The Drawback of Complexity

Getting a refund from the United States Federal Government is never easy. In the case of customs duty drawback, it can also be aggravating. That is one of the lessons of EchoStar Technologies, LLC v. United States, a recent decision of the U.S. Court of International Trade.

As background, duty drawback is a statutory program under which a party can claim a refund of 99% of the duties paid on imported merchandise after that merchandise has been exported, destroyed, or used to manufacture something that was exported. It is also possible to claim drawback for duties paid on something that was imported where a commercially equivalent item was subsequently exported or destroyed. The details of drawback law are set out in 19 USC 1313 and 19 CFR Part 191 and there are many details regarding how to make a successful claim. Note also that drawback has undergone a recent and significant change pursuant to the Trade Facilitation and Trade Enforcement Act of 2015, which I discussed here. None of those TFTEA changes are relevant to this case, which involves claims that pre-date the new law.

What happened to EchoStar is the kind of thing that happens to importers and drawback claimants all the time. Basically, EchoStar lost its way in a maze of technical requirements and conflicting advice. That is a condition for which anyone who has worked in this field can find sympathy. But, drawback is a privilege, not a right, and securing a refund requires fealty to technical requirements that often seem ridiculous in a world in which "don't put form over substance" and "no harm no foul" are usually decent arguments.

What happened here is that EchoStar filed its drawback claims electronically. Customs and Border Protection rejected the claims on the grounds that it requires paper claim forms. EchoStar protested and filed a summons in the Court of International Trade when CBP denied the protests.

Leading up to the dispute, EchoStar worked with a service provider to prepare drawback claims. The service provider then contracted with a third company to make the claims. While planning this process, EchoStar relied on a "guidance" document published by CBP's San Francisco drawback office in 2010. The guidance document, which is not a regulation and is not published on the main CBP web site, stated that a complete claim must include a CBP Form 7551 and that claims filed with out a 7551 will be rejected. The guidance document also advised claimants to file through the Automatic Broker Interface ("ABI"), which was the then-current the electronic filing system. The guidance document distinguished between electronic claims filed in ABI and manual claims filed on paper.

EchoStar also had in its possession a "Drawback Summary" document from CBP. That document stated "[a]t this time, a full paper claim is still required."

EchoStar's service provider weighed in on this. It told EchoStar that its practice is to file electronically and then submit a paper copy of the claim as backup. EchoStar told the service provider it would seek guidance from CBP to resolve the question, but it failed to do that.

None of material is actually "law"-- not the guidance document, not the summary, and not the advice EchoStar might have received from whatever helpful CBP person happened to answer the phone.

The law requires a drawback entry and all the necessary documents to complete to complete the claim. The drawback entry is a Customs Form 7551. EchoStar filled out a 7551 and gave it to the contractor to make the claim. The contractor transferred some of the data from the 7551 to Customs via the ABI system. It did not, however, transmit the complete 7551 via ABI because at the relevant time ABI was not programmed to accept the 7551. In other words, it was impossible to file a complete drawback claim in ABI. Customs notified the contractor that it needed to submit the claims on paper or they would be cancelled. The contractor followed up with the paper documents within the time provided, but CBP denied the claims as untimely.

There are a couple questions that arise. First, do these facts, including the electronic submission of some of the 7551 data, constitute a sufficient drawback claim? Second, does providing the documents within the period demanded by Customs cure the defect in the claim?

On the first point, drawback entries must be filed using Customs Form 7551. 19 CFR 191.2(k). EchoStar did not file a 7551; it filed some of the data contained in a completed 7551. By the time of the claims, the law had been amended to allow CBP to accept electronic claims, but that law did not require CBP to accept electronic claims. Similarly, an amendment to the regulatory definition of "filing" to include electronic transmission to CBP did not mandate that CBP accept an electronic drawback claim and, in particular, not an incomplete claim. The Court, therefore, found that EchoStar had not established that it filed a complete claim electronically.

But, it did follow up with a paper claim within the time demanded by CBP. According to EchoStar, that should resolve the issue in its favor. Unfortunately, the law was not on EchoStar's side here either.

The drawback statute expressly states that extensions to the three year claim period will not be granted "unless it is established that [CBP] was responsible for the untimely filing." This exception does not come up much. We discussed in in relation to the Delphi case back in 2009. The Court looked at Delphi and another case and determined that this exception only applies where the claimant would have made a timely and complete claim but for the misleading advice from CBP.

