Wednesday, May 27, 2015

Ruling of the Week 2015.16: SCOTUS Edition

I'm falling behind on my goal of blogging a ruling a week. So, I am cheating and calling an action of the United States Supreme Court a "ruling," which it technically is.

Yesterday, the Supreme Court denied the petition for certiorari in Shadadpuri v. United States. That means that the decision of the full United States Court of Appeals in Trek Leather stands as the law of the land.

Is this a terrible result? Probably not in that particular case. It appears that Mr. Shadadpuri was a bad actor in terms of customs compliance. But, the decision is not limited to bad actors. It means that anyone who provides information to Customs that is material to its handling of an entry is potentially liable for a penalty if that information turns out to be false by reason of fraud, gross negligence, or negligence. By anyone, I mean anyone. This applies to the importer, individuals who are employees of the importer, and third parties including brokers, carriers, sureties, and domestic purchasers.

The reason this is a big deal is not that it has never happened before. It has. It is only a big deal because this is the first time (at least as far as I know) that the Federal Circuit has said this is the law.

The question is what happens now. Realistically, maybe nothing new. If your company strives for compliance and you are a conscientious professional, you have automatically limited your exposure to liability. But, we no longer have the colorable argument that only the importer can be liable for negligence. So, you need to continue to strive for compliance both on behalf of your company and personally in all your communications with Customs.

More important will be how Customs and the Department of Justice behave. Justice has stated that Trek is not a change in the law and that it is unlikely to have broad application. Justice has stated, through individuals in non-binding settings where they do not represent official Department policy, that it will continue to bring cases against individuals only where there is egregious misbehavior by individuals directly involved in the violations.

What we are left with is a new paradigm in which the Supreme Court has effectively confirmed that Customs and Justice have the power to levy penalties against individuals who are not the importer of record. The question is whether Customs and Justice will continue to exercise that power in the rare case where an individual engages in egregious violations of the customs law. I remain confident that will be the case, mainly because Justice thinks this was always the law. But, I am leery and unfortunately on the lookout for evidence to the contrary.

Tuesday, May 19, 2015

Happy Tariff of Abominations Day

May 19th is a holiday for customs and trade professionals. I know that because I declared it to be so. If you don't recall, read this post.

Thursday, May 14, 2015

Ruling of the Week 2015.15: The Festive Penguin

Several alert readers have pointed me in the direction of the May 6, 2015 Customs Bulletin & Decisions in which U.S. Customs and Border Protection proposes to revoke NY N035321 (Aug. 18, 2008). In that ruling, Customs considered the classification of a 14-inch plastic penguin made of red, orange, green and clear beads. To make the item even more impressive, it is equipped with light bulbs that run through the frame and it wears a "Santa hat" made of lights. Stop there for a moment. As with my lighted tie, I have been unable to find a picture of this particular item. Note to anonymous law clerk who found me a representative tie: treat this as a challenge. Find me a picture, please.

Customs originally classified this item in Heading 3926 as an other article of plastic. The importer asked for reconsideration of that decision and asserted that it is properly classified as a festive article in heading 9505. As you probably know, the scope of heading 9505 has been the subject of a lot of litigation. This is primarily because goods classified in that heading are duty free and also because most things can be festive if seen in the right context. My kid's dirty soccer socks can be strung from the mantel to celebrate World Cup season.

In a tariff sense, festive articles includes items traditionally used at Christmas (e.g., artificial Christmas trees, nativity scenes, Christmas nutcrackers, and yule logs). More generally, the item must be closely associated with a festive occasion and must be used or displayed principally during that occasion. Seeing it on display at other times should be "aberrant."

"Other articles of plastic," on the other hand, is a basket provision. That means goods will not be classified in 3926 if they are specified or included elsewhere. So, if 9505 fits, 3926 fails.

So what about our penguin? Unlike a reindeer, there is no recognizable connection between a penguin and Christmas. But, in this case, the penguin has donned a "Santa hat." The hat is an article traditionally associated with Christmas and the festive Christmas season. So much so that CBP believes that the presence of the hat makes the display of this penguin aberrant outside of the Christmas season. This penguin is not a general decoration, it is a Christmas decoration. As such, it should be classified in 9505.10.25.

That's a win for the importer, and that is good enough for me.

I continue to believe that the test for festive articles related to Christmas, Easter, and other Christian holidays is too subjective. I have previously proposed a more scientific test. I still think it makes sense.

Also, this is a great opportunity for tariff engineering. I propose adding a Santa hat to basically anything that is dutiable. That doesn't seem like an artifice or disguise, does it?

