Saturday, October 29, 2011

Container Store

On Thursday, I did a very dangerous thing. I talked about trade law in a room of about 100 trade lawyers and judges from both the Court of International Trade and the Court of Appeals for the Federal Circuit. This was at a CIT and Customs and International Trade Bar Associations sponsored event in DC, which was a great success.

The topic was the identification of situations in which judicial review raised more questions for the relevant agencies and parties than it resolved. As it turns out, that phenomenon is more easily found in antidumping and countervailing duty law than in customs law. We discussed issues like zeroing, the ITC's causation analysis where non-subject imports are in the market, and the application of adverse facts available. In all cases, the trade lawyers on the panel expressed concern about the courts swinging from one position to another or injecting new elements into what might have been a settled analysis. My role was to moderate, so I had little to add. But, it was an interesting conversation for me.

Plus, I had the surprisingly awesome experience of sitting in the big judicial chair in the Federal Circuit's very impressive court room. I had never seen that courtroom from that side of the bench.

On the topic of ambiguity in customs law, it was easier to find situations in which judicial review cleared up some question. Such is the case with this decision involving imports by the Container Store. The issue is very similar to the question presented in storeWALL, which we previously discussed. The issue in Container Store had to do with the classification of components of elfa brand shelving systems. Customs and Border Protection wanted the "top racks" and the corresponding vertical standards classified as base metal mountings and fittings in Heading 8302. The plaintiff, on the other hand, wanted the merchandise classified as parts of furniture in 9403.

Here is a picture of what I think was at issue (with the exception of the horizontal shelf bracket).

Initially, it is pretty easy to see what Customs is thinking. The products appear to have more in common with mounting hardware than with furniture. In terms of how CBP officials at ports handle merchandise, looking into a box of these things would not bring chairs, beds, cupboards, or any other furniture to mind.

On the other hand, the Federal Circuit essentially resolved this dispute in storeWall where it found similar complete systems to be "unit furniture." The argument turns on the fact that these systems are flexible and modular. When fully assembled, the user might build a system with drawers and shelves, which would qualify as furniture. On the other hand, the user might only install pegs and hooks, which would not qualify as furniture. In storeWALL, the CIT upheld Customs' argument that the goods could not be classified as furniture unless, at the time of entry, the configuration was certain to qualify as furniture.

The Federal Circuit reversed that decision on the grounds that "unit furniture" implies flexible storage systems that can be configured as desired by the user. The CIT, helpfully followed that guidance and reached a consistent conclusion with respect to the Container Store merchandise. Thus, the CIT has done its part to avoid creating any ambiguity with respect to this kind of stuff. We can only hope that the Federal Circuit, if asked, will follow suit.

Congratulations Frances on your win.

Wednesday, October 26, 2011

The Byrd Amendment Still in Court?

Despite having been repealed in 2005, the Continuing Dumping and Subsidy Offset Act (known as the Byrd Amendment) is still in Court, although maybe not anymore. In Furniture Brands Int'l v. United States, a three-judge panel of the Court of International Trade was asked to decide a number of motions most of which were directed at dismissing the case for failing to state a claim on which relief can be granted.

The point of the CDSOA is to allow members of the domestic industry to receive an allocation of funds collected from importers. These funds were intended to offset the expense of pursuing the case incurred by the petitioners and domestic interested parties who supported the petition. Thus means that domestic interests who opposed the petition are not entitled to CDSOA funds. The Court of International Trade had held in previous cases that this petition support requirement violated both the first amendment guaranty of free speech and the fifth amendment guaranty of equal protection. Unfortunately, for the plaintiff, the Court of Appeals for the Federal Circuit reversed both of those earlier decision.

After finding, consistent with prior CDSOA cases, that the Court of International Trade had subject matter jurisdiction, the CIT addressed whether there was any way for the plaintiff to successfully maintain the cause of action. The Court found that plaintiff's claims were precluded by the Federal Circuit's decisions that the CDSOA violates neither the first nor the fifth amendments. Plaintiff made an effort to distinguish its case on several grounds. First, it argued that the plaintiff's opposition to the petition was not commercial speech, which is subject to a lower level of constitutional review, but was actually more highly protected speech on a matter of public concern. Second, the plaintiff argued that one of the earlier decisions was based in part on the fact that the "domestic" party was owned by a foreign company. Neither of these arguments was sufficiently compelling for the CIT to draw a distinction to the prior CAFC decisions.

The plaintiff's last argument has to do with a decision the Supreme Court issued after the plaintiff filed this case. That case, Sorrell v. IMS Health, involved a Vermont statute that authorized civil remedies for the prohibited use of prescription information. That statute was content-based and also discriminated against speakers based on view point. In contrast, according to the CIT, the CDSOA does not intentionally suppress expression. Consequently, the CIT held that the Federal Circuit decisions control and need not be given a narrow reading, as proposed by the plaintiff.

