Friday, May 31, 2013

The Problem with Test Cases: Deckers

UPDATE: On rare occasions, this blog generates a more detailed discussion about a particular case. This is one of those occasions. After talking it through with a respected and knowledgeable practitioner, I think a clarification is necessary. That clarification is as follows: This decision got me thinking about test cases and what it means to suspend a case under a designated test case. I used that opportunity to expound on this unique aspect of customs practice. But, in doing so, I did not make it clear that the result in Deckers did not depend on the fact that it had been suspended under a test case. Rather, the plaintiff filed a complaint. That moved the case out from suspension and after which it proceeded along as would any other case at the Court of International Trade. The decision in the test case did not ipso facto control the outcome. Instead, the Court decided the government's motion for summary judgment on the merits, which was also consistent with the decision in the test case. That is a meaningful distinction that I am happy to clarify. That said, I have made some adjustment below.

The Court of International Trade has a few unique rules of practice. Chief among those is Rule 84, which permits a party to designate an action as a "test case" and suspend other cases pending the outcome of the test case. In customs litigation, this can be a handy tool. As you might imagine, most importers do not have a single entry or even a single protest worth bringing to Court. Typically, it is hard to justify litigation unless there are many entries at issue. Obviously, that may take time to pile up and all the while the statute of limitations is running. Also, it is usually highly inefficient to have to litigate each denied protest separately if the same issue of law and facts are presented.

The test case procedure can even be used by an unrelated party importing similar merchandise. That, by the way, is a very cost-efficient way to challenge Customs and Border Protection. The second importer can effectively ride the coat tails of the first importer who is pursuing the case. Of course, the downside is that you have little control over how the case is presented. And, if the plaintiff in the test case loses, the second importer may have trouble getting out from under it.

I am thinking about test cases because of Deckers Corp. v. United States. That case involved the tariff classification of athletic sandals. The test was case decided in 2007 and affirmed in 2008.  I am shocked to say that I apparently did not do a post on the test case. I find that very hard to believe.

In the new decision, the United States has moved for summary judgment to dismiss in a previously suspended case on the basis of the decision in the test case. According to the United States, consistent with the earlier decisions, the athletic sandals are "shoes" but are not "tennis shoes, basketball shoes, gym shoes, training shoes and the like" for purposes of tariff classification because they have open toes and open heels. Consequently, the government maintains that as a matter of law the sandals cannot be classified in 6404.11.80, no matter how useful they may be in athletic endeavors.

Faced with the decision in the test case that sports sandals are not like the listed exemplars in 6404.11.80, the Court of International Trade turned to the motion to suspend the current case under the test case. In that motion, the plaintiff stated that the "test case involves the same plaintiff, the same defendant, the same class or kind of merchandise, i.e., sports sandals, and the same claims."

Thus, the Court of International Trade found that the controlling law and these representations did not permit the plaintiff to recover. Consequently, it dismissed the case.

In this case, the plaintiff lifted the suspension by filing a complaint in an effort to pursue the case on its merits. Consequently, it is true that the status of the case having been suspended did not control the outcome. Nevertheless, the Court did take note of plaintiff's prior representations that the case involved the same class or kind of merchandise. That is a somewhat cautionary tale about the test case/suspension process; although probably not as big a deal as my first draft of this post would have you think.

Procedurally, there are alternatives for plaintiffs. One possibility is to only suspend cases when it becomes necessary to take some action after filing a summons (which is usually 18 months). See Rule 83. This can avoid putting all of your denied protest eggs in one test case basket. Should the importer lose the first test case, it can (within limits) pursue the remaining cases as if the test case never happened. That is because, unlike possibly any other court in the country, the Court of International Trade does not accept the legal notion of res judicata. That means, as long as the case is not frivolous, either side can bring up the same issue again. At some point, stare decisis kicks in and the plaintiff risks seriously annoying the Court. But, as a technical matter, serial litigation of the same issue is possible and sometimes beneficial at the Court of International Trade.

