Wednesday, December 28, 2005

Privilege & Waiver & Complaints: Oh, My!

The Court of International Trade had an interesting question in the latest chapter of the Optrex penalty litigation.

To understand this, you need to know about the first chapter. Optrex is an importer of liquid crystal display devices. It ran into a classification problem and received a notice of penalty from Customs. So far, this is fairly routine. What makes it interesting is that Optrex claimed that there should be no penalty because it had relied on advice of counsel, which is evidence of reasonable care. Hearing that, Customs said, "prove it" and asked to see the advice. Optrex declined citing attorney-client privilege.

Obviously that put Customs in a bind. It could not make any kind of reasonable care decision simply on the basis of Optrex's assertion that it sought the advice of counsel. At the same time, Optrex has a right to assert the privilege. It also has a right to waive the privilege; either on expressly or through its actions. In Court last year, Judge Barzilay held (slip op. 04-79) that by asserting the advice from counsel as a defense, Optrex made the substance of the advise an issue in the litigation. Like it or not, Optrex waived the privilege. So, the advice came into Court and Customs got a look at it.

There was another discovery side show involving the proposed deposition of a CBP lawyer. The question there was whether that lawyer was giving legal advice to Customs, which would be privileged, or whether he was acting as an investigator. In that case, his communications with others in CBP or ICE would not be privileged. See, this privilege stuff is important and can be tricky.

Now that everyone has read the advice of counsel it seems that what Optrex did was get advice and not follow it. Insert voice of Homer here: D'Oh.

Consequently, Customs asked the Court of International Trade for permission to amend its complaint to assert a higher level of culpability: gross negligence and fraud rather than simple negligence. The effect of that would be to at least double the potential penalty and, in the case of fraud, extend the statute of limitations.

Normally, amending a complaint is fairly routine. But, the Court has discretion and should look at a number of factors including the prejudice to the defendant--in this case, Optrex. In her most recent decision (slip op. 05-160), Judge Barzilay denied the motion to amend the complaint.

She based her decision principally on the fact that Customs is required to tell the importer the level of culpability in the notice of penalty. This allows the importer to respond properly at the administrative stage. Without this opportunity, the importer might not have the ability to resolve the matter administratively before going to Court. A more ominous interpretation would permit Customs to always claim simple negligence in the penalty notice and up the ante whenever the importer refuses to pay and decides to go to Court.

The CIT's decision is in line with the normal rule that both sides to an administrative process must go through the entire process before jumping into Court. There are some cases in which the Courts have waived this requirement, but Judge Barzilay held that this is not one because the administrative process is set by statute.

The last point in the case involves the statute of limitations. This is the rule that if Customs wants to bring a penalty case claiming negligence or gross negligence, it must do so within five years from the date of entry. Customs argued that because the evidence was concealed, it could not have made a gross negligence claim and it wants to do so now. The Court disagreed and said that the five-year limit is firm. But, she noted that the period for fraud cases does not begin to run until the fraud is discovered. So, the government retains the opportunity to make a fraud case provided it runs through the proper administrative process.

All of which is quite interesting. At least to me.

Tuesday, December 20, 2005

Customs Goes MTV

I have repeatedly said that the work CBP does is important. For the most part, CBP handles its job in a professional and respectful way. It also needs a bit of marketing to let people know the important job it does and may need to attract some new folks to do it. That is probably why it has posted some videos explaining Customs to the world.

I am particularly taken by this one. It has "Miami Vice-ish" music; James Bondy shots of fast boats, cars and even horses; and some peeks at high-tech looking gadgets. It also has a bit of pathos in that CBP personnel are shown saving lives in what appears to be the desert along the southern border. You know they are saving lives because the video includes a helpful title sliding across the screen saying "Saving Lives." Other titles include "Preventing terrorism," "Securing Our Borders," and "Seizing Contraband."

The two things I like best are first that the file is actually called "cbp_music_video" and, second, that the video ends with a graphic of plane taking off and then a smashing pane of glass. I'm not sure that last bit was well thought out. I am sure this is not likely to be a big hit on TRL.

Thursday, December 15, 2005

Turf Fights & Job Openings

It seems that the press is picking up on the apparent mess at Homeland Security. This Newsweek article notes that the issues go way beyond my question of whether it makes sense to keep CBP and ICE as two separate agencies. It turns out that all three border control agencies--Customs & Border Protection, Immigration & Customs Enforcement, and the Citizenship & Immigration Service--all lack a leader. In addition, there are apparently ongoing issues between CBP and ICE relating to turf and money. The article says these fights are sapping morale and debilitating the agencies.

