Monday, December 31, 2018

Reflecting on 2018

This will be the last post of 2018. It was not a good year for the Customs Law Blog. It was a good and difficult year for customs lawyers and equally so for importers.

2018 gave us 232 duties on steel and aluminum products and a poorly implemented exclusion process. We also saw 301 duties imposed on billions of dollars of goods imported from China, plus a slightly better exclusion process. To make the year just that much more unpredictable, importers and exporters faced numerous threats by the US to withdraw from NAFTA and the release of the text of a substantially new North American free trade deal. All of that, and other factors, kept me from being able to update the blog as often or as substantively as I would have hoped. I hope you are all reading my Twitter feed to keep up with me and my short updates.

I am forever grateful to the readers of this blog. I appreciate your feedback and hope to continue to have opportunities to meet in real life at trade events throughout the year. 2019 will mark the 14th year of the Customs Law Blog, which is an unusually long life for a blog and in particular for a legal blog. I wish you all great success, health and happiness in 2019.

What to Take from 2018: Suppliers Lie

This is part 2 of the Univar discussion. For the evidence issues, see part 1.

If you know me or have ever heard me speak about customs penalty cases, you may know that I am forever frustrated by the disconnect between exporter dishonestly and importer liability. In my personal view, there are many cases in which a naïve or careless importer is left holding the penalty bag when an unscrupulous exporter lies about the true nature of the product or the relevant law. How many times does an importer need to ask the exporter to confirm the country of origin, composition, or other relevant fact before the importer can legally rely on those representations? In an age of on-line e-commerce transactions in which seller and buyer may never meet IRL, what is the responsibility of the importer?

Those are rhetorical questions because the law is clear on this. My frustration with the law is real, not rhetorical. Let’s look at the facts of United States v. Univar USA, Inc. (Slip Op. 18-157)
to see how it played out. What follows is my commentary on reasonable care; it is not intended to represent the Court’s analysis. It is the kind of analysis--fired by suspicion and powered by 20/20 hindsight--that CBP uses in enforcement actions.

Univar is the leading chemical distributor in the United States. Thus, it can be presumed to be familiar with the industry and the relevant regulations. Prior to 2003, it purchased and imported the sweetener saccharin from China.  In 2003, saccharin from the People’s Republic of China became subject to antidumping duties under case number A-570-878.

After the antidumping duties were imposed, Univar sought out a non-Chinese supplier of saccharin. This indicates that Univar understood the importance of country of origin with respect to the antidumping duties and the total landed cost of the product.

Univar eventually found a supplier claiming to make the product in Taiwan. It received a price quote including shipments from Taiwan. Univar also assisted the supplier in securing necessary FDA clearance to export saccharin to the US. The FDA registration listed an address in Taiwan as the point of production. In 2004, a representative of Univar visited Taiwan to inspect the supplier. The supplier stated that it owned a factory in Taiwan, but the Univar representative visited a factory in Taiwan owned by a different company at a different address. A month later, Univar started imports from the new supplier.

Sometime in 2004, Univar sought to have its saccharin certified as kosher. This process involves having a rabbi (technically, a mashgiach) visit the production site and inspect for compliance with kashrut. There was an apparently successful certification visit in 2005 to the location identified in the FDA documentation. On three subsequent rabbinical visits, the mashgiach was not permitted to inspect the plant for various reasons including a shut down, a flood, and construction, all of which seem suspiciously convenient.

This case involves 36 entries Univar made between 2007 and 2012. In each entry, Univar declared Taiwan to the country of origin. For each entry, it had a certificate of origin issued by the relevant chamber of commerce in Taiwan, as authorized by the Taiwan Board of Foreign Trade. Such certificates of origin are routinely issued without much effort at confirmation.

In 2008, Univar engaged a well-known licensed customs broker to undertake a compliance audit. In its report, the broker told Univar that it had a good culture of compliance and that a “good importer” need not visit a foreign supplier prior to purchasing from that factory.

If that were the entire story, would that pass muster as reasonable care? The supplier said it had a factory. It was visited at least once by the kosher certifying authority. The local Chamber of Commerce issued an officially sanctioned certificate of origin. Shipments to the US came from Taiwan. The broker hired to assess compliance was satisfied. The only problem seems to be that subsequent visits by rabbis were not successful.

Let’s add more context.

First, keep in mind that the antidumping duty order created an incentive for Chinese suppliers to transship and misrepresent the origin of their product. Univar is a large chemical company with experience in the trade and it was aware of the dumping order. That is important context.

Moreover, shortly after it started importing from Taiwan, a domestic producer notified Univar of its suspicions that the supplier was transshipping from China. When questioned, the supplier pointed to the 2004 site visit, which was actually to a different location operated by a different company. Next, Univar allowed the domestic company to conduct a chemical analysis of a sample. The domestic company concluded that the product had been made in China. Univar discounted this conclusion as based on a false understanding of what was happening in China.

Also in 2004, a representative from PepsiCo, a Univar customer, contacted the company questioning whether the saccharin was made entirely in Taiwan or was further processed from China-origin material. By 2006, Univar was aware of rumors that it was purchasing saccharin that originated in China. In 2007, a Univar employee asked a sourcing agent whether Univar might be receiving China-origin saccharin that was being repacked in Taiwan. Finally, in 2008, the president of another company trying to resell Univar’s saccharin reported to Univar that it was having trouble reselling the merchandise because the alleged producer did not actually manufacture in Taiwan.

Now what do you think? Was Univar acting with reasonable care throughout the period? Does any one of these facts represent a point at which Univar should have stopped claiming the product to be from Taiwan?

That question is harder than it might seem. There was a long separation of events between 2004 and 2008. It is not clear exactly who in the company knew what and who was responsible for compliance. Was this information conveyed to the broker and to the internal compliance staff?

Add to that the fact that the address provided to the FDA for the factory turns out to be a residential apartment building. Given that fact, it is not clear how the first rabbinical visit was conducted. Finally, the government of Taiwan had not issued any required licenses to manufacture saccharin, though there is reason to believe at least one unlicensed producer was operating.

We’ll come back to compliance. At this point, it is fair to say that there was enough in the record to establish that a reasonable jury could find that Univar had made material false statements as to the origin of the saccharin. Consequently, the Court of International Trade denied the motion for summary judgment. Thus, the resolution of this case will likely require a trial.

The important point for compliance professionals is to learn from Univar and use it an example of how to respond to compliance concerns. What we know is that suppliers have incentives to lie and that the law punishes importers who do not act reasonably to ferret out the lies. Suppliers rarely have to worry about being subject to a penalty. Even is a civil suit against the supplier for commercial fraud in its home country is often impractical.

Below, with the benefit of hindsight and experience, are some things importers might consider when onboarding a new supplier and periodically re-certifying the supplier. None of these are technically required and not one alone would necessarily have prevented the penalty case against Univar. Nevertheless, when dealing with a product where there is an incentive to transship to avoid duty or quota, or where the exporter claims to be a legitimate exporter of branded merchandise, keep these points in mind.

  1. Understand how trade rules impact suppliers and assume suppliers will lie to take advantage of the rules. This applies particularly to origin but can also go to the identity of the producer and exporter (which is relevant for ADD/CVD deposit rates), the material used to make the item, the method of production, etc.
  2. Remember that transshipment is a common practice, especially when an antidumping or countervailing duty order is imposed. This also includes the 301 duties applicable to China. Suppliers in countries subject to the order who suddenly have a source in a country not covered by the order are likely lying.
  3. When switching to a supplier in a new country, check the trade data to see if there is a history of exporting the product to the US. If you are the first person to ever buy it from the new country, be doubly suspicious.
  4. Confirm the existence of the production facility. A site visit by an employee or agent is the best confirmation. As a starting point, also check the address in Google Earth or a similar service. Does it look to be a factory capable of making the product?
  5. Confirm that the business at that address is actually associated with the supplier. To do this ask to see business licenses, corporate documents, and other indicia of legal status.
  6. Once it is established that the business exists and is located at that facility, confirm it has the machinery, equipment, and personnel necessary to make the product. If the process requires machine tools, ask to see them either in a site visit or (at a minimum) in photographs. Digital photographs of machinery and equipment should confirm via metadata the date and location at which they were taken. You should confirm that the machines are functional, are owned by the supplier or at least held by long-term lease, and that workers know how to operate them.
  7. Ask to see records showing that there are sufficient production employees at the plant to make the product.
  8. While you are at it, you can check that the employees are there legally. They should be of the required age to work and not there as prison or forced labor. Do this by demanding to see identification and work papers as well as private conversations with employees.
  9. Confirm that the plant has an inventory or supply of the raw materials necessary to make the product. The inventory of raw materials should pre-date the production of exports to you and should be sufficient to make the material. A pound of steel wire in inventory is not a good sign if you ordered half a ton of wire hangers.
  10. Finally, if the goods are branded or have certifying marks (including, for example UL, HDMI, USB, Bluetooth, etc.), ask to see the license from the mark holder permitting the supplier to manufacture and export the product. It is not sufficient to get a letter saying that such a license exists. Remember, suppliers lie. If the supplier says it purchased the goods from a third party, get the identity of that third party and ask for confirmation that it is properly licensed. Many trademark holders have online means of verifying that marks are legitimate, use those resources. See, e.g., HDMI Adopters and UL Verify.

