Sunday, December 19, 2010

Pre-Break Update

I am going to be off the grid next week (more or less). So, to keep everyone happy while I am gone, here are some things to contemplate:

The House passed its Omnibus Trade Act of 2010 on December 15. The bills contains an 18-month extension of GSP and an 18-month extension of ATPA/ATPDEA but only for Ecuador and Colombia, not for Peru. Here is a link to the bill text. The bill also contains many temporary duty rate reductions. The Senate is expected to take up the bill soon.

The final text of the Anti-counterfeiting Trade Agreement has been published and the USTR is seeking comments on it before February 15.

Monday, December 13, 2010

Costco: Tie Goes to the Circuit Court

The Supreme Court has decided the Costco grey market Omega watch case. We discussed that earlier here. Unfortunately for those seeking clarity, the case was "decided" by an eight-judge panel. Newest Justice Kagan was excluded because she worked on the case at the Justice Department. As you Supreme Court scholars know, a tie decision results in a non-precedential affirmance of the lower court decision. Thus, this is entirely anticlimactic.

Friday, December 10, 2010

Pleading

I have never intended this blog to be nothing more than a repository of case law from the Court of International Trade and the Court of Appeals for the Federal Circuit. My goal is that this blog serves as a place to find analysis of developments in the area of customs law and compliance. Early on, I blogged on more general topics involving corporate compliance and regulatory changes. Lately, I have not had much inspiration to do so. I want that to change. In fact, for 2011 I resolve to post more often on regulatory and compliance developments. If you want to help me improve the blog for next year, feel free to send me questions or post ideas. My friends and readers out there have been of great assistance in making this blog work. So, to the Retired Customs Guy, the Broker in Texas, to Matt, and to Anonymous, keep the comments and questions coming. It helps keep the bold interesting for all involved.

Now that I am done pleading with you, I will talk about a pleading case from the Court of International Trade: FAG Holding Corp. v. United States.

This is another of those cases where the procedural rules got in the way of the plaintiff getting a decision on the merits. That is not to suggest that the decision is unfair or incorrect. It is just a reminder to all of us that the technical aspects of presenting a case to the CIT matter. Given the current state of the law, I think it is fair to say that these things matter more than they have in the past.

The law requires that a complaint present "sufficient factual matter, accepted as true, to 'state a claim to relied that is plausible on its face.'" That is a mash-up of two Supreme Court cases: Ashcroft v. Iqbal and Bell Atl. Corp. v. Twombly. That means that the complaint must be more than speculative. That was not always the case. Prior to these Supreme Court cases, it was possible to file a complaint asserting a right to relief on the assumption that the plaintiff's lawyer could use discovery to find facts sufficient to show a right to relief. Today, the lawyer needs to know and assert the facts that make out a plausible right to relief. And, since we can't just assert facts we do not have some basis to believe, this change in burden is meaningful.

FAG involves the application of dumping duties to to two entries. Plaintiff protested the application of the antidumping duties, claiming that the entries had liquidated by operation of law without the antidumping duties. To make out a case for deemed liquidation, the plaintiff needs to allege and prove that (1) the suspension of liquidation from the dumping case terminated, (2) the Customs was notified that the suspension terminated, and (3) that Customs failed to liquidate the entries within six months. Those are pretty specific requirements.

For the plaintiff to have a right to relief, it needs to allege in its complaint the date of entry of the merchandise. This is a prerequisite to determining the dumping review period and, therefore, the date of suspension of liquidation. In this case, the Court looked to the physical entry documents to determine the entry date. "Entry" in this context is the filing of documents necessary to secure the release of the merchandise. Here, the importer used the "immediate delivery" process to secure a quick release of the goods. Under this process, the time of entry is defined in the regulations as the time the entry summary document is filed in proper form with estimated duties attached. This is a week or so later than the date alleged in the complaint. That puts the entries in a subsequent antidumping review period and means that the suspension of liquidation had not terminated at the time of liquidation.

Based on those facts, the Court held that the complaint did not allege facts sufficient to create a plausible right to relief. As a result, the Court dismissed the action.

On the Horizon


The Court of Appeals for the Federal Circuit has decided the appeal in Horizon Lines v. United States. Interestingly, the CAFC affirmed the Court of International Trade but found that the lower court had committed harmless error in its legal analysis.

Since you follow these things, you probably remember that this case involved duties assessed by the United States for ship repairs undertaken outside the U.S. Horizon Lines challenged the duty assessment on the grounds that the work performed on the ship was not a dutiable repair but was actually a non-dutiable modification. I know this kind of semantic distinction makes non-lawyers crazy, but there it is. That is how the law is written and that is what Customs and the Court must apply.

The modification in question was an improvement to the container guide system used to place containers in appropriate locations in the cargo hold. The change improved the speed and ease of loading the ship and improved safety during the loading operation.

The CIT found no evidence that the container guides were in need of repair. Consequently, the CIT held the work to be a non-dutiable modification. Although noting that the container guides were in good working order prior to the modification, the CIT held that fact to be irrelevant.

On appeal, the United States argued that the CIT took too narrow a view of "repair" as meaning restoring a feature to good working condition after sustaining damage. Rather, the government suggests that repairs include systematic improvements to the operation of a vessel.

The Federal Circuit agreed with the CIT's more narrow definition of "repair" in this context. Further, the Court held that the condition of the modified parts is relevant to determining whether the modification is a repair. If the part is in good working order, there would be no need for a repair. This is where the CIT got the analysis wrong, but the error was not important to the ultimate decision.

Thus, when faced with deciding whether to undertake some ship modification, carriers should note that if the work is done to "mend" or "restore" a system after it has been damaged or decayed, that expense is likely to be dutiable (unless another exception applies).

Thursday, December 02, 2010

Slow News Edition

It looks like imports from Canada will be subject to the same requirements for fumigating or heat treating wood packing materials that apply to the rest of the world. FR Notice.

Also, the ITC report on modifying the tariff treatment of certain festive articles has been delayed until December 13.

Here is a CBP Fact Sheet on import safety.

Updated list of countries cooperating in the Arab League Boycott.

Tuesday, November 23, 2010

Speaking Of . . . .

Not a half hour after posting about the tiger trade, I saw this press release concerning illegal trafficking in sperm whale teeth and narwhal tusks. The conviction includes a count for violating the Lacey Act.That is up to 20 years in prison and $250,000 in fines. Somehow, I doubt peddling scrimshaw to tourists in Nantucket was worth it.

For what it is worth, in my head, the defendant looks like the sea captain from The Simpsons.  Yar!

WCO Announces Tiger Trade Cooperation

Long-time readers of this blog know I am interested in the illegal trade in animals. Usually, that manifests itself in posting articles about some guy arrested with 20 turtles in his pants or some similar oddity. Despite the News of the Weird aspects of it, the illegal trade in animals is an important issue. The people behind this are depleting the natural diversity of wild animals and threatening the wild population. The buyers of these animals are often simply idiots with little impulse control. Where I might want to splurge on some shiny electronic device, these folks want to own an exotic animal, usually illegally.

Today, it was reported that five international enforcement agencies including the World Customs Organization and CITES have formed a consortium to fight the trade in tigers. Here is the press release: WCO - Press.

Best of luck.

Saturday, November 20, 2010

Judicial Conference in a Nutshell

I always enjoy the Court of International Trade Judicial Conference, and the most recent edition was no exception. Granted, a lot of the personal enjoyment comes from having the opportunity to see friends and colleagues. But, there is plenty of substance to be absorbed as well.

For whatever reason, the conference skewed somewhat to trade-related discussions over customs this time around. From a customs lawyer's perspective, it would appear that the single most vexing issue facing the trade bar is the issue of Commerce's policy of publishing liquidation instructions within 15 days of a final agency determination. This causes problems because the parties have 30 days in which to challenge the determination by filing a summons. In the ordinary case, the plaintiff gets to Court and asks for an injunction against liquidation to prevent that from happening.  Sometimes, Customs and Border Protection liquidates entries prior to the filing of a summons and request for an injunction. Once the entries liquidate, the case is moot and the potential plaintiff has lost the opportunity to seek judicial review. Everyone seems to agree that the best solution is some kind of automatic stay or injunction against liquidation for the 30 days.

