Monday, February 26, 2007

Ahh, The Rich Coffee of Canada!

Customs and Border Protection is taking a second look at the country of origin marking of roasted coffee from Canada. In the February 14, 2007 Bulletin, CBP announced that it intends to modify NY R03084 to hold that the country of origin is the counrty in which the beans were roasted, rather than where they were harvested.

Lucky for Starbucks, Caribou, Pete's, and the rest of the caffeine pushers, roasted coffee is exempt from origin marking. But, the interesting question is whether the exemption permits an importer to identify the coffee by the country or region of harvesting where it is legally of Canadian origin. That would seem, at least without the benefit of actual research, to present a problem for coffee sellers who want to identify their product as Sulawesi, Ethiopian, Jamaican, or Kona. If the legal origin is Canada, the package is going to have to be pretty clear about that.

The more general lesson to take from this is that when you import something via Canada or Mexico, you need to consider whether it is the "good of a NAFTA country" for marking purposes. If so, the NAFTA marking rules of 19 CFR 102 apply even though your product might be from Sumatra or El Salvador.

Thursday, February 22, 2007

CBP News of the Odd

Someone tried to smuggle a human being into the United States in the engine compartment of a vehicle. Here is that story. I'd like to see a picture of how that worked.

Also, if you plan to import any African rodents, prairie dogs, or certain other animals, you need to know that the FDA is re-opening the comment period on its interim final rule concerning these animals. Here is the FR notice. The reason for this is the continuing need to prevent the spread of monkeypox in the human population. Monkeypox is related to smallpox. Obviously this is important work and it is good to know that smart people are worrying about these things and working to keep us all safe. But, there is no way to avoid the obvious fact that "monkeypox" is a funny word.

Is NAFTA Drawback Constitutional?

The Court of International Trade took up this question recently in Nufarm America's Inc. v. United States, Slip Op. 07-23 (Feb. 15, 2007). Rather than create false suspense, I'll just tell you that the Court held it is constitutional. Let's take a look at the case.

You need to understand the crazy world of duty deferral under NAFTA. When negotiating NAFTA, the parties identified a potential problem. Assume a manufacturer in the U.S. imports non-NAFTA parts but they are duty free because the manufacturer is a is in a foreign trade zone, uses a temporary importation bond, or subsequently claims drawback. Absent the FTZ, the parts would have been subject to a duty of, say, $100. If, the parts are used to produce a NAFTA-originating product, the finished good will likely be duty-free on export to Mexico or Canada. That means that because of the FTZ, the non-NAFTA parts escape duty when entering Mexico or Canada. That sets up a scenario where a NAFTA party (read that as "Mexico") could become an "export platform" for non-NAFTA goods and that was not the intent of NAFTA.

To avoid this perceived problem, the parties decided that someone should get paid that $100 at least once. To accomplish that, the NAFTA requires--in Article 303--that the parties limit the waiver or deferral of duties to the lesser amount (amount, NOT rate) owed to either the country where the goods were first imported or the NAFTA party to which they are subsequently exported. In the example above, the lesser amount owed is the zero due on the finished NAFTA-originating goods exported to the Mexico or Canada (as compared to the $100 owed to the U.S. but for the FTZ). So, the U.S. is permitted to waive or defer only zero, meaning that the importer into Mexico has to pay $100 to the U.S. when the goods are exported.

If the duty going into Mexico were $25, the U.S. could defer that amount meaning the U.S. would collect $75 ($100 - $25) and Mexico would collect $25. The total is the $100 normally due the U.S.

That's enough detail for now. There are exceptions for certain transactions. Also, I do know that drawback only refunds 99% of the duties paid. If you want the details, look at 19 C.F.R. sec. 181, Subpart E.

NuFarm was apparently paying attention to the harbor maintenance tax litigation and remembered that Article I, Sec. 9 of the Constitution says: "No Tax or Duty shall be laid on Articles exported from any State." Given that the NAFTA rules require the payment of duty 60 days after exportation, it seems natural to ask whether that requirement is constitutional.

The government argued essentially that the duty does not arise as a result of the exportation. Rather, the duty liability is the result of importation of dutiable merchandise. Thus, the argument goes, the export clause is not invoked. This makes some sense. What is being paid is an import duty. Also, as the Court points out, there is a rational reason for the restriction of duty deferral benefits. Thus, the Court finds for the U.S. and dismissed the case.

