Sunday, November 05, 2017

Bonus 2017 DiCarlo-CIT Lecture at JMLS

The Center for International Law at the John Marshall Law School has moved the annual DiCarlo-Court of International Trade Lecture back to the fall semester. That means we are having second one in calendar 2017.

The event is Tuesday, November 14. Registration and details are available here.

There will be two CLE panels including one featuring ethics credit. The first panel will discuss the status of NAFTA with perspectives from the U.S., Canada, and Mexico. The second will focus on the ethical and practical issues related to conducting an corporate internal investigation.

These are great events for the Chicago-area trade community. Please come out to support the program, get CLE credit, and hear from expert speakers.

Saturday, November 04, 2017

Welcome to Android & CustomsMobile

This is going to be one of my old-school posts mostly about something other than customs law. It is about my history with mobile devices and my current heartache. Deal with it. At the end, I get to a more relevant review of the CustomsMobile app.

Around 2001, I used something called a Handspring Visor with a VisorPhone attachment. It was basically a Palm Pilot with a slot for extension modules, and its was both functional and cool.

When that stopped being cool, around 2004 I switched over to a Palm Treo 650. That was a great device. It was compact, had a web browser and, if I remember right, would sync with my work email and contacts. That was great until a guy I know doused it in coffee. I wrote about that in 2005. In 2006, I replaced that with a new Treo 700p, which I also wrote about. That post garnered one of my favorite comments ever, from then-New York Times tech columnist David Pogue.

After that, I had brief dalliance with Android in the form of a Motorola Droid A855. One of the original "Droids," that was set by default to loudly say "Droid" as a notification. I actually still have that phone. It is surprising small and heavy. It has a sliding, physical keyboard that is so small I am surprised I ever considered it usable.

Then came Windows Phone 7 on a Samsung Focus. Watch this ad.

I stuck with Windows Phones from then on. I had a terrific Nokia Lumia 920. That was a solidly build, beautifully designed phone that worked exactly as expected with Windows Phone 8 and 8.1. Beyond the main interface and its "live tiles," a unique thing about Windows Phone at that point was that it pulled together lots of feeds into hubs. If I looked at a person in my People Hub, I would see their online activity across Facebook and Twitter, plus emails and text messages. Or, something like that. It has been a while but it worked well.

When Windows Phone 10 became a thing, my 920 would not do the upgrade and I moved on to a Lumia 950. Again, this was a rock solid, if somewhat underwhelming design. For a "flagship" phone, it was surprisingly modest. Still, it worked beautifully and integrated perfectly with all of my work functions. Having Office programs on the phone meant I could easily edit Word and PowerPoint documents on the fly and Outlook had complete access to my contacts and calendar.

I know that by 2015 there were plenty of ways to accomplish all this on an iPhone or Android device, but the simplicity of being in one ecosystem was efficient and appealing. On top of that, I still enjoy the live tiles and the overall user interface. Cortana, the built in virtual assistant is surprisingly helpful, automatically noting things like booked flights and package deliveries. For a while, I was half-jokingly proud to say I was one of the 1% of Americans who understood how a decent mobile device should look and work.

The problem with being a one percenter is that few developers will produce software for your platform. This lead to the so-called app gap between Windows devices and iOS and Android. Overtime, the apps available for my bank, my pharmacy, my airline of choice, and others either disappears or were left orphaned with no new features and no support. Other apps never appeared at all. That is true for paying parking meters, hailing cabs, controlling my internet connected home thermostats, and other basic functions. For the most part, I was able to live without these apps. Much of the functionality of the apps can be accomplished through the company's mobile site, but it is not quite as easy as a single click to launch the app.

Then three things happened almost simultaneously. First, I had to buy a car. The new car includes iOS and Android connectivity and balked at my Windows Phone, calling it an "incompatible" device. I could use the basic Bluetooth compatibility, but I felt somewhat disrespected by my own car. At about the same time, a high-ranking exec at Microsoft went on the record saying that the continued development of new features for what is now called Windows Mobile is not a priority for the company. He also said he personally uses an android device to benefit from the availability of apps. A short time later, Microsoft announced that it would end its Groove music streaming service (though not the player software). I don't actually use the streaming service, but this seemed like a further retreat from mobile.

At that point, I was done. Today, I am carrying an LG V30 Android phone. For the most part, I dislike the user interface tremendously. I find that that it takes more swipes and presses to accomplish some tasks. But, I have loaded the Microsoft Launcher and all the Microsoft applications to get most of the same level of integration with my work systems. I linked my phone to the new Fall Creators Update version of Window, giving me notifications on my PC. So that is good. I also now have full compatibility with my car and a second app to manage charging (it's a plugin hybrid). And, I have regained access to the formerly missing apps including tickets for my commuter rail so that I may no longer be the last guy on board with a paper ticket. I guess that is good.

I still miss my 950. Cortana, the Windows virtual assistant, is available on Android but requires more steps to activate, which is too bad. I wish Microsoft had been able to create a third ecosystem in consumer mobile devices. It appears that its current plan is to try to coopt Android as much as possible, which I guess is a good business play.

Which brings me to CustomsMobile, which my Android phone now has installed as an app. If you are a customs lawyer or compliance pro, this is an extremely useful app. The app is basically an information aggregator that puts key customs information on your phone.

For me, the key components are likely to be rulings and the HTSUS. Rulings are up to date and searchable. The app also has several "canned searches," for frequently searched topics such as "responsible supervision" and "NAFTA." Search results can be sorted by relevance or date. The HTSUS is set out by Section and Chapter for easy navigation. It is also searchable. Once in the text, the tariff numbers are links to a rulings search for that provision. That functionality should be familiar to anyone who uses CROSS. The General Rules of Interpretation, along with all the General Notes, are included. One nice value added feature is that the General Notes are given titles, meaning you do not need to remember that General Note 12 is NAFTA and General Note 4 is GSP, for example.

CustomsMobile also contains features that might be of particular interest to lawyers, and not just customs lawyers. Specifically, it has the entirely of the U.S. Code, not just Title 19, and the full Code of Federal Regulations. Once in a search, users can expand or contract the scope from just Title 19 to all titles or particular chapters. For example, a search for "bonds" in CFR Title 19 produces 425 results. Limiting that to Chapter 1, covering CBP, produces 261 results. Limiting that further to Part 133 gets me to the seven relevant provisions for bonds relating to alleged intellectual property violations. Search options include boolean operators, wild cards, word proximity and other useful features. Lawyers who use Lexis or Westlaw will be familiar with these forms of search syntax.

Other info included in CustomsMobile is port contact information, arranged by state and searchable CSMS administrative messages. These are handy and are probably very useful for brokers and compliance professionals. The last chunk of data Customs Mobile includes is AD/CVD messages from the CBP database. These are good to have access to, but do not serve the function that most people want. What would be super useful is a table of deposit rates by order. Right now, you need to go back through Federal Register notices and ADD/CVD messages to try to find rates. I believe, but don't know for certain, that the rates are available in ACE or ABI. After all, brokers must be able to identify that to complete the entry process.

Another source CustomsMobile might consider porting over to the app is the CBP IPR database. This is a searchable database of trademarks and copyrights recorded with Customs for border enforcement. This is handy for anyone looking to make a deal to import branded products from unauthorized sellers overseas.

Does CustomsMobile make me happy that I am now carrying an Android device? No. Does it lessen the pain? Absolutely. It is a valuable tool for quick reference when away from my main computer and that can be a valuable tool. Given that it is free, CustomsMobile belongs on every customs compliance professional's phone.

[Editorial Note: I am aware that blogs sometimes endorse products without disclosing that the blog received promotional consideration. Just to be clear, CustomsMobile did not know I was posting this and did not pay me in any way. Also, just to be clear, I am not opposed to monetizing the blog.]

Wednesday, October 25, 2017

Bankruptcy and Customs Penalties

Lawyers often have a tendency to wrongly believe that some question of particular interest to them is wholly unique and has never been addressed. The resolution of the matter, therefore, will “make new law” and put the lawyer into the legal history books. The opposite also happens. We often believe we know something to be true and assume that there must be precedent supporting whatever proposition we hope is the law.

Such was the case with the impact of a bankruptcy filing in the course of a civil penalty case at the Court of International Trade. There had been an understanding among some importers and certainly among some members of the bankruptcy bar that filing for bankruptcy protection would automatically stay the penalty case pending the outcome of the bankruptcy process.
The stay derives from 11 U.S.C. §362(a), which states the following:
Except as provided in subsection (b) of this section, a petition filed under section 301, 302, or 303 of this title, or an application filed under section 5(a)(3) of the Securities Investor Protection Act of 1970, operates as a stay, applicable to all entities, of—
(1)  the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title.

