Wednesday, March 27, 2013

Kirtsaeng II, the Dissent

Kirtsaeng, discussed in this prior post, was not unanimous. Justice Kagan wrote a concurring opinion in which Justice Alito joined. Justice Kagan's main point is to recognize that the Court's decision significantly narrows the ban on the unauthorized importation of copyrighted works found in 17 U.S.C. § 602(a)(1). She believes, however, that the source of that problem is not the decision in Kirtsaeng, but the prior decision in Quality King v. L'Anza, which upheld the notion that the first sale rule trumps the ban on importation.

Justice Ginsberg wrote a dissenting opinion in which Justice Kennedy Joined and Justice Scalia joined in part. In Justice Ginsberg's view, the Court should not have embraced the theory of international exhaustion of copyright. Further, the dissent suggests that the "parade of horribles" the majority envisions are largely imaginary.

Regarding the scope of the first sale doctrine (i.e., "exhaustion"), the dissent notes that the Court in the prior Quality King case distinguished between copies of works made in the United States and copies made abroad. The Quality King Court stated that copies made abroad are not made "under" the U.S. copyright law and, therefore, the first sale rule does not apply. The majority dismissed this part of Quality King as not necessary to the prior holding and, therefore, not controlling here. Justice Ginsberg, however, would have held, consistent with that language in Quality King, that the first sale rule of section 109 does not apply to copies made outside of the United States. Doing otherwise, she stated, reduces the scope of the importation ban to cover only "larcenous lessees, licensees, consignees, and bailees of films and other copyright-protected goods." According to the dissent, that is not the scope of protection Congress intended to provide to copyright holders.

A final--and, for this blog, interesting--aspect of the dissent is the point that the United States clearly does not want the importation ban to be so limited. Evidence of that is that the U.S. has adopted the position in international trade negotiations that countries should have the right to bar the importation of copies of copyright works sold abroad. The U.S. advanced this argument at the WTO in conjunction with the Agreement on Trade-Related Aspects of Intellectual Property ("TRIPS"). Justice Ginsberg stated that she would "resist a holding out of accord with the firm position the United States has taken on exhaustion in international negotiations."

If this is truly the firm position of the United States, it is fair to assume that Congress may take up this issue. If that happens, we may see a legislative effort to put some teeth back into the ban on the unauthorized importation of copyrighted works.

Lastly, in my first post on this case, I mentioned a that there was something interesting about the district court judge in this case. The case was first heard in the Southern District of New York by Donald C. Pogue, Chief Judge of the U.S. Court of International Trade. As I have mentioned in the past, judges of the Court of International Trade are appointed by the President for life under Article III of the Constitution. As such, they are fully empowered district court judges who can, when given permission by the Chief Justice, sit by designation in any federal court that wants them. CIT judges provide an important service to the judiciary and the public by serving as judges in the various district and circuit courts around the country.
 

Tuesday, March 26, 2013

Messin' with Customs

Link Snacks, Inc. v. United States is a straight forward and very frustrating case from the Court of International Trade. The sole question is whether beef jerky made of dehydrated cured beef is classifiable as cured beef (1602.50.09, 4.5%) or as other beef (1602.50.20, 1.4%). The problem for the plaintiff is that the beef is undeniably cured and that not all beef jerky is made of cured beef. Further, there is no tariff item specifically addressing dehydrated beef or beef jerky. Thus, the alternative is between an eo nomine classification for cured beef (which this is) and a basket provision for other beef (excluding corned beef). Given that "other" means beef that is not cured or pickled and that this jerky was cured, the plaintiff had a tough case.

Plaintiff made several solid arguments about the essential nature of beef jerky. What turns a meat into jerky is not curing. Rather, it is the dehydration that turns it into the well know tough strips of meat leather beloved by Sasquatch and Sasquatch pranksters. This lack of moisture is what defines jerky regardless of whether the meat is or is not cured.