At first I was on board with this. The duty involved is a normal import duty. The liability results from importation.

But, now I am wondering. Assume for a minute that NAFTA was not involved. The merchandise comes in on a TIB and is subsequently exported. No duties are owed. That means that in a TIB situation like Nufarm's, importation does not result in a duty liability. Neither would exportation. But the NAFTA drawback rules change the result. The goods come in free of duty just like any TIB. Duty liability only attaches when exported and only when exported to Canada or Mexico. It seems reasonable to conclude that the NAFTA drawback rule creates duty liability that would not otherwise exist and that it is triggered by the exporter's choice to ship to Canada or Mexico as opposed to any other destination.

The CIT's analysis is thorough and a perfectly reasonable. But, it seems as if there is room for reasonable minds to disagree on this point. That, my friends, is why they created the Federal Circuit.

Thursday, February 15, 2007

What is Freely Programmable?

For years, I have been fascinated by the classification of automatic data processing equipment. Some of the first issues on which I worked involved pretty high-tech gear that was not technically computers. But, the guts were plenty smart and a good tinkerer could probably have programmed it to play Pong or tic-tac-toe when not being used for its intended purpose.

Think about an ATM machine. I am confident there is no technical reason that would prevent a smart ATM hacker from turning one of those into a video game or word processing station (of course the numbers-only keyboard would be murder to use). I suspect the smokin' hot 486 processors of 1987 are busy running the gas pumps and vending machines of today.

This all comes up because of the Federal Circuit's decision in Optrex America, Inc. v. U.S. At issue in Optrex was the classification of a number of LCD display modules and incomplete LCD assemblies. The importer wanted them classified in 8473 as parts of ADP machines, which would make them duty free. Customs, on the other hand, wanted them classified as either signaling devices of 8537 or other LCD's of 9013.

To be classifiable in 8473, the parts must be "suitable for use solely or principally with" ADP machines. Based on the CAFC opinion, it seems that Optrex failed the solely or principally part. It appears that these products were fully capable of use in coffee makers, photocopiers, or any one of the million other places we see LCDs these days. But, the analysis the court provides is somewhat more nuanced (that is the difference between the judiciary and a random blogger).

The Court noted that ADP machines are defined as:

Digital machines, capable of (1) storing the processing program or programs and at least the data immediately necessary for execution of the program; (2) being freely programmed in accordance with the requirements of the user; (3) performing arithmetical computations specified by the user; and (4) executing, without human intervention, a processing program which requires them to modify their execution, by logical decision during the processing run.

I was a computer science guy in college (although my degree is in political science). And, I continue to be sort of a geek--that explains my Star Wars oral argument. I fully understand that the definition above is trying to get a general purpose computer. But this gets back to the question of when is something "freely programmable" and who the user is supposed to be.

Assume that there is, in fact, an Intel 486 processor inside a gas pump. There is no question whatsoever that the processor is part of a general purpose ADP machine. The 486 is the heart and sole of a freely programmable computer. The problem is that it has been encased in a gas pump and cut off from all other possible applications. My old 486 Gateway ran WordPerfect 4.2 for DOS just fine. When I was bored with that, I could play a reasonable facsimile of Pac-Man on the same computer. Nothing about the processor in the gas pump changes that. It remains freely programmable.

The Federal Circuit, however, disagreed with this approach. Rather, it interpreted "user" to be the end user. That is the person who drives up to get gas. The Court said the "user" is not the gas pump manufacturer who might, in theory, be able to program it to do something else.

Thus, all the smart ATM machines, computer controlled factory equipment, digital video recorders, and MP3 players of the world are excluded from being classified as ADP machines, no mater how much processing power they pack. The fact that my Samsung MP3 player probably has more computing power than the Apollo command module and lunar lander combined, is not enough to make them freely programmable.

This is where Optrex got tripped up. Even though some of its product did actually end up on file server computers, which are freely programmable, the vast majority ended up on other dedicated devices. Thus, the LCDs failed the solely or principally part of the test.

