Sunday, December 31, 2017

Recently, On Discovery

This has nothing to do with Michael Burnham or tardigrades.
Discovery disputes are pretty uncommon in the Court of International Trade, and for good reason. Most CIT cases, these days, are “on the record” reviews of antidumping and countervailing duty decisions from the Department of Commerce or International Trade Commission. Those cases do not involve discovery about which to have a dispute. Most customs cases are tariff classification cases in which there is not often a real dispute about the nature of the imported product. That means the cases turn on questions of law, not fact, thereby limiting the genuine (if not perceived) need for discovery.
Penalty cases area a whole different world. In penalty cases, the Department of Justice is often trying to figure out what happened and, more important, what it can prove. That means penalty cases often involve a lot of discovery requests from the government directed at the defendant and its personnel. For its part, the defendant often wants to know what the government THINKS happened and what the government THINKS it can prove. As a result, the defendant often seeks discovery of, among other things, Customs and Border Protection’s or Homeland Security Investigation’s Report of Investigation, which is the extremely tedious document that details the government’s investigation into the alleged violation. While the defendant is at it, the defendant will usually request any other relevant documents it thinks might exist and illuminate what has been happening.
The CIT Rules permit the use of the same discovery tools as are available in any U.S. District Court. Among those are depositions (Rule 30), interrogatories (Rule 33), and requests to admit (Rule 36). A party that believes a request has exceeded the permitted scope of discovery may move for a Protective Order to halt or limit the allege discovery abuse (Rule 26(c)).
Two recent decisions from the Court of International Trade have waded into the scope of permitted discovery. Both decisions are in the case United States v. Greenlight Organics, Inc. (slip op. 17-167 and 17-168).
The first decision involves Greenlight’s motion to compel the United States to produced 145 documents over which the government has asserted privilege. As background, the United States produced 2,861 documents, withholding 145. For those 145, as required by Rule 26(b)(5)(A), it provided a privilege log identifying the document along with its sender, recipient, date, subject, and the privilege claimed.
In this case, the government asserted the “deliberative process” and “law enforcement” privileges. These privileges protect the deliberations of agency officials from disclosure and encourage frank discussions of legal and policy matters related to the law enforcement decision-making process. Once the government successfully asserts the privileges, the burden shifts to the requesting party to show a “compelling need” to overcome the privilege.
To make a successful claim of these executive privileges, the government must do more than merely assert it. Following a decision of the U.S. Court of Appeals for the DC Circuit, Landry v. F.D.I.C., the Court of International Trade held that the government must:
1.       Make a formal claim of privilege via the head of the agency or his or her delegate;
2.       Submit an affidavit showing “actual personal consideration by that official;” AND
3.       Provide a detailed explanation of what the document is and why it falls within the scope of the privilege.
In this case, the government failed to submit the required affidavit. Having failed to do so, the United States has failed to successfully assert the privilege. Consequently, the Court ordered the United States to do so before ruling on the merits of the privilege claim.
Given the lack of a fully asserted claim for privilege, the Court found it premature to rule on Greenlight’s request for in camera review of the documents. In camera review is where the judge requires the party to produce documents for her private review so that the judge can make a fully informed decision on the merits of the claim of privilege and the other party’s need for production. The Court also declined to act on Greenlight’s motion to compel production.
The second Greenlight decision involves two competing motions. In the first, the United States seeks to compel responses to several discovery requests. The second involves Greenlight’s motion for a protective order preventing much of this inquiry by the government.
Here, I am going to cut to the chase so that I can discuss the underlying issue, which is, to my mind more important for the average reader of this blog. The government’s requests go to the personal involvement of the two corporate principals in the classification and valuation of the imported merchandise. In other words, the requests appear directed at determining whether those individuals were responsible for the alleged fraud or negligence. The requests also go to the personal finances of those individuals.
This should send a shiver of concern up the spine of corporate officers and compliance personnel. Greenlight Organics is the defendant in this case, not the individual officers. However, as a reminder, the dustup surrounding the 2014 Federal Circuit decision in Trek Leather means that “any person” can be liable for a violation of Section 1592, the customs penalty law. Thus, the individuals, acting as agents for the actual importer Greenlight, might be personally liable for their actions related to the alleged violation.
