Wednesday, October 25, 2017

Bankruptcy and Customs Penalties

Lawyers often have a tendency to wrongly believe that some question of particular interest to them is wholly unique and has never been addressed. The resolution of the matter, therefore, will “make new law” and put the lawyer into the legal history books. The opposite also happens. We often believe we know something to be true and assume that there must be precedent supporting whatever proposition we hope is the law.

Such was the case with the impact of a bankruptcy filing in the course of a civil penalty case at the Court of International Trade. There had been an understanding among some importers and certainly among some members of the bankruptcy bar that filing for bankruptcy protection would automatically stay the penalty case pending the outcome of the bankruptcy process.
The stay derives from 11 U.S.C. §362(a), which states the following:
Except as provided in subsection (b) of this section, a petition filed under section 301, 302, or 303 of this title, or an application filed under section 5(a)(3) of the Securities Investor Protection Act of 1970, operates as a stay, applicable to all entities, of—
(1)  the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title.

On its face, this law would appear to prevent the continuation of the § 1592 penalty case. 

Purely anecdotal evidence supported that proposition. Lore in some corners of the customs bar includes stories of Customs and Border Protection dropping penalty cases after a bankruptcy filing. This makes sense on several fronts. First, the bankruptcy surely indicates that he importer is in financial extremis. As a practical matter, it might be impossible or close to impossible to collect anything approaching what the government is seeking. Second, the penalty will be set by the CIT judge, who is required to take into consideration the defendant’s ability to pay. The bankruptcy filing indicates that the ability to pay is, at best, minimal. So, even if the case were not stayed, the thought was that Justice would decide that continuing to pursue the case was not a good use of limited resources.

But, if you asked a customs lawyer to prove anything I just wrote in the previous paragraph, you were likely to get some non-specific answer about how the issue was settled a long time ago or how it’s in the bankruptcy law. One time, a few years back, I asked a couple bankruptcy lawyers about this, and got the answer that “as a practical matter, the case will go away.” That is was not a concrete statement of law.

Recently, this largely theoretical question became exceedingly practical in two cases before the U.S. Court of International Trade. The first involved a meat packer called Rupari Food Services. The second involved an importer of athletic apparel called Greenlight Organic Inc. Both involved ongoing penalty cases in which the defendant filed for bankruptcy protection. In both cases, the defendant asserted that the automatic stay prevented any further proceedings in the CIT penalty case. For disclosure purposes, I was co-counsel to Rupari through the penalty litigation up to the bankruptcy.

In both cases, the Department of Justice pointed out that the automatic stay has several exceptions specifically stated in the statute. The relevant one here is § 362(b)(4), which permits the continuation of actions by a governmental unit seeking “to enforce such governmental unit’s . . . police and regulatory power, including the enforcement of a judgment other than a money judgment, obtained in an action or proceeding by the governmental unit to enforce such governmental unit’s or organization’s police or regulatory power[.]”

Customs and Border Protection is clearly a governmental unit. That means the question is whether a customs penalty is Customs seeking to enforce its police and regulatory power. While the answer to that question may seem obvious, it is not. A common perception has been that the exercise of police and regulatory power is limited to the prevention of a present threat to public health and safety or to stop an ongoing fraud. If there is o present threat or ongoing fraud, then the exception does not apply and the penalty case at the Court of International Trade should be stayed.

There is law on this question and it involves a two-part test. The first is whether the government action is primarily directed at protecting its pecuniary interest in the debtor’s property, as opposed to protecting the public health and safety. The second test is whether the government action is directed at effectuating public policy rather than adjudicating private rights. If the purpose of the action is to protect the government’s pecuniary interest or to adjudicate private rights, then the exception is inapplicable, and the stay will apply.

In these cases, the United States is seeking to secure payment of a debt, specifically the administratively assessed customs penalty. That means there is a pecuniary interest at stake. But, that interest is not sufficient to overcome the exercise of police powers. According to both decisions, the collection of a customs penalty is an effort to effectuate public policy rather than adjudicate private rights. According to the legislative history to the bankruptcy stay, the stay does not apply where the government is suing a debtor to prevent or stop a fraud or similar police or regulatory laws, or is attempting to fix damages for a violation of such law.