Which brings me to my Treo smartphone. By the way, David Pogue is right; it is a terrific device. The Treo can run all sorts of programs. One minute it is a web browser, the next I am editing documents. Later, I can use it to play solitaire. Turns out that is freely programmable enough to be a computer. Customs said so, at least indirectly, in this ruling holding that a Treo stylus is an accessory to an ADP machine.

Tuesday, February 13, 2007

CBP Warning Shot

Are you a textile importer? If so Customs and Border Protection is watching you.

CBP recently issued TBT-07-003 which says, effectively, that it is sick of textile importers getting their entries wrong.

Here is the meat of it:

In its review of entry summaries, US Customs and Border Protection (CBP) has found both brokers and importers to have made egregious errors in the reporting of statistical data, such that the entry documents do not correctly reflect the transactions. These errors occur in the reporting of quantity, country of origin, classification, and manufacturer identification number.

To which Customs responds:

This is to advise the trade community that CBP Headquarters will be reviewing entries to identify egregious errors. When errors are identified, the ports will be directed to pursue penalties against brokers and importers, as applicable.

What do we take from this? CBP is letting textile importers know that they better get things right. That means classification, value, country of origin, and other items need t0 be confirmed by the importer. Importers need some procedures to guide compliance personnel through to a conclusion supported by reasonable care.

The problem is that "reasonable care" is difficult to define. In many ways, we know reasonable care when we see it. The legislative history to the Customs Modernization Act focuses on the use of internal and external experts to manage compliance. Generally speaking, your obligation as an importer is to act with the same degree of care as would a reasonable importer in a similar situation.

The easier approach is to identifying what reasonable care is not. Reasonable care is not:

  • Blind reliance on a broker
  • Accepting the supplier at its word for anything
  • Looking at the commercial invoice as the only source for value information
  • Treating the country of shipment as the country of origin
  • Using duty rates as a factor in classification
  • Accepting different treatment of the same merchandise at different ports
  • Guessing at or estimating non-dutiable charges
  • Not following instructions from CBP

Rather, compliance systems need to be created that confirm value, classification, origin, duty preference, intellectual property rights, other agency requirements, and other legal requirements up front. Then, the importer should engage in internal post-entry reviews to confirm that the system is producing correct results.

Commercial enforcement is a growth business for Customs. This notice from CBP is further proof of that. Don't be the next importer who becomes an example of a failure to exercise reasonable care.

Sunday, February 11, 2007

CBP Lookin' Out for You

Marketing is tough. Any effort to look hip by the unhip generally reeks of unhip. Exhibit A, CBP trying to remind spring breakers to take their passports. It's an important effort, given that CBP will have to process all the returning revellers. It's just that the cartoon character more closely resembles something for the Barney set, not the wet t-shirt and beer bong crowd.

Credit does go to CBP for breaking up a robbery in a California convenience store. Also, for finding a guy stashed inside the dash of a car crossing at Calexico.

More substance to follow.

Sunday, February 04, 2007

337 Case Review

I’m a little behind blogging case law. As I told a few readers who came up to me at the Georgetown function, I’m trying to catch up. Here’s the first, it is Fuji Photo Film Co., Ltd. v. International Trade Commission.

You know those single-use disposable cameras you see at tourist spots and excessively fun weddings? There has been a lot of litigation over whether, and to what extent, a company can collect the used cameras, fix them up, reload them with film, and resell them. It seems like a good thing to do. At least it keeps them out of the landfill. Very likely the companies that manufacture them have recycling programs. The question in this case was whether another company can do that without infringing the patent on the camera.

You might reasonably ask what this has to do with customs law. This case came up through an action at the International Trade Commission under section 337 of the Tariff Act. That provision makes it illegal to import merchandise that infringes a U.S. intellectual property right or that is otherwise unfair competition. When the ITC find a violation, it can order Customs and Border Protection to exclude the merchandise and, in some cases, can issue cease and desist orders against importers. Violations of a cease and desist order can result in a monetary penalty.

This case at the Federal Circuit involved a couple issues including whether Fuji, the patent holder in question, can appeal from a finding of non-infringement which resulted in no civil penalty for violating a cease and desist order. Turns out it can’t since it is not entitled to relief in the form of damages. Remember, penalty money goes to the government. I gather it would be up to the United States to appeal if it wanted to.