In the midst of this discussion, the question was raised about the role of importers in trade cases. The question, which I asked, had to do with the situation in which the importer wants the entries liquidated at the prevailing rate (whether that is the deposit rate or the assessment rate) without waiting for the respondent and petition to fight it out in court. If you think about, this is the one area of trade law where the importer is at the mercy of the exporter. Yet it is the importer who pays the duties. Importers often complain when they receive a liquidation notice five or more years after the date of entry because the liquidation was suspended pending litigation in which the importer was not even involved. Someone else in the audience suggested that this question raises fifth amendment taking issues. That is a topic that might be worth a law review article.

On the customs front, there was some interesting discussion about the standard for pleading facts in a complaint. The Supreme Court has recently required that the facts plead lead to a "plausible" conclusion that the plaintiff is entitled to relief. According to the panel where this was discussed, this should not be difficult to accomplish, but plaintiffs need to be aware. Otherwise, they might be looking down the barrel of a Rule 12 motion to dismiss.

All in all, it was a good conference. The location at the Trump in Soho was very nice too. Congratulations to everyone on the planning committee.

If you are interested, the papers from the conference are posted here.

Wednesday, November 10, 2010

The Primrose Path to Default

Pleading continues to be an issue in Court of International Trade litigation. In any other Court, that would not merit a comment. However, in the last two years or so, the CIT has issued several decisions focused on pleading, and that is a change from prior years.

In United States v. Callanish, Ltd., the United States alleged that the importer entered evening primrose oil without the required FDA approval. Because of this, Customs and Border Protection claimed the entries contained false or misleading statements or omissions, in violation of the penalty statute (19 USC 1592). Callanish, in particular, was the the manufacture of the product in Scotland and shipped the goods to the U.S. Apparently, the claim against Callanish is for aiding and abetting the allegedly fraudulent scheme.

After being served with an amended complaint, Callanish failed to defend itself. As a result, the United States moved for a default judgment to the tune of $17 million, the domestic value of the merchandise. The Court granted the default, but balked at entering judgment (which is technically two different things).

The issue for the Court was whether the government has pled facts sufficient to establish liability. It turns out that  the pleadings did not establish, to the Court's satisfaction, the domestic value of the merchandise. Rather, the complaint simply asserts that to be the value. Hence, the Court denied the motion for a default judgment but gave the U.S. 60 days in which to amend its complaint.

OK, so that is all technical and legal. An interesting aspect of the case for importers and compliance people is that CBP pursued this matter under 1592 as a penalty case. Typically, importers expect problems with FDA or other government agencies will be resolved via a Notice to Redeliver and then a liquidated damages case when the goods are not returned to Customs. The problem for Customs under those circumstances is the limited window in which it case demand redelivery. By proceeding under 1592, Customs can go back five years and, in the case of fraud, possibly collect the full value of the goods.

The lesson to be learned from that is that FDA imports (and goods regulated by other agencies) are not free and clear after the conditional release period ends. Like all imports, 1592 remains a viable enforcement tool.

Friday, November 05, 2010

When is Painting Repair?

Those of you who know me , also know that I spent (and unfortunately continue to spend) a lot of time of a single issue involving the tariff treatment is painting as an operation incidental to assembly under HTSUS item 9802.00.80. So, paint-related issues always catch my eye.

Horizon Lines, LLC v. United States is a paint case of a different color. The issue here has to do with whether painting a U.S.-flag ship in a foreign port constitutes repair for purposes of assessing the 50%  duties applicable to repairs. While in China, the Horizon Lines Crusader was painted above and below the water line. Below the water line, the painting was done in conformity with an international convention relating to the removal or sealing of environmentally destructive antifouling agents. Having had the occasion to apply copper-based antifouling paint to a a relatively tiny hull, I can tell you this is somewhat nasty stuff. Customs and Border Protection applied duty to all of this activity on the grounds that it constituted repair.

For an operation performed on a ship to be considered a dutiable repair, it has to involve (1) the purchase of equipment or parts, (2) the acquisition of repair parts or materials, or (3) "expenses of repair." "Repair" is understood in this context to mean the restoration of the ship to good condition after decay or other injury.

According to the Court of International Trade, paint applied to a ship's hull is not equipment. But, painting to restore the vessel to good condition may be a repair and, therefore, dutiable. However, there was much disagreement as to whether the application of antifouling paint was a non-repair modification or the repair of a decayed antifoulding system. As a result, the Court found that there were material issues of fact in dispute. That means that the anticlimactic ending to this post is that the defendant's motion for summary judgment as to work performed below the waterline was denied. For work above the waterline, the defendant's motion for summary judgment was granted (which means the U.S. won).

Thursday, November 04, 2010

Pop Quiz: Counterfeit?

Customs plays an important role in preventing the importation of merchandise that infringes U.S.-held intellectual property rights. That is an important job for the economy as well as for the health and safety of the public. You can usually be pretty certain that a company that is willing to rip off a brand name trademark is not too scrupulous about health and safety requirements. There are lots of dangerous counterfeit products out there, and we should all thank CBP for helping keep them out of the marketplace.

But there are also non-counterfeit products that nevertheless infringe someone's trademark, trade dress, or other intellectual property right. Those products may or may not present health and safety concerns as well. But, they are legally different.

Specifically, a "counterfeit" product is one bearing a mark that is "identical to or substantially indistinguishable from a registered trademark." 19 CFR sec. 133.21(a). These are the fake Coach and Prada bags, HP ink cartridges, and Nike shoes for example.

Recently, CBP used this picture as an example of counterfeit batteries:


I totally understand that these batteries are ripping off Duracell and that CBP should seize them as being infringing. But, is this a counterfeit products issue? "Young Emperor" is not identical or indistinguishable from "Duracell." So what is going on here?

Actually, CBP is on the right track about this and the folks at Duracell have been on the ball too. You need to understand that the label design can also be a trademarked device. In this case, beyond the Duracell name, the company all holds a trademark on the copper and black packaging as well. If you want to check, it is registration number 1039589. While the brand name  has not been copied, the packaging has.

We could quibble about whether the Duracell registration requires both the color scheme and the brand name, but the illustrative point is clear. Infringer who think they will avoid legal problems with minor changes to spelling or by avoiding the use of the brand name are often wrong.

Advice for the U.S.-based rights holder is to record your trademarks, copyrights, and other intellectual property with Customs and Border Protection. Then work with CBP to let the agency know what aspects of your product or packaging are protected. CBP will then be in a position to help protect your rights. And, they are all the more happy to do so if you can point to a health or safety issue related to the infringing goods.

Tuesday, October 26, 2010

Dirty Deems Done Dirt Cheap

This case is very strange. It is also one of those interesting cases that involves the intersection of customs and trade law. Specifically, it involves Customs and Border Protection's treatment of entries subject to an antidumping duty order. As it happens, that treatment was wrong.

By way of background, the salient facts are that Alden Leeds was the importer of chemicals that were subject to an antidumping duty investigation. At the time of entry, the importer was required to make a cash deposit of almost 25%. Because the producer requested an administrative review of the deposit rate, Commerce instructed Customs to suspend liquidation of the entries. The review subsequently found an assessment rate of about 4%. That should have made for a hefty refund to Alden. Unfortunately, it did not.

Rather than withhold liquidation, Customs affirmatively posted an official bulletin notice stating that the entries had liquidated by operation of law (i.e., they were "deemed liquidated"). This is the first odd thing about these facts. A deemed liquidation occurs when the time for liquidation expires without any action by Customs. It is a non-sequitur to publish a notice of deemed liquidation. It appears that what Customs tried to do was publish a notice of liquidation. That, of course, should have been prohibited by the suspension instructions from Commerce. It appears that someone at Customs noticed the entries, investigated, wrongly determined that they had been deemed liquidated by operation of law, and decided to publish notice just to let the world know that fact.

When Commerce published the final results, Alden Leeds sought a refund. Customs' unfortunate response was that the entries liquidated. Because the importer did not file a timely protest, Customs believed that it had no means by which to refund the money. So sorry. Alden Leeds then had no where to turn but the Court of International Trade.

It is worth pausing here to consider the next odd part of this case. It is absolutely clear that Customs made a mistake in this case by liquidating the entries. It is also clear that the United States government does not have a right to the funds. Should the apparent lack of a legal avenue by which the importer can force Customs to refund the money really dictate the policy here? Why did no one in Customs say, "file a suit and we will settle for the full amount you are owed." Is there something that prevents Customs from acting like a reasonable commercial actor in this case? That is not a rhetorical question. If you know the answer, drop a comment below.

