Sunday, November 22, 2015

Deemed Liquidation and Notice

The second recent case from the Court of International Trade involves the deemed liquidation of an entry. It is United States v. Great American Insurance Company of New York. This is a collection case in which the United States is seeking $50,000 from a surety for unpaid antidumping duties, plus pre-judgment and post-judgment interest.

For purposes of my own time management, I am just going to give you the take-aways. If you want more detail, read the decision.

The first question is whether Customs and Border Protection can reliquidate a deemed liquidation within the 90-day period set in 19 USC 1501. A deemed liquidation occurs when Customs fails to liquidate an entry within the time allotted by statute. In the ordinary case, this is one year from the date of entry. See § 1504(a). Under 1504(d), an entry that has been suspended is deemed liquidated if not liquidated within six months of the lifting of the suspension. In this case, the defendant argues that Customs cannot reliquidate an entry deemed liquidated under § 1504(d). The Court of International Trade disagreed, noting that since 2004, § 1501 has specifically referenced § 1504. That reference covers deemed liquidations under both § 1504(a) and § 1504(d).

The second question was when the 90-day clock starts to run for the voluntary reliquidation. The defendant asserted the entirely reasonable position that it starts to run on the date of the deemed liquidation. That would make the reliquidation in this case untimely, and therefore void. The Court found the statute specifies that the relevant date is the date of notice, not the date of liquidation. In this case, the notice was provided some 10 months after the liquidation date. Using the notice as the start date, the reliquidation was timely. Further, the 10-month delay was not unreasonable.

If you were in law school, taking notes on this decision, that is what you would write down.

Saturday, November 21, 2015

Suspension, Assessment, and Liquidation

Interesting court decisions are piling up.

The first is American Power Pull Corp. v. United States. This case involves two entries of hand trucks from China, which are subject to an antidumping duty order. At the time of entry, the importer deposited 26.49% of the value of the merchandise as a dumping duty deposit and Customs issued a notice of suspension of liquidation. A periodic review covering the entries followed and Customs continued the suspension of liquidation. After the review, and no doubt much to the disappointment of the plaintiff, the assessment rate was set at 383.60%. The producer filed suit to challenge that determination, no doubt making the plaintiff in this case happy. The Court granted an injunction against liquidation of the entry. Eventually, the rate was reduced to 145.90% and Commerce issued liquidation instructions to Customs and Border Protection. When CBP liquidated the entries with the additional assessment, American Power Pull protested, asserting that the entries had liquidated by operation of law at the rates asserted at the time of entry. Customs denied the protests and American Power Pull filed suit in the Court of International Trade.

The issue here is whether liquidation of the entries was properly suspended. If not, then the entries liquidated by operation of law at the 26.49% deposit rate. If they were properly suspended, then the dumping assessment can be properly applied.

The plaintiff argued that there is no statutory authority for the suspension of liquidation. This is premised on there having been no affirmative determination at the time of the suspension. Absent an affirmative determination, Commerce lacks authority to suspend the liquidation of entries. The United States moved to dismiss.

The Court of International Trade disagreed. The statutory authority for suspension begins with the affirmative preliminary determination by Commerce. 19 USC 1673b(d)(2). This suspension can stay in place for six months. After the final determination, Commerce publishes an order, which instructs Customs to assess the antidumping duties and to collect deposits of antidumping duties on current and future entries. The liquidation of the entries requires that Commerce tell Customs the assessment rate, which is determined in a periodic review under 19 USC 1675 (if review is requested). According to the Court of International Trade, this retrospective system of making deposits against future assessment rates has been interpreted as implying that the suspension of liquidation continues until the review (if requested) if finally resolved.The publication of the final results is the notice Customs needs to lift the suspension, at which time, Customs has six months to liquidate the entries. If litigation challenging the results follows, the Court of International Trade can issue an injunction to preserve the status quo and prevent liquidations prior to final determination of the correct assessment rates.

All of that means that the question to be decided was whether the entries were liquidated within six months of the lifting of a lawful suspension. This is where the dates become important.

  • The dumping order was issued on November 17, 2004 with a deposit rate of 26.49%. Entries from that point on were automatically suspended.
  • The entries were made on May 24 (my birthday for future reference) and June 14, 2006.
  • The second periodic review commenced, continuing the suspension.
  • On July 28, 2008, Commerce published the final results of the review, raising the assessment rate to 383.60%.
  • The producer commenced a challenge in the CIT and the court enjoined liquidations (effectively continuing the suspension).
  • The litigation ended and the injunction dissolved June 15, 2012 when Commerce published notice of the amended final results setting the assessment rate at 145.90%.
  • The entries were liquidated on August 10, 2012 (about two months later).

