Sunday, February 21, 2010

A Case of Note

LeMans Corp. v. United States

At what point does specialized clothing become sports equipment? I thought this question was decided in a Federal Circuit case involving Bauer-Nike ice hockey pants back in 2004. Apparently, I was wrong about that.

This case involves clothing designed exclusively for use while engaged in "power riding sports." The clothing included protective padding, was made of moisture wicking fabric, and designed to fit comfortably while roaring around a dirt track at high speeds. Customs classified the merchandise in Chapters 61 and 62 depending on the specific article involved. The importer sought classification in Chapter 95 as sports equipment.

The Court initially found that the motocross garments (sweaters, jackets, ) are all classifiable in Chapters 61 and 62 based upon General Rule of Interpretation 1 to the HTSUS. That analysis seems clear enough. The interesting question is whether the merchandise is also classifiable in Chapter 95.

LeMans' argument is that the goods are described by Heading 9506. As a result, GRI 3(a) requires the application of the relative specificity test. Because sports equipment is a more specific description, it should prevail over the less specific apparel classifications. The Court did not accept this argument.

According to the Court, "equipment" is necessary, useful, or appropriate to a specific activity. The Court appears to agree that the apparel is useful and appropriate for motocross racing. Nevertheless, it looked to the Explanatory Notes for clarification as to the meaning of "sports equipment." In the EN, the Court found a long list of equipment from snow skis to tennis rackets and from hockey sticks to fencing foils. The closest thing to this merchandise was various kinds of protect pads and guards. Thus, the Court concluded that apparel was not intended to be included in Chapter 95.

But what does that say about the Bauer Nike hockey pants? Well, I think there are two interesting points here. First, the Court of International Trade says that the Bauer Nike decision did not intend to offer a definitive definition of the term "equipment." Consequently, the CIT looked at it fresh and in light of the Explanatory Notes. Given the Court of Appeals' recent curt decision in Outer Circle Products, I suspect we will hear from the CAFC on that point. Next, I found it interesting that the CIT cited subsequent Customs rulings as consistent with its decision. Those rulings should be in accord with the Court's decisions, not the other way around. Based on all this, the Court affirmed Customs' classification on the grounds of GRI 1 without regard to GRI 3.

The Court is correct that whenever GRI 1 is sufficient to classify merchandise, the analysis stops there. What I wonder about is when it becomes necessary and appropriate to open the Explanatory Notes. I know Customs says that the ENs should always be consulted. But, in this case, I would have applied the reasoning from the Federal Circuit, found the meaning of "equipment" to be clear and applicable to the merchandise. At that point, I would have been in a GRI 3(a) situation. By turning to the ENs early, the Court found a gloss on the meaning of "equipment" that might not otherwise be there. I don't know whether that is appropriate given that the HTSUS is the statutory language. But, I also know that I am in the minority on this point.

A Few Things

I know things have really slowed down here when my family complains that I am not posting often enough. I have not done a completely off-topic post in a while. And, the on-topic world has been personally fairly busy of late while at the same time not particularly full of interesting developments. So, here are a couple updates culled from the recent news. None involve animal smuggling.

The Justice Department has announced a new task force on intellectual property enforcement. In many ways, I think this is great. Intellectual property really is the engine that drives vast swaths of our economy. But, I admit to feeling a little queasy every time I hear about increased IPR enforcement involving imports. The reason is that I know that many well-intentioned small business people inadvertently get caught up buying counterfeit merchandise and end up losing money and merchandise as a result. I am not making excuses for them, I just wonder whether they have a voice with the government. More worrisome, I think, is that legitimate importers of grey-market goods are often unable to prove that their goods are not counterfeit. This is largely because they were not purchased from the authorized producer or reseller and those people have no interest in facilitating parallel imports. It becomes tough for the importer to prove a negative and the rights holder can almost always identify counterfeits. Its a tough spot for both sides because the rights holder must keep tight controls over information about its security measures.

According to press reports, Japan has proposed to the WTO that 53 energy-efficient products be given duty-free status. It is Document 10-0862, which you can find here. Seems like a good use of tariffs to promote environmental policy. Of course, that often butts up against industrial policy.

The Bureau of Industry and Security has published new guidance for freight forwarders in routed transactions.