EchoStar could not avail itself of the exception because it did not rely on advice from CBP. In fact, the contractor responsible for filing the claim advised EchoStar to submit paper copies of the drawback claim. EchoStar, based on its incomplete reading of non-binding documents, determined that the contractor misunderstood the requirements. And, EchoStar failed to follow through on its own advice to check with Customs to confirm whether the paper form is required. EchoStar also either ignored or did not fully read the Summary document that was in its possession. That document explicitly stated the requirement for a paper claim form.

Where does that leave us? If you are like me: queasy. If this were a contract dispute between two private parties in state court, the judge would likely find that EchoStar had substantially complied with its side of the bargain. It provided the information necessary to process the refund, but it did so incorrectly. The error was largely technical and did not prejudice the other side, which owed EchoStar the money. If the CIT were charged with doing the fair and just thing, it would be able to order the government to pay along those same lines. If this had gone to a jury, I am fairly certain the jury would have found a way to find for the plaintiff. That, however, is not the world in which the federal courts operate when the United States is the defendant. Instead, drawback is a privilege and the technical formalities are legal requirements. Substantial compliance does not seem to be sufficient, unless CBP caused the error.

That should serve as a reminder that what you in the trade community do for a living is complex. Mistakes can be costly. Do not ignore the warning signs that you are out of compliance. Non-lawyer trade pros should always work from the regulations to the rulings and only then to unofficial guidance. [Yes, lawyers, I can hear you. I know we should start with the statute.] After doing the reading, you should be able to put together a coherent set of requirements. If you have to ignore something or read something in a less than natural way to make it fit, you are probably on the wrong path. I know it sounds condescending, but it is generally in your best interests to leave it to the lawyers to figure out a way to protect your company's rights while also pushing the outer limits of the text.

CAFC Orders U-Turn in Ford Transit Case

The U.S. Court of Appeals for the Federal Circuit has issued the much-anticipated decision in Ford Motor Company v. United States. For many who have been watching this case closely, the most important takeaway is what the Court did not do. This decision does not in any way question the ongoing validity of tariff engineering for duty savings. Tariff engineering is the practice of designing products to meet the requirements for classification in a tariff provision with a beneficial rate of duty. The law on that is unchanged.

So, what did just happen?

First, I recommend you go back and look at the prior blog posts on this case. There is a lot of background I do not want to reiterate here. In particular, read this and this. The short version of the story is that Ford Motor Company sells a vehicle in the U.S. known as the Transit Connect. The vehicle meets all U.S. safety requirements for passenger vehicles and is built off the Ford Focus passenger vehicle platform. When imported, these vehicles have rear seats, rear seat belts, rear windows, and other features that are indicative of a passenger vehicle. These features, particularly the presence of seats are also antithetical to using the vehicles for the transport of goods. With just that information, it would be clear that the Transit should be classified as a passenger vehicle of HTSUS Heading 8703.

There is, however, more to the story. Immediately after importation, the Transits undergo a refit during which the rear seats, seat belts, and windows are removed. The floor in also modified to eliminate depressions where a rear-seat passenger might rest her feet. This modification creates a smooth and uninterrupted area behind the driver seat. In other words, some of the Transits, after importation, became cargo vehicles. Customs and Border Protection viewed that process as creating a fictional or temporary product that was a disguised cargo vehicle. As a result, Ford paid a duty of 2.5% rather than 25%.

The U.S. Court of International Trade found that Ford's process was a legitimate exercise of tariff engineering. Rather than hold that Ford's process is an illegal "disguise" or "artifice" to deprive the United States of duties owed, the CIT performed a methodical classification analysis and found that the vehicles, in their imported condition, were passenger cars and should be treated as such regardless of the subsequent modification.

On appeal, things did not go very different, except in terms of the result.

The legal analysis for proper tariff classification always starts with applying the terms of the headings and legal notes to determine whether the imported item falls within the scope of the heading. That is General Rule of Interpretation 1 and is often the only rule that needs to be applied to reach a classification. 

The first potentially applicable heading is 8703, which covers:

Motor cars and other motor vehicles principally designed for the transport of persons (other than those of heading 8702), including station wagons and racing cars . . . .

The Federal Circuit immediately identified an issue in how to address this language. The Court of International Trade treated this as an eo nomine heading, meaning it describes an item by name or physical characteristics, not by its use. As a result, the CIT did not take use or intended use into consideration. Rather, it focused on physical characteristics, which it found to be indicative of a passenger vehicle.

