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.

Wednesday, September 17, 2014

Customs Trolls and the False Claims Act

Want to see the tip of the spear of a new aspect of the practice of customs law? Take a look at United States of America ex rel. Customs Fraud Investigations, LLC v. Victaulic Company. This is a decision of the United States District Court for the Eastern District of Pennsylvania.

What we have here is a False Claims Act case brought by a private company calling itself Customs Fraud Investigations, LLC. CFI scoured through ships manifest data to find products it believed might be lacking correct country of origin markings. It then compared the import data to pictures of the products it found on eBay to confirm its suspicions. Armed with that data and the possibility of a financial windfall, CFI filed a case against Victaulic in the federal district under the False Claims Act. I hereby dub this the birth of the customs troll. Compare that to the patent troll and you will see why.

In the end, CFI lost (at least so far), but how we got to that point is interesting.

The False Claims Act is designed to permit the government to levy civil penalties against companies and individuals who make false claims for governmental benefits. Common examples of this kind of fraud are health care providers who submit claims to Medicare for reimbursement related to services that never happened or were unwarranted. As you can imagine, there are a lot of other programs that pay money to claimants that can be abused. For each of those, there are False Claims Act defendants.

An interesting thing about the FCA is that it deputizes regular folks to also bring the case to by filing a claim in a federal district court. The claim is filed under seal to protect the identity of the "whistleblower." The Justice Department then reviews the case and decides whether it want to take over and pursue the defendant. If the Justice Deparatment decides not to intervene, then the original whistleblower, who is known as the "relator," can proceed on his or her own, technically on behalf of the United States.

Why would someone do this? There is money to be had. The relator gets a portion of the recovery, and a larger portion if the Department of Justice does not intervene. This incentivises medical clerk, government contract administrators, and others who might see shenanigans to report them. It also gives an incentive to lawyers to find and pursue these cases, which can include a recovery of attorneys fees, which is always nice.

To the best of my knowledge, Customs Fraud Investigations LLC is the first entity set up for the purpose of identifying cases of customs fraud for a profit. That is similar to a company that looks to acquire patents not for purposes of exploiting the technology but rather to sue potential infringers. Those folks are patent trolls or in the parlance of the trade "Non-Practicing Entities." So CFI is a 'Non-Importing Entity."

What CFI LLC did was an exercise in mining big data to find potential customs violations. To the best of my knowledge, CFI was not a business partner, employee, or competitor of Victaulic.

The substance of the case is interesting. CFI has a couple problems. The first has to do with the public disclosure exemption. Under this rule, a plaintiff may not successfully bring a FCA case if the information on which it is based has already been publicly disclosed in the news media or certain other outlets. In this case, much of the underlying data came from Zepol. According to the Court, Zepol is a news media outlet. But, that was not enough to bar the action. Although CFI LLC relied in part on Zepol data, it needed the eBay information to complete its analysis. EBay, according to the Court, is not a media outlet covered by the act. As a result, the public disclosure bar did not apply.

The second issue was whether CFI LLC had provided enough facts in its complaint to plausibly establish that Victaulic had imported improperly marked goods. On this point, the Court found that CFI LLC had shown a lot of imports and had shown that there are unmarked Victaulic in the secondary marketplace. CFI LLC had, however, not been able to make the link between the unmarked products for sale on eBay and the imports. CFI LLC needed to also show that the unmarked products were the imports rather than being products of the U.S. not subject to a marking requirement.

Because CFI LLC failed to plead facts making that connection, the Court dismissed the case.

One additional point is worth noting. The underlying alleged false claim here was not just that the goods were unmarked at the time of entry. It was that as a result, Victaulic was liable for marking duties of 10% of the value of the merchandise. By failing to mark the goods, Victaulic avoided marking duties and, therefore, made what is called a reverse false claim. That is, rather than receiving a payment as a result of the claim, Victaulic allegedly avoided having to make a payment.

