Monday, December 21, 2015

Charge the Weapon and Change the Toner!

I have been sitting on Xerox Corp. v. United States while I try to take care of meaningful client work. Thank you clients for another year of interesting and rewarding work. I am always honored to be given the opportunity to work with some great companies and individuals.

[There may be spoilers in the links below. There are none in the text. Go down those rabbit holes at your peril.]

I am irrationally happy to say that saw Star Wars: The Force Awakens this weekend. It made me very happy to re-live being 14 years old, at least for a while. I am also very pleased to say that the reboot did not screw anything up. It has almost exactly the look and feel of the original trilogy, is a bit funnier, and moves at a great pace. Now, if they don't turn Star Trek into the Fast and the Furious, I will continue to be nerdishly happy. I am, however, starting to lose enthusiasm for Batman vs. Superman, which they better not screw up. [Shaking fist at heaven.]

That said, I am now about to discuss the tariff classification of a "pre-clean dicorotron high voltage power supply," which seems entirely like something Rey might be scavenging on Jakku. In reality, it is part of an iGen3 high-speed multifunction laser printer for high-volume but short run jobs. When I say it is big, I mean it is Hutt sized. It is probably big enough to climb into to for warmth on a cold Hoth night. There are two models of this printer. The smaller is over 7,000 pounds and costs about $405,000. The larger is almost 8,000 pounds and costs $610,000. So you are not going to pick one of these up on a whim at Best Buy. Despite the high price, these are printers; they lack scanners and facsimile functionality.

So what about Rey's power supply? The classification is clearly in Heading 8504 as an electrical transformer, static converter, etc. The question is whether it is a power supply "for automatic data processing machines or units thereof of heading 8471." That means the real question is whether Jabba the Printer is a unit of an automatic data processing machine.

The interesting conundrum here comes from the Note 5 to Chapter 84, which, if I could, I would make scroll up the screen Star Wars style.

(B) Automatic data processing machines may be in the form of systems consisting of a  variable number of separate units.  Subject to paragraph (E) below, a unit is to be regarded as being a part of a complete system if it meets all the following conditions:

(a) It is of a kind solely or principally used in an automatic data processing system;

(b) It is connectable to the central processing unit either directly or through one or more other units; and

(c) It is able to accept or deliver data in a form (codes or signals) which can be used by the system.

(D) Printers, keyboards, X-Y coordinate input devices and disk storage units which satisfy the conditions of paragraphs (B)(b) and (B)(c) above, are in all cases to be classified as units of heading 8471.

(E) Machines performing a specific function other than data processing and incorporating or working in conjunction with an automatic data processing machine are to be classified in the headings appropriate to their respective functions or, failing that, in residual headings.

There is no question that the printer satisfies the requirements of paragraph (B). Furthermore, paragraph (D) specifically references printers, which this surely is despite being the Death Star of laser printers.

What to make of paragraph (E)? This machine does perform a specific function, it prints. It only prints. And, it prints in a way that is not typical of traditional home or in-office computer use. It can print the entire run of a Lands' End catalog in 12 parsecs. Does that exclude it from being an ADP machine of 8471?

No. According to the Court of International Trade, a big laser printer that converts digital images to images on paper is continuing to perform the same data processing function as a more mundane laser printer. This is clear because paragraph (D) above specifies that printing is a data processing application. Paragraph (E) must, therefore, be referring to machines that perform some specific function other than printing when done in conjunction with an ADP machine. That would include printing presses of the Guttenberg style that use blocks of type, plates, or cylinders, for example. Those are classifiable in Heading 8443.

According to the Galactic Senate Court of International Trade, nothing in the tariff suggests that ADP printers of 8471 are constrained by size or speed (or time and space). Consequently, the iGen3 is classifiable as a unit of an ADP machine and the pre-clean dicorotron high voltage power supply is a part thereof.

One last thing, did anyone watch Jessica Jones? If not, you should. It was as good, possibly better than Daredevil and puts the currently too sunny Arrow to shame.

OK, I think that is out of my system for the moment.

Tuesday, December 08, 2015

Ruling of the Week 30: Tapenade and the Chutney Problem

It is apparent that I did not succeed in my goal of getting 52 Rulings of the Week into the Blog. Despite, that, I think this has been a pretty productive blog year. This will be my 71st post of the year, with one to follow. That will probably cap 2015. Next year, I hope to pick up the pace somewhat. I'll continue trying to post the Ruling of the Week and court cases. I'll also make an effort at other administrative news.

You know what I miss? Posts about animal smuggling. Keep an eye on my Twitter feed for news, mostly in the form or retweets from other bloggers.

For now, consider the chutney problem.

Headquarters Ruling H259324 (Sep. 3, 2015) involved the tariff classification and NAFTA status of green olive tapenade from Canada. This ruling is from a protest with an application for further review. That means that Customs and Border Protection denied the NAFTA claim made on this merchandise and the importer protested. In what appears to have been an effort to make the product satisfy the applicable NAFTA rule of origin, the importer suggested that its original classification as prepared or preserved vegetables of Heading 2005 was incorrect and the tapenade was classifiable as a sauce or a preparation for a sauce in Heading 2103.

Tapenade via Wiki Media

If you have been to a snooty restaurant serving Mediterranean-inspired New American California farm to table cuisine (and who hasn't?), you have had tapenade. It is, in my experience, a spread of mashed olives (usually black ones) with other flavorings. In this case, it was made form non-NAFTA olives, diced tomatoes, red peppers, carrots, onions, vegetable oil, garlic, and lemon juice. Not all of those ingredients originated in the territory of a NAFTA country. As a result, to qualify for the NAFTA preference, the production of the product must produce a qualifying change in tariff classification for all of the non-originating materials. The qualifying change depends on the classification of the finished product.

The importer asserted that the tapenade was properly classified as a sauce or sauce preparation. But, CBP and the Court of International Trade have been down that road before. A sauce is defined as a homogenous preparation that it is not intended to be eaten on its own. Rather, a sauce is to be added to food as a condiment, usually in liquid form, to make the food more palatable. And, dipping a piece of bread still counts as eating it alone.

Here, the tapenade appears to have been chunks of vegetables mixed with oil. It also appeared based on marketing information that it was both intended and actually eaten alone.

The importer did a fantastic piece of lawyering by introducing into the record recipes by which the tapenade could be added to broth and other ingredients to make a sauce. I hope Customs has a test kitchen and tried out the preparations. [GaK, please let me know if you did!] The importer argued this showed that the tapenade is a sauce preparation. Customs did not buy that argument. If it did, I suspect every tomato would also be a sauce preparation.

As I read this, it appeared to me that Customs was doing a fine analysis. But, then we hit the chutney wall. Chutney is a delicious combination of sliced fruit sweetened with sugar and flavored with lemon and mustard. It is a thick, globulous  preparation that does not readily pour over food. It is, however, used as a condiment for meat and other dishes. Personally, I like mango chutney on a turkey sandwich, but that's just me.

Muffuletta from Wiki Media

In HQ 962419, Customs held that chutney is a sauce of 2103 rather than a preparation of fruit. To distinguish the tapenade from chutney, Customs pointed out that the solid portion of the tapenade is suspended is a semi-transparent red liquid. Customs noted that unlike chutney, this tapenade is not gelatinous, not creamy, and not a spreadable paste. It sounds to me that this was a runny form of tapenade, possibly more like an olive giardiniera or even a muffuletta, either of which is delicious but not a tapenade.

You know what a runny liquid with suspended vegetables is? A sauce. If this stuff was runny enough to be poured over meat and if there was evidence of that use, it seems to me that it might be properly classified as a sauce. If, on the other hand, it looks like the muffuletta in the picture above, it is really not much more than chopped olives and other vegetables in oil, which seem not very homogenous and sauce-like to me.

Customs classified the tapenade in Heading 2005.

On the NAFTA front, once CBP determined the correct classification to be in Heading 2005, the applicable rule of origin requires that the non-originating green olives make a change from another tariff heading. Unfortunately, the olives are also classifiable in Heading 2005. That is not a qualifying shift and the goods are non-NAFTA originating. Tasty, but non-originating.

Thursday, December 03, 2015

Nitek and the Penalty Process

There is a lot on my plate at the moment, but I want to be sure to squeeze this in for you. There goes my lunch-time walk up Michigan Avenue.

United States v. Nitek Electronics is an important decision of the United States Court of Appeals for the Federal Circuit. Go read it. The gist is all you will get from me today.

