Customs Law

State of the Union

2012-01-25T10:36:00.001-06:00

For discussion:

I will go anywhere in the world to open new markets for American products. And I will not stand by when our competitors don’t play by the rules. We’ve brought trade cases against China at nearly twice the rate as the last administration – and it’s made a difference. Over a thousand Americans are working today because we stopped a surge in Chinese tires. But we need to do more. It’s not right when another country lets our movies, music, and software be pirated. It’s not fair when foreign manufacturers have a leg up on ours only because they’re heavily subsidized.

Tonight, I’m announcing the creation of a Trade Enforcement Unit that will be charged with investigating unfair trade practices in countries like China. There will be more inspections to prevent counterfeit or unsafe goods from crossing our borders.And this Congress should make sure that no foreign company has an advantage over American manufacturing when it comes to accessing finance or new markets like Russia. Our workers are the most productive on Earth, and if the playing field is level, I promise you – America will always win.

President Obama, January 25, 2012
State of the Union

The Urge to Merge

2012-01-17T11:58:00.001-06:00

In case you have not heard (which is a fancy way of saying that I am catching up on this), the President wants congressional authority to merge several key trade-related functions into a single agency. Most of these are not enforcement agencies and, therefore, do not show up in this blog space often. On the other hand, they are trade promotion agencies. The agencies under consideration for merger are:

Here is the White House fact sheet on the proposal. I do not know whether Commerce's "core business and trade functions" include Import Administration and, therefore, dumping and countervailing duty cases.

Grammar Question

2012-01-15T17:08:00.003-06:00

In my last post, I referenced the internet in the lower case. The spell checker built into Blogger wanted me to capitalized it. That is consistent with the spell checker in Word. This may generate as much controversy as the apostrophe in Customs'.

According to Grammar Girl, my go-to source for these things, "Internet" is a proper noun referring to a specific network. Hence, it is properly capitalized. That advice is apparently consistent with several style manuals. The Grammarist goes the other way.

I don't think of the internet as a single network anymore, even though it is technically interconnected. Rather, it is now a medium for the dissemination of of information. Like radio and television. That is no longer a proper noun, but a common noun. No capitalizing "internet" for me.

I'm with the Grammarist. How about you?

Blockbuster Decision for Estee Lauder

2012-01-15T16:50:00.000-06:00

Estee Lauder is a Court of International Trade case involving the tariff classification of the plaintiff's "Blockbuster" cosmetics kit. This kit consists of an outer case, several cosmetics (e.g., lipsticks and eye shadows), a cosmetics case, cosmetics brushes, and a brush case. All of it was imported together in a gold carton. If the internet is working properly, this is a picture of what we are talking about:

There were no questions as to what the merchandise is, so the court decided this on a motion for summary judgment, which means this is entirely a legal question. The government proposed to classify these kits as separate items while Estee Lauder argued that the kits qualify as retail sets under the Harmonized Tariff Schedule. In the alternative, the Government argued that if the kit is a retail set, then the essential character is imparted by the case, which puts the entirety in the a tariff provision in Heading 4202 with a 20% rate of duty. Cosmetics, on the other hand, are duty free. You do the math.

The Government's first argument is interesting. Recall that the General Rules of Interpretation are to be applied in order to arrive at a classification for the imported good. Nothing in GRI 1, which requires classification according to the legal text of the HTSUS, addresses collections of goods. Consequently, the Government argued that GRI mandates that each item be classified separately. This is actually consistent with the text and something I have considered in the past.

The problem with this argument is that there would never be a way to classify kits as retail sets because there is always a way to classify the parts individually. That would effectively mean that nothing would ever be classified as a set. Rather, as the Court of International said in the decision, Customs and Border Protection must move beyond GRI 1 when the resulting classification does not take into consideration the whole of the product. Interestingly, the Court gives no citation for this proposition, but it makes complete sense and avoids the absurd result of never having retail sets.

The next interesting question was whether the components of the kit are "put up together to meet a particular need or carry out a specific activity." This is a tougher call. Customs and Border Protection says that parts of a kit must be so related to one another as to be clearly intended for use together. Thus, a sandwich, chips, and a drink are a used together or in conjunction to one another and would be a set. But, tins of shrimp, pate de foie, and cocktail sausages would not be a set because the individual items are not used together or in conjunction. At least that is what CBP says. In this case, it appears the Government pointed out that the cosmetics in the kit are not used closely together. This makes some sense as nail polish, lipstick, and eye shadow are not used on the same surfaces or mixed together.

On the other hand, Estee Lauder said that the contents of the kits were selected to allow the consumer to create "looks." Everything I know about makeup I learned from watching Face Off on Syfy. But, this makes sense to me. I suppose there is some level of color coordination between eyes, cheeks, lips, and nails. If that is what constitutes "a look," then I see the point. So did the Court, which held that the collection is a set.

That leaves the final question, which was which item in the kit imparts the essential character and, therefore, controls the classification. The CIT found it "obvious" that the essential character comes from the makeup, which is consistent with what the Court viewed as the particular need or purpose served by the kit.

The Government, however, disagreed and argued that the 4202 cases must be taken into consideration. First, the Government noted that the cases and cosmetics are not mutually complementary or adapted to one another. This analysis, however, is not relevant to the status of the collection as a retail set. Rather, according to the Court, this is the analysis for composite goods of two or more materials combined into a single unit (think teddy bear with a radio in its belly). Second, consistent with some prior Customs and Border Protection rulings, the Government argued that the case was not closely configured to contain the cosmetics and, therefore, should not be considered part of the set. The Court rejected this argument as being inconsistent with the language of the HTSUS and not based on a very consistent application by Customs.

Consequently, the Court held that the cosmetics impart the essential character to the set, which includes the cases. That is likely a big win for Estee Lauder. As far as the development of the law, it may be a useful decision (if it holds up). It is based squarely in the text and there are lots of situations where cases are part of a set. Thus, I suspect the Federal Circuit will get the last word on this.

Crickets . . . Crickets . . .

2012-01-13T13:00:00.002-06:00

I realize it has been very quiet here the past couple weeks. That is generally a sign that I have been busy with client work and life. If you need it, please be reassured that I am alive and well and plan to catch up shortly. On my plate are two Court of International Trade Cases and Customs and Border Protection's proposal to change the way it views transfer pricing in transaction value scenarios.

Be back soon.

This is Encouraging

2011-12-30T14:34:00.003-06:00

One of the issues I have long had with Customs' enforcement activities is what I perceive to be a lack of effort to differentiate between counterfeit goods, which should be seized, and unauthorized parallel imports, which are usually (but not always) perfectly admissible. Parallel imports, also known as gray market goods, are legitimate goods that are purchased abroad and imported without the authorization of the U.S. trademark or copyright holder. Image finding a case of expensive brandy at a fire-sale price in Iceland. If you think you can make a buck reselling the goods in the U.S., buy the goods, and import them, you are a parallel importer (and there is nothing wrong with that). Unless, as is often the case, the goods really are counterfeit and you are being duped, but that is not what we are talking about here.

The problem is that when your brandy arrives at the port, Customs and Border Protection has to decide whether you are entitled to import the goods. As a general matter, goods bearing American trademarks cannot be imported without the authorization of the trademark holder. So, CBP has the right (and duty) to ask whether you have proof of authorization to import (with an exception discussed below). When the importer can't show authorization from the trademark holder, Customs is, in my experience, apt to declare the merchandise to be counterfeit and force the importer to prove that it is not. That can be very hard to do. You are faced with trying to prove that a case a brandy, handbag, watch, or other product is genuine. Think about that. Better yet, go to your kitchen cabinet and pull out any box or can. Now, ask yourself what it would take to prove that the product in your hand is not a very good counterfeit. The fact that you bought it at the grocery store does not prove that the grocery store was not selling counterfeits (it happens). If you know what you are doing, you know to look for good printing, good grammar, consistent ingredients, and other factors that indicate that the merchandise is legitimate. But, it is hard. I suspect it is not uncommon for parallel importers to lose merchandise to seizures because they cannot provide evidence that the product is not counterfeit.

Also, even if the goods are legitimate parallel imports, they can still be excluded from the commerce of the United States if they are materially different than the same goods sold in the U.S. The threshold for "material" is not very high, so even legitimate goods can sometimes be lost on those grounds.

You may be asking what about this is encouraging about this.

Over the last couple years, I have been at several public fora at which CPB representatives talked about the priority efforts they take to enforce intellectual property rights. At several of those events, I have asked whether Customs trains port personnel to release legitimate parallel goods and what steps Customs and Border Protection takes to facilitate legitimate parallel trade. In the past, the response was dismissive. More recently, Customs has recognized the rights of parallel importers and has stated that enforcement efforts must be sensitive their needs.

That is consistent with this document, which is recommendations from COAC concerning intellectual property enforcement. The recommendations include extending C-TPAT to cover intellectual property compliance. This seems to be a reaction to the lack of enthusiasm for the Importer Self Assessment program. Another thought is to use an ISF-style pre-arrival filing to identify legitimate goods. All of this depends on some presently non-existent robust database to identify legitimate goods. To me, the interesting thing is that the document makes several references to the rights of parallel importers. That seems to mean that Customs and Border Protection will continue its valuable efforts at intellectual property enforcement and will, I hope, do that while bearing in mind the rights of parallel importers.

We will have to watch how that develops.

Welcome to 2012

2011-12-30T13:05:00.001-06:00

President Obama has signed the Presidential Proclamation authorizing the implementation of the World Customs Organization's 2012 update to the Harmonized Tariff Schedule. Here is a link to the source document. There are changes throughout the tariff schedule. However, they seem to cluster around food and agricultural products and products with an environmental impact (good or bad).

On that note, I wish you all a very happy, healthy, and successful 2012.

The Missing Post

2011-12-22T18:23:00.000-06:00

There is a lot going on. Unfortunately, I am in the land of terrible internet access. Thus, I give you these two headlines and links.

Customs and Border Commissioner Bersin is leaving his post at the end of the month.

The Federal Circuit has ruled the U.S. law does not permit the application of CVD law to Non-Market Economies, including China.

More to follow.

Bioreactor: Hair Band or Lab Equipment?

2011-12-17T15:04:00.001-06:00

"Bioreactor" sounds like a good name for a heavy-metal band, or possibly for a post-apocalyptic video game. But, in reality, it is a machine in which living organisms, typically bacteria, perform some useful chemical function. For example, you might want to feed complex carbohydrates like barley to yeast and end up with beer. For industrial purposes, you might be feeding bacteria something and ending up with an antibiotic. Applikon Biotechnology, Inc. v. United States is a Court of International Trade case about the tariff classification of bioreactors. For reference, here is a page full of the plaintiff's products, all of which look like props from a sci-fi movie except for the green one, which looks like it comes from Kang and Kodos of the Simpsons.

The question here was whether Customs and Border Protection properly classified the bioreactors in 8419 as machinery, plant or laboratory equipment for the treatment of materials by a process involving a change of temperature. The plaintiff wanted the goods classified in 8479, which is the basket heading for machines and mechanical appliances having individual functions not specified or included elsewhere in Chapter 84. Customs' position was supported by the fact that the merchandise includes a temperature control mechanism and requires a heating blanket, which is not imported with the merchandise.

The decisive finding by the Court of International Trade was that the temperature control function is subsidiary to the overall operation of the bioreactors. Apparently, the temperature control feature is not always used and the bioreactor can function without the heating blanket. More to the point (at least in my mind), the heating function is not intended to change the temperature of the culture. Rather, it is intended to maintain the temperature. These are not ovens, they are incubators. Based on that, the Court found that 8419 is inapplicable.

This conclusion was consistent with HTSUS Chapter 84, Note 2(e) which excludes from Heading 8419 machinery in which the change of temperature is subsidiary. And that was about it.

Show Me the Evidence!

2011-12-10T10:50:00.001-06:00

Tariff classification disputes are rarely very sexy. On the other hand, that is not always the case. A recent pair of decisions from the Court of International Trade are good examples of the latter. Both involve the tariff classification of an upper garment for women described as a top with "shelf bra" or as a "bra top." You can probably see where this is going and, if you are offended by the sort of humor that comes from 12-year-old boys, you might want to avoid this post. The two cases are Lerner New York, Inc. v. United States and Victoria's Secret Direct LLC v. United States. Both of the decisions are preliminary determinations having to do with an important evidence question.

What it comes down to is whether a woman, whose professional work is in part to serve as a fit model, may testify as to the functioning of the imported merchandise in providing support for her bosom. Solely for purposes of providing context to my readers to ensure an adequate understanding of what is at issue here, I provide the picture below of the model in question as Blogger's Exhibit 1 for identification:

[The image is copyrighted by MSA Models and used here for education and commentary, which is a fair use.]

The government moved to preclude testimony by this witness on the grounds that her testimony would be based on her professional experience making her an expert witness. As an expert, the plaintiff would be required to provide a written report of her expected testimony. Because that was not done, the government wants her precluded her from testifying. In response, the plaintiff says that her testimony will not be as an expert but as a fact witness concerning the fit and function of the apparel. According to the plaintiff, the witness will not be providing opinions and, therefore, is not required to provide an expert report.

All of this relates to Federal Rules of Evidence 701 and 702, which deal with opinion testimony. Rule 701 permits a lay person to give an opinion in court where it is rationally based on the witness’s perception; helpful to clearly understanding the witness’s testimony or to determining a fact in issue; and not based on scientific, technical, or other specialized knowledge. In this case, the support provided by the garment is clearly within the witness' perception. She is, after all, the one in need of support and has worn the garment. Assuming the question of support remains in dispute (note that there seems to be some question on that point), her testimony on this point seems as if it will be helpful (if not just interesting). Finally, this is not a scientific question. All in all, this sounds very much like a Rule 701 lay witness.

Rule 702, on the other hand, permits experts to give opinions in truly technical or scientific questions. This rule reads:

A witness who is qualified as an expert by knowledge, skill, experience, training, or education may testify in the form of an opinion or otherwise if:
(a) the expert’s scientific, technical, or other specialized knowledge will help the trier of fact to understand the evidence or to determine a fact in issue;
(b) the testimony is based on sufficient facts or data;
(c) the testimony is the product of reliable principles and methods; and
(d) the expert has reliably applied the principles and methods to the facts of the case.

Based on the authority of Rule 701, the Court of International Trade denied the defendant's motion to exclude this testimony. The most immediate result of that decision may be that these cases will break all Court of International Trade records for public attendance at the trial of a classification case.

The thing I find interesting about this, other than the obvious, is that this appears to me to be symptomatic of an increasing focus on evidence questions in Court of International Trade litigation. It strikes me that most of these questions are a distraction from getting to a result on the merits. Now, I am not accusing anyone of improper conduct. There are rules of evidence and they are there to ensure a fair resolution of the case. Either party may properly object to the attempted use of improper evidence. But, I also think that many of the technical details involving the admissibility and consideration of evidence are of greater importance in jury trials than in the summary judgment or bench trial process we have at the CIT. Moreover, I think it is important to remember that Federal Rule of Evidence 102 requires that the rules be interpreted "so as to administer every proceeding fairly, eliminate unjustifiable expense and delay, and promote the development of evidence law, to the end of ascertaining the truth and securing a just determination." To my way of thinking, if the judges of the Court of International Trade are experts in tariff classification and are charged with reaching the correct result, they should be trusted to assess the credibility of witnesses and sort out what is reliable or unreliable evidence. Trusting them to do so might help speed up litigation at the Court. Nevertheless, it is important that all of us who represent parties before the court stay abreast of the rules of evidence . . . so to speak.

Ford, Horizon & Cisco (Pun-based Title TBA)

2011-11-28T20:57:00.001-06:00

The last month has been extremely busy and December does not look to be any less so. Consequently, you are about to get the shortest court decision summaries possible. Catch me in January, when it looks like I will have more breathing room, and I will do better.

Ford Motor Company v. United States

Ford, which is rapidly becoming the go-to litigant for interesting issues, challenged Customs' denial of a post-entry NAFTA claim in which it had failed to provide NAFTA certificates. The Court of International Trade dismissed Ford's challenge on the grounds that it failed to properly make the claim and, therefore, the Court lacked jurisdiction. The Federal Circuit reversed (see this prior post) holding that the lack of a NAFTA certificate was not jurisdictional. Rather, the Court had jurisdiction and the question to be decided was whether the claim was properly made.

On remand, the CIT had to decide whether Customs and Border Protection properly denied the post-entry claim. According to the Court, it did. The basis for this is that the NAFTA Agreement and the implementing regulations are very specific about the need to provide the NAFTA CO at the time of the claim. In this case, "the claim" is made when the importer asserts the right to duty-free entry, not at some subsequent point in time when the importer produces the document. Thus, the statute and NAFTA-specific regulations, in the context of a post-entry claim, require that the importer produce the Certificate of Origin. According to the Court, that trumps a general regulation permitting importers to produce documents supporting duty-free claims at a later time. Frankly, I am not sure that is correct but I am just giving you what the court said.

Horizon Lines LLC v. United States

This is another case involving the 50% duty on repairs to U.S.-flag vessels conducted outside the United States. See 19 USC 1466 for the details. In this case, the vessel was the Horizon Crusader, which had its bottom recoated with tin-free anti-fouling paint as an upgrade to comply with an international convention requiring the use of tin-free anti-fouling systems. Apparently, tin is not good for the ocean environment. [That makes me wonder just how awful the copper-based bottom paint I used to spray on my boat was for Lake Michigan.] The ship was, according to the Court, in good working order and any repairs done to the hull were incidental to the recoating operation. Consequently, this bottom painting operation was not a dutiable repair.

Judge Wallach, soon to be of the Court of Appeals for the Federal Circuit, gets extra points for distinguishing between classes of expert witnesses as percipient and non-percipient. Your run of the mill expert retained for his or her academic or professional expertise is a non-percipient expert. Experts who know a lot about a specific topic because they were actually involved in the facts that gave rise to the case are percipient experts. In Customs litigation, we traditionally use a lot of engineers, chemists, marketing people, and other personnel from the importer who know a lot about the products involved. They are percipient experts. In most courts, percipient and retained experts are treated slightly differently. In the CIT, they are treated basically the same.

Cisco Systems, Inc. v. United States

This is one of those cases that makes me wonder whether the Court of International still has a culture of cooperation and accommodation that moves cases toward decision on the merits. But that discussion is for another day. This case involves the classification of networking equipment. As a preliminary matter, the government moved to dismiss the case on the grounds that the protests filed with Customs and Border Protection were not sufficiently detailed to qualify as valid. This is the same issue we discussed in reference to Estee Lauder here. Based on that case, Customs and Border Protection should have seen how this would turn out. The Court of International Trade cited a line of cases stretching back to 1877 stating that technical precision is not required in a protest so long as it is sufficiently clear to permit Customs to understand what is in the mind of the protestant. Further, more recent cases have indicated that Customs has some level of duty to inquire when the protest is not sufficiently clear. Finally, protests are construed liberally in favor of finding them valid.

The gist of the claim is that Cisco described the merchandise as "networking equipment." The United States claims that this phrase is overly broad and does not specify the type of merchandise at issue. The Court noted that Customs has used the same phrase in its own publications to describe Cisco's products. Further, in relation to the entries at issue the description is sufficiently clear. And, because the protests were valid, the subsequent timely amendments were also valid. Thus, the motion to dismiss was denied.

The Court also denied the plaintiff's technical argument that the motion was procedurally defective and should have been treated as a motion for summary judgment. If you are interested in that level of detail, you are probably a party to the case. If you are not a party to the case and want to know more, read the decision.

Hitachi: Shall = Should

2011-11-05T12:44:00.002-05:00

Sometimes, people complain that lawyers can't speak or write in simple English. Usually, I am sympathetic to this complaint. But, there are time when lawyer language has to be complicated to anticipate and avoid later arguments about what some text means. If your argument in a contract dispute is "We all know I was not supposed to paint the house in the rain," but you can't point to that in the contract, you are in a weak (but not untenable) position. If you have a contract that covers when, how, and in what conditions you are supposed to paint, it will be easier to resolve the dispute. So, up to a point, legalese has a place. Hitachi Home Products is all about how courts grapple with bad drafting and important points left out of laws.

Here is the regulation relating to how Customs and Border Protection is supposed to decide protests (19 CFR 174.21):

Except [for protests relating to exclusions], the port director shall review and act on a protest filed in accordance with section 514, Tariff Act of 1930, as amended (19 U.S.C. 1514 ), within 2 years from the date the protest was filed.

There is a similar use of "shall" in the statute, which also says that Customs "shall allow or deny such protest . . . ."

The issue in Hitachi Home Products was what happens when the two-year period runs out. The Court of International Trade previously held that nothing happens. There were two main reasons for this decision. First, neither the statute nor the regulation say what happens when the two years expires. As a general principal, the Courts will not step in and create a consequence when neither Congress nor the relevant agency have bothered to do so. Second, the protestant can force Customs to act by requesting accelerated disposition under 19 USC 1515(b). This will usually result in a denied protest, which can be reviewed by the Court in the ordinary course.

The Federal Circuit has now affirmed Hitachi and, for all intents and purposes, the decision is in line with the CIT decision. The Court of Appeals held that there is no rule in the law that makes a protest older than two years automatically approved. According to the Court, that is in part evident from the opportunity to request accelerated disposition.

The more interesting part to read is the dissent by relatively new Federal Circuit Judge Reyna, who comes to the Federal Circuit with a background in trade law. According to Judge Reyna, protests not decided within the two year period are deemed approved. The dissenting opinion is based largely on the fact that the statute and the regulation both impose a two year period in which Customs is to act and that the majority opinion effectively turns that limitation into a meaningless nullity. The dissent was also impressed by the fact that that the cases on which the majority relied all involved much shorter periods in which the agency was to act. The longer period given to Customs and Border Protection, according to the dissent, was intended to ensure that Customs acted on the protest. Also, when the protest law was amended in 1970, Congress changed the operative word from "may" to "shall." This indicates a Congressional intention that "shall" means "must."

But, that still leaves the pesky question of what happens when Customs and Border Protection fails to meet the requirement. According to the dissent, the answer is there in the statute. After two years, Customs must allow or deny the protest. A denial, the dissent notes, requires a written notice be sent to the protestant. An allowance, on the other hand, need not be the subject of a notice. Thus, the default result, which happens without action by CBP, is the allowance of the protest. The ability of the protestant to effectively force a denial through accelerated disposition should not, according to Judge Reyna, be used as the "escape valve" because it can result in cases being sent to the CIT without adequate review by Customs in a manner similar to the pre-1970 automatic referral process.

Overall, I think the dissent is interesting in that it pulls together a number of meaningful threads from the text, the legislative history, policy, and the history of customs litigation. On the other hand, as a general matter, I hate to do that when the answer might be right in the statute. In this case, the majority found the Congress provided no consequence. That usually means that "shall" really means "should." That is also a reasonable result.

Of course, the best result would be for Congress to take note and fix this. Protests should be decided within two years or be deemed approved. What, I wonder, should happen when a ruling request is more than two years old?

Airflow Remand: Worth Reading

2011-11-04T12:24:00.000-05:00

Airflow Technologies is one of my favorite cases of the past few years. In it, the Federal Circuit reversed the Court of International Trade and held that the tariff description "straining cloth" in HTSUS heading 5911 only applies to cloth used for straining solid particles from liquids. Whatever clearing the air or other gases of particulates may be called, it is not straining. The Federal Circuit remanded to the Court of International Trade for additional consideration. The CIT has now issued its remand decision, and it is interesting.

