Sunday, December 31, 2017

Recently, On Discovery

This has nothing to do with Michael Burnham or tardigrades.
Discovery disputes are pretty uncommon in the Court of International Trade, and for good reason. Most CIT cases, these days, are “on the record” reviews of antidumping and countervailing duty decisions from the Department of Commerce or International Trade Commission. Those cases do not involve discovery about which to have a dispute. Most customs cases are tariff classification cases in which there is not often a real dispute about the nature of the imported product. That means the cases turn on questions of law, not fact, thereby limiting the genuine (if not perceived) need for discovery.
Penalty cases area a whole different world. In penalty cases, the Department of Justice is often trying to figure out what happened and, more important, what it can prove. That means penalty cases often involve a lot of discovery requests from the government directed at the defendant and its personnel. For its part, the defendant often wants to know what the government THINKS happened and what the government THINKS it can prove. As a result, the defendant often seeks discovery of, among other things, Customs and Border Protection’s or Homeland Security Investigation’s Report of Investigation, which is the extremely tedious document that details the government’s investigation into the alleged violation. While the defendant is at it, the defendant will usually request any other relevant documents it thinks might exist and illuminate what has been happening.
The CIT Rules permit the use of the same discovery tools as are available in any U.S. District Court. Among those are depositions (Rule 30), interrogatories (Rule 33), and requests to admit (Rule 36). A party that believes a request has exceeded the permitted scope of discovery may move for a Protective Order to halt or limit the allege discovery abuse (Rule 26(c)).
Two recent decisions from the Court of International Trade have waded into the scope of permitted discovery. Both decisions are in the case United States v. Greenlight Organics, Inc. (slip op. 17-167 and 17-168).
The first decision involves Greenlight’s motion to compel the United States to produced 145 documents over which the government has asserted privilege. As background, the United States produced 2,861 documents, withholding 145. For those 145, as required by Rule 26(b)(5)(A), it provided a privilege log identifying the document along with its sender, recipient, date, subject, and the privilege claimed.
In this case, the government asserted the “deliberative process” and “law enforcement” privileges. These privileges protect the deliberations of agency officials from disclosure and encourage frank discussions of legal and policy matters related to the law enforcement decision-making process. Once the government successfully asserts the privileges, the burden shifts to the requesting party to show a “compelling need” to overcome the privilege.
To make a successful claim of these executive privileges, the government must do more than merely assert it. Following a decision of the U.S. Court of Appeals for the DC Circuit, Landry v. F.D.I.C., the Court of International Trade held that the government must:
1.       Make a formal claim of privilege via the head of the agency or his or her delegate;
2.       Submit an affidavit showing “actual personal consideration by that official;” AND
3.       Provide a detailed explanation of what the document is and why it falls within the scope of the privilege.
In this case, the government failed to submit the required affidavit. Having failed to do so, the United States has failed to successfully assert the privilege. Consequently, the Court ordered the United States to do so before ruling on the merits of the privilege claim.
Given the lack of a fully asserted claim for privilege, the Court found it premature to rule on Greenlight’s request for in camera review of the documents. In camera review is where the judge requires the party to produce documents for her private review so that the judge can make a fully informed decision on the merits of the claim of privilege and the other party’s need for production. The Court also declined to act on Greenlight’s motion to compel production.
The second Greenlight decision involves two competing motions. In the first, the United States seeks to compel responses to several discovery requests. The second involves Greenlight’s motion for a protective order preventing much of this inquiry by the government.
Here, I am going to cut to the chase so that I can discuss the underlying issue, which is, to my mind more important for the average reader of this blog. The government’s requests go to the personal involvement of the two corporate principals in the classification and valuation of the imported merchandise. In other words, the requests appear directed at determining whether those individuals were responsible for the alleged fraud or negligence. The requests also go to the personal finances of those individuals.
This should send a shiver of concern up the spine of corporate officers and compliance personnel. Greenlight Organics is the defendant in this case, not the individual officers. However, as a reminder, the dustup surrounding the 2014 Federal Circuit decision in Trek Leather means that “any person” can be liable for a violation of Section 1592, the customs penalty law. Thus, the individuals, acting as agents for the actual importer Greenlight, might be personally liable for their actions related to the alleged violation.