Sunday, December 30, 2018

A Sweet Lesson in Hearsay

United States v. Univar USA Inc., Part 1

This is another penalty case. It has two distinctly different discussions. The first has to do with several disputes concerning the admissibility of evidence. The second has to do with whether the importer exercised reasonable care. This is a 69-page opinion, so we will only hit the highlights, starting with the evidence questions.

The government’s claim in this case is that Univar imported saccharine from China allegedly transshipped through Taiwan and misrepresented the correct country of origin. As a result, Univar would have illegally avoided paying antidumping duties.

Defendant Univar made a motion for summary judgment arguing that the case should be dismissed as a matter of law. The Rules of the Court of International Trade require that the parties submit statements of facts about which there is no dispute to be tried. These statements must be supported by a citation to admissible evidence. See USCIT Rule 56(c). Regarding evidence, the defendant moved to exclude several categories of evidence from the court’s consideration. By and large, the question is whether this evidence was inadmissible hearsay.

Hearsay is an out of court statement that is introduced to prove the truth of the matter asserted in the statement. Fed. R. Evid. 801(c). Thus, if I send an email to my friend saying that the light was green when I drove through, it would be improper to use that email as evidence of the color of the light. There are several exceptions to this rule. For example, if that were my dying declaration or it were against my own interest to make that statement, the email would be admissible.

The first group of documents to which Univar objected were emails sent by Univar employees to its agents or third parties. The government was using these emails, among other things, to show what Univar knew about the merchandise as a means of assessing its culpability for the alleged misrepresentations. In other words, the email was not used to show the origin of the saccharine. Rather, it was used to show the impact of the incorporated statements on Univar with respect to its business practices. In other words, if an email chain indicates to an importer that there is reason to doubt the truthfulness of the country of origin statement from the supplier, the email may not be admissible to prove the country of origin. It is, however, admissible to show that the company had reason to doubt the information it was reporting. The Court reached a similar decision with respect to emails to Univar from its agents and employees.

The third group of contested documents were internal Univar documents including trip reports, letters and PowerPoint decks. Under FRE 801(d)(2)(D), these documents are not hearsay because they are offered by an opposing party and were made by agents or employees. Moving on.

The fourth group of documents is a mixed bag including an appearance by a Rabbi hired to determine whether the saccharine is kosher, sections of Taiwan’s customs laws, and an affidavit from a Special Agent. The statement of the rabbi (more on this in the next post) was not introduced to prove the truth of his statement but rather how it should have impacted Univar’s compliance stance. Testimony about the existence and content of an exclusivity agreement was excluded both as hearsay and under the “best evidence rule,” which states that a document is the best evidence of the contents of the document and should be introduced rather than relying on testimony about the document.

Univar objected to the introduction of other documents. The Court engaged in a detailed analysis of each and applied the relevant evidence rules. It is worth a read because evidence questions do not come up all that often in customs cases. Nevertheless, I am going to move on to the substance.

That will be the next post.

Where is the Report of Investigation?

As we get to the end of 2018, I am trying to wrap up a lot of work and a few blog posts. Here is the first.

Greenlight Organics is not a particularly interesting decision on its own, at least not at this point. It involves a motion for summary judgment in a customs fraud case. The government is seeking approximately $3.5 million in unpaid duties and penalties from Greenlight. Because this is a fraud case brought under 19 USC 1592, the applicable statute of limitations in five years. See 28 USC 1621. The trick with a fraud case is that, unlike the standard negligence case, the five-year clock does not start to run until Customs and Border Protection first learns of the fraud.

Here, the government filed its complaint on February 8, 2017. Defendant contends that the government knew of the fraud in 2011, making the case time barred. The United States counters that it did not know of the fraud until sometime after February 8, 2012, making the case timely.

The Court of International Trade declined to grant summary judgment. According to the Court, determining the date of discovery of fraud is a fact-specific exercise that is rarely amenable to summary judgment. Looking at the elements of the fraud involved in this case, the Court did not see sufficient evidence of when the government might have first determined that the products were allegedly misclassified, that the importer was allegedly using double invoicing to fraudulently declare value, and that the importer acted with the intent to defraud the government. Consequently, these facts will have to be established through the introduction of evidence at trial.

I have zero reason to quibble with the legal analysis. The date of discovery rule is entirely well established and has been applied in customs cases. I also agree entirely that this phase of the case presents a question of fact that requires a review of the facts to answer the question presented.

My question (and it really is a question) is: What remains to be presented to the Court? In penalty cases, the United States has usually conducted a thorough investigation. The progress of that investigation is usually recorded by the investigating Agent in a document known as a Report of Investigation, or ROI. The ROI is often several inches thick and includes summaries of documents, lab reports, conversations with CBP personnel, and with witnesses. The ROI, assuming one exists, should contain a summary of what the government knows and when it knows it. That, by itself, might be sufficient to determine when the five-year period began to run and, possibly avoid a trial on this question and on the merits.

Reports of Investigation have been referenced in other cases as evidence of the facts surrounding a penalty case. For example, in United States v. Ford Motor Company, Ford pointed to the ROI as contradicting testimony concerning the scope of an investigation. In Clymore v. United States, the ROI was cited as evidence that Customs and Border Protection knew the identity of the owner of a seized truck.

There are several reasons why the ROI might not resolve this matter. Perhaps there is no ROI. I am not sure why that would be the case. Perhaps there is conflicting information in the ROI requiring a live person to clarify. It is possible that conflicting information has created a credibility issue that will be best resolved through live testimony. Judges have often said that the best way to judge credibility is by watching the person testify. If any of these possibilities is true, it makes sense to move this question to trial. Otherwise, one would think that the documents would be sufficient to tell the story of when CBP determined that there was evidence of fraud.

Thursday, November 01, 2018

Reasonable Efforts to Confer are More than Short Emails

Things continue to happen in the world. Here is one:

U.S. v. Great Neck Saw Manufacturers (18-144)

This is one of the rare discovery disputes that produced a written opinion from the Court of International Trade. The underlying case involves an effort to collect a $1 million penalty on approximately $307 thousand in unpaid duties. As per the usual course of action, the government served on defendant requests for production, interrogatories, and requests to admit. Citing the large number of entries, GNSM requested an extension to respond. Five days after the extended period, GNSM provided a response that did not address the entire request. In the response, GNSM noted the difficulty of gathering the information on approximately 6500 entry lines, the need for client confirmation, and its inability to produce some information. Four weeks later, the government inquired as to the status of the remaining request. After some additional production and additional expressions of effort by the defendant, the Government filed a motion to compel production.

The interesting question raised here is not whether the defendant failed to cooperate in discovery. Rather, the question on this motion to compel is whether the plaintiff sufficiently satisfied the requirement of CIT Rule 37 to confer with the defendant regarding its requests. This requirement is intended to keep this kind of dispute between the parties and prevent it from getting to the point of a motion to compel. And yet, here they are.

According to the Court:

Plaintiff would have the court believe that the Government did enough to satisfy its burden to confer via its exchange of emails. The difficulty for Plaintiff is that its emails are minimal in length. The requirement to confer is not met by email exchanges that are little more than perfunctory and simply restate Plaintiff’s demands that GNSM fulfill its discovery obligations. . . . Furthermore, “requesting or demanding compliance with the requests for discovery,” or “simply showing that the discovery in question was requested more than once” is not enough to satisfy Plaintiff’s duty to confer.

At the same time, defendant has not fully responded to the discovery requests and has not adequately stated its objections.

As a result, the Court denied plaintiff's motion without prejudice. That means the motion can be renewed at a later date. In the meantime, the Court also ordered the parties to meet in person to confer in an effort to resolve the dispute.

Monday, October 15, 2018

GSP Refund Claims Denied

In other news, the Court of International Trade has dismissed a claim seeking refunds of duties paid while GSP was lapsed. The case, Industrial Chemicals Inc. v. United States involves 65 entries on which the importer paid duties for goods that would have been duty-free if the Generalized System of Preferences was in effect. When GSP was renewed, the importer had a statutory 180-day period (ending December 28, 2015) in which to make a claim. Due to some undefined misunderstanding between the importer and its customs broker, the claim was not made until February 2, 2016. Customs promptly denied the request as untimely. The importer filed a protest challenging . . . well, something. Customs and Border Protection denied the protest and the importer sued in the Court of International Trade.