The gist is that when the United States commences a penalty action in the United States Court of International Trade, the point of the action is to collect on the same penalty claim Customs and Border Protection asserted in the administrative process. In Nitek, Customs' claim was based on a finding that the importer had acted with gross negligence. When Justice filed the case in the CIT, it asserted that the violation occurred as a result of (un-gross) negligence. Nitek moved to dismiss on the grounds that Customs never made a claim based on negligence and, therefore, that claim was not properly before the Court. The CIT agreed and dismissed the case.

On basically the same reasoning, the Court of Appeals has affirmed.

The reason this is important is that it means that Customs' administrative process limits the Justice Department's ability to define the case against the defendant. In the old days, it was generally understood that once Customs imposed a penalty, DOJ could handle it any way it wanted in Court. That is no longer true, if it ever was.

Nitek is consistent with a prior case called Optrex in which the Court said that Justice may not amend a complaint to assert a higher level of culpability than was contained in Customs' penalty claim. There, the Court of International Trade found the lack of notice concerning the higher potential penalties and the different facts that must be proven precluded pursing an elevated penalty in Court.

This case is different because Justice asserted a lower level of culpability in Court. When challenged, it analogized to the criminal law concept of the lesser included offense. Under that doctrine, if I kill a man I can be charged with murder as well as manslaughter because manslaughter requires all the same facts as murder. To prove murder, the prosecutor will need to show the additional aggravating factor of premeditation (or whatever it is they say on Law & Order). In Nitek, the CAFC refused to accept the analogy and said there is no such thing as a lesser included offense in customs penalty cases.

This might have a lasting impact on the practice. Initially, I expect Customs to be much more scrupulous about detailing the facts and conclusions at each level of culpability that may apply. This is effectively administrative pleading in the alternative to preserve the alternatives for later litigation. But, administratively, Customs cannot try and collect in the alternative. At some point, it makes a claim and that claim demands that the allegedly liable party pay one amount as a penalty for some specific set of facts. It is possible that the alternative pleading will merge into the final "bill" Customs put to the defendant. That remains to be see.

Sunday, November 22, 2015

Deemed Liquidation and Notice

[UPDATE: Sometimes, Congress fixes things. That is the case here. The Trade Facilitation and Trade Enforcement Act of 2015 includes, at § 911 a fix for the issue discussed in this post. The relevant amendment changes the existing law "by striking 'on which notice of the original liquidation is given or transmitted to the importer, his consignee or agent' and inserting 'of the original liquidation'.” This should make the relevant date the date on which the deemed liquidation occurs, not the date of notice, which is how it should be (if you ask me).]

The second recent case from the Court of International Trade involves the deemed liquidation of an entry. It is United States v. Great American Insurance Company of New York. This is a collection case in which the United States is seeking $50,000 from a surety for unpaid antidumping duties, plus pre-judgment and post-judgment interest.

For purposes of my own time management, I am just going to give you the take-aways. If you want more detail, read the decision.

The first question is whether Customs and Border Protection can reliquidate a deemed liquidation within the 90-day period set in 19 USC 1501. A deemed liquidation occurs when Customs fails to liquidate an entry within the time allotted by statute. In the ordinary case, this is one year from the date of entry. See § 1504(a). Under 1504(d), an entry that has been suspended is deemed liquidated if not liquidated within six months of the lifting of the suspension. In this case, the defendant argues that Customs cannot reliquidate an entry deemed liquidated under § 1504(d). The Court of International Trade disagreed, noting that since 2004, § 1501 has specifically referenced § 1504. That reference covers deemed liquidations under both § 1504(a) and § 1504(d).

The second question was when the 90-day clock starts to run for the voluntary reliquidation. The defendant asserted the entirely reasonable position that it starts to run on the date of the deemed liquidation. That would make the reliquidation in this case untimely, and therefore void. The Court found the statute specifies that the relevant date is the date of notice, not the date of liquidation. In this case, the notice was provided some 10 months after the liquidation date. Using the notice as the start date, the reliquidation was timely. Further, the 10-month delay was not unreasonable.

If you were in law school, taking notes on this decision, that is what you would write down.

Saturday, November 21, 2015

Suspension, Assessment, and Liquidation

Interesting court decisions are piling up.

The first is American Power Pull Corp. v. United States. This case involves two entries of hand trucks from China, which are subject to an antidumping duty order. At the time of entry, the importer deposited 26.49% of the value of the merchandise as a dumping duty deposit and Customs issued a notice of suspension of liquidation. A periodic review covering the entries followed and Customs continued the suspension of liquidation. After the review, and no doubt much to the disappointment of the plaintiff, the assessment rate was set at 383.60%. The producer filed suit to challenge that determination, no doubt making the plaintiff in this case happy. The Court granted an injunction against liquidation of the entry. Eventually, the rate was reduced to 145.90% and Commerce issued liquidation instructions to Customs and Border Protection. When CBP liquidated the entries with the additional assessment, American Power Pull protested, asserting that the entries had liquidated by operation of law at the rates asserted at the time of entry. Customs denied the protests and American Power Pull filed suit in the Court of International Trade.

The issue here is whether liquidation of the entries was properly suspended. If not, then the entries liquidated by operation of law at the 26.49% deposit rate. If they were properly suspended, then the dumping assessment can be properly applied.

The plaintiff argued that there is no statutory authority for the suspension of liquidation. This is premised on there having been no affirmative determination at the time of the suspension. Absent an affirmative determination, Commerce lacks authority to suspend the liquidation of entries. The United States moved to dismiss.

The Court of International Trade disagreed. The statutory authority for suspension begins with the affirmative preliminary determination by Commerce. 19 USC 1673b(d)(2). This suspension can stay in place for six months. After the final determination, Commerce publishes an order, which instructs Customs to assess the antidumping duties and to collect deposits of antidumping duties on current and future entries. The liquidation of the entries requires that Commerce tell Customs the assessment rate, which is determined in a periodic review under 19 USC 1675 (if review is requested). According to the Court of International Trade, this retrospective system of making deposits against future assessment rates has been interpreted as implying that the suspension of liquidation continues until the review (if requested) if finally resolved.The publication of the final results is the notice Customs needs to lift the suspension, at which time, Customs has six months to liquidate the entries. If litigation challenging the results follows, the Court of International Trade can issue an injunction to preserve the status quo and prevent liquidations prior to final determination of the correct assessment rates.

All of that means that the question to be decided was whether the entries were liquidated within six months of the lifting of a lawful suspension. This is where the dates become important.

  • The dumping order was issued on November 17, 2004 with a deposit rate of 26.49%. Entries from that point on were automatically suspended.
  • The entries were made on May 24 (my birthday for future reference) and June 14, 2006.
  • The second periodic review commenced, continuing the suspension.
  • On July 28, 2008, Commerce published the final results of the review, raising the assessment rate to 383.60%.
  • The producer commenced a challenge in the CIT and the court enjoined liquidations (effectively continuing the suspension).
  • The litigation ended and the injunction dissolved June 15, 2012 when Commerce published notice of the amended final results setting the assessment rate at 145.90%.
  • The entries were liquidated on August 10, 2012 (about two months later).

Because liquidation was within the permitted six-month period, the Court of International Trade found the liquidations to be proper. Thus, the Court dismissed plaintiff's claims.

This case is a sterling example of the lunacy that is the retrospective system used in the U.S., and in no other country (as far as I know). Look what happened to the importer here and, more important, what might have happened. At the time of entry, the importer should have known that its total landed cost should include antidumping duties of 26.49%. Its purchase price and subsequent resale price should have been calibrated to reflect that cost. Keep in mind that the rule against reimbursement by the producer/exporter means this cost cannot be passed back to the producer.

Granted, the importer should have known that there is a risk, even a substantial risk, that the assessment rate will be higher than the deposit rate. But how high? When will it be assessed? There is almost no way to know that. A sophisticated producer might be able to run simulations of the dumping calculations and predict its assessment rates at various pricing levels, but that is not the usual circumstance and does not help for past entries.

Instead, importers in the U.S. are faced with an ill defined risk that can wipe out profits on these products and cost substantially more. In this case, these entries were in 2006. If we assume they were sold at a nice profit of 15%, that means that by virtue of a collection in 2015 (following this decision), the importer will be in the whole to the tune of 130% of the purchase price (more or less, I know I am simplifying the math). There was no way to predict this at the time of entry. This makes it nearly impossible for the importer to manage the risk of importing products subject to a dumping or countervailing duty case.