If, on the other hand, this heading describes a product by use, evidence of use consistent with the language would be relevant. Typically, a use provision is clearly designated as such. For example, Heading 0504 covers, among other things, guts "prepared for use as sausage casing." Heading 3305 covers "Preparations for use on the hair." The law recognizes that words other than "for use" can communicate that the tariff language is limited by use. On the other hand, the rule is also clear that a limitation based on use should not be read into an eo nomine provision.

From: https://rear-view-mirror.com/2014/08/03/the-chimera/

There is, however, a recently created chimera of classifications. These are classifications that, while called eo nomine include a description that "inherently suggests a type of use." This comes primarily from GRK Canada a case involving the classification of "wood screws," which are not screws made of wood. As such, the description inherently suggests that wood screws are used to fasten wood. In addition to GRK, the Federal Circuit relied on its decision and the CIT analysis in Marubeni America Corp. v. United States, the case that classified modern SUV's as passenger rather than cargo vehicles. In that case, the Court of International trade took note of, for example, the vehicle's "intended purpose of transporting persons" and reviewed marketing materials showing use to transport people.

Based on that, The Federal Circuit read "principally designed for the transport of persons" as language inherently suggesting use as a passenger vehicle. And that is the decisive moment for Ford. 

Having determined that use is a relevant consideration, the Court then turned to whether the Transit Connect fits within the terms of 8703. The Court first recognized that "[t]he structural design features favor a finding that the subject merchandise is designed for transport of passengers."

The Court found that certain "auxiliary design features" indicate that the vehicles were not principally designed for the transport of passengers. This includes the lack of headrests, "comfort wires" to provide passenger support, and tumble lock mechanisms on the rear seats. The second row of seats was also covered in a less expensive fabric. All of this was indicative of the temporary nature of the rear seats. Other important factors include the lack of rear seat handholds, rear side airbags, and an exposed metal floor. These design choices, according to the Court, facilitate the post-entry conversion of the Transit Connect into a cargo van.

Turning directly to address use, the Court evaluated the traditional criteria for determining principal use. These are the so-called Carborundum factors. Read about that here. [Side note: Although the Court specifically said otherwise, the practical consequence of this approach may be to effectively convert the eo nomine heading into a use provision.] Among the relevant Carborundum factors are use in the same manner as merchandise that defines the class and the expectations of the ultimate purchaser. Here, all of the Transit Connects at issue (there is a wagon model that is delivered as a passenger vehicle) were delivered as two-seat cargo vans without rear seats, seat belts, or footwells and might have had the rear windows replaced with opaque panels. Ford's internal research indicated that the vehicle has "little appeal" as a passenger vehicle. Its advertising was consistent in that it separately identified the wagon model, which has a different designation and which was not included in this case.

From this, the Court concluded that the Transit Connect is not principally designed for the transport of persons. That leaves it to be classified as a vehicle for the transport of goods, which is a loss for Ford. 

I have pretty serious reservations about this decision. The consideration of use in the application of an eo nomine classification provision remains troubling. I raged against this in 2014 when discussing GRK. I think it complicates matters for the average lay classifier and will produce less certainty for businesses than would a strong separation between the analytical streams. 

More to the legal point, I do not think it was necessary in this case. The language in 8703 is very specifically NOT about use. It is about DESIGN. That matters. Here, the Federal Circuit conflated design and use. The Federal Circuit basically says as much at page 12 of the slip opinion:

Although HTSUS Heading 8703 is an eo nomine provision, the “principally designed for” portion inherently suggests a type of use, i.e., “the transport of persons.” 

I fully recognize that the point of most engineering is to match design to use. A baseball bat crocheted from yarn might be a nice design but is unlikely to get much use in an actual game. [Thanks Etsy user.] On the other hand, this is a legal analysis and words have to be given their natural meanings. In this case, "principally designed for" has a meaning that is distinct from use. The WCO and Congress know how to indicate use when that it what is intended. We should not have to grapple with whether tariff language inherently suggests something; it should be on the page.

In Marubeni the Court of Appeals explained that "principally" means "in the chief place" and "done by design or purposefully as opposed to be accident or inadvertently." Applying that to "principally designed," the question is whether the transport or persons or of goods was the chief design consideration and whether those design elements were done purposefully. Once could rationally make that determination either way without needed to layer on the consideration of use. I think that is what the CIT intended both in Marubeni and in this case.