On the law, the problem for Alden Leeds is a prior case called Juice Farms which involves a similar unfortunate set of facts. In that case, the Court of Appeals for the Federal Circuit held that the improper liquidation should have been the subject of a protest and that a protest would have provided an adequate remedy. Because a protest was possible, the Court of International Trade did not have jurisdiction under 1581(i), the residual jurisdiction provision.

The CIT, however, distinguished Juice Farms, on the grounds that it involved affirmative rather than deemed liquidations. Oddly, in this case Customs posted a bulletin notice of liquidation, which sounds a lot more like an affirmative liquidation than a deemed liquidation. Furthermore, there is nothing different about the protestability of a normal versus a deemed liquidation. But, because this case involves supposed deemed liquidations, which require no action from Customs, the Court found Juice Farms to be inapplicable.

In the end, the Court made the point that the notice of liquidation was a legal nullity.  Customs might just as easily posted a notice saying that I had won the Tour de France. Since the posting was in error and meaningless because of the official suspension of liquidation, there was no liquidation and I am not Lance Armstrong. Without a liquidation, filing a protest would be futile, making it a "manifestly inadequate" step. Thus, the Court held that no protest was required and the Court had (i) jurisdiction to decide the case.

This could easily have gone the other way on the basis of Juice Farms, and it might still. As a policy matter, one could argue that importers are supposed to monitor the status of their entries and that the protest process gives importers recourse. Extending this burden to include monitoring erroneous or illegal liquidations is not particularly far fetched. Further, there is a principle of law that estoppel does not run against the government. That means that parties cannot make a claim against the government (absent a statute permitting it) simply because the party relied on the representation of the government to its detriment. In this case, that would be relying on the statement from Commerce that Customs will not liquidate the entries.  But that strikes me as bad policy. An importer should be able to accept that the relevant agencies are going to do what they are legally required to do and that the Court will hold them to it.

Thursday, October 21, 2010

Hello Sydney

By request, I am posting this by request, something I am happy to do. If you see customs-related news items, always feel free to forward them to me at customslawblog@gmail.com.

It seems that the Australian government is hoping that travelers entering the country know pornography when they see it and report it when they are carrying it. This has caused a bit of a dust up down under because not all pornography is illegal to possess in Australia and not all is banned from importation. However, the two sets apparently do not coincide exactly. According to Australian Customs and Border Protection, travelers should just disclose what they have and let Customs sort it out. I am not sure on the law in Australia concerning border searches or self incrimination (feel free to comment if you are). Either way, it certainly seems like a bit of a stretch to assume that a traveler will arrive at the Customs desk Kingsford-Smith and open his or her bag of porn for the inspector to review. Maybe Australians are genetically immune to embarrassment.

More on the story is here. In case you are arriving right now and want to know what to leave on the plane, according to the news story "banned material includes child pornography, bestiality, explicit sexual violence, degradation, cruelty and non-consensual sex."

Are Excises Taxes Protestable?

When Customs collects a tax for another agency, is it making a protestable decision? That is an important question. If the answer is yes, then the U.S. Court of International Trade has subject matter jurisdiction over the denied protest. If the answer is no, the importer has to look elsewhere for relief.

That is also the question presented in Shah Brothers, Inc. v. United States, which involves entries of "gutkha." Gutkha is a tobacco preparation containing betel nuts and various aromatic agents.Apparently, gutkha is a smokeless tobacco product and is, therefore, subject to excise tax as well as import duties. Smokeless tobacco comes in two varieties: chewing tobacco and snuff. The problem for the plaintiff is that the excise tax on snuff is higher than the excise tax on chaw and the Alcohol and Tobacco Tax and Trade Bureau (the "TTB") concluded that this product is snuff. Customs, on the other hand, eventually agreed with the importer on the classification of the merchandise. That means that the only issue left for the Court of International Trade is the TTB treatment of the product and the tax as collected by Customs and Border Protection.

The Court initially looked at its jurisdictional statute, 28 USC 1581 and found that since this the TTB determination did not involve a decision of Customs and Border protection, it was not direcltly reviewable on the basis of a denied protest. The Catch-22 is that the decision is also not subject to review under the Court's residual jurisdiction because any review of the TTB's decision would necessary require a review of how Customs implemented that decision (since the TTB does not collect taxes at the border, that is Customs' job). In fact, in the process of creating the Department of Homeland Security and moving Customs from Treasury to DHS, Treasury specifically delegated to Customs the function of collecting revenue at the border. Since the real issue is not what TTB asked of Customs, but what Customs did to the imports, the Court finds that the importer had an adequate remedy under the protest review process of 28 USC 1581(a).

Whenever 1581(a) is available as a means of getting into Court, the usual result is that no other means of establishing jurisdiction will work unless the protest process is "manifestly inadequate." The Court did not see any such inadequacy in this case. Finally, the plaintiff's valiant effort at latching on to the Administrative Procedure Act to establish jurisdiction to review a "final agency action," was also unavailing. The APA does not provide aggrieved parties a means of circumventing the established path to judicial review. In light of the non-futile availability of the administrative protest, the APA was no help to the plaintiff. The CIT dismissed for lack of jurisdiction.

Thursday, October 14, 2010

Filer Code Safe for Now

Customs and Border Protection assigns licensed customhouse brokers unique filer codes. These codes allow the broker to have electronic access to Customs.  The filer code, therefore, effectively permits the broker do business in a modern commercial environment. Absent an active filer code, the broker may as well have to operate using carrier pigeons and smoke signals. Consequently, when CBP threatened to deactivate its filer code, Lizarraga Customs Broker went on the offensive.

The issue reached the Court of International Trade. The procedural status of the case is a little tangled. It appears that plaintiff wanted an injunction to prevent CBP from deactivating its filer code. While that request was pending, the parties submitted their complaint and answer. Eventually, the United States government filed a so-called "Confession of Judgment" in favor of Lizarraga. According to the government, this should have resolved the case because the US has agreed not to suspend the filer code and the plaintiff, therefore, has the relief it was seeking in Court. In other words, the case was mooted. Absent a controversy for which the Court can grant relief, the government argued, the CIT no longer had jurisdiction over the case.

"Not so fast," was Lizarraga's response. While, the immediate threat may have been resolved, the plaintiff maintained that the Court continued to have jurisdiction because it was likely that CBP would start the process over. If there is a likelihood that the allegedly wrongful behavior will be repeated, the mootness doctrine does not apply. Despite that clever argument, the Court dismissed the case.

Two facts supported the Court finding mootness. First, the Court found that it could not decide the issue without a fully developed factual record. Developing that record would require that the case continue. However, because there is no additional relief to be granted, continuing the case would produce nothing but a theoretical answer to a purely legal question. At least I think that is the reasoning. The second point is that counsel for the United States said in Court that brokers are entitled to some procedural protections when their filer code is threatened. Consequently, the Court accepted that as a statement that the US would not repeat its effort to summarily deactivate the filer code. Thus, the requested injunction was moot and the motion denied.

This case may seem technical and legal. The importance of it for brokers, though, is that it represents an on-the-record acknowledgement by Customs that it cannot simply yank a filer code. Rather, the broker is entitled to notice and an opportunity to be heard. Further, the Court was clear that it was not stating that the procedural protections afforded under the Administrative Procedure Act were necessarily sufficient in all cases. Thus, the decision appears to put everyone on notice that the threat of deactivating a filer code is important, subject to the APA, and will be given careful scrutiny by the Court. Brokers should take some solace in that conclusion.

Wednesday, October 13, 2010

Gilda Wins

We have been following along with Gilda Industries, Inc. v. United States since the early days of this blog (here and here). Remember back when I would also blog about spiders in my basement and and Spore creatures? I kind of miss those days. I know my extended family does too.

Gilda involves 100% retaliatory duties assessed on Gilda's imported toasted bread products. The duties were in response to a European policy to block imports of U.S. beef after the WTO found that the ban was not supported by scientific evidence. The procedure for continuing the retaliation required that a representative of the  benefiting U.S. industry request the continuation of the retaliation. In 2007, no one from the beef industry made such a request. As a result, Gilda argues that the retaliatory duties expired. The Court of International Trade agreed and ordered that the duties collected after the 2007 expiration be refunded with interest. This is the decision on appeal to the Court of Appeals for the Federal Circuit.

