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.

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