Monday, September 18, 2017

The Great Bulb Debate

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

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

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

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

So, are these “lamps” of Chapter 85?

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

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

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

So, what gives with Chapter 85?

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

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

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

The Great Unmasking

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

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

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

Tuesday, August 29, 2017

GSP and Sets

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

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

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

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

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

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

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

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

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

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

Monday, August 21, 2017

Ford Analysis

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Monday, August 14, 2017

Chew on This

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

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

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

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

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

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

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

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

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

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

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

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


Saturday, August 12, 2017

XYZ and Lever Protection (Part 2)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

This will be an interesting case to follow.

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

Friday, August 11, 2017

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

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

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

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

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

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



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

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

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

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

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

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

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

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

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

Shots fired.

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

Thursday, August 10, 2017

Good News (About Ford and the Blog)

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

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

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

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

Obviously, a more detailed analysis will follow.

Congratulations to Ford and its counsel.

Friday, June 02, 2017

Interest: Equitable and Otherwise

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

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

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

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

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

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

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

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

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

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

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

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

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

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 420Science.com, 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!

ORIGINALLY POSTED MARCH 22, 2017.
UPDATED APRIL 4, 2017.


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.


UPDATE:

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.