Thursday, January 21, 2010

Learning Moments

United States v. Tip Top Pant, Inc and Saad Nigri is an interesting case from the Court of International Trade that provides all kinds of useful lessons.

The facts are that Tip Top imported shorts from Mexico and made a claim for duty-free treatment under NAFTA. Customs issued a CF28 Request for Information relating to the claim. In the request, Customs stated that “Due to the fact that this office is already reviewing your invalid claims, you are no longer eligible for the provisions set forth under 19 C.F.R. § 162.74.” What we have there is an effort to avoid the importer making a prior disclosure to protect itself against penalties. The regulations are clear that an importer loses the right to make a disclosure when it has notice that Customs has opened an investigation into the matter. But, an investigation is not “a review.” In theory, Customs reviews, to one degree or another, all kinds of entries: good, bad, and fraudulent. A simple entry review is not a formal investigation. Is this really enough to preclude a disclosure? I don’t know, but someone is going to have to ask the courts someday.

Another interesting point about the CF28 is that it declares the entries to contain “invalid claims” even before the importer has had an opportunity to respond. What kind of process is that?

The next thing I find fascinating is that the United States brought this case to Court before it completed the administrative penalty process. It is possible Customs was facing an impending statute of limitations problem and had to get into Court right away. The Court, however, took note of the incomplete process.

The United States made a motion for summary judgment arguing that all the facts necessary to establish liability for the company and its CEO Mr. Nigri had been established. The Court, however, found that Customs had not followed the proper penalty process by giving the defendants a full opportunity to rebut the claims against them. More over, Customs had never responded to the importer’s petition to mitigate the penalty. Without a complete penalty process, the Court refused to grant summary judgment for the government.

Last, and actually most interesting, is the case against Nigri personally. The facts do establish that Nigri was the person in charge of Tip Top Pants at the relevant times. In other words, if there were false claims, they happened on his watch. The complaint the United States filed asserts that Tip Top was the importer of the merchandise. It further asserts that the merchandise did not qualify for duty-free treatment as claimed. Lastly, the complaint says that Nigri was CEO and Chairman of the company.

Based on this pleading, the Court independently raised the question of whether that is enough to make Nigri a party and finds it is not. According to the Court, the complaint did not allege any behavior on Nigri’s part that was evidence of his negligence. Without allegations of negligence or other behavior leading to personal liability, the Court held that the United States had failed to allege a cause of action against Nigri. Thus, the case was dismissed with respect to him.

Now what? The Court was pretty clear that it is late in the litigation to amend the complaint to assert a claim against Nigri. Depending on the statute of limitations status of the case, the United States might be able to bring a separate case against him. For that, we’ll have to wait and see.

Of more immediate interest to compliance managers are the lessons from the CF28. First, always respond. You will do yourself and your company no good hoping the 28 goes away. If you need an extension to respond, ask. If you have a reasonably good story, you are likely to get an extension. Second, even if we assume that a CF28 is an appropriate vehicle to notify an importer of an investigation, what harm might have come from filing a disclosure? It would have at least permitted the argument that a disclosure was properly made. The possible downside is that to complete the disclosure, you might have to give up all the information Customs is going to use against you in a penalty if the disclosure is truly invalid. That is a risk. But, it is also most likely the case that Customs would have received that same information via an administrative summons or in discovery. So, an attempt at a disclosure may not hurt and might be very valuable. That decision, however, is one you need to talk through with your lawyers and management. I’m not making any recommendation here.

Thursday, January 14, 2010

Ford Focus on NAFTA

For purposes of keeping readers of this blog informed, here is a meat and potatoes summary of Ford Motor Company v. U.S., a decision relating to the documentation needed for a successful post-entry NAFTA claim. For now, I am going to leave my person views out of this.

The facts are that Ford entered parts from Canada and did not make a NAFTA claim at the time of entry. Customs liquidated the merchandise as dutiable. Ford made a subsequent claim for post-entry NAFTA treatment. This is a relatively common procedure under 19 CFR 181 Subpart D. At the time of its claim, Ford did not provide NAFTA certificates of origin. When it did provide certificates, the one-year period for filing had elapsed. Because the certificates were not provided within one year of the date of importation, Customs denied the post-entry claim. Ford protested and Customs and Border Protection denied the protest.

In the Court of International Trade, Ford raised several arguments in support of its claim. The Court, however, followed two prior decisions of the Federal Circuit and strictly construed the one-year period for making a complete claim. In Xerox, the Federal Circuit held that a protest is not a valid means of making of post-entry NAFTA claim. Rather, the importer must proceed under the specific law and regulations for post-entry claims, which includes the requirement that certificates be submitted to complete the claim within one year of importation. Corrpro, according to the CIT, went further and held that there can be no valid protest for NAFTA status without a prior valid claim, which for a post-entry claim, would include a certificate.

