Tuesday, July 14, 2020

CIT Strikes Down Doubled 232 Duties on Turkey

In TransPacific Steel v. United States, the United States Court of International handed the Commerce Department and the President a defeat with respect to the Section 232 duties imposed on aluminum and steel products from Turkey. This case is narrow in scope but important.

The specific issue before the Court was whether Presidential Proclamation 9772 which made aluminum and steel products from Turkey subject to twice the rate of Section 232 duty than has been applied to products of other countries. Plaintiffs in this case raised several arguments seeking to overturn the proclamation and recover the excess duties paid.

The first argument is statutory and procedural. Section 232 duties are the result of a process that begins when the Commerce Department initiates an investigation. The results of that investigation are then communicated to the President who can chose to take action. The President only has 90 days in which to decide whether he (in this case) is going to act and what that action will be. Then, he has 15 days in which to implement that action and 30 days to report to Congress the reasons for the action taken.

In this case, the initial 232 investigation was initiated by Commerce on April 19, 2017 and the Secretary issued the report on January 11, 2018. That started the clock running. On March 8, 2018, the President issued Proclamation 9705, imposing 25% 232 duties on steel products. Then, on August 10, 2018, the President issued Proclamation 9772, doubling the duties on steel products from Turkey. The August 2018 action was more 211 days after Commerce issued the report.

Plaintiffs argued that an action taken more than 105 days (i.e., 90 + 15) after the President receives the report is in violation of the statute. The government defended the action on the grounds that rather than being a new action, the increased duties on Turkish steel were a modification of the existing action. 

The Court reiterated a point it made in its previous decision involving TransPacific that  “[t]he President's expansive view of his power under section 232 is mistaken, and at odds with the language of the statute, its legislative history, and its purpose.” 

Rather than find strict adherence to the statutory timeline to be a "sanction" imposed on presidential actions, the Court noted that nothing prevented the President from returning to the Department of Commerce for a new report related specifically to Turkey to satisfy the statutory requirements. Given that the source of this authority is a delegation from Congress to the President, it makes sense that the limitations imposed by Congress be applicable.

Thus, the Turkey proclamation was made in violation of the statute and, therefore, is void. Although the Court stated only that judgment will enter accordingly, it appears that the judgment will require that Customs refund the duties excess paid. Of course, this case will make it at least as far as the Federal Circuit and likely someone will ask for Supreme Court review.

The plaintiffs raised additional arguments that are interesting. The first was an equal protection argument that the President had inappropriately singled out products from Turkey for additional duties. Part of this relates back to the original Commerce Department report on steel, which included Turkey in an aggregate analysis of the industry but did not single out Turkey as a specific concern. The question for the Court was whether singling out products from Turkey for additional duties was justified by a sufficient legitimate governmental purpose. If there is a justifiable purpose, the disparate impact may not result from arbitrary or irrational implementation.

Section 232 duties are intended to promote and protect national security, which is a legitimate governmental purpose. However, the Court could find no justification in the steel report for treating Turkish products more harshly. As mentioned, Turkey was not singled out in the report and it is the sixth largest exporter of steel to the U.S. Thus, the action was not rational and appears arbitrary if the alleged support for it is the steel report. The reality, only mentioned in passing and not really considered by the Court, is that the President appears to have taken this action to pressure Turkey for the release of a U.S. citizen held in Turkey.

Proclamation 9772 was, therefore, a violation of the plaintiff's equal protection rights.

The remaining argument was that the increased duties on Turkish steel are a violation of constitutional due process. The basis for the due process claim is essentially that the government failed to follow the process set out in the statute before imposing the additional duties. Because the Court had already decided that the Proclamation was void because of the failure of the government to follow the statutory process, there was no need for the Court to address this claim.

All in all, this is a good decision for importers seeking to know that the Court of International Trade will hold the government, including the President, to the statutory and constitutional requirements applicable to trade regulation. The President had a statutory path to follow to impose these duties and did not do so. The Court, therefore, rightly invalidated the action. Checks and balances in action, just like we learned in eighth grade (not to mention law school).

