CAFC Gives CBP Suspension Authority for Ambiguous Orders

When an imported product is potentially subject to antidumping or countervailing duties, there has long been a tension between the roles of U.S. Customs and Border Protection and the Commerce Department in making the final decision of whether CBP should collect duty deposits. On the one hand, CBP is right there at the port and is the agency responsible for revenue collection. On the other hand, Commerce has the technical expertise in the dumping laws and drafted the scope description for the investigation and the order (with input from interested parties).

Sunpreme, an importer of solar modules, has been engaged in a long-running dispute over the whether its imports are within the scope of an order on U.S. imports of certain solar cells from the People’s Republic of China. I'm not going to focus on the scope question here. For customs lawyers, the more interesting question is which agency gets to make the scope decision and how that impacts the process of importation. In Sunpreme Inc. v. United States, a nearly full Federal Circuit now appears to have given the final word on the issue of which agency, but leaves much of the administrative process to be resolved.

Sunpreme's imported solar modules are based on a hybrid thin film technology that, at the time of entry, was not clearly within the scope of the relevant order. CBP, aware of the order but unclear on whether it applied to the merchandise, sought advice from its laboratory, not from the Commerce Department. The lab reported its opinion that the merchandise was within the scope of the order. At that point, CBP notified Sunpreme that it was suspending liquidation of the entries, which is the correct course of action for merchandise that is subject to antidumping and countervailing duties. Sunpreme paid the additional deposits to secure the release of the merchandise.

An ambiguous rabbit or possibly a duck.

Two months later, in June of 2015, Customs asked Commerce for guidance on whether the goods were within the scope of the order. Commerce responded to Customs Commerce can make a scope ruling, "which can be requested by the importer or exporter."

The fact that Customs suspended liquidations on its own, prior to getting guidance from Commerce is the nub of the issue.

To lift the suspension and presumably to stop paying the ADD and CVD deposits, Sunpreme filed a case in the Court of International Trade effectively challenging Customs' independent scope determination. Given the ambiguity in the scope of the order as applied to this merchandise, the CIT held that Customs lacked the authority to interpret the order, which means CBP lacked the authority to suspend liquidation. The Federal Circuit reversed that finding on jurisdictional grounds, stating that Sunpreme should first have requested a scope ruling from Commerce.

In response to a request from Sunpreme, Commerce initiated a scope inquiry on December 30, 2015. On July 26, 2016, it issued a final scope determination finding that the Sunpreme solar cells are within the scope of the orders. Commerce then issued (apparently for the first time) instructions to Customs to continue to suspension of liquidations of pre-scope inquiry imports and to begin suspending liquidations and collecting deposits for entries after December 30, 2015.

Just to get it out of the way, the Federal Circuit agreed with the CIT that substantial evidence supports the Commerce Department's final scope ruling that Sunpreme's solar modules fall within the scope of the order. 

OK, but starting when? Was the CBP-initiated suspension prior to December 30, 2015 appropriate? If not, Sunpreme would not owe ADD/CVD prior to that date. The CIT and the Federal Circuit panel held that when the scope is ambiguous, CBP does not have authority to suspend liquidation prior to Commerce initiating a scope inquiry.

The reasoning for this decision is simply that Commerce is the agency with the responsibility to interpret its orders. When there is no ambiguity about whether a product is covered by an order, Customs makes a decision without interpreting the order; it just applies the order. Where there is ambiguity, there is no way for Customs to make a decision without also making an interpretation. That distinction comes from a couple prior decisions of the Federal Circuit including AMS Associates, Inc. v. United States and Xerox Corp. v. United States.

The government requested a rehearing of the panel decision. Because prior three-judge panels of the Federal Circuit have addressed the question of the allocation of power between Customs and Commerce, those decisions are binding on subsequent panels. The only way to revisit that is via the full 12-judge Court sitting en banc, which is what happened here (minus Judge Wallach). That allowed the Federal Circuit to take a fresh look at the issue.

The Court noted that 19 CFR § 351.225(l)(1) makes it clear that when Commerce conducts a scope inquiry, any existing suspension of liquidation will continue. That means that someone, presumably Customs, could have initiated the suspension. When Commerce issues a final scope determination finding merchandise to be within the scope of the order, the suspension "will continue." If, at the time of scope inquiry, the entries had not been suspended, Commerce is required to instruct CBP to suspend unliquidated entries made after the date of the initiation of the scope inquiry. 19 CFR § 355.225(l)(3). Finally, if the scope inquiry results in a finding that the merchandise is not subject to the order, then any suspension is ended and the entries can liquidate.

An ambiguous profile.