Filter media is complicated to classify for two reasons. First, the media itself can be made of various materials from paper to fiber glass to textiles. Second, the imported product is often not just the media but the media housed or supported in some way. Think about a basic furnace filter as an example. Although everyone calls those things "furnace filters," Customs and Border Protection tends to think of them as the just the media. To CBP, a "filter" is advanced beyond simply mounted media. You tell me whether that seems consistent with the common and commercial meaning the next time you buy a furnace filter or replacement filter for a humidifier.

This case deals with just the media, imported in bulk rolls. Customs and Border Protection has lots of rulings putting various textile filter media in Heading 5911 on the theory that it is a textile product for technical uses. Importers have suggested 5603, other nonwoven products. Of course, 5603 is duty free. Over time, there seems to have been a drift toward a conclusion that filter media of textiles belong in 5911, which is dutiable. In some ways, I like that. I like a simple rule that importers can implement. But, this is more complicated than that. Heading 5911 only covers textile products and articles for technical uses if they are "specified in Note 7" to Chapter 59. That adds a limitation that importers, Customs, and the Courts cannot ignore.

Because 5603 excludes products of 5911, the Court first looked at whether the filter media was classifiable in 5911. This resulted in a detailed analysis that gave meaning to all the relevant limitations in Note 7.

The note is broken down into two sections, the first part, 7(a), states that 5911 includes:

Textile products in the piece, cut to length or simply cut to rectangular (including square) shape (other than those having the character of the products of headings 5908 to 5910), the following only:
(i) Textile fabrics, felt and felt-lined woven fabrics, coated, covered or laminated with rubber, leather or other material, of a kind used for card clothing, and similar fabrics of a kind used for other technical purposes, including narrow fabrics made of velvet impregnated with rubber, for covering weaving spindles (weaving beams);
(ii) Bolting cloth;
(iii) Straining cloth of a kind used in oil presses or the like, of textile material or of human hair;
(iv) Flat woven textile fabrics with multiple warp or weft, whether or not felted, impregnated or coated, of a kind used in machinery or for other technical purposes;
(v) Textile fabric reinforced with metal, of a kind used for technical purposes;
(vi) Cords, braids and the like, whether or not coated, impregnated or reinforced with metal, of a kind used in industry as packing or lubricating materials;

The Government contended that the filter media fell within Note 7(a)(i) as being similar to felt, which is also a non-woven product.The Court, however, found that ts is not sufficient to be similar to felt. Rather, the note requires that the media be similar to felt that is coated, covered or laminated with rubber and of a kind used for card clothing or a similar fabric of a kind used for technical purposes. Although the media is covered with a tackifying adhesive and polyester backing, it is not coated, covered, or laminated with rubber, leather, or another material, is not used for card clothing, and according to the Court, is not similar to coated fabrics used for other technical purposes. [Note: read the opinion if you want to know what the heck card clothing is. The answer is interesting.] There were no significant arguments that the media fell within any other provision of Note 7(a).

Note 7(b) covers:

Textile articles (other than those of headings 5908 to 5910) of a kind used for technical purposes (for example, textile fabrics and felts, endless or fitted with linking devices, of a kind used in papermaking or similar machines (for example, for pulp or asbestos-cement), gaskets, washers, polishing discs and other machinery parts).

This part of the opinion is another very interesting careful parsing of the tariff language. Many people read these texts and assume that "goods," "products," and "materials," are all just equivalent ways of saying "stuff." That is not the case. Rather, the law assumes that when different words are used in the same statute, there is a reason for it. In this case, the question was whether the filter media qualifies as an "article" for purposes of 7(b).

Note that 7(a) covers "products" and 7(b) covers "articles." Consequently, the CIT found they have different meanings. According to the Court's analysis, a textile product is a material (e.g., fabric). A textile article is an object with a fixed identity and dimension (e.g., textile gaskets). This is consistent with the examples in each rule. 7(a) focuses on fabrics and materials. 7(b) mentioned gaskets, washers, and polishing disks. Also, the Explanatory Notes refer to textile articles being produced from textile products. This product is bulk rolls of textile filter media, thus, according to the Court, it is not an article for purpose of 7(b).

Consequently, the goods are not classifiable in 5911. That leaves 5603. Even though 5603 excludes goods of 5911, because the filter media is not 5911, it stays in 5603.

Now, if only someone would address the issue of the furnace filter. That would make me a happier man.

Up Next: Hitachi! I shall do it soon. But I need not. Read it and you will understand.

Container Store

2011-10-29T14:02:00.000-05:00

On Thursday, I did a very dangerous thing. I talked about trade law in a room of about 100 trade lawyers and judges from both the Court of International Trade and the Court of Appeals for the Federal Circuit. This was at a CIT and Customs and International Trade Bar Associations sponsored event in DC, which was a great success.

The topic was the identification of situations in which judicial review raised more questions for the relevant agencies and parties than it resolved. As it turns out, that phenomenon is more easily found in antidumping and countervailing duty law than in customs law. We discussed issues like zeroing, the ITC's causation analysis where non-subject imports are in the market, and the application of adverse facts available. In all cases, the trade lawyers on the panel expressed concern about the courts swinging from one position to another or injecting new elements into what might have been a settled analysis. My role was to moderate, so I had little to add. But, it was an interesting conversation for me.

Plus, I had the surprisingly awesome experience of sitting in the big judicial chair in the Federal Circuit's very impressive court room. I had never seen that courtroom from that side of the bench.

On the topic of ambiguity in customs law, it was easier to find situations in which judicial review cleared up some question. Such is the case with this decision involving imports by the Container Store. The issue is very similar to the question presented in storeWALL, which we previously discussed. The issue in Container Store had to do with the classification of components of elfa brand shelving systems. Customs and Border Protection wanted the "top racks" and the corresponding vertical standards classified as base metal mountings and fittings in Heading 8302. The plaintiff, on the other hand, wanted the merchandise classified as parts of furniture in 9403.

Here is a picture of what I think was at issue (with the exception of the horizontal shelf bracket).

Initially, it is pretty easy to see what Customs is thinking. The products appear to have more in common with mounting hardware than with furniture. In terms of how CBP officials at ports handle merchandise, looking into a box of these things would not bring chairs, beds, cupboards, or any other furniture to mind.

On the other hand, the Federal Circuit essentially resolved this dispute in storeWall where it found similar complete systems to be "unit furniture." The argument turns on the fact that these systems are flexible and modular. When fully assembled, the user might build a system with drawers and shelves, which would qualify as furniture. On the other hand, the user might only install pegs and hooks, which would not qualify as furniture. In storeWALL, the CIT upheld Customs' argument that the goods could not be classified as furniture unless, at the time of entry, the configuration was certain to qualify as furniture.

The Federal Circuit reversed that decision on the grounds that "unit furniture" implies flexible storage systems that can be configured as desired by the user. The CIT, helpfully followed that guidance and reached a consistent conclusion with respect to the Container Store merchandise. Thus, the CIT has done its part to avoid creating any ambiguity with respect to this kind of stuff. We can only hope that the Federal Circuit, if asked, will follow suit.

Congratulations Frances on your win.

The Byrd Amendment Still in Court?

2011-10-26T22:11:00.001-05:00

Despite having been repealed in 2005, the Continuing Dumping and Subsidy Offset Act (known as the Byrd Amendment) is still in Court, although maybe not anymore. In Furniture Brands Int'l v. United States, a three-judge panel of the Court of International Trade was asked to decide a number of motions most of which were directed at dismissing the case for failing to state a claim on which relief can be granted.

The point of the CDSOA is to allow members of the domestic industry to receive an allocation of funds collected from importers. These funds were intended to offset the expense of pursuing the case incurred by the petitioners and domestic interested parties who supported the petition. Thus means that domestic interests who opposed the petition are not entitled to CDSOA funds. The Court of International Trade had held in previous cases that this petition support requirement violated both the first amendment guaranty of free speech and the fifth amendment guaranty of equal protection. Unfortunately, for the plaintiff, the Court of Appeals for the Federal Circuit reversed both of those earlier decision.

After finding, consistent with prior CDSOA cases, that the Court of International Trade had subject matter jurisdiction, the CIT addressed whether there was any way for the plaintiff to successfully maintain the cause of action. The Court found that plaintiff's claims were precluded by the Federal Circuit's decisions that the CDSOA violates neither the first nor the fifth amendments. Plaintiff made an effort to distinguish its case on several grounds. First, it argued that the plaintiff's opposition to the petition was not commercial speech, which is subject to a lower level of constitutional review, but was actually more highly protected speech on a matter of public concern. Second, the plaintiff argued that one of the earlier decisions was based in part on the fact that the "domestic" party was owned by a foreign company. Neither of these arguments was sufficiently compelling for the CIT to draw a distinction to the prior CAFC decisions.

The plaintiff's last argument has to do with a decision the Supreme Court issued after the plaintiff filed this case. That case, Sorrell v. IMS Health, involved a Vermont statute that authorized civil remedies for the prohibited use of prescription information. That statute was content-based and also discriminated against speakers based on view point. In contrast, according to the CIT, the CDSOA does not intentionally suppress expression. Consequently, the CIT held that the Federal Circuit decisions control and need not be given a narrow reading, as proposed by the plaintiff.

Given that legal conclusion, the CIT also denied the plaintiff's motion to amend its complaint on the grounds that the amendment would be futile.

And, that is all the constitutional law you will get from me tonight.

The Mess that is MPF

2011-10-24T12:51:00.001-05:00

To cut to the case, the President signed the Korea-FTA legislation last. As a result, the MPF changes in that bill will control. That means that Merchandise Processing Fee will increase to .3464% retroactively to October 1, so expect a bill from Customs and Border Protection. For now, the system will not accept payments at the higher rate. Customs is expected to provide about a week's notice before the program is done to implement the increase.

Note that the change in rate does not affect the $25 minimum or the $485 maximum. Thus, large commercial shippers, who are likely to have the cap apply to most shipments, will see no real change in their total landed cost. On the other hand, small shippers will likely absorb the increase in MPF collected. That seems like something else to anger the Occupy Wall Street crowd.

It's a Win

2011-10-24T12:41:00.000-05:00

Sometimes the most important case in the world is your own. In that context, I give you Firstrax v. United States. The issue in this case was the tariff classification of collapsible pet crates used to provide a portable home for dogs and an aesthetic alternative to wire crates. Some of the smaller crates involved included a handle on the top. This created a superficial similarity in appearance to pet carriers, which these products are not. The primary distinction between the two is that pet carriers tend to have a rigid bottom for the comfort of the animal and these crates rely on the floor or ground to provide a rigid surface.

Customs and Border Protection wanted to classify these products in HTSUS Heading 4202 on the theory that they are similar to travel bags used to transport, store, protect, and organize personal affects. The Court of International Trade disagreed with this on almost every front. According to the court, a living, breathing pet cannot be "stored" an a manner similar to socks in a suitcase and a single pet (without accessories or other items) cannot be said to be "organized" like toiletries in a travel bag. Also, the evidence indicated that the crates are not meaningfully protective and are not designed for transport. Thus, the crates are unlike the exemplars in 4202. Rather, the crates are classifiable as other made up articles of textile.

Of course, I think this is a good decision. I think it may be applicable to other circumstances in which a textile or plastic container holds a single item, but that depends on the facts. The other open question is whether the U.S. will appeal. That remains to be seen.

Interesting 337 Case

2011-10-20T14:39:00.001-05:00

I have a couple interesting cases to cover. The first is Tianrui Group v. International Trade Commission, which is a Section 337 exclusion case. We don't usually cover 337 cases here, so some background is appropriate.

The law permits a U.S. holder of intellectual property rights to bring an action in the International Trade Commission seeking to exclude from the United States imported products that infringe the intellectual property. Usually, but not always, the IP rights involved are from patents, but 337 applies to copyrights, trademarks, and other rights. To be technically correct, 337 also applies to other methods of unfair competition including some antitrust violations. If the ITC finds a violation, it can issue an exclusion order, which tells Customs and Border Protection of prohibit the entry of infringing merchandise. Appeals from the ITC are heard by the Court of Appeals for the Federal Circuit, bypassing district court review

There is a lot in this case. If you are interested in it, read the whole opinion. This summary will only hit the highlights and will miss the detail.

The underlying issue in this case is interesting for two reasons. First, it relates to trade secrets. Second, it relates to activity occurring entirely in China. The facts are that Amsted, a U.S. manufacturer of cast steel railway wheels licensed a secret process to foundries in China. When TianRui tried to license the process, it was unable to strike a deal with Amsted. Instead, it hired nine employees from a licensed Chinese producer, some of whom knew the secret process. TianRui then began producing wheels using the process and exporting them to the United States. Amsted sought to exclude that merchandise via a 337 action.

In the ITC, TianRui raised the argument that because the alleged violation occurred entirely in China, there was no basis on which to bring a 337 case in the U.S. Rather, according to TianRui, the Chinese courts provide a more appropriate forum.

Trade secret misappropriation law is an entirely different animal than patent, copyright, and trademark law, all of which are implemented in federal statutes. Trade secrets, on the other hand, are based on state laws. The administrative law judge at the ITC applied trade secret law as found in Illinois, where Amsted and other parties have offices. As an issue of state trade secrets law, this raises the question of whether behavior that takes place entirely in China is subject to state trade secret law.

As an initial point, the Federal Circuit held that state trade secret law does not control the issue. Rather, the Court held that a single federal standard should determine what constitutes misappropriation of a trade secret in the context of Section 337. The reason for this is that Section 337 embodies Congressional policy to protect American intellectual property rights. That is not an issue of state law.

On the main point, TianRui argued that Section 337 does not make trade secret law have extraterritorial reach to cover activities that took place entirely in China. As a general principal, American law does not have extraterritorial application unless Congress specifically states that it does. The Court found that the presumption against extraterritorial application does not apply here for three reasons. First, the law explicitly addresses imports to the U.S., which inherently regulates products produced through foreign activity. Second, the law addresses unfair competition in the U.S. that results from the importation of the merchandise. Finally, the legislative history indicates Congressional intent to regulate foreign behavior. Thus, the Federal Circuit held that 337 has extraterritorial reach.

The case has a strong dissenting opinion arguing that Section 337 cannot regulate activity occurring entirely outside the United States. According to that opinion (by Circuit Judge Moore), the United States has "no right to police Chinese business practices." The dissent goes on to say that there are all manner of potentially unfair business practices occurring outside the United States including suppressed wages and forced labor. The dissent calls the breadth of the majority opinion "staggering."

The dissent notes that is is sympathetic to Amsted and that TianRui appears to be a bad actor. Nevertheless, the judge finds nothing in the statute or the legislative history to show a congressional intent to apply trade secret law extraterritoriality. That is distinct from patent law, which is specifically included in the statute. Lastly, the judge noted that Amsted had an opportunity to bring this conduct within the extraterritorial scope of 337 by getting a process patent to cover the trade secret. Of course, my IP lawyer friends will point out, that limits the lifetime of protection. If the folks at Coke had to do that to preserve their secret formula, it would only be a secret for 20 years.

Korea: Yes, I know

2011-10-13T14:48:00.000-05:00

Panama and Colombia, too.

Here is an article from the Atlantic about the deals, focusing on Korea.

I feel as if I should have something insightful to say and that I should take a position on the economic impact these deals will have on the U.S. as a whole, on jobs in particular, and possibly on compliance professionals. The truth is, I am somewhat numb to trade deals.

Far and away, the trade agreement that gets the most commercial traction is the NAFTA. We are 17 years into NAFTA and every day (really, every day) I answer questions about how to do the documentation. That is because the rules are very complex. I am happy for the opportunity to help and I truly understand the complexities of the data gathering necessary for compliance. But I also know that adding additional trade deals adds exponentially to the compliance difficulties. For this, I blame the WTO's inability to get a comprehensive trade deal done during the Uruguay Round. As it is, the NAFTA was used as a model for that agreement and for the TRIPS agreement that followed. But, without comprehensive (meaning global) trade liberalization, the U.S. and other countries have fallen into the somewhat random chaos of bilateral and multilateral regional deals and topic-specific agreements (e.g., the new anti-counterfeiting agreement).

The problem with the trade deals is that each one of them is intended to promote trade within their region. That means that the NAFTA is intended to encourage trade between the North American neighbors. As a result, NAFTA goods may not qualify for duty-free export to Australia because of excessive Canadian or Mexican content. Goods I can certify under the U.S.-Chile FTA may not qualify under the agreements with Singapore, Bahrain, or Morocco. And, the paper work and records for each are similar but distinct. If a company tries to qualify goods under both the U.S.-Central America-Dominican Republic Agreement and the NAFTA, it will likely need to gather two sets of origin certifications from suppliers because the rules of origin for the materials used to make the finished goods differ.

With all due respect, I suspect the agreements with Colombia and Panama will add little to the burden on most compliance professionals. Certain industries and certain companies will feel a big impact, but overall the impact will be small. That is not necessarily the case with Korea, which is a major economy with a lot of trade. According to USTR figures, the Korea agreement will open up Korea to $10 billion in exports and all greater American access to Korea's $560 billion services industries. That is significant.

I remain fairly convinced that these deals are a net positive for the economy while recognizing that individual companies and workers may be hurt. That is troubling and, unfortunately, makes for the most obvious kind of media coverage and the most compelling stories. In the long term, the best approach is to scrap these deals in favor of a global approach to trade that lets countries benefit from their comparative advantages while preventing the so-called race to the bottom. Of course, that is much easier said than done, which is exactly why we are now getting three new trade deals.

So, to my compliance professional colleagues out there, here is your interim Korea toolbox:

Final text
Rules of origin (in which you will see tariff shifts and RVC calculations based on the build-up and build-down methodologies)
Tariff elimination schedule (See Schedule 2-B at the end)

There will be no specific Certificate or Origin for Korea, but here are the required data elements:

(a) the name of the certifying person, including as necessary contact or other identifying information;
(b) the importer of the good (if known);
(c) the exporter of the good (if different from the producer);
(d) the producer of the good (if known);
(e) tariff classification under the Harmonized System and a description of the good;
(f) information demonstrating that the good is originating;
(g) date of the certification; and
(h) in the case of a blanket certification issued as set out in paragraph 4(b), the period that the certification covers.

Importers will be able to self-certify or to rely on a written or electronic certification from the exporter or producer. Exporters may rely on the producer's reasonable written or electronic certification or on the exporter's knowledge that the goods are originating.Verification may be focused on the importer, exporter, or producer and there are special rules of verification relating to textiles and apparel.

Feel free to ask specific questions, which I may answer. I will follow up with more interesting details about the KORUS agreement as they arise.

IP Theft in the News

2011-10-03T22:47:00.000-05:00

Here is a news item stating that Immigration and Customs Enforcement's Homeland Security Investigations special agents raided a number of Florida sites to execute search warrants relating to possible counterfeit goods. In the end, they collected 50,000 counterfeit items with a total retail value of $28 million. That's not surprising. If the government created a flee market and push cart squad, it could find counterfeits with little effort. As a general principal, that is a good thing. Counterfeiting is theft and vendors of counterfeit goods free ride on the value of brands to which they have no claim.

However, every time I hear about about one of these events, I wonder whether any of the goods were actually genuine but gray market products. As a general rule, gray market goods that are not materially different from the authorized products sold in the U.S. are entitled to entry. This is a rule that recognizes that the vendor has been fully compensated in the first, legitimate sale and has no right to prevent subsequent resales as long as consumers are getting what they think they are purchasing. The problem is that gray market goods are often accused of being counterfeit. That puts the importer in the difficult position of having to prove the negative proposition that the goods are not counterfeit. In that circumstance, a small importer will often walk away from the goods. Which can be a big loss for a small entrepreneur.

Which reminds me, On October 1, the U.S., six other countries and the EU signed the Anti-Counterfeiting Trade Agreement to help fight this kind of thing. As it is late, I will give a hat tip and link to Patent Baristas for more info. The USTR Fact Sheet on the ACTA is here.

Lastly, when did ICE agents start working for HSI? Just asking. I think I missed that.

There Goes My Pet Theory

2011-10-03T22:18:00.000-05:00

The Federal Circuit has affirmed the Court of International Trade's decision in LeMans v. United States and has broken my heart in the process.

LeMans involves the tariff classification of apparel designed for motocross participants, which Customs and Border Protection classified in HTSUS Chapters 61 and 62. LeMans protested and challenged the classification in the Court of International Trade, which upheld Customs. LeMans' argument was that the merchandise should be classifiable as sports equipment in Chapter 95. I posted about the lower court decision here and even opined in the comments that I expected a reversal. I was wrong, and it has me annoyed.

In a case called Bauer-Nike, the Federal Circuit previously held that hockey pants, which include pads, are necessary, useful, and appropriate to the sport of playing hockey. As a result, consistent with the Explanatory Notes, hockey pants are sports equipment, not apparel. This was primarily by comparison to "pads" and "guards," which are listed in the Explanatory Notes to Chapter 95. Based on that, I have adopted the position that clothing adapted to a specific sport to the extent that it can be deemed appropriate, necessary, or useful to the sport would be sports equipment if not provided for more specifically elsewhere.

Instead, the Federal Circuit backed away from the Bauer-Nike. The Court held that the prior case is distinguishable because the hockey pants contain pads or guards and are, therefore, comparable to the sports equipment listed in the Explanatory Notes.

Just to be clear, I have no objection to the merchandise being prima facie classifiable as apparel in Chapters 61 and 62. My only issue is whether it is also prima facie classifiable as sports equipment. LeMans, on the other hand, did argue that the merchandise is so specialized that it cannot permissibly be classified as apparel. The Court noted the lack of protective or specialized features in the clothing and that some sports-specific apparel is specifically listed in Chapter 61 and 62 including swimwear and ski-suits. Thus, the Court found it to be classifiable with apparel.

The real trick was dealing with Bauer-Nike without disrupting the "necessary, useful, or appropriate" definition of sports equipment. To do that, the Court focused on the exemplars in the Explanatory Notes (including the aforementioned pads and guards). But, LeMans argued, there is no reason to get to the Explanatory Notes when the Federal Circuit has already defined the term, making the statute clear. To me, this is a persuasive argument that carried the day in the festive articles cases and elsewhere. Looking to the Explanatory Notes for the scope of a term the Court has already defined and for which there is no longer any ambiguity, strikes me as giving the EN's too much weight.

I still think there is life for Bauer-Nike outside of hockey. In particular, sports clothing that is protective in nature and can reasonably be considered to include pads or guards should fall within the scope of that decision. Despite that, this decision makes those arguments harder, and gives a boost to those darned Explanatory Notes.

Talk About Dutch Courage

2011-09-28T12:19:00.000-05:00

This is old news I inexplicably missed. Thanks to Rafael for the tip. The story is that in 2010, the Customs authorities in French Guiana stopped a Dutch traveler with a suspicious pair of pants. They found a pouch full of humming birds. From the pictures, I would assume the beaks were not at all comfortable. Follow the link to see the truly strange pictures.

Value Change Up for Comment

2011-09-24T16:15:00.001-05:00

Customs is floating an idea to reinterpret the value law with respect to transfer pricing to give related party importers more flexibility with respect to post entry adjustments. Here is the notice asking for comments.

This is a long-awaited notice, but it is just a request for comments rather than an actual proposal.

