Friday, February 26, 2016

Discovery Dispute at the Court of International Trade

Discovery is the legal process through which each side to a law suit asks the other side to disclose the facts relevant to the claims and defenses. It usually consists of depositions of knowledgeable witnesses, written questions and requests for production. Discovery disputes are unusual in customs litigation. More often than not, the parties can reach an agreement on the material facts. The dispute is usually, but not always, over the conclusions to be reached from those facts after the applicable law is properly interpreted. When a discovery dispute does arise, people notice (and by "people" I mean "me").

Meyer Corporation, U.S. v. United States is about a discovery dispute. The underlying issue is that Customs and Border Protection audited Meyer and determined that its application of the first sale methodology of valuation was unacceptable. If you don't know what that means, go back and read this classic post from 2005. Customs also denied duty-free claims under the GSP. After the audit went negative, the importer ask Regulatory Audit to seek internal advice from Customs' headquarters. That internal advice resulted in ruling  HQ H088815 (Sept. 28, 2011)(note that the ruling is there but seems to be posted without all of the proper formatting). The ruling went against the importer, and the lawsuit followed.

From Investigations

In discovery, counsel for the plaintiff sought essentially all of the documents in Customs' possession relating to the audit and to the internal advice. That resulted in the production of nearly 10,000 pages and Excel files. Some of the contents were redacted on the basis of governmental privileges covering the deliberative process and law enforcement techniques. In addition, business proprietary information, attorney work product, and attorney-client privileged material was redacted. As required, the government produced a detailed privilege log explaining the reasons for the redactions. This was followed by eight depositions for current and former Customs personnel, at least one of whom was technically speaking for the agency.

Plaintiff then filed a motion to compel Customs to provide un-redacted versions of the documents.

The deliberative privilege is intended to protect the government's decision-making process. It gives governmental officials the ability to freely and openly discuss matters of policy without fear that those discussions will be subject to discovery. In other words, it hides what goes into the sausage that is administrative rule making and forces lawyers to challenge the result. Advisory opinions, recommendations, and inter-office skirmishes get ground up into the final product. Litigants are generally not permitted to hunt around for the helpful scrap of veal that went into the bratwurst.

To be covered by deliberative privilege, the relevant department head (or a designee) must formally assert the claim in an affidavit describing the information and his or her actual consideration of it. In this case, the affidavit came from the Acting Executive Director of Regulations and Rulings. In other words, one of the officials involved in making the decision.

The deliberative process is not absolute. If there is no other source for some information and the plaintiff's need for it outweighs the harm to the process, the information is discoverable. Further, if those deliberative documents are somehow applied by the decision maker as if they were law, the documents are discoverable. In other words, Customs can't say "we have a secret memo on this issue that says you lose."

The Court did not discuss the law enforcement privilege claim other than to say that the rule for asserting it is similar. So, I will leave that alone as well.

The Court of International Trade took the practical step of actually looking at the disputed un-redacted documents, without disclosing them to the plaintiff. According to the Court, all of the redactions are of business proprietary information, agency proprietary information, or work product prepared in anticipation of making one or more of these decisions.

Based on that review and the OR&R declaration, the Court determined that the claim of privilege was appropriate. None of the information had been made public elsewhere and no exceptions to the privilege apply.

The decision ends with "To the extend the plaintiff disagrees with Customs' analysis and denial of its protest, the burden in on the plaintiff to establish its entitlement to first-sale and GSP treatment in accordance with the facts and law established during judicial review that is de novo." My personal translation of that is "Hey plaintiff, you have the facts of your transactions, bring them to court and prove your case."

Ruling of the Week 2016.5: Kaboom! Project Management Fees

There used to be a time when I was able to keep this blog up, make each post funny, and occasionally interesting to the customs compliance pros. But, as periodically happens, then I get busy. It turns out that this is week 8 of 2016 and I am about to post ROTW number 5. I am not happy about that. Let's see what we can do to catch up.

Today's ruling is HQ H270670 (Feb. 17, 2016) and continues our focus on value questions. Value is complicated enough to make many compliance professionals quake.

The ruling involves purchases by "The Cereal Company" of premiums or toys. The only Cereal Company I can find online purports to be in Zambia. Thus, my assumption is that the Cereal Company is a pseudonym for an actual cereal company and that these toys are headed into boxes of puffed sugar and artificial color.

