Wednesday, August 24, 2016

Breaking News: Otter Products is Still Correct

You may know that one of the more closely watched appeals has been Otter Products, LLC v. United States in which the Court of International Trade previously overturned the tariff classification Customs and Border Protection assigned to covers for mobile devices. My original post on the case is here.

Customs classified the covers in HTSUS Heading 4202, which includes, among a large number of other things, suitcases, camera case, backpacks, and similar contains. The Court of International Trade held that mobile device covers are not "similar" to the exemplars listed in the heading and, therefore, could not be classified there. The principle reason supporting that conclusion was that none of the exemplars allow the user complete and functional access to the contents while in the container. To put it in colorful terms: I can't wear my socks when they are in a closed suitcase but I can use my device when it is in the OtterBox Commuter and Defender cases at issue. The alternative is to classify these products as "other articles of plastic" in Heading 3926. The applicable rates of duty are 20% for tariff item 4202.99.00 versus 5.3% for tariff item 3926.99.90.

The Federal Circuit has now affirmed. The decision is, in my opinion, close to perfect.

Looking to the legal text, the Court noted Chapter 39, Note 2(m), which states that Chapter 39 does not cover trunks, suitcases, handbags, and other containers of Heading 4202. That means that if the device covers are properly classified in 4202, they cannot be classified in 3926.

To fall within 4202, the covers must be "similar containers," meaning similar to trunks, suitcases, and other listed containers. To be fair, some of the listed containers are kinda, sorta similar to device cases including spectacle cases, tobacco pouches, and beverage bags. When trying to decide whether something is similar to the listed containers, the Court considers "the unifying characteristics" of the listed products and determined whether the imported item shares those characteristics and does not possess a "more specific primary purpose that is inconsistent with the listed exemplars." A number of prior decisions have identified the unifying characteristics of Heading 4202 as being the ability and purpose of "organizing, storing, protecting, and carrying various items."

Right out of the blocks [Metaphor alert: I must have recently watch too many hours of Olympic track.], the Federal Circuit determined that mobile device cases that provide continual, useful access to the enclosed device are not "containers" at all, let alone "similar containers." The point here is that the common definition of "container" includes examples of items such as boxes, crates, cans, and jars, all of which usually require some minimal effort on the part of the user to get to the enclosed item. The Court of International Trade noted that the device covers at issue, on the contrary, are designed to let the user get to and manipulate the device without opening the cover or removing the device. It is, however, easy enough to envision an open box, for example, permitting access and use of the enclosed item. Consequently, while important, neither the Federal Circuit nor the CIT ended its analysis with this point.

Next, the Court noted that the Commuter and Defender covers are not "similar" to the listed exemplars. Here, the real question was whether the test for "similar containers" required the container to have all four of the unifying characteristics or whether any one is enough. This was an open question and, in my view, a false dichotomy. The answer need not be one or the other in all cases. As the Federal Circuit eventually found, the proper analysis takes all the factors into consideration but applies them in the context of both the item to be classified and the text of Heading 4202. According to the decision:

We take this opportunity to clarify that there is no requirement that the subject merchandise meet all four characteristics to qualify as a “similar container” under Heading 4202.  Courts should consider the four characteristics collectively and then determine whether, in light of those considerations, the classification would lead to an inconsistency.  If, for example, an item met only one of the four characteristics, it almost certainly would not qualify as a “similar container” under Heading 4202.  Allowing a single factor to satisfy the inquiry would, in almost all conceivable scenarios, render the scope of “similar containers” so broad that it would lead to absurd results and make consistent application of the standard all but impossible.

Turning to those individual characteristics, the Federal Circuit first looked at whether the covers organize the devices. They do not. A phone on the table or in my pocket is just as organized as a phone in a case on a table or in my pocket.

Looking to "storage," the Court held that because the devices remain fully accessible and useable, the covers are not "storage" containers.

It was undisputed that the covers protect the devices.

Finally, the covers do not facilitate carrying the devices. The Court observed that, if anything, the device carries the case. Furthermore, when it comes to carrying the device, there is little difference between carrying the naked device and one in a cover. Thus, the covers do not "carry" the device.