Imagine what might have happened had the rate stayed at 383%. In some cases, assessments like that are financially untenable and the importer is forced out of business. The absurdity of this is that it was entirely out of the importer's control. The only option seems to be to stop purchasing from the subject country from the date of the preliminary affirmative determination. It can be worse if there is a finding of "critical circumstances," which pushes the effective date back 90 days earlier.

There are more rational approached. In other countries (again, so I am told), a change in rate is applied prospectively rather than to past entries. This makes the administration of process much simpler. It also means that liability can be evaluated with a far greater degree of certainty.

Another, possibly more theoretical problem, is that a dumping order can have such negative consequences for the consuming industries, workers, and consumers that it is against the larger economic public interest. What would happen, for example, if a dumping order on sheet steel made it all but impossible for auto makers in the U.S. to have an adequate supply of steel? If the American industry could not ramp up to supply the auto makers, would there be layoffs? Would factories be idled and production moved out of the U.S? It is, at least theoretically, possible. The way to resolve that is to include a public policy analysis in dumping and countervailing duty cases. Something similar happens in Section 337 cases involving intellectual property violations. If enforcement of the order is not in the public interest, the Commission can refuse to grant relief to the petitioner. If the Commission does grant relief, the President has the authority to order it be withheld. Something like that makes sense in the trade context as well.

Don't walk away from this mini rant thinking I have no sympathy for domestic producers. I do. Dumping is an unfair trade practice for a reason. It hurts domestic industries and workers. I support their efforts to seek a fair free market. I also understand that the reason dumping works is usually that the producer is able to use high prices in the home market or a third market to subsidize lower prices in the U.S. That is unfair to the U.S. industry and to the consumers in the higher priced markets. Without completely frictionless exports to those countries, the U.S. industry cannot respond by selling into the higher priced markets, possibly undercutting the high local prices. I get all that.

But, the law should also recognize the rights and interests of the importers, who are almost always bystanders to the trade cases. A prospective system that takes into consideration the larger public interest would go a long way toward balancing the impact and value of trade cases.

Friday, November 13, 2015

Goodbye Sitemeter

Since the earliest days of this blog, I have used Sitemeter to count the number of visits. The count is currently 233,472. Sitemeter has gone haywire and I rarely delve deeply into my visitor data anyway. So, I am pulling the link from the bottom of the page. If anyone has a suggestion for a good and free way to get analytics, let me know.

Thursday, November 12, 2015

One Protest Per Customer

I'm going to do this one quickly because I am busy and the case is straightforward, but still an important lesson.

In Design International Group v. United States, the Court of International Trade reaffirmed the rule that an importer may only file one protest contesting the liquidation of an entry. In the case, the importer made two entries of pencils. When Customs liquidated the entries, it allegedly miscalculated the quantity and, as a result, incorrectly assessed duty. The broker for the importer filed protests for each entry. That right there is one protest per entry. Customs denied both entries.

Subsequently, counsel for the importer filed a third protest challenging the denial of both prior protests. That is a second protest challenging the liquidation of each of the entries. When Customs and Border Protection denied that third protest, the importer filed suit in the Court of International Trade, using the third denied protest as the basis for jurisdiction.

What do you think? Discuss.

The issue here arises because of 19 USC 1514(c)(1)(d), which says:

Only one protest may be filed for each entry of merchandise, except that where the entry covers merchandise of different categories, a separate protest may be filed for each category. In addition, separate protests filed by different authorized persons with respect to any one category of merchandise . . . .

Under this law, a second protest is invalid unless an exception applies. An invalid protest does not give the Court of International Trade anything to review.

Here, the plaintiff argued that the exception applies. According to counsel, the first protest on each entry was filed by the customhouse broker, who is an authorized party. The third protest (which is really the second on each of the two prior entries) was filed by the lawyer, a different authorized party. Thus, the third protest was valid and its denial provides the Court with jurisdiction.

The Court rejected this argument. In doing so, it referenced a number of cases invoking the "one protest rule." All these cases repeat that only the first protest received is valid. The Court also noted that allowing a protest of the denial of a protest could lead to the absurd result of a never-ending series of protests of the denial of protests. Consequently, the Court dismissed the action for lack of subject matter jurisdiction.

There Court is, I think, correct. But, I think I can help explain the result by articulating what I perceive to be the unstated premise in the opinion. That premise is that a protest filed by a broker for the importer and a second protest filed by a lawyer for the importer ARE BOTH FOR THE IMPORTER. See that? Brokers and lawyers are agents for the importers, not separate "authorized persons."

The exception in the statute is there to permit, for example, the surety, who has a financial interest in the liquidation, to protest the liquidation. Other authorized parties include the person paying the duties and any person seeking delivery.

Separate and apart from the importer, the statute permits "any authorized agent of" the importer to file a protest. Does that mean that each agent is a separate authorized person? Maybe. The statute can be read that way. But, that reading permits an importer to file a series of protests through a series of different authorized agents. That also seems like an absurd result. The more likely reading, based on zero research and five minutes of thought, is that each agent stands in the shoes of the importer for this purpose and the importer is limited to a single protest either on its own or through agents.

Do you agree with that analysis?

Wednesday, October 28, 2015

Ruling of the Week 2015.29: Hasbro II, Royalties and Proceeds

Continuing my exploration of classic Customs and Border Protection rulings, we come to the confounding "General Notice" called Hasbro II. It was published at 27 Cust. B. & Dec. No. 6 (1993). Customs does not have Customs Bulletins online from that far back, so I put a copy here for you to read.

The issue arises from a ruling request concerning an apparent royalty payment. Hasbro, as the importer/buyer of merchandise agreed to pay the seller 7% of the resale invoice price of the imported goods. Presumably, in addition to the original purchase price, the contract requires Hasbro to pay an addition amount to the seller equal to 7% of whatever price Hasbro gets for the goods on resale in the U.S.

It seems fairly obvious that the 7% second payment, which is included in the purchase contract, is part of the total price paid or payable for the imported goods. That would tend to make it dutiable.

But, the law requires specificity. If the payment is not "for the merchandise when sold for exportation to the United States," it can only be added to the dutiable value if the statute specifically allows for it. On possibility is that the payment is the "proceeds of any subsequent resale . . . that accrue, directly or indirectly, to the seller." That would be dutiable under 19 U.S.C. 1401a(b)(1)(E). The other possibility is that the payment is a dutiable royalty or license fee related to the imported merchandise that the buyer is required to pay, directly or indirectly, as a condition of the sale of the imported merchandise for exportation to the United States." That is dutiable under 19 U.S.C. 1401a(b)(1)(D).

Initially, Customs found the distinction between these two provisions to be unclear. Given the ambiguity, Customs looked at the legislative history to try to divine what Congress intended. Regarding proceeds of subsequent resale, the Statement of Administrative Action (which is how the White House explains a trade bill to Congress) stated only that to be dutiable the proceeds must related directly to the imported merchandise and that Customs should make the decision on a case-by-case basis.

Regarding royalties, the SAA was much more detailed. First, royalties related to patents covering processes to manufacture the imported goods will generally be dutiable. This makes sense given that the value of the royalty is access to the technology or know-how necessary to make the very product that is being imported.

On the other hand, royalties paid to third parties (i.e., not the seller) for the use in the United States of copyrights and trademarks related to the imported merchandise will generally be treated as the buyer's selling expenses (e.g., domestic marketing) and not dutiable. This also makes sense in that the product name or logo may be valuable from a branding perspective, but they do not necessarily reflect the intrinsic value of the merchandise sold by the seller. But, that is not always the case. If the payment is to the seller and the buyer is required to make the payment as a condition of the sale for exportation to the United States, then the fee is closely tied to the acquisition of the physical merchandise and may be dutiable. This also requires a case-by-case analysis.

After reviewing the legislative history, Customs turned to an analysis of court decision under the prior law. In summary, those decisions found that three questions help determine whether a payment is a dutiable royalty. Those questions are:

1. Was the importer merchandise manufactured under patent? If the answer is yes, then the payment is more closely tied to the production of the merchandise and is, therefore, more likely dutiable.

2. Was the payment involved in the production or sale of the imported merchandise? This question goes more deeply into the purpose of the payment. If the importer can show that the payment is for something other than the manufacture, production, or purchase of the imported goods, the payment may not be dutiable. Customs gave two examples in which the Court found that the putative royalty was for the use of the product in the United States, not for the patent rights related to the production or importation of the product. A positive answer to this question, therefore, leans toward dutiablity while a negative answer leans against.

3. Could the importer buy the product without paying the fee? If the fee is not optional and goes to the seller, it is more likely to be a dutiable part of the value of the merchandise. According to Customs, this question "goes to the heart" of whether the payment is a condition of sale. That means a negative answer to this question indicates dutiability.

