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.