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.