So, let's get it over with and merge at least CBP and ICE. And, since the President seems to be having trouble finding a leader for the agencies, I hereby volunteer for the top job in the merged agency. Mr. President, feel free to call me at the office.

Something Squirrely at CBP

This doesn't require much in the way of comment. It is worth noting that the story was carried in at least 40 media outlets checked by my automated news search.

Tuesday, December 13, 2005

Broken heroes on a last chance power drive

Sorry Bruce, make that "power strip."

It's a funny thing that Customs still puts out the Customs Bulletin. Seems like there is no point. Between a posting to its web site and a Federal Register notice, it seems like they should be able to have everything sufficiently public. But, they still put it out. And, every now and then, I find something surprising in it.

Today, I discovered that your basic surge protector-type power strip is not actually a device for protecting electrical circuits under 8536.30.80, which has a duty rate of 2.7%. Why would I ever have thought that? Well, because power strips generally include a fuse or circuit breaker and also circuitry to filter out spikes in voltage. The reason you use them is to protect the sensitive circuits in your expensive electronics. So, on its face, 8536 seems like a good heading for their classification. This makes so much sense that Customs issued a bunch of rulings to this effect.

Not so fast. Customs correctly found a problem with that kind of thinking (see page 56). If there is a circuit breaker or fuse plus surge protection circuitry, then the power strip incorporates two separate apparatus of heading 8536. Since those two items are on a board, panel or base, they fall within the terms of heading 8537 and specifically under 8537.10.90. Unfortunately, that tariff item has the same 2.7% rate of duty. It's a wash.

The moral of the story is as old as classification: read the full text of the heading every time.

Kate Moss not on the Most Wanted List

Immigration and Customs Enforcement posts its list of the most wanted criminal aliens. These are all bad guys and there is really nothing funny about the list except that model and alleged cocaine abuser Kate Moss is not on the list. Why am I thinking about this? Because this article quotes a Customs & Border Protection spokesperson saying that if Kate Moss is convicted of a crime in the U.K., she won't be admitted to the U.S. to work. Consequently, it appears that Ms. Moss is staying out of the U.K. and not planning to cooperate in the investigation.

Maybe she will get the Noriega treatment.

Is this legal?

Is it legal to sell a Customs & Border Protection uniform patch, like this person is doing? I know I am the customs lawyer and I am supposed to have the answers to these questions. But, I'm not sure about this and I don't plan to look it up. If anyone knows, please drop a comment.

Wednesday, December 07, 2005

Customs Does Gucci a Solid

Customs maintains an active enforcement program relating to intellectual property laws. This is the job of the Intellectual Property Rights Branch at headquarters. The job of the IPR branch is to prevent the illegal importation of goods bearing infringing trademarks, trade names, or unauthorized reproductions of copyrighted works. As I mentioned previously, they are also responsible for the enforcement of laws relating to traffic in cultural properties. I have always thought that heading up that branch would be a great job. In law school, I was very interested in intellectual property law and actually went to the trouble of getting an LL.M. in the field. It comes in handy now when clients have IPR related issues come up at the border.

The easy cases for Customs to deal with involve counterfeit merchandise. This is what happened with Gucci (plus Coach and Burberry) at the port of Norfolk. Customs seized a shipment of almost 2,000 boxes of counterfeit handbags, wallets, and backpacks bearing these trademarks. Unfortunately for the importer, the manufacturer was not authorized to apply the trademark and just went ahead and did it. That is counterfeiting. It is illegal. Don't do it. And, if you happen to be looking for merchandise to sell in your shop and get an outrageously good deal on Nike shoes from a seller in Vanuatu or Moldova, ask to see a copy of their agreement with Nike. After that, you are on your own.

Counterfeit cases get tricky is when there is a real dispute over whether the mark is counterfeit or just infringing. To be counterfeit, it has to be essentially identical. It needs to be a simulation of the official mark. Anything less than that is trademark infringement, but not counterfeiting. This matters because the penalties and procedure is different.

The real tricky cases for Customs involve so-called gray market or parallel importation goods. These are legitimate products (i.e., not counterfeits or copy cat products) that the U.S. trademark holder did not want sold in the U.S. Sometimes, they were produced under license in a foreign country exclusively for sale in that country. Another scenario is goods produced in the U.S. that are exported for sale in another market. If the merchandise is purchased abroad and independently imported to the U.S., the officially licensed seller ends up competing against itself and is usually very annoyed. This happens with all sorts of goods but is very common in cosmetics and small electronics.