Sunday, July 05, 2020

Metalized Yarn and Tariff Engineering

Once again, the Court of International Trade has been asked to consider the status of apparel made from a synthetic yarn that includes zinc nanoparticles. This time, the decision is Lockhart Textiles Inc. v. United States. The decision ultimately turns on whether the yarn from which the apparel was made is of synthetic fibers or whether the addition of the zinc in the yarn production process makes it "metalized" and, therefore, an "other yarn." The result is significant. If the plaintiff's contention is correct, the apparel is classified in HTSUS item 6104.69.80, which carrier a rate of duty of 5.6%. If the United States is correct, the proper classification is 6104.63.20, which carries a rate of duty of 28.2%. 

I know this is not true, but I can't read about clothing made of metalized yarn without assuming it looks like something from the closet of a Star Trek alien or the original Robinson family from Lost in Space.

Reading this case, I was left with the question of why this product exists? There was no discussion of the physical characteristics that the inclusion of zinc would impart to the fabric. That made me wonder whether this was an exercise in tariff engineering in which the entire point was to save more than 22% in duty, which is significant. I don't know the answer, but it is clear that there are at least possible reasons to do this other than tariff avoidance. Here is a technical paper providing examples including possible flame retardant and antimicrobial effects. That said, the "why" is not at all important.

Which, brings me to an important side note. The U.S. Supreme Court denied the petition for certiorari in Ford Motor Company v. United States. This is the case involving the tariff classification of the Transit Connect. This vehicle was brought to the United States configured as a passenger van. After importation, Ford removed the rear seats and rear windows and made some addition changes to convert the vehicle to a a cargo van. CBP challenged the classification arguing that the practice was an impermissible "disguise or artifice." The Court of International Trade sided with Ford. The Court of Appeals for the Federal Circuit, however, took a different approach. It focused on the language of Heading 8703, which covers "Motor cars and other motor vehicles principally designed for the transport of persons . . . ." Based on the "designed for" limitation, the CAFC found that the heading implies a specific use as a vehicle to transport persons and that evidence of use is, therefore, relevant to the classification analysis. Finding that 100% of the relevant Transit Connects were pre-identified as destined for conversion to cargo vehicles, the CAFC revered the CIT and held that CBP had properly classified the vehicles in 8704 as cargo haulers. 

That is where things now sit. The difficulty is that we do not know the standard by which a future court is to weigh evidence of use in one of the chimera classifications that are not use provisions but suggest a use. Facts matter and the facts of the next similar case will matter.

Importantly, this case does not disrupt the long standing proposition that importers can design and structure products with the intent to achieve a lower rate of duty as long as the goods are properly presented to Customs without disguise of artifice. 

Which brings us back to metalized yarn.

This issue here comes down to how this yarn is made. It starts as any synthetic fiber would, as a slurry of polymerized molecules. Normally, that slurry would be turned to fibers by forcing through a "spinnerets." In this context, a spinneret is an industrial device that injects a tiny stream of hot liquid polymers into the air or a liquid where it solidifies into a fiber. Visitors to county fairs and circuses have seem a similar process in action at cotton candy stands. Arachnophobes have nightmares of the [trigger warning] biological equivalent.  Here, the zinc nanoparticles are added to the slurry and extruded at the time the fibers are formed. The fibers must then be spun to create yarn and the yarn knit to make fabric.

The plaintiff in this case argued that the relevant yarn is classifiable in 5605, which covers:

Metalized yarn, whether or not gimped, being textile yarn, or strip or the like of heading 5404 or 5405, combined with metal in the form of thread, strip or powder or covered with metal:
The plaintiff's contention is that as long as the end product is yarn combined or covered with metal, the yarn is classified in 5605. The government takes a narrower view and reads the heading as requiring that the yarn must first exist as yarn and only then be combined or covered with metal. 

To resolve this potential ambiguity, the Court looked to the Explanatory Notes and found two distinct descriptions of the product. The first describes textile yarn combined with metal thread or strip. The second describes textile yarns coved with metal. According to the Court, these two paragraphs describe two methods by which metal may be added to pre-existing textile yarns.

Plaintiff raised the interesting argument that the imported merchandise is a later developed form of the metalized yarn included in 5605. Because, an eo nomine classification covers all forms of the item including later developed forms, this makes some sense. The Court, however, held that this analysis unavailing because the language of the heading includes the specific indication that the yarn be covered or combined with metal, which is consistent with the notion that the yarn must exist before it is coated or covered with metal.