Customs found that these questions provide a useful analytical approach under the current law.

Turning bask to the case at hand, it was unclear whether the product was made under patent, but the agreement gave the buyer the right to manufacture it. That is close to a "yes" on question one. Customs found that the 7% payment obligation accrued upon the sale of the product, regardless of when the buyer actually collected the sale price from its customer. Under these facts, Customs held the payment to be a dutiable royalty.

But wait, there's more!

Customs also said that the same payment can be analyzed separately to determine whether it is also the proceeds of subsequent resale. Here, the obligation to pay was based on the resale price. According to Customs, part of the income the buyer derived from the subsequent resale accrued to the seller. It is, therefore, dutiable as proceeds.

This ruling has had significant practical consequences. Not the least of which is that Customs and Border Protection takes royalties and license fees very seriously when conducting audits. A typical early step is an audit is for Customs to request a Chart of Accounts. From there, Customs will identify accounts labeled as "Royalties," "License Fees," "Commissions" and similar items. It will then ask to see activity in those accounts and expect either proof that the amounts were declared or an explanation as to why not.

This means that importers need to be aware of the compliance impact of royalties, license fees, proceeds, and similar mechanisms. Purchasing people need to communicate with compliance staff to ensure that dutiable royalties are declared and non-dutiable payments are properly vetted and documented. If the company has in-house lawyers, those who work in intellectual property fields should be fully briefed on this and should alert the compliance team to new agreements.

Finally, when in doubt, get a ruling.

Thursday, October 22, 2015

When Does A Treatment Start?

Do you know what I hate? Change. Once I get comfortable with something, I am not a big fan of changing it up until something demonstrably better comes along. I drive my cars until I can't and I have gone to the same place to get my hair cut for 15 years. I have an 8 year old computer at home that is only now getting annoying enough to merit a trip to the recycling center.

I also do not like it when Customs and Border Protection makes a change without an obvious and good reason. I get that if the Harmonized System Committee changes the law, Customs will implement the change. Also, I am completely in favor of the movement to ACE, which will provide demonstrable benefits to the trade. But other times, it seems to just be a matter of Customs rethinking the issue or never having been happy with the result the first time around. See, first sale valuation

This comes up in the context of American Fiber & Finishing, Inc. v. United States, a recent decision of the Court of International Trade. The case involves a change in practice with respect to the classification of cotton gauze fabric. AFF had been entering and Customs had been liquidating the guaze in 5803.00.10, which is a duty-free provision. In January of 2010, CBP issued a Notice of Action changing the classification to 5208.21.40, which carries a 10.2% rate of duty. AFF protested the rate increase.

In its protest, AFF asserted that Customs violated 19 USC § 1625(c) when it changed the classification of this merchandise without public notice and comment. Under that law, Customs must follow notice and comment procedures before it issues an interpretive ruling or decision that has the effect of modifying a treatment previously accorded by Customs to substantially identical transactions.

Unpacking that, if AFF can show that there was a "treatment" in place regarding the classification of these products, then Customs can't simply rate advance the entries. Before changing the treatment, Customs would need to publish a notice and give the public opportunity to comment on the change.

The first issue is whether the rate advance announced in a CF-29 Notice of Action is an interpretive ruling or decision. That question has been addressed in previous cases. If a decision is the functional equivalent of a ruling or internal advice, if it "unilaterally changes the rules," then it is an interpretive ruling or decision requiring notice and comment under 1625(c). In this case, there is some remaining question about whether the Notice of Action was the equivalent of a ruling, so the Court set that issue aside for now.

The second issue was whether AFF could show a treatment. To do that, AFF needs to prove that there was an actual determination by a Customs officer regarding substantially identical transactions and that over a two-year period immediately preceding the claim of treatment, Customs consistently applied that determination. At this point in the case, the parties have asked the Court to rule on when the relevant two-year period begins to run. As you can probably imagine, this would be important if there was evidence of inconsistent treatment at some point in the past. By selecting the proper two-year period, AFF might be able to establish a treatment.

Customs says the relevant period is the date of the protest, which is when AFF first asserted that a treatment existed. AFF says the protest is simply a document in which the treatment is referenced. According to AFF, the claim for treatment was made at the time of entry consistent with the prior treatment. That would push the starting point for the two-year period back as much as 494 days (314 for liquidation and 180 for the protest).

The Court found that a "claim" can be either the assertion of a right or the means by which the assertion occurs. Think about a prospector in the old west. The moment he is jumping up and down shouting that he struck it rich, he is making a claim. On the other hand, he has to go down to the county office to file his claim. Both are claims. Looking at the larger context of the relevant regulations, the Court held that the relevant claim is the assertion of the right, not the administrative mechanism. The "defining operative facts that gave rise to [AFF's] claims" are the entries. In other words, AFF jumped up and down asserting its right to duty-free treatment at the time of entry, not in the protest.

This case is not over. The issue of whether there is an interpretive ruling remains to be determined. In addition, the parties now must gather and present evidence of treatment for the two-year period immediately prior to the earliest entry. So, relax; there is more to come.

Wednesday, October 21, 2015

Ruling of the Week 2015.28: Billiards Procurement

Governments buy all kinds of unexpected stuff. Billiards tables, for example.

In HQ H268491 (Oct. 15, 2015), U.S. Customs and Border Protection issued a final determination on the country of origin of certain billiards tables for purposes of government procurement under the Trade Agreements Act of 1979. These rulings are not your run of the mill origin determination for purposes of labeling or duty determinations. Rather, an interested party may ask CBP for either an advisory or final decision on whether an article is a product of a designated country or instrumentality for purposes of securing a waiver of the "Buy American" rules for goods offered for sale to the U.S. Government.

This ruling involves four billiards tables assembled in the United States from components from various countries. The components are shipped to the customer and the tables are assembled on-site. It is sufficient to understand that there are a lot of steps and a lot of parts. Also, the assembly requires the careful leveling of the slate surfaces to ensure a flat table. For one of the tables, as an example, the U.S.-origin components and assembly operation is 43% of the total cost. Other components come from Brazil, Vietnam, Indonesia, and Taiwan.

Under the applicable origin rules, the billiard tables will be products of the United States if the non-U.S. materials have been substantially transformed into a new and different article of commerce with a new name, character, or use distinct from that of the imported article. 19 USC § 2518(4)(B). In making these decisions, Customs applies its analysis consistent with the Federal Acquisition Regulations that require the U.S. Government to purchase U.S.-made products or products of designated countries. The FAR uses the same substantial transformation test.

With that framework, Customs looked at the assembly operations involved. It compared the process to prior decisions concerning furniture assembly. Customs found that the assembly of between 71 and 91 individual components required two skilled and trained workers was "complex and meaningful." The process transforms the components into a new and distinct article of commerce, i.e., a billiards table. As a result, the tables are products of the U.S. and the U.S. government is cleared to purchase these billiards tables.

Here are some trick shots from a GoPro ad, for your work-day amusement.

That's all well and good. But, I have a far less important question. Aren't these actually pool tables? The ruling discusses the gutter system used for the ball return. That means there are pockets (or "holes") in the table. As a youngster, I spent some time in a bowling alley/pool hall owned by my grandfather, Sam Friedman. I was lead to believe that billiards is the largely-English game of knocking cue balls and strikers around a table for no apparent reason. Pool, on the other hand, is the game of The Hustler in which a white cue is used to strike colored balls into pockets, usually for money. None of this should be confused with snooker, whatever the heck that is. Pool is sometimes called "pocket billiards," which is good for purposes of disambiguation. Am I right that there is a difference or am I failing to understand that American English is full of imprecise usage?

Monday, October 12, 2015

Ruling of the Week 2015.27: Prototypes and Double Taxation

This is a review of what I will call a "classic" Customs and Border Protection ruling about which everyone in the trade should be familiar. In this case, we are talking about HQ 545907 (Oct. 11, 1996), which is the reconsideration of HQ 545278 (Apr. 7, 1994).

This ruling involves a contract between Ford Motor Company and Yamaha Motor Company. Under the terms of the deal, Yamaha was to design and develop a modified Ford engine. Ford agreed that it would purchase any prototypes Yamaha made. If the program was successful, Ford agreed to enter into a contract for the purchase of the modified engines.

To develop the modified engine, Yamaha produced 178 prototypes, which were purchased by Ford. Ford imported 156 of the prototypes and paid duty on them based on the price paid to Yamaha. Note that this is 1996, before tariff item 9817.85.01 was added to the tariff. The program was a success and Ford started importing the engines.