According to the Court of International Trade, there was evidence introduced showing that other jerky producers do not use cured meats. Consequently, this creates an opportunity for Link Snacks to engage in some tariff engineering. If it produced jerky from un-cured meats, it would seem that its jerky would qualify for the lower rate of duty. That makes me wonder whether the sudden prevalence of uncured pepperoni and salami in my market has more to do with tariff rates than with artisanal charcuterie.

The reason this case is frustrating is that the tariff schedule does not appear to be designed to recognize beef jerky as a food item. As was mentioned above, the defining characteristic of jerky is its low moisture content. There should be a breakout under cured and uncured meats for dehydrated meat to account for jerky products.

Further, I am confused by tariff item 1602.50.10 which covers uncured meat, corned beef. Corned beef is a salt cured beef product.  The Link Snacks case is very clear that the addition of salt and nitrate to meat is the definition of curing. Corned beef appears to contain both. See this federal government discussion of the allowable amount of nitrate in corned beef. To that extent, Heading 1602 appears to have a problem in that it is treating corned beef, eo nomine, as uncured meat.

The only way I can reconcile that is by assuming that the corned beef of 1602.50.10 is not treated with both salt and nitrate while cured corn beef (i.e., with both salt and nitrate) would be in 1602.50.09. Unfortunately, that does not seem to be the case as this ruling involves corned beef that is treated with both salt and nitrate but is classified 1602.50.10 as an uncured meat. Here is a similar ruling.

I can't find a single ruling in which corned beef was treated as cured meat. I know it is incorrect to compare two tariff items at different levels of indentation. The comparison here is between cured and other, not between cured and corned beef. Still, the fact that a cured meat is specified at the same eight-digit level as corned beef makes me think that the "cured or pickled" meat of 1602.50.09 might mean something different than what it seems to mean.

Corned beef notwithstanding, on its face, the jerky in this case was cured and that would exclude it from 1602.50.20, which is what the Court of International Trade held.

When are Pants Not Pants?

This has been an interesting issue for a while now. It started when the Court of Appeals for the Federal Circuit declared that hockey pants with built-in pads were not classifiable as wearing apparel, but as hockey equipment. That was in a case called Bauer Nike Hockey USA, Inc. v. United States, back in 2004. At that time, I was pretty certain that a lot of sports-specific clothing was going to end up classifiable as sports equipment on the basic premise that it is not easily or comfortably worn in other settings and is necessary or appropriate for participation in the sport.

Unfortunately, the Federal Circuit had other ideas. In Lemans Corp. v. United States, the Federal Circuit held that motocross jackets were not sports equipment because, unlike the hockey pants in Bauer Nike, they did not incorporate protective pads or guards.

Recently, the Court of International Trade had to wrestle with the classification of football pants and jerseys in Riddell, Inc. v. United States. The pants at issue contained four interior sleeves designed to hold thigh pads and knee pads. However, at the time of importation, the pads were not included in the garments. The pants were cut to accommodate other pads including an athletic cup. The jerseys were designed to accommodate shoulder pads and to hold the pads snugly to the body. But, when imported, the jerseys contained no padding. Based on Bauer Nike (and arguably on Lemans), Riddell argued that these articles should be classified as football equipment in 9506.99.20, which is duty free. The alternative classifications carry rates of duty ranging from 14.9% to 32%.

First, we should make it very clear that this case can be decided on the basis of General Rule of Interpretation 1. We would be wrong to jump to a discussion of whether "football equipment" is  more less specific than, for example, "other garments." It is more specific, but that is not relevant. What matters here is that Note 1(t) to Section XI precludes articles of Chapter 95 from classification in Chapters 61 and 62. Similarly, Note 1(e) to Chapter 95, precludes the classification of wearing apparel in that chapter. Consequently, the sections are mutually exclusive with respect to this merchandise and, if the goods are football equipment, they must be classified in Chapter 95.

