Dinos Among Us

In a weird example of synchronicity, while walking to work today I was listening to Brian Dunning's Skeptoid podcast discussion of relic dinosaurs such as the Ropen of New Guinea and Mokele-Mbembe of Congo. As I crossed Michigan Avenue, I found this:

Unfortunately, rather than being a living T-Rex, it is a promotion for the Field Museum of Natural History, which is celebrating the anniversary of its acquisition of Sue, the T-Rex skeleton. Sue, for the record, is 65 million years old.

For My Friends at Costco

For those of you not following my increasingly rare tweets (www.twitter.com/customslawblog), I should note that one of my favorite issues is headed to the Supreme Court. That issue is whether it is permissible to purchase branded merchandise abroad and import it without the consent (in this case) of the copyright holder. More commonly, these cases revolve around trademarks and whether the product is materially different from the authorized U.S. product. This, however, is a copyright case. In either case, what we are talking about here is called parallel importation or the gray market.

This case will clarify a gap left in the prior Supreme Court decision on the topic, which was Quality King v. L'Anza. In that case, a U.S. company sold hair-care products to a distributor in the U.K., who sold them to someone in Malta (of all places). Someone found the goods there at a bargain price and re-imported them to the U.S. where they were sold at discount shops.

L'Anza, seeking to protect its upscale market from bargain store competition, invoked the Copyright Act provision giving it the sole right to the sale and distribution of the work. In case you are wondering how this applies to shampoo, note that copyright law applies to tangible works of authorship, even if only minimally creative. So, the logo on a bottle (or the cleverly designed bottle itself) can be protected by copyright.

A specific provision of the law states that:

Importation into the United States, without the authority of the owner of copyright under this title, of copies . . . of a work that have been acquired outside the United States is an infringement of the exclusive right to distribute copies under section 106, actionable under section 501. . .

On its face, this would appear to say that the unauthorized importer has a problem.

But, there is another part of the Copyright Act that says:

the owner of a particular copy. . .lawfully made under this title, or any person authorized by such owner, is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy or phonorecord. . . .

What this seems to say is that once the copyright holder sells the work, the new owner can freely sell (or otherwise distribute) that copy of the work. That explains Netflix, used book stores, and libraries. By the way, note my rare use bold face. This does not allow someone who buys a work to make a copy and distribute the copy. Got that? This is not the get-out-of-jail-free card for digital file sharing.

The Supreme Court looked at those two pieces of the law and held that L'Anza had sold its products to the U.K. distributor. At that point, (1) it was fully compensated for the value of the goods and (2) it lost control of the goods. Thus, Quality King was permitted to re-import the goods over the objections of the copyright holder.

While that seemed to resolve the issue, there was one small straw onto which some copyright holders might grasp. What, they asked, happens if the sale takes place outside the U.S. and the U.S. copyright holder is not compensated for the sale? This might take place where, for example, the copyright holder is the U.S. licensee of a European luxury brand and the imported goods were sold by the European company, not the U.S. company.

That is close enough for my purposes to the situation in Costco v. Omega, which involves expensive Omega watches imported through unauthorized channels by Costco under the authority of the L'Anza decision. Omega sued and the Ninth Circuit distinguished the L'Anza decision on the grounds that the all important "first sale" had not occurred in the U.S. Costco appealed to the Supreme Court. Supporters are lining up on both sides, with the Obama Administration supporting the Ninth Circuit decision.

If the Ninth Circuit is affirmed, all sorts of interesting ramifications result. According to some of the arguments presented, if the case is not reversed, libraries and used book stores will need to know where books were first sold to determine whether they have the right to distribute them. Another possibility is that companies will see an incentive to produce outside the U.S. as a means of establishing tighter controls on the U.S. market. Another possibility is that companies will toss copyrighted logos onto products simply to use as leverage to keep the goods out of the U.S. None of this strikes me as a good result in the age of increasingly open global markets. Thus, this will be an interesting case to watch (hilarious pun intended).

On Your Left . . .

you will find my lungs. On your right is my heart. The reason for that bit of bike and charnel house humor is brought to you by the fact that I rode my bike to work for the first time yesterday. I am still feeling it today. Still, it was a nice sunny day. Pretty cold at the start of the ride and a bit windy on the way home, but overall, a pleasant commute. I did cheat a bit by driving half way, but its the thought that counts, not my ironic carbon footprint.

While I am linking to reruns from this blog, I wish you all a happy Tariff of Abominations Day!

The Straw that Broke the Camelbak

For my buddy Lowell, I am tagging this entry as "Cycling."

The Court of International Trade has ruled that a hydration system worn on the back while engaged in physical activity such as cycling is, for all intents and purposes, a backpack. Let's see how it got there.

The merchandise consisted of Camelbak-brand hydration systems. These clever products are liquid reservoirs and a delivery tube mounted in a backpack. Here is an example, which may not have been involved in the actual case. The thirsty cyclist or other athlete can sip fluids from the reservoir via the tube and a valve. As you can see, the hydration system also holds cargo, as would an ordinary backpack.

The question in Camelbak Products v. United States, was whether for tariff classification purposes the hydration systems are "traveling bags" or "sport bags," on the one hand, or are "insulated food or beverage bags" on the other hand. Both possible classifications are in HTSUS heading 4202. Thus, the General Rules of Interpretation are applied at the subheading level in this case. If that does not make sense to you, see GRI 6.

