Saturday, May 19, 2018

Country of Origin for Dumping Orders

I have trying to get to this one, and now is the time. Bell Supply Co, LLC v. United States is an important decision from the Court of Appeals for the Federal Circuit.

The issue presented is whether, when making a scope determination, Commerce should apply the traditional substantial transformation test to determine the origin of the merchandise that was partially manufactured in a country subject to the order and partially manufactured outside that country. In this case, the question was whether unfinished oil country tubular goods initially fabricated in China and finished in Indonesia are within the scope of the order covering OCTG from China.

Bell purchased "green tubes" from China and sent them to Indonesia where they were heat treated and finished. In 2014, the Department of Commerce issued a scope ruling finding that the OCTG shipped from China as green tubes and then finished in third countries remain products of China for purposes of the application of the antidumping duty order. To get there, Commerce applied the substantial transformation test. Contrary to Customs and Border Protection rulings on similar facts, Commerce found that heat treating and finishing did not change the country of origin of the merchandise.

Bell challenged that decision in the Court of International Trade. There, it argued that the antidumping laws have a regulatory process designed to resolve exactly this kind of question. That process is a "circumvention" inquiry, which does not involve substantial transformation. 19 USC 1677j(b).

The Court of International Trade agreed. It held that the circumvention analysis is the specific standard for determining whether foreign producers are trying to evade an AD order by completing merchandise in a third country. The CIT remanded the matter to Commerce for the application of the circumvention analysis.

On remand, Commerce took a closer look at the language of the order, which is always a good thing. There, it noticed that the order covers unfinished OCTG from China. Commerce divined in that language guidance that unfinished OCTG exported from China is always unfinished OCTG, even when sent to Indonesia to become finished OCTG.

The Court of International disagreed again and remanded. On the second remand, Commerce found that finished OCTG imported from Indonesia were outside the scope of the order. First, it found no indication that the order covered unfinished OCTG from China finished in a third country. Second, it found that the operations in Indonesia did not constitute circumvention. The CIT sustained this conclusion.

Two questions were presented to the Court of Appeals. First, does the order cover unfinished OCTG from China that are finished in a third country? On this, the Federal Circuit held that absent language to the contrary, the order should be applied to merchandise at importation. In this case, the imported merchandise is not unfinished OCTG from China. It is finished OCTG. Thus, to the extent the order applies to unfinished OCTG from China, that does not describe the applicable merchandise.

The next question was whether the merchandise was finished OCTG from China. To decide that, the Court was asked to pick between substantial transformation and circumvention as the appropriate analysis. The Federal Circuit did not take that bait.

Rather than pick one means of analysis, the Federal Circuit instructed Commerce and the Court of International Trade to use both. Substantial Transformation should be used first to determine the country of origin of the imported article. Using that test, Commerce would seek to determine whether the subsequent processing results in an article of commerce with a new name, character or use. In doing so, Commerce can consider (1) the class or kind of merchandise; (2) the nature and sophistication of processing in the country of exportation; (3) the properties, essential components, and end-use of the product; (4) the cost of production compared to the value added; and (5) the level of investment.

If it turns out that the merchandise is not of the country subject to the order, the question remains whether it should be treated as within the scope of the order. That is the function of the circumvention test. Commerce can find the merchandise to be in scope if:

(1) “the process of assembly or completion in the foreign country . . . is minor or insignificant,” (2) the value added in the country subject to the AD and CVD order is a significant portion of the total value of the merchandise, and (3) “action is appropriate under this paragraph to prevent evasion of such order or finding.”  § 1677j(b)(1)(C)–(E).
If the merchandise is from a country not covered by the order but the further processing meets the circumvention test, then the goods remain in scope.

Based on this reasoning, we now know that origin for scope purposes is a two part test. First, use substantial transformation to determine whether subsequent processing changed the country of origin. If so, and assuming the second country is not covered by the order, determine whether the further processing is circumvention. If not, then the imported product is not subject to the order.

The Federal Circuit vacated the decision of the Court of International Trade and remanded.

Sunday, May 13, 2018

CBP Sued Over Currency Seizure Practice

[Note: Updated to properly identify the organization supporting the litigation.]

I often tell students and other lawyers that the great thing about my practice is the lack of human drama. In most cases, getting to the right result in a dispute with Customs and Border Protection is about knowing the law and making sure everyone applies it properly to the facts. Usually, no one cries and rarely is anyone subject to imprisonment.

But, that is not always the case. One thing we do in my office is help people with currency seizures. Just to be 100% clear on this: It is illegal to bring over $10,000 in or out of the country without declaring it to Customs. This is very useful information for law enforcement on a number of fronts. The money might be from illegal activity, it might be going to support terrorist organizations, it might be part of a money laundering scheme.

When entering the country, there is an obvious time and place to make this declaration. If you are using a paper declaration form, it is right there as 13: "I am (We are) carrying currency or monetary instruments over $10,000 U.S. or foreign equivalent. Yes. No." On the other hand, when leaving the country, no one asks that question. Many people do not know there is an obligation to report when leaving the country. Those who do may find it hard to find the actual CBP office where the declaration needs to be made and get there in close proximity to the time for a departing flight.

What you need is a FinCEN 105 form. According to the instructions, travelers "shall file FinCEN Form 105 at the time of entry into the United States or at the time of departure from the United States with the Customs officer in charge at any Customs port of entry or departure." If this is relevant to you, call the general number at the port you will be transiting and ask for the correct location to make the declaration. Then, ask yourself why you feel the need to carry a bundle of cash.

I have seen this process cause grief several times. In most cases, if the traveler can prove a legal source of the funds, he or she can secure the release of much of the seized funds. But, not always. If the evidence of lawful sources is unclear or if there are aggravating factors such as efforts to conceal the currency or lying to Customs, the funds or a portion of them may be forfeited.

For the average person, the requirements and then the civil asset forfeiture process can be difficult to navigate. And, honestly, the Customs people who are the front line on this issue are not always as clear and respectful as one would hope.

Another problem is that CBP will not release the seized currency unless the traveler signs an agreement stating that it will not take any legal action against CBP. This is called a hold harmless agreement. According to CBP practice, if the traveler fails to sign the hold harmless agreement, CBP will start administrative forfeiture procedures. Translated to English, that means CBP will use the money as leverage to get itself out of any potential legal jeopardy.

The problem is that the seizure may have actually violated the rights of the traveler. Signing the hold harmless agreements means the traveler gives up the ability to challenge the seizure or seek damages for an unlawful seizure. That means, for example, waiving arguments that the seizure was an unconstitutional taking, violated the fourth amendment's protection against unlawful seizure (but see this discussion), or was otherwise unlawful. Moreover, it means that if CBP delays or otherwise fails to return the money in a timely manner, the traveler gives up his or her first amendment right to petition the government for redress of that claim.

This is the issue in a recently filed class action law suit challenging the requirement for a hold harmless agreement. Thanks to Clif Burns'  Export Law Blog for the tip.

The case is brought by the Institute for Justice. According to its website, "IJ litigates to limit the size and scope of government power and to ensure that all Americans have the right to control their own destinies as free and responsible members of society." Here is the IJ description of the case.

The underlying seizure involved a passenger heading to Nigeria who failed to disclose that she was carrying a little over $41,000. The passenger was a nurse who had saved much of the money to open a clinic in Nigeria. The remainder was from family sources and was to be delivered to her family in Nigeria. Not that is matters, but she was born in Nigeria and became a U.S. citizen in 1994.

Customs seized the currency and gave her a Civil Asset Forfeiture election form on which she could tell CBP whether she abandoned the currency, would pursue an administrative process, or wanted the case referred to the Office of the U.S. Attorney for judicial proceedings. She requested the latter.