This case is honeycombed with players. The Cereal Company buys the toys from suppliers in China. An unrelated third party in the U.S. called Insight Promotions arranges for the toys to be wrapped and performs project management and testing. To save on alpha-bits, I will call that company "Insight." Insight outsources the wrapping to a third company in Canada called Econopac. Consequently, the goods go from China to Econopac in Canada and then to the United States. Econopac does not purchase the goods and does not have title. It invoices Insight for its services.

Insight Promotions performs additional services on behalf of the Cereal Company. Those include consultation about the toy design, communication with the manufacturer about production, testing, consultation with the buyer about packaging, management of the packing process, etc. According to Customs, the Cereal Company "reimburses" Insight for these services. I think the better term is "pays." Although, Insight may be reimbursed for the services from Econopac, assuming it pays Econopac.

For some reason, the Canadian Econopac is the importer into the United States. Think about that for a moment. Econopac does not own the goods, it is a toller providing services. The Cereal Company needs the merchandise and is the purchaser. Insight is supposed to be managing the process for The Cereal Company. There may be a perfectly good reason why this is set up this way. But, to my way of thinking, the Cereal Company might want to have more control over the compliance of its supply chain. It is a kick in the head when there is a problem with an entry and the party with the greatest interest in the goods, which I am assuming is the Cereal Company, is not the importer and can't easily get involved in the issue. But, that is a side issue for another day.

At entry, Econopac declares the value to be the sum of the following pebbles of value:
  • The price paid by the Cereal Company for the toy
  • Econopac's fee for wrapping
  • The value of the wrapping material (plastic film)
  • The additional fees for services charged by Insight
The question raised in the ruling is whether the additional services provided by Insight in the U.S. should be part of the dutiable value.

Uncle Sam, through U.S. Customs and Border Protection, assumes that the proper method of appraisal is transaction value. That means that the dutiable value will be the "price actually paid or payable for the merchandise when sold for exportation to the United States." That is, in other words, the total payment made for the merchandise by the buyer to or for the benefit of the seller.

Here, the payment to Insight is not a payment to the seller of the imported goods. The goods were sold by the supplier in China to the Cereal Company. Insight and Econopac were service providers, not sellers. On top of that, the services Insight provided were not closely related to production. It did not design the item nor did it provide manufacturing or production expertise. The payments to Insight, therefore, are not art of the price paid or payable for the imported merchandise. Which, I can say without waffling, is a good result.

Sunday, February 14, 2016

Is it Deja Vu, Again?

[Updated because sometimes proofreading is useful. I corrected some typos and clarified a bit.]

The Court of International Trade has been asked to decide the classification elfa-brand racks and hanging standards made of epoxy-bonded steel for the Container Store. No, this is not a repeat and you are not experiencing legal Deja vu. The issue has been raised again. The interesting point is that the result has changed, so read on.

Before we get too far down this rabbit hole, re-read this post on stare decisis at the Court of International Trade. It is useful background. Then, here is my post on the prior Container Store case.

There are two items at issue in this case. elfa top tracks and hanging standards. The top tracks look like this:
The top track can be screwed into place on a wall or other surface and serves an an anchor for the handing standards, which look like this when attached to the top track:

The hanging standard lets consumers attach components such as shelves, baskets, and other items in customized configurations. In my garage, this is what keeps hoses, rakes, and lawn chairs off the ground.

This case follows the prior Container Store decision in which the CIT held that the merchandise was properly classified in HTSUS Heading 9403.90.80 as parts of furniture. That decision, in turn, relied on a Federal Circuit decision in a case called storeWall, LLC v. United States. An important distinction is that the merchandise in storeWall was plastic. The merchandise here is steel.

Here, Customs and Border Protection liquidated the entries classifying the merchandise in HTSUS item 8302.41.60, as base metal mountings and fittings for building. In Court, Customs asserted that the correct classification is 8302.42.30 as mountings and fittings suitable for furniture (3.9%). Container Store argued for 9403.90.80, other parts of furniture (Free).

The first thing Container Store requested is an order requiring that Customs apply the prior Container Store and storeWall decisions to all of its pending cases and protests. I like the chutzpah. But, the only thing before the Court is the summons in this case. That summons identified two denied protests as subject to the challenge. Pending protests, unliquidated entries, and cases on the Court's reserve calendar are not before the Court. Thus, the Court declined the request to issue a blanket order.

