Monday, July 28, 2008

News To Me

I'll be off line for a week or so. If anything of interest to readers of this blog happens, feel free to post it in the comments. I'll do my best to catch up on my return.

In the meantime, here is a topic for discussion:

SSAB v. United States: Another case of good law making for a bad result?

One other note, as of tomorrow, my office is relocating to another floor of the same building. If you need to send me anything, the new suite number is 1020. All other contact info is the same as it has been for the past nine years. And, just to gratuitously vent about moving a law firm: What a hassle!

Thanks for listening.

Friday, July 25, 2008

Goodbye Substantial Transformation, Hello Tariff Shift

Customs and Border Protection has published a Notice of Proposed Rule Making today proposing to do away with the time-honored substantial transformation test for determining country of origin. I'm sad. I like this rule. I like it for precisely the reasons that CBP wants to do away with it.

The substantial transformation rule states that merchandise originates from the country in which it last changed its name, character, or use. The first articulation of this test was in a 1908 Supreme Court decision involving Anheuser-Busch. The question was whether cleaning and coating beer bottle corks (!) produced U.S.-origin corks. The Court held that the corks remain foreign because no new product emerged from the operations in the U.S. The most famous substantial transformation case is U.S. v. Gibson-Thomsen (1940) in which the Court of Customs and Patent Appeals found that wooden brush blocks and toothbrush handles without bristles became articles of the U.S. when bristles were added.

This approach has given importers and their lawyers a fair amount of leeway in arguing over origin. Finding a name change is gold. When that fails, you need to look for more subjective changes in character and use. This has led to a variety of strategies including things like whether the imported merchandise is a "producer's good" as opposed to a "consumer's good."

As early as the NAFTA negotiations in the early 1990s, it was clear to some (I suspect mainly in Canada and Mexico) that this test was too unpredictable. As a result, NAFTA introduced the concept of tariff-shift based origin rules. Keep in mind that we are not talking about the preference origin rules of HTUS Note 12(t). For this purpose we are talking about the so-called NAFTA Marking Rules of 19 CFR Part 102.

In today's notice, CBP has pulled the trigger on its long-stated desire to apply the NAFTA Marking Rules across the board. The only exceptions will be where an international agreement requires the use of substantial transformation. So the preference origin rules under NAFTA will not change. Also not proposed for change are preference determinations for goods--other than textiles and apparel-- under the U.S.-Israel and U.S.-Jordan FTAs. For other FTAs and programs that rely on origin determinations, the Part 102 rules will apply in addition to the other requirements of the programs.

So, you might be wondering, what about the Generalized System of Preferences? Remember that the rules for GSP require a substantial transformation (or double substantial transformation for non-BDC materials) plus 35% value added and direct shipment. Under this proposal, the rule will be based on tariff shifts, 35% value added, and direct shipment.

At first blush, I'm not sure I see much to complain about here. In a case called Bestfoods, the Federal Circuit said that CBP has the legal authority to dispose of substantial transformation. And, from an administration perspective, this will likely produce more predictable results for importers. The real trouble, of course, will be in the implementation details. There are very likely to be pockets of importers who are suddenly going to have to mark as foreign products they have been selling in the U.S. without origin labels. Based on my experience, this will drive the marketing people nuts. It will take some time for those issues to surface. Now would be a good time examine your origin determination process and see what might change. Comments are due in 60 days on September 23, 2008.

Monday, July 21, 2008

Administratve Law and Super Bowl XXXVIII

Is 9/16th of a second enough to offend anyone?

We'll come back to that.

Whenever I talk to students (either as an adjunct professor or in so-called "informational interviews"), I talk up the value of a class in administrative law. Customs and trade law is administrative law. Despite the name and the often undue emphasis on WTO disputes, this practice is generally about the federal government regulation of business. That makes it administrative law. It is only tangentially international law.

The only way to be fully able to advise clients on what Customs and Border Protection can and cannot due is to understand the more general limitations imposed upon the agency by administrative law. Agencies are bound by law. Agencies must follow their own regulations. Courts should defer to the agency only when the law is unclear. Stuff like that. As I tell students, the most important trade law case is Chevron and that case involves environmental regulations.

So, what are we to do with this decision of the Third Circuit? The case involves the review of the FCC's fine for the 9/16 of a second broadcast of Janet Jackson's breast during the Superbowl halftime show. The applicable standard of review is "arbitrary and capricious" under the Administrative Procedure Act (5 USC 706(2)(A)). Arbitrary and capricious is the standard applied to reviews of negative preliminary injury determinations in trade cases and by the Court of International Trade in cases brought under 28 USC 1581(i). Clearly, this case is relevant to us.
Here is a nice articulation of the standard of review based on SEC v. Chenery:

We generally find agency action arbitrary and capricious where:

the agency has relied on factors which Congress has not intended it to consider, entirely failed to consider an important aspect of the problem, offered an explanation for its decision that runs counter to the evidence before the agency, or is so implausible that it could not be ascribed to a difference in view or the product of agency expertise. The reviewing court should not attempt itself to make up for such deficiencies; we may not supply a reasoned basis for the agency’s action that the agency itself has not given.


