Monday, October 20, 2014

Ruling of the Week 13: Keeping Up With The Jones Act

The Jones Act is an aspect of customs law we don't often cover. It is, however, disproportionately represented in the rulings Customs and Border Protection issues. It is, therefore, worth a brief look.

The part of the Jones Act with which we are concerned regulates coastwise transport and is 46 U.S.C. § 55103. Under the law, to be a coastwise-qualified vessel, the ship must have been made at a U.S. shipyard, documented in the U.S., and owned by a citizen of the U.S. Only coastwise-qualified vessel can carry passengers or cargo from one U.S. port to another. A non-coastwise-qualified vessel may not transport passengers or cargo from one U.S. port to another U.S. port without risking a $300 penalty. Many ships are documented in Panama, the Bahamas, and other countries where the fees and regulations are favorable. This is why cruises departing the U.S. return to the port of departure.

Customs is often asked whether a person who happens to be on a ship is considered a passenger for purposes of the Jones Act. That is what happened in HQ H258132 (Oct. 15, 2014). A passenger is anyone on board who is not connected to the operation of the vessel.

In this case, someone was on board the M/V Seabourn Quest to install a new satellite antenna. Customs has held repeatedly that workmen [sic] and technicians are not passengers if their activities on board the vessel contribute to the operation, navigation, or business of the vessel. Installing a satellite antenna is directly connected to the operation of the vessel and, therefore, the technician is not a passenger.

Done and done.

Now for you ship nerd, the M/V Seabourn Quest was built in Italy and is documented in the Bahamas. It is a cruise ship capable of carrying 450 passengers with a crew of 335. Here is a nice shot from "The Cruise People."


If you are interested in the economics of the Jones Act, check out this episode of NPR's Planet Money.

Monday, October 13, 2014

Ruling of the Week 12: Coffee Canada Style

This really more of a case review than a ruling in that it comes from the Canadian International Trade Tribunal, which is not Canada Border Services Agency and is clearly not U.S. Customs and Border Protection. But, it is an interesting issue and Canadian customs law has a slightly exotic air about it. So, here we go, eh.

There are a growing number of coffee artisans and coffee snobs. I find myself among the latter as I make excellent but highly inefficient cups of coffee in my AeroPress contraption. I also spend too much time and money at Intelligensia Millennium Park where I occasionally purchase an individually prepared, single cup filtered, lovingly agitated, and perfectly heated cup of exotic coffee. It is delivered with a small carafe of the remainder for your refill. On the espresso side, the macchiato is a work of art and perfectly paired with a glass of sparkling water. If it is morning, the buckwheat scone is a delightful addition. But, I digress and leave myself open to well earned ridicule.

The legal question here is whether espresso machines that grind beans and pump hot steam are coffee makers for purposes of tariff classification. That raises the difficult question of whether espresso is coffee, which was apparently a matter of much debate in the CITT.

The case is Philips Electronics v. President of the CBSA. The classification issue is whether an espresso machine should be classified as a coffee maker under HS Heading 8516.71.10 or as an other electro-mechanical domestic appliance of 8509.80.90. The product is the Talea Giro Plus, which is a pretty impressive looking machine.


The unit is clearly a domestic appliance. It also contains a number of electro-mechanical features including a bean grinder, pump, and a gearbox of some kind. Both of the relevant classifications are in Chapter 85. According to the Explanatory Notes to 8509, machines of that heading are to be classified based on their principal function, even if there are two or more complementary functions. The Explanatory Notes to Heading 8516 list electro-thermic machines including coffee makers as included in that Heading.

Philips argued that the espresso machines are both electro-mechanical and electro-thermic. As such, they are prima facie classifiable in both headings. From there, Philips argued that the espresso machines are not just coffee makers and are more specifically described as electro-mechanical appliances because their principal function is making espresso, not coffee. (If you just said, "What's the difference?" you need to spend more time and money on your coffee products.) Philips also made an essential character argument that the grinder and pump are what provide the essential character to this appliance and differentiate it from a simple Mr. Coffee.

CBSA, as you might imagine, had a different view. It argued that heating the water was the principal function, making these machines fall within Heading 8516 as electro-thermic appliances. In the alternative, CBSA argued that the essential character is imparted by the electro-thermic components of the composite machine.

What to do? First, go get yourself a cup of Joe.

The problem here is that the espresso machine is a functional unit or composite good but it is also a finished thing. This is not a situation where some mad genius of marketing as created a chimera of two largely unrelated things like my dream of a microwave corn popper that is also a streaming media player. This is different. It is an espresso machine that includes a pump and grinder as part of its design to fulfill its purpose of making espresso. According to the Explanatory Notes to Section XVI, that is a case where the classification of the composite good or functional unit does not depend on essential character. If it did, the absurd result might be classifying a complete item as one of several competing components even though there is a perfectly good heading for the complete item. That should be avoided.

