Thursday, January 24, 2008

First Sale, Settled Law and CBP

In today's Federal Register, Customs and Border Protection is proposing to modify the interpretation of the phrase "sold for exportation to the United States" to effectively eliminate the use of so-called first sale valuation by U.S. importers.

Some history is in order here. Transaction value is defined as the price paid or payable for the merchandise when sold for export to the United States. There is a long line of court decisions stating that the sale for export to the United States can be a sale between parties other than the U.S. buyer and its immediate seller. Usually, this involves a middleman who buys from the factory and resells to the U.S. buyer. When the buyer can show that the first sale was destined for the U.S. and can get documents proving the sale price, that can serve as the transaction value for appraisment. I wrote about this previously here.

As far back as 1988, the Federal Circuit upheld middleman pricing as an appropriate interpretation of the value statute. In McAfee Co. v. United States, 842 F.2d 314 (Fed. Cir. 1988), made-to-measure suits were being exported from Hong Kong to the U.S. The U.S. buyer would order from a Hong Kong distributor, who then purchased the suits from tailors. The tailors made the suits specifically to the U.S. customers' measurements. Accordingly, the Federal Circuit held that the first sale from the tailor to the distributor was the sale for export to the U.S. An even earlier case, United States v. Getz Bros. & Co., 55 C.C.P.A. 11 (1967) reached the same conclusion although under an earlier valuation statute. In McAfee, the Federal Circuit held that the change in the law was not significant enough to change the result.

Nissho Iwai America Corp. v. United States, 982 F.2d 505 (Fed. Cir. 1992), involved another serial transaction. In that case, the Federal Circuit held that Customs had to use the sale from the manufacturer to the middleman as the sale for valuation because the sale was at arm's length and the goods were clearly destined for the U.S.

All of that should have resulted in what we like to call "settled law." With settled law, everyone knows what is expected of them. It allows importers to exercise reasonable care. It meets the requirements of "informed compliance." In other words, settled law is a good thing. More on that below.

CBP correctly noted that more recent cases have refused to apply decisions from the the old valuation statute to the current law. Most notable is VWP of America, Inc. v. United States, 175 f.3D 1327 (Fed. Cir. 1999) in which the Federal Circuit said that the correct standard for deciding value issues is the current law rather than the prior law. Keep in mind, however, that VWP did not involve the question of which of two sales was the sale for export to the United States. Also, it is important to know that the phrase "sale for export" appeared in both the old and the current statute.

In addition to VWP, Customs notes that the Technical Committee on Customs Valuation issued a commentary on the question. The Committee noted that the Value Agreement does not define the phrase "sold for export to the country of importation." The Committee concluded that the Agreement assumes that the buyer for purposes of valuation is in the country of importation. That means, according to the Committee, that the sale for valuation should be the last sale, not the first. Customs also correctly noted the difficulty importers have in establishing the details of the first sale and the difficulty CBP auditors have in verifying them. This is "considerable fact finding" that the Courts and legislative history agree were not anticipated under the revised value law.

Based on all of this, CBP concludes that it is consistent with the WTO Agreement and with the statutory text to re-interpret the value law consistent with the Committee decision. In other words, "first sale" will become "last sale."

This raises a ton of important questions. First and foremost is whether the Federal Circuit will agree. The problem for Customs is that the Federal Circuit has already ruled on the interpretation of "sale for export to the U.S." That interpretation stands until it is overturned either by the Supreme Court or by the full Federal Circuit sitting en banc. It is difficult to predict what happens in litigation, but I very much doubt that the Federal Circuit is going to like having its precedent given so little respect. On the other hand, there have been several cases recently in which international obligations have been used as a lever to push the interpretation of statutes in certain directions. So, Customs is not without ammunition.

The other question is frankly this: What is going on? Why is so much law becoming unsettled?

The current leadership at Customs seems to be taking a very hard look at a number of policies and exercising its administrative discretion in ways that are antagonistic to the trade. For example, in a January 9 Bulletin Notice, CBP proposed to modify rulings interpreting HTSUS item 9801.00.20. The proposal would greatly reduce the ability of importers to use 9801.00.20 to avoid paying duties again on the re-importation of goods previously imported, duty paid, and exported pursuant to a lease of similar agreement. In the past, CBP has been very liberal in construing "similar arrangements." That was the settled law. Under the proposal, the similar agreement must have a "use" similar in nature to a lease. While I can see the point, the question remains, Who was clamoring for this change? Who benefits by taking this position? This has no relation to cargo security and it does not facilitate legitimate trade. What's the problem? It is not enough just to say that CBP is trying to properly enforce the law because it is an executive agency with discretion in how it enforces the law.