The only binding definition of "sports equipment" that can be applied to "football equipment" comes from the Federal Circuit's decision in Bauer Nike. In that case, the Federal Circuit held that sports equipment is merchandise that is "necessary, useful or appropriate" to that sport. In Lemans, the Federal Circuit further narrowed the definition by stating that "sports equipment" is not "apparel-like" in nature and is almost exclusively for the protection of the participant. Examples include fencing masks, knee pads, and shin guards. As nicely summarized by the Court of International Trade:

"[S]ports equipment" is defined as non-apparel-like merchandise that is necessary, useful or appropriate for a sport, and if the merchandise is worn by a user, those articles are almost exclusively protective in nature and would complement, or be worn in addition to apparel worn for a particular sport.

According to the Court of International Trade, Riddell's imported merchandise does not meet the definition of football equipment. Specifically, the merchandise is apparel-like in nature and is not almost exclusively protective in nature. Football pads themselves would likely meet this definition, but not the garments imported without the pads. Further, the garments are not "parts" or "accessories" of the pads.

This, of course, creates the opportunity to test the definition further by asking whether the inclusion of the pads in the garments at the time of entry (or even just in the same shipment) might have produced a different result. Given that hockey pants are reasonably apparel-like but included significant padding, similarly configured football pants might also be classified as sports equipment. This also raises questions about other kinds of sports-specific apparel that contains permanent or removable task-specific padding that performs an important protective function. Would that include soccer goalie shirts, which incorporate elbow padding? What about bike shorts and bibs, which are remarkably uncomfortable to wear off the bike, usually include no amenities such as pockets or a fly, and contain a large and expensive protective pad? These are cases that should be carefully considered, especially given the high rates of duty applicable to apparel.

In the end, Bauer Nike remains valid case law and articles similar in nature to hockey pants may be classifiable as sports equipment. If you are an importer of sport-specific equipment, it makes sense to try and apply this decision to your product.

Wednesday, March 20, 2013

Kirtsaeng SCOTUS Analysis

The background to Kirtsaeng v. John Wiley & Sons, Inc. is interesting. This is a copyright case involving the unauthorized importation of textbooks. Wiley is a publisher of textbooks in both the U.S. and various foreign markets. Some of the books it sells in foreign markets are produced abroad and contain notices stating that the books are intended only for sale and distribution in specified non-U.S. markets. The notice further states that exporting the book to an unauthorized market, presumably including the United States, is a violation of the publisher's copyright.

Supap Kirtsaeng was a Thai student in the United States. To supplement his income, Kirtsaeng asked friends and family in Thailand to send him English-language versions of textbooks offered for sale in Thailand at prices that were lower than the price for a comparable book in the United States. Kirtsaeng would then resell the book, reimburse his supplier, and keep the profit. This is a fairly typical example of a small parallel import, or gray market, operation. Wiley sued Kirtsaeng for copyright infringement on the basis of the unauthorized importation of the books. After a trial, Kirtsaeng was found to have infringed Wiley's copyrights and he was assessed $600,000 in statutory damages. [More on the District Court judge below. Spoiler Alert: Court of International Trade judges turn up in interesting places.]

To make sense of this, we need to discuss a little copyright law. In the U.S., copyright law grants to the author of an original work of authorship certain exclusive rights including the right to distribute the work to the public. 17 USC 106(3). The rights, however, are subject to important limitations. For purposes of this case, the relevant limitation is that:
Notwithstanding the provisions of section 106(3) [the section that grants the owner exclusive distribution rights], the owner of a particular copy or phonorecord lawfully made under this title . . . is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy or phonorecord.
This is the "first sale doctrine" of  17 USC 109. The first sale doctrine is why you can buy a book and then give it to someone as a gift without violating the copyright holder's distribution right. It also allows for used book stores and libraries. Keep in mind that purchasing a copy of a copyrighted work does not give the purchaser the right to make additional copies, derivative works, or other uses of the work.