Because liquidation was within the permitted six-month period, the Court of International Trade found the liquidations to be proper. Thus, the Court dismissed plaintiff's claims.

This case is a sterling example of the lunacy that is the retrospective system used in the U.S., and in no other country (as far as I know). Look what happened to the importer here and, more important, what might have happened. At the time of entry, the importer should have known that its total landed cost should include antidumping duties of 26.49%. Its purchase price and subsequent resale price should have been calibrated to reflect that cost. Keep in mind that the rule against reimbursement by the producer/exporter means this cost cannot be passed back to the producer.

Granted, the importer should have known that there is a risk, even a substantial risk, that the assessment rate will be higher than the deposit rate. But how high? When will it be assessed? There is almost no way to know that. A sophisticated producer might be able to run simulations of the dumping calculations and predict its assessment rates at various pricing levels, but that is not the usual circumstance and does not help for past entries.

Instead, importers in the U.S. are faced with an ill defined risk that can wipe out profits on these products and cost substantially more. In this case, these entries were in 2006. If we assume they were sold at a nice profit of 15%, that means that by virtue of a collection in 2015 (following this decision), the importer will be in the whole to the tune of 130% of the purchase price (more or less, I know I am simplifying the math). There was no way to predict this at the time of entry. This makes it nearly impossible for the importer to manage the risk of importing products subject to a dumping or countervailing duty case.

Imagine what might have happened had the rate stayed at 383%. In some cases, assessments like that are financially untenable and the importer is forced out of business. The absurdity of this is that it was entirely out of the importer's control. The only option seems to be to stop purchasing from the subject country from the date of the preliminary affirmative determination. It can be worse if there is a finding of "critical circumstances," which pushes the effective date back 90 days earlier.

There are more rational approached. In other countries (again, so I am told), a change in rate is applied prospectively rather than to past entries. This makes the administration of process much simpler. It also means that liability can be evaluated with a far greater degree of certainty.

Another, possibly more theoretical problem, is that a dumping order can have such negative consequences for the consuming industries, workers, and consumers that it is against the larger economic public interest. What would happen, for example, if a dumping order on sheet steel made it all but impossible for auto makers in the U.S. to have an adequate supply of steel? If the American industry could not ramp up to supply the auto makers, would there be layoffs? Would factories be idled and production moved out of the U.S? It is, at least theoretically, possible. The way to resolve that is to include a public policy analysis in dumping and countervailing duty cases. Something similar happens in Section 337 cases involving intellectual property violations. If enforcement of the order is not in the public interest, the Commission can refuse to grant relief to the petitioner. If the Commission does grant relief, the President has the authority to order it be withheld. Something like that makes sense in the trade context as well.

Don't walk away from this mini rant thinking I have no sympathy for domestic producers. I do. Dumping is an unfair trade practice for a reason. It hurts domestic industries and workers. I support their efforts to seek a fair free market. I also understand that the reason dumping works is usually that the producer is able to use high prices in the home market or a third market to subsidize lower prices in the U.S. That is unfair to the U.S. industry and to the consumers in the higher priced markets. Without completely frictionless exports to those countries, the U.S. industry cannot respond by selling into the higher priced markets, possibly undercutting the high local prices. I get all that.

But, the law should also recognize the rights and interests of the importers, who are almost always bystanders to the trade cases. A prospective system that takes into consideration the larger public interest would go a long way toward balancing the impact and value of trade cases.

Friday, November 13, 2015

Goodbye Sitemeter

Since the earliest days of this blog, I have used Sitemeter to count the number of visits. The count is currently 233,472. Sitemeter has gone haywire and I rarely delve deeply into my visitor data anyway. So, I am pulling the link from the bottom of the page. If anyone has a suggestion for a good and free way to get analytics, let me know.

Thursday, November 12, 2015

One Protest Per Customer

I'm going to do this one quickly because I am busy and the case is straightforward, but still an important lesson.

In Design International Group v. United States, the Court of International Trade reaffirmed the rule that an importer may only file one protest contesting the liquidation of an entry. In the case, the importer made two entries of pencils. When Customs liquidated the entries, it allegedly miscalculated the quantity and, as a result, incorrectly assessed duty. The broker for the importer filed protests for each entry. That right there is one protest per entry. Customs denied both entries.