The more interesting question was whether replacing the entire back of the camera was infringing reconstruction as opposed to allowable repair. This came up because of a concept called patent exhaustion. In the copyright context, it is called “first sale” (not to be confused with the customs valuation concept). Basically, it means that once the patent holder sells the merchandise, the new owner can do pretty much what they want with it including resell, rent, lease, or repair it. But, there are limits. The buyer can’t recondition the merchandise so much that it is essentially re-building it. After all, manufacturing is one of the patent holder’s exclusive rights.

At the ITC, the Administrative Law Judge held that replacing the entire back of the disposable camera was too much because it required replacing components critical to what is protected by the patent. The Federal Circuit rejected this approach and remanded the case back to the agency to recalculate the penalty amount.

More generally, 337 cases are interesting. I’ve heard them described as patent litigation on steroids. Things happen very fast. The entire case is to be resolved in 11 to 15 months. In a district court, that is light speed. The ITC tends to follow the law from the courts fairly closely. Still, it is perceived as a better place for U.S. companies to get protection from grey market merchandise—sometimes called parallel imports.

One last point, and this is just me musing. I know the ITC has years of experience in these cases. I also know that the patent bar is quite happy with the ITC process. But, I have always thought that it would be a natural development to move 337 cases to the Court of International Trade.

The CIT is an article III court with all the powers of a district court, which is where patent cases generally go. Like the district courts, the CIT uses the Federal Rules of Evidence and slightly modified Federal Rules of Civil Procedure. The ITC only has jurisdiction over intellectual property infringement when it involves an importation. The CIT basically only deals with importations as well.

There is a messy problem in a 337 case when one of the parties starts a parallel action in a district court. The ITC proceeding can be stayed and the record developed in the district court transferred to the ITC when that proceeding is complete. Also, the ITC can’t fully enforce its orders. It has subpoena powers but I believe it would ultimately would need a court order to impose sanctions for contempt, for example. Finally, appeals from the ITC go right to the Federal Circuit, where all patent cases from the district court go and all appeals from the CIT.

Why not eliminate all the issues that result from the ITC not being a court and shift the cases to the CIT? The patent bar will squawk that the CIT judges lack patent experience. Well, so do the majority of new district court judges. That problem would take care of itself in short order. Another concern is that ITC cases are subject to pretty strict guidelines (the old “rules” violated GATT) to keep things moving and the courts have no such limitations. That may be true, but the docket at the CIT permits it the luxury of focusing on a smaller number of cases and it could endeavor to keep the cases moving.

Of course, the CIT judges may have no interest in this work (although it is actively looking for broader jurisdiction). Like I said, this is just me thinking out loud, but over the years this has always struck me as an efficient and logical use of judicial resources.

So, to the patent lawyers out there, tell me why I am wrong.

Thursday, February 01, 2007


Seems like the comments function is not working. I'll try and get it resolved. Thanks.

Is Luke Skywalker Human?

Yesterday, at a Georgetown CLE event, I participated in a mock oral argument on the classification of Luke Skywalker and Han Solo action figures. You can read my brief here. The issue came down to whether "action figures" are dolls for classification purposes and whether Luke and Han are human beings. Let me know what you think.

Below are my notes for the oral argument. I lost.

May it please the Court.

The parties agree on many key facts in this case.

Galaxy recognizes that its Luke Skywalker and Han Solo action figures might, to the lay person, be viewed as dolls in the ordinary course.

Galaxy contends, however, that the facts of this case and more important, the facts of life "a long time ago, in a galaxy far away" mean that for purposes of tariff classification neither the Luke Skywalker figure nor the Han Solo figure are dolls.

The sole factual reason for this is that, despite appearances to the contrary, neither character is a human being.

The Law

The government maintains that these figures are classifiable in the eo nomine provision for dolls in HTSUS item 9502.10.40, dutiable at 12%.

However, Heading 9502 includes a limitation stating that it covers "dolls representing only human beings." Thus, if the characters are not human beings, their figures cannot be classified in 9502. This limitation must be given consideration. [Clarendon, Nootka (clams)]

Thus, the characters' human characteristics do not preclude classification in 9503.

The remaining possible classification is as other toys in 9503.49.00 (6.8%).

Toy Biz

The court has previously been asked to discern the species of fictional characters of questionable heritage.

The facts here are remarkably similar to those in Toy Biz. That case involved superhero action figures of the X-Men, Spider- Man and Fantastic Four story lines, packed in blister packs with accessories.