Here is another useful quote for the proposition that agencies can change their policies provided they do it in a reasoned way:


The question is whether the FCC’s departure from its prior policy is valid and enforceable as applied to CBS. As noted, agencies are free to change their rules and policies without judicial second-guessing. See, e.g., Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 863 (1984). But an agency cannot ignore a substantial diversion from its prior policies. See Ramaprakash v. FAA, 346 F.3d 1121, 1124 (D.C. Cir. 2003) (agency must “provide a reasoned analysis indicating that prior policies and standards are being deliberately changed, not casually ignored”). As the Supreme Court explained in State Farm, an agency must be afforded great latitude to change its policies, but it must justify its actions by articulating a reasoned analysis behind the change . . . .

Does first sale valuation come to mind?

I am now speaking directly to the judges (and their clerks) at the CIT: Please inject some appropriately judicial spice into your opinions. Find in-context ways in which to mention Janet Jackson's breast in your decisions. It can only improve the traffic to the CIT's web site.

For those who care, the FCC fine was, in fact, deemed arbitrary and capricious but since it is a 102 page opinion and I have work to do, that's all you will get from me.

9th Circuits Still Says CBP Can Search Your Laptop

In an expected result, the U.S. Court of Appeals for the 9th Circuit has denied a petition for rehearing in the case of U.S. v. Arnold. This case involved the issue of whether Customs and Border Protection can search laptops (or other digital devices) that passengers carry with them across the border. We've covered this issue before (here, here and here). I also recently contributed an article on it to the June 2008 issue of CCS Contact.

So, it seems there is not much to add except that nothing has changed. Should this go up to the Supreme Court, which is doubtful, I predict not much will change there either. It seems that Congress is going to need to step in if there is to be any limitation in the authority given Customs to conduct border searches. As previously noted, some Senators have raised the issue.

Friday, July 18, 2008

More from the Courts

The Courts have been busy. On Wednesday, the Federal Circuit decided Volkswagen, in which another case was dismissed under Court of International Trade Rule 12(b)(5) for failure to state a claim.

Volkswagen follows from Saab and similar cases involving efforts by importers to secure a value adjustment under 19 CFR 158.12 for latent defects in automobiles. Because Customs and Border Protection calculates duties as a percentage of value, if the vehicle was actually worth less than reported at the time of entry, the importer paid too much in duties. The problem in this case is that the defects were not discovered until after liquidation was final, meaning that a protest was no longer available. VW attempted to claim the adjustment directly under 158.21, which has no time limit associated with it.

The result here is that the CAFC held that even though there is no deadline stated in 158.12, it relates to appraisal. Appraisal decision can only be challenged via a protest. Thus, there was no relief available.

The decision has an interesting concurrence by Senior Judge Friedman (no relation, BTW) who finds the result to be harsh but correct. He suggests that Congress is the appropriate body to fix the problem.


Speaking of Courts, the Supreme Court might take the opportunity to look at some customs-related issues. Two petitions for certiorari have been filed.

The first is in Sakar International. That case involves a jurisdictional question relating to whether the seizure of merchandise bearing allegedly counterfeit Microsoft Windows logos is an embargo for purposes of the exclusive jurisdiction of the Court of International Trade under 28 U.S.C. § 1581(i)(4). The CAFC said no on the basis of the Supreme Court decision in K-Mart.

The second cert petition was filed in NuFarm, which argues that the NAFTA drawback rules (in this case relating to in-bond rather than drawback per se) are unconstitutional as a tax on exports. The rules require that when merchandise is imported to the U.S. under bond for export, within 60 days after export to a NAFTA country the importer has to pay duties to the U.S. that would have been due but for the bond. To Nu Farm, this sounds like a duty triggered by the exportation, which would violate the export clause. To the CAFC, it is just the deferred payment of the import duty.

Although it is unlikely that either of these cases will get further review, stay tuned for future developments.

Lastly, I promised I would go back and expound further on Totes-Isotoner. I have re-read the opinion a couple times and don't really think I have much to add that is at the right level of detail for this blog. On the question of whether the issue is really that inanimate objects have no equal protection rights, I think that is somewhat different than the court's analysis of the complaint. I see the problem as being one of asserting that people were injured as a result of the discriminatory tariff. This is why the court discussed the fact that the tariff items in question are not actual use provisions. There will need to be a showing, I think, that men buy men's gloves and, therefore, are injured. If the issue were whether gloves have rights, I think the case would have been dismissed on standing or justiciability.

But, as with all my musings, I am just a member of the blogosphere's chattering class. Feel free to disagree.

Wednesday, July 16, 2008

Dispatches from Laredo

Here are a couple good articles on enforcement activity in Laredo. Both involve the use of in-bond procedures to defraud either the U.S. or Mexico. In one case, Chinese fabric moving in-bond to Mexico was improperly manipulated to change its origin labeling to indicate that it was of U.S.-origin. False NAFTA certificates were also issued. In the other case, in-bond merchandise destined for Mexico was diverted to the U.S. and false pedimentos were used to show export.