Because of this legal reality, the government asserted that its questions about the two individuals were related to the case against Greenlight and also to the possibility of claims against the individuals. The first part makes sense. If an officer or employee of Greenlight made a material false statement or omission, then Greenlight is liable for the violation. If that person made the false statement knowing it to be false, then Greenlight would potentially be liable for fraud—the highest level of culpability under the statue. Consequently, the Court allowed the inquiry into the personal involvement in the suspect decisions.
But what about claims against the individuals and the requests for personal financial information? Greenlight objected to these questions because the two individuals are not defendants in the case. The complaint, which sets out the plaintiff’s claims, does not allege individual wrongdoing or individual liability. According to Greenlight, that makes this line of inquiry outside the scope of the complaint and, therefore, outside the scope of appropriate discovery.
The Court disagreed. Citing Supreme Court precedent, the Court of International Trade noted discovery rules are liberally interpreted to permit discovery on any matter that may bear on an issue that is or may be an issue in the case. Discovery, in other words, is not limited to the complaint. According to the government, that is the point. It explicitly stated that it wanted the discovery “to assist it with determining whether to amend its complaint to include charges of individual liability against Greenlight’s officers.” According to the Court, this falls within the liberal nature of discovery and is, therefore, appropriate.
Because of all this, Greenlight’s motion for a protective order preventing much of this effort was denied.
So what is the take away from this? First, it is a reminder that the government can and will pursue charges against individuals for corporate imports. That underscores the importance of compliance generally and, for compliance personnel, the importance of documenting efforts to correct non-compliance by, when necessary elevating the issue to upper management. Second, these decisions are an important reminder that in a de novo penalty case, the original complaint does not fix the scope of the claims that can be brought by the United States.
But, is that the right result? A couple things make me wonder. First, Rule 26 sets out the scope of discovery. As presently constructed, the Rule allows discovery:
regarding any nonprivileged matter that is relevant to any party’s claim or defense – including the existence, description, nature, custody, condition, and location of any documents or other tangible things and the identity and location of persons who know of any discoverable matter. For good cause, the court may order discovery of any matter relevant to the subject matter involved in the action. Relevant information need not be admissible at the trial if the discovery appears reasonably calculated to lead to the discovery of admissible evidence.
I have always read the Rule’s focus on claims and defenses as limiting discovery to joined issues. That means claims and defenses as reflected in the complaint and the answer. That is, of course, inconsistent with the result here, so it is not legal advice. I thought discovery was only permitted on  matters related to the subject matter of the action but not related to a claim or defense “for good cause.” Again, that appears to be an incorrect reading.
It is worth noting that the U.S. Federal Rules of Civil Procedure used in the districts courts modified the corresponding FRCP 26 to remove the good cause test and also removed the condition that “information need not be admissible at the trial if the discovery appears reasonably calculated to lead to the discovery of admissible evidence.” See FRCP 26. The CIT rules will probably make a similar change at some point. What, if any, impact that has on the future application of CIT Rule 26 remains to be seen. It appears to indicate that the focus remains on claims and defenses while laying on top of that a condition that the request be proportional to the stakes of the case. 
A second issue has to do with the nature of the action. A penalty case in the Court of International Trade is not an empty hook on which the United States can hang any theory of liability against the importer and the individuals involved. Rather, it is a collection case in which the United States seeks to recover the penalty Customs already assessed in the administrative process. Absent a perfected administrative claim against an individual or entity, there is no claim to assert in Court. The only de novo aspects are that the Court decides whether the United States has proven in court the facts necessary to substantiate the already asserted claim. Based on the facts proven in court, the CIT can order the defendant to pay the full claim, a lesser amount, or nothing at all. This is the rule of exhaustion of administrative remedies in a penalty case as explained in United States v.Nitek Electronics, Inc., and UnitedStates v. Optrex America, Inc.
Discovery is a preliminary stage of litigation. A lot can and still might happen in this case as it proceeds. If new claims are brought, the Court may be asked to address the question of whether the claims were properly perfected at the agency level. There may also be questions of whether the statute of limitation has expired on any new claims. This could come in the form of a motion to dismiss or motion for summary judgment.
For now, we know that the discovery rules are to be liberally construed and that Greenlight will likely have to turn over the requested information. We also have a stark reminder of the importance of legal compliance both for corporate entities and for individuals. The rule of Trek Leather is that Customs need not pierce the corporate veil to assert liability against individuals who were personally involved in making material false statements or omissions. Continue to document your compliance efforts and push back wherever you perceive potential non-compliance.
There is certainly more to follow in this case.