In a prior decision called Quality King v. L'Anza, the Supreme Court held that the first sale doctrine permitted the importation of copyrighted products that were made in the United States without the authorization of the copyright holder. This case is based on facts that are slightly but importantly different. The books Kirtsaeng was importing were not produced in the United States. Thus, the question to be answered was whether the books were "lawfully made under this title" as that phrase is used in section 109(a). If not, then the first sale doctrine would not protect Kirtsaeng's business.

The Supreme Court, via Justice Breyer, parsed this question as whether the first sale doctrine is based on the geography of where the Copyright Act applies (i.e., the United States) or on whether the copies were produced in a manner consistent with the Copyright Act regardless of the physical location of production. According to the Court, "under this title" means "in accordance with."

The Court found that inferring a geographical limitation in the statute requires unacceptable linguistic gymnastics. Specifically, the Court found no reference to location in the plain language. "Under," according to the decision, does not mean "where." Further, the Copyright Act can be "applicable" to works outside of the United States. The Court gave as an example the Copyright Act being applicable to an apparently as-yet unpublished Irish manuscript lying in a desk drawer in Ireland. In support of this analysis, the Court noted that adding a geographic element to the first sale doctrine would mean that an individual who purchases a bumper sticker in Europe would not be able to legally display it in the United States. Similarly, a professor would not be able to show a foreign made movie in a film class.

Based on this review of the law, the majority of the Supreme Court held that the sale of the lawfully made textbooks in Thailand exhausted the copyright holder's ability to control the distribution of those copies. As a result, the distribution right does not prohibit the importation and resale of the books in the United States.

With respect to works primarily protected by copyright, this decision further narrows the protections afforded copyright holders. Under this decision, owners of foreign made legitimate copies of works may import those works without the authorization of the copyright holder. That means that the ban on unauthorized importations now limits only importations by parties who do not own the work. That might apply, for example, to those who possess licensed software, foreign printers who produce but do not own books, thieves, and librarians. It is not clear whether this was what Congress intended and there is obviously friction between the first sale doctrine and the distribution right.

In the end, for readers of this blog, I suspect the decision will have limited impact. This is most important to literary works, film, software, music, and art. These are not the kinds of articles usually imported by the container load (although that certainly happens). Nevertheless, Quality King v. L'Anza involved salon products with a copyrighted label. Thus, the copyrighted element need not be the primary product involved.

To the extent these products are also subject to enforceable trademarks (e.g., the word mark "WILEY"), the trademark provides another avenue for possible enforcement. However, the law is pretty clear that (with some exceptions) genuine products bearing an authorized trademark that are not materially different from the same product offered for sale in the United States are admissible gray market products. The idea behind pursuing this issue on a copyright theory may well have been to get around that perceived trademark loophole. Mr. Kirtsaeng seems to have taken the wind out of those sales. Now that the Supreme Court has spoken on the issue, it will be up to Congress to change the law if that is what it wants to do.

Tuesday, March 19, 2013

Breaking News: SCOTUS Decision on Parallel Imports

On March 18, the Supreme Court issued a decision in Kirtsaeng v. John Wiley & Sons. The Court held that the first sale doctrine of copyright law applies to works made abroad. This means that importers can purchase legitimately made copyrighted works abroad and import them without the permission of the copyright holder. That is good news for retail companies that import legitimate products through parallel channels.

Analysis to follow.

Sunday, March 17, 2013

At Last! We have solved the Kinder Egg Crisis

Since 1938, chocolate eggs molded around a toy surprise have been illegal to import into the United States. These items are deemed too dangerous for kids due to a potential choking hazard and also the toy is in direct contact with the food, which upsets the Food and Drug Administration.

Today, we are happy to announce that an entrepreneur has solved the problem of the banned Kinder Egg. Behold the Choco Treasure. Using good old American engineering know-how, the Choco Treasure satisfies both the Consumer Products Safety Commission and the Food and Drug Administration by encapsulating the toy in a plastic holder inside the chocolate egg, which separates when eaten to reveal the contents.