On its face, this law would appear to prevent the continuation of the § 1592 penalty case. 

Purely anecdotal evidence supported that proposition. Lore in some corners of the customs bar includes stories of Customs and Border Protection dropping penalty cases after a bankruptcy filing. This makes sense on several fronts. First, the bankruptcy surely indicates that he importer is in financial extremis. As a practical matter, it might be impossible or close to impossible to collect anything approaching what the government is seeking. Second, the penalty will be set by the CIT judge, who is required to take into consideration the defendant’s ability to pay. The bankruptcy filing indicates that the ability to pay is, at best, minimal. So, even if the case were not stayed, the thought was that Justice would decide that continuing to pursue the case was not a good use of limited resources.

But, if you asked a customs lawyer to prove anything I just wrote in the previous paragraph, you were likely to get some non-specific answer about how the issue was settled a long time ago or how it’s in the bankruptcy law. One time, a few years back, I asked a couple bankruptcy lawyers about this, and got the answer that “as a practical matter, the case will go away.” That is was not a concrete statement of law.

Recently, this largely theoretical question became exceedingly practical in two cases before the U.S. Court of International Trade. The first involved a meat packer called Rupari Food Services. The second involved an importer of athletic apparel called Greenlight Organic Inc. Both involved ongoing penalty cases in which the defendant filed for bankruptcy protection. In both cases, the defendant asserted that the automatic stay prevented any further proceedings in the CIT penalty case. For disclosure purposes, I was co-counsel to Rupari through the penalty litigation up to the bankruptcy.

In both cases, the Department of Justice pointed out that the automatic stay has several exceptions specifically stated in the statute. The relevant one here is § 362(b)(4), which permits the continuation of actions by a governmental unit seeking “to enforce such governmental unit’s . . . police and regulatory power, including the enforcement of a judgment other than a money judgment, obtained in an action or proceeding by the governmental unit to enforce such governmental unit’s or organization’s police or regulatory power[.]”

Customs and Border Protection is clearly a governmental unit. That means the question is whether a customs penalty is Customs seeking to enforce its police and regulatory power. While the answer to that question may seem obvious, it is not. A common perception has been that the exercise of police and regulatory power is limited to the prevention of a present threat to public health and safety or to stop an ongoing fraud. If there is o present threat or ongoing fraud, then the exception does not apply and the penalty case at the Court of International Trade should be stayed.

There is law on this question and it involves a two-part test. The first is whether the government action is primarily directed at protecting its pecuniary interest in the debtor’s property, as opposed to protecting the public health and safety. The second test is whether the government action is directed at effectuating public policy rather than adjudicating private rights. If the purpose of the action is to protect the government’s pecuniary interest or to adjudicate private rights, then the exception is inapplicable, and the stay will apply.

In these cases, the United States is seeking to secure payment of a debt, specifically the administratively assessed customs penalty. That means there is a pecuniary interest at stake. But, that interest is not sufficient to overcome the exercise of police powers. According to both decisions, the collection of a customs penalty is an effort to effectuate public policy rather than adjudicate private rights. According to the legislative history to the bankruptcy stay, the stay does not apply where the government is suing a debtor to prevent or stop a fraud or similar police or regulatory laws, or is attempting to fix damages for a violation of such law.

Consequently, in both these cases, the Court of International Trade held that the bankruptcy stay does not apply. Moreover, the case may proceed to the entry of judgment. That judgment will serve to fix the amount of the liability, which remains unsecured. The judgment does not convert the government into a secured creditor, nor does it force the payment of the debt. But, it does give the United States a perfected claim to be pursued in the bankruptcy proceeding.

In the end, the United States is going to have to be satisfied with whatever the creditors are able to work out. It may not be very much, which may be why these claims have apparently been dropped in the past. But, the current policy appears to be to pursue the matter in the CIT despite the bankruptcy. This is an important development for anyone facing a significant penalty and thinking that bankruptcy may be a strategy to avoid the claim.

Tuesday, October 24, 2017

Home Depot and Entry Hardware

Home Depot and stores if its ilk are one of the many places I go to find out how little I know about a great many things. Generally, I employ a "three step test" for home improvement projects. Under that test, if the project requires more than three process steps or three steps up a ladder, I outsource the job. That means there are vast arrays of hardware items to which I have had little or no exposure. On the other hand, I have done a lot of tariff classifications of power tools, hand tools, lawn and garden products, and home appliances (and parts thereof). Consequently, when I do wander into a Home Depot I sometimes pick up the odd lock washer or large forged hand tool and ask questions like "Is this in scope?" or "Is this really Made in USA?"

The actual Home Depot company, on the other, recently asked the U.S. Court of International Trade to classify various pieces of door hardware. The merchandise consisted of packaged exterior door knobs and trim, interior knobs and trim, a latch, strike plate, installation hardware, and keys. The exterior knob included a key slot and keyed cylinder (meaning the lock portion). Customs and Border Protection classified the merchandise in 8301.40.60 as locks. Home Depot contended that the merchandise was classifiable in 8302 .41.60 as fittings for doors, etc. suitable for buildings.

So, the sole question appears to be whether the presence of the lock in the exterior knob is sufficient to require classification as a lock in 8301.

The Court of International Trade started by defining "lock" as a device securing a door in a closed position with a bolt propelled by a key or other mechanism. Looking to the merchandise, the Court quickly found that it consisted of key-operated locks intended to secure doors and that the locks were of base metal.

The Court then concluded that the door knobs are parts of the locks. It got there by looking to industry standards. On top of that, the Court found that Home Depot advertises this merchandise as door locks. Consequently, the Court held that the merchandise is classifiable in 8301as locks.

That leaves the question of whether the merchandise is also classifiable in 8302. According to Home Depot, these goods were just knobs improved with locking mechanisms. A such, they are door fittings. This makes some sense because an eo nomine description includes all forms of the article including later developed improvements.

Alas, this clever argument did not prevail. The Court noted that there is nothing inherently wrong with having similar products in two different headings if the language of the headings separates the articles. In this case, 8301 specifically includes locks. Heading 8302, on the other hand, only includes fittings for doors and similar items. Thus, the description in 8302 is incomplete compared to the description in 8301. Thus, the Court found 8301 to apply.

Note that this is not a decision based on General Rule of Interpretation 3 and Relative Specificity. The Court's holding is that the goods are not described by 8302. Thus, there is no reason to compare the specificity of the two headings.

Sunday, October 22, 2017

XYZ/Milecrest Survives Motion to Dismiss

XYZ, it turns out, is a company called Milecrest Corporation.

This is the next chapter of the modern XYZ affair at the Court of International Trade. If you are not up to speed on what is happening, read my earlier posts (here, here and here).

In this Court of International Trade case, Milecrest has asked the Court of International Trade to review the decision by Customs and Border Protection to grant Lever Brother protection to Duracell-branded batteries. Granting that protection, as explained in the earlier posts, would make it more difficult for Milecrest to import and sell Duracell batteries. To do so, they will need to be marked indicating that they were not intended for the U.S. market and that they differ materially from the authorized product.

At this stage, Duracell and the United States have moved to dismiss the case arguing that Milecrest has not stated a claim for which it is entitled to relief or, in the alternative, that the Court of International Trade does not have jurisdiction over this dispute.

Regarding jurisdiction, the Court of International Trade, like all federal courts, is a court of limited jurisdiction. If this issue does not fall within limited matters assigned by Congress to the CIT, then it must be dismissed.

The problem for Milecrest is that although it may have asserted facts that, if true, would indicate a violation of the Administrative Procedure Act, those facts do not create jurisdiction. Rather, jurisdiction needs to be derived from 28 U.S.C. 1581(a)-(i). In this case, the relevant provision is subsection (h), which says:

The Court of International Trade shall have exclusive jurisdiction of any civil action commenced to review, prior to the importation of the goods involved, a ruling issued by the Secretary of the Treasury, or a refusal to issue or change such a ruling, relating to classification, valuation, rate of duty, marking, restricted merchandise, entry requirements, drawbacks, vessel repairs, or similar matters, but only if the party commencing the civil action demonstrates to the court that he would be irreparably harmed unless given an opportunity to obtain judicial review prior to such importation.

Duracell argued that the grant of Lever Brothers Protection is not a “ruling” for purposes of 1581(h). The Court reiterated its prior decision that granting this protection is a ruling because it is a written statement by CBP that was published as an interpretation of a regulation. Nothing in this motion changes that.