The issue this notice seeks to address has to do with the application of transaction value in cases where the related parties have a transfer pricing policy that requires periodic adjustments to the sales price of the goods. Usually, this is done to ensure that the selling entity earns the appropriate amount of profit over the fiscal year or other period. Hitting that target is often an important consideration for tax planning. Consequently, companies spend a lot of time and effort working with accounting firms to establish an acceptable transfer pricing policy that meets their tax needs. In some case, these policies can be validated by one or both of the governments involved in what is called an Advanced Pricing Agreement.

The problem from a Customs standpoint is that post-entry adjustments to sales prices may impact on the correct entered value of the merchandise. There are a number of legal consequences to these adjustments. For example, if the amount of the adjustment is fixed or can be calculated based on a set formula at the time of entry, then the adjustments can be taken into consideration as part of a transaction value. In other words, if there is an acceptable formula, transaction value applies and the value can be updated--typically via reconciliation. Also, while the law requires that increases in price be taken into consideration, decreases and rebates are ignored. [No one ever said the law is fair.] Thus, post-entry price adjustments may not be evenly applied.

The biggest question has been whether a transfer price policy that relies on post-entry price adjustments is compatible with transaction value as the basis for appraisal. In some rulings, Customs and Border Protection has held that the transfer price policy did not create an acceptably fixed formula for appraisal. As a result, Customs has ruled that transaction value was not applicable and relied on the so-called "fall back" method of appraisal. In those cases, the adjustments were applied and the valuation ended up at essentially the same place.

Which brings me to the question of whether this is really important? Is this really just substituting one label for another? If the "transaction value" and the "fallback method" get to the same amount by taking into consideration the adjustments, does it really matter. You either have Customs accepting your policy as a formula for transaction value or rejecting transaction value and calling the same analysis a fall back.

One critical point is that if this proposal gets adopted, Customs will take price reductions into consideration because the reductions will not be discounts or rebates. Rather, they will be treated as applications of the policy and, therefore, the agreed price for the goods. That might produce some duty savings for importers who engage in downward price adjustments.

Another point is that the factors listed in the notice to support the finding that a transfer price can be considered a formula should inform the drafting of transfer price policies going forward if the proposal is ever adopted.

None of that strikes me as earth shaking, but I seem to be in the minority on that front. At least one lawyer I know and respect, my soon to be published co-author, has already labeled this the most important development in value law since the adoption of the current WTO code in 1979. Personally, I would give that title to the Federal Circuit decision in Nissho Iwai, which started the modern practice of using first sale valuation. I also know that the ABA Section on International Law, Customs Law Committee is interested in this.

So, you customs compliance and tax people out there, tell me whether this proposed change would significantly impact your business one way or the other. Comments are open.

New FAIR Enforcement Act

2011-09-24T15:37:00.002-05:00

Here is something else I missed while I was away. Maybe you missed it too.

Senator Claire McCaskill has introduced legislation directed at creating policies to make it harder for companies to evade the payment of customs duties. In essence, this seems similar in goal to the ENFORCE Act, which my partner David Forgue covered in this interesting white paper. The new proposal focuses in part on the relationship between brokers and importers by imposing a "know your customer" requirement on brokers. In addition, the bill would eliminate bonding for new shippers in antidumping casing and require cash deposits like other importers. Apparently, this is intended to prevent new shippers from making a lot of entries and then defaulting when it comes time to assess the dumping duties.

Here is a press release from Senator McCaskill.

Waiting for GSP

2011-09-24T10:53:00.000-05:00

There are things that happen in Washington that are a complete mystery to me. One such mystery is this kabuki dance that happens periodically when the Generalized System of Preferences expires. Everyone is pretty confident that it will eventually be renewed. But, despite that knowledge, Congress spends time futzing around with it (and similar programs like AGOA). It gets attached to other things that some legislator wants and used as leverage in negotiations.

Here's a crazy idea: Someone should introduce a bill just making it permanent unless and until repealed. Presumably, this could be coupled with a new set of rules defining beneficial developing country, if that is part of the political problem. If that were to happen, traders would know what to expect and there would be none of this administrative hassle of retroactive application.

Until something that reasonable happens, we have to put up with the sausage factory that is Congress.

So, with the preamble, I am letting you know that the Senate has passed an amended House GSP bill that also includes MPF adjustments and an extension of Trade Adjustment Assistance. Because there were amendments, this has to go back to the House for reconciliation before it can go to the President. According to press reports, the House hopes that the bill can be considered along with the pending trade agreements with Colombia, Panama, and South Korea.

Here is a USTR press release on the developments.

Frogs

2011-09-21T16:09:00.000-05:00

I am just back from Paris. Despite being a middle aged, well educated, reasonably well traveled person, I had never been to Paris (or anywhere in France) before this trip. I had an excellent time meeting with lawyers from throughout Europe and the North America to discuss our various practice areas. As is usually the case with these things, we had interesting discussions coupled with some exceptionally good meals and a bit of seeing the sites.

I narrowly escaped an airport fiasco on the way back when I realized that I had failed to pack a bottle of wine in my checked bag. For a moment, I considered being the person in the airport you marvel at when he or she sits down to eat their smuggled sausage or when they abandon a gallon of conditioner at the security line. I blame my lack of foresight on too little sleep. A quick reshuffle of dirty clothes from the big bag to the carry on created room for the wine without undue delay to others checking in.

The locals were nothing but nice and helpful. Hence, if you think the title of this post is an anti-French slur, you are wrong. In reality, it is a reference to this article, which tells of Customs and Border Protection in Houston discovering a rare amphibian in a cargo container.

How dare you think otherwise?

News to Use

2011-09-10T21:46:00.000-05:00

The MPF and GSP renewals have made it through the House and will now go to the Senate. The MPF will, assuming the bill passes, increase for formal entries to %0.3464. However, all indications are that the $485 cap will remain the same. That means that importers of small value merchandise are likely to feel the brunt of this increase more than importers of high-value imports. If this blog contained political commentary, which it doesn't, one might wonder about the politics of that decision.

The House bill also retroactively renews GSP. It appears that if entries were flagged using the A SPI while GSP had lapsed, the entries will be liquidated with GSP benefits. Of course, that remains to be seen, so don't rely on that for your internal procedures.

In his jobs speech, the President encouraged Congress to act to implement the already-negotiated trade agreements with South Korea, Colombia, and Panama. Reliable sources in Washington say that those agreements need to be submitted to Congress soon if they stand a chance of getting done before we are fully mired in the election process. Personally, I already feel mired.

If you use the port of Whitetail, MT, you need to look for another port. Customs is proposing to permanently close the port.

Uniform Marking Officially Dead

2011-09-01T11:04:00.000-05:00

But, like a brain eater from Zombieland or the upcoming World War Z, it may be back. Remember, always double tap.

Tomorrow, Customs will publish a Federal Register Notice making technical corrections to the Part 102 rules of origin and officially withdrawing the proposal that the U.S. implement tariff shift rules of origin for all commodities. The specific changes relate to pipe fittings and flanges, greeting cards, glass optical fiber, rice preparations, and certain textiles and apparel. If you import those goods, please check the FR Notice when it comes out. I am not giving a link because the link will to tomorrow's Federal Register will be dead tomorrow after the official version is published.

Regarding the proposal to adopt uniform rules of origin primarily based on a tariff shift methodology, Customs reports that it received a total of 70 public comments, 42 of which expressed opposition to the July 25, 2008 proposal. As a result of these comments, Customs and Border Protection states that is has "determined not to proceed with its proposal." For many people, this is a good outcome.

The problem most importers expressed (at least to me) about the proposed rules was not that it was difficult for producers to apply. Generally, it can be assumed that a producer knows the materials used in the production of its products and the materials' country of origin. That would be enough information for them to classify the goods, apply the tariff shift (or descriptive shift) rule to materials to do not originate in the country of production, and determine origin. This gets muddy in situations where raw materials or other commodities are traded many times or commingled, but those are the exceptions.

The problem is that under the proposal, it would be enormously difficult for importers to know any of this information. Importers, who have to act with reasonable care, would have difficulty determining whether they can rely on the representations of producers or exporters. Without a NAFTA-like verification process that put the burden on the producer or exporter, this proposal created a big liability risk for importers.

I know that some people will argue that the current rules do the same thing. There is some truth to that. Ultimately, the importer is currently responsible for the correct country of origin declaration and marking. But, it strikes me that an importer today has a better chance of explaining the traditional substantial transformation test to a supplier and getting reasonably reliable information to support the origin determination.

It will be interesting to see whether this has a zombie-like afterlife. Rumor has it that the U.S. was hoping to push these rules out here and then internationally as a means of creating a global standard. There is a lot to be said for a global standard. But, I think Customs and Border Protection is missing the target. It would be much more valuable to U.S. exporters to have a single, uniform rule on country of origin labeling so that exporters would not need to design origin labels to meet local requirements. Personally, I think a universal label showing an icon for manufacturing (maybe a gear or factory) along with the ISO code and flag for the country of origin might do the trick.

Snakes Not on a Plane

2011-08-30T11:34:00.001-05:00

As you know, I am a sucker for a story about people with reptiles in their clothing. Here is the latest.

TSA in Miami stops man for a pants-load of snakes and tortoises - South Florida Sun-Sentinel.com

Update: here is a story about smuggled jaguar pelts.

http://www.sun-sentinel.com/news/local/breakingnews/fl-jaguar-skins-arrest-20110830,0,685309.story

Keep up the good work South Florida Sun-Sentinel.

Gibson Guitars Raided Under Lacey Act (Again)

2011-08-26T11:38:00.000-05:00

Someone at Fish & Wildlife must hate rock 'n' roll. Gibson Guitars was raided again this week for alleged violations of the Lacey Act. This time, the violation appears to relate to the interpretation of Indian law relating to whether the wood was harvested correctly.

My prior post on Gibson is here.

Importer Identity Theft

2011-08-25T14:04:00.000-05:00

The Court of International Trade decision in Kairali Decan, Inc. v. United States has been kicking around for a couple weeks and I have struggled with whether comment on it. I have recently decided that purely procedural decisions are of interest to only a small segment of readers of this blog. Also, procedural cases generally do not turn on broadly applicable principles of law (which make for good posts).

But, this case has an interesting fact pattern and I have seen it covered elsewhere (I’m looking at you Adonica Wada). Also, someone recently thanked me for reading these cases so he doesn’t have to. So here are my two cents.

The underlying facts are that someone imported food from Sri Lanka. I say “someone,” because it seems pretty well established that the importer was not the plaintiff in this case. Rather, someone who is regularly in the business of importing food from Sri Lanka stole the identity of the plaintiff and made entry using its information. As a result, when the FDA decided that it wanted the merchandise redelivered to Customs and Border Protection, CBP inquired with the plaintiff and eventually sent the Notice to Redelivery to Kairali, who promptly said “It’s not our stuff.” When Customs did not receive the merchandise, it eventually made a claim for liquidated damages from Kairali, the importer shown on the entry papers.

At some point, the plaintiff paid the liquidated damages to avoid administrative sanctions and filed a suit in the Court of Federal Claims to secure a refund. What the plaintiff did not do was file a protest with Customs and Border Protection challenging the redelivery notice (or the liquidated damages for that matter).

The Court of Federal Claims looked at the case and said, “This seems to be a case for the Court of International Trade” and promptly sent the case to New York. Upon arrival at the CIT, the plaintiff claimed that the Court had so-called residual jurisdiction to review the matter (see 28 U.S.C. § 1581(i)) because it relates to the administration of the customs laws. As is typical in most customs cases invoking (i) jurisdiction, the Department of Justice argued that plaintiff should have filed a protest, which would either have resulted in a favorable decision by the agency or would have given the CIT a denied protest to review to review under 28 U.S.C. § 1581(a). According to this argument, if a plaintiff could have protested and a protest would not have been manifestly inadequate as a means of getting the desired relied, a protest is a prerequisite to getting into the CIT. This, by the way, is a well-established rule of law that is not really subject to much debate anymore (unless you are the Supreme Court and Harbor Maintenance Tax is involved).

This left Kairali with having to argue that it could not file a protest and that a protest would have been manifestly inadequate. On the first point, Kairali argued that it could not file a protest because it was not the importer. Rather, it was the victim of identity theft and should not be required to act like the importer to challenge the redelivery demand. Unfortunately, the law involved says that a protest may be filed by the importer “shown on the entry papers.” Kairali was the importer shown on the entry papers. The Court also found that Kairali had notice of the demand within the 180 day period to file a protest. Thus, the CIT found it could have filed a protest.

Which leads to the question of whether a protest would have been manifestly inadequate. This is usually the case where the outcome of the protest is a foregone conclusion and a mere formality. That was not the case here. According to the Court, the plaintiff could have used the protest mechanism to inform Customs and Border Protection that it was not the legitimate importer and did not have possession of the goods. Given that information, CBP may have granted the protest, meaning the process was not a mere formality.

The CIT, therefore, held that because the plaintiff could have filed a protest, it could not seek judicial review on the basis of the Court’s (i) jurisdiction. Consequently, the CIT does not have jurisdiction. Since the Court of Federal Claims has already held that it lacks jurisdiction, the CIT gave the parties some time to report whether the case should be transferred to any other forum.

All of this raises two questions for me and neither of these are advice to Kairali, just thoughts put down on virtual paper while flying from DC to Chicago and being forced to go via St. Louis due to weather. First, since the CIT has now determined that it actually lacks jurisdiction, is there a legitimate argument that it should go back to the Court of Federal Claims? That court only transferred the case based on its understanding that the CIT had jurisdiction. I think this is a reasonable question.

Second, I wonder about the proper construction of the protest statute. The full language is that a protest may be filed by “the importers or consignees shown on the entry papers.” Would someone familiar with English grammar and the next antecedent rule please tell me how we are supposed to know whether the phrase “shown on the entry papers” modifies both “importers” and “consignees” or just “consignees.” Seems like something worth considering. Where are you Grammar Girl, when I need you?

Last thing: Kudos to Judge Carman for breaking out the Robert Frost and proving a citation thereto.

Border Searches and Comic Books

2011-08-19T14:15:00.000-05:00

Here is an interesting piece on border searches from the Comic Book Legal Defense Fund. The Fund is focused on border searches of electronic and traditional media where any of various forms of comics, graphic novels, and related literature are involved. That would include anime, manga, yuri and other genre that might cross the creepy line for some readers. On the other hand, the creepy line is what makes first amendment law important and interesting. Creepy can be a long way from obscene. Plus, many of the arguments raised in this context relate to the protection of children from harm and exploitation, neither of which happens when no live models.

Surety Not Too Late

2011-08-18T21:52:00.000-05:00

The Federal Circuit has reversed a decision of the Court of International Trade involving whether the surety on a customs bond should have filed a protest to challenge Customs' collection efforts. Hartford Fire Insurance Co. v. United States is interesting for a couple reasons. First, the courts don't see a lot of suretyship cases. Second, this one was handled successfully by my partner Rick Van Arnam; so I say it is interesting.

This is one of those cases that is all about whether the Court of International Trade has jurisdiction to review a decision. The underlying issue is whether the surety is liable for the importer's default. Hartford, the surety, filed a suit in the CIT seeking to prove that it was not liable for the debt due to what might have been criminal acts by some employees of the importer. Customs defended that claim by arguing that Hartford should have raised the issue in an administrative protest at Customs rather than in Court. For administrative law students, that is an exhaustion argument. For Customs lawyers, that is the argument that you can't get into the CIT based on its broad grant of residual jurisdiction when you could have gotten into court on the basis of a denied protest.

Hartford, however, argued that it did not know that it might have a defense to the claim until after the protest period expired. Consequently, no protest was possible and there was no need to exhaust the administrative remedies.

A majority of the Federal Circuit reviewed the facts and agreed with Hartford. The key facts are that during the protest period Hartford had knowledge that there was a criminal indictment relating to the importation of this merchandise. The indictment, however, was of a named individual and the related documents did not implicate the importer or the shipments secured by Hartford. Thus, the question comes down to whether that information was sufficient notice of a claim to require the filing of a protest. Two out of three Federal Circuit judges said it was not. The dissenting judge believes that the information available to Hartford during the protest period was sufficient to find that Hartford should have known of its possible claim.

Obviously, this is a very fact-specific case and the outcome was a close call. All of which means, Rick did a good job. Congratulations.

Goodbye Courtesy Notice

2011-08-18T21:15:00.001-05:00

So, I've been busy. It happens.

One of the many things I need to post is that Customs and Border Protection has finalized a rule to eliminate the mailed paper copy of the courtesy notice of liquidation for entries that were filed electronically via the Automated Broker Interface. As it stands, CBP provides an electronic notice of liquidation to the broker via ABI and mails the paper courtesy notice to the importer. Going forward, importers who want to monitor liquidations will have to do so via the Automated Commercial Environment Portal. If you are one of the small percentage of people who file paper entries, you will still get paper courtesy copies.

As a practical matter, this may not make much difference. The official legal notice (which almost no one ever sees) is the posting at the customhouse. Many importers simply assume liquidation happens 314 days after entry. Others get reports from their broker. This state of affairs, together with the estimated $3 million in annual savings, is probably what prompted Customs and Border Protection to reconsider the notice process.

Look for your last paper notice September 30, 2011.

Here's the Thing

2011-08-13T21:07:00.002-05:00

Isaac Industries is an odd little Court of International Trade case that does not really present a discussion of law that is likely to apply generally. It relates to whether a protest was timely filed to challenge Customs and Border Protection's denial of a drawback claim. The issue arose because Customs closed the Miami drawback center and consolidated that operation in Los Angeles. The claim was filed in Miami and denied in Los Angeles but the liquidation notice was posted in Miami where the protest was filed. The question is when responsibility for the claim was transferred from Miami to LA and where the protest should properly have been filed. The Court basically found that the relevant Federal Register notices were clear and that the protest was filed in the wrong port, making it untimely.

What I think is interesting about this case is that it really turns, for all intents and purposes, on the Federal Register Notice. The Court treats the Notice as if it has the full force and effect of law. If the notice was an amendment to a regulation (rather than an informational notice) it might, I honestly don't know off the top of my head. On the other hand, it seems that the protest got to Customs (in the larger sense) in a timely manner. While the importers (and everyone else) are presumed to know the contents of the Federal Register, can "Customs" be presumed know to that it received a protest at another port? If Customs sent a letter to the main corporate address of a large company, would the Court find that the company's counsel or compliance manager should have known about the letter?

Regardless of the law (which is a funny thing for a lawyer to say), this looks to me to be one of those maddening situations in which someone at Customs might have asked why the agency was litigating this issue. If the drawback claim was valid but for the irregularities of the filing and there was some justifiable confusion surrounding the change in responsible offices, couldn't anyone simply say, "Grant the claim. The company should be able to get the drawback to which it is entitled?" I get that equity basically does not compel the U.S. government to do anything. I am not talking about equity (or law), I am talking about trade facilitation, management, and goodwill.

Just a thought.

On the equity front, in United States v. Canex Int'l, the Court of International Trade did use equity to find that the United States is entitled to prejudgment interest in a penalty case. According to the Court, "It would be inequitable and unfair for the government to make an interest-free loan of this sum" from the date of a demand for liquidated damages. In this case, the Court said that "[E]quity compels the court to grant prejudgment interest."

The Return of Mellorine

2011-08-13T11:03:00.000-05:00

The Federal Circuit has affirmed the Court of International Trade decision in Arko Foods Int'l regarding the proper tariff classification of mellorine. As you may recall from this post, mellorine is a dessert product similar to ice cream but made with animal or vegetable fat rather than all or some of the butterfat. Customs and Border Protection classified the mellorine in HTSUS item 2105.00.40 as a dairy product. The importer, seeking to avoid the application of import quotas, argued initially for classification as fruits and nuts (0811) or other edible preparations (2106). The CIT rejected those arguments and addressed where in Heading 2105 the product falls. Eventually, the CIT agreed with the importer that because milk is not the chief or essential ingredient, it does not the preponderant ingredient. That made the mellorine classifiable as 2105.00.50. The United States appealed.

The Federal Circuit decision affirmed the CIT. The government's main argument appears to have been that mellorine is a milk product for purposes of Additional Note 1 to Chapter 4 because the industry treats it as such. Following its down comforter jurisprudence from a called Pillowtex, the Federal Circuit held that the question before it was whether the mellorine has the essential character of milk. As a result, the Court recognized the need for a factual analysis based on "the nature of the material or component, its bulk, quantity, weight or value, or by the role of a constituent material in relation to the use of the goods." Based on the CIT's analysis, the Federal Circuit held that milk does not provide the essential character to mellorine. Thus, the correct classification is 2105.00.50, I guess. I say I guess because the Court's decision says 9404.90.90, which is the provision for the comforters from Pillowtex. As Homer would say, D'Oh!

Speaking of mellorine, I am now the owner of an ice cream machine and have been working may way through lots of test runs. So far, my favorites have been rum raisin, white chocolate, and roasted banana. All of which come from The Perfect Scoop by David Lebovitz. My advice to would be Ben's and Gerry's: more fat is better than less fat and egg yolks are awesome. This weekend, I plan to try a batch of green tea. This is a dangerous selection because I am the only person in my house who likes green tea ice cream. Branching out from Lebovitz's book, I have found a recipe for margarita sorbet. Sadly lacking from Lebovitz book is a recipe for mellorine. So, if anyone has a recipe they like, feel free to send it on. I will make a batch in the name of legal research.

The Don't Show Me State

2011-08-12T10:02:00.001-05:00

Giving away trinkets with a pro-U.S. business message can be hard. We have already discussed whether pens the U.S. Customs and Border Protection gave out at some event were properly marked. Now, with a hat tip to Wayla-guy comes word that the state of Missouri has run into issues with trinkets promoting jobs in Missouri. Based on this article, it seems the state ordered a bunch of novelty carabiners from a Missouri based business. The carabiners were emblazoned with a logo and web address for a state jobs service. Unfortunately, when the carabiners arrived, someone noticed that they were labeled as having been made in China. [Insert annoying sing-song "Awkward" here.]

Being plucky Midwesterners, the state officials in charge asked for volunteers to help remove the labels. Also consistent with the Midwestern setting, volunteers were enticed to give their time with the promise of doughnuts. Eventually, the labels were removed.

Readers of this blog are likely to know where I am headed. That is 19 U.S.C. § 1304(l), which reads:

(l) Penalties Any person who, with intent to conceal the information given thereby or contained therein, defaces, destroys, removes, alters, covers, obscures, or obliterates any mark required under the provisions of this chapter shall—
(1) upon conviction for the first violation of this subsection, be fined not more than $100,000, or imprisoned for not more than 1 year, or both; and

(2) upon conviction for the second or any subsequent violation of this subsection, be fined not more than $250,000, or imprisoned for not more than 1 year, or both.

Normally, I would not point this out. It is not my intent to get anyone into trouble. On the other hand, the story is already in the local paper. Also, I think this shows some of the craziness that surrounds the marking laws. On the one hand, the recipient of this item is not purchaser and likely does not care in the least where it comes from. If the recipient does care, he or she would not have been able to influence the purchase decision, so the marking is irrelevant. But, it is clearly not irrelevant, because the Missouri officials were so worried about being embarrassed that they removed the marking.

In the real world, where people vote with their wallets and make personal purchasing decisions, cost weighs far more on the decision than does origin. And, very few reasonable Americans would expect an inexpensive, low-tech trinket to be made in America. So, even absent the marking penalty noted above, it seems like the folks in Missouri over reacted to the "political optics" of the situation without thinking about the real world. All of which makes me wonder whether Missouri isn't much closer to Washington, D.C. than I had thought.