Despite the regulations, prior panel in this case followed the earlier Federal Circuit decisions stating that Customs cannot interpret the scope of an ambiguous order. It follows that if CBP can't interpret an ambiguous order, it also can't suspend the entry because doing so implies making a decision on whether the merchandise is potentially within the scope of the order, which is interpreting the order.

The full (minus one) Federal Circuit reversed course on this point. The Court started with the inarguable premise that CBP is charged determining and collecting the duties owed on imported goods. That means it must determine "in the first instance" whether goods are subject to an ADD or CVD order. In exercising its role, Customs cannot expand or change the scope of an order through its own independent interpretation. However, when there is ambiguity, CBP is also not prohibited from delaying liquidation to ensure Commerce provides guidance on the scope question. Putting that restriction on Customs, according to the Court of Appeals, would prevent Customs from fulling its legal obligation. Customs, the Court held, "may not simply ignore ambiguous orders."

It is possible that this decision in not widely applicable. The starting point is that there is ambiguity in the scope of an order and that the imported goods fit within the ambiguity. This is already a narrow Venn diagram.

But, for those case where it does apply, importers are at greater risk unexpectedly of being assessed AD and CV duties. Assume the case of an importer who believes in good faith that its imports are close but nevertheless outside the scope of an order. Prior to this decision, before CBP could suspend the liquidation of the entries, someone would have to ask CBP to commence a scope inquiry. Presumably, this would give the importer notice of the risk and the ability to both participate in the inquiry and, if needed, make changes to its supply chain. If no scope review is initiated because Commerce declines to act or for any other reason, the entries would liquidate in the ordinary course.

That pre-Sunpreme result is entirely consistent with the finality of liquidation and the remedial nature of trade law. On finality, liquidations are final as between both the importer and the government. In the absence of a violation or other exception, once Customs liquidates the entry, it cannot go back and collect additional duties. That is an ancient principle of customs law. It allows commercial importers as well as individuals repose by knowing they are not continually accruing unquantified (and potentially unquantifiable) liability. It also ensures that Customs does its important job within the time allotted for liquidation.

The point about trade remedies being remedial is that the process is set up to protect domestic producers from unfair competition. It is not intended to punish importers. Purchasing cheap merchandise, even dumped merchandise, is not criminal and is not fraud. An importer of near scope merchandise with a reasonable belief that the merchandise is outside the scope of the order (ambiguous or not) is entitled to enter that merchandise without depositing duties. It is a fair allocation of risks between the domestic industry and the importer (which is also usually a domestic business interest with its own employees and capital investments) to not allow CBP to assess ADD and CVD until Commerce clears up the ambiguity.

Keep in mind that the petitioners, who represent the domestic industry, made the initial request for the order and suggested the scope. The burden should be on the domestic industry and the Commerce Department to arrive at language properly describing the scope of the order. Ambiguity in the order should not be a trap for importers. At a minimum, it makes sense as a policy matter to allow entries to liquidate in the ordinary course until Commerce clarifies the scope.

I am not saying the Federal Circuit's reading of the regulations is wrong. I am saying that this change will likely cause importers some grief.

A Bag Of Classification

Everyone knows what a Ziploc-brand sandwich bag is and has a general sense of the range of uses for them. Personally, I use a small resealable (and probably not Ziploc-brand) bag every time I go out for a bike ride to hold my phone, ID, a key and a little cash. It helps me organize and protect my items while I transport them and myself around the neighborhood. I also use a larger (i.e., non-sandwich sized) resealable bag to collect loose change that I don't want jangling around in my pockets. [Note to younger readers: Old people like me sometimes use currency. Such transactions occasionally result in an over payment that is offset with coins in a process we used to call "making change."]

What may be less clear is the tariff classification of resealable sandwich bags. That was the issue in S.C. Johnson & Son, Inc. v. United States. We covered the lead up to this decision here. Rereading that post and the paragraph above, I realize I am low on creativity. More creative writing would be a good resolution for 2020, but I can't figure out how to express that idea.

On the classification, the two provisions in issue are both in Chapter 39, which covers articles of plastic. The government contended that the correct classification is in Heading 3923 as "Articles for the conveyance or packing of goods, of plastics . . . ." The relevant subheading being 3923.21.00, which covers "Sacks and bags . . . of polymers of ethylene."

The plaintiff argued that the correct heading is 3924, which covers "Tableware, kitchenware, other household articles and hygienic or toilet articles of plastics . . . ." The proposed tariff item is 3924.90.56, which covers "other" such products.

We learned from the first decision in this case that Heading 3923 is a tariff classification that turns on the use of the product. In this case, that means that Ziploc bags are only classifiable there if they are principally used to convey or package goods. As discussed in the first post, the determination of principal use requires evidence, not just an interpretation of the statute. This decision thoroughly reviews the evidence of use following the so called Carborundum factors, which are:

[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. 

