Thursday, December 31, 2009

Here's the deal

I don't moderate comments. I don't get enough to worry about and almost all have been on point and respectful. I've noticed that I am attracting a few more spammy comments and at least on company that sells a NSFW product has posted numerous spam comments. For now, I am going to leave the situation alone. Rather than moderate comments, I'll assume everyone understands that anonymous comments don't come from me. If it does get worse, I'll move to moderating comments.

Unless anyone can tell me whether I can block comments from a specific visitor in Blogger. That would be the better solution.

Wednesday, December 30, 2009

Eye on Trade

Over at Public Citizen's Eye on Trade blog, they are complaining that CAFTA has no means by which the US can eject a country that has undertaken some anti-democratic action, failed to adopt the rule of law, or otherwise misbehaved. The blog compares that to AGOA, a program in which the President has exactly that power. Recently, Niger, Guinea, and Madagascar lost AGOA benefits following undemocratic transfers of power. Why not, Public Citizen wonders, do the same under CAFTA where Honduras has had a similar experience.

The reason is that AGOA, GSP, and other unilateral preference programs belong to the United States. The US made the rules and can kick out a country that fails to satisfy the rules. CAFTA, like NAFTA and the other bilateral or multilateral trade agreements, are different. The rules were negotiated between and among the parties. Since no one will agree to negotiate and implement a trade agreement from which they might be ejected, the agreements contain no such provisions.

Public Citizen may not like it, but the practical reality is that the trade agreements just don't work that way.

Monday, December 28, 2009

Docket Clearing

As the 2009 winds down, the Court of International Trade appears to be clearing its collective desk.

Storewall, LLC v. United States involves the classification of wall panels used as store display systems. The panels are made of plastic and affix to a wall via a plastic locator tab. The panels are grooved to accept shelves, baskets, and other display items. The importer claims that the merchandise is classifiable as furniture in Heading 9403, while Customs asserts that the correct classification is as articles of plastic in Heading 3926.

The problem for the plaintiff is that Chapter 94 Note 2 defines furniture as something designed to be placed on the floor or ground. The display systems mount on a wall. But, the note contains an exception for items designed "to be hung, to be fixed to the wall or to stand one on the other." That exception is intended to cover "cupboards, bookcases, other shelved furniture and unit furniture." The wall-mounted panels are clearly not cupboards or bookcases. Thus, the question is whether they are unit furniture, which is not defined in the HTSUS.

The Explanatory Notes provide some guidance in that they state that unit furniture is for holding various objects or articles such as books, crockery, kitchen utensils, etc. The ENs also state that 9403 does not cover coat, hat, and similar racks. Further, "unit" is defined in this context as a piece of furniture that can be fitted with other pieces to form larger systems. Think of modular bookshelves at Ikea and you'll be on the right track.

Having teed this up legally, the Court faced a factual problem. It is possible that as imported a complete store display system might qualify as unit furniture. To do that, it would have to be something other than a coat or hat rack or similar rack. If the system is ultimately used with pegs rather than shelves or baskets, therefore, it would not qualify as unit furniture. Thus, the specific configuration at the time of importation is determinative. In this case, according to the Court, at the time of importation, the goods were not unit furniture but generic articles capable of multiple configurations. Apparently, because the completed article is not necessarily unit furniture, the components could not be classified as parts thereof.

That said, the merchandise was found to be prima facie classifiable as other articles of plastics in Heading 3926.

The decision raises a question for the plaintiff. What would the Court have said had each wall panel been imported with the hardware necessary to mount shelves? It seems the conclusion might have been 9403. Given that, is it commercially feasible to configure the importations as unit furniture even if the ultimate use is as something else? That bit of tariff engineering depends on the cost of separately shipping the other components and of either returning or scrapping the shelves. But, it is something to consider.

Arko Foods Int'l v. United States is also a classification case. This one involved mellorine, which is apparently an ice cream alternative made with non-butter fats; although in this case, the ingredients in mellorine included milk powder and whey. Some varieties might also include cheese a or whole milk powder. Customs classified the mellorine in Heading 2105 as ice cream or another edible ice. Plaintiff asserts that the proper classification is as composite articles having the essential character of prepared fruit or other food preparations.

The Court's analysis begins with a conclusion: mellorine is classifiable in 2105 as an "other edible ice." It just is. This is one of those things that is not really worth arguing about. It is a frozen dessert similar to sherbet. Since the application of GRI 1 leads to that conclusion, the argument concerning GRI 3(b) and composite goods must fail. Classification stops when a GRI produces an answer; it is inappropriate to move on to later GRIs.

The hard part is the proper tariff item with Heading 2105. That question turns on whether the mellorine is an article of milk or cream for purposes of Additional U.S. Note 1 to Chapter 4. The reason this is interesting is that there are several Customs rulings on what constitutes a beverage having an appreciable amount of milk. In those rulings, Customs drew the line at 5%. Customs argued that those rulings are entitled to deference by the Court in deciding whether the mellorine is an article of milk or cream. The Court, however, rejected that argument on the basis that the present question does not involve a beverage and the relevant note asks whether mellorine is an article of milk or cream not whether it contains an appreciable amount of milk. That strikes me as entirely correct and the right thing to do. It is always easier to side with the government and say that deference made you do it. Pointing out that a ruling lacks a reasoned analysis and addresses a somewhat different question is tougher because you know it creates an opportunity for appeal.

Rather than apply the 5% rule, the Court looked to an earlier Court of International Decision for a test. Under Wilsey Foods, the Court looks to whether milk or cream is the essential ingredient, the ingredient of chief value, and the preponderant ingredient. In addition, the Court looks to whether the product is considered a dairy product in the relevant industry. In this case, the Court found that milk or cream were neither essential nor predominant ingredients. Also, neither constituted the chief value of the mellorine. But, there was testimony that mellorine is considered a dairy product in the industry. This testimony, however, was held to be of limited value on the specific question. Consequently, the Court found the mellorine to be something other than an article of milk or cream and, therefore, classifiable in 2105.00.50.

That leaves only one important question: Where exactly can I get my hands on some of this stuff? It comes in exciting flavors including purple yam, Quezo Real (with cheese!), and durian. Seriously, these sound like food products I want to try.

Monday, December 21, 2009

The Oracle Says: Confirm it in Writing

This case follows in the footsteps of the decision in Aectra Refining and involves the question of what is necessary to perfect a claim for drawback. In this case, the claim was for the drawback of the Harbor Maintenance Tax and the Merchandise Processing Fee. It is also a good life lesson about the importance of the confirming memos we lawyers use to get things on paper (real or virtual) when others are content to leave them un-memorialized.

As background, you need to understand that in Aectra, the plaintiff did not claim drawback on MPF and HMT because, at the time of the initial claim, the law did not support the drawback-ability of those fees. Following a Federal Circuit decision in Texport Oil Co., the law provided for drawback of MPF but not HMT. Congress made HMT eligible for drawback in 2004 and retroactively applicable to pending claims. The specific issue in Aectra was whether Aectra’s protest was enough to establish a claim for drawback of HMT and MPF that was not asserted in the original claim. In Aectra, the Federal Circuit held that the protest could only challenge Customs and Border Protection’s decision on what was in the claim. Since the drawback on HMT and MPF was not asserted, Customs did not actually deny it, and the protest was not a basis for challenging the lack of drawback.

Delphi’s facts are a little different in an important way: in transmitting the claims to Customs, Delphi included a letter specifically stating that it was not waiving its claims to HMT and MPF drawback. Further, the letter confirmed Delphi’s understanding that Customs would permit it to file a protest if, after Texport, MPF and HMT drawback became permissible. Delphi claims that this correspondence was enough to protect its right to protest the denial of the HMT and MPF drawback. Not surprisingly, the government disagreed.

The Court rejected Delphi’s principal argument on the grounds that the notice letter did not constitute a complete and timely claim for drawback. The letter did not include a calculation of the drawback amount claimed for the MPF or HMT. Consequently, Customs did not have adequate notice of the claim. In addition, the subsequent protest, which occurred outside the three-year period in which a drawback claim can be amended, was neither sufficient nor timely to add HMT and MPF to the claim.

Delphi, however, had an additional argument that the three-year period to amend the claims was extended far enough to make the protest an adequate means of perfection. The question is what caused the extension. First, the Court held that it was not the mere futility of seeking drawback when the law did not permit it. Nor was it Customs’ delay in liquidating the claims (which happened beyond the three-year period). Rather, it was the fact that Delphi seems to have received advice from a drawback supervisor, who suggested that Delphi wait and perfect its claim via the protest process.

A couple important points about this: First, the Court is very clear that it might not have reached this conclusion had Delphi relied upon advice from “a low-level employee in some far-flung outpost . . . .” Instead, Delphi sought advice from the very official responsible for making the decision on the application of drawback to MPF and HMT. Second, this has to be distinguished from estoppel and equitable tolling. Those principles allow private parties to change the nature of their relationship by relying upon clear statements. If, for example, the landlord says that you can stay another month for free and, in reliance on that statement, you forgo looking for a new apartment, then you have every right to stay and might have a right to damages if he kicks you out during that extra month. [By the way, that’s not legal advice for squatters, your lease might vary. I never took that class.] The important point is that these principles don’t apply to the United States government. If an import specialist tells you that Thursdays are Duty-Free Day at Port Huron, you don’t get to skip paying duties.