Next, the Court turned to whether Milecrest has sufficiently pleaded irreparable harm from the CBP ruling. To properly assert a case, a plaintiff at the Court of International Trade must provide a short and plain statement of the grounds for jurisdiction. Here, Milecrest asserted that it was seeking review of a CBP decision to restrict the importation of merchandise, that will if not reviewed cause it irreparable. According to the Court, that was sufficient. Furthermore, the connection between the Lever Brother ruling and harm to Milecrest is supported by sufficient allegations to allow the case to go forward.

Finally, Duracell argued that the law permitting CBP to restrict materially different gray market products is not intended to protect Milecrest, a parallel importer. As such, Milecrest does not have standing to raise this complaint. The Court disagreed. The law providing protection to Duracell necessarily results in the regulation of Milecrest, putting Milecrest in the “zone of interest” of the law. That gives it standing to sue.

After dispensing with an argument that Milecrest did not exhaust the administrative process, the Court found it has jurisdiction under 1581(h) to decide the case, if properly brought.

The next issue was whether Milecrest had properly stated a claim on which relief can be granted. To satisfy this requirement, Milecrest must have stated facts which, if assumed to be true, state a plausible claim for relief. Here, that means showing a final agency action with no other adequate administrative remedy. The granting of Lever Brothers protection is a final agency action. Congress has not provided any other means for Milecrest to seek relief, thus the action appears to be sufficiently well pleaded to survive the motion to dismiss.

In its first count, Milecrest claimed that CBP’s action was unlawful because it did not provide public notice and an opportunity for comment prior to making the decision. If Milecrest proves notice and comment is required and that CBP failed to follow that procedure, then Milecrest is entitled to relief. Thus, the motion to dismiss is denied.

Similarly, Milecrest has pleaded that the decision to grant Lever Brothers Protection was arbitrary, capricious, an abuse of discretion or was otherwise not in accordance with law. This count raises an important and fundamental question. Is CBP’s grant of Lever Protection overly broad in that it might grant Duracell protection against imports of batteries that are not physically and materially different from the authorized batteries on sale in the U.S.? If so, CBP will have exceeded its legal authority. This, according to the Court, is a plausible claim for relief.

Lastly, Milecrest claims that the ruling granting protection to Duracell is impermissibly vague because it fails to state how the batteries are physically and materially different from authorized batteries. As such, importers do not know what batteries might require labeling nor why. The Court also found this to be a well-pleaded count for relief.

Thus, this case will go forward. This is a good result for parallel importers. If this reaches a final judicial decision, this may be the first case that provides some guidance and possibly limits on the scope of CBP authority to limit parallel imports. Remember, these are legitimate products, not counterfeits. CBP has no authority to stop grey market products unless they are physically and materially different from the authorized U.S. counterpart. If CBP is overstepping and granting Lever Protection to products at the behest of the rights holder, this case may put a stop to that arbitrary overreach. If, on the other hand, Duracell and Customs show that the batteries are physically and materially different, the grant of protection will be upheld and Milecrest will have to begin labeling the products as unauthorized imports.

Sunday, October 15, 2017

Ruling of the Week: Shark Tank and Customs

I never make an effort to watch Shark Tank. However, for some reason I am always running across it. I always get sucked in. I think the discussions of business valuation and strategy are interesting. I am certain they are very distilled through the editing process, but hearing successful investors critique an entrepreneur's pitch is fascinating to me.

Not long ago, I saw a guy pitch an iPhone case that has a monochrome screen affixed to the back. Using its own battery and Bluetooth connection to the phone, the second screen continuously displays updates, pictures, and other data.

The device is called a popSlate (review)


How would you classify that?

It turns out, not as a radio transmitter/receiver of 8517, which is where CBP previously classified smart watches that use Bluetooth to get updates from the phone. In this case, CBP held that the screen provides the essential character. As such, Customs classified it as an other machine or apparatus having individual function in 8543.

I have not spent any time reviewing this classification. It does strike me, though, that this might be described as an indicator panel of 8531. Anyone want to take up the challenge and tell me why that is wrong (or even right)?

Irwin Tools: Pliers are Still Pliers

Remember the Irwin Tools Case? That case considered whether certain locking pliers were properly classified as wrenches or as either pliers or clamps. The Court of International Trade held that the plaintiff had overcome the presumption that Customs correctly classified the pliers as wrenches. But, because Irwin had not moved for summary judgment, the Court could not give a final classification. Subsequently, Irwin moved for summary judgment and the government moved for reconsideration of the original decision. If you have not read my original post on this case, please do so.

The CIT has now handed Irwin a complete victory. The gist of the prior ruling is that a wrench has a head that fits snugly over or around the head of a fastener and a single handle that can be turned to apply torque. Pliers, on the other hand, have two handles and two jaws that pivot and must be squeezed to grasp an object. A clamp has a frame of some kind and two opposing surfaces that can be adjusted by a screw, lever, or similar device to hold an object firmly in place.

A motion to reconsider a prior judgment is directed to the discretion of the Court. The Court will grant a motion to reconsider when it finds that justice requires it to do so. Factors that may indicate justice requires reconsideration include a significant change in the controlling law or reason to believe that the court patently misunderstood the issues presented. A simple disagreement with the outcome will not do it. That was the case here and the judge denied the motion.

So where do we classify locking pliers? No surprisingly, as pliers. All of the locking pliers have two handles and two jaws that pivot relative to one another. This allows the user to squeeze the handles to close the jaws around an object to manipulate it.

The Court also found that the evidence before it did not establish that the locking pliers were classifiable as clamps. Rather than be tightened with a screw, lever or thumb nut, the locking pliers are closed by squeezing the handles. Further, the configuration of the two handles and a pivot is distinct from clamps.

Reading somewhat between the lines and possibly due to my own involvement with this issue, it strikes me that the government’s main argument was that this issue had already been decided. The CIT addressed this issue in 1983 in a case called Associated Consumers v. UnitedStates, 5 CIT 148, 565 F. Supp. 1044. Associated Consumers was affirmed by the Federal Circuit in a non-precedential decision without an opinion. Of course, the 1983 case was under the old Tariff Schedule of the United States. Furthermore, the decision of one CIT judge is not binding on another judge subsequently looking at the issue. The Court, after reviewing the physical nature of the various tools at issue and the standard definitions of pliers determined that these locking pliers are properly classified as pliers.

There is a bit of side issue in this case about use. Does the word “wrench” suggest a particular use, such as turning a nut or bolt? Does the word “clamp” imply a usage? Maybe. But, that was all addressed in the prior Irwin decision and the Court saw no reason to revisit it now.
Anyone curious about all the bankruptcy issues floating around? I'm on it. I'll try to get to that this week.

Uniform Practices and Treatments: Kent International

You may have noticed that I am not doing a particularly good job of blogging these days. I have no good excuse for that other than the fact that I have a job that is not blogging. But, I realize and am gratified to know that people read this blog and expect it to be up to date. I am making an effort to do that. I will have a lot of time in airplanes this week, so I’ll try and knock out some updates.

Kent International, Inc. v. United (Slip Op 17-123) addresses the question of whether Customs and Border Protection had an “established and uniform practice” or a “treatment” applicable to the classification of a product known as the “WeeRide Kangaroo” child bicycle seat. We talk about this product previously here. In the phase of the case we are discussing now, the United States has moved to dismiss the counts of Kent’s complaint alleging an established uniform practice and a treatment.
At this juncture, the question presented is whether Kent has alleged sufficient facts to suggest that it has a right to relieve that is more than speculative. In the current parlance of pleading, the allegation in the complaint must be “plausible on its fact,” assuming all the allegations to be true.

The gist of Kent’s complaint is that from 2005 on, Customs classified its bike seats under heading 8714 (10%) as parts of bicycles. But, according to Kent, from 2007 through 2011, Customs and Border Protection issued binding rulings to other importers classifying similar products in heading 9401 (free). The rulings remained unrevoked until 2014. See 48 Cust. B. & Dec. 29 (Jul. 23, 2014). During that time, CBP also approved Kent’s protests seeking duty-free entry under 9401. After the rulings were revoked, CBP denied a then-pending protest and liquidated Kent’s merchandise under the dutiable provision.

An established and uniform practice (“EUP”) is a statutory recognition that importers should be able to rely Customs’ established practice without risk of rate advances or penalties. The existence of an EUP is not easy to establish. It must be either “declared” or “de facto.” A declared EUP results from a formal administrative declaration and is a pretty rare thing.

Absent a declared EUP, the Court of International Trade can find that Customs has made uniform liquidations over time that the importer can rely on that past practice until it is formally changed. For lawyers, this is kind of like detrimental reliance and estoppel but since estoppel generally does not apply to the federal government, we get it via the EUP.