Because of this legal reality, the government asserted that its questions about the two individuals were related to the case against Greenlight and also to the possibility of claims against the individuals. The first part makes sense. If an officer or employee of Greenlight made a material false statement or omission, then Greenlight is liable for the violation. If that person made the false statement knowing it to be false, then Greenlight would potentially be liable for fraud—the highest level of culpability under the statue. Consequently, the Court allowed the inquiry into the personal involvement in the suspect decisions.
But what about claims against the individuals and the requests for personal financial information? Greenlight objected to these questions because the two individuals are not defendants in the case. The complaint, which sets out the plaintiff’s claims, does not allege individual wrongdoing or individual liability. According to Greenlight, that makes this line of inquiry outside the scope of the complaint and, therefore, outside the scope of appropriate discovery.
The Court disagreed. Citing Supreme Court precedent, the Court of International Trade noted discovery rules are liberally interpreted to permit discovery on any matter that may bear on an issue that is or may be an issue in the case. Discovery, in other words, is not limited to the complaint. According to the government, that is the point. It explicitly stated that it wanted the discovery “to assist it with determining whether to amend its complaint to include charges of individual liability against Greenlight’s officers.” According to the Court, this falls within the liberal nature of discovery and is, therefore, appropriate.
Because of all this, Greenlight’s motion for a protective order preventing much of this effort was denied.
So what is the take away from this? First, it is a reminder that the government can and will pursue charges against individuals for corporate imports. That underscores the importance of compliance generally and, for compliance personnel, the importance of documenting efforts to correct non-compliance by, when necessary elevating the issue to upper management. Second, these decisions are an important reminder that in a de novo penalty case, the original complaint does not fix the scope of the claims that can be brought by the United States.
But, is that the right result? A couple things make me wonder. First, Rule 26 sets out the scope of discovery. As presently constructed, the Rule allows discovery:
regarding any nonprivileged matter that is relevant to any party’s claim or defense – including the existence, description, nature, custody, condition, and location of any documents or other tangible things and the identity and location of persons who know of any discoverable matter. For good cause, the court may order discovery of any matter relevant to the subject matter involved in the action. Relevant information need not be admissible at the trial if the discovery appears reasonably calculated to lead to the discovery of admissible evidence.
I have always read the Rule’s focus on claims and defenses as limiting discovery to joined issues. That means claims and defenses as reflected in the complaint and the answer. That is, of course, inconsistent with the result here, so it is not legal advice. I thought discovery was only permitted on  matters related to the subject matter of the action but not related to a claim or defense “for good cause.” Again, that appears to be an incorrect reading.
It is worth noting that the U.S. Federal Rules of Civil Procedure used in the districts courts modified the corresponding FRCP 26 to remove the good cause test and also removed the condition that “information need not be admissible at the trial if the discovery appears reasonably calculated to lead to the discovery of admissible evidence.” See FRCP 26. The CIT rules will probably make a similar change at some point. What, if any, impact that has on the future application of CIT Rule 26 remains to be seen. It appears to indicate that the focus remains on claims and defenses while laying on top of that a condition that the request be proportional to the stakes of the case. 
A second issue has to do with the nature of the action. A penalty case in the Court of International Trade is not an empty hook on which the United States can hang any theory of liability against the importer and the individuals involved. Rather, it is a collection case in which the United States seeks to recover the penalty Customs already assessed in the administrative process. Absent a perfected administrative claim against an individual or entity, there is no claim to assert in Court. The only de novo aspects are that the Court decides whether the United States has proven in court the facts necessary to substantiate the already asserted claim. Based on the facts proven in court, the CIT can order the defendant to pay the full claim, a lesser amount, or nothing at all. This is the rule of exhaustion of administrative remedies in a penalty case as explained in United States v.Nitek Electronics, Inc., and UnitedStates v. Optrex America, Inc.
Discovery is a preliminary stage of litigation. A lot can and still might happen in this case as it proceeds. If new claims are brought, the Court may be asked to address the question of whether the claims were properly perfected at the agency level. There may also be questions of whether the statute of limitation has expired on any new claims. This could come in the form of a motion to dismiss or motion for summary judgment.
For now, we know that the discovery rules are to be liberally construed and that Greenlight will likely have to turn over the requested information. We also have a stark reminder of the importance of legal compliance both for corporate entities and for individuals. The rule of Trek Leather is that Customs need not pierce the corporate veil to assert liability against individuals who were personally involved in making material false statements or omissions. Continue to document your compliance efforts and push back wherever you perceive potential non-compliance.
There is certainly more to follow in this case.