This, however, is not an estoppel case. Rather, it is based on the drawback statute, which specifically provides for an extension of time to complete the claim when Customs is responsible for the late filing. 19 USC 1313(r)(1). The advice from Customs caused Delphi not to file a claim for HMT and MPF drawback until the protest after the liquidation of the claim. Because Customs caused the delay, 1313(r)(1) applies.

And how do we know Delphi received that advice? Because of the confirming letter it wrote to the very person who provided that advice. The letter asked the drawback supervisor to respond if he disagreed. He did not respond. In the Court of International Trade, that is as good as an agreement. Plus, his affidavit seems to have helped.

What do we learn from this? Maybe very little, because the circumstances are unusual. There are not many places where Customs’ delay results in an extension to file. But, it does show the value of documenting communications with decision makers. For Customs, it shows the perils of letting some communication from an importer or claimant sit on your desk unanswered.

Wednesday, December 16, 2009

The Graceful Injunction

Agro Dutch Industries is technically a dumping case, but it deals with the issue of the impact of liquidation by Customs and Border Protection, so I will deal with it here.

This case involves the review of the dumping order covering preserved mushrooms from India. Commerce issued its determination and Agro sought to challenge it. To preserve its rights, Agro moved for an injunction with the consent of the United States. The injunction was necessary to prevent Customs from liquidating the entries. The general rule is that once liquidation happens, there is no relief available and the case is moot. So, the injunction was important and both sides knew it. In the background is the fact that Agro waited beyond the allowed 30 days to seek the injunction, but that provides context more than anything else.

At the request of the government, the injunction included a five day grace period before it became effective. The grace period was intended to prevent Customs people from accidentally violating the order and ending up in contempt of court.

Guess what happened: Customs liquidated most of the entries during the five day period.

Agro went back into Court asking that the injunction be retroactively amended to cover the entries of for some other relief to fix the situation. The Court of International Trade granted the relief and ordered that the entries be treated as unliquidated. The government appealed.

This is one of those interesting cases where the law, at least in general terms, seems to produce a bad result. Following a number of Federal Circuit decisions, it would seem clear that the liquidations mooted out the case. But, the facts matter and often the decision lies in the details.

In this case, the fact that the United States agreed to the injunction and requested the five day gap only to protect Customs from possibly erroneously violating an injunction indicated that both sides understood that there should be no intentional liquidations during that period. Consequently, the intent of both parties and the Court of International Trade was that the entries would remain unliquidated and available for judicial relief. Given those unique facts, the Court invoked its powers in equity to affirm the Court of International Trade's order modifying the injunction and preserving the entries for review and relief.

It's a surprising result, which only makes sense when you look at the details. The lawyers who worked on it for Agro must have done a good job. Unfortunately, Agro appears to have been represented by the Unknown Lawyer of Anonymous, Secret & Nameless. Otherwise, the CAFC would have named them.

Tuesday, December 15, 2009

Seeing Hypocrisy

Often, I disagree with a position adopted by U.S. Customs and Border Protection. That is the nature of my job. Sometimes I am right, sometimes, I am wrong, and often reasonable minds may differ. What I don't do is see everything that CBP does through the lens of Washington policy makers. That is primarily a result of years of experience dealing with the agency and also my Midwestern practicality. Rarely do I see any coordinated conspiracies.

For example, there was a lot of hubbub a while back about a CBP proposal that would have effectively banned the importation of a category of pocket knives that have spring assisted opening mechanisms but have not heretofore been classified as illegal switchblades. Some people believed this to be a stealth effort by the Obama administration to slowly limit personal rights which would ultimately result in the repeal of the Second Amendment and the loss of gun rights for all Americans.

I seriously doubt that. In fact, I am willing to bet that no one outside of Customs or possible the Department of Homeland Security knew anything about that proposal before it showed up in the Federal Register. I just don't believe that anyone in the White House is paying close attention to the details CBP admissibility decisions. There is a war going on, health care to sort out, and an economy in shambles. Pocket knives seems pretty far down the Oval Office agenda.

The same goes for the current controversy over the tariff classification of solar panels equipped with electrical diodes are classifiable as generators. Apparently, similar panels have long been classified as photovoltaic cells, which are duty-free. However, earlier this year, Customs noted that solar panels with diodes are excluded from that classification when they incorporate elements to control the flow of electricity. Consequently, it ruled that such solar panels are properly classified as electrical generators and subject to a 2.5% rate of duty.

This caused the people who have been exporting solar panels to the United States and those who purchase them to cry foul. Yesterday, Scott Lincicome, a trade lawyer in Washington wrote on his blog that the classification decision is inconsistent with the Administration's efforts to support green business and encourage trade in environmentally friendly products. In a post accusing the White House of hypocrisy, he asks "Is the Obama Administration publicly pushing for free trade in "environmental goods," while quietly raising tariffs on a key "green" product to protect domestic businesses from losing market share?" He answers the question by saying that it looks that way.

I have no beef with this thesis if the "Obama Administration" is taken in its literal sense of everyone who works for the executive branch. On the other hand, I think it is extremely unlikely that anyone from "the Administration" applied any political pressure that made its way to the National Import Specialists in New York who issue routine classification decisions. If a policy decision were made to protect or encourage the U.S. production of solar panels, wouldn't the easier process be to pass a tax incentive or some other more direct incentive? More likely, this is a case of one hand not watching the other hand and probably purposefully so.

Maybe I am wrong. I just don't buy that there is actual affirmative hypocrisy at work. Rather, I think the folks at CBP are trying to do their jobs properly applying the tariff schedule without regard to larger policy questions. If that bumps up against some larger economic or environmental policy, Congress or the "Administration" will have to fix it. And that is exactly what happened with the knife issue. Congress amended to law to prevent CBP from making the change. End of controversy. If anyone feels this is a big enough issue to push, it should try and get duty suspension or some other legislative relief. Otherwise, CBP is going to move ahead, doing its job.

Tuesday, December 08, 2009

2009 Counterfeit Goods Statistics

Customs and Border Protection has posted its annual report on the seizure of counterfeit merchandise. Here are some highlights:
  • Almost 15,000 seizures of counterfeit merchandise
  • The seizures amounted to $260 million in domestic value
  • There was a small decline in seizures, which was far smaller than the decline in overall imports
  • China was the leading source for counterfeits
  • Footwear was the leading commodity seized
Here is a link to the full report.

Friday, December 04, 2009

It Must Be The Holiday Season

Customs has seized a $1.6 million in counterfeit toys. The merchandise included "knockoff" Barbie dolls and riding toys with unauthorized Jeep labels. Here is the news story.

IN a separate event, Customs and Border Protection seized $1.7 million in merchandise bearing counterfeit sports team logos. Wayla-guy would be offended to know that Cubs logos were included among the counterfeits. Here is that news story.

Normally, I would not post simple news reports on seizures. But, I just taught on this topic last night. So, this is to let my student know that these things really happen in the real world. My student, I hope, also now understand how very difficult it can be for a good faith buyer to differentiate between a counterfeit and legitimately imported gray-market goods. For all you budding retail entrepreneurs, note that this is a risky business.

Monday, November 30, 2009

Gibson Guitars Raided Under Lacey Act

Just when I thought there was nothing new to blog about . . . .

According to news reports, the Gibson Guitar company has been raided by federal agents of the Fish and Wildlife Service enforcing the Lacey Act amendments. The underlying investigation appears to be focused on imports of rosewood from Madagascar. Under the Lacey Act, importers of many products that are or include plant materials are required complete a declaration identifing the botanical genus and species being imported and to certify that the plant materials were harvested and exported legally.

From a corporate compliance stand point, that can be difficult because the direct supplier often will not know the origin or legal status of the wood it purchased. This requires that importers set up a system a tracking the plant material back to it's origin. It is not unlike NAFTA tracing for automotive companies.


Tuesday, November 17, 2009

Seventh Circuit on ITAR

Sometimes it takes a while for things to actually hit the front of my brain. Such is the case with a June 2009 decision of the Seventh Circuit Court of Appeals involving an appeal from a criminal conviction under ITAR. In the spirit of "better late than never," here is a summary of U.S. v. Pulungan (No. 08-3000, decided Jun. 15, 2009).

Mr. Pulungan tried to export some riflescopes to Indonesia. Believing there to be an arms embargo on Indonesia, he planned conceal the actual destination by transshipping via Saudi Arabia. In reality, the embargo had been lifted in 2005, two years before the attempted export. The scopes, however, are arguably controlled by the International Traffic in Arms Regulations as riflescopes "manufactured to military specifications." Importantly, the law provides that the designation "in regulation" of items as defense articles is not subject to judicial review. As a result, the district court instructed the jury to accept the State Department's designation of the rifle scopes as being manufactured to military specifications even though the responsible witness was not able to explain what those specifications entail. He was found guilty by a jury of trying to export without a license and sentenced to 48 months in prison.