The Ford case is over, but it reeks of the same issues. Why did CBP decide to pursue Ford for NAFTA records it could have secured from the exporter. Someone made that decision for some policy reason. Happily, the case was dropped. But, at this point, we still have no idea what the current policy is.

The same goes for the Informed Compliance Publication on transfer pricing. Customs had the opportunity to facilitate legitimate trade by telling importers that getting (and following) a fancy accounting firm transfer pricing study is sufficient to establish reasonable care. Instead, it told importers that the study is not sufficient. Who benefits from that position?

Compliance is easier to establish and maintain in an environment where we know the rules and they don't change without reason. Assuming there is good reason for these changes in policy, it would be nice if CBP were more transparent about it.

Everytime CBP has a decision to make like this, one hopes some one in the process asks, "Do we have to do this? Is it required?" If not, the next question should always be, Why are we doing this?

Monday, January 21, 2008

10 + 2 Open Thread Experiment

This is an experiment in Wiki blogging.

Customs and Border Protection's Notice of Proposed Rule Making on the Importer Security Filing (so-called 10+2) is creating a big splash as people try and sort out exactly what will be required and what will happen in the case of non-compliance. Certainly, the requirements will create additional data to be collected and transmitted. Some of that may be burdensome. There are also concerns about the protection of business proprietary information.

I have some practical questions.
  • How is your company reacting?
  • How difficult do you expect compliance to be?
  • Can you quantify the difficulty in terms of time or expense?
  • What do you view as the most onerous part of the proposal?

Leave an anonymous comment here. Try and use this space for a discussion. Maybe acting as a group we can shed some useful light on the proposal.

In Contact

I have mentioned in the past that I provide content to the National Customs Brokers and Forwarders Association of America via their National Educational Institute magazine, CCSContact.

In this post, I am providing links to some of that content, which you may find of interest. Or maybe not.

Ford Dismissed and Compliance Resolutions

Tariff Engineering After Heartland

Record Keeping and NAFTA (Before CBP Dismissed Ford)

Feeling Festive

Wednesday, January 16, 2008

Delevopments on the IPR Front

Customs and Border Protection, as you likely know, plays an important role in enforcing U.S. intellectual property rights at the border. CBP can seize merchandise that infringes a U.S. copyright or trademark and can enforce a U.S. International Trade Commission exclusion order for patents or other rights.


What you may not know, is that CBP can include intellectual property issues in audits of importers. So, in additional to having your classification, value, marking, and rate of duty ducks in a row, you also need to be certain that you have the right to import merchandise that bears a U.S. trademark or is covered by a U.S. copyright. You may not think this is a common occurrence but it is. Branded merchandise is almost always the subject of trademark protection. Granted, for CBP to engage in enforcement the mark must be recorded with Customs, but that is also very common. If you are importing goods bearing a trademark, check CBP's online IPR search and check whether the trademark is recorded. The same goes for copyrighted works such as software, movies, music, and art work. Copyright enforcement is less common because Customs only gets involved where the work is "pirated."


I'm thinking about this because CBP just published its Focused Assessment audit standards for intellectual property issues. That document is here. The document gives helpful advice regarding best practices and manager responsibilities for importers.

On a related front, rights holders often complain that it is hard to get Customs to act to protect their interests. In response, Customs has issued a document with the clever title How to get IPR Border Enforcement Assistance. The upshot is that CBP has set up a new e-mail address for contacts relating to IPR enforcement. That address is: hqiprbranch@dhs.gov. The IPR BRANCH may also be reached by telephone at (202) 572-8710.

Product safety at the Ports

The Consumer Products Safety Commission is going to be assigning its own personnel to major ports, starting on the west coast. CSPC will be working with Customs and Border Protection to target suspect shipments for CPSC inspection. According to news reports, it remains unclear how many CPSC officials will be posted to the ports. Apparently, last year CPSC stopped 200 shipments.