Friday, December 29, 2017

In the Zone

At the moment, my family and I are hiding from the Chicago winter in Panama. There is no sign of winter here.

There is, however, a big canal. From my current poolside seat, I can see freighters, container ships, and tankers, lined up waiting to enter the canal on the pacific side. I am told they wait can be about 24 hours or more and that the 80 km transit can take 8 hours or more. It is very cool to see this in real life. Although I have spent my entire career dealing with supply chains, I rarely need to actually see the supply chain in action. Here, it is unavoidable.

So, off to the Miraflores locks for a closer look.

(c) 2017 LMFriedman

(c) 2017 LMFriedman

Happy new year to all of you.

How the Sausage Casing is Made

Continuing my effort to catch up on 2017 customs decision from the Court of International Trade, we come to Kalle USA, Inc. v. United States. For lots of reasons, I am going to treat this carefully. First and foremost, this is a case litigated by my law firm. As far as I know, this is not final, and I will not say anything about the matter that is not consistent with the position we advanced in the CIT. On top of that, I have a case pending before the Court that raises similar issues. Therefore, this post is just the facts and just the conclusions of law.

Kalle imports lay-flat tubes that are layers of plastic and textile materials. The long edge of the tube is sealed with glue. These tubes are used as casings for sausages and sometimes cheese. There are two versions of the casing at issue. For the majority of the merchandise, the textile is about 140 micrometers compared to 20 micrometers for the plastic. The textile value is € 0.96/165 cm compared to € 0.73/165 cm for the plastic. The textile allows the casing to transmit dyes and aromas to the encased food. The textile remains visible in the finished product and provides strength and shape. The plastic prevents moisture loss by filling the spaces between textile fibers.

Kalle believes the merchandise should be classified as a plastic tube of Heading 3917. The United States believes that the correct classification is in Heading 6307 as an other made up article.
According to the Court, this case can be resolved under General Rule of Interpretation 1 by an application of the relative Section and Chapter Notes, without recourse to essential character or relative specificity under GRI 3.

There are a lot of notes in play here. Most important is that Chapter 39, Note 1 states that “plastics” does not apply to textile materials of Section XI. Consistent with that, Chapter 39, Note 2(p) excludes from that chapter, goods of Section XI including textiles and textile articles. So, if the casings are textile articles of Section XI, they are excluded from Chapter 39.

Looking to Section XI, we find Note 1(h), which excludes, among other things, woven, knitted, or crocheted fabrics impregnated, coated, covered, or laminated with plastics, or articles thereof, of Chapter 39. However, because this note only applies to materials “of chapter 39,” the Court looked to the notes applicable to Chapters 56 and 59 for guidance on distinguishing between articles of Chapter 39 and those of Section XI. If, according to the Court, Section Note 1(h) were intended to be all encompassing, the clarifying notes of Chapter 56 and 59 would not be necessary. Given that they exist, they must have some meanings. Further, these notes are referenced in the Explanatory Notes as a means of distinguishing products of Chapter 39. Thus, the Court applied these notes to define products of Chapter 39, which would be excluded from Section XI.

Having determined the analytical approach, the Court turned to the question raised by these notes: is the textile material “completely embedded, impregnated, coated, covered or laminated with plastic?” If so, it is a plastic of Chapter 39 and excluded from Section XI.

On this question, the parties had different interpretations of the legal standard. Kalle argued that the plastic layer on one side of the textile embeds or coats the textile material. The Court, looking to dictionary definitions, disagreed. The Court held that to qualify for this exclusion from Section XI, the plastic must be on both sides of the textile, not just one.

That was pretty much it for Kalle. To clean up the loose ends, the Court also noted that gluing the two sides of the tube constitutes assembly sufficient to qualify the product as a made up article. The Court also found that the textile was present in the plastic as more than merely reinforcing material. The textile added desirable functional characteristics.

Taken all together, this GRI 1 analysis lead the Court of International Trade to conclude that the combined plastic and textile sausage/cheese casing is best classifiable in Heading 6307 as an other made up article.

Sunday, December 24, 2017

Is a Santa Suit Apparel?

It is Christmas Eve as I write this while on my way to warmer climes. This short vacation is a good opportunity to catch up on court decisions and blog posts. The fact that it is Christmas makes a discussion, however brief, of Rubies Costume Co. v. United States timely.