Enter the appellate lawyers.

The first issue was whether the designation of the 'scopes as manufactured to military specifications was "in regulation" and, therefore, beyond judicial review. The Seventh Circuit recognized that it would not be possible for the government to list every single 'scope made to military specs and that a narrative description was an efficient way to draft the regulation. However, the Court also stated that the designation of the specific 'scopes at issue in this case was not in the regulations. It was known to the manufacturer (presumably via a commodity jurisdiction decision) and to other industry "insiders" but there is no evidence the status of these specific 'scopes was known to the defendant.

Unlike a regulation, which is published for the world to see, a commodity jurisdiction decision is essentially private. The State Department, according to the Court, cannot be permitted to regulate (actually criminalize) behavior based on a document kept secret in a file. Thus, the Court held that in a case such as this, the government is required to prove, not just assert, that the products are covered by the regulation. In this case, that means the government needed to prove that the 'scopes were manufactured to military specs.

The second issue had to do with whether the defendant knew that the 'scopes were defense articles. That knowledge is a legal requirement for conviction. But, as was discussed above, the defendant did not know that the 'scopes had been designated as defense articles. On this front, there are some bad facts for Mr. Pulungan. First, he apparently viewed and printed web pages stating that limit the countries available for shipment of the 'scopes. Second, he was apparently willing to pay above market prices for the 'scopes. Third, he lied to associates about how many 'scopes he was buying and where they were to be sent. Lastly, he had written notes wrongly indicating that munitions shipments to Indonesia were barred. Taken together, the United States argued, these facts indicate knowledge by the defendant that something illegal was going on.

In a very forcefully worded section of the opinion, the Court said that the retail web sites might have had numerous reasons for declining to sell outside the U.S. including possibly exclusive distribution territories. As a result, Mr. Pulungan cannot be said to have known that the merchandise could not be legally exported without a license. As an aside, it is interesting to note that the examples the Court used might not be as clear as the Court believes. USB flash memory produced outside the U.S. is, contrary to the Court's statement, subject to U.S. export control laws once imported to the U.S. even if it is not a defense article. Similarly, the limitation on the export of orange flavored milk chocolate may have to do with dairy quota systems. Nevertheless, the legal conclusion was that the defendant did not have knowledge of the requirement for a license to export the 'scopes.

On the second point, the Court refused to hold that the knowing effort to violate a non-existent arms embargo transferred to the attempted unlicensed export. In the end, though, it did not matter because the U.S. was unable to prove that the defendant knew the 'scopes were manufactured to military specs.

Where does this leave the Department of State and, more specifically, the Directorate of Defense Trade Controls? The Court very clearly offered on alternative: make publicly available the list of items found to fall within a certain USML category. In other words, list the results of commodity jurisdiction decisions. That would result in something similar to Customs and Border Protection's online rulings database. Not only would exporters see the specific items found to be defense articles, but the rationale would be visible. That would make internal corporate commodity jurisdiction determinations more reliable. Of course, for policy reasons, the government may not want the specific details available. Still, providing the list would be a useful first step.

Tuesday, November 10, 2009

Trademark Lawyer FOIA Suit

Here is an interesting footnote to my recent post on Customs and Border Protection's enforcement of intellectual property rights.

First, I received an e-mail from some well-respected customs lawyers expressing concerns over Customs' enforcement. The concerns included the timing of infringement decisions and, surprisingly, the fact that Customs' has seized legitimate merchandise bearing registered a trademark on the theory that the registered trademark infringed another registered trademark. That sounds like CBP has stepped into the Patent and Trademark Office's territory.

Another interesting point is this post by Seattle Trademark Lawyer Michael Atkins. According to the post, another Seattle trademark lawyer has filed a suit under the Freedom of Information Act seeking the release of all seizure notices relating to counterfeit merchandise. From the post, it is not clear whether the suit goes so far as to seek records of detentions and Notices to Redeliver. Either way, it is also not clear what has triggered the plaintiff's interest. It is hard to say whether the plaintiff thinks CBP is being too tough or not tough enough, or has some other interest entirely.

Maybe the suit is trying to get identifying information on specific importers. That possibility, by the way, relates directly to the District Court's decision to uphold Customs denial of the request on the grounds that releasing the information would release competitively sensitive information. That triggers exception 4 to the FOIA. Apparently, an appeal has been filed.

Sunday, November 08, 2009

Off Topic: I hate musicals . . . usually.

It has been a while since I have done a purely off-topic post. For purposes of efficiency and recognizing that most visitors to this blog are looking for specific and useful information, I have avoided the "whatever strikes my fancy" kind of post. Facebook has also given me a more appropriate outlet for those topics. That said, I am moved to write about an episode of Batman: The Brave and the Bold.

I am not a fan of classic American musical theater. I would rather do just about anything than sit through another production of Oklahoma!, Camelot, or Bye Bye Birdie. On the other hand, I have enjoyed more modern musicals including Rent, and Les Miserables. The stage production of Tommy was one of the best musicals I have seen.

That is background. The next piece of background is that I read comic books, or "comics" as we in the know say. Specifically, I read a couple series on the DC side of things (although I am dabbling in Marvel's effort to bring Captain America back from the dead). In the DC Universe ("DCU"), I read a couple of the Batman titles including the new Batman Detective, which features Batwoman Kate Kane at the moment, and the new Batman and Robin series, which tells the story of a new Batman and new Robin trying to figure out how to make their way in the wake of Bruce Wayne's apparent death. I say "apparent" because Bruce seems to have been transported to the distant past and, as a general principle, these things are rarely permanent in comics. Just look at Captain America. I'm hopeful J'onn J'onzz (AKA Martian Manhunter) gets the same treatment.

The other series I read is the Justice League of America and the related title Cry for Justice. These titles seem to be a mess and I am not sure why I keep reading. Everyone knows that the best incarnations of the JLA consisted need the Big Three: Batman, Superman, and Wonderwoman. Into that mix, you need other A-list characters such as a Flash, Green Arrow, a Green Lantern, and one or two other well known characters such as Black Canary, Zatanna, Ray Palmer's Atom, or Hawkgirl. Aquaman is the best known character with the least utility so he is, sadly, disposable in this context.

The current incarnation of the JLA, though, is a collection of B-listers including Plastic Man, Dr. Light, Vixen, and Red Tornado. Also, there is a lot of angst going on as the League debates its future and its mission. While that is going on, Green Lantern and Green Arrow are off with Supergirl, Atom, and odd characters like Gongorilla, proactively hunting for the bad guys, which is a change from their usual reactive process. That change in mission has lead to some interesting "ripped from the headlines" questions about, for example, the value and morality of torture. If Ray Palmer goes up your nose, into your sinus cavity, and then starts to grow until you confess your plans, is that torture? I think the writers need to regroup and ask whether they can address the same interesting and thought-provoking issues with the better-known characters.

So, back to musicals.

Last night, my eight-year-old and I caught up on some TV episodes of Batman: The Brave and the Bold. Generally, I don't like this series. Although it is full of good team-ups, it is more in the style of the camp 1960's TV show than the gritty Dark Knight I like to read. But, it can be witty and it does dive very deeply into the DCU. I preferred the cartoon series The Batman, which had a more serious tone.

One of the episodes we watched last night was Mayhem of the Music Meister. I was dubious from the start because I am not aware of any established character known as the Music Meister. Further, I noticed additional credits at the beginning for music and lyrics. What's going on here, I wondered.

What it turned out to be was a fully-realized musical episode. The show opens with a scene involving the villains Black Manta, Gorilla Grod, and Clock King trying to steal a communications satellite while Black Canary, Aquaman, and Green Arrow try to stop them. For reasons that are not immediately clear, the heroes and villains begin to sing their taunts at one another. Eventually, it is discovered that they are all under the mind control of Music Meister, expertly voiced by Neil Patrick Harris.

The singing evolves into a fully choreographed and orchestral piece with hints of West Side Story. From then on, there is little spoken dialog. Also, a romantic subplot develops with Music Meister longing after Black Canary (well voiced by Grey DeLisle), who is longing for Batman. This is more involved than it seems as fans know she ends up married to Green Arrow (a fact foreshadowed in the conclusion of the episode). The show includes the expected elements of a blockbuster musical including a large chorus of Bat villains singing from Arkham Asylum, that Batman "drives them Bats." That is followed by a Black Canary/Music Meister duet that could have been lifted from Beauty and the Beast. After she and Batman are captured, Music Meister puts them in one of thoseRube Goldberg deathtraps to the tune of a punk-ish tune including the lyrics "Acid steaming, lasers beaming, bones crushing, deathtrap." The show ends with a the calculated "blockbuster " song and plot climax.