Subsequently, counsel for the importer filed a third protest challenging the denial of both prior protests. That is a second protest challenging the liquidation of each of the entries. When Customs and Border Protection denied that third protest, the importer filed suit in the Court of International Trade, using the third denied protest as the basis for jurisdiction.

What do you think? Discuss.

The issue here arises because of 19 USC 1514(c)(1)(d), which says:

Only one protest may be filed for each entry of merchandise, except that where the entry covers merchandise of different categories, a separate protest may be filed for each category. In addition, separate protests filed by different authorized persons with respect to any one category of merchandise . . . .

Under this law, a second protest is invalid unless an exception applies. An invalid protest does not give the Court of International Trade anything to review.

Here, the plaintiff argued that the exception applies. According to counsel, the first protest on each entry was filed by the customhouse broker, who is an authorized party. The third protest (which is really the second on each of the two prior entries) was filed by the lawyer, a different authorized party. Thus, the third protest was valid and its denial provides the Court with jurisdiction.

The Court rejected this argument. In doing so, it referenced a number of cases invoking the "one protest rule." All these cases repeat that only the first protest received is valid. The Court also noted that allowing a protest of the denial of a protest could lead to the absurd result of a never-ending series of protests of the denial of protests. Consequently, the Court dismissed the action for lack of subject matter jurisdiction.

There Court is, I think, correct. But, I think I can help explain the result by articulating what I perceive to be the unstated premise in the opinion. That premise is that a protest filed by a broker for the importer and a second protest filed by a lawyer for the importer ARE BOTH FOR THE IMPORTER. See that? Brokers and lawyers are agents for the importers, not separate "authorized persons."

The exception in the statute is there to permit, for example, the surety, who has a financial interest in the liquidation, to protest the liquidation. Other authorized parties include the person paying the duties and any person seeking delivery.

Separate and apart from the importer, the statute permits "any authorized agent of" the importer to file a protest. Does that mean that each agent is a separate authorized person? Maybe. The statute can be read that way. But, that reading permits an importer to file a series of protests through a series of different authorized agents. That also seems like an absurd result. The more likely reading, based on zero research and five minutes of thought, is that each agent stands in the shoes of the importer for this purpose and the importer is limited to a single protest either on its own or through agents.

Do you agree with that analysis?

Wednesday, October 28, 2015

Ruling of the Week 2015.29: Hasbro II, Royalties and Proceeds

Continuing my exploration of classic Customs and Border Protection rulings, we come to the confounding "General Notice" called Hasbro II. It was published at 27 Cust. B. & Dec. No. 6 (1993). Customs does not have Customs Bulletins online from that far back, so I put a copy here for you to read.

The issue arises from a ruling request concerning an apparent royalty payment. Hasbro, as the importer/buyer of merchandise agreed to pay the seller 7% of the resale invoice price of the imported goods. Presumably, in addition to the original purchase price, the contract requires Hasbro to pay an addition amount to the seller equal to 7% of whatever price Hasbro gets for the goods on resale in the U.S.

It seems fairly obvious that the 7% second payment, which is included in the purchase contract, is part of the total price paid or payable for the imported goods. That would tend to make it dutiable.

But, the law requires specificity. If the payment is not "for the merchandise when sold for exportation to the United States," it can only be added to the dutiable value if the statute specifically allows for it. On possibility is that the payment is the "proceeds of any subsequent resale . . . that accrue, directly or indirectly, to the seller." That would be dutiable under 19 U.S.C. 1401a(b)(1)(E). The other possibility is that the payment is a dutiable royalty or license fee related to the imported merchandise that the buyer is required to pay, directly or indirectly, as a condition of the sale of the imported merchandise for exportation to the United States." That is dutiable under 19 U.S.C. 1401a(b)(1)(D).

Initially, Customs found the distinction between these two provisions to be unclear. Given the ambiguity, Customs looked at the legislative history to try to divine what Congress intended. Regarding proceeds of subsequent resale, the Statement of Administrative Action (which is how the White House explains a trade bill to Congress) stated only that to be dutiable the proceeds must related directly to the imported merchandise and that Customs should make the decision on a case-by-case basis.

Regarding royalties, the SAA was much more detailed. First, royalties related to patents covering processes to manufacture the imported goods will generally be dutiable. This makes sense given that the value of the royalty is access to the technology or know-how necessary to make the very product that is being imported.

