Sunday, May 29, 2011

BenQ Remanded

The Court of Appeals for the Federal Circuit has vacated and remanded the decision of the Court of International Trade concerning the tariff classification of video monitors that are most likely used with computers but have standard connections for use with other video sources. My post on the original decision is available here.

This is one of those cases that makes tariff classification more than just checking a ruling or the index to the Harmonized Tariff Schedule. Classification is a lot like a Sudoku puzzled. In order to get to the right result, the classifier has to apply all the rules in the right order. Skip a step or misunderstand a rule, and you are likely to get the wrong result.

That is what that Federal Circuit says happened at the Court of International Trade. The CIT appears to have focused on Note 5(E) to Chapter 84 to the exclusion of Note 5(B). Note 5(E) provides that "Machines incorporating or working in conjunction with an automatic data processing machine and performing a specific function other than data processing are to be classified in the headings appropriate to their respective functions or, failing that, in residual headings." According to the CIT decision, the monitors can perform a specific function other than operating in conjunction with a computer (e.g., displaying video from a DVD or other data source). Consequently, they are to be classified according to that function.

But, the Federal Circuit noted that 5(B) stated (at the time of these entries):

Automatic data processing machines may be in the form of systems consisting of a variable number of separate units. Subject to paragraph (E) below, a unit is to be regarded as being a part of a complete system if it meets all the following conditions:
     (a) It is of a kind solely or principally used in an automatic data processing system;
     (b) It is connectable to the central processing unit either directly or through one or more other units; and
     (c) It is able to accept or deliver data in a form (codes or signals) which can be used by the system.
That means that the monitors can only classified as automatic data processing machine units if they satisfy the three conditions set out in 5(B). There was no debate about (b) and (c), so the question was whether the monitors were of a kind solely or principally used in  automatic data processing machines.

The Court of International Trade, however, did not determine whether the monitors were solely or principally used with ADP systems. Further, the Court held that 5(E) does not trump 5(B). Rather a better reading is that a monitor that is solely or principally used in an ADP system will still be excluded from 8471 if it performs a specific function. Keep in mind that ADP machines are general purpose computers, not machines performing a specific function. So, a monitor that is used for an ATM machine, for example, would not be classifiable in 8471.

So, because the Court of International Trade did not conduct a principal use analysis, the Federal Circuit vacated the prior decision and remanded for further analysis.

AD Scope Decisions

This is not the trade law blog, but when push comes to shove it is usually Customs that enforces the trade laws. That means that trade issued often come up for importers who were never directly involved in an antidumping or countervailing duty case. Take, for example, the large number of companies that have discovered that the aluminum extrusions they purchase from China are three times as expensive as they had planned. Whether the commodity is an aluminum extrusion or anything else, importers are often caught off guard by dumping or CVD orders.

First, some background. An antidumping case results when a domestic producer petitions the U.S. government for trade relief. The petition has to provide some basis for believing two things. First, that the product is being sold in the United States at a price (properly adjusted) that is below the cost that similar goods (properly adjusted) are being sold in the home market. Second, that the "below normal value" sales are causing (or are likely to cause) material harm to the petitioning industry. If the Commerce Department find dumping and the International Trade Commission finds injury, a dumping order will require that Customs collect additional duties to offset the difference between the home market and the U.S. prices.

The dumping law is inherently problematic for consumers and consuming industries and beneficial to producers. This always creates tension. For example, a dumping order on sheet steel helps the steel industry compete against cheap imports. That protects jobs, might encourage more investment in modernization, and is generally good for that slice of the economy. But, a dumping order on steel is bad for car manufacturers, appliance makers, builders, the aircraft industry, and any other consumers of steel. Ultimately, the additional cost of steel is passed on to the consumers. So, is it a dumping order good or bad for the economy? That is something economist can sort out (most say it is not). As I tell my students, we just have to deal with the law in a way that works best for our clients.

Another, more technical aspect of the dumping law is based on the economic theory on which it is based. The theory is that the only reason the producer can dump in the U.S. market is because the U.S. producer cannot turn around and dump in the producer's home market. Usually, this is because the producer's country has high tariffs or some other non-tariff barrier to entry. The result is that the consumers in the home market pay a higher price for goods to subsidies the lower prices charged in the U.S. Under this theory, the dumping is unfair to both the U.S. domestic producers and to the foreign market consumers. Again, the economists can sort out whether that is true.