There are problems with this theory. First of all, Customs need not impose marking duties in all cases of mismarked goods. It can, for example, seek redelivery and then pursue liquidated damages if the goods are not returned to Customs. There is also a question of whether the failure to mark is a "claim" if the entry documentation properly identifies the country of origin. Because of the pleading issues, the Court did not have to address these interesting questions.

Mark my words, the False Claims plaintiff's bar is going to start talking to compliance people looking for wrongdoing. In-house counsel and compliance managers should review how they respond to internal reports of potential violations and complaints. You need to address them quickly, fully, and with the utmost respect to the party raising the issue. The last thing you want is a disgruntled employee with CFI LLC on his or her speed dial.

Also, first thing tomorrow, make sure that your company has requested that U.S. Customs and Border Protection not publish you import data. You can do that under 19 CFR 103.31(d). Do it. It can prevent your data from being mined by a customs troll.

Tuesday, September 16, 2014

Breaking News: CAFC Finds Corporate President Liable in Trek Leather

In a closely watched decision, the Court of Appeals for the Federal Circuit has reversed itself and upheld the decision of the Court of International Trade in U.S. v. Trek Leather. The core issue here is whether an individual can be held liable for customs-related negligence when that individual is not the importer of record. According to 19 U.S.C § 1592 no "person" may "enter or introduce" merchandise into the United States by means of a material false statement or omission that is the result of fraud, gross negligence, or negligence. Here, the government claimed that the importer and its president were both separately negligent. The president argued that since he did not enter the merchandise, he could not be negligent.

Initially, the Federal Circuit agreed. It reasoned that negligence is an absence of reasonable care and that the law only puts the reasonable care obligation on the importer of record. The United States asked the full Court of Appeals to reconsider that decision, which it agreed to do.

In the decision issued today, the Court reversed course and affirmed the Court of International Trade. The Court found that the phrase "enter or introduce" expands the scope of "persons" to whom the law is applicable beyond the importer of record. Because the defendant was actively involved in directing the importation of this merchandise, and did so on the basis of false statements, he "introduced" the merchandise and can be held liable for negligence.

Compliance professionals, small business owners, and entrepreneurs who import should think about that.

I'll post a more detailed analysis as soon as possible.

Thursday, September 11, 2014

Ruling of the Week 8: Those Annoying Rubber Bracelet Things

In every profession, there are senior statesmen and women who have been around a long time and share their wisdom with the young whippersnappers. When I was a young whippersnapper customs lawyer, there were several at Barnes, Richardson & Colburn where I worked and continue to work. In particular, Bob Burke and Jim O'Kelly were and remain in that category. Outside of my firm, one of the guys who held that position was Bill Outman of Baker & McKenzie. Bill was recently the recipient of a CBP ruling that merits a brief discussion. Bill, this one is for you.

HQ H236523 (July, 2, 2014), is a request to Customs and Border Protection to reconsider the classification of various styles of silicone bands. These are similar to, but not in all cases the same as, those charity and awareness bracelets people wear. Some were sized to be worn as rings, rather than around the wrist. Importantly, some were not intended to be worn at all but were intended to be used as bindings for printed material or for sets of shirts and caps. Most were printed with some text or design.

The reason this ruling is interesting is that it follows directly from the GRK decision we recently discussed here. In that case, the U.S. Court of Appeals for the Federal Circuit reiterated an old notion that the use of a product can be used as evidence of proper classification in an eo nomine tariff provision. That notion is inconsistent with the conventional wisdom that the use of imported goods is only relevant when the tariff makes it relevant, which would be in a so-called "use provision." An eo nomine provision, on the other hand, describes the product by name, which is usually independent of use. Salt, for example, is salt whether used in cooking or on a frozen driveway. [Note: don't send me email about the tariff classification of salt. That is an example of English, not legal advice on how to classify salt.]

The silicone bands in Bill's ruling clearly have two different uses. Some are imitation jewelry and some are for binding things together like regular office supply rubber bands, only nicer.