Monday, May 11, 2015

Another Defeat for Customs Trolls

Do you remember the tale of Customs Fraud Investigations, LLC v. Victaulic Company? If not, you should go back and read that post.

CFI is an entity established to conduct research and analysis with the apparent goal of identifying customs fraud. The ultimate goal of which appears to be to profit by bringing False Claims Act cases against alleged fraudsters. Nice business model.

In the case of Victaulic, CFI claimed that the company was not labeling its products consistent with the country of origin marking laws and regulations. While doing so, Victaulic also allegedly failed to notify Customs and Border Protection of the violation and deposit marking duties. As a result, according to CFI, Victaulic has committed customs fraud and, by making a false claim, deprived the U.S. government of lawful revenue. CFI claims it should be able to maintain a False Claims Act case on this basis and receive a portion of the revenue eventually paid to the U.S.

As previously discussed, CFI based this assertion on a comparison of Victaulic's publicly available ships manifest data and pictures of Victaulic products offered for sale of eBay. CFI claims that the pictures lack any country of origin markings or in some cases lack adequate country of origin marking. From that CFI concludes, and asked the U.S. District Court for the Eastern District of Pennsylvania to conclude, that it can state a cause of action under the False Claims Act.

As you know, the Court previously dismissed this case with prejudice because it found CFI had failed to state a claim. CFI is back in Court seeking to file an amended complaint. In its decision denying the motion, the Court recounts the history of this case and the application of the marking laws to the False Claims Act. The Court notes that there is no spot on the customs entry summary (CBP Form 7501) where an importer is required to disclose a liability for marking duties potentially imposed under 19 U.S.C. § 1304(i).

In this phases of the case, CFI has argued that is should be permitted to amend its complaint to state a cause of action. What follows in the opinion is larger procedural and primarily of interest to lawyers. So, I will get it out of thew way to make room for the more interesting point.

First, CFI waited too long to move to amend the complaint. CFI did not move to amend until after the Court entered final judgment against it. That was despite knowing that the Court was skeptical of the "bare bones" complaint and was contemplating a dismissal. The Court waited eight months between the hearing and the dismissal, giving CFI time to move to cure the defects in its complaint. This delay weighs against granting a motion to amend now.

More important, the Court found that any effort to amend the complaint would be futile because there does not appear to have been a violation of the False Claims Act. This is because an importer does not owe marking duties at the time of importation. That obligation arises only if unmarked or improperly marked goods enter the U.S. and are not subsequently remarked, exported, or destroyed. An importer is simply not permitted to preemptively say to CBP, "these goods are not properly marked, so here is my 10% marking duty." That's not how it works. Because the obligation does not arise at the time of importation, Victaulic did not make a false statement by failing to disclose the lack of payment of marking duties, which were not yet owed and may never be owed.

The more interesting question presented here is what will CFI or other FCA plaintiffs have to do to make a FCA case involving customs fraud?  Federal Rule of Civil Procedure 9(b) requires that a complaint "state with particularity the circumstances constituting fraud." The complaint must contain more than evidence of the mere opportunity for fraud. In that context, the Court made an interesting observation that:

It is worth noting that CFI is essentially a stranger to Victaulic. It has no inside information, unlike the typical qui tam relator, who has usually seen direct or indirect evidence of a fraudulent scheme. A current or former employee of a defendant, or an individual who is otherwise in a position to have inside information about a defendant's practices and conduct, bears some level of reliability when he acts as a qui tam relator because he was in a position [to] have observed the alleged fraud through personal experience. . . . When a relator is a complete stranger to the defendant who has constructed a case of fraud entirely from the outside, his allegations do not necessarily bear the same reliability. That is not to say that a corporate outsider cannot function as a relator. However, any outside investigation into a private company's fraud must, in accordance with Rule 9(b), supply the Court with a level of reliable information that strongly supports an inference a FCA violation occurred.

That is a pretty strong statement that prospective customs trolls will need to meet a high burden of pleading fraud. We should keep in mind that this is a decision from one district court. There have been and will be other efforts to bring FCA cases involving customs fraud. Some of those will succeed. So, this remains a developing area of law.

One thing that continues to be certain is that companies should request that their import data be treated as confidential. That will help prevent the kind of data mining CFI has undertaken. You can get started on that here.

Monday, May 04, 2015

Ruling of the Week 2015.14: The "Treatment" of Bicycle Seats

Note, this is not another post about tariff classification. Read through the facts to get to the more interesting issue.

How much controversy could there possibly be over the tariff classification of an add-on child safety seat for bicycles? Apparently, enough to general HQ H170637 (Feb. 11, 2015).