For there to be a de facto EUP, the plaintiff needs to show evidence of a practice of liquidations that, in the absence of notice of a change, would lead a reasonable importer to expect Customs to follow the practice. What the importer needs to have is evidence of a high number of consistent liquidations, at a high number of ports, over an extended period of time, and no reason to suggest a different classification would apply (i.e., no uncertainty).

Remember, at this stage Kent only needs to allege facts that make a its case plausible. Kent can show its own entries at multiple ports. It also has the approved protests and the rulings issued to other importers. From this, the Court of International Trade concluded the Kent’s allegation of an EUP was sufficiently probable to proceed.

A “treatment” is a little different. It is also statutory. Under 19 USC 1625(c), if CBP proposes an interpretive ruling or decision that has the effect of “modifying the treatment previously accorded by [Customs and Border Protection] to substantially identical transactions, Customs must publish the decision in the Bulletin. The notice must provide at least 30 days for notice and comment. The final decision, changing the practice, shall be effective 60 days after notice of CBP’s final decision is published.

A “treatment” is defined in the regulations as an actual determination by a CBP officer regarding substantially identical transactions and that decision was consistently applied for a two-year period. 19 CFR 177.12(c). The plaintiff also needs to show that the current action is an “interpretive ruling or decision” that would have the effect of modifying the previous treatment.

Kent has alleged that CBP liquidated the entries of three other importers of substantially identical merchandise between 2007 and 2014, when CBP issued a formal revocation. Moving to dismiss, Customs argued that Kent cannot produce sufficient evidence of consistent CBP treatment over a two-year period, nationwide.

That, however, is not the standard Kent must meet at this point. According to the Court, Kent only needs to allege facts that, if true, would make a plausible case for a treatment. Based on the complaint before the Court, Kent has done that. As a result, the Court denied Defendant’s motion to dismiss the two counts.

Sunday, October 01, 2017

Blog Contest

I am back in the mix for the Expert Institute legal blog competition.

Do me a favor and vote here.

Monday, September 18, 2017

The Great Bulb Debate

Our next case to discuss in The Gerson Company v. United States, which involves the tariff classification of artificial candles in the form of tea lights and candles. These are “artificial” because rather than being consumable candles with a wick that burns, they are translucent plastic or wax with a battery that powers an LED that simulates the appearance of a burning wick. You have probably seen these at a million restaurants that drop the tea lights into decorative holders on the table to create artificial ambiance.

Customs classified these items in Heading 9405, which covers lamps and lighting fittings including search lights and spotlights, and parts thereof, not specified elsewhere. The importer’s primary argument was that the faux candles are classifiable in Heading 8543 as electrical machines and apparatus, having individual functions, not specified or included elsewhere in Chapter 85. Specifically, the importer claimed the correct classification was as electric luminescent lamps. Plaintiff had three alternative classifications all in Chapter 85. 8541 covers, among other things, light emitting diodes.

On its face, this is an odd situation in which there are two tariff provisions that appear describe the same merchandise. These candles are “lamps” in that they are devices the principle purpose of which is to provide illumination, albeit minimally. They might also be electric luminescent lamps.
Getting to the bottom of this requires a pretty detailed analysis of the tariff language. [As an aside, the tariff does not get to electric luminescent lamps until below the heading level, which means it is not a comparable provision. But, it does indicate an intention that some lamps belong in 8543.]

Regarding Chapter 94, “light fittings” are designed to be attached to another surface, such as a wall. These are not that. If they are in Chapter 94, they are “lamps.” According to Chapter 94, Note 1(f), Chapter 94 does not cover lamps of Chapter 85.

So, are these “lamps” of Chapter 85?

The Court rejected classifying these items as LEDs or semiconductor devices of Chapter 85 because it determined that the complete faux candles as a whole are not described as the discrete constituent components. This used to be called a “more than” analysis, but under the HTSUS that terminology has fallen out of use.

Regarding 8543 (“Electrical machines and apparatus, having individual functions, not specified or included elsewhere in this chapter . . . .”), the “lamps” provided elsewhere in Chapter 85, including lighting for motor vehicles, flashlights, electrical signaling equipment, and incandescent lamps, are distinct from the faux candles. With the exception of flashlights and similar product, all of these items are components intended to be used as parts of a larger device.

The Court concluded that the “lamps” of Chapter 85 are components or otherwise intended to be used in conjunction with other devices. Lamps of Chapter 94, to the contrary, are independent and fully functional stand-alone devices. The flashlights of Chapter 85 are an inexplicable exception. Further, reading Chapter 85 to cover all electric lamps, which is the logical consequence of plaintiff’s argument, leaves Chapter 94 to cover only lamps powered by kerosene, alcohol, whale oil, and other non-electrical means. That must be wrong given that the Explanatory Notes to Chapter 94 note that it covers lamps and lighting fittings using any source of light, including electricity.

So, what gives with Chapter 85?

The bottom line here is that this problem is uniquely American in nature. The Harmonized System is an international nomenclature that occasionally sneaks in an Anglicism. In this case, the Explanatory Notes make it clear that Chapter 85 covers electrical goods not generally used independently, but used as components, for example “lamps.” Given the normal American connotation that lamps sit on desks, side tables, and floors as complete items, this is difficult to parse. Unless, you read “lamps” in the European (and also engineering sense) of “bulb.”

Looking at it through this lens, the Court concluded that Chapter 85 lamps are components, often “bulbs” and similar devices while Chapter 94 lamps are complete devices in the American sense of the word.  This leaves the flashlight as the inexplicable problem child. Perhaps, if we called them “torches,” this would be easier to sort out. [Actually, it wouldn’t, but I wanted to say that anyway.]

Based on this analysis, the complete battery-operated faux candles are classifiable in 9405 as lamps. I gather that if imported separately, the LED’s would not be Chapter 94 lamps. They would be electroluminescent lamps, meaning “bulbs.” That’s confusing. In the end, the Court of International Trade classified these items in 9405.40.80 as other electric lamps.

The Great Unmasking

As we know from my previous post, XYZ is the pseudonym of a company that imports Duracell batteries through channels that are not authorized by Duracell. That makes XYZ a “parallel importer” or “gray market importer.” Putting the best possible spin on its business model, XYZ finds opportunities to bring quality products to consumers at lower prices by taking advantage of imbalances in Duracell’s global pricing. In this model, Duracell has been fully and completely compensated through its foreign sale and is trying to thwart XYZ only to keep its U.S. price high. So, XYZ is arguably the champion of the common consumer.

XYZ is, of course, operating in the realm of many righteous warriors for freedom and justice who have adopted a nom de guerre or “code name” to protect their identity from evil doers. Young Bruce Wayne could only do so much to protect Gotham. Batman, on the other hand, can operate at (or well passed) the edge of legality to take on the enemies of justice. Spider-Man has greater power and, therefore, greater responsibility than does Peter Parker. But, there are always those who seek to unmask our heroes. Sometimes, even other good guys.

