Tuesday, December 31, 2013

Stick a Fork In 2013

2013 is done.

To all of you who read this blog, thank you. I am gratified to know that some of you in the trade community find enough useful and interesting information here to voluntarily give up your time to read my words. That means I am doing my job.

As always, I welcome comments and criticism. Also, when I am out and about, I am always happy to meet people who let me know that they read the blog. If you see me at an event, please introduce yourself. That's true no matter what role you play in the trade community.

Should you or your company have customs, trade, or export needs, please feel free to reach out to me and my partners at Barnes, Richardson & Colburn. We are happy to help.

All my best to all of you. I wish you a happy, healthy, and prosperous new year.

Remeber "Video" Cameras?

Sony Electronics, Inc. v. United States is about the tariff classification of a Sony camera that is capable of capturing still and moving digital images. Just to be clear about what we are discussing, it is the NSC-GC1.

Sony asked Customs for a ruling on the classification of these cameras in 2007.  Customs and Border Protection responded that the cameras should be classified in 8525.80.50 as "television cameras, digital cameras, and video camera recorders." Sony wanted the cameras classified in 8528.80.40 as "digital still image video cameras."

The gist of this case is whether the phrase "digital still image video camera" refers only to cameras capable of recording still images or also includes cameras capable of recording moving images. Customs argued that the phrase refers to the technology used to capture images by electronic means rather than on film. Thus, this tariff item would cover cameras used to capture still (and only still) images by digital means in an electronic format.

Sony, on the other hand, argued that "video" means moving images. Thus, this tariff items covers cameras capable of making digital recordings of still or moving images.

The Court did a lot of analysis of the meaning of video at the time the HTSUS was updated to include this provision. There was some back and forth about how best to interpret the word. In the end (and I am giving this short shrift), the Court found that "video" means moving images. To get there, the Court relied on dictionary definitions both current and from as far back as 1996. Also, the Explanatory Notes use the term video in conjunction with television cameras, which clearly record or transmit moving images. As a result, the Court of International Trade held that "digital still image video cameras" covers cameras capable of recording both still and moving images.

I'm not 100% comfortable with that result. Off the top of my head, it strikes me that this can be resolved without looking beyond the phrase at issue. If this provision were intended to cover both still and moving image capturing cameras, shouldn't there be a word between image and video? It should say "digital still image and video cameras." As is, it looks to me like "digital still image" modifies "video cameras" in such as way as to make explicit that cameras in this heading are all designed to capture still images in a video format, meaning not on film. Otherwise, "still" loses its meaning. In other words, I tend to agree with Customs on this one. That, of course, is absent a minute of research or any opportunity to view the briefs. So, take it for what it is worth. I suppose the Federal Circuit will have an opportunity to sort it out. Clearly, I must be wrong because Sony won and, congratulations to it and its counsel on that.

Two for One

This being the last day of 2013, I am trying to do some real and virtual desk cleaning. Part of that is making sure I have reviewed the relevant CIT cases for the year. It turns out I am behind by three. Here is a brief discussion of two of them:

United States v. Alejandro Santos and Alejandro Santos, CHB

This decision follows the entry of a default judgment against a customhouse broker who apparently misidentified entries of pesticides as animal fat and misidentified the importer of record. The broker also made unsupported claims for duty-free treatment under the NAFTA and other violations. Customs and Border Protection issued a prepenalty and penalty notice informing him of a $30,000 penalty to be assessed. Santos waived service but did not appear to defend the claims against him. The first round of this case was discussed here.

Given the facts presented in the unchallenged complaint, the Court of International Trade found that Santos violated a number of regulations enforced by Customs and Border Protection. Consequently, a penalty was appropriate. The Court stated that the violations were both numerous and qualitatively significant. Further, he had been warned previously with respect to some of the violations. Consequently, the Court found that the $30,000 penalty, which is the statutory maximum, was reasonable.

Shah Bros., Inc. v. United States

This is another case with some background. I first posted about it here. The underlying issue is the correct tariff classification of smokeless tobacco products from India known as gutkha. Customs and Border Protection initially classified it as snuff rather than as chewing tobacco. The importer challenged that classification in the Court of International Trade. The government has now agreed with the classification of the merchandise subject to the case and, therefore, has moved to "confess judgment." While that may sound good, the importer is annoyed because it actually wants a binding decision on the classification of the merchandise to prevent future litigation on the same point. Unfortunately, because Customs and Border Protection agreed with Shah Bros. in the case before the Court, there is no longer a "case or controversy" for the Court to resolve. Further, this is not a case where the plaintiff will not be able to secure relief in repeated entries. Rather, the importer got the relief it requested. consequently, the Court dismissed the case as now being moot.

Two down, one to go.

Sunday, December 15, 2013

Importer Holds Customs' Feet to the Fire, Gets Singed


Welcome to the U.S. Court of International Trade, Judge Kelly. You get to start out with an odd case.

The issue here is the status of a ruling (N187601) issued to Best Key regarding the tariff classification of metalized yarn imported from China. In the ruling, Customs and Border Protection classified it in tariff item 5605.00.9000, which has a rate of duty of 13.2%. Subsequent to the ruling, Customs consulted trade publications and industry experts. Customs then determined that this merchandise did not come within the common and commercial meaning of the term metalized yarn. The reason for this was that although the yarn had been treated with metal powder, it contained only trace amounts of metals and did not exhibit a metallic look or feel. Consequently, in the April 24, 2013 Customs Bulletin, Customs and Border Protection proposed to revoke that ruling and reclassify the merchandise in 5402.47.90 as synthetic filament yarn, which has a duty of 8%. So, to keep things in perspective, understand that the plaintiff wants the revocation implemented.

Under 19 USC 1625(c), Customs must give the public at least 30 days to comment on the proposal. According to the Bulletin notice, that period ended May 20, 2013 (you do the math). Next, Customs and must publish a final decision within 30 days of the close of the comment period. That would have been about June 19, 2013. That final decision becomes effective 60 days after the date of publication, which would have been about August 18, 2013. Unless CBP doesn't do anything, which is what happened here.

As a result, 70 days after the close of the comment period, the plaintiff went to the Court of International Trade seeking an order forcing CBP to implement its decision. But, things are more complicated than they seem because the shutdown of the U.S. government caused some delays and Customs eventually did publish its decision in the October 2, 2013 issue of the Customs Bulletin.

That means the first question for the Court was whether the eventual publication made this whole affair moot. Looking at the complaint broadly, the Court determined that the issue before it was not just whether Customs eventually issued a decision. Rather, it was the broader question of whether Customs and Border Protection complied with the statutory requirements for publishing its revocation determination in a timely manner.

In this case, publication on October 2 was really only effective for those people who receive the Customs Bulletin by mail from private contractors. That is not "easy and continuing access," which is what the law requires to count as publication. The web version of the publication was not accessible until after the government restarted on October 17. As a result, the Court found that it would be inequitable to allow the government to rely on October 2 as the publication date and effectively shorten the notice period. Thus, the Court ordered that the notice period began to run on the 17th and that the notice will become effective 60 days thereafter.

So, the upshot is that the plaintiff wanted to force Customs to publish its notice and start the 60 day clock running no later than around August 18. But, because CBP eventually did get around to making the publication on October 2 and then the nastiness of the government shut down, the Court held that the publication was not really effective until October 17, meaning that the revocation does not become effective until December 16, 2013, which is even later than CBP expected.


This case has been dismissed. This is sort of technical and does not have much to do with the actual tariff classification issue, so I will be brief. If you are interested in the details, read the opinion. The bottom line is that the plaintiff is a Chinese yarn company. According to plaintiff, the revocation of the subject ruling on the classification of a garment will harm it by creating a disincentive for apparel manufacturers to use its yarn on imported products. But, because the plaintiff is not an apparel importer, it is not in a position to challenge the ruling on the garment. To do so, it should import a garment and, if it disagrees with the liquidation, file a protest and challenge the garment classification in court. That, my friends, is what we call a decision on standing.

