Wednesday, August 24, 2016

Breaking News: Otter Products is Still Correct

You may know that one of the more closely watched appeals has been Otter Products, LLC v. United States in which the Court of International Trade previously overturned the tariff classification Customs and Border Protection assigned to covers for mobile devices. My original post on the case is here.

Customs classified the covers in HTSUS Heading 4202, which includes, among a large number of other things, suitcases, camera case, backpacks, and similar contains. The Court of International Trade held that mobile device covers are not "similar" to the exemplars listed in the heading and, therefore, could not be classified there. The principle reason supporting that conclusion was that none of the exemplars allow the user complete and functional access to the contents while in the container. To put it in colorful terms: I can't wear my socks when they are in a closed suitcase but I can use my device when it is in the OtterBox Commuter and Defender cases at issue. The alternative is to classify these products as "other articles of plastic" in Heading 3926. The applicable rates of duty are 20% for tariff item 4202.99.00 versus 5.3% for tariff item 3926.99.90.

The Federal Circuit has now affirmed. The decision is, in my opinion, close to perfect.

Looking to the legal text, the Court noted Chapter 39, Note 2(m), which states that Chapter 39 does not cover trunks, suitcases, handbags, and other containers of Heading 4202. That means that if the device covers are properly classified in 4202, they cannot be classified in 3926.

To fall within 4202, the covers must be "similar containers," meaning similar to trunks, suitcases, and other listed containers. To be fair, some of the listed containers are kinda, sorta similar to device cases including spectacle cases, tobacco pouches, and beverage bags. When trying to decide whether something is similar to the listed containers, the Court considers "the unifying characteristics" of the listed products and determined whether the imported item shares those characteristics and does not possess a "more specific primary purpose that is inconsistent with the listed exemplars." A number of prior decisions have identified the unifying characteristics of Heading 4202 as being the ability and purpose of "organizing, storing, protecting, and carrying various items."

Right out of the blocks [Metaphor alert: I must have recently watch too many hours of Olympic track.], the Federal Circuit determined that mobile device cases that provide continual, useful access to the enclosed device are not "containers" at all, let alone "similar containers." The point here is that the common definition of "container" includes examples of items such as boxes, crates, cans, and jars, all of which usually require some minimal effort on the part of the user to get to the enclosed item. The Court of International Trade noted that the device covers at issue, on the contrary, are designed to let the user get to and manipulate the device without opening the cover or removing the device. It is, however, easy enough to envision an open box, for example, permitting access and use of the enclosed item. Consequently, while important, neither the Federal Circuit nor the CIT ended its analysis with this point.

Next, the Court noted that the Commuter and Defender covers are not "similar" to the listed exemplars. Here, the real question was whether the test for "similar containers" required the container to have all four of the unifying characteristics or whether any one is enough. This was an open question and, in my view, a false dichotomy. The answer need not be one or the other in all cases. As the Federal Circuit eventually found, the proper analysis takes all the factors into consideration but applies them in the context of both the item to be classified and the text of Heading 4202. According to the decision:

We take this opportunity to clarify that there is no requirement that the subject merchandise meet all four characteristics to qualify as a “similar container” under Heading 4202.  Courts should consider the four characteristics collectively and then determine whether, in light of those considerations, the classification would lead to an inconsistency.  If, for example, an item met only one of the four characteristics, it almost certainly would not qualify as a “similar container” under Heading 4202.  Allowing a single factor to satisfy the inquiry would, in almost all conceivable scenarios, render the scope of “similar containers” so broad that it would lead to absurd results and make consistent application of the standard all but impossible.

Turning to those individual characteristics, the Federal Circuit first looked at whether the covers organize the devices. They do not. A phone on the table or in my pocket is just as organized as a phone in a case on a table or in my pocket.

Looking to "storage," the Court held that because the devices remain fully accessible and useable, the covers are not "storage" containers.

It was undisputed that the covers protect the devices.

Finally, the covers do not facilitate carrying the devices. The Court observed that, if anything, the device carries the case. Furthermore, when it comes to carrying the device, there is little difference between carrying the naked device and one in a cover. Thus, the covers do not "carry" the device.

