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.

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.