The examination of the four factors did not end the analysis. The government argued that the CIT imposed an additional fifth factor that the item must be removed from use while in the container. The Federal Circuit disagreed. This was not a new factor. Rather, it was a recognition that the digital device covers have a characteristic and purpose that is inconsistent with the examples in 4202. That characteristic is that the enclosed device remains fully useable. That was not an error on the part of the CIT.

This is a really good decision, and not just for Otter Products. There are many importers with pending protests or summonses waiting for this decision. They should all be very happy. Moreover, this is an important decision because the Federal Circuit did not get tripped up by trying to create a simple black and white test composed of all four factors or of any one factor. Instead, the Court took a thoughtful approach to both interpreting Heading 4202 and applying that interpretation to the specific products at issue. It is possible to imagine a variety of mobile device covers that should properly stay in Heading 4202. They might have some sort of handle or a cover that needs to flip open to use the phone. By focusing on the particular items at issue, and recognizing that it is was not necessary to make one hard and fast rule for all possibilities, the Court avoided future problems and added clarity to the law.

Taking all of that into consideration, the Federal Circuit found the device covers to be classifiable in 3926 and affirmed the Court of International Trade.

A win is a win. A win that makes good law is even better. Congratulations to all involved. [Go ahead, click the link.]

Saturday, August 13, 2016

Zombie Protests and GSP

There have been a few cases of note that I have not yet reviewed. Call it Olympic Distraction Syndrome or Summer is Rapidly Ending Depression. Either way, I've read the cases so you don't have to.

First up, Zojirushi America Corp. v. United States, from the U.S. Court of International Trade. This case will go down in legal history as the genesis of Zombie Protests. You heard it here first.

Zojirushi is an importer of vacuum bottles and jars, home appliances, and housewares. It made several entries that Customs and Border Protection liquidated as entered. Zojirushi then protested the liquidation and asserted a claim for duty-free treatment under the Generalized System of Preferences. Customs, following its internal policy, "rejected" the protest as asserting a non-protestable claim.

This case is important and complicated enough to merit bold-face headings, a rarity in this blog.

Jurisdiction: 1581(a) or 1581(i)?

Usually, Customs will either approve or deny a protest. When it denies a protest, the protestant can bring an action to the Court of International Trade under 28 USC 1581(a). Absent a denied protest, the Court of International Trade will not be able to hear the case pursuant to 1581(a).

The alternative is to bring the case pursuant to 1581(i), which is the so-called residual jurisdiction of the CIT. It is applicable to cases involving the collection, administration, and enforcement of customs duties that are not properly the subject of a denied protest.  Because Customs rejected the protest rather than denying it, Zojurushi filed its case under (i). The problem for Zojirushi is that (a) and (i) are mutually exclusive and if it could have filed a case under 1581(a), then it cannot proceed under 1581(i).

The Court framed the issue as whether the GSP claim was properly protestable. If so, then jurisdiction is proper under 1581(a). If not, then (i) may be the proper avenue for the plaintiff. This is an important question because it goes to the heart of whether an importer can protest a no-change liquidation. After all, CBP liquidated the entry without GSP benefits because that is what the importer requested. If CBP did what the importer asked, why allow the importer to challenge Customs' decision? Is it fair to say that CBP made no decisions that can be protested?

Let's look at the law. Protestable decisions are defined in 19 USC 1514, which permits a challenge to "any clerical error, mistake of fact, or other inadvertence . . . adverse to the importer, in any entry, liquidation, or reliquidation, and, decisions of [Customs and Border Protection] . . . as to . . . the liquidation . . . of an entry . . . pursuant to . . . section 1500 of this title." According to the CIT, the protest in this case involved an inadvertence that is adverse to the importer. That would be the failure to assert the GSP claim. Furthermore, the inadvertence related to the entry and was reflected in the liquidation. On its face, the statute seems to make this a protestable decision.

The Department of Justice was not without arguments. Relying on Customs' regulation 19 CFR 10.172, Justice argued that a claim for GSP is only protestable if made at the time of entry. The Court disagreed. The regulation states, in part, that "If duty-free treatment is claimed at the time of entry" the claim is to be noted noted by appending the letter A to the HTSUS number. The "if" clearly implies that there are circumstances where the claim is not made at the time of entry. The regulation makes this explicit when it later says, "If duty-free treatment is claimed subsequent to the time of entry . . . ", other documentary requirements apply. This language was added in 1977 precisely to permit post-entry claims. Similar language is in a 1994 Treasury Decision.