I am certain that the folks at Customs and Border Protection are happy to see this advancement in science. Every year, the agency publishes notice that the Kinder Egg is contraband and seizes many at the border.

Good going Choco Treasure. More here.

Patents Sneak into the Court of International Trade

I have been sitting on Corning Gilbert for a while. But, it is time we tackle it.

First some background. I fascinated by intellectual property law and initially planned to practice in that area. I even spent a little time in a firm doing copyright work. But, I had the great opportunity to clerk at the Court of International Trade and never looked back. Except that I did manage to get an LL.M. in Intellectual Property Law. Today, I get to exercise that knowledge and interest in cases involving the border enforcement of intellectual property rights by U.S. Customs and Border Protection. That almost always means copyright and trademarks. But, there are occasions when patent issues creep out of the International Trade Commission and into the Ports or the Court of International Trade. Corning Gilbert is one of those.

The case involves a decision by Customs and Border Protection to exclude certain coaxial cables from the commerce of the United States on the grounds that the connectors are within the scope of a General Exclusion Order ("GEO") issued by the International Trade Commission. The GEO prohibits the entry of merchandise infringing claims 1 or 2 of this patent (click to see what we're talking about).

When Customs excluded the goods, the importer filed an administrative protest with an Application for Further Review. That resulted in a ruling and a denied protest. The denied protest is appealable to the Court of International Trade, which is exactly what Corning Gilbert did.

In Court, there were three issues. First, whether the ruling Customs issued is entitled to judicial deference. In customs cases involving a denied protest, a ruling may be entitled to deference if it is logical, consistent, and otherwise has the power to persuade the Court. In this case, the Court did not find the ruling to be persuasive and gave it no deference. The reasons for this are quite technical and relate to the nature of the original action at the ITC.

A domestic rights holder can bring an action in the ITC to prevent the importation of merchandise that infringes a patent, trademark, copyright, or certain other rights. These are brought under 19 U.S.C. § 1337 and they are called "337 cases." In the vast majority of 337 cases, the ITC hears patent-related cases. If the rights holder is successful, the ITC can issue an Exclusion Order to preclude the importation of the subject merchandise. However, in other case, the ITC may provide broader relief and grant a General Exclusion Order covering infringing merchandise in general. A GEO covers goods the ITC specifically found to be infringing and other infringing goods. The decision as to what other goods are infringing is left to Customs and Border Protection, which has to enforce the order. In this case, Corning Gilbert was not a party to the 337 action and its merchandise was never considered by the ITC. Further, when Customs reviewed the merchandise, it did not do a thorough analysis of the patent claims (the legal definition of the invention) to determine whether the Corning Gilbert merchandise infringed. Consequently, the Court of International Trade found the CBP ruling to be unpersuasive.

The second step in the Court's analysis was to construe the patent claims to determine exactly what is protected. That is a necessary step before deciding whether the imported goods infringe the protected invention. In this case, the Court found that the critical element of the invention was a cylindrical body member of the relevant coaxial connector.

 


Finally, the Court had to determine whether the imported merchandise infringed the patent. Finding that the imported merchandise does not include a deformable cylindrical body member as described in the properly construed patent claims, the Court concluded that the imported goods do not infringe the patent. Consequently, Customs improperly excluded the goods from the U.S.

There are a couple of things that follow from this case worth noting. First, the actual patent holder was not involved. This is because the case arises out of a denied protest. The importer made the protest and became the plaintiff. Customs denied the protest and became the defendant. The only role for the patent holder would be as an amicus third party, which did not happen in this case.

Second, note that the importer may have benefited from not participating in the ITC proceeding. Had it done so, the ITC might have rules specifically with respect to its products. That would have made the CBP ruling far more persuasive and might have turned the case. That raises a question as to whether the best strategy for an importer might be to ignore the ITC and fight the good fight with Customs and in the CIT. I don't know the answer to that, but I suspect we will find out over time.