On the other hand, royalties paid to third parties (i.e., not the seller) for the use in the United States of copyrights and trademarks related to the imported merchandise will generally be treated as the buyer's selling expenses (e.g., domestic marketing) and not dutiable. This also makes sense in that the product name or logo may be valuable from a branding perspective, but they do not necessarily reflect the intrinsic value of the merchandise sold by the seller. But, that is not always the case. If the payment is to the seller and the buyer is required to make the payment as a condition of the sale for exportation to the United States, then the fee is closely tied to the acquisition of the physical merchandise and may be dutiable. This also requires a case-by-case analysis.

After reviewing the legislative history, Customs turned to an analysis of court decision under the prior law. In summary, those decisions found that three questions help determine whether a payment is a dutiable royalty. Those questions are:

1. Was the importer merchandise manufactured under patent? If the answer is yes, then the payment is more closely tied to the production of the merchandise and is, therefore, more likely dutiable.

2. Was the payment involved in the production or sale of the imported merchandise? This question goes more deeply into the purpose of the payment. If the importer can show that the payment is for something other than the manufacture, production, or purchase of the imported goods, the payment may not be dutiable. Customs gave two examples in which the Court found that the putative royalty was for the use of the product in the United States, not for the patent rights related to the production or importation of the product. A positive answer to this question, therefore, leans toward dutiablity while a negative answer leans against.

3. Could the importer buy the product without paying the fee? If the fee is not optional and goes to the seller, it is more likely to be a dutiable part of the value of the merchandise. According to Customs, this question "goes to the heart" of whether the payment is a condition of sale. That means a negative answer to this question indicates dutiability.

Customs found that these questions provide a useful analytical approach under the current law.

Turning bask to the case at hand, it was unclear whether the product was made under patent, but the agreement gave the buyer the right to manufacture it. That is close to a "yes" on question one. Customs found that the 7% payment obligation accrued upon the sale of the product, regardless of when the buyer actually collected the sale price from its customer. Under these facts, Customs held the payment to be a dutiable royalty.

But wait, there's more!

Customs also said that the same payment can be analyzed separately to determine whether it is also the proceeds of subsequent resale. Here, the obligation to pay was based on the resale price. According to Customs, part of the income the buyer derived from the subsequent resale accrued to the seller. It is, therefore, dutiable as proceeds.

This ruling has had significant practical consequences. Not the least of which is that Customs and Border Protection takes royalties and license fees very seriously when conducting audits. A typical early step is an audit is for Customs to request a Chart of Accounts. From there, Customs will identify accounts labeled as "Royalties," "License Fees," "Commissions" and similar items. It will then ask to see activity in those accounts and expect either proof that the amounts were declared or an explanation as to why not.

This means that importers need to be aware of the compliance impact of royalties, license fees, proceeds, and similar mechanisms. Purchasing people need to communicate with compliance staff to ensure that dutiable royalties are declared and non-dutiable payments are properly vetted and documented. If the company has in-house lawyers, those who work in intellectual property fields should be fully briefed on this and should alert the compliance team to new agreements.

Finally, when in doubt, get a ruling.

Thursday, October 22, 2015

When Does A Treatment Start?

Do you know what I hate? Change. Once I get comfortable with something, I am not a big fan of changing it up until something demonstrably better comes along. I drive my cars until I can't and I have gone to the same place to get my hair cut for 15 years. I have an 8 year old computer at home that is only now getting annoying enough to merit a trip to the recycling center.

I also do not like it when Customs and Border Protection makes a change without an obvious and good reason. I get that if the Harmonized System Committee changes the law, Customs will implement the change. Also, I am completely in favor of the movement to ACE, which will provide demonstrable benefits to the trade. But other times, it seems to just be a matter of Customs rethinking the issue or never having been happy with the result the first time around. See, first sale valuation

This comes up in the context of American Fiber & Finishing, Inc. v. United States, a recent decision of the Court of International Trade. The case involves a change in practice with respect to the classification of cotton gauze fabric. AFF had been entering and Customs had been liquidating the guaze in 5803.00.10, which is a duty-free provision. In January of 2010, CBP issued a Notice of Action changing the classification to 5208.21.40, which carries a 10.2% rate of duty. AFF protested the rate increase.

In its protest, AFF asserted that Customs violated 19 USC § 1625(c) when it changed the classification of this merchandise without public notice and comment. Under that law, Customs must follow notice and comment procedures before it issues an interpretive ruling or decision that has the effect of modifying a treatment previously accorded by Customs to substantially identical transactions.

Unpacking that, if AFF can show that there was a "treatment" in place regarding the classification of these products, then Customs can't simply rate advance the entries. Before changing the treatment, Customs would need to publish a notice and give the public opportunity to comment on the change.

