Thursday, May 26, 2016

My Point Exactly

For the past couple years, I have been on the record at numerous events and in numerous publications with various ideas for how to make tariff classification litigation more efficient and, therefore, more useful for importers. There are several good ideas floating around about this. Not the least of which is the Court of International Trade's recently announced pilot program for a "small claims" process. Others have done the lion's share of the work on that.

My big idea has been to promote early efforts to resolve the legal questions about how to interpret the Harmonized Tariff Schedule. My thought is that if everyone is reading the tariff the same way, the parties will know what facts matter and whether there is a real dispute. With the fact disputes eliminated or narrowed down, discovery can be focused and the parties can get to the controlling issues quickly. It's even possible that, once the parties know the meaning of the tariff terms, cases will be stipulated or settled.

I got here by analogizing tariff classification disputes to patent infringement cases. In a patent case, the judge interprets the patent claims following what's known as a Markman hearing. You can read all about that here, in the Brooklyn Journal of International Law.

Along comes Chemtall, Inc. v. United States, from the Court of International Trade to help me make my case. Chemtall is a complicated case involving more chemistry than I have seen since high school. The opinion is full of helpful diagrams of chemical structures. The product at issue is acrylamide tertiary butyl sulfonic acid or ATBS, for short. The classification question is whether that product is an amide. Since the structure of the produce is well understood, the only question is the definition of an amide.

According to the Explanatory Notes, an "amide" is a compound with an amide functional group and either hydrogen, alkyl radicals, or aryl radicals.

Plaintiff's position in this case is that "many" sources do not explicitly limit the definition of "amide" to those compounds with these functional groups and, therefore, it is possible to substitute a different structure. But, the Explanatory Notes provide a specific definition, which is going to be pretty persuasive. Further, the only source of support for this theory was the plaintiff's expert. Note that the expert is an expert in chemistry, not in interpreting the law. That is what judges are for.

The Court did not agree to expand the definition and applied the Explanatory Notes. That resulted in a win for Customs and Border Protection.

If the parties knew that definition early in the case, would it have taken three years to resolve the matter? Possibly, I was not involved and do not know what disputes might have been raised and resolved along the way.

Plaintiff had some other arguments about whether the product was derivative and the meaning of the 10-digit statistical suffix. And, I certainly do not pretend to understand the chemistry. The great thing about being a lawyer is that I am confident I could understand it if and when it became necessary. That is not today.

What I find fascinating about this case is that THERE WERE NO FACTS IN DISPUTE. The only issue was how to read the tariff language. Much of the 13-page opinion was a careful explanation of the process of tariff classification, the standard of judicial review, and the nature of the product. The value of the expert testimony was a minimal consideration.

When there are no material facts in dispute, cases get decided on motions for summary judgment. That is how the majority of classification cases are resolved. If that is the case, doesn't it make sense to identify the question of law up front, resolve it, and then decide whether it makes sense to continue to pursue the case? If the case goes forward, the relevant facts should be fairly well known, making discovery more focused and the whole process more efficient.

Something like that is supposed to happen in patent cases through Markman hearings and it makes sense to me to try something like that in the Court of International Trade. People in the trade have started talking about applying Markman in tariff cases, which is a good thing. On the other hand, Markman was a patent case and has not direct relevance here. Consequently, I hereby declare that if and when this process takes hold in customs litigation, it be called a "Friedman hearing."

Ruling of the Week 2016.12: Avalanche Aribag

One of the things I find interesting about my job as that I have the opportunity to learn about all sorts of products that I might not ever see in my real life. One such product is the avalanche airbag. It never occurred to me that such a thing existed, but as soon as I read the words "avalanche" and "airbag" together, the concept made perfect sense. This is the item in question:

It is designed to keep the wearer "afloat" in the event of an avalanche. More information about the product is available here. Basically, it is a backpack that incorporates a sturdy balloon and an electrically powered fan to inflate it. Once inflated, the balloon prevents the wearer from being buried in snow.

In NY N274983, Customs was asked to classify this airbag enhanced backpack. My first thought was, "Oh no, this is going in Heading 4202 as a backpack." To me, that seems to undervalue the safety features. Moreover, none of the exemplars in 4202 have safety features. But, that is a straw man I need not fight, because 4202 was not in play. Rather, the importer suggested classification in Heading 9506.99.60 as sports equipment. Customs disagreed with that and noted that the airbag backpack is neither "requisite" not "essential" to any sporting activity.

Instead, Customs classified it in Heading 6307 as an other made up article of textile.

The thing about this device is that it apparently could be worn by anyone in an avalanche-prone area, whether or not participating in a sport. For example, I can see this being worn by the folks who groom and patrol ski runs, by park rangers, and by scientists doing field work. That makes me wonder whether the manufacturer might be able to modify the design to make it clearly dedicated to a sporting event. Customs did admit that it includes exterior straps designed to carry skis, snowboards, and ice axes. Is that enough to make it a product of 9506? Maybe. A more interesting question might be whether there is a clever design tweak that would make it clear that this is a "sporting" product? I don't know what that might be, but I hope the engineers at Arc'teryx are working on it.

Tariff engineering: It's value-added classification.

Wednesday, May 18, 2016

Ruling of the Week 2016.11: Seriously?

Calling this post a "Ruling of the Week" is a little disingenuous. It has been many weeks since I was able to make a "weekly" post. Nevertheless, this is my effort to get back on that self-imposed horse.