There, as here, Customs relied on pre-HTS cases for a broad definition of "doll" to include many variations on dolls including toys, decorative articles, and puppets, some of which included non-human characteristics (e.g., a horse and rider) [American Import] or lacked human characteristics (e.g., a torso) [R. Dakin & Co.]

But, in all of these cases, the doll represented a human being in some form. (e.g., G.I. Joe) [Hasbro]

In the conversion to the HTS, the tariff language changed. The tariff now requires that dolls represent only human beings. According to normal rules of construction, and consistent with Toy Biz, this limitation must be given effect. [Clarendon]

The Explanatory Notes to Heading 9503 state that the heading covers "toys representing animals or non-human creatures even if possessing predominantly human physical characteristics (e.g., angels, robots, devils, monsters)."

In Toy Biz, Judge Barzilay held this limitation to mean dolls must represent "human beings as opposed to any other beings."

That means the figure, to be a doll, must be an "example" or "the embodiment" of a human being. The Luke and Han characters, although they resemble humans and have predominantly human physical characteristics, are manifestly not human.

Two arguments support finding both Luke Skywalker and Han Solo are not human and, therefore, their figures are not dolls.

o The ontological proof
o The legal proof

The Ontological Proof

A human being is a member of the human race, a member of the genus Homo, and usually Homo Sapiens. [JVC Co. Court can look to lexographic sources, technical sources, and its own understanding.]

1 U.S.C. § 8:

In determining the meaning of any Act of Congress, or of any ruling, regulation, or interpretation of the various administrative bureaus and agencies of the United States, the words “person”, “human being”, “child”, and “individual”, shall include every infant member of the species homo sapiens who is born alive at any stage of development.

The genus Homo evolved on this planet starting about 4.3 million years ago.

Modern humans emerged only about 200,000 years ago.

The Star Wars saga is set "a long time ago, in a galaxy far away."

The nearest galaxy to ours is the Sagittarius Dwarf a Elliptical Galaxy, which is 80,000 light years away.

For humans to have populated a galaxy far away, even in ships capable of traveling at near light speeds, they would have had to have left the earth at least 80,000 year ago at a time when our ancestors were just reaching Asia from Africa. At realistic speeds of modern spacecraft, 1.5 me million years would be needed. ml

Because Star Wars is set in the distant past, not the future, it is impossible for any human being to be present in the story line.

Thus, neither Luke Skywalker nor Han Solo can possibly be human.

The Legal Proof

Toy Biz relied upon three observations: to test
whether a figure represents a human
being for purposes of tariff classification.

1. A single non-human characteristic is sufficient to establish that the figure does not represent "only a human being."

Luke Skywalker has a number of non-human characteristics including:
· He can move objects at a distance by use of "the force"
· He can exercise remote mind control through the force
· He has no paternal grandfather. His father, Anakin Skywalker, was born by the will of the force possibly to fulfill a prophecy.
· He has uncanny skills in hand to hand combat and piloting.
· He has a fantastically advanced prosthetic hand.

Han Solo also has non-human characteristics:
· He was born on the planet Corellia, presumably in another galaxy.
· He travels in the company of a large, furry, creature known as a Wookie.
· He has uncanny language skills permitting him to communicate effortlessly with a Wookie, the bounty hunter Greedo, and other non-human creatures.
· He possesses a spaceship, the Millenium Falcon, capable of violating the known laws of physics by traveling faster than light.

2. The characters are known in popular culture to be non- human aliens.

· Both characters are know to live in a distant galaxy.
· Both characters come packaged with a light saber, a fantastical weapon of alien technology.
· Both packages reference adventures on other planets.

In Toy Biz, similar characteristics were found to differentiate the character Long Shot, an otherwise human appearing character, from human beings.

3. The marketing and packaging of the characters establishes that they are not human.

· Star Wars is a world-wide popular culture phenomenon every
· Nearly adult in America can identify these characters by sight
· It is widely understood that these character live and work in another galaxy, travel between planets, battle evil tyrants who have turned to the "dark side of the force," and ultimately triumph through the good side of the force.
· This is a fantastic, unearthly fabled story, and is, following Toy Biz, sufficient to make the action figures classifiable as toys rather than dolls.

Thank You