A countervailing duty case is similar excepted that the alleged injury is caused by the home market government subsidizing the production or export of the product.

All of which is background for Mid Continent Nail Corp. v. United States. A dumping order is defined by the "scope of the order." This is the section telling Customs what products are covered and what are not covered. In some cases, the scope is not very clear. In Mid Continent, the scope covered numerous kinds of nails and excluded numerous kinds of nails. What the scope did not say was how to handle nails imported with other non-nail products. In particular, the imported merchandise in this case was household tool kits sold at Target.

Target requests a scope clarification ruling from Commerce, which decided that the tool kits contain subject nails but that the kits as a whole were excluded from the scope of the order. Target had argued that nothing in the scope section of the order stated that kits were to be included in the scope. Target probably also argued that the small number of nails in these kits were not really competing with U.S.-based nail producers and, therefore, not causing injury. But, none of that really matters. What matters is what the scope section of the order says. And, the petitioner argued that nothing in the scope section of the order excludes kits or nails contained in kits as long as the nails clearly are scope merchandise.

Enter the Court of International Trade, which was not happy with Commerce. There are specific regulations for how a scope determination is to be made. Under 19 CFR sec. 351.225(k), Commerce is first supposed to look at the description of the subject merchandise in the petition, the investigation, and the determination. Only if that does not resolve the question, Commerce should then look at a number of factors including:

  • The physical characteristics of the product
  • The expectations of the the ultimate purchasers
  • The ultimate use of the product
  • The channels of trade in which the product is sold
  • The manner in which the product is advertised
In this case, the Commerce Department, apparently following the importer's suggested analysis, jumped right to the second part of the analysis. The problem with this is that whether you start with the first or the second step is likely to be determinative. A kit will rarely have physical characteristics and end uses similar to a single product in the kit. 

Because Commerce skipped the first step, it did not consider whether the petition or some subsequent investigation document clearly addressed the question of kits including nails. Nor did Commerce state whether the nails within the kits might be subject to the scope of the order. Consequently, the Court of International Trade held that the scope determination was not supported by substantial evidence in the record. The CIT remanded the case to Commerce for a new consideration of the first step of the scope analysis.

This is a useful decision for importers to understand. When dealing with dumping orders, the first question is often whether the product is within the scope of the order. Understanding the legal process Commerce is supposed to employ in making that determination will help importers decide whether it makes sense to pursue a Commerce Department scope clarification.

Sunday, May 22, 2011

Court Catch Up 3: In which Hot Surfaces Ignite

Graphite Sales v. United States is a classification case involving electric heating resistors. These are metal elements connected by wires to a power source. When electricity flows, the element heats up. If you are having trouble picturing that, look inside your toaster when it is on. We are talking about the red things, except that the resistors at issue are more compact are are used in gas appliances like stoves and clothes dryers. They heat up and ignite the gas in the appliance and serve as an alternative to a pilot light.

The classifications in play at the Court of International Trade were Heading 9613, "Cigarette lighters and other lighters, whether or not mechanical or electrical," and Heading 8516, "Electric heating resistors," among other things. The duty for 9613 is 3.9% and for 8516 is free. Now, please don't send me e-mails complaining that I am not dragging the classifications out to 10 digits. In this case, the headings are the only thing that matter. I know duty rates do not attach to headings. But, this is my summary. If you want to be picky, write your own.

Here, the parties actually stipulated to the legal conclusion that the goods are properly described as "electric heating resistors." So, they are prima facie classifiable there. However, the government points out that the products are also properly described as "other lighters, whether or not mechanical or electrical." That creates a classic classification problem, which would be perfect for a classroom example or text book, if someone were writing a text book on this. More on that later.

When a product is prima facie classifiable in two headings, the Court of International Trade turns to General Rule of Interpretation 3(a) and the rule of relative specificity. Under that rule, the description that is more specific will prevail. So, I say with my professor hat on, which is more specific: lighters or electric heating resistors? Usually, the description that covers fewer items or is harder to satisfy is considered to be more specific. Also, a use provision is generally considered to be more specific than an eo nomine description.