The law involved here is 19 USC 2417(c), which arguably automatically terminates retaliation on the four-year anniversary of the action unless the beneficiary domestic industry requests that it continue. The relevant language is that absent a request, "such action shall terminate at the close of such 4-year period." Further, the statute requires that the USTR provide the industry with notice at least 60 days prior to the action terminating. In the case, the USTR failed to do that.

According to the Federal Circuit, the "shall terminate" language quoted above is mandatory in nature because it includes consequences for failing to act, i.e., the termination of the action. This is in contrast to the requirement that the Trade Representative "shall notify" the industry. That part of the statute does not contain a consequence for failing to notify the industry. As a result, the CAFC found it to be directory in nature. According to the Court, the lack of timely notice, therefore, did not toll the automatic termination.

In a valiant effort to set things right, the USTR also argued that its failure to provide notice to the industry should not result in the loss of protection to the industry. After all, the statute was passed to protect the domestic producers. On this front, the CAFC took a hard stance and held that even absent notice from the USTR, the beef industry was obligated to make a timely request for continued retaliation.

So, it would appear that some folks are going to be entitled to pretty substantial duty refunds. This controversy has been the source of a lot of suspended cases at the Court of International Trade. I suspect, there are more than a few customs lawyers out enjoying some wine and cheese in celebration.


Well, Jane, it goes to show you, it's always something.

Tuesday, October 12, 2010

Cert. Denied in Totes - Judicial Conference

I have been remiss again, but not for wont of effort. I have just been on the road while also sick. That is a bad combination.

In terms of follow-up information, you should know that on October 4, the Supreme Court denied certiorari in Totes-Isotoner. That is the case challenging the constitutionality of gender- and age-specific tariff rates. It remains to be seen whether that is the end of the issue. The critical legal determination to date has been that the distinctions drawn in the tariff schedule are not facially discriminatory. As a result, a plaintiff needs to prove not just the an improper distinction is drawn but also that it was done for an inappropriate purpose. That makes the case much more difficult to prove. I suspect there were sighs of relief throughout Customs and Border Protection.

The Court of International Trade has issued three customs-related decisions that I will summarize as soon as possible.

For those of you who might not be members of the Customs and International Trade Bar Association or admitted to practice at the Court of International Trade, the Court's Judicial Conference is November 18 in New York. Here is information on the event. And, if you are not a CITBA member, you should be.

Monday, September 27, 2010

Redelivery and Conflicts

Sometimes, we all have to take a big breath, close our eyes, and wade into a 64 page Court of International Trade Opinion. In this case, that opinion is United States v. Pressman-Gutman Co.

The substance of this case is interesting in that it deal with the liability a surety has when the importer breaches the terms of its customs bond. In particular, Customs was seeking $120,000 for Pressman-Gutman's failure to redeliver merchandise to Customs. When the importer failed to redeliver, Customs sought liquidated damages from Pressman-Gutman. This is the usual course of action because merchandise is, more often than not, already gone by the time the importer received the Notice to Redeliver. When Pressman did not pay the liquidated damages, Customs sought payment from American Motorist Insurance Co, or AMICO the surety. The surety also refused to pay and moved for additional collateral to protect it from what it viewed as impending liability and also for attorneys fees related to the action. Pressman and the surety maintain that the Notice to Redeliver was late and, therefore, they are under no obligation to redeliver and not liable for liquidated damages

An interesting side issue is that Pressman also argued that the attorney's representing the surety, who had at one time also represented it, were not entitled to attorney's fees due to a conflict of interest.

On the merits, the case turns on the timeliness of the Notice to Redeliver. The regulations permit Customs and Border Protection to demand redelivery within 30 days of the end of the conditional release period applicable to the merchandise. When Customs requests a sample, the conditional release period ends when Customs receives the sample. In this case, Customs demanded redelivery well beyond the the end of this period. Customs, however, argues that it properly extended the conditional redelivery period by 90 and notifying Pressman that the sample had been sent for laboratory analysis.

According to the CIT, the government's position is "bankrupt." The Court notes that 19 CFR 113.62(d) requires that Customs issue a Notice of Redelivery within 30 days of the end of the conditional release. Further, the Court noted 20 years of Customs rulings stating that the conditional release period ends on the delivery of sample to Customs. Thus, the Court found the United States had no basis on which to proceed against Pressman for liquidated damages.

The government raised three arguments in its defense. The first argument was that Customs properly extended the conditional release period by so notifying the importer. On this point, the Court found that the conditional release period ended 30 days after Pressman delivered the requested sample. The putative extension was made after that date. As a result, the Court held that even assuming Customs has the authority to extend a conditional release period, this one had lapsed and, therefore, was no longer available to be extended.

In it's second argument, the government pointed to 19 CFR 141.113(c), which requires that a Notice of Redelivery be issued "promptly." According to this argument, there is no definition of the term "promptly," and, therefore, the request in this case was timely. Noting the same customs rulings, the Court held that Customs has always defined "promptly" as meaning within 30 days of the receipt of samples, when requested. Thus, the Court rejected this argument.

The final legal argument was based upon internal Customs' memoranda noting that the agency has 30 days in which to demand redelivery or take other appropriate action. Based on this, the government argued that the notification that the samples had been sent for laboratory analysis and that the conditional release period had been extended was "other appropriate action." The Court disposed of this argument by noting that in the numerous headquarters rulings Customs has issued on this topic, not once did it use "other appropriate action" as the basis for extending the conditional release period. On the contrary, Customs seems to have consistently noted that this tight schedule can cause problems for the agency. Customs has repeatedly noted this concern and has, nevertheless, held customs to the 30 day post-samples period.

The government's last effort was to distinguish the case on the facts. The short version of this argument is that while a lot of HQ rulings seem to say that the 30 day post-sample period is strictly enforced, none of those cases involved a circumstance in which there was an affirmative effort by Customs to extend the period. The Court rejected that argument essentially on the weight of the prior discussion. According to the court, given the absence of evidence for a legal means of extending the period (especially after it had lapsed), the Court would not would not find one on the basis of the effort to document an extension.

This is one of those cases that might has a short shelf life, even assuming it survives an appeal. The regulations do not address the issue squarely. Almost all of the authority relied upon here is from rulings. Customs, like all federal agencies, has the authority to reconsider its legal interpretations of ambiguous laws and regulations. To do so, though, Customs has to jump through the proper administrative hoops. With respect to previously issued rulings, that means the revocation or modification process of 19 USC § 1625. It is a good bet that someone in Customs is looking at that right now.

Part two of this long opinion deals with an ethics questions that rarely arises in customs law. In the usual circumstance, customs lawyers represent importers and the adverse party is the United States government. There are, however, exceptions to that rule. For example, if a domestic party challenges the classification Customs applies to imports, the customs lawyer needs to look out for a conflict with clients who might be importers. Trade remedy cases also present conflicts. This case illustrates one of the few other conflicts and that is whether a lawyer may represent a surety that may have a claim against an importer that has also been represented by that lawyer.

In this case, the surety, AMICO, sought attorneys fees from Pressman, the importer. AMICO, as it happens, was represented in this matter by the same law firm that had initially represented Pressman in its administrative dispute with Customs over the validity of the redelivery request. Subsequently, AMICO hired the same law firm to review the substance of the administrative protests that law firm had filed for Pressman. Apparently, the possibility of a conflict had been raised a number of times before the law firm filed an appearance on behalf of AMICO.  When Pressman moved to disqualify the law firm, the firm withdrew its appearance and new counsel was substituted. AMICO moved for an award of attorneys fees including fees for the conflicted firm's work prior to its withdrawal.

Pressman defended the request for attorneys fees on the grounds that the attorneys should have been barred from representing AMICO because they had previously represented Pressman on the same matter, creating a conflict of interests.

The conflicts analysis here is somewhat complicated in that Pressman was no longer a client of the firm representing AMICO. That means the more limited conflicts rule regarding past clients applies. The New York version of that rule is DR 5-108, which states in part that:

[A] lawyer who has represented a client in a matter shall not, without the consent of the former client after full disclosure . . .
Thereafter represent another person in the same or a substantially related matter in which that person’s interests are materially adverse to the interests of the former client.

According to the opinion, it is indisputable that Pressman never waived the conflict. Further, the two matters on which the firm were engaged are at least substantially related if not two sides of a single dispute.

