Monday, October 01, 2018

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.

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.

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.

Thursday, July 05, 2018

Archaeological Pieces Under 9705 HTSUS

As of July 1, 2018, importers of archaeological pieces have to report their merchandise to U.S. Customs and Border Protection with new detail. That is because the U.S. has added a new statistical breakout for these items and two related statistical notes.

Prior to January of 2018, Heading 9705 provided, in its entirety:

Click Image for Better View

For people who trade in these items, those who study the legal and illegal trade in antiquities, and (presumably) enforcement agencies, lumping archaeological, historical, and ethnographic pieces together did not provide adequate detail about what is entering the country. As previously drafted, 9705.00.0070 covered items as diverse as a 1936 Bugatti race car and an Egyptian Stone Ushabti  from the 18th Dynasty.

Working on behalf of the U.S. Committee of the Blue Shield and with the support of several interested not-for-profit entities, we asked the 484(f) Committee to further divide this provision to separately identify, in particular, archaeological items.  The result is a new level of detail on the treatment of the items in Heading 9705 and new statistical notes to add clarity to the language. As a side benefit, there is now also a recognition that coins can, depending on age and how they were collected, constitute archeological pieces.

The new 9705 reads as follows:

Click Image for Better View

Note that the subheading for coins now includes the limitation "other than archaeological pieces." Beyond that, there are new breakouts at .75 for archaeological pieces and .80 for ethnographical pieces. Both breakouts reference statistical note 1, which reads:

For the purposes of statistical reporting number 9705.00.0075, "Archaeological pieces" are objects of cultural significance that are at least 250 years old and are of a kind normally discovered as a result of scientific excavation, clandestine or accidental digging or exploration on land or under water. For the purposes of statistical reporting number 9705.00.0080, "Ethnographic pieces", which may also be called "ethnological pieces" are objects that are the product of a tribal or nonindustrial society and are important to the cultural heritage of a people because of their distinctive characteristics, comparative rarity or their contribution to the knowledge of the origins, development or history of that people. See Customs and Border Protection (CBP) Informed Compliance Publication on "Works of Art, Collector's Pieces, Antiques, and Other Cultural Property".

To ensure that the reporting of archaeological pieces is not obscured in sets or collections imported as a whole, the tariff includes new statistical note 2, which reads:

For statistical reporting of merchandise provided for in subheading 9705.00.00, collections made up of articles of more than one type of cultural property, i.e., zoological, biological, paleontological, archaeological, anatomical, etc., shall be reported by their separate components in the appropriate statistical reference numbers, as if separately entered.
These new data present some important opportunities. To the extent importers are properly reporting the full tariff item and statistical suffix at the time of entry, Customs and Border Protection will have better data to focus on imports that might be subject to restrictions under the 1970 UNESCO Convention on the Means of Prohibiting and Preventing the Illicit Import, Export, and Transfer of Ownership of Cultural Property. That Convention is implemented in the U.S. as the Convention on Cultural Property Implementation Act ("CCPIA"), 19 USC 2601-2613 and in customs regulations at 19 CFR 12.104-12.109. Under these laws and regulations, the U.S. can extend protection to archaeological and ethnological materials from States that have ratified the Convention and for which the United States has entered into a bilateral agreement.  There is also a mechanism to unilaterally extend emergency protection. Covered items cannot be imported to the United States without documentation showing that their exportation was not in violation of the laws of the originating State or that their importation was otherwise permitted under the CCPIA.

For products not properly declared as archaeological or ethnographic pieces using the correct statistical suffix, the failure to do so might expose the importer to penalties under the customs laws. This is not new, but by separating archaeological and ethnographic pieces from historical pieces, an importer will not be able to assert that it item is a historical piece to disguise its true nature while reporting the correct statistical suffix covering historical pieces as well as archaeological and ethnographic pieces. The importer will now have to pick one and get it right.

