Sunday, December 30, 2012

Broker Penalty by Default

I am barely back from a brief vacation. I note that in the ramp up to being a way from the office and while I was gone, the U.S. Court of International Trade did not stop pushing out decisions. So, this is the first in what should be a small group of catching-up posts.

United States v. Alejandro Santos is an action to recover a civil penalty from a licensed customhouse broker. That, in and of itself is relatively unusual. In the ordinary circumstance, the importer bears the brunt of the penalty. If you see a broker penalty case, you can usually assume there is some interesting story in the background. In this case, we don't get much in the way of background because the defendant failed to respond to the complaint. Thus, the only question here is whether the uncontested facts as asserted by the government are sufficient to establish its right to recovery.

The bottom line is that the government was able to plead facts sufficient to satisfy the Court that it was entitled to a default judgment against the broker. What is instructive here is the nature of the violations. Brokers should be aware of the complaints made against this defendant and take a moment to consider their own compliance process to ensure that similar errors do not arise.

Count One involved the broker billing entries to a freight forwarder without notifying the importer of record or ultimate consignee. If you don't know why that was a violation, see 19 CFR 111.36(a). That cost the broker $5,000.

Count Two involved the failure to produce a power of attorney from the importer of record on an entry. When the broker did produce a corresponding POA, it was dated subsequent to the date of entry and did not properly identify the broker as the attorney-in-fact. A valid POA is required under 19 CFR 141.46. This cost an additional $5,000.

Count Three involved the misclassification of corn husks as "vegetable hair" under subheading 1409.90.10 rather than 1404.90.90. Apparently, the entries involved in this count were made after Customs and Border Protection gave the broker advice concerning this classification. That was a $4,000 penalty.

The last count involved an entry of alleged U.S. goods returned, which were not entirely U.S. goods. The broker apparently acknowledged the error, but never corrected the 7501 entry document. As a consequence, Customs alleged both a misclassification and a failure to exercise due diligence. That was a $5,000 penalty.

Given the asserted facts and the lack of a challenge from the broker, the Court of International Trade held that the amount of the penalty (a total of $19,000) was reasonable.

One down . . . .

Thursday, December 20, 2012

The Tale of theTempura Tariff

R.T. Foods, Inc. v. United States involves the tariff classification of prepared tempura vegetables. Somehow, I was surprised to find out that this is an imported product, though a mental walk through the frozen food isle reminded me that just about any food product can be bagged, frozen, and shipped. In this case, the specific products were a tempura vegetable medley and tempura vegetable bird's nests. The medley consisted of a mix of sweet potato, carrot, something called "wing bean," green bean (or long bean), and eggplant. The bird's nests were julienned carrots, onion, and kale mixed together. Both products were dipped in tempura batter, frozen, packed and shipped.

Before it could get to the classification issue, the Court of International Trade had to deal with a jurisdictional issue. Remember that for the Court to have jurisdiction to hear a classification case, the importer must have filed a protest within 180 days after the date of liquidation and filed a summons in the Court within 180 days following the denial of the protest by Customs and Border Protection. In this case, the summons was filed about 200 days after the denial of the protest. That makes it appear to be untimely.

The plaintiff, apparently aware of the 180-day rule, noted in a footnote on the summons that it had requested that Customs set aside the denial of the protest. According to the plaintiff, that request tolled the running of the 180-day clock. The Court disagreed and held it lacked jurisdiction to review that protest. Although the Court did not reference it, this conclusion is consistent with an earlier case involving Sears.

On another protest, the Court of International Trade found it lacked jurisdiction to review Customs' decision because of the lack of a case or controversy. This is an important constitutional consideration for all federal courts. But, for our purposes here, it boils to the notion that if Customs liquidates your entries in a favorable provision and you have no injury, there is no jurisdiction by which the Court can review the protests. Such was the case here where Customs accidentally liquidated a number of entries under the plaintiff's proposed classification.

This decision left the Court with three entries on a single denied protest with which to consider the classification issue.