Friday, December 29, 2017

In the Zone

At the moment, my family and I are hiding from the Chicago winter in Panama. There is no sign of winter here.

There is, however, a big canal. From my current poolside seat, I can see freighters, container ships, and tankers, lined up waiting to enter the canal on the pacific side. I am told they wait can be about 24 hours or more and that the 80 km transit can take 8 hours or more. It is very cool to see this in real life. Although I have spent my entire career dealing with supply chains, I rarely need to actually see the supply chain in action. Here, it is unavoidable.

So, off to the Miraflores locks for a closer look.

(c) 2017 LMFriedman

(c) 2017 LMFriedman

Happy new year to all of you.

How the Sausage Casing is Made

Continuing my effort to catch up on 2017 customs decision from the Court of International Trade, we come to Kalle USA, Inc. v. United States. For lots of reasons, I am going to treat this carefully. First and foremost, this is a case litigated by my law firm. As far as I know, this is not final, and I will not say anything about the matter that is not consistent with the position we advanced in the CIT. On top of that, I have a case pending before the Court that raises similar issues. Therefore, this post is just the facts and just the conclusions of law.

Kalle imports lay-flat tubes that are layers of plastic and textile materials. The long edge of the tube is sealed with glue. These tubes are used as casings for sausages and sometimes cheese. There are two versions of the casing at issue. For the majority of the merchandise, the textile is about 140 micrometers compared to 20 micrometers for the plastic. The textile value is € 0.96/165 cm compared to € 0.73/165 cm for the plastic. The textile allows the casing to transmit dyes and aromas to the encased food. The textile remains visible in the finished product and provides strength and shape. The plastic prevents moisture loss by filling the spaces between textile fibers.

Kalle believes the merchandise should be classified as a plastic tube of Heading 3917. The United States believes that the correct classification is in Heading 6307 as an other made up article.
According to the Court, this case can be resolved under General Rule of Interpretation 1 by an application of the relative Section and Chapter Notes, without recourse to essential character or relative specificity under GRI 3.

There are a lot of notes in play here. Most important is that Chapter 39, Note 1 states that “plastics” does not apply to textile materials of Section XI. Consistent with that, Chapter 39, Note 2(p) excludes from that chapter, goods of Section XI including textiles and textile articles. So, if the casings are textile articles of Section XI, they are excluded from Chapter 39.

Looking to Section XI, we find Note 1(h), which excludes, among other things, woven, knitted, or crocheted fabrics impregnated, coated, covered, or laminated with plastics, or articles thereof, of Chapter 39. However, because this note only applies to materials “of chapter 39,” the Court looked to the notes applicable to Chapters 56 and 59 for guidance on distinguishing between articles of Chapter 39 and those of Section XI. If, according to the Court, Section Note 1(h) were intended to be all encompassing, the clarifying notes of Chapter 56 and 59 would not be necessary. Given that they exist, they must have some meanings. Further, these notes are referenced in the Explanatory Notes as a means of distinguishing products of Chapter 39. Thus, the Court applied these notes to define products of Chapter 39, which would be excluded from Section XI.

Having determined the analytical approach, the Court turned to the question raised by these notes: is the textile material “completely embedded, impregnated, coated, covered or laminated with plastic?” If so, it is a plastic of Chapter 39 and excluded from Section XI.

On this question, the parties had different interpretations of the legal standard. Kalle argued that the plastic layer on one side of the textile embeds or coats the textile material. The Court, looking to dictionary definitions, disagreed. The Court held that to qualify for this exclusion from Section XI, the plastic must be on both sides of the textile, not just one.

That was pretty much it for Kalle. To clean up the loose ends, the Court also noted that gluing the two sides of the tube constitutes assembly sufficient to qualify the product as a made up article. The Court also found that the textile was present in the plastic as more than merely reinforcing material. The textile added desirable functional characteristics.

Taken all together, this GRI 1 analysis lead the Court of International Trade to conclude that the combined plastic and textile sausage/cheese casing is best classifiable in Heading 6307 as an other made up article.

Sunday, December 24, 2017

Is a Santa Suit Apparel?

It is Christmas Eve as I write this while on my way to warmer climes. This short vacation is a good opportunity to catch up on court decisions and blog posts. The fact that it is Christmas makes a discussion, however brief, of Rubies Costume Co. v. United States timely.

