Monday, September 26, 2016

Explanatory Notes Discounted

No, this article is not about where to find a cheap copy of the Explanatory Notes to the Harmonized System. Rather, it is about the Federal Circuit decision in Sigma-Tau Healthscience, Inc. v. United States, in which the Court of Appeals discounted the legal impact of a definition in the Explanatory Notes.

The case is about the classification of two stabilized forms of the chemical carnitine, which may or may not be a vitamin. Carnatine, which is also known as vitamin Bt, is not called out by name in the Tariff Schedule. Customs classified this merchandise as chemical products and preparations of the chemical or allied industries not elsewhere specified in Heading 3824. Sigma-Tau protested and asserted that the correct classification is as vitamins of 2936. Complicating matters, the Court of International Trade held that the merchandise is classifiable in Heading 2923 as "Quaternary ammonium salts and hydroxides; lecithins and other phosphoaminolipids, whether or not chemically defined: Other." Sigma-Tau appealed. On appeal, the U.S. sought classification in 2923 and Sigma-Tau argued for 2936, leaving 3824 out in the cold with no suitors.

This case is mainly complicated because it involves a fair amount of organic chemistry and a little medicine. The classification, on the other hand, gets resolved by applying General Rule of Interpretation 1, which is not how the Court of International Trade did it. That is an important point. The Federal Circuit took the CIT to task for moving beyond GRI 1 and applying the rule of relative specify under GRI 3. As we will see below, applying the legal text was sufficient to resolve the question.

The key here is Chapter 29, Note 3, which states that merchandise classifiable in two or more headings of Chapter 29 is to be classified in the heading that occurs last in numerical order. This Note has the force and effect of statute and must be followed. The only Chapter that is relevant on appeal is Chapter 29 and the last of the potential headings in numerical order is 2936, vitamins. Consequently, if this stuff is vitamins, then 2936 must be the correct Heading.

When a term is not defined in the tariff, the proper meaning is the common and commercial meaning. Where dictionaries and other sources of definitions differ, the court looks for the consensus understanding of the meaning, focusing on the commonality in the various definitions. A problem arose here because although the HTSUS allows for other vitamins and provitamins to be classified in Heading 2936, the Explanatory Notes provide less room to maneuver. The EN state that vitamins cannot be synthesized by the human body and, therefore, must be obtained from outside sources. Carnatine, it turns out, can be synthesized in the body, except for by newborns, who must consume it.

To me, this is the interesting point of the case. What should the Court do with the limitation in Explanatory Notes, which does not appear in the HTSUS? The Court noted that the Explanatory Notes are not binding on it. They are generally useful guides that are informative, but, according the to Court of Appeals, "we shall not employ their limiting characteristics, to the extent there are any, to narrow the language of the classification heading itself." This is consistent with a case called Archer Daniels Midland, which it is important to note, is an appeal I won on a similar point.

That created the question of whether this limitation is part of the common and commercial meaning. According to the Court, it is not. As a result, the fact that the human body can synthesize carnatine does not prevent it from being a vitamin. As evidence of that, the Court noted that vitamin D can be synthesized by the body and it is commonly understood to be a vitamin.

The Court arrived at a consensus definition of "vitamin" as compounds that are necessary for normal physiological function and that are not synthesized by the host in amounts adequate to maintain normal functioning.  It turns out that carnatine can be synthesized in adequate amounts by adults, but not by newborns. The government contended that the test should be limited to adults, but there was no such limitation in the common meaning of the term nor in any of the legal text. Consequently, the Federal Circuit found Carnatine to be a vitamin.

Having made that conclusion, it follows that the correct classification is in Heading 2936. Specifically, in the residual tariff item 2936.29.50. That means that the Court of International had to be reversed.

Saturday, September 24, 2016

The Scope of a Scope Ruling

This being the Customs Law Blog, I don't often wade into the related area of antidumping and countervailing duty law. But, the two areas often bump into each other for my clients and for other importers. Sometimes the issues are generally applicable and require attention, which is the case with Guangzhou Jangho Curtain Wall v. United States.

The important issue for our purposes is the impact of a scope clarification issued by the Department of Commerce. People often refer to these as scope rulings, and importers who are used to dealing with Customs and Border Protection rulings might make some incorrect assumptions about how they apply to imported merchandise. This case shows that the Department of Justice also had some incorrect assumptions about scope clarifications.