Is there a Decision?

Getting to what I see as the meat of the debate, Justice argued that because there was no claim at the time of entry, Customs made no decision regarding GSP when it liquidated the entry. Without a decision to challenge, there can be no valid protest. To support this proposition, Customs relied on a ruling, HQ H193959 (Jul. 30, 2012). The ruling, while not a formal regulation, is entitled to judicial deference proportional to its "power to persuade."

The CBP ruling was based on two prior decision of the Court of Appeals for the Federal Circuit. In Xerox and Corrpro, the Federal Circuit said that under the applicable statutes and regulations, an importer cannot first assert a NAFTA claim in a protest. The question before the CIT is whether that principle applies to GSP claims. According to the CIT, the Federal Circuit did not go that far. In fact, the Federal Circuit explicitly said it was not suggesting that an as-entered liquidation can never give rise to a protest. The decision was limited to preferential claims under NAFTA. The ruling, therefore, was not persuasive.

Form this, the CIT concluded that the post-entry GSP claim can be first asserted in a protest. In other words, there is a protestable decision.

But, is there a Denied Protest?

Customs did not affirmatively deny the protest; it rejected the protest as invalid. Since 1581(a) requires a denied protest as the basis for jurisdiction, there is an issue of whether CBP's action constitutes a denial.

It is easy enough to conclude that what CBP did was not an allowance of the protest. Was it a denial?

This is where things turn ugly for the importer.

Let's assume it was a denial. In that case, the summons to the Court of International Trade would be due 180 days from the date of denial. In this case, the summons was filed beyond that date, but within the 2-year period allowed under 1581(i). If 1581(a) is the proper basis for jurisdiction the case is time barred.

But, CBP did not deny the protest. If it had, Customs would have followed the required procedures including providing a reason for the denial and notifying Zojirushi of its right to seek judicial review. Everything CBP did appears to have been calculated to communicate that no denial had occurred because the protests was simply rejected as not properly filed. Consequently, the rejection cannot be interpreted as a denial.

Where does that leave Zojirushi? Not without recourse. It turns out that a rejected protest is not exactly dead. But it is not quite alive either. It has not been denied but is not exactly pending either. I am certain that as far as CBP is concerned, the issue is decided and over. What we have here is The Walking Dead of Protests. But, unlike the walkers on TV, this one can be cured.

The law provides that whenever "a protest has not been allowed or denied in whole or in part," the protestant can force a decision by seeking accelerated disposition under 19 USC 1515(b). Under the much maligned decision in Hitachi, the protestant can do this any time, even after the 2-year period in which CBP was supposed to act.  Here, Customs has neither allowed nor denied the protest, that makes it open to accelerated disposition. If the protestant takes that route, it will likely have a denied protest after 30 days, and a ticket back to Court.

Because Zojirushi can get adequate relief under 1581(a), it cannot proceed under 1581(i). That means the case is dismissed but very much alive if Zojirushi demands accelerated disposition.

I am not a fan of the result in Hitachi, though I think it is legally correct. As a matter of policy, I think CBP should required to act on a protest within the 2-year period. If it can't do that, I think the importer deserves finality and the protest should be deemed granted. At a minimum, it should be deemed denied and open to judicial review. But, I am not Congress and that is not the law. The nice thing about this decision, is that it makes lemonade out of what I think of legislative lemons by finding a means for the protestant to get to Court when CBP. That is a good result.

Monday, August 08, 2016

Ruling of the Week 2016.18: A 1967 Ferrari in the HTSUS

We have been down this road before. When is a car so classic, so old, and so valuable that it ceases to be a car for purposes of tariff classification and is treated as a collector's piece of historical interest?

This time, in HQ H271385 (May 9, 2016), the question involves a 1967 Ferrari 275 GTS/4 NART Spyder. I think this is the model in question:

This particular vehicle is the second to last of 10 such vehicles ever produced. One sold at auction in 2013 for over $27 million. The commercial invoice used at the time of importation showed this vehicle having a value of $25 million.