The Court, therefore, held that the yarn was not classifiable in 5605 and, therefore, the apparel was not knitted of "other textile materials." And, therefore, the judgment was for the United States.

Friday, July 03, 2020

Federal Circuit Upholds iPad Covers Classification as Plastic Articles

Last year, the Court of International Trade decided that plastic iPad Smart Cases, which function as both protective covers and stands are properly classified in HTSUS Heading 3926. Apple, on the other hand, wanted these covers classified in the duty-free provision covering accessories of computers in Heading 8473. We discussed the CIT decision here. Apple appealed and now the Court of Appeals for the Federal Circuit has affirmed the CIT.

There is not a lot new in the CAFC decision, but it does a really good job of setting out the legal process of tariff classification and the analysis that produced the result. So, if you are new to this stuff, read the decision.

The nub of the issue is what to do with the Explanatory Notes of Heading 8473 and how to interpret the relevant note. The heading covers "Parts and accessories (other than covers, carrying cases and the like) suitable for use solely or principally with the machines of headings 8470 to 8472." The relevant language from the Explanatory Notes provides that:
[This] heading excludes covers, carrying cases and felt pads; these are classified in their appropriate headings. It also excludes articles of furniture (e.g., cupboards and tables) whether or not specially designed for office use (heading 94.03). However, stands for machines of headings 84.70 to 84.72 not normally usable except with the machines in question, remain in this heading.

Apple's not unreasonable position was that the Smart Case is a stand for the iPad. This image shows how that makes sense.

According to the last sentence of the Explanatory Note quoted above, if this cover is a stand and is not normally usable with other devices, then it is not excluded from 8473. Or so Apple argued.

The Court of Appeals took a different view. It focused on the existence of the word "However" in the start of that sentence. That means the last sentence is not an independent idea. Rather, it modifies (or is in contrast to) something else. Using the well-established (at least among lawyers) rule of the last antecedent, the Court determined that the final sentence modifies the second sentence. Therefore, the only "stands" that are to remain in 8473 are furniture and only furniture stands that have no use other than with the machine in question (i.e., the iPad). Because the Smart Case is a cover and is not furniture, it is excluded by the first sentence.

The Court made an additional important point about the use of the Explanatory Notes in general. It is easy enough to fall back on the ENs as the definitive final statement on the scope of HS Headings. That is a mistake. First, as the Court of Appeals noted here, the Explanatory Notes provide generally useful guidance on the interpretation of the headings but are not binding. Moreover, the EN cannot introduce ambiguity into a clear heading and cannot add a limitation into a heading that is not limited. Here, the heading expressly excludes covers and cases. Apple was trying to use the Explanatory Notes to add a limitation on what covers and cases are to be excluded. In other words, the language of the heading (as with any statute) is always the starting point.

With respect to the correct classification, the Court of Appeals noted that the Smart Case is composed of various materials include a plastic exterior and a microfiber interior. Consequently, it applied General Rule of Interpretation 3(b) to classify the case as a composite good. As neither party challenged the CIT determination that the plastic provides the essential character, the Court affirmed the classification as 3926.90.99.

Saturday, June 13, 2020

Ruling of the Week: Origin and Value of Programmed USB

Customs and Border Protection has issued ruling HQ H308234 (Jun. 3, 2020) which covers the classification, valuation, NAFTA status, and 301 status of a USB drive with software on it. Given that a large portion of the trade community is still keenly following origin and 301 issues, it is a good ruling to review.

The products involved are the Start Me Stick and the Fix Me Stick. Both of these devices are USB stick drives containing software. The point of the Start Me Stick appears to be to access the internet while bypassing the computer to which the stick is attached. I guess the use case for that is if you use a public terminal (at a library, for example), if your current computer too slow, or if for some reason you need a wholly private browser experience that is not run through the browser on your computer. That latter might help if, say, you are looking for a new job or Tinder date via your office computer. I am not clear how this thing gets and IP address and whether activity run through it would show up in router activity logs or elsewhere, but that is not my problem.