If you are interested in the background on res judicata in the Court of International Trade, at least from the perspective of a Department of Justice Lawyer, take a look at this paper from the 15th Judicial Conference of the Court.

Wednesday, May 29, 2013

Law Speeds Getting Snakes on a Plane (for Export)

H.R.-2158, the Expedited Departure of Certain Snake Species Act, has been introduced in to Congress. The intent of the law is to create a Lacey Act exemption allowing for the expedited shipment of invasive snake species out of the U.S.

Speaking as someone who watches a fair amount of Animal Planet, I hope this becomes law.

Monday, May 20, 2013

A Day Late and an Abomination Short

May 19 was Tariff of Abominations Day, a holiday I created for customs and trade compliance people. I hope you enjoyed yourself.

If you are wondering what I am on about, please read this post from May of 2008. And, if you are sufficiently Nerdist to get the reference, it has nothing to do with Emil Blonsky.

Credit: Marvel Comics

A Laser-Like Focus on Questions of Law

The Court of International Trade's recent decision in EOS of North America v. United States has a few interesting bits of legal analysis in it.

The underlying facts of the case are simple enough. The EOS imported devices called "laser sintering machines." In more common terms, these are advanced 3D printers used to rapidly produce metal and plastic prototypes and other custom products from powdered raw material. A computer in the system interprets a three-dimensional mathematical model of the finished object and then directs a laser to melt the powder in a patter that corresponds to a thin layer of the finished object. When that layer is complete, the surface is recoated with powder and the laser melts the next layer of material. In this way, known as additive manufacturing, the system build up a possibly quite complex three-dimensional object.

If you want to know how this cool technology works, watch this video:

The dispute here is whether these machines are properly classified as laser welding machines of HTSUS Heading 8515, which is what the plaintiff wanted. Customs classified the machine designed to produce metal objects as a machine tool of Heading 8463 and the machine designed to produce plastic parts as machinery for manufacturing products from plastic of Heading 8477. In all cases, there was an alternative classification available in Heading 8479 as machines having individual functions not elsewhere specified in Chapter 84.

The first major issue for the Court of International Trade was to determine whether the machines perform welding as that term is used in Heading 8515. Other disputes included whether the machines "work" metal as that term is used in Heading 8463, which requires that the machine tools be for "working metal." In this context, the Court made an important statement:
The court’s analysis of whether, for tariff classification purposes, the M270 is a laser beam welding machine or machine tool and whether the P390 is a welding machine is not affected by the parties’ use of their respective, suggestive terms. Mere use of such terms does not, as a factual matter, impart the characteristics of a “welding” process or a machine tool that “works” metal. Thus, the use of those terms does not create a genuine dispute as to any fact material to the tariff classification of the subject merchandise.

What this means is that the parties' squabbles over who calls the machines what and what language individuals use to describe the product does not create a factual dispute as to the true nature of the product. In other words, the fact that the plaintiff may use the language of the favorable tariff heading to describe its product does not mean that the product has those characteristics. Similarly, the fact that Customs may chose to describe the product in ways that are more similar to its preferred heading does not actually say anything about the nature of the product. Rather, where there is objective evidence of the nature of the product, that will resolve the factual issues relating to what the merchandise actually is. Parties should remember this when pushing definitions on each other during depositions and other parts of discovery.

With respect to the definition of the word "welding," which is key to this dispute, the Court makes another important statement, this time in footnote 10:
Defendant also raises an objection to plaintiff’s proposed definition of the word “welding.” . . .  However, the scope and meaning of this term as used in the article description of heading 8515 is a question of law and therefore does not give rise to a genuine issue of material fact.