I'm not going recapitulate the detailed discussion of each of these facts. Read the opinion for that. It is an excellent example of the back-and-forth between facts and arguments that is common in these cases. It suffices to say that the Court reviewed the evidence in light of the Carborundum factors and held that they support a finding that the bags are prima facie classifiable in Heading 3923.

That, however, is not the end of the case. Before reaching a conclusion, the Court must determine whether the bags are also classifiable in Heading 3924. The plaintiff submitted evidence that these plastic bags are found in the household. Thus, the Court found that the bags are also prima facie classifiable in Heading 3924.

The plaintiff asked the Court to reconsider its earlier decision that Heading 3924 is a use provision as well. Assuming Heading 3924 is a use provision, plaintiff contended that the Carborundum factors favor a finding that the principal use for the sandwich bags is in the household. Given that the principal use is the single most common use in the United States, a product with many uses can have only a single principal use. Thus, evidence of principal use in the household might have superseded evidence of principal use as a conveyance or for packaging. In a footnote, the Court reaffirmed its prior decision that 3924 is an eo nomine classification that describes the product by name, not use. Thus, there was no need for the Court to determine which use was the principal use.

When two or more headings describe merchandise, the correct classification can usually be determined through General Rule of Interpretation 3(a). Under that rule, the heading that provides the most specific description is preferred. A heading is more specific when it includes requirements that are more difficult to satisfy and describes the article with a greater degree of accuracy and certainty.

Heading 3923 is a use provision and, according to the Court, has requirements that are more difficult to satisfy. Furthermore, the Court found that "tableware, kitchenware, other household articles and hygienic or toilet articles" of Heading 9324 is a more diverse group of products than those described in Heading 3923, which are all containers, stoppers, and lids of some kind. As a result, the Court found that Heading 3923 is the more specific description of the product and, therefore, the correct classification is 3923.21.00.

I do want to address the process of how this case was handled, which echoes some of my thoughts from the first post. I am happy to see that both sides were able to agree on an efficient means of getting the merits before the Judge.

What happened is that the parties requested a "trial on the papers." Rather than bring live witnesses into court, the parties agreed to admit all the documents, deposition transcripts, and expert reports into evidence. This means that the parties worked together to resolve issues (or waive objections) relating to admissibility of documents. No witnesses were needed to lay the foundation for the introduction of business records and no time was wasted on evidentiary motions. There was also no time needed to prepare direct and cross examination or to prep witnesses. No one had to take time to testify and the Court did not need to travel to hear witnesses say exactly what was in the documents.

I realize many district court litigators will find this notion offensive, but the reality is that agreeing to the facts that are not reasonably in dispute and laying it before the judge with a written legal argument is entirely reasonable in most (but not all) classification cases. Agreeing to facts where possible is not the same as agreeing to the outcome of the case. Making the argument that the facts support the desired and correct result is how the lawyer earns his or her fees, not arguing about whether a plastic bag is, for example, made of plastic (to use an obviously extreme example).

I was not involved in this case. It is entirely possible that there were all manner of disputes about the facts and what was relevant and admissible. Even if that was the case, this dispute appears to have been well argued by lawyers who understood what was actually in dispute and how the case should be analyzed. Lawyers who know the law and the facts, as these apparently did, should be able to do this more often. Judges might consider whether early intervention in classification cases to focus the parties on the dispositive issues might help move cases to faster resolutions and encourage more meritorious classification cases to come before the Court of International Trade.

Imports and Process Patent Infringement

Usually, a patent dispute involving imported merchandise gets resolved by the International Trade Commission in what is known as a Section 337 (19 USC 1337) case. The relief in a successful 337 case is most often an "exclusion order," prohibiting the importation of the infringing merchandise. An exclusion order can be general or limited. A general exclusion order prohibits all specified merchandise, even merchandise made or imported by entities that were not party to the action. A limited exclusion order prohibits the importation of specified merchandise by entities named in the order. An ITC decision in a 337 case may be immediately appealed to the U.S. Court of Appeals for the Federal Circuit, which is also the court that decides appeals from the Court of International Trade.

Often, the exclusion order is all the relief the patent owner needs. It protects the market from the infringing foreign product and allows the patent holder to enjoy the intended benefit of exclusive use of the patented invention or process.

A 337 case is separate from an infringement action in which the patent holder seeks damages as well as an injunction against future infringement. A patent infringement case makes its way through the various U.S. district courts and is reviewed on appeal by the Federal Circuit.