The examination of the four factors did not end the analysis. The government argued that the CIT imposed an additional fifth factor that the item must be removed from use while in the container. The Federal Circuit disagreed. This was not a new factor. Rather, it was a recognition that the digital device covers have a characteristic and purpose that is inconsistent with the examples in 4202. That characteristic is that the enclosed device remains fully useable. That was not an error on the part of the CIT.

This is a really good decision, and not just for Otter Products. There are many importers with pending protests or summonses waiting for this decision. They should all be very happy. Moreover, this is an important decision because the Federal Circuit did not get tripped up by trying to create a simple black and white test composed of all four factors or of any one factor. Instead, the Court took a thoughtful approach to both interpreting Heading 4202 and applying that interpretation to the specific products at issue. It is possible to imagine a variety of mobile device covers that should properly stay in Heading 4202. They might have some sort of handle or a cover that needs to flip open to use the phone. By focusing on the particular items at issue, and recognizing that it is was not necessary to make one hard and fast rule for all possibilities, the Court avoided future problems and added clarity to the law.

Taking all of that into consideration, the Federal Circuit found the device covers to be classifiable in 3926 and affirmed the Court of International Trade.

A win is a win. A win that makes good law is even better. Congratulations to all involved. [Go ahead, click the link.]

Saturday, August 13, 2016

Zombie Protests and GSP

There have been a few cases of note that I have not yet reviewed. Call it Olympic Distraction Syndrome or Summer is Rapidly Ending Depression. Either way, I've read the cases so you don't have to.

First up, Zojirushi America Corp. v. United States, from the U.S. Court of International Trade. This case will go down in legal history as the genesis of Zombie Protests. You heard it here first.

Zojirushi is an importer of vacuum bottles and jars, home appliances, and housewares. It made several entries that Customs and Border Protection liquidated as entered. Zojirushi then protested the liquidation and asserted a claim for duty-free treatment under the Generalized System of Preferences. Customs, following its internal policy, "rejected" the protest as asserting a non-protestable claim.

This case is important and complicated enough to merit bold-face headings, a rarity in this blog.

Jurisdiction: 1581(a) or 1581(i)?

Usually, Customs will either approve or deny a protest. When it denies a protest, the protestant can bring an action to the Court of International Trade under 28 USC 1581(a). Absent a denied protest, the Court of International Trade will not be able to hear the case pursuant to 1581(a).

The alternative is to bring the case pursuant to 1581(i), which is the so-called residual jurisdiction of the CIT. It is applicable to cases involving the collection, administration, and enforcement of customs duties that are not properly the subject of a denied protest.  Because Customs rejected the protest rather than denying it, Zojurushi filed its case under (i). The problem for Zojirushi is that (a) and (i) are mutually exclusive and if it could have filed a case under 1581(a), then it cannot proceed under 1581(i).

The Court framed the issue as whether the GSP claim was properly protestable. If so, then jurisdiction is proper under 1581(a). If not, then (i) may be the proper avenue for the plaintiff. This is an important question because it goes to the heart of whether an importer can protest a no-change liquidation. After all, CBP liquidated the entry without GSP benefits because that is what the importer requested. If CBP did what the importer asked, why allow the importer to challenge Customs' decision? Is it fair to say that CBP made no decisions that can be protested?

Let's look at the law. Protestable decisions are defined in 19 USC 1514, which permits a challenge to "any clerical error, mistake of fact, or other inadvertence . . . adverse to the importer, in any entry, liquidation, or reliquidation, and, decisions of [Customs and Border Protection] . . . as to . . . the liquidation . . . of an entry . . . pursuant to . . . section 1500 of this title." According to the CIT, the protest in this case involved an inadvertence that is adverse to the importer. That would be the failure to assert the GSP claim. Furthermore, the inadvertence related to the entry and was reflected in the liquidation. On its face, the statute seems to make this a protestable decision.

The Department of Justice was not without arguments. Relying on Customs' regulation 19 CFR 10.172, Justice argued that a claim for GSP is only protestable if made at the time of entry. The Court disagreed. The regulation states, in part, that "If duty-free treatment is claimed at the time of entry" the claim is to be noted noted by appending the letter A to the HTSUS number. The "if" clearly implies that there are circumstances where the claim is not made at the time of entry. The regulation makes this explicit when it later says, "If duty-free treatment is claimed subsequent to the time of entry . . . ", other documentary requirements apply. This language was added in 1977 precisely to permit post-entry claims. Similar language is in a 1994 Treasury Decision.