Saturday, December 14, 2013

When is a Motor not a Motor?

Belimo Automation v. United States presents a old problem for many importers, at what point is an assembly that includes a motor something other than a motor. Usually, when presented with that questions, Customs and Border Protection will say "Not here." Also of not, this marks the first appearance in this blog of newly minted Judge Mark Barnett of the U.S. Court of International Trade. Because Judge Barnett comes from the Department of Commerce, I suspect we will be seeing quite a few customs decisions from him while he waits for his work product from Commerce to work its way through the court process.

Belimo imported an assembly used in heating, ventilation, and cooling (HVAC) systems. It consisted of a single electric motor, gears and two printed circuits. One of the printed circuits connects to and monitors the electric motor, which are used to open and close dampers to adjust the flow of air. As HVAC systems go, the pc board (which is known as an ASIC) is fairly sophisticated. It connects to and monitors the position of the motor and can calculate the position of the gears in the imported device. That corresponds to the position of the air damper. Based on data from the central controller, the ASIC calculates the desired damper position and signals the motor to act accordingly.

So, is the assembly a motor of HTSUS Heading 8501 or is it an automatic regulating and control device of Heading 9032?

To fit in 9032, the device must control the flow, level, pressure, or other variable in a liquid or gas or automatically control temperature, whether or not the operation depends on an electrical phenomenon that varies according to the factor to be controlled, and that are designed to bring that factor to and maintain it at a desired value.

The importer made an elaborate argument that the factor to be controlled is something other than the flow, level, pressure in a liquid or gas or temperature. If so, the fact that the assembly does not measure any variable of air flow, a liquid, or temperature would not prevent its classification in 9032. But, the Court disagreed and held that "the factor" is just a shorthand way of restating the variables listed above (i.e., something about airflow, liquids, or temperature). Given that these devices do not measure one of those variables and take some action to keep it in check, they are not properly classified in Heading 9032.

So, again, what about 8501?

The devices convert electrical energy into mechanical power to move the damper. According to the Court of International Trade, that makes them motors. The presence of the ASIC is not enough to change that result. According to the Court, motors stay motors even when equipped with additional components, absent limiting language or legislative intent. The Explanatory Notes go on to say that motors remain classifiable in 8501 even when equipped with pulleys, gear boxes, or flexible shafts so long as the principal function remains the same as a motor.

While the ASIC contributes additional functionality to the assembly, the Court of International Trade concluded that those additional functions are complementary to the function of the motor. As a result, the merchandise remains classifiable in 8501.

That's all well and good, but it only goes so far. This question comes up a lot and it is not always clear how to draw the line. Take a hand kitchen mixer, for example, it really is nothing more than a motor. The dive shaft connects directly to the attachments, which rotate to impart force to the cake batter or other inchoate baked goods. Nothing about that is in principal distinct from a motor, except that the mixer has a specific function and is clearly identified with a different name. There are a lot of assemblies that contain motors that are similarly dedicated to a specific task and have specific names. Electric razors and electric toothbrushes are in that category. Those are not motors because they are dedicated to a particular task, have a specific name, and are more specifically classified elsewhere in the tariff. At what point is a specialized assembly that contains a motor something other than a motor? I'm not sure I have a general answer. I do know that in any given case it requires detailed and creative thinking by both the importer and Customs to get it right.

UP Penalty Unconstitutional

Union Pacific Railroad has been fighting the good fight with U.S. Customs and Border Protection over whether it is liable for penalties for illegal drugs imported via railcars that were being used by unrelated Mexican railroad companies. UP's role was to forward the electronic manifest data to CBP and pick up the railcars after CBP clearance. Keep in mind that CBP does not accept electronic manifest transmissions from Mexican railroads. In an interesting opinion, the Eighth Circuit Court of Appeals has held that CBP lacks the authority to penalize UP for the actions of Mexican drug cartels on railcars UP neither owned nor controlled.

According to the opinion, UP has no railroad operations in Mexico and no control over the Mexican railroads involved. It has no ability to control employees of the Mexican railroads and no authority to secure or search trains inside Mexico. When a train arrives at the border, CBP inspects it and sends the Mexican locomotive and crew back to Mexico. When CBP releases the train, UP hooks up a locomotive and carries the railcars on to their destination.

UP has taken steps to prevent smuggling in its network. It has 200 police officers and 300 security contractors on that job. At the border crossings, UP spends $2.4 million per year on this effort. It also built facilities for CBP including inspection towers. UP is also a member of C-TPAT and other partnerships with law enforcement.

Despite that effort, it turns out that there have been illegal drugs in railcars carried by UP in the U.S. after entry from Mexico. As a result, and despite all those facts above, Customs and Border Protection has sought to impose a $38 million penalty on UP. The theory for the penalty collection is that UP failed to include the illegal drugs, which it did not load and did not know were present, on the electronic manifests. Included in the total of the penalties is $655,215 for drugs UP found after CBP inspected and released the railcar. UP notified Immigration and Customs Enforcement about the drugs, which CBP then decided to treat as a violation by UP.

For its part, during the administrative process, CBP reasonably agreed to mitigate the penalties by up to 95% if UP ensured that railcars were inspected in Mexico. UP apparently rejected this offer on the grounds that it is impossible for UP to comply due to the lack of security for its personnel. Keep in mind, these officers would be operating in Mexico actively interfering with the operation of drug cartels. If UP police were assigned that task, they would not be able to carry firearms, could not make arrests, and, if they seized drugs, would technically be liable for possession under Mexican law. The Mexican railroads actually rely on the Mexican military for inspections because police authorities have been ineffectual.

CBP makes the not unreasonable point that UP has a business relationship with the Mexican railroads and, therefore, some leverage. It appears that CBP wants UP to use that leverage to force the Mexican railroads to implement a CBP-approved training program for inspecting the railcars. Unless adequately inspected, UP would not take the railcars from the Mexican railroads. This truly sounds reasonable enough. But, when you remember that neither the local police authorities nor the Mexican military has succeeded in stopping the drug cartels, it seems to be too much to ask.

Customs position is based on 19 U.S.C. 1584(a)(2), which Customs says requires that common carriers exercise the highest degree of care and diligence in preventing drug smuggling in railcars. According to the Court, in 1988 Congress required that Customs pass a regulation defining the highest degree of care and diligence. To date, Customs has not done so.

This case was brought under the Administrative Procedure Act. As such, CBP's decision to impose the penalties will be upheld unless it was arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law. Similarly, the penalties will be set aside if Customs acted in excess of statutory authority or short of its statutory requirements.

At the start of its analysis, the Court asked whether the penalties are constitutionally suspect. The Court noted that by imposing a sever penalty on a morally innocent actor, Customs may have violated the fifth amendment's due process clause. Further, despite an apparent argument from Customs, this penalty is not permitted by the common law of civil forfeiture because the monetary penalty is not a forfeiture, the railcars were not misused by UP, and UP was not negligent. Thus, there is a question as to the constitutionality of Customs' interpretation of the law.

Where one interpretation of a statute indicates that it is unconstitutional and another indicates that it is constitutional, the Court will adopt the latter. Thus, the Eighth Circuit next looked at what Congress intended the statute to mean. 

The Court noted that the law requires the "person in charge" of the vessel or vehicle to be responsible for properly reporting the cargo, including illegal drugs. CBP determined that UP was the person in charge because it electronically filed the manifests for the Mexican railroads. The Court, however, noted the other parts of the Tariff Act define the person in charge as someone on the vehicle or vessel such as a purser, master, pilot, or conductor. Under this meaning, UP was not in control of the trains when they entered the U.S. Further, although subject to some dispute, UP was not the owner of most of the railcars.

Further, the Court found that CBP's interpretation of the "highest degree of care and diligence" was not reasonable. On this point, the Court found no clear indication of congressional intent to "stretch constitutional limits." Accepting Customs' no-stone-unturned approach would require UP to accomplish what Mexican police and military authorities have failed to accomplish. This, the Court was unwilling to do.