This is a signal that the parties need to recognize that the meaning of tariff terms will be sorted out by the Court based on prior court decisions, dictionaries, technical publications, and other reliable lexicographical sources as a matter of law. Again, this is a reminder to the litigants that not all disagreements raise questions of fact that merit any attention in discovery or would preclude a decision by the Court on the merits of the case. The Court makes similarly short work of disputes over the meaning of "sintering" and descriptive terms used by plaintiff including "state of the art" and "cutting edge." None of these disputes present meaningful questions because the terms are not used in the tariff headings under consideration or will be determined by the Court as a matter of law. Thus, the Court found no material issues of fact in dispute.

Turning to the legal questions, the Court first found that the M270, which is the machine designed to make parts from metal powders, is not a machine tool of Heading 8463. According to the Court, "machine tools" are machines that use tooling to shape solid work by removing material or deforming material. Based on various definitions, the Court found that machine tools perform work on solid objects rather than powders.

Defendant argued that the M270 is an advanced form of a machine tool, similar in nature to other computer driven machine tools that do not employ traditional tools. Example of this type of machine tool include electron-beam machining and laser machining. The Court, however, rejected that argument as overly broadening the meaning of "machine tool." Consequently, the Court held the M270 is not a machine tool.

The Court then turned to whether the device is a laser welding machine. On this issue, the Court looked at a number of dictionary definitions, the Explanatory Notes, and other sources to find that welding is the joining of solid surfaces through the application of heat. In the case of the EOS M270, the solid material is the individual powder particles. When heated, these particles completely melt. As a result, the Court could not find solid surfaces being joined. Consequently, the Court rejected 8515 as an applicable heading.

Having excluded the M270 from classification as welding machines and machine tools, the Court found it to be classified in heading 8479 as an other machine not described elsewhere in the Chapter. The Court provides readers with an excellent example of detailed classification work when it applies General Rule of Interpretation 6 to arrive at the appropriate tariff item for the machine.

Turning to the P390, which is the machine used to produce plastic parts, the Court finds it is squarely within the terms of 8477, which covers machines for the manufacture of products from plastics. Having found that the process employed by EOS machines is not "welding," the Court excluded 8515 from consideration. Consequently, the machine is properly classified in 8477.

Friday, May 10, 2013

Ugg. A Decision on Boots.

When last we considered the tariff classification of Ugg Classic Crochet boot, the Court of International Trade held that the boots are "of the slip-on type" and, therefore classifiable in HSTUS item 6404.19.35. Ugg appealed to the Court of Appeals for the Federal Circuit, which has now affirmed the CIT.

First, a note on usage. The Federal Circuit almost uniformly refers to the Court of International Trade as the "Trade Court." I wonder why that is. I am not aware of any practitioners who appear before that Court using that phrase. I think the common usage is either "CIT" as the shorthand or "Court of International Trade" in full. But, I like "Trade Court" and think I will adopt it (within the limits of satisfying Google that this is a place to find information on the Court of International Trade). Second, in this case, the majority decision decided to refer to HTSUS item 6404.19.35 as "subheading 19.35"). That is very much in line with the practice in which patent numbers are truncated for simplicity. I kind of like that approach, but would add an apostrophe as they do in patent practice. Thus, I would say "defendant argued for classification in subheading '19.35." Of course, that only works when you are talking about subheadings in a single heading.

The legal question here was whether the Ugg boots are "of the slip-on type that is held to the foot without the use of laces or buckles or other fasteners."

Deckers contended that slip-on footwear covers shoes, presumably loafers, slippers, and similar non-laced shoes that the wearer steps into without much in the way of assistance. Further, Deckers argued that the boots were not "slip-on" because getting into them requires that they be pulled on with the hands.

On the first point, the Court noted that the general term "footwear" is broader than shoes and, on its face, would cover boots as well as shoes. According to the Court, had Congress intended only to cover slip-on shoes and not boots, it would have said so. Further, the Court said that the definition of slip-on footwear in Treasury Decision 93-88  includes boots and, because it has been consistently applied, was persuasive.