Throughout all of this, Batman has worked to save the day without singing. He has, however, offered a number of funny quips including that Music Meister's show has been cancelled due to "criminal intent and bad reviews." In the end, though, Batman too has to sing, with the help of his utility belt. Cue the final reprise of Canary's love song to Batman and the timely arrival of Green Arrow.

All in all, the music and writing is top notch. It perfectly walks the line between the cartoony world of TV superheroes and a send up of over-the-top Broadway musicals. In a lot of ways, it reminded me of the very entertaining Spamalot, which strikes something of the same balance.

It seems this was a bit of a surprise success for Warner Bros. It has now released the soundtrack, which is available in the Zune Marketplace and Amazon. It's probably in iTunes as well.

See for yourself via Daily Motion:

Saturday, November 07, 2009

Cruising to Prison

I'm only posting this link because I know there continues to be interest in the policy questions surrounding Customs and Border Protection warrantless searches of electronic storage devices such as laptops and phones.

This guy was pulled from the customs line following a cruise. He was already a convicted sex offender. That, no doubt, accounts for the heightened scrutiny. When CBP reviewed the contents of his computer, it found child pornography. As a result, the passenger is now headed to prison for 15 years.

The article makes the usual references to civil libertarian concerns and possible statutory changes. The problem with the cases is that the defendants are so unsympathetic. Who in Congress will stand up for the rights of perverts and terrorists to be free from border searches. The problem, of course, goes much deeper because it is not just perverts and pornographers who might be searched. It is everyone and that means privileged medical records, attorney-client communications, ill-conceived love letters, and other sensitive documents. Customs has issued new guidelines on the searches, and there are some safety measures in place. Still, there is enough here to make everyone feel a little queasy.

Friday, November 06, 2009

New IPR Bond

Customs and Border Protection has established a new continuous bond category for intellectual property rights holders to use to secure the release of samples of allegedly infringing merchandise. This will simplify the process of getting samples for analysis for companies that often work with CBP to interdict counterfeits or infringing merchandise. Rights holders can also use a single transaction bond, if they prefer.

Here is the notice from Customs, which includes an contact number for more information.

While we are talking IPR, Customs has also finally republished the Informed Compliance Publication on CBP Enforcement of Intellectual Property Rights. All this activity is probably evidence of Customs' continuing focus on IPR enforcement.

Here is a nagging question I have. Does anyone in Customs represent the innocent legitimate importer in enforcement policy. The reason I ask is that I have seen clients with legitimate, non-infringing merchandise suffer very serious expense and delays trying to secure the release of merchandise. I understand that the the rights holders a legally entitled to protection and I am also very aware of the economic contribution intangible property makes to the U.S. economy. We should not allow free riders and criminals to hijack a brand. But, the innocent party that buys legitimate merchandise through parallel, unauthorized channels can rarely produce a chain of documentation back to the authorized producer. Neither the producer nor the rights holder has any interest, under the current system, in facilitating that importation. So the importer is stuck.

For now, the solution for the importer is to make sure the purchase agreement is contingent upon release of the merchandise and includes an indemnification for losses due to defending infringement claims, CBP penalties, storage expenses, etc. Of course, the guy selling NFL jerseys from a truck in Tijuana or shampoo from a card table in Red Square in Moscow is unlikely to agree to those terms.

Wednesday, November 04, 2009

No Transfer in License Revocation Case

The Court of International Trade has once again dashed the hopes of Arthur Schick to regain his customhouse broker’s license without re-applying for a license from scratch.

I previously reported on Mr. Schick’s plight. He had his license summarily revoked after failing, due to illness, to file his triennial status report as required by 19 U.S.C. 1641(g). Mr. Schick’s lawyers made a valiant effort, raising a number of arguments that Customs and Border Protection improperly revoked the license without a hearing and, therefore, the revocation is invalid. These arguments were based upon the customs regulations, the Administrative Procedure Act, and the Fifth and Eighth Amendments to the Constitution. The latter arguments were based on the premise that the lack of a hearing violated Mr. Schick’s due process rights and that the revocation was an excessive punishment.

In the first opinion from the Court of International Trade, the Court dismissed the case finding that it had no jurisdiction to review the decision. On appeal, the Federal Circuit agreed that the Court of International Trade lacked subject matter jurisdiction. Nevertheless, the Federal Circuit remanded and suggested that the CIT should consider transferring the case to a court that does have jurisdiction. Plaintiff has suggested that the District Court for the District of Columbia would be the correct venue.

This possible solution, however, ran into another obstacle. Considering the motion to transfer, the CIT began with the premise that transfers are only appropriate where the transfer serves the interest of justice. Consequently, the Court looked at the merits of the underlying claim challenging the revocation. That did not go well for Mr. Schick.

Basically, the Court held that there is no right to a hearing when a broker’s license is revoked for failure to file the triennial report. Revocation is essentially automatic. Because Customs had no discretion on whether to revoke the license, the CIT found that the lack of a hearing did not violate any of Mr. Schick’s rights under the regulations, the Administrative Procedure Act, or the Constitution. Further, Mr. Schick admitted in his complaint seeking relief that he had failed to file the report, thereby admitting that the license was properly revoked.

Because none of Mr. Schick’s arguments had merit, none would result in the restoration of his license or even a hearing on the issue. Consequently, according to the Court of International Trade, justice would not be served by transferring the case to another Court. The Court, therefore , denied the motion and dismissed the case.

Wednesday, October 28, 2009

Miami 2009 & DiCarlo Lecture

I know this is short notice, but if anyone is going to be in Miami tomorrow for the ABA Section of International Law Fall Meeting, please say hello to me. I will be helping to moderate a panel on transfer price for customs and income tax Thursday at 8:30 AM. Apparently, the ABA felt the driest possible topic should start off the morning. Friday there is a tour of MIA Customs and Border Protection cargo facility. I am not sure if I will make that because I have a flight to catch Friday evening.

While I am thinking of it, if you are in Chicago next week, I'll be introducing U.S. Court of International Trade Judge Timothy Stanceu at the annual DiCarlo lecture. This lecture is named in memory of "my judge," Dominick L. DiCarlo who was Chief Judge of the Court of International Trade. Judge DiCarlo had three successive John Marshall grads as law clerks. Judge Stanceu is, I think, the eight judge to speak in the series. Information is available here.

Thursday, October 22, 2009

Page Slap

It's been a pretty busy couple of weeks and will continue to be. Earlier this week, I participated as co-counsel for the plaintiff in a mock trial sponsored by the Customs and International Trade Bar Association. The trial went reasonably well, although I was surprised by a document I created on which I failed to check the math. Note to self: Don't do that in real life.

There have been a couple developments recently that deserve some blog coverage:

Here is video of testimony on the Customs Reauthorization bill.

Customs and Border Protection has published a Federal Register Notice regarding the use of sampling methodologies and offsetting overpayments in audits. This is interesting because statistical sampling in audits and prior disclosure perfections has been somewhat ad hoc. The issue has generally been whether the importer and the auditor could come to an agreement on a reasonable means of calculating the duties owed. Both sides generally understand that it is often not worth the effort and resources to get to an exact number when a reasonable amount of work will get to a number the protects the interests of the United States. Enter statistical sampling, in which both sides agree to a method of selecting a random universe of items for review and to be bound be the results in some way.

Under the proposal:
  • CBP will have sole discretion of decide whether sampling is to be applied or accepted
  • CBP will explain the approved sampling methodology
  • Once accepted, the audited party cannot challenge the methodology [Waive your red flag here.]
  • CBP always reserve the right to conduct a full entry-by-entry audit
The same proposal covers offsetting overpayments identified by auditors. The problem here is that often in an audit, it will be determined that an importer overpaid on some entries and underpaid on others. Traditionally, Customs did not permit the importer to use the overpayments to offset the amount owed due to underpayments. For dumping lawyers, this is a little like zeroing. Under the Trade Act of 2002, CBP must permit offsetting in an audit situation where:
  • The overpayments are identified during a CBP audit
  • The audit was completed after August 6, 2002
  • The overpayments relate to liquidated entries
  • The overpayments are within the scope of the audit
  • The overpayments were not made for illegal purposes
An important note is that CBP will not treat the failure to claim a duty preference at the time of entry as an overpayment. Also, offsetting will not be permitted to result in a net refund.

If you want to comment on this, your deadline is December 21, 2009.

Friday, October 16, 2009

Preference Criterion What?

Recently, I answered a question posted on the ICPA listserv. The question was interesting enough that I will review the substance of it here.

Most people generally think of the NAFTA preferences in terms of criteria A through D. These cover the vast majority of compliance issues with B being the leader. The ICPA question was about preference criterion E. What, you ask? Never heard of it.

Well, it is of limited use, but if you are in the IT sector, it is a terrific rule. Preference E states simply that certain goods listed in NAFTA Annex 308.1 are considered originating simply by virtue of having been imported duty paid into the NAFTA region. [If you struggle with tariff shifts and RVCs, pick your jaw up off the ground.] What this means is that a 100% Japanese content computer imported duty paid into Mexico, for example, is originating when it is later transferred to the United States or Canada. In other words, for the IT sector, NAFTA sets up a mini customs union.