Apologies to DC Comics and Warner Bros.
XYZ started this battle hoping to prevent Duracell from securing what is known as “Lever Brothers Protection” for its batteries. If you are not familiar with gray market imports and the Lever Brothers rule, go read the earlier post.
Initially, this case was between XYZ and the United States government. XYZ is exercising its rights as an importer to challenge an administrative action by Customs and Border Protection. No other parties are necessary for ZYX to do that. Duracell, however, rightly wanted an opportunity to state its case in support Lever Protection. To accomplish that, Duracell moved to intervene, which the Court permitted. 
Once part of the case, Duracell challenged the designation of the identity of the plaintiff as confidential and subject to a judicial protective order. To protect its anonymity, XZY did something called a motion for an order to show cause why XYZ’s true identity should not remain confidential. This is effectively a request that the Judge make the other side explain its position so that the judge can make a ruling. Here is the decision from the Court of International Trade.
For its part, XYZ believes that it risks business and legal retaliation from Duracell. That is entirely reasonable. XYZ is competing against Duracell with Duracell’s own products (note these are not identified as counterfeits; they are genuine Duracell batteries). If XYZ were unmasked, Duracell might bring an action against it for trademark infringement. The merits of that claim are beyond the scope of this blog, but Duracell might have problems with that claim if the goods XYZ imports are identical in all material ways to the batteries Duracell sells in the U.S. Duracell might take other commercial actions such as working to undercut XYZ with its customers or otherwise discouraging sales by XYZ. XYZ naturally wants to avoid those problems.
But, XYZ’s desires do not necessarily comport with the law. The applicable protective order allows for XYZ to keep certain designated categories of information confidential. The relevant category here is “proprietary, business, financial, technical, trade secret, or commercially sensitive information.” The Court noted a lack of evidence concerning this designation and held that XYZ had failed to meet its burden on this front.
Nevertheless, the Court may exercise its discretion to maintain the anonymity of the plaintiff. Anonymity is not favored. The Rules of the Court require that every case be prosecuted in the name of a real party. This is an important principle in that it allows the parties to know the identity of the opposition. It also forms an important part of the public record, allowing the public to know the facts surrounding public judicial proceedings. The Court is required to balance the desire for anonymity against the public interest and any potential unfairness to the opposing party.
Cases in which anonymity was permitted have included facts such as the risk of personal violence, deportation, and arrest. Take, for example, Roe v. Wade, in which the plaintiff proceeded under the pseudonym “Jane Roe.” Clearly, the real Norma McCorvey was taking public position for which she might fairly have risked violence and intimidation. 
Here, the plaintiff’s concern is that it might end up on the wrong side of a trademark infringement suit. That is a legitimate concern, but it is not enough. According to the Court of International Trade, protecting the party’s economic or professional life is not a sufficient reason to overcome the presumption that the name of a litigant in a U.S. court is a matter of public record.
Thus, XYZ has been unmasked leaving it with the question of whether to proceed under its own name or to give up the case and preserve its identity. More on that shortly.
Now, just to be sure that I am being even handed, I want to be clear that my effort to use a superhero metaphor should not be interpreted as taking a side. Duracell has a point. A company with multinational distribution and sales often wants to control who sells its products and where. There are lots of reasons for that including protecting the company’s good will and its distributor relationships. On the goodwill front, a company like XYZ is not going to get complaints if the batteries fail for whatever reason. The consumer is going to see Duracell on the label and complain to it. Duracell might rightly respond, “Sorry, that package of batteries was never intended to be in the U.S. We did not sell it to the store where you bought it. You are out of luck.” Most companies won’t do that. Rather, they might take the return or otherwise accommodate the unhappy customer. That means XYZ has cost Duracell a sale to the retailer and Duracell took on the added expense making someone who was not even its customer happy. That’s not fair to Duracell. 
Also, Duracell might have distribution agreements in place that give retailers exclusive geographic rights. I don’t know if this is true, I am just giving a hypothetical example. If Duracell limits its distribution channel, it has agreed to give a retailer certain business opportunities. A company like XYZ comes along and starts to sell in competition with that retailer, which undercuts the value of the authorized relationship with Duracell.
Lastly, these batteries might not be exactly what the U.S. consumer expects of a Duracell product. Perhaps they were formulated and manufactured to work in the cold of Greenland and won’t work as well in the comparatively balmy U.S. market. Or, perhaps, batteries sold in New Zealand have to be slightly larger than their U.S. equivalents to prevent choking in kiwis (the birds, not the people). If the American consumer buys a Duracell battery, it should get what it expects from the Duracell trademark.
For companies that sell branded products, parallel imports are a serious problem. That is why Duracell is exercising its legal rights to secure Lever Brothers Protection.

Tuesday, August 29, 2017

GSP and Sets

Here's a question. Assume pots and pans from Thailand individually qualify for duty-free entry into the United States under the Generalized System of Preferences ("GSP"). That means they have 35% of their value derived from Thai-origin materials or costs and are shipped directly from Thailand to the U.S. So far, so good. Now assume that glass lids for the pots and pans are added to the imported goods and those lids are from China, which is not a GSP-eligible country. Do the pots and pans continue to qualify for duty-free entry under GSP or is the entire set disqualified due to the presence of the lids from China?

That is the question presented in Meyer Corporation US v. United States. The tricky thing about this situation is keeping separate tariff classification rules, entry documentation, and GSP eligibility. The classification of the pots and pans plus the lids is controlled by General Rule of Interpretation 3(b), under which the retail set is assigned a single classification based on the one item in the set that imparts the essential character. In this case, that was the pots and pans. As a result of this rule, the entire retail set is usually assigned a single rate of duty.

Following a 1991 Treasury Decision (T.D. 91-7), Customs argued that the 35% value added test must be applied to the entire set, including the lids. According to Customs, the mere packaging of the lids with the pots and pans was not sufficient to substantially transform them into articles of Thailand, making them count against the 35% requirement.

Rather than focus on the Treasury Decision, the Court of International Trade looked at the GSP statute. In 19 U.S.C. 2463, Congress extended GSP benefits to "any eligible article which is the growth, product, or manufacture of a beneficiary developing country" if that article satisfies the other statutory requirements. The pots and pans, individually, are eligible articles. The set, as a whole, is not.

According to the Court, the GSP statute extends to the individual articles that make up the contents of the set, not the set itself. The fact that GRI 3(b) produces a single rate of duty applicable to the retail set does not collapse the contents of the set into a single article for GSP purposes. Thus, the pots and pans arguably retain their individual GSP status. That is the legal conclusion. Whether the facts establish that to be true or not, is not decided in this preliminary decision.

There are other related issues to be settled. For example, if the pots and pans get duty-free status under GSP, does that mean that the lids are dutiable as products of China? If so, at what rate, the rate applicable to the pots and pans, which provide the essential character or at the rate applicable to glass lids from China? The Court did not resolve that and noted that further briefing is necessary to do so.

Next, the plaintiff asserted that the proper valuation for purposes of entry and, therefore, the GSP calculation should be the sale price of the lids from the Chinese manufacturer to the company in Thailand. This is first-sale valuation under Nissho Iwai (Fed. Cir. 1992). To determine whether the first sale is a bona fide sale for purposes of appraisal, Customs looks to the level of profitability of the "firm." In this case, CBP treated the firm as the parent of the importer. There is a debatable question of whether that is a reasonable data point for comparison. The Court also noted that the first sale might be influenced by China's status as a non-market economy. In the end, the Court determined that there are not sufficient facts available to make a decision on this point.

As a result, the Court ordered the parties to confer and propose how to proceed.

The legal decision here should not be lost in the details. This case holds that combining GSP-eligible and non-GSP-eligible items in a retail set does not strip the benefit of the GSP from the eligible articles in the set. That is the takeaway and is big, if it holds up on appeal.

There is a practical question of how entry will be made. A footnote in the decision discusses the possibility of separate line items or even separate entries of the items within the set. The resolution of that also remains to be seen. But, keep in mind that the contents of retail sets must be itemized on the entry anyway. This is the X/V reporting requirement contained in the instructions (see page 14) for completing the 7501. One would assume that adding the A prefix to the HTSUS number at the V-line level would take care of that (if more than one Special Program Indicator can be applied). If not, a new SPI covering both V and A might need to be added to the system.

Monday, August 21, 2017

Ford Analysis

Since I promised and because it is important, here is my more detailed analysis of the Court of International Trade decision in Ford Motor Co. v. United States, Slip Op. 17-102.

The background is pretty well known at this point; here is the short version. Since the 1960's there has been a 25% duty assessed on motor vehicles for the transport of goods (i.e., trucks). This is the result of U.S. retaliation in a trade spat over European duties on U.S. chicken. As a result, the 25% duty on trucks is known as the "chicken tax." The rate generally applicable to motor vehicles for the transport of people (i.e., cars, passenger vans, and SUVs) is 2.5%. That difference creates an opportunity, which Ford has tried (so far successfully) to exploit. What if you were to import a passenger van, pay 2.5% duty, and then convert it to a cargo vehicle prior to delivery to the dealer or customer? Would that be legal?

That is the question addressed and decided by the Court of International Trade.

The vehicles at issue are Ford Transit Connects. You no doubt have seen these driving around as urban delivery vehicles (think florists, bakeries, plumbers, and similar businesses). You also see them, though less often, as taxis, hotel shuttles, and family wagons. As imported, all the Transit Connects have swing out front doors, second row sliding doors with windows, and swing out rear doors. As imported, they also have a second row seat with seat belts; child locks in the rear doors; lights in the front, middle and rear of the vehicle; a full-length cloth headliner; and coat hooks in the second row.

Importantly, the second row of seats, as imported, does not have certain features. Specifically, the seats do not have headrests, a tumble forward lock mechanism, or accompanying labels. Over time, Ford found ways to reduce the cost of the rear seat. Later versions lacked certain structural wires that make it more comfortable for passengers and were wrapped in a "cost reduced" fabric. There are many other relevant facts stated in the opinion, which is worth reading. But, this is enough for our purposes.

The reason the Transit Connect may not be just a passenger van with a lousy rear seat is what happens after importation. After CBP clearance, but still within the confines of the Port, a Ford contractor unbolts and removes the rear seats and safety equipment. The rear footwells (dips in the floor where passengers would put their feet) are filled to create a flat cargo floor. Sometimes, Ford also removed the rear windows and replaced them with solid metal panels. The result is a cargo van with no rear seats. There is no dispute that had the cargo van been imported, it would have been subject to the 25% chicken tax.