The U.S. Attorney did not act on the case within the time permitted. The legal consequence of this is that the money is to be returned to the traveler promptly. See 18 USC 983(a)(3)(B). Rather than promptly returning the funds, CBP sent the hold harmless agreement and informed her that the money would be returned in full when she signed and submitted the agreement. Rather than do that, she brought this action:

to put CBP’s policy or practice to an end, to void any Hold Harmless Agreements signed by class members as a result of this policy or practice, to recover [the named plaintiff's] seized cash and any other seized property that has not been returned to class members because they did not sign Hold Harmless Agreements, and to stop CBP from targeting her for additional, intrusive screening without giving her an adequate opportunity to challenge her classification.
One of the interesting things that is likely to come out of this case is some data on how often these seizures happen. More important, how often does CBP make a seizure that the U.S. Attorney does not pursue?

This latter question is of practical importance to lawyers who deal with seizures. If it turns out that Assistant U.S. Attorneys more often than not do not pursue civil forfeitures, then maybe it does not pay to go through the CBP administrative forfeiture process. That process is slow and it is not always clear who is making or influencing the decision. There is also the perception (and it may just be the perception) that once the seizure train starts, it is very hard to stop before it arrives at a forfeiture. There are lots of reason for this including some degree of CBP deference to port-level enforcement.

The problems are often more acute when merchandise other than currency is seized. This is because it is not always easy to figure out what storage fees might be incurred. At some point, storage can be more expensive than the value of the merchandise and the expense of hiring counsel who is familiar with the process. Importers will often cut their losses by abandoning the merchandise rather than fight what might be an unjustified seizure.

This is a case to watch. The fact that it is being brought as a class action and supported by a non-governmental partisan entity means it is less likely to go away with a quiet settlement. This case is clearly addressed to a bigger picture idea. CBP could, of course, make it go away by issuing the refund and by changing its practice.

I also think there is an issue here for Congress. As long as the law requires the declaration, there should be a clear means of doing so. Congress should require that ports (including the domestic terminals of airports from which international flights leave) prominently post the requirement to report. Furthermore, the airlines, cruise lines, and other carriers should be required to distribute the forms. In the alternative, CBP and FinCEN (the Financial Crime Enforcement Network) should make it possible to file the form online some reasonable time before departure. Seriously, we don't need people getting caught up in this for no reason other than a lack of knowledge. Moreover, we do not need to have knowledgeable travelers wandering around airports trying to find a CBP office to submit the form.

That may not fit with the Institute for Justice goal of limited government, but that's not my goal here.

Saturday, May 12, 2018

Digital Border Searches

Sometimes, the most interesting customs cases are not litigated at the Court of International Trade. They are in the U.S. district courts and involve important constitutional and administrative law principles not related to duties and penalties. Two of those deserve note here. This post will cover the first.

And, yes, I know there are more routine CIT and CAFC cases to address. Someone [a former government official who, despite this crack, I still like] event recently chastised me for being behind here. I promise you that my self-appointed obligation to the trade community weighs heavily on me. I will try to catch up.

But first is U.S. v. Kolsuz. This case involves CBP's suspicion-less search of a cell phone.

As background, you need to know that the law has been clear for decades that Customs and Border Protection is allowed to search cargo and the personal effects of arriving passengers without a warrant and without even particularized suspicion that they might contain evidence of a crime. In other words, as a general matter, your fourth amendment protections from unreasonable search and seizure do not apply at the border. There are lots of reasons for that. Primarily it relates to the ability of a sovereign nation to control who and what cross its borders (both entering and leaving).

There are a lot of things that are not permitted into the country whether or not it is a crime to import the item. CBP protects the health and safety of the public by interdicting, for example, unsafe consumer products, equipment that does not meet environmental standards, the products of endangered species, and agricultural pests. Every now and then, it finds illegal Mongolian horse meat and genitals. CBP could not do its job if it needed a warrant or even suspicion to check whether an arriving passenger has some contraband. Similarly, there are also many things that may not leave the country without prior approval. By crossing the border, the passenger and cargo become subject to inspection for any reason or no reason whatsoever. But note that if the "inspection" were by a street cop away from the border, it would be a "search" and would require a warrant if not incident to an arrest. Remember that the next time you arrive at the border.

An issue that has been percolating for some time is whether this principle extends to the contents of your digital devices. Can CBP review the contents of a passenger's cell phone or computer? That is a potentially far more personally invasive search than is poking around in the wet bathing suits and uninvited beach sand that is in many carry-on bags arriving with passengers. People have been arguing that a search of data should require grounds beyond simply being at the border. Lately, this argument is getting some traction.

You should note that Kolsuz had previously been stopped for illegally exporting firearm parts, so he was on Customs' radar. In this case, he was at Dulles airport in Virginia attempting to board a flight to Turkey when CBP searched his luggage and found firearm parts. Under the International Traffic in Arms Regulations, the weapons can only be exported with a license, which Kolsuz did not have. After finding the weapons, CBP conducted an on-the-spot manual search of his mobile phone. After that, CBP conducted a more detailed forensic search of his phone. That search produced a report showing his contacts, emails, instant messages, photographs, browsing history, physical locations and other personal information. The full report was almost 900 pages long and took a month to compile using specialized software.

Kolsuz moved to suppress the introduction of evidence taken from the forensic search of his phone. He did not challenge the manual search.

The Fourth Circuit noted that the law has long upheld warrantless and suspicion-less routine border searches. However, the law also requires that enforcement agents have individualized suspicions before conducting "highly invasive," non-routine searches. In the past, this has generally applied to physically, personally invasive searches of, for example, body cavities where the "dignity and privacy" of the person are at stake or searches that destroy or unreasonably damage personal property.

In Kolsuz's favor is a recent U.S. Supreme Court decision called Riley v. California. In Riley, the Supreme Court held that cells phones may only be searched incident to an arrest with a warrant based on probable cause to believe the phone contains evidence of a crime. Riley was not a border search, but it did set a bar for local police indicating that the search of a cell phone is not the same as a pat down intended to protect the arresting officer and preserve evidence.

Kolsuz's first argument was that once the phone was taken from him (for a month) and he was in custody, the rationale for the border search exception dissipated and  warrant became necessary. This makes some sense. To the extent the border search exists to allow the United States to control its borders and interdict incoming or outbound contraband, it has already served its purpose. Subsequent investigation, which involved the detailed search of personal data, should, according to this argument, require a warrant. The Court disagreed and held that because the search began as a border search and involved a transnational crime, it remained connected to the border and the border search exception applies.

The defendant's next argument was that a month-long forensic deep dive into a personal cell phone is "highly invasive" and not the kind of routine search permitted at the border without a warrant. The Court agreed that the forensic search should be considered "non-routine," involving a threat to the dignity and privacy of Kolsuz. The factors the Court found persuasive include:
  • the shear amount of data stored on a modern smart phone, which greatly exceeds what could be hand carried or packed into a car if printed, and 
  • the uniquely personal nature of the data on a smart phone including contacts, email, physical locations and web history.
However, it does not follow that an invasive, non-routine search at the border requires a warrant. This is where things start to fall apart for Kolsuz. The Court noted that even after Riley, there is no binding precedent holding that an invasive forensic search of a cell phone at the border requires a warrant. Rather, the CBP officers involved reasonably relied on the current understanding that a non-routine search may be conducted on the basis of reasonable suspicion. Having previously found firearm parts in his bags, CBP had reasonable and individualized suspicion that Kolsuz's phone might contain evidence of a crime. Thus, the search was permissible.

There are other similar cases making their way through the courts. Eventually, this will end up at the Supreme Court. In the meantime, travelers take note. I have read lots of advice about encryption and burner phones and leaving all sensitive data in the cloud. I'm not going to give legal advice on this. You need to do what is appropriate. If you have concerns, talk to a lawyer.

Traveling lawyers should keep in mind that their phones and other personal devices may contain privileged information that needs special attention if stopped by CBP (or any police agency). Finally, corporate compliance policies should take this into consideration for traveling employees.