Given the absence of the required regulatory definition,  the Eighth Circuit applied the common law meaning of the phrase, which is the "normal, elevated standard of care expected of any common carrier." This is not the familiar reasonable care imposed on importers. Rather, it is the "utmost care and diligence." But, that should not be translated to mean all the care possible or conceivable. It requires "everything necessary to the security . . . and reasonably consistent with the business of the carrier, and the means of conveyance employed." Under this standard, the Court found that CBP was holding UP to an unreasonable standard of care. UP, according to the Court, has done everything reasonably consistent with its business and the means of conveyance (actually more) to prevent illegal drugs from entering the U.S. given that it is not in control of the railcars when they reach the U.S.

Consequently, the Court found no reason to accept Customs' interpretation of the statute, which would raise serious constitutional questions. Rather, it interpreted the statute to require reasonable efforts consistent with the utmost care of a common carrier. That makes the penalties unlawful.

That is a big win for UP, which might have taken the mitigation deal and walked away. Instead, this case illustrates, in a fairly narrow circumstance, that Customs penalty claims must be carefully considered in the context of whatever law is being enforced. If the subject of the claim had no control over the circumstances and no ability to mitigate the risk of a violation, that penalty may be suspect. That is a valuable reminder.

Wednesday, November 27, 2013

Heads Up: Georgetown 2014

I will again be moderating a panel at the annual Georgetown CLE International Trade Update in February. This is one of the premier trade-related educational events of the year and well worth the time and expense to attend. Other than my panel, which is a survey of recent developments in customs law, highlights include an always lively discussions with Court of International Trade and Court of Appeals for the Federal Circuit judges and a panel covering legislative issues. As a bonus, there will be ethics credit available.

Click here to read the program brochure.

Wednesday, November 20, 2013

The Pesky Problem of Preference Criteria

Those who are responsible for NAFTA compliance are very familiar with the NAFTA Certificate of Origin and the Preference Criteria to be recorded in Field 7.  The criteria are used to indicate to the importer as well as to the customs authorities in the country of importation exactly how the goods qualify as originating. Under the NAFTA, there are six possible preference criteria with preference criterion B being the most common. When Customs sees a B in Field 7, it knows that the finished good contains non-originating material and that the good qualifies as originating because the non-originating materials made a qualifying change in tariff classification as a result of production in North America and, if applicable, the finished good satisfies the Regional Value Content requirement.

That is all simple enough under NAFTA. But, under the subsequent free trade agreements, no one ever specified a coding system for the preference criteria. As far as I am concerned, the lack of a uniform coding methodology is a travesty. Nevertheless, U.S. Customs and Border Protection's instructions on the implementation of the various agreements require that the certifying party specify how the good came to be originating.

Apparently, Customs has found this to be a bit of a problem as well. I gather that based on the fact that Customs just issued a reminder to the trade that FTA claims need to specify the basis for the origin determination. In that message, Customs also provided examples. Here is the text of the message free of copyright and in glorious courier font:

For importations into the United States under a free trade agreement (FTA), when a producer, exporter or importer issues an FTA certification of origin (a.k.a. Implementation Instructions, Attachment A), the “Preference Criterion” field should indicate how the good originates (meets the terms of the agreement) with the greatest specificity possible.


For example, with respect to an importation of lead sheet under the Peru TPA classified in HTSUS 7804.11.00, the “Preference Criterion” field of the certification of origin* should indicate how the good originates, as follows:

           If the good is wholly obtained:

HTSUS General Note 32(b)(i) or alternatively, Peru TPA Article 4.1(1)(a)

           If the good is produced entirely in Peru and all non-originating materials undergo the required tariff shift (and/or regional value content) specified in the corresponding specific rule of origin:

HTSUS General Note 32(n)78.2**  or alternatively, Peru TPA Annex 4.1, Chapter 78, Item 2

           If the good is produced entirely in a Peru exclusively from originating materials:

HTSUS General Note 32(b)(iii) or Peru TPA Article 4.1(1)(c)

This methodology should be used for all “tariff-shift” FTAs*** unless the Agreement, Regulations, or other officially published material provides for an alternate method. (e.g. The NAFTA provides for criterion “A,” “B and “C”.)

If no rule of origin is met, FTA preference cannot be claimed.

*   The Peru TPA certification of origin is available at http://www.cbp.gov/linkhandler/cgov/trade/- trade_programs/international_agreements/free_trade/peru/a.ctt/a.pdf and the certifications of origin for our other FTAs are available on www.cbp.gov by searching the country name and selecting the corresponding SmartLink.

**  The General Note citation is preferable for ease of use and because it is periodically modified to incorporate World Customs Organization updates to the Harmonized System nomenclature.

***  The FTAs that employ a tariff-shift methodology to confer origination are: NAFTA, Chile FTA, Singapore FTA, Australia FTA, CAFTA-DR, Peru TPA, Colombia TPA, and Panama TPA.

Questions may be directed to fta@dhs.gov.

Thursday, November 07, 2013

Paper Punches Not for Making Up Paper

Remember the Wilton case on hand-actuated paper punches? The United States Court of Appeals for the Federal Circuit has affirmed the decision of the Court of International Trade that the punches are properly classified in HTSUS Heading 8203 as perforating punches and similar hand tools. The importer had argued for classification in Heading 8441 as "Other machinery for making up paper pulp, paper or paperboard, including cutting machines of all kinds . . . ."

Wilton got hung up on the "for making up" part of that heading. The Court of Appeals held that term to refer to the industrial manufacture of paper and paper products. These punches, which are used for craft projects, are not industrial machines for making up paper products. Thus, under General Rule of Interpretation 1, the correct classification is in 8203.

If you want to read it, the opinion is here.

An interesting procedural note here is that the plaintiff had actually convinced U.S. Customs and Border Protection to classify many of the subject punches in 8441. Despite that agreement, the Court of International Trade and the Court of Appeals both noted their obligation to reach the correct result and rejected that agreed classification.

Wednesday, October 30, 2013

Did a Fight Just Break Out at the Court of Appeals?

Typically, I don't cover trade remedies cases here on the Customs Law Blog. But, now and then, something interesting happens on the trade side and it is worth a mention. That just happened.

A little background is necessary. The Court of International Trade has exclusive jurisdiction to review certain decisions of the Department of Commerce and the International Trade Commission relating to the imposition of antidumping and countervailing duties. When it does that, the CIT acts pretty much like a court of appeals; there is no trial, no witnesses, no objections and no findings of fact as there might be in a customs case. Rather, the CIT reviews the decision on the basis of the administrative record compiled at the agency. Generally speaking, if the agency decision is supported by substantial evidence and otherwise in accordance with law, the CIT will uphold the agency.

When a party appeals one of these cases from the CIT to the Court of Appeals for the Federal Circuit, the CAFC does exactly the same thing. The CAFC looks at the same record and applies the same test. If the CAFC finds that the agency decision is supported by substantial evidence on the record and is otherwise in accordance with law, the CAFC will uphold the decision.

Think about what that means for the work done by the judges of the Court of International Trade. If the CAFC starts at exactly the same point from which the CIT started, then the CIT decision is really just a speed bump on the inevitable road to the CAFC. By applying the same standard of review, the CAFC effectively creates the proverbial second bite at the apple that all losing lawyers want.

In most such circumstances, we can blame Congress for creating such an inefficient system. But, in this case, that is only half true. Congress started the problem by failing to include in any law anything about the standard of review the CAFC us to apply in these cases. That left the CAFC to figure it out, which it did in a case called Atlantic Sugar Ltd. v. United States (Fed. Cir. 1984). Since that time, the Court of Appeals has redone the work of the Court of International Trade. And, also since that time, a vocal group of judges and lawyers have decried the wastefulness of this system while others have defended it as a proper allocation of responsibility.