Kent International imports the Wee Ride child safety seat that is designed to mount in front of the saddle on an adult bicycle. Here's what it looks like:



Back in 2005, CBP issued a ruling classifying the Wee Ride as a bicycle accessory in 8714.99.80, subject to a 10% rate of duty.  Customs subsequently issued rulings to other importers classifying similar safety seats in 9401.80.40 as seats, which is a duty-free provision. Obviously, that gave competitors an advantage and probably annoyed Kent. Kent even got some protests approved on the basis of the subsequent rulings. However, Kent's subsequent entries were liquidated in 8714, forcing anther round of protests, which included an Application for Further Review, the intent of which seems to have been to convince Customs to revoke the earlier unfavorable ruling.

The bad news for Kent is that CBP revoked the later inconsistent rulings and determined the correct classification to be as bicycle accessories in 8714. See HQ H180103. In other words, CBP stuck to its guns and affirmed the earlier decision issued to Kent.

What options does that leave Kent? Remember, there has been a substantial period in which it paid a higher rate of duty than did competitors importing similar products. Can it get that money back to level the proverbial playing field?

Kent first argued that the rulings classifying safety seats in 9401 and CBP's liquidation of some of Kent's safety seats constitutes a "treatment." The legal effect of a "treatment" is that, like a ruling, Customs cannot modify it without providing public notice and comment pursuant to 19 USC 1625. But, a treatment is not a ruling. According to CBP, the fact that Kent asked for and received a ruling on the product trumps any argument it may have that CBP developed an inconsistent treatment of these products, which it then modified without proper notice. Rather, the ruling issued to Kent remains in effect until modified or revoked, which never happened. Strike one for Kent.

Picking up on this point, Kent next argued that CBP implicitly revoked or modified the ruling it received when CBP issued the conflicting subsequent rulings to other importers. According to Kent, the appropriate remedy for this is that it should receive the more favorable treatment accorded to the other importers. That, of course would be entirely fair and reasonable.

But, based on the epic litigation involving the classification of "white sauce" in International Custom Products I, CBP disagreed. In that case, the Federal Circuit held that a subsequent Notice of Action was not sufficient to modify or revoke a ruling without the other requirements of section 1625. As a result, the subsequent modification was null and void. Applied to this case, the subsequent rulings were not section 1625 notices of the proposed modification of the ruling originally sent to Kent. As a result, the subsequent rulings had no impact on the ruling issued to Kent. In other words, Kent is stuck with the ruling issued to it until that ruling is modified or revoked. Strike two.

Finally, Kent argued that CBP's rulings and liquidations of seats in Heading 9401 constitutes a de facto established and uniform practice. This is a little different than a mere "treatment." An EUP usually involves a finding by the Secretary of the Treasury. When there is an EUP, Customs cannot increase the rate of duty on merchandise until 30 days after the publication of notice in the Federal Register. See 19 USC 1315(d). On top of that requirement, the courts have found that in some cases there can be a de facto EUP even without a finding of the Secretary of Treasury.

It is hard enough to establish that there is a de facto EUP. It is even harder to do so when CBP has issued a ruling on your product that is inconsistent with the alleged EUP. Moreover, the practice with respect to these seats was not "uniform;" some of Kent's products were liquidated as bike accessories and some as seats. Consequently, CBP declined to find an EUP. That is strike three.

As a result, CBP did not grant any relief to Kent. Under GRI 1 and, specifically, Note 1(h) to Chapter 94, Customs found the bike seats to be classifiable as bike accessories. The problem with all this is that the classification applied to Kent's products appears to be correct (at least we can assume that for now). By applying the correct classification to Kent and an incorrect, more favorable rate of duty to other importers, CBP did potentially substantial damage to Kent. The question is whether someone who got the correct rate of duty has any remedy in this circumstance. Based on these facts, it does not appear that Customs thinks so.

What will the Court say when this get there, as I assume it will. First, there is the classification. Let's hope Kent is protesting entries on which it is paying duties. That will provide a remedy going forward. For the prior period in which Kent was at a tariff disadvantage, it seem Kent needs some kind of equitable remedy. Here's hoping Kent finds it.

What lessons can be learned from all this? First, remember that if you seek a ruling, you will be bound by the result. Do not take that process lightly. Submit a fully supported, well reasoned request that actually advocates for your desired result. A ruling that says "Here is my sample. Please tell me the correct classification," is a recipe for potential disaster. Second, stay abreast of what is happening in your industry. When the conflicting rulings were issued, Kent could have stepped up as an interested party and argued against the results. This might have shortened the period in which it was at a disadvantage.