That's all well and good but the devil is always in the details. The question presented in the ICPA question was about the documentation. Specifically, what origin to declare for the goods on the NAFTA CO and on the entry documents.

There are two rulings (NY R03125 and H005101) addressing preference criterion E and neither explains the procedure for making a claim at the time of entry. In both rulings, the real issue was the country of origin marking. Because the goods were further processed in Canada, the origin for marking purposes was found to be Canada. In addition, the August 20, 2009 Customs Bulletin (page 18) includes a notice saying the Customs is considering the status of an earlier related ruling.

When more than minor processing takes place in the NAFTA region, the NAFTA Preference Override (19 CFR 102.19(a)) kicks in and makes the origin the country of last processing. But is no processing occurs, the answer is unclear.

The HTSUS permits only two special program indicators to make a NAFTA claim: MX and CA. To make a legally valid preference criterion E claim at the time of entry, you have to use one or the other. But in the example of the Japanese computer, the CO must be accurate and valid. The CO, therefore, should probably correctly state the fact the origin is JP because the NAFTA marking rules don't result in a NAFTA country being the country of origin.

Further, the instructions on the NAFTA Certificate of Origin are a little squirrely on this point. The instructions seem to recognize that the goods are not actually originating but that the goods are only "considered" originating. Here is the language:

Certain automatic data processing goods and their parts, specified in Annex 308.1, that do not originate in the territory are considered originating upon importation into the territory of a NAFTA country from the territory of another NAFTA country when the most-favored-nation tariff rate of the good conforms to the rate established in Annex 308.1 and is common to all NAFTA countries.
That is different than criterion A through D which just define originating goods. So, this seems kind of like the NAFTA preference override, which assigns an origin for duty purposes only and leaves marking alone. Does criterion E work the same way?

An alternative approach that avoids this problem, but has cash-flow implications, is to avoid making the claim at the time of entry. Instead, make a post-entry claim for a refund. That way, you don't have to assert a NAFTA country as the origin in the SPI column (although it can be argued that the SPI is not an origin claim but only a duty preference).

So, here is a question for you. Am I over thinking this? Is there really no problem. Maybe one of the brokers out there will set me straight. Or, if you happen to work for an IT equipment importer, please drop a comment and let me know what is happening on the ground with respect to this issue.

Wednesday, October 14, 2009

Can the CIT Review What Customs Reviews?

This is a tricky question that was answered in Funai Electric Co. v. United States.

The underlying issue has to do with a determination by the International Trade Commission that certain imported digital televisions infringed a U.S. patent. As a result, the ITC issued an exclusion order requiring Customs and Border Protection to prohibit entry of the infringing televisions. This all happens under 19 U.S.C. sec. 1337 in what is called a 337 case.

Following the exclusion order, some of the infringers developed a work-around to produce what they believed to be non-infringing televisions. They then went to Customs to get a ruling confirming the admissibility of the new televisions. Customs provided the ruling. Seeing the value of their exclusion order evaporate, the patent holder went to the Court of International Trade seeking a declaratory judgment or other relief holding that Customs has no authority to determine the scope of an ITC exclusion order. Rather, that task should fall to the ITC. The defendant (that is the importer of the re-engineered televisions) moved to dismiss the case for lack of subject-matter jurisdiction.

The Court reviewed the somewhat checkered past of cases considering the jurisdiction of the CIT to hear cases similar to this. If the Court has jurisdiction, it would be via the statute giving it jurisdiction to grant declaratory relief or under the Court's so-called residual jurisdiction.

On declaratory judgment, 28 USC 1581(h), the Court provided little analysis other than to followed a prior case, Eaton Corp., finding no jurisdiction under 1581(h). Further, the Court found no case in which a similarly situated plaintiff had secured (h) jurisdiction.

Regarding residual jurisdiction under 28 USC 1581(i), the court noted the absence of an issue involving (1) revenue from imports or tonnage or (2) tariffs, duties, fees, or other taxes on imports. That knocked out 1581(i)(1) and 1581(i)(2). Because no embargo or quantitative restriction is involved, 1581(i)(3) does not provide jurisdiction. Note that the Supreme Court has said the exclusion of merchandise infringing intellectual property rights does not count as an embargo or quantitative restriction. Lastly, the broad grant of jurisdiction under (i)(4) is linked to the administration and enforcement of the items subject to review under (i)(1) through (i)(3), that (i)(4) did not provide jurisdiction either.

Plaintiff's last resort was an appeal to the general, but non-statutory, authority of the Court of International Trade to resolve civil actions arising out of federal laws regulating import transactions. While that is manifestly true, it is also somewhat aspirational. As the Court of Appeals for the Federal Circuit has re-affirmed, the CIT's actual jurisdiction is determined by actual statutes and cannot be expanded by judicial decision. Consequently, the lack of a statutory basis on which the Court may assume jurisdiction dooms the plaintiff's efforts.

The Court clearly wanted to hear the case. Early on in the discussion of the jurisdiction provision, Senior Judge Aquilino states explicitly, "the undersigned has not doubted the intent of its framers than an action like this be subject to the jurisdiction of the Court of International Trade." In the end, though, he was compelled to leave changing the law to, what he characterized as, "higher authority."

Where does that leave us? Well, the CBP ruling is still valid because it can't be reviewed. Should CBP have issued it to start with? That question will have to wait for word from either the Federal Circuit or a district court somewhere that might have jurisdiction.

Monday, October 12, 2009

My Service To You

I read Rodrogue, so you don't have to.

United States v. Rodrogue involves a technical issue in which the United States attempted to cure defective service on the defendant. Service is the means by which a defendant is notified of a claim against it. If service is not made properly, the Court does not have jurisdiction. In this case, the US sought leave of the Court to extend the 120-day service period by an additional 90 days and to permit service by public notice. Public notice service is based on the legal fiction that people actually read the legal notices buried in the back of the newspaper.

The gist of the facts is that Customs repeatedly tried to serve the defendant's at the wrong addresses. One defendant was finally served, but after the statute of limitations and the 120-day period for service had run. The other defendant was never served. The upshot is that the United States needed to show good cause for its failure to serve. If it does show good cause, the Court must grant the request. In this case, the Court found no good cause. In fact, the Court says that the government could not easily have done any less to effectively accomplish service. In the absence of good cause, the Court still has discretion whether or not to grant the motion. Given these facts, the Court declined to exercise that discretion and the motion for an extension was denied. Having denied the extension, the motion to permit service via public notice was moot.

Despite the mootness, the Court engaged in a thorough, detailed, searching analysis of the law surrounding service by publication. As a litigant, I might appreciate the effort and the thorough opinion. I can clearly see that a judge wants to be certain that no relevant legal principal or citation has been missed. But, as a regular customs lawyer reading this, it seems hard to get through 64 "Talmudic" pages and 119 footnotes for the proposition that the government really needs to use reasonably good efforts to serve defendants; otherwise, it risks having its case dismissed.

Tuesday, October 06, 2009

Update: News of the Weird

Back in August on 2008, I blogged the story of a customs broker who was being investigated after having gone to the Federal Reserve to turn in some battered currency for clean new money. According to the original story, the money was found in Mexico.

Yesterday, the Washington Post ran an update on the story. The money involved totaled some $6.4 million and was found buried at a warehouse in Mexico. As it turns out, and contrary to my first post, the broker involved appears to have crossed all the t's and dotted all the i's to properly bring the currency into the U.S.

Still, there is something fishy going on as there was a settlement payment made to the U.S. Assuming this were truly just found money, it's not clear to me that there would be any need to settle anything. So, is there something more to this?

Even with that tail hanging just a bit, it's nice to have an end to the mystery.




Thursday, October 01, 2009

Epilogue: The Wrath of Kahrs

We are in the final stretch. I hope this is the last post on this case.

Kahrs's (grammar note: that looks awful) final argument has to do with 19 USC 1625 and the rule that once Customs has issued an interpretive ruling or settled on a uniform treatment of merchandise, it has to respect that practice. To change practice, Customs is required to go through a public notice and comment process. Kahrs takes the position that prior denied rulings, multiple intensive reviews, and hundreds of liquidations count as interpretive rulings, which cannot be undone via a simple CF-29 Notice of Action.

Initially, the Court held that denied protests are not interpretive decisions within the meaning of the statute. The law does provide that "protest review decisions" are interpretive rulings. Simple denied protests, however, are outside the scope of 1625. Ditto the liquidation and intensive examinations. To make things worse for Kahrs, the Court noted that is 2001, Customs did go through the 1625 process and properly revoked the prior rulings on this merchandise.

Regarding prior treatment, as opposed to prior rulings, Kahrs must first prove a consistent prior treatment by Customs applying Kahrs's favored classification. This requires proof of an actual determination by a Customs officer and consistent treatment over a two-year period. Liquidations that occur without examination or review do not count. That leaves 12 entries on which Kahrs tried to build a treatment.