This particular Rubies case involves a Santa jacket and pants. Apparently, it is a particularly well-made Santa costume. Among other characteristics, it features a zippered jacket with lining and finished sleeve cuffs. The pant legs are unfinished, but are designed to be tucked into black shoe covers, meaning they do not show. The costume sells for about $100 and includes a fabric-care label specifying that it be dry cleaned. I think this is an image of the item in question:

We have been over some of this ground in previous posts. See here and here for example. The basic question is whether these garments are wearing apparel of Chapter 61 of the HTSUS or whether they are festive articles of Chapter 95. There is also a question of whether Santa’s toy sack is similar to a travel bag of Heading 4202.
I have repeatedly proposed a bright-line for these cases. For some reason, no one listens. I say if we want to know whether something is closely associated with Christmas so as to qualify as a duty-free article of Chapter 95 all we need to do is show it to a rabbi. If the rabbi takes one look at it and says. “I would never have that in my home,” then it is a Christmas (or possibly Easter) festive article. But, I digress.

To take a step back, we need to understand that certain garments are excluded from classification as wearing apparel in Chapter 61. Section XI, Note 1(t) excludes articles of Chapter 95, which includes festive articles. Plaintiff Rubies’ contention is that the Santa costume is a festive article. The problem for Rubies is that Chapter 95, Note1(e) excludes “fancy dress,” of textiles, of chapters 61 or 62. Consequently, if the Santa costume is also “fancy dress” then the Santa costume is not an article of Chapter 95 and is, therefore, not excluded from Chapter 61.
The Court of Appeals for the Federal Circuit has previously addressed the question of whether costumes are “fancy dress.” That case involved what I believe to be the sort of flimsy Halloween costumes I recall from my youth. These were the ones that came in a box from the local pharmacy or convenience store with a clear plastic window allowing the buyer to see the plastic mask of Casper the Ghost or Superman, for example. Inside the box, we would find a flimsy onesie with an opening in the back that tied at the neck. The costume part was adorned with a printed motif matching the mask. Without fail, for me at least, the masks were unwearable either because the elastic strap holding them in place would break almost immediately or it was impossible to see, breathe, or both. These were “flimsy” in all senses of the word. 

On appeal, the Federal Circuit held that “fancy dress” includes “a costume (as for a masquerade or party) departing from conventional style and [usually] representing a fictional or historical character.” However, for fancy dress to be excluded from Chapter 95, it must be “of textiles, of chapters 61 or 62.” Consequently, according to the Court, the fancy dress must also be “wearing apparel.” To be wearing apparel, the garment must be of the kind ordinarily worn as “clothes or coverings for the human body worn for decency or comfort.” From that, the Court determined that a costume is a festive article when it is a flimsy, non-durable item having utility and use associated with the festive occasion. Compared to a standard garment, it will have functional or structural deficiencies. Festive costumes will have a significant element of “make believe” or “festive value” and only incidentally afford coverage for decency and comfort.
Here, the Santa jacket has a zipper closure and long sleeves with a turned edge. The jacket is durable and intended for repeated wearing and cleaning. This is a non-flimsy garment. The pants too, although they have an elastic waist and unfinished leg bottoms. This, according to the Court, makes them durable garments that can be ordinarily worn even if infrequently. That means the Santa suit is fancy dress and that excludes it from classification in Chapter 95 as festive articles.

I can’t pick at the legal analysis. It seems to closely follow the guidance from the Court of Appeals and gives meaning to the entirety of the legal text. I just subjectively hate the outcome.
What is more festive than a Santa suit? I would posit, very few things. What is more closely associated, at least in the U.S., with Christmas than Santa? Probably nothing. How likely are you to see a person in a Santa suit between January 1 and November 1? Not very likely. If you are anything like me, if you happen to see a Santa roaming the mall or streets in July, your initial reaction is to scream internally, “Hey Buster, Christmas is in five months!” Walking around in a Santa suit in the summer is a fugitive use of it. Why? Because a Santa suit is not really apparel. Rather it is a commercial or artistic rendering of a character associated with a specific festive event. For the sake of young readers stumbling on this page, I will not opine on whether the Santa character is fictional or historical or actual. Either way, the clothing turns the wearer into a specific representation of a character who is associated with a specific holiday. To me, that is not wearing clothes in the ordinary sense.
The problem with my own analysis is that half the people in Chicago on any given day are wearing some article of clothing that communicates their affiliation with the Cubs, Sox, Bull, or Bears. In my house, there is even apparel emblazoned with the logo of the Chicago Wildfire, our local professional Ultimate team. Wearing these, even a full-on Bears uniform with pads and helmet, however, does not “depict” a specific character associated with a specific festive occasion any more than wearing a police or firefighter uniform depicts a specific person or character associated with a specific event.