The reason these cases are tricky is that the courts have generally decided that once a company sells something, it can't control resales because it has been fully compensated through the goods. In other words, when Apple (as a random example) sells an iPod in England, it has been paid exactly what is expected to be paid for that unit. If the new owner figures out that she can ship it to the U.S. and sell it here at a profit, that is her business. Apple, if it wants to prevent that activity, needs to write better contracts with its distributors or deal with its pricing discrepancies. At least that is what the courts have generally held.

But, as with most things in the law, there are exceptions. The main one comes out of a case called Lever Bros. Co. v. United States, 981 F.2d 1330 (D.C. Cir. 1993)(sorry, I can't find a free link). In that case, the D.C. Circuit was asked to determine whether Customs had properly passed a regulation exempting from gray market protection goods imported without the authorization of the U.S. trademark holder where the party that applied the trademark abroad was somehow affiliated with the U.S. trademark holder. That exception was based on the idea that the two related companies should somehow work it out themselves.

In Lever the question involved soap made specifically for the UK market. Across the pond, they have harder water and that are less inclined to smell flowery than is the average American. So, Lever made the soap for the UK market a bit different. That means that when some enterprising person imported the soap to the US and consumers said, "Hey, good deal on my favorite Lever soap," they were bound to be disappointed by the weak lather and lack of flowery smell. Under those circumstances, the Court held, the consumer is not getting what they paid for and Lever is probably being damaged in terms of good will. So, Customs was ordered to seize the merchandise despite the affiliate exception in the regulation.

Now, the issue in all these cases is whether the imported goods are materially different than the goods sold in the foreign market. Things courts have considered materially different include physical characteristics, packaging, labeling and warranties. This can be tricky and might require some arguments for or against depending on whether you are the importer or the rights holder.

One side point, Customs tried to improve protection by creating something called Lever Protection. Under this program, U.S. rights holders can register their products and characteristics with Customs. When a gray market product is imported and the U.S. rights holder has secured Lever Protection from Customs, the goods will be detained unless they are properly marked to indicate that the goods differ from the genuine product intended for U.S. sale. Apparently, only a handful of companies have opted for this protection. Possibly that is because it essentially tells parallel importers how to get materially different products into the country.

Copyrighted works are a whole other deal. Basically, there is no copyright protection for parallel imports. That is, if the goods are not "piratical." But, if their production would have been copyright infringement had it taken place in the U.S., then they can be seized. The real issue in these cases is whether the imported work is infringing.

Class dismissed.

ADDENDUM (12/13/2005):
Here is another article. It involves Nike shoes and Burberry handbags.

So, Maybe I am Right

Does former Customs Commissioner Bonner read my blog? I doubt it. But, we appear to agree on one thing: CBP and ICE should be merged into a single border enforcement agency.

I said this in a previous post.

Now, the former Commission has publicly said the same thing to the Washington Times.

Does that make a groundswell?

ADDENDUM (12/13/2005):
Oddball blogger and conservative columnist Debbie Schlussel agrees with me, too. Now I feel dirty.

Thursday, December 01, 2005

Two Quick Notes:

That must be what they mean by "trade facilitation."

It has recently been noted in the press that the uniforms worn by our Border Patrol are purchased from a company in Tennessee that has outsourced the manufacturing to Mexico. Hence, U.S. Border Patrol Agents are wearing uniforms with a "Made in Mexico" label on the collar. According to the Border Patrol union president, "It's embarrassing to be protecting the U.S.-Mexico border and be wearing a uniform made in Mexico." I guess I don't see the issue. It would be embarrassing for a Border Patrol Agent to be, say, employing an illegal alien as a housekeeper. Wearing a uniform made in Mexico seems OK. At least it is properly marked with its country of origin.

Blogger held up in Immigration

A Canadian blogger who online claimed to be from New York, rather than Toronto, and who carried a magazine mailed to him at a New York address got detained when trying to enter the U.S. The story is reported here although the guy apparently removed it from his own blog. I have no opinion on whether he was properly detained (and apparently searched). It sounds like the circumstances were legitimately a bit suspicious. What I do think is interesting is that the officer apparently Googled the guy's blog and read enough to determine where he claimed to live as part of the routine passenger clearance process.

I better watch what a say.