Deckers argued that the term "slip-on" is not used in the industry to refer to boots. In an important bit of analysis, the Federal Circuit reviewed a number of retail web sites as examples of common and commercial usage. This is important because the Court did so in an effort to cite "reliable sources" of the meaning of the term. The reason this is important is that classification cases sometimes get bogged down on questions relating to the admissibility of evidence showing usage because it is very difficult properly lay a foundation for an advertisement. Typically, an ad is not a business document of the importer, the author is unknown, and the ad does not run in a publication that is known to be authoritative and reliable. So, one side or the other might object on the grounds that anything said in the ad is inadmissible hearsay.

It's not. The reason it is not is two fold. First, this is not evidence of a fact that is in dispute. In the context of this case, it is not important whether the particular shoe or boot being advertised might in fact be slipped on one's foot. Rather the issue is whether the term "slip-on" is commonly and commercially used in connection with boots. Because we are not using an out-of-court statement to prove the truth of the matter asserted, it is not hearsay. Second, the Court decides the scope of the tariff terms as part of its task of construing the law. In my view, there really should not be disputes over these sorts of examples of usage. The only real question should be whether the Court deems the example to be reliable. In other words, when making decisions as to the meaning of the law, the Court is not relying on evidence in a legal sense but on its understanding of the English language.

Deckers' next argument was that a boot that must be pulled on using the hands cannot be "slipped-on." Unfortunately, the Court of Appeals noted that many articles of clothing that are consider to be slip-on require the use of the hands. The best example is gloves, which require some effort to get on.

Related to this is a grammar argument over the words "that is" in the tariff language. The question is whether the words "that is" in the phrase "of the slip-on type, that is held to the foot without the use of laces or buckles or other fasteners" signal that "held to the foot without the use of laces or buckles or other fasteners" defines "slip-on type." In that interpretation, "that is" means i.e. and should have been set off by commas before and after. On the other hand, if the second phrase merely qualifies "slip-on," then to be classifiable in this provision the footwear must be BOTH slip-on and without fasteners. That is an interesting question.

In the Court's view, Congress should have inserted commas. Otherwise, according to the Court, other language in the tariff becomes meaningless. For example, the heading covers footwear with open heels. These are obviously slip-on and would be included in '19.35 (see how well that works?) without the need to specify that they have open heels. While that makes sense, I am not sure I see how it resolves the argument about what "that is" means. In fact, I think the dissent is right on this point.

The case includes one final interesting (at least to me) bit of procedure. This is a decision on a motion for summary judgment. That means that one party, in this case the government, believed that the only open question was the proper interpretation of the tariff and that no material facts were disputed. The Federal Circuit agreed that there are no disputes as to the material facts regarding the physical nature of the boots; leaving only a question of statutory interpretation. In that context, the Federal Circuit said that the Court of International Trade "may examine many resources to ascertain the common meaning or commercial understanding of a particular tariff term . . . . a court may consult dictionaries, scientific authorities . . . and lexicographic and other materials." This again is a good statement as to the job of the Court of International Trade in these cases and the fact that the Trade Court (see that?) is pretty free to roam where it wants to find the meaning of the tariff. Deckers, unfortunately, did not present enough evidence to refute the agreed-upon facts and, as a result, the Court of International Trade granted the government's motion for summary judgment over Deckers' assertion that, if a trial were held, it could present more contrary evidence.

As has been the case recently, I like the dissenting opinion here. Judge Dyk believes that if Congress had intended the subheading to cover all slip-on footwear defined as footwear without laces or buckles or other fasteners, then there would be no need for the HTSUS to add the phrase "slip-on," because that would be co-extensive with footwear lacking laces, etc. According to Judge Dyk's dissent, the subheading covers footwear that can be slipped on without external assistance (such as the use of the hands) AND that lack fasteners. A slip-on shoe with fasteners would be excluded.

Saturday, May 04, 2013

Victoria's Secret is Tariff Classification

Remember my post on the question of whether a fit model can testify on the question of whether a shelf bra provides support for her bosom? Sure you do, it's a classic of the customs blog genre.