The order in question covers aluminum extrusions from China. The full scope is here. The scope specifically excludes finished merchandise. According to the order:

The scope also excludes finished merchandise containing aluminum extrusions as parts that are fully and permanently assembled and completed at the time of entry, such as finished windows with glass, doors with glass or vinyl, picture frames with glass pane and backing material, and solar panels. The scope also excludes finished goods containing aluminum extrusions that are entered unassembled in a "finished goods kit." A finished goods kit is understood to mean a packaged combination of parts that contains, at the time of importation, all of the necessary parts to fully assemble a final finished good and requires no further finishing or fabrication, such as cutting or punching, and is assembled "as is" into a finished product. An imported product will not be considered a "finished goods kit" and therefore excluded from the scope of the investigation merely by including fasteners such as screws, bolts, etc. in the packaging with an aluminum extrusion product.

In this case, the merchandise was curtain walls. A curtain wall system is commonly used as the exterior of a modern building. The curtain wall is not load bearing and merely blocks weather, adds design, and keeps people inside. The building is supported by structural elements in the core of the building. Often, curtain walls are glass with extruded aluminum members supporting the glass. If you have seen a modern skyscraper, you have seen a curtain wall.

Prior to this case, there had been two Commerce Department scope rulings on curtain walls. The first ruling held that curtain wall components are not finished goods for purposes of the scope exclusion. That decision was affirmed by both the Court of International Trade and the Court of Appeals for the Federal Circuit. The second ruling initially held that complete curtain wall systems sold pursuant to a contract for the entire system as also within the scope of the order. The CIT twice remanded that ruling to Commerce, and at the time of this decision, the issue remains before the CIT.

When Commerce announced the opportunity for the second administrative review of this order, Jangho requested review. At that time, whether complete curtain wall systems were within the scope of the order was (and still is) unresolved. Jangho responded to the questionnaire noting that it was doing so to cooperate, but stating that the curtain wall systems are outside the scope of the order. Jangho then pulled out of the process and did not participate any further. When Commerce finished the preliminary review, it found that Jangho's products are subject to the PRC-wide rate and did not explicitly address the scope issue. In the final determination, Commerce noted the scope question but held Jangho's products to be within the scope of the order because Jangho had not followed procedures to request a scope clarification. A similar result occurred in the countervailing duty case. Jangho appealed to the CIT.

Since we don't often talk about antidumping and countervailing duty law, we should review how this litigation is different from a customs case. First, the role of the CIT is to review the administrative decision on the agency record, rather than on the evidence presented to it. That means in ADD/CVD cases, there is no discovery, no testimony from witnesses, and no findings of fact. The judge must uphold the Commerce Department determination unless it is not supported by substantial evidence on the record or otherwise not in accordance with law. That is true even if he or she would have reached a different conclusion.

The first question before the Court was whether Commerce acted according to law when it held the curtain wall units to be within the scope of the order because of the lack of a scope clarification request from Jangho. The regulation on this is clear that when there is information indicating that a scope clarification is warranted, Commerce "will initiate" an inquiry. 19 CFR 351.225(b). That language does not give Commerce a lot of room to subject merchandise to ADD and CVD when it knows that there is a question as to whether the merchandise is within the scope of the order. Commerce knew there was a scope question and it did not self-initiate a scope inquiry.

What Commerce did was argue that Jangho was obligated to request a scope ruling. According to the Court of International Trade, that is not correct. Rather, an interested party can alert Commerce to a scope issue in the course of an administrative review. If Commerce determines that there is a genuine question, it must investigate the scope issue. That is what Jangho did when it requested review, was made a mandatory respondent, and then provided data while indicating that its curtain wall systems are outside the scope of the order. Thus, according to the Court, the Jangho was not obligated to initiate a formal scope inquiry through a separate request.

So far, so good. Now we get to the part that I think is most relevant to the average importer trying to be compliant. Many importers know that a classification, value, or other ruling issued by Customs and Border Protection is binding on Customs and on the requesting party for the subject merchandise. A ruling is technically not binding on another importer, even if the merchandise is similar. That does not mean that subsequent importers should not follow published rulings; it should. But, it does mean that the ruling is technically limited in scope.

In this case, the Department of Justice argued that a prior scope ruling covering curtain wall units imported pursuant to a contract for a full curtain wall was not applicable to the similar merchandise at issue in this case. According to Justice, that prior scope ruling (as modified by subsequent litigation) is only applicable to the requesting party. Looking at the regulations, the Court of International Trade found that scope rulings are applicable to merchandise, not to the company that requested the ruling. This is consistent with Commerce's ability to self-initiate an inquiry when it sees a scope question with respect to a particular product. Furthermore, the regulation allows interested parties to make scope requests with respect to "a particular product." As a whole, the regulations make it clear that scope rulings address products, not parties. In that way, they are different from Customs rulings which address specific merchandise imported by specific a specific party.