A recent patent decision from the Federal Circuit caught my attention because it involves infringement by importation but does not involve a 337 exclusion order. The case is Syngenta Crop Protection, LLC. v. Willowood, LLC. All you need to know about the facts is that Syngenta owned a U.S. patent covering a fungicide and its manufacturing process. Process patents are distinct from the patent covering the invention itself and protect the means of making or accomplishing some useful thing. Willowood made a competing generic version of the compound in China through a related party and imported it into the United States. For purposes of this discussion, we can assume that if the product were made in the U.S. following the process that was employed in China, the production would infringe the patent.

The question here involves the definition of infringement in 35 USC 271(g), which states (with my emphasis):

Whoever without authority imports into the United States or offers to sell, sells, or uses within the United States a product which is made by a process patented in the United States shall be liable as an infringer, if the importation, offer to sell, sale, or use of the product occurs during the term of such process patent. In an action for infringement of a process patent, no remedy may be granted for infringement on account of the noncommercial use or retail sale of a product unless there is no adequate remedy under this title for infringement on account of the importation or other use, offer to sell, or sale of that product. A product which is made by a patented process will, for purposes of this title, not be considered to be so made after—

(1) it is materially changed by subsequent processes; or

(2) it becomes a trivial and nonessential component of another product.

Willowood imported into the United States a product that was made by a process patented in the United States. That would seem to fall squarely within the statute making Willowood an infringer.

Not so fast, says Willowood.

Section 271(a) covers infringement of patented inventions, as opposed to patented processes. That section provides:

Except as otherwise provided in this title, whoever without authority makes, uses, offers to sell, or sells any patented invention, within the United States or imports into the United States any patented invention during the term of the patent therefor, infringes the patent.

Prior decisions of the Federal Circuit have interpreted § 271(a) as imposing a "single-entity requirement" for a finding of direct infringement of an invention by the use of a patented process. Here, Willowood acted only as the importer. A related company produced the merchandise using the patented process. Applying the same reasoning, Willowood argued that it cannot be liable for infringement under § 271(g) because it was not the single entity responsible for the production and infringement of the merchandise.

The Federal Circuit disagreed. It held that "the single-entity requirement, which is necessary for direct infringement liability under § 271(a), has no application to acts that do not constitute infringement under § 271(g)." According to the Court, § 271(g) is focused on the act of the unauthorized importation of products that are made via a patented process. Infringement occurs under § 271(g) when an item is made abroad using a patent process and then imported into the U.S. without authorization. By focusing on the product rather than the exercise of the patented process, § 271(g) does not include the single-entity requirement.

While patent infringement may not be something that most import compliance professionals worry about, it is something that should be on the radar and covered with purchasing professionals. Suppliers should be be able to warrant that products and the means of production are not infringing any patents, trademarks, copyrights or other intellectual property. Steps should be taken to confirm that is true and the supplier should be willing to indemnify the buyer for losses if it turns out to not be true. In addition to patent liability, infringing imports may result in supply chain disruptions due to ITC exclusion orders and penalties for importations that are contrary to law. 

So, consider this a New Year's Eve reminder of one more thing to track in 2020.

All the best.

Valuation: A New Hope

Who doesn't like a good value case now and again? Value cases are kind of like Star Wars movies; they pop up once every few years and move the story along a little bit at a time. Sometimes, we get a new perspective from an upstart judge and sometimes a veteran steps back in to right the ship until the inevitable reboot. It seems like it is have been a while since the Court of International Trade weighed in on what constitutes a dutiable addition to value. So, it is a good time for us to catch up on Trimil, S.A. v. United States and see what is truly cannon and what it part of the expanded universe of valuation legends (AKA CBP rulings). And, always remember that the Star Wars saga begins with a trade war.

This needs to be quick, as I am going to the movies soon (as you might have guessed).

Trimil (who, with no judgment, I picture as an individual looking like Watto) is an importer of Armani branded clothing. At the time of entry (including the subsequent reconciliation), Trimil reported the dutiable value of the merchandise as what it paid the manufacturer plus design and advertising fees and a trademark royalty it paid to Armani (or an Armani affiliate). After the entry was finally liquidated, Trimil protested and claimed that the additional fees paid to Armani are not dutiable. Customs and Border Protection denied the protest and Tramil brought suit in the Court of International Trade.

The advertising and design fees were paid for assistance in developing the market for Armani trademarked clothing in the Unites States. The amount of the fee was based on Trimil's net revenue. The trademark license gave Trimil the ability to manufacture, purchase, and sell Armani-labeled products in the United States. The royalty was based on sales. Both sets of agreements included minimum payments. All of the agreements could be terminated if Trimil failed to make the required payments or, I assume, in the case of a blockade of Naboo.

