Tuesday, June 25, 2013

Burning Questions of Fact

If you know me professionally, you know I have recently been going on ad nauseam about how there is almost never a dispute as to the facts in a classification case before the Court of International Trade.  As a result, my world view is that parties at the CIT should tee up the legal questions early and get the case resolved without a lot of time and effort going into probing the facts.

Now and then, I am reminded that this is not always the case. Today, my reminder comes in the form of Tyco Fire Products L.P. v. United States. Tyco involves glass liquid-filled bulbs used in fire sprinkler systems as triggers holding valves closed. When heated, the liquid expands and eventually breaks the glass bulb causing the valve to open and the sprinkler to activate. Similar bulbs are used in water heaters to keep vent doors open. When heated, the bulb breaks and the vent door closes. That chokes out fire in the water heater. What we are talking about is the red part of this Tyco sprinkler head.

Customs classified these bulbs as articles of glass in Chapter 70. Tyco argues that they belong in Chapter 84 as parts of machinery or equipment. The decision on that question of law comes down to the application of Note 1(c) to Chapter 84, which excludes "[l]aboratory glassware (heading 7017); machinery, appliances or other articles for technical uses or parts thereof, of glass (heading 7019 or 7020)." The relevant Explanatory Notes state that Note 1(c) is intended to exclude merchandise that has the character of an article of glass. An article loses its character as being "of glass" if, among other not relevant considerations, it has been combined with a high proportion of other materials.

Based on this, the Court set out to determine the essential character of the liquid-filled glass bulbs. If it is the glass, then the bulbs are excluded from Chapter 84 and Customs' classification is correct. Tyco asserted that the liquid imparts the essential character because it is the liquid that expands and shatters the glass. Thus, the liquid provides the main functional component. It is interesting to note that Tyco apparently did not claim that the product might be classified as the liquid.

For its part, the government argued that the glass supports the load from the valve or door and, therefore, performs a long-term and important function in the overall system.

Neither side presented evidence regarding other indicia of essential character such as relative values and weights.

As a result, the Court found itself with an unresolved and material question of fact. Under those circumstances, summary judgment is not appropriate.

Assuming the bulbs might be classified in Chapter 84 as parts, the Court found there to be a second unresolved question of material fact. To be classified as a part, the bulbs must be principally or solely used as part of the relevant device. According to the Court, that makes all parts provisions in the HTSUS into use provisions (a formulation I do not recall seeing expressed, but which makes sense). Under Additional U.S. Rule of Interpretation 1(a), to determine the principal use of the bulbs, the Court needed to determine the class or kind of product into which they fall and the most common use of that class ort kind of product in the United States.

Trying to resolve those issues, the Court found there to be a genuine issue of material fact as to the principal use of the bulbs other than the water heater bulbs. This was primarily because there was evidence before the Court of uses in applications other than fire sprinklers.

Consequently, the Court found two big questions of fact that need to be resolved before it can enter judgment. In other words, this is exactly not the kind of case that can be resolved quickly by focusing on the meaning of the tariff terms. Instead, this is the kind of case that may require extensive discovery on the issues of essential character and use. But, to get some value for my world view, the fact that the judge has distinctly pointed to the relevant questions of fact should help focus the rest of the proceeding on the questions that matter. If there is still discovery to be had, this decision should help avoid needless fishing.

Saturday, June 15, 2013

Details on Equal Protection Case

As mentioned, the Federal Circuit has again dismissed efforts by importers to challenge separate and unequal rates of duty on  certain items of apparel. The cases were brought by Forever 21, Rack Room Shoes, and a company called Skiz, which was created for purposes of pursuing this case (more on that later).

This has been a tough case all along and the plaintiffs seem to have made a solid effort at getting a successful result. On its face, it seems to be an obvious proposition that a higher tariff on men's apparel than on women's apparel would discriminate against men. Imagine a sales tax in which men paid a higher rate at the cash register than do women. That would never be constitutional and that is similar to how the plaintiffs see this case.

Unfortunately, the Court of International and the Court of Appeals for the Federal Circuit have seen it differently. Rather than the tariff being a tax based on the gender or age of the buyer, the tariff is a tax on merchandise imported into the United States. That merchandise has no constitutional rights and the plaintiffs in this case are corporations without gender or age. That makes it hard for the plaintiffs to show that they have suffered discrimination. That raised problems relating to the legal standing of the plaintiffs to pursue this case.

With respect to Rack Room and Forever 21, the Court of Appeals for the Federal Circuit held that both companies (1) are sufficiently closely related to their customers, (2) their customers suffered an injury, and (3) the customers have no remedy on their own. As a result, Rack Room and Forever 21 are appropriate representatives for their customers and, therefore, had legal standing to pursue the case.