Commerce was wrong to hold this merchandise to be within the scope of the order. Jangho raised the question during the administrative review. From there, Commerce should have self initiated an inquiry. In completing that inquiry, Commerce should have taken note of applicable rulings issued on similar products. Having failed to do that, Commerce's determination was not in accordance with law and, therefore, was remanded. The Court did affirm a part of the administrative decision concerning window wall units on the grounds that Jangho failed to properly raise the issue and, therefore, failed to exhaust the administrative process.

Wednesday, September 21, 2016

Ruling of the Week 2016.19: Wherein A Christmas Tree is Not Festive

"Ruling of the week," who am I kidding? This one comes to you via an annoying slow GoGo In-Flight connection and an extremely small seat 10C on an American Airlines RJ700 bound for San Antonio. Read it with that in mind. It may not be my best work.

Welcome to fall, the time of year when retailers are filling their shelves with Halloween decorations and their warehouses with of Christmas goods ready to be unleashed on the shopping public. It is also a good time of year to revisit the question of when decorative items are classifiable as festive goods of Heading 9505 and, therefore, entitled to duty-free entry. That is exactly the question Mr. Christmas Inc. asked Customs and Border Protection to reconsider is HQ H258442 (Aug. 18, 2016). Seriously, the importer was Mr. Christmas. I did not make that up.

The merchandise is a set of tapered glass cones that are 13.5” tall and 3.5” at their widest. The cones contain randomly placed LED lights that are activated by switch located at the bottom of the base. The manufacturer ensures that LED lights are placed at the tip of each cone, to create a glow at the tip when the LED lights are on. The glass cones are sold in sets of three in one of the following colors: green, gold, red, silver, or blue.  Here is a picture taken from the ruling itself.

Stop right there. You tell me: Is that a Christmas decoration? Of course it is. How do I know? The same way I know pornography: I know a Christmas decoration when I see one. We have been down this road here and here.

Over the years, I have devised an essentially foolproof test for determining whether something is a festive article related to a Christian holiday. Just ask a rabbi. If the rabbi says, “I would never have that tchotchke in my home,” it is a festive article. I can pretty much guaranty that this item looks enough like a Christmas tree to keep it off the mantel at the rabbi’s house.

Sadly, that is not the law. According to Customs and Border Protection, to be classified in Chapter 95 as a festive article the item must be (1) closely associated with a festive occasion and (2) must be used or displayed principally during that festive occasion. This is not a low bar. In fact, the item must be so closely associated with the festive occasion that using during another time of year would be aberrant.

According to Customs, it would not be aberrant to display these glass cones at times other than Christmas. Keep in mind that they are sculptures of trees, lighted, and in sets of green, red, blue, silver, and gold. I am getting all festive just thinking about them. But, CBP noted that the cones lack indications of branches, leaves or other characteristics of trees. Moreover, the beading on the cone is not ball-shaped or otherwise indicative of Christmas tree ornaments and the interior lights do not stay in place to ensure that the tip of the “tree” is lighted. Consequently, the art critics at CBP determined that the cones do not closely resemble Christmas trees. Keep in mind that Customs previously ruled that a lighted penguin wearing a Santa hat was sufficiently associated with Christmas to be a festive article of Chapter 95.

Mr. Christmas argued that its (his?) marketing information showed that these cones are sold as Christmas decorations around the holiday. CBP dismissed this by noting contrary evidence and the fact that marketing is only one piece of evidence to be considered. One piece of contrary evidence was a QVC clip in which the designed or a similar item suggests that the cones are appropriate decorations year-round.

In the end, Customs was not convinced that the lighted tree sculptures are Christmas decorations. This is an admittedly subjective analysis and I know that CBP is required to draw lines around product classifications. I just think these items are on the festive side of that line. CBP classified them in 7013.99.90 as glassware at 7.2% ad valorem. My guess is that this may not be the last we see of these glass cones.

Tuesday, September 20, 2016

Return of the Blogger

Once upon a time, there was the Customs Law Blog. It was a happy place where the Blogger diligently provided useful and occasionally entertaining updates to his readers, all of whom he liked very much. But sometimes things did not go as planned. Sometimes, the Blogger needed to work. Even when "work" is mostly planning a big party for some visiting lawyers, talking to trade groups, and finishing a new version of his text book,  there is still real work to do for people who pay real bills. That leaves the Blog and its loyal readers with nothing new to read. That is, until the Blogger finds time. "Don't give up loyal readers," says the sad and tired Blogger, "I have something new for you and I'll post it soon."