Show Some Love

2011-08-11T14:40:00.000-05:00

I know you are all holding your breath waiting for my review of the Federal Circuit's decision in Ark Foods. I promise to get to it soon. In the meantime, if I may make a shameless plug for myself, please support my blog in the ABA's quest for the Blawg 100. Here are the details:

Dear Blawgger:

We're working on our list of the 100 best legal blogs, and we'd like your advice on which blawgs you think we should include and/or what practice areas you'd like to see represented in the Blawg 100.

Use the Blawg 100 Amici form to tell us about a blawg——not your own——that you read regularly that you think other lawyers should know about. If there is more than one blawg you want to support, please send us additional amici through the form. We may include some of the best comments in our Blawg 100 coverage. But keep your remarks pithy——you have a 500-character limit.

Editors make the final decisions about what's included in the Blawg 100; this isn't a scenario in which the blawgs that receive the most amici are the ones that make the list. A blawg with no amici support at all can still make our list. See the amici form page for additional information about amici and Blawg 100 criteria.

Friend-of-the-blawg briefs are due no later than Friday, Sept. 9.

Thanks

Operation Flying Turtle

2011-08-05T10:18:00.001-05:00

Yes, my fascination with animal smuggling continues. Here is a press release from the Department of Justice. In this case, a Japanese national pleaded (n.b. not "pled") guilty to turtle and tortoise smuggling when Customs and Border Protection found 55 live animals packaged as snack food in his luggage. Of course, they may well have been snack food. But, once you violate the Convention on International Traffic in Endangered Species, it does not matter what you planned to do with the creatures.

On the issue of the past tense of plead, Bryan Garner notes that both pled and plead have gained some credence as proper usage in American English (which is what I speak). But, Garner states that pleaded is the predominant form, and that is good enough for me. I know that because Garner quotes me as a usage example in A Dictionary of Modern Legal Usage, 667 (2d. ed):

"No case was to be pleaded at Superior Court for less than a three pounds fee . . . ." Lawrence M. Friedman, A History of American Law 100-01 (2d ed. 1985).

OK, in reality, that not me; it is one of the other L. M. Friedmans out there. In this case, it is Stanford's Marion Rice Kirkwood Professor of Law Lawrence M. Friedman. Still, it is nice to see one's name in print when it is unexpected.

On the expected front, for those of you teaching in this areas, the book is coming along and should be available in the Spring semester. It is not clear whether a teaching guide will be available. More on that later.

99 44/100% Pure Smuggling

2011-08-04T09:25:00.001-05:00

Do people still want to buy ivory art? A while back, we covered an arrest for scrimshaw-related smuggling. Now, I see that a Philadelphia shop owner has been arrested for smuggling elephant ivory. The investigation resulted in about a ton of ivory being seized by authorities. Here is the press release. I understand that people all have different tastes in art and artifacts. And, I can kind of see the attraction of antique ivory pieces as a specimen of craft work from a time when the mores surrounding the killing of elephants was different. But I am surprised there remains a market for this in the West and particularly in the U.S.

Judge Wallach Nominated to Federal Circuit

2011-07-29T10:13:00.000-05:00

Usually, I do not cover breaking personnel news, but this is interesting, relevant, and good news for the customs and trade bar. Here is an article from The Blog of Legal Times stating that Judge Wallach may be moving to the Federal Circuit.

Here is what the White House had to say (which is easier than writing something myself):

WASHINGTON, DC – Today, President Obama nominated Judge Evan Jonathan Wallach to the United States Court of Appeals for the Federal Circuit. Judge Wallach is currently a judge on the United States Court of International Trade.

“Judge Wallach has distinguished himself throughout his legal career in both the public and private sectors,” said President Obama. “He possesses a keen intellect and a commitment to fairness and integrity that will serve him well as a judge on the Federal Circuit.”

Judge Evan Jonathan Wallach: Nominee for the United States Court of Appeals for the Federal Circuit
Judge Evan Jonathan Wallach has been a judge on the United States Court of International Trade, based in New York, since 1995. He has also served as an adjunct law professor on the law of war at numerous institutions, including Brooklyn Law School and New York Law School, since 1997. Born in Superior, Arizona, Judge Wallach enlisted in the United States Army in 1969, and served in the Vietnam War from 1970 to 1971 as a terrain reconnaissance sergeant in the 8th Engineer Battalion. He was awarded the Bronze Star Medal. He returned from the war to complete his B.A. at the University of Arizona in 1973. He received his J.D. from University of California at Berkeley's Boalt Hall School of Law in 1976, and also received an LL.B. in public international law from University of Cambridge Law School in 1981. In 1976, after completing law school, Judge Wallach joined the law firm of Lionel Sawyer & Collins in Las Vegas as a litigation associate, becoming a partner in 1983. He took a leave of absence from the firm from 1980 to 1981 to study at Cambridge in the United Kingdom, and then another leave of absence from 1987 to 1988 to serve as general counsel and public policy advisor to Senator Harry Reid. From 1989 to 1995, Judge Wallach served in the Nevada Army National Guard as an attorney-advisor, providing legal counsel for his brigade’s commanders and all brigade personnel. In 1991, he entered active service during the Persian Gulf War, serving as an attorney-advisor in the International Affairs Division of the Office of the Judge Advocate General of the Army at the Pentagon. Judge Wallach was appointed to the Court of International Trade in 1995. Since that time, he has presided over more than 230 cases to verdict or judgment addressing questions of international trade and customs law. He has also frequently sat by designation on several federal trial and appellate courts, hearing more than 80 cases on the Courts of Appeals for the Second, Third, and Ninth Circuits.

Hillary Clinton Agrees with Me

2011-07-26T22:06:00.006-05:00

Secretary of State Clinton was quoted in the New York Times today warning our Asia trading partners to avoid a multitude of inconsistent and complicated trade deals. Rather, she encouraged a broader regional approach to avoid creating difficulties for businesses. According to Mrs. Clinton:

"There is now a danger of creating a hodgepodge of inconsistent and partial bilateral agreements which may lower tariffs, but which also create new inefficiencies and dizzying complexities,” Mrs. Clinton said. “A small electronics shop, for example, in the Philippines might import alarm clocks from China under one free trade agreement, calculators from Malaysia under another, and so on — each with its own obscure rules and mountains of paperwork — until it no longer even makes sense to take advantage of the trade agreements at all. Instead, we should aim for true regional integration."

Think about that for a minute.

Mrs. Clinton is so far into the pot calling the kettle black territory that she could star as Mrs. Potts in a remake of Beauty and the Beast.

Consider the plight of a company that seeks supplier certificates for purposes of its NAFTA certification. Later, one of its customers wants certification for the U.S.-Australia FTA. Oops, the rules of origin are different, so the company has to go back to the supplier for a new certificate. Of course, the supplier might not be familiar with the rules for Australia and assumes that since its product is NAFTA originating, it must qualify for the Australia agreement as well. Or maybe not, because in order to comply with NAFTA, its purchasing department was careful to find critical suppliers in Mexico. That effort, of course, hurts in the context of every other FTA. Now, multiply that set of problems for U.S. free trade agreements with Central America, Chile, Singapore, Jordan, Morocco, Israel, Bahrain, and soon Colombia, Panama, and South Korea. Each of these agreements (most of which were Bush-administration initiatives) is fundamentally at odds with the others.

The other effect of all these bilaterial and multilateral agreements is that many U.S. trading partners have better than most-favored-nation status. Today, if a country has MFN status, it is at a disadvantage to an FTA partner. So, one might wonder, why bother with finishing up the WTO talks (which Secretary Clinton would call larger integration)? It seems like the better approach is to seek an individual sweet deal.

But, as the Secretary of States seems to acknowledge, the proliferation of sweet deals makes it increasingly hard to comply with any of them. For that, I thank Mrs. Clinton, for pointing out the difficulty that U.S. trade policy has created at home.

How Do You Classify a Diaper Machine? Depends.

2011-07-26T16:53:00.002-05:00

The question in National Presto Industries v. United States, is whether an adult diaper-making machine is classified in 8441 as other machinery for making up paper pulp, paper, or paperboard or in 8479 as other machinery having an individual function, not specified or included elsewhere in Chapter 84. Typically, one would assume that 8441 will apply because it is more specific than 8479, which is a basket provision. But, that analysis skips past General Rule of Interpretation 1. If the goods fit in 8441, they go there.

Presto, the plaintiff in this case, reasoned that because Customs classifies diapers as articles of paper pulp, the machine that makes a diaper must fall within 8441. Presto backs this up with Customs and Border Protection rulings saying that paper pulp provides the essential character to diapers. In addition, the Explanatory Notes to 8441 broadly state that 8441 covers machinery for producing made up articles of paper pulp.

The government, argues that because paper pulp makes up only a portion of the diaper, 8441 does not fully describe the operation of the machine.

Relying entirely on GRI 1, the Court of International Trade rejected the government's argument. First, it found that the heading specifically requires an inquiry into the type of product produced by the machinery. That is a diaper. Second, diapers are products of paper pulp. Thus, the machine produces articles of paper pulp and, therefore, goes in 8441. Plato could not have said it better.

[Note to self: Best. Headline. Ever.]

T. Boone Pickens Invokes NAFTA

2011-07-18T13:46:00.000-05:00

According to this article, U.S.-based energy guy T. Boone Pickens feels that he has been unfairly cut out of a deal for the sale of electricity to Canada via wind production. I have no idea about the underlying facts, but I am always happy to see investors invoking the NAFTA Chapter 11 provisions, the corresponding investment provisions in other Free Trade Agreements, or free-standing bilateral investment treaties.

In the case of NAFTA, Mr. Pickens will need to prove that a Canadian governmental entity undertook a "measure" that violated a protection provided to U.S. or Mexican investors in Canada. Those protections include:

National Treatment: This means that the investor must receive treatment that is no less favorable than would be afforded to a similarly situated domestic investor.

Most Favored Nation Treatment: This means that the investor must receive treatment that is no less favorable than would be afforded to a similarly situated investor from any other country.

Minimum Standard: This means that the NAFTA parties must provide investors from other NAFTA countries treatment consistent with international law, including fair and equitable treatment. For American lawyers, this generally correlates to due process

Compensation for Expropriation: If a measure imposed by a NAFTA party directly or indirectly expropriates the investment of an investor from another party, is is "tantamount to nationalization or expropriation" of the investment, the investor is entitled to compensation unless an exception applies. Again, for American lawyers, this is comparable to fifth amendment takings law.

So, investors under NAFTA Chapter 11 and similar agreements have important rights. In the case of the NAFTA, these rights can be invoked through the Chapter 11 dispute settlement process. Here's wishing Mr. Pickens and Mesa Power the best of luck.

Customs and Border Protection Updates ISA

2011-07-17T21:16:00.000-05:00

Customs and Border Protection has posted an updated Importer Self Assessment Memorandum of Understanding. You can read that document here.

I don;t want to sound like a curmudgeon; I am at least two years away from that status. But, I have long had questions about the value of ISA participation. Looking at this MOU, the ISA member agrees to a number of things including:

Agreeing to comply with applicable CBP laws and regulations
Perform annual risk assessments
Make appropriate disclosures
Maintain results of testing for three years and make test information available to CBP upon request
Maintain an audit trail from financial records to CBP declarations, or an alternate system that ensures accurate values are reported to CBP

So, the ISA member has to perform annual testing and maintain the records for review by CBP.

An importer that is not in ISA but behaves as if it were would undertake annual (or more often) risk assessments. Those reports, however, if done at the direction of counsel, would be privileged against disclosure to Customs. Further, the company could decide what to disclose to Customs. A company that is careful and interested in compliance would make disclosures to protect itself from penalties and to ensure that it has paid the appropriate amount of duties to the U.S. Further, a careful and compliant company is going to maintain records in accordance with the law.

It seems to me that ISA members have agreed to give up the flexibility that goes with internal controls. The main benefit for this undertaking is to be removed from the random audit pool. That is true and a valuable benefit. But, importers should keep in mind that ISA membership does not remove them the responsibility of responding to a so-called Quick Response Audit. Nor does it mean that Customs and Border could not launch a full-blown audit if it sees a reason to do so. And, the MOU specifically states that ISA members are not immune from penalty liability (although membership may be taken into consideration in setting penalty amounts).

So, I have a question for ISA members out there: Is it worth it? If so, how?

Happy 4th, Happy Canada Day, Etc.

2011-07-03T11:06:00.001-05:00

It's a long weekend here. I am catching up on e-mail and news. Here are a couple interesting things.

Australian Customs and Border Protection foils a plot to smuggle reptiles in teddy bears.
More smuggling in teddy bears; this time it's cash.
Detroit area boater finds Czech national swimming to US.
UPS package contained nearly $1 million in allegedly counterfeit watches.

Here is Steve Chapman in the Chicago Tribune dissing Trade Adjustment Assistance. The point I think he missed is that the difference between someone in Pennsylvania losing a job to someone in Texas and the same worker losing a job to Brazil is that no affirmative change in policy by the federal government helped the job move to Texas. Since the U.S. government entered into a trade agreement that ultimately cost that American a job, it seems only decent to provide some benefits to help the worker adjust.

Chapman also forgets that tariffs are only one variable in a complex decision on where to locate production facilities. It is true that most countries and most goods already have low duty access to the U.S. market. But, an FTA removes additional barriers to trade including creating protections for investors, improved intellectual property protection, more transparent customs practices, etc. The trick for policy makers in the U.S. is to be sure that our trading partners do not enhance their cost advantages by lower labor and environmental standards or failing to enforce their laws. That is the race to the bottom, which the U.S. should not facilitate.

Exclusions Seized are not Excluded from Court

2011-06-30T08:45:00.001-05:00

I rarely mention specific judges of the Court of International Trade. I generally never want my blog posts to be personal and I certainly do not want to risk having a judge think I am taking pot shots. But, I presently feel compelled to call out Judge Timothy Stanceu. Happily, it is because he is my hero of the moment due to his decision in CBB Group, Inc. v. United States. Anyone interested in how Customs and Border Protection treats merchandise detained, excluded, and ultimately seized for alleged intellectual property violations should read this case.

The important point of background is that Customs can’t hang on to imported merchandise indefinitely without going through several procedural steps. When merchandise first arrives, Customs has five days in which to release it. After that, it is considered to be “detained.” Detention is sort of importer limbo. But, after 30 days of detention, the goods are considered to have been “excluded.” Keep in mind that “exclusion” is not a seizure. All it means is that Customs has found the merchandise to be inadmissible or has failed to admit it within 30 days. At the point of exclusion, an importer has the right to file a protest challenging the exclusion. Customs can grant or deny the protest. But, if it fails to act within 30 days (for a total of 60 days), the protest is legally considered to be denied. This is the important point: a denied protest can be challenged by filing a lawsuit in the Court of International Trade.

But, there is another possible step. Customs can seize the merchandise. When that happens, a party seeking the release of the merchandise can either go through an administrative process with Customs and Border Protection, or it can file a case in a federal district court. The CIT has no role to play in a seizure case.

In CBB Group, the importer filed a protest challenging the exclusion. On the day after the 30-day protest period elapsed, the importer filed a summons in the Court of International Trade. About 20 days later, Customs issued a notice of seizure claiming that the seizure had been effectuated on the date of the summons. On the basis of the seizure, Customs moved to dismiss the case claiming the CIT lacked jurisdiction, was not able to grant relief, and should not decide questions of copyright law. Judge Stanceu quickly dismissed each argument.

The basic point is that Congress gave importers the right to protest exclusions and the CIT the power to review denied protests. Nothing in the law limits the nature of the exclusion that can come before the CIT provided the decision on admissibility is up to Customs. While the Court does not have jurisdiction over seizures, its jurisdiction attached in this case when the importer filed a timely summons prior to the seizure. While there may be a question as to the date of the actual seizure, the Court relied on the Notice date.

The government’s argument boils down to the notion that after a court case is commenced, it can wrest an exclusion case away from the Court of International Trade by seizing the goods. The Court found nothing in the law or legislative history to support that notion. In fact, the Court found legislative history stating that Customs’ eventual decision on admissibility after judicial review has begun does not relieve the Court of its duty to grant relied. The House Report does say that Customs must notify the Court if it makes a decision on admissibility or seizes the merchandise. But, the report does not state that Customs can put that decision into effect without the Court’s permission.

All of which leads Judge Stanceu to find that the post hoc seizure did not divest the Court of jurisdiction. While he was at it, he pointed out that judges of the CIT are perfectly capable of making intellectual property rulings and have done so in prior cases. Now, it looks like he might get his chance to make such a ruling.

Who Left USTR In Charge?

2011-06-29T23:42:00.003-05:00

Usually, when a federal agency takes some action, it provides a statement of legal authority. While this may look like boilerplate, it can be important. For example, the statute providing legal authority might include procedural steps that must be followed before the action can be taken. Or, the legal authority might dictate whether a court has jurisdiction to review the action. Almond Bros. Lumber v. United States, is an example of the latter.

This case from the Court of Appeals for the Federal Circuit involves the long-running dispute between the United States and Canada over softwood lumber imports to the U.S. Softwood lumber is possibly the Jarndyce v. Jarndyce of the trade world. [Note: I never actually read Bleak House, I just like the metaphor.] All you need to understand this case is the gist, and that is all I will give you.

Canada sells lots of softwood lumber to the U.S. Back in 1986, a coalition of U.S. lumber producers filed a petition seeking the imposition of countervailing duties on the imports. Before the countervailing duty investigation was complete, the U.S. and Canada entered into a Memorandum of Understanding to manage the softwood lumber trade. Eventually, Canada terminated that agreement, which prompted the Commerce department to self-initate a new investigation. Following a CVD order, the U.S. engaged in marathon litigation in U.S. courts, the U.S.-Canada Binational Panel, an Extraordinary Challenge Committee (“ECC”), and possibly the Galactic Senate on Coruscant. As all that played out, but before an order was finalized, the U.S. and Canada entered into another Softwood Lumber Agreement (“SLA”) in 1996.

That SLA expired in 2001, which prompted the U.S. industry to file a new petition; this time, seeking countervailing and antidumping duties. For the first time, these petitions actually resulted in orders. As you can guess, that spawned more litigation including a Binational Panel, ECC, WTO panel, and a hearing before the Guardians of the Universe on Oa (in 3D!). All of which was superseded by a 2006 SLA. That agreement required Canada to distribute $500 million to members of the U.S. industry represented by the Coalition.

[Side note: To keep DC Comics from getting mad at me for using their image, I note first that I spend too much money on their products. Second, I paid to see the movie. Third, readers to my blog are encouraged to buy these Guardians of the Universe action figures from DC Direct.]

As you might guess, the plaintiffs in this case are not members of the Coalition. They went to the Court of International Trade arguing that they are entitled to a portion of the funds from Canada because the purpose of the SLA was to protect the U.S. industry, not just the Coalition members, affected by Canada’s wrongdoing.

That’s a reasonable enough argument. The question is whether the CIT has the subject matter jurisdiction to decide the case. The answer to that turns on exactly what law authorized the USTR to enter into all these agreements. Keep in mind that the USTR acts on behalf of the President in trade negotiations. If the USTR was acting under some non-specific or constitutional authority, the CIT might not be the place to bring the case (and there may be no court with jurisdiction). If, on the other hand, the USTR was acting pursuant to U.S. law relating “tariffs, duties, fees, or other taxes on the importation of merchandise for reasons other than the raising of revenue,” then the Court of International Trade is the right place pursuant to 28 U.S.C. 1581(i).

So, what exactly was the USTR doing? According to the Federal Circuit, the USTR was making agreements pursuant to Section 301 of the Trade Act of 1974, which is 19 U.S.C. 2411. This is a provision that allows the President to take action when a foreign country imposes an unreasonable or discriminatory policy that burdens or restricts U.S. commerce. One action permitted under Section 301 is the collection of duties, which would not be for the raising of revenue.

The government essentially argued that the USTR never said it was acting under sec. 2411. Rather, it stated in a press release that it was acting under its general authority to negotiate, including under the Trade Act of 1974. Further, the government argued that had the USTR been acting pursuant to sec. 2411, it would have followed the required procedure. Since it did not, it must have been acting under other authority.

The Federal Circuit did not buy this argument. Rather, it looked back to the beginning of the dispute. The Court noted that the 1996 SLA was made pursuant to sec. 2411 and that USTR followed all the procedural requirement of that statute. Nothing in the record indicated that the 2006 agreement, which was intended to address the same issues, was based on any different legal authority. Furthermore, all of the parties to the dispute had plenty of notice from 1986 onward that the USTR might enter into agreements of this nature. Further, the USTR release invoked the Trade Act of 1974 as a basis for its action. The Federal Circuit took this as an indication that sec. 2411 was the relevant authority. Lastly, President Reagan referenced Section 301 of the Trade Act of 1974 in a letter published in the Federal Register relating to the 1986 agreement. All together, the Federal Circuit found this a sufficient basis to conclude that SLA is a tariff measure not related to the raising of revenue and, therefore, the Court of International Trade should have taken jurisdiction.

Things that are on my Mind

2011-06-28T09:02:00.001-05:00

Did you know that Customs had previously ruled that imported business cards required country of origin marking on every card, not just the box? If not, scroll down to page 16 in this Bulletin. Happily, the notice is a revocation of the rulings. In the revocation, Customs agrees that marking on the box in which the cards reach the purchaser is enough.

Customs has reminded (?) the trade that if you are making a post-entry NAFTA claim that includes a change in tariff classification, the HTSUS change needs to be handled via either a protest or a PEA. The NAFTA change is to be handled via a 520(d) claim. So says CBP here.

I have three decisions on my desk to review and possibly blog. At least two are interesting to me. One involves a jurisdictional dispute over an intellectual property seizure. Another involved a denied drawback claim. The third is a penalty case. You tell me which you want first.

Lastly, and very important, is a note that the Border Patrol (a unit of Customs and Border Protection) has tracked, located, and photographed a bigfoot. I know this because I read Cryptomundo. Apparently, Border Patrol officers doing helicopter patrols spotted tracks, which were subsequently followed to a cave in which a bigfoot was found and photographed. There are a bunch of things wrong with this story (beyond the obvious one). The one about which I am curious is that if the Border Patrol took the pictures, how come they are in the hands of Native American tribal authorities who refuse to part with them? Relevant to this blog, I want to know whether the Border Patrol has jurisdiction inside a reservation. Does anyone know? If the reservation includes the U.S.-Canada border, one would think the Border Patrol and Customs and Border Protection would have some authority. On the other hand, reservations are, as I understand it, sovereign and at least marginally autonomous. I once saw a movie that implied that the Border Patrol had to stay outside the reservation and work with tribal police inside. Seeing that movie is as close as I plan on getting to doing actual legal research on this topic. So, if anyone knows the status of CBP and BP officers in Native American reservations, please drop a comment.

Revenge of the TSUS: "More Than" Rides Again

2011-06-16T22:06:00.000-05:00

The Court of Appeals for the Federal Circuit has decided the appeal in Camelbak Products LLC v. United States. And, in this case, the Camelbak is the winner. You may recall we discussed this case earlier here. In that post, my main gripe was that the Court of International Trade did not perform much of an analysis of whether the combined backpack/hydration system was a composite good for tariff purposes. It turns out that I was basically right, though the Court of Appeals went further than I thought it might.

This is a very interesting opinion. The Federal Circuit first had to deal with the question of whether the Court of International Trade was correct that the backpack/hydration system falls within the scope of the eo nomine provisions for travel, sports, and similar bags in HTSUS heading 4202. If it does, then the goods are classifiable there pursuant to GRI 1. On the other hand, there is also an eo nomine provision for beverage bags.