In the CIT, the United States moved to dismiss for lack of subject matter jurisdiction. There is some ambiguity about the plaintiff’s theory. The protest might be directed at the original refusal to grant GSP preferences at the time of liquidation. That theory does not work because the protest was filed well after the 180-day limit for protesting a liquidation. That protest would be invalid and would not give the Court a basis for review.

The alternative theory is that the protest addressed the denial of the request for a refund. On this front, the plaintiff was also late. The statute specifically set December 28, 2015 as the last date for claims covering entries during the period GSP had lapsed. The claim was made on February 2, 2016, which was over a month too late. Given the statute, Customs had no authority to grant the requested refunds. Apparently, if CBP has no discretion, there is no decision to be made and, therefore, no decision to protest. Hence, the protest would be invalid and would not give the Court a basis for review.

This all appears perfectly reasonable. It seems to follow from other cases where the Court held that CBP’s ministerial role in something (e.g., the collection of Harbor Maintenance Tax) did not amount to a protestable decision. Personally, I think there is a close call in many of these cases between a lack of jurisdiction and an obvious result on the merits. Could the Court have held that it had jurisdiction and then just as quickly held that Customs properly denied the protest as untimely? Same result but the importer gets its day in Court.

Lamenting Litigation

Sometimes, a seemingly simple proposition is not easy to prove in federal court. Such is the case with the tariff classification of Ziploc bags.

First, a note to intellectual property lawyers. Ziploc is a registered trademark of SC Johnson & Sons. I am not using it as a generic description. Rather, it is the actual product at issue in the Court of International decision SC Johnson & Sons v. United States. I am not going to say "brand" or insert a registered trademark symbol ® throughout my text. Let's just all agree that when I say "Ziploc" I mean plastic bags that are products of SC Johnson & Sons.

On its face, one would expect that the classification of these common items under the Harmonized Tariff Schedule of the United States would be a relatively straight-forward proposition. In fact, I am surprised there is a controversy at all.

There are two potential HTSUS heading. Heading 3923 covers: "Articles for the conveyance or packing of goods, of plastics; stoppers, lids, caps and other closures, of plastics." Ziploc bags are arguably articles for packing goods such as sandwiches, potato chips, and other items tucked into a sack lunch. The also have many other hand uses. Personally, I put my phone, drivers license, and a $20 bill in a Ziploc or similar bag and stick it in my jersey pocket every time I go for a bike ride. Ziploc and similar bags are also handy for non-TSA Pre-Check packing of 3-ounce liquids. In all cases, I am packing some item or items and conveying them from one place to another. Even if I just us a Ziploc bag to collect loose change (as I do), I am arguably packing those things away for later use.

Heading 3924 covers: "Tableware, kitchenware, other household articles and hygienic or toilet articles, of plastics." Ziploc bags reside in the same drawer of my kitchen where you would find aluminum foil and plastic wrap. These bags find many uses in the kitchen including storage of otherwise loose items in the refrigerator, freezer, and pantry. 

Based on my experience and understanding of the English language, both of these headings describe the article. The question is which is the legally correct classification.

Usually, when there are two headings that both prima facie describe an article, the resolution is fairly easy. In that circumstance, General Rule of Interpretation 3(a) tells us that the most specific description is the one that prevails. The more specific description is generally understood to be the one that has conditions that are harder to satisfy or that covers the fewer number of items. 

This case, however, has an added complexity. While Heading 3924 is a list of items described by name (e.g., tableware and kitchenware), Heading 3923 is a description of items by use (e.g., articles for the conveyance or packing of goods). Thus, to decide whether there really are two headings applicable, the Court of International Trade had to determine whether Ziploc bags are used is a manner consistent with the articles of Heading 3923. If the bags are not of the class or kind of articles that are most commonly used in a manner consistent with the heading description, then they are not classifiable in both headings and the rule of relative specificity is inapplicable.

Classifying a product on the basis of use is, unfortunately, no simple task. The law is such that the Court of International Trade is to review seven factors that indicate use:

[1] use in the same manner as merchandise which defines the class; [2] the general physical characteristics of the merchandise; [3] the economic practicality of so using the import; [4] the expectation of the ultimate purchasers; [5] the channels of trade in which the merchandise moves; [6] the environment of the sale, such as accompanying accessories and the manner in which the merchandise is advertised and displayed; and [7] the recognition in the trade of this use.
Doing that, requires evidence, not just legal arguments about the scope and meaning of the headings. In this case, the Court concluded that it did not have enough evidence to perform a use analysis and, therefore, ordered that the case be tried.

So, we have no conclusion on the classification of Ziploc bags.

Is this the right or a good result? Honestly, I am concerned that setting this case down for a trial is going to make what is likely already an expensive case even more expensive and time consuming. Is there another way to get to the right result, whatever that may be?

There is a legal "rule of thumb" that a classification based on use is more specific than an eo nomine classification naming the item. If that rule is followed, then the goods should be classified in 3923, the use provision. See, e.g., Totes, Inc. v. United States. The problem with that is that GRI 3(a) says there is only a question of relative specificity if the two headings are equally applicable. It seems that can only be the case after we know that the item is classifiable in the use provision. So that does not really help at this stage. This may explain why the Court did not reach a conclusion.

Rather than a trial, the Court could also have held open the motions for summary judgment and asked for additional briefing on the open questions of fact. The Court acknowledged that it has information concerning the physical characteristics of the bags, actual consumer use of the bags, and consumer expectation of the bags. What is missing? Is there, for instance, deposition testimony on channels of trade or acceptance in the trade of this use? If not, perhaps a short period of limited discovery on the specific open questions followed by new briefs would help resolve the matter. There is nothing wrong with a trial, but the actual recitation of testimony in front of a judge in open court may be more than is needed to get this one done and in the books.

This is something I think about a lot. Customs classification cases are too expensive and often too complicated to be economically justifiable. A lot of this has to do with discovery and trial preparation that is rarely dispositive of the case. More often than not, the case turns on the interpretation and scope of the headings rather than the nature of the imported item. In those cases, no amount of deposition testimony, marketing literature, or internal Customs memoranda will change how the judge reads the statute.

This is not one of those cases that turns on a question of law. The Court is saying that it lacks evidence for facts specifically necessary to perform the required analysis. I get that. Still, how hard should it be to classify a Ziploc bag? Essentially every American knows what they are and how they are used. Is it going to be necessary for SC Johnson to hire a pollster to design a rigorous poll to determine consumer expectations regarding Ziploc bag usage? It seems to me, and this is just me opining rather than a statement of law, that the rules and procedure are making this more complicated and expensive than is should be. Maybe not every classification brought to the Court needs to be a full-blown federal case.

Years ago, the practice at the Customs Court was to place every denied protest on the Court's docket. Judges would periodically show up at ports and, when requested, review the protest decisions in open court. It is my understanding that there was no discovery and little to prepare. I imagine the practice was much like traffic court is today. I think I am feeling nostalgic for a practice I never actually knew.

Wednesday, October 10, 2018

Lawyerly Arguments on Drawback

There are a lot of practicing lawyers who secretly or not so secretly harbor desires throw in the legal towel and transition to a career that is their true passion. A third of them think they would be award-winning novelists if only they had time to write. Another third think they should be hedge fund managers, venture capitalists, or similar financial potentates. The remainder are an eclectic mix of future pastry chefs, bike shop owners (who are also excellent baristas), rock drummers, and other jobs where middle-aged hipsters with discretionary income will fit right in.

The rest of us actually like lawyering and sometimes get the opportunity to be creative at the same time. Such is the case in Flint Hills Resources v. United States, a not-so-recent decision of the U.S. Court of International Trade. The question was whether Customs and Border Protection properly denied refunds of Harbor Maintenance Tax ("HMT"), Merchandise Processing Fee ("MPF"), and Environmental Tax ("ET") for a group of petroleum drawback claims from the turn of the last century. Spoiler: it did but read on anyway.

The issue here is all about timing. Back in the day, meaning prior to 2004, the Court of Appeal for the Federal Circuit held that HMT was not subject to drawback because it was a non-discriminatory tax on harbor usage not sufficiently linked to importation. The same goes for ET. MPF, on the other hand, was held to be subject to drawback. Take a look at Texport Oil Co. v. United States. After the Federal Circuit held this to be the law (and after much consternation in the trade community), Congress amended the law to permit drawback of duties, taxes, and fees due upon importation.

The problem that quickly cropped up is whether people who had pending drawback claims at the time of the change in the law were entitled to drawback on HMT and ET. Many of those pending claims did not include a request that HMT and ET be refunded. After all, the law did not permit the refund, so why make the claim? It seems entirely prudent to have claimed a refund only of duty and MPF.