Given that legal conclusion, the CIT also denied the plaintiff's motion to amend its complaint on the grounds that the amendment would be futile.

And, that is all the constitutional law you will get from me tonight.

Monday, October 24, 2011

The Mess that is MPF

To cut to the case, the President signed the Korea-FTA legislation last. As a result, the MPF changes in that bill will control. That means that Merchandise Processing Fee will increase to .3464% retroactively to October 1, so expect a bill from Customs and Border Protection. For now, the system will not accept payments at the higher rate. Customs is expected to provide about a week's notice before the program is done to implement the increase.

Note that the change in rate does not affect the $25 minimum or the $485 maximum. Thus, large commercial shippers, who are likely to have the cap apply to most shipments, will see no real change in their total landed cost. On the other hand, small shippers will likely absorb the increase in MPF collected. That seems like something else to anger the Occupy Wall Street crowd.

It's a Win

Sometimes the most important case in the world is your own. In that context, I give you Firstrax v. United States. The issue in this case was the tariff classification of collapsible pet crates used to provide a portable home for dogs and an aesthetic alternative to wire crates. Some of the smaller crates involved included a handle on the top. This created a superficial similarity in appearance to pet carriers, which these products are not. The primary distinction between the two is that pet carriers tend to have a rigid bottom for the comfort of the animal and these crates rely on the floor or ground to provide a rigid surface.

Customs and Border Protection wanted to classify these products in HTSUS Heading 4202 on the theory that they are similar to travel bags used to transport, store, protect, and organize personal affects. The Court of International Trade disagreed with this on almost every front. According to the court, a living, breathing pet cannot be "stored" an a manner similar to socks in a suitcase and a single pet (without accessories or other items) cannot be said to be "organized" like toiletries in a travel bag. Also, the evidence indicated that the crates are not meaningfully protective and are not designed for transport. Thus, the crates are unlike the exemplars in 4202. Rather, the crates are classifiable as other made up articles of textile.

Of course, I think this is a good decision. I think it may be applicable to other circumstances in which a textile or plastic container holds a single item, but that depends on the facts. The other open question is whether the U.S. will appeal. That remains to be seen.

Thursday, October 20, 2011

Interesting 337 Case

I have a couple interesting cases to cover. The first is Tianrui Group v. International Trade Commission, which is a Section 337 exclusion case. We don't usually cover 337 cases here, so some background is appropriate.

The law permits a U.S. holder of intellectual property rights to bring an action in the International Trade Commission seeking to exclude from the United States imported products that infringe the intellectual property. Usually, but not always, the IP rights involved are from patents, but 337 applies to copyrights, trademarks, and other rights. To be technically correct, 337 also applies to other methods of unfair competition including some antitrust violations. If the ITC finds a violation, it can issue an exclusion order, which tells Customs and Border Protection of prohibit the entry of infringing merchandise. Appeals from the ITC are heard by the Court of Appeals for the Federal Circuit, bypassing district court review

There is a lot in this case. If you are interested in it, read the whole opinion. This summary will only hit the highlights and will miss the detail.

The underlying issue in this case is interesting for two reasons. First, it relates to trade secrets. Second, it relates to activity occurring entirely in China. The facts are that Amsted, a U.S. manufacturer of cast steel railway wheels licensed a secret process to foundries in China. When TianRui tried to license the process, it was unable to strike a deal with Amsted. Instead, it hired nine employees from a licensed Chinese producer, some of whom knew the secret process. TianRui then began producing wheels using the process and exporting them to the United States. Amsted sought to exclude that merchandise via a 337 action.

In the ITC, TianRui raised the argument that because the alleged violation occurred entirely in China, there was no basis on which to bring a 337 case in the U.S. Rather, according to TianRui, the Chinese courts provide a more appropriate forum.

Trade secret misappropriation law is an entirely different animal than patent, copyright, and trademark law, all of which are implemented in federal statutes. Trade secrets, on the other hand, are based on state laws. The administrative law judge at the ITC applied trade secret law as found in Illinois, where Amsted and other parties have offices. As an issue of state trade secrets law, this raises the question of whether behavior that takes place entirely in China is subject to state trade secret law.

As an initial point, the Federal Circuit held that state trade secret law does not control the issue. Rather, the Court held that a single federal standard should determine what constitutes misappropriation of a trade secret in the context of Section 337. The reason for this is that Section 337 embodies Congressional policy to protect American intellectual property rights. That is not an issue of state law.