Is there a Decision?

Getting to what I see as the meat of the debate, Justice argued that because there was no claim at the time of entry, Customs made no decision regarding GSP when it liquidated the entry. Without a decision to challenge, there can be no valid protest. To support this proposition, Customs relied on a ruling, HQ H193959 (Jul. 30, 2012). The ruling, while not a formal regulation, is entitled to judicial deference proportional to its "power to persuade."

The CBP ruling was based on two prior decision of the Court of Appeals for the Federal Circuit. In Xerox and Corrpro, the Federal Circuit said that under the applicable statutes and regulations, an importer cannot first assert a NAFTA claim in a protest. The question before the CIT is whether that principle applies to GSP claims. According to the CIT, the Federal Circuit did not go that far. In fact, the Federal Circuit explicitly said it was not suggesting that an as-entered liquidation can never give rise to a protest. The decision was limited to preferential claims under NAFTA. The ruling, therefore, was not persuasive.

Form this, the CIT concluded that the post-entry GSP claim can be first asserted in a protest. In other words, there is a protestable decision.

But, is there a Denied Protest?

Customs did not affirmatively deny the protest; it rejected the protest as invalid. Since 1581(a) requires a denied protest as the basis for jurisdiction, there is an issue of whether CBP's action constitutes a denial.

It is easy enough to conclude that what CBP did was not an allowance of the protest. Was it a denial?

This is where things turn ugly for the importer.

Let's assume it was a denial. In that case, the summons to the Court of International Trade would be due 180 days from the date of denial. In this case, the summons was filed beyond that date, but within the 2-year period allowed under 1581(i). If 1581(a) is the proper basis for jurisdiction the case is time barred.

But, CBP did not deny the protest. If it had, Customs would have followed the required procedures including providing a reason for the denial and notifying Zojirushi of its right to seek judicial review. Everything CBP did appears to have been calculated to communicate that no denial had occurred because the protests was simply rejected as not properly filed. Consequently, the rejection cannot be interpreted as a denial.

Where does that leave Zojirushi? Not without recourse. It turns out that a rejected protest is not exactly dead. But it is not quite alive either. It has not been denied but is not exactly pending either. I am certain that as far as CBP is concerned, the issue is decided and over. What we have here is The Walking Dead of Protests. But, unlike the walkers on TV, this one can be cured.

The law provides that whenever "a protest has not been allowed or denied in whole or in part," the protestant can force a decision by seeking accelerated disposition under 19 USC 1515(b). Under the much maligned decision in Hitachi, the protestant can do this any time, even after the 2-year period in which CBP was supposed to act.  Here, Customs has neither allowed nor denied the protest, that makes it open to accelerated disposition. If the protestant takes that route, it will likely have a denied protest after 30 days, and a ticket back to Court.

Because Zojirushi can get adequate relief under 1581(a), it cannot proceed under 1581(i). That means the case is dismissed but very much alive if Zojirushi demands accelerated disposition.

I am not a fan of the result in Hitachi, though I think it is legally correct. As a matter of policy, I think CBP should required to act on a protest within the 2-year period. If it can't do that, I think the importer deserves finality and the protest should be deemed granted. At a minimum, it should be deemed denied and open to judicial review. But, I am not Congress and that is not the law. The nice thing about this decision, is that it makes lemonade out of what I think of legislative lemons by finding a means for the protestant to get to Court when CBP. That is a good result.

Monday, August 08, 2016

Ruling of the Week 2016.18: A 1967 Ferrari in the HTSUS

We have been down this road before. When is a car so classic, so old, and so valuable that it ceases to be a car for purposes of tariff classification and is treated as a collector's piece of historical interest?

This time, in HQ H271385 (May 9, 2016), the question involves a 1967 Ferrari 275 GTS/4 NART Spyder. I think this is the model in question:

This particular vehicle is the second to last of 10 such vehicles ever produced. One sold at auction in 2013 for over $27 million. The commercial invoice used at the time of importation showed this vehicle having a value of $25 million.