The relevant question is whether the sums Ford paid to Yamaha for the prototypes, some of which were imported and subject to duty, are to be included in the value of the engines imported for purchase by Ford. In the initial ruling, Customs held that the payments for the prototypes were inextricably linked to the cost of developing the modified engine. As such, those payments for the prototypes were part of the price paid or payable for the production engines and, therefore, subject to duty again when Ford imported the engines.

Ford raised several good points. First, it pointed out that this result violates the principle against double taxation. Here, the prototypes have already been subject to duty based on their declared value. That value, according to Ford, should not be subject to duty again. That is obviously true as it creates a disincentive to perform any part of the testing in the U.S. Had Ford tested them in Japan, this would never have been a problem.

In the request for reconsideration, Customs stuck to its original position. According to Customs, payments for the development of samples and prototypes are usually considered to be part of the price paid or payable for the subsequent production merchandise. Here, the prototypes were inextricably linked to the cost of developing the new engines. As such, payment for the prototypes are part of the total price paid for them. Because the prototype engines were not returned to Yamaha, they were not assists. But, the payments remain part of the total price paid or payable for the final production engines.

Most of the sting of this ruling has been mitigated by the addition of HTSUS item 9817.85.01, which provides for duty free entry of "Prototypes to be used exclusively for development, testing, product evaluation, or quality control purposes . . . ." There are a number of relevant Chapter Notes regulating the application of this provision. When trying to use 9817.85.01, be sure that the merchandise legally qualifies as a prototype for development, testing, etc. A similar result could be accomplished by using a Temporary Importation Bond or possibly drawback (if the prototypes or equivalent products are exported or destroyed).

Despite there being several strategies by which to avoid this issue, it continues to surprise some people that this is the rule. Companies that do not have good policies and procedures for handling prototypes can end up with a big, unexpected duty bill. This can happen when engineers, for example, arrange for prototypes to be shipped directly to them, outside of the normal compliance process. Don't let that happen. If your company imports prototypes, samples, evaluation items, ofr similar pre-production goods, make sure there is a well-published and understood process to making those entries. And, be sure to let your broker know that a shipment contains prototypes. A bit of upfront work on this front can avoid significant headaches later.

Monday, October 05, 2015

Composite Wood is not Necessarily Veneered

In Composite Technology International, Inc v. United States, the Court of International Trade considered the tariff classification of wooden door stiles and rails consisting of a 9.5 mm thick pine cap laminated to a based of laminated poplar wood layers. Each poplar layer is lass than 6 mm thick. The exposed surface is a layer of pine.

Customs classified the merchandise in 4421.90.97 as other articles of wood. The imported protested that classification and claimed that the correct classification is 4412.99.51 as other plywood, veneered panels, and similar laminated wood. The issue, therefore, was whether the imported merchandise is properly classified as plywood, veneered panels, or similar laminated wood. If so, it would not be classifiable as an "other article of wood."

According to the plaintiff, the merchandise described above fits squarely within the definition of a veneered panel or, in the alternative, as a "similar laminated wood."

For those of you who, like me, might have no idea what this case is about, here is a useful illustration:

From Homestead Interior Doors
Looking at the Explanatory Notes, the Court quickly identified the apparent problem for the plaintiff. The Explanatory Notes state that these products are a thin veneer of wood affixed to a base. Heading 4408 defines "sheets of veneering" as being not more than 6 mm in thickness, which indicates that a veneer for purposes of Heading 4412 must also be less than 6 mm. Here, the facing layer exceeds 6 mm and, therefore, is not a veneer.

Plaintiff relied on a prior decision of the Federal Circuit called Boen defining plywood construction for purposes of Heading 4412. That case defined plywood, but did not address the meaning of veneer.  Consequently, the CIT was not moved to follow it.

That leaves open the question of whether the merchandise is "similar laminated wood." On this, the CIT was also unconvinced. The Explanatory Notes define similar laminated wood as:

[1] Blockboard, laminboard and battenboard, in which the core is thick and composed of blocks, laths or battens of wood glued together and surfaced with the outer plies. Panels of this kind are very rigid and strong and can be used without framing or backing.

[2] Panels in which the wooden core is replaced by other materials such as a layer or layers of particle board, fibreboard, wood waste glued together, asbestos or cork.

On this point, the plaintiff failed to prove that the core of the product was blocks, laths, or battens glued together. That precludes classification under the first definition of "similar laminated wood." Similarly, because the cores are wood, and not some other material, the merchandise did not fit the second meaning of similar laminated wood.

There is not much more to say about this case. If there is an issue for appeal, it strikes me that the CIT read the Explanatory Notes definition of "similar laminated wood" as exclusive, which seems contrary to the broad meaning of the term "similar." If the heading were intended to cover only those two categories of "similar" products, the HTS language should say so. This reading of the notes seems to add a limitation that is not otherwise there. That is a no no, at least according to the Federal Circuit. 

Saturday, October 03, 2015

Withdrawal Not As Easy As Expected

The second recent Court of International Trade decision of interest primarily to lawyers is United States v. International Trading Services, LLC and Julio Lorza. In this case, the lawyer representing International Trading Services and Mr. Lorza tried to withdraw from his representation of the corporate defendant while apparently continuing to represent the individual.

It is not very easy to fire a client in the middle of litigation. The CIT's Rule 75(d) requires that an appearance by an attorney may only withdrawn by order of the Court. It requires that the lawyer make a motion and that the motion be served on the client. Here, the corporate defendant dissolved pursuant to Florida law before counsel was hired by Mr. Lorza to represent both the defunct company and the individual. Counsel seeks to withdraw from representing the corporation on the entirely reasonable grounds that it no longer exists. Consequently, according to counsel, he has no corporate client to represent.

The United States opposed the motion.

Florida Bar rules state that a lawyer may only withdraw when "withdrawal can be accomplished without material adverse effect on the interests of the client" or for "other good cause." In other words, clients cannot be abandoned mid-matter without some really good reason. Also working against withdrawal is CIT Rule 75(b)(1). which requires that corporations appear in the Court represented by counsel.

What this comes down to is the question: If there is no corporation, why does it need representation? The answer is that under Florida law, ITS remains amendable to suit and is still part of the case. As such, it can only appear in Court through counsel. Without substitute counsel to represent the interests of the defunct company, withdrawal will result in adverse effects on ITS.

We should not confuse the question of whether ITS can continue as a defendant and whether Customs and Border Protection will be able to collect from it. Enforcing a judgment against a dissolved corporation raises numerous legal issues. The status of the company is controlled by state law. In some states, the dissolved corporation continues to exist for purposes of winding up and also for prosecuting or defending any actions. However, once the assets are distributed to creditors, there remains the question of whether Customs can collect from the presumably bloodless turnip.

Of course, as an individual, Mr. Lorza does not have the ability to simply dissolve. He still needs a lawyer.

Friday, October 02, 2015

Duped "Importer" Liable for Customs Fraud

UPDATED: April 2, 2019.

Note: As originally drafted, this post was based on the first version of the CIT slip opinion. As published, the initial opinion included the name of the broker involved. As amended, that person is identified only as "Individual A." The amended slip opinion is here. On the request of the broker and consistent with the Court's decision to not identify the broker, I have removed the name below.


There have been several recent cases at the Court of International Trade that merit discussion. Two, in particular, are primarily of interest to lawyers. They show the truth of the old adage that bad facts make bad law.

The first is United States v. Jeanette Pacheco. In this case, the United States of America is pursuing Ms. Pacheco to the tune of $2.6 million for her "role" in a customs fraud scheme. The "scheme" went like this: A licensed customs broker approached Pacheco in a nightclub. He offered her a way to make some fast cash and gave her $200 to sign a customs power of attorney. It is not clear that Pacheco had any additional contact with the broker thereafter.

After that, the broker began making entry of dried peppers, declaring the value to be $0.11 per kilogram. It turns out that a legally correct value was $3.75 per kilogram. When Customs and Border Protection queried Pacheco about the value, she failed to respond. To complicate matters, the FDA declared the peppers adulterated, refused entry, and demanded redelivery. Pacheco failed to redeliver the peppers to Customs and Border Protection. That resulted in a liquidated damages claim of $184 thousand.

CBP issued penalty and pre-penalty notices to Pacheco. Eventually, the government sued her to collect the penalty and she failed to respond. In this decision, the Court of International Trade imposed a default judgment on Pacheco.