On the main point, TianRui argued that Section 337 does not make trade secret law have extraterritorial reach to cover activities that took place entirely in China. As a general principal, American law does not have extraterritorial application unless Congress specifically states that it does. The Court found that the presumption against extraterritorial application does not apply here for three reasons. First, the law explicitly addresses imports to the U.S., which inherently regulates products produced through foreign activity. Second, the law addresses unfair competition in the U.S. that results from the importation of the merchandise. Finally, the legislative history indicates Congressional intent to regulate foreign behavior. Thus, the Federal Circuit held that 337 has extraterritorial reach.

The case has a strong dissenting opinion arguing that Section 337 cannot regulate activity occurring entirely outside the United States. According to that opinion (by Circuit Judge Moore), the United States has "no right to police Chinese business practices." The dissent goes on to say that there are all manner of potentially unfair business practices occurring outside the United States including suppressed wages and forced labor. The dissent calls the breadth of the majority opinion "staggering."

The dissent notes that is is sympathetic to Amsted and that TianRui appears to be a bad actor. Nevertheless, the judge finds nothing in the statute or the legislative history to show a congressional intent to apply trade secret law extraterritoriality. That is distinct from patent law, which is specifically included in the statute. Lastly, the judge noted that Amsted had an opportunity to bring this conduct within the extraterritorial scope of 337 by getting a process patent to cover the trade secret. Of course, my IP lawyer friends will point out, that limits the lifetime of protection. If the folks at Coke had to do that to preserve their secret formula, it would only be a secret for 20 years.

Thursday, October 13, 2011

Korea: Yes, I know

Panama and Colombia, too.

Here is an article from the Atlantic about the deals, focusing on Korea.

I feel as if I should have something insightful to say and that I should take a position on the economic impact these deals will have on the U.S. as a whole, on jobs in particular, and possibly on compliance professionals. The truth is, I am somewhat numb to trade deals.

Far and away, the trade agreement that gets the most commercial traction is the NAFTA. We are 17 years into NAFTA and every day (really, every day) I answer questions about how to do the documentation. That is because the rules are very complex. I am happy for the opportunity to help and I truly understand the complexities of the data gathering necessary for compliance. But I also know that adding additional trade deals adds exponentially to the compliance difficulties. For this, I blame the WTO's inability to get a comprehensive trade deal done during the Uruguay Round. As it is, the NAFTA was used as a model for that agreement and for the TRIPS agreement that followed. But, without comprehensive (meaning global) trade liberalization, the U.S. and other countries have fallen into the somewhat random chaos of bilateral and multilateral regional deals and topic-specific agreements (e.g., the new anti-counterfeiting agreement).

The problem with the trade deals is that each one of them is intended to promote trade within their region. That means that the NAFTA is intended to encourage trade between the North American neighbors. As a result, NAFTA goods may not qualify for duty-free export to Australia because of excessive Canadian or Mexican content. Goods I can certify under the U.S.-Chile FTA may not qualify under the agreements with Singapore, Bahrain, or Morocco. And, the paper work and records for each are similar but distinct. If a company tries to qualify goods under both the U.S.-Central America-Dominican Republic Agreement and the NAFTA, it will likely need to gather two sets of origin certifications from suppliers because the rules of origin for the materials used to make the finished goods differ.

With all due respect, I suspect the agreements with Colombia and Panama will add little to the burden on most compliance professionals. Certain industries and certain companies will feel a big impact, but overall the impact will be small. That is not necessarily the case with Korea, which is a major economy with a lot of trade. According to USTR figures, the Korea agreement will open up Korea to $10 billion in exports and all greater American access to Korea's $560 billion services industries. That is significant.

I remain fairly convinced that these deals are a net positive for the economy while recognizing that individual companies and workers may be hurt. That is troubling and, unfortunately, makes for the most obvious kind of media coverage and the most compelling stories. In the long term, the best approach is to scrap these deals in favor of a global approach to trade that lets countries benefit from their comparative advantages while preventing the so-called race to the bottom. Of course, that is much easier said than done, which is exactly why we are now getting three new trade deals.

So, to my compliance professional colleagues out there, here is your interim Korea toolbox:

Final text
Rules of origin (in which you will see tariff shifts and RVC calculations based on the build-up and build-down methodologies)
Tariff elimination schedule (See Schedule 2-B at the end)

There will be no specific Certificate or Origin for Korea, but here are the required data elements:
(a) the name of the certifying person, including as necessary contact or other identifying information;
(b) the importer of the good (if known);
(c) the exporter of the good (if different from the producer);
(d) the producer of the good (if known);
(e) tariff classification under the Harmonized System and a description of the good;
(f) information demonstrating that the good is originating;
(g) date of the certification; and
(h) in the case of a blanket certification issued as set out in paragraph 4(b), the period that the certification covers. 
Importers will be able to self-certify or to rely on a written or electronic certification from the exporter or producer. Exporters may rely on the producer's reasonable written or electronic certification or on the exporter's knowledge that the goods are originating.Verification may be focused on the importer, exporter, or producer and there are special rules of verification relating to textiles and apparel.