That is the situation facing the plaintiffs in Flint Hills. Customs processed the claims and did not refund the unclaimed HMT and ET. Why should it, there was no request that it do so? CBP is not obligated to hunt around for the maximum refund available to the claimant. It processes claims based on the documents presented. The claimants protested and argued that they are entitled to drawback on HMT and ET. CBP denied the protests, which then landed in the Court of International Trade.

Plaintiff had a number of very smart, lawyerly, and ultimately unsuccessful argument. First up is the scope of review. Customs’ basic argument for this entire case is that the drawback claims were not "complete" and, therefore, the protests were properly denied. The protests did not say they were denied for being incomplete. According to Plaintiffs, this means CBP accepted the claims as complete and cannot subsequently argue that they were incomplete. Clever.

Unfortunately, challenges to denied protests are not the kind of administrative review that depends on the legal determination CBP made in its decision. The protest is reviewed de novo, which means that the Court figures out what is right on its own. The Court did that here and, following several prior decisions of the Court of Appeals determined that a complete drawback claim states the full amount to be refunded. Having failed to include a claim for HMT and ET, the claimant was not entitled to their refund.

Related to this is an argument that the drawback claim can be complete while also incorrectly stating the amount to be refunded. For support, Plaintiff’s pointed to a Customs and Border Protection ruling that allowed a claim to be processed despite the claimant incorrectly seeking a 100% refund rather than the statutory 99%. Relying on that analysis, the Plaintiffs argued that an incorrect calculation does not constitute an incomplete claim.

Again, the Court was not persuaded. The Court pointed to several decisions defining a complete drawback claim as one that includes a correct calculation of the refund. A customs ruling was not enough to overcome that case law. The fact that the Federal Circuit qualified the leading decision by noting it was not aware of any authority to find otherwise, despite the CBP ruling being available, was not a big enough peg on which to hang that legal hat. [Note: I am conflating a couple arguments here, but they all relate to what constitutes a complete claim.]

Next, Plaintiffs argued that it did not need to make a complete claim within the three years it was originally entitled to make a claim. Under this theory, the claim for HMT and ET did not become available until 2004 when Congress amended the law. That would have given Plaintiffs additional time. Presumably the protest would have been a means to assert the additional claim within the three-year period. This is a good example of basic lawyering. When did the right to a claim accrue? When did the clock run out? Those are always important questions.

This did not work because the amendment said specifically that it applied to new claims and pending unliquidated claims. The Federal Circuit previously interpreted the statute as applying to pending claims that already included a complete claim for HMT and ET. These did not, so they were incomplete.

Finally, for our purposes, Plaintiffs argued that the amendment violated the separation of powers. This, again, is a creative bit of lawyering that was ultimately unsuccessful. The gist is that the Federal Circuit held that HMT was not subject to drawback and that decision was final. When Congress amended the law, it stated that the amendment was not intended to create a new right to drawback but to clarify that HMT was always subject to drawback. According to Plaintiffs, this shows that Congress simply rejected the decision of the judicial branch, overstepping into a judicial role.

This, however, was not a successful argument. Basically, Congress has the power to amend laws in light of judicial decisions with which it disagrees. When it does so, Congress is not ignoring or contravening a judicial decision. Rather, it is changing the law to affect what it considers to be the correct policy. Law is not static. Congress gets to re-write it so long as Congress stays in the lanes set by the Constitution. The Judiciary interprets the laws. Here, Congress wrote a new law and the fact that it effectively overruled a CAFC decision does not make it improper.

Tuesday, October 09, 2018

Watch this space

There is a chance I will soon see a gap in my schedule large enough to write a post or two. It could happen. I'm not promising, but it could.

There are several Court of International Trade decisions to discuss. We also have a new trade agreement with Mexico and Canada that we will not call NAFTA; it is the United States Mexico Canada Agreement. The only pronounceable word I can get from that is "UnMexiCan." That does not seem good for political marketing in Mexico. I hope to give some highlights of that agreement here.

You may also have noticed that today was the deadline for filing exclusion requests from the first round of Section 301 duties on goods from China. That, and 232 duties, is a significant part of why I have had my head down.

Friday, September 14, 2018

CIT: Trolls are Not Human

We live in an age in which we recognize and respect the great diversity of humanity. No matter your shape, color, or gender; your physical abilities or challenges; or your religious affiliation or lack thereof, you are a human being entitled to all of the rights and privileges of all other human beings.

Of course, that does not apply to Trolls. Trolls are gross little beings with wide noses between their big eyes and jug handle ears. Plus, their heads are disproportionately large and they have hair that stands tall like wheat in a Nebraska field. Sometimes, they have unnaturally green skin.

Don't get me wrong, some of my best friends are trolls. I wish them all the best. I just know to a legal certainty that they are not human and I don't want my kid marrying one.

I know this because the Court of International Trade told me so in Russ Berrie & Co., Inc. v. United States.

This is one of those cases that is a grind to get through and must have been so for the judge. There are many categories of items to be classified. In most cases, Plaintiff argued that the item should be classified in Heading 9505 as a festive, carnival, or entertainment articles. Customs and Border Protection wanted them classified as toys.

I am going to focus on the trolls here. If you want to know about the classification of practical jokes, candle holders, baby booties and other articles best categorized as "impulse buys," read the full opinion.

Chapter 95 covers toys. Heading 9502 covers dolls "representing only human beings." This is in contrast to Heading 9503, which covers "other toys." This puts the humanity of Trolls front and center before the Court of International Trade. The Court quickly eliminated 9502 by finding that "even if the Trolls are considered to be 'dolls,' they are not 'dolls representing only human beings.'" According to the Court, Trolls are "mythical, non-human creatures."

We have been over this ground before. See the discussion of whether Luke Skywalker is human.

The new question was whether a Troll dressed in a way that obviously relates to a holiday is a festive article. Our friend the Monster Troll up above is a case in point. [Update: I removed this image. It was a green-skinned troll dressed like Frankenstein's monster.] In short, the Court held that "however dressed, these goods are still toys, i.e., they are designed to provide amusement." Apparently a Monster Troll is not "traditionally used at Christmas," or by implication at other holidays including Halloween. Moreover, the Troll is not a decorative item for display at a holiday.

Plaintiff valiantly argued that the Toll was nevertheless an article  for "entertainment." This did not fly. The examples in the Explanatory Notes associated with entertainment are things like magic tricks and practical jokes. There is, apparently, a difference between the "amusement" provided by a toy and the "entertainment" provided by a squirting boutonniere.

Because the Trolls are amusing rather than holiday-themed decorations, the Court classified them as toys.

I very much wonder about whether the fact that these items are called "Trolls" impacted the decision. Separate and apart from the Russ Berrie product, trolls are a traditional character of Norse mythology. So says Wikipedia. That is perfectly aligned with the determination that these toys represent non-human mythical figures. If the evidence before the court was the same toy but called "Little Buddies," "Annoying Children," or "Big Haired Humans," would the result be the same? The toys have hands, feet, bodies, faces, and ample hair. Are they much different from any other cartoonish doll? Personally, I don't think so. On the other hand, they are called Trolls, which has some meaning.

Now that we have resolved that trolls are not human, I am rethinking my analysis of this and this.

Friday, September 07, 2018

Case Dismissed Over $26

Often, Customs and Border Protection gets a win for legally correct reasons that are not, in the bigger picture, "just." That is the nature of what we do. There are rules and we live in a country where the rule of law is supposed to matter. We cannot avoid the application of those rules to reach the result we think is better on policy or personal grounds. Neither Congress nor the Administration (including the executive agencies like Customs and Border Protection) can impose their wills to reach a desired conclusion that is inconsistent with the law or the constitution. If they do, it is the role of the judiciary to declare the action illegal and ensure it is remedied. At least that is how it is supposed to work. That is why a lifetime appointment to the federal bench in among the most consequential of powers granted the President and the Senate. At the same time, federal judges (particularly in lower courts like the Court of International Trade) have to follow the law as written and as interpreted by higher courts. In the case of the CIT, that means the Court of Appeals for Federal Circuit and the U.S. Supreme Court.

Why am I thinking about this? Mostly because I watch and read the news. Also, because I have given a lot of thought to how importers can have their rights protected when Customs takes an action contrary to their interests. There are many traps in that process, any one of which can end up with the importer not getting his or her day in court. Also, it is often unreasonably expensive meaning that many individuals and small importers with serious claims are priced out of court.

Which brings me to the tragic tale of Dis Vintage LLC v. United States.

Here is the law you need to know: Under 28 U.S.C. 2637(a), "A civil action contesting the denial of a protest under section 515 of the Tariff Act of 1930 may be commenced in the Court of International Trade only if all liquidated duties, charges, or exactions have been paid at the time the action is commenced . . . ."

