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.