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.

Tuesday, May 30, 2017

On Toner Cartridges and Gray Market Imports

The United States Supreme Court has made it easier for discount retailers and "off-brand" Amazon resellers to import and sell refurbished goods, which is good news for bargain seekers.

First, a little background. Intellectual property rights like patents, trademarks, and copyrights are a deal that inventors, artists, and brand innovators make with the United States government. To promote the activity of these creative enterprises, the government grants a limited monopoly on the sale or exploitation of the work. That is why you can't make a copy of Star Wars Rogue One for 95 years, at which time it will fall into the public domain. Similarly, you can't start making your own version of the latest antibiotic because the company that put in the effort on research and development most likely owns the patent.

But, the scope of intellectual property rights is limited. With respect to patents, the law give the patent holder the "right to exclude others from  making, using, offering for sale, or selling" the invention. However, the law includes an exception that applies when the patentee sells the item. At that point, the product is the private individual property of the purchaser, who acquires all the rights of ownership, including the right to re-sell that item. This is why although you can resell your smartphone, you can't reproduce it. The same goes for music files and your trademarked running shoes. This is the rule of exhaustion.

In Impression Products, Inc. v. Lexmark Int'l, Inc., the United States Supreme Court had to decide whether Lexmark could contractually prohibit purchasers of toner cartridges from reselling them. Lexmark did this to keep the cartridges out of the hands of companies like Impression Products, that refurbish, refill, and resell the cartridges at a discount and in direct competition with Lexmark.

To discourage this activity, Lexmark set up two sales channels. In one channel, customers paid "full price" for an unrestricted toner cartridge. In the other channel, called the "Return Program," Lexmark offered a 20% discount in exchange for adding a microchip to the cartridge. The chip contained software that prevent the reuse of the cartridge. In this channel, the purchaser contractually agreed not to transfer the cartridge to anyone other than back to Lexmark. While this was a clever strategy, third parties figured out how to circumvent the chip, allowing the resellers to continue in business.

Lexmark sued Impressions for patent infringement, arguing that it did not acquire the right to use or sell the cartridge. The idea here is not unreasonable. By taking part in the Return Program, the purchaser acquired limited rights and did not acquire the right to resell the cartridge. Under normal principles of commercial law, the purchaser cannot resell more rights than it acquired. Thus, the resale should violate the patent. The Court of Appeals for the Federal Circuit agreed and held in favor of Lexmark.

The Supreme Court, via Chief Justice Roberts, took a different path. The analysis starts with a quotation from 17th Century Lord Coke who said that "in an owner restricts the resale or use of an item after selling it, that restriction 'is voide, because . . . it is against Trade and Traffique, and bargaining and contracting betweene man and man." According to the Court, this is more than an old statement of common law. Rather, it is a principle that Congress has allowed to remain in the patent laws. Without the exhaustion principle, we would not have used car dealers because patentees for individual parts might sue the dealership for repairing and reselling the car and the parts it contains. Consequently, the express reservation of rights by the patentee to the original purchaser does not give the seller a continuing interest in that item.

One additional wrinkle in this case was that some of the cartridges were first sold outside the United States. Thus, the Supreme Court had to decide whether the foreign sale exhausted the U.S. patent rights. Lexmark argued that exhaustion as a result of a foreign sale would interfere with the U.S. market and prevent it from reaping the full value of its patent monopoly. The Supreme Court was unmoved. It said, "the Patent Act does not guarantee a particular price, much less the price from selling to American consumers. Instead, the right to exclude just ensures that the patentee receives one reward--of whatever amount the patentee deems to be 'satisfactory compensation' . . . --for every item that passes outside the scope of the patent monopoly." In other words, Lexmark got paid for those sales outside the U.S. at whatever price it deemed appropriate.

This is the second in a series of Supreme Court victories for parallel importers, also known as gray market importers. The first involved copyrights in textbooks. You can read that here. On the trademark front, the law is more complicated and depends on whether the merchandise is materially different than the products sold in the United States and on whether the trademark was applied outside the United States under the control or ownership of the U.S. trademark holder. If you are interested in that, start here.

Overall, this will permit the free market in the resale of patented goods. That is, as I said, good news for discount retailers and small-scale entrepreneurs. Patentees may adjust quickly, though. The decision makes it clear that this result only applies to sales. If the good is transferred subject to a license and ownership stays with the patentee, then the licensee has no right to resell the item. Expect future toner cartridges to come with license agreements.

Tuesday, May 23, 2017

Nairobi Protocol

The Court of International Trade has taken an interesting hard look at the Nairobi Protocol to the Florence Agreement on the Importation of Educational, Scientific, and Cultural Materials, which is popularly known as just the Nairobi Protocol. For purposes of Sigvaris, Inc. v. United States, the important point is that the Nairobi Protocol permits duty-free entry to the United States for articles that are specially designed or adapted for the use or benefit of the blind or other physically or mentally handicapped persons. The merchandise at issue here is graduated compression hosiery, arm-sleeves, and gauntlets.

The merchandise is all designed to apply a certain amount of pressure the extremities to help prevent the pooling of blood or other fluids as might happen in people with certain vascular and lymph conditions. The hosiery was designed for use by people with early stage chronic venous disease. The arm sleeves and gauntlets were for people with lymphedema, which causes sever swelling in the arms and is common among women who have undergone a mastectomy.

I’m going to jump to the conclusion here. Legally, a person is said to be handicapped if they have a chronic or permanent condition that results in substantial difficulty undertaking the basic activities of life such as caring for one’s self, walking, speaking, seeing, learning or working. People with early stage chronic vascular disease can experience leg fatigue, heaviness in the legs, varicose veins, and swelling. But, 25% of sufferers experience no symptoms and those that experience symptoms do not have trouble completing basic life tasks. Thus, people with early stage chronic vascular disease are not handicapped for purposes of the law. The hosiery, therefore, is not entitled to duty-free entry under the Nairobi Protocol.
The result is different for lymphedema, which is the inability to circulate lymph fluid. It can result in pain, swelling, and ulcerations. The swelling can be so severe that it results in the inability of the patient to use the affected arm. That is, according to the Court, a handicap. As a result, the compression arm sleeves and gauntlets qualify for duty-free entry under the Nairobi protocol.
That is all well and good. It makes perfect sense and is a good analysis for anyone thinking of using the Nairobi Protocol.

Despite that, I keep returning to a single line in the decision. That line states: “The Court does not give credible weight to the Government’s assertion that a person with one arm is able to perform life’s major activities without substantial limitation.”
I don’t think I have ever written a blog post in which I have criticized a lawyer’s argument. I am hesitant to do so here. But, I really want to explore how that argument got into the briefs. I understand the factually correct assertion that people with one arm are fully capable of independent living. Two things about that fact, though, bear consideration. First, much of that independence may be facilitated by apparatus that would qualify for duty-free entry under the Nairobi Protocol. This would be true, for example, of prosthetic limbs (but not parts thereof). The existence of other Nairobi Protocol material should not undercut the ability of these products to qualify for duty-free importation.

Assuming the argument was that a person with one arm can live and work independently without any mechanical or other technological support, one should wonder what evidence for this proposition the Government provided.
Let’s be 100% clear. I am in no way, shape, or form implying that people with a physical challenge cannot live independent lives without external support. I am also not saying that there are no examples of successful and independent one-armed people. There are. All I am saying, and all the Court said, is that it is not credible to argue that a person with one arm does not have a permanent condition that causes substantial difficulty completing basic life tasks. As I type this post in the cramped quarters of American Airlines coach class, I am struck by the difficulty presented by the prospect of typing with one hand. Dragging a suitcase through an airport with only one arm would make it impossible to simultaneously use a smart phone or carry a drink in the other hand, as is the ubiquitous condition in modern airports. Riding a bike can be done with one hand, but two is far easier and safer. While I think I could drive easily with one arm, I learned just yesterday that I can barely change a tire with two perfectly good arms when one lug bolt is 80% stripped (but that is another story). I am sure that monitoring my daily activities would lead to a long list of tasks that would be far more difficult without two good arms.