In deciding whether Customs and Border Protection had properly classified the Camelbak products, the Court noted that an eo nomine provision does not include products that is more limited or more diverse in function provided that difference is significant. In that case, the identity of the article has changed. This comes from a 1996 case involving Casio and is slightly at odds with the maxim that an eo nomine provision covers all forms of the article. But, if you think about it, all it does is recognize that if you add enough features to a backpack, it might eventually become something else, which seems reasonable.

In making the determination of whether something falls within an eo nomine provision, the CAFC found several factors relevant. These factors include:

The design of the subject article
The use or function of the article
How the subject articles are regarded in commerce
Whether the additional component is a substantial part of the whole

Applying these factors, the Court found that the Camelbak products possess features that are substantially in excess of backpacks. Further, the hydration components are of different design from the backpack and provide a different function.On this point, the Court was influenced by testimony from a Camelbak employee that hydration is their primary focus as a business.

Based on this analysis, the Court found that the imported merchandise was not simply backpacks with the added feature of beverage storage. Rather, it is composite goods requiring an analysis under GRI 3(b) to determine whether the essential character is imparted by the backpack or the beverage bag. Because there is a dispute as to whether the bags are insulated (which is an element of the beverage bag classification), the CAFC sent the case back tot he CIT for further action.

There is a strong dissent in this case, which is always interesting. The dissent is not convinced by the marketing literature or by the differential in price from traditional backpacks. The dissent also uses the nice analogy of the hypothetical night safety backpack that incorporates a flashlight. Importantly, the dissent seems to concede that at some point adding features to an eo nomine article will remove it from that description, but the dissenting judge (Bryson) does not think that line has been crossed here.

Personally, I think this is a good decision. I think it allows people to articulate what we often feel when looking at advanced versions of products. At some point, the advanced product is really something else. In the old days, we said it was legally "more than" the eo nomine description. In the era of the HTSUS, Customs and Border Protection tells us that is not a proper analysis. But, take an MP3 player as an example. They used to be single purpose devices with no external display. Over time, they added a simple LCD character display, often with a clock. Then, the display became color and was big enough to play display album art. At that point, the device was still primarily an MP3 player for listening to music. But, it was also a clock and probably could display photos. Next, the units were able to play video. OK, is it still primarily a machine for reproducing music or has the video superceded the music? Did video kill the MP3 player? There are rulings on this for iPods and Customs and Border Protection says, Yes. Adding video changed the classification. OK, that is an iPod (or Zune). What about when the Zune (or iPod) started being able to run applications? Is it still a video player or is it more than a video player? I think that depends on the answer to a lot of questions. But, for our purposes, the analysis is the point, not the answer. And, the Court's analysis in Camelbak, I think, might make the "more than" analysis more useful going forward.

And, yes I give equal time to the Zune because I have one and think it is a great device and better client software. Yes, I am aware of all the buzz about killing the brand in favor of some XBox-centric ecosystem. That doesn't make it a bad device. In fact, if you look at the UI on Windows Phone 7 and the hints of what is coming in Windows 8, it sure looks like Zune is taking over Microsoft rather than going away.

Things I Should Have Said

2011-06-03T17:02:00.012-05:00

I have a bad habit of assuming that people who visit this site are completely up to date on what is going on administratively. So, I failed to let people know about something fairly important: Customs issued new guidance to the ports on the proper use of the CF 28 (Request for Information) and CF 29 (Notice of Action) and how those documents relate to the commencement of an investigation. I posted about the issue here.

Due to my confirmed belief that there is no copyright in works created by the federal government, I am posting the notice in its entirety. Note, I have no idea why there are numbers throughout.

GUIDANCE:

PASS TO: Please pass this information to port directors, assistant port directors, import specialists, entry specialists, brokers, and importers.5

CONTACT: For questions regarding this memorandum, please contact Ms. Laurie Dempsey, Chief, Entry, Summary, and Drawback at (202) 863-6509, laurie.dempsey@dhs.gov.

ENT11 OT:TPP:TFA:ESD MB May 24, 2011

MEMORANDUM FOR: Directors, Field Operations

FROM: Executive Director, Trade Policy and Programs Office of International Trade

SUBJECT: CBP Forms 28 and 29 Language

The purpose of this memorandum is to remind ports of U.S. Customs and Border Protection’s (CBP) policy concerning the appropriate issuance of CBP Form 28, Request for Information and CBP Form 29, Notice of Action.5 5

The CBP Form 28 is used by CBP when there is insufficient information in the entry summary package to determine admissibility, appraised value, or classification of imported merchandise.5 Brochures, descriptive literature, blueprints, samples, proof of payment, affidavits, etc. may be requested.5

CBP has advised the field to limit the use of the CBP Form 28 for the purposes stated above and not extend its use as notification that a formal investigation has commenced as a matter of enforcement policy, not a matter of law. The preferred mechanism to inform the importer of the commencement of an investigation is by correspondence on CBP letterhead or the CBP Form 29.

CBP has also advised the field that the CBP Form 28 shall not be used to request proof of a properly executed valid power of attorney.5 CBP shall request proof of a properly executed valid power of attorney during a broker compliance visit or via an individually drafted letter.

CBP has also advised the field concerning the use of the CBP Form 29.5 Generally, as stated in 19 CFR 152.2, an entry which is entered at a rate or value of merchandise which is too low, or the import quantity exceeds that of the entered quantity, and the estimated aggregate increase in duties exceeds $15, CBP will notify the importer of the specific nature of the difference.5 If the rate advance is a proposed action, the importer is afforded 20 days, from the date of CBP mailing the CBP Form 29, to furnish CBP with specific reasons why the rate advance should not be issued.

It is CBP’s goal to act uniformly in providing legal notification to the appropriate party when proposing or taking certain actions.5 CBP should avoid using language on these forms such as “failure to provide information could lead to penalties under 19 USC 1592…” or “this office is investigating the classification of…” if in fact an investigation is not already in process.5 Such language defeats the goal of informed compliance and may dissuade importers from filing valid prior disclosures.

For questions regarding this memorandum, please contact Ms. Laurie Dempsey, Chief, Entry, Summary, and Drawback at (202) 863-6509, laurie.dempsey@dhs.gov.

Please pass this information to port directors, assistant port directors, import specialists, entry specialists, brokers, and importers.5

Signed by Therese Randazzo for:Brenda B. Smith cc:5 Director, Trade Operations Division, Office of Field Operations

This is pretty important in that is should help the trade avoid fights over whether a prior disclosure is still appropriate. Apparently, Customs is planning to engage the trade and the ports in some training related to the issue. If that happens, I'll try to remember to pass it on.

BenQ Remanded

2011-05-29T14:45:00.000-05:00

The Court of Appeals for the Federal Circuit has vacated and remanded the decision of the Court of International Trade concerning the tariff classification of video monitors that are most likely used with computers but have standard connections for use with other video sources. My post on the original decision is available here.

This is one of those cases that makes tariff classification more than just checking a ruling or the index to the Harmonized Tariff Schedule. Classification is a lot like a Sudoku puzzled. In order to get to the right result, the classifier has to apply all the rules in the right order. Skip a step or misunderstand a rule, and you are likely to get the wrong result.

That is what that Federal Circuit says happened at the Court of International Trade. The CIT appears to have focused on Note 5(E) to Chapter 84 to the exclusion of Note 5(B). Note 5(E) provides that "Machines incorporating or working in conjunction with an automatic data processing machine and performing a specific function other than data processing are to be classified in the headings appropriate to their respective functions or, failing that, in residual headings." According to the CIT decision, the monitors can perform a specific function other than operating in conjunction with a computer (e.g., displaying video from a DVD or other data source). Consequently, they are to be classified according to that function.

But, the Federal Circuit noted that 5(B) stated (at the time of these entries):

Automatic data processing machines may be in the form of systems consisting of a variable number of separate units. Subject to paragraph (E) below, a unit is to be regarded as being a part of a complete system if it meets all the following conditions:
(a) It is of a kind solely or principally used in an automatic data processing system;
(b) It is connectable to the central processing unit either directly or through one or more other units; and
(c) It is able to accept or deliver data in a form (codes or signals) which can be used by the system.

That means that the monitors can only classified as automatic data processing machine units if they satisfy the three conditions set out in 5(B). There was no debate about (b) and (c), so the question was whether the monitors were of a kind solely or principally used in automatic data processing machines.

The Court of International Trade, however, did not determine whether the monitors were solely or principally used with ADP systems. Further, the Court held that 5(E) does not trump 5(B). Rather a better reading is that a monitor that is solely or principally used in an ADP system will still be excluded from 8471 if it performs a specific function. Keep in mind that ADP machines are general purpose computers, not machines performing a specific function. So, a monitor that is used for an ATM machine, for example, would not be classifiable in 8471.

So, because the Court of International Trade did not conduct a principal use analysis, the Federal Circuit vacated the prior decision and remanded for further analysis.

AD Scope Decisions

2011-05-29T12:30:00.000-05:00

This is not the trade law blog, but when push comes to shove it is usually Customs that enforces the trade laws. That means that trade issued often come up for importers who were never directly involved in an antidumping or countervailing duty case. Take, for example, the large number of companies that have discovered that the aluminum extrusions they purchase from China are three times as expensive as they had planned. Whether the commodity is an aluminum extrusion or anything else, importers are often caught off guard by dumping or CVD orders.

First, some background. An antidumping case results when a domestic producer petitions the U.S. government for trade relief. The petition has to provide some basis for believing two things. First, that the product is being sold in the United States at a price (properly adjusted) that is below the cost that similar goods (properly adjusted) are being sold in the home market. Second, that the "below normal value" sales are causing (or are likely to cause) material harm to the petitioning industry. If the Commerce Department find dumping and the International Trade Commission finds injury, a dumping order will require that Customs collect additional duties to offset the difference between the home market and the U.S. prices.

The dumping law is inherently problematic for consumers and consuming industries and beneficial to producers. This always creates tension. For example, a dumping order on sheet steel helps the steel industry compete against cheap imports. That protects jobs, might encourage more investment in modernization, and is generally good for that slice of the economy. But, a dumping order on steel is bad for car manufacturers, appliance makers, builders, the aircraft industry, and any other consumers of steel. Ultimately, the additional cost of steel is passed on to the consumers. So, is it a dumping order good or bad for the economy? That is something economist can sort out (most say it is not). As I tell my students, we just have to deal with the law in a way that works best for our clients.

Another, more technical aspect of the dumping law is based on the economic theory on which it is based. The theory is that the only reason the producer can dump in the U.S. market is because the U.S. producer cannot turn around and dump in the producer's home market. Usually, this is because the producer's country has high tariffs or some other non-tariff barrier to entry. The result is that the consumers in the home market pay a higher price for goods to subsidies the lower prices charged in the U.S. Under this theory, the dumping is unfair to both the U.S. domestic producers and to the foreign market consumers. Again, the economists can sort out whether that is true.

A countervailing duty case is similar excepted that the alleged injury is caused by the home market government subsidizing the production or export of the product.

All of which is background for Mid Continent Nail Corp. v. United States. A dumping order is defined by the "scope of the order." This is the section telling Customs what products are covered and what are not covered. In some cases, the scope is not very clear. In Mid Continent, the scope covered numerous kinds of nails and excluded numerous kinds of nails. What the scope did not say was how to handle nails imported with other non-nail products. In particular, the imported merchandise in this case was household tool kits sold at Target.

Target requests a scope clarification ruling from Commerce, which decided that the tool kits contain subject nails but that the kits as a whole were excluded from the scope of the order. Target had argued that nothing in the scope section of the order stated that kits were to be included in the scope. Target probably also argued that the small number of nails in these kits were not really competing with U.S.-based nail producers and, therefore, not causing injury. But, none of that really matters. What matters is what the scope section of the order says. And, the petitioner argued that nothing in the scope section of the order excludes kits or nails contained in kits as long as the nails clearly are scope merchandise.

Enter the Court of International Trade, which was not happy with Commerce. There are specific regulations for how a scope determination is to be made. Under 19 CFR sec. 351.225(k), Commerce is first supposed to look at the description of the subject merchandise in the petition, the investigation, and the determination. Only if that does not resolve the question, Commerce should then look at a number of factors including:

The physical characteristics of the product
The expectations of the the ultimate purchasers
The ultimate use of the product
The channels of trade in which the product is sold
The manner in which the product is advertised

In this case, the Commerce Department, apparently following the importer's suggested analysis, jumped right to the second part of the analysis. The problem with this is that whether you start with the first or the second step is likely to be determinative. A kit will rarely have physical characteristics and end uses similar to a single product in the kit.

Because Commerce skipped the first step, it did not consider whether the petition or some subsequent investigation document clearly addressed the question of kits including nails. Nor did Commerce state whether the nails within the kits might be subject to the scope of the order. Consequently, the Court of International Trade held that the scope determination was not supported by substantial evidence in the record. The CIT remanded the case to Commerce for a new consideration of the first step of the scope analysis.

This is a useful decision for importers to understand. When dealing with dumping orders, the first question is often whether the product is within the scope of the order. Understanding the legal process Commerce is supposed to employ in making that determination will help importers decide whether it makes sense to pursue a Commerce Department scope clarification.

Court Catch Up 3: In which Hot Surfaces Ignite

2011-05-22T14:33:00.000-05:00

Graphite Sales v. United States is a classification case involving electric heating resistors. These are metal elements connected by wires to a power source. When electricity flows, the element heats up. If you are having trouble picturing that, look inside your toaster when it is on. We are talking about the red things, except that the resistors at issue are more compact are are used in gas appliances like stoves and clothes dryers. They heat up and ignite the gas in the appliance and serve as an alternative to a pilot light.

The classifications in play at the Court of International Trade were Heading 9613, "Cigarette lighters and other lighters, whether or not mechanical or electrical," and Heading 8516, "Electric heating resistors," among other things. The duty for 9613 is 3.9% and for 8516 is free. Now, please don't send me e-mails complaining that I am not dragging the classifications out to 10 digits. In this case, the headings are the only thing that matter. I know duty rates do not attach to headings. But, this is my summary. If you want to be picky, write your own.

Here, the parties actually stipulated to the legal conclusion that the goods are properly described as "electric heating resistors." So, they are prima facie classifiable there. However, the government points out that the products are also properly described as "other lighters, whether or not mechanical or electrical." That creates a classic classification problem, which would be perfect for a classroom example or text book, if someone were writing a text book on this. More on that later.

When a product is prima facie classifiable in two headings, the Court of International Trade turns to General Rule of Interpretation 3(a) and the rule of relative specificity. Under that rule, the description that is more specific will prevail. So, I say with my professor hat on, which is more specific: lighters or electric heating resistors? Usually, the description that covers fewer items or is harder to satisfy is considered to be more specific. Also, a use provision is generally considered to be more specific than an eo nomine description.

Here, the Court of International trade found that "electric heating resistors" is more specific. There are many kinds of lighters, but only one that is an electric heating resistor. And, according to the Court, both provisions are eo nomine tariff headings. Thus, 8516 prevails. According to the Court, the Explanatory Notes are consistent with that conclusion.

Here's my question: Isn't "lighter" a use provision? Doesn't it describe a product that is intended to create heat for the sole purpose of igniting something? The difference between a toaster heating element and a lighter is that the toaster is not intended to cause the bagel to burst into flames. That strikes me as a meaningful distinction. If "lighter" is a use provision, then it would be more specific than the eo nome description for electric heating resistors. Just a thought.

Speaking of textbooks. It turns out that someone is writing a text book on these questions. That would be me and my friend and co-author Damon Pike. Here is the pre-publication info. Watch this space for details.

Court Catch Up 2: In Which Pirates are Discussed

2011-05-22T14:07:00.000-05:00

In CBB Group Inc. v. United States, the underlying issue has to do with plush toys that Customs and Border Protection detained as piratical copies. "Piratical" in this sense has nothing to do with Jack Sparrow or Black Beard. Rather, it refers to products the production of which, if made in the U.S., would constitute copyright infringement. So, DVDs holding a copy of Pirates of the Caribbean: On Stranger Tides, produced in China without the express written consent of Disney, would be piratical (in two senses).

This decision is entirely procedural. It involved another defense motion to stay discovery pending the Court's decision on a motion for judgment on the pleadings. Apparently, the government is so convinced that there is nothing to this case, that it does not want to bother with discovery. Rather, it thinks the Court of International Trade should dismiss.

This is one of those cases where the decision is basically entirely up to the discretion of the judge. Here, the Court points out that this case involves the refusal to admit merchandise and that the parties agreed to an expedited schedule. So, it should be moving quickly. Yet, at the time of the opinion, the merchandise was already held up by eight months. Given that, and the lack of any evidence of undue burden or expense to the government, the Court denied the motion to stay discovery. In other words, "All hands, make sail. Or, ye be keelhauled."

Which brings me to the other kind of pirates. I sat through the fourth Johnny Depp installment as the ambiguously everything pirate. Is he straight? Is he sober? Is he an idiot? It is humorously unclear. I might know the answer if I had seen the second and third movies. This one is mildly entertaining and, if I tried to sort through it, might make absolutely no sense. I do feel the need to go back and watch both "The Little Mermaid" and "Splash," because I think my image of our half-fish friends might have changed. The mermaids in the new movie are clearly not as friendly as Madison.

Court Catch Up 1: In Which the Surety Does Not Get Notice

2011-05-21T10:06:00.000-05:00

I have another FOIA case to post. But, while I have been steadily (and happily) busy at work, the Courts have been busy too. Here is an update.

United States v. American Home Assurance Co. is a penalty case that is in the early stages. The defendant, a surety, asked the court to grant summary judgment in its favor and to stay any further discovery until the court acts on the summary judgment motion. The United States has also asked for a stay, but it wants a stay of the summary judgment motion until discovery is complete. The basis for the defendant's motion is that Customs apparently suspended liquidation of the relevant entries but never notified the surety of that suspension. According to the surety, that means the suspension was ineffective.

This case involves merchandise subject to an antidumping duty order. The importer's entries were, like all entries subject to the case, suspended when someone requested an administrative review. Customs should have notified the surety of the suspension but did not. Years later, the government is trying to collect antidumping duties from the surety, who is defending on the grounds that the lack of notice means the entries liquidated more than six years ago. Any action, according to the defendant, is now time barred.

The Court did what courts should do and took a careful look at the statute. It found that the law requires that a surety receive notice after Customs suspends liquidation. From this, the Court concluded that notice is not a condition precedent to the lawful suspension of duties. Rather, the lawful suspension creates an obligation to provide notice. There is nothing in the language of the statute, 19 USC 1504(c), indicating that the failure to provide notice will void the suspension. That leaves it up to the Court to decide whether the lack of notice harmed the surety and , if so, whether any remedy is appropriate. In this case, the Court said that whether the surety could make out harm as a result of the lack of notice will depend on the facts uncovered in discovery. Thus, the Court denied both the motion to stay discovery and the motion to stay the summary judgment process (which the court said was ready to be resolved).

More to follow.

The Constitution Project Report on Data Searches

2011-05-18T12:38:00.000-05:00

A legal think tank known as The Constitution Project, has issued a report on the practice of searching digital devices carried by passengers at ports of entry. This has been a hot-button issue that has pitted privacy advocates against Customs and Border Protection's security and law enforcement mandate. Here is a link to the report.

The report concludes with a recommendation that the Department of Homeland Security amend its existing policy to require a reasonable suspicion of wrongdoing before conducting a digital search. Further, the report recommends that DHS secure a warrant before it is able to retain copies of data or seize the device for further review beyond a reasonable period. There are other recommendations including some dealing with potential racial profiling, privileged information, and the possibility that other law enforcement agencies will piggy back on Customs border search authority to get information that would otherwise not be available without a warrant.

The Webs We Weave

2011-05-18T08:53:00.000-05:00

This blog has a history with spiders. And, with animal smuggling (here and here, for example). Thus, there is no way I was going to pass up this story. Yes, you can guess the gist of it. A German national has been found guilty of illegally importing spiders, tarantulas in particular, into the United States. Among his merchandise was the protected Mexican red-knee variety. I guess it is a good business, except for the part that involves six months in jail and a $4,000 fine.

FOIA Cases

2011-05-14T21:49:00.000-05:00

There have been a couple of recent Freedom of Information Act cases that touch on trade issues and caught my attention.

The first is Watkins v. Customs and Border Protection. This case involves an intellectual property lawyer who made a number of requests to several ports for copies of seizure notices issued to trademark owners when Customs seizes counterfeit goods. These notices include the name and address of the importer, the exporter, and the manufacturer (if known) and other information. Customs eventually provided some of the requested documents, but they had been highly redacted. The plaintiff appealed the limited release to the District Court and then to the Ninth Circuit.

By way of background, the Freedom of Information Act creates a public right to access public documents that have been unnecessarily shielded from the public. The Supreme Court has said that the purpose of the act is "to ensure an informed citizenry, vital to the functioning of a democratic society, needed to check against corruption and to hold the governors accountable to the governed." But, the act contains nine exceptions that justify the government withholding information.

In this case, the government asserted FOIA exception four, which protects from disclosure trade secrets and commercial or financial information obtained from a person and privileged and confidential. The Ninth Circuit broke that exception down in to three elements: the information must be (1) commercial and financial, (2) obtained from a person or by the government, and (3) privileged or confidential.

The plaintiff's argument was that the Notices of Seizure cannot be commercial information because they pertain to the unlawful commercial activity. But, the Ninth Circuit quickly dismissed this argument. Rather than be a determination that the goods are counterfeit, the Notice of Seizure is simply a notice that goods have been seized on the suspicion that the goods are counterfeit. At the time of the seizure notice, the importer retains the right to challenge the seizure and secure the release of the merchandise. Also, the Court noted that importers of legitimate merchandise sometime (sadly) acquiesce to the seizure and ultimate forfeiture of legitimate goods. Thus, the Court upheld the lower court's conclusion that the Notices contain commercial information relating to supply chains.

But, if the information is not privileged or confidential, the law will still require it to be released. To show that the information is confidential, Customs and Border Protection needs to prove both that there is competition in the relevant market and that the release of the information will harm that competition. In this case, because the FOIA request was for "all notices," the relevant market, according to the Court, is the entire $1 trillion in U.S. imports. Based on the size of the market, the Court essentially said that there must be competition. Further, the Court found little doubt that within that $1 trillion in trade, there are importers of legitimate products who zealously guard information about their supply chains. Thus, the Court found both competition and a likelihood of injury from release. Therefore, the FOIA exception applies.

Or does it? There is an exception to the exception. Specifically, the the allegedly confidential information is distributed to the public, the government has arguably waived the claim of confidentiality. Some courts have held that where the information is distributed to the public and that distribution (apparently in contrast to the record itself) is preserved in a public record, there has been a waiver of Exception Four. In this case, the Notice of Seizure have been sent to the trademark owner (who is not a party to the commercial transaction involved). Arguably, that constitutes a waiver requiring the release of the information. But, the majority opinion distinguished this case from other waiver cases because the information did not involve national security, the other cases did not involve a "no strings attached" disclosure as is true here, and there is no public record preserving these disclosures. So, the majority, over a dissenting opinion, held that the waiver did not apply.

This is all very interesting. I have a hard time making that last leap with the Court. On its face, it seems that if Customs and Border Protection is willing to provide rights holders with Seizure Notices, then it is not treating that information as confidential. But, there is more to it than that. First, the disclosure to the rights holder is statutorily mandated. So, Customs is not making a judgment call regarding the information. Rather, it is just following the legal mandate. Second, it strikes me that confidentiality based on commercial value is intended to protect the importer. It really should be up to the importer to waive the confidential treatment of its information, not up to the government.

