if some of the vehicles are sold as entered as passenger vans, then the classification as such would be correct. This strikes me as a problem for the government. If it would be OK for the dealer to make the modifications after delivery, what legal basis is there to say the importer can't do the same thing after entry?

There is over a century of law affirming the principle that importers may configure merchandise in a manner to avoid duties provided the merchandise is properly described to Customs for review without artifice or disguise. There is also a well-established body of law that post-importation use does not matter for the classification of merchandise under an eo nomine tariff description. That said, the Federal Circuit's questions indicate that it make be looking at this case through the new(ish) lens it created in GRK Canada in which the Court allowed itself (and the Court of International Trade and Customs) to consider evidence of use consistent with an eo nomine designation that inherently suggests a use.

So now we wait and see whether GRK impacts the outcome of this case. My guess is that both sides are already considering how they will make this case interesting enough to get the attention of the Supreme Court. No matter who loses, that is likely to be the next stop.

Saturday, March 16, 2019

Composite Machines and Classification

One of the tricky things about classifying modern devices is that they often have more than one function. Is your smartphone a phone, a computer, a music player, or a device used primarily for whatever this is? That is the issue in McMesson Canada Corp. v. United States, in which the Court of International Trade classified a device that dispenses, packages, and labels medications in a way that helps to ensure accurate dispensing and patient compliance with medical instructions. Here is a promotional video of a related, if not the same, machine.

From McKesson

The machine is composed of a pill canister at the top. The lower part contains reels of plastic packing material and a printer. Based on input from the touch screen, pills are weighed on an internal scale and dispensed into plastic pouches, which are printed with patient information and a bar code. All of this is driven by Pacmed software running on a Windows computer.

This is how I envision Pacmed service technicians. And, this is why.

Customs & Border Protection classified the machines in 8479.89 as "other" machines having individual functions not specified elsewhere (2.5%). McKesson protested seeking classification in Heading 8422.40 as packing or wrapping machinery (Free).

Everything in this case starts from the premise that the Pacmed is a composite machine. That seems pretty unassailable. Note 3 to Section XVI tells us what to do with composite machines:

Unless the context otherwise requires, composite machines consisting of two or more machines fitted together to form a whole and other machines designed for the purpose of performing two or more complementary or alternative functions are to be classified as if consisting only of that component or as being that machine which performs the principal function.
Keep in mind that this Note only comes into play if there is no heading that describes all of the functions of the particular item. For example, a clock radio combines two distinct machines performing connected functions. If there were no heading that addressed both functions, the classification would be based on the principal function (which is a good discussion topic I often use in law school classes). Fortunately, 8527 covers radio receivers whether or not combined with a clock, making Note 3 inapplicable.

The question here is whether the principal function of this device is within the scope of 8422. The relevant language from that heading includes:

machinery for filling, closing, sealing or labeling bottles, cans, boxes, bags or other containers; machinery for capsuling bottles, jars, tubes and similar containers; other packing or wrapping machinery (including heat-shrink wrapping machinery)

The Pacmed machine does not fill an existing bottle, can, box or other container. So that cannot be its primary function. That leaves "other packing or wrapping machinery including heat-shrink wrapping." Note that the Explanatory Notes clarify that these machines may also label. Is that what we have here?

Customs does not think so. The Government's argument is that all of the various functions of the machine are equally as important to the primary function, which is the distribution of medication. According to the government, in the absence of a single primary function, the classification in last numerical order is applicable under GRI 3(c). Or, in the alternative, if the principal function is distribution, there is no heading covering that and the basket provision of 8477 is correct.

The Court did not buy the Government's argument. The Court noted that many (I might guess "most") packing machines have some capacity to store and measure quantities of the product to be packaged. They also have some capacity to physically deliver the material to the package and often label the package. The Court pointed out that Customs has reached a similar conclusion in prior rulings on, for example, machinery to fill pouches with milk (NY 879640 (Nov. 17, 1992)) and machines to fill pots and trays with planting soil (NY 866831 (Sep. 19, 1991)).

There was also some debate about whether the machine dispenses medication. Apparently, the Government's position that the machine is for the distribution of medicine is bolstered by the notion that it is a dispenser and dispensing is not a function listed in 8422. I guess because that sounds more "medical" than saying the pouches drop out the front and are picked up by a human being who then takes the medicine to the patient. In reality, this machine strikes me as an ATM for drugs. By the way, ATM's are classified as "automatic bank note dispensers" of 8472. Dispensing is what packing machines do. If they did not, the machines would create lots of convenient packages that no one could ever access or distribute.

Finally, the fact that the machine incorporates and works in conjunction with automatic data processing equipment does not change the classification. Chapter 84, Note 5(E) covers that. When machines work in conjunction with computers but are designed to perform a specific function other than data processing, the correct classification is based on that function. This is why ATM machines and modern gas pumps are not classified as computers; they have perform functions other than data processing.

Based on all of this, the Court reached an interesting conclusion. Without regard to Note 3, the Pacmed is a packing machine. All of the addition operations support packing. In other words, those operations are there to facilitate packing rather than as additional separate functions.

But, just to be complete, the Court provided the Note 3 analysis and found the principal function to be packing.

That's a win for McKesson and a reminder that I need to use more Star Trek references here. Future spoiler alert, the Red Angel is Wesley Crusher. There, I have taken a controversial stance. Now I will go see Captain Marvel to the ire of internet trolls everywhere.