According to the CITT, espresso is defined as coffee made by forcing steam through ground coffee beans and as strong, concentrated coffee. Even the business documents Philips produced refer to the quality of the coffee the machine can produce. Based on this and oral testimony, the Tribunal found that espresso is a form of coffee. That means that the machines at issue can make coffee. The fact that a typical coffee machine cannot produce espresso, did not save the day for Philips.

Thus, these machines, which make espresso, are classifiable as coffee makers. Let the hipster waling begin.






Saturday, October 04, 2014

Ruling of the Week 11: Grillin' Claws

To the realm of cooking tools I never knew I needed, add "Grilling Claws."


Apparently, this is the proper way to shred barbecued meat. I don't know how I have gotten along this far in life without a set.

And, if I were importing these particular grilling claws, the tariff classification would be 7323.99.9030, Harmonized Tariff Schedule of the United States (HTSUS), which provides for…kitchen…articles…of…steel…: other: other: not coated or plated with precious metal: other: other…kitchen or tableware suitable for food or drink contact. The rate of duty will be 3.4 percent ad valorem.

I know this because the Ruling of the Week is N256578 (Sept. 24, 2014).

Friday, October 03, 2014

Streetsurfing

I am doing this quick. It is, for me, a Holiday today and I am behind on blog posts. Happy New Year to those of you celebrating.

Streetsurfing LLC v. United States is a classification case from the U.S. Court of International Trade that revolves around one of my favorite topics: what is sports equipment as opposed to a toy, apparel, or some other general use product? In this case, the product is a sort of high-tech skateboard-ish gizmo called a casterboard. The traditional solid deck is split, creating two independently moving platforms connected by a joint. By opposing pressure on the front and back platforms, the thing moves the rider along, including uphill.

Here's a video that makes it pretty clear what we are talking about.




With that in mind, here is the bottom line question: Is that a wheeled toy (9503.00.00, duty free) or is it sporting goods for general physical exercise (9506.99.60, 4%)?

The starting point here is noticing that 9503.00.00 is a principal use provision requiring that the article be used for amusement, although some physical exertion may be required. On the other hand, 9506.99.60, is a residual provision. That means that 9503 is the more specific heading and, if the product can be classified in both headings, 9503 will prevail. That means, the first question is whether the product is a toy that can be classified in 9503.

In addition to being for amusement, the Court of International Trade held that wheeled toys have other common characteristics including:
  1. No need for training
  2. Absence of meaningful risk of injury
  3. Lack of acquired skill to fully use the item
  4. Lack of exercise or athletic aspects to the item's use
  5. The presence of some device to assist in the use of the item (e.g., handlebars)
The Streetsurfing boards failed each of these tests. Thus, they are not toys. Thus, there is no conflict between 9503 and 9506.

To be sporting equipment, the product must meet another set of criteria. Most important, there must be a meaningful degree of healthy, challenging, and skillful recreation involve. There need not be organized competitions, rules, or scoring for the article to be sporting equipment.

Here, the Court found that the Streetsurfing boards possess the qualities necessary to be classified as sports equipment. Thus, the Court upheld Customs and Border Protection's classification in 9506.99.60.

Monday, September 29, 2014

Ruling of the (Last) Week 10: Botox Pas a Deux

For those of you who might not know it, botulism is bad for you. According to Wikipedia, it is a rare and potentially fatal condition caused by toxins produced by certain bacteria. A common cause of the rare condition is improper food preservation.

But, there is an upside to botulism, particularly for the Hollywood red carpet set and others worried about the perception that they may be aging. Where that perception is caused by fine lines on the forehead and face, the botulism toxin, when properly administered, might be just what the dermatologist ordered.

As it turns out, that means that some of this stuff is imported for cosmetic use. And therein lies the rub. We have botulism toxin imported for cosmetic use. How should that be classified? We get the answer from the current Customs Bulletin, in which CBP proposes to revoke its prior decision in Ruling N209720. The new ruling will be HQ 227295.

The two products here are FDA approved Botox and Botox Cosmetic. [Note from Larry: Botox is a registered trademarks of Allergan. CBP seemed very intent on making that known, so I will do the same.] The former is approved for various medical uses including the treatment of spasms, which makes sense since this stuff can paralyze you. The latter is injected into facial muscles to improve the look of lines. Botox has been classified in 3002.90.51 as a toxin. Botox Cosmetic has been classified in 3304.99.50 as a beauty preparation or preparation for the care of the skin (other than medicaments).