Also, the fact that there is a statute requiring the disclosure seems to indicate that there is no intent to waive confidentiality. What is happening is that Congress is facilitating the trademark owners' ability to sue the importer and the exporter to recoup any losses or damages. Finding a waiver in these circumstances seems to penalize the importer by compounding the disclosure beyond the statutory requirement. Frankly, it seems like the problem here is that Customs and Border Protection does not restrict further distribution of Notices received by domestic rights holders.

Well, that turned out to be longer than I expected. There is more in the case concerning the FOIA fee schedule. The issue has to do with the fact that the Customs regulations do not correspond with DHS regulations concerning FOIA fees. If you are interested in that part, you are on your own. I'll do the other FOIA case soon.

Extra Batteries Are Not Sets

2011-05-03T11:33:00.000-05:00

The Federal Circuit has decided Dell Products v. United States, a case we previously discussed here.

Not much changed in the analysis between the Court of International Trade and the Federal Circuit's decision affirming the CIT.

The facts are simple. Dell imported a laptop computer kit (via a foreign trade zone) that contained an extra battery. The battery was added to the order by the customer and not by Dell. The bottom line is this: According to both courts, when General Rule of Interpretation 3(b) talks about articles "put up in sets for retail sale," they are referring to collections of goods selected by the seller rather than collections of goods selected by the buyer. In the former case, the goods have been "put up" for retail sale. In the latter case, they have simply been selected.

This is a perfectly reasonable reading of the law, which will likely stand as the final word on this question. Divorced from the business of actually processing entries, it makes a lot of sense. But, as I said previously, I don't think this is a good decision in a practical enforcement context.

The long-standing principal of customs law is that goods are classified in their condition as imported. Dell argued that, as imported, the goods constitute a set and should be treated as such. But, the Federal Circuit looked to an 1897 Supreme Court decision to find that the manner of sale or intended use of goods may be relevant in determining whether several goods imported together are to be classified separately or as a single entity. Further, the Federal Circuit found the language 3(b) to require an inquiry into how the pieces came to be packaged together. According to the decision, the inquiry is not the what is contained in the shipment, but what was offered for sale. Thus, because the extra battery was not offered for sale as part of the larger set, it is classified and subject to duty as a separate item.

So, how will industry react to this? Retailers might want to identify common combinations of items and offer them as sets to ensure that they receive unified tariff treatment (assuming the rate is beneficial). It might also be possible to segregate some products from the advertising for high-duty-rate sets to ensure that they receive the lower rate of duty applicable to the individual part. Also, how much advertising is necessary to show that something was offered as a set? Can Dell create a dynamic web page that shows, even momentarily, various configurations of computers and accessories to evidence that the products have been put up in sets for retail sale? It is possible that Customs will focus on individual transactions and ask for proof that the set was created by the seller at the time of the sale.

This is potentially quite complicated. So much so that it seems strange for Customs to have adopted this position. As the agency charged with interpreting the law, Customs might just as easily have adopted the position that 3(b) is to be applied to the box as it crosses the border. This would have facilitated legitimate trade and allowed for a useful allocation of enforcement resources. Instead, the position pressed by Customs creates new opportunities for well-meaning importers to get caught up in technical compliance errors.

Maybe this is worthy of congressional attention.

More on Congressional-Executive Agreements

2011-04-30T09:47:00.000-05:00

Many thanks to Brenda Jacobs of Sidley Austin who sent me some additional background on Congressional-Executive Agreements as a tool for implementing free trade agreements. This relates to to a previous post in answer to a question about how the pending FTA's might get implemented if President Obama lacks Trade Promotion Authority (FKA "Fast Track").

Brenda sent on a Congressional Research Service document answering the question "Why Certain Trade Agreements Are Approved as Congressional-Executive Agreements Rather Than as Treaties." The document explains that Congress has previously granted the President temporary trade negotiating authority. The most recent authority under the Bipartisan Trade Promotion Authority Act of 2002, though, has expired. Trade agreements negotiated under that authority, including agreements with Colombia, Panama, and South Korea, remain eligible for approval under the TPA process (although Colombia is not subject to expedited procedures because because the bill was submitted without required coordination with Congress). That process relies on an implementing bill sent to both houses of Congress for approval by a majority vote. The Senate's treaty ratification process is not involved. This leaves open the status of the Trans-Pacific Partnership, negotiations for which began in 2009, after TPA expired.

The legal background on this relates to the constitutional delegation of authority to Congress of the power to regulate trade with foreign nations. This proved unwieldy. Letting every member of the House and Senate have input to the terms of a trade deal would make negotiating difficult. Plus, would the trading partner have faith that the agreement it reached with some negotiators survive the legislative process. If not, it would come back to Congress for amendments and the process might go on for ever. As early as 1890, Congress decided to delegate its negotiating authority to the President. Subsequently, the Supreme Court upheld this delegation as constitutional. Most recently, a challenge to the constitutionality of the NAFTA was defeated when the 11th Circuit declared the questions to be a non-justiciable political question.

Through various statutory delegations, the President has negotiated and Congress has approved the GATT, the NAFTA, and the Uruguay Round WTO Agreement.

So, all of that dances around the question that was originally posed: What procedure will be used to if the Trans-Pacific Partnership is to be implemented? The short answer it that I don't know. Absent a statutory delegation of authority, it would appear at first blush that the agreement would go to the Senate as a treaty for ratification. But, that seems excessively technical. The terms of the trade agreement, once reduced to a statute (rather than a self-executing treaty), are easily characterized as a domestic statute regulating foreign trade. In that light, there is no reason to go through the treaty process. A simple vote by both houses would be sufficient. But, absent TPA, the expediting procedures such as restricting amendments would not apply. In other words, TPP would be subject to all the normal sausage making that goes into domestic legislation.

In an effort to avoid that, Senate Bill S. 98 (Portman) would extend TPA through 2016. Having seen the budget debate and the looming question of the debt ceiling, I am all in favor of S. 98.

When Does Cycling Season Start?

2011-04-25T12:29:00.000-05:00

Here in Chicago, I am starting to see hearty souls out on their bikes. I'm not that hearty. It is still in the low 50's and has been raining, it seems, for weeks. But, I have moved my bike from the basement to the garage, so that is progress.

While I contemplate a ride to work, I also think about the danger of "dooring." Apparently, Governor Quinn has been thinking about it as well. According to an AP report, the Illinois Department of Transportation wants data on dooring incidents. One can only hope that means the government is interested in doing something to reduce the risk.

For those of you who don't know, "dooring" is the name for the dangerous accident that occurs when a cyclist crashes into an opening car door. The rider often ends up head over heels and can be severely injured. Drivers, remember to check for bikes before opening your door.

U.S. Can't Keep AD Duties

2011-04-21T11:18:00.000-05:00

I don't usually cover trade remedies cases on this blog. Nevertheless, I feel like I am seeing more questions than ever from importers about dealing with trade remedies. And, this is just an interesting opinion, which hits both customs and trade issues.

In Canadian Wheat Board v. United States, the question was whether the United States could legally keep antidumping duty deposits on unliquidated entries Customs collected in the enforcement of an antidumping duty order that a NAFTA binational panel invalidated. In reality, the panel has no authority to invalidate an order. Rather, it ordered a remand to the ITC to reconsider injury. On remand, the ITC found no material injury. The NAFTA panel affirmed that finding and Commerce revoked the order. But, Commerce instructed Customs and Border Protection to stop collecting cash deposits as of the revocation date and stated that the revocation would not affect the liquidation of entries prior to that date. In effect, that was an instruction to liquidate prior entries with the cash deposits. Importers then went to the Court of International Trade seeking an injunction against liquidation and the return of the deposits.

On its face, this seems like a strange position for the government to have taken. According to the Federal Circuit, "[This] action is so bizarre and unfair that we would be most reluctant to sustain it unless we could say with complete assurance that there was no doubt that Congress intended that result." Further, the Court said that "Neither the statute nor its legislative history 'suggests the Congress intended to produce such an inequitable result.'" The Court characterized the action as "extraordinary and seemingly arbitrary . . . ."

It is clear how this is going to turn out. The interesting question for us in why the government pursued this position at all. I don't think it had much to do with the duties. It appears that if this were not a panel case but had been reviewed initially by the CIT, the government might have seen it differently. That is my speculation, but stick with me.

The government's first argument had nothing to do with the merits of retaining the deposits. Rather, it focused on whether this case was an attempt to enforce the decision of the NAFTA panel. The law is clear that a final NAFTA panel decision is not subject to judicial review (19 USC 1516a(g)(2)). If this case is about reviewing the substance of the NAFTA decision, then the case should be dismissed. The Court, however, found that the case now focused on the implementation rather than the substance of the panel decision and it was not barred.

Second, the government argued that NAFTA panels can only provide prospective relief (see 19 USC 1516a(g)(5)(B)). Granting a refund of unliquidated cash deposits would be retroactive relief. This also makes some sense, but the Court held that the treatment of unliquidated entries depends on what happens at liquidation and that is prospective in nature.

Thus, the government lost on the merits. But, if you look at it in the broader context, this seems like exactly the kind of argument the Justice Department should make. There is little law on the implementation of NAFTA panel decisions. This decision might impact future actions in dumping and countervailing duty cases not just in the U.S., but in Canada and Mexico as well. So, this might be an important step in understanding how panel decisions are to be implemented. And, the fact that it came out in a way that seems both logical and just, is a bonus.

Trade Agreements without Fast Track

2011-04-21T10:50:00.000-05:00

In response to my cry for reader-generated content, I received a question from textile guru David Trumbull, the gist of which is:

If President Obama negotiates a Trans-Pacific Partnership free trade agreement and submits it to congress without Trade Promotion Authority would it be subject to the "Treaty Clause" (2/3 vote in Senate with no House vote needed)? Or, would it be treated as a congressional-executive agreement and would need a simple majority vote in both houses as would any other law?

Personally, I have always been suspicious of the congressional-executive agreement as a means of managing international relations (including trade). It simply does not show up in the Constitution, which specifies that the President can make treaties with the advice and consent of the Senate. On the other hand, Congress has the power to regulate trade with foreign nations. So, the congressional-executive agreement is basically a delegation of authority from Congress to the President to negotiate a deal, which then goes before both the House and Senate for approval by a simple majority. It sounds a lot like Fast Track (now "Trade Promotion Authority"), but is more ad hoc. Some scholars have opined that the process is unconstitutional, but the Supreme Court has upheld it (at least according to Wikipedia).

I don't know the answer to the questions. I invite those who might know or just want to express an opinion to do so in the comments.

Greetings from Chicago & Happy Blogoversary

2011-04-15T22:15:00.000-05:00

Yes, I am here. Things have been very busy the past several weeks. That is a good thing; I am not complaining. Also, I have not seen much in the way of developments that merit a much analysis. Of course, I am behind in my reading, so there may be things in the pipeline.

On Wednesday, this blog celebrated its sixth anniversary. As blogs go, that is fairly remarkable and I am still pleased with both the content and the traffic. Thanks for helping to make the blog both satisfying for me to write and, I hope, enjoyable for you to read.

As an experiment in blogging, I am willing to crowd source the blog. If you have something related to customs compliance, trade law, export controls, cycling, or technology that merits a mention in this blog, send it to me. Keep it to about 100 words or less. If I think it is interesting, I will post it and give you credit. Competing law firms are not excluded but entirely commercial messages will not make the cut.

I am here for you 365 days a year. I rarely ask for anything. Just this once, in my hour of need, toss me a bone.

CAFC Reverses storeWALL

2011-04-03T17:22:00.000-05:00

As the post title might suggest, the Federal Circuit has reversed the Court of International Trade decision in storeWall v. United States. My previous discussion of this case is here.

You may recall that this case involves the tariff classification of home storage systems. Specifically, the imported merchandise was specially designed mounting hooks (called tabs) and wall panels. The panels can accept all sorts of storage accessories from baskets and shelves to simple hooks. If you are having trouble picturing this, visit the plaintiff's web site here.

The Court of International Trade held that the products were possibly "unit furniture" or parts thereof of heading 9403 based upon the dictionary definitions of the words "unit" and "furniture." According to the Explanatory Notes, unit furniture is designed "to be hung, to be fixed to the wall or to stand one on the other or side by side, for holding various objects or articles . . . ." With respect to parts of unit furniture, the Explanatory Notes also state that the term expressly excludes coat, hat, and similar racks and other similar articles. Based on this (and more) information, the CIT held that a complete storeWALL system might be classifiable as furniture. But, if the complete unit consisted only of the wall panel and hooks or pegs (similar to coat racks), then it was excluded from classification as furniture in 9403. Because the merchandise was not always used to make "furniture," the Court reasoned that it was not prima facie classifiable in 9403. Consequently, the CIT classified the merchandise in Chapter 39 as articles of plastic.

The first issue on appeal was the application of the "rack exception" from the Explanatory Notes. Generally, I am not a big fan of the Explanatory Notes when the tariff language is clear. And, the Federal Circuit has usually said that the Explanatory Notes cannot be used to introduce a limitation into the tariff heading that is not present in the text. Thus, I figured the the rack exception was about the be deflated. I was wrong about that.

Rather, the Federal Circuit held that the CIT properly consulted various sources to determine the common and commercial meaning of "unit furniture." These sources included dictionaries and other sources. Similarly, the CIT was correct in consulting the non-binding Explanatory Notes. The Federal Circuit characterized the Explanatory Notes as "clearly relevant guidance" but added the important caveat "where a tariff term is ambiguous." OK, I can live with that. The Court also reiterated its decision in Airflow Tech. in which it said that "When the language of the tariff provision is unambiguous and the Explanatory Notes contradictory, we do not afford the Explanatory Notes any weight." [Note: that is not a direct quote, but the meaning is correct.] Since the rack exclusion does not contradict the tariff language, the CIT was correct to rely on it.

But, the Federal Circuit did disagree with the CIT regarding the classification of a storeWALL system consisting entirely of hooks. The CIT felt that that as imported the merchandise did not have a fixed function. The Federal Circuit, on the other hand, considered this flexibility to be indicative of the flexible nature of "unit furniture," which is intended to be assembled in various ways to suit the consumer's needs. Even if a particular installation of a storeWALL consisted solely of hooks, it is still capable of accepting shelves and brackets. A simple coat rack does not have that flexibility. Thus, the merchandise was properly classifiable as parts of unit furniture in 9403.

There is an interesting concurring opinion in which Judge Dyk argues that the tariff provision at issue is a use provision. The heading and subheading language does not expressly indicate that it is a use provision, but Judge Dyk finds evidence for that in the relevant legal notes and Explanatory Notes which define "unit furniture" based on how it is used. As a result, Judge Dyk would analyze this case under U.S. Additional Note 1(a) and classify the goods based on their principal use. According to the Judge, there is evidence to support a finding that the principal use is as unit furniture. Thus, he gets to the same place, though in a possibly more textually consistent way.

Ford Wins on NAFTA Jurisdiction

2011-03-22T08:36:00.000-05:00

Ford Motor Company got a win out of the Court of Appeals for the Federal Circuit yesterday. Here is the opinion. I am still in Phoenix for ICPA, so I need to be quick about this.

Basically, the case involved a 1520(d) post-entry claim. Ford made the claim within the one-year period but did not submit the required NAFTA certificates until after the one year period. The Court of International Trade held that the one-year period was jurisdictional, meaning that no claim could be made in the CIT to challenge Customs denial of the claim. This was based on two prior cases finding that the failure to make a NAFTA claim at the time of entry was not protestable.

The CAFC disagreed with the CIT on narrow grounds. Following a recent Supreme Court case, the Federal Circuit stated that the CIT had labeled the failure to submit certificates within the one-year period as "jurisdictional" incorrectly. Rather, the lack of certificates is an element of the claim to be considered by the Court but it does not deprive the Court of International Trade subject matter jurisdiction to review the denial of the protest challenging the denied 1520(d) claim.

This is a good result and makes sense. But, the CAFC was clear that it did not address the merits. That will go back to the CIT. Now the issue will be whether Customs properly denied the claim in the absence of timely certificates. That is a close question. The regulations provide the port with discretion to waive the need for some documents including certificates of origin. Given that, it appears that question will be whether Customs properly exercised its discretion when it denied the claim.

For that, we will have to wait and see what the Court says. Personally, I think it is important for Court to hear cases on their merits and to avoid placing technical obstacles in the way of litigants. But, the CO is not a court document. What is involved here is a technical obstacle to duty-free access to the U.S. That is going to get a high degree of deference from the Court. So, we will wait and see.

Export Conviction Upheld

2011-03-17T22:09:00.001-05:00

Compliance people all understand that export controls law is almost impossibly complicated. It is hard to image a more complicated set of laws, especially when criminal enforcement is involved. But, is the law so complicated that it is unconstitutionally vague? That is the question the Ninth Circuit Court of Appeals addressed in United States v. Zhi Yong Guo.

Just or background, for a criminal law to be enforceable, it must be written in a way that allows people to understand what is illegal and to adjust their behavior accordingly. When the speed limit is set at 55 MPH, we all know what is expected. If, however, the speed limit we written as "Travel as fast as is appropriate given the circumstances described in a chart published in the official regulations and assuming the Governor has not let his executive order expire," would you know how fast to go?

The Defendant in this case conspired with others to export FLIR thermal cameras to China without the required licenses. FLIR cameras are prized by the military, security services, industry, and cryptozoologists for their ability to image people, animals, and blobsquatches in the dark. Because of their obvious value to people who do not have the best interests of the United States at heart, the Commerce Department controls their export to much of the world. So, next time you mount a Yeren hunt, be sure to get a license to export the FLIR cameras.

In this case, the defendant argued that the export controls laws are too vague to be constitutional. The Ninth Circuit discovered what compliance people have always known: it is damned complicated but not impossible to figure out. So, the Court upheld the conviction. While I have no sympathy for the defendant based upon his bad acts, I do have some sympathy for his criminal defense lawyer. Apparently, he got so frustrated trying to figure out the Commerce Control List that he threw up his hands and said, "This can't be constitutional."

Protests Basics

2011-03-17T21:47:00.000-05:00

Most importers and their customhouse brokers understand that an administrative protest is the vehicle by which importers challenge many (but not all) decision by Customs. Often, protests are treated as routine administrative documents. In a classification case, it is not uncommon to see protests that say "Customs classified the gizmo as X and it should be Y, so please reliquidate." That won't get you very far.

A good protest includes a fully developed argument for the correct classification and against the classification Customs applied. This is usually supported by technical drawings, photographs, and legal reasoning based on HTSUS language, court decisions, and rulings.

What is not always understood about protests is that they are jurisdictional documents. That means that often the only way to get into the Court of International Trade is to have a valid protest that clearly addresses the question presented to the Court. If a protest is untimely, does not cover the correct merchandise, or relates to some decision that is not subject to protest, you will get bounced from Court.

The issue in Estee Lauder Inc. v. United States was whether the protest sufficiently described the merchandise. The merchandise involved was several configurations of kits of cosmetics and accessories in and vanity bag. The question presented to the Court of International Trade was whether Customs and Border Protection properly liquidated the merchandise in several different tariff classifications rather than a retail set with a single tariff classification.

Customs denied the protest and Estee Lauder took the matter to Court. Once in Court, the Justice Department moved to have the case dismissed on the grounds that the protest insufficiently described the merchandise. Relying on an 1877 Supreme Court decision, the Court of International Trade started from the premise that technical precision is not required of a protest. Rather, a protest is sufficient if it shows that the challenge brought to the Court was, at the time of the protest, "in the mind of the importer, and that it was sufficient to notify [Customs] of its true nature and character. . . ." Further, the law requires that the Court should liberally interpret a protest in favor of it being sufficient to secure jurisdiction.

The government's argument was that the protest specifically described some configuration so of the cosmetics kit and, therefore, necessarily excluded other configurations. Thus, to the extent the importer sought judicial review, it can only be with respect to merchandise specifically described by the protests.

The Court agreed that it was difficult to make a precise comparison of the protests and the entry documents to determine which kits were at issue. At the same time, the Court found that the protest contained general language referring to cosmetic kits made up of "various components" and that this language was broad enough to notify Customs of the challenged classification decisions.

This seems like a close case, but I can certainly see how the Court could reach this conclusion. Considering the requirement that the Court of International Trade liberally construe protests, the broad reading of the protest seems appropriate.

The final, and interesting point, is that the Court also said that the lack of precision in the protest should not have presented an insurmountable hurdle for Customs. Rather, based on a prior court decision involving Saab cars, the Court found that Customs should have inquired of the importer to determine the scope of the question. This, I think, might be a slippery slope of sorts. My advice to importers is to not let this mean Customs must act on a sloppy protest by seeking clarification from the importer. There remains a level of specificity which the Court will require. As I have said in the past, you don't want to be the test case to determine how unclear a protest can be to still get judicial review. I also wonder whether Customs will agree that it has a duty to inquire. If this case, along with Saab, is read to create a new duty of inquiry on Customs, it is likely to end up appealed to the Federal Circuit.

So, watch this space.

See You at ICPA

2011-03-15T12:11:00.001-05:00

Anyone headed to Phoenix for the ICPA meeting next week should come by to say hello. I will be hanging around the Barnes, Richardson & Colburn table (booth 16) between sessions. I am also speaking at a Monday session. Looking forward to seeing everyone.

Zune Humor

2011-03-11T09:19:00.004-06:00

UPDATED BELOW

It's been a long while since I posted anything completely off topic, so bear with me.

I'm a Zune guy. Not the fancy HD version and not with functionality built into a Windows Phone. No, I have a first generation, 120 GB, big old Zune. It sounds great, holds more content than I will ever need, and works just fine. I do find that I like the convergence of having content on my phone. My upcoming choice between sticking with a Motorola Droid (which I love) and a Windows Phone is for another day.

The thing that people don't appreciate about the choice between MP3 players is the desktop side of things. Every time I have to deal with one of the iTunes accounts in my house, I am reminded how much better the Zune desktop client is than iTunes. For starters, while iTunes is entirely functional in its design, the Zune client has an appealing look to it. But, the main thing is that when I plug in my Zune, it syncs new content, removes played podcasts, and generally does what it is supposed to do without any fuss. I can't say that is true of iTunes. For whatever reason, I find I am often struggling with iTunes to get it to sync properly and, almost more important, to understand exactly what it is doing. We use our mobile devices for podcasts more than anything else, and maybe that is an area where iTunes is weak.

The Zune client also provides really good recommendations for content. It's "mix view," which shows how artists relate to one another, is also great. I don't use many of the social features built into Zune. I wish they would be adopted to the podcast market. It would good to find the small cohort of people who listen to both Skeptoid and This American Life.

The big problem I am having in iTunes is trying to isolate the iPad library from two iPod libraries all of which use the same credit card info in the iTunes store. The libraries keep ending up merged. And, since it is not possible to do what Zune calls a "reverse sync," I don't want to delete the libraries on the PC. I know there are third party utilities to sync from the iDevice to iTunes, but it seems to me that I should not need to do that.

Why am I thinking about this? One, I have recently had to replace the HD in my main home computer and have been wrestling with iTunes to get everything back to normal. Also, because Matt and Jessica from the Zune Inside Podcast alerted me to the recent appearance of Zune Man on Robot Chicken. In this episode, Steve Jobs is attacked by an angry Compact Disc Man and Zune Man.

Enjoy.