So much for the background.

In NSK Corp. v. International Trade Commission, this all came to a boil. The underlying dispute in the case is not important for us. What is important is that the CAFC denied a request for an en banc rehearing in a trade case. That allowed any judge of the Court to opine on any issue presented. The standard of review is present as an issue in every case (though not usually a controversial issue).

Enter Circuit Judge Evan Wallach, still relatively new to the Court of Appeals and, perhaps more important, late of the U.S. Court of International Trade. Judge Wallach wrote a dissenting opinion in which he took the opportunity to rail against Atlantic Sugar. He was joined in his dissent by Judge Reyena, who actually practiced as a trade lawyer, and Chief Judge Rader, who has spoken openly of his disdain for Atlantic Sugar in the past. Three judges do not make a majority, but they make for interesting reading.

Judge Wallach makes a few interesting points:

  • The standard being applied comes from the law applicable to the CIT, not the CAFC
  • Congress set the CIT standard of review to eliminate complex and burdensome review in the Court, which indicates a legislative intent to create an efficient, not duplicative, system
  •  In practical reality [my words, not his], the CAFC never truly ignores the CIT decision and the standard of review should acknowledge that
  • The standard has been inconsistently applied depending on the posture of the case, without any statutory basis for the differing analysis
  • The CIT has expertise in this area of law and its decisions deserves deference
  • Modern administrative law in the era of Chevron and Skidmore favors deference in part to properly allocate effort; duplicative review is inconsistent with that approach
The majority was not without a spokesperson, or five. According to the majority, Atlantic Sugar and de novo review is just fine. The majority has some interesting points of its own:
  • Every judicial circuit has adopted a similar approach to appellate review of an agency determination following review by a district court
  • The standard of review suggested by the dissent has only been applied by the Supreme Court in reviewing Circuit Courts of Appeals, an no other circuit has adopted it
  • Nothing in the trade or judicial statutes requires that these cases be handled differently than happens when other circuits undertake review of agency action
  • Even outside of administrative review, there are cases where appellate courts repeat the review of the trial court without deference
This last point has been an issue for me in trying to sort this out. I don't always litigate, but when I do, I prefer to litigate customs issues. The vast majority of those cases do not involve a dispute as to the facts. The judge only has to interpret the law and apply it to the agreed facts to resolve the case. That is summary judgment. When a party appeals from a decision on summary judgment, the appellate court does exactly the same thing. It is, once again, the proverbial second bite at the apple. No one, to my knowledge, has complained about this system.

But, summary judgment is different because there is no dispute of fact at all in play. In a trade case, the CIT (and then the CAFC) has to decide whether there is substantial evidence in the administrative record to support the conclusion reached by the agency. That does not mean that the CIT engages in fact finding or even weighing facts. But, it does mean that the sufficiency of the factual record is in dispute. Maybe that is sufficiently different from summary judgment to justify a different standard.

As the majority says, Congress knows how to write laws providing for judicial review. If Congress wanted the CAFC to do something other than what happens in many cases under the Administrative Procedure Act, it could have said so. Moreover, having now seen this controversy brewing, Congress knows how to fix it if Congress thinks there is a problem.

So now we wait and see whether any other wining party raises this issue in its defense of a CIT decision or whether Congress takes an interest. Either way, it will remain interesting to watch.

Tuesday, October 15, 2013

No Money, No Day in Court

E&S Express Inc. and Simon Ying v. United States, is another of those exasperating cases where a technicality prevents a judgment on the merits. That said, let me absolutely clear that the technicality involved is unquestionably the law and not something the Court could or should have ignored. Nevertheless, the result stinks for the importer.

Much like the most recent International Custom Products case involving imported white sauce, the sole question here is whether E&S has taken all the steps necessary to secure jurisdiction for the U.S. Court of International Trade to review a protest U.S. Customs and Border Protection denied. The two necessary steps are (1) a timely summons and (2) payment to Customs of all liquidated duties, fees, and taxes. It is the second prong that is the problem here.

E&S imported wooden bedroom furniture from China, which is subject to an antidumping duty order. At the time of entry, E&S deposited the estimated antidumping duties. Subsequent to importation, Customs billed  E&S for additional antidumping duties, to the tune of $76,895. That bill arrived after importation, after the goods had been sold, and about 10 months ater E&S dissolved. E&S protested the assessment, which was subsequently and separately rescinded by Commerce. But, E&S never paid the duties.

After Customs denied the protest, E&S filed suit in the Court of International Trade. The government then moved to dismiss based on E&S's failure to pay the duties.

E&S raised a number of arguments including that the retroactive application of the duty assessment against a dissolved company violated the company's due process rights. More interesting, E&S pointed out that its surety bond of $50,000 covered six of the nine entries at issue and, therefore, Customs could have collected duties on some of the entries. According to E&S, the Court should find the presence of the bond and the opportunity for Customs to collect sufficient to give the Court jurisdiction over at least six of the entries.

The Court did not see a way to do that. The statute, 28 U.S.C. § 2636(a)(1), is clear that the party seeking judicial review must pay the duties before getting its day in Court. E&S, having failed to satisfy that requirement, has not perfected its claim. The Court of International Trade, therefore, had no jurisdiction and the Court dismissed the case.

That said, this can be an onerous requirement. That is far more clear from the International Custom Products case. Perhaps Congress should consider an alternative whereby the plaintiff secures a bond to proceed in Court. That is how appeals work in many courts, which require a bond to secure payment of the judgment. From a litigation strategy position, E&S might have been able to work out a deal by which Customs denied only a single protest to serve as a test. E&S would then have been able to deposit a smaller sum of money and proceed to a judgment on the merits. I recognize that is nothing more than Monday morning quarterbacking, but it might have worked. Obviously, that would also depend on the good graces of Customs.

Lastly, if E&S is out of business, I wonder if there is any way for CBP to collect. If this case is really about protecting Mr. Ying, Counsel for E&S should be sure to read Trek Leather.

Wednesday, September 18, 2013

Link Maintenance

I am not sure how often readers of this blog might use the suggested links on the right margin. I have noticed that a few of the blogs listed there have gone dormant and other URLs have been co-opted by other sites. So, I have done a little curating and removed dead or bad links. I also added a link to the Cultural Heritage Lawyer blog, which I recommend you visit. Cultural heritage law is focused on the restrictions on the trade in antiquities and important artifacts of cultures and ethnic groups. Often, the primary enforcement agencies are Department of Homeland Security Investigations (of ICE for us old timers) and U.S. Customs and Border Protection. As a result, these issues often become issues of customs law, and something I try to follow. You should too, it is interesting stuff.

Also, while I do not tweet often, I remind readers to subscribe to my Twitter feed to catch short updates and links to interesting articles.

Tuesday, September 17, 2013

Big Tuna Loses Appeal

The U.S. Court of Appeals for the Federal Circuit has affirmed the decision of the Court of International Trade in Del Monte Corporation v. United States. For my post on the underlying case, see here. The decision is here.

You may recall that the classification issue in this case boiled down to whether tuna meats packed in pouches with sauces containing small amounts of oil are deemed to be "in oil" for purposes of tariff classification. Two prior decisions are at play in this argument. A 1915 case called Strohmeyer & Arpe holds that fish cooked in oil then partially drained and packed in another liquid, which subsequently absored a portion of the cooking oil remaining in the fish, is fish packed in oil. A subsequent case called Richter Bros. found that fish that had been fried in oil, drained, and then packed in in a non-oil liquid, was not "packed in oil" because the oil was not used in the packing process. While these cases appear to be somewhat at odds, the Federal Circuit distinguished both on the grounds that neither case involved oil used in the packing materials. In this case, the oil was in the pouch, not the fish, and, therefore, neither case contradicts Customs' classification.