Here are two related articles.

Product safety chief targets West Coast ports

Safety Chief Defends Record

Remember when the mantra was "One face at the border?"

All Politics is Local

In Illinois, we elect our state court judges. That puts a tremendous amount of responsibility in the hands of voters. I am not implying that judges are somehow beyond the capability of voter evaluation. The problem is more one of volume. Most voters cannot make a meaningful choice between the hundreds of candidates running for judge. The major newspapers give scant attention to judicial elections and the Chicago Bar Association judicial evaluation results are not yet out and who knows how well distributed they will be. So, judicial elections unfortunately often turn on ballot position, the ethnicity of surnames (more on that below), and gender.

That is why I want to let Cook County voters know about my friend Mike Hyman who was appointed by the Illinois Supreme Court to fill a judicial vacancy and is now running to keep the seat. Mike is the candidate endorsed by the Democratic Party for the position. The Chicago Bar Association has called him "Highly Qualified" for the job and the Chicago Council of Lawyers called him "Well Qualified." Before becoming a judge, Mike was one of the premier litigators of complex fraud and class action law suits in the country. He was also President of the Chicago Bar Association and the Decalogue Society of Lawyers.

I have known Mike for at least 10 years while we served together on the Editorial Board of the Chicago Bar Association putting out the Bar's magazine, The Record. I have never known anyone to take on more responsibility and produce more results than Mike. He does everything with energy, enthusiasm, and the grace to listen to and understand every side in a discussion. Mike writes beautifully and has a wide and deep knowledge of the law, history, and literature that informs all of his decisions. In short, Mike is exactly the kind of person the voters in Illinois should want on the bench. Consequently, I am asking my friends and colleagues who live in Cook County to Punch 100 on your ballot to elect Mike Hyman to the Circuit Court of Cook County, Nowicki vacancy.

My Bar colleague Jack Leyhane has posted some of Mike's writing on the judiciary to his blog, For What It's Worth. I encourage you to read it.

One last thing: The surname issue in Cook County is worthy of scrutiny by anthropologists and sociologists. The practice of voting for Irish names is so well ingrained in this City that non-Irish candidates have--in the past--legally changed their names as part of a campaign strategy. This produces candidates with names like Esther Bernstein O'Rourke and Leon Jefferson O'Malley. Given the number of candidates involved and the lack of real coverage of judicial elections, it is understandable that voters latch on to something quick and familiar when casting a vote. Unfortunately, this leads to other problems. I am told that there has not been a Jewish candidate elected judge in Cook County in 12 years. It has, again I am told, been 18 years since there were two judges with Jewish surnames elected in Cook County. Given the high representation of Jews in the practice of law, this is an unfortunate set of statistics. The judiciary should represent the community and the legal profession when without compromising the quality of judges.

Electing Michael Hyman to the bench (really retaining him), adds to diversity in the court. But, far and away more important than that, electing Mike keeps an eminently qualified lawyer and judge on the bench serving the people of the County.

Punch 100 for Michael B. Hyman.

Monday, January 07, 2008

Did You Miss Me?

I am back from the tour of Orlando theme parks.

I'll assume you are all up-to-date on the fact that Customs and Border Protection finally published some details on the 10+2 data requirements. If not, read this.

A couple other things of interest:

The Court of Appeals for the Federal Circuit had to deal with a problem relating to the Court of International Trade's electronic filing system. In brief, the lawyer did not successfully file an appeal in the system. The CAFC decided that a defective notice of appeal means the case never left the CIT, which can, therefore, act on the plaintiff's motion for an extension of time in which to file the appeal. There is not much law here, it is just interesting because it is the first case I recall seeing relating to the CM/ECF system.

In another case, the CAFC upheld a CBP regulation requiring notice of intent to export for unused merchandise drawback claims. This case has to do with rulemaking authority and is mostly interesting as proof of what I often tell law students: The most important (by which I mean "useful") class I took in law school had nothing to do with international law or international business transactions, it was Administrative Law.

And, just to give you compliance managers out there more evidence that compliance can save money in the long run, here is another case in which the Court of International Trade assessed the maximum penalty against importers who, in this case, did not properly report that their imports were subject to antidumping duties.