With that in mind, recall that the transaction value of imported merchandise is defined in 19 USC 1401a(b) as the price actually paid or payable for the merchandise when sold for exportation to the United States, plus certain statutory additions. Among the relevant additions is "any royalty or license fee related to the imported merchandise that the buyer is required to pay, directly or indirectly, as a condition of the sale of the imported merchandise for exportation to the United States."

Another relevant addition is an "assist," which is anything of value provided by the buyer free of charge or at a reduced cost that is used in conjunction with the production of the imported merchandise or in its sale for export to the United States. This is 19 USC 1401a(h). Assists can include tangible goods (e.g., raw materials) or services (e.g., design and engineering). However, engineering undertaken in the U.S. is excluded from the dutiable value of an assist.

Customs famously asserts that all amounts paid by the buyer to the seller or in connection with the purchase of the merchandise are presumptively dutiable and the burden is on the importer to show that the amount should be excluded. See, for example, HQ H294766 (May 31, 2018). For the importer to do that, it must show that the payment was for something other than the merchandise and is not one of the additions to value enumerated in the statute. See, e.g., Chrysler v. United States, 17 CIT 1049 (1993)(which is so long ago that I can't find an open link to it, making me feel as old as Yoda).

Regarding the design fees, these are pretty clearly dutiable assists. The fees went to Italian designers who created models, selected fabrics, and reviewed prototypes. Even Trimil agreed these were dutiable. Don't read too much into this. There is a line between dutiable engineering and merely creating drawings or specifications. It has to do with the difference between telling the manufacturer what to make and leaving it to the manufacturer to make the thing and, on the other hand, telling the manufacturer how to manufacture something. The latter is dutiable, the former may not be. See, e.g., HQ 547487 (Jun. 23, 2000). It all makes sense, from a certain point of view.

The advertising fees were paid by Trimil to Armani for Armani's efforts to advertise and market the merchandise in the U.S. The Court noted that the statute is clear on what constitutes part of dutiable value. It states that the transaction value is "the price actually paid or payable for the merchandise when sold for  exportation to the United States, plus . . . the amounts attributable to the items (and no others) described in subparagraphs (A) through (E) . . ." 19 USC 1401a(b). Thus, if the advertising fee is not a listed statutory addition, then it is not dutiable. Moreover, the price paid or payable is the amount paid (or payable) to the seller or for the benefit of the seller.

The advertising fee was paid to Armani, not to the seller. Thus, the question was whether it was "for the benefit" of the seller. The Court held that the advertising fee benefitted both Trimil and Armani by supporting the post-importation resale marketing in the U.S. The benefit to the manufacturers is, according to the CIT, tangential to the post-entry benefits to Trimil and Armani.

On top of that, the Court pointed to a CBP regulation specifically stating that advertising and marketing undertaken by the buyer are not indirect payments to the seller and that royalties for copyrights and trademarks paid to a third party are generally selling expenses. 19 CFR 152.103. Based on this, the Court distinguished the advertising fee from a royalty or license and found it to not be a dutiable addition to transaction value.

Next up is the trademark royalty, which was separate from the advertising fee discussed above. Here, the government's position was that because Trimil's right to have the Armani merchandise produced was dependent on its continued payment of the license fee, that fee was for the benefit of the manufacturer. Similar to its analysis of the advertising fee, the Court found this to be too broad of a reading of the statute. In relatively strong language (as these things go) the Court said:

[M]erely because the fees are paid as part of a series of agreements that touch on all parts of the larger transaction resulting in eventual sale of the clothing in the United States does not somehow make the seller-manufacturers beneficiaries of Trimil’s payment under the Agreements. As with the advertising fees, Trimil paid the fees to third party Armani, and all of the rights and obligations under the contracts accrued to or were performed by the actual parties to the contracts. Again, Trimil’s right to affix Armani trademarks, and resell the clothing in the United States as Armani-trademarked products, provides no quantifiable benefit to the seller manufacturers from the trademark royalty fees paid. The claimed benefit—placement of an order by Trimil with the seller-manufacturers—is too far removed from the payment of the trademark royalty fees to [the Armani affiliate] to make them part of the price actually paid or payable to the seller-manufacturer.

That still leaves the question of whether the trademark fee is a royalty, which is explicitly listed in section 1401a as a dutiable addition to value when they are required to be paid as a condition of the sale for exportation to the United States. Here, the issue is whether the trademark royalty paid by Trimil to Armani is a condition of the sale by the unrelated manufacturer to Trimil. The government did not point to anything in the agreement between Trimil and the manufacturer making payment of the Armani royalty to requirement for the purchase of the apparel. The fact that Armani might cancel its agreement with Trimil was not sufficient to make the payment of the royalty a condition of the sale for exportation.