The second issue had to do with valuation and I gave it short shrift in my first post. The value question can be reduced to whether post-entry price adjustments were actually part of a formula for purposes of an acceptable transaction value. The adjustments here were made by the producer in Thailand to account for decreased production costs and the recovery of useful tuna meat by the packer. After making entry, Del Monte paid the supplier's invoices for these adjustment. In Court, Del Monte said that there was a fixed formula used to calculate those adjustments and, as a result, the adjustments could be included in the transaction value.

The Federal Circuit agreed with Customs and Border Protection that the arrangement constituted a formula. According to the Court, a formula must be clear and definite. In this case, there was no written contract, formal policy or other "hallmark" of a formal agreement with the processor. Based on those facts, there was not enough evidence of a formula to overcome the presumption that Customs should disregard post-importation decreases in the price actually paid for merchandise.

Battle Over White Sauce Continues

I have been sitting on the latest decision in International Custom Products v. United States for a while now. This stems from a combination of being busy and also some white sauce fatigue. It appears that we are nearing the end of this very long-running dispute. If you need background, start with this post.
Also, the background section of this latest opinion from the Court of International Trade does a good job of setting the stage. The entirety of the dispute revolves around U.S. Customs and border Protection's classification of white sauce in 99 entries. CBP suspended the liquidation of most of those entries pending the results of the litigation. However, Customs liquidated 13 entries and denied the resulting protests. As a result of that denied protest, International Custom Products owes the United States $28,000,000 (I'll pause to let that sink in.)

The interesting thing about this decision is that it is purely procedural but entirely important. Usually, before an importer can get into the Court of International Trade to challenge a denied protest, the importer must pay all of the duties, charges, or exactions. See 28 U.S.C. 2637(a). In other words, denied protest cases are designed to allow the importer to secure a refund of overpaid duties, not to provide a way of avoiding the payment of duties. In this case, the plaintiff has not paid the $28 million Customs says is owed.

The problem here is that the plaintiff is suing the United States government. In the long history of English common law, it was generally impossible to sue the King. The sovereign is immune from most law suits. That followed over to the colonies and continues to be part of U.S. law. Today, sovereign immunity means that the U.S. government can only be sued when it consents and only within the terms of that consent. The U.S. has consented to a refund of duties suit in the United States Court of International Trade (it even created the Court, in part, for that very reason). But, the terms of that consent require the payment of the duties.

Because of this, the Court held that it lack denied protest jurisdiction (28 USC 1581(a)).

This left the plaintiff with one Hail Mary argument: the entire requirement that it pay $28 million as the price of admission to court is, in this case, unconstitutional. The requirement infringes the first amendment right to access the Court and violates the fifth amendment right to due process. That makes good practical sense, although the Court finds it to be legally wrong. In fact, the Court describes the claim as seeking "unprecedented and startling relief."

According to the Court, this requirement for pre-payment has been consistently upheld and applied for over 200 years. Nevertheless, the magnitude of the duty difference applicable in this case (2400%) makes it unique. In fact, the Court notes that the pre-payment requirement appears to give Customs and Border Protection an incentive to reclassify merchandise into the highest possible rate of duty to create an insurmountable barrier to judicial review. However, that harsh result does not, according to the Court, render the requirement unconstitutional. Thus, the case was dismissed.

Given the history of this case, I am certain we will be hearing more about white sauce and this issue from the Federal Circuit.

Saturday, August 17, 2013

Do I Amuse You?

Remember when I said I was trying to catch up? I know it looks like a lie. It's not. I'm just running around on a real work for real people and on real end-of summer efforts to not waste good weather. That said, I am still reading court cases.

I'm going to make short work of Spring Creative Products Group v. United States, a decision of the U.S. Court of International Trade. The case involved the proper tariff classification of a craft kit for the making of a fleece throw. The kit contained two 48 by 60-inch fabric panels and materials used to knot them together into a single throw. Most of the kits included a panel printed with a character from a popular cartoon, comic book, or children's movie. Customs and Border Protection classified it as pile fabric of man- made fibers in 6001.22.00. The importer challenged that classification and asserted that the correct classification was as a toy in Heading 9503.

The Court of International Trade made a lot of findings of fact and conclusions of law, all of which were helpfully set out in numbered paragraphs. That makes the decision technically precise but, frankly, a little tough to read. But, we can bottom line this easily enough.

Because of Section XI, Note 1(t) of the HTSUS, if the goods are classifiable in Heading 9503, they are excluded from Section XI, including Chapter 62. The relevant part of Heading 9503 is a use provision meaning that the principal use of the merchandise must be as a toy. Customs has long held that the distinguishing characteristic of toys is that they are designed primarily for amusement rather than for some utilitarian purpose. Toys provide a pleasurable diversion.

The Court applied the famous (among a small group of people) Carborundum factors to determine whether these kits are of the class or kind of merchandise that provides amusement and diversion. In a nutshell, the Court found that both the physical characteristics of the merchandise and the expectations of purchasers indicated that the kits were principally used as toys. Contrary to the argument put forward by the Department of Justice, the fact that the importer was not a toy company and the kits are not sold in toy stores did not negate the fact that the goods are toys. As a result, they are properly classifiable in 9503.

Thursday, August 15, 2013

Importing from Myanmar?

I don't usually do this, but here it is expedient. Rather than summarize Customs and Border Protection's guidance on imports from Burma, I'll just repeat it. I cannot quite figure out where this is placed on the CBP website, but it is called "burma_august2013.doc."

Certain Burmese Rubies, Jadeite and Articles Containing Burmese Rubies or Jadeite Are Prohibited from Importation into the United States

In light of the expiration of the Burmese Freedom and Democracy Act of 2003 (the “BFDA”) (Public Law 108-61), as amended by the Tom Lantos Block Burmese JADE (Junta’s Anti-Democratic Efforts) Act of 2008 (the “JADE Act”) (Public Law 110-286), on August 7, 2013, the President issued an Executive Order (“EO”) that prohibits the importation of “any jadeite or rubies mined or extracted from Burma and any articles of jewelry containing jadeite or rubies mined or extracted from Burma.”  This EO amends Executive Order 13310 (July 28, 2003), in relevant part, by revoking the section of that order imposing a prohibition on the importation into the United States of any article that is a product of Burma.  Therefore, with the expiration of the BFDA, as amended by the JADE Act, and with the new amendment to Executive Order 13310, there is no longer a general ban of “any article that is a product of Burma,” and certain provisions of the JADE Act and the Presidential Proclamation 8294 of September 26, 2008 (the “Proclamation”) will no longer be enforced.  As such, CBP is removing the JADE Act regulations at 19 CFR § 12.151.  CBP will no longer enforce certain provisions of the JADE Act and the Proclamation, such as the exporter certification requirement for the importation of “non-Burmese covered articles.”   

Imports Prohibited

CBP will continue to enforce the import prohibition of Burmese jadeite and rubies, and articles containing Burmese jadeite and rubies, as defined in the August 7, 2013 EO. 

For purposes of the import prohibition in the EO, the following definitions apply: 

(a)       the term "jadeite" means any jadeite classifiable under heading 7103 of the Harmonized Tariff Schedule of the United States (HTS);

(b)        the term "rubies" means any rubies classifiable under heading 7103 of the HTS;

(c)        the term "articles of jewelry containing jadeite or rubies" means:

(i) any article of jewelry classifiable under heading 7113 of the HTS that contains jadeites or rubies; or

(ii) any article of jadeite or rubies classifiable under heading 7116 of the HTS.

Exception to the Import Prohibition

Section 6 of the August 7, 2013 EO states that there is no prohibition of the importation of any jadeite or rubies mined or extracted from Burma or any articles of jewelry containing jadeite or rubies mined or extracted from Burma that were previously exported from the United States, including those that accompanied an individual outside the United States for personal use, if they are reimported to the United States by the same person who exported them, without having been advanced in value or improved in condition by any process or other means while outside the United States. 