Today, we look at HQ H264891(Apr. 5, 2016), primarily because before I read this ruling I had never heard of "tendu leaf cones." I bet most you had not.

A tendu turns out to be the East Indian Ebony tree, diospyros melanoxylon. Someone decided to import leaves of the tendu tree rolled into a tapered cone and secured with threads and a band. You might reasonably be wondering why anyone would need this product. It turns out that these cones are commonly used as wrappers for bidis, which are an alternative to cigars and can be packed with tobacco or "other smoking mixtures." This image should help illustrate what we are talking about.

Keep in mind that as imported the cones were empty. They were, however, packaged with a plastic tool designed to facilitate filling and packing the cones with whatever smoking material the consumer chooses.

The potential HTSUS headings for this product are 1404, Vegetable products not elsewhere specified or included; 3926, Other articles of plastic; or 4813, Cigarette papers.

Because 1404 is a basket provision, it will only apply if one of the other two more specific headings does not apply. As between 3926 and 4813, it seems clear that cigarette paper is the more specific of the two headings. So, we should start there.

The obvious problem is that a leaf is not, in any ordinary sense of the word, "paper." According to the Explanatory Notes, "Paper consists essentially of the cellulosic fibres of the pulps of Chapter 47 felted together in sheet form." Because of this, Customs has previously ruled that tobacco wrappers made of tobacco leaves are not classified as cigarette papers. That would apply to the unprocessed tendu leaves, and exclude them from Heading 4813.

Customs then determined that the cones and plastic stick constitute a retail set to be classified on the basis of the single product that imparts the essential character. Here, Customs focused on the single item without which the set could not meet its particular need or carry out its specific activity. Customs concluded, reasonably enough, that the tendu leaves impart the essential character.

That, of course, leads to the question of where to classify the leaves. The only remaining option is Heading 1404 as other vegetable products and the applicable rate of duty is free.

So far so good. But, Customs is a law enforcement agency and is responsible for border enforcement for both the Food & Drug Administration and the Alcohol and Tobacco Tax Bureau. One has to wonder whether the importer contemplated that its classification ruling request may end up raising issues of admissibility. Customs specifically warned the importer that it did not rule on the admissibility of the merchandise. It may be subject to additional regulations under the Food, Drug, and Cosmetic Act as amended by the Family Smoking Prevention and Tobacco Control Act. Moreover, the tendu cones may be subject to federal excise taxes. Now that those issues have been raised, the prospective importer should be certain to confirm admissibility and tax status before investing much effort in trying to import these products.

Thursday, May 12, 2016

Final Exam 2016: Identity Crisis Edition

You may recall that last year my final exam for Trade Remedies was an elaborate, cinematic fact pattern involving the DC superhero universe. See here for that. Read the comments, which are really quite good.

This year, I was not able to string together quite as detailed a fact pattern for my Customs Law class. I did, however, ask this question. Tell me what you think is the correct answer. I will be flexible, but you should not need to stretch too much.

I'll be back soon. I promise.


Ralph Dibny is the CEO of Plastico, which imports plastic in various forms from suppliers all over the world into the United States. To find suppliers, Ralph relies on two representatives. Reed Richards is responsible for suppliers in South America. Patrick “Eel” O’Brian is responsible for suppliers in Asia. Neither representative is an employee of Plastico.

When Plastico wants to purchase materials from South America, Dibny contacts Richards who then finds suppliers that can provide the necessary material. Richards facilitates the transaction by locating and approving suppliers to Plastico’s standards, creating Plastico Purchase Orders, reviewing supplier invoices for Plastico, approving payment by Plastico, and arranging transportation. For these services, Richards earns a fee of 5% of the invoice price Plastico pays to the supplier. That amount is not shown on the commercial invoice for the imported product and has not been declared to Customs as part of the dutiable value of the merchandise.

Purchasing from Asia is a different process. Eel O’Brian has relationships with several plastic manufacturers throughout Asia. When a manufacturer in Asia has excess inventory, it contacts O’Brian and asks him to sell it to customers in the U.S. The supplier dictates the lowest acceptable price and usually refuses to take responsibility for the cost of shipping and transportation insurance, which must be paid by the customer, including Plastico. O’Brian will then contact Dibny and offer the merchandise to Plastico. If Plastico wants to purchase the merchandise on O’Brian’s terms, it agrees to purchase it from O’Brian. At that point, Plastico will create a Purchase Order naming O’Brian as the supplier. O’Brian places the order with the supplier, who ships the merchandise directly to Plastico in the United States according to the terms of Plastico’s P.O. with O’Brian. The supplier invoices O’Brian who then sends Plastico an invoice showing O’Brian as the seller and including a markup to add his profit. Plastico may not know the identity of the supplier until it receives the shipment, if even then. O’Brian has similar arrangements with several U.S. customers. He negotiates prices with the U.S. customer to maximize his income. The O’Brian’s markup is included in the commercial invoice used for entry and, therefore, has been declared to Customs as part of the dutiable value of the merchandise.

Plastico is always the importer of record and is not related to Richards, O’Brian, or to any foreign manufacturer of plastics. Transaction value is the applicable basis of appraisal.

Dibny has asked for your legal advice on whether the fee paid to Richards and O’Brian’s markup are legally part of the dutiable value of the merchandise. Dibny also wants to know whether there are adjustments Plastico can make to ensure that the amounts paid to Richards and O’Brian’s markup are not dutiable.