Here is what it apparently looks like when you are using as Start Me Stick:

The Fix Me Stick is similar except that when plugged into a computer, it runs antivirus and malware scans and removes threatening software from the computer to which is is attached.

Physically, both devices are made of printed circuit board assemblies from Taiwan that include non-volatile memory. The PCBAs are shipped to China for final assembly. At this point, they are blank USB devices. From China, the drives are sent to Canada where they are flashed, meaning the software is installed onto the memory chips. The software was developed in Canada.

The first question is how to classify these things. That is not particularly hard. They are just USB drives with software on them. These are solid-state, non-volatile storage devices. Heading 8523 covers, among other things, solid-state, non-volatile storage devices whether or not recorded. That's clearly this and the actual tariff item is 8523.51.00.

Next is the question of NAFTA status. This was also not hard, but it is worth taking a look because the specifics of the rule are pretty odd.

Items of 8523.51 are subject to the following NAFTA rule:
(A) A change to prepared unrecorded semiconductor media of subheading 8523.51 from any other good of subheading 8523.51or any other subheading; or
 (B) A change to recorded semiconductor media of subheading 8523.51 from any other good of subheading 8523.51 or any other subheading. 

The flashing operation changes the USB drive from an unrecorded to a recorded semiconductor media of 8523.51. Note that this rule does not require a change in tariff classification; it only requires that the item go from unrecorded to recorded. There is no fallback rule based on Regional Value Content either. Had they not been recorded, the (A) rule might also have worked because the PCBA might be classified in 8523.51 and the finished but unrecorded media would also be in 8523.51. 

Next, CBP considered the NAFTA marking rules to deter the country of origin for marking. This was also straightforward. The rule, in 19 CFR Part 102, requires:
A change to records, tapes and other recorded media for sound or other similarly recorded phenomenon, excluding products of chapter 37, from prepared unrecorded media for sound recording or similar recoding or other phenomena, other than products of chapter 37.
Again, this item goes from prepared and unrecorded to recorded. That means it is a product of Canada for this purpose.

Next comes the money question: Is this item subject to 301 duties? On it face, that seems unlikely. The main working component, the PCBA that contains the non-volatile memory is from Taiwan. The Chinese components are the external casing and an internal plastic holder. Presumably, though I do not know for certain, they are also lower in value that the PCBA. 

But the question is whether the programming in Canada matters. It does, but only sort of. This is where I think CBP is heading in the wrong direction. First, to issue the ruling, CBP only needs to find that the item is not from China and it could do that by noting that the working parts are from Taiwan and they are not substantially transformed in China. Then, the operation in Canada is irrelevant because we know 301 duties do not apply and the NAFTA marking rules have determined that the item is a product of Canada.

But, assuming CBP wants to run through the full analysis, the question is whether programming Canada is a substantial transformation. Does the programming resulting in a new article of commerce with a new name, character, or use such that the components from Taiwan and China have become integral to the new product? For years, I would have said yes on the basis of Data General v. United States, a 1982 decision of the Court of International Trade holding that flashing a programmable memory chip causes a physical change in the electronic structure such that it becomes useful for a specific function. That, according to the Court was a substantial transformation. 

In reaching that decision, the Court noted that "programs are designed by a project engineer with many years of experience in 'designing and building hardware.' While replicating the program pattern from a 'master' PROM may be the quick, one-step process to which the defendant refers, the development of the pattern and the production of the 'master' PROM require much time and expertise." The point of this was to refute the government's argument that the act of programming was a simple and, therefore, not transformative step. 

From that statement, the United States has has done two things. First, it assumes the program development occurred in the U.S. That is not clearly stated in Data General. Second, it ignores the major point of the opinion which is that programming the chip causes physical changes that are equivalent to manufacturing and result in a substantial transformation. The Court stated:

It is undisputed from the evidence that programming alters the character of a PROM. Programming changes the pattern of interconnections within the PROM. A distinct physical change is effected in the PROM by the opening or closing of the fuses, depending on the method of programming. Link to the text of the note These physical alterations, not visible to the naked eye, may be discerned by electronic testing of the PROM. The electronic pattern introduced into the circuit by programming solely gives it the function as a read only memory. The "essence" of the article, its pattern of interconnections or stored memory, is established by programming. Uniroyal, Inc. v. United States, 3 CIT 219 (1982). The PROM has no function or use except for programming. In this sense, programming is equivalent to the assembly of a circuit board, which in 19 C.F.R. § 10.14(b) is cited as an example of substantial transformation.
But CBP does not follow this lead. Rather, it combines the physical manufacturing operation of programming the chip with the intangible intellectual exercise of writing the code. CBP has fairly consistently been finding that flashing chips results in a substantial transformation where the code was written and flashed in the same country. Here, CBP concluded, "Accordingly, we have generally found that programming a device in the same country where the software was written constitutes a substantial transformation." 

This makes no sense to me. Programming code is an intellectual exercise that requires skill and knowledge but it does not make a thing that is, by itself, subject to the customs laws. Electronic transmissions, like phone calls and internet data, are not subject to duty, do not need to be entered, and are not generally considered to be merchandise. The physical item that embodies the intellectual effort is the merchandise. The position taken by CBP is equivalent to determining that a Stephen King novel printed in Argentina on paper from Canada is a product of the U.S. because he wrote it at his desk in Maine.

I agree that Data General indicates that programming an integrated circuit makes a physical change in the chip. The arrangement of the logic gates, which are physical switches, represent the logical steps of the code. So the "machinery" of the chip is physically changed and the use of the chip is also changed. So, that can easily be a substantial transformation. What I disagree with is that the location of the coding matters. Another analogy is to find that an iPhone from China is a product of the U.S. because the hardware was largely designed here and the code was developed here. 

Reading Data General to require that the code be written in the same country in which it was flashed to the chips is an overextension of a fact stated in the decision. It is is similar to the emphasis CBP has placed on parts having a "predetermined end use," which is a gross overextension of the opinion in National Hand Tools. This kind of analysis adds layer upon layer to the "new name, character, or use" test to make that phrase little more than the title for a far more complex and less predictable test. CBP really should walk this trend back and the Court of International Trade should facilitate that by trying to refocus on the core of the test rather than trying to reconcile the entire history of all origin cases each time a new one arises. 

All of that said, Customs found that flashing the Canadian code in Canada was a substantial transformation. As such, the item is Canadian and not subject to the Section 301 duties applicable to products of China.

The last bit is whether the value of the code is included in the transaction value of the USB drives. As a general rule, the U.S. does not require that the value of software on a carrier medium be included in the transaction value of the imported medium. That applies, for example, to magnetic and optical disks. See T.D. 85-124 (1985). But, there is an exception for data or instructions stored on integrated circuits, semiconductors and similar devices or articles incorporating them. So, the value of the code needs to be added to the value of these USB drives.

That is many more words than I expected to use to explain this. That has much to do with the fact that I think the origin determinations for electronics is unnecessarily confused, in part by the focus on the intangible intellectual property. But, there you have it, a full run down on the FixMeStick and StartMeStick.

Monday, June 08, 2020

Ruling of the Week: Is That Crude?

The difference between crude or roughly trimmed stone and polished stone may seem pretty obvious in the colloquial sense. But, in the world of tariff classification, it is always possible for facts to complicate matters. 

Such is the case in HQ H306644 (Feb. 3, 2020), our Ruling of the Week.

The imported merchandise was identified as Blue Pearl, India (or Jet) Black and India Red in roughly five to seven foot lengths and three to four foot widths. The importer originally classified the merchandise in Heading 2516 as crude or roughly trimmed granite. CBP's lab looked at the merchandise and determined that it was polished on two opposite faces or on one face. The importer disputed that the surfaces were polished and CBP looked again. The lab came back with a determination that the top surface is highly reflective of light and smooth to the touch. According to the lab, that is sufficient grounds to find it is polished.

As an aside, it also turns out that the stones are not granite, but that will not matter much.

The two competing headings are 2516 and 6802. The former covers monumental and building stone whether or not roughly trimmed or merely cut, by sawing or otherwise, into blocks or slabs of a rectangular (including square) shape. The latter covers other monumental or building stones.

So, at the heading level, this is all about what constitutes roughly cut versus other.