Plaintiff next raised the question of whether Customs is required to follow the court decisions by virtue of 19 CFR 152.16(e), which states:

Other decisions adverse to Government. Unless the Commissioner of Customs otherwise directs, the principles of any court decision adverse to the Government (except for a decision upholding an American manufacturer's petition as covered in paragraph (d) of this section) shall be applied to unliquidated entries and protested entries which have not been denied in whole or in part and in which the same issue is involved as soon as the time within which an application for a rehearing or review may be filed has expired without such application having been made. See § 176.31 of this chapter for the treatment of entries which are the subject of a court decision.
This is the regulation that tells Customs when it has to start following a court decision that goes against it. According to the regulation, the decision applies to unliquidated entries and pending protests after the time runs for an appeal. So, if the case goes to the Federal Circuit, the decision is not applied to unliquidated entries until the Federal Circuit decides the case and the time to appeal to the Supreme Court runs out. The regulation was no help to Container Store because the entries on the summons before the Court were both liquidated and the subject of denied protests.

That brings us to stare decisis. Stare decisis is the legal principal that makes a court's judgment a statement of the applicable law. In other words, it is a precedent. Future decisions by the same court (read that as "judge") and lower courts should be consistent with the precedent. Container Store pointed to stare decisis as requiring that the Court of International, as embodied in Judge Barnett, follow the prior Container Store decision issued by Judge Ridgway and the Federal Circuit decision in storeWall.

The easier issue is the precedential impact of storeWall. The problem for Container Store is that Judge Barnett is not facing the same set of facts as was presented to the Federal Circuit in storeWall. The product in storeWall was plastic, and that distinction matters. HTSUS Section  XV, which contains Heading 8302, covers base metals and articles of base metal. These provisions were not in play in storeWall. In particular, Chapter 94, Note 1(d) excludes from that Chapter "parts of general use" of Section XV. When it decided storeWall, the only competing headings were the basket provisions for other articles of plastic (Heading 3926) and parts of furniture (Heading 9403). Thus, storeWall does not control the outcome here.

What about the prior Container Store decision? First off, judges of the same court are not bound by each other's decisions. The duty of each judge in each classification case is to find the correct result. Presented with new arguments or new evidence, the subsequent judge can reach a different conclusion. Unfortunately for Container Store, that is what happened here.

Which brings us to the actual classification analysis. The government conceded that the elfa products are prima facie classifiable in Heading 9403 as parts of furniture. That means the question is whether the merchandise is also prima facie classifiable in Heading 8302. If so, the exclusionary note will kick the merchandise out of 9403, landing it in 8302.

Heading 8302 includes base metal mountings, fittings and similar articles suitable for furniture. Base metal is defined to include iron and steel. Although bonded with epoxy, the merchandise is steel and, therefore, base metal. The merchandise serves as a support frame for various components and is, therefore, mountings.

With respect to 9403, the Court applied the definition of "furniture" from storeWall. Under the definition, the versatility and adaptability of the system are consistent with "unit furniture." So, 9403 remains in play.

Looking to the relevant legal notes, as is required under General Rule of Interpretation 1, there are several relevant considerations. Section XV, Note 1(k) excludes from 8302 articles of Chapter 94. Further, Note 2(c) defines the term "parts of general use" for the entire tariff schedule as including articles of Heading 8302.

As an aside, the United States raised an interesting issue with respect to Note 1(k). When a note excludes "articles" of a certain heading, does "articles" refer to all products of that heading, including parts or only to finished articles, exclusive of parts? I read it as the latter, but that issue need not be resolved to decide this case.

Chapter 94, Note 1(d) excludes parts of general use. The top racks and standards are parts of general use and are, therefore, not classifiable in 9403. This is consistent with Additional U.S. Rule of Interpretation 1(c), which says that a provision for parts will not prevail over a specific provision for that part. Heading 8302 is the specific provision for these parts. That makes the correct classification 8302.42.30.

That is a reasoned and reasonable result. But, I have a question. Based on this, was storeWall decided correctly? Chapter 94, Note 1(d) excludes parts of general use of base metal "or similar goods of plastic." The racks and standards in storeWall were apparently similar in design and use, but were made of plastic. Should they have been excluded as plastic parts "similar" to based metal articles of 8302? If the analysis in storeWall touches on this issue, then that analysis might be binding on the CIT, in which case this decision would be in conflict with a binding precedent. My assumption is that storeWall does not address parts of general use and since this post is already too long, I am not going to check right now. What I will do is bet that the Federal Circuit will have another opportunity to address this issue when Container Store appeals (again).

Thursday, February 04, 2016

Ford Motors and the Missing $6.2 Million

One would think that if everyone involved agreed that the United States federal government owes a taxpayer a refund of over $6 million that the government would pay it. One would hope that would not be controversial. Unfortunately, it is and it points up a problem in litigation.