While it is true that errors in statistical reporting do not usually result in a customs penalty, this circumstance is different in that the correct reporting goes to admissibility of the merchandise. For items subject to protection under the CCPIA--including those from Iraq and Syria that are protected under special legislation--admissibility depends on the documentation showing legal exportation. The new reporting requirements should help to flag those items and give Customs an additional point of enforcement action.

Why does this matter? Mainly because regardless of the source or nature of the item, the United States, as a party to the Convention has made a policy decision that it wants to help countries preserve their cultural heritage by working to reduce illicit trade in these items. On top of that, there is strong evidence indicating that the illegal sale of looted artifacts has been a source of operating income for terrorist organizations and that this has resulted in significant destruction to priceless sites. See, for example here and here. We are hopeful that these and possibly future changes to the HTSUS will provide Customs, researchers, and traders with better data from which to monitor legal and prevent illegal trade in cultural property.

Sunday, July 01, 2018

Game of Thrones, the HTSUS Edition

Heading 9817 of the Harmonized Tariff Schedule of the United States includes a subheading covering the following:

Articles specially designed or adapted for the use or benefit of the blind or other physically or mentally handicapped persons; parts and accessories (except parts and accessories of braces and artificial limb prosthetics) that are specially designed or adapted for use in the foregoing articles: 

The question presented to the U.S. Court of International Trade in Danze, Inc. v. United States is whether certain toilets and toilet tanks fall within this subheading and are, therefore, entitled to duty-free entry to the United States.

The basis for the plaintiff's argument is that the merchandise complies with the Americans With Disabilities Act. The toilets include the Orrington High-Efficiency One-Piece model shown here and the Cirtangular Two-Piece. The tank involved is the Orrington tank. Note that none of these products have any obvious adaptations for the disabled such as grab bars. Nevertheless, the toilets meet the ADA requirements for accessibility. According to Danze literature, the ergonomics of the toilets make sitting and standing more comfortable for users.

Tariff item 9817.00.96 implements the Nairobi Protocol to the Florence Agreement on the Importation of Educational, Scientific and Cultural Materials. Part of the intent of the protocol is to provide “duty free treatment to articles for the use or benefit of the physically or mentally handicapped persons, in addition to articles for the blind."

There are two question that relate to the application of this provision to imported goods. First, is the item specially designed in some way to accommodate the user? Second, is that accommodation related to a physical or mental handicap? According to the legal notes to Chapter 98, "'physically or mentally handicapped persons’ includes any person suffering from a permanent or chronic physical or mental impairment which substantially limits one or more major life activities, such as caring for one’s self, performing manual tasks, walking, seeing, hearing, speaking, breathing, learning, or working.”  U.S. Note 4(a), Subchapter XVII, Chapter 98, HTSUS. 

"Specially designed" is not defined in the HTSUS. However, Courts have previously construed this term and the legislative history provides guidance. In the end, the Court held that  “articles specially designed for handicapped persons must be made with the specific purpose and intent to be used by or benefit handicapped persons rather than the general public.” Moreover, "[a]ny adaptation or modification to an article to render it for use or benefit by handicapped persons must be significant."

There is no debate that these products comply with the ADA and associated federal guidelines. The question is whether that is enough to meet the classification requirement. According to the Government in this case, mere compliance with the ADA is not sufficient to show a significant adaption.

According to the Court, the ergonomic design of these toilets (and the associated tank) is primarily the seat height, which makes them comfortable. This toilet height has become a popular option for general consumers, not just (or predominantly) the disabled. This is also true of the flush controls and the elongated bowl design.

Without more evidence of specific and significant adaptation to disabled users, Danze was unable to show that these toilets were specially designed or adapted for the use or benefit of the disabled. Rather, it appears that they are consumer-oriented products that also satisfy the requirements of the ADA. Accordingly, the Court of International granted summary judgment in favor of the United States.

Tuesday, June 26, 2018

Let's Talk About Bugs

The United States Department of Agriculture has the important obligation to protect American farms, orchards, forests, parks and backyards against the damage that can be caused by plant diseases and pests that enter the United States through our ports of entry. This is derived from the Plant Protection Act, 7 USC 7701. For commercial importers, the most common pest vector is the humble wooden pallet, which can house and transport a number of pests including horntails (AKA wood wasps).