That's a good result for Trimil and for importers. This decision, assuming it stands, adds clarity to the analysis of advertising and royalty expenses paid to third parties and brings balance to the force. It also highlights that the condition of the sale requirement for a royalty to be dutiable cannot be inferred where the manufacturer is unrelated to the owner of the intellectual property. The reality may well be that the manufacturer does not care at all about the trademark owner's interests. Ultimately, that is between the importer and the trademark owner and might play out in an trademark infringement case without impacting the dutiable value of the merchandise.

On the other hand, it is also true that if Armani were to terminate the trademark license, any subsequently produced merchandise imported to the U.S. would be as counterfeit as a Darth Vader motorcycle cop toy and, as a result, subject to seizure. So, don't think for a minute that this valuation decision creates a license (so to speak) to violate trademark agreements with third parties.

On Monitors (and Anti-Monitors)

Prysm, Inc. v. United States, answers the question, "Are those cool looking video walls that show up in office building lobbies, hotel lobbies, and fancy conference centers monitors of the sort that are used with computers?" The answer, at least as far as the Court of International Trade is concerned, is no.

Here is an image, from the Prysm website, of what the case is about.

Technically, that device is a Display Wall System made up of laser phosphor display ("LPD") tiles and a proprietary image processor. The image processor accepts an incoming signal, converts it to Prysm's proprietary format, and sends it on to the LPD. The imported merchandise subject to this case is just the LPD tile, not the entire system.

Prysm contends that the LPD is properly classified as a part of a monitor in Heading 8529. In the alternative, Prysm contends that the LPD is classifiable in Heading 8528 as a monitor of a kind solely or principally used in an automatic data processing system of heading 8471. The government counters that the correct classification is in Heading 8528, but as an "other" monitor (i.e., one not used with an ADP system).

I am going to edit this down to get to the interesting bit. The Court first found the LPD to be a complete monitor, not part of a monitor, because it uses internal technology to display images and is capable of receiving signals from the image processor. The fact that is generally takes two or more to make a display wall system was not sufficient to make the LPD "parts."

So, that leaves the question of whether the LPD is the kind of monitor that is solely or principally used in an automatic data processing system of heading 8471. The answer to that question did not depend on the size of the typical wall display configured of LPD tiles. It does, however, depend on the principal use of the device, which is the single most common use in the United States for merchandise of the same class or kind. A "class or kind" of merchandise consists of items that are commercially fungible in all pertinent circumstances."

At first blush, this might seem like an odd inquiry. Most people, I say with absolutely no empirical evidence, equate monitors with computer displays. There was some expert testimony to that effect in the case, though it appears to have been unpersuasive. But, speaking as a guy who used to sell moderately high-end audio and video equipment for a living, there are monitors that are designed to be hooked up to sources other than computers. These form the guts of home theaters and other systems with the primary signal source being external TV tuners, cable/satellite boxes, and DVD players. Today, these monitors will almost always have connections that allow them to display data and images from a computer.

The HTSUS differentiates between monitors based on use. A 60-inch screen designed to be affixed to a wall with limited flexibility regarding height and angle, is unlikely to be the sort of monitor with which I might spend a quiet Saturday pounding out a blog post while thinking about superheros (see below). A computer monitor, on the other hand, is likely to be designed for closer viewing and incorporate tilt and swivel adjusting mechanisms and other ergonomic features. The imported LPD tiles lack any of those features.

Given the lack of features indicating use with automatic data processing systems and no strong evidence of that use, the Court found the LPD tiles to be classified as monitors of 8528.59.33, which are dutiable at 5% (give or take Section 301 duties).

I consider this to be one of those fascinating questions about the convergence of computer technology and everything else in the world. First, it appears that LPD technology could be used to build desktop monitors with ergonomic adjustments. That might happen, which would lead to a different result (at least for complete monitors). Moreover, it is 100% clear to me that these LPD tiles will almost always get their video images from an actual computer somewhere. Any other source would be incredibly static and probably not worth the efforts. This is particularly true in a conference room setting where task-specific data is almost always needed. Even in a building lobby, the management probably wants an easy way to change and update the image. The best way to do that is (likely) by hooking up a computer. Nevertheless, it does not appear that is enough to make the device into something that is principally used for automatic data processing. Rather, it is a large screen that can be driven by a number of sources, including a computer.

One last note, the HTSUS has changed since 2016 when these entries occurred. As of January 1, 2017, subheading 8528.51.00 was deleted and replaced with subheading 8528.51 (for monitors “[c]apable of directly connecting to and designed for use with an automatic data processing machine of heading 8471”). Subheading 8528.59.31 was also deleted. Thus, this decision should be considered in light of those changes when applied to current entries.