Of the 12, seven were subject to review by an import specialist. But the Court found no evidence that Customs sampled the merchandise to ascertain the correct classification. According to the Court, "[m]ere perusal of entry summary data is hardly the type of entry-specific classification analysis that a Customs import specialist undertakes, nor is it the type of act contemplated by the plain language of § 177.12(c)(1)(i)."

Regarding the five cargo examinations, the opinion provides fine background on what happens during a cargo examination. In this case, the exams were the result of random stratified selections. In some cases, these exams may not have involved an import specialists and it is not always clear what was examined. The notation "OK COMPLIANT" in the data does not, according to the Court, necessarily indicate review by an import specialist specifically for classification. Based on this and a similar analysis of other comments in the data, the Court concluded that Kahrs had not established a treatments for purposes of section 1625(c)(2).

The next (and last!) argument is similar in that it posits that an established and uniform practice existed regarding the classification of this merchandise. If there is an EUP, no administrative ruling can increase the rate of duty without publication in the Federal Register. The regs on this are at 19 CFR 177.10(c), (e). Plaintiff's argument is that the CF-29 Notice of Action cannot replace publication in the Federal Register.

The Court had several problems with this argument. First, an EUP is generally affirmatively declared by the Secretary of Treasury, and that did not happen. Second, there was a ruling revoking prior classifications back in 2001 that was published in the Customs Bulletin (although not the Federal Register). This gave Kahrs notice of the change. That Bulletin notice stated that there was no EUP. Furthermore, Kahrs was unable to show the existance of an undeclared, de facto EUP. This was for much the same reasons that it could not show a legally binding "treatment." Thus, Customs's (seriously, I don't like that s's) failure to publish a notice in the Federal Register was not an administrative error.

Which leaves us with with Kahrs in the reactor core, light saber in hand, staring down at a young but powerful Import Jedi. The Jedi is hurt, but knows the Force (of the law) is with him. Kahrs, extends a hand to the Import Jedi and says, "Join me. Together, we can rule galactic customs compliance."

"I won't," the Jedi responds through a clenched jaw.

"Your master has lied to you."

Crouching on a narrow catwalk over the deep chasm of the reactor core, the Jedi shouts. "No, Master Harmon has taught me well. You are wrong. I follow the way of the Explanatory Notes."

Kahrs, his voice deep and his black helmet amplifying his labored breathing, responds, "I am an IMPORTER! Join the Import Side. Embrace the Import Side."

The Jedi looks down. He is buffeted by winds that make no sense what so ever deep inside the cloud city. He looks back at the Kahrs the Importer, smiles slightly, and leans over. He topples into the reactor core shaft.

Cue the music. Fade to black.

Please join us in a few months for Kahrs V: The Federal Circuit Speaks.

Wednesday, September 30, 2009

On the Apostrophe

UPDATED BELOW:

Garner's The Elements of Legal Style, Rule 2.6 (Oxford, 1991)(emphasis in original) states the following:

2.6 Form Singular Possessives by Adding 's to the Singular Form of the Noun

The rules holds true regardless of how the word ends: thus, witness's, Jones's, Congress's, and testatrix's. There are three exceptions to the rule. First, the word its is possessive, it's being the contraction for it is. Second, your and hers, which are absolute possessives, take no apostrophe. Third, biblical and classical names that end with a -zes, or -eez sound take only the apostrophe. Thus,

Jesus' Moses' Aristophanes' Socrates'

If the possessive form seems awkward to you, rephrase: the laws of Moses instead of Moses' laws, the action of Congress or the congressional action instead of Congress's action.

Given the treatment of Customs as a singular entity, I take it from Garner (my go-to grammar guy) that the CAFC was correct as a matter of formal grammar. Customs's will be my preferred usage henceforth and I am a little embarrassed that I had floated toward treating Customs as a plural noun, which would justify my use of the naked apostrophe. But, that still leaves open the question of Customs's own institutional preference and whether there is any reason for it.

Update:

I am shocked at the amount of controversy this has generated. I have actually written on some contentious issues, but have never generated this many comments. I am very worried about you all.

That said, I found a different answer via Grammar Girl's Quick and Dirty Tips. Unlike Garner, GG (AKA Mignon Fogarty) says there is no hard and fast rule on this and that style guides differ in their advice. She also points this article deconstructing a Supreme Court opinion reviewing a Kansas statute in which there were multiple opinions and differing views on the use of the 's. According to the author, Jonathan M. Starble:

The surprisingly popular practice of omitting the final "s" in all s-ending words is both technically improper and completely illogical. Indeed, the use of an additional "s" accurately reflects proper pronunciation. Whereas an 's produces a clear sound, a mere apostrophe produces no sound at all. Accordingly, if one were to pronounce the sentence, "Kansas' statute is constitutional," it would sound exactly the same as the sentence, "Kansas statute is constitutional." That wouldn't make any sense. Furthermore, it is hard to imagine that law clerks for Justice Thomas go around saying to people, "Hello, I'm Justice Thomas clerk." (Of course, the same analysis applies to people like Jesus and Moses, but they are apparently entitled to some type of "grandfather" exception.)

Given the diversity of opinion, I am feeling empowered to return to my prior practice of dropping the trailing s. I will, though, continue to use a lower case letter c when using customs as an adjective rather than as a proper noun. Thus "customs classification" refers to the practice of classifying merchandise under the tariff schedule. On the other hand, "Customs' classification" refers to the classification Customs assigned to the merchandise.

Anyone want to argue about that?

Tuesday, September 29, 2009

Kahrs III: What Have I Done Wrong?

Here I sit, painfully aware of my promise to my loyal readers to digest and summarize this Court of International Trade decision in a way that is both accurate and entertaining (well, entertaining to customs lawyers). The opinion is a dry 88 pages long. My task is daunting. I feel like I am standing at the base of some reasonably tall mountain with too little food and without an experienced Sherpa. I wonder whether there is any meaningful principle of customs law to be taken from this case. In other words, why am I bothering?

[Pause for much time spent staring into space waiting for some sort of sign from heaven telling me what to do. None arrives, I continue reading.]

Kahrs imports wood flooring which it classified in 4418 as builders' joinery. Customs and Border Protection classified the merchandise in 4412 as plywood. Kahrs filed suit and asserted as its causes of action:
  • Improper revocation of prior rulings via a CF-29
  • Acts in opposition to an established and uniform practice
  • Proposed alternative classifications
  • A commercial designation claim
  • A claim for declaratory relief
Before the Court could get to the merits of these claims, it had to deal with the government's motion to dismiss the declaratory judgment claim for lack of jurisdiction and for failing to state a claim. The court also had to deal with a motion to strike certain allegations. On top of that, each side filed multiple motions for summary judgment on the individual claims. Poor Judge Carman explicitly complained about this in footnote 6.

The declaratory judgment action was brought under the Court's residual jurisdiction (28 USC 1581(i)) in an effort by the plaintiff to have the Court pass on the classification and exercise of reasonable care by Kahrs. This would provide a defense in any subsequent penalty case brought by the United States. The Court dismissed this claim on the grounds that the only entries properly before the Court were those covered by the denied protests and the summonses. Rather, the proper venue for raising those issues is as a defense in a penalty action. Thus, the Court dismissed that claim in its entirety.

Next, the government moved to strike some statements from Kahrs' complaint. The motion to strike was untimely and, therefore, the Court denied it.

That takes us to summary judgment, which goes to the merits. There were several motions and cross-motions for summary judgment addressing various claims brought by Kahrs. Happily, the Court first addressed the proper classification of the merchandise.

Customs treated the merchandise as plywood (4412) while Kahrs wanted it classified at assembled parquet panels (4418). Kahrs also provided as alternatives other edge-glued lumber and builders' joiner (both in 4418).

Heading 4412 covers "[p]lywood, veneered panels and similar laminated wood." Plywood is a structural material comprised of sheets of wood glued together with the grain of adjacent panels at right angles. Plywood is made up of veneer panels, which are thin sheets of wood. Finally, laminating is uniting layers of material by adhesive. The Explanatory Notes state that 4412 covers plywood used as flooring panels sometimes referred to as "parquet." Looking at samples and industry standards, the Court found that Kahrs' products are classifiable in 4412.29.

Turning to 4418, the Court had to determine whether the merchandise was also described as "parquet panels." Parquet is joinery consisting of an inlay of geometric or other patterns usually of different colors. Celtics fans know parquet when they see it. The Court held that the primary feature of parquet is that it involves a geometric pattern or mosaic. Kahrs' flooring, on the other hand, simulated solid wood planking. In the absence of a geometric pattern, the product is not classifiable in 4418.30. The fact that the flooring produces a striped pattern or a pattern simulating natural wood did not help.

