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.