The two products are identical, but marketed differently. What to do? As in all such cases, start with the legal text.

Note 1 to Chapter 30 excludes from classification in that Chapter preparations of, among other things, Heading 3304. So, if Botox Cosmetic is properly in 3304, it cannot be classified in 3002.

The first question is whether Botox Cosmetic is a "preparation." While the term is not defined in the tariff itself, Customs and the Courts have previously held that a preparation is something that has been "prepared or made up for its appropriate use." Another definition is "something made, equipped, or compounded for a specific purpose." Botox Cosmetic has been created for the purpose of treating skin lines. So it qualifies as a preparation.

That leads to the next question of whether Botox Cosmetic is "for beauty and make-up" or "the care of the skin." This is where things get more interesting. The way Botox Cosmetic works is that when injected into the muscle under the skin, the muscle relaxes. That relaxation is what causes lines in the skin to appear less pronounced. That is wholly different than topical cosmetics and skin treatments. Because Botox Cosmetic does not beautify or treat the skin in a manner similar to make-up and topically applied products, it is not a "beauty or make-up preparation, or a preparation for the care of the skin."

That means that it is not included in Heading 3304 and leaves toxins of Heading 3002 as the correct classification.

One final note. You do not often see CBP make a joke (or even a quip) in a ruling. In this case, an unstated underlying assumption of the analysis is that removing facial lines is a beautifying treatment. In that context, all CBP said was "Without getting into whether wrinkles are beautiful in the eye of the beholder . . . ." That was enough to make me smile when I read it. Of course, I can move all my facial muscles, so that helped too.

Wednesday, September 24, 2014

More on Trek

Sometimes even I hate lawyers.

Part of the job is to watch for developments in the law and advise clients on how those developments might impact them. Because lawyers are careful by nature, we have a tendency to see the worst possible outcome and tell our clients to be prepared for it. If I needed a literary analogy to insert here, I could do no better than Henny Penny. On the other hand, what happens if we fail to point out the worst possible outcome? Well, let's just say we might not be doing that part of our job that requires lawyers to keep their clients informed.

What does this have to do with Trek Leather? Many of my colleagues in the customs bar read the decision as greatly expanding the potential for customs penalty cases to be brought against individual corporate officers and compliance professions. Unfortunately, they are not wrong on that score. But, I think they may be overwrought.

Just to recap, the Federal Circuit decided in Trek Leather that the president and sole shareholder of an importing corporation could be held liable for customs penalties despite not being the importer of record. This is inconsistent with the general legal notion that an individual employee or officer is not liable for corporate debts unless that person engaged in criminal behavior, fraud, or was the legal alter-ego of the company. In fact, entrepreneurs start corporations for exactly this reason. In many cases, their lawyers have advised them to incorporate to avoid having personal liability for corporate actions. Generally, that is good advice.

Trek Leather was not a fraud case. The company admitted to negligence in the improper valuation of wearing apparel. And, at no point did Customs or the Department of Justice argue that it could "pierce the corporate veil" to treat the individual as the alter-ego of the company. Doing so usually requires proof that the company was not managed as a separate entity (e.g., commingling of funds, a lack of corporate formalities, under-capitalization, etc.). So, why is Mr. Shadadpuri, the officer involved, liable for customs penalties?

The reason is Congress and the Supreme Court. Both entities have a tendency to mess up a perfectly good legal argument.

Congress is responsible for the text of the penalty statute, 19 U.S.C. § 1592. That statute creates liability for any person the enters or introduces merchandise into the United States by means of fraud, negligence or gross negligence. Mr. Shadapuri is clearly a person. But, he did not enter the merchandise; Trek Leather did that. According to the full Court of Appeals, that means the only real question is whether Mr. Shadadpuri "introduced" merchandise by means of his own negligence or gross negligence.