The problem with these critters and many like them is that they bore into trees to lay eggs. That can result in bugs emerging from processed lumber or even from completed structures.

When pests are discovered by Agriculture Inspectors at port of entry, the USDA will issue an Emergency Action Notice. Generally, the EAN requires that the offending shipment be turned around and exported from the U.S. 7 CFR 319.40-3. To prevent that from happening, the USDA has adopted a system under which wood packing material may be imported if there is adequate evidence of it having been treated to prevent infestation. The required treatment must be consistent with the international ISPM-15 standard and the material must be marked accordingly.

There has been a lot of recent enforcement action on this of late. In September, CBP issued a notice stating that "to motivate" compliance, it was alerting the trade that CBP may issue penalties for single violations. This was a change from the prior practice of not issuing a penalty until there had been five violations. CBP further noted that there would be no yearly reset for calculating repeat violations. See CSMS #17-000612 (Sep. 26, 2017).

One company that ran afoul of the wood packing material ("WPM") rules is Andritz Sundwig GmbH. Andritz imported $39.5 million in machinery for the production of steel and aluminum in two shipments. For each shipment, it received an Emergency Action Notice demanding the exportation of the cargo. Rather than comply with the EAN, Andritz filed a protest challenging the exclusion and requested accelerated disposition to get the case before the U.S. Court of International Trade. The resulting case is Andritz Sundwig GmbH v. United States.

Andrtiz asked the Court to review the denial of the protest and the demand for immediate exportation. Andritz also asked for declaratory judgment that the EANs are invalid. Andrtiz wanted the Court to order CBP to permit the merchandise to be separated from the WPM and the WPM fumigated.

In response, the United States moved to dismiss the case on the grounds that the Court of International Trade lacked subject matter jurisdiction over the dispute.

In most cases, a denied protest is subject to review at the CIT. That is usually non-controversial. However, a protest of the exclusion of merchandise is slightly different than the typical protest over classification, value or rate of duty. Exclusion can only be protested when it is "under any provision of the customs laws." 19 USC 1514(a)(4).

The authority for the EAN, according to the CIT, is not the "customs laws." Rather, it is the Plant Protection Act. The EAN states that the Department of Agriculture is the supervisory agency involved. As a result, the CIT held the denied protest was not properly before it. Moreover, the case was not within the Court's residual jurisdiction, which also relates generally to tariffs, duties, quantitative restrictions (other than for public health and safety) and the administration thereof.  The case belongs in the U.S. District Court for the Southern District of Texas, to which the case was transferred.

One thing to note is that the CBP administrative message notes that a penalty for an EAN would be issued pursuant to section 1592 or section 1595a of Title 19 of the U.S. Code. Title 19, as you likely know, is "Customs Duties," and penalty cases (at least under 1592) are routinely before the CIT. This makes me think that the CIT has not seen the last case involving an APHIS penalty.

Also, as a matter of grammar, I am not following the government's lead and stating that goods subject to an EAN must be re-exported. To me, that implies that they merchandise was previously exported from the U.S. I think the better usage is that the goods need to be exported, for the first time. Anyone have a reason why I am wrong about that?

Sunday, June 03, 2018

Last Stand for Active Frontier

The saga of the Active Frontier penalty case has been going on since 2011. The CIT has just issued a default judgment against the company, ending this phase of the litigation.

For background, start with this post.

The important take-away from this case is how the Court set the penalty amount. The alleged material false statement in this case is the country of origin. Under the circumstances, this is a non-revenue violation and the maximum penalty is 20% of the value of the goods. 19 USC 1592(c)(3). The United States sought the maximum allowable penalty, which was about $80,000.