There is another variation of the Transit Connect that has better rear seats and other passenger-related features. These vehicles, identified as the Transit Connect 9, are sold as imported and remain passenger vehicles. These were not re-classified and are not subject to this litigation. But, they illustrate the difference between passenger vehicles intended for the market and those Ford knows at he time of importation will be converted to cargo vans.

The question raised in this case is whether Ford's process of importing passenger vehicles knowing that they will be converted to cargo vehicles is permissible tariff engineering.

The starting point for this analysis is the legal principle that goods are classified in their condition as imported. This goes back at least as far as a 1881 when the Supreme Court held that it was permissible for an importer to darken refined sugar to avoid the higher duty applied to lighter sugar. In that case, the Supreme Court said "So long as no deception is practised, so long as the goods are truly invoiced and freely and honestly exposed to the officers of customs for their examination, no fraud is committed, no penalty is incurred." In a case called United States v. Citroen, 223 U.S. 497 (1912), the importer purchased a string of pearls in France. Prior to importation, the importer unstrung the pearls and imported them with the lower rate of duty applicable to pearls "in their natural state." The Supreme Court found no fraud and upheld the application of the lower rate of duty despite it being clear that the pearls were to be restrung into a necklace after importation.

Those cases and the ones that followed establish that an importer is free to structure its products to achieve the lowest legally available rate of duty. But, there is a caveat. Importers cannot escape an applicable duty by resort to "artifice or disguise." That means that an importer cannot hide the true nature of the imported article. For example, an importer got into trouble when it hid high quality (and high duty) tobacco in a bale of low quality (and low duty) tobacco. Assuming the importer did not properly declare both grades of tobacco, that is fraud; it might actually be smuggling.

Is Ford's process an unacceptable artifice or disguise? According to CBP, the as-imported passenger vehicles with low-cost rear seats were never intended to be sold. That makes them fictional, temporary products that have no real purpose other than avoiding the chicken tax. Customs contended that is a disguise or artifice.

The Court of International  Trade disagreed. First, Customs' approach is inconsistent with the general premise that importers are permitted to fashion their merchandise to achieve lower rates of duty. Second, the Court held that asking (or permitting) CBP to inquire as to the subsequent processing of merchandise and the genuineness of the imported product would impair the timely and sound administration of the entry process. Most important, the cases that have found disguise or artifice do so where the appearance, rather than physical characteristics, are changed. Merritt, the sugar case, involved adding molasses to darken light sugar. But, the tariff applicable in 1881 classified sugar based on its color (i.e., its appearance) rather than physical characteristics. That means changing the color of the sugar was changing the physical parameter that controlled classification.

This would seem to decide the issue. The Transit Connects were presumably properly invoiced and reported to Customs. Customs had the opportunity to inspect them and make a determination as to the correct classification. Furthermore, the vehicles as imported had actual rear seats and other passenger-related components.

But, there was more to this. The question remained whether the as imported vehicle has features that satisfy the requirements for classification as a vehicle for the transportation of persons rather than cargo. In other words, did Ford build a real passenger vehicle with what appears to have been an epically lousy rear seat? Or, do the physical characteristics of the as-imported vehicle indicate that it is really a cargo van? According to the Court of International Trade, "That Ford ultimately removes that seat after importation is immaterial." For our purposes, that is the decisive utterance of this case.

Having established that the as-imported condition is what matters for classification, the Court next turned to the classification question. The relevant case for that analysis is Marubeni America Corp. v. United States. In that case, the Court identified a number of structural features that differentiate passenger from cargo vehicles. Many of these are features that interfere with loading cargo or that add comfort for passengers. Looking at the Transit Connect, the Court found numerous similarities to the Transit Connect 9, which remains a passenger vehicles after importation. The only question was whether the cost-reduced rear seat was sufficiently inadequate for passengers to prevent the classification of the vehicle as for the transport of people.

It turns out it is not this rear seat is not so lousy that it does not qualify as a passenger seat. The seats fold forward, but do not lock. The inability of the seats to lock makes transporting cargo more difficult than it would be if the seats locked away. The lack of support wires in the seats did not make them unsuitable for human passengers and they remained compliant with safety requirements. In other words, the cheap seat is still a seat. That means the vehicle, as entered, has features that indicate it is designed for the transport of people.

There was one last issue. Does the post-importation use of the vehicles as cargo vans affect their classification? If the two competing headings are eo nomine classification, use would be largely irrelevant. The Federal Circuit decision in Marubeni did not treat Heading 8703 (covering vehicles principally designed for the transport of person) as a use provision.

But, recent Federal Circuit decisions have indicated that some eo nomine provisions suggest that evidence of use consistent with the eo nomine designation may be relevant and useful for classification. On this front, the CIT held no such inquiry was required. First, the distinction between passenger cars and trucks is not that challenging in light of the established Marubeni factors. Second, Heading 8703 does not suggest a use. Instead, the Heading indicates that design is the primary consideration.

Having walked through that analysis, the Court made a very important ruling that does not substantially change the law. The relevant time for classification remains the time of importation. Importers continue to have the right to fashion products in a manner to achieve the lowest legally applicable rate of duty. At the same time, importers must properly describe their products to Customs. A false statement about what is being imported or an effort to make merchandise appear to be something other than what it actually is at the time of importation will be an impermissible "artifice or disguise." And, finally, the way to distinguish between passenger vehicles and cargo vehicles is to look at whether the vehicle has design characteristics and features that, taken together, show it to be principally designed for the transport of persons (or cargo).

This is a huge win for Ford. More important, it is a huge win to the trade community as a whole. This decision continues the established law and maintains existing compliance obligations. It allows companies to continue to make changes to their products to manage their duty liability, even if those changes are temporary. There is a real question as to how the Court of Appeals will decide the inevitable appeal of this case. Given the dollar amounts that are likely to be at stake and the importance of the legal principal (remember, CBP thinks this is an unfair trade practice), this case might even see an effort to secure Supreme Court review. So, keep your eyes on this case.

Now, whenever you are driving around with someone, if you see a Transit Connect, you will have an interesting work-related story to tell. For all of you who, like me, have friends and family who have no idea what customs law is about, tell them this story. It may be the best example to come along since the debate over whether the X-Men are humans.

Monday, August 14, 2017

Chew on This

The important legal and possibly philosophical question to be answered in Mondelez Global LLC v. United States is whether the unflavored, and largely chemical, base for chewing gum is classified in HTSUS Heading 2106 as a food preparation or in Heading 3824 as a chemical preparation.

While that is an interesting question, the most interesting thing about his case may be the procedure used to get it this far. It appears that the United States made a motion for partial summary judgment to ask the Court to decide a question of law as early as possible. This makes sense when there is a possibly dispositive question of law that can be resolved without discovery or the introduction of factual evidence. The answer to that question of law might lead the parties to resolve the case by settlement or, at a minimum, the answer provides guidance on what are the important questions of fact.

Addressing the legal questions early, therefore, can be an efficient way to manage customs litigation. At least that is the theory I put forth here. Things may have gotten a little bollixed up because Mondelez opposed the motion for partial summary judgment on the question of law and then jumped in with both feet asking the court to grant full summary judgment on the whole case before the parties had engaged in discovery. That's its right, so I can't really complain, but this does not seem to have been a good test of my theory of tariff litigation.

On the merits, the first question is whether gum base is a "food preparation" of Heading 2106., as the government contends. If the Court finds that gum is a food and that the base is specially prepared for the manufacture of chewing gum, then even with just partial summary judgment on those questions, the government might well win the case because it would follow that the gum base is a food preparation.

But, Mondelez has a different thought. It contends that Heading 2106 only covers items that are themselves consumed as food and that gum base is not consumed as food. Mondelez also points out that gum base is not intended for human consumption and is not valued for its nutritional qualities.

On this question, the Court noted that the phrase in 2106 is "food preparation." That has a different meaning than the phrase "preparations for food." As written, preparations classifiable in 2106 must be food. According to the Court, "food" is a substance that is intended to be ingested or imparts flavor or nutritional value to something that is ingested. So tea leaves are presumably food preparations because they impart flavor to tea even though the leaves themselves not consumed. Something can be food without providing nutritional value, so long as it is ingested.

But, the government also argued that if it does deliver nutrition, the substance is food. At this early stage, the government has not explored whether the gum base is a means of delivering nutritional compounds, even if the base is not ingested. It turns out that gum bas includes a few components that arguably have nutritional value. Those are vegetable oil, calcium carbonate, lecithin, and triacetin.