This is where the Supreme Court comes into play. Back in 1909, the Supreme Court held that the penalty statute was broad enough to cover actions and people who do not make entry. That's U.S. v. Mescall. Furthermore, in a 1913 in rem case with the awesome name United States v. 25 Packages of Panama Hats, the Supreme Court (via Mr. Justice Lamar) determined that the  word "introduced" was added to the penalty law to ensure that it covers situations where the merchandise did not actually get entered. In the Panama Hats case, for example, the goods arrived at the port and no one ever claimed them or made entry. According to the Court, "Instead of punishing only for entering or attempting to enter on a fraudulent invoice, it punished an attempt by such means 'to introduce any imported merchandise into the commerce of the United States,'"

Based on this precedent, the Federal Circuit had this to say (sorry for the big quote):

Panama Hats confirms that, whatever the full scope of "enter" may be, "introduce" in section 1592(a)(1)(A) means that the statute is broad enough to reach acts beyond the act of filing with customs officials papers that "enter" goods into United States commerce. Panama Hats establishes that "introduce" is a flexible and broad term added to ensure that the statute was not restricted to the "technical" process of "entering" goods. It is broad enough to cover, among other things, actions completed before any formal entry filings made to effectuate release of imported goods. We need not attempt to define the reach of the term. Under the rationale of Panama Hats, the term covers actions that bring goods to the threshold of the process of entry by moving goods into CBP custody in the United States and providing critical documents (such as invoices indicating value) for use in the filing of papers for a contemplated release into United States commerce even if no release ever occurs.

What Mr. Shadadpuri did comes within the commonsense, flexible understanding of the "introduce" language of section 1592(a)(1)(A). He "imported men's suits through one or more of his companies." Gov't Facts at 1. While suits invoiced to one company were in transit, he "caused the shipments of the imported merchandise to be transferred" to Trek by "direct[ing]" the customs broker to make the transfer. Id. at 1-2, 4. Himself and through his aides, he sent manufacturers' invoices to the customs broker for the broker's use in completing the entry filings to secure release of the merchandise from CBP custody into United States commerce. Supra pp. 7-8. By this activity, he did everything short of the final step of preparing the CBP Form 7501s and submitting them and other required papers to make formal entry. He thereby "introduced" the suits into United States commerce.

Applying the statute to Mr. Shadadpuri does not require any piercing of the corporate veil. Rather, we hold that Mr. Shadadpuri's own acts come within the language of subparagraph (A). It is longstanding agency law that an agent who actually commits a tort is generally liable for the tort along with the principal, even though the agent was acting for the principal. Restatement (Second) of Agency § 343 (1958); Restatement (Third) of Agency § 7.01 (2006). That rule applies, in particular, when a corporate officer is acting for the corporation. 3A Fletcher Cyc. Corp. § 1135 (2014). We see no basis for reading section 1592(a)(1)(A) to depart from the core principle, reflected in that background law, that a person who personally commits a wrongful act is not relieved of liability because the person was acting for another. See United States v. Matthews, 533 F. Supp. 2d 1307, 1314 (Ct. Int'l Trade 2007), aff'd, 329 F. App'x 282 (Fed. Cir. 2009); United States v. Appendagez, Inc., 560 F. Supp. 50, 54-55 (Ct. Int'l Trade 1983). That is as far as we go or need to go in this case. We do not hold Mr. Shadadpuri liable because of his prominent officer or owner status in a corporation that committed a subparagraph (A) violation. We hold him liable because he personally committed a violation of subparagraph (A).


So there you have it. Mr. Shadadpuri is liable for his own bad acts. At a minimum, he personally made false representations to Customs as a result of his own negligence. The fact that he was an officer of the importing entity is not the basis for his liability. Rather, it is his own personal bad acts.

That brings me back to customs lawyers and Henny Penny, AKA Chicken Little. We were all very happy for our clients when the initial three-judge Federal Circuit panel held that only the importer of record could be liable for negligence under the customs penalty statute. Many of us, myself included, believed that to be the correct result for the reasons stated by the first panel. In brief, that panel held that negligence in the customs context is an absence of reasonable care. Reasonable care, in turn, is a statutory creation that specifically applies only to importers of record. Thus, it follows quite nicely that only the importer can fail to exercise reasonable care and be liable for customs penalties. Those two statutes are now decoupled from one another.

When the full Court of Appeals agreed to rehear the appeal, the Cassandras of the customs bar were cursed with a vision of the future in which anyone who submits materially false or incomplete information to customs can end up a defendant in a penalty case. And, like Cassandra of ancient Troy, we were right. The decision of the Federal Circuit, as written leads to that possibility. In my view, that's a bad thing.

But, is it the end of the world? Probably not. We need to keep some perspective. This may be a good example of the lawyers' adage that "Bad facts make for bad law." Mr. Shadapuri was, in Customs' view a bad guy. He was warned about assists previously and provided information to the broker that omitted references to assists. He was not a diligent compliance professional who was doing the best he could with the information available to him. Nor was he a diligent corporate office who delegated authority to a trained compliance professional and supervised as needed. He was the individual responsible for the information provided to Customs and he appears to have known or at least should have known it was wrong.