The classification issue is that if the silicone bands are classifiable as imitation jewelry (Heading 7117), they are precluded from classification as articles of rubber in Chapter 39 by Chapter Note 2. The problem is that while the products are very similar in construction, the printed or embossed designs or lack thereof indicate that some of them are decidedly not jewelry. How to make a consistent classification analysis?

Like the court in GRK, Customs and Border Protection looked back to an old case call United States v. Quon Quon, 46 CCPA 70 (1959), in which the old Court of Customs and Patent Appeals said that use is :of paramount importance" in determining the identify of a manufactured article. [Editor's Note: Is Quon Quon a character in the Star Wars universe?]

When you look at it that way, it becomes obvious which of these silicone bands are jewelry and which are not. Or does it? Frankly, it is a little hard to tell without pictures. There seems to have been a lot of weight given to how the importer described the goods and their intended uses. Customs and Border Protection, which had samples of the goods, made the call based on design, lettering, and stated intended purpose.

I'm still not 100% comfortable with this approach under the Harmonized System, as opposed to the old TSUS, which was in place when Quon Quon was decided. I don't like it because it adds an element of subjectivity to tariff classification and makes superficial differences like printing determinative of classification.

What was the alternative? That's the hard question. Some of these are clearly jewelry, in that they are intended to be worn as decoration. That takes me back to my GRK analysis. Maybe, the right thing to do is to treat "Jewelry" not as an eo nomine description at all but as a description that necessarily includes as an intended use personal adornment. That's what I said about wood screw, which implies use in wood. If jewelry is, under my unorthodox and possibly crazy analysis, actually a use provision, then this whole issue goes away. Under that approach, the HTSUS mandates a consideration of use and the classifications for these silicone bands would vary accordingly.

Monday, September 08, 2014

Ruling of the Week 7: Rum by Any Other Name

Alcohol Victoria is a 99 proof (49.5% alcohol by volume) neutral spirit beverage made of distilled sugarcane. This seems like something I would like to know more about. It does not seem to be rum, which is made from sugarcane byproducts such as molasses and cane juice. My understanding is that rum production was historically a means of using up material from the production of sugar. Alcohol Victoria must be different in that it is made directly from cane.

Does that make it similar to Cachaca? This Brazilian product is the chief ingredient of the caipirinha, one of my favorite summer cocktails. It is distilled from sugarcane juice. Alcohol Victoria might also be similar to CSR, a potent spirit made in St. Kitts.

The caipirinha.

The question in HQ H197914 (Jun. 25, 2014) is how to classify Alcohol Victoria. There was no disagreement on the correct heading, which is 2208. That heading covers "spirits, liqueurs and other spirituous beverages." It might be classified in 2208.40 as "Rum and other spirits obtained by distilling fermented sugar-cane products." That seems easy enough.

But, Alcohol Victoria is "neutral," which means that it has no secondary characteristics associated with the sugar cane from which it was produced.  It turns out that the Explanatory Notes define vodka as something "obtained by distilling fermented mash of agricultural origin (e.g., cereal, potatoes) . . . ." The Alcohol and Tobacco Tax and Trade Bureau defines vodka as a neutral spirit without distinctive character, aroma, taste, or color. Thus, the Alcohol Victoria could also be classified in 2208.60.

Along the way to resolving this conundrum, Customs noted that this product is not a liqueur or cordial because it does not have any added flavoring.

That leaves us with two subheadings that apply to the merchandise. So, what to do? Keep in mind that because we know the correct heading and are focused only on finding the correct subheading, General Rule of Interpretation 6 applies. That means we apply the Section and Chapter Notes to the subheadings as applicable and then apply the GRI in order to the subheadings. That takes us to GRI 3(a), which tells us that when two or more subheadings apply to the same product, the subheading with the more specific description of the product will prevail. The subheading that includes characteristics or requirements that are more difficult to satisfy is the more specific subheading.