Next, the Court addressed whether the merchandise can be classified as edge-glued lumber in 4418.90.20. The Court concluded that this term encompasses only single-layer products cut by the mill and glued only on the edges. Thus, the merchandise was excluded. On the last alternative classification as other builders' joinery of 4418.90.45, the Court quickly rejected the argument based on the CIT decision in Faus. But, since the goods in that case were fiberboard, not wood, the Court's ultimately reversed Faus analysis, was inapplicable.

The next set of issues relate to whether Customs improperly revoked certain rulings and decisions. Since I have a job and actual work to do, let's leave that for Kahrs IV: The Phantom Revocation.

Saturday, September 26, 2009

And Now, A Word from the CAFC

Before I get to Kahrs III: The Search for Refunds, I want to take a look at Faus Group, Inc. v. U.S., which the Federal Circuit issued yesterday. There are a number of reasons for that. First, Faus is short. Second, it's brevity seems to raise something of an issue. Third, it relates to some of the same legal questions. Fourth, it raises a truly important grammar question.

Faus involved the classification of laminated flooring panels as either fiberboard under heading 4411 or as "builders' joinery" under 4418. The Court of International Trade had upheld Customs and Border Protection's classification in 4411.

The merchandise is pre-cut, tongue-and-grooved flooring consisting of a fiberboard coated with a photographic image to simulate natural wood. The pieces are not structural and are designed to be installed on a secure subfloor. Within heading 4418, Faus asserted that the proper classification was in 4418.30.00 as parquet panels or in 4418.90.40 as other.

The Federal Circuit's analysis is refreshingly concise. The Court's first step was to define builders joinery as pieces of wood or fiberboard that are already joined or capable of being joined that function as non-structural finishing for the interior of buildings. According to the Court, that puts this merchandise prima facie in 4418.

The government argued that Note 4 to Chapter 44 narrowed the scope of 4418 by permitting 4411 to include articles that have been worked along an edge as long as the work does not give the article the essential character of merchandise described by another heading. The Court rejected this for the simple reason that Note 4 says nothing about the scope of 4418. In other words, applying the Note to limit the scope of 4418 requires a leap from the text in what I can best describe as an attempt to determine the subjective intent of the drafters (Note: that is me speaking, the CAFC did not say that). This is not a constitutional case requiring that kind of thinking (and it is debatable whether that kind of reasoning is necessary in a constitutional case).

Turning to 4411, the Court was faced with two interpretations of Note 4. Here, we need to quote the whole note:

Products of heading 4410, 4411 or 4412 may be worked to form the shapes provided for in respect of the articles of heading 4409, curved, corrugated, perforated, cut or formed to shapes other than square or rectangular or submitted to any other operation provided it does not give them the character of articles of other headings.
The issue is whether the final proviso applies to all of the listed operations (e.g., curved, corrugated, perforated, etc.) or only to "any other operation." The CIT held it applied only to other unlisted operations. Apparently, the premise here is that the tongue-and-groove gives the goods the shape of wood of 4409 but since it is not wood, it has "the character of articles" of 4418. Therefore, Note 4 prohibits classification in 4411. The government argued since the proviso only applies to "other operations," this fact is irrelevant.

The Court, to its credit, did not resolve this question. Rather, it said (effectively), "so what?" If we assume the the CIT was wrong, then the merchandise is excluded from 4411. If, on the other hand, we assume the CIT was correct, then what happens?

What happens is that the Court has to decide between 4411 and 4418 based on the General Rules of Interpretation. The way to do that is to apply GRI 3(a) and classify the merchandise in the heading that most specifically describes it.

There are a couple tests for specificity. The Court first considered which of the two heading is more difficult to satisfy. Builders' joinery, according to the Court, must be processed so that the pieces can be joined. Heading 4411, on the other hand, covers (among other things) raw fiberboard. The second test for specificity to to ask which of the two headings covers fewer items. Because builders' joinery covers only products used as non-structural elements, it has a more limited scope of use than does 4411 and covers a larger variety of products. Thus, under GRI 3(a), 4418 is the more specific and, therefore, applicable heading.

Having reached that conclusion, it becomes unnecessary to resolve the meaning of Note 4. Either Note 4 excludes the merchandise or 4418 is more specific. Either way, the CIT got to the wrong result. That leaves the correct classification as 4418.90.40.

That took the Federal Circuit 11 pages. In the course of its opinion, the Federal Circuit made the following interesting observation:

In a fifty-three page analysis, an analysis that can only be described as Talmudic in its breadth and thoroughness, the trial court parsed the verbiage contained in the competing headings, explored dictionary definitions, and sorted through a wealth of prior cases on the construction of HTSUS headings.

Why is this in the opinion? It strikes me as somewhat ambiguous. It might be intended to give credit to the trial court for its thoroughness and detail. On the other hand, it might be interpreted as an expression of frustration at having to parse through Talmudic reasoning to get to a relative specificity decision.

Is 53 pages too much for a relatively simple classification decision? How much is enough is a very tough call. Clearly, the Court wants the parties to know that all of the arguments and evidence were given full consideration. The CIT also needs to convey to the Federal Circuit that the case was decided carefully. When I was a clerk (admittedly a long time ago), my Judge had two rules. First, nothing gets into his opinion that is unnecessary to the outcome (i.e., no dicta). Second, nothing goes in that did not come from one side or the other. The latter is based on the usually correct premise that really good lawyers who fully understand their case have written the briefs. These rules make eminent sense to me. Among other things, they result in concise opinions.

I am in no way criticizing the CIT's opinion. I have no facts on which to do that. I have no idea how the briefs looked in this case. Certainly there was a lot of focus on the meaning of Note 4. It must have been presented as an important issue. Still, I subjectively feel like there is a general trend toward longer CIT opinions. Is the CAFC feeling that too? Can someone confirm whether there is such a trend? If so, how would that inform the advocacy at both courts?

I'm not sure of the answers to these questions; it is a MonsterQuest.

Last thing: page 2 of Faus contains the following sentence: "Faus protested Customs's classification." Here is the grammar question: is that the proper possessive form? I would generally go with Customs'. Literature from the agency says no apostrophe ever. I blogged about this in one of my very first posts. I might have to revisit this with a little statistical analysis. For now, I am hopeful Grammar Girl will accept this as a challenge.

Wednesday, September 23, 2009

Kahrs II: Revenge of the Import Specialst

Returning now to the saga of Kahrs International, we have some more evidence questions to resolve. Before that, and with all due respect to the guy who complained about my Audi post, I say, "Hey Kahrs, nice floors you have there." I notice only because my kitchen floor is a wreck.

In this second published opinion, the government moved for summary judgment, in part, on the basis of two declarations from Customs personnel. Kahrs moved to strike portions of those statements. Motions like this are decided on the basis of the judge's sound exercise of discretion and can only be reversed if the judge abused that discretion. In other words, the judge has pretty wide latitude here.

The motion to strike comes down to an ages-old question in customs litigation: Are Customs Import Specialists "experts" for purposes of giving testimony in court. A run of the mill witness is generally only allowed to testify as to facts. "The light was green." "It was 8:00 PM." Expert witnesses, on the other hand, can review information and, drawing upon their technical knowledge, offer opinions based on the facts. "From those skid marks, in my opinion he was traveling 80 MPH." Because of this leeway, a party seeking to use an expert has to provide the other side with background information establishing the witness' credentials and also the facts upon which the opinions are based. The latter is usually done through an expert's report.

In Kahrs, the witnesses from Customs gave what the plaintiff considered to be opinion testimony but were not identified as experts and were not treated as such. Kahrs, therefore, moved to strike some of the statements. But, the government noted that Federal Rule of Evidence 701 permits non-expert opinion testimony in certain limited cases, including when based upon personal knowledge and experience, "often on the job."). This is the difference between personal knowledge and technical knowledge. So a machine shop operator can give an opinion as to how something might have been made based on her personal experience while a professor of engineering can give the same opinion based on years of academic work even if he never set foot on a shop floor.

Turning to the two witnesses, the Court found that each had significant personal experience dealing with wood products and the wood-products industry. They have also read the relevant materials from Customs and the trade. Thus, they had acquired knowledge through personal experience and were, therefore, permitted to offer lay opinions within the area of their personal knowledge.

This does not really resolve the question of whether an Import Specialist is an expert. It does, however, appear to create the path by which they will be permitted to give opinion testimony.

The Court then turned to numerous objections plaintiff raised with respect to the government's proposed findings of fact. These are numbered paragraphs of individual facts presented to the Court with a reference to backup evidence. Courts can construct their decisions based on uncontested or proven facts submitted in this way. Each of the plaintiff's objections was overruled or the Court stated it would not consider some objectionable information.