The real question is whether and when the two parties became adverse to one another. Keep in mind that throughout much of the administrative process, the two companies had interests that were aligned. That is, neither wanted to pay a dime to Customs. Thus, according to the lawyers, there was no conflict until such time as it became obvious that something might be paid to Customs. At that point, the surety and the importer have diverging--if not adverse interests--because the surety knows that if it suffers any liability, it will pursue the importer to recoup its losses. Further, in this case, the surety sought additional security from Pressman well before the law firm started working for AMICO. According to the Court of International Trade, that possibility creates at least the appearance of divided loyalties and, therefore, impropriety under DR 5-108. I'm not sure about when the appearance of impropriety triggers a true violation as it is generally easier to find such appearances after the fact. Nevertheless, in this case, it seems a real conflict existed at least after AMICO's request for additional security.

Under those circumstances, the Court held that Pressman could not be required to finance the legal work performed against its interests by lawyers who were conflicted. Thus, the Court denied the motion seeking fees with respect to that work, although it granted a request for fees for work performed by another work not relating to the conflicted lawyers.

And for that, I wish I could give all my lawyer readers ethics CLE credit.

Tuesday, September 21, 2010

Requests for Information As Disclosure Terminators

Recently, I mentioned that nothing of interest has been going on. That was a mistake. For weeks, I have been working on several fronts on an issue of interest to all importers. I think because I have been involved for a while, and because the issue started slowly enough, I did not notice that lots of people now seem to care. So, consider this a catch up post.

The issue in question is whether Customs and Border Protection can use the common Request for Information (CF28) or Notice of Action (CF29) as the record of the commencement of an investigation and evidence proving that an importer has received notice of the commencement of an investigation.

This matters for several reasons. Most important, importers who discover violations of certain customs laws may protect themselves from civil penalties (in excess of interest on unpaid duties) by completing a voluntary prior disclosure. In the disclosure, the importer sets out the incorrect and the corrected information, tenders duties owed and probably the interest, and walks away with, we hope, an improved compliance system. But, if the importer is on notice that Customs has already commenced an investigation into the same issue, the importer is stuck and cannot fully benefit from a disclosure. [As an aside, that does not necessarily mean that a disclosure is of no value, but that is a conversation about strategy for another post.]

There are lots of threads of conversation concerning this issue. One is a question of policy: Is it good for trade facilitation and compliance for Customs and Border Protection to attempt to preclude disclosures while publicly saying that it encourages disclosures? The second question is why is this happening? Is it a top-down policy or a strategy developed at the port level by personnel who are removed from the broader policy questions? Third, is it legally correct that a CF28 or CF29 can be the record of and provide notice of the commencement of an investigation? And, finally, even if the notice is proper, has the investigation actually be commenced properly.

I can't spend too much time on all these questions. The first two require only a brief comment, which will not be backed up with any empirical evidence. Just based on experience and conversations with importers, this seems to be bad policy. Whether or not it was intended as such, the use of the very common CF28 and CF29 looks as if the agency is playing a game of "gotcha." Importers are very used to seeing these communications as a routine means of Customs either collecting basic compliance information or informing the importer of Customs' decision regarding already submitted information. In other words, these documents have been viewed as a non-threatening, cooperative channel of communications. Assuming this practice continues, that will rapidly no longer be the case. Also, because the CF28 and CF29 are generally communications from an Import Specialist and not from Fines, Penalties, and Forfeitures, using it as notice of an investigation seems on its face to be inherently questionable. It kind of like having the waiter at a fancy restaurant deliver the bill (a routine task) while flashing a badge and a gun (an implied threat). That does not encourage good customer relations.

As to why? I have no idea. My guess is that this started with a clever and overly zealous Import Specialist who was worried that an importer might be on the verge of exercising its right to make a disclosure. I suspect, but don't really know, that enforcement minded Customs personnel have never liked the disclosure process anyway. It really is a get-out-of-jail-free card (unless you count the time, administrative costs, and legal fees). Maybe the notion spread among port personnel that this was a good tool to increase the collection of revenue through penalties and to strengthen enforcement. I don't know that to be the case, but it makes sense to me.

On the third question, the regulations (19 CFR 162.74) are quite clear on what constitutes evidence that the importer is on notice of the commencement of an investigation.

(i) Knowledge of the commencement of a formal investigation —(1) A disclosing party who claims lack of knowledge of the commencement of a formal investigation has the burden to prove that lack of knowledge. A person shall be presumed to have had knowledge of the commencement of a formal investigation of a violation if before the claimed prior disclosure of the violation a formal investigation has been commenced and:
(i) Customs, having reasonable cause to believe that there has been a violation of 19 U.S.C. 1592 or 19 U.S.C. 1593a, so informed the person of the type of or circumstances of the disclosed violation; or
(ii) A Customs Special Agent, having properly identified himself or herself and the nature of his or her inquiry, had, either orally or in writing, made an inquiry of the person concerning the type of or circumstances of the disclosed violation; or
(iii) A Customs Special Agent, having properly identified himself or herself and the nature of his or her inquiry, requested specific books and/or records of the person relating to the disclosed violation; or
(iv) Customs issues a prepenalty or penalty notice to the disclosing party pursuant to 19 U.S.C. 1592 or 19 U.S.C. 1593a relating to the type of or circumstances of the disclosed violation; or
(v) The merchandise that is the subject of the disclosure was seized; or
(vi) In the case of violations involving merchandise accompanying persons entering the United States or commercial merchandise inspected in connection with entry, the person has received oral or written notification of Customs finding of a violation.

It should be clear that options (ii) through (vi) are not involved here. That means the question is whether a CF28 or CF29 informs the importer of the type of or circumstances of the disclosed violation. I hate to say it, but maybe. The CF29 Notice of Action is usually issued to an importer after an Import Specialist has taken the time to review the entry documentation and often after requesting additional information. In that case, it seems possible that the Import Specialist might have, as is required, "reasonable cause" to believe that a violation has occurred. So, if the CF29 comes after reasonable cause and in fact notifies the importer of the type or circumstances of the violation, it might very well provide sufficient notice. [Keep in mind that I still think it is bad policy.]

The CF28 is a different animal. This is a request for information. To me, that means that the Import Specialist is effectively saying to the importer, "I am not sure what is going on here. I need more information to determine whether you are right." That strikes me as a really poor basis on which to later argue that the Import Specialist had reasonable cause to believe anything about that particular importation. I can imagine a circumstance in which the Import Specialist includes very specific language in the CF28 designed to indicate the commencement of an investigation. But there has to be more than a question to be asked for there to be an investigation. That goes to my last question.

According to 19 CFR 162.74:

A formal investigation is deemed to have commenced as to additional violations not included or specified by the disclosing party in the party's original prior disclosure on the date recorded in writing by the Customs Service as the date on which facts and circumstances were discovered or information was received that caused the Customs Service to believe that a possibility of such additional violations existed. Additional violations not disclosed or covered within the scope of the party's prior disclosure that are discovered by Customs as a result of an investigation and/or verification of the prior disclosure shall not be entitled to treatment under the prior disclosure provisions.
So, there has to be a writing indicating that some Customs official knew on a date certain that there was the possibility of an undisclosed violation. On the face of the regulation, a well-crafted CF28 might do that. However, the regulation needs to be understood in the context of what Congress intended when it created the penalty statute.

The importer's responsibilities were substantially revamped in the Customs Modernization Act of 1993, which also brought us the North American Free Trade Agreement. In the congressional reports that accompanied the Mod Act, the House and Senate set out in some detail their expectation of how Customs was to manage the relationship between opening investigations and importer prior disclosures.

For example, the House Committee on Ways and Means said that the commencement of an investigation should result in the "creation of a formal document or electronic transmission that will serve as evidence, if so required, of the formal opening of an investigation. That document or transmission must be maintained by Customs Office of Enforcement or other central unit to be designated with Customs." The report goes on to state that when Customs has "reasonable cause to believe" that a violation has occurred, the Office of Enforcement or other central unit shall consider the facts that have been recorded and make a determination as to whether the facts merit the opening of a formal investigation. See S. Rept. 103-361, 103d Cong., 1st Sess. 122. According to the Senate Report, the Finance Committee expected hat these requirements for the creation of a record and centralized review would "allay the trade community's concerns that the benefits of prior disclosure will be denied in the absence of tangible evidence."

To me, without the benefit of the circumstances in any particular case, an Import Specialist acting alone is not via a CF28 or CF29 is not consistent with Congressional intent regarding the formal opening of an investigation. There needs to be some higher-level review and some centralized record. Without that, this has the feel of the denial of prior disclosure without tangible evidence. But, we must keep in mind, whether that is the case will depend on the facts of each particular case.