Hat tip to Peter Quinter of GrayRobinson.

Sunday, April 15, 2018

Are You Exhausted?

Cases in which U.S. Customs and Border Protection asks the U.S. Court of International Trade to impose a civil penalty have evolved over the years I have been in practice. It used to be understood that if Customs went through the entire administrative penalty process and moved to litigation, all bets were off. The notion was that because the Court would hear the case de novo and make a decision based on the evidence presented in Court, everything was starting from scratch.

That is no longer the case. The current understanding is that civil penalty cases are collections cases in which Customs is attempting to collect the penalty it already assessed through the administrative process. This is a significant change. It means, for example, that if during the administrative process CBP only asserts that the importer was negligent , it cannot come into court asking the Court of International Trade to impose a penalty based on fraud. See, U.S. v. Optrex (CIT 2005) and U.S. v. Ford Motor Co. (Fed. Cir. 2006). By the same token, if the government goes all in and administratively asserts that the violation occurred as a result of fraud, and only fraud, it cannot fall back to gross negligence or negligence in Court. See U.S. v. Nitek Electronics, Inc. (Fed. Cir. 2015). There are no lesser included offenses in administrative penalty cases.

The reason for this is that CBP has failed to "exhaust" the administrative process. As a result, the future defendant has not had notice of the claim against it. Nor has the defendant had a full opportunity to respond to the claim. Absent that opportunity, CBP has not perfected its claim as required by the statute.

The fact that the Court of International Trade decides the matter de novo only means that the government must present admissible evidence of the violation to the Court. Defendants can then introduce admissible evidence showing either that no violation occurred or that it exercised the required degree of care. This is distinct from the "on the record" judicial review of other administrative matters in which the Court is limited to the record made in the administrative proceeding. The Court of International Trade also sets the penalty amount.

United States v. Aegis Security Insurance Co. and Tricots Liesse 1983, Inc., a recent decision of the Court of International Trade adds even more heft to the exhaustion requirement.

The underlying issue here is a messy series of NAFTA claims, a prior disclosure, followed by an offer in compromise, and a penalty notice. The critical issue is that the Pre-Penalty Notice included the statement that the importer had the right to make an oral presentation as to why the penalty should not be imposed. There were some telephone calls between non-lawyer representatives for the importer and Customs that appear to have been related to the offer in compromise and a subsequent offer in compromise.

Counsel for the importer then sent a letter to Customs seeking a face-to-face meeting concerning the penalty claim. Customs put off the proposed meeting while litigation was pending with the surety. No meeting occurred and CBP issued the final penalty determination. When the importer did not pay, the government filed a suit in the CIT seeking to collect the assessed penalty.

In Court, the defendant contended that Customs' failure to provide the requested meeting means that it had failed to perfect a valid penalty claim. As a result, the entire claim should be dismissed. For its part, the Government contends that the multiple phone calls were sufficient opportunity for the defendant to address the issues.

The Court found that the requirement for exhaustion applies to CBP civil penalty cases. Moreover, the Court found it to be "undisputed that Customs failed to perfect its claim for a monetary penalty." In holding that the phone calls between company representatives and Customs were insufficient to satisfy the statutory requirement, the Court said (citations omitted):

The record evidence demonstrates that this post Notice of Penalty telephone call was not conducted in the usual, more formal, manner in which Customs proceeds with penalty cases, and no officials from Customs’ Fines, Penalties & Forfeitures Office (the office generally charged with conducting any requested oral hearings during the pre-penalty and penalty phases of § 1592 claims) participated in the telephone call. In addition, it is undisputed that following the issuance of the Notice of Penalty, the August 3, 2013 telephone conversation, and Customs’ June 13, 2014 rejection of Tricots’ second offer in compromise, Tricots made requests for a § 1592(b) oral presentation on September 15, 2014, October 30, 2014, and November 21, 2014, more than one year before Customs issued its November 24, 2015 Final Penalty Determination. Moreover, Tricots signed waivers of the statute of limitations, “in order that [it] might obtain the benefit of the orderly continuation and conclusion of an administrative proceeding,” which effectively waived the statute of limitations through August 18, 2016. Notwithstanding Tricots’ requests and concerns, and a lack of urgency for Customs to make its Final Penalty Determination, Tricots was told that “any meeting at this time would be premature.”

This is consistent with the legislative history, which notes that the importer would have the right to make oral and written representations in a mitigation proceeding before the decision on mitigation is decided. The importer needs an opportunity to "fully resolve a penalty" before proceeding to court as a defendant. According to the Court of International Trade, that means the importer (or party charged in the penalty action) must have a meaningful opportunity for an oral presentation. The Court points to testimony characterizing this as a "hearing," which might be overstating the case, but it makes the point. The oral presentation requirement means there should be a formal meeting at which there is a full opportunity for the importer to be heard.

This is such an important part of the administrative process that the CIT did not require that the defendant show prejudice. The Court, therefore, granted summary judgment with respect to this portion of the case.

What do we learn from this? If you are in the private bar, ALWAYS ASK FOR A MEETING. If you are at CBP, ALWAYS GRANT A MEANINGFUL MEETING.

Saturday, April 14, 2018

On Trademarks, Seizures, and Due Process

As you might imagine, U.S. Customs and Border Protection has a lot of enforcement tools in its law enforcement quiver. One of those is to prevent an importer from securing the payment of duty and release of merchandise with a continuous entry bond and, instead, to require a separate bond for every single entry. Hence, the name "single entry bond." Securing a single entry bond is an administrative hassle for the importer.

Another tool available to CBP is setting the bond amount. The higher the bond amount, the more up front cash the importer ties up and the harder it is for the importer to continue in business. At some point, the bond requirement can be so high that no surety will assume the risk as a price the importer can afford. That effectively puts the importer out of the importation business.

Why might CBP do this? Because they do not trust the importer. In the past, for example, enhanced bond requirements have been applied to ensure the collection of antidumping and countervailing duties.

Recently, CBP imposed a single entry bond requirement on a company called U.S. Auto Parts Network, which imports replacement grills for automobiles. According to CBP, U.S. Auto imported or attempted to import 30 shipments of grills that were contained counterfeit merchandise. In response, customs required single entry bonds valued at three times the value of the shipment. In other words, CBP said to U.S. Auto, "We don't think you are doing business in a manner consistent with the law, so we are going to make it very hard for you to continue."

Rather than roll over, U.S. Auto lawyered up and told CBP, "Well, come to think of it, we are not too happy about how you are doing business. In fact, we don't think you are doing business in a manner consistent with the law." The first salvo in this battle, at least at the Court of International Trade, is a motion for a temporary restraining order preventing CBP from imposing the single entry bond requirements. See U.S. Auto Part Network, Inc. v. United States (and a bunch of other named parties).

To understand the larger battle going on here, you need to understand the law regarding trademark enforcement at the border. The Lanham Act is the American trademark law. At section 42, the Lanham Act prohibits the importation any product that copies or simulates the name of a domestic manufacturer or registered trademark in such a way that causes confusion to the public regarding the true origins of the product. In contrast to our normal discussions around the Customs Law Blog, in this context "origin" means the producer or brand owner. Nike, for example, is supposed to be the origin of shoes bearing its swoosh mark. The Tariff Act follows suit and makes counterfeit goods subject to seizure and forfeiture. See 19 USC 1526.

A temporary restraining order is a big deal. It asks the Court to jump in with an order preventing a party from taking some action to prevent an irreparable harm to the movant. To succeed, the movant, in this case U.S. Auto, must show (1) that it will incur irreparable harm in the absence of such order or injunction; (2) that it is likely to succeed on the merits of the action; (3) that the balance of hardships favors the imposition of temporary equitable relief; and (4) that the requested temporary restraining order or injunction is in the public interest. This is the same standard we recently addressed in our Passover edition.