There are several relevant legal notes in the HTS and corresponding Explanatory Notes, the gist of which is exactly what you would expect. Chapter 25 and Heading 2516 cover mineral products in a crude state, crushed, ground, etc. including those that are "roughly trimmed or merely cut." On the other hand, the Explanatory Notes to Heading 6802 state that the heading covers monumental or building stone that has been worked beyond the stage of normal quarry products of Chapter 25.

If you are wondering why this is even a question, the importer's point is that the smooth surfaces result from not from polishing but from wire saw cutting. 

How does that get resolved? Not on the actual facts, but on a legal presumption.

CBP's laboratory methods are presumed correct unless conclusively shown to be in error. CBP, in the course of deciding the protest on Further Review, makes the initial decision on whether the importer has proven the lab to be incorrect. That is a high burden for an importer. Here, the importer could not point to any flaws in the laboratory analysis and did not submit any independent laboratory analysis to the contrary. As a result, CBP held that the importer had failed to adequately explain the surface appearance and overcome the lab's determination. 

Customs, therefore, denied the protest and determined that the stops is classifiable in 6802.99.00 as worked monumental or building stone. This case, if the importer is correct, is well suited to being resolved in court. In fact, I hope it is and that we are treated to the spectacle of a fresh from the quarry slab of rock being wire cut in open court. That should resolve the matter pretty quickly.

Sunday, May 31, 2020

Ruling of the Week: An Inflatable (W)easel

I keep an eye on rulings from CBP with a focus on those that are slightly off kilter or entertaining to the 12-year old boy that still lives in my head. Cruising the most recent Customs Record, I saw that Customs and Border Protection had issued a ruling concerning the classification of a Giant Inflatable Weasel.

Alas, when I sat down to read the ruling, I found it actually concerned a giant inflatable easel. That is far less silly, but equally as illustrative. So, here is what we can learn from HQ H301988 (May 14, 2020).

The merchandise is a PVC inflatable easel. I do not know for certain that this is the same product, but based on the description, it seems to be. The image comes from Heathsong.com, which is mysteriously close to Plow & Hearth, the party that requested the ruling, so I am going with this being it. The product comes with four cans of paint, one brush, and four sponges.

Custom initially classified this item as furniture in 9403.70.4015 or 9403.70.8015, depending on whether the plastic was reinforced or laminated (the former) or not (the latter). 

The importer asked for reconsideration at CBP Headquarters and renewed its argument that this item is a toy classifiable in 9503.00.0073. The gist of the argument is that this easel is intended for and used as a creative plaything and has no other use.

Customs, however, noted that the Explanatory Notes to Chapter 95 state that "This Chapter covers toys of all kinds whether designed for the amusement of children or adults." Customs also put some text about the classification of toys in quotes after referencing the Explanatory Notes, but the language does not appear in the Notes. In reality, the language is taken from In Zone Brands v. U.S., the bottle topper case we recently discussed

The relevant language from In Zone Brands is about the overlap between child-friendly but otherwise utilitarian items and toys. In In Zone Brands, the Court said that "to classify every eye-catching, child-friendly article as a toy, simply because it enhances a child’s imagination, is to unacceptably blur the HTSUS headings defeating their purpose and leading to absurd results." The Court also noted that "when amusement and utility become locked in controversy, the question becomes one of determining whether amusement is incidental to the utilitarian purpose, or whether the utility purpose is incidental to the amusement."

With this in mind, CBP determined that the easel serves a mainly utilitarian function, namely to produce an easel for painting by a young child. Man, I hate this conclusion. Assuming that image is indicative of the real product, it seems clearly designed as a diversion for kids. It is not intended to produce lasting art. It appears that the paint is applied to a plastic sheet and then washed off with the included sponge, which indicates this is not really an art easel. It is more like a blackboard or whiteboard, which, by the way, are also not classified as toys because they are utilitarian rather than articles of amusement. 