Doing that, I am struck by a few unavoidable (to me) conclusions. First, the Transit Connect is built off the passenger Focus platform, a decision that Ford made purposefully.  Next, Ford purposefully put seats in the middle of what might otherwise be a usable cargo area. The presence of the seats and foot wells actually interferes with the use of this vehicle as a cargo van. That was a purposeful decision. Similarly, rear windows are not generally considered an advantage in a cargo van. That means Ford purposefully decided to make a vehicle with an impediment to use as a cargo vehicle. These are not minor impediments; no competent engineer would do that when designing principally for cargo. 

In the bigger picture, the principal design achievement of the Transit Connect might have been to qualify as a passenger vehicle that is easily convertible into a cargo van. Yes, the vehicle needed to be street legal and popular enough as a van to justify the investment. Its design will certainly reflect that as well. I just find it hard to see how on these facts the Transit Connect, with a set of uncomfortable cheap seats in the middle of the cargo bed, was at the time of entry principally designed as anything other than a passenger vehicle that is easily and economically convertible into a cargo van. That is a legitimate design objective and a real thing not a disguise or artifice (which I know was not the question presented). 

There is likely more to come on this case. Just remember, if you hear it described as a blow to tariff engineering, that is wrong. Nevertheless, this decision is likely to make it harder to classify based solely on physical characteristics. That might have a larger than anticipated impact.

Words Matter in HS Classification

When inexplicably up at 5:00 AM with no prospect of going back to sleep seems to be as good a time as any to catch up on blog posts.

Aero Rubber Company v. United States has already had some coverage on the blog. The first time we discussed this case, it was as a Customs and Border Protection ruling. The second time was in connection with a Court of International Trade decision on the admissibility of evidence. Now, the CIT has issued a decision on the merits.

The merchandise at issue is silicone bands with writing on them. These are larger than wrist size and are used to bind together or secure various items including brochures, video game accessories, aircraft parts, and restaurant menus. Customs classified the bands in Heading 3926 as articles of plastic. The plaintiff argues that the words on the bands require that they be classified in Heading 4911 as other printed matter.

Key to this decision is Section VII, Note 2, which states that:

Except for the goods of heading 3918 or 3919, plastics, rubber and articles thereof, printed with motifs, characters or pictorial representations, which are not merely incidental to the primary use of the goods, fall in chapter 49.

Following this rule, as required by General Rule of Interpretation 1, means that if the printing on the bands is more than merely incidental to the primary use of the band as a whole, then the band is to be classified in Chapter 49.

According to the Court, "incidental" in this context means, among other things, something of lesser importance, something that is subordinate in relation to something else, and secondary in nature. The flip side of that is that according to the Explanatory Notes to the Harmonized System, Chapter 49 "covers all printed matter of which the essential nature and use is determined by the fact of its being printed with motifs, characters or pictorial representations.”  Therefore, only printing that is non-essential in nature should be excluded from Chapter 49.

Boiling this down, the Court found that printing that imparts the essence of a product, is necessary, or basic to the item moves merchandise into Chapter 49. Printing that is incidental or subordinate does not. To make that distinction clear, the Court provided a bright line:

Where printing has a communicative purpose, the printing comprises part of the essence of the product.  Indeed, where a product’s printing has a communicative purpose, one can reasonably surmise that the product as a whole is intended to carry out that communicative purpose.  Logically, a communicative printed component is meant to transfer information.  The product is the medium for the message, regardless of what other purpose it might have.  Whatever the other functions of the product, the printed component becomes part of the essential nature of the product.

With that cleared up, the only thing left for the Court was to go through the various printed bands and determine whether the printing on each was communicative or incidental (meaning, in my words, "decorative"). It turns out that company logos, slogans, instructions to "Remove Before Installation," shirt sizes, and web addresses are all communicating information to the reader. Thus, they are all communicative printing that is not merely incidental to the silicone bands' ability to bind or secure whatever it surrounds.

On the other hand, a set of numbers without additional context is merely decorative and does not communicate anything. In this case, the band was ordered to bind together brochures for marketing a high-end apartment building. The numbers were the street address but that would not be obvious to the reader without the brochures enclosed by the bands. The Court considered that to be decorative.