My question about this stands: how did it get into the brief? Giving everyone the benefit of the doubt, was there some more subtle argument that was not well conveyed in the opinion? The opinion is thorough, so that does not seem to be the case. Was it the best argument available given the fact that lymphedema sometimes results in the inability to use an arm? If so, did the Department of Justice just go along with Customs and Border Protection’s views?
This matters because it goes to the nature of the relationship between lawyers and clients and to the public policy of the United States. Lawyers sometimes need to tell their clients that the best argument is not good enough, that the law does not support the reality the client wants. That can be a hard conversation, but hard conversations are part of the job. This is, I think, true for all lawyers but especially so for those lawyers who have the privilege of representing the United States government. While a private party, with a purely financial interest in securing a duty refund, might take a shot at a weak argument, the United States should be pursuing arguments that support the policy objectives of the United States while also preserving and protecting the revenue. It is hard to see how proffering the argument that having one good arm is not a handicap that merits the relatively minor impact on the American economy of duty-free access to the market is good public policy.

I would be very happy to be talked out this position. Is there some issue of international harmonization at stake? Is there some evidence of actual fraud? If you have insight into the reasoning, please drop a comment.

Wednesday, May 17, 2017

The "It's May? I Better Catch Up" Edition

There have not been many specifically customs-related cases from the courts of late. There have been plenty of rulings, in fact there have been rulings every week. I just have not had a chance to blog them. That is why things have been slow here. I have been tossing out the occasional tweet on agency actions and newsworthy developments. If you are not doing so already, please follow my Twitter feed @customslawblog or check it in the box on this page.

In the meantime, the Court of International Trade issued an opinion in United States v. International Trading Services. This decision is fairly uncomplicated decision the defendant in this penalty case failed to show up and defend itself. If you recall the earlier decision in this matter, you will understand why. The corporate client dissolved, leaving the lawyer, in his mind, without a client to represent. The lawyer tried to formally withdraw from the case but was rebuffed by the Court which held that the legal entity remained subject to suit under Florida law and, therefore, still needs a lawyer.

The underlying penalty here has to do with the incorrect classification of sugar on eight entries. The error resulted in just under $300 thousand in unpaid duties. The United States, on behalf of Customs and Border Protection, moved to collect the duties and a penalty of two times the unpaid amount. The defendant did not respond. As result, there was no real doubt that the Court would impose a penalty. The question was how much.

This is a good decision to read because it very logically walks through the process the Court of International Trade undertakes to assess a penalty. The first question is whether there was a material false statement or omission in connection with the entry of merchandise. A statement or omission is material if it would tend to alter Customs' appraisement or the importer's liability for duties. An incorrect classification that results in the underpayment of duty is material. Once the Court identifies a material false statement or omission, the defendant has the burden of proving that it did not result from negligence, gross negligence or fraud. As the defendants did not respond, the facts asserted in the motion are treated as true. That means there was no question as to liability.

Customs was seeking to recover about $691 thousand in penalties. But, setting the penalty amount is the responsibility of the judge, not Customs. The Court, therefore, walked through the 14 factors set out in a case called Complex Machine Works, which is worth a read for background. Here, Judge Barnett took the very helpful step of grouping those 14 factors into five broader categories. Those are:

  1. The defendant's character
  2. The seriousness of the offense
  3. The practical effect of the imposition of the penalty
  4. The economic benefit gained by the defendant
  5. Public policy concerns
The Court made a couple very important points. First and foremost is that the statutory maximum is not the default starting point for the penalty. The Court must consider the case on a clean plate. Starting at the maximum stacks the deck against the defendant by forcing it to argue down from the most severe penalty rather than having the Court consider the evidence to reach an appropriate result. The Court suggests starting at the midpoint and adjusting up or down as the evidence indicates.

Next, regarding cooperation, potential defendants should recognize that this is more than being pleasant through the course of the investigation. Customs' guidelines suggest mitigation where the defendant has exhibited "extraordinary cooperation beyond that expected from a person under investigation." Note that the CBP guidelines are not binding on the Court, although it did note their existence and apparently gave them some weight.

Related to this, the Court undercut somewhat the common argument that an importer had prior good behavior. This case involved eight separate entries. The Court characterizes this as defendant "serially misclassif[ying] entries accruing to Defendants a significant economic benefit." Does this mean that only the first entry would benefit from prior good behavior? My concern here is that in many cases the importer would not know about the error until several, possibly many, entries took place. Most errors are systematic in nature, not individual. My inclination would be to treat the error as the substantive decision rather than the entry and extend the benefit of good behavior regardless of the number of entries involved. Of course, that is only one of 14 factors, so the impact may be minimal.

Taking all of this into consideration, the Court found the maximum penalty to be appropriate. On top of that, the Court found it appropriate to grant prejudgment interest to the United States. 

Saturday, April 29, 2017

Ruling of the Week 2017.9: Chronically Late

Had I been thinking and available to do it, I would have posted this on April 20. Sorry I am late.

Grab some snacks, because we are about to discuss HQ H282163 (Apr. 13, 2017), which addresses whether a storage case with multiple adjustable compartments and a combination lock closure is prohibited merchandise.

Why would that be the case? It might help to know that the cases go by the name "Stashlogix" and come in three modes: Go-Stash, Eco-Stash and Pro-Stash. In addition to the combination lock, other Stashlogix features include a "stash journal" to "help keep track of all those crazy names," a UV-proof jar that can be re-labeled, odor absorbing packs, and a labeling marker. The products are designed "based on the principles of functionality, security, and discretion." The company advertises that the cases are used to store valuable private items such as fire-arms and addictive pharmaceuticals.

Here is a picture of the "Pro-Stash" case:

As you might have figured out, the question is whether the Stashlogix cases are drug paraphernalia under 21 USC 863. If so, they are prohibited merchandise.

The law defined drug paraphernalia as follows:
any equipment, product, or material of any kind which is primarily intended or designed for use in manufacturing, compounding, converting, concealing, producing, processing, preparing, injecting, ingesting, inhaling, or otherwise introducing into the human body a controlled substance, possession of which is unlawful under this subchapter. It includes items primarily intended or designed for use in ingesting, inhaling, or otherwise introducing marijuana . . . .

The statute contains many examples of drug paraphernalia including variations on pipes, miniature spoons, wired cigarette papers, and cocaine freebase kits. None of the exemplars in the statute are carrying or storage cases. So why is this a problem?

In the ruling, Customs and Border Protection noted that similar UV-proof jars are sold with labels clearly indicating their connection to marijuana and related products. One example is labeled, in part, "THC," which is a reference to "tetrahydrocannabinol," the principal active ingredient in weed. Another UV-proof jar is decorated with a marijuana leaf. 

Customs also noted that one reseller of the bags, a site called, advertises them with other "stash bags" from a company called "Dime Bag," which is clever. Also, a site called The Stoner Mom wrote a favorable review of the Stashlogix cases. According to the review, the cases are "perfect for today's stoner parent."

[As I sit here, it occurs to me that I have been surfing headshops and stoner sites for an hour. For the next six months the internet will probably be serving me adds for all sorts of stonerware.]

The question is whether any of that matters. The Stashlogix bags are discrete. They do not have the stereotypical stoner markings such as pot leaf designs, variations on the flag of Jamaica, and pictures of Shaggy from Scooby-Doo.

Plus, jars are jars. They can be used for anything. If I were a chef, this might be a perfectly good way to protect, organize, transport and store [see what I did there?] spices and other valuable but non-perishable ingredients. Could it also be a travel bag? The jars might be useful for cosmetics and other preparations.