UPDATE: It appears Microsoft will no longer produce Zune hardware. That probably makes sense. As you can see from the post above, it is the software that provides the advantage. See this story from CNN.

Laptop Search Snags Secrets

2011-03-09T14:27:00.001-06:00

This, ladies and gentlemen, is why Customs and Border Protection searches laptops and other digital media. I'm not saying I agree with the current state of the law on this topic. I am particularly worried about maintaining privilege and the very person nature of some of the information on digital devices. But, there is a real law enforcement benefit to being able to do this. The article linked below is an example. Interestingly, the article says Customs got a search warrant to look at the laptop. That was nice, but probably unnecessary.

Defense contractor charged with stealing secrets on laptop - Computerworld

Making Headway Under CITES

2011-03-07T11:23:00.001-06:00

The WCO is reporting good results from a transregional effort to stem the illegal trade in species protected by the Convention on the International Traffic in Endangered Species. According to the report the effort:

resulted in the seizure of more than 22 tonnes and 13 000 pieces of protected wildlife covering over 31 species, including one live monkey (“Macaca sylvanus” species), two dead monkeys (bushmeat of the Macaques species), 295 pieces of ivory (statues, jewellery, chopsticks, etc.), 57 kg of raw ivory, four rhino horns, 4 726 kg of pangolin meat, 323 seahorses, and one leopard skin.
Other products detained during the operation and still undergoing further investigation to determine their exact CITES status include: 5 300 kg of shark fins, 12 056 pieces of sea shells, 11 250 kg of sea cucumbers, 1 000 kg of eel intestines, and 50 kg of bushmeat.

Link: WCO - Press

Lacey Act Sentencing

2011-03-02T22:02:00.001-06:00

Of all the things compliance people need to worry about, the Lacey Act is one of the craziest. Not that it is not an important and valuable law. As originally drafted, it was intended to prevent poaching of wild game and is used to enforce laws against trafficking in endangered species. But, the Lacey Act has been expanded to require that importers of plants and plant-based materials make a declaration of the botanical name of the species involved and that it was harvested and exported legally. This is very tough when the importer is several steps removed from the person who harvested the tree, for example. Consider a car company in Germany that uses lovely rosewood in its interior trim. The importer in the U.S. needs to know that the wood making up the trim was harvested legally. That is way outside the usual visibility of the supply chain.

That is just me grousing.

In a much more typical case, the Justice Department recently announced the conviction and sentencing of an antiques dealer who illegally importer sperm whale teeth and narwhal tusk. That is worth 33 months of prison time.

Since there is no copyright on government documents, I'll give you the highlights rather than a link.

WASHINGTON—David L. Place, owner of Manor House Antiques Cooperative in Nantucket, Mass., was sentenced to 33 months in prison for illegally importing and trafficking in Narwhal tusks and Sperm Whale teeth, the Department of Justice and the National Oceanic and Atmospheric Association (NOAA) announced today.

On Nov. 19, 2010, a federal jury in Boston convicted Place of eight counts including conspiracy, Lacey Act violations and smuggling for buying and illegally importing Sperm Whale teeth and Narwhal tusks into the United States, as well as selling the teeth and tusks after their illegal importation. The market value of the teeth and tusks illegally imported and sold by Place was determined to be between $200,000 and $400,000. One of Place’s co-conspirators, Andrei Mikhalyov of Odessa, Ukraine, pleaded guilty in federal court in Boston on related charges. Mikhalyov served a nine month prison sentence and was deported to the Ukraine.

Sperm Whales are listed as “endangered” under the Endangered Species Act (ESA), and are listed on Appendix I of the Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES). Narwhals are listed as “threatened” under the ESA, and are listed on Appendix II of CITES. It is illegal to import parts of either the Sperm Whale or the Narwhal into the United States without the requisite permits/certifications, and without declaring the merchandise at the time of importation to U.S. Customs and Border Protection and the U.S. Fish and Wildlife Service.

“The unlawful importation of endangered species is a serious crime that the Justice Department is committed to stopping,” said Ignacia S. Moreno, Assistant Attorney General for the Environment and Natural Resources Division of the Department of Justice. “We will not tolerate the illegal market in endangered species such as the Narwhal and the Sperm Whale, and we will continue to prosecute those who violate the law.”

News You Might Want

2011-02-26T10:57:00.000-06:00

Been slow on the news front. Here are some things that crossed my virtual desk recently:

Customs and Border Protection has July 17th as the date it will start enforcing that rule that any bulk residue in instruments of international traffic entering the U.S. must be properly manifested and entered. CBP has published a FAQ on the topic.

There will be a change to the textile rules of origin under the DR-CAFTA. According to a statement on the USTR web site:

We approved a series of changes to the Agreement’s rules-of-origin for textile and apparel goods that will facilitate regional trade and integration. These changes will expand opportunities under the CAFTA-DR Agreement and encouraging a vibrant textile and apparel supply chain in the Western Hemisphere to effectively face the challenge that Asian competitors represent. We also agreed to increase the cumulation limits to encourage greater integration of regional production through limited reciprocal duty-free access with Mexico and Canada to be used in Central American and Dominican Republic apparel, as called for under the Agreement.

The Bureau of Industry and Security has issued another notice stating that cloud computing providers are not subject to EAR so long as they are not providing anything subject to EAR. This relates to the infrastructure providers. Keep in mind that a public or private cloud user might well violate the EAR if he or she is not careful. For example, if I were to put EAR controlled technical data in a corporate cloud and let engineers in China access it, there might be a violation. That is very different from just creating and maintaining the system in which that might occur. Here is the decision.

Counterfeit iPads have hit the market. Imaging the technical resources necessary to accomplish that. If only that power were used for good, not evil.

$381,000 in your spare tire is way better than finding a $5 bill in your jeans pocket. Except, of course, for the going to jail part.

Hold the Mayo

2011-02-15T22:06:00.000-06:00

Occasionally, and usually without knowing it, the Supreme Court has something to say that might affect customs lawyers and their clients. Mayo Foundation v. United States might be one of those occasions.

The issue at the front of the case was whether medical residents are "students" for purposes of the Federal Insurance Contributions Act, or FICA. As you may notice every month, FICA takes a portion of your wages for Social Security. Students who earn wages, however, are exempt. So, if residents are students, they are exempt. Apparently, there had been a period of uncertainty regarding the application of this rule to residents. As a result, in 2004 the Treasury Department created a regulation saying, among other things, that anyone working 40 hours or more in a week is not a student even if the work is related to an educational objective. The regulation specifically used medical residents as an example of a non-exempt student. Mayo started withholding FICA on its residents wages and eventually sued for a refund.

What is possibly relevant for us is the Supreme Court's analysis of this interpretive regulation. As is usually the case in these situations, the Court began by applying the two-step Chevron (1984) analysis. Under this test, if the statute is clear on its face, then the Court applies the statute as drafted by Congress without regard to the agency's interpretation. The Court found that the statute was not clear as to whether residents are students and, therefore, moved on to the second step.

In Chevron step two, the Court generally asks whether the agency's interpretation of the statute, as expressed in the regulation, is manifestly contrary to the statute. Only if it is, does the Court reverse the agency's interpretation. If the agency has adopted a "permissible" interpretation, then the Court will defer to that interpretation.

But, in this case Mayo argued for a different analysis. Rather than Chevron step two, Mayo asked the Court to look at a number of factors indicating the general persuasiveness of the interpretation. Those factors include how long the regulation has been in place, whether it was passed contemporaneous with the statute, and whether Congress has apparently accepted the agency interpretation. These factors come from a 1979 case called National Muffler, which also involved a Treasury Department regulation. Note that National Muffler predates Chevron, but is has been cited post-Chevron in Treasury cases.

Rather than accept Mayo's invitation, the Court found no reason to adopt a different approach to the review of administrative interpretations in tax cases than in all other cases. In his opinion for an 8-0 Court (Justice Kagan did not participate), Chief Justice Roberts stated "We see no reason why our review of tax regulations should not be guided by agency expertise pursuant to Chevron to the same extent as our review of other regulations."

Why might this be of interest to customs lawyers? If you have read this far, you probably already know where I am going and that is to Skidmore deference. As you probably know, in Mead, the Supreme Court held that some determinations by Customs and Border Protection are not entitled to full Chevron deference but may be treated as persuasive under Skidmore. A decision will be persuasive when it is internally logical, consistently applied, and otherwise carries the indications of persuasiveness. The questions raised by Mayo is whether Mead and Skidmore still apply to Customs.

I think the answer is yes. The easily seen evidence for this is that the Mayo decision cites Mead in several places and makes no indication that it is less than applicable. Second, the regulation is question in Mayo was a full-blown regulation passed after public notice and comment. Under Mead, that is the kind of regulation entitled to Chevron deference. Skidmore applies to less formal decisions like Customs binding rulings and protest determinations.

So, while Mayo dances up to it, I don't think it changes anything for customs practitioners. That, of course, does not mean that the Department of Justice might not want to explore the boundaries of the case as applied to Customs' interpretations of statutes. But, as long a Mead remains the law, it appears we will continue to argue about persuasiveness under Skidmore.

Another Delayed Protest Case

2011-02-15T09:24:00.001-06:00

UPDATED TO FIX A TYPO. Thanks, Victor.

The Court of International Trade has issued another decision in a case brought by a frustrated importer waiting too long for a protest decision from Customs and Border Protection. The case is Norman G. Jensen, Inc. v. United States. After waiting more than two years for a protest decision, Jensen went to the CIT seeking a writ of mandamus ordering Customs to act on the protests. Mandamus is available where the petitioner has a clear right to some governmental action. Since Customs has a two-year statutory deadline for deciding protests, it makes sense that the importer has a right to a decision. Typically, though, Courts will order the government to complete the action only when it is ministerial or clerical in nature. Since this involved a protest decision, it strikes me that the exercise of legal analysis needed may not have been ministerial, but that was not the peg on which the Court hung its dismissal hat.

Rather, the Court dismissed the case on the basis that it lacked subject matter jurisdiction. The plaintiff brought the case under the Court's residual jurisdiction provision 28 USC 1581(i). But, the Court has jurisdiction to review denied protests under 1581(a). The long-standing rule has been that a plaintiff cannot get into the Court of International Trade on 1581(i) grounds when it could have availed itself of 1581(a).

In the case of a protest, an importer can force a decision by requesting accelerated disposition under 19 USC 1515(b). Under this statute, an importer can ask Customs and Border Protection to act on a protest. If Customs does not decide the protest within 30 days of the request for accelerated disposition, then the protest is deemed denied. Either an actual denial by Customs or a deemed denial provides a basis for judicial review under 1581(a). Because 1581(a) is not a manifestly inadequate way for the plaintiff to get the relief it is seeking, the Court found it lacked jurisdiction to hear the case.

If this sounds familiar, it is because a similar issue was raised recently by Hitachi Home Electronics. Perhaps, on the basis of these decisions, Customs is going to see a lot more requests for accelerated disposition.

That's a Trebuchet

2011-01-27T09:26:00.000-06:00

It's been a while since I blogged about a simple drug smuggling scheme. Generally, I am happy to report, I work with commercial importers. Only rarely have I had to call in a criminal lawyer for help. Still, this is a border issue, and it counts as amusing, at least to me.

Various news outlets are reporting that Mexican drug smugglers had been attempting to use a catapult to hurl marijuana across the border. Clearly, this is the work of a geek smuggler (and I mean that in a positive sense). But, looking at the poor video, it looks like the gizmo was actually a trebuchet, which is much more elegant than a simple catapult. A trebuchet is a "siege engine" used until the 13th Century to toss heavy, burning, or infected things at one's opposition. Apparently, a trebuchet is far more accurate than a catapult. The difference between the two being, at least as I understand it, that the trebuchet has a loose rope-link sling rather than a fixed basket for the projectile. This causes the sling to whip around, adding significant momentum, much like a snapped towel or quality golf swing. Also, most trebuchet were powered by counterweights rather than the spring of the main member (imaging a bunch of Medieval peasants pulling a tree trunk back and you get the idea). The image below shows the benefit of the trebuchet design.

Here is what the whole thing looks like:

Both images are from this Wikipedia article.

I have seen a trebuchet used to toss pumpkins. And, there is a guy at the Renaissance Faire in Bristol, Wisonsin (generally my image of Hell) named Doktor Kaboom, who uses one to toss eggs to great amusement. Clearly, with the advent of trebuchet smuggling, the device is experiencing its own renaissance of a sort.

(e) Jurisdiction: Let the Flood Gates Open

2011-01-25T11:54:00.004-06:00

The Court of International Trade is, like all federal courts, a court of special and limited jurisdiction--just more so. If a case does not fall within the scope of 28 USC 1581-84, the CIT has no power to hear it. Some of the provisions of section 1581 have been effectively dormant. Until yesterday, that was true of 1581(e), which provides:

The Court of International Trade shall have exclusive jurisdiction of any civil action commenced to review any final determination of the Secretary of the Treasury under section 305(b)(1) of the Trade Agreements Act of 1979.

A section 305(b)(1) determination is a determination by Customs and Border Protection that an article is or would be a product of a foreign country or instrumentality for purposes of government procurement. What this is all about is the application of both the Buy American Act and the Trade Agreements Act of 1979. There is a lot of history here, and the opinion in Xerox Corp v. United States does a good job of summarizing it. What is important to know is that the BAA generally requires that government agencies provide a preference for the acquisition of U.S.-origin products. The determination of origin under the BAA is based on the goods having been produced in the U.S. and having more than 50% domestic content.

The TAA, on the other hand, implements the WTO Government Procurement Agreement. Products from members to the GPA (which does not include all WTO members, making it "plurilateral"), receive treatment no less favorable than U.S. products for purposes of procurement. In other words, the preference is waived for products of GPA countries and certain other designated countries. To provide treatment no less favorable, the approach adopted has been to focus on whether the product was substantially transformed in the GPA country or other designated country. This created a paradox in which foreign products of countries eligible for GPA treatment received better treatment than U.S.-produced products that might not otherwise satisfy the BAA 50% rule. For years, that paradox was resolved by finding that foreign products further processed in the U.S. that undergo a substantial transformation in the U.S. are treated as U.S. goods for procurement purposes.

In Xerox, Customs issued a ruling on the origin of toner cartridges in which it held that the merchandise was not substantially transformed in the U.S. Customs, however, did not actually state the origin of the cartridges. Xerox, (which, interestingly, was not the party that sought the ruling), challenged the determination claiming that there was a substantial transformation in the U.S.

Got all that? I can wait.

What this decision is about is only whether the Court of International Trade has jurisdiction. The government raised two arguments against the Court hearing the case. The first was that the ruling from Customs was not actually a final determination and was, therefore, not ripe for review. The basis for this is that the statute requires Customs to determine whether the merchandise originates in a designated country or instrumentality for purposes of the TAA. Rather, Customs only said that no substantial transformation occurred in the U.S. According to the government, that decision would not qualify the products for U.S. government procurement under the 50% content rule of the BAA.

Xerox, pointed out that this determination does not really relate to the BAA. Rather, since 1990, the government practice has been to treat products substantially transformed in the U.S. (so-called U.S.-made end products) as eligible for government procurement on the same terms as TAA/GPA goods. This resolves the paradox noted above. So, a determination that no substantial transformation occurred in the U.S. might be a final determination if that results in a determination that the goods are not entitled to TAA status. Also, the Court noted that Customs has issued many origin rulings applying this very reasoning. The government's litigation position, therefore, appears to be that all the prior rulings were invalid exercises beyond Customs' authority. The Court disagreed. However, because the determination was incomplete in that it did not affirmatively identify the country of origin, the Court remanded to Customs with instructions to do so.

The second argument was that the case did not present a justiciable controversy, which is necessary for federal jurisdiction. The Court rejected that argument on the grounds that a ruling in favor of Xerox would make the toner cartridges available for U.S. government procurement. As a result, the case presents a real controversy that can be resolved by judicial review.

So, now we will have to see what happens on the merits. After that, it is a sure bet that the U.S. will appeal to the Federal Circuit.

This is a very interesting development. First, it should help to put government contracting lawyers as well as CIT litigators on notice that the CIT is open for business when it comes to these disputes. Also, the government's arguments, if accepted, would fundamentally change the procurement process by re-installing the BAA vs. TAA paradox. Having U.S.-made end products at a competitive disadvantage for U.S. government procurement cannot be a politically acceptable result. Thus, if the CAFC reverses, you can bet Congress will act quickly to fix the result.

By Request: It's OK to Say "No NAFTA"

2011-01-22T10:08:00.000-06:00

So far, I have not done very well at following my resolution to post more often in 2011. So, I will respond to a specific request for a post. This request comes from someone who has quite reasonably decided not to issue meaningless NAFTA certificates in the ordinary course.

What is a meaningless NAFTA certificate? One that provides little or no duty savings to the importer. Generally, that means where the product involved is unconditionally duty free into the other NAFTA countries. If it is already duty-free, the added benefits of a NAFTA claim are either zero or small. When compared to the administrative cost of chasing supplier certificates of origin, record keeping, and responding to possible verifications, it is perfectly rational for a producer to decide not to provide certificates for duty-free products.

Typically, producers who do that hit two objections. The first is easily dismissed. It is not true that originating goods must be the subject of a NAFTA CO to enter any of the NAFTA countries. It is just not true. Think about for a minute. What if the goods were actually non-originating for NAFTA purposes, but still of US origin? Those goods could be sent to Mexico and Canada, where they would be subject to the prevailing non-NAFTA rate of duty applicable to US goods. If a producer opts not to certify goods, they are, for all intents and purposes, non-originating goods and will be treated as such. Duty gets paid, in the US MPF gets paid, and life goes on. When customers understand that, they may agree that they do not need a CO. After all, it increases their record keeping obligation, the risk of audits, and other legal obligations.

The second objection is more substantive. It may well be that customers need a CO not to support a claim but to accumulate originating content for the regional value content of their finished goods. That is a real concern and producers need to decide how to handle that as a matter of customer service.

Last thing, and this is only tangentially related, there is no NAFTA rate of duty for US goods returned. This comes up periodically and I have discussed it previously. Look at the column 1 special rate of duty in the HTSUS. There are two NAFTA claims available: MX and CA. If goods are sent to Canada and returned to the US without being advanced in value or improved in condition, the should come back under HTSUS heading 9801. This is a shame as 9801 has additional record keeping requirements. There should be a general NAFTA claim that also applies to US goods. Unfortunately, there is not. If you are assigning the origin based on the country of shipment and a NAFTA CO that says US, you might be doing it wrong. If the goods are processed in Canada or Mexico, the NAFTA preference override might apply.

Side Note: I am not a sports guy. I generally do not care. But, when the bandwagon picks up steam and civic pride is on the line, I jump on. So: Go Bears.

Caviar Redux

2011-01-13T09:41:00.001-06:00

Way back in the early days of this blog, when I was funny, I covered the U.S. ban on certain types of caviar. The Fish & Wildlife Service would like you all to know that the ban applies, in certain circumstances, to cruise ships and international passenger aircraft. Basically, they can't sell the affected types of caviar because that constitutes a commercial import or export in violation of the Convention on the International Traffic in Endangered Species or the U.S. Endangered Species Act. Those carriers can serve caviar to passengers but are not permitted more than 125g per passenger. Plus, it appears from the FWS document, that the caviar must all be consumed on board.

So, for all you sophisticates out there, if you are jonesing for some caviar on your next international flight, don't expect more than 125g and don't expect to be able to buy an extra pot in flight. Personally, I'm not a big fan.

UPDATE: Speaking of FWS, is that 55 live turtles in your luggage?

Beta Test, or, Color Me Orange

2011-01-07T11:45:00.000-06:00

Roche Vitamins, Inc. v. United States is a Court of International Trade opinion on the classification of a beta-carotene product. The tricky thing about beta-carotene is that is can be used as a dietary supplement (as a precursor for vitamin A) or a a colorant that produces a lovely carrot color. This is a good case to read if you are interested in how the Court interprets tariff provisions requiring classification based upon use.

Specifically, the Court held that the phrase "coloring matter" in subheading 3204.19 means that the "matter" must be principally used as coloring. As a result, the Court needs a lot of information to resolve the case. First, the court must determine the "class or kind" of product that encompasses the merchandise. Then, it must consider six factors including physical characteristics, expectations of purchasers, and channels of trade to determine whether the beta-carotene of that class or kind is principally used as coloring.

The problem for the Court appears to be that while it received a lot of legal arguments regarding the classification, it does not have the facts necessary to answer the question about principal use. Thus, in an anticlimactic move, the Court of International Trade refused the plaintiff's motions for summary judgment.

Riddle Me This

2011-01-07T10:33:00.000-06:00

The regulations regarding the export of encryption software are among the most convoluted in the trade world. The problem is not so much that the regulations are poorly written. The problem is that the technology is complicated and the average trade person does not necessarily have the expertise needed to interpret the regulations.

That situation is slowly easing as the Obama administration simplifies various aspects of the export laws and regulations. For example, in this Federal Register Notice, the Bureau of Industry and Security is announcing that certain mass market, publicly available encryption software in object code with symmetric key length greater than 64 bits is no longer subject to EAR. While they were at it, BIS also announced that "publicly available" encryption object code classified under Export Control Classification Number (ECCN) 5D002 on the Commerce Control List when the corresponding source code meets the criteria specified under
License Exception TSU is also no longer subject to the EAR.

I hear rejoicing from the Bay Area.

NOTE: I recognize that "Riddle Me This" is a bad title. I was thinking about encryption and complicated regulations as a puzzle of sorts. Mostly, it makes me sound like the giant geek that I am.

Pigeon Eggs from Cuba Lacey Act Violation

2011-01-04T10:02:00.000-06:00

Here is a link to a Department of Justice press release noting the guilty plea of two Miami men charged with violations of the Lacey Act. Specifically, they smuggled pigeon eggs into the US from Cuba. Note that this raises all kinds of other Cuba-embargo-related questions, but that is not the substance of the charge. One of the defendants runs (or maybe now it is correct to say "ran") a pet store specializing in racing and homing pigeons.

GSP Instructions

2011-01-04T09:56:00.001-06:00

As you probably know, Congress could not get its act together to pass an extension of GSP before the end of 2010. That means that merchandise that might otherwise have been duty-free is now forced to entry the U.S. dutiable. This is not an unusual circumstance. So much so that Customs and Border Protection has a means of dealing with this, which works on the assumption that GSP is not dead and will be reauthorized.

In the meantime, importers should continue to use the GSP SPI on entries. That effectively flags entries so that when Congress renews GSP, the entries can be liquidated with GSP benefits. But, until that happens, duty deposits must be made at the applicable MFN rate.

AGOA, on the other hand, has not expired and can continue to be used. And, to round out the alphabet soup of preference programs, ATPDEA was granted a short extension through February 12, 2011 for Columbia and Ecuador, but not for Peru (which should not be harmed due to the trade agreement with the US).

Pre-Break Update

2010-12-19T19:17:00.000-06:00

I am going to be off the grid next week (more or less). So, to keep everyone happy while I am gone, here are some things to contemplate:

The House passed its Omnibus Trade Act of 2010 on December 15. The bills contains an 18-month extension of GSP and an 18-month extension of ATPA/ATPDEA but only for Ecuador and Colombia, not for Peru. Here is a link to the bill text. The bill also contains many temporary duty rate reductions. The Senate is expected to take up the bill soon.

The final text of the Anti-counterfeiting Trade Agreement has been published and the USTR is seeking comments on it before February 15.