Monday, March 11, 2013

A Non-Protestable "Exclusion"

Just because Customs and Border Protection rejected an importer's attempted entry of merchandise, that does not mean it was "excluded" for purposes of filing an administrative protest. That is the lesson of Sunshine International Trading v. United States.

Sunshine is an interesting case in that the plaintiff asked the Court of International Trade to review the denial of a protest concerning the rejection of an entry. Keep in mind that a rejection is not a liquidation, meaning that it is basically Customs telling the importer to resubmit the (usually virtual) paperwork for some reason. In this case, it was because the invoices did not properly describe the merchandise and Customs believed that the reported value was incorrect.

Sunshine filed a protest challenging the rejection of its entry of women's jeans. Apparently, the focus of the protest was on the reappraisal of the jeans from $2.70 per pair to over $6 per pair. Customs denied the protest in full and also stated that it had been erroneously filed. Customs also referenced an unrelated regulation as the basis for denying the protest. Sunshine brought the denied protest to the Court of International Trade for judicial review.

As with all federal cases, an initial question is whether the Court has subject-matter jurisdiction to review the case. In this case, that means whether there was a proper protest that was, in fact, denied. Importers may protest the "exclusion of merchandise from entry or delivery" under 19 U.S.C. § 1514(a)(4). Sunshine claimed this to be an exclusion from entry or delivery.

It turns out that "exclusion" is not defined in the law. However, the Court found that an "exclusion" is a final determination by Customs that the merchandise may not enter the United States for some serious policy reason, which is usually codified in a law or regulation. The Court relied, in part, on a prior cases called Tak Yuen Corp. v. United States, in which the entry was rejected when the importer failed to deposit estimated antidumping duties. There, the Court found no exclusion because the importer was able to correct the papers and resubmit the entry. In this case, the Court found that the rejection of the entry was not a final determination. Rather, it was a notification to Sunshine of defects in the papers and was coupled with an invitation to resubmit the entry. Consequently, the Court of International Trade held that there was no exclusion from entry.

Sunshine made a second technical and interesting argument. According to Sunshine, this was an exclusion from delivery, which is distinct from an exclusion from entry. The Court agreed that an exclusion from delivery is a separate legal determination. Nevertheless, because the goods had not been entered and Sunshine did not have a legal right to immediate delivery, there was no right of delivery that had been subject to exclusion.

Because the rejection of the entry is not the legal equivalent of an exclusion, Sunshine did not have the right to file a protest under 19 U.S.C. § 1514(a)(4). Consequently, there was no valid protest for Customs and Border Protection to deny. That means, there was no jurisdiction for the Court of International Trade to exercise its role of reviewing actions by CBP. Thus, the Court dismissed the case.

On the way to dismissing the case, the Court of International Trade let Customs know that it mishandled the protest. According to the Court, Customs sent several confusing messages when it denied the protest, gave a spurious reason for the denial, and noted that the protest was made in error. The better approach would have been for Customs to reject the protest (as it had the entry) as not having been addressed to a protestable event. That would have notified the party of the problem and possibly provided an opportunity to perfect the entry and make a valid protest of the liquidation.

This makes me wonder what an importer would do if faced with a situation in which Customs and Border Protection incorrectly deemed a protest to have been filed in error and, therefore, to be in valid. Would the rejection date count as a de facto denial for purposes of judicial review? There would have to be some mechanism by which the importer can get to Court to show that the protest was, in fact, valid. Otherwise, Customs could avoid judicial review by declaring protests to be invalid. Perhaps, faced with that circumstance, jurisdiction would attach not from the denial of the protest but under the Court's residual jurisdiction provided for in 28 U.S.C. § 1581(i). That will have to wait for an appropriate case to be resolved.

In the end, this case should sound familiar to students of administrative law. It mean, effectively, that an entry rejection is not a final determination subject to protest. The most likely consequence of this case is that future importers who receive rejection notices will know to correct the papers to get the entry processed and then to file a protest of the liquidation of the entry. That protest, if timely and sufficiently detailed, will be subject to judicial review.