The bottom line from Trek Leather is this: there is no automatic immunity from penalties for everyone but the importer of record. But, there is also no automatic liability for corporate officers and compliance professionals. Rather, what we now know (barring an unlikely reversal by the Supreme Court) is that the statute exposes individuals to liability for their own false or incomplete representations to Customs and Border Protection.

That understanding does not change materially my advice to companies and compliance personnel. That advice remains, "Be sure you know that what you are saying is true and that, if asked, you can prove it." In my view, Trek does not mean that Customs compliance people need to personally and specifically prove up everything they ever say to Customs. Reliable corporate records are those records on which the corporation relies. The import manager at a commercial bakery need not find the tree from which its imported cinnamon was harvested. But, if the bakery says it came from Vietnam, that manager needs to have a reasonable basis on which to make that statement.

Of course, I know that "reasonable basis" is the giant gap in that statement. My "reasonable" may not be reasonable to the Office of Fines, Penalties, and Forfeitures and the Court of International Trade may have a different view on what is reasonable. What I do know is that "reasonable care" requires something less than absolute certainty. I cannot say and will not try to define it here in the absence of specific facts. Unfortunately, i am coming to the conclusion that reasonable care is much like pornography in the mind of Mr. Justice Stewart:

I shall not today attempt further to define the kinds of material I understand to be embraced within that shorthand description; and perhaps I could never succeed in intelligibly doing so. But I know it when I see it, and the motion picture involved in this case is not that.

Before Trek, I advised clients to be reasonably certain about what they say to Customs. After Trek, I give the same advice. The difference is that now I can add that by doing so they protect the importer and themselves.



Monday, September 22, 2014

Ruling of the Week 9: Doc Brown, Red Matter, and Chicken Wire Frames

U.S. Customs and Border Protection takes a lot of heat for not being terribly responsive when it comes to ruling requests. I know, because I have thrown some of that heat. It is very difficult to develop a business plan when the importer does not know the applicable rate of duty. As a general rule, Customs does a good job of getting rulings out. Often times, those are well within the administrative guidelines for timeliness. But, when making that determination is difficult enough to require input from Customs Headquarters, where there is an international dispute about the correct classification, or when another party already has the issue before Customs, things can quickly get bogged down. That causes a lot of frustration. Apparently, Customs is taking bold new steps to satisfy the needs of importers. I know this from ruling N246515.

I found this ruling while looking for rulings with a fairly current date. I saw that N246515 references the importer's letter of September 18, 2014. As I write this post, it is September 22, 2014. A four day turnaround over a weekend is amazing customer service from CBP. But, it turns out to be better than that. I then noticed that CBP issued ruling on October 17, 2013about 11 months before the date of letter.

Several things might be happening here. I know from watching a lot of History Channel's hard science reporting (including Ancient Aliens and UFO Hunters), that normal causation can be interrupted by inter-dimensional quantum entanglement and magnetic vortices that form along geophysical ley lines connecting high-qi sites such as the pyramid complex at Giza, Machu Picchu, and Stonehenge. My guess is that the ley line between Stonehenge and the Nazca lines runs through New York. Specifically, it probably runs through the Office of the National Import Specialist Division. That is a plausible explanation for how Customs answered an inquiry before it was sent.

Another possibility is that Customs seized a Delorian, not knowing it has a flux capacitor and 1.21 gigawatt plutonium generator installed. When a CBP officer got it up to 88 MPH, it jumped into the past, where the officer responded to this letter before jumping back to the future. Perhaps a despondent Romulan with access to red matter is involved.

A less likely possibility is that someone typed the wrong date in the letter and I happened upon it as a result. William of Ockham was a parsimonious kill joy.



On to the substance.

Crafty people can do all sorts of useful, or at least decorative, things with what the rest of us might consider to be junk. In this case, the imported product was chicken wire affixed to a wooden frame. Apparently, this item is used as the base on which crafty types affix decorative items to make wall hangings and whatnot.

CBP was aware of similar items being imported for use as jewelry racks. On that basis alone, CBP decided to classify these items "accordingly," meaning as jewelry racks. I have already spent too many words on this ruling, so I will keep this short and simply say, "Huh?" I'm not sure how supportable that analysis is.

The next problem was that CBP needed to determine whether the racks are of metal (i.e., chicken wire) or wood (i.e., the frames). Here, CBP found that neither component prevailed to provide essential character. As a result, it applied General Rule of Interpretation 3(c) and used the last occurring applicable tariff heading. In this case, that was 8302.50.00 as base metal mountings, fittings, and similar articles . . . brackets and similar fixtures . . . ."

That is a duty-free provision, so I assume everyone was happy regardless of the consequences to time and space.