Coming soon Kahrs III: On the Merits


New Commissioner Nominated

President Obama has finally nominated Alan Bersin to serve at Commissioner of Customs and Border Protection. Here is his official bio:

Alan Bersin was appointed by Homeland Security Secretary Napolitano in April, 2009 as Assistant Secretary for International Affairs and Special Representative for Border Affairs in the Department of Homeland Security (DHS). In that capacity, he serves as the Secretary's lead representative on Border Affairs and Mexico, for developing DHS strategy regarding security, immigration, narcotics, and trade matters affecting Mexico and for coordinating the Secretary's security initiatives on the nation's borders. Prior to his current service, Bersin served as Chairman of the San Diego County Regional Airport Authority. Previously, Mr. Bersin served as California’s Secretary of Education between July 2005 and December 2006 in the Administration of Governor Arnold Schwarzenegger. Between 1998 and 2005, he served as Superintendent of Public Education in San Diego and from 2000 to 2003 served as a member and then Chairman of the California Commission on Teacher Credentialing. Prior to becoming the leader of the nation’s eighth largest urban school district, he was appointed by President Bill Clinton as the United States Attorney for the Southern District of California and confirmed in that capacity by the U.S. Senate. Mr. Bersin served as U.S. Attorney for nearly five years and as the Attorney General’s Southwest Border Representative responsible for coordinating federal law enforcement on the border from South Texas to Southern California. Mr. Bersin previously was a senior partner in the Los Angeles law firm of Munger, Tolles & Olson. Mr. Bersin received his A.B. in Government from Harvard University (magna cum laude) and attended Balliol College at Oxford University as a Rhodes Scholar. In 1974, he received his J.D. degree from the Yale Law School.

Let's deconstruct that a bit. He's a smart guy: Harvard, Rhodes Scholar, Yale Law. Has a law enforcement background: U.S. Attorney and AG's guy in the southwest. But a public service guy: Education jobs in California. Now at DHS on border affairs. So it seems he has a solid background in law enforcement but also in the management of an agency with completely different objectives (i.e., education). The education job was probably as much about managing a multi-headed beast with too few resources as it was about actual education policy.

So, with that in mind, I am cautiously optimistic.

Tuesday, September 22, 2009

Deem It All!

This post is really background to the next couple posts.

The Court of International Trade is not known for disputes over discovery or the admissibility of evidence. But, if you want to see a customs case involving hard-fought battles over evidence, look no further than Kahrs International v. U.S. The first opinion in this matter involved a highly unusual motion by the United States to have the Court withdraw deemed admissions. This week, two more opinions came out. Let's deal with them in order.

The underlying dispute has to do with the treatment of wood veneer flooring strips. The defendant failed to timely respond to several requests to admit from the plaintiff. A request to admit is a discovery tool through which one side simply asks the other to admit some fact as a means of taking it off the table as an issue. If the other side does not respond, the fact is deemed to have been admitted.

The Court, however, has discretion to relieve the party of it's deemed admissions where it will not serve the goal of getting to the merits of the case and the withdrawal of the admission will not prejudice the other parties ability to bring or defend its case. In other words, if the Court feels it can get to the merits without substantial prejudice to the other party, it can un-deem the admissions. Importantly, the focus is not on what caused the late response or no response. This is not about the quality of excuses, it is about getting to the right result fairly.

The Court noted that leaving the deemed admissions deemed would lead to a victory for the plaintiff on at least some counts. Further, the Court noted that the defendant's answer to the complaint effectively denied these same allegations. Accordingly, the deemed admissions did not serve the goal of a decision on the merits. Thus, the Court found the first prong to have been satisfied.

To satisfy the second prong, the plaintiff would need to show prejudice. In this situation, prejudice is not simply having to prove the otherwise admitted fact. It relates to the inability to prove that fact otherwise. On this point, the Court found that the delay in answering the requests was not substantial and that the plaintiff has the opportunity to depose witnesses necessary to prove the otherwise deemed admitted fact. Thus, it was unable to show prejudice.

As a result, the Court ordered that the deemed admissions be deemed withdrawn, which is a lot of deeming.

The second opinion in this case, resolves Kahrs' motion to file a reply brief and to exclude certain evidence. That will be the next post.

Saturday, September 19, 2009

Dear Audi, Why?

As a far too occasional bike commuter, I feel I should be offended by this ad for the Audi diesel. Audi seems intent on lumping bike commuters, strap hangers, and Segway owners into a larger category of nerds and losers. Of course, only the kick-scooter commuters belong there.

Oddly, I'm not offended. Instead, I'm thinking the S5 is pretty hot looking. Damn you Audi!





Wednesday, September 16, 2009

FCPA Goes Hollywood

Here is a little something for those of you out there trying to convince management that compliance is worthwhile. Some folks in Hollywood were apparently not paying attention to the Foreign Corrupt Practices Act. It seems they decided that the best way to get the contract to run the Bangkok Film Festival was to bride the relevant governmental official to the tune of $1.8 million.

Under the FCPA, with very limited exceptions, it is illegal for a U.S. person to make a corrupt bribe a foreign governmental official to secure or retain business. There are very limited exceptions for what are often called "grease payments." A grease payment is made to expedite a ministerial task that is certainly going to happen. The difference has to do with whether the bribe is to get someone to exercise discretion in your favor as opposed to just do their job. Still, if your theory is that you are making grease payments so it is all good, you are treading on some very thin legal ice.

The second part of FCPA has to do with recordkeeping in the U.S. There is a lot to this part but it is tougher to explain. The bottom line is that your books and records better properly report your corrupt and non-corrupt bribes. If the SEC or DOJ finds your books are hiding payments, that is a separate violation. It is kind of like getting a drug dealer on tax evasion.

The other thing people don't realize about the FCPA is that the penalty can be disgorgement of the proceeds. So, if your sale team gave the Minister of Aviation of Whocaresastan a bottle of scotch while showing off your cool new ATC system, and failed to properly record the gift, your company might have to give back the $1 billions it earned on the airport construction contract.

That can hurt. Oh, and people can also go to jail.

So, FCPA compliance should not be under the radar. Get some training for your management and sales staff. It will save you a lot of grief later.

Monday, September 14, 2009

Residue and Tires

On the regulatory front, Customs and Border Protection is delaying enforcement of the rule requiring the entry of previously considered empty containers if there is residue in the container. For now, they can be treated as empty. The implementation of this change is delayed until further notice.

After this comes into force, the residual goods will have to be entered. Quantities may be estimated, but if a more accurate quantity is later determined, the entry should be updated.

In case you spent the past 48 hours under a rock or in a cave, President Obama has decided to levy new duties on tires for passenger cars and light trucks from China. This is a Section 421 case based upon the theory that there has been a surge in imports and the U.S. industry needs some breathing room to adjust. The duties will begin at 35%, go to 30% in the second year, and then to 25%. This is the first time an industry has successfully sought relief from the Obama administration. Here is the USTR press release. This takes effect 15 days from September 11, 2009 (which is September 26).

Wednesday, September 09, 2009

Classification Case

UPDATED TO FIX THE LINK:

Generally, I worry about any court opinion that requires its own table of contents, but in my effort to fill the gaps in my recent blogging, I will jump into ENI Technologies v. United States.

The merchandise involved is RF generators that take AC electricity, convert it to DC and then produce electrical current at specific frequencies and power. The frequencies are high enough to be in the range of radio energy, but the output is just electrical current at a certain wattage. In this case, the wattage is in the order of thousands of watts. The output is used to create plasma useful in the production of semiconductors, to which it is integral. Although there are other applications, semiconductor production appears to be the primary use.

Customs classified the merchandise as static converters. The importer had a number of alternative classifications starting with parts of plasma processing systems. This required an analysis of Section XVI, Note 2, which controls the classification of parts of goods in Chapters 84 and 85. Under the note, goods classifiable in Heading 8466 remain there even if used used solely or principally with a particular kind of machine. Tariff item 8466.93.85 covers parts of machines for plasma etching. That means that if the RF generators are parts for plasma etching systems, they are classifiable in Heading 8466.

The Court then engaged in a thorough analysis of the meaning of the term "part" and concluded that parts act on and affect the operation of the article of which they are a part. In other words, parts must have a direct relationship to the primary article. Based on this, the Court found that the RF generators are parts of plasma etching systems. However, any RF generators that have other principal uses are not classifiable in 8466 and may be classified with the machines with which they are solely or principally used.

Still with me?

The Government's position was that the RF generators are static converters of Heading 8504. Although the Explanatory Notes define static converters, in part, as an apparatus used to convert electrical energy in order to adapt it to further use, the Court declined the Government's invitation to rely on this broad definition. Rather, the Court looked to other examples of static converters and found that found that the term does not encompass apparatus that convert AC to DC and then back to AC at higher frequencies.

The remaining possibilities were for machines for processing semiconductor materials and electrical machines having individual functions not specified elsewhere. The Court applied the Carborundum factors plus its finding that the principal use of the RF generators is to process semiconductor material in 8479.89.84 if they are used in a process other than plasma etching of 8466.93.85.

Thus, the Court denied the Government's motion for summary judgment and granted the importer's motion to the extent the principal use of the merchandise is known. The Court then ordered the parties to work out the details.

And that, my friends, is a short summary of a 49 page opinion. I'm sure those familiar with the case will say I missed the important points, but you take what you can get for free. Right?

And with that, I say, "Good night from Minnesota."