So, you might be asking, what is an Anti-Monitor? If you have to ask, you are not up to speed for the coming Crisis on Infinite Earths. Given my affection for all things DC, I am fully invested. Let's just say that the Monitor is a being as old as the universe who is running a poorly explained but clearly important strategy to save the multiverse from destruction in the coming Crisis. Although it has not yet been revealed, that Crisis may well be the work of the Monitor's evil sibling, the Anti-Monitor. We'll miss you, Oliver Queen, but thanks for your service.

The link to the trailer no longer works. Try this instead.

Pleading Matters

The penalty case against Greenlight Organic Inc. and now its owner and president seems to be a case that will not end. For background, read the previous posts here and here.

This issue raised in the most recent Court of International Trade decision has to do with a penalty claim the United States is asserting against Mr. Parambit Singh Aulakh, the owner and president of the importer. The case against Mr. Aulakh is premised on the allegation that Greenlight, under the direction of Mr. Aulakh, misclassified and undervalued shipments of athletic apparel on approximately 122 entries.

There are two Court rules in play in this phase of the case. To survive a motion to dismiss under CIT Rule 12(b)(6), the complaint must contain sufficient factual matter to state a claim to relief that is plausible on its face. That means the complaint must contain assertions of facts that allow the Court to draw a reasonable inference that the defendant is liable. It is not enough for the plaintiff to set out conclusions of law. The complaint must state the facts that, if proven to be true, would allow the Court to conclude that the plaintiff is entitled to the relief sought.

When the allegation is that defendant has committed fraud, Rule 9(b) requires that the circumstances constituting fraud be stated "with particularity."

Here, Mr. Aulakh claims that the Department of Justice has failed to state a claim for which relief can be granted because it has not stated with particularity how he personally engaged in any fraudulent behavior. In response, the Government appears to rely on the defendant's position in the company and the fact of the false representations about the merchandise. But, 19 USC 1592(a) requires the government to show that a person entered, introduced, or attempted to enter or introduce merchandise into the United States by means of a material and false statement or omission. That means there must be reason to believe that the defendant personally did something to violate the statute.

There is no question but that Mr. Aulakh is a person subject to the statute (despite the corporate nature of the importer). This was all hashed out in Trek Leather. I don't like the wholesale rejection of the notion of separate corporate existence. Typically, individuals are not responsible for corporate liability unless the Court makes a formal determination that the corporation is the alter ego of the individual or "pierces the corporate veil." In customs law, that does not have to happen. Any person involved in an entry is potentially liable for penalties under section 1592. That means that corporate managers who oversee customs compliance are potentially at risk. That risk, however, should not be overstated. To the extent managers have responsibilities for compliance, if they are doing their jobs properly, they will be exercising reasonable care and, therefore, even if there is a disagreement with Customs, not subject to a penalty. Of course, no one wants to be charged with a civil penalty and forced to undertake the expense and risk associated with defending against the claim. Thus, the whole Trek Leather imbroglio.

That's not the issue here. The problem for the Government is that the complaint is overly conclusory. First, the complaint does not specify the entries at issue, the alleged loss of revenue, or the correct HTSUS classification. Furthermore, the complaint does not state when, how, or what Mr. Aulakh did that constituted participation in the alleged fraud.  Mainly, it seems to rely on the premise that he was in charge and, therefore, participated in the fraud.

That is not enough. According to the Court, "Absent adequate facts supporting the fraud allegations, Plaintiff cannot impute knowledge to Aulakh merely by virtue of his position of power and influence over Greenlight."

That did not end the matter. Rather than dismissing the case, and in the absence of bad faith, undue delay or other undue prejudice, the Court exercised its discretion to allow the Government to amend the complaint to cure these defects. The Government has 45 days from the date of the opinion to do so.

There is an additional oddity in this case: Greenlight has not had a lawyer for eight months. That is problematic because corporations can only appear in federal court through counsel. Given that circumstance, the Court pointed out that the case may be subject to a default judgment.

But, there can be no default judgment without a valid case to pursue. If the Government does not get a properly pleaded complaint filed in 45 days, the case will be dismissed. That would be a win for Mr. Aulakh. On the other hand, the Court seems to be suggesting that if the complaint is fixed and if Greenlight (and presumably Mr. Aulakh) does not show up to defend, the Court will entertain a motion for a default judgment, which would be a win for the Government. Of course, we do not know if the Government would ever be able to collect on that judgment, but that is for another day.