Irreparable harm is the kind of harm that cannot be fixed later through some other remedy such as money damages. Hence, the name (h/t to Brian Garner). According to U.S. Auto, it has not been able to find a surety willing to sign on to the risk of approximately $5 million per week. As a result, it cannot import and its business is effectively winding down. Although the Government characterized this as speculative harm, the Court found it to be a sufficient showing of irreparable harm.

Regarding the relative hardships, the Court balanced the potential end of U.S. Auto's business against CBP's significant expense in resources devoted to inspecting the imports, including the estimated thousands of hours necessary to inspect 90 containers currently at the port of entry. As between these two, the Court found the balance weighs in favor of U.S. Auto. After all, there is no chance of CBP going out of business despite the inconvenience.

The likelihood of success on the merits is, as you might imagine, what makes this interesting. U.S. Auto made four arguments. The first two revolve around the Administrative Procedures Act and the process CBP used to implement the single entry bond requirement. Under the APA, a final agency action can be overturned if, among other things, the action is arbitrary, capricious an abuse of discretion, or not in accordance with law. An agency action can also be overturned if it was taken without the required process.

According to the Court, the record establishes that 99% of U.S. Auto's imports were not suspected of being counterfeits. In other words : U.S. Auto was facing a corporate death sentence for 1% of its imports. That, according to the Court, is contrary to Customs' own mandate to set bond amounts to ensure compliance. And that is enough to show a likelihood of success on the merits of the APA claims.

U.S. Auto's third claim is that Customs' process did not permit the importer an opportunity to challenge the bond amount in a meaningful way. If true, this would be a violation of the fifth amendment requirement that no person is to be deprived of life, liberty, or property without due process of law. At it core, "due process" is notice and a meaningful opportunity to be heard. Although this may seem like a slam dunk, there is a problem. No one has a protected interest (either property or liberty) in continuing to engage in international trade. That precludes a showing of the likelihood of success on this count.

Turning to the public interest, U.S. Auto contends that allowing it to continue in operation while the case is decided on the merits is in the public interest. Specifically, it prevents the likely loss of over 350 jobs and provides the public with a source of cheaper replacement parts. The Government contends that the public is best served through the enforcement of the intellectual property laws and by allowing CBP to better allocate resources. The Court found the public interest favors enforcement of the trade laws.

Because only one of the four factors weighed in favor of the Government, the Court granted the TRO. Under the terms of the order, CBP may continue to require a single entry bond at three times the value of the portion of the shipment believed to be counterfeit merchandise. In other words, CBP may impose the enhanced bond requirement on the 1%, not the 99% of U.S. Auto's imports.

I'll tell you right now: this is an important and interesting case to watch. A related issue is being litigated in the Federal District Court in Delaware, where LKQ Corporation and Keystone Automotive Industries are challenging CBP's conclusion that replacement automotive grills are counterfeit. In that case, the importers are arguing that the doctrine of functionality prevents the grills from infringing trademarks.

Note that the trademarks involved are the shape and configuration of the grills, not the corporate or model logo affixed to the car. BMW, for example, has a distinctive grill that is reminiscent of spread wings or of kidneys, depending on your sensibilities. That design is a registered trademark.

Source: Motor Trend
The doctrine of functionality holds that a product configuration cannot be treated as a trademark where the feature is essential to the function of the article or is competitively necessary to use the feature in the market place. The argument in this case is that an aftermarket replacement grill for a BMW, for example, must be shaped to fit the vehicle. Furthermore, no one would buy a replacement grill for a fancy BMW that did not look like the original. As such, the replacement grills are protected by the doctrine of functionality. That means they do not infringe the trademarks or the trademarks are invalid as applied to the replacement parts.

On the other hand, motor vehicle grills are immediately identifiable. That is why this vehicle sets off so much cognitive dissonance. You know that Rolls grill does not belong on that VW bug.

It is important to note that these cases are about the parts. This is not about some knock-off car manufacturer using the BMW grill on a car in a way that would confuse the car buyer of the source of the car. That would likely be infringement. Also, my assumption here is that the buyers of the replacement grills are not being led to believe that they are buying BMW OEM parts. That is a question of fact going to the way the sale is made and the products packaged.

Another important question is whether trademarks are even the proper tool to protect these parts. The LKQ complaint notes that design patents are available to protect the non-functional aspects of industrial design and that design patents have a limited life. That is a contrast to trademarks, which can be perpetual as long as they are used.

If the plaintiff's successfully show that there is no infringement, then the seizures are not legal and the plaintiffs should be free to continue their businesses without CBP interference. Of course, invalidating a trademark is a big deal. The rights holders will not take this threat to their business without a fight. Thus, this is shaping up to be a customs law case with major collateral impact. So, keep watching.

Also, I should point out that all three companies in both suits are represented by the same intellectual property boutique. So, this is a well coordinated strategy. That will also make this fun to watch.

As a side note to the plaintiffs' lawyers, should it come up, please go strong toward overturning the argument that there is no property interest in continuing an established business that depends on international trade. It seems that the government should not be able to effectively kill a company without the owners and beneficiaries of the enterprise having a constitutional right to be heard. Sometimes when something feels wrong, it turns out it feels that way for a reason.

Thursday, April 05, 2018

No Injunction Against 232 Duties

Yes, I know it has been a while. Trust me, I feel the guilt of not posting. At the Georgetown update last month, someone actually asked me "What happened to the Customs Law Blog?" That hurt. Like most people in the customs and trade field, it has been an extraordinarily busy time. But I digress and wallow in self pity.

The Court of International Trade has denied a motion for a preliminary injunction seeking to prevent the U.S. from imposing a 25% duty on imported steel under Section 232 of the Trade Expansion Act of 1962. The case is Severstal v. U.S. This is the first of what will likely be many challenges to the 232 duties in U.S. courts and at the WTO.

Under the Act, the Commerce Department studied whether imported steel presented a threat to U.S. national security. A similar study on aluminum was running on a parallel track. The report found that the availability of steel is important to national security and that the combination of imports and excess foreign capacity weakens the domestic economy. The report concluded that national security would be improved if U.S. steel production was running at 80% of capacity. To achieve that level of capacity utilization, Commerce recommended, among other things, tariffs on imported steel to encourage the consumption of domestic steel. That Commerce Department conclusion was despite a finding by the Department of Defense that U.S. steel production was sufficient to meet U.S. military needs.

Relying on the Commerce Department findings, the President announced duties in Proclamation 9711, which modified an earlier version of the order. The proclamation proposed to assess a 25% duty on certain steel products imported into the U.S. The duties came into effect on March 23, 2018. One of the reasons for the amended proclamation was to increase the number of exemptions from Canada and Mexico to those countries plus, South Korea, Australia, Argentina, Brazil and the EU.

The plaintiffs in this case are a Swiss steel trader and its related Miami-based affiliate. The Swiss entity is an exporter to the U.S. The Miami-based entity is an importer. Both companies are wholly owned by a Russian company. The company had entered into contracts to sell steel in the U.S. prior to the imposition of the duties. With the additional 25% duty, those contracts will be far less lucrative, if there is a profit at all.

There are a bunch of interesting legal problem for the plaintiffs in this case. The first is jurisdiction, which the Court quickly found it had under 28 USC 1581(i). That law gives the Court of International Trade exclusive jurisdiction over cases brought against the United States challenging "tariffs, duties, fees, or other taxes on the importation of merchandise for reasons other than the raising of revenue." Clearly this is that.

The next question is whether the plaintiffs had standing. In this case, standing is defined as a person who is “adversely affected or aggrieved by agency action within the meaning of section 702 of title 5." That is a reference to the Administrative Procedure Act. The government argued that there is no standing because the Supreme Court has held that the President is not an agency and his actions are not agency actions by which some can be aggrieved. The CIT rejected this argument and found that Congress, by granting exclusive jurisdiction to the CIT to review tariffs, must have also intended that a change in tariffs provide standing in the Court. Otherwise, there is an absurd result of the CIT having exclusive jurisdiction and the district courts being the only place where the plaintiff has standing.