This particular Rubies case involves a Santa jacket and pants. Apparently, it is a particularly well-made Santa costume. Among other characteristics, it features a zippered jacket with lining and finished sleeve cuffs. The pant legs are unfinished, but are designed to be tucked into black shoe covers, meaning they do not show. The costume sells for about $100 and includes a fabric-care label specifying that it be dry cleaned. I think this is an image of the item in question:


We have been over some of this ground in previous posts. See here and here for example. The basic question is whether these garments are wearing apparel of Chapter 61 of the HTSUS or whether they are festive articles of Chapter 95. There is also a question of whether Santa’s toy sack is similar to a travel bag of Heading 4202.
I have repeatedly proposed a bright-line for these cases. For some reason, no one listens. I say if we want to know whether something is closely associated with Christmas so as to qualify as a duty-free article of Chapter 95 all we need to do is show it to a rabbi. If the rabbi takes one look at it and says. “I would never have that in my home,” then it is a Christmas (or possibly Easter) festive article. But, I digress.

To take a step back, we need to understand that certain garments are excluded from classification as wearing apparel in Chapter 61. Section XI, Note 1(t) excludes articles of Chapter 95, which includes festive articles. Plaintiff Rubies’ contention is that the Santa costume is a festive article. The problem for Rubies is that Chapter 95, Note1(e) excludes “fancy dress,” of textiles, of chapters 61 or 62. Consequently, if the Santa costume is also “fancy dress” then the Santa costume is not an article of Chapter 95 and is, therefore, not excluded from Chapter 61.
The Court of Appeals for the Federal Circuit has previously addressed the question of whether costumes are “fancy dress.” That case involved what I believe to be the sort of flimsy Halloween costumes I recall from my youth. These were the ones that came in a box from the local pharmacy or convenience store with a clear plastic window allowing the buyer to see the plastic mask of Casper the Ghost or Superman, for example. Inside the box, we would find a flimsy onesie with an opening in the back that tied at the neck. The costume part was adorned with a printed motif matching the mask. Without fail, for me at least, the masks were unwearable either because the elastic strap holding them in place would break almost immediately or it was impossible to see, breathe, or both. These were “flimsy” in all senses of the word. 


On appeal, the Federal Circuit held that “fancy dress” includes “a costume (as for a masquerade or party) departing from conventional style and [usually] representing a fictional or historical character.” However, for fancy dress to be excluded from Chapter 95, it must be “of textiles, of chapters 61 or 62.” Consequently, according to the Court, the fancy dress must also be “wearing apparel.” To be wearing apparel, the garment must be of the kind ordinarily worn as “clothes or coverings for the human body worn for decency or comfort.” From that, the Court determined that a costume is a festive article when it is a flimsy, non-durable item having utility and use associated with the festive occasion. Compared to a standard garment, it will have functional or structural deficiencies. Festive costumes will have a significant element of “make believe” or “festive value” and only incidentally afford coverage for decency and comfort.
Here, the Santa jacket has a zipper closure and long sleeves with a turned edge. The jacket is durable and intended for repeated wearing and cleaning. This is a non-flimsy garment. The pants too, although they have an elastic waist and unfinished leg bottoms. This, according to the Court, makes them durable garments that can be ordinarily worn even if infrequently. That means the Santa suit is fancy dress and that excludes it from classification in Chapter 95 as festive articles.

I can’t pick at the legal analysis. It seems to closely follow the guidance from the Court of Appeals and gives meaning to the entirety of the legal text. I just subjectively hate the outcome.
What is more festive than a Santa suit? I would posit, very few things. What is more closely associated, at least in the U.S., with Christmas than Santa? Probably nothing. How likely are you to see a person in a Santa suit between January 1 and November 1? Not very likely. If you are anything like me, if you happen to see a Santa roaming the mall or streets in July, your initial reaction is to scream internally, “Hey Buster, Christmas is in five months!” Walking around in a Santa suit in the summer is a fugitive use of it. Why? Because a Santa suit is not really apparel. Rather it is a commercial or artistic rendering of a character associated with a specific festive event. For the sake of young readers stumbling on this page, I will not opine on whether the Santa character is fictional or historical or actual. Either way, the clothing turns the wearer into a specific representation of a character who is associated with a specific holiday. To me, that is not wearing clothes in the ordinary sense.
The problem with my own analysis is that half the people in Chicago on any given day are wearing some article of clothing that communicates their affiliation with the Cubs, Sox, Bull, or Bears. In my house, there is even apparel emblazoned with the logo of the Chicago Wildfire, our local professional Ultimate team. Wearing these, even a full-on Bears uniform with pads and helmet, however, does not “depict” a specific character associated with a specific festive occasion any more than wearing a police or firefighter uniform depicts a specific person or character associated with a specific event.