From a classification perspective, there is no question that this is a car of Heading 8703. The question is whether it is also a collectors' piece of historical interest of Heading 9705. If so, Note 4 to Chapter 97 precludes classifying the vehicle in Heading 8703.

Clearly, this item is of great interest to collectors. That leaves open the question of whether that interest is "historical." Looking to dictionary definitions, Customs determined that an item is of historical interest if it relates to history or is concerned with past events. To be of historical interest, the item should be rare, old, and connected to a specific historical event, era, person, or other thing worthy of study. When applied to the "Ushabti of Neferhotep," for example, Customs found an ancient Egyptian statute to be classifiable in Heading 9705.

Turning to prior rulings involving cars, Customs noted that cars are generally mass-produced commercial goods, not collector's pieces of historical significance. Even when made in limited runs and promoted as collectors' items, mass-produced merchandise is not likely to classified in 9705 until it is both old and rare. So much for my collection of Green Lantern Happy Meal toys.

But, this car is both old and rare. Customs has previously classified some nearly-unique vehicles as collectors' items. Customs did so after considering many factors and cautions against concluding that an antique or classic car is necessarily a collectors' item.

But, seriously, look at this car. It is a $25 million, nearly one-of-a-kind, 1967 Ferrari. It was personally designed by Enzo Ferrari and was handmade by him and his design partner. Of course it is an item of historical interest. Someone at Customs and Border Protection, being both rational and apparently a bit of a car buff, reached the same conclusion. This is a collectors' piece of historical interest. It is entitled to duty free entry. By my math, that is a $62,500 win for the importer.

Thursday, August 04, 2016

Ruling of the Week 2016.17: A Burning Question About Drawback

What happens when an importer pays duties, taxes and fees on imported merchandise which is subsequently destroyed in a fire? Unfortunately, nothing good.

Duty drawback is a statutory mechanism by which 99% of the duties, taxes, and fees paid on entry may be refunded if, within three years of importation, the merchandise is exported or destroyed under Customs' supervision. The merchandise must not have been "used" in the U.S. and the claimant must satisfy the regulatory requirements. See generally 19 USC § 1313(j)(i). As an aside, there are other kinds of drawback for special circumstances including petroleum products, substituted goods, and rejected merchandise.

In HQ H219828 (Aug. 27, 2014), a company called Sarmento Import and Export, Inc., sought drawback on bottles of wine lost in a warehouse fire. To give CBP the opportunity to observe destruction, the regulations require that the claimant submit a Form 7553 at least seven working days prior to the intended destruction date. This gives CBP the opportunity to verify what merchandise was destroyed. CBP need not always do so, but it must be given the opportunity. Of course, there was no prior knowledge that the fire would occur and no intended date of destruction.

The fire occurred on June 6, 2009. In an effort to recoup the duties, taxes, and fees paid on the lost inventory, Sarmento filed a CBP Form 7553 on September 2, 2010, more than a year after the wine was destroyed. As further backup, Sarmento submitted inventory receipts, post-fire photographs, a spreadsheet, and prior customs entries. Most of the company's records were destroyed in the fire.

Sarmento asked CBP to verify the destruction after the fire occurred. Unfortunately, CBP was unable to verify what merchandise had been destroyed. Consequently, CBP could not certify on the 7553 that it had verified the destruction of previously entered merchandise. Sarmento, therefore, was not entitled to drawback.

This is a sad story, but there are a few lessons to be learned.

First, drawback is technical and has detailed requirements. Be careful when making claims to satisfy the statutory and regulatory requirements. There is always the possibility that CBP has over stepped its regulatory authority by mandating some detailed information or other procedural requirement not intended by Congress. But, no one should want to be the claimant who has to fight that fight.

Second, detailed inventory records showing customs entries and the corresponding receipts of merchandise and warehouse location should be maintained and backed up separate from the inventory itself. While there is no way for Sarmento to have filed a timely 7553, Notice of Intent to Destroy, having better records might have given CBP more confidence in the claim. That would not have guaranteed a successful claim, but it would have helped.

Third, think about whether your insurance covers duties, taxes, and fees as well as part of the insured value of your inventory.

I'll look for better news to pass on.