The next question is whether the Plaintiffs could show that they are entitled to injunctive relief. Consistent with this being Passover, that raises four questions. To qualify for an injunction, the plaintiffs needs a "Yes" to the following:
  1. Will the plaintiffs suffer irreparable harm unless the Court grants the requested injunction?
  2. Are the plaintiffs likely to succeed on the merits of the case?
  3. Who will suffer the greater hardship?
  4. Is the requested relief in the public interest?
To succeed on the motion, the plaintiffs need not recline to the left nor dip their bitter herbs in salt water.

With respect to irreparable harm, the Court noted that the important considerations are the immediacy of the harm and whether the harm can be remedied by some subsequent award rather than an injunction. Here, Plaintiffs had steel on the water that would be subject to the 25% tariff when it arrived. Under its contracts, Plaintiffs were responsible for the duty. They lacked the assets to cover that additional expense and had to secure bank financing from the parent company. Plaintiffs also stopped taking orders for delivery to the U.S. in anticipation of the duties being imposed. 

From this, the Plaintiffs identified several possible harms. For example, effort to negotiate with customers to accept a portion of the tariff burden harmed their business relationships. They also lost out on contracts they would otherwise have made in the U.S. The Miami-based Plaintiff asserted that if forced to pay the duties and payback the loan, it would likely end up bankrupt.

The Court was skeptical of some of this. It specifically rejected the notion that having to pay the duties is itself irreparable harm because the importer has the ability to challenge the constitutionality of the assessment and secure a refund if successful. See the entire history of Harbor Maintenance Tax litigation.

However, the other business damage is not the kind of injury that can be remedied with a money judgment. Additionally, the exemptions made for major steel exporters creates further difficulty for the Plaintiffs in that they will not be competing with other producing countries on an equal footing. From all of this, the Court of International Trade found that the Plaintiffs had shown irreparable harm that was more then merely speculative.

Next up is the likelihood of success on the merits. To secure a preliminary injunction, the Plaintiffs need to show at least a fair chance of success on the merits of the claim. The greater the potential harm, the lower this burden. Here, the harm is pretty remote, making this a fairly high burden. This is where things get more interesting.

The Government argued that Plaintiff cannot win this case because the issue is a non-justiciable question of presidential discretion. That means that it is the kind of presidential decision that cannot be second guessed by the Courts. The CIT was unpersuaded. On the contrary, the Court found that Section 232 is a limited delegation of authority from Congress to the President to regulate trade. While the exact decision taken by the President may not be subject to review, the Court can determine whether the President so misconstrued the statute that he has exceeded the scope of his delegated authority. And that is the meat of this case.

Plaintiffs argued that the Congressional delegation of authority to the President limits his action to trade regulation in support of national security. According to Plaintiffs, the President misconstrued his authority when he equated national economic interests with national security. As the Court put it:

Plaintiffs . . . argue that the Section 1862 Steel Tariff is being used in trade negotiations to draw concessions from other countries unrelated to steel imports. Such a mismatch – harm to domestic industry (A) threatens to impair national security, import-restricting actions favoring domestic industry (A) are taken under Section 1862, such restrictions are then lifted in exchange for concessions favoring unrelated domestic industry (B) – would raise a credible question as to whether the President misapprehended the authority granted by Section 1862.
As evidence, the Plaintiff pointed to several statement from the President that point to economic rather than security considerations. For example, at one point, the President said "Tariffs on Steel and Aluminum will only come off if new & fair NAFTA agreement is signed." This is despite Canada and Mexico being significant exporters of steel to the U.S. Arguably, if national security were the issue, they would not be exempt. According to Plaintiffs' argument, national security is a pretextual peg on which the President has hung an economic hat. If so, that would mean he misconstrued his authority.

The problem for Plaintiffs is that the statute give Commerce many factors to consider including the overall economic health of the nation. According to the law:

In the administration of this section, the Secretary and the President shall further recognize the close relation of the economic welfare of the Nation to our national security, and shall take into consideration the impact of foreign competition on the economic welfare of individual domestic industries; and any substantial unemployment, decrease in revenues of government, loss of skills or investment, or other serious effects resulting from the displacement of any domestic products by excessive imports shall be considered . . . .
That means that the President can and should consider the general economic welfare and the welfare of specific industries. The Commerce report acknowledged these factors. Given the breadth of factors to be considered, the Court could not find that the President overstepped his limited delegation of authority.

That conclusion means that Plaintiffs are unlikely to succeed on the merits. 

That might have been enough to decide the case. Nevertheless, being thorough is always a good thing. The Court went on to find that the balance of hardship weighs in favor of the Plaintiffs. As discussed above, the Miami-based Plaintiff faces a risk of bankruptcy. The U.S., on the other hand, only risks a delay in collecting duties.

With respect to the public interest, the Court found the parties on an equal footing. National security is, of course in the public interest. So is the rule of law.

This is a preliminary ruling. The Plaintiffs did not succeed in securing a preliminary injunction. Now they must decide whether they want to press forward with a challenge to the duties. They might also seek an expedited appeal from the Federal Circuit. If this really is bet-the-farm litigation for the U.S.-based plaintiff, expect there to be more. 

Tuesday, March 20, 2018

Patience You Must Have, Young Lawyer

Always two there are, no more, no less. A name for the thing and a use for it. How to classify, you must choose. Choose wrong, and unbalance the tariff law.

Such was GRK Canada. The Court of Appeals chose the use-side, it did. Told the lower court to consider use, even when to the thing a name the tariff gives. Two masters of the tariff struggled for the name-side they did, but the Court went to the use-side.

But a Chosen One there is. Bring balance to the law, the Honorable Circuit Judge Reyna did.

[I'm done, being Yoda is surprisingly exhausting.]

My point is that, in my opinion, the prior decision of the Court of Appeals for the Federal Circuit in GRK Canada, Inc. v. United States, upset the normal course of classification by inserting considerations of use into the analysis of eo nomine tariff provisions.

The case involves the tariff provisions for wood screws (7318.12) and for self-tapping screws (7318.14). Both are eo nomine classifications, though the names suggest a use. In its first ruling on this issue, the Court of International Trade focused on the physical characteristics of the merchandise and of products commonly and commercially known as wood screws and self-tapping screws. The CIT gave no weight to evidence of use in making its determination.

On appeal, the Federal Circuit held that the CIT was incorrect to essentially ignore use. The Court instructed that when an eo nomine tariff classification suggests a particular use, evidence of use consistent with that eo nomine designation is relevant and should be considered. The Federal Circuit sent the case back to the CIT for reconsideration.

On remand, the trade court took note of the evidence of use and reiterated the physical differences between wood screws and self-tapping screws. The Court then held that the proffered evidence of use, while taken into consideration, did not overcome the evidence of physical characteristics consistent with the name of the product.

Now, the Federal Circuit has decided the second appeal in this case. This time, Circuit Judge Reyna, who, along with Judge Wallach, had dissented in the previous decision to deny a rehearing of the case, drafted the opinion for the panel. I do not often name specific judges in these posts. In this case, it is relevant that Judge Reyna had dissented. It is also relevant that both Judge Reyna and Judge Wallach come from a trade background.

This time, the Federal Circuit acknowledged that the CIT had followed its instructions to consider evidence of use. The Court then held:

For the reasons set forth in the Court of International Trade’s opinion, we find these common and commercial meanings of “other wood screws” and “self-tapping screws” to be amply supported by the source material of record without further elaboration.  We thus hold that (1) the common and commercial meaning of “other wood screw” under HTSUS 7318.12 is “a screw that forms its own thread by compressing surrounding material designed to fasten wood to wood or other fibrous material,” and (2) the common and commercial meaning of “self-tapping screw” under HTSUS 7318.14 is a “specially hardened screw, that meets minimum torsional strength requirements, that can cut away material to form a mating thread in non-fibrous material, and is designed to fasten nonfibrous materials, such as metal, to either fibrous or nonfibrous materials.”