Personally, I might have gone the other way. My question is whether the use of the number as the marketing hook for the building is equivalent to a logo or name. The Washington Post recently ran a story on the use of personal names for apartment buildings. One example is Liz, not The Liz, in Washington. Is Liz as a logo or company name particularly more communicative than, say 303 when used as the catchy name for a building? That is a close call.

Clash with a Titan

Being an importer is fraught with legal peril. It just is. Often, importers are unaware of legal requirements. In other cases, the importer doesn't care and assumes that its small or infrequent transactions are unlikely to get noticed. That might have been a viable (if not compliant) strategy 20 years ago. Back in the day, the biggest risk to the non-compliant importer was that a Customs Officer would actually open a container and find something amiss. Today, Customs and Border Protection operates in the era of big data. Using targeting algorithms, CBP computers can find discrepancies based on country of origin, country of export, classification, and value. A little data mining based on those factors can pluck the enforcement needled from the haystack of international trade. So, the baseline advice for importers is: know the law, be compliant, and don't assume you will not be caught.

That would have been good advice for a company called Titan Metals Corporation, which is the subject of a recent (OK, I admit it, recent-ish) decision from the Court of International Trade.

Titan's business is to collect scrap metal in the US and sell it to India. On one occasion, it imported a steel flange from India. At the time of entry, Titan filed a normal type 01 consumption entry. However, there is an antidumping duty order covering Forged Stainless Steel Flanges from India. On top of that, Titan made a GSP claim for duty-free treatment, which means it doubled down on India as the country of origin. Customs inquired as to why Titan had not made a Type 03 entry and deposited antidumping duties. 

What followed is a series of shifting explanations. First, Titan asserted that the flange was not finished and was, therefore, outside the scope of the order. Later, Titan claimed that the flange was actually a US product that was mistakenly shipped to India and returned. Regarding the latter theory, Titan provided some supporting documentation but CBP found the weights and values of the export and subsequent improt did not match sufficiently to prove that the imported flange was the same item that had been exported to India.

Complicating matters was testimony from Titan's president that the declaration of origin made at the time of entry was false. He apparently went on to testify that he knew it was false at the time of the entry.

Customs issued a penalty notice seeking $146,368.64 in unpaid antidumping duties and a penalty of $283,969.97. That penalty is the statutory maximum for a violation based on simple negligence. I realize the math does not work out exactly. Two times the unpaid duty would be $292,737.28. The penalty amount is capped at the domestic value of the merchandise, which is the amount Customs sought. It appears the lesser amount should have been the maximum penalty. On the other hand, I went to law school to avoid doing significant math. I may be missing something.

The interesting thing about this case is that the Court had to grapple with the penalty amount. Lately, a lot of these cases have been default judgments, leaving the Court little to work with. Here, Titan made several arguments that, despite admitting to a knowing material false statement, the penalty should be reduced.

First, Titan pressed that there is an open question of fact as to whether the goods are actually subject to the ADD order. Specifically, whether the goods were of U.S.-origin. Customs countered that Titan did not follow the regulatory requirements to make a claim for U.S. Goods Returned. It did not provide a Foreign Shipper's Declaration. It did not produce a declaration by the owner, importer, or consignee certifying the basis of the claim. See 19 CFR 10.1 for the details of how to do this properly.

Titan's reasons for failing to provide the documentation were not sufficient to create a triable question of fact. Basically, the mere denials of facts or conclusory statements that a dispute exists are not sufficient to create a genuine dispute Titan failed to produce anything concrete. Accordingly, the Court found no genuine issue of fact regarding the origin and, therefore, that the case can be resolved on summary judgment.

This is an important practice point. Penalty cases are decided by the Court of International Trade de novo on the basis of the record made before the Court. That leads some lawyers to assume that they will be able to start fresh in Court with witnesses explaining away the violation in a scene ripped from an old episode of LA Law. That can happen, but it is a rare event. To get to a trial, the importer can't just say, "I promise, we can prove that there is no violation." Prior to that, in its Answer and in the response to the inevitable motion for summary judgment, the defendant needs to put concrete facts on the record that establish a genuine dispute as to what happened.

There might also be a genuine dispute regarding facts relevant to setting the penalty. If, for example, the defendant seeks mitigation on the basis of prior good behavior or inexperience, it needs to get those facts on the record to create a genuine issue. Otherwise, as happened here, the case will be resolved on the pleadings and the briefs.