The CIT just made public a decision on the classification of motocross apparel. It is a very interesting case that I will summarize as soon as possible. And, speaking of the Court of International Trade, I will be in Washington on Thursday and Friday for the Georgetown International Trade Update. I am on the Bench and Bar panel on Thursday afternoon. If you are there, please say hello to me. Softball questions are also welcome.

Wednesday, February 10, 2010

What Did Brown Do Wrong?

I'm going to do this quickly to get it off my chest. In United States v. UPS Customhouse Brokerage, the United States sought to impose monetary penalties on UPS for failing to exercise the required level of supervision with respect to its brokering activities.

For more background, look here and here. Note that I am disclaiming my prior standard of review analysis. This is a de novo case. There is no review. The standard of review was not really a question in the first place.

Procedurally, the case is complicated. It has been before the Court of International Trade on motions for summary judgment by both parties and there was an unsuccessful effort to get the main legal question before the Court of Appeals for the Federal Circuit in an interlocutory appeal. There was a trial on the merits, which the United States won. That judgment was appealed and the Federal Circuit vacated the judgment in part and remanded to the CIT for further proceedings.

The basis for the Federal Circuit's decision was that Customs improperly failed to consider all ten factors specified in 19 CFR 111.1 in the definition of "responsible supervision and control." When the regulations says Customs "will consider" the listed factors, that is mandatory language that Customs cannot ignore.

That left open the interesting question of exactly what the Court should do on remand. One option available to the Court would be a remand back to Customs to consider all the relevant factors. Or, the Court could order additional proceedings to let the government create a full record for review in light of the Federal Circuit's interpretation of 111.1.

The Court of International Trade looked at this in the context of a request for a rehearing. In other words, ,was there surprise, accident, or mistake in the first trial? The Court found that the Federal Circuit's interpretation of the regulation was not new or surprising. Rather, because of the very novelty of the question, plaintiff should have anticipated that its interpretation was not necessarily correct. According to the opinion, "This is not a case in which Plaintiff could rely upon a long-established interpretation of the law in planning its legal strategy, but rather a case in which Plaintiff knew well in advance of trial that the success of its case could depend upon establishing evidence to satisfy either of two potential outcomes on the applicability of the [sec.] 111.1 factors."

Thus, what we have here is a failure of the government to prove its case under the legal standard set down by the Federal Circuit. Having tried to make its case and failed, the Court of International trade refused to give the government an opportunity to cure the defects through either administrative of further judicial proceedings. Judgment for the defendant.

And, we're all very likely to see this case once again in the Federal Circuit. Perhaps, if a penalty is ever assessed, we will get the answer to the far more interesting question of whether the penalty statute imposes a limitation on the total liability brokers face. That question is still out there, isn't it?

Sunday, February 07, 2010

Totes Tossed

The Court of Appeals for the Federal Circuit has affirmed the decision of the Court of International dismissing Totes-Isotoner Corp. v. United States. As in the decision from the CIT, this case turns more on technical issues concerning the pleading of the case than it does on the merits. Thus, it is unclear whether this is the last word on whether tariff items that differentiate among products based on the gender or age of their intended users are unconstitutional.

On its face, this seems like an easy question. If there were a sales tax of 14% assessed on gloves purchased by men and 12.6% of gloves purchased by women, it seems unlikely that the tax would last long before being declared unconstitutional as a violation of equal protection. But, a customs duty of 14% on men's gloves versus 12.6% on women's gloves is harder to analyze.

There were lots of issues before the Federal Circuit. We'll discuss each:


The government took the position that the right way for Totes to challenge the assessment of an allegedly unconstitutional tariff was via an administrative protest. Totes, on the other hand, skipped the protest process and proceeded on the basis of the Court of International Trade's residual jurisdiction, 28 USC 1581(i). The Federal Circuit re-affirmed it position that Customs has no authority to declare a statute unconstitutional. Thus, a protest would not provide a remedy in this case. Totes, therefore, was correct is bringing the case under subsection (i).


Standing is an interesting issue in this case. The requirement that the plaintiff have standing to bring the suit is intended to limit cases to those brought by the injured party. In this case, the question is whether Totes, as the importer but not as a glove-wearing man, was the right party to bring the complaint. Every importer of men's gloves regardless of gender, according to the government's argument, pays the same rate of duty. So Totes is not really injured by discrimination. The CIT held that Totes is an appropriate plaintiff, and the Federal Circuit agreed.