I'm going to cut through a lot of stuff and get to the point. The Government contends that the Camelbak is a fancy backpack and that adding a possibly insulated bladder [note: there is a question regarding insulation] does not make it something else. Camelbak contends that the tariff item for sports bags does not fully describe the hydration system because it fails to take into account the insulated bladder. According to Camelbak, the proper analysis is to treat the product as a composite good (GRI 3) and determine the essential character. Camelbak thinks the essential character is the hydration portion, not the cargo portion.

The Court agreed with the Government that the Camelbak is just a fancy backpack. The Court drew an analogy to a car and noted that fancy cars remain classifiable as cars, which is unimpeachable. A car is no less a car because it contains an air conditioner, a radio, and a DVD entertainment system. The question is why is that the case? I think that if we really think hard about that question, it is not simply that the machine is fully described as a car. Rather, it strikes me that we all intuitively know that neither the air conditioner nor DVD player impart the essential character to the car. The ultimate function of the car is to provide transportation. Anything else is non-essential.

I don't think it is as easy to dismiss the bladder in a Camelbak. If I wanted to buy a backpack, I would go buy one. If I want a hydration system, on the other hand, I would go buy a Camelbak. In that case, the cargo carrying components of the Camelbak might be incidental (or at least non-essential). I don't know how that question would turn out. It would, however, be interesting to know the relative value of the components and whether there is any evidence relating to the use of each part by the end consumer. Then, we could do an explicit GRI 3 analysis and see where we end up.

CIT Decisions

The Court of International Trade issued a couple decisions on May 6 that are worthy of note on technical grounds.

In Shinyei Corp. of America, the plaintiff filed protests to challenge liquidation instructions relating to the assessment of antidumping duties. Unfortunately, that is a challenge to a decision of the U.S. Department of Commerce, not Customs and Border Protection. As a result, the customs protest was invalid and the subsequent case not properly before the Court on the basis of 28 USC 1581(a). The Court struck the complaint and gave Shinyei 30 days in which to amend the complaint, at which time it will likely assert jurisdiction on the basis of 1581(i).

The other case is Great American Insurance Co. This case goes to a fundamental requirement for getting into Court to challenge a liquidation: you need to pay the duties before you ask for them back. Under 28 USC 2637(a), a civil action contesting the denial of a protest may be brought in the Court of International Trade only after all liquidated duties, charges, or exactions have been paid. GAIC put the summons in certified mail and then paid the duties. Unfortunately, there is CIT Rule that says a summons is deemed filed on the date of certified mailing. Payment to Customs, on the other hand, takes place only when Customs actually receives the money.

The summons and the payment legally (if not factually) crossed in the mail. Because the case was commenced prior to paying the duties, there was technically nothing to fight about and no relief that could be granted. According to the Court, the law on this issue is unambiguous and the Court declined to equitably change either the effective date of payment or of commencing the suit.

These cases represent the kinds of decisions that baffle lay people. Everyone knows that Shinyei can get into Court to have its claim addressed. Assuming no statute of limitations problem, it is just a matter of citing the proper jurisdictional basis. Similarly, GAIC did pay the duties it wants refunded. So, why not just let the cases proceed since "everyone knows" that's the right thing to do?

The problem for the Court is that the law makes it very hard to sue the United States of America. In the old days, it was just completely impossible to sue the king. This was sovereign immunity in its purest form. In the U.S., the government enjoys sovereign immunity unless Congress has specifically waived it. Since the default position is that the U.S. government is immune from lawsuits, Courts very strictly construe waivers of that immunity. Similarly, the Court of International Trade, like all federal courts (but even more so) is a court of special and limited jurisdiction. If you want to be in the Court of International Trade, you need to be there for a reason clearly within its exclusive jurisdiction. Taken together, these two principles mean that there are many ways to screw up an effort to get your case before the CIT. That is not always the best way to get to a just result. Unfortunately, it is the law.

No Deemed Protest Denial

What happens if Customs and Border Protection sits on your protest for two years or more? There has been a notion among importers that the protest is automatically denied and can be challenged in Court. I think the basis for this is three fold. First, both the statute and the regulation are clear that Customs "shall" act on the protest within two years. See 19 USC sec. 1515(a) and 19 CFR sec. 174.21(a). Second, in cases where the importer requests accelerated disposition of the protest, a failure to act is deemed to be a denial. And third, there just should be some sort of consequence for Customs' failure to act.

In Hitachi Home Electronics (America), Inc. v. United States, the Court of International Trade settles the question. Basically, it comes down to the fact that neither the statute nor the regulation imposes any consequence for Customs' failure to meet the two-year deadline. Absent some consequence, the law treats the apparent deadline as a directory guideline rather than as mandatory. While that seems to be contrary to the English understanding of the word "shall," it is a pretty well-established legal principal. After all, if Congress did not bother to specify a consequence, why should the Court bother to create one?

That is the upshot of the decision. In practice what that means is that Hitachi was not able to invoke the Court's jurisdiction to review a denied protest (because the protests has not yet been denied). Instead, Hitachi needs to wait for Customs to act, which is not a great place for Hitachi to be. Because Hitachi will have a remedy available if and when the protest is denied, the Court also held that it could not review the case on the basis of the Court's residual jurisdiction. As a general proposition, you can't invoke residual jurisdiction if you are going to have a denied protest in the future. There are exceptions to this rule including where the protest will be futile or the relief available inadequate, but those do not apply.

So, Hitachi is back to twiddling its metaphorical thumbs waiting to see what Customs will do. And, in case you are wondering, the protest was filed in May of 2005.