Turning to the penalty amount, the Court noted the 14 Complex Machine Works factors generally considered when setting a penalty. We have discussed those previously. The Court has a lot of discretion here. The existence of mitigating factors does not preclude the maximum penalty. On the other hand, the government's claim for the maximum is not entitled to any special deference. In other words, the Court has to make an independent penalty determination based on the evidence.

In this case, the Court noted a lack of prior violations, that this was a one-time import, and that Titan is a small business. It has just five employees including the president's daughter. Titan is not a "repeat player familiar with the customs laws and regulations." Apparently, it had never hired a customs broker prior to this importation because it is in the business of exporting, not importing. On the other hand, Titan's president testified in a deposition that the company made a knowing false statement regarding origin and antidumping status. That is a bad act and the penalty should be sufficiently high to deter future lawbreakers. Based on these and the other Complex Machine Works factors, the Court imposed a penalty of 50% of the statutory maximum.

Humbug from the Federal Circuit

We have discussed the classification of so-called festive articles many times on this blog. See, for example here, here, and here. The last of those links goes to my analysis of the Court of International Trade's decision to classify a well-made Santa suit as articles of apparel rather as duty-free festive articles. The Federal Circuit has now affirmed that decision in Rubie Costume Company v. United States.

In terms of law, there is not much new in Rubies. The issue turns on whether a particularly well-made Santa suit is "fancy dress." If so, it is excluded from Chapter 95, which covers festive articles, by the action of Chapter 95, Note 1(e). "Fancy dress" is not defined in the tariff. The Federal Circuit did define it in a previous Rubies' case as encompassing costumes that are classifiable as wearing apparel. A costume is wearing apparel if it is not flimsy and poorly constructed. A costume is not flimsy if it has features like finished edges, zippers, inset panels, darts, and hoops.

Even though the merchandise is obviously a Santa costume that is obviously associated with the Christmas holiday, the well-sewn costume was sufficiently durable to be cleaned and worn multiple times. Based on its durability and construction, the Federal Circuit held it is fancy dress and, therefore, precluded from classification in Chapter 95.

So far so good. I have no qualms about the decision and generally like to see these things resolved with a fairly well-defined rule to be applied by importers, Customs & Border Protection, and the courts going forward. This also provides a decent road map for future exercises in tariff engineering. Future Santa suits will be less likely to feature linings, zippers, finished pockets, and other indicia of quality.

What I do want to focus on is an important piece of dicta in this opinion. On page 11, the Federal Circuit makes a shocking finding:

There is no dispute that the Santa Suit is a costume traditionally worn in conjunction with the celebration of Christmas, a festive occasion, to portray Santa Claus, a fictional jolly character that significantly contributes to the festivity of the occasion. 

Look, Christmas has no religious significance and little cultural weight for me. I don't care whether Santa is any more real than the Mongolian death worm. But doesn't this off hand statement about the fictional status of Santa fly in the face of the important legal precedent set in the bench trial depicted in the documentary film Miracle on 34th Street (1947)? That case established the legal principle of "Quis est verus, qui accipit mail," meaning roughly "He that receives mail is real." Also, the Federal Circuit has ignored the hard hitting investigative journalism of the New York Sun's 1897 in response to a reader inquiry from one Virginia O'Hanlon. While not necessary to resolve the matter before it, the Federal Circuit seems to have gone out on a limb to make a factual determination with significant cultural impact. My only hope is that the members of this particular three-judge panel are soon visited the specters of law clerks past, present and future who will show them the value of judicial restraint when it comes to shattering the hope and dreams of future litigants.

Now go get me that prize turkey from the window in the butcher shop.

On Juries, Customs Penalties and Prog Rock

I really don't mind if you sit this one out. I'll make it quick.

Although defendants in customs penalty cases are entitled to a jury trial on whether or not they are liable for a violation, the amount of the penalty is not a question for the jury.

So says the Court of International Trade in United States v. Univar USA, Inc. That is the penalty case involving allegedly Chinese saccharine.

The gist of this case is that 19 USC 1592(e)(1) state that all issues in the case, including the amount of the penalty are to be tried de novo before the Court of International Trade. But, that does not say anything about who is the finder of fact and on what issues. Nothing is easy, is it?