On the other hand, we should not blind ourselves to the reality of these bags. After all, they are called "Stashlogix" for a reason. According to Urban Dictionary, my favorite lexicographical resource, "stash" can refer to a "secret collection such as of drugs, pornography, etc." Also, according to Stoner Mom, the Stash Journals included with the bags are pre-printed with guides for rating the form and strain including categories for edible, oil, and powder, which (I am told) are forms in which weed and weed products can be consumed.

Getting back to the law, the statute also identifies several relevant factors. Those include:
  1. instructions, oral or written, provided with the item concerning its use;
  2. descriptive materials accompanying the item which explain or depict its use;
  3. national and local advertising concerning its use;
  4. the manner in which the item is displayed for sale;
  5. whether the owner, or anyone in control of the item, is a legitimate supplier of like or related items to the community, such as a licensed distributor or dealer of tobacco products;
  6. direct or circumstantial evidence of the ratio of sales of the item(s) to the total sales of the business enterprise;
  7. the existence and scope of legitimate uses of the item in the community; and
  8. expert testimony concerning its use.

Given all of this, the legal question is whether the Stashlogix cases are "primarily intended for use" and "designed for use" in, among other things, concealing a controlled substance. These are to be considered objectively and with respect to the likely use of the item, not a specific or individual use. My example of the well-organized chef, does not help if the most likely use is by the Stoner Mom and her stoner ilk.

So, what is the evidence of intended use and design?

First, the odor absorbing packets are described as providing "discretion." According to Customs and Border Protection, the intent and likely use of these packets is to conceal the odor of weed.

What about the UV-proof jars? Initially, I thought the intent was to preserve the contents by blocking UV light; like putting beer in an amber or green bottle. Apparently, my weed knowledge is limited. According to Customs, the specific type of glass involved here has the capacity to absorb UV light and also X-rays. That means the jars are designed and intended to help conceal, rather than preserve, the contents.

Marketing for the bags did not help. As mentioned, they are sold along side other bags that are more explicitly for the storage of pot by retailers expressly catering to stoners. It is hard to say whether that marketing should be imputed to Stashlogix. The fact that Stoner Mom and other bloggers find the bag useful is not really direct evidence of Stashlogix's design and intent.

On the other hand, Stashlogix does not seem to have gone out of its way to break that association. Stashlogix does not explicitly say it makes and imports stash bags for stoners. It says it provides locking cases for people looking to discretely store private items. Those private items could be prescription medications, weapons, or anything else. A post on its website includes this picture:

Note that the bag seems to contain a wallet, some sunscreen, and other items that do not look to be weed-related. A locking travel bag seems to be very useful at the waterpark or when forced into close quarters with people you don't know particularly well. It could also be very useful at home if someone required powerful medications that should not be left accessible to kids.

Customs did not buy any of that. It seems that the Stoner Mom and 420 Science made this case much harder than it might have been had Stashlogix been able to control its branding. The "Stash" part of its name does not help either. If I were giving the company legal advice, I would drop the stash journals too.

Stashlogix is now in a tough spot. State laws have greatly expanded the ability of Americans to legally access weed. But, it remains subject to federal law. The law prohibits the importation of drug paraphernalia. You might think that Stashlogix could start sourcing its product in the U.S. to avoid the customs issues. Unfortunately, the law also prohibits the use of interstate commerce to transport drug paraphernalia. I hope these guys have a factory in Colorado because if this ruling sticks, that might be the best place to make and also sell the bags.

One interesting aside is that this ruling does not involve customs duties. It goes to whether Stashlogix can do business as an importer. That might be irreparable harm. This might be one of the vary rare cases in which 28 USC 1581(h) would give the U.S. Court of International Trade jurisdiction to review a CBP ruling without the importer having to make an entry and protest the liquidation. 

Thursday, April 13, 2017

Surprise, Locking Pliers Are Not Wrenches

Tariff classification is based on the common and commercial meaning of the words used in the Harmonized Tariff Schedule of the United States. One of the words that has been in dispute of late is "pliers" as applied to locking pliers. To picture the product at issue, think about Vise-Grips®, which is a registered trademark of Irwin Tools, the plaintiff in this case.

An older Court of International Trade case under the prior Tariff Schedule of the United States ruled that locking pliers are classified as wrenches. The reason for this was that people use locking pliers to lock onto a nut or bolt head and to turn, or wrench it. Because people use the tool to apply torque to the nut or bolt, the CIT ruled it is, despite its name, a wrench.

In the Irwin case, the CIT made two important decisions. First, it held that the prior TSUS decision did not bind it to a given result in this case. Second, the Court rejected the notion that the way people use the tool is relevant to this classification. Instead, the Court held that "wrench" is an eo nomine description of the item that does not suggest a particular use.

From that basis, the question became, what is the common and commercial meaning of a wrench. The Court concluded that is a tool with a single handle and a working head that is either an open slot or socket that has is shaped to exactly or closely fit a bolt head, nut, or similar fastener.

The locking pliers have two handles and a grasping head that is not specifically shaped to fit a fastener. That means it is not a wrench.

So, what is it? We don't know yet. This decision was on the government's motion for summary judgment. Irwin had not moved for a decision. Consequently, the case was not yet ripe for a final decision. Irwin will need to file a motion for summary judgment, reach a settlement, or use some other mechanism to get to a final judgment.

Tuesday, April 04, 2017

Ruling of the Week: 2017.8: To Drawback, And Beyond!


The customs implications of space travel have always interested me. NASA has confirmed, at least according to this article, that astronauts have to make customs declarations on returning to earth. It is not exactly clear to me whether that would be the case for an orbital flight that departs the U.S. and returns to the U.S. without an intervening stop at the International Space Station or elsewhere. In fact, the Apollo 11 customs entry seems to have been something of a joke, even if it was "official."

The future is certainly going to be filled with questions about this sort of thing. What will happen, from a customs-perspective, the first time someone starts a commercial asteroid mining operation? Will we need to expand the notion of "country of origin."

The obvious analogy is to ships at sea. Today, the law is clear with respect to fish caught in international waters. According to the Court of International Trade, in a case called Koru North America v. U.S.:

On the high seas, the country of origin of fish is determined by the flag of the catching vessel. Procter & Gamble Mfg. v. United States, 60 Treas. Dec. 356, T.D. 45099 (1931), aff'd, 19 CCPA 415, C.A. D. 3488, cert. denied, 287 U.S. 629, 53 S.Ct. 82, 77 L.Ed. 546 (1932). In international law, a ship on the high seas is considered foreign territory, functionally, "a floating island of the country to which [it] belongs." Thompson v. Lucas, 252 U.S. 358, 361, 40 S.Ct. 353, 64 L.Ed. 612 (1920). See also Robbins (Inc.) v. United States, 47 Treas. Dec. 261, T.D. 40728 (1925) (fish are characterized by their first taking).
That means an asteroid or portion thereof brought to the earth by a U.S.-registered space vessel will have a U.S. country of origin.

The folks who negotiated NAFTA thought this through. According to Article 415 of the Agreement, "goods taken from outer space, provided they are obtained by a Party or a person of a Party and not processed in a non Party" are considered to be "wholly obtained or produced" in North America. For you NAFTA nerds out there, that means they qualify as originating under Preference Criterion A.

What about going the other way? What if I import some fuel and send it out into orbit? Does that constitute exportation for purposes of drawback? That is the question presented in HQ H282698 (Feb. 24, 2017).

The law permits an importer receive drawback on duties, taxes, and fees paid on imported merchandise that it unused in the united stated and then exported or destroyed within five years of importation. There are lots of documentary requirements and procedures that need to be followed to secure drawback, so don't assume that I just explained all the ins and outs to you.

Merchandise is still unused if it has been repacked or subjected to other operations specified in the law. Again, don't try this at home without getting legal advice. In this case, about 66% of the fuel is loaded onto the satellite to power its thrusters in orbit. The remainder is exported from the U.S. According to CBP, transferring the unused propellant to a container for export is repacking and does not constitute use. It is, therefore, eligible for drawback.