From a classification perspective, there is no question that this is a car of Heading 8703. The question is whether it is also a collectors' piece of historical interest of Heading 9705. If so, Note 4 to Chapter 97 precludes classifying the vehicle in Heading 8703.

Clearly, this item is of great interest to collectors. That leaves open the question of whether that interest is "historical." Looking to dictionary definitions, Customs determined that an item is of historical interest if it relates to history or is concerned with past events. To be of historical interest, the item should be rare, old, and connected to a specific historical event, era, person, or other thing worthy of study. When applied to the "Ushabti of Neferhotep," for example, Customs found an ancient Egyptian statute to be classifiable in Heading 9705.

Turning to prior rulings involving cars, Customs noted that cars are generally mass-produced commercial goods, not collector's pieces of historical significance. Even when made in limited runs and promoted as collectors' items, mass-produced merchandise is not likely to classified in 9705 until it is both old and rare. So much for my collection of Green Lantern Happy Meal toys.

But, this car is both old and rare. Customs has previously classified some nearly-unique vehicles as collectors' items. Customs did so after considering many factors and cautions against concluding that an antique or classic car is necessarily a collectors' item.

But, seriously, look at this car. It is a $25 million, nearly one-of-a-kind, 1967 Ferrari. It was personally designed by Enzo Ferrari and was handmade by him and his design partner. Of course it is an item of historical interest. Someone at Customs and Border Protection, being both rational and apparently a bit of a car buff, reached the same conclusion. This is a collectors' piece of historical interest. It is entitled to duty free entry. By my math, that is a $62,500 win for the importer.

Thursday, August 04, 2016

Ruling of the Week 2016.17: A Burning Question About Drawback

What happens when an importer pays duties, taxes and fees on imported merchandise which is subsequently destroyed in a fire? Unfortunately, nothing good.

Duty drawback is a statutory mechanism by which 99% of the duties, taxes, and fees paid on entry may be refunded if, within three years of importation, the merchandise is exported or destroyed under Customs' supervision. The merchandise must not have been "used" in the U.S. and the claimant must satisfy the regulatory requirements. See generally 19 USC § 1313(j)(i). As an aside, there are other kinds of drawback for special circumstances including petroleum products, substituted goods, and rejected merchandise.

In HQ H219828 (Aug. 27, 2014), a company called Sarmento Import and Export, Inc., sought drawback on bottles of wine lost in a warehouse fire. To give CBP the opportunity to observe destruction, the regulations require that the claimant submit a Form 7553 at least seven working days prior to the intended destruction date. This gives CBP the opportunity to verify what merchandise was destroyed. CBP need not always do so, but it must be given the opportunity. Of course, there was no prior knowledge that the fire would occur and no intended date of destruction.

The fire occurred on June 6, 2009. In an effort to recoup the duties, taxes, and fees paid on the lost inventory, Sarmento filed a CBP Form 7553 on September 2, 2010, more than a year after the wine was destroyed. As further backup, Sarmento submitted inventory receipts, post-fire photographs, a spreadsheet, and prior customs entries. Most of the company's records were destroyed in the fire.

Sarmento asked CBP to verify the destruction after the fire occurred. Unfortunately, CBP was unable to verify what merchandise had been destroyed. Consequently, CBP could not certify on the 7553 that it had verified the destruction of previously entered merchandise. Sarmento, therefore, was not entitled to drawback.

This is a sad story, but there are a few lessons to be learned.

First, drawback is technical and has detailed requirements. Be careful when making claims to satisfy the statutory and regulatory requirements. There is always the possibility that CBP has over stepped its regulatory authority by mandating some detailed information or other procedural requirement not intended by Congress. But, no one should want to be the claimant who has to fight that fight.

Second, detailed inventory records showing customs entries and the corresponding receipts of merchandise and warehouse location should be maintained and backed up separate from the inventory itself. While there is no way for Sarmento to have filed a timely 7553, Notice of Intent to Destroy, having better records might have given CBP more confidence in the claim. That would not have guaranteed a successful claim, but it would have helped.

Third, think about whether your insurance covers duties, taxes, and fees as well as part of the insured value of your inventory.

I'll look for better news to pass on.