Here, the Court of International trade found that "electric heating resistors" is more specific. There are many kinds of lighters, but only one that is an electric heating resistor. And, according to the Court, both provisions are eo nomine tariff headings. Thus, 8516 prevails. According to the Court, the Explanatory Notes are consistent with that conclusion.

Here's my question: Isn't "lighter" a use provision? Doesn't it describe a product that is intended to create heat for the sole purpose of igniting something? The difference between a toaster heating element and a lighter is that the toaster is not intended to cause the bagel to burst into flames. That strikes me as a meaningful distinction. If "lighter" is a use provision, then it would be more specific than the eo nome description for electric heating resistors. Just a thought.

Speaking of textbooks. It turns out that someone is writing a text book on these questions. That would be me and my friend and co-author Damon Pike. Here is the pre-publication info. Watch this space for details.

Court Catch Up 2: In Which Pirates are Discussed

In CBB Group Inc. v. United States, the underlying issue has to do with plush toys that Customs and Border Protection detained as piratical copies. "Piratical" in this sense has nothing to do with Jack Sparrow or Black Beard. Rather, it refers to products the production of which, if made in the U.S., would constitute copyright infringement. So, DVDs holding a copy of Pirates of the Caribbean: On Stranger Tides, produced in China without the express written consent of Disney, would be piratical (in two senses).

This decision is entirely procedural. It involved another defense motion to stay discovery pending the Court's decision on a motion for judgment on the pleadings. Apparently, the government is so convinced that there is nothing to this case, that it does not want to bother with discovery. Rather, it thinks the Court of International Trade should dismiss.

This is one of those cases where the decision is basically entirely up to the discretion of the judge. Here, the Court points out that this case involves the refusal to admit merchandise and that the parties agreed to an expedited schedule. So, it should be moving quickly. Yet, at the time of the opinion, the merchandise was already held up by eight months. Given that, and the lack of any evidence of undue burden or expense to the government, the Court denied the motion to stay discovery. In other words, "All hands, make sail. Or, ye be keelhauled."

Which brings me to the other kind of pirates. I sat through the fourth Johnny Depp installment as the ambiguously everything pirate. Is he straight? Is he sober? Is he an idiot? It is humorously unclear. I might know the answer if I had seen the second and third movies. This one is mildly entertaining and, if I tried to sort through it, might make absolutely no sense.  I do feel the need to go back and watch both "The Little Mermaid" and "Splash," because I think my image of our half-fish friends might have changed. The mermaids in the new movie are clearly not as friendly as Madison.

Saturday, May 21, 2011

Court Catch Up 1: In Which the Surety Does Not Get Notice

I have another FOIA case to post. But, while I have been steadily (and happily) busy at work, the Courts have been busy too. Here is an update.

United States v. American Home Assurance Co. is a penalty case that is in the early stages. The defendant, a surety, asked the court to grant summary judgment in its favor and to stay any further discovery until the court acts on the summary judgment motion. The United States has also asked for a stay, but it wants a stay of the summary judgment motion until discovery is complete. The basis for the defendant's motion is that Customs apparently suspended liquidation of the relevant entries but never notified the surety of that suspension. According to the surety, that means the suspension was ineffective.

This case involves merchandise subject to an antidumping duty order. The importer's entries were, like all entries subject to the case, suspended when someone requested an administrative review. Customs should have notified the surety of the suspension but did not. Years later, the government is trying to collect antidumping duties from the surety, who is defending on the grounds that the lack of notice means the entries liquidated more than six years ago. Any action, according to the defendant, is now time barred.

The Court did what courts should do and took a careful look at the statute. It found that the law requires that a surety receive notice after Customs suspends liquidation. From this, the Court concluded that notice is not a condition precedent to the lawful suspension of duties. Rather, the lawful suspension creates an obligation to provide notice. There is nothing in the language of the statute, 19 USC 1504(c), indicating that the failure to provide notice will void the suspension. That leaves it up to the Court to decide whether the lack of notice harmed the surety and , if so, whether any remedy is appropriate. In this case, the Court said that whether the surety could make out harm as a result of the lack of notice will depend on the facts uncovered in discovery. Thus, the Court denied both the motion to stay discovery and the motion to stay the summary judgment process (which the court said was ready to be resolved).