In an effort to avoid a potentially costly scientific and expert analysis of this question, the government moved for partial summary judgment on the scope of 2106 without first investigating this question. Because of that, it asked the Court to refrain from deciding Mondelez's motion for summary judgment. The Court, not wanting to penalize the government for trying to be efficient, agreed and did not address that question.

Still on the table is whether chewing gum base is covered by Heading 3824 as a chemical preparation. Note 1(b) to Chapter 38excludes "mixtures of chemicals with foodstuffs or other substances with nutritive value, of a kind used in the preparation of human foodstuffs . . . ." Such goods, according to the note generally go in Heading 2106. The Explanatory Notes clarify that goods are not excluded from Chapter 38 by the mere presence of substances having incidental nutritive value. In other words, products of 2106 are "of a kind" used in the preparation of human food and which are valued for their nutritional content.

That means there is a necessary question of fact to be resolved: is gum base valued for its nutritional properties? That, according to the Court, is essentially the same question that must be answered to resolve the classification in Heading 2106.

This sets up a problem for the Court. Mondelez moved for summary judgment and presented evidence that gum base is not valued for its nutritional properties. The U.S. was hoping to avoid this issue and moved to resolve the legal question of whether gum base is a food preparation (making chewing gum "food"). If the Court ruled it is not food, then 2106 would have been excluded. The Court could not answer that question on the record presented. If it acted on Mondelez's motion for summary judgment, it would be doing so on a less than complete record, putting the government at a disadvantage for having tried to get the case resolved efficiently.

The Court wisely refused to do so. Instead, it ordered the government to advise whether it wants time for discovery. If no discovery is needed, Mondelez will prevail on the basis of the uncontroverted evidence.

Saturday, August 12, 2017

XYZ and Lever Protection (Part 2)

This is a discussion of the jurisdictional merits of XYZ Corporation v. United States. If you are not up on the ins and outs of parallel (or "gray market") imports, read Part 1 of this post.

Remember what is happening here: Plaintiff, going by the pseudonym XYZ Corporation, wants a preliminary injunction to prevent Customs and Border Protection from granting Lever Rule protection to Duracell batteries imported in bulk or in retail packaging.

The first question the Court has to decide is whether it even has jurisdiction to resolve this dispute. The Court of International Trade, like all federal courts, is a court of special and limited jurisdiction. It can only act if Congress gave it the authority to do so. There are two possible bases of jurisdiction in this case.

The first is 28 USC 1581(h), which states in full (with my emphasis):
The Court of International Trade shall have exclusive jurisdiction of any civil action commenced to review, prior to the importation of the goods involved, a ruling issued by the Secretary of the Treasury, or a refusal to issue or change such a ruling, relating to classification, valuation, rate of duty, marking, restricted merchandise, entry requirements, drawbacks, vessel repairs, or similar matters, but only if the party commencing the civil action demonstrates to the court that he would be irreparably harmed unless given an opportunity to obtain judicial review prior to such importation.

The second basis is 28 USC 1581(i)(4), which is the residual provision giving the Court jurisdiction over actions against the United States challenging CBP decisions relating to, among other things, the administration and enforcement of duties and quantitative restrictions on the importation of merchandise.

These two bases for jurisdiction are mutually exclusive. The Court cannot exercise jurisdiction under section 1581(i) if it has jurisdiction under 1581(h). Thus, the question comes down to whether this challenge is properly heard in the CIT as a request for declaratory judgment under 1581(h).

The first factor is clear. This is a pre-importation review. The next question is whether the granting of Lever Rule protection to Duracell is a "ruling." In this context, a "ruling" is a determination as to the manner in which CBP will treat a completed transaction. Here, CBP has made a determination to grant Lever Rule protection against merchandise bearing the Duracell trademark, meaning it has decided how it will treat those future importations. Moreover, under Customs' own regulations, a ruling is a written statement, issued by Headquarters, published in the Customs Bulletin, interpreting the customs and related laws. The decision to grant Lever Rule protection satisfies those requirements and is, therefore, a ruling. Furthermore, it is a ruling about restricted merchandise, making it appropriate subject matter for declaratory judgment.

The next of the elements required to secure (h) jurisdiction is where things usually fall apart: irreparable harm. More often than not, a customs can be resolved with a refund of duties, taxes, and fees, plus interest. That means there is almost always a way to repair the harm, making (h) inapplicable. But, there are things a money judgment can't fix such as loss of goodwill, damage to reputation, loss of future business opportunities, etc. Here, XYZ  showed that it has lost sales and suffered damage to its business reputation as a result of the grant of Lever Rule protection to Duracell. It has shown through an affidavit and testimony that customers are concerned about potential repercussions from the owners of the Duracell mark. Plaintiff also faces great uncertainty regarding whether its shipments will be released. These are significant, non-monetary harms that cannot be remedied through a refund of duties or other money judgment.

As a result of these conclusions, the Court of International Trade found that it has 1581(h) jurisdiction to hear this challenge to the extension of Lever Rule protection. That means that is does not have jurisdiction under 1581(i).

The next set of questions has to do with whether the plaintiff in this case has standing to challenge the CBP determination. "Standing" is the legal requirement that the plaintiff have a legitimate interest in the litigation. It typically means that the plaintiff must be the party that was injured. You can't sue the driver who caused an accident if you were miles away and uninjured. Here, XYZ is an importer of the affected merchandise and has complained of an injury to its business as a direct consequence of CBP's action. It has standing to sue.

The last question is whether the issue is ripe for decision. Generally, federal courts will only review final agency action. Here, CBP issued its final notice and declared that Lever Rule protection would commence. That is a final agency action. Furthermore, the issue is ready for resolution; all the relevant facts are known and the legal issue can be decided.

All of which means that this case is properly before the Court of International Trade.

The Court has denied the requested preliminary injunction against enforcement of the Lever Rule protections. That is because the relief available under (h) us limited to declaratory judgment with prospective application to future imports.

But, this case is far from over. There is still the question of whether the grant of Lever Rule protection requires public notice and comment under the Administrative Procedures Act ("APA"). If it does, the grant of Lever Rule protection in this case, and potentially all prior cases, is void. That would be a big deal. The Court has ordered the parties to confer and submit a scheduling order for the resolution of the remaining issues. In other words, the Court will likely have to decide whether the regulations implementing the Lever Rule are consistent with the requirements of the APA and possibly the due process clause.

This will be an interesting case to follow.

More to come. I am sitting on a penalty case and the important philosophical question of whether chewing gum is food. And, we might have to talk about bankruptcy law.

Friday, August 11, 2017

The XYZ Affair and a Quasi-War Over Gray Market Imports (Part I)

Every now and then a case shows up at the Court of International Trade that does not fit into the normal baskets of what tends to happen there. One such case is XYZ Corporation v. United States.

Here is some background. U.S. law says that only the trademark owner or someone authorized by the trademark owner can import products into the United States bearing the mark. That makes sense and it is how the law is usually described. But, it is also incomplete.

The law also provides that once someone buys the physical item bearing the mark, that person can do pretty much what he or she wants with it, including resell it and import it. That is the principal of trademark exhaustion. The idea is that through the authorized sale, the trademark owner has been fully compensated and has no lingering rights to control the further disposition of the product.

That creates an opportunity for entrepreneurs. If a company can find a good deal on shampoo, chocolates, or Mexican cola in some foreign market, it can import the goods into the United States and sell them here at a profit. This is the business model on which many discounters and on-line sellers operate. It is perfectly legal . . . up to a point.

The problem for parallel importers (or "gray market" importers) is that U.S. trademark law still does not allow the use of a trademark in a way that that is likely to cause confusion as to the attributes of the product. Assume you go into your local deep discount shop to buy a bar of Shield soap, because that is what you always buy and you expect it to work they way you like it to work. You see the familiar Shield label, grab a bar, and run home for a shower. Unfortunately, your shower is unsatisfying because the soap does not lather properly and maybe smells a little funny. What gives?

What happened is that you bought a perfectly cromulent bar of soap authorized by Lever Bros., the owners of the Shield trademark. It is just that the particular bar you bought at a steep discount was intended for some other country, not the U.S. It was formulated specifically for consumer preferences and conditions in that country and does not work well in the U.S. Lever Bros. never intended for it to be sold in the U.S. But, they lost control over that bar of soap when it was sold in an authorized channel abroad.

Those facts resulted in the famous Lever Bros. Co v. United States, a 1989 decision on the legality of parallel imports of authentic trademarked products. The upshot of that case is that parallel imports are generally legal. But, if the product is materially different than the product authorized for sale in the United States, then consumers may be deceived as to the nature of what they are buying. Consequently, U.S. trademark holders are permitted to seek the exclusion of imports that bear legitimate trademarks but are nonetheless materially different from the local versions. This is the Lever Rule.