Pacheco's failure to appear in Court acts as an admission of liability. But, the Court of International Trade must still determine the amount of the penalty to be imposed. In doing so, the Court noted that "by providing her identity to [the broker] for $200 so that he could conduct customs business on his own behalf, Pacheco aided and abetted his fraud upon Customs." That emphasis is mine. The Court also noted that as the principal in the relationship, Pacheco can be held liable for the acts of the agent, meaning the broker.

Given that, the Court looked at the circumstances to determine the amount of the penalty to be imposed. The Court found some aggravating factors including failing to respond to a request for records and the fact that the importations threatened the public health and safety. Also, although it is not clear when it happened, it appears that Pacheco lied to Customs about whether the peppers were hers. On all of these facts, the Court imposed a penalty in the full amount requested by Customs: $2,651,312.

I hate this case. Not because it is wrong, but because it is probably right. Pacheco did so many things wrong here that she basically sealed her fate. But, there is another story that can be told. It appears that Pacheco made the very stupid choice of signing a power of attorney without any understanding of what that means. She did so for a quick $200, which ended up costing her (at least on paper) $2.6 million.

But, was she really the principal in this transaction? She was legally, because she signed the POA allowing the broker to make entry on her behalf. But, it also does not appear that she had any knowledge of the importations, she did not decide to undervalue the goods, she did not know the goods were adulterated. When she "lied" to Customs that the goods were not hers, I suspect she had no idea that the goods were being imported in her name. The peppers probably were not hers as far as she was concerned. As far as I can tell, she did not order them, did not pay for them, and did not take delivery of them.

I'm not even sure she was the principal. In agency law, the agent works for the principal. Here, the agent was working entirely for himself (or so it appears). He duped her into signing the document and then used her identity to make fraudulent imports. I don't see why that is not a mitigating circumstance. My assumption is that the broker is the subject of his own penalty case and may even be subject to criminal prosecution. I don't know what happened to him.

This is a bad set of facts. Obviously, Pacheco should never have signed the POA. She should have responded to CBP. She should have responded to the penalty notices. She should have thrown the broker under the first bus she could find. But, despite all those mistakes, what we seem to have is identity theft with the victim now on the hook for $2.6 million. While that is probably legally correct, that seems wrong.

Monday, September 28, 2015

Ruling of the Week 2015.26: "Where Have I Been" Edition

[Updated because I either cannot spell, type, or proofread. The post is substantively the same.]

Life and work sometimes intervene to prevent me from being a full-time blogger. So, I missed a couple rulings. Sorry about that, I do my best.

I'm scanning rulings now for something of interest and stumbled on NY N266542 which is moderately NSFW and amusing to the 12 year old boy still stuck in my head. It involves a harness used when mommy and daddy love each other very much. The tariff classification is 6307.90.98 as an other made up textile article. The ruling is only of interest in a prurient way.

Another one that caught my eye is N266838 (Aug. 4, 2015) concerning the tariff classification of used vegetable cooking oil. The product comes from the Ivory Coast and is classified in 1518.00.40 as animal or vegetable oil chemically modified and inedible, not elsewhere specified or included. I'm not sure whether use in cooking results in chemically modified oil or that the oil is inedible in its imported condition. There was a second ruling on similar facts with the oil coming from Hungary.

What I think is interesting about this ruling is that it could be the start of an interesting business model. The oil was imported to be turned into biodiesel fuel. I wonder whether the rest of the world has enough left-over cooking oil to keep refineries going in the U.S. This would give us a whole new way to exploit oil reserves in other countries without actually having to drill for it.

The last ruling I'll note is NY N266719 (Aug. 4, 2015), in which Customs and Border Protection classified a tri-fold tabletop nativity scene made of metal panels depicting Mary and Joseph flanking the baby Jesus. The importer thought this should be classified as a Christmas item, which made sense to me. However, there is an eo nomine provision for nativity scenes in 9505.10.30, which is a festive articles provision and is duty free. Clearly, this item passes my Rabbinical Test for festive articles. That will be an important test to bear in mind as we approach the holidays.

Saturday, September 05, 2015

Ruling of the Week 2015.25: No Refund for CPSC Restricted Goods

[UPDATE: I changed the title of this post to more accurately reflect the content, and to not look like an idiot.]

Like a lot of other lawyers who do administrative law, I have lately been thinking about Customs and Border Protection's efforts to wrangle its partner government agencies into using the Automated Commercial Environment to submit data to Customs. If you have been dealing with Customs for the last year or so, you have probably seen this image.

What is happening is the mandatory use of Customs' ACE system for electronic filing of data for other agencies. Previously, this data might have gone to Customs on paper or in a different electronic system. If this works, it will be great. If you are an importer, make sure your broker is up to speed and has invested in the software and training necessary to keep up with these changes.

One of the agencies that is moving toward ACE implementation is the Consumer Products Safety Commission. CPSC regulates and enforces product safety. Products that do not satisfy existing CPSC standards or are shown to be unsafe can be deemed inadmissible. Customs' role is to ensure that importers have the necessary documentation to prove that the products meet any applicable safety standards (e.g., lead content, choking hazards, etc.).

Which brings me to the Ruling of the week: HQ H239257 (Jul. 25, 2013). The importer entered some lighters, which Customs released. However, the CPSC asked Customs to issue a Notice of Redelivery because the importer had failed to file a pre-importation report with CPSC. In this case, the importer actually redelivered the goods to Customs and subsequently exported them to Canada. [Side note to Canada: Be on the lookout for potentially dangerous lighters from America.]

After exporting the goods, the importer asked Customs for a refund of the duties it paid. Note, this is not a drawback claim. The importer just wants its money back and pointed to 19 USC 1558. Under that statute, duties cannot be refunded after the release except for certain circumstances. Relevant to this situation, Customs can refund duties paid "[w]hen prohibited articles have been regularly entered in good faith and are subsequently exported or destroyed pursuant to a law of the United States and under such regulations as the Secretary of the Treasury may prescribe." (I added the emphasis.)

The problem is that when federal agencies interpret their regulations, they sometimes give very specific and technical meanings to terms. Here, the rub is the word "prohibited." The lighters could have been entered into the United States had the importer properly documented them with the CPSC. Consequently, the lighters were not "prohibited," they were merely "restricted." Prohibited merchandise cannot lawfully be imported under any circumstances. Restricted merchandise, on the other hand, can be imported when the importer proves it has satisfied the legal requirements for entry.

Because the lighters could have been imported into the United States if the importer satisfied CPSC requirements, they were merely restricted and not prohibited. As such, CBP refused to refund the duty deposits.

So, when will Section 1558 apply? What is truly prohibited merchandise? Here is CBP's helpful page for travelers. As you might imagine, illegal narcotics and child pornography are both prohibited merchandise. But, it is unlikely that the importer will have declared those goods to Customs and paid duty. Under certain circumstances, Absinthe is prohibited (keep that thujone level down, please) as are unsafe toys and items made of dog and cat fur. There are others including lottery materials from any other country.

One industry that I suspect might qualify for refunds under this provision is the makers and importers of smokers' wares that have been needlessly and cruelly labeled drug paraphernalia [probably NSFW by many standards], which is prohibited merchandise.

Saturday, August 29, 2015

Ruling of the Week 2015.25: Stipulation Schmipulation

This one is for the lawyers. I'll try my best to make it not too far "inside baseball."

Cases in the Court of International Trade don't always result in a published opinion. There are lots of ways customs cases get resolved. It is possible that one side or the other will just give up and file a voluntary dismissal. In other cases, the parties come to an agreement as to the proper treatment of the entry in favor of the plaintiff. When that happens, the parties file a Stipulated Judgment on Agreed Statement of Facts under Rule 58.1. The Court will usually then enter the judgment and Customs will reliquidate the entry with a refund to the plaintiff or cut a lump-sum refund check.

Sometimes there is a combination of events. Because of the large number of related cases at the CIT, the Court has a unique process by which it allows parties to designate a case a "test case" (Rule 84) while suspending other cases that involve the same issues. Once the test case is resolved, the suspended cases are moved to a "Suspension Disposition Calendar" (Rule 85) for resolution. Usually (at least in my experience), the suspended cases will be resolved consistent with the test case. That means that if the plaintiff wins, the suspended cases will be resolved by a Rule 58.1 stipulation. If the government wins, the suspended cases will be dismissed.