Consequently, in both these cases, the Court of International Trade held that the bankruptcy stay does not apply. Moreover, the case may proceed to the entry of judgment. That judgment will serve to fix the amount of the liability, which remains unsecured. The judgment does not convert the government into a secured creditor, nor does it force the payment of the debt. But, it does give the United States a perfected claim to be pursued in the bankruptcy proceeding.

In the end, the United States is going to have to be satisfied with whatever the creditors are able to work out. It may not be very much, which may be why these claims have apparently been dropped in the past. But, the current policy appears to be to pursue the matter in the CIT despite the bankruptcy. This is an important development for anyone facing a significant penalty and thinking that bankruptcy may be a strategy to avoid the claim.

Tuesday, October 24, 2017

Home Depot and Entry Hardware

Home Depot and stores if its ilk are one of the many places I go to find out how little I know about a great many things. Generally, I employ a "three step test" for home improvement projects. Under that test, if the project requires more than three process steps or three steps up a ladder, I outsource the job. That means there are vast arrays of hardware items to which I have had little or no exposure. On the other hand, I have done a lot of tariff classifications of power tools, hand tools, lawn and garden products, and home appliances (and parts thereof). Consequently, when I do wander into a Home Depot I sometimes pick up the odd lock washer or large forged hand tool and ask questions like "Is this in scope?" or "Is this really Made in USA?"

The actual Home Depot company, on the other, recently asked the U.S. Court of International Trade to classify various pieces of door hardware. The merchandise consisted of packaged exterior door knobs and trim, interior knobs and trim, a latch, strike plate, installation hardware, and keys. The exterior knob included a key slot and keyed cylinder (meaning the lock portion). Customs and Border Protection classified the merchandise in 8301.40.60 as locks. Home Depot contended that the merchandise was classifiable in 8302 .41.60 as fittings for doors, etc. suitable for buildings.

So, the sole question appears to be whether the presence of the lock in the exterior knob is sufficient to require classification as a lock in 8301.

The Court of International Trade started by defining "lock" as a device securing a door in a closed position with a bolt propelled by a key or other mechanism. Looking to the merchandise, the Court quickly found that it consisted of key-operated locks intended to secure doors and that the locks were of base metal.

The Court then concluded that the door knobs are parts of the locks. It got there by looking to industry standards. On top of that, the Court found that Home Depot advertises this merchandise as door locks. Consequently, the Court held that the merchandise is classifiable in 8301as locks.

That leaves the question of whether the merchandise is also classifiable in 8302. According to Home Depot, these goods were just knobs improved with locking mechanisms. A such, they are door fittings. This makes some sense because an eo nomine description includes all forms of the article including later developed improvements.

Alas, this clever argument did not prevail. The Court noted that there is nothing inherently wrong with having similar products in two different headings if the language of the headings separates the articles. In this case, 8301 specifically includes locks. Heading 8302, on the other hand, only includes fittings for doors and similar items. Thus, the description in 8302 is incomplete compared to the description in 8301. Thus, the Court found 8301 to apply.

Note that this is not a decision based on General Rule of Interpretation 3 and Relative Specificity. The Court's holding is that the goods are not described by 8302. Thus, there is no reason to compare the specificity of the two headings.

Sunday, October 22, 2017

XYZ/Milecrest Survives Motion to Dismiss

XYZ, it turns out, is a company called Milecrest Corporation.

This is the next chapter of the modern XYZ affair at the Court of International Trade. If you are not up to speed on what is happening, read my earlier posts (here, here and here).

In this Court of International Trade case, Milecrest has asked the Court of International Trade to review the decision by Customs and Border Protection to grant Lever Brother protection to Duracell-branded batteries. Granting that protection, as explained in the earlier posts, would make it more difficult for Milecrest to import and sell Duracell batteries. To do so, they will need to be marked indicating that they were not intended for the U.S. market and that they differ materially from the authorized product.