That said, there is a range of products that can be considered easels. Taking a virtual stroll through Blick's Art Supply, it is easy to find that a professional artists easel might look like this:

There is also a full category of kids' easels with this as just one example:

These are not insubstantial structures. While I am not an artist, it strikes me that a defining characteristic of an easel would be that it securely holds the canvass or other surface on which the art is created. I am guessing (seriously, I don't know this to be true), that the plastic sheet on the inflatable easel moves with the breeze in a way that would make even a pre-teen Van Gogh cry. It is possible that an easel as unstable as this product is what made Edvard Munch scream

This just does not seem to be a real easel by any stretch of the imagination. It is as much of an easel as an inflatable bounce house is a house (which is to say not at all)

But, even if I am right about that, there are other problems for the importer. Specially, the ENs to Chapter 95 exclude articles that are used for drawing, painting and other art activities. While my argument above might overcome that, it is a confounding factor that adds weight to CBP's decision.

Finally, there is the problem that the Explanatory Notes to Heading 9403 specifically references easels as furniture covered in that heading. Again, that assumes this is actually an easel, which is how it is described in its marketing materials. 

But, and this is where I will rest my case, Chapter 94, Note 1(l) states that the chapter does not include "Toy furniture or toy lamps or lighting fittings (heading 9503), billiard tables or other furniture specially constructed for games (heading 9504), furniture for conjuring tricks or decorations (other than electric garlands) such as Chinese lanterns (heading 9505)." This makes is clear that something can be both a toy and furniture. Maybe that is supposed to be limited to tiny versions of furniture that cannot perform the function, like the tables and chairs in a doll house. But, the language does not say that. If this is a toy easel, it seems to be "toy furniture" and is, therefore, classifiable in HTSUS Heading 9503. 

Tuesday, May 26, 2020

Service of Process at the CIT: Part II

This is the second decision involving whether the United States properly served a summons and complaint on Chu-Chiang "Kevin" Ho, one of the defendants in a penalty case. The alleged violation  is the false description of imported HID headlight kits. The kits are not admissible merchandise because they violate U.S. Department of Transportation safety rules. On the entry documents, the merchandise was described as ballasts for interior track lights. 

Assuming the truth of that allegation, the question remains whether Mr. Ho was properly served. Without proper service the Court of International Trade does not have person jurisdiction over him and the case cannot proceed. The rules related to this are covered in the prior post. Here, we are dealing with an opinion involving a separate but related case. This decision is slip opinion 20-66.

The principal question presented is whether the process server hired by the government successfully served Mr. Ho at his home. The facts are that the server tried to serve Mr. Ho at his residence in April 2019 but incorrectly provided two copies of the complaint and not one of the summons and one of the complaint. This is technically defective under California law, which controls in these matters. The process server tried several more time in May. Finally, on June 1, 2019, the process server went to Mr. Ho's door. Something happened there and the process server left the documents on the ground. What happened is a critical question of fact.

Proving that proper service occurred is the responsibility of the plaintiff. The plaintiff must show that the documents were delivered to the defendant. The defendant, knowing he or she is being served, may not evade service by refusing to take the papers (despite what you may have seen on TV). Once it is clear that the defendant knows he or she is being served and is evading service, the process server may leave the documents in a place that is obvious and likely to come to the attention of the defendant. 

According to the process server, he went to Mr. Ho's residence and knocked on the door. Mr. Ho answered, recognized that he was being served and closed the door. At that point, the server left the documents at the door. Interestingly, there is video evidence of the alleged transaction. In one video, the process server is shown at the door and allegedly reacting to Mr. Ho, who is never seen. The government relies on the body language of the process server as evidence of an interaction with Mr. Ho that justifies a finding that he evaded service. 

The defendant produced a second video from a Ring doorbell system and alleges that it confirms that Mr. Ho did not open the door. The government claims that the video was edited to not show the process server reacting to Mr. Ho.

Mr. Ho also produced evidence showing he was not home at the time the process server attempted to make service and left the papers. 

What we have here are two conflicting descriptions of a set of events, both of which cannot be simultaneously true. In other words, someone is probably lying (or possibly grossly incorrect about what happened). As is his way, Judge Reif set the tone for this conclusion by quoting Mario Puzzo from the Godfather, to wit: "We are all honorable men here, we do not have to give each other assurances as if we were lawyers." 

Based on its review of the video evidence and the other testimony, the Court concluded that Mr. Ho was not home at the time of the attempted service. Thus, the government failed to carry its burden to prove successful service. As a result, the Court granted defendant's motion to quash the service.