More to follow.

Wednesday, May 18, 2011

The Constitution Project Report on Data Searches

A legal think tank known as The Constitution Project, has issued a report on the practice of searching digital devices carried by passengers at ports of entry. This has been a hot-button issue that has pitted privacy advocates against Customs and Border Protection's security and law enforcement mandate. Here is a link to the report.

The report concludes with a recommendation that the Department of Homeland Security amend its existing policy to require a reasonable suspicion of wrongdoing before conducting a digital search. Further, the report recommends that DHS secure a warrant before it is able to retain copies of data or seize the device for further review beyond a reasonable period. There are other recommendations including some dealing with potential racial profiling, privileged information, and the possibility that other law enforcement agencies will piggy back on Customs border search authority to get information that would otherwise not be available without a warrant.

The Webs We Weave

This blog has a history with spiders. And, with animal smuggling (here and here, for example). Thus, there is no way I was going to pass up this story. Yes, you can guess the gist of it. A German national has been found guilty of illegally importing spiders, tarantulas in particular, into the United States. Among his merchandise was the protected Mexican red-knee variety. I guess it is a good business, except for the part that involves six months in jail and a $4,000 fine.

Saturday, May 14, 2011

FOIA Cases

There have been a couple of recent Freedom of Information Act cases that touch on trade issues and caught my attention.

The first is Watkins v. Customs and Border Protection. This case involves an intellectual property lawyer who made a number of requests to several ports for copies of seizure notices issued to trademark owners when Customs seizes counterfeit goods. These notices include the name and address of the importer, the exporter, and the manufacturer (if known) and other information. Customs eventually provided some of the requested documents, but they had been highly redacted. The plaintiff appealed the limited release to the District Court and then to the Ninth Circuit.

By way of background, the Freedom of Information Act creates a public right to access public documents that have been unnecessarily shielded from the public. The Supreme Court has said that the purpose of the act is "to ensure an informed citizenry, vital to the functioning of a democratic society, needed to check against corruption and to hold the governors accountable to the governed." But, the act contains nine exceptions that justify the government withholding information.

In this case, the government asserted FOIA exception four, which protects from disclosure trade secrets and commercial or financial information obtained from a person and privileged and confidential. The Ninth Circuit broke that exception down in to three elements: the information must be (1) commercial and financial, (2) obtained from a person or by the government, and (3) privileged or confidential.

The plaintiff's argument was that the Notices of Seizure cannot be commercial information because they pertain to the unlawful commercial activity. But, the Ninth Circuit quickly dismissed this argument. Rather than be a determination that the goods are counterfeit, the Notice of Seizure is simply a notice that goods have been seized on the suspicion that the goods are counterfeit. At the time of the seizure notice, the importer retains the right to challenge the seizure and secure the release of the merchandise. Also, the Court noted that importers of legitimate merchandise sometime (sadly) acquiesce to the seizure and ultimate forfeiture of legitimate goods. Thus, the Court upheld the lower court's conclusion that the Notices contain commercial information relating to supply chains.

But, if the information is not privileged or confidential, the law will still require it to be released. To show that the information is confidential, Customs and Border Protection needs to prove both that there is competition in the relevant market and that the release of the information will harm that competition. In this case, because the FOIA request was for "all notices," the relevant market, according to the Court, is the entire $1 trillion in U.S. imports. Based on the size of the market, the Court essentially said that there must be competition. Further, the Court found little doubt that within that $1 trillion in trade, there are importers of legitimate products who zealously guard information about their supply chains. Thus, the Court found both competition and a likelihood of injury from release. Therefore, the FOIA exception applies.