According to the Federal Circuit, Totes has suffered an injury in that it has paid the higher rate of duty. In addition, as the importer and reseller of the gloves, it has a close relationship with the ultimate purchasers of the gloves. Finally, purchasers have no ability to challenge the assessment of duties because they are not the importers. Finally, the purchasers of gloves have an interest in being free of discrimination. Thus, Totes has standing to be the plaintiff. It is worth noting that Totes did not claim to be seeking standing on behalf of purchasers but only on behalf of its client the importer. Nevertheless, the Federal Circuit analyzed this as a derivative standing case.

Political Question

The government next argued that the determination of rates of duties is a political question not subject to review by the courts. In other words, because duty rates are the result of international negotiation involving economic and foreign policy, they should be free from judicial oversight. But, this is not a case involving a pure international obligation. Rather, the negotiated agreement was implemented by the Congress in a run-of-the-mill statute. According to the Federal Circuits, it is the job and duty of the courts to review statutes for constitutionality. Thus, the political question doctrine did not bar Totes from making its case.

So far, so good for Totes. Frankly, they are doing better than I expected. My first reaction to this case was that it would be dismissed on the grounds of standing and that the only way to make this challenge would be by having individual men as plaintiffs, proving that the added duty is passed on to purchasers and that it dis-proportionally affects men. So, Totes is way ahead of where I thought they would be. But, it is at this point that things go south.

Failure to State a Claim

The Court of International Trade held that Totes' complaint failed to allege facts that state a claim for which it is entitled to relief. In other words, it did not provide the facts necessary to show illegal discrimination.

The Federal Circuit's analysis was a little different than the CIT's, but it got to the same place. The Federal Circuit started from the premise that disparate impact alone can, in some cases, establish a violation of the equal protection clause. But, according to the Court, in the tariff context (as distinct from jury selection, employment, and housing), more is necessary. The plaintiff has to show an intent to discriminate. The first reason for this is that the tariff system is not really focused on the buyer. Rather, it is an effort to strike a balance based on product type, country of origin, and other economic and policy factors. The difference in duties between men's and women's gloves, therefore, is likely because they are different products affected by different economic conditions. Without evidence of an intent to discriminate against men, the Federal Circuit was unwilling to assume a discriminatory purpose.

The second reason the Federal Circuit took this approach is that the Supreme Court has long held that Congress has broad authority to craft taxes to raise revenue. Taxing often includes the power to differentiate between group. I guess that is why there are multiple income tax rates.

Because of these concerns, the Court held that the tariff differential is not facially discriminatory. In the absence of facial discrimination, a plaintiff needs to discriminatory intent, not just disparate impact. Totes did not plead any evidence of discriminatory intent. Consequently, the Federal Circuit affirmed the dismissal for failure to state a claim.

There is an interesting concurring opinion in this case. The concurrence states that there is no reason to treat equal protection cases arising under the tariff laws different from any other equal protection case. Rather, the concurrence focuses on the fact that Totes' argument is based entirely on the presence of a facially discriminatory tariff. Totes, apparently, did make a disparate impact argument. But, according to the concurrence, because the tariff is not facially discriminatory because it is directed at products, not people and is borne by importers not persons of gender (to coin a stupid phrase). Consequently, traditional equal protection law requires a showing of discriminatory intent. That showing is missing, so according to the concurrence, the case should be dismissed.

If this decision stands, it appears that Tote's or another plaintiff will have to show a Congressional intent to discriminate against men in the tariff rate applicable to gloves. That may be a an impossible task. Clearly, though, we will all be waiting to see what happens next.

Thursday, February 04, 2010

Blog Update

By that title, I mean this is an update about the blog. My routine in the morning is to check the Federal Register for agency updates and the Court of International Trade and Court of Appeals for the Federal Circuit pages for new cases. I also have Google alerts for relevant topics. I tweet the little things that strike me as interesting or amusing. And, I feel like it has been quiet lately. Not much has seemed blog-worthy.

I do have the UPS decision from the Court of International Trade sitting on my desk. I'll blog that sooner or later. The bottom line, though, is simple. In broker penalty cases, Customs is supposed to consider a list of 10 elements when setting penalties. If it fails to consider all 10, it did not do its job and any penalty assessed is invalid.

On the more general front, I've got some speaking events coming up. I'll be at the Georgetown International Trade Update February 25-26, and at ICPA's Orlando meeting March 14-18. For those in the oil business, I'll also be at API in San Antonio March 7-9. Yes, that is a busy stretch.