Doing so, the Judge turned to another source of legal wisdom, the Homeland  television series. There, he quotes the interrogation of a recovered prisoner of war. When asked what the former prisoner tells those who ask about his captivity, he replies, "I lie. Tell them stories they want to hear." While the Court did not have to make a finding as to the truthfulness of the process server's account of the events, this fictional colloquy certainly colors the overall decision and result.

As to the result, as we learned in the prior post, the Court does not lack discretionary powers to fix this mess. Finding a high degree of prejudice to the United States and that the defect in service is easily curable, the Court granted the government an additional 60 days in which to complete service. If service is not properly completed in that time, the case will be dismissed as to the defendant. 

Service of Process at the CIT, Part I

In two recent decisions of the Court of International Trade, Judge Reif has used a number of movie and television references in the course of deciding, among other things, whether a defendant had been properly served. This post will cover the first of those decisions.

Service of the summons and complaint is a necessary step because it alerts the a party of the filing of a law suit and allows defendant to  properly respond. If service is not properly accomplished, the case may be dismissed. In the Court of International Trade, service is controlled by Rule 4.  Relevant here is Rule 4(b), which states that in cases commenced by the concurrent filing of a summons and complaint, the plaintiff is required to serve the defendant. Furthermore, Rule 4(l) dictates that:

If a defendant is not served within 90 days after the complaint is filed, the   court – on motion or on its own after notice to the plaintiff – must dismiss the action without prejudice against that defendant or order that service be made within a specified time. But if the plaintiff shows good cause for the failure, the court must extend the time for service for an appropriate period. 

That brings us to the first of a pair of decisions: United States v. Chu-Chiang "Kevin" Ho, et al. (Slip Op. 20-56). Here, the question was whether the Court of International Trade should grant the United States extra time to successfully complete service on Mr. Ho. For his part, the defendant moved to quash the attempted service and have the case dismissed. As you can tell from the case caption, this is a penalty case, so the onus was on the United States to serve the defendant.

The basic facts are that the United States attempted to serve Mr. Ho through a professional process server on June 30, 2019, just 9 days after filing the complaint and early on in the 90 day time allowed for service. Although the process server reported having completed service, Mr. Ho later established that he was out of the country on that date and could not have been served. The U.S. then tried to serve him again on September 26, which was seven days after the end of the allowed 90 days. This attempt at service was also not successful. Finally, service was completed on October 16, 2019. The U.S. then moved for an extension of time to make late that service timely.

Rule 4(l) provides two means by which the Court may grant additional time for service. First, if the plaintiff shows "good cause," the Court must extend the time. In the absence of good cause, the Court may exercise its discretion and grant additional time.

Good cause is a tricky thing. It is a very subjective standard. The federal courts have, therefore, put some gloss on the phrase to give guidance to the bar and to lower courts. Generally, good cause for an extension of the time to serve process means that the plaintiff can show it has made reasonable efforts to effect service. There must be real diligence and that diligence must take into account that the case may be dismissed. If the statute of limitations has run or will run soon--meaning the case cannot be refiled--the level of diligence required is greater. 

Here, the Court found that the United States did not show good cause. The failure to properly serve within the 90 days would have resulted in the end of the case. Thus, the United States was obligated to act "meticulously." Despite that, there were period of "relative inaction" by the government. This inaction was sufficient for the Court to find it was not obligated to grant the requested extension.

Nevertheless, the Court found that Mr. Ho had actual knowledge of the complaint due to other ongoing litigation. Moreover, he did (eventually) receive the summons and complaint, albeit late. At the same time, dismissing the case would cause prejudice to the United States in that the case would not be decided on the merits. The defendant, for its part, had not shown comparable prejudice in its his ability to defend against the claims. Thus, the Court granted the motion for an extension of the time to serve Mr. Ho. 

In reaching this result, Judge Reif reminded us of the 2002 movie Serving Sara in which Matthew Perry plays a process server seeking to serve papers on a character played by Elizabeth Hurley. A rival process server calls to warn her with the line "Hey, lady, when is getting served papers any good, huh? Don't be stupid, hang up and get out." Should you have forgotten what appears to have been a forgettable film, here is the trailer.