Thursday, November 01, 2018

Reasonable Efforts to Confer are More than Short Emails

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

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

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

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

According to the Court:

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

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

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

Monday, October 15, 2018

GSP Refund Claims Denied

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

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

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

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

Lamenting Litigation

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Wednesday, October 10, 2018

Lawyerly Arguments on Drawback

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

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

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

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

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

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

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

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

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

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

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

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

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

Tuesday, October 09, 2018

Watch this space

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

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

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

Friday, September 14, 2018

CIT: Trolls are Not Human

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

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

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

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

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

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

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

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

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

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

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

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

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

Friday, September 07, 2018

Case Dismissed Over $26

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

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

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

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

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

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

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

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

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

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

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