The first issue is whether the rate advance announced in a CF-29 Notice of Action is an interpretive ruling or decision. That question has been addressed in previous cases. If a decision is the functional equivalent of a ruling or internal advice, if it "unilaterally changes the rules," then it is an interpretive ruling or decision requiring notice and comment under 1625(c). In this case, there is some remaining question about whether the Notice of Action was the equivalent of a ruling, so the Court set that issue aside for now.

The second issue was whether AFF could show a treatment. To do that, AFF needs to prove that there was an actual determination by a Customs officer regarding substantially identical transactions and that over a two-year period immediately preceding the claim of treatment, Customs consistently applied that determination. At this point in the case, the parties have asked the Court to rule on when the relevant two-year period begins to run. As you can probably imagine, this would be important if there was evidence of inconsistent treatment at some point in the past. By selecting the proper two-year period, AFF might be able to establish a treatment.

Customs says the relevant period is the date of the protest, which is when AFF first asserted that a treatment existed. AFF says the protest is simply a document in which the treatment is referenced. According to AFF, the claim for treatment was made at the time of entry consistent with the prior treatment. That would push the starting point for the two-year period back as much as 494 days (314 for liquidation and 180 for the protest).

The Court found that a "claim" can be either the assertion of a right or the means by which the assertion occurs. Think about a prospector in the old west. The moment he is jumping up and down shouting that he struck it rich, he is making a claim. On the other hand, he has to go down to the county office to file his claim. Both are claims. Looking at the larger context of the relevant regulations, the Court held that the relevant claim is the assertion of the right, not the administrative mechanism. The "defining operative facts that gave rise to [AFF's] claims" are the entries. In other words, AFF jumped up and down asserting its right to duty-free treatment at the time of entry, not in the protest.

This case is not over. The issue of whether there is an interpretive ruling remains to be determined. In addition, the parties now must gather and present evidence of treatment for the two-year period immediately prior to the earliest entry. So, relax; there is more to come.

Wednesday, October 21, 2015

Ruling of the Week 2015.28: Billiards Procurement

Governments buy all kinds of unexpected stuff. Billiards tables, for example.

In HQ H268491 (Oct. 15, 2015), U.S. Customs and Border Protection issued a final determination on the country of origin of certain billiards tables for purposes of government procurement under the Trade Agreements Act of 1979. These rulings are not your run of the mill origin determination for purposes of labeling or duty determinations. Rather, an interested party may ask CBP for either an advisory or final decision on whether an article is a product of a designated country or instrumentality for purposes of securing a waiver of the "Buy American" rules for goods offered for sale to the U.S. Government.

This ruling involves four billiards tables assembled in the United States from components from various countries. The components are shipped to the customer and the tables are assembled on-site. It is sufficient to understand that there are a lot of steps and a lot of parts. Also, the assembly requires the careful leveling of the slate surfaces to ensure a flat table. For one of the tables, as an example, the U.S.-origin components and assembly operation is 43% of the total cost. Other components come from Brazil, Vietnam, Indonesia, and Taiwan.

Under the applicable origin rules, the billiard tables will be products of the United States if the non-U.S. materials have been substantially transformed into a new and different article of commerce with a new name, character, or use distinct from that of the imported article. 19 USC § 2518(4)(B). In making these decisions, Customs applies its analysis consistent with the Federal Acquisition Regulations that require the U.S. Government to purchase U.S.-made products or products of designated countries. The FAR uses the same substantial transformation test.

With that framework, Customs looked at the assembly operations involved. It compared the process to prior decisions concerning furniture assembly. Customs found that the assembly of between 71 and 91 individual components required two skilled and trained workers was "complex and meaningful." The process transforms the components into a new and distinct article of commerce, i.e., a billiards table. As a result, the tables are products of the U.S. and the U.S. government is cleared to purchase these billiards tables.

Here are some trick shots from a GoPro ad, for your work-day amusement.

That's all well and good. But, I have a far less important question. Aren't these actually pool tables? The ruling discusses the gutter system used for the ball return. That means there are pockets (or "holes") in the table. As a youngster, I spent some time in a bowling alley/pool hall owned by my grandfather, Sam Friedman. I was lead to believe that billiards is the largely-English game of knocking cue balls and strikers around a table for no apparent reason. Pool, on the other hand, is the game of The Hustler in which a white cue is used to strike colored balls into pockets, usually for money. None of this should be confused with snooker, whatever the heck that is. Pool is sometimes called "pocket billiards," which is good for purposes of disambiguation. Am I right that there is a difference or am I failing to understand that American English is full of imprecise usage?