At this stage, Duracell and the United States have moved to dismiss the case arguing that Milecrest has not stated a claim for which it is entitled to relief or, in the alternative, that the Court of International Trade does not have jurisdiction over this dispute.

Regarding jurisdiction, the Court of International Trade, like all federal courts, is a court of limited jurisdiction. If this issue does not fall within limited matters assigned by Congress to the CIT, then it must be dismissed.

The problem for Milecrest is that although it may have asserted facts that, if true, would indicate a violation of the Administrative Procedure Act, those facts do not create jurisdiction. Rather, jurisdiction needs to be derived from 28 U.S.C. 1581(a)-(i). In this case, the relevant provision is subsection (h), which says:

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

Duracell argued that the grant of Lever Brothers Protection is not a “ruling” for purposes of 1581(h). The Court reiterated its prior decision that granting this protection is a ruling because it is a written statement by CBP that was published as an interpretation of a regulation. Nothing in this motion changes that.

Next, the Court turned to whether Milecrest has sufficiently pleaded irreparable harm from the CBP ruling. To properly assert a case, a plaintiff at the Court of International Trade must provide a short and plain statement of the grounds for jurisdiction. Here, Milecrest asserted that it was seeking review of a CBP decision to restrict the importation of merchandise, that will if not reviewed cause it irreparable. According to the Court, that was sufficient. Furthermore, the connection between the Lever Brother ruling and harm to Milecrest is supported by sufficient allegations to allow the case to go forward.

Finally, Duracell argued that the law permitting CBP to restrict materially different gray market products is not intended to protect Milecrest, a parallel importer. As such, Milecrest does not have standing to raise this complaint. The Court disagreed. The law providing protection to Duracell necessarily results in the regulation of Milecrest, putting Milecrest in the “zone of interest” of the law. That gives it standing to sue.

After dispensing with an argument that Milecrest did not exhaust the administrative process, the Court found it has jurisdiction under 1581(h) to decide the case, if properly brought.

The next issue was whether Milecrest had properly stated a claim on which relief can be granted. To satisfy this requirement, Milecrest must have stated facts which, if assumed to be true, state a plausible claim for relief. Here, that means showing a final agency action with no other adequate administrative remedy. The granting of Lever Brothers protection is a final agency action. Congress has not provided any other means for Milecrest to seek relief, thus the action appears to be sufficiently well pleaded to survive the motion to dismiss.

In its first count, Milecrest claimed that CBP’s action was unlawful because it did not provide public notice and an opportunity for comment prior to making the decision. If Milecrest proves notice and comment is required and that CBP failed to follow that procedure, then Milecrest is entitled to relief. Thus, the motion to dismiss is denied.

Similarly, Milecrest has pleaded that the decision to grant Lever Brothers Protection was arbitrary, capricious, an abuse of discretion or was otherwise not in accordance with law. This count raises an important and fundamental question. Is CBP’s grant of Lever Protection overly broad in that it might grant Duracell protection against imports of batteries that are not physically and materially different from the authorized batteries on sale in the U.S.? If so, CBP will have exceeded its legal authority. This, according to the Court, is a plausible claim for relief.

Lastly, Milecrest claims that the ruling granting protection to Duracell is impermissibly vague because it fails to state how the batteries are physically and materially different from authorized batteries. As such, importers do not know what batteries might require labeling nor why. The Court also found this to be a well-pleaded count for relief.

Thus, this case will go forward. This is a good result for parallel importers. If this reaches a final judicial decision, this may be the first case that provides some guidance and possibly limits on the scope of CBP authority to limit parallel imports. Remember, these are legitimate products, not counterfeits. CBP has no authority to stop grey market products unless they are physically and materially different from the authorized U.S. counterpart. If CBP is overstepping and granting Lever Protection to products at the behest of the rights holder, this case may put a stop to that arbitrary overreach. If, on the other hand, Duracell and Customs show that the batteries are physically and materially different, the grant of protection will be upheld and Milecrest will have to begin labeling the products as unauthorized imports.