The classification proposed by Customs is 2004.90.85, "Other vegetables prepared or preserved otherwise than by vinegar or acetic acid, frozen . . . ." This carries an 11.2% rate of duty. Plaintiff asserted that the vegetables were properly classified in 2106.90.99, which covers "Food preparations not elsewhere specified or included . . . frozen." This is a duty-free provision for products of Thailand.

The Court wisely and clearly unpacked Heading 2004 to find that there are five elements that must be present for goods to be classified in that heading:
  1. The goods are vegetables,
  2. that are prepared or preserved,
  3. otherwise than by vinegar or acetic acid,
  4. that are frozen, and are
  5. not products of heading 2006.
The Court then found that both the medley and the nests satisfy these five requirements. That makes 2004 a contender.

To be classifiable in 2106, the products must be:
  1. a food preparation, that is
  2. not elsewhere specified or included.

Given the Court's conclusion that the goods are specified and included in 2004, this makes 2106 the dark horse. To bolster its case, the plaintiff noted prior Customs rulings addressing the classification of vegetable chips and hors d'oeuvres. But, the Court found these products to be distinct from tempura-coated vegetables, apparently because of the number of other ingredients. The Court also noted that Customs has often classified tempura products based on the nature of the coated food item. Thus, these rulings were unavailing. Of course, we might also note that a Customs ruling cannot bind the Court of International Trade and is only relevant to the degree it has the power to persuade the judge. Apparently, he was more persuaded, if at all, by the tempura rulings.

Lastly, there was a bit of a tussle over whether the sweet potatoes in the mix should force the mixture to be classified in the heading for tubers. The Court first found that the sweet potatoes were not sufficiently material to require that the mixture be classified as such. Without saying so, it appears the Court conducted a GRI 3(b) essential character analysis and found that the sweet potatoes were not the essential character of the mixture. Finally, assuming the sweet potatoes were relevant, the Court noted that the proposed alternative only applied to edible parts of plants "not elsewhere specified or included. Because this mixture is include in 2006, it cannot be classified in heading 2008.

As a result, the mixed vegetable products, dipped in tempura, fried, and frozen were found to be classifiable in Heading 2004.90.85.

And now, I am hungry for a shrimp tempura udon.

Tuesday, December 11, 2012

A Saucy Decision

Generally, if I fall behind in my effort to report on decisions of the Court of International Trade, it is because I am busy. Such is the case currently. I have been traveling about the country for various events and business meetings. At the present, I am in Detroit having just enjoyed a shwarma dinner and a brief interlude with an elliptical machine. Now, I will take advantage of free WiFi to catch up on a relatively interesting case that I have so far failed to cover.

That case is International Custom Products v. United States. If that sounds familiar to you it is because this case has been in the Court of International Trade and the Federal Circuit in one form or another since 2005. The basic underlying issue is whether a prepared food product is classifiable as a dairy product or as a sauce base. This matters a lot because if it is a food product and the entries at issue were made without proper quota, the rate of duty owed increases 2400%. That is the very definition of a classification case worth litigating.

The issue in this specific case is whether the Notice of Action Customs issued to rate advance the entries conflicted with a ruling Customs and Border Protection had issued on the merchandise. If the Notice of Action was effectively a modification or revocation of the ruling, then Customs was statutorily required to go through a public notice and comment process to change the ruling. Customs argued that the ruling actually did not cover the products in the entry because the ruling request did not describe the same merchandise as was imported. This was based on an alleged difference in the amount of milk fat in the product and the possible absence of some thickening agents.

There is a lot of language in the decision (which is part of the reason I have waited so long to read it). The upshot is that the Court found that the ruling request did describe the same merchandise as was imported. Further, the ruling request properly described range of uses for the product. Thus, the Court found that the ruling was binding on Customs and could not be modified or revoked except by the notice and comment process (see 19 USC 1625).

The next step is critical. In the face of a binding ruling, is a conflicting Notice of Action the same thing as a modification or revocation of the ruling? According to the Court of International Trade, it is. As a result, Customs could not simply rate advance the entries without notice and comment. That means that the goods should be liquidated as entered and, therefore, this is a potentially big win for the plaintiff.