Recently, AAEI raised the issue with Customs and Border Protection. Customs' response is on the AAEI web site. Basically, Customs says they have the legal authority to use the CF28 and CF29 as notice of the commencement of an investigation as well as the written record thereof. But, they say that the CF28 should not be routinely used for that purpose. The CF29, on the other hand, will be used for that purpose. Despite that conclusion, Customs promises to issue guidelines clarifying the use of the CF28.

In the end, this practice strikes me as based on bad policy. As I said, it seems inconsistent with an effort to foster cooperation and collect revenue via disclosures. It seems punitive and hyper technical. Despite that, it might be perfectly legal. It is, however, going to lead to much more complicated disputes over when and how the alleged investigation was opened. Suddenly, customs lawyers (who are more often on the receiving end of discovery requests) are going to brushing up on our discovery techniques because there is now going to be a fight about the paper trail.

Thursday, September 16, 2010

What's Happening

This is just a reminder that I am still here, in case you were wondering. I have been on the lookout for something interest to post. Lately, there have been slim pickings.

The ACLU is pursuing another lawsuit challenging Customs and Border Protection's policy and practice of relating to searches of digital storage devices including laptops and phones at the border. Here is their press release. I wish them luck, but they have a very tough legal row to hoe. The advantage that the ACLU has in its case is that the plaintiff is a much more sympathetic character than the child porn smuggler usually caught up in these cases.

On top of that, I should alert you to a couple upcoming speaking gigs, both NAFTA related.

First, I will be talking about NAFTA verifications at the International Trade Club of Chicago on Friday, September 24. Then, I am really excited to be doing a full-day presentation on NAFTA, internal reviews, and planning for compliance for the Midwest Global Trade Association in the Minneapolis area. If you are reading this and attend either event, please be sure to introduce yourself to me.

Last thing, I've been getting a relatively large number of spam comments lately. Rather than turn on comment moderation, I plan to ignore them. Please do the same.

Thursday, September 02, 2010

Hey Accountants!

I have an article in the latest edition of BNA Tax Planning International, Indirect Taxes (Vol. 8, No. 8, Aug. 2010). The article is entitled "Challenging Customs in the United States Court of International Trade." I'd provide a link to the article, but it is in an old-school paper publication and the on-line version requires a subscription. So, run out and look for the article on the newsstand. I hope it is next to something with Kim Kardashian on the cover.

Thursday, August 26, 2010

Oh, Canada!

I do a lot of NAFTA work. For years, there have been unanswered questions concerning the ability of producers or exporters to allocate non-originating good to domestic customers and originating goods to customers in other NAFTA countries. That would maximize the benefit to the customers but might result in otherwise dutiable merchandise never being the subject to duty. The Canadian International Trade Tribunal recently got a crack at part of that question in Tara Materials, Inc. v. President of the Canada Border Services Agency, Appeal No. AP-2009-016 (Aug. 3, 2010).

Tara exports artists’ canvases from the United States to Canada. Apparently, it dual sources fungible fabric used to make the canvases and some of it comes from outside of North America. In an on-site verification by CBSA, it was determined that Tara’s production resulted in goods that are originating 72% of the time and non-originating 28% of the time.

In these circumstances, the NAFTA permits the producer to employ an inventory management system to determine the origin of the material used to produce any given finished item. This is set out in Article 406 of the NAFTA, which states in part that: “where originating and non-originating fungible materials are used in the production of a good, the determination of whether the materials are originating need not be made through the identification of any specific fungible material, but may be determined on the basis of any of the inventory management methods set out in the Uniform Regulations.” In other words, NAFTA  personified does not care if canvas number 1 is really originating and canvas number 10 is really non-originating, so long as only 72% of the canvases are treated as originating.

The U.S. regulations implementing this provision are at 19 C.F.R. Pt. 181, App. § 7(16). The origin of the fungible materials may be determined based upon an inventory accounting methodology set out in Schedule X. Those methodologies include specific identification, First In First Out, Last in Last Out, and averaging. 

In Tara, everyone agreed that finished canvases produced from originating fabric are originating and that finished canvases made from non-originating materials are not originating. The disagreement relates to the application of the Schedule X to fungible goods.

Under the averaging methodology, the producer determines the ratio of originating to non-originating materials in inventory. Schedule X states that the ratio can be applied to determine the origin of materials withdrawn from inventory. However, with respect to fungible goods, the determination applies to “each shipment” of fungible goods. "Crap!," you say. That means each shipment must be treated as nearly 30% non-originating, and that makes certification a hassle. It also creates grief for the customer. 

Tara countered that it had selected the averaging methodology applicable to fungible materials, not fungible goods so the “per shipment” limitation applicable to finished goods did not apply to its products. As a result, Tara claimed the right to allocate 100% of its originating goods (or 72% of its production) to exports to Canada, where they benefit from NAFTA treatment. The remaining 28% would be sold to U.S. customers, who do not necessarily care about the NAFTA status of the goods. 

The tribunal disagreed and held that the two regulations address two distinct segments of the production and distribution process. Section 7(16)(a) deals with production while section 7(16)(b) deals with the finished goods. Thus, the two determinations are applied in succession. Schedule X requires that the latter determination be applied to shipments.

The regulations with respect to fungible goods apply only where the goods are combined or mixed in inventory. In this case, found that the originating and non-originating canvases were mixed in inventory.
Thus, the remaining question was whether § 7(16.1) requires the use of the same inventory accounting methodology for materials and for goods. That is required where “both fungible materials and fungible goods are withdrawn from the same inventory.” According to Tara, it maintained inventories of materials and finished goods in separate rooms. Consequently, it may choose to apply the specific identification methodology to its finished goods and is not bound by the application of the averaging ratio to shipments. 

CBSA disagreed, arguing for an expansive definition of inventory that encompassed both materials and finished goods. The Tribunal refused to accept Tara’s narrow definition because it is unlikely that producers would ever physically mix production materials and finished goods. Rather, the Tribunal found it sufficient that Tara had finished goods and materials in the same warehouse. As a result, § 7(16.1) applied, forcing Tara to apply the averaging methodology to each shipment of finished goods.

This certainly not the best result for producers. Companies would like to have the maximum flexibility in allocating their originating goods to customers who can most benefit. Nevertheless, this decision, assuming it remains the final word, does provide a solid basis on which producers can determine how to manage their NAFTA systems.

Tuesday, August 24, 2010

Court Update

There have been several recent customs-related decisions from the Court of International Trade recently. I have read them and generally don't find much in any that require comment. At the same time, I don't want you to think that I am slacking off. So, here are short summaries.

Aromont USA, Inc. v. United States, involves the classification of a viscous "stock"  made from animal bones or vegetables. The issue was whether Customs and Border Protection properly classified the merchandise as soups and broths rather than as other food preparations. Initially, the Court had to hold that because the merchandise at issue in this case was not identical to merchandise that had been the subject of a previous Customs ruling, the ruling did not bind Customs and Border Protection. The primary difference seems to be the commercial designation of the merchandise. Here, the goods were called "stock," which is said to be equivalent to a "demiglace." I will check with my foodie friends on that.  On the substance, the Court found that "soup" and "broth" are use provisions and that the principal use of the imported merchandise was as a flavoring agent in gravies and in industrial food preparation. Thus, Customs' classification was reversed  and a win for the plaintiff.

BP Oil Supply Co. v. United States, is a  rare evidentiary dispute at the Court of International Trade. The underlying issue has to do with denied claims for duty drawback and an otherwise routine motion for an amendment to the Court's scheduling order controlling the progress of the case.  The U.S. responded with a motion to strike arguing that BP improperly included confidential settlement negotiations in its memorandum in support of the requested scheduling change. The theory is that the judge should not know what private discussions the parties have had about settlement as that might skew the judge's thinking if he or she has to actually decide the case. After finding that some of the text included with the motion should be considered confidential settlement discussions, the Court stated that: "Prudence therefore dictates that it would be exceedingly unwise for the court to give any consideration to these materials or to allow them to become part of the record. The emails, proposed stipulation of facts, and documents related to that proposal are therefore inadmissible on this motion pursuant to FRE 408 and its underlying policies. In the interests of judicial economy, however, these items will be disregarded by the court rather than stricken from the record."