Sunday, October 15, 2017

Ruling of the Week: Shark Tank and Customs

I never make an effort to watch Shark Tank. However, for some reason I am always running across it. I always get sucked in. I think the discussions of business valuation and strategy are interesting. I am certain they are very distilled through the editing process, but hearing successful investors critique an entrepreneur's pitch is fascinating to me.

Not long ago, I saw a guy pitch an iPhone case that has a monochrome screen affixed to the back. Using its own battery and Bluetooth connection to the phone, the second screen continuously displays updates, pictures, and other data.

The device is called a popSlate (review)


How would you classify that?

It turns out, not as a radio transmitter/receiver of 8517, which is where CBP previously classified smart watches that use Bluetooth to get updates from the phone. In this case, CBP held that the screen provides the essential character. As such, Customs classified it as an other machine or apparatus having individual function in 8543.

I have not spent any time reviewing this classification. It does strike me, though, that this might be described as an indicator panel of 8531. Anyone want to take up the challenge and tell me why that is wrong (or even right)?

Irwin Tools: Pliers are Still Pliers

Remember the Irwin Tools Case? That case considered whether certain locking pliers were properly classified as wrenches or as either pliers or clamps. The Court of International Trade held that the plaintiff had overcome the presumption that Customs correctly classified the pliers as wrenches. But, because Irwin had not moved for summary judgment, the Court could not give a final classification. Subsequently, Irwin moved for summary judgment and the government moved for reconsideration of the original decision. If you have not read my original post on this case, please do so.

The CIT has now handed Irwin a complete victory. The gist of the prior ruling is that a wrench has a head that fits snugly over or around the head of a fastener and a single handle that can be turned to apply torque. Pliers, on the other hand, have two handles and two jaws that pivot and must be squeezed to grasp an object. A clamp has a frame of some kind and two opposing surfaces that can be adjusted by a screw, lever, or similar device to hold an object firmly in place.

A motion to reconsider a prior judgment is directed to the discretion of the Court. The Court will grant a motion to reconsider when it finds that justice requires it to do so. Factors that may indicate justice requires reconsideration include a significant change in the controlling law or reason to believe that the court patently misunderstood the issues presented. A simple disagreement with the outcome will not do it. That was the case here and the judge denied the motion.

So where do we classify locking pliers? No surprisingly, as pliers. All of the locking pliers have two handles and two jaws that pivot relative to one another. This allows the user to squeeze the handles to close the jaws around an object to manipulate it.

The Court also found that the evidence before it did not establish that the locking pliers were classifiable as clamps. Rather than be tightened with a screw, lever or thumb nut, the locking pliers are closed by squeezing the handles. Further, the configuration of the two handles and a pivot is distinct from clamps.

Reading somewhat between the lines and possibly due to my own involvement with this issue, it strikes me that the government’s main argument was that this issue had already been decided. The CIT addressed this issue in 1983 in a case called Associated Consumers v. UnitedStates, 5 CIT 148, 565 F. Supp. 1044. Associated Consumers was affirmed by the Federal Circuit in a non-precedential decision without an opinion. Of course, the 1983 case was under the old Tariff Schedule of the United States. Furthermore, the decision of one CIT judge is not binding on another judge subsequently looking at the issue. The Court, after reviewing the physical nature of the various tools at issue and the standard definitions of pliers determined that these locking pliers are properly classified as pliers.

There is a bit of side issue in this case about use. Does the word “wrench” suggest a particular use, such as turning a nut or bolt? Does the word “clamp” imply a usage? Maybe. But, that was all addressed in the prior Irwin decision and the Court saw no reason to revisit it now.
Anyone curious about all the bankruptcy issues floating around? I'm on it. I'll try to get to that this week.