For that answer, we turn to the Seventh Amendment to the Constitution, which preserves the right to a jury trial in common law actions where the amount in controversy exceeds $20. That means the question before the Court as whether the amount of a civil penalty in a case commenced by the United States is analogous to a common-law cause of action at about the time of the American Revolution for which a jury would have been permitted. That is an exercise of living in the past.

Under this test, Univar absolutely has a right to a jury on the question of liability. But, according to the CIT, it does not have a right to have the jury decide the amount of the penalty. The amount is fixed, within a specified range, by Congress. Congress, therefore, delegated that task to the judge. Unlike a question of damages, the amount of the penalty is not a determination of a fact. Rather, it is a discretionary calculation of multiple factors that is traditionally performed by a judge. This follows from a decision of the Supreme Court in a similar case involving penalties under the Clean Water Act, but not involving an Aqualung. See Tull.

Note: Sometimes, I just write to amuse myself. Any useful legal analysis is a byproduct.

Coming to Grips with Use

Customs and Border Protection and the U.S. Department of Justice have strenuously defended the position that locking pliers should be classified as wrenches. They found support for this in a 1983 decision of the Court of International Trade in which the Court found that items (possibly incorrectly) described as "Vise Grips" were used to twist, or "wrench" items and, therefore, were classified as wrenches under the old Tariff Schedules of the United States.

In Irwin Industrial Tool Co. v. United States, the Court of International Trade held that under the Harmonized System, pliers are versatile two-handled tools with jaws that pivot to squeeze an object. A wrench, on the other hand, is a tools with a head, jaw or socket that snugly fits around the head of a fastener and that provides leverage to turn the fastener. Applying these definitions, locking pliers like the ones below are not wrenches even though they can be used (or misused) to "wrench" a stuck bolt or similar item.

The United States appealed. The Federal Circuit has now affirmed.

This seems remarkably straight-forward. Tariff language is interpreted consisted with its common and commercial meaning. These items are commonly and commercially known as locking pliers (although there is some evidence to the contrary). That should resolve the dispute.

But, tariff classification is often not that easy. The question here, complicated by cases such as GRK Canada, is whether we are dealing with purely eo nomine classifications or whether use is relevant to the classification. The government took the position that a wrench is a tool used to twist an object. Locking pliers, according to the government, are designed to allow for continuous pressure while applying torque, as one would with a wrench.

The Court first held that the term "pliers" is eo nomine and not defined by use. The Court looked at dictionary definitions and industry standards to identify pliers as two-handled tools with a pivoting jaw. A similar analysis showed that "wrench" is an eo nomine term defined by physical characteristics that adapt the tool to snugly engage the head of a fastener. Importantly, the Court of Appeals held that "Even though the record suggest that the tools may be designed for a particular use, we determine that the language of the particular headings here does not imply that use or design is a defining characteristic." 

I do not disagree with this at all. In fact, I emphatically agree.

But, I am left confused about when a tariff term will suggest a use and when, therefore, evidence of use consistent with that suggestion is relevant for classification purposes. This is the GRK problem. "Wrench," after all, is also a verb. The way to clear this up is to backtrack from the notion that evidence of use is relevant without specific language in the tariff heading indicating that use is contemplated as part of the meaning. In Irwin, the Federal Circuit notes that the language of these two headings does not contain signals suggesting a specific use. As examples, it noted "articles of a kind normally carried in the pocket . . ." and "preparations therefor." 

I can see "preparations for" something indicating an intended use. If something is prepared for a sauce, it seems that evidence of use in a sauce is relevant to the classification. On the other hand, the fact that something is normally carried in the pocket is a little removed from its actual use as few things are useful simply by virtue of being carried in the pocket. That thing in my pocket is a key, wallet, or phone all of which have distinct uses. It strikes me that the feature of normally being carried in the pocket points to design and physical criteria more than use.

The drafters of the HTS know how to signal a use provision. Here are some examples:

0504.00.00 Guts . . . for use as sausage casing

3401           Organic surface-active products and preparations for use as soap

8483.40.30 Gear boxes . . . imported for use with machines for making [paper products]

This is distinct from terms such as "suitable for use with" or "designed for use with." These phrases indicate, to me at least, that the proper inquiry remains with the physical characteristics of the product. Something is suitable for use with something else if its physical characteristics allow it to be used in that way, regardless of whether it is so used. Of course, there is an outer limit at which it becomes absurd. A crankshaft is suitable for use as an anchor but doing so is not economically rational. "Designed for use" also indicates, to me, that the Court should be looking at the features and characteristics of the item that indicate a design intention. If there is some feature that prevents or significantly interferes with the identified use, then the item is not designed for that use. 