In this case, the subheading for rum identifies the specific raw material from which the product is to be made, i.e., fermented sugarcane products. Vodka, it turns out, can be made from any agricultural material. Based on that, Alcohol Victoria is rum of 2208.40 after all.

We can now return to our end of summer cocktails secure in that knowledge.

[Note: Updated as per the comment below.]

Tuesday, September 02, 2014

Ruling of the Week 6: Instruments of International Traffic

I'm enjoying the Ruling of the Week feature. One important benefit of this task is that I get to blog about some aspect of customs law that might not otherwise make it into the Court of International Trade or a Federal Register Notice. This week (really last week, but who's complaining?), the topic is Instruments of International Traffic, which is the subject of  HQ H255763 (Aug. 15, 2014). You should look at the Ruling because Customs and Border Protection included pictures, which are usually helpful.

The law allows importers to designate reusable containers, racks, skids, and similar fixtures as Instruments of International Traffic. The relevant regulation is 19 C.F.R. § 10.41a. The value of making this designation is that IIT's are not subject to duty and exempt from other aspects of the normal entry process. That can be a valuable cost-savings mechanism for frequent and repeated imports. Think about a car company in Detroit that gets the same parts from Windsor, Ontario multiple times a day using the same pallets, racks, and bins. The importer can avoid the cost and compliance effort of entering the pallets, racks, and bins if they are recognized as instruments of international transport and treated accordingly.

The way CBP looks at this, an IIT is something that is "a substantial container or holder." The article must also be capable of repeated use and used in significant numbers in international traffic. This rolls up into HTSUS item 9803.50.00, which provides for duty-free entry for products "of a class specified by the Secretary of the Treasury as instruments of international traffic." IIT's may be imported empty or containing the articles they are intended to transport.

In this ruling, CBP found that the containers were substantial (with a five to seven year service life)and reusable (about 1,500 times per year). Given those facts, the subject containers were found to be IIT's.

The ruling does not go into the details, which are always important. First of all, to do this, the importer has to have a corresponding bond to ensure that customs duties will be paid if the IIT's turn out to be dutiable for some reason. One reason that happens is that the container gets diverted from international traffic to domestic ("point-to-point") use or stays in the U.S. for a year or more. When that happens, the former IIT is subject to entry and duty if applicable. That means a compliant importer will have a process for tracking IIT's and reporting those that go astray. Also, there are specific rules regarding the serializing of containers and exceptions for traffic between the U.S. and Canada and Mexico. So, check the regs.

Thursday, August 28, 2014

Reservations about the Reserve Calendar

Customs cases present a few unique challenges to potential litigants in the U.S. Court of International Trade. One of those that every unfavorable liquidation of a customs entry stands alone as a possible claim to be brought to the Court for review. Often, multiple entries are grouped together into a single protest and the denied protest forms the basis of the case. The plaintiff initiates the case by filing a summons, rather than a complaint as is done in most courts. The summons puts the case on the Court's Reserve Calendar (see Rule 83) where it can sit for 18 months or more if the Court grants an extension. Sometimes, the cases sit on the Reserve Calendar for substantially more than 18 months.

Why is this the process? Because the typical customs case involves a small potential refund but is often one in a series of many similar potential cases that are worth litigating in the aggregate. To facility the resolution of issues covering many entries and many protests, the Court allows cases to sit on the Reserve Calendar and pile up. The plaintiff then has several options for how to proceed.

As far as I know, the most common approach is for the plaintiff to select one representative case as a "test case" under Rule 84. Once a test case is designated, cases with the same questions of law and fact can be suspended pending the outcome of the test case. When the test case is finally resolved, the parties can usually agree to stipulated judgments in the suspended cases. In some circumstances, it may turn out that the judgment in the test case is not applicable to the some of the suspended cases. When that happens, those cases need to proceed to judgment. Sometime, not often, one side or the other just does not like the result in the test case and will proceed to litigate again in the hope of getting a different result. In customs law, because each denied protest is a separate case, we can have serial litigation of the same issue until pressing the case again is frivolous and a waste of time. At that point, the lawyers involved has problems of their own.