Parties who are temporarily exporting from the U.S. “any jadeite or rubies mined or extracted from Burma or any article of jewelry containing jadeite or rubies mined or extracted from Burma” are advised to register those articles prior to export through one of the following methods:
CBP Form 4455 - Certificate of Registration

CBP Form 4457 - Certificate of Registration for Personal Effects Taken Abroad

A carnet issued by the U.S. Council for International Business. This is more suitable for commercial samples and items for trade shows and exhibitions.

If one of the above-referenced documents is not presented to CBP at the time of re-importation into the United States, the importer must present documentary evidence that supports the claim that subject articles were exported and re-imported by the same person without having been advanced in value or improved in condition by any process or other means while outside the United States.  Without such documentation, the articles are subject to seizure by CBP.

For questions regarding the import prohibition in the August 7, 2013 EO, contact CBP’s Partner Government Agencies (PGA) Branch at ogaandimportsafety@dhs.gov

Executive Order - Prohibiting Certain Imports of Burmese Jadeite and Rubies

U.S. Economic Sanctions Against Burma – See U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC)


Thursday, August 08, 2013

This is a test.

Let me know if this works and what you think. And, as always, it is not legal advice.

Saturday, August 03, 2013

Changes in Latitude, On Me

About this time in the summer, I am thinking I gotta fly to St. Somewhere for some boat drinks. Unfortunately, that is not in the cards. I'll make due with homemade margaritas and reading Latitudes International Fragrances, Inc. v. United States so that you don't have to go insane. [My apologies to Jimmy Buffett for those five references.]

This case has to do with the proper tariff classification of glass bottles imported empty. In the U.S., the bottles were combined with other merchandise to form a scented oil diffuser kit. U.S. Customs and Border Protection classified the bottles in HTSUS item 7013.99.50 as glassware for indoor decoration. That resulted in a still rate of duty of 30%. Plaintiff believes that the correct classification is in 7010.90.50 as bottles for the conveyance of oils, which has a rate of duty of free. Note that both of these provisions are principal use provisions. Consequently, it is the use of the class or kind of merchandise that controls the classification, not the use of the actual imported merchandise.

According to the plaintiff, these bottles are used to convey the scented oil to the ultimate consumer and that it is the oil that the consumer is purchasing. Defendant, on the contrary, argued that the bottles are an attractive decorative item similar to a vase.

To sort this out, the Court of International Trade applied the so-called Carborundum factors to determine the class or kind to which the bottles belong. That means that this post will have at least seven more paragraphs, which is not what I had hoped.

1. General Physical Characteristics of the Merchandise

Yes, the bottle is attractive and decorative. On the other hand, it has a stopper that is designed to prevent the fragrance oil from leaking out of the bottle. Further, the bottle's shape facilitates inserting those cattail-like reeds used to suck up the oil. On this point, the Court tilted toward conveyance.

2. Expectations of the Ultimate Purchaser

The bottle is only sold to consumers as part of a kit with oil and reeds. While it is attractive, the expert testimony that consumers would keep and refill the bottle was not sufficiently probative to make a finding. Further, the bottles are a small portion of the value of the kit (about $0.50 out of $18), indicating to the Court that the consumer expects to be purchasing a defuser kit and to discard the bottle.

3. Channels of Trade

The bottles are imported empty and are not offered for sale to retail customers in their imported form. Thus, the channel of trade is distinct from the channel for vases and decorative items.

4. Environment of Sale

Defuser kits are advertised and sold to retail end users. The bottles are not sold, advertised, or displayed separately by retailers. That makes them unlike vases.

5. Use in the Same Manner as Merchandise That Defines the Class

There was limited evidence that the bottles are reused. That means that there was also limited evidence of their decorative use being predominant. In other words, the main use appears to be holding oil in defuser kits. Thus, this factor also points in the direction of bottles for the conveyance of oils.

6. Economic Practicality of So Using the Imported Merchandise

The cost of the bottle is apparently so low that is does not make economic sense for the importer to offer refills of oil and defuser sticks. This factor also tilts in favor of 7010.

7. Recognition in the Trade of this Use

The last Carborundum factor is the recognition of the use in the trade. There was not a lot of evidence on this point.

Following that review, the Court of International Trade noted that its own examination of the bottles indicated that their features are consistent with bottles for the conveyance of materials. The primary consideration in this part seems to have been the presence of a stopper designed for use with defuser reeds.

The last bit of the case is interesting. The Department of Justice asserted that the ruling Customs and Border Protection issued to the importer is entitled to judicial deference under a Supreme Court decision called Skidmore. What Skidmore says is that this sort of decision (which was not subject to public notice and comment) is entitled to deference consistent with its degree of persuasiveness. Thus, I always wonder why the judges don't say "Yes, it get's Skidmore deference" and move on to the question of how much deference. Instead, the Court seems to look at the ruling and make the binary decision of whether it is persuasive enough to be entitled to deference. That is an analytical question that I think matters, but probably not very much.

In this case, the Court was not impressed with Customs and Border Protection's comparison of the bottles to jars and its application of the relevant Explanatory Notes. Consequently, it held that the ruling was not so thorough or logical to warrant deference.

All of which adds up to a win for the plaintiff.

Now, before I blow out my flip flops, where are my limes and my tequila? [That makes six.]

Friday, August 02, 2013

Next: La Crosse Technology or "The Return of Oscar Outlook"

When we last left Oscar Outlook, mascot of La Crosse Technology, the United States Court of International Trade determined that several combinations of meteorological instruments and clocks had the essential character of clocks or various weather related instruments for purposes of tariff classification and were not properly classifiable as meteorological instruments. Now we have the Court of Appeals for the Federal Circuit stating its disagreement with that determination.

As background, the Federal Circuit stated that all of the devices at issue in the appeal include  wireless instruments to measure outdoor conditions and a base unit to measure indoor conditions. The devices have an LCD display, a barometer, and a microprocessor. The processor is programmed to analyze historical barometric readings and predict the weather. The forecast shows up on our friend Oscar Outlook in the form of his clothing. And, it is important to note, they all include a clock.

The first issue here was whether this case can be decided on the basis of General Rule of Interpretation 1, which states in relevant part that "classification shall be determined according to the terms of the headings and any relative section or chapter notes . . . ." According to La Crosse, Heading 9015 covering meteorological appliance is sufficiently broad to cover all of the products without resort to any other rules of interpretation. The Court, however, determined that this undervalues the contribution of the clock. Because Heading 9015 does not cover clocks and clocks are "substantially in excess" of the features of the articles in Heading 9015, the Court moved on to General Rule of Interpretation 3(b).

Rule 3(b) addresses composite goods. A composite good is an article composed of two or more dissimilar articles. Imagine a teddy bear with a corn popper in its belly and you will have an idea of what is happening in General Rule of Interpretation 3(b). The rule states:

Mixtures, composite goods consisting of different materials or made up of different components, and goods put up in sets for retail sale, which cannot be classified by reference to 3(a), shall be classified as if they consisted of the material or component which gives them their essential character, insofar as this criterion is applicable

According to the Federal Circuit, all of the devices in question monitor weather conditions and provide forecasts. These are not features performed by clocks. In addition, the weather functions add significant cost over the clocks alone. Consequently, the Court found the essential character to be imparted by the meteorological capabilities.

This did not resolve the matter. At this point, all we know for sure is that the merchandise is not clocks. There were still two competing headings: Heading 9015 covering meteorological appliances not covered elsewhere and 9025 covering thermometers, barometers, hygrometers, etc. and combinations thereof. Because of the weather forecasting capabilities of the devices, the Court of Appeals reversed the Court of International Trade and held that the goods are properly classified in 9015.80.80. According to the Court, "[T]he forecasting feature is central to the devices at issue and takes the devices at issue out of the narrow scope of instruments described by 9025, and into the broader category of meteorological devices described by Heading 9015, and more specifically by subheading 9015.80.80."