To me, the Santa suit is different because it has a distinct purpose of communicating the identity of the depicted individual rather than showing a functional or personal affiliation the way a uniform does. Furthermore, depicting that individual communicates specific connections with a specific festive event. In my mind, a Santa suit, like a devil, ghost, or pirate costume is communicative and linked to a festive occasion. Fancy dress, on the other hand, would be, for example, a historical costume (say a colonial minuteman) that is not associated with any specific festive occasion or specific character.
Unfortunately, I do not get to make the rules. I just help others follow them and report on the results. For now, and probably for the foreseeable future, costumes will only be classified as festive articles when they are flimsy, non-durable items that cannot be ordinarily worn for comfort and decency. I can live with that.

Consolidated Fibers: What the EAJA?

Consolidated Fibers, Inc. v. United States involves an importer’s motion for attorneys’ fees under the Equal Access to Justice Act (“EAJA”). And, it is a cautionary tale for importers and customs lawyers.

The underlying facts are not too complicated. Consolidated entered polyester stable fiber from Korea. At the time of entry, it deposited the 7.9% estimated dumping duties that were then due. Because the producer was subject to administrative review, the liquidation of the entry was suspended. On December 10, 2007, Commerce published the results of the review and determined the assessment rate to be 48.14%. On January 14, 2008, Commerce issued instructions to Customs to liquidate the entries at the assessment rate. CBP failed to act on those instructions until May 6, 2011 when it published a bulletin notice of liquidation stating that the entry liquidated by operation of law on June 10, 2008 at the 7.9% deposit rate. But, shortly thereafter, on June 17, 2011, CBP “rate advanced” the entry to 48.14% and reliquidated the entry.

Consolidated protested the reliquidation. In its protest, Consolidated noted that the entry liquidated by operation of law six months after the assessment rate was published. Since liquidations are generally final as to all parties, this might appear to be enough. Consolidated relied on a 2004 CIT case called International Trading v. United States, 28 CIT 1, 16-18, 306 F. Supp. 2d 1265, 1278-79 (2004), which was affirmed by the Court of Appeals in 2005, as support for its position.
The Court, however, noted that by the time CBP reliquidated Consolidated‘s entry, Congress had amended 19 U.S.C. § 1501 to allow Customs to reliquidate an entry that had liquidated under § 1504, i.e., liquidated by operation of law, within 90 days of the date of publication of the notice of liquidation. That means that the clock started running on this liquidation on May 6, 2011 when Customs issued the notice of liquidation and the reliquidation was timely. [Note from Larry: This changed again in 2016 when the statute was amended to start the reliquidation clock running from the date of the deemed liquidation not the notice.]

OK, so how does that relate to the EAJA claim?

The odd thing about this case is that it follows a “confession of judgment,” in which the United States effectively admitted that it should not have rate advanced the entry. In other words, the government is willing to pay back the extra antidumping duties Consolidated paid. But, plaintiff refused to stipulate the case unless the U.S. also agreed to pay attorneys’ fees, which the U.S. government would not do. 
To qualify for fees under EAJA, the requesting party must have prevailed in the litigation and show that the other party’s position was not substantially justified. That means that no reasonable person would have accepted the position as justified. This includes the administrative position. So, was Customs substantially justified in denying the protest?
The protest only cited the pre-amendment International Traders case as support for its protest. On that basis alone, according to the Court of International Trade, Customs was justified in denying the protest. Customs had at least arguable authority to reliquidate the entry up to 90-days following the publication of the bulletin notice. In the protest, Consolidated did nothing to refute this. According to the CIT, Customs has no obligation to recognize and act on other grounds that might have been asserted in the protest. Specifically, had Consolidated argued that a nearly three-year gap between the deemed liquidation and the notice was unreasonable and the reliquidation void, Customs would have been able to respond. Absent the presence of those grounds in the protest itself, CBP was substantially justified in denying the protest.

And yet, you say, the government apparently felt it was in the wrong. It agreed to refund the additional dumping duties. All I can say to that is being wrong is not the same as being substantially unjustified. It is a good thing whenever the government cooperates and agrees to stipulate or otherwise settle a case. All parties should be encouraged to do that. Settling, however, does not mean that the original administrative or litigation position was substantially unjustified. We need to keep that in mind.
The more important lesson of this case is that CBP need not hunt around for a justification to grant a protest. It must only consider the grounds asserted by the protestant. Maybe this means our protests need to look a little more like the kitchen sink. It also strongly weighs in favor of importers recognizing the protest as a pre-litigation document that should be drafted by a lawyer.

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.