Here are the facts you need to know: Dis Vintage had a classification beef with Customs over whether its imported apparel should be classified as "worn" clothing and eligible for duty-free treatment. It filed a timely protest and the protest was denied. Customs issued a series of bills to Dis Vintage seeking payment of the duties. The bills came as follows:
  • January 25, 2016 - "Full Amount Due Upon Receipt" was $9,981.80, "Amount Due After 02-05-16 (including interest)" was $10,006.38.
  • February 29, 2016 - "Full Amount Due Upon Receipt" was $10,006.38, "Amount Due After 03-06-16 (including interest)" was $10,031.01.
  • April 4, 2016 - "Full Amount Due Upon Receipt" was $10,031.01, "Amount Due After 04-05-16 (including interest" was $10,057.08.
Upon receipt of the April 4, 2016 bill (on April 11, 2016), Dis Vintage paid CBP $10,031.01. On May 12, 2016, after paying that bill, Dis Vintage filed its summons to commence a case in the Court of International Trade. Then, on May 16, it received a bill for the "remaining amount due" of $26.16.
Has Dis Vantage succeeded in commencing its case? 

[Stop reading and drop a comment answering that question. Then finish reading this post.]

The Court of International Trade found the law to be clear and unambiguous. At the time it filed its summons, Dis Vintage had not paid "all liquidated duties, charges, or exactions."
First, the Court noted that it has no discretion around questions of jurisdiction. Noting a prior Federal Circuit decision, the Court stated that it cannot, "even in the interest of justice, extend [its] jurisdiction where none exists." The Court noted that each bill contained two amount and that each provided the date on which additional interest became due. In the case of the January and February bills, the importer had about a week to make payment before the interest was added to the debt. That was not the case for the April 4 bill, which was presumably the March bill but sent late and gave only one day's notice before the interest was added to the debt. Note that the April bill was received after the additional interest became due.

According to the Court, Customs properly added interest to the debt every 30 days. Thus, the interest became due on April 5 even though the bill was issued late and did not provide adequate time to pay. Dis Vintage paid the bill after April 5 and did not pay the interest owed. As a result, it did not satisfy the statutory requirement to invoke the jurisdiction of the Court of International Trade.
In many cases, the law has an escape value for bad facts like this. That valve is known as "equity" and gives courts some flexibility to do what is right. The Court of International Trade has all the powers in law and equity as are enjoyed by any other federal district court, so can it make this right?
In short, no. There is no equitable exception to jurisdiction. Courts can only act within the scope of authority granted to them by the constitution and Congress. The CIT, therefore, was stuck. Dis Vintage pressed on arguing that the bills were ambiguous and the Customs failed to send the bills on time. Moreover, able counsel for Dis Vintage, apparently aware of the legal requirement, put into the record an email exchange regarding the payment and CBP's confirmation that it had been accepted and applied to the debt. Nevertheless, the Court found it was not authorized to act in part because CBP never said that the debt was paid in full.

I have no idea how much money was at stake in the disputed protest. I do know that this issue of having to pay the debt prior to commencing an action is a trap and a problem for litigants. There have been multiple cases in which the importer did not have the financial ability to pay the bill to challenge the denied protest. This results in meritorious claims going unreviewed. 

I am aware that there are strategies to get around this. For example, CBP may be willing to act on a single test protest, leaving the others suspended while the court action plays out. That can work. But, it depends on the willingness of CBP to proceed on that basis. It does not, however, address the problem of the importer who cannot afford to pay the duties even on a single entry. Think, for example, of the importer who unknowingly entered merchandise subject to an antidumping duty order of 200%. That liquidation may be suspended for years resulting in a totally unexpected and potentially ruinous bill several years later. Why should that person have to pay the duties to challenge the assessment?

Perhaps the "why" no longer matters. This is the law. To change this, Congress will need to act. It could amend the statute to permit the importer to substitute a bond or other security to ensure that CBP will be paid if it prevails. That would permit the Court to get to the merits and provide additional judicial review of CBP's actions. That would be a net good for the trade and the public in general because there should always be adequate checks on the exercise of executive power.

Sunday, August 19, 2018

Tapenade Redeption

In 2016, I had fun participating in a mock oral argument on the classification of a loose mixture of chopped olives. The facts of that case were modeled on a ruling concerning the classification of olive tapenade and artichoke tapenade. See my discussion of that here. In the High Court of ICPA, I lost to a jury of my peers, which remains to this day a shocking stain on my record. I suspect the entirely fake judge was terribly biased.

Today, I have renewed confidence thanks to a decision of the U.S. Court of International Trade in Mondiv v. United States, in which the CIT found for the plaintiff that the merchandise is, in fact, sauce or a sauce preparation.

Despite my joy, I feel terrible physically and will make this quick.

Both products are prima facie classifiable in HTSUS Heading 2005, where CBP classified them as "Other vegetables prepared or preserved otherwise than by vinegar or acetic acid, not frozen, other than products of heading 2006."

But, it also turns out that both products are prima facie classifiable in Heading 2103 as "Sauces and preparations therefore; mixed condiments and mixed seasonings; mustard flour and meal and prepared mustard."

Because the merchandise is prima facie classifiable in two headings, the question under GRI 3(a) becomes which of the two is a more specific description. To make that determination, the CIT asks which of the two headings is more difficult to satisfy. Here, the Court held that to me "sauces" because preparing a sauce requires additional ingredients intended to enhance the flavor of food.

Also, the goods, when properly classified, qualify for NAFTA.

Thus, I clearly should have appealed the travesty of the ICPA mock trial.

If anyone needs me, I will be napping.

Saturday, August 18, 2018

Sigvaris Affirmed

This is far less interesting than the life and death fight over the vaquita, but nevertheless an interesting illustration of how tariff language is to be interpreted.

You may recall Sigvaris, the classification case involving graduated compression hosiery. These items exert 15 to 20 mmHg of compression on the wearer to force pooled blood to circulate out of the leg and throughout the body. Customs and Border Protection classified these products as graduated compression hosiery in Heading 6115, subject to a 14.6%rate of duty. Plaintiff protested, claiming that they should qualify for duty-free treatment as articles specially designed or adapted for the use or benefit of the physically handicapped in Heading 9817. These articles are duty-free. Customs denied the protests and the U.S. Court of International Trade agreed with Customs. The basic rationale for that decision was that these products are designed to help patients with early stage conditions that do not yet interfere with getting around and basic daily tasks.

The Court of Appeals for the Federal Circuit has affirmed that decision.

Although reaching the same result, the Federal Circuit took a different approach in the analysis. It found that the relevant inquiry is not, as the CIT had done, about the condition for which the merchandise is allegedly designed. Rather, it is about the persons for whom the merchandise may have been designed. According to the Court, merchandise entitled to duty-free entry must be "specially designed" for "persons" with a given limitation, not specially designed to address the symptoms of a specific disorder that may afflict a person.

Looking at it from this angle, the Federal Circuit held that to qualify for duty-free entry, the merchandise must be designed for the use or benefit of a class of person who has a physical limitation to an extent greater than it is designed for other persons. Evidence of this would include the physical properties of the merchandise, whether the merchandise is solely used by the handicapped, the specific design of the merchandise, the likelihood it is useful to the general public, and whether the merchandise is sold in specialty stores.

Given the facts found by the CIT, the Federal Circuit was able to conclude that the merchandise was not specially designed for the use or benefit of a specific class of persons at all. Consequently, it did  not need to reach the question of whether that class of persons also happens to be handicapped.

Extinction, Biodiversity, and the Court of International Trade

[Note: I am so disappointed in the Federal Government (exclusive of the judiciary) that I am leaving this pinned here for a while. Advancing that into the future is the only way I could make it stick. The actual publication date is Aug. 18, 2018. Visit the NRDC, Center for Biological Diversity, and Animal Welfare Institute to donate.]

Over the years, the Court of International Trade has occasionally had to dip its judicial toes into environmental law. In Natural Resources Defense Council v. Ross, it was asked to do so to help prevent the potentially imminent extinction of the vaquita. Jumping in with both feet, Judge Gary Katzmann issued a fairly dramatic decision that appears to force the government to act consistent with an existing law intended to protect these animals.

"Vaquita" is Spanish for "little cow," but the animal in question is only the most distant of evolutionary cousin to the land-dwelling cow. The vaquita is the smallest known cetacean, which is the suborder of sea-dwelling mammals that includes whales, dolphins, and porpoises. The vaquita is native to the Mexican waters of the Gulf of California. It is also on the brink of extinction. There may be as few as 15 of these animals alive today. This is so few, that the loss of a single additional individual could significantly increase the likelihood of extinction.

Credit: San Miguel Times
The major threat to the vaquita is getting tangled in gillnets, which are nets hung in the water column with the intention of entangling fish and shrimp for human consumption.