This thought is brought to you by Ford Motor Company v. United States, in which the Federal Circuit refused to order Customs and Border Protection to pay Ford the refund. Instead, the issue was sent back to the Court of International Trade for another round of litigation.

The background on this case is complicated and a bit of a mess. Ford imported some Jaguar cars and deposited estimated duties at the time of entry. It must have flagged the entries for ACS Reconciliation because it subsequently filed nine reconciling entries seeking a $6.2 million refund. The reconciliations were filed between June of 2005 and October of 2006. Normally, Customs has a year to liquidate the entry and can extend that time by up to three one-year extension periods. If not liquidated within the one-year period or within an extension period, the entry is deemed liquidated based on the information provided by the importer. In this case, that would be with the lower duty liability Ford asserted in the reconciliation. In April of 2009, Ford filed suit claiming the entries were deemed liquidated and seeking payment of the refund.

Part of the problem is how Ford had to file the case. Because there were no liquidations of the entries, Ford had nothing to protest. Consequently, it could not file a case under 28 USC 1581(a), as is the normal course of action. Instead, it filed under 28 USC 1581(i), which is subject to a two year statute of limitations but is only available to a plaintiff when challenging a denied protest is impossible, futile, or manifestly inadequate.

After Ford filed its case, Customs affirmatively liquidated five of the nine entries. At that point, the Court of International Trade dismissed the case with respect to those five entries on the grounds that (a) jurisdiction was available, meaning the case was not properly filed. The CIT refused to decide the issue with respect to the remaining four entries, saying that all nine could be protested and challenged under 1581(a). Customs then liquidated the remaining entries and denied all refunds.

Ford appealed. That is not this appeal, that was Ford I, also known as Ford Motors and the Cursed Reconciliation. In that decision the CAFC held that the liquidations by Customs subsequent to the filing of the (i) case did not defeat the subject matter jurisdiction the Court had under the properly filed (i) case.

Back in the CIT, it was determined that all but one of the claims was filed beyond the two-year statute of limitations for an (i) case. For the remaining case, the CIT declined to exercise its discretion to decide the case. According to the CIT, the most efficient approach is for all of the cases to decided together in an (a) case. Ford appealed, again, in what is now Ford II, Ford Motors and the Federal Circuit.

If this was not already an excessively lawyer post, it is about to get worse. The first issue has to do with whether the two-year statute of limitations is jurisdictional. If so, the Court of International Trade would lack the power to review and decide the cases that were filed beyond the two-year deadline. Frankly, it shocks me that this is a question, but it is. Recent Supreme Court cases, including United States v. Kwai Fun Wong have expressed the view that Courts should not find a jurisdictional bar without very clear direction from Congress. Congress need not use any "magic words," though I suggest "Colloportus" would be an appropriate way to lock the courthouse doors. Here, the Federal Circuit found no jurisdictional bar in a statute of limitations and, effectively shouted "Alohomora." Rather than a jurisdictional bar, the statute of limitations is a run-of-the-mill statement of the litigant's filing obligations. [We'll come back to that.]

That means the Court should look to the merits of the case. The first part of the merits was whether the CIT abused its discretion when it refused to issue a declaratory judgment on Ford's claims that were timely filed. Trial courts, including the Court of International Trade, hold "unique and substantial discretion" in deciding whether to issue declaratory relief. On the previous remand, the CIT declined to exercise that discretion, finding that it would be more efficient to adjudicate all the claims in a 1581(a) case after CBP denied the protests. There is merit to this as a 1581(a) case is a de novo case where all the issues are decided on the basis of the evidence presented to the Court. a 1581(i) case is more limited review of the administrative process. Based on all of this and the generally wide latitude given a trial court's discretionary decisions, the Federal Circuit affirmed the CIT's decision to withhold declaratory relief.

Regarding the claims that were filed beyond the statute of limitations, the Federal Circuit noted that Customs liquidated these entries and the claims remain subject to litigation under 1581(a) in the CIT. Consequently, the Federal Circuit is certain (enough) that the CIT would not have exercised its discretion on these cases either. So, the Court of Appeals affirmed the decision.

What that means is that this is all headed to the Court of International Trade, again. There, the CIT will have to figure out what to do with a case that was filed late, but where the statute of limitations is not technically jurisdictional. Assuming the cases are decided on the merits, it appears that Ford should be able to collect the $6.2 million, perhaps in a Goblet of Fire.