The reason I am going on about this is the recent Customs and Border Protection ruling HQ 236655 (May 27, 2015). The underlying question was the tariff treatment and NAFTA eligibility of evening primrose oil. You may recall evening primrose oil from its earlier work here. In an earlier phase of the dispute, CBP denied several protests and the importer filed summonses at the Court of International Trade. Those cases were resolved on a Rule 58.1 Stipulated Judgment on Agreed Statement of Facts. According to those judgments, the EPO was to be reliquidated as a food preparation and as qualifying for preferential treatment under the NAFTA. In other words, the Customs and the Department of Justice decided that the importer was correct and a judge of the United States Court of International Trade issued an order to that effect.

Fast forward to subsequent entries. One might think that Customs would provide those entries the same treatment as it did the entries in the court cases. That turns out not to be the case. Customs liquidated contrary to the judgment, classifying the EPO as a vegetable oil not qualifying for NAFTA. The importer protests, as you would imagine, and pointed to the prior judgments of the Court of International Trade.

This raises two very important issues.

First, does CBP have to treat a stipulated judgments as precedential decisions that control the liquidation of future entries not covered by the summonses? Second, if CBP wants to take an action contrary to the stipulated judgments, must it go through the public notice process to alert the trade that it is limiting the application of a court decision?

On the first issue, the stipulated judgment states that "the products subject to this action" will be liquidated as food preparations with NAFTA preference, as the importer wanted. In addition, the DOJ lawyer involved apparently sent an email to counsel for the importer stating that EPO capsules would be liquidated accordingly. Taken together, the importer claims this binds CBP on future entries.

Customs disagreed. Citing a couple prior cases, Customs stated that a stipulated judgment is a contract in the nature of a settlement agreement between the parties. The unique aspect of a stipulated judgment is that it is entered into in open court and ratified by the Judge. That makes it enforceable. But, because it is a contract, it is enforced like a contract. A party to a contract is only entitled to the benefits of the contract. In this case, and in the case of most stipulated judgments, the agreement is limited to the entries "subject to the action." That means that the stipulation only covers those entries on the summons and Customs need not apply it to future entries.

This may be surprising. After all, this is a judgment and the judgment is enforceable. Beyond the specific language of the stipulation, the real problem is that customs law is governed by a 1927 Supreme Court case called United States v. Stone & Downer. Under that case, the normal rules of federal civil procedure do not apply. Technically, we do not have res judicata. That means that the decision in one case does not dictate the outcome of a future case involving the same parties and the same facts. As we say in Customs law, each entry stands on its own. So, CBP's analysis, I am sad to say, makes some sense to me.

On the second issue, CBP held that it is not required to publish a notice that it is limiting the stipulated judgment. We need to take a step back because if you are a regular lawyer who does not do customs litigation, this will sound crazy.

Under 19 USC 1625(d), Customs has the ability to publish a notice limiting the application of a court decision. This allows Customs to effectively limit a court decision to the party and particular products involved, avoiding wider application of the legal principle. Lawyers might reasonably wonder why this is constitutional and what allows Congress to tell an Executive branch agency that it can limit a decision of the Judiciary. I don't know the answer and think, if pushed, this would be unconstitutional. Happily, it only happens in rare circumstances.

Here, Customs relied on its decision that the stipulated judgment is a contract and not a true judgment of the Court. Given that premise, there is no need for Customs to publish a notice limiting the stipulated judgment because it is self limiting to the entries at issue.

So that's the ruling. What's the impact?

There is currently a bit of controversy over how cases are managed at the Court of International Trade. Some lawyers like to file a summons and leave the cases unassigned while working with the government to arrive at a stipulated judgment. This can take a long time and works as long as the Court gives extensions to the initial 18-month period to remain on the "Reserve Calendar." Other lawyers move more quickly to designate a test case and litigate the matter. Afterwards, the parties likely can work out stipulated judgments for any suspended cases.

Looking at this ruling, it strikes me that an importer who expects to continue to import the item will not want to rely on a stipulated judgment without an actual decision from the Court of International Trade. That means more reliance on the test case-designation process and less on the Reserve Calendar.

Another new concern might be the actual terms of the agreement. For the most part, the terms are dictated by the Court's Form 9, which only addresses the stipulable entries. Should lawyers be inserting additional language in the agreement to control future entries? I would like to do that, but it seems likely to be a deal breaker for Justice. Also, rumor has it that some judges do not like deviation from Form 9. Maybe the better approach is to have an actual settlement agreement that addresses future entries. That is still probably a deal breaker. So that is a quandary.

Friday, August 21, 2015

Finality of Liquidation and the Loss of Defenses

Most people assume that when sued by the United States for unpaid customs duties, taxes, fees, and interest, the defendant will have an opportunity to assert all available defenses to the claim against it. That is technically true. The question is which defenses are available. United States v. American Home Assurance Co., has made the answer to that question a bit clearer, but maybe not in a good way.

American Home ("AHAC") is the surety on a number of bonds covering the importation of mushroom and crawfish tail meat from China. Both of those products are subject to antidumping duty orders. Customs and Border Protection liquidated the entries and assessed antidumping duties. When the importer defaulted, the government tried to collect from AHAC and informed AHAC of its intent to seek post-judgment interest. AHAC protested the demands for payment of duties and interest. Customs denied the protests.  Therein lies the problem.

Section 1514 of the Tariff Act of 1930 (19 USC 1514) makes a liquidation final and conclusive on all parties including the United States, unless the someone files a valid protest. If the protest is denied, the importer or surety can file a summons in the Court of International Trade challenging the denial. Absent a summons, the denied protest renders Customs' decision final and conclusive. Finality is a bar to an importer's efforts to seek a refund of overpaid duties and also a bar to a duty recovery action by Customs. If there was a violation through fraud, gross negligence, or negligence, Customs can try to collect duties and interest going back five years, but that is the exception.

This case is a little different because the claim for interest was not asserted at liquidation. Rather, it came in the first demand for payment on the bond that CBP made to the surety, AHAC. AHAC attempted to defend the interest claim against it, but was shut down.

According to the Court, the interest assessment is a protestable charge or exaction. The decision to impose interest was not ministerial or automatic. Rather, Customs had to apply law and facts to determine whether AHAC might be held responsible for interest. Consequently, CBP made a protestable decision. The fact that the charge or exaction was first asserted after liquidation does not change the fact that it was protestable and, in fact, protested.

Because AHAC did not challenge the denied protests in the Court of International Trade, the denial became final and conclusive. As a result, according to the Court, AHAC must pay the interest claimed up to the value of the bonds.

This raises all kinds of hackles.

What this means is that an importer who is dissatisfied with a denied protest has no choice but to pay Customs or go to the Court of International Trade as a plaintiff. Normally, that is what one would expect and it is not a tremendous problem. However, there is a statute that requires that plaintiffs pay all of the disputed duties, taxes, and fees before commencing the action in the CIT. That means that if the protesting party cannot afford to pay the duties allegedly owed (as sometimes happens) and cannot file a lawsuit, the act of filing the unsuccessful protest will have waived any opportunity to assert defenses in the eventual collection action. That is a terrible result that hurts the importer coming and going.

In the long run, will this create a disincentive to file protests? It might. If my product is being improperly assessed at a high rate of duty but I don't have the money or wherewithal to litigate in the CIT, what is my best option? Previously, I might have filed a protest and then decided how to go forward if it were denied. Now, am I better off making entries at the lower rate of duty contrary to instructions from CBP, but with internal and external evidence of reasonable care? Eventually, CBP will make that into a penalty case in which I will be able to assert all of my defenses. Clearly, that is a risky strategy because the penalties will be more severe than the duties unless I have a rock-solid case of reasonable care. But, importers do disagree with Customs and Customs is not always right. In some (likely rare cases) that may be the best way to proceed.

One important final point: Although I am saying I don't like the result, I am not saying it is wrong. In fact, with a limited amount of time spent on research, I can't see why it might be wrong. I generally think that defendants have the right the right to assert all available defenses in civil actions brought by the United States. This case does not violate that principle. But, it limits the scope of available defenses where there is a denied protest. That seems like a big price to pay. But, the finality of liquidation is a shield as well as a sword. Often, an importer will seek refuge in the fact that the liquidation is final and cannot be revisited by Customs. This is the same principle, although it favors the U.S. There is a certain symmetry to that.

Thursday, August 20, 2015

Ruling of the Week 2015.24: How Wide is Your Bike Lock?

Although I have actually been on my bike a shamefully few times this year, I remain interested in all things related to cycling, particularly commuting by bike. A key tool for a bike commuter is a good, solid lock. Thus, I noticed H168717 (July 17, 2015) in the August 12, 2015 Customs Bulletin. You will need to scroll to page 90 to find the ruling.