The propellant loaded into the satellite is a different story. According to CBP, it is "used at the moment of its injection into a satellite thruster system." It is, therefore, not eligible of "unused merchandise" drawback.

Customs, however, provides a helpful alternative. It is also possible to secure drawback on imported materials used to manufacture goods in the U.S. CBP has previously applied that to parts of a satellite manufactured in the U.S. and exported to China for launch. That export to China was the relevant export for drawback purposes, not the launch into space. But, other rulings had determined that "merchandise assembled into a communications satellite sent into permanent orbit in outer space" is exported for drawback purposes. In this recent ruling, CBP reaffirmed that decision and held that launch to permanent orbit is an exportation for drawback purposes.


Yesterday was the brokers exam. I had an opportunity to review the questions and I realized this post might be viewed by some as incomplete. So, let me say that I am aware that 19 U.S.C. § 1484a exempts certain items returned from space from entry requirements.

If you took the test, I am referring to Question 39 about whether goods brought into the customs territory of the United States by NASA from space or from a foreign country require an entry. As I read that provision, it applies to items previously launched into space from the customs territory of the United States and which remain in the control of United States persons on United States owned vessels. It does not exempt items obtained in space and brought into the customs territory of the United States nor does it apply to goods that were launched into space from a foreign country and then brought from space to the U.S. I think the question is a bit of a mess. If the goods were obtained in space or launched into space from a foreign country, I think a formal entry is required; probably a type 52 government entry (but I have not checked that). If the goods were launched from the U.S., and the other requirements of the statute are met, no entry would be required.

Saturday, April 01, 2017

Executive Order on Customs Enforcement

Apparently, the administration has pivoted to its trade agenda. Yesterday, we saw the draft letter to Congress outlining the modest goals for NAFTA renegotiations. I also tweeted the announcement that Kevin McAleenan would be nominated to Commissioner of Customs and Border Protection. The last recent action is the Executive Order issued yesterday "Establishing Enhanced Collection and Enforcement of Antidumping and Countervailing Duties and Violations of Trade and Customs Laws."

What's this about?

The Executive Order notes that as of May 2015, the United States has failed to collected $2.3 billion in antidumping and countervailing duties. Often, the liable importer is a foreign entity without assets in the U.S. or is insufficiently capitalized to pay the duties. Either way, the duties are uncollectable. To address this, Customs imposes bond requirements and, in certain cases, Commerce requires cash deposits of duties. As is, the bonding requirements can be onerous. In some cases, the surety requires cash collateral to issue the bond, meaning the surety is taking no risk and the importer may as well pay the duties up front (if it can). I have personally seen companies put out of business because they could not secure sufficient bonds. That, of course, is the nature of doing business in merchandise that is allegedly unfairly traded and, as they say, a risk of doing business.

What the Executive Order does is require that the Secretary of Homeland Security must develop a plan to require certain importers of merchandise subject to an antidumping or countervailing duty order and who pose a risk to the revenue of the United States to provide security through a bond or other legal measure. The plan must be developed within 90 days of the date of the order.

The new part of this might turn out to be the risk assessment for certain importers. The Order specifies that it applies to "covered importers." These are defined as new importers or importers for which Customs and Border Protection has a record of incomplete or late payment of antidumping or countervailing duties. One obvious concern this raises is that an honest importer who discovers a failure to deposit antidumping or countervailing duties might be penalized for making a disclosure and voluntary tender. The penalty would come in the form of increased bond requirements. The reasonable response to that might be that the importer benefitted from an artificially low bond during the time it was withholding the duties. For similar reasons, this will raise the stakes in post-entry audits where unpaid dumping and countervailing duties are discovered. Clearly, the biggest burden will fall on new importers who will likely see increased bonding requirements.

Also within 90 days, the Secretary must develop a plan "for combatting violations of United States trade and customs laws for goods and for enabling interdiction and disposal, including through methods other than seizure, of inadmissible merchandise . . . ." I am curious what interdiction and disposal methods the government might deploy other than seizure (and the forfeiture that generally follows). There is exclusion and re-exportation, but that does not lead to "disposal."

Regarding the protection of intellectual property rights at the border, the Executive Order requires that the government share, to the extent permitted by law, with rights holders information necessary to determine whether there has been an IPR rights infringement and information regarding merchandise that has been abandoned before seizure. Right now, that information is withheld because CBP treats it as commercial proprietary information. The impact of this might be to allow the rights holders to sue infringers in U.S. courts or to seek exclusion orders from the International Trade Commission.

Finally, the order tells the Attorney General to recommend prosecution practices and allocate appropriate resources to "ensure that Federal prosecutors accord a high priority to prosecuting significant offenses related to violations of the trade laws." This is interesting in that is appears to be focused on criminal violations. I say this because the trade enforcement lawyers who deal with penalty cases are not "prosecutors;" they are in the Civil Division at Justice. Even the Assistant U.S. Attorneys who handle seizures do so in civil matters. Does that mean we can expect more prosecutions of individuals for trade-related fraud and false statements? It seems so.

Keeping in mind that the collection of antidumping and countervailing duties has been a priority enforcement issue for years and that the United States has put significant resources toward the interdiction of products violating U.S. intellectual property rights, this Order seems to be telling CBP: "Keep at it." There is some specific instructions to apply risk assessments to importers of goods subject to antidumping and countervailing duty orders. I suspect, but can't prove, that people at CBP would tell you that the agency was already doing that.

Trump Administration NAFTA Strategy

It appears the U.S. will not be withdrawing from NAFTA. At least not immediately.

Yesterday, a draft letter from the Acting USTR Stephen Vaughn to Congress made its way to the public. The letter notifies Congress of President Trump's intention to initiate negotiations with Mexico and Canada to modify NAFTA. Obviously, this was a big campaign issue for candidate Trump, who declared NAFTA to be a complete disaster for the American people.

The interesting thing about the draft strategy is that it is directed at making manufacturing more profitable "within the trading bloc." The President believes that will lead to job creation in the United States and support rural communities and service providers. The letter partially makes the case for NAFTA by noting that in 2016, the bloc accounted for $1.07 trillion in trade in goods and $139 billion in services. This is a fairly traditional, pro-trade, pro-NAFTA endorsement of the proposition that trade is a net positive.

However, the letter does a quick pivot to focus on the U.S. trade deficits with Canada and Mexico. The letter then states that NAFTA is out of date. Post-NAFTA free trade agreements have addressed modern concerns including digital trade, labor and environmental standards. In the NAFTA, labor and employment were added as "side letters" after the agreement was fully negotiated. According to the letter:

Reviewing these relationships will also demonstrate new leadership by the United States on trade. The very highest standards, the broadest coverage, and the most effective oversight and execution of the agreement's obligations will make the United States, and North America, stronger, a more attractive place to do business and a model for the rest of the world in the 21st century. This will reinforce our shared interests, promote our common values, and reinforce cooperation beyond economic issues to shared bilateral and regional security concerns. We expect to obtain results that improve on previously negotiated outcomes. 

This sounds like a reasonable place from which to start updating an agreement that is more than two decades old. So, what does the administration have in mind? The letter covers a lot of ground, but not in much detail.

Regarding trade in goods, it seems the primary goal is to remove lingering non-tariff barriers to trade in North America. The letter suggests market access between each NAFTA country and the United States. It also suggests addressing permits, licenses, and "and other trade restrictive measures." Textiles and apparel are called out for attention, as is the leveling "the playing field on tax treatment."

With respect to NAFTA rules of origin, the letter states as a negotiating goal:

Seek rules of origin that ensure that the Agreement support production and jobs in the United States, procedures for applying these rules, and provisions to address circumvention that ensure that preferential duty rates under the agreement apply only to goods eligible to receive such treatment, without creating unnecessary obstacles to trade.