Then, the Court performed a Judicial mind trick that can only be accomplished with a lifetime appointment and a high concentration midichlorians: it said, "We decline to accept the Government’s invitation to elevate the role of use in our interpretation of the eo nomine provisions at issue here." I realize the Court means "elevate the role of use above a mere consideration," but it certainly looks to me like that invitation came from the Court. The Government just accepted it.

This is a good decision. While it leaves the original GRK decision in place, it literally restores the balance to the Force, I mean to the law. Use is something the CIT (and presumably Customs and Border Protection) can look at. But, based on this decision, it seems clear that objective physical characteristics will carry the day when interpreting eo nomine tariff language.

Sunday, March 11, 2018

Default Penalties

I have spent considerable time trying to summarize United States v. Rupari Food Services. I have now come to the conclusion that we are all better off if I just don't. You can read it.

When you do, you will see that for a significant time during the litigation of this matter, I served as co-counsel to the defendant along with my friend Peter Quinter of GrayRobinson. At approximately the time that Rupari filed for bankruptcy protection, we were discharged by the client. The Court entered a default judgment on the basis of the facts asserted in the complaint and for the full amount claimed by the United States.

That's very likely the end to what is a monumentally sad case.

March Madness

March is always a busy travel month for me. Despite having just returned from Washington, DC, I am presently on my way to San Diego. The ICPA conference, which starts this evening, also explains why half of the customs lawyers who practice in Chicago are on this flight. If anything bad happens to this plane, there will be a lot of openings for customs lawyers in Chicago.

This flight also gives me a long overdue opportunity to post about a few relevant cases. The first of which is Moen Inc. v. United States, which addresses the seemingly mundane question of the legal and existential nature of the humble toilet paper holder.

As we shall see, this decision is a clean sweep for the plaintiff who should be congratulated for effectively wiping up a victory. I am certain counsel for the plaintiff is flush with pride. The Government, which found no relief, may feel some urgency to an appeal.

Moen believes the TP holders are properly classified as base metal mountings of Heading 8302. Customs and Border Protection believes the correct classification to be as other articles of zinc including toilet and sanitary wares in Chapter 79. One item is composed primarily of steel and was classified as such by Customs in Chapter 73.

The Court of International Trade started its analysis by determining the scope of Heading 8302. That heading covers:

Base metal mountings, fittings and similar articles suitable for furniture, doors, staircases, windows, blinds, coachwork, saddlery, trunks, chests, caskets or the like; base metal hat-racks, hat-pegs, brackets and similar fixtures; castors with mountings of base metal; automatic door closers of base metal; and base metal parts thereof:

First, zinc is a base metal as defined by Section XV, Note 3.

The next question the Court considered is the meaning of the phrase “base metal hat-racks, hat-pegs, brackets and similar fixtures . . . .” Because the merchandise at issue is neither a hat-rack, nor a hat-peg, the question seems to have been whether it is “similar” to those items. Or, the merchandise might actually be “brackets.” Defining these terms, the Court found that hat-racks, hat-pegs, and brackets have similar characteristic in that they are affixed to a wall or similar structure and used to hang, hold, or support some other item, which, frankly, sounds a lot like a toilet paper holder.

The Government’s counterargument was based on two propositions. First, that the toilet paper holders differ from hat-racks and pegs in that they include a mechanism to secure the roll that is not found in racks and pegs. The first problem with that argument appears to have been that it was not true for all of the models at issue. Still, if the distinction were meaningful, it might have lead to a different result for some of the items. The Court did not find it meaningful.

The second argument is that hats, coats, towels and similar items are removed from their respective racks as an entirety rather than in segments as is the case with toilet paper. First, had this been my case, I would have asked the Judge to take judicial notice of the fact that the ability to take a reasonable portion of toilet tissue for the job at hand is not universal and is almost entirely absent from humans under the age of 10. But, I digress. More important, the Court finds this distinction lacking in the text and also countered by the example of paper towels which are both towels and doled out in segments.

I do have a slight question about how this part of the analysis was framed. The Court was trying to find the defining common characteristics of racks, pegs, and brackets. That exercise, under the principle ejusdem generis, is not textual. I am not balking at the result here. I just wonder whether the right approach might have been for the plaintiff to point to racks that have a similar function. I am thinking, for example, of the racks that hold rope, wire, and chain in hardware stores and are used to dole out portions for sale. I have no idea where those would be classified, but they same similar in function. Textiles and ribbons are displayed in a similar manner.
Turning to the Government’s proposed classification, the Court noted that Note 2 to Section XV excludes articles of Chapters 82 and 83 from Chapters 72 to 76 and 78 to 81. Given that the Court had just concluded that these products are properly classified in Heading 8302, it follows that they cannot be classified in Chapter 79 as articles of zinc or in Chapter 73 as articles of steel.

Ipso facto, the Government’s argument goes down the drain.

Thursday, March 08, 2018

Steel and Aluminum Proclamations

Here is the lowdown on President Trumps action on steel and aluminum.

Saturday, February 24, 2018

On 4202: Legal Briefs, Boxer Briefs, and Boxer Dogs

Back when I was a young law clerk at the U.S. Court of International Trade, I was occasionally inspired to lobby my judge to insert a clever phrase or literary allusion into an otherwise dry opinion. I specifically recall trying to insert the phrase "second thwack at the piñata" where "second bite at the apple" would have been the more common usage. In a case involving the tariff classification of fruit preserves, I tried to convince the judge to use phrases like "the defendant is in a jam," "Customs squeezed the importer," "the fruits of this effort," etc. None of that made it into the published opinion.

It appears that Judge Katzmann of the U.S. Court of International Trade has a much more liberal view of drafting, or possibly a much more persuasive law clerk. I gather that from reading Quaker Pet Group, LLC v. United States. The decision opens with this scene:

Catching sight of three tiny orphaned kittens wandering in a battlefield tent, President Abraham Lincoln directed Colonel Bowers of General Grant’s staff:  “Colonel, I hope you will see that these poor little motherless waifs are given plenty of milk and treated kindly.” Some eighty years later, President Harry Truman is famously said to have remarked,“[i]f you want a friend in Washington, get a dog.” It would certainly have been beyond the contemplation of the 16th or 33rd Presidents that their animals might be categorized as items or personal effects.  Yet, the determination of that categorization under the domestic tariff scheme is central to the question presented by the case before this court: how should cloth pet carriers be classified for the purposes of determining what tariff rate should apply to their importation?

 The issue in the case is whether cloth pet carriers are classifiable as similar to sport and travel bags in HTSUS Heading 4202 or as other made up articles of textile in Heading 6307. What we are talking about is something like this:

This item clearly shares many characteristics of the basic gym bag, which would be classifiable in Heading 4202, which covers:

Trunks, suitcases, vanity cases, attaché cases, briefcases, school satchels, spectacle cases, binocular cases, camera cases, musical instrument cases, gun cases, holsters and similar containers; traveling bags, insulated food or beverage bags, toiletry bags, knapsacks and backpacks, handbags, shopping bags, wallets, purses, map cases, cigarette cases, tobacco pouches, tool bags, sports bags, bottle cases, jewelry boxes, powder cases, cutlery cases and similar containers, of leather or of composition leather, of sheeting of plastics, of textile materials, of vulcanized fiber or of paperboard, or wholly or mainly covered with such materials or with paper:…
   With outer surface of sheeting of plastic or of textile materials:...

But, the item to be contained in this bag is not sweaty socks and wicking t-shirts. It is a living, breathing, and potentially annoying little dog. Does that matter?