Dissenting Circuit Judge Bryson had a different and important take on the clock issue. He agreed with much of the analysis and, in particular, that this is a GRI 3(b) case involving composite goods. Where Judge Bryson differed was on the determination of essential character. He noted that the so-called "clock models" had very prominent clock features including alarms, calendars, and the ability to project the time onto walls. Also, the clocks were advertised as such.

According to Judge Bryson, when the Court of International Trade determined that these models had the essential character of clocks, it made a factual determination. To reverse a finding of fact, a federal court of appeals must find that the lower court committed clear error. Judge Bryson did not find clear error in the decision of the Court of International Trade and, therefore, would not have reversed.


Wednesday, July 31, 2013

Time to Catch Up, Part 1: Trek Leather

I am sorry to report that I have a backlog of decisions to review. So, let's get started.

Do you remember United States v. Trek Leather, Inc.? No? I'm not surprised as I appear not to have bothered to cover the decision from the Court of International Trade. You might want to go back and read that for context. Here, we will discuss the decision from the Court of Appeals for the Federal Circuit.

The question presented in Trek Leather is whether a corporate officer, in this case Harish Shadadpuri, can be held personally liable for negligence in relation to a customs entry for which the corporation was the importer of record. In this case, Shadadpuri was the president and sole shareholder of the importer of record and also a 40% shareholder of the consignee for 72 entries of men's suits. Upon entry, Trek Leather (which I will call Trek Leather to distinguish it from the fine people at Trek Bicycle Corp.) failed to properly declare the value of fabric provided to the foreign manufacturer. That material was an assist, which must be added to the value of imported merchandise declared to Customs and Border Protection. As it happens, this had been an issue for a company run by Shadadpuri two years earlier. That made Customs unhappy and Customs charged both Trek Leather and Shadadpuri as an individual with customs fraud and, in the alternative, gross negligence or negligence.

Shadadpuri argued that because Trek Leather was the importer, he could only be held personally liable if (1) the government proved that there was no legal distinction between him and the corporation (known legally as "piercing the corporate veil"), (2) he committed fraud, or (3) he aided and abetted a fraud by Trek Leather. Eventually, Trek Leather, the corporate entity that was the importer of record, admitted to gross negligence and the government abandonded the fraud claim. That left Shadadpuri facing liability only for negligence (gross or otherwise). As it happens, it is impossible to "aid and abet" negligent conduct by someone else. In other words, people are only responsible for their own negligence. In this case, Shadadpuri said the importer of record was the negligent party.

Nevertheless, the government proceeded on the theory that Shadadpuri is a "person" covered by the penalty statute, 19 USC 1592(a). That statue prohibits any person from entering merchandise into the United States by means of fraud, gross negligence, or negligence. The Court of International Trade held that Trek Leather and Shadadpuri were jointly and severally liable as "persons" who were grossly negligent with respect to the entry of merchandise.

On appeal, Shadadpuri's argument was that as long as there was no fraud on his part or on Trek Leather's part (which was conceded by the government), he could not be held liable for negligent actions by the importer of record. This is because the obligations to act with reasonable care (meaning the absence of negligence) apply only to importers of record. See, for example, 19 USC 1484.

That means the government needed to convince the Court of Appeals for the Federal Circuit that a corporate officer who does not personally commit fraud can be held liable for the negligence of the corporation. According to the government, that follows from the broad meaning of the term "person" in section 1592.

The Court did not accept this invitation. Rather, it started from the premise that the corporation is, absent a pierced corporate veil, a separate legal entity from its officers. Further, as stated above, one cannot aid and abet the negligence of another party. Finally, negligent conduct actionable under section 1592 requires that the actor violate some duty owed to Customs. In this case, that duty arises with respect to the obligation to exercise reasonable care when making an entry. That duty attaches to the importer of record, not to individual corporate officers nor to anyone else. Thus, the government could not make a case against Shadadpuri. Had the government wanted to do so, according to the Court, it should have either stuck to its original fraud allegation or tried to pierce the corporate veil.

As it is, corporate officers can probably sleep a little bit more easily tonight. Note that is not legal advice and corporate officers should not assume they are not responsible for corporate actions.

In a dissenting opinion, Circuit Judge Dyk noted that the earlier version of the penalty statute would have imposed liability on Shadadpuri as an agent of Trek Leather. The legislative history to the current act states that the change in language was not intended to change the scope of persons subject to penalties. Early on, the Court of International Trade held that the current language permitted a corporate officer to be liable for violations of section 1592. Further, according to Judge Dyk, there is no support for the distinction the majority draws between negligence and fraud. In either case, no person may make entry in violation of the statute. Thus, Judge Dyke would have upheld the decision of the Court of International Trade.

Friday, July 19, 2013

The War on Christmas: Customs Edition

Sometimes, tariff classification by the rules produces results that are completely inconsistent with what a normal, thinking person would expect to be correct. Case in point: HQ H237067 (June 20, 2013).

The ruling, apparently drafted by Ebinezer Grinch von Scroogeheimer of the Regulations and Rulings Unit, considered the tariff classification of a complete, adult sized, and apparently well-made Santa costume known as the Premier Plush Nine Piece Santa Suit. Look at this picture and tell me whether it is a festive article closely associated with a holiday:

Of course it is. To the average person and, I might add, the average customs entry writer, the picture would be enough to resolve that issue. Plus, I personally apply the Bubbe and Zayde test. Under my test, if you are unlikely to find the item in the home of an elderly Jewish couple, it is probably a festive article associated with a Christian holiday.

The problem is that Customs and Border Protection and importers do not get to rely on gut reactions when classifying merchandise. It is times like these that we shake our fist in the air and curse the damned General Rules of Interpretation.

The costume in question consisted of the top, pants, hat, belt, gloves, shoe covers, beard, wig, and a toy sack all packaged together. The top and pants were a synthetic blend, with sewn-in care labels stating the the garments are to be Dry cleaned.The top was lined and the top and pants were both trimmed with faux fur. It is all packaged together for retail sale.

There are two big issues here that lead to the ultimate classification of this merchandise. First, is the costume (or any component thereof) a festive article of Chapter 95? Second, is it a retail set under GRI 3, leading to a single tariff classification? A lump of coal goes in your stocking if you think this has a happy ending. [Did I do that right? That's outside my cultural experience.]

The thing to remember is that the several of the potentially applicable chapters, including Chapters 39, 42, and 67 include legally binding notes excluding articles of Chapter 95. Chapter 95, in turn, covers "Festive, carnival or other entertainment articles." Consequently, if the costumes are classifiable in Chapter 95, they would be excluded from the other chapters and entitled to duty-free entry into the United States, hence the ruling request.

This is where the rules start to get in the way of the obvious result. Note 1(t) to Section XI, which covers textiles and textile articles, excludes goods of Chapter 95 from that section. That is good for the importer. However, Note 1(e) to Chapter 95 excludes "fancy dress, of textiles, of chapter 61 or 62" from Chapter 95. Thus, if the costume is fancy dress, then it cannot be in Chapter 95 and if it is not in Chapter 95, then it is not excluded from Section XI.

According to prior decisions of the Court of Appeals for the Federal Circuit, "fancy dress, of textiles, of chapter 61 or 62" includes costumes that are also "wearing apparel." The difference between costumes that are wearing apparel and those that are not is based on the quality of finishing including the presence of zippers, insert panels, finished edges, and whether the costume is "flimsy." Basically this test is intended to differentiate the one-time wearable, cheap Halloween-style costume from substantial garments that might be worn repeatedly to masquerade balls in Jane Austin novels. Customs and Border Protection distills this into a test based on styling, construction, finishing touches, and embellishments.

In this case, Customs found that the top and pants had tightly sewn seams and that the top included a zipper concealed under the faux fur. All of the edges were finished. For this and other reasons, Customs found the garments to be non-flimsy. So, that makes the costume wearing apparel.

Next comes Note 3(a) to Chapter 61 which states that the components of a man's suit must be of the same fabric construction, color, and composition. The pants lack faux fur trim. As a result, Customs and Border Protection found the pants and top did not constitute a "suit" and should be classified as separates in 6105 (top) and 6103 (pants).