Friday, July 22, 2016

The Revenge of GRK Screws

Abraham Lincoln is reported to have asked, "How many legs does a dog have if you call his tail a leg?" He answered his own question. "Four. Saying that a tail is a leg doesn't make it a leg." This is an important legal principle in customs law. How you describe a product at the time of entry does not control the classification. You can't import pickles, call them baseballs and expect Customs to agree. My own corollary to Lincoln's question is this: "What do you call a bowling trophy if you use it as a hammer?" The answer is, a broken bowling trophy.

This all matters because the correct name, (as opposed to a fraudulent name) of an item is often a potent indicator of its tariff classification. Many tariff provisions in the Harmonized Tariff Schedule of the United States are so-called eo nomine provisions. Eo nomine is legal Latin for "Under that name; by that appellation." It comes from the expression "Perinde ac si eo nomine tibi tradita fuisset,"meaning "just as if it had been delivered to you by that name." At least that is what my trusty Black's Law Dictionary says. If the item is properly described by the name provided in the tariff, then it is classified there, unless some part of the legal text excludes it.

Other tariff items depend on the use of the item for classification. For example, HTSUS Heading 8704 covers "motor vehicles for the transport of goods." That means that vehicles will only be classified there if they are used to transport goods, as opposed to people. Note that this is not an eo nomine headings; 8704 does not say "Trucks." Instead, it covers any motor vehicle for the transport of goods whether it is a truck, van, lorry, dumper, or tanker. As long as the item is both a motor vehicle and for the transport of goods, it goes in 8704.

The Harmonized Tariff Schedule of the United States recognizes this distinction between eo nomine and use provisions. According to Additional U.S. Rule of Interpretation 1(a),
In the absence of special language or context which otherwise requires--
(a) a tariff classification controlled by use (other than actual use) is to be determined in accordance with the use in the United States at, or immediately prior to, the date of importation, of goods of that class or kind to which the imported goods belong, and the controlling use is the principal use;
When a tariff classification is controlled by use, we look to evidence of principal use. When it is not, we apply the legal text and notes to classify the item according to its description (modified as necessary by the legal notes to the tariff).

The question is, can we, when classifying something in an eo nomine provision, treat the use of the item as evidence of it being properly described? In other words, if we are classifying knives, should Customs and Border Protection and the Court of International Trade consider evidence that the item is used for cutting? That may seem like a ridiculous question. The non-trade nerds of the world would say, "Of course. If no one ever uses a cucumber to cut, it should not be treated as if it were a knife." But, the trade nerds have long believed the answer to be different. We believed that classifying an item in an eo nomine term like "knife" depended only on the physical characteristics of the thing and not on its use, principal or otherwise. We would ask: Can it be held in the hand? Is there a blade? Is the blade sharp? If so, it is a knife, even if it is is such a poor example of a knife that it might only ever be used as a doorstop.

The Federal Circuit decision in GRK Canada changed that. You can read about the prior litigation in my three previous posts on this issue. Start here. Now, the law is that when the eo nomine description of an item suggests a particular use, the Court of International Trade, and presumably Customs, may consider how an item is used to help define the meaning of a tariff term (a question of statutory interpretation). They may also consider evidence of use when classifying the the article (a question of fact). The CIT had initially refused to take use into consideration when classifying items described as "wood screws." The Federal Circuit reversed and remanded. The CIT has issued its revised decision.

The CIT decision begins with a detailed analysis of what the Federal Circuit seems to require in the post-GRK environment. There are open questions. The one I previously raised, which is raised again, is whether an eo nomine classification that suggests a specific use is, in fact, "controlled by" use such that Additional U.S. Rule of Interpretation 1(a) is applicable. If that is the case, then many nominally eo nomine headings have just been converted to use provisions. Nothing in the Federal Circuit decision answered that question.

Next, the Court spent considerable time defining "wood screws" and "self-tapping screws" based on the tariff language, Explanatory Notes, and normally lexicographical sources. According to the Court, neither term is "controlled by use," meaning that AUSRI 1(a) is not implicated and the question is not the principal use of these screws. Use is, however, "implicated."