Uniform Practices and Treatments: Kent International

You may have noticed that I am not doing a particularly good job of blogging these days. I have no good excuse for that other than the fact that I have a job that is not blogging. But, I realize and am gratified to know that people read this blog and expect it to be up to date. I am making an effort to do that. I will have a lot of time in airplanes this week, so I’ll try and knock out some updates.

Kent International, Inc. v. United (Slip Op 17-123) addresses the question of whether Customs and Border Protection had an “established and uniform practice” or a “treatment” applicable to the classification of a product known as the “WeeRide Kangaroo” child bicycle seat. We talk about this product previously here. In the phase of the case we are discussing now, the United States has moved to dismiss the counts of Kent’s complaint alleging an established uniform practice and a treatment.
At this juncture, the question presented is whether Kent has alleged sufficient facts to suggest that it has a right to relieve that is more than speculative. In the current parlance of pleading, the allegation in the complaint must be “plausible on its fact,” assuming all the allegations to be true.

The gist of Kent’s complaint is that from 2005 on, Customs classified its bike seats under heading 8714 (10%) as parts of bicycles. But, according to Kent, from 2007 through 2011, Customs and Border Protection issued binding rulings to other importers classifying similar products in heading 9401 (free). The rulings remained unrevoked until 2014. See 48 Cust. B. & Dec. 29 (Jul. 23, 2014). During that time, CBP also approved Kent’s protests seeking duty-free entry under 9401. After the rulings were revoked, CBP denied a then-pending protest and liquidated Kent’s merchandise under the dutiable provision.

An established and uniform practice (“EUP”) is a statutory recognition that importers should be able to rely Customs’ established practice without risk of rate advances or penalties. The existence of an EUP is not easy to establish. It must be either “declared” or “de facto.” A declared EUP results from a formal administrative declaration and is a pretty rare thing.

Absent a declared EUP, the Court of International Trade can find that Customs has made uniform liquidations over time that the importer can rely on that past practice until it is formally changed. For lawyers, this is kind of like detrimental reliance and estoppel but since estoppel generally does not apply to the federal government, we get it via the EUP.

For there to be a de facto EUP, the plaintiff needs to show evidence of a practice of liquidations that, in the absence of notice of a change, would lead a reasonable importer to expect Customs to follow the practice. What the importer needs to have is evidence of a high number of consistent liquidations, at a high number of ports, over an extended period of time, and no reason to suggest a different classification would apply (i.e., no uncertainty).

Remember, at this stage Kent only needs to allege facts that make a its case plausible. Kent can show its own entries at multiple ports. It also has the approved protests and the rulings issued to other importers. From this, the Court of International Trade concluded the Kent’s allegation of an EUP was sufficiently probable to proceed.

A “treatment” is a little different. It is also statutory. Under 19 USC 1625(c), if CBP proposes an interpretive ruling or decision that has the effect of “modifying the treatment previously accorded by [Customs and Border Protection] to substantially identical transactions, Customs must publish the decision in the Bulletin. The notice must provide at least 30 days for notice and comment. The final decision, changing the practice, shall be effective 60 days after notice of CBP’s final decision is published.

A “treatment” is defined in the regulations as an actual determination by a CBP officer regarding substantially identical transactions and that decision was consistently applied for a two-year period. 19 CFR 177.12(c). The plaintiff also needs to show that the current action is an “interpretive ruling or decision” that would have the effect of modifying the previous treatment.

Kent has alleged that CBP liquidated the entries of three other importers of substantially identical merchandise between 2007 and 2014, when CBP issued a formal revocation. Moving to dismiss, Customs argued that Kent cannot produce sufficient evidence of consistent CBP treatment over a two-year period, nationwide.

That, however, is not the standard Kent must meet at this point. According to the Court, Kent only needs to allege facts that, if true, would make a plausible case for a treatment. Based on the complaint before the Court, Kent has done that. As a result, the Court denied Defendant’s motion to dismiss the two counts.

Sunday, October 01, 2017

Blog Contest

I am back in the mix for the Expert Institute legal blog competition.

Do me a favor and vote here.