The Court of International Trade has now decided the relevant cases, which are Lerner New York, Inc. v. United States and Victoria's Secret Direct v. United States.

Starting with Victoria's Secret, the issue was whether the article of clothing was properly classified as tank top or similar garment, which is the classification proposed by Customs and Border Protection. Plaintiff argued that the top was either a brassier or an unspecified "other garment." The garment was described on the invoice as a "basic tank" with "shelf bra." I am no expert on fashion, but a little time on Bing leads me to believe that this is similar to the garment in question:

According to the Court:
The shelf bra is formed from two pieces of fabric (front and back) that are sewn together and that together extend around the entire upper, inner portion of the garment.  The fabric immediately above the elastic band is gathered by the band. The top of the shelf bra is attached to the body of the garment only at the upper hem of the garment and is attached around the entire circumference of the upper hem.

The legal issue here seems to revolve around the fact that this garment provides the wearer with the support of a bra and an article of outerwear in one garment. In the words of one witness, "It was a top that provided the support of a bra."

The government asserted that this garment should be classified in Heading 6109, which covers "T-shirts, singlets, tank tops and similar garments, knitted or crocheted." Tariff classification in the proper subheading of this heading would have resulted in a duty rate of 16.5% Classification as a brassier as put forward by the plaintiff would result in a rate of 6.6%. The plaintiff's alternative classification as an other garment of Heading 6114 carried a rate of 10.8%

In this context, and relying on the Explanatory Notes, the Court of International Trade found that articles in this heading are of the kind normally worn as undershirts. The fact that T-shirts may be printed with pictures and words for use as outerwear does not change that conclusion because the garments remain derived from or similar to t-shirts used as undershirts. Similarly, the fact that some tank tops are worn as outerwear does not mean that they are not similar to the sleeveless, light-weight garments often worn by men as undershirts. A lot of this has to do with the difference between American and British English and the meaning of the term "vests," which does not appear in the U.S. version of the HS. The Court further found that women's garments that provide support, such as brassieres and corsets, are not included in Heading 6109. Because the garment in question was both outerwear and provided support, it was not properly classified in Heading 6109.

Getting to that conclusion involved two interesting arguments. The first had to do with the fact that the importer described these garments as tank tops on the invoices and in marketing literature. Typically, that would lead to the conclusion that they are classifiable eo nomine as tank tops in Heading 6109. But, that is not always the case. The Court made the important statement that:
the record fact that plaintiff identified the Bra Top in various communications as a “tank” or “tank top” is not an admission by plaintiff that the garment at issue is a “tank top” within the meaning of that term as used in the heading 6109 article description. The meaning of a tariff term is a question of law and, therefore, cannot be the subject of a factual admission by a party; instead, the court has the “independent responsibility to decide the legal issue of the proper meaning and scope of HTSUS . . .

The reason this is important is that it goes to the heart of one of the problems in customs tariff litigation. Usually, the case is decided on a question of law. In this case, the question presently under review is the scope of Heading 6109. The fact that a Victoria's Secret might call this product a tank top does not make it legally so. Moreover, statement is just a fact that does not change the legal scope of the heading. If it did, Victoria Secret should start invoicing all of its products as "duty-free millstones" because that would make them classifiable in 6804.10.00 and duty free. Rather, as the Court noted, it is up to the Court to make the legal determination as to the meaning of the tariff term.

The reason I say this points to a problem in tariff litigation is that both sides spend a lot of time trying to find examples of the importer or Customs calling a product one thing or another, depending on their perspective. But, as the Court said here, that really does not mean much of anything. Again, if a witness for the importer refers to its pencil as a fork, all we know is that the witness said this, not that the item is legally a fork.