An alternative is to consolidate all of the cases into one action and have all of the cases finally resolved together. That happens when the collection of cases is relatively small and manageable.

Another option is to keep the cases on the Reserve Calendar while a single case is litigated but not designated a test case. When the litigation is done, the parties can negotiate a settlement or stipulated judgment. That, however, requires plaintiffs to manage the docket very closely and ensure that the time allowed for the case to remain on the Reserve Calendar does not expire. After 18 months, the case is in danger of being dismissed. Rule 83 says, in part:

(c) Dismissal for Lack of Prosecution. A case not removed from the Reserve Calendar within the 18-month period will be dismissed for lack of prosecution and the clerk will enter an order of dismissal without further direction from the court unless a motion is pending. If a pending motion is denied and less than 14 days remain in which the case may remain on the Reserve Calendar, the case will remain on the Reserve Calendar for 14 days from the date of entry of the order denying the motion. 

The Rule also says:

(d) Extension of Time. The court may grant an extension of time for the case to remain on the Reserve Calendar for good cause. A motion for an extension of time must be made at least 30 days prior to the expiration of the 18-month period. 

 All of which is background to Rockwell Automation, Inc. v. United States. I will not go into the gory (and they are gory) details of what happened. In the end, the requested extension of time to remain on the reserve calendar was granted. However, the case puts the bar on notice that it is not acceptable to repeatedly miss the deadline for filing motions for an extension of time and to seek relief out of time, even with the consent of the defendant. Again, I leave it to you to read the gory details.

But, I have a question about how Rule 83 is supposed to work. Honestly, I had always treated Rule 83(d) as requiring that a motion for an extension of time be made at least 30 days prior to the expiration of the 18-month period and also 30 days prior to the expiration of any subsequent extension granted by the Court. That's safe and conservative.

But, a good friend of mine who is also in the thick of CIT litigation pointed out that the rule does not actually say that. The 30-day requirement specifically references "the expiration of the 18-month period." That is the first period on the Reserve Calendar and not the subsequent extensions. It would appear that motions for subsequent extensions are permitted without any advance notice. The Court effectively rejected this argument when it quoted Rule 83(d) as follows, including the bracketed edits and italics: "[a] motion for an extension of time [to remain on the Reserve Calendar] must be made at least 30 days prior to the expiration of the 18-month period [or later, if the 18-month period has been extended pursuant to USCIT Rule 83(d)]."

A similar issue crops up with respect to the role of the Clerk's Office. Rule 83(c) says that a case not removed from the Reserve Calendar within the 18-month period will be dismissed by the Clerk of the Court without the involvement of a judge (assuming no motion is pending). But, what happens after that 18-month period when a case is still on the Reserve Calendar due to an extension of time having been granted? That is not "within the 18-month period" and, therefore, it appears that the Clerk should not dismiss the case on her own.

If the 30-day notice and automatic dismissal rules only apply to the first 18-month period and not subsequent extensions, then Rockwell may be a lot of angst over nothing because the requests for extensions were timely if filed before the last day of the extended Reserve Calendar period. If they were timely, the Court should liberally grant them when the plaintiff shows "good cause," which the Court refers to as a lenient standard. If the motions were untimely, then the plaintiff has the much higher burden of having to show excusable neglect. No one likes to argue that they were negligent even if the neglect was excusable.

Unfortunately, given that the motion was granted, there is nothing from which to appeal. That means the questions raised above will remain theoretical until someone misses a date and has their case dismissed after the initial 180-day period on the Reserve Calendar. Not that anyone asked, but it looks to me like the test case-suspension process is looking better. Of course, that process has its own docket management issues. But those issues do not arise until after the test case is decided.

As always, tell me if I am wrong about this.