It does, because of Additional U.S. Note 1 to Chapter 42, which states (emphasis added), “the expression ‘travel, sports and similar bags’ means goods, other than those falling in subheadings 4202.11 through 4202.39, of a kind designed for carrying clothing and other personal effects during travel, including backpacks and shopping bags of this heading, but does not include binocular cases,
camera cases, musical instrument cases, bottle cases and similar containers.” Because dogs and cats are not clothing, for this bag to be a travel, sports or similar bag, the contained pet must be "personal effects."

The meaning of "personal effects" is not clear except that it applies to inanimate objects generally worn or carried on one's person. Examples include keys, wallets, watches, and similar items. Coco the rambunctious schnauzer and Fluffy the aloof tabby are not similar items. According to Judge Katzmann, "Pets are living beings, and thus not things or items."

Looking at the items specifically mentioned in Heading 4202, one thing is clear: there are no trunks, bags, cases, or other containers in that list that are intended to transport, organize, carry and protect living creatures. Under the legal principle of ejusdem generis,  when a general word or phrase follows a list of specifics, the general word or phrase will be interpreted to include only items of the same class as those listed. The class of goods listed in 4202 is designed to help travelers, commuters, and others in transit tote their personal effects, whether that be legal briefs or boxer briefs, but not boxer dogs.

On this record, the Court was able to conclude as a matter of law that the pet carriers are not similar to the items listed in Heading 4202.

What remains to be done is figure out where these carriers are classified. Heading 4202 is now off the table. At this preliminary stage of the case, there is insufficient evidence before the Court to make a determination as to the correct classification. Consequently, one of two things are going to happen.

[CONFLICT WARNING: This case is being litigated by my law firm. And, I personally did the first successful litigation on this issue in a case called Firstrax, so what follows might be viewed as biased.]

The parties can continue with formal discovery in which the plaintiff will produce facts showing that the carriers are textile items. Then, plaintiff will move for summary judgment, produce that evidence to the Court and hopefully win the case. For the government to win, it will need to show that the carriers are not classifiable in 6307 either because they are not textile products or there is a better alternative classification. That could happen, I just don't happen to see it.

The alternative is that the parties will trade evidence until the government agrees that the carriers are textile products and that 6307 is the best classification other than its preferred 4202. At that point, the parties should be able to enter into an agreement to stipulate these cases in favor of the plaintiff. That might not happen if the government believes the Court of International Trade is wrong in its reading of 4202 and wants to appeal to the Federal Circuit, which I can only hope is packed full of pet lovers.

Tuesday, January 23, 2018

The Unbearable Unambiguity of Laws

Someday, when I am done practicing and looking for a final way to stay engaged, I would like to teach Administrative Law to JD students. I often tell student that, for what I do, the single most important class I took in law school was not any class with "international" in the course description. It was Administrative Law. My practice is all about what the federal government can and cannot require of importers and exporters and what must be required of the federal government. That is administrative law.

Two recent decisions from the Court of Appeals for the Federal Circuit put this nicely in focus.

The first is Capella Sales & Services Ltd. v. United States. This is one of those cases with a relatively straight-forward analysis that leads to a bad result. Capella entered aluminum extrusions from China. At the time its entries liquidated, Commerce had determined the countervailing duty deposit rate to be 374.15%. Capella did not challenge the rate and, as a result, there was no injunction preventing the liquidation. Subsequently, other importers did challenge the rate, which was found to be grossly incorrect. The correct rate was determined to be 7.37%. After that decision, Commerce, as it is required to do, published a notice of the judicial determination "not in harmony with" its determination. Subsequent liquidations would be at the lower rate.

If you have any empathy, you feel for Capella. It had terrible timing. Earlier imports might have escaped the preliminary determination entirely. Later imports would have benefited from the lower rate. More legally, it appears that Customs and Border Protection liquidated entries at a rate that was determined to be unlawful. Surely, Capella should have some way to recoup the difference.

Unfortunately, that is not how the law is written. The statute requires that entries be liquidated in accordance with the determination of the Commerce Department. 19 USC 15106a(c)(1). The only exceptions are (1) where a court has ordered an injunction against liquidation and (2) where the entry is after the Federal Register Notice of a decision contrary to Commerce's determination. Alternatively, (3) an interested party can request an administrative review of the applicable rate under 19 USC 1675(A)(2)(C). There is no factual dispute that Capella's entries do not fit into one of these categories.

Capella basically argued for a writ of rachmones. It asked the court to take note of the unusual circumstances of a 375% deposit rate compared to a roughly 7% assessment rate. In light of that, it asked the Court to find that the statutory scheme was ambiguous, giving the Commerce Department discretion (and presumably a mandate) to liquidate at the lower, "correct" rate. The textual basis for that conclusion was reed thin.

Citing the Chevron doctrine, Court noted that where Congress has specifically addressed a question, the Court's role is to give effect to the law as written. Here, it found that Congress made no exception for the bad circumstances of this case despite knowing exactly how to draft such exemption. Given the lack of ambiguity, the Federal Circuit affirmed the liquidations at the higher rate.

The second case is Glycine & More, Inc. v. United States. Here, the issue is whether Commerce can change the meaning of a regulation by publishing an informal interpretation in a "guidance" document. The regulation at issue is 19 CFR 351.213(d)(1) which explains what Commerce is supposed to do when an interested party requests an administrative review and subsequently withdraws the request.

The regulation states:

The Secretary will rescind an administrative review under this section, in whole or in part, if a party that requested a review withdraws the request within 90 days of the date of publication of notice of initiation of the requested review. The Secretary may extend this time limit if the Secretary decides that it is reasonable to do so.

In this case, a party that requested review submitted a notice of the withdrawal and requested an extension of the 90 days to complete the request after the 90-day period had run. Commerce refused to extend the period and, therefore, continued the reviews. The requesting party refused to participate and was assigned a 453.79% deposit rate on the basis of facts otherwise available and an adverse inference. That certainly hurt.

Commerce did so based on an interpretive notice from 2011 stating that Commerce will not grant extensions "unless the requestor demonstrates that an extraordinary circumstance has prevented it from submitting a timely withdrawal request." The Court of International Trade held that Commerce's interpretation of its regulation was unreasonable and defeated the purpose of the regulation.

On appeal, the Federal Circuit applied the same analysis it applies to an agency interpretation of a statute, which is what we discussed above. If the regulation is clear, "it is the duty of the courts to enforce it according to its obvious terms and not to insert words and phrases so as to incorporate therein a new and distinct provision."

The Federal Circuit found no ambiguity. It found that prior to the 2011 Notice, the regulation was understood to provide Commerce with wide discretion to exercise its judgment to grant extensions in reasonable circumstances. After the 2011 Notice, the regulation was interpreted to limit that discretion to "extraordinary circumstances." No such limitation exists in the text. According to the Court, that is an "incompatible departure from the clear meaning of the regulation." Commerce cannot re-write the regulation through an informal guidance notice. It must follow the formal notice-and-comment rulemaking process.

Consequently, Commerce must reconsider its denial of the requested extension as if the 2011 Notice did not exist.

And that is an administrative law two-for-one post.

Wednesday, January 10, 2018

The Case of the Substitute Radical

While I had big plans for this post, time and work have intervened. I will skip the chemistry lesson and tell you what you need to know. This is the upshot from the CAFC decision in Chemtall.

The classification issue boils down to whether acrylamide tertiary butyl sulfonic acid ("ATBS") is an amide or a derivative of an amide. An amide is a class of chemicals that is defined by a carbon atom double bonded to an oxygen atom and to a nitrogen atom. The carbon atom is bonded to a radical designated R1. The nitrogen atom is bonded to two radicals designated R2 and R3. That makes for molecule that looks like this:

The issue here is the composition one of the radicals. Is the product still an amide if one of the radicals is bonded to the sulfur compound SO3H? If so, the product is classifiable in 2924.19.11 as an amide (3.7%). If not, it is classifiable in 2924.19.80 (6.5%).