The Court concluded that a "wood screw" is a screw intended to be used and able to produce its own thread in wood. A "self-tapping screw" is a screw made of hardened material, intended to be used and able to cut its own thread through non-fibrous material." Neither definition is "controlled by use." Further, nothing in the Explanatory Notes indicates that classification turns on the manner of use. On the contrary, the texts indicate that the classification of screws is controlled by their physical characteristics such as the nature of the point, thread, and whether they are made of hardened materials. There is, however, a suggestion that wood screws will be used in wood. Similarly, "self-tapping" screws will likely be used "for tapping." There is no authority for the proposition that self-tapping screws will only be used in non-fibrous materials.

Having taken all of that into consideration, the Court differentiated between wood screws and self-tapping screws on the basis of whether they are made of hardened steel meeting the minimum torsional strength requirements sufficient to cut their own mating threads in non-fibrous materials. It is apparently undisputed that this describes the screws at issue. It is also undisputed that the screws are intended for fastening non-fibrous materials to other materials. That the screws can be used in wood does not preclude their classification as self-tapping screws. Consequently, the screws remain classified in 7318.14.10 as self-tapping screws, in exactly the same place the plaintiff first asserted in 2009.

So what does this mean for compliance pros? Good question.

At a minimum, it means that when classifying items in an eo nomine classification that suggests a use, we now need to ask whether the description is "controlled by use." If so, you are dealing with a use provision and must apply AUSRI 1(a) to classify the article based on principal use. It is not clear how this determination will be made, though the CIT opinion in this case provides a thorough example to follow.

If the classification is not controlled by use but the eo nomine description suggests a use, compliance professionals should confirm that there is evidence of real and intended use consistent with that name. For example, if you are classifying "locks," be sure that the marketing and design history indicates an intention to use the item to secure an area or object (i.e., as a lock). Next, ask whether there is evidence of contrary use. It will be an unusual case in which the evidence of use is inconsistent with the intended use. But, evidence of use consistent with the intended use supports your classification. All of that might go into a protest.

This is complicated, but it might be more theoretical than practical. The result in this case did not change as a result of the analysis of use. It may be that the original reversal and remand back to the CIT was more about process than about substance. Unfortunately, we won't know the overall impact until more cases make their way through the CIT and Federal Circuit.

Thursday, July 21, 2016

No Refund of Excessive CVD

I have previously pointed out the few cases that I see as ending in an injustice, even where the result is legally correct. These cases always lead me to ask whether anyone in a position of power in the United States Government asked whether the ultimately successful litigation position was actually the right thing to do. Sometimes, it is not. Capella Sales & Services Ltd. v. United States, is one of those cases.

The background you need to understand this case is that there has been a long-running dispute over the proper calculation of the countervailing duty deposit rate imposed on aluminum extrusions from China. In May of 2011, Commerce initially calculated the all-others rate applicable to companies in China that were not assigned their own or a separate rate as 374.15%. Following some litigation, Commerce reduced the deposit rate to 137.65%. Finally, after additional litigation, the deposit rate was reduced to 7.37% in October of 2015.

At the time of entry, importers of aluminum extrusions subject to the order are required to deposit estimated countervailing duties based on the prevailing rate stated in Commerce Department instructions to Customs and Border Protection. Importers who are unsatisfied with the applicable rate are permitted to request administrative review of the order and can have the liquidation of their entries suspended pending a final determination of the proper rate of the CVD.

Capella, the plaintiff in this case, did not do that. While all that trade litigation was happening, Capella made four entries of merchandise. At the time of entry, Capella was not aware that the merchandise it was imported was subject to the CVD order. As a result, it did not deposit any countervailing duties. It also did not participate in the case, despite being notified by Customs that its merchandise was subject to the order. As a result, Customs liquidated the entries with 374.15% CVD, which was the then-current rate in the Commerce Department instructions. After the rate was determined to be 137.65%, Capella filed a case in the Court of International Trade seeking to recover the CVD it deposited in excess of the amount ultimately found to be correct.

Let's recap. Capella made some mistakes. It failed to recognize that it was importing merchandise covered by a countervailing duty order. It also failed to participate in the investigation or take any steps to prevent the liquidation of its entries. But, the United States Government also made some mistakes. Whatever it did wrong, it collected roughly 367% of excess CVD from Capella and other companies.

The question in this case is whether Capella has a means of recovering the excess CVD it paid. Sadly, the answer is no.