Coupled with this, that letter suggests that the NAFTA countries should work together to improve their implementation of the WTO trade facilitation commitments including the transparent, efficient, and predictable application of the customs laws. The fact that the Administration favorably referenced a WTO commitment should give the WTO some satisfaction.

The letter goes on to provide goals relating to trade in services, intellectual property protection, sanitary and phytosanitary measures, and to bring enforceable labor and employment measures within the body of the agreement itself.

While these goals seem to be reasonably consistent with modernizing the NAFTA along the lines of the subsequent U.S. free trade agreements, there are a few more controversial issues raised in the letter. For example, the letter states as a goal establishing a rule that permits government procurement to be conducted in a manner consistent with U.S. law and the Administration's policy on domestic preferences. That might be inconsistent with current NAFTA Chapter 10 and the WTO Government Procurement Agreement.

An area of much concern to many on both the left and the right of the political spectrum is the NAFTA investor-state dispute settlement mechanisms. These are the arbitration panels the NAFTA implemented to settle allegations by an investor from a NAFTA country that a NAFTA failed to provide fair treatment to the investor. "Fair" in this context means consistent with how the country would have treated a domestic investor or an investor from another non-NAFTA party. The standard is "no worse" treatment and "fair and equitable" treatment. Many have suggested that these arbitral panels are an affront to national sovereignty because they penalize sovereign nations for regulating to protect, for example, the environment. On the right, people argue that the investor-state dispute mechanism lets unelected, non-appointed private parties overturn lawful regulations and policy decisions. On the left, people have argued that the mechanism allows corporate interests to overturn reasonable environmental, health, and safety measures. This letter does not do much to quell the fears on either side. It generally seeks to improve procedures, reduce frivolous claims, and ensure that U.S. investors are treated fairly.

Lastly, the letter says the U.S. will seek to completely gut the NAFTA Chapter 19 mechanism for resolving dumping and subsidy disputes. For non-NAFTA parties, challenges to decisions of the Department of Commerce and International Trade Commission relating to antidumping and countervailing duty cases are heard by judges of the U.S. Court of International Trade, who are appointed by the president to lifetime positions. Chapter 19 moved those cases to private arbitration panels. No subsequent agreement has included this mechanism and there is no reason to believe that the U.S. CIT and presumably the Canadian International Trade Tribunal and Mexican courts are not proper venues for judicial review of these administrative decisions. The letter seeks to move them back to the courts.

Overall, this letter is more moderate than I expected from the campaign and post-campaign rhetoric. It's general goal of seeking to modernize NAFTA seems laudable and appropriate. Of course, this is nothing more than an opening notification to Congress. The devil will be in the minutia of details concerning, among other things, rules of origin and customs procedures. There has been talk about some of the complexities of the NAFTA including the limitations on drawback and the automotive tracing rules. The thing to keep in mind is that much of the NAFTA was written in close consultation with the impacted U.S. industries. We have tracing, for example, because the highly integrated North American automotive industry wanted tracing to make it more difficult for non-North American producers to take advantage of NAFTA without making significant investments in the region and in regional suppliers. It is not clear that the industry sees it any different today.

Thursday, March 30, 2017

DiCarlo Lecture at JMLS April 20, 2017

I am proud to be moderating the 15th Annual Dominick L. DiCarlo Court of International Trade Lecture at the John Marshall Law School in Chicago on April 20, 2017.

John Marshall's Center for International Law was kind enough to start hosting this program in memory of the important contributions Judge DiCarlo made to the practice of trade law and to the three John Marshall alumni who served him as law clerks. The program will include a conversation with the Honorable Jennifer Choe-Groves about her transition from government and private practice to a judge of the Court of International Trade. We will also talk about the nature of practice before the specialized court. Following the Judge, there will be two informative CLE panels covering developments in trade compliance. Once will focus on developments in supply-chain risks such as the growing use of False Claims Act cases and changes in U.S. sanctions policies. The second panel will focus on numerous aspects of intellectual property protection at the border by U.S. Customs and Border Protection including the scope of 337 exclusion orders and review by the CIT.

Scope: Aluminum Extrusions and Finished Goods Kits

Understanding the scope of antidumping and countervailing duty orders is critically important for customs compliance professionals. It does a company no good whatsoever to find a low-cost producer of some product somewhere outside the U.S. only to later discover after importation that the merchandise is subject to an antidumping or countervailing duty. Given that antidumping and countervailing duties are often in excess of 30% and have been as high as 300%, this is a potentially serious concern. If Customs and Border Protection discovers the error and the error resulted from negligence, it can collect the unpaid duties plus penalties covering a five-year period. In some cases, that can be enough to bankrupt a small importer.

Before we get into this case, let me dispel a common misunderstanding. CBP "flags" HTSUS classifications that are potentially subject to an ADD or CVD order. As a result, many brokers and importers manage AD and CVD compliance through tariff classification. If the classification is not flagged, then the assumption is that the product is outside the scope of the order. If it is flagged, ADD and CVD (or both) must be deposited. The worst decision is to assign a different tariff classification to the merchandise in an effort to avoid an ADD or CVD order. That might constitute fraud and probably won't work anyway.

The real question is whether the imported item falls within the description of the merchandise subject to the order in the order itself. Tariff classification numbers are provided as a courtesy, for reference. They do not control scope determination.

That brings us to Meridian Products, LLC v. United States, a recent decision of the U.S. Court of Appeals for the Federal Circuit. The case involves the order covering aluminum extrusions from China. This is a broad order that covers any product of the specified kinds of aluminum provided that the product is made by an extrusion process. It generally covers parts and semi-finished articles. The order specifically excludes some finished goods and finished good kits that contain aluminum extrusions. Relevant to this case, the exclusion for finished good kits states that the order:

excludes finished goods containing aluminum extrusions that are entered unassembled in a “finished goods kit.”  A finished goods kit is understood to mean a packaged combination of parts that contains, at the time of importation, all of the necessary parts to fully assemble a final finished good and requires no further finishing or fabrication, such as cutting or punching, and is assembled “as is” into a finished product.  An imported product will not be considered a “finished goods kit” and therefore excluded from the scope of the [Orders] merely by including fasteners such as screws, bolts, etc. in the packaging with an aluminum extrusion product.
Meridian imported "trim kits" consisting of a decorative frame that surrounds, but does not attach to, large appliances like refrigerators and freezers. The imported kit includes the trim pieces, which are aluminum extrusions, a hexagonal wrench, fasteners, and assembly instructions. I think the trim around the oven in this picture is what we are contemplating:


Whether this combination of goods is subject to the orders went to the Court of International Trade not once but four times. The CIT ordered three remands to the  Commerce Department for reconsideration. The CIT interpreted the finished goods kit exclusion as meaning that finished goods are excluded even if those finished goods consist only of aluminum extrusions and fasteners. According to the Court, the overall context of the order indicates that the inclusion of fasteners in the packaging of an unassembled finished good does not void the exclusion. Commerce disagreed, but felt constrained to follow the Court, which is why the issue went to the Court of Appeals.

On appeal, the Federal Circuit disagreed with the Court of International Trade. The primary reason being that the order explicitly limits the finished goods kit exemption. The petitioner and Commerce included that language about fasteners to accomplish something, so the Court needed to apply it. In this case, the application of that language indicates that the finished item to be assembled with the fasteners is not excluded because it is nothing more than the aluminum extrusions and fasteners.

The Federal Circuit also said that ignoring the fastener language renders the order meaningless. Similarly, the Court said that the CIT created inconsistency by reading the order to apply to aluminum parts imported individually but not to the same parts when imported as a kit with fasteners.

Personally, I think the source of the disagreement between the CIT and Federal Circuit is how the order treats finished goods. Before talking about kits, the order says:

The scope also excludes finished merchandise containing aluminum extrusions as parts that are fully and permanently assembled and completed at the time of entry, such as finished windows with glass, doors with glass or vinyl, picture frames with glass pane and backing material, and solar panels. 