Here's the answer: most secondary chemistry resources define amides as having only hydrogen or hydrocarbyls bonded to the nitrogen. The sulfur compound is neither. Furthermore, Chemtall's expert testimony that an amide can contain a substituted radical was not, according to the Court, persuasive. The non-binding Explanatory Notes were not clear on this point. Thus, Chemtall failed to convince the Court that the CIT decision was incorrect. The Federal Circuit affirmed, leaving the classification as 2924.19.80.

Two interesting asides appear in the decision, both of which reinforce fundamental points of tariff classification law. The first is that a dictionary definition is most persuasive if it appears close in time to the promulgation of the statutory language. In this case, the 1986 edition of two dictionaries were favored because they were closest in time before the 1989 enactment of the HTSUS. Second, the two-digit statistical suffix forming the 9th and 10th digits of the tariff item (and corresponding language) are not relevant to the interpretation of the tariff. This decision will probably be cited for those two propositions more than anything else.

Yes, the title of this post is intended to sound like a Sherlock Holmes mystery. If I did not have a real job, this post would follow suit.

Sunday, January 07, 2018

Contain Yourself

The Container Store v. United States has an interesting history. It involves the tariff classification of elfa "top tracks" and "hanging standards." Top tracks are the horizontal mounting members that can be affixed to a wall. The hanging standards are vertically connected to the top tracks. The hanging standards have slots that can be used for mounting attachments such as shelves, baskets, and drawers allowing consumers to build customs storage solutions. I am pretty sure this is what we are talking about:

This may ring a bell with you, because we have been down this road before. We discussed the CIT decision in this case here. And, before that, we addressed the same question in a case called storeWALL

The reason this issue is back before the Court of Appeals for the Federal Circuit is that in customs law, few things are ever final and beyond subsequent question. Each time an importer has a classification dispute with Customs and files a protest, the denied protest can be the basis of a separate lawsuit. For reasons of history and Supreme Court precedent (that might be worth a second look), a CIT decision stating the classification of the merchandise does not preclude either party from challenging the decision again and re-litigating it. For the lawyers reading this, despite what you may have learned in Civil Procedure, normal rules of res judicata do not apply to customs litigation. 

In the first Container Store case, Judge Ridgway followed the Federal Circuit decision in storeWall and concluded that the merchandise is classifiable in Heading 9403 as parts of unit furniture. Apparently, the United States government was not happy with that result, and re-litigated the issue. This time, the case landed on the desk of Judge Barnett who reached a different conclusion. According to Judge Barnett, the metal components at issue here differ from the plastic storeWall products. He found that Chapter 94 Note 1(d) excludes the merchandise, which he found to be "parts of general use." Accordingly, they should be classified in Heading 8302. 

Heading 8302 covers:

Base metal mountings, fittings and similar articles suitable for furniture, doors, staircases, windows, blinds, coachwork, saddlery, trunks, chests, caskets or the like; base metal hat racks, hat-pegs, brackets and similar fixtures; castors with mountings of base metal; automatic door closers of base metal; and base metal parts thereof:
Heading 9403, on the other hand, covers "Other furniture and parts thereof . . . ."

Note 2 to Section XV states that parts of general use include "[a]rticles of heading  . . . 8302." Container Store does not dispute that parts of general use of Heading 8302 are excluded from Heading 9403. It argued, however, that the merchandise is not parts of general use. Spoiler: The Federal Circuit agreed with The Container Store.

Relevant here are the Explanatory Notes to the Harmonized System. With respect to Heading 8302, the Notes state:

This heading covers general purpose classes of base metal accessory fittings and mountings, such as are used largely on furniture, doors, windows, coachwork, etc. Goods within such general classes remain in this heading even if they are designed for particular uses (e.g., door handles or hinges for automobiles). The heading does not, however, extend to goods forming an essential part of the structure of the article, such as window frames or swivel devices for revolving chairs.
According to the Federal Circuit, the top tracks and hanging standards form the indispensable structural framework of the modular storage unit. Based on the Explanatory Note, these items are excluded from classification in 8302. That means, the goods are not excluded from Heading 9403.

This should not be seen as upending the law on parts of general use. It remains true that parts of general use are to be classified as such even if they are specialized to a specific task. The Federal Circuit addressed this in its discussion of its prior Honda decision. That case involved the classification of an oil bolt, which is a specialized fastener that also includes features allowing it to transfer oil. Honda argued that it was classifiable as a vehicle part, not a bolt. The Federal Circuit disagreed. The difference here is that there was no reason to exclude the oil bolts from the classification for fasteners. Here, the Explanatory Notes indicate that structural components are not included in Heading 8302.

Because the top tracks and hanging standard are not classifiable in 8302, they are not parts of general use. Because they are not parts of general use, they are not excluded from 9403. Having reached that conclusion, and consistent with storeWall, the Federal Circuit concluded that this merchandise is best classified in 9403.90.80 as parts of unit furniture.

Note that this does not follow directly from storeWALL as a matter of stare decisis. This is related to but different than the lack of res judicata mentioned above. Stare decisis is the legal principle that cases should be decided based on precedent. This is a fundamental characteristic of the common law system used in the U.S., Canada, the U.K., and other jurisdictions. But, stare decisis only applies to the legal determinations and not to the questions of fact nor to legal determinations not part of the prior holding. In a classification case, whether the item fits in a particular heading is a question of fact. So stare decisis does not apply to the final classification determination. And, storeWall did not address the question of parts of general use and Heading 8302. So, while the result is the same as storeWALL, that decision did not dictate the outcome.

Thursday, January 04, 2018

Waterproof Footwear

A long time ago, I went to a local shoe store in search of a pair of fairly rugged work boots that I could wear in the winter when forced to work outside for some reason. I recall the sales guy telling me that a particular pair was 80% waterproof. Because I can sometimes be a jerk, I asked what that means and he just repeated that they are 80% waterproof. I asked whether that means they leak 20% of the time, or 20% of the water comes in, or that 80% of the surface area was 100% waterproof, which I am certain was the correct answer. He was unable to answer and this became a long-running joke in my house about the misuse of statistics.

I am reminded of that by LF USA, Inc. v. United States, a Court of International Trade Case involving the classification of plastic children's clogs. This is a pretty quick decision that focuses on the meaning of "waterproof." If the clogs are waterproof, they would be classified in Heading 6401, provided they also meet the other requirements. If not, they are classified as Customs determined is 6402. I envision these as Crocs-like products entirely of plastic. Surely, they would suffer no damage by being soaked in water for eternity. In that sense, they are waterproof. But, is that the legal meaning of the term?

There is no dispute about the nature of the merchandise, so this turns entirely on the meaning of the tariff.
Heading 6401 covers:

Waterproof footwear with outer soles and uppers of rubber or plastics, the uppers of which are neither fixed to the sole nor assembled by stitching, riveting, nailing, screwing, plugging or similar processes . . . .

Note 3 of the Additional U.S. Notes to Chapter 64 defines "waterproof" for purposes of Heading 6401 as "designed to protect against penetration by water or other liquids, whether or not such footwear is primarily designed for such purposes." The parties agree that the clogs at issue do not protect the foot against contact with water or other liquid. Plaintiff argued that the full heading shows that "waterproof" refers to the means of fixing the sole to the upper by some method other than stitching, nailing, plugging, etc. Presumably, those methods leave holes and render the shoe less than waterproof, perhaps only 80% waterproof.

The Court rejected this argument. It applied the legal note and dictionary definitions and found that footwear is waterproof when it is designed to protect against the penetration of water and other liquids. Given that clogs fail that test, the Court found in favor of the government and affirmed CBP's classification. The remaining issues in the case, thereby, fell to the wayside.

That should wrap up the CIT cases for 2017 that I will cover, I note that there are a few CAFC decision I missed when my work life got surprising busy in June. I'll catch up on those soon.