U.S. law supports the worldwide preservation of the vaquita and other marine mammals through the Marine Mammal Protection Act ("MMPA"). Under the so-called Import Provision of the MMPA, 16 USC 1371, Congress sought to prevent the incidental killing of marine mammals in the course of commercial fishing worldwide. One tool it deployed is the "Imports Provision," 16 USC 1371(a)(2), which bans "the importation of commercial fish or products from fish which have been caught with commercial fishing technology which results in the incidental kill or incidental serious injury of ocean mammals in excess of United States standards." To make that comparison, regulations were implemented requiring a finding of comparability and creates a presumption that the foreign fishery is not operating to U.S. standards if there is no finding of comparability. Under 50 CFR 216.24(h)(1)(ii)(A), it is illegal to import fish or fish products from a fishery without a valid comparability finding. However, the regulation contains is a one-time exemption until January 1, 2022, apparently to permit commercial operators and foreign governments to transition their operations. There is also the option of "Emergency Rulemaking" to protect very small populations that are at the risk of extinction.

The Mexican government made efforts to protect the vaquita. For example, in June of 2017, it announced a permanent ban on gillnet fishing in the vaquita habitat. That ban, however, included an exemption for gillnet fishing of the curvina and sierra, which are known to cause vaquita fatalities. In addition, illegal gillnet fishing continues for totoaba, which is in demand in Asia for its swim bladders. Illegal shrimp and chano fishing also continues.

In this case, the Natural Resources Defense Council, the Center for Biological Diversity, and the Animal Welfare Institute, all of which are non-governmental environmental and conservation organizations, asked the Court of International Trade to impose a preliminary injunction on the importation of fish products from the Gulf of California fisheries using gillnets in a potentially last-ditch effort to help preserve the vaquita.

Rather than actually take action consistent with the clear intent of Congress to reduce vaquita mortality to close to zero, the United States Government opposed the motion on technical legal grounds. First, it challenged the Court of International Trade's subject matter jurisdiction. Second, it challenged the standing of the parties to bring the case.


All federal courts are limited in the scope of their authority. As a starting point, the Court must have jurisdiction over these subject matter of the dispute. Here, the plaintiffs are seeking an order enforcing what they believe to be a statutory and regulatory embargo on the importation of fish and fish products caught with gillnets. The Court of International Trade has jurisdiction over civil actions arising out of any U.S. law that provides for an embargo. 28 USC 1581(i)(3). Under the Administrative Procedure Act, a civil action can be commenced where a plaintiff asserts that an agency failed to take a "discrete" action that it is required to take.

The government's argument is that the ban on gillnet fish products is neither discrete nor is it required. Apparently, the question of whether it is consistent with Congressional direction or just the right thing to do was not enough sufficiently compelling for the National Marine Fisheries Service.

The Court found the ban to be both discrete and mandatory. The statute directs that the government "shall ban" the importation of these products. "Shall" indicates a command; it is language indicating that a duty is mandatory. Where Congress wants to be less than mandatory, it knows how to use the word "may." Furthermore, there is no waiver authority in this section of the law. The government argued that the 5-year exemption in the regulation indicates that it is not yet required to implement the embargo. The CIT noted that the statute does not contain that exemption and that the "Government cannot give itself a five year exemptions from compliance with the MMPA, which dictates that the Secretary of the Treasury 'shall ban offending imports in order to meet'" the legal requirement to reduce the killing of and injury to marine mammals. Thus, the embargo is required.

It is also discrete. While implementing the embargo may require multiple steps, that does not mean it is not legally discrete. Further, that the regulations do not define U.S. standards for purposes of making the comparability determination does not mean that the required embargo is not discrete. The fact is that the vaquita is on the verge of extinction and the importation of fish and fish products caught using gillnets is contributing to death of and injuries to vaquita. That is in direct contravention of the U.S. standards. Waiting until 2022 or any further agency delay may contribute to the extinction of this species. This is why the law directs that the Secretary of the Treasury "shall ban" the offending imports. This is sufficient to make the embargo a discrete action and to give the CIT jurisdiction.


Standing is the legal requirement that plaintiffs have a genuine interest in the litigation they commence. To have standing, the plaintiff must (1) have suffered a concrete and particularized injury that is either actual or imminent, (2) the injury must be fairly traceable to the defendant, and (3) a favorable decision is likely to redress the injury.

Here, the United States Government takes the position that because some of the individuals representing the plaintiff organizations have never seen a vaquita and have no plans to travel to the vaquita range, they do not have a particularized injury beyond the "subjective" interest in the animal. This is thick with irony as there may soon be no vaquita to see.

Environmental law has long recognized that a recreational and aesthetic interest in viewing nature is a protectable interest that can give rise to standing. That includes an interest in viewing a vaquita. The decreasing vaquita population and potential extinction impacts that interest in a real and direct way.  The fact that a single representative of the plaintiff organizations has the desire to observe the animal is sufficient.

The government's second argument is more compelling. The government correctly noted that the ultimate fate of the vaquita does not rest entirely in its hands. This is true. Even a complete import ban will not stop vaquita deaths if the Mexican government does not entirely ban gillnets in the vaquita range and if there is not complete compliance with the ban. Neither seems imminent.

It is also true that vaquita may be killed by passing boats, disease, or a hungry shark. That does not mean that the U.S. should not apply the law. Nor does it mean that doing so will not be an incremental and useful step (hopefully among several steps) to protect the vaquita. According to the Court of International Trade, the risk to the vaquita is fairly traceable to the government's inaction and a favorable decision will at least help redress that injury.

Preliminary Injunction

Having found jurisdiction and standing, the next question for the Court was, what to do? Plaintiffs asked for a preliminary injunction requiring the U.S. to ban the importation of fish and fish production from gillnets in the Gulf of California.

We have previously covered the legal standard for a preliminary injunction. Here, for example. This post is long enough as is, so I will not go into the details.

The statute mandates the immediate requested embargo to prevent the extinction of marine mammal species.  Furthermore, the U.S. standard is at least indicated by the National Oceanographic and Atmospheric Administration's assessment of "potential biological removal." Thus, the Court found there to be a likelihood that plaintiffs will ultimately succeed on the merits of their claim.

Next, the Court noted prior federal decisions stating that "Environmental injury, by its nature, can seldom be adequately remedied by money damages and is often permanent or at least of long duration, i.e., irreparable." Plaintiffs, who have personal and professional interests, both scientific and aesthetic, in the vaquita will suffer an irreparable injury to that interest in the event of the extinction of the vaquita. To say nothing of the harm to the vaquita itself (which, technically, not before the Court).

Regarding the balance of the hardships, the government made the reasonable argument that a preliminary injunction might interfere with ongoing negotiations with Mexico over fishing in the Gulf of California. In fact, according to the argument, it might be easier to secure an import ban without the preliminary injunction interfering with ongoing discussions. [Side note: This and the potential for related WTO litigation may be the underlying reason the U.S. opposed the imposition of an injunction.] The Court found that the statutory mandate and clear congressional intent to reduce the bycatch of marine mammals to near zero weighs in favor of the preliminary injunction.

Finally, the injunction is in the public interest. It is always in the public interest to ensure that federal agencies comply with the law. The statutory purpose here is to protect the vaquita and similar species. That is, therefore, the public interest.

The Court ordered that, pending a final resolution on the merits, that the United States ban the importation of all fish and fish products from the Mexican commercial fisheries that use gillnets in the vaquita's range.

The U.S. did so via a Cargo Systems Messaging Service posting, 18-00484, which says, in its entirety:

** This message supersedes message 18-000483 **

In response to a United States Court of  International Trade order (Slip-Op 18-92) and in cooperation with the National Marine Fisheries Service (NMFS), U.S. Customs and Border Protection (CBP), is imposing immediate import restrictions on fish and fish products from Mexico caught with gillnets deployed in the range of the vaquita, a species of porpoise endemic to northern Gulf of California waters in Mexico and listed as an endangered species under the U.S. Endangered Species Act.
This action prohibits the importation into the United States from Mexico of all shrimp, curvina, sierra, and chano fish and fish products harvested by gillnets in the upper Gulf of California (UGC) within the vaquita’s geographic range.  To effectuate the court order, the importation into the United States of shrimp, curvina, sierra, and chano fish and fish products under the HTS codes listed below, caught with a gillnet within the vaquita’s range, is prohibited.  Any shrimp, curvina, sierra, and chano fish and fish products not caught by gillnet in the vaquita’s range and imported under the HTS codes listed below from Mexico as country of origin must be accompanied by the certification set forth below upon arrival.