Thanks to the reader who tipped me to these stories.

False Certificates

Shamed Broker

The CIT and the Endangered Species Act

Federal Circuit has issued a decision in Salmon Spawning & Recovery Alliance.

The issue here is whether the CIT can hear a claim that Customs and Border Protection and Fish & Wildlife have failed to enforce the Endangered Species Act with respect to certain salmon imports from Canada. The CIT previously dismissed for lack of subject matter jurisdiction because the enforcement of the embargo lies within the discretion of the agencies and is not subject to review.

On this point, the CAFC affirmed the CIT finding the claim to be non-justiciable.

The plaintiff's second claim is that the agencies failed to conduct a required consultation on the enforcement of the embargo. The CIT dismissed this claim for lack of standing.

On this point, the CAFC reversed. The Court held that the plaintiff's members have an interest (even if only aesthetic) in observing the salmon in their natural habitat. Also, the right invoked is procedural (i.e., the requirement for consultation) and the standing requirement is, therefore, relaxed.

With respect to this claim under section 7 of the Endangered Species Act, there was a remaining issue as to subject matter jurisdiction. The CAFC characterized this as a "novel" issue of first impression. Thus, although it acknowledged that it could have decided the issue, the CAFC remanded the case to the CIT to decide the jurisdictional issue. If the CIT finds a lack of jurisdiction, the case goes back to the Western District pf Washington, where it originated.

Also, welcome to Mr. Micawber who is blogging on a number of issues, which may well include customs and trade law. I'll let you link over to figure out the identity behind the Dickensian pseudonym.

Monday, July 07, 2008

Breaking: Gender Discrimination Case Dismissed

On July 3, the CIT dismissed Totes-Isotoner, but not on the grounds many people expected. It is a very interesting read (link). This is the case asserting that tariff rates that distinguish between products for men and women or between adults and children are unconstitutionally discriminatory. For example, men's gloves of HTSUS item 4203.29.30 are subject to a rate of 14% while gloves for other people (presumably women and children) of HTSUS item 4203.29.40 are dutied at 12.6% ad valorem.

I'm going to read the case more carefully and will provide a fuller analysis, but here are the highlights I have gleaned this morning:

  1. Because the tariff differential is implemented in a statute, review of its constitutionality is not precluded by the political question doctrine. In other words, this is not purely a questions of policy or negotiations, it is a tariff law that can be reviewed.
  2. Totes, as the importer, has standing to pursue the case even though it is only indirectly affected because it is being used to implement the allegedly discriminatory measure.
  3. Totes' claimed injury is a direct result of alleged express discrimination and, therefore, it falls within the zone of interest protected by the constitution.

However, Totes has a problem. In its complaint, Totes did not assert any facts showing a right to relief. Flipping this around, it seems to be a requirement for pleading real, as opposed to possible injury. What Totes apparently failed to do is assert that what appears to be express gender discrimination is not based upon some legally sufficient governmental justification. Having failed to allege a purpose or intent to disfavor one protected class (e.g., men), the Totes complaint is insufficient to state a claim on which relief can be granted. Another aspect of this is that there is no clear link between these tariff designation of products and the actual use of them. Totes has not asserted in its complaint that men buy men's gloves and women by women's gloves.

As a result, the Court of International Trade dismissed the case. Importantly, the dismissal was without prejudice meaning that Totes may be able to adjust its pleading and re-file. Of course, even if this case cannot be fixed, there are a large number of cases pending before the Court. That means, it appears this issues will get hashed out on the substance.

Here's the link again if you are interested.

Let The Chips Fall

Here is a classification decision of another sort.

In the UK, most food items are exempt from the value added tax. However, there is an exception for what Americans would call "potato chips." Recently, the UK tax court had to decide whether Pringles, those tube-packed stacks of potato-ie goodness, are actually potato chips for purposes of the tax exemption.

Procter & Gamble, the maker of Pringles, argues that Pringles are actually made from a baked dough rather than a fried slice of potato. Further, Pringles do not shatter when eaten like a chip but melt in your mouth. This last bit strikes me as odd since in my experience Pringles shatter quite nicely when chewed and also seem to spontaneously shatter in the bottom of the can.

Here is an article from Bloomberg on the controversy.

Thanks to numerous readers for the tip.

Wednesday, July 02, 2008

Touch My Survey Monkey

I've created a survey of to get some visitor feedback. It is not at all scientific; just humor me.

Click here to take survey

I view this as kind of an experiment. If it works, I'll do future surveys on important issues like whether companies should join Customs and Border Protection's Importer Self Assessment program and what is the best harbor on Lake Michigan?

Costa Rica Inches Closer to CAFTA

To meet the U.S.-imposed October 1 deadline for implementing CAFTA, Costa Rica has dismantled its telecom monopoly and now its insurance monopoly. See the story here from the International Herald Tribune.

You may now break into "Do You Know the Way to San Jose?" and I don't mean California.