This means that aluminum extrusions will not be subject to the orders when entered fully assembled as part of something else, like a picture frame. I think, and this is based on nothing other than trying to reconcile the two opinions, that the CIT viewed this as an indication that finished goods are outside the order whether imported assembled or disassembled. Given the language above, would a disassembled picture frame fall within the scope of the order? Yes, because it is not "fully and permanently assembled." The CIT saw the finished goods kit exclusion as taking care of that issue by permitting the disassembled picture frame to enter as non-scope merchandise, just like the assembled picture frame. I don't think the Federal Circuit would disagree with that result.

The problem is how to treat products that are finished goods consisting of nothing but aluminum extrusions and fasteners. Note that the examples above are all more than just aluminum extrusions. They are windows with glass, doors with glass or vinyl, and picture frames with glass and backing. Based on that, it appears Commerce would find Meridian's trim pieces to be within the scope of the order even if imported assembled. Reading the finished goods kit to exclude the disassembled article that would be in the scope of the orders if imported assembled, creates an anomaly that the Federal Circuit has avoided.

This is an important decision for two reasons. First, if you have scope issues, this decision provides an excellent primer on the scope process and how to analyze orders. Second, if you have been importing finished goods kits, you should reconsider your position. To fall within the exception, there should be more than aluminum extrusions and fasteners necessary to complete the product and everything should be in the box. Note that because the tool and instructions and not part of the finished product, they don't count toward the analysis of the exception.

Friday, March 17, 2017

Post ICPA Thanks

Thanks to everyone at ICPA who stopped by to tell me that they read the blog. I don't always pay close attention to the site analytics and I don't have particularly good visibility of who is visiting. Seeing you all in real life is very encouraging. Keep reading. See you in San Diego.

Friday, March 03, 2017

This is a Test: The CPSC Webinar

Because this is the 21st Century, I figured I should try more than one media. Below is the recording of a webinar I conducted with my colleague Chuck Joern.

Consumer Products and Import Requirements from Barnes Global Trade on Vimeo.

Wednesday, March 01, 2017

Holiday Rituals

WWRD U.S. v. United States is exactly the kind of case that makes me love what I do. Much like our recent foray into sunflowers seeds, this case seems to have a simple answer that gets derailed by the law. It has to do with some potentially festive articles, which is also one of my favorite legal topics.

The question here is the classification of several examples of tableware that are decorated with Christmas or Thanksgiving motifs. The items have names like "Old Britain Castles - Pink Christmas" and "12 Days of Christmas crystal flutes." Customs and Border Protection classified the merchandise in various headings based on their composition. The plaintiff protested and asserted that the merchandise is specifically designed and intended for use in conjunction with Christmas or Thanksgiving dinners. According to plaintiff, that makes the correct classification HTSUS item 9817.95.01, which reads:

Articles classifiable in subheadings 3924.10, 3926.90, 6307.90, 6911.10, 6912.00, 7013.22, 7013.28, 7013.41, 7013.49, 9405.20, 9405.40 or 9405.50, the foregoing meeting the descriptions set forth below: 
Utilitarian articles of a kind used in the home in the performance of specific religious or cultural ritual celebrations for religious or cultural holidays, or religious festive occasions, such as Seder plates, blessing cups, menorahs or kinaras . . . .

The history of this provision is interesting. After a lot of litigation, in 2007 the HTSUS was amended to clarify when utilitarian articles are "festive articles" related to holiday celebrations. The amendment added Note 1(v) to Chapter 95, which excludes from Chapter 95 "Tableware, kitchenware, toilet articles, carpets and other textile floor coverings, apparel, bed linen, table linen, toilet linen, kitchen linen and similar articles having a utilitarian function (classified according to their constituent material)."

This change caused a related problem. Changes to the HTSUS are supposed to be revenue neutral. Removing these items from the duty-free provisions of Chapter 95 resulted in an increased rate of duty. To fix that, the ITC added 9817.95.01, which is also duty free and avoids the messy issues of classification as festive articles.

What all that means is that because of Note 1(v), these products cannot be classified in Chapter 95. If they are not classifiable in 9817.95.10, then CBP correctly classified them according to their constituent materials. So, what about 9817.95.10?

A lot of the legal analysis is about breaking down text to find its correct meaning. Doing that to 9817.95.01, we find that merchandise classifiable there must be:

  1. Classifiable in 3924.10, 3926.90, 6307.90, 6911.10, 6912.00, 7013.22, 7013.28, 7013.41, 7013.49, 9405.20, 9405.40 or 9405.50
  2. Utilitarian
  3. Of a kind used in the home
  4. In the performance of specific religious or cultural ritual celebrations for religious or cultural holidays, or religious festive occasions
There was no controversy surrounding the first three elements. The sole question before the Court was, therefore, whether these items are used in the performance of specific religious or cultural ritual celebrations for religious or cultural holidays, or religious festive occasions.

Ask yourself whether Thanksgiving dinner is a specific cultural ritual celebration? It is a specific cultural celebration. That seems to be clear. After all, we all know what that looks like, right?

Normal Rockwell's Freedom from Want
via a Quinta Arts Foundation
But, is the imported tableware part of a "ritual celebration?"

We all have family rituals for Thanksgiving dinner.  Do you have to hide the alcohol before Uncle Abe arrives and starts mixing overly sweet Old Fashioneds? Does Grandpa insist on carving the turkey his special circa 1975 electric carving knife? Does little Jenny come back from Berkeley to lecture everyone on the evils of industrial turkey farming while being the sole person willing to eat her tempeh loaf and non-gmo cranberries? How about when the entire assembled family simultaneously leans back from the table just enough to loosen their belts and newly-tight pants and then moves in for pie? 

I am less comfortable opining on Christmas rituals. I can, however, say with certainty that my personal Hanukkah ritual involves using a curved carrot peeler as an implement to clear candle stubs from the menorah each of the eight nights. Another widespread ritual is the discussion among knowledgeable Jews of exactly the best means of accomplishing that task.  Add to that the ritual second degree burns inflicted on the poor bubbe tasked with frying the latkes or, in fancy households, the sufiganyot. The latter should look familiar to Rustbelt residents who enjoyed paczki this week.

The legal problem is that while those may be rituals in a colloquial sense, they are not rituals in a tariff sense. According to the Court of International Trade, a ritual is "a customarily repeated often formal act or series of acts." That means it is something done the same way, using the same steps, every time. A ritual is essentially scripted and can be reduced to the instructions necessary to accomplish it. That is distinct from the raucous and chaotic family gathering around the Thanksgiving or Christmas table.

That understanding of "ritual" is consistent with exemplars in the tariff item. Seder plates, for example, are part of the ritual Passover Seder. "Seder" means "order" and the important ritual of every Seder is telling the story of the redemption from salvery in Egypt. The event is so ritualized that there is a manual given each participant. 

No matter what crazy things happen at any particular Seder, there is a defined ritual for telling the Passover story. It involves four cups of wine, four questions, and a plate full of symbolic foods. Often, the evening ends with a debate over whether Charlton Heston was better in The 10 Commandments or in The Omega Man, but that is not in the haggadah. 

Plaintiffs in this case lost because the Court of International Trade found that a family dinner is not a "ritual," even when it falls on Thanksgiving or Christmas. In other words, every celebration is not a ritual celebration. With no ritual involved, the dinnerware could not be classified in 9817. 

Note to the tableware industry, you might want to take a lesson from Maxwell House Coffee and start printing instruction books for Thanksgiving and Christmas dinner.

Tuesday, February 28, 2017

Ruling of the Week: 2017.7: Our Lady of Guadalupe in Wood

Customs law is an interesting practice because we get to see all of the interesting things that come into the country. Granted, a lot of it is pieces of machinery, chemicals, and goods for resale. Now and again, something strange or unexpected shows up. Couple that with my belief that the Harmonized Tariff Schedule of the United States provides the legal means of determining important philosophical questions such as whether something is art or is holy. These questions are, sort of, the issue in HQ H136955 (Aug. 6, 2014), which for some reason was only recently published.