Costco: Tie Goes to the Circuit Court

2010-12-13T13:51:00.000-06:00

The Supreme Court has decided the Costco grey market Omega watch case. We discussed that earlier here. Unfortunately for those seeking clarity, the case was "decided" by an eight-judge panel. Newest Justice Kagan was excluded because she worked on the case at the Justice Department. As you Supreme Court scholars know, a tie decision results in a non-precedential affirmance of the lower court decision. Thus, this is entirely anticlimactic.

Pleading

2010-12-10T11:41:00.000-06:00

I have never intended this blog to be nothing more than a repository of case law from the Court of International Trade and the Court of Appeals for the Federal Circuit. My goal is that this blog serves as a place to find analysis of developments in the area of customs law and compliance. Early on, I blogged on more general topics involving corporate compliance and regulatory changes. Lately, I have not had much inspiration to do so. I want that to change. In fact, for 2011 I resolve to post more often on regulatory and compliance developments. If you want to help me improve the blog for next year, feel free to send me questions or post ideas. My friends and readers out there have been of great assistance in making this blog work. So, to the Retired Customs Guy, the Broker in Texas, to Matt, and to Anonymous, keep the comments and questions coming. It helps keep the bold interesting for all involved.

Now that I am done pleading with you, I will talk about a pleading case from the Court of International Trade: FAG Holding Corp. v. United States.

This is another of those cases where the procedural rules got in the way of the plaintiff getting a decision on the merits. That is not to suggest that the decision is unfair or incorrect. It is just a reminder to all of us that the technical aspects of presenting a case to the CIT matter. Given the current state of the law, I think it is fair to say that these things matter more than they have in the past.

The law requires that a complaint present "sufficient factual matter, accepted as true, to 'state a claim to relied that is plausible on its face.'" That is a mash-up of two Supreme Court cases: Ashcroft v. Iqbal and Bell Atl. Corp. v. Twombly. That means that the complaint must be more than speculative. That was not always the case. Prior to these Supreme Court cases, it was possible to file a complaint asserting a right to relief on the assumption that the plaintiff's lawyer could use discovery to find facts sufficient to show a right to relief. Today, the lawyer needs to know and assert the facts that make out a plausible right to relief. And, since we can't just assert facts we do not have some basis to believe, this change in burden is meaningful.

FAG involves the application of dumping duties to to two entries. Plaintiff protested the application of the antidumping duties, claiming that the entries had liquidated by operation of law without the antidumping duties. To make out a case for deemed liquidation, the plaintiff needs to allege and prove that (1) the suspension of liquidation from the dumping case terminated, (2) the Customs was notified that the suspension terminated, and (3) that Customs failed to liquidate the entries within six months. Those are pretty specific requirements.

For the plaintiff to have a right to relief, it needs to allege in its complaint the date of entry of the merchandise. This is a prerequisite to determining the dumping review period and, therefore, the date of suspension of liquidation. In this case, the Court looked to the physical entry documents to determine the entry date. "Entry" in this context is the filing of documents necessary to secure the release of the merchandise. Here, the importer used the "immediate delivery" process to secure a quick release of the goods. Under this process, the time of entry is defined in the regulations as the time the entry summary document is filed in proper form with estimated duties attached. This is a week or so later than the date alleged in the complaint. That puts the entries in a subsequent antidumping review period and means that the suspension of liquidation had not terminated at the time of liquidation.

Based on those facts, the Court held that the complaint did not allege facts sufficient to create a plausible right to relief. As a result, the Court dismissed the action.

On the Horizon

2010-12-10T10:25:00.002-06:00

The Court of Appeals for the Federal Circuit has decided the appeal in Horizon Lines v. United States. Interestingly, the CAFC affirmed the Court of International Trade but found that the lower court had committed harmless error in its legal analysis.

Since you follow these things, you probably remember that this case involved duties assessed by the United States for ship repairs undertaken outside the U.S. Horizon Lines challenged the duty assessment on the grounds that the work performed on the ship was not a dutiable repair but was actually a non-dutiable modification. I know this kind of semantic distinction makes non-lawyers crazy, but there it is. That is how the law is written and that is what Customs and the Court must apply.

The modification in question was an improvement to the container guide system used to place containers in appropriate locations in the cargo hold. The change improved the speed and ease of loading the ship and improved safety during the loading operation.

The CIT found no evidence that the container guides were in need of repair. Consequently, the CIT held the work to be a non-dutiable modification. Although noting that the container guides were in good working order prior to the modification, the CIT held that fact to be irrelevant.

On appeal, the United States argued that the CIT took too narrow a view of "repair" as meaning restoring a feature to good working condition after sustaining damage. Rather, the government suggests that repairs include systematic improvements to the operation of a vessel.

The Federal Circuit agreed with the CIT's more narrow definition of "repair" in this context. Further, the Court held that the condition of the modified parts is relevant to determining whether the modification is a repair. If the part is in good working order, there would be no need for a repair. This is where the CIT got the analysis wrong, but the error was not important to the ultimate decision.

Thus, when faced with deciding whether to undertake some ship modification, carriers should note that if the work is done to "mend" or "restore" a system after it has been damaged or decayed, that expense is likely to be dutiable (unless another exception applies).

Slow News Edition

2010-12-02T11:34:00.000-06:00

It looks like imports from Canada will be subject to the same requirements for fumigating or heat treating wood packing materials that apply to the rest of the world. FR Notice.

Also, the ITC report on modifying the tariff treatment of certain festive articles has been delayed until December 13.

Here is a CBP Fact Sheet on import safety.

Updated list of countries cooperating in the Arab League Boycott.

Speaking Of . . . .

2010-11-23T16:26:00.000-06:00

Not a half hour after posting about the tiger trade, I saw this press release concerning illegal trafficking in sperm whale teeth and narwhal tusks. The conviction includes a count for violating the Lacey Act.That is up to 20 years in prison and $250,000 in fines. Somehow, I doubt peddling scrimshaw to tourists in Nantucket was worth it.

For what it is worth, in my head, the defendant looks like the sea captain from The Simpsons. Yar!

WCO Announces Tiger Trade Cooperation

2010-11-23T15:26:00.000-06:00

Long-time readers of this blog know I am interested in the illegal trade in animals. Usually, that manifests itself in posting articles about some guy arrested with 20 turtles in his pants or some similar oddity. Despite the News of the Weird aspects of it, the illegal trade in animals is an important issue. The people behind this are depleting the natural diversity of wild animals and threatening the wild population. The buyers of these animals are often simply idiots with little impulse control. Where I might want to splurge on some shiny electronic device, these folks want to own an exotic animal, usually illegally.

Today, it was reported that five international enforcement agencies including the World Customs Organization and CITES have formed a consortium to fight the trade in tigers. Here is the press release: WCO - Press.

Best of luck.

Judicial Conference in a Nutshell

2010-11-20T11:16:00.000-06:00

I always enjoy the Court of International Trade Judicial Conference, and the most recent edition was no exception. Granted, a lot of the personal enjoyment comes from having the opportunity to see friends and colleagues. But, there is plenty of substance to be absorbed as well.

For whatever reason, the conference skewed somewhat to trade-related discussions over customs this time around. From a customs lawyer's perspective, it would appear that the single most vexing issue facing the trade bar is the issue of Commerce's policy of publishing liquidation instructions within 15 days of a final agency determination. This causes problems because the parties have 30 days in which to challenge the determination by filing a summons. In the ordinary case, the plaintiff gets to Court and asks for an injunction against liquidation to prevent that from happening. Sometimes, Customs and Border Protection liquidates entries prior to the filing of a summons and request for an injunction. Once the entries liquidate, the case is moot and the potential plaintiff has lost the opportunity to seek judicial review. Everyone seems to agree that the best solution is some kind of automatic stay or injunction against liquidation for the 30 days.

In the midst of this discussion, the question was raised about the role of importers in trade cases. The question, which I asked, had to do with the situation in which the importer wants the entries liquidated at the prevailing rate (whether that is the deposit rate or the assessment rate) without waiting for the respondent and petition to fight it out in court. If you think about, this is the one area of trade law where the importer is at the mercy of the exporter. Yet it is the importer who pays the duties. Importers often complain when they receive a liquidation notice five or more years after the date of entry because the liquidation was suspended pending litigation in which the importer was not even involved. Someone else in the audience suggested that this question raises fifth amendment taking issues. That is a topic that might be worth a law review article.

On the customs front, there was some interesting discussion about the standard for pleading facts in a complaint. The Supreme Court has recently required that the facts plead lead to a "plausible" conclusion that the plaintiff is entitled to relief. According to the panel where this was discussed, this should not be difficult to accomplish, but plaintiffs need to be aware. Otherwise, they might be looking down the barrel of a Rule 12 motion to dismiss.

All in all, it was a good conference. The location at the Trump in Soho was very nice too. Congratulations to everyone on the planning committee.

If you are interested, the papers from the conference are posted here.

The Primrose Path to Default

2010-11-10T10:11:00.000-06:00

Pleading continues to be an issue in Court of International Trade litigation. In any other Court, that would not merit a comment. However, in the last two years or so, the CIT has issued several decisions focused on pleading, and that is a change from prior years.

In United States v. Callanish, Ltd., the United States alleged that the importer entered evening primrose oil without the required FDA approval. Because of this, Customs and Border Protection claimed the entries contained false or misleading statements or omissions, in violation of the penalty statute (19 USC 1592). Callanish, in particular, was the the manufacture of the product in Scotland and shipped the goods to the U.S. Apparently, the claim against Callanish is for aiding and abetting the allegedly fraudulent scheme.

After being served with an amended complaint, Callanish failed to defend itself. As a result, the United States moved for a default judgment to the tune of $17 million, the domestic value of the merchandise. The Court granted the default, but balked at entering judgment (which is technically two different things).

The issue for the Court was whether the government has pled facts sufficient to establish liability. It turns out that the pleadings did not establish, to the Court's satisfaction, the domestic value of the merchandise. Rather, the complaint simply asserts that to be the value. Hence, the Court denied the motion for a default judgment but gave the U.S. 60 days in which to amend its complaint.

OK, so that is all technical and legal. An interesting aspect of the case for importers and compliance people is that CBP pursued this matter under 1592 as a penalty case. Typically, importers expect problems with FDA or other government agencies will be resolved via a Notice to Redeliver and then a liquidated damages case when the goods are not returned to Customs. The problem for Customs under those circumstances is the limited window in which it case demand redelivery. By proceeding under 1592, Customs can go back five years and, in the case of fraud, possibly collect the full value of the goods.

The lesson to be learned from that is that FDA imports (and goods regulated by other agencies) are not free and clear after the conditional release period ends. Like all imports, 1592 remains a viable enforcement tool.

When is Painting Repair?

2010-11-05T13:36:00.000-05:00

Those of you who know me , also know that I spent (and unfortunately continue to spend) a lot of time of a single issue involving the tariff treatment is painting as an operation incidental to assembly under HTSUS item 9802.00.80. So, paint-related issues always catch my eye.

Horizon Lines, LLC v. United States is a paint case of a different color. The issue here has to do with whether painting a U.S.-flag ship in a foreign port constitutes repair for purposes of assessing the 50% duties applicable to repairs. While in China, the Horizon Lines Crusader was painted above and below the water line. Below the water line, the painting was done in conformity with an international convention relating to the removal or sealing of environmentally destructive antifouling agents. Having had the occasion to apply copper-based antifouling paint to a a relatively tiny hull, I can tell you this is somewhat nasty stuff. Customs and Border Protection applied duty to all of this activity on the grounds that it constituted repair.

For an operation performed on a ship to be considered a dutiable repair, it has to involve (1) the purchase of equipment or parts, (2) the acquisition of repair parts or materials, or (3) "expenses of repair." "Repair" is understood in this context to mean the restoration of the ship to good condition after decay or other injury.

According to the Court of International Trade, paint applied to a ship's hull is not equipment. But, painting to restore the vessel to good condition may be a repair and, therefore, dutiable. However, there was much disagreement as to whether the application of antifouling paint was a non-repair modification or the repair of a decayed antifoulding system. As a result, the Court found that there were material issues of fact in dispute. That means that the anticlimactic ending to this post is that the defendant's motion for summary judgment as to work performed below the waterline was denied. For work above the waterline, the defendant's motion for summary judgment was granted (which means the U.S. won).

Pop Quiz: Counterfeit?

2010-11-04T11:05:00.000-05:00

Customs plays an important role in preventing the importation of merchandise that infringes U.S.-held intellectual property rights. That is an important job for the economy as well as for the health and safety of the public. You can usually be pretty certain that a company that is willing to rip off a brand name trademark is not too scrupulous about health and safety requirements. There are lots of dangerous counterfeit products out there, and we should all thank CBP for helping keep them out of the marketplace.

But there are also non-counterfeit products that nevertheless infringe someone's trademark, trade dress, or other intellectual property right. Those products may or may not present health and safety concerns as well. But, they are legally different.

Specifically, a "counterfeit" product is one bearing a mark that is "identical to or substantially indistinguishable from a registered trademark." 19 CFR sec. 133.21(a). These are the fake Coach and Prada bags, HP ink cartridges, and Nike shoes for example.

Recently, CBP used this picture as an example of counterfeit batteries:

I totally understand that these batteries are ripping off Duracell and that CBP should seize them as being infringing. But, is this a counterfeit products issue? "Young Emperor" is not identical or indistinguishable from "Duracell." So what is going on here?

Actually, CBP is on the right track about this and the folks at Duracell have been on the ball too. You need to understand that the label design can also be a trademarked device. In this case, beyond the Duracell name, the company all holds a trademark on the copper and black packaging as well. If you want to check, it is registration number 1039589. While the brand name has not been copied, the packaging has.

We could quibble about whether the Duracell registration requires both the color scheme and the brand name, but the illustrative point is clear. Infringer who think they will avoid legal problems with minor changes to spelling or by avoiding the use of the brand name are often wrong.

Advice for the U.S.-based rights holder is to record your trademarks, copyrights, and other intellectual property with Customs and Border Protection. Then work with CBP to let the agency know what aspects of your product or packaging are protected. CBP will then be in a position to help protect your rights. And, they are all the more happy to do so if you can point to a health or safety issue related to the infringing goods.

Dirty Deems Done Dirt Cheap

2010-10-26T23:32:00.000-05:00

This case is very strange. It is also one of those interesting cases that involves the intersection of customs and trade law. Specifically, it involves Customs and Border Protection's treatment of entries subject to an antidumping duty order. As it happens, that treatment was wrong.

By way of background, the salient facts are that Alden Leeds was the importer of chemicals that were subject to an antidumping duty investigation. At the time of entry, the importer was required to make a cash deposit of almost 25%. Because the producer requested an administrative review of the deposit rate, Commerce instructed Customs to suspend liquidation of the entries. The review subsequently found an assessment rate of about 4%. That should have made for a hefty refund to Alden. Unfortunately, it did not.

Rather than withhold liquidation, Customs affirmatively posted an official bulletin notice stating that the entries had liquidated by operation of law (i.e., they were "deemed liquidated"). This is the first odd thing about these facts. A deemed liquidation occurs when the time for liquidation expires without any action by Customs. It is a non-sequitur to publish a notice of deemed liquidation. It appears that what Customs tried to do was publish a notice of liquidation. That, of course, should have been prohibited by the suspension instructions from Commerce. It appears that someone at Customs noticed the entries, investigated, wrongly determined that they had been deemed liquidated by operation of law, and decided to publish notice just to let the world know that fact.

When Commerce published the final results, Alden Leeds sought a refund. Customs' unfortunate response was that the entries liquidated. Because the importer did not file a timely protest, Customs believed that it had no means by which to refund the money. So sorry. Alden Leeds then had no where to turn but the Court of International Trade.

It is worth pausing here to consider the next odd part of this case. It is absolutely clear that Customs made a mistake in this case by liquidating the entries. It is also clear that the United States government does not have a right to the funds. Should the apparent lack of a legal avenue by which the importer can force Customs to refund the money really dictate the policy here? Why did no one in Customs say, "file a suit and we will settle for the full amount you are owed." Is there something that prevents Customs from acting like a reasonable commercial actor in this case? That is not a rhetorical question. If you know the answer, drop a comment below.

On the law, the problem for Alden Leeds is a prior case called Juice Farms which involves a similar unfortunate set of facts. In that case, the Court of Appeals for the Federal Circuit held that the improper liquidation should have been the subject of a protest and that a protest would have provided an adequate remedy. Because a protest was possible, the Court of International Trade did not have jurisdiction under 1581(i), the residual jurisdiction provision.

The CIT, however, distinguished Juice Farms, on the grounds that it involved affirmative rather than deemed liquidations. Oddly, in this case Customs posted a bulletin notice of liquidation, which sounds a lot more like an affirmative liquidation than a deemed liquidation. Furthermore, there is nothing different about the protestability of a normal versus a deemed liquidation. But, because this case involves supposed deemed liquidations, which require no action from Customs, the Court found Juice Farms to be inapplicable.

In the end, the Court made the point that the notice of liquidation was a legal nullity. Customs might just as easily posted a notice saying that I had won the Tour de France. Since the posting was in error and meaningless because of the official suspension of liquidation, there was no liquidation and I am not Lance Armstrong. Without a liquidation, filing a protest would be futile, making it a "manifestly inadequate" step. Thus, the Court held that no protest was required and the Court had (i) jurisdiction to decide the case.

This could easily have gone the other way on the basis of Juice Farms, and it might still. As a policy matter, one could argue that importers are supposed to monitor the status of their entries and that the protest process gives importers recourse. Extending this burden to include monitoring erroneous or illegal liquidations is not particularly far fetched. Further, there is a principle of law that estoppel does not run against the government. That means that parties cannot make a claim against the government (absent a statute permitting it) simply because the party relied on the representation of the government to its detriment. In this case, that would be relying on the statement from Commerce that Customs will not liquidate the entries. But that strikes me as bad policy. An importer should be able to accept that the relevant agencies are going to do what they are legally required to do and that the Court will hold them to it.

Hello Sydney

2010-10-21T09:50:00.000-05:00

By request, I am posting this by request, something I am happy to do. If you see customs-related news items, always feel free to forward them to me at customslawblog@gmail.com.

It seems that the Australian government is hoping that travelers entering the country know pornography when they see it and report it when they are carrying it. This has caused a bit of a dust up down under because not all pornography is illegal to possess in Australia and not all is banned from importation. However, the two sets apparently do not coincide exactly. According to Australian Customs and Border Protection, travelers should just disclose what they have and let Customs sort it out. I am not sure on the law in Australia concerning border searches or self incrimination (feel free to comment if you are). Either way, it certainly seems like a bit of a stretch to assume that a traveler will arrive at the Customs desk Kingsford-Smith and open his or her bag of porn for the inspector to review. Maybe Australians are genetically immune to embarrassment.

More on the story is here. In case you are arriving right now and want to know what to leave on the plane, according to the news story "banned material includes child pornography, bestiality, explicit sexual violence, degradation, cruelty and non-consensual sex."

Are Excises Taxes Protestable?

2010-10-21T09:33:00.000-05:00

When Customs collects a tax for another agency, is it making a protestable decision? That is an important question. If the answer is yes, then the U.S. Court of International Trade has subject matter jurisdiction over the denied protest. If the answer is no, the importer has to look elsewhere for relief.

That is also the question presented in Shah Brothers, Inc. v. United States, which involves entries of "gutkha." Gutkha is a tobacco preparation containing betel nuts and various aromatic agents.Apparently, gutkha is a smokeless tobacco product and is, therefore, subject to excise tax as well as import duties. Smokeless tobacco comes in two varieties: chewing tobacco and snuff. The problem for the plaintiff is that the excise tax on snuff is higher than the excise tax on chaw and the Alcohol and Tobacco Tax and Trade Bureau (the "TTB") concluded that this product is snuff. Customs, on the other hand, eventually agreed with the importer on the classification of the merchandise. That means that the only issue left for the Court of International Trade is the TTB treatment of the product and the tax as collected by Customs and Border Protection.

The Court initially looked at its jurisdictional statute, 28 USC 1581 and found that since this the TTB determination did not involve a decision of Customs and Border protection, it was not direcltly reviewable on the basis of a denied protest. The Catch-22 is that the decision is also not subject to review under the Court's residual jurisdiction because any review of the TTB's decision would necessary require a review of how Customs implemented that decision (since the TTB does not collect taxes at the border, that is Customs' job). In fact, in the process of creating the Department of Homeland Security and moving Customs from Treasury to DHS, Treasury specifically delegated to Customs the function of collecting revenue at the border. Since the real issue is not what TTB asked of Customs, but what Customs did to the imports, the Court finds that the importer had an adequate remedy under the protest review process of 28 USC 1581(a).

Whenever 1581(a) is available as a means of getting into Court, the usual result is that no other means of establishing jurisdiction will work unless the protest process is "manifestly inadequate." The Court did not see any such inadequacy in this case. Finally, the plaintiff's valiant effort at latching on to the Administrative Procedure Act to establish jurisdiction to review a "final agency action," was also unavailing. The APA does not provide aggrieved parties a means of circumventing the established path to judicial review. In light of the non-futile availability of the administrative protest, the APA was no help to the plaintiff. The CIT dismissed for lack of jurisdiction.

Filer Code Safe for Now

2010-10-14T16:11:00.000-05:00

Customs and Border Protection assigns licensed customhouse brokers unique filer codes. These codes allow the broker to have electronic access to Customs. The filer code, therefore, effectively permits the broker do business in a modern commercial environment. Absent an active filer code, the broker may as well have to operate using carrier pigeons and smoke signals. Consequently, when CBP threatened to deactivate its filer code, Lizarraga Customs Broker went on the offensive.

The issue reached the Court of International Trade. The procedural status of the case is a little tangled. It appears that plaintiff wanted an injunction to prevent CBP from deactivating its filer code. While that request was pending, the parties submitted their complaint and answer. Eventually, the United States government filed a so-called "Confession of Judgment" in favor of Lizarraga. According to the government, this should have resolved the case because the US has agreed not to suspend the filer code and the plaintiff, therefore, has the relief it was seeking in Court. In other words, the case was mooted. Absent a controversy for which the Court can grant relief, the government argued, the CIT no longer had jurisdiction over the case.

"Not so fast," was Lizarraga's response. While, the immediate threat may have been resolved, the plaintiff maintained that the Court continued to have jurisdiction because it was likely that CBP would start the process over. If there is a likelihood that the allegedly wrongful behavior will be repeated, the mootness doctrine does not apply. Despite that clever argument, the Court dismissed the case.

Two facts supported the Court finding mootness. First, the Court found that it could not decide the issue without a fully developed factual record. Developing that record would require that the case continue. However, because there is no additional relief to be granted, continuing the case would produce nothing but a theoretical answer to a purely legal question. At least I think that is the reasoning. The second point is that counsel for the United States said in Court that brokers are entitled to some procedural protections when their filer code is threatened. Consequently, the Court accepted that as a statement that the US would not repeat its effort to summarily deactivate the filer code. Thus, the requested injunction was moot and the motion denied.

This case may seem technical and legal. The importance of it for brokers, though, is that it represents an on-the-record acknowledgement by Customs that it cannot simply yank a filer code. Rather, the broker is entitled to notice and an opportunity to be heard. Further, the Court was clear that it was not stating that the procedural protections afforded under the Administrative Procedure Act were necessarily sufficient in all cases. Thus, the decision appears to put everyone on notice that the threat of deactivating a filer code is important, subject to the APA, and will be given careful scrutiny by the Court. Brokers should take some solace in that conclusion.