The Court of International Trade first had to resolve the question of whether it had jurisdiction to review the case. Here, Capella was not challenging the substance of the deposit calculation. In fact, it was happy with the final calculation. Capella's complaint was that Commerce failed to modify its instructions to Customs to retroactively modify the deposit rate. A challenge to Commerce's instructions falls within the Court's grant of subject matter jurisdiction in 28 USC 1581(i). So, jurisdiction is not the problem.

However, the government also moved to dismiss the case under rule 12(b)(6) on the grounds that Capella failed to plead a cause of action. Capella's argument was that by keeping money to which it was not entitled, the government was acting in a manner that is arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law. This makes sense. The Court already determined that the higher rate was not in accordance with law. What right should the government have to keep that money?

Unfortunately, there are procedural steps that need to be followed to preserve the right to recovery. As mentioned above, Capella did not participate in the investigation. It did not seek review of the deposit rate applicable to its products. Most important, it did not have the liquidation of its entries suspended or judicially enjoined. According to the statute, unless liquidation is suspended or enjoined, the entries will be liquidated in accordance with the Commerce Department instructions. If liquidation is enjoined pending litigation, the entries will liquidate in accordance with the final court decision.

Because Capella did not prevent the liquidation of its entries, Commerce acted properly when it liquidated the entries at the higher rate.

That, is a tough break for Capella, even if the result is not wrong. There is a principle of administrative law that requires parties to exhaust the administrative process to gain access to the Court. This is useful in most cases because it allows the agency to fully and completely review the matter and it creates a complete record for judicial review. There is also the rule that a statute means what it says. Both of these rules of law work against Capella.

But, most importers in this same situation and even those who made deposits at the time of entry did not envision such a dramatic change in the deposit rate. Participating the case is expensive and time consuming. Not enough importers will do it. The lesson of this case may be that importers should always participate in the reviews and always seek to have liquidations suspended as the only way to preserve the right to a refund should someone succeed in securing a lower deposit rate. That hardly seems efficient.

As it is, many importers have paid far too much and the domestic industry has received market protections far in excess of what the correct analysis would have mandated. No, the right, just, and efficient thing is for Commerce to amend its instructions to refund excess deposits paid. Since that will never happen, Congress should pass a bill refunding the excess duties paid by importers. Unfortunately, there may not be anyone in Congress who will stand up for the importers of aluminum extrusions.

Wednesday, July 06, 2016

Ruling of the Week 2016.16: July 4th Edition

I hope my readers in America, which is 90% of the readership, had a happy Independence Day Holiday. As is essentially mandatory, I watched fireworks and contemplated the range of pyrotechnical displays available. If we create a spectrum from the impressive aerial burst you might see at Disneyworld to tossing a lit match in the air, there are many options in between. Among the least entertaining versions of fire-related entertainment products is the so-called "black snake." I remember lighting these things off as a kid. They smoke a lot, create a messy and not particularly impressive ash trail, and leave enough residue on the sidewalk that an underage and unauthorized user is likely to get in trouble.

If you are not familiar with what I am on about, watch this:

As I am likely to do, I also wondered about the tariff classification and admissibility of these things.

In NY N114744 (July 23, 2010), Customs was asked for the classification of TNT CP1051 assorted color snakes of fireworks class 1.4G. The importer was asserting that the correct classification is as a festive article in HTSUS item 9505.90.20. I suggest you watch the video again. It is Exhibit 1 in proving that these are hardly "festive" even if intended as such, but that is my judgment, not a legal determination.

The alternative classification was 3604.10.90, which provides for other fireworks. Without much analysis, CBP jumped to General Rule of Interpretation 3(a) and held that Heading 3604 is the more specific of the two potentially applicable headings. The issue was whether the snakes were more properly treated as pyrotechnic toys or as fireworks in Class 1.4G. Inexplicably, to resolve this question about the 9th- and 10th-digit statistical suffix, Customs referenced the WCO Explanatory Notes. Apparently, a pyrotechnic toy is more likely to be handheld, while these items are lit on the ground and watched from a distance.

On top of that, the Consumer Products Safety Commission defines snakes as Class 1.4G as did the importer's documentation to the Department of Transportation.

As a result, the snakes were classified in 3604.10.9010 as other fireworks of Class 1.4G.