Danger Will Robinson: Classifying Robot Controllers

These days, marketers describe everything as "smart." There are smart televisions, a smart toaster, and even a smart toothbrush. The question is, how smart do these devices (or their parts) have to be to turn them into automatic data processing machines, or as normal people call them, "computers?"

That is the question presented, at least in this summary, in Fanuc Robotics America, Inc. v. United States.

We have talked about the complexity that is ADP classifications a number of times. Go back and read this and this.

The gist of this case is that Fanuc makes industrial robots (really robot arms) that do industrial robot tasks like spot welding, painting, and materials handling. The robot is not a general purpose device that can, if properly programmed, perform other tasks like playing ping pong, mixing cocktails, or doing your yard work. For that, you need a Class M-3 Model B-9 Non-Theorizing Environmental Control Robot.

Personally, I like the upgrade and continue to wait for Lost in Space Season Two. Come on already, Netflix.

Credit: https://ew.com/movies/tv-movie-robot-upgrades/?slide=5910697#5910697

In this case, Fanuc was importing 10 printed circuit assemblies that are part of the robot controller. The assemblies all have the kind of functions you might find in a computer. One is a CPU. One is a memory board. One controls input and output. If any one of those boards were imported by a computer manufacturer for use in assembling a computer, they might reasonably be classified as units or parts of an ADP system. The problem here, is that they were imported for use in a robot with a specific end use. [More on that below.]

Plaintiffs try to address that concern by pointing out that the boards are not part of the robot; they are part of the controller for the robot. Fanuc believes the controller is an ADP machine. I am not sure what the Fanuc controller looks like or how the user interface works. But, I am pretty certain that in the absence of the Fanuc controller, these robot arms could be controlled by a standard computer with an appropriate adapter. That raises the serious question of whether a programmed controller that is doing work that could otherwise be done by a computer is an ADP machine.

The Court of International Trade had no problem resolving the classification of  the controller. It held that the controller is classifiable in 8537 as board, panel, console, etc. for electric control including numerical control apparatus. The controllers distribute electrical signals to the robot and receive signals back from the robot. The controllers, as is also required for classification in 8537, contain at least two items classifiable in 8536 (e.g., switches, relays, and fuses). The Explanatory Notes support this classification by instructing that 8537 includes programmable controllers. Furthermore, Chapter 84, Note 5(E) says:

Machines incorporating or working in conjunction with an automatic data processing machine and performing a specific function other than data processing are to be classified in the headings appropriate to their respective functions or, failing that, in residual headings.

According to the Court, the controllers have a specific function other than data processing. They are robot controllers. Consequently, they are to be classified based on that function. That puts them in 8537, not 8471.

From there, the Court was able to conclude that the various assemblies were parts of the programmable controller of 8537. That put them in Heading 8538. Plaintiff argued, to no avail, that within the controller is a machine that is classifiable as an ADP machine and that the assemblies are parts of that. There is some interesting analysis in the opinion on this point. In theory, classifying parts of even slightly smart devices might, under this theory, require several levels of theoretical deconstruction to see whether the parts satisfy the rules set out in Chapter 84, Note 5 including whether they are freely programmable in accordance with the requirements of the user. The Court cut through that by focusing on the user of the robot and finding that these parts are not programmable by that user to do anything other than the tasks for which the robot was designed.

I think the judges of the Court of International Trade might want to watch more movies in which hackers make connected systems do their bidding. Something like this:




I suspect that Chuck Bartowski (and future Shazam) would be happy to make the Fanuc robot arms play ping pong or mix the perfect Old Fashioned, but hackers are not the "users." The question of who is the user in electronic systems gets very murky very quickly. What if Fanuc's team could do more with the robot arm but has locked it down in the controller so that the customer does not muck up the programming?

Also, as I always wonder, exactly how much freedom is needed to be freely programmable? In CBP Rulings, Customs seems to have arrived at the test of whether a user can load and run multiple different programs on the device. Recently, an import specialist asked me whether the device under consideration can be programmed to play videos from the Internet and also run a virus protection program. Those are pretty specific requests and may not be relevant to all ADP machines. I have also seen CBP ask whether the device can run Word and PowerPoint. Clearly, what CBP is looking for is a general purpose device that can do multiple and different tasks with a change in programming.

Robot arms are probably not there. On the other (robot) hand, complex controllers might be if they are based, for example, on a general purpose operating system such as Window, Linus or Android. Systems running those operating systems generally can be programmed to play games, do word processing, and display pictures, for example.

In the end, the Court found all of the printed circuit assemblies to be classifiable in 8538.90.30 as other printed circuit assemblies of Heading 8538.

One last thing, only because it is an issue I have been contemplating. Is 8471, which describes Automatic Data Processing machines an eo nomine or a use provision? I have always assumed it to be an eo nomine provision and that Note 5 was there to explain what physical and functional characteristics define an ADP machine. The Court seems to have been very swayed by the fact that the parts are used in conjunction with programmable controllers for industrial robots. I have no idea whether the parts are, in reality, generic electronic components or at least of the class and kind of components that might be used in ADP machines. Memory boards, CPUs, and input/output boards are all parts of computers. This seems to be an issue but I also have no doubt that counsel for Fanuc has been down that road.

More to the point, now I wonder whether items of 8471 might be an example of the new category of classification chimera of eo nomine classifications that inherently suggest a particular use. If that is the case, at least for now, how to go forward is murky.

Quitting When Ahead

Tariff classification litigation sometimes takes a relatively long time to run through the system. To be clear right at the top, I am not complaining about that. The pace is usually set with the consent of the parties. Classification cases do not involve the loss of liberty or property, no families are at risk, no one is being deported. Many of the usual policies that encourage speedy action simply do not exist. No one wants cases to needlessly languish. If the plaintiff wins, the public does end up paying interest with the refunds. On the other hand, the United States had been holding that money improperly. Also, if either party has a reason to press for a quick resolution, or it is clear that the case is amendable to a quick resolution, there are tools to make that happen.

Occasionally, the time it takes to litigate a case changes the facts on the ground. Moen, Inc. v. United States is an interesting example of that phenomenon. The case involves the classification of showerheads. The relevant entries were made in 2014 and the case was filed in 2015, which is pretty quick as these things go.

Customs and Border Protection classified the showerheads in Heading 3924 as "other household articles and hygienic or toilet articles of plastic . . . ." In 2014, the rate of duty on the merchandise was 3.4%. Moen believed that the correct classification was as mechanical appliances for spraying liquids in tariff item 8424.80.90. The rate applicable to the particular item was 1.8%, making for a reasonable potential return in the litigation.

As a result of the President's actions under Section 301, effective August 23, 2018 goods of 8424.89.90 from China are subject to a 25% rate of duty. That makes the litigation stakes very different. Someone at Moen needed to do some math to figure out whether the refund applicable to merchandise entered prior to the duty increase was worth the risk of paying a 25% duty on the merchandise for the foreseeable future. This is tricky math. The potential recovery is a known number. The future risk depends entirely on how long the 301 duties stay in place, which is an unknown. To complicate matters more, the original classification of 3924.90.56 is now on pending List 4, so it will likely be subject to additional duties going forward.

So, what to do