The merchandise at issue is the 3/4 round depiction of Our Lady of Guadalupe with surrounding rays of light. The issue is whether this is a statuette or ornament of wood of HTSUS heading 4420, an original sculpture of Heading 9703, or an article for use by a religious institution of HTSUS item 9810.00.25.

The starting place for this analysis is that Note 1(r) to Chapter 44 excludes works of art of Chapter 97. That means the first philosophical question to be addressed is whether the above depiction of Mary is a work of "art" as opposed to a commercial craft. While artists, collectors, curators, and academics might argue that the definition of art is profoundly subjective, Customs does not work that way.

To be classifiable in Heading 9703, the item must be an "original" sculpture, ancient or modern. That excludes decorative items of conventional craftsmanship of a commercial nature. That means the random coconut carved into the head of a monkey is not likely to be "art" by this definition because the workmanship is conventional and commercial. Court cases have held that a statue is original if the artist exercised his or her own aesthetic imagination and artistic conception when creating the work.

It turns out that this image is basically a three-dimensional copy of images dating back to 1531. Stick with me here as I am way out of my comfort zone. In 1531 Mary appeared to Juan Diego. After the event, his cloak was miraculously imprinted with a version of the image depicted in the statue and also "countless" similar depictions. See, for example, this image of Juan Diego from

And here is the "original:"

You can see that the imported statue does not show a lot of aesthetic imagination or artistic conception. Consequently, CBP declared it to not be "art." Also, there was no evidence presented establishing the identity of an artist who might have exercised some artistic imagination. That prevents classification in 9703.

What about 9810.00.25? This is an interesting question. The tariff item covers:
Articles imported for the use of an institution established solely for religious purposes:
Articles imported for the use of an institution organized and operated for religious purposes, including cemeteries, schools, hospitals, orphanages and similar nonprofit activities staffed and controlled by such institution:
Altars, pulpits, communion tables, baptismal fonts, shrines, mosaics, iconostases, or parts, appurtenances or adjuncts of any of the foregoing, whether to be physically joined thereto or not, and statuary (except granite or marble cemetery headstones, granite or marble grave markers and granite or marble feature memorials, and except casts of plaster of Paris, or of compositions of paper or papier-mâché)  

According to CBP, articles classifiable in this tariff item must be subject to a pre-importation sale to a religious institution. Here, it appears the item may have been sold to a church, but there is a failure of adequate proof. There is an inconsistency between the commercial invoice, which describes a 3/4 round statue, and the purchase order, which describes a fully round statue. Other documents do not list the church as party to the transaction. In addition, the entity listed as the importer is a re-seller of this type of merchandise and maintains an inventory of similar statues. IMports for re-sale would not fall within this tariff item.

As a result, Customs was not convinced that this particular statue was destined for use by a religious institution. Customs, therefore, rejected the possible classification in Heading 9810.

The statue of Our Lady of Guadalupe was, therefore, classified in tariff item 4420.10.00 with a 3.2% rate of duty.

Friday, February 24, 2017

Ruling of the Week 2017.6: Printers vs. Printing Machines

This one will be quick, for lots of reasons. Mostly, I don’t have much to add to the ruling other than a question. The ruling at issue is HQ H128416 (Feb. 9, 2017). It involves the tariff classification of digital wide-format ink-jet printer used to print and cut vinyl graphics for outdoor advertising and similar applications.

The printer is a combination of a printing machine and a cutting machine. As such, the competing tariff provisions are in Heading 8443 (Printing machinery) and 8477 (Machinery for working rubber or plastic). That is the sole question addressed in the ruling.

To resolve the classification, Customs and Border Protection applied Note 3 to Section XVI of the HTSUS, which states in relevant part:

Unless the context otherwise requires, composite machines consisting of two or more machines fitted together to form a whole and other machines designed for the purpose of performing two or more complementary or alternative functions are to be classified as if consisting only of that component or as being that machine which performs the principal function.

According to the importer, the principal function is printing, making the machine an article of 8433. Customs agreed, finding that the machine would not be used solely for cutting but that it might be used for printing without cutting. Customs examined the factors set out in United States v. Carborundum Co., 63 C.C.P.A 98, 536 F.2d 373 (1976), including physical characteristics, channels of trade, expectation of the ultimate purchaser, and recognition in the trade to ultimately agree that this machine is primarily a printer.

OK, so here’s my question: Why not consider this to be an 8471 unit of an automatic data processing machine? In other words, why is this ink-jet printer different than the ink-jet printer on my desk? The difference between 8471 printers and 8443 printing machines was discussed at length by the Court of International Trade in Xerox, which we reviewed here. The ruling states that these are “digital” printers. That means that they function in conjunction with a computer to translate digital data into signals to the printer. The only difference is that they print on large format plastic rather than on paper and they can cut the plastic. Once we determine that printing is the principal function, it seems to me that the cutting becomes irrelevant. What we know from Xerox is that large scale digital printing is still a data processing function. That would make these printers units of ADP machines of Heading 8471.

I am probably wrong for some factual reason not stated in the ruling. Heck, I may be wrong on the legal analysis. My analysis ends up with the potentially absurd result that all digital printers are ADP machines and 8443 printing machines would cover only Gutenberg-style presses and similar analog machines. It would be nice to know whether this was discussed and how it was decided that 8471 is not relevant.

Tuesday, February 21, 2017

Sunflower Seeds

I am falling behind on Rulings of the Week, but not for want of effort. I am keeping up with CIT decisions (more or less). The latest of which is Well Luck Co., Inc. v. United States. The case has to do with the classification of sunflower seeds that have been processed for human consumption. Some have been flavored with spices or other flavorings and dried. All are roasted and salted. The question is the tariff classification, which turns out to be trickier than you think.

The options are HTSUS item 1206.00.00, which covers "Sunflower seeds, whether or not broken." The applicable rate of duty is free and this is what the plaintiff claimed is correct. Customs and Border Protection liquidated the sunflower seeds in HTSUS item 2008.19.90 as "Fruits, nuts and other edible parts of plants, otherwise prepared or preserved . . . not elsewhere specified or included: Nuts, peanuts (ground-nuts) and other seeds . . . ." The applicable rate of duty is 17.9%, which is a significant deviation.

Think about everything you know about classification. In your heart, you already know the answer, don't you? Sunflower seeds are sunflower seeds. They are called out eo nomine in 1206.00.00 and that tariff item covers all forms of the sunflower seed. Easy. On top of that, as between the two, Heading 1206 is more specific in that is covers sunflower seeds. Heading 2008, on the other hand, covers other edible parts of plants not elsewhere specified or included, which is far less specific. Finally, since sunflower seeds are specified in 1206, they cannot be included in 2008.

All of that makes sense.

And yet, your conclusion (and mine) is wrong. Let's try to sort it out.

First off, do not jump to Relative Specificity under General Rule of Interpretation 3(a) until we fully explore the text as required by GRI 1.

Let's agree that if the processed sunflower seeds are classifiable in 1206, they are excluded from 2008. So that is the first question the Court of International Trade had to decide: are processed sunflower seeds "sunflower seeds" for purposes of Heading 1206? Getting the botany out of the way, there was no dispute that the imported product is the edible seed of Helianthus annuus, the common sunflower.

The problem for the plaintiff in this case is that the Explanatory Notes further define sunflower seeds of Heading 1206 as "minimally processed" and having general uses including for the extraction of oil and for sowing. These are not those seeds. They have been processed to add flavoring (even if just salt) and have been heated to an extent that they are no longer suitable for sowing. These are sunflower seeds with the specific use of being a food item. As a result, they are excluded from Heading 1206 and reamin classifiable in Heading 2008.