The other interesting argument raised by the government was that the shelf bra tank top is an improved version of the standard tank top and is, therefore, included in 6109 under the eo nomine provision for tank tops. Usually, this is a compelling argument. The tariff schedule is intended to cover newly invented items and improvements on old items. Maybe this is just a fancy new tank top. The Court, however, noted that its conclusion that 6109 does not cover support garments and does not cover outerwear effectively eliminates this garment from being classified as an improved tank top. In other words, even though the plaintiff calls it a tank top, the plaintiff is legally incorrect and this is an article of outerwear with support features.

Given all that, the question remained as to the correct classification. The plaintiff first argued that the merchandise should be classified as a brassier or similar article. The Court concluded that brassieres are undergarments and that sports bras are the adaptations of brassieres for use as sportswear. According to the Court, this garment was neither. That left the goods to be classified in 6114 as an other garment, knitted or crocheted. Given that 10.8% is a lot lower than 16.5%, that seems like a victory for Victoria.

Post-Entry NAFTA Claims: Is Reconciliation a Waiver?

As you likely know, Ford Motor Company has been battling with Customs over whether it is entitled to duty refunds pursuant to post-entry NAFTA claims it made without submitting a completed NAFTA Certificate of Origin from the exporter within the required one-year period. This issue has been the subject of a number of prior posts. To catch up on it, read here, here, and here.

This case follows the remand to the Court of International Trade, in which that Court considered the specific NAFTA-based requirements that an importer provide a copy of the certificate of origin with a post-entry claim made under 19 USC 1520(d). Ford had argued that is can make the claim without the certificate of origin and provide it subsequently because 19 CFR 10.112 provides:
Whenever a free entry or a reduced duty document, form, or statement required to be filed in connection with the entry is not filed at the time of the entry or within the period for which a bond was filed for its production, but failure to file it was not due to willful negligence or fraudulent intent, such document, form, or statement may be filed at any time prior to liquidation of the entry or, if the entry was liquidated, before the liquidation becomes final.
The Court of International Trade held that this regulation does not help Ford because the more specific and subsequently passed NAFTA regulations require that the CO be filed with the claim. The Court of Appeals for the Federal Circuit has now had the opportunity to review that decision. The CAFC opinion is here.

On the first point regarding 19 CFR 10.112, the Federal Circuit agreed with the Court of International Trade that the NAFTA rules creating specific requirements for the filing of post-entry claims trump the more general regulation on duty-free documentation. There is nothing really new there.

It is worth noting that Judge Newman wrote a very persuasive dissent on this point. According to Judge Newman:
In entering into the NAFTA, and as ratified and codified, neither the executive nor the legislative bodies nor any historical documentation we have found reflected an intent to remove the benefit of the pre-existing general regulatory provision of § 10.112. I have unearthed no hint of an intent to add this burden and rigor to trade with Canada and Mexico. The entirety of this history shows a contrary intent, to facilitate such trade.
As a result, she would have found that by failing to amend 10.112 when implementing NAFTA, the government effectively stated that it is applicable to the NAFTA claims. This is, in my opinion, a wise and well-justified opinion. Alas, it did not carry the day.

But, Ford did not lose the appeal. Instead, the majority of the Federal Circuit addressed the question of whether the ACS Reconciliation Program has a legal impact on this case. Under Customs and Border Protection's ACS Reconciliation Program, an importer can electronically flag an entry to notify Customs that some aspects of the information initially reported is subject to later correction. While "Recon" us most often used for value, it can also be used to make a post-entry NAFTA claim. An important point is that for Recon claims, the importer need not submit a paper CO at the time of the post-entry claim.

This raises an important question. If both manual claims and Recon claims are Customs and Border Protection's effort to implement the section 520(d) process, how come only manual claims require a paper CO? Is it possible that by implementing the post-entry process via Recon, Customs also effectively waived the requirement for a NAFTA CO in the post-entry environment?

That is a good question. Unfortunately, we do not have an answer. Neither Customs nor the Court of International Trade explained why the same statutory provision has two different implementations and two different requirements with respect to the paper CO. As a result, the Federal Circuit remanded the case (again!) to the CIT for further proceedings.

That means we will likely be writing about this case again in a few months.