Consequently, Ford's post-entry claims, which lacked NAFTA certificates, were invalid. Without a valid claim, there could be no valid protest of Customs' denial of the claim. Without a valid denied protest, the Court lacks jurisdiction to review the claim. Ford also argued for review under the Court's residual jurisdiction. The Court, however, noted that had Ford properly proceeded under the claim and protest process, the Court could have reviewed the case under the normal denied protests route. Having failed to properly follow that path to court, Ford could not fall back on residual jurisdiction.

What do we learn from this? Post entry claims require a valid certificate of origin and all the paperwork must be in to Customs within one year of importation. What we don't learn is how the Court would have addressed the substantive issues Ford attempted to raise. Those issues include the application of 19 CFR 10.112 to NAFTA claims. That regulation says:
§ 10.112 Filing free entry documents or reduced duty documents after entry.

Whenever a free entry or a reduced duty document, form, or statement required to be filed in connection with the entry is not filed at the time of the entry or within the period for which a bond was filed for its production, but failure to file it was not due to willful negligence or fraudulent intent, such document, form, or statement may be filed at any time prior to liquidation of the entry or, if the entry was liquidated, before the liquidation becomes final. See §113.43(c) of this chapter for satisfaction of the bond and cancellation of the bond charge.

That, I will let you discuss among yourselves.

Monday, January 11, 2010

First Sale Data

Because I have previously discussed my views on the Customs and Border Protection proposal to interpret the valuation statute to do away with the so-called first sale rule, I probably should have mentioned that the International Trade Commission has published its congressionally mandated report on the topic. Note that the report is 255 pages, although the narrative is in the first 35 or so, the remainder is appendices and charts.

There is not a whole lot of data here. Here are some of the highlights based on data collected from September 1, 2008 to August 31, 2008:
  • 23,520 entities reported using first sale for valuation (8.5% of all importers)
  • Of those using first sale, 14% were in textiles, footwear, and apparel; 12% were in metals and metal products; 10% were in machinery, transportation, and computers
  • $38.5 billion of trade was affected (2.4% of all imports)
  • Of all first sale trade, by value 31% was machinery, transportation, and computers; 15% was electrical equipment; and 14% was textiles, apparel, and footwear
An interesting piece of data that is missing is the revenue lost by application of the first sale rule. The ITC did not have access to data showing the difference between the declared value and the fully-loaded cost to the importer. As a result, it is still not clear whether this is a big revenue issue for the U.S.

I must admit that I am a bit surprised by the number of entities using first sale and the diversity of the industries involved. Beyond that, I am not sure what conclusions Customs or Congress will be able to draw from this study. Customs original position has less to do with revenue than with international consistency and its reading of the value code. It seems unlikely that this report will change any minds at Customs. That means the question may well end up back in Congress.

Tuesday, January 05, 2010

Friends Don't Let Friends Classify

I have been in a single ballroom containing a very large segment of the lawyers working in the customs law field. Basically, we all know or know of each other. I bring this up, because I might be about the piss off some friends and former colleagues. So be it. I am also about to potentially annoy the U.S. Court of Appeals for the Federal Circuit.

The source of all this potential annoyance is Outer Circle Products v. United States, which the Federal Circuit decided today. I discussed this case previously. It involves the classification of zippered bottle wraps, kind of like can kozies but bigger. The Court of International Trade classified them in 4202 as "bottle cases," which are specifically listed in the heading. In doing so, the CIT had to distinguish a prior decision of the Federal Circuit in which that court held that 4202 (as it then existed) does not cover "containers that organize, store, protect, or carry food or beverages." The CIT's decision held that as imported without a bottle, the wraps could not contain anything. Ergo, the prior decision did not control and the wraps were to be classified eo nomine as bottle cases.

On appeal, the Federal Circuit stuck to its prior decision and reversed the CIT. The CAFC reasoned that the coolers at issue in the earlier case were not designed to store or protect loose food without further containment. Rather, the coolers would contain numerous containers of food. Similarly, the bottle cases are designed to contain a bottle containing a beverage. Hence, the no-food-or-beverage rule applies.

That seems straightforward and advances the law by affirming a bright-line rule. Everyone should now know that food and beverage containers stay out of 4202, as it then existed.

Here's my question: So what does 4202 mean when it specifically mentions bottle cases? I think I understand the CAFC to be saying that "bottle cases" are for protecting, carrying, and storing empty bottles or bottles filled with other non-food or beverage items. This is because no other items listed in 4202 are intended to contain food or beverages. So, the analysis makes legal and practical sense.

But, look at this wine bottle case. It is leather-ish, has a cover with a clasp, and a shoulder strap. For all intents and purposes, it is a suitcase for wine bottles. Guess what goes in 4202: suitcases. But, under this decision, that bottle case belongs somewhere else in the tariff schedule. I'm not sure that advances the law in a predictable way. It seems to me that the classification of a bottle case should not depend on either what the bottle contains or whether it is empty.

So, "nice work" to the folks who did a good job and won the case on appeal. You should be happy that I was not on the panel. To the panel, when next we meet, please keep in mind that reasonable minds can differ and I clearly have no idea what I am talking about.