Skiz is another story. Skiz was created by one of the lawyers involved in the case specifically to be a plaintiff. Skiz imported merchandise, paid duties, and protested the collection of duties by Customs and Border Protection. Unfortunately, Skiz has no customers (of any age or gender) who may have been impacted by the differential duties. As a result, the Federal Circuit found that Skiz lacked standing to represent third parties and had no standing on its own. Thus, the case was dismissed with respect to Skiz.

With respect to the claims brought by Forever 21 and Rack Room, the issue had to do with pleading. The Courts have held that the different tariff rates do not constitute "facial discrimination." Because this is an equal protection case, the burden on the plaintiffs is to show facts indicating that Congress intended to discriminate based on gender and age. The first step in a court case would be for the plaintiffs to plead facts, which if true, show that it is "plausible" that Congress intended to discriminate. That is where Rack Room and Forever 21 ran into problems.

Rack Room's argument was that Congress could have created a tariff that did not rely on age and gender to differentiate between products. For example, the tariff might be higher or lower based on the size or weight of the product. From that, Rack Room asked the Court to infer that Congress intended the burden of the different rates to apply to people based on age and gender. The Federal Circuit was unwilling to make that jump. According to the Court, that would constitute an improper end run around the requirement that Rack Room plead facts plausibly showing discriminatory intent.

Forever 21 did not fare much better. It raised two main arguments. First, Forever 21 noted that the  Tariff Classification Study of 1960 included language suggesting that there is no rational basis to differentiate apparel duty rates based on the gender and age of the ultimate customer. From this, Forever 21 asks the Court to infer that Congress intended to perpetuate an unsupportable and discriminatory tariff.

The Court was not willing to make that inference. According to the Court, the study related to one category of merchandise. Further, it is not clear that the particular classification language discussed in the study carried over into the Tariff Schedule of the United States and then into the current Harmonized Tariff Schedule.

Forever 21's final argument is apparently a tour de force of legal research and a mysteriously odd lack of specificity. According to the company, there is an un-named treatise from 1892 discussing tariffs on wool clothing. According to the treatise, the product descriptions were intended to create lower tariffs on clothing intended to be worn by slaves. This presented two issues for the Court. First, the treatise was apparently not named nor quoted on the record. Second, assuming the treatise says what it is reported to say, the Court could not see a connection between the slavery-related tariffs and the current tariff schedule.

Based on this analysis, the Federal Circuit dismissed all three cases. That, of course, raises the question of whether this is the end of the case. Well, that is not up to me. There is a Supreme Court to answer questions exactly like this.

The underlying problem in this case is the determination that the discrimination embodied in the tariff schedule is not facially discriminatory. That is what requires the plaintiffs to show discriminatory intent. If any of the plaintiffs in this case or any of the numerous other cases currently pending in the Court of International Trade take this up to the Supreme Court, that seems to be the weak link to attack. Of course, I know the lawyers involved in this case, and I am pretty confident that they are way ahead of me on that point.

Thursday, June 13, 2013

Equal Protection Claims Dismissed

My goal here has never been to be a source of breaking news, but it happens occasionally. In this case, I want to let you know that the Court of Appeals for the Federal Circuit has dismissed appeals challenging the constitutionality of separate and unequal tariffs for certain items of apparel.

The decisive utterance of the opinion is:

Neither Rack Room nor Forever 21 has pleaded facts sufficient to make plausible their claim that Congress enacted the relevant provisions of the HTSUS with discriminatory intent, and we therefore affirm the dismissal of their claims [by the Court of International Trade]. Skiz's appeal is dismissed for lack of standing.

A detailed analysis will follow. For now, you can read the opinion here.

Thursday, June 06, 2013

The Customs News

Some of this is old-ish, but still may be of interest.

Customs has opened the last three of its planned Centers of Excellence and Expertise. The new CEE are in Atlanta (Consumer Products and Mass Merchandise), Miami (Agriculture and Prepared Products), and San Francisco (Apparel, Textiles, and Footwear). If you are currently participating in a CEE, please post a comment as to how you think it is working and whether you see any benefits yet.

President Obama Seeking to Strengthen Enforcement of ITC Exclusion Orders. According to a White House announcement, the Administration has taken a number of steps to improve the enforcement and administration of the patent laws. One such step involves asking the U.S. Intellectual Property Enforcement Coordinator to undertake a review of current Customs and Border Protection and International Trade Commission procedures used to evaluate the scope of an ITC exclusion order for enforcement purposes. This is an interesting issue as it is not always clear which agency has the final say and whether an exclusion results in a protestable event for purposes of judicial review in the Court of International Trade, as recently happened in the Corning Gilbert case.