Thursday, June 17, 2010

What About the Battery?


Dell Products v. United States raises the question of just how many batteries are part of a computer set? According to the U.S. Court of International Trade, the answer is one.

The facts of this case are simple enough. One notebook computer entered the United States (via an FTZ) with two batteries. The second battery was a consumer selected option. Customs classified one battery with the computer and the second battery as a battery. Importantly, the computer only has one battery compartment, so the two batteries cannot be used simultaneously.

Dell's first argument was that the second battery combined with the computer and presumably the first battery constitute a functional unit and should be classified as a whole. HTSUS Section XVI, Note 4 states that a machine comprised of a number of individual components intended to contribute to a clearly defined function, may be classified in the heading appropriate to that function. This makes some sense as everything in the box, including the second battery, contributes to the operation of the computer. The problem is that the functional unit rule is limited, at least according to the Explanatory Notes, to components that are essential to the performance of that defined function.

In this case, the computer could operate just fine on one battery or on the power adapter. As a result, the Court did NOT find the second battery to be part of the functional unit that is the computer.

The much more interesting point has to do with whether this group of components is a retail set for purposes of GRI 3(b). Remember that GRI 3(b) says that goods put up in sets for retail sale may be classified as the article in the set that provides the essential character to the set. Determining whether a group of items is a set can be tricky. The rule is that you need to have two or more articles classifiable in different headings [note: odd exceptions exist] imported together for a particular purpose without repackaging.

In this case, the Court saw no problem in principal with the extra battery being part of a set. Thus, the fact that the second battery might be redundant did not destroy the set for classification purposes.

What did destroy the set is that it was customized by the consumer. According to the Court of International Trade, that simple fact means that the merchandise was not "put up" in a set "for retail sale." Why? Because the retailer--Dell--did not select the articles in the set and offer them for sale as a collection. Consequently, the collection was not put up for sale. Rather, much like a shopper dropping groceries into a cart, the collection was amassed for purchase by a consumer.

Here is an excerpt:
Dell’s position would permit goods packaged together to be classified a “set” for tariff purposes even if the grouping of goods was not fixed when offered for sale. This result would nullify the language of GRI 3(b) which anticipates a set as a defined unit that is offered for sale to retail consumers. Here, the contents of a customized order are determined by an individual customer; Dell did not designate which merchandise constituted a set for retail sale.

This is not to suggest that simply marketing or offering items together inherently creates a “retail set” for tariff purposes. Rather, this court is stating that a consumer’s customized order of individual, complementary items, (i.e. items that were never put up together as a pre-determined combination), is not transformed into a GRI 3(b) “retail set” upon entry merely by virtue of being ordered at the same time and subsequently packaged together in an FTZ.
I'm not sure what to say about that. It strikes me as contrary to the proposition that goods are classified in the condition in which they are imported, generally without reference to how they got that way. This rule prevents much of modern e-commerce from benefiting from GRI3(b) because any level of customization as to the contents of the set would destroy the set.

It is important to note that this case only explicitly held that the second battery was classified as a battery, not as part of the computer set. Nevertheless, it seems to follow that any customer-selected accessories in the box would fail the set rule as described here. I wonder whether that is really even what Customs wanted as an outcome.

One more point: the Court gives a thorough description of the law of deference and the application of Skidmore v. Swift in classification cases. Then, in footnote 13, the Court deals with a ruling that involves a notebook computer imported with two batteries. Customs classified this collection together as a computer in 8471. Although the Court distinguishes the ruling because it was unclear whether the computer in question could simultaneously use both batteries, the Court said nothing more about deference. It's interesting that the ruling was distinguished rather than held to be unpersuasive under Skidmore. As long as Skidmore is out there, it seems like it could use a workout every now and then.


James said...

So now this makes things interesting. If I am a retailer, and I have multiple "Package" deals that could theoretically comprise all of the various sets of my product, and if I marketed them as sets and sold them as sets - would that meet the definition set by this court.... hmmm makes you think

Leroy F. Berven said...

To extend James' comment slightly:

Now contemplate the situation in which:
(a) each reasonably plausible combination of base unit + accessories receives its own SKU,
(b) the goods are entered into and stored in an FTZ, wherein they are kitted (into various SKUs) as ordered, and
(c) the completed SKUs are withdrawn from the FTZ for consumption, as the orders are shipped.