On the long road to this decision, there is some interesting side reading. First, there is an unusually long discussion of the credibility and scope of knowledge of the government's expert witness. The Court gave little weight to much of the expert's testimony because the Court believed that the expert was too personally invested in the outcome.

The second side issue is equally interesting. the government subpoenaed a former employee of the importer. While the Court also did not give much weight to this witness, her testimony gives a lot of insight into why the government has been pursuing this case so hard for so long. Keep in mind, I am just reporting here. I am not vouching for the content. What this witness said was that the principal of the company told her that the production of "white sauce" with high levels of milk fat "was just another way to bring in butter." In other words, this is a scheme to avoid the dairy quota.

My take on this is that the importer might have been engaging in a perfectly legitimate exercise of tariff engineering. There is nothing wrong with importing a high milk fat sauce and then processing it into butter once imported. But, that is going to be tricky to accomplish. If your plan is to do that and you get a ruling from Customs to ensure that you are doing it properly, be sure you explain ALL of it to Customs. Otherwise, you are likely to end up at the crossroads of Heartland By-Products and this case.

Friday, December 07, 2012

Customs Reauthorization Introduced

For ages, the trade has been expecting a bill to continue funding Customs and Border Protection and to make changes to facilitate legitimate trade. A bill has been introduced by Ways & Means Trade Subcommittee Chair Kevin Brady (R-TX) covering some of that ground. Here is a link to the bill summary. Here is the full text.

A few highlights include:
  1. Section 102(b) creates the office of Trade Advocate to serve as a liaison between the trade and Customs and Border Protection
  2. Field Operations would be transferred to the Office of International Trade under Section 102(d)
  3. The creation of an inter-agency Customs Review Board to provide comments on proposed regulatory changes
  4. Under Section 203, CBP must provide to Congress a report on its plans for completing the implementation of ACE
  5. A prohibition on agencies using ITDS from also using other electronic systems for cargo clearance
  6. It appears that cargo data previously only used for cargo safety and security will now be available for targeting for commercial enforcement. See Section 211(b).
  7. Joint training with the private sector to improve tariff classification and the enforcement of antidumping and countervailing duty measures. See Section 217.
  8. New requirements for non-resident importers to maintain an agent in the United States to accept service of process and potentially be liable for penalties. Section 224.
  9. The creation of a Certified Importer Program under Section 225. This gives a statutory right to expedited release for Tier 2 and Tier 3 participants in C-TPAT and ISA.
  10. The immediate release to a rights holder of an image or sample of imported merchandise suspected of infringing a U.S. copyright or trademark. Section 231.
  11. Provisions for the prevention of recurring evasions of antidumping and countervailing duty orders
  12. Increasing the de minimis value for purposes of imports from $200 to $800 in Section 402.
  13. Increasing the value threshold for formal entries to $2500, also in Section 402.

Tuesday, December 04, 2012

SCOTUS Updates

Yesterday was the Judicial Conference of the U.S. Court of International Trade, which is the biennial meeting of the judges and bar of the Court. There were some very interesting discussions about efforts to harmonize WTO dispute law, Customs seizures, and practice before the Court. Congratulations to the planning committee and the Court of International Trade staff for putting together the program. If you are interested, you can read the papers here.

During the conference, it was announced that the Supreme Court had acted on two petitions for review in Customs cases.

In the first, the Supreme Court denied certiorari in Hitachi (see here and here). As a result, Customs has no obligation to decide a protest before the two-year deadline. This means that if an importer wants to force a decision, it has no choice but to use the accelerated disposition process, which might be better termed "accelerated denial."

The Supreme Court also denied certiorari in Alden Leeds (see here and here). This result means that importers must track liquidations, whether deemed or affirmative, if they want to challenge them. The fact that the importer did not see the notice of the liquidation and that there really should not be notice of a deemed liquidation does not relieve the importer of that obligation.