To me, the Santa suit is different because it has a distinct purpose of communicating the identity of the depicted individual rather than showing a functional or personal affiliation the way a uniform does. Furthermore, depicting that individual communicates specific connections with a specific festive event. In my mind, a Santa suit, like a devil, ghost, or pirate costume is communicative and linked to a festive occasion. Fancy dress, on the other hand, would be, for example, a historical costume (say a colonial minuteman) that is not associated with any specific festive occasion or specific character.
Unfortunately, I do not get to make the rules. I just help others follow them and report on the results. For now, and probably for the foreseeable future, costumes will only be classified as festive articles when they are flimsy, non-durable items that cannot be ordinarily worn for comfort and decency. I can live with that.

Consolidated Fibers: What the EAJA?

Consolidated Fibers, Inc. v. United States involves an importer’s motion for attorneys’ fees under the Equal Access to Justice Act (“EAJA”). And, it is a cautionary tale for importers and customs lawyers.

The underlying facts are not too complicated. Consolidated entered polyester stable fiber from Korea. At the time of entry, it deposited the 7.9% estimated dumping duties that were then due. Because the producer was subject to administrative review, the liquidation of the entry was suspended. On December 10, 2007, Commerce published the results of the review and determined the assessment rate to be 48.14%. On January 14, 2008, Commerce issued instructions to Customs to liquidate the entries at the assessment rate. CBP failed to act on those instructions until May 6, 2011 when it published a bulletin notice of liquidation stating that the entry liquidated by operation of law on June 10, 2008 at the 7.9% deposit rate. But, shortly thereafter, on June 17, 2011, CBP “rate advanced” the entry to 48.14% and reliquidated the entry.

Consolidated protested the reliquidation. In its protest, Consolidated noted that the entry liquidated by operation of law six months after the assessment rate was published. Since liquidations are generally final as to all parties, this might appear to be enough. Consolidated relied on a 2004 CIT case called International Trading v. United States, 28 CIT 1, 16-18, 306 F. Supp. 2d 1265, 1278-79 (2004), which was affirmed by the Court of Appeals in 2005, as support for its position.
The Court, however, noted that by the time CBP reliquidated Consolidated‘s entry, Congress had amended 19 U.S.C. § 1501 to allow Customs to reliquidate an entry that had liquidated under § 1504, i.e., liquidated by operation of law, within 90 days of the date of publication of the notice of liquidation. That means that the clock started running on this liquidation on May 6, 2011 when Customs issued the notice of liquidation and the reliquidation was timely. [Note from Larry: This changed again in 2016 when the statute was amended to start the reliquidation clock running from the date of the deemed liquidation not the notice.]

OK, so how does that relate to the EAJA claim?

The odd thing about this case is that it follows a “confession of judgment,” in which the United States effectively admitted that it should not have rate advanced the entry. In other words, the government is willing to pay back the extra antidumping duties Consolidated paid. But, plaintiff refused to stipulate the case unless the U.S. also agreed to pay attorneys’ fees, which the U.S. government would not do. 
To qualify for fees under EAJA, the requesting party must have prevailed in the litigation and show that the other party’s position was not substantially justified. That means that no reasonable person would have accepted the position as justified. This includes the administrative position. So, was Customs substantially justified in denying the protest?
The protest only cited the pre-amendment International Traders case as support for its protest. On that basis alone, according to the Court of International Trade, Customs was justified in denying the protest. Customs had at least arguable authority to reliquidate the entry up to 90-days following the publication of the bulletin notice. In the protest, Consolidated did nothing to refute this. According to the CIT, Customs has no obligation to recognize and act on other grounds that might have been asserted in the protest. Specifically, had Consolidated argued that a nearly three-year gap between the deemed liquidation and the notice was unreasonable and the reliquidation void, Customs would have been able to respond. Absent the presence of those grounds in the protest itself, CBP was substantially justified in denying the protest.

And yet, you say, the government apparently felt it was in the wrong. It agreed to refund the additional dumping duties. All I can say to that is being wrong is not the same as being substantially unjustified. It is a good thing whenever the government cooperates and agrees to stipulate or otherwise settle a case. All parties should be encouraged to do that. Settling, however, does not mean that the original administrative or litigation position was substantially unjustified. We need to keep that in mind.
The more important lesson of this case is that CBP need not hunt around for a justification to grant a protest. It must only consider the grounds asserted by the protestant. Maybe this means our protests need to look a little more like the kitchen sink. It also strongly weighs in favor of importers recognizing the protest as a pre-litigation document that should be drafted by a lawyer.