To make matters worse, Customs noted that Note 14 to Section XI states that textile garments of different headings are to be classified separately even if put up in a retail set. That is another reason the costume cannot be classified as a whole. Consequently, Customs moved on to individually classify the gloves, sack, wig, and beard. Of those, only the wig and beard made the cut as festive articles of Chapter 95. For some reason, Customs deferred ruling on the Santa hat, belt, and shoe covers until a later ruling.

The moral of this Christmas story is that tariff classification requires a detailed application of the legal text and that a quick gut reaction will often lead to no good. Or, that Customs' heart is two sizes too small.

Tuesday, July 09, 2013

Marking Unassembled Products

I do a lot of training talks for lots of organizations and I am happy to do so. One of my go-to examples for tariff classification is a complete bicycle imported unassembled in a retail box. This is a good way to discuss General Rule of Interpretation 2(a), which tells us that goods imported in an unassembled or disassembled condition will be classified as the finished article if, when imported, it is complete or has the essential character of the complete article. In my bike example, that means that the unassembled bicycle is classified as if it were assembled.

What I don't usually talk about in the context of that example is the marking of the disassembled bicycle in a retail box. I am, however, thinking about that because Customs and Border Protection recently published a proposal to revoke the ruling NY N015337 (Aug. 23, 2007) in which it addressed the marking of an unassembled child carrier/seat for a bicycle. The proposal is in the Customs Bulletin starting at page 39.

The product involved is the rack mount Bell Cocoon Child Carrier. I think this is it:

Some of the parts for this seat were imported from China. Others were imported from Taiwan (more on the geopolitics later). The molded plastic bucket seat and other components were produced in the United States. After importation, the foreign and domestic components were packaged together for retail sale in an unassembled state.

In proposed new ruling HQ H234565, Customs identified two questions. First, how should the individual components be marked at the time of importation? Second, how should the unassembled seat be marked for retail sale?

First, some background: U.S. law requires that unless an exception applies, all articles of foreign origin imported into the United States must be marked with their country of origin. 19 USC 1304. The marking has to be conspicuous and as legible, indelible, and permanent as the nature of the article (or its container) will permit. The marking must indicated the English name of the country of origin of the article so that the ultimate purchaser of the item should be able to identify the country of origin and, "buy or refuse to buy them, if such marking should influence his [or her] will." U.S. v. Friedlaender & Co., 27 CCPA 297, 302 (1940). The ultimate purchaser is generally the last person in the U.S. who received the goods in the form in which they were imported.

This is where things get difficult in this case. Here, as in my bicycle example, the numerous parts are packaged together but not otherwise changed in any way. In the notice, Customs asserts that means the retail purchaser of the seat is the ultimate purchaser of the components. That means that "The Chinese [and Taiwanese] components must be marked at importation." That does not strike me as a big deal or hard to implement by the importer. The parts are likely imported in bulk and, I am guessing, are properly marked if not on the parts then on the containers.

Related to this is the fact that the importer knows it will be repackaging the seat parts into seat kits. Consequently, Customs helpfully pointed out the requirement that the importer provide a repacker's certificate to the Port of Entry. That certificate states that the importer who repacks goods will not obscure the origin marking on the products or will repack in such a way as to properly communicate the country of origin. See 19 CFR 134.26 for details.

Now, what about that retail marking? Keeping in mind that Customs says that the retail customer is the ultimate purchaser of the imported parts, this is where things get more difficult for the importer. According to Customs, the outside of the retail container must state the country of origin of each component. Customs cites a number of prior rulings in support of this proposition.

The important take away here is what Customs did not do. Many importers might have assumed that because the kit will, by virtue of GRI 2(a), be classified as an entirety, that it will be treated as a single item with a single country of origin. After all, if the parts were assembled into the seat prior to sale, there would probably be a substantial transformation from foreign components to finished seat. In that case, the article would not be "foreign" and would not need to be marked at all. Customs also did not fall back on selecting a single country of origin based on the one component that provides the essential character to the finished article. That can work in the NAFTA marking context, but not here (at least according to Customs).

Assuming the seat kit is packaged in an opaque box, this means that the origin label on this retail box will be complicated. It will apparently have to list the origin of each foreign component at retail sale.

Is this the right result? I'm not sure, for a couple reasons.

First, the ultimate purchaser of the components may not be the retail customer. I realize that nothing beyond repacking is done to the components. Nevertheless, the components are presumably imported in bulk and classified as individual items. The commercial reality of the retail sale is that, consistent with GRI 2(a), a single item has entered the commerce of the United States. The retail customer did not select the various components when it purchased the kit in exactly the same way that the retail customer would not select the components of an assembled seat. On that basis, even though only packaging into kits has occurred, it strikes me that the component importer is the ultimate purchaser. If that is true, then the kit would not need to be marked.

Second, I am continually hung up on when the NAFTA marking rules apply. They clearly do not apply to the components from China and Taiwan when imported. Those are not goods of a NAFTA country. But, what about the kit? The kits are not the imported products, and the marking rules do not apply to the kits as a whole, only to the imported components.

But, if we look just at the retail kit, it is likely that under 19 CFR 102.11, the country of origin would be the U.S, either because of tariff shifts or because the piece that imparts the essential character is the U.S.-origin plastic seat. We don't really know, I am just making assumptions as an academic exercise. If that is the case, then the retail kit would qualify as the good of a NAFTA country for marking purposes. It would not be NAFTA originating, but it would qualify as a U.S.-origin product and not require marking.

This is not an accepted application of the NAFTA rules. Do not apply them in this way without getting legal advice. I am not aware of any rulings that apply the NAFTA marking rules in this way. But, I think this is consistent with the way they are written. Customs would agree with my caveat above that the imported foreign articles are the components from China and Taiwan. The marking rules are applied to them in both their imported form and as parts of the kit. It would not be proper, under this analysis, to apply different rules to the kit in a way that avoids marking the foreign non-NAFTA products.

But, I think that two-part marking analysis is exactly what happens in the traditional application of substantial transformation to products that are further processed in the U.S. Forget the NAFTA rules for a second. If the components are imported in bulk, they need to be marked so that the ultimate purchaser knows the origin. But, if subsequent processing in the U.S. results in a substantial transformation, then the new product is considered to be of U.S. origin for purposes of marking. That second look at the finished product is exactly how I am suggesting that the NAFTA rules can be read.

Another apparent problem with my theory is that it means all foreign products subjected to further processing in the U.S. would be analyzed under the NAFTA rules and substantial transformation would be completely eliminated. That is a canard; and is not what happens. Substantial transformation would only be obviated in those cases where, after the NAFTA rules are applied, it is determined that a result showing the U.S., Canada, or Mexico as the country of origin. In this case, if China or Taiwan were determined to be the country of origin, the final marking determination would fall back to the traditional substantial transformation approach. To me, that makes sense in the NAFTA context and here.

But, and this is important, that is not how Customs sees things. To the best of my knowledge, every ruling issued by CBP on the application of the NAFTA marking rules has involved a product shipped from, processed in, or containing materials from Canada or Mexico. I am not aware of Customs ever applying the NAFTA marking rules to goods of non-NAFTA origin that were further processed in the U.S.

So, the lesson here is two fold. One, the non-NAFTA marking requirement for unassembled components in kits is that the retail packaging must not obscure the marking on the components or must display the origins of the components. Second, with respect to the NAFTA part, I am prone to thinking too much about this particular topic.

If, by chance, you want to comment on the CBP proposal, the due date is August 2, 2012.

Finally, I think it is interesting that the proposal clearly states that the component parts are from China (i.e,, the Peoples Republic of China) and Taiwan (i.e., the Republic of China). In history and politics, that is an important distinction. Nevertheless, it looks to me that Customs conflated the two into "China." Customs might want to change that before it gets a call from one or two angry ambassadors.