This case is lousy with technicalities. It is actually the sort of technical decision that makes non-lawyers wonder why we can't just get to the correct result. I admit to having that feeling myself--often. Circuit Judge Newman, in a fine dissenting opinion, expressed just that frustration.

The litigation problem here is that as lawyers we all have clients and responsibilities. Once we are in Court, it is sometimes hard to see the heart of the issue through the technical legal arguments. The fact that there may be a good legal argument against refunding this money does not obviate the underlying fact that Ford has apparently overpaid customs duties by a whopping $6.2 million. It appears (though there is some ambiguity) that Customs agrees with this proposition. If that's true, it would be nice if Customs just did the right thing and refunded the money. Otherwise, the U.S. is enjoying what we lawyers call an unjust enrichment. But, the law and the rules are there to protect taxpayers as well. A company that overpays can't sit on its rights or improperly assert those rights. If it does, it risks being out of luck. That system creates an impasse the often can't be bridged without a trip or two to court.

Tuesday, February 02, 2016

Ruling of the Week 2016.4: Curtis Stone's Chop Chop

Here is something you may not know about me . . . I watch competitive cooking shows the way a normal guy watches baseball. As far as I am concerned, Alton Brown is the Kenesaw Mountain Landis of cooking and Ted Allen is its Howard Cosell. Consequently, when a ruling (HQ H266149 (Oct. 21, 2015)) from Customs and Border Protection invokes the name of Curtis Stone, I pay attention. In this case, the question was the tariff classification of "the Curtis Stone Chop Chop Deluxe Food Chopper."

Exhibit A:

I suspect someone at Customs is a fan because the sentence "Curtis Stone is a celebrity chef from Australia," is irrelevant to the issue. It is, however, a true statement.

As you can tell from the picture, this is a hand powered chopper with interchangeable blades. The top handle presses down, pushing the food item through the blade and into the receiving container. Simple.

The goods entered the United States classified in 8205.51.30 (3.7%) as handtools (including glass cutters) not elsewhere specified or included; household tools; other. The statistical level refers to "Kitchen and table implements," but that is not really relevant for classification purposes. The customs broker subsequently corrected the entry and asserted that the correct classification is 7323.93.0060 (2%), which covers "Table, kitchen or other household articles . . . of iron or steel, of stainless steel: Kitchen ware." Customs and Border Protection rejected both classifications and went with 8210.00.0000 (3.7%) covering "Hand-operated mechanical appliances, weighing 10 kg or less, used in the preparation . . . of food . . . ."

Problem one for Curtis, who was not actually the protestant, is that the Explanatory Notes to Heading 7323 state that the heading only covers items not more specifically provided for in another heading. Further, the Explanatory Notes exclude from Heading 7323 household articles having the character of tools including cheese graters, mincers, and vegetable mashers. On the other hand, the Explanatory Notes indicate that Chapter 82 covers "Articles of cutlery" and "certain mechanical domestic appliances." To make matters worse, the EN to 8205 states that it covers all hand tools not included in other Headings of Chapter 82. The Chop Chop sits on the countertop when in use and is, therefore, not hand held. That brings us to 8210.

The Explanatory Notes state that 8210 covers non-electric mechanical appliances, not exceeding 10 kg, used in the preparation of food. The Note goes on to say that something is "mechanical" "if it has such mechanisms as crank-handles, gearing, Archimedian screw-actions, pumps, etc.; a simple lever or plunger is not in itself, however, regarded as a mechanical feature  . . . unless the appliance is designed for fixing to a wall or other surface, or is fitted with base plates, etc. for standing on a table, on the floor, etc."

According to Customs, 8210 describes the Chop Chop, which is a sufficient basis on which to exclude it from 7323 and 8205.

But, there is the mandolin issue. Exhibit B.

Mandolins have been classified in 7323, so what gives? According to Customs, the hand operated push and pull action of the mandolin is not mechanical in the same sense as is the plunger on the Chop Chop. With all due respect to Customs, I would worry about that. It strikes me that neither device provides much in the way of mechanical advantage. The plunger has a bit of a gravity assist, but that's it, and the note says a plunger is not enough. As far as I can tell, there is no gear, pulley, spring or other mechanical element that amplifies the action of the user. That strikes me as a weakness in the decision.

But, that is just me. What do you think. Is the Chop Chop mechanical? Should Curtis Stone file a case? If so, can we call him as an expert witness and have him make French fries in the courtroom as demonstrative evidence and as a snack? If so, I'm totally in.