Or does it? There is an exception to the exception.  Specifically, the the allegedly confidential information is distributed to the public, the government has arguably waived the claim of confidentiality. Some courts have held that where the information is distributed to the public and that distribution (apparently in contrast to the record itself) is preserved in a public record, there has been a waiver of Exception Four. In this case, the Notice of Seizure have been sent to the trademark owner (who is not a party to the commercial transaction involved). Arguably, that constitutes a waiver requiring the release of the information. But, the majority opinion distinguished this case from other waiver cases because the information did not involve national security, the other cases did not involve a "no strings attached" disclosure as is true here, and there is no public record preserving these disclosures. So, the majority, over a dissenting opinion, held that the waiver did not apply.

This is all very interesting. I have a hard time making that last leap with the Court. On its face, it seems that if Customs and Border Protection is willing to provide rights holders with Seizure Notices, then it is not treating that information as confidential. But, there is more to it than that. First, the disclosure to the rights holder is statutorily mandated. So, Customs is not making a judgment call regarding the information. Rather, it is just following the legal mandate. Second, it strikes me that confidentiality based on commercial value is intended to protect the importer. It really should be up to the importer to waive the confidential treatment of its information, not up to the government.

Also, the fact that there is a statute requiring the disclosure seems to indicate that there is no intent to waive confidentiality. What is happening is that Congress is facilitating the trademark owners' ability to sue the importer and the exporter to recoup any losses or damages. Finding a waiver in these circumstances seems to penalize the importer by compounding the disclosure beyond the statutory requirement. Frankly, it seems like the problem here is that Customs and Border Protection does not restrict further distribution of Notices received by domestic rights holders.

Well, that turned out to be longer than I expected. There is more in the case concerning the FOIA fee schedule. The issue has to do with the fact that the Customs regulations do not correspond with DHS regulations concerning FOIA fees. If you are interested in that part, you are on your own. I'll do the other FOIA case soon.

Tuesday, May 03, 2011

Extra Batteries Are Not Sets

The Federal Circuit has decided Dell Products v. United States, a case we previously discussed here.

Not much changed in the analysis between the Court of International Trade and the Federal Circuit's decision affirming the CIT.

The facts are simple. Dell imported a laptop computer kit (via a foreign trade zone) that contained an extra battery. The battery was added to the order by the customer and not by Dell. The bottom line is this: According to both courts, when General Rule of Interpretation 3(b) talks about articles "put up in sets for retail sale," they are referring to collections of goods selected by the seller rather than collections of goods selected by the buyer. In the former case, the goods have been "put up" for retail sale. In the latter case, they have simply been selected.

This is a perfectly reasonable reading of the law, which will likely stand as the final word on this question. Divorced from the business of actually processing entries, it makes a lot of sense. But, as I said previously, I don't think this is a good decision in a practical enforcement context.

The long-standing principal of customs law is that goods are classified in their condition as imported. Dell argued that, as imported, the goods constitute a set and should be treated as such. But, the Federal Circuit looked to an 1897 Supreme Court decision to find that the manner of sale or intended use of goods may be relevant in determining whether several goods imported together are to be classified separately or as a single entity. Further, the Federal Circuit found the language 3(b) to require an inquiry into how the pieces came to be packaged together. According to the decision, the inquiry is not the what is contained in the shipment, but what was offered for sale. Thus, because the extra battery was not offered for sale as part of the larger set, it is classified and subject to duty as a separate item.

So, how will industry react to this? Retailers might want to identify common combinations of items and offer them as sets to ensure that they receive unified tariff treatment (assuming the rate is beneficial). It might also be possible to segregate some products from the advertising for high-duty-rate sets to ensure that they receive the lower rate of duty applicable to the individual part. Also, how much advertising is necessary to show that something was offered as a set? Can Dell create a dynamic web page that shows, even momentarily, various configurations of computers and accessories to evidence that the products have been put up in sets for retail sale? It is possible that Customs will focus on individual transactions and ask for proof that the set was created by the seller at the time of the sale.

This is potentially quite complicated. So much so that it seems strange for Customs to have adopted this position. As the agency charged with interpreting the law, Customs might just as easily have adopted the position that 3(b) is to be applied to the box as it crosses the border. This would have facilitated legitimate trade and allowed for a useful allocation of enforcement resources. Instead, the position pressed by Customs creates new opportunities for well-meaning importers to get caught up in technical compliance errors.

Maybe this is worthy of congressional attention.