Challenge to Higher 232 Duties on Turkish Steel

Remember when the President imposed tariffs on steel and aluminum under Section 232? He did so following a Commerce Department study showing that imports of steel and aluminum suppress domestic production far enough below capacity to be a threat to the national security. The steel tariffs were set at 25% and the aluminum tariffs at 10%. Here is Proclamation 9705. Those tariffs remain largely in place. In August of 2018, the President followed up with Proclamation 9772, which doubled the tariff on steel from Turkey to 50%. In Transpacific Steel LLC  v. United States, an importer of Turkish steel challenged that increase and sought a refund of the difference. The bases for the challenge are, among other things, that singling out importers of products from Turkey violates the Equal Protection Clause of the Fourteenth Amendment and that the President’s failure to follow required procedures violates the Due Process clause of the Fifth Amendment.

The United States moved to dismiss this challenge as failing to state a cause on which the Court can grant relief.

As noted in a concurrence by Judge Katzmann, this case is not about the general constitutionality of the delegation of authority to the President under Section 232. That issues is currently before the Federal Circuit on appeal from the Court of International Trade. Rather, this case is all about how Section 232 was deployed against imports from Turkey as opposed to imports from the rest of the world.

To succeed on a motion to dismiss, the Government needed to show that the complaint does not contain facts “plausibly suggesting” that the plaintiff is entitled to the relief it is seeking. The likelihood of obtaining relief must be more than merely speculative. This standard is deferential to the plaintiff and the Court is required to construe the undisputed facts in the light most favorable to the plaintiff. Here, there do not appear to be any facts in dispute.

To state a claim under the equal protection clause, plaintiff needed to allege the lack of a rational relationship between the disparate treatment of importers of Turkish products and a legitimate governmental purpose. To overcome that allegation, the defendant must “articulate any set of facts that rationally justify a distinction in classification, irrespective of whether the President himself actually justified his action at the time it was taken.” According to the Court, it is difficult to image a situation in which the government could fail to clear this low bar.

And yet, here we are.

The Government provided no facts that justify identifying importers of Turkish steel as a separate category for purposes of Section 232. It did make general statement about the high level of imports from Turkey and the 14 antidumping and countervailing duty orders on steel from Turkey. These facts, however, place Turkey in the mainstream of steel exporting countries. They do not indicate that it is a unique or even increased risk to the national security. The Court found it could not discern a possible rational justification for the distinction. Thus, the motion to dismiss was denied.

The due process argument is all about procedure. The law provides a detailed road map for imposing trade restrictions in the name of national security. The process starts with a Commerce Department report to the President. If Commerce finds a threat to national security, the President must decide whether he or she agrees with the conclusion. If so, he or she has 90 days in which to decide how to proceed. Once he or she decides to act, the President must do so within 15 days.

In this case, there was no separate finding with respect to Turkey in which the Commerce Department found it to be a unique or elevated threat to national security. Moreover, Proclamation 9772 was issued far beyond the 90 days allowed to determine the appropriate course of action and beyond the additional 15 days in which to act.

The government responded to this with the position that doubling the duties on Turkey was an adjustment of the remedy authorized by the initial Commerce Department report and Presidential Proclamation. The Court did not agree. Rather, the Court read Section 232 as requiring that the President act decisively to eliminate the risk to national security within the specified times. This implies that the process is complete when the President acts, except for the explicitly granted authority to end the action under the Act. Similarly, individual exemptions do not require the full statutory process because the Proclamation initially imposing the duties explicitly authorized the Secretary of Commerce to exempt particular products.

The Court, therefore, denied the motion to dismiss, letting the case go forward to motions for summary judgment. Keep in mind, as noted by separate concurrence, this case does not decide the issue presented. It only means that the plaintiff’s complaint contains sufficient facts to state a plausible claim that the increased 232 duties on steel (and by implication aluminum) from Turkey violate the constitution and, therefore, should be refunded to importers.

A few additional points to clean up:

The increased duties on Turkey were removed in May of 2019. That does not make this case moot. The government collected the additional duties and plaintiff is seeking a refund. This is a live dispute and not a theoretical question.

Second, the existence of this cases raises procedural questions for similarly situated importers of steel and aluminum from Turkey. Importers that paid the excess 232 duties, should consider filing protests on liquidated entries and asking Customs and Border Protection to withhold action on the protest until this case is finally decided (which may be a while). This is a risky proposition because the constitutionality of an action by the President and the Commerce Department is not something that is subject to review by CBP on a simple protest. That means other importers might need to file cases similar to Transpacific and decide whether to stay their cases pending a final decision in this case. That is a complicated issue of jurisdiction that harkens back to the Harbor Maintenance litigation. So, before you jump talk to a lawyer and remember that nothing you read here is legal advice.