Citizen Watch Co. of Am. v. United States, deals with the always vexing question of what constitutes a container classifiable in Heading 4202 of the Tariff Schedule of the United States. For reasons relating to pending litigation, I am dancing around this one. The merchandise involved was cardboard and fabric watch boxes that were said to be sturdy enough for only 10 to 50 open and close cycles. Customs and Border Protection classified these as similar to jewelry cases of 4202. The Court found that the boxes were not suitable for long-term use (even though they need not be able to survive as long as the watches). Consequently, they were not sufficiently similar to jewelry cases to be classified in 4202. Rather, they end up in the more general provision for containers in 4819.

Lastly, Tip Top Pants, is back on a motion for rehearing. First, I think rehearings present a semantic problem. In many decisions on rehearing, it seems the Court reviews the merits of the case, finds no error and, therefore, denies the motion for rehearing. It seems to me that the motion ought to be granted whenever the movant identifies a reason to take a second look but that the rehearing might then result in no change in the decision. But that is just me. On the merits, the Court stuck to the decision that Customs has to respond to petition to mitigate a penalty before moving on to collect the penalty in Court.

Tuesday, August 17, 2010

The DR-CAFTA Bind

[Tip of the hat to my partner David Forgue, who has been thinking about this issue out loud longer than me.]

At what point is compliance with a trade agreement so risky that it becomes unworkable? Do the powers that be know that the trade agreements they negotiate might be effectively nullified by the cost of compliance? These are questions raised by the Federal Register Notice Customs and Border Protection published today.

Nominally, the notice finalizes changes to the regulations implementing the Dominican Republic-Central America-United States free trade agreement. However, the response to one comment is particularly telling. Here is the relevant text:
Comment: The commenter asserted that Sec. 10.585(a)(1) and (a)(2) impose impossible obligations on the importer. These provisions state that an importer who makes a claim for preferential tariff treatment under the CAFTA-DR (1) will be deemed to have ``certified'' that the good is eligible for such treatment; and (2) is responsible for the truthfulness of the claim and the information in the certification. According to the commenter, unless the importer has conducted an audit of the producer's books and records, it cannot ``certify'' that the good is eligible for preference or attest to the truthfulness of the claim and the information in the certification. In this regard, the commenter noted that some producers may be reluctant to open their books and records to their customers, including U.S. importers.
CBP's Response: CBP disagrees with the commenter's assertion that the importer should not be responsible for certifying that the goods are eligible for preference or for the truthfulness of the claim and the information in the certification. It is the responsibility of the U.S. importer of the goods for which preference is sought to file the appropriate entry with CBP and make the claim for preferential tariff treatment for the goods. In making this claim, the importer is responsible for exercising reasonable care to ensure that the goods are entitled to such treatment. CBP acknowledges that some producers may be reluctant to open their books to importers, but notes that an importer who has not acted fraudulently but nevertheless made an incorrect claim, is not subject to penalties if the importer promptly and voluntarily makes a corrected declaration and pays any duties owing. (19 CFR 10.585, 10.621, 10.623)
Basically, this says that importers are on the hook for what their suppliers tell them. You can ask for a certificate of origin, but it remains the importer's responsibility to exercise reasonable care to ensure that the certificate you received is true. As the commenter suggests, this may be difficult. What is the importer to do if the supplier provides a CO and refuses to permit the importer to review backup documents? Does reasonable care dictate that the importer reject that CO?

Conceptually, "reasonable care" should be based upon the standard of care that would be exercised by a similarly situated importer acting reasonably. Unfortunately, we have no real idea what that means in everyday practice. In retrospect, it will be easy for Customs to say that the importer should not have trusted the supplier. See the unfortunate precedent of Golden Ship Trading and my prior discussion of this in the NAFTA context.

A corporate compliance manager is likely to see this as a dilemma. The manager has only a few choices and none of them are great. First, the manager might simply choose to rely on COs from suppliers based on an examination of the four-corners of the CO itself. If it looks good on its face, accept it. The problem with that is that it might expose the company to liability down the road for duties and penalties if the COs eventually turn out to be invalid.

To avoid that possibility, the manager might decide to only accept COs from suppliers willing to permit a thorough vetting of the supporting documents. While that is safe from liability, it adds complication and expense to the supply chain. Would most companies authorize travel to Guatemala to review production records at a supplier? In addition, it probably precludes the use of suppliers who will refuse the increased scrutiny, which is more likely if materials costs must be disclosed.

The middle ground is to strategically review suppliers based on the criteria relevant to the particular importer. High MFN duty rate products and high volume imports present greater risk and greater potential liability. Those should get greater scrutiny than low volume, low duty imports. Some goods engender more risk of unscrupulous supplier conduct and deserve more attention. A product with a complicated rule of origin should be the subject of a more searching review than a simple rule. For example, apparel is trickier and more subject to shenanigans than is coffee. This strategy might limit liability, but does not eliminate it.

Another approach is to include in purchase contracts language requiring that the goods be originating under the appropriate rules of origin and require indemnification for losses resulting from that being untrue. If the application of this clause is contested, it might require litigation or arbitration in the supplier's home jurisdiction.   That may be expensive and impractical.

Credit should be given to Customs for pointing out in the Federal Register Notice, that an importer can avoid liability by voluntarily correcting an entry that asserted an incorrect claim. That is true and does provide a safety valve. But, it presupposes that the importer knows that the claim was invalid.

In the end, each importer needs to weigh the risks and rewards of compliance. Keep in mind that this issue runs throughout most of our preference programs including GSP.

It did not need to be this way. Look at NAFTA. Under that agreement, the importer is pretty clearly (note important hedge) permitted to rely on the certificate of origin from the exporter. The CO and the verification system put the burden of proof on the exporter, not the importer. Granted, the importer might be on the hook for additional duties if the exporter fails a verification. Further, if the importer's reliance on the document was unreasonable, it could be subject to penalties. But, the focus under NAFTA is clearly on the exporter.

For some reason, the US does not like the NAFTA verification model. The newer trade agreements shift the verification to the importer. And, Customs has made efforts (including the Ford litigation) to use reasonable care and record keeping to shift that burden to the importer. How successful they will be in that effort remains to be seen.

Regardless of what happens with NAFTA, the DR-CAFTA, GSP, AGOA, and other trade preference programs put importers in a bind. Reliance on the exporter is not likely to satisfy Customs and Border Protection as evidence of the exercise of reasonable care. Audits of suppliers are expensive and time consuming. If the duty avoidance is minimal or the potential penalty substantial, the cost of compliance might make the trade agreement a bad deal for importers.

That leads to the last question: Do the policy makers at USTR and in the White House know that the on-the-ground implementation of trade agreements might actually nullify the benefits they were intended to generate? Does it help Central America or Sub-Saharan Africa to have a trade preference program that is so risky that importers think twice about using it?

Thursday, August 05, 2010

Newsy Stuff

A few news items on note:


Festive Articles


Customs and Border Protection has asked the ITC to study a proposed tariff change to correct the tariff treatment of so-called festive articles that have utilitarian functions. This follows from successful litigation undertaken by my firm that showed that holiday-themed articles, even those that have utilitarian functions, can be entitled to duty-free entry under Chapter 95 of the tariff schedule. The problem is that in an effort to "correct" what Customs viewed as this erroneous classification decision, the modifications to the 2007 tariff schedule made non-revenue neutral changes, which is not a favored result. This tariff study is aimed at correcting that by changing the tariff classification but preserving the duty-free status of the goods. Should this happen, the change will be effective for goods entered on or after February 3, 2007.


Lacey Act


APHIS has published a proposed definition of "common cultivar" and "common crop food" for purposes of Lacey Act compliance. These plants will be exempt from reporting requirements.


A common cultivar will be a plant, other than a tree, that:

  • has been developed through selective breeding or other means for specific morphological or physiological characteristics; and
  • is a species or hybrid that is cultivated on a commercial scale; and
  • is not listed: (1) in an appendix to the Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES); (2) as an endangered or threatened species under the Endangered Species Act of 1973 (16 USC 1531 et seq.); or (3) pursuant to any State law that provides for the conservation of species that are indigenous to the State and are threatened with extinction.
A common food crop would be a plant that
  • has been raised, grown, or cultivated for human or animal consumption, and
  • is a species or hybrid that is cultivated on a commercial scale; and
  • is not listed: (1) in an appendix to CITES; (2) as an endangered or threatened species under the Endangered Species Act of 1973 (16 USC 1531 et seq.); or (3) pursuant to any State law that provides for the conservation of species that are indigenous to the State and are threatened with extinction.
ITAR


The
State Department is going to require Comodity Jurisditction requesssts to be submitted electronically via form DS-4076. Keep in mind that your block 5 descritptions will be published in the CJ determinations list. Keep proprietary information in block 15. This is effective inon Friday, September 3.