Despite the defendant not showing up to refute the claims or assert any mitigating factors, the Court did not say it was bound to assess the maximum penalty. On the contrary, it noted that the penalty is to be set de novo by the Court on the basis of the available information. Here, the Court noted that the true bills of lading clearly showed the true origin of the merchandise. Defendant, exercising even minimal effort could have determined and reported the correct country of origin. On that fact, the Court found it appropriate to assess the maximum penalty for a negligent violation.

OMG, a Dispatch from the Benelux

Antwerp is a lovely city in which to spend a few days talking about trade law, European privacy regulations, and eating everything in sight. There were also more than a few Belgian beers involved.

I am now on a train from Antwerp to Amsterdam. On the way, I figured I would read OMG, Inc. v. United States. "Why?," you might reasonably ask. [Is that remotely the correct way to punctuate that sentence?] Well, it is what I do for you.

Despite the caption, OMG is not about internet-age acronyms. Nor is it about products intended for teenage girls in poorly written CW dramas. [Note: I don't actually know that teenage girls on CW dramas ever say "OMG," but I feel like they might.] Rather, it is about the scope of the antidumping duty order on steel nails from Vietnam. The scope of that order states, in part:

The merchandise covered by the Orders is certain steel nails having a nominal shaft length not exceeding 12 inches.  Certain steel nails include, but are not limited to, nails made from round wire and nails that are cut from flat-rolled steel.  Certain steel nails may consist of a one piece construction or be constructed of two or more pieces.  Certain steel nails may be produced from any type of steel, and may have any type of surface finish, head type, shank, point type and shaft diameter.  Finishes include, but are not limited to, coating in vinyl, zinc (galvanized, including but not limited to electroplating or hot dipping one or more times), phosphate, cement, and paint.

OMG imported zinc anchors into the United States. The Court described the zinc anchors as follows:

Each Zinc Anchor consists of two components: (1) a zinc alloy body, which comprises approximately 62% of the total weight of the complete Zinc Anchor; and (2) a zinc plated steel pin, which comprises approximately 38% of the Zinc Anchor’s total weight.  The zinc body and zinc plated pin are produced in Vietnam, and then assembled together in Vietnam, resulting in a one-piece article of commerce: a Zinc Anchor. While it may be physically possible to separate the zinc body from the steel pin after the Zinc Anchor has been created, disassembly is not commercially realistic, in light of the Zinc Anchor’s cost and use, as well as the likelihood that the components will be damaged and rendered useless by the disassembly process.
The controversy here surrounds the zinc-plated steel pin. The pin is arguably a nail, though it seems unlikely that the pin will be separated from the remainder of the anchor. The value of the pin is about 17% of the value of the anchor.  Based on the OMG website, I am pretty certain this is what we are talking about:

This item is used to fasten things to masonry walls. The assembly is inserted into a pre-drilled hole. The pin is then struck with a hammer. The force of the hit, moves the pin deeper into the shaft, which then widens to accommodate the pin. This works as a fastener because the body expands in the hole, not because the nail bites into wood or any other material.

In 2017, the Department of Commerce held that this item is unambiguously within the scope of the relevant order. OMG challenged that decision in the Court of International. On review of a scope determination, the CIT must uphold the decision unless it is unsupported by substantial evidence or otherwise not in accordance with law.

The Court started its analysis with the language of the order. The critical question is what constitutes a nail. The Court concluded that "nail" unambiguously refers to a slim, usually pointed fastener to be inserted by impact. The Court then noted that he pin, which is only part of this fastener, is not itself a fastener. It is initially inserted into a pre-drilled hole and, after hammering, does not grip the material into which it has been inserted. Instead, it expands the zinc body, which then grips the sides of the pre-drilled hole. Furthermore, industry practice is not to refer to these anchors or the pins as nails, although they may be called, for example, "drive nail anchors."

The Court of International Trade, therefore, held that the OMG anchors (and their steel pins) are not nails within the scope of the order. As a result, it remanded to scope determination to the Department of Commerce to complete a revised scope determination consistent with this decision. In other words, Commerce should come back with an order finding these anchors and pins to be outside the scope of the order.

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.