Customs has implemented the Lever Rule in a kind of tricky way. First, it defines "restricted gray market goods" as "foreign-made articles bearing a genuine trademark or trade name identical with or substantially indistinguishable from one owned and recorded [with CBP] by a citizen of the United States or a corporation or association created or organized within the United States and imported without the authorization of the U.S. owner." 19 CFR 133.23(a). I say this is "tricky," because you will note that goods meeting this definition are not actually restricted; they will be prevented from entering the U.S. only in limited circumstances. The qualifiers are important.

Restricted gray market merchandise must have a trademark that was:
  1. Applied by licensee independent of the U.S. trademark owner (and, presumably, not under its control);
  2. Applied by the foreign trademark owner or under its authority, provided that the foreign trademark owner is not the U.S. trademark owner, its parent, its subsidiary, or otherwise under common control or ownership (again, note we are talking about a foreign party not under the control of the U.S. trademark owner); or
  3. Applied by the U.S. trademark owner or someone under its ownership or control but applied to goods that are materially different from the articles authorized for distribution in the U.S.
It's that last bit that we are worried about in this case.

A U.S. trademark owner can submit a request to Customs to exclude genuine but materially different restricted gray market goods. See 19 CFR 133.2(e). This is called Lever Rule Protection. But there is a caveat here. Remember that parallel imports of materially different products are restricted because consumers might be deceived (or at least confused) about what they are getting. The way to fix that is to label the product as not authorized for the U.S. market and materially different from the authorized product. No consumer confusion means the goods can be imported.

I am not 100% certain why companies seek Lever Rule Protection. One consequence is that it tells prospective importers to affix labels to the product to get them through Customs. Materially different but genuine products that are unlabeled are subject to seizure. I suspect that most importers don't know about the labeling option or don't bother to label, which makes the Lever Rule valuable. Also, seeking Lever Protection gets the trademark front and center with CBP for enforcement.

OK, all of that, leads up to the modern, as opposed to the historical, XYZ affair

In this case, Duracell asked for Lever Rule Protection for bulk and retail packaged batteries bearing genuine Duracell marks. Customs, following its regulations, published a notice of that request in the Bulletin on January 25, 2017. On March 22, 2017, CBP announced that it had granted Lever Rule Protection to Duracell but did so without permitting public comment. Customs' rationale was only that it determined the batteries to be materially different than their domestic counterparts.

This did not sit well with some company, which we must assume is a parallel importer of Duracell batteries. For purposes of this litigation, that company has a assumed the nom de guerre "XYZ Corporation." XYZ complained to Customs that restricting imports is a serious matter that affects the rights of third parties who should have an opportunity to comment before CBP takes action. XYZ also noted that the bulk batteries are not, in its estimation, materially different than Duracell's U.S. products. XYZ requested that CBP reconsider. XYZ then sued Customs seeking judicial review of the extension of Lever protection and an injunction preventing CBP from enforcing gray market restrictions on Duracell batteries. 

Shots fired.

Given that I still work for a living, I am going to call that Part I. I will finish this up soon.

Thursday, August 10, 2017

Good News (About Ford and the Blog)

Turns out that I am still alive and still consider this to be an active blog. I have been working very hard on a number of fronts and simply have not had the time to keep you all up to date. I'll be back soon.

I know I will be back soon, because this showed up on the docket at the Court of International Trade in Ford Motor Co. v. United States:

Order entered on 8/9/2017 Judgment: ORDERED that Plaintiff's motion for summary judgment is GRANTED; it is further ORDERED that Defendant's cross- motion for summary judgment is DENIED; it is further ORDERED that judgment is entered for Plaintiff; it is further ORDERED that the subject merchandise is correctly classifiable pursuant to subheading 8703.23.00 of the Harmonized Tariff Schedule of the United States ("HTSUS"); it is further ORDERED that Customs and Border Protection, United States Department of Homeland Security ("Customs"), reliquidate the entry which is the basis of this case under the aforesaid HTSUS subheading; and it is further ORDERED that Customs refund to Plaintiff any overpayment of duties together with any interest allowed by law. (related document(s) 144 ).(Demb, Rebecca) (Entered: 08/09/2017)

This is the much discussed, by me at least, case involving the tariff classification of the Ford Transit Connect.  This docket entry indicates that Ford has won at the Court of International Trade. The decision has not yet been published as the Court has requested that it be reviewed to identify any business proprietary information. A decisions should be published in the next two weeks.

Obviously, a more detailed analysis will follow.

Congratulations to Ford and its counsel.

Friday, June 02, 2017

Interest: Equitable and Otherwise

The Federal Circuit has affirmed the Court of International Trade's holding that a surety is be liable for statutory interest but not for equitable interest when the importer defaults on the payment of antidumping duties. What follows is heavy on law, short on fact, and important to sureties and also importers. The case is United States v. American Home Assurance Company.

When importers fail to pay duties, taxes, and fees to the U.S. government, the government can collect interest on the unpaid portion. If the importer defaults, the surety becomes liable up to the value of the bond, unless the surety has a defense it can assert (and [spoiler] actually asserts it). In this case, the importer defaulted on the payment of antidumping duties and Customs tried to collect the duties and interest from the surety. There was no question about the liability for the duties. The questions presented has to do with interest.

There are multiple bases for the interest. First, interest is available to the United States under 19 U.S.C. 1505(d), which states:

If duties, fees, and interest determined to be due or refunded are not paid in full within the 30-day period specified in subsection (b), any unpaid balance shall be considered delinquent and bear interest by 30-day periods, at a rate determined by the Secretary, from the date of liquidation or reliquidation until the full balance is paid. No interest shall accrue during the 30-day period in which payment is actually made.

Separate from that, 19 U.S.C. 580 provides:

Upon all bonds, on which suits are brought for the recovery of duties, interest shall be allowed, at the rate of 6 per centum a year, from the time when said bonds became due.

On top of that, there is a thing called "equitable prejudgment interest," which is not statutory and derives from the judicially perceived need to compensate the United States for the loss of the use of money owed to it from the time the obligation to pay accrued until a judgment ordering payment is entered. This is a traditional rule established by judges, not by Congress.

Starting with equitable prejudgment interest, the United States appealed the Court of International Trade's decision to deny prejudgment equitable interest. The Federal Circuit held that equitable remedies are generally unavailable when there is an adequate statutory remedy. Section 580 would appear to provide a statutory remedy at the relatively high rate of 6%, making the government whole. There is, however, a wrinkle in this case in that the recent Trade Facilitation and Trade Enforcement Act of 2015 expressly permits the government to recover both equitable prejudgment interest and statutory interest under section 580.

Nevertheless, equitable interest remains equitable in nature. The fact that Congress recognized that the Court of International Trade might award equitable interest does not mean the CIT must do so. Here, the Federal Circuit held that the CIT properly considered the equitable factors and concluded that the government was sufficient compensated by the statutory interest. Thus, the denial of additional equitable interest was proper.

Regarding the section 580 interest, the issue was not the availability of the remedy, which is clearly permitted under the statute. Rather, the surety argued that the CIT improperly permitted section 580 interest to be calculated on top of the section 1505(d) interest, putting interest on interest. The surety also argued that the relevant date for when interest should start to run is the date of denial of the protest rather than the first demand for payment.

On the first question, the Federal Circuit interpreted section 508 as clearly permitting interest on the entire bond amount, including 1505 interest. This would obligate the surety to pay interest on interest up to the amount of the bond. Regarding timing, the Court said section 508 is "clear and unambiguous" that the interest clock begins to run on the government's first formal demand.

The issue with respect to section 1505 interest was different. This is the legal question of whether the surety waived its right to content the interest by failing to challenge the denial of the protest and pay the duties and fees owed. The underlying rationale here is that decisions by Customs imposing charges or exactions on an importer are final and conclusive unless a protest of law suit contesting the liquidation is properly commenced. A surety is permitted to challenge a charge or exaction through an administrative protest. The fact that the interest is assessed after liquidation, does not change its nature as a protestable charge. Here, Customs denied the protest. At that point, is the defendant wanted to challenge the charge, it needed to file a summons in the Court of International Trade. For whatever reason, AHAC chose not to exercise that right and the decision became final and conclusive.

The latter point is very important. Where an importer or surety disagrees with Customs' efforts to collect duties, taxes, fees or interest, it must challenge the charge or exaction. Failing to protest will result in a final and conclusive assessment and will divest the importer or surety of the right to challenge it when sued in the CIT. I'm not happy with this result. It produces a waiver of defenses that many importers may not understand or appreciate. It is, however, the law.