Tuesday, August 03, 2010

Federal Circuit Web Site 2.0

Am I the last person to see the new Federal Circuit web site? It is a major improvement over the previous page. Thanks to whatever federal IT workers did the job.

The main element of the new  home page is an attractive photograph of one of the Court's impressive courtrooms. There are navigation links above and below. The links at the top have scrolling submenus that appear when the cursor hovers over them. The links at the bottom are direct links to the referenced information. It is simple, but it works. On a quick look, it is not clear why the navigation tools are organized as they are. For example, "The Court" at the top has a submenu for "Judges," which is also a standalone item on the bottom right. Daily dispositions is also in two places, but that might just make the information easier to find.

The Federal Circuit hears appeals from the Court of International Trade concerning decisions by Customs and Border Protection. Consequently, I visit this site relatively often. It is nice to see "Opinions & Orders" prominently on the bottom. Even nicer is that on the page for opinions and orders, visitors can sort by the origin of the appealed decision. That means I can finally see a list of only appeals from the CIT. That will be very handy for most customs lawyers and even more handy for the patent lawyers who do not care at all about customs cases.

Note: I am tagging this as "off topic," but only slightly.

Friday, July 30, 2010

Reminder from BIS: We Don't Do Jurisdiction

In one my rare forays into blogging on exports, I will point out this reminder from the Bureau of Industry and Security. This interim final rule will amend the Export Administration Regulations to clarify that CCATS determinations by BIS only tell the applicant the relevant ECCN for the product. Having it classified for export purposes, however, does not mean the product is actually subject to the EAR. Currently, BIS does not issue jurisdiction rulings as the Directorate of Defense Trade Controls (DDTC) does for ITAR.

The Federal Register notice solicits comments on this rule. Perhaps the thing that might be valuable to tell BIS is that it should start issuing jurisdiction rulings. Maybe this will be moot if and when the export regimes are merged and there is a single list administered by a single agency. Wouldn't that be nice?

Monday, July 26, 2010

News slap: One Really Small Step

PETA complains to CBP after the death of a CBP dog in a hot CBP car.

Aphids stopped at border.

US stops computers bound for Cuba from Canada.

Customs and Border Protection employee stole Neil Armstrong's declaration and tried to sell it. For those of you under 30, Neil Armstrong is kind of big deal. He used to be more famous than Justin Bieber. More here.

A couple cases from the Court of International Trade:

Delphi Petroleum, Inc. v. United States, denying Delphi's effort to force the United States to pay attorney's fees following the decision on the merits. The Court denied the motion.

Ford Motor Company v. United States, is a somewhat confusing case involving protests from the lack of explicit liquidation of reconciliation entries. The question has to do with whether the liquidations were extended or whether they should be treated as having liquidated by operation of law. In the end, the Court found that the case as presented was either not properly before the Court or not an appropriate venue in which to address the merits. What it comes down to is that for liquidated entries, the proper way into the Court of International Trade is via a denied protest and 28 U.S.C. sec. 1581(a). For unliquidated entries, it might be proper to get into Court via the Court's residual jurisdiction under 28 U.S.C. sec. 1581(i). But, if liquidation is still in the offing or might actually have happened, it is better to go the denied protest route.

Sunday, July 25, 2010

Passing this on . . .

I rarely get what amounts to a press release, but I recently received one from the University of Minnesota regarding a symposium on international economic law. I consider myself a workaday administrative law practitioner. I tend to find these things to be more theoretical than practical and I am all about being practical. nevertheless, there are people interested in these things, so I will pass it on.


The International Economic Law Interest Group of the American Society of International Law wishes to solicit paper and panel submissions in connection with its Biennial Conference at the University of Minnesota from November 18-20, 2010.  The conference is a wonderful opportunity to collaborate with a broad cross-section of international economic law specialists and hear from prominent keynote speakers including Professor Jose Alvarez at NYU and WTO Appellate Body member Ricardo Ramirez (Mexico).

Under the theme of International Economic Law in a Time of Change: Reassessing Legal Theory, Doctrine, Methodology and Policy Prescriptions, the Interest Group has issued the following call for papers:

“The start of the second decade of the twenty-first century is witnessing a confluence of events affecting international economic law that calls for re-evaluation. The international context has radically changed. Most analysts contend that we are shifting toward a multi-polar world in light of economic transformations in China, India, Brazil, and other developing and transitional countries, coupled with economic stagnation in the United States and Europe which are beset by a financial crisis and embroiled in foreign wars and security concerns. These developments have arguably complicated international economic governance, yet other factors–such as the current financial crisis–press consideration of new forms of international economic governance, such as the G-20. Global economic interdependence, exemplified by global production and supply chains, calls for sustained attention to international economic law and institutions.

With this backdrop, the November conference will organize sessions that address the full range of international and transnational economic law. We encourage scholars to submit papers or panel proposals related to trade, investment, international financial regulation, transnational private law, and development law, as well as their intersection with social regulation such as over global warming, labor rights and consumer safety. This call for papers welcomes submissions that provide new analytic frameworks, reassess legal theory, evaluate developments in legal doctrine, engage in empirical analysis of the way international economic law operates, and provide guidance for policymakers, regulators and adjudicators in this time of international economic change.”

Abstract submissions of a maximum of 300 words are due by July 30, 2010 and should be emailed to 2010IELconference@gmail.com.  After a blind review process, selection decisions will be made in September.  

The conference is co-sponsored by the University of Minnesota Law School and the Minnesota Journal of International Law.  The Journal anticipates publishing some of the conference papers as part of a special symposium issue.  Questions about the conference should be directed to the Interest Group Co-Chairs, Susan Franck (franck@wlu.edu) and Greg Shaffer (shaffer@umn.edu).  

Tuesday, July 20, 2010

Monkey Business

It has been a while since I reported on the nastiness that is exotic animal smuggling. Here is a story from the BBC about a man arrested in Mexico City for smuggling titi monkeys from Peru. He had them rolled up in socks under his clothing, to protect them from having to be x-rayed as cargo. He had 18 monkeys with him, two of which had died when he was arrested.

Thursday, July 15, 2010

APHIS Wins One

Sometimes, interesting court decisions come from someplace other than the Court of International Trade or Federal Circuit. In this case, it is the Second Circuit.

In Natural Resources Defense Council v. Department of Agriculture, the NRDC, California, Connecticut, and my state of Illinois sued the Department of Ag over its implementation of regulations regarding imported solid wood packing materials.

If you are event tangentially involved in international logistics, you know that wood packing materials have been identified as a vector for plant pests entering the United States. Emerald ash borers and Asian longhorn beetles have destroyed trees throughout the U.S. and in my neighborhood. Given the danger posed by these and other pests, the Animal and Plant Health Inspection Service decided to regulate the importation of SWPM. The issue in this case is whether APHIS properly considered the alternatives, including the possibility of a phased-in complete ban on SWPM.

The legal basis for this challenge is two fold. First, the National Environmental Policy Act requires that a federal agency prepare an environmental impact statement prior to taking any major action affecting the quality of the environment. The plaintiff's alleged that APHIS' EIS was inadequate in that it failed to give full consideration is a phased-in ban on SWPM. The second basis for the case is the Plant Protection Act, which requires Ag to facilitate trade while also working to reduce the risk f the dissemination of plant pests.

Like most administrative law cases, this one does not turn on whether APHIS' decision is correct or even the best alternative. Rather, the sole issue before the Court was whether APHIS had properly followed its mandate to consider the environment and trade. It appears the main complaint was that APHIS did not give enough thought to and discussion about the notion of a phased-in ban. The details that I am skipping over relate to the availability of substitute materials, the fact that the fumigating chemicals used on SWPM are ozone-depleting, and the relative level of development of our trading partners.

The Court held that APHIS provided sufficient consideration to the relevant factors and adequately explained them in its various Federal Register notices. Consequently, the Court affirmed the decision of the district court and upheld the current regulatory standards.

Speaking of which, importers need to know these rules. Imports that are not compliance with the standards may result in liquidated damages, seizures, and redelivery notices. None of which is going to make you happy.