The issue is the proper classification of Master Lock cable locks. Customs originally classified the locks in HTSUS item 8301.10.50 as "Padlocks: not of cylinder or pin tumbler construction: Over 6.4 cm in width." That tariff item has a duty rate of 3.6%. Master Lock argued for classification in item 8301.10.20, which covers locks with a width not over 3.8 cm and has a duty rate of 2.3%.

I am going to save myself two thousand words by saying, this is what we are talking about:

8020D: Picture from Amazon
8119DPF: Picture from Amazon
You can see where this is going, right? The sole question is, "What is the correct way to measure the width of these locks?"

There are a couple of possible answers. First, it might be the length between the red lines in the top picture. That seems to encompass the width of the locking mechanism. The curved inserts on each side would be considered other parts of the assembly; probably extensions of the cable. Another way to measure the width is to consider it to be the distance between the far ends of the "shoulders." This extends the width further.

While you think about that, ask yourself this illuminating additional question: How long is the lock?

Think about it.

The answer matters.

It turns out that CBP has not been measuring the width of the lock at all. Rather, it has been measuring that segment of the length made up by the lock itself. "Length" refers to the longest dimension of a body. Put another way, length is the longest straight line that can be drawn through a body. Based on that, CBP has always included the cable in the length of the lock. It is, therefore, inconsistent (and incorrect) to treat the length of the lock as its width.

Customs and Border Protection has made a course correction. It now recognizes that the width is the line perpendicular to the length. As a result, it is approximately, this:

Note that the picture here is based on a picture in the ruling. It appears to me that W does not include the height of the "shoulder." This image is one I made to approximate what is in the ruling. Don't rely on it as an exhibit.

Having re-measured the locks, Customs agreed with Master Lock that they are classifiable in 8301.10.20 as being less than 3.8 cm in width. That is a win for Master Lock and a good decision by CBP.

Saturday, August 08, 2015

Ruling of the Week 2015.23: How Smart is Your Watch?

Smart watches are cool new technology. Generally, I want cool new technology. I'm not so interested in a smart watch, at least not at the moment. One reason for this is that I am firmly commitment to my Windows Phone. I have little interest in a watch that requires me to have an iOS or Android phone. Microsoft does not sell a smartwatch, although its former partner Nokia was shopping one. I have some interest in a Microsoft band, which is supposed to have impressive utility for cycling. But, I hear there is a new version on the horizon, so I am waiting. That said, I am struggling to get my current bike computer (a Polar CS300) working. So, I am also kind of jonesing for a Polar M450. These are clearly my first world issues.

A more relevant consideration for this blog is the proper tariff treatment of a smartwatch. Customs recently settled the issue, at least with respect to a Samsung "Gear" Live Android smartwatch. See HQ H257947 (July 14, 2015).

The watch uses Bluetooth wireless technology to communicate with a paired smartphone and, therefore, to the internet. The user interacts with the watch through a touchscreen. There are two classes of application that can run on this particular smartphone. Some are local and run directly on the phone. Others require a connection to a paired phone. Paired applications require the phone to do the heavy data processing, network connectivity, and data storage. An unpaired watch is not able to perform these tasks beyond the limited data storage and processing capabilities of the watch itself. One such feature is the ability to display the time, as a watch really should do.

So, for classification purposes, is this a wrist watch of Heading 9102 or is it a composite good classifiable elsewhere? In the old days, we would have asked, "Is it more than a watch?" Or, is it something else entirely?

Customs and Border Protection initially determined that the Samsung smartwatch differs significantly from watches of 9102. Specifically, it includes electronic components not normally seen in watches including an AMOLED display, CPU, 512 MB of RAM, 4 GB of internal flash memory, and several sensors. Although this watch can display the time, it is designed to allow users to display and manipulate data. The fact that it is worn on the wrist and displays time is not enough to make it a watch.

Customs then constructively disassembled the watch to look at all of its components. It found a radio transceiver of 8517, sound recording and reproducing apparatus of 8519, a video display of 8521, and sensors of 9029 and 9031. Customs them treated the watch as a composite good consisting of all of these components. Based on GRI 3(b), the correct tariff classification for the watch would be the classification of the single component that imparts the essential character.

Essential character is a tricky concept. The item that imparts essential character will vary depending on the nature of the components, their value, quantity, bulk and role in the use of the finished item. Here, Customs found that the Bluetooth connectivity was of primary importance to the operation of the smartwatch. Consequently, Customs found that the radio transceiver imparts the essential character and classified the smartwartch in tariff item 8517.62.00. This is a duty-free provision.

It is a good result, but I have serious questions about whether it is right. What worries me about the analysis is the laptop on which I am currently typing. It has internal memory, a hard drive for storage, a CPU, a display, and can run applications written for its operating system. It also has Bluetooth and WiFi wireless capabilities. And, it is classified in 8471 as an automatic data processing machine, not as a radio transceiver.

I realize that the functionality of the smartwatch is extremely limited when not paired with a phone. That is not true of my laptop, but that is a matter of degree. My laptop is far more useful when connected to a network. Moreover, in the modern "cloud first" world, the location of the data and the processing capability is far less important than the ability to get to and use that data. To me, the watch is much more analogous to a "thin client" or "dumb terminal" than it is to a radio transceiver. Customs has previously classified thin client terminals, which rely on remote storage and data processing power, as units of ADP machines in Heading 8471. If I were classifying the smartwatches, I would give strong consideration to that analysis.

Here's the other thing that bugs me about this ruling. Customs was quick to dissect the watch into its components before trying to classify it as a whole. I think that would have lead to Heading 8471. We don't look at a passenger car and say it is part car, part radio/entertainment center, part air conditioner. We look at the whole thing and see if it is a passenger car. Here, the collection of devices form a coherent whole that is designed to allow for data input and manipulation. That's how I might address this.

The outcome is likely the same: duty free. So,this is not one of those things that is likely to get litigated. It is entirely theoretical and, therefore, perfect fodder for a blog post.

About that Lion and the Lacey Act

A lot has been said about the Minnesota dentist who killed Cecil the lion in Zimbabwe. From the perspective of this blog, the question being asked is whether the American dentist violated any U.S. laws. The short answer is that I don't know for certain whether any criminal laws have been violated.

What has come up in the trade context is whether the hunter violated the Lacey Act. Since Lacey impacts trade, it pops up in my practice and is worth a short exploration.

The Lacey Act was first passed in 1900 and is an early conservation law. As originally enacted, it protected animals from illegal hunting through criminal and civil penalties. The law also prohibits trade in protected animal and plant species that are hunted or harvested illegally.

It is a crime to import into the United States any injurious animals including brown tree snakes, big head carp, zebra mussels, and flying fox bats. 18 USC 42. Exceptions can be made for properly permitted (and dead) zoological specimens and certain "cage birds." A violator may be imprisoned  and fined.

More relevant is that the Lacey Act also makes it illegal to import any plant or animal taken in violation of a foreign law or regulation. 16 USC 3372. This is an important compliance issue for anyone that imports animal and plant products. If you happen to import wood to make violins, for example, you need to know that the wood was harvested legally. Assuming you purchase from a supplier who is a few steps removed from the actual person that cut down the tree, how can you prove that the wood was legally harvested? Keep in mind that the Act applies to derivative products as well. This is a paperwork and due diligence process familiar to importers who have to comply with lots of similar regulations. And, it is important. That is what Gibson Guitars learned when it agreed to pay $300,000 to settle a Lacey Act case.

So, what about Cecil and the dentist? The press has reported that Cecil was illegally lured out of a wildlife sanctuary. That makes the killing illegal under Zimbabwe law (at least that is what I have read). So, did the hunter violate the Lacey Act? Not yet. The Lacey Act only kicks in when the illegally taken wildlife is imported, exported, sold, or otherwise subject to interstate or foreign commerce.

The press also reported that Cecil was decapitated and skinned. I don't know much about hunting, but I do know something about spooky home d├ęcor. To me, that sounds like the hunter had the intention to mount Cecil's head and turn his pelt into a rug. Unless he has a home in Zimbabwe, that likely means he was planning to import said lion head and skin to the U.S. That, my friends, would be a violation of the Lacey Act.

It is unclear whether any part of Cecil was actually imported. So, it does not appear that there was a violation of U.S. law. Press reports also indicate that the U.S. has not charged the hunter with a violation of any U.S. law. I suspect the Department of Justice and the Fish & Wildlife Service are smart enough to ask about the present location of the remains. That's why the real issue for the dentist is whether he will be extradited to Zimbabwe for prosecution there.