CBP also is requiring that all other fish and fish products not within the scope of the import restrictions but imported under the HTS codes listed below from Mexico as country of origin be accompanied by the following certification upon arrival:


As the Importer of Record or duly authorized official/agent of the importer of record, I do hereby certify, to the best of my knowledge and belief, that the fish/fish products contained in this shipment are of species of fish or fish products, or from fisheries, not caught with gillnets deployed in the range of the vaquita, in the upper Gulf of California waters in Mexico.

Printed Name (Importer/Agent)

If a completed U.S. IMPORT CERTIFICATION OF ADMISSIBILITY is not filed, then the entire shipment must be denied entry.

This U.S. IMPORT CERTIFICATION OF ADMISSIBILITY may be submitted to CBP via the Document Imaging System (DIS), e-mail, fax or physical presentation in hardcopy form to the appropriate CBP Port of Entry official for review.

Trade restrictions on these products harvested by gillnets in the UGC of Mexico will continue until a further order is issued by the court.  The U.S. Import Certification of Admissibility as outlined above will be required for the HTS codes listed in this notice until further, superseding guidance from NMFS is issued regarding these trade restrictions and the protocol for Certification of Admissibility. Such guidance from NMFS will be communicated through various means, including a notice in the Federal Register and a subsequent CSMS message in coordination with CBP.

Any questions of CBP regarding this message should be forwarded to the Commercial Targeting & Analysis Center (CTAC) at

The attachment to the Notice is here.

Finally, on August 14, 2018, the Court issued a second order basically reaffirming its prior decision and clarifying that the injunction is effective immediately. See Slip Op. 18-100.

Tuesday, August 07, 2018

Lamps, Lanterns, and Justice

The Court of Appeals for the Federal Circuit has affirmed the Court of International Trade decision in The Gerson Company v.United States. This is the case you may remember from here, in which we discussed the difference between a lamp and a bulb.

As is the case in most classification cases, the issue on appeal was the same as it was below. Here, that means whether artificial tea light candles and similar devices are "lamps" of Heading 9405 or "electrical machines and apparatus . . . not specified or included elsewhere" of Heading 8543. It is relevant for purposes of discussion that Heading 8543 includes the subheading "electric luminescent lamps," at 8543.70.70 (now .71)

The Court of Appeals agreed that in a "hyper technical" sense, the artificial candles are electrical machines or apparatus. But, they are also lamps. What to do?

The Court noted that the apparent conflict (or ambiguity) can be resolved by reading the statute as a whole. Context matters. Looking at it in that light the Court found that 8543 must be more limited in scope than was proposed by plaintiff. If lamps are electrical machines and apparatus of 8543, and consequently excluded from 9405, what remains of 9405? Only non-electric lamps. That seems incongruous in that 9405 expressly covers searchlights and spotlights, which are presumably electrical. Furthermore, the Explanatory Notes describe lamps of 9405 as including lamps of any material that use any source of light, including electricity.

That would include lanterns. This one, for example, is perpetually powerful and able to recharge all your devices, including any extraterrestrial power rings you may have received from dying pink aliens. It would not be very useful in brightest day, but would be welcome in blackest night. [Yes, it has been a while since I did that kind of aside. It feels good.]

The description of electric lamps as complete items squares with the Explanatory Notes to Chapter 85, which describes that chapter as covering electrical goods not generally used independently. Rather, goods of Chapter 85 tend to play a particular role as a component in electrical equipment. To me, that sounds like a "bulb."

Gerson made several valiant arguments to overcome this analysis. It argued against using the Explanatory Notes to add limitations to the plain meaning of a Heading. It also argued that the Court of International Trade improperly treated these competing headings as controlled by use. Neither argument gained any traction.

There are a couple important analytical points to take from this case. First, the HTSUS is a statute that will be read as a whole to avoid conflicts. Any classification analysis that eliminates a potential heading must do so producing a consistent and logical reading of both headings. You can't leave one heading so limited in scope as to be effectively meaningless.

Second, always compare headings at the heading level. The fact that "electric luminescent lamps" appears in a subheading of 8543 does not dictate the scope of the heading.

One last point I think is worthy of note. The Court of International Trade almost always starts a classification analysis noting its obligation to reach the correct result. This comes from a 1984 Court of Appeals decision called Jarvis Clark Co. v. United States. The opinion was written by visiting Senior Circuit Judge John Minor Wisdom. Initially, it is important to linger at the beauty of being a judge named "Wisdom," (ignore the "Minor" part). That is like being a doctor named "Jane Curesall" or a super-villain named "Ed Nigma."

Regarding the Court's obligation to find the correct result, the Court of Appeals instructed:
The clear intent of Congress was to change the operation of the dual burden by requiring the Court of International Trade to reach a correct result. This requirement is not inconsistent with the presumption of correctness embodied in § 2639(a)(1). The importer still has the burden of establishing that the government's classification is wrong. Ordinarily it will be difficult to meet this burden of proof without proposing a better classification. But the trial court cannot determine the correct result simply by dismissing the importer's alternative as incorrect. It must consider whether the government's classification is correct, both independently and in comparison with the importer's alternative. In some cases, the government's classification may be so patently incorrect that the importer can overcome the presumption of correctness without producing a more satisfactory alternative. In other cases, the importer's alternative may have faults and yet still be a better classification than the government's. In either case, the court's duty is to find the correct result, by whatever procedure is best suited to the case at hand.
Apparently, this obligation does not attach to the Court of Appeals.  I gather that because in footnote 3 of this decision, the Court points to two alternative classifications, neither of which Gerson presented as alternative classifications. Because they were not argued, the Federal Circuit did not consider them. Had the CIT been aware of these alternatives, under Jarvis Clark, I think it would have been obligated to consider and, as appropriate, reject them. There may be no practical consequence to this difference in process. But, someday, there will be an odd case in which the best classification occurs to neither of the parties and not to the CIT. In that case, I guess the Federal Circuit would remand for further consideration.

Sunday, July 29, 2018

Swimways Floaties Classification

I often say that tariff classification cases rarely depend on disputed facts and, in my view, generally do not turn on facts not clear from an examination of the imported product. In other words, I often think these cases present fewer issues and can be more easily resolved than is the common view. 
That said, there are obvious examples of where this is not the case. One example is Swimways Corp. v. United States, in which the Court of International had to undertake a fairly detailed factual analysis to determine the essential character of recreational floatation devices made of plastic inflatable floatation bladders, textiles mesh, and a metal spring that permits the deflated device to be compacted and then snap back to shape for use. The case involves two groups of floaties, the first are designed for adults. The second are designed for young children to help acclimate them to water as the first part of a learn to swim program.

U.S. Customs and Border Protection classified these floaties (which is my word, not the parties’) as other textile articles in Heading 6307. The importer protested and asserted that the correct classification for the adult floaties is in 3926 as other articles of plastics. For the child floaties, the plaintiff claimed that the proper classification is in Heading 9506 as an article for general physical exercise.

Let’s deal with that last part first. “General physical exercise” is not defined in the tariff schedule, nor in the Explanatory Notes. The Court looked to the Oxford English Dictionary for the meaning of “exercise” and found it to be training for the purpose of improving the body, mind, or spirit. Physical exercise is more specifically “excursion undertaken with a view with a view to the maintenance or improvement of health.

The packaging for the baby floatie, on the other hand, explained that it was useful for introducing infants to the water. It also helps them stay comfortable and happy in the water. Even though this may be an important first step in learning to swim, it is not physical exercise. Thus, the Court rejected this proposed classification.

As a result, the floaties are all going to be classified in the same heading.

Analytically, this is a useful decision to read. It very methodically goes through the legal and factual issues and illustrates how a classification should be determined. The first important decision the Court made is that neither Heading 3926 nor Heading 6307 fully describes these articles.

Heading 3926 covers “Other articles of plastics and articles of other materials of headings 3901 to 3914.” Heading 6307 covers “Other made up articles, including dress patterns.” Note 1 to Chapter 63 specifies that the goods of that Chapter must be “of textile.” Neither heading fully describes the floaties. For example, neither describes the metal spring. Further, 3926 does not include the textiles and 6307 does not include the plastics.

Because of that, the headings and the relevant legal notes do not resolve the classification. As a result, the Court moved on the determining classification on the basis of the material that imparts the essential character to the floaties. I am not going to through all of it. Here are the highlights: 

The Court differentiated between materials and components for purposes of identifying essential character. With respect to materials, the Court held that by weight, bulk and value no material predominates. Consequently, the Court moved on to components.

Looking at each, the Court found that the inflatable plastic bladders provide the floatation to the floaties. This is, obviously, pretty key. In addition, the bladders are the most complex parts to produce. They are also the most expensive components. Those factors convinced the Court to classify the floaties in Heading 3926.

There was a bonus issue in this case. I suspect, but do not know, that this bonus issue came as a surprise to the parties. That can happen, in part, because the Court of International Trade has a mandate to find the correct classification, whether or not the correct classification was argued by either party.