This conclusion is consistent with the Explanatory Notes. It is also consistent with the overall structure of the HTSUS, which moves from less processed to more highly processed materials. There is no doubt that the imported seeds are more highly processed than similar seeds for oil extraction or sowing. Thus, I don't have much of a problem with this result.

But, I think there is an analytical open question. A few Court of Appeals cases have held that the Explanatory Notes should not be used to impose a restriction on the language of the HTSUS that is not present in the text. See, e.g., Archer Daniels Midland v. U.S. Is that what happened here? Is there an answer to this issue that does not violate that principle?

There are no legal notes to Chapter 12 that exclude processed sunflower seeds. There are also no relevant Section Notes. Suddenly, this is a hard case.

The Court resolved this concern by noting that the meaning of the term "sunflower seed" is actually ambiguous. The lexicographical materials submitted to the Court indicate two distinct meanings. First, there are the raw and minimally processed seeds that remain suitable for oil extraction and for sowing. Those seeds may also be used for human consumption. Although not addressed by the Court, it is worth noting that Heading 1206 includes two statistical suffixes for sunflower seeds for "human use." The suffixes are not relevant to classification, but are indicative that some of the seeds of Heading 1206 are edible by humans.

The second meaning of sunflower seeds is in reference to the prepared snack food, which is no longer capable of general use. Having found two distinct meanings, the term is ambiguous and it makes sense and is legally correct to look to the Explanatory Notes to resolve the ambiguity.

That resulted in a substantial duty increase, which is why I suspect the Federal Circuit will let us know whether it agrees with this analysis. Given Archer Daniels Midland and the related cases, it is a close call on which reasonable judges might differ.

Wednesday, February 15, 2017

Who Moved My CAFTA-DR Cheese?

La Nica Products is an odd case. It involves a claim for preferential duty treatment under the US-Central America-Dominican Republic Free Trade Agreement, or CAFTA-DR. The merchandise is cheese from Nicaragua. On its face, one would think that an agricultural product like cheese would satisfy most rules of origin. But, that is not the issue in this case.

The problem here is the identity of the party making the claim. La Nica was listed as the importer of record and made the claim for duty-free treatment. After entry, La Nica, who had been listed as the importer of record, filed a Post-Entry Amendment ("PEA") attempting to change the importer of record to another party. Apparently, the other party purchased the cheese while it was en route. Customs and Border Protection asked La Nica for proof of the sale to the new alleged IOR and for a certificate of origin to support the CAFTA-DR claim. Plaintiff did not respond.

Customs denied the the PEA request and liquidated the entries as dutiable, thereby denying the CAFTA-DR claims as well. Plaintiff protested, and CBP denied the protests.

Under 19 CFR § 10.583(a), an importer may make a claim for preferential treatment under CAFTA-DR. The same regulation notes that a claim may be based on a certificate of origin from the importer, exporter, or producer. CAFTA-DR claims are, of course, subject to verification and can be denied if the Port Director determines that the importer has provided insufficient evidence to verify the origin of the merchandise.

What went wrong here? While the La Nica made the CAFTA-DR claim, it also told CBP that it was not the importer. Having sold the goods in transit, it appears that La Nica was no longer the owner of the goods at the time of entry and, therefore, was not the proper importer of record. Because the CAFTA-DR regulations require the the claim be made by the importer, La Nica is out of luck.

A couple things to remember about this. First, La Nica apparently never asserted that even though it sold the merchandise, it retained the right to make entry. If it retained a verifiable financial interest in the goods, it might have satisfied CBP's liberal interpretation of "owner" for purposes of making entry. That is not addressed in the decision.

The confounding issue here is that someone needs to be the IOR. Customs denied the PEA on the grounds that La Nica failed to prove the in-transit sale. That would seem to indicate a finding by CBP that La Nica still owned the merchandise and, therefore, was a proper importer. Alas, the CIT did not agree. Plaintiff has the burden of proof. In Court, La Nica continued to assert that it had made a successful sale of the cheese. Thus, the evidence before the Court indicated that La Nica was not the owner, which resulted in it being the wrong party to make the CAFTA-DR claim.

That is an example of free-trade whiplash.

Monday, February 13, 2017

Snuggies Are Blankets


Remember Snuggies? A few years back, they were part of the zeitgeist. Here is a reminder of exactly what is a Snuggie.

According to the commercial, Snuggies are wearable blankets with sleeves-like tubes. That raises an interesting classification question. Is it a blanket of HTSUS item 6301.40.00 (8.5%) or is it a garment classifiable in 6114.30.30 (14.9%)? Or, if it is neither, is it an "other made up article?" The Court of International Trade had to decide that question in Allstar Marketing Group v. U.S.

These are important questions in my world. I get that there is a lot going on in the larger world. Lately, I have been inspired and a little shamed watching lawyers who practice in areas affecting the actual lives and liberty of people, particularly refugees and others trying to entry the country. It made me proud to be a lawyer to see my colleagues set up shop at airports to provide assistance. Yesterday, I was at a meeting sponsored by HIAS Chicago at which an immigration lawyer offered pro bono assistance to arriving refugees. Occasionally, we get to undertake projects for individuals and worthwhile organizations, but that is uncommon in my practice. Here is an example of which I am still proud. Happily, I am currently working on a project that I think will serve the larger public, but it is still in the early stages and will not have the direct, personal impact that we have seen from the good work of immigration lawyers.

Now, back to the wearable blanket.

The evidence presented to the Court of International Trade shows that the importer referred to Snuggies as blankets in communications with the producer-supplier. The marketing materials show people using Snuggies in a variety of settings both in the home and outside, including on an airplane and at a sports stadium. Snuggies have sleeve-like tubes attached to allow users (or are they wearers?) to use their arms freely while still in the comparative warmth of the Snuggie.

The Court found that it had all the information necessary to resolve the matter and that there were no material questions of fact in dispute. That means, the only question is whether Snuggies fit within the common and commercial meaning of the tariff terms "garments" or "blankets." Under Note 2(a) to Chapter 63, if Snuggies are classifiable as garments, they cannot be classified as blankets or other textile items.

Tariff item 6114.30.30 covers "Other garments, knitted or crocheted: Of man-made fibers: other . . . ." There is no dispute that Snuggies are knitted of man-made fibers. The question is, are they "garments?" Looking at the structure of Section XI, the Court found that the items specified in Headings 6101 through 6114 are "garments," which is interchangeable with "apparel." Prior court decisions indicate that apparel is articles that "are ordinarily worn--dress in general." These are "clothes and covering for the human body warn for decency or comfort" as well as adornment. The government argued that because Snuggies are worn for comfort, they are apparel. The Plaintiff argued that because they are not worn for decency and adornment, they are not apparel.

The Court focused on the fact that apparel is "ordinarily worn." Specialized items covered by the apparel provisions include aprons, smocks, clerical vestments, scholastic (and presumably judicial) robes, and certain sports apparel. According to the Court, all of these are more akin to apparel than are Snuggies.

The Court then considered the use of the product. For why, see here. Physically, Snuggies are one-size-fits-all items and are open in the back. These characteristics do not resemble the kind of apparel that is "ordinarily worn." Furthermore, Snuggies were "inspired" by prior existing products called "Slankets" and "Freedom Blankets," both of which were marketed as blankets. Finally, the sales and marketing literature refers to the Snuggie as a blanket. According to the Plaintiff, that makes Snuggies improved blankets.

Blanket is defined as a warm covering used especially on a bed or a similar article used as a body covering for warmth. The Snuggie was designed and marketed as a covering for warmth. Since "blanket" is an eo nomine tariff description, it includes all forms of the article, including improved forms. From that, the Court was able to find Snuggies to be blankets (with sleeves). The addition of sleeves, according to the Court, did not so modify the nature of the article to make it something other than a blanket. The sleeves are incidental to the warming cover that is a Snuggie.

Thus, the plaintiff wins (this round) and Snuggies are classifiable as blankets of 6301.40.00.