Feel free to ask specific questions, which I may answer. I will follow up with more interesting details about the KORUS agreement as they arise.

Monday, October 03, 2011

IP Theft in the News

Here is a news item stating that Immigration and Customs Enforcement's Homeland Security Investigations special agents raided a number of Florida sites to execute search warrants relating to possible counterfeit goods. In the end, they collected 50,000 counterfeit items with a total retail value of $28 million. That's not surprising. If the government created a flee market and push cart squad, it could find counterfeits with little effort. As a general principal, that is a good thing. Counterfeiting is theft and vendors of counterfeit goods free ride on the value of brands to which they have no claim.

However, every time I hear about about one of these events, I wonder whether any of the goods were actually genuine but gray market products. As a general rule, gray market goods that are not materially different from the authorized products sold in the U.S. are entitled to entry. This is a rule that recognizes that the vendor has been fully compensated in the first, legitimate sale and has no right to prevent subsequent resales as long as consumers are getting what they think they are purchasing. The problem is that gray market goods are often accused of being counterfeit. That puts the importer in the difficult position of having to prove the negative proposition that the goods are not counterfeit. In that circumstance, a small importer will often walk away from the goods. Which can be a big loss for a small entrepreneur.

Which reminds me, On October 1, the U.S., six other countries and the EU signed the Anti-Counterfeiting Trade Agreement to help fight this kind of thing. As it is late, I will give a hat tip and link to Patent Baristas for more info. The USTR Fact Sheet on the ACTA is here.

Lastly, when did ICE agents start working for HSI? Just asking. I think I missed that.

There Goes My Pet Theory

The Federal Circuit has affirmed the Court of International Trade's decision in LeMans v. United States and has broken my heart in the process.

LeMans involves the tariff classification of apparel designed for motocross participants, which Customs and Border Protection classified in HTSUS Chapters 61 and 62. LeMans protested and challenged the classification in the Court of International Trade, which upheld Customs. LeMans' argument was that the merchandise should be classifiable as sports equipment in Chapter 95. I posted about the lower court decision here and even opined in the comments that I expected a reversal. I was wrong, and it has me annoyed.

In a case called Bauer-Nike, the Federal Circuit previously held that hockey pants, which include pads, are necessary, useful, and appropriate to the sport of playing hockey. As a result, consistent with the Explanatory Notes, hockey pants are sports equipment, not apparel. This was primarily by comparison to "pads" and "guards," which are listed in the Explanatory Notes to Chapter 95. Based on that, I have adopted the position that clothing adapted to a specific sport to the extent that it can be deemed appropriate, necessary, or useful to the sport would be sports equipment if not provided for more specifically elsewhere.

Instead, the Federal Circuit backed away from the Bauer-Nike. The Court held that the prior case is distinguishable because the hockey pants contain pads or guards and are, therefore, comparable to the sports equipment listed in the Explanatory Notes.

Just to be clear, I have no objection to the merchandise being prima facie classifiable as apparel in Chapters 61 and 62. My only issue is whether it is also prima facie classifiable as sports equipment. LeMans, on the other hand, did argue that the merchandise is so specialized that it cannot permissibly be classified as apparel. The Court noted the lack of protective or specialized features in the clothing and that some sports-specific apparel is specifically listed in Chapter 61 and 62 including swimwear and ski-suits. Thus, the Court found it to be classifiable with apparel.

The real trick was dealing with Bauer-Nike without disrupting the "necessary, useful, or appropriate" definition of sports equipment. To do that, the Court focused on the exemplars in the Explanatory Notes (including the aforementioned pads and guards). But, LeMans argued, there is no reason to get to the Explanatory Notes when the Federal Circuit has already defined the term, making the statute clear. To me, this is a persuasive argument that carried the day in the festive articles cases and elsewhere. Looking to the Explanatory Notes for the scope of a term the Court has already defined and for which there is no longer any ambiguity, strikes me as giving the EN's too much weight.

I still think there is life for Bauer-Nike outside of hockey. In particular, sports clothing that is protective in nature and can reasonably be considered to include pads or guards should fall within the scope of that decision. Despite that, this decision makes those arguments harder, and gives a boost to those darned Explanatory Notes.