The additional issue relates to an accessory to the baby floatie, which is a combination toy with four inflatable arms. On three of the four arms is an infant toy: a stacker, a squeaker, and a soft star. On the fourth arm is a teether. What to do with this accessory, which comes with the floatie?

One might expect that the toys would be included in the classification of the floatie as part of a retail set. The Court did not take that approach. Rather, pointing out that the “octopus” of toys and teether are not used in conjunction with the floatie for the purpose of floatation. They also do not rely on the floatation device for their use or value. Consequently, the Court classified the toy array separate from the floatation devices. That resulted in the floatation devices, which are not retail sets, being classified in 3926 along with a separate retail set of toys of Heading 9503.

Saturday, July 21, 2018

Jurisdiction Argument Goes Up In Smoke

U.S. Customs and Border Protection is the agency responsible for the collection of federal excise taxes. Recently, a question has come up regarding which court is the proper venue for an action to collect these taxes. Turns out, that is not as clear as you might have thought. United States v. Maverick Marketing, LLC Et Al., tries to sort that out.

Maverick Marketing and Good Time USA were involved in an agreement to import tobacco. Under 26 USC 5701, importers of tobacco are liable for federal excise taxes. The United States has alleged that Maverick and Good Times made material false statements and/or omissions when entering tobacco products into the United States and, as a result, deprived the government of excise taxes. A previous decision (Slip Op. 18-16) of the Court of International Trade denied defendants' motion to dismiss for failure to state a claim.

The jurisdiction problem arises from the language Congress used in the statute defining the jurisdiction of the Court of International Trade.  Keep in mind that the Court of International Trade, like all federal courts, can only act within the jurisdiction granted to it by Congress. For cases the United States brings to collect a penalty assessed by Customs, the relevant statute is 28 USC 1582, which says:

The Court of International Trade shall have exclusive jurisdiction of any civil action which arises out of an import transaction and which is commenced by the United States—
(1) to recover a civil penalty under section 592, 593A, 641(b)(6), 641(d)(2)(A), 704(i)(2), or 734(i)(2) of the Tariff Act of 1930; 
(2) to recover upon a bond relating to the importation of merchandise required by the laws of the United States or by the Secretary of the Treasury; or 
(3) to recover customs duties.
What's missing from that?

This case is about about recovering federal excise taxes, not customs duties. Federal excise taxes are not mentioned in the statute. Furthermore, this part of the case is not about recovering a penalty; it is only about the taxes. To the extent that the surety was also a defendant, the Court does have jurisdiction under subsection (2) to recover on the bond.

The Court of International Trade was able to see its way through this and find it has jurisdiction. The key is that Section 1582 gives the Court "exclusive jurisdiction of any civil action which arises out of an import transaction and which is commenced by the United State . . . to recover a civil penalty under" section 1592. Section 1592(d) permits the United States to seek the recovery of any duties, taxes, or fees it was deprived of as a result of the false statement or omission. Furthermore, 1592(d) states that Customs may recover lost duties, taxes, and fees even if no penalty is assessed. Consequently, when subsection (1) gives the CIT jurisdiction over a claim to recover a civil penalty under section 1592, that necessarily includes the recover of unpaid taxes and fees, despite subsection (3) being silent as to taxes and fees.

The Court also held that the federal excise taxes are legally equivalent to customs duties for purposes of jurisdiction. Boiling it down: The taxes on tobacco products are imposed on imported merchandise, become due at the time of entry, and are collected and administered by Customs. The taxes are also based on the value of the imported merchandise and reported on the entry documents. All in all, they are handled as if they are duties. This finding is consistent with a federal appeals court case from 1951 that was referenced in the relevant legislative history to 28 USC 1582. It also comports with the ancient legal principal "Si is vultus amo a anatis, natat ut anates, et quacks quasi anas est anatem tum verisimile."

On those two grounds, the Court found it had jurisdiction over is action brought by the government to recover federal excise taxes.

Sunday, July 08, 2018

Duty Drawback, TFTEA, and Administrative Delay

Tobacos de Wilson, Inc., et al. v. United States, et al. is an effort to force Customs to apply amended drawback law after the statutory deadline but before Treasury has completed the regulatory process. It is pretty in the weeds but is important to drawback claimants. In the bigger picture, it is a good example of using the Courts to ensure that administrative agencies are meeting congressional mandates for action.

The Trade Facilitation and Trade Enforcement Act of 2015 (known awkwardly as "TFTEA," which is pronounced "tiff-TEE-ah" in my office) made three important changes to the duty drawback law. Those changes, intended to make drawback less cumbersome, include: a change to the standard for substitution manufacturing drawback; a change to the test for commercial interchangeability for substitution unused merchandise drawback; and an expansion of the period for filing drawback claims.

Under the law, Treasury (remember, drawback is all about the money) had two years to pass regulations implementing TFTEA. That two-year period expired on February 24, 2018 without implementing regulations. Apparently, a draft Notice of Proposed Rule Making is been sent to Office of Management of Budget for review. Under the statute, starting February 24, 2018, drawback claimants can elect to proceed under the pre-amendment version or under the TFTEA.

On February 5, 2018, Customs and Border Protection published a Guidance Document (the link goes to Version 3)stating that it would not apply the TFTEA until the pending regulations are fully promulgated. That guidance also included restrictions on drawback not included in the TFTEA. Among those restrictions is the denial of accelerated disposition for TFTEA claims pending the new regulations.

The first question, as is always the case, is whether the Court of International Trade had jurisdiction to hear this challenge to CBP's Guidance Document. The Administrative Procedure Act, 5 USC 702, gives individuals a means to challenge a final agency action. But, it is not a jurisdictional statute. Some other statute must grant the court hearing the case the authority to do so. In this case, jurisdiction is based on 28 USC 1581(i)(4), which gives the Court of International Trade exclusive jurisdiction over "civil actions commenced against the United States, its agencies, or its officers, that arise out of any law of the United States providing for administration and enforcement with respect to, among other things import revenue collection. According to the Court, the Guidance Document, which is an operative statement of CBP policy and details how drawback claims are to be processed, is a final agency action subject to review. Consequently, this case is properly before the CIT.

Thus, under the APA, the question to be resolved is whether the policy stated in the Guidance Document is arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law or is without observance of procedure required by law.

Plaintiffs' first and second counts relate the allegation that the Guidance Document illegally limits a claimant's rights to accelerated payment. Accelerated payment of drawback claims is a regulatory provision that does not depend on the drawback statute, either pre- or post-TFTEA. See 19 CFR 191.92. Under the Guidance Document, CBP would continue to grant accelerated payment for claims filed under the old law but would decline accelerated payment for claims filed under TFTEA. According to plaintiffs, this is inconsistent with the regulations, especially 19 CFR 191.0, which states generally that the regulations apply to all drawback claims. Plaintiffs' reading of that makes it applicable to TFTEA claims as well.

The Court of International Trade rejected that argument. According to the Court, TFTEA requires Treasury to determine the calculation methods to be applied to refunds. Those methods will be determined in the regulations. Thus, for claims filed under TFTEA, the law requires a determination as to methodology that has not yet occurred. The regulation, therefore, is inconsistent with the statute and is invalid when applied to a TFTEA claim.

Plaintiffs also challenged two limitations on TFTEA drawback claims: the "first-filed" and "mixed use" rules. The first-filed rule means that the first claim made relating to a line on an entry will dictate the type of drawback available to be applied to the remaining merchandise on the line. This can limit the drawback available to claimants if, for example, some of the merchandise was first claimed on the basis of direct identification. All subsequent claims for that entry line must also be based on the direct identification method. Under the mixed use rule, claimants must identify entry lines that are subject to both pre-TFTEA and TFTEA claims. Under the most recent Guidance Document, CBP will accept these claims, but not process them until the regulations are passed.

Because CBP will not be enforcing these rules until the regulations are in place, the Court found these claims to be moot.

Plaintiffs next argued that the deadline for implementing regulations was mandatory and that the government's failure to comply entitles Plaintiffs to relief. The Court agreed that the deadline in the statute s clear and mandatory. Plaintiffs and other claimants are being deprived of benefits Congress intended to be in place by now. This, according to the Court, is a violation of the law.

The question is what to do about that violation? The Court had already ruled that the plaintiffs do not have a right to accelerated payment under TFTEA. Consequently, it refused to order it. The Court also found that it was not yet necessary to order Treasury to complete the regulatory process by a date certain. Instead, the Court ordered that if the government did not complete the process by July 5, 2018, the Court would consider imposing a deadline. [Note, this opinion was issued on June 29, 2018.] On top of that, the Court noted its willingness, if necessary, to craft further relief to ensure that the benefits of TFTEA are not lost due to administrative delay.