Classification is a legal analysis. It is, at the same time, also performed every day by thousands of non-lawyers who are engaged in making compliance decisions for importers large and small. Even licensed brokers are not always fully aware of the details of the legal analysis of tariff language. Bright line tests are necessary to facilitate trade and to avoid creating traps for the average importer, for whom the statute is allegedly written in the language or ordinary commerce.

CIT Upholds Constitutionality of 232 Duties

Here is a quick take on the decision of the Court of International Trade in American Institute for International Steel v. United States. This is the case challenging the constitutionality of Section 232, under which President Trump imposed duties on steel and aluminum products in furtherance of national security. Plaintiff's theory of the case is that the statute is facially unconstitutional because it violates the constitutional requirement for separation of powers.

The starting point for this that Congress, not the President has the power to regulate trade. In Section 232, Congress delegated some of that power to the President so that he may make adjustments to trade to protect the national security. AIIS argued that the powers given to the President are unbounded by an "intelligible principle," meaning he can exercise legislative powers that are reserved to Congress. That would be unconstitutional. If, on the other hand, the President can only act within a defined set of parameters, then the delegation is constitutional.

This case was heard by a three-judge panel of the CIT. While not common, three-judge panels are often convened at the CIT when a constitutional question is raised. Importantly, three-judge district court decision are immediately appealable to the Supreme Court. 28 U.S.C. 1253. As far as I know, the ability to directly appeal from a three-judge district court should be applicable to the Court of International Trade, which has all the powers of a district court and is generally treated as a district court.

The decision in this case was unanimous, although there is an interesting separate opinion that deserves some attention.

The majority opinion details prior cases raising a similar challenge. Most relevant is Federal Energy Admin. v. Algonquin in which the Supreme Court held that Section 232 easily passes the intelligible principle test for constitutional delegation. Basically, that is all you need to know. Once the Supreme Court has declared the statute to be facially constitutional, there is not much a lower court can do. 

The main opinion does add some caveats. Most interesting is the recognition by the Court that imposing duties under the authority of Section 232 for some reason unrelated to national security would constitute an unconstitutional exercise of legislative authority. Nevertheless, the Court lacks a mechanism to review the President's subjective motives making that review a practical impossibility.

Despite that concern, the Court upheld the President's exercise of delegated authority and the 232 duties on steel (and aluminum) remain in place.

Writing separately, CIT Judge Katzmann issued an opinion dubitante. First, I have no doubt that the entire customs and trade bar spent considerable time on the interesting footnote explaining the nature of an opinion dubitante. Personally, I love this kind of legal arcana. An opinion dubitante is one that agrees in the result but expresses grave concerns with that result.

The gist of Judge Katzmann's opinion is that the facts of the President's exercise of Section 232 authority may be so unlike previous uses of the law that Algonquin and the earlier cases may not apply. He points, for example, to the opinion of the Secretary of Defense that U.S. steel and aluminum production is sufficient to meet the national security requirements. He also notes that Algonquin includes the following:

Our holding today is a limited one.  As respondents themselves acknowledge, a license fee as much as a quota has its initial and direct impact on imports, albeit on their price as opposed to their quantity.  As a consequence, our conclusion here, fully supported by the relevant legislative history, that the imposition of a license fee is authorized by  § 232(b) in no way compels the further conclusion that any action the President might take, as long as it has even a remote impact on imports, is also so authorized.

This is an important limitation, although it goes more to the nature of the adjustment imposed than the basis for the adjustment.

Judge Katzmann goes on to say:

[Under Section 232, the] President is not bound in any way by any recommendations made by the Secretary, and he is not required to base his remedy on the report or the information provided to the Secretary through any public hearing or submission of public comments.  There is no rationale provided for how a tariff of 25% was derived in some situations, and 10% in others.  There is no guidance provided on the remedies to be undertaken in relation to the expansive definition of “national security” in the statute – a definition so broad that it not only includes national defense but also encompasses the entire national economy.

My take on this it that Judge Katzmann seems troubled not so much by Section 232 per se but by the President's use of it in this particular case. Perhaps, it seems, the present circumstances show a previously unanticipated expansive reading of 232 through which the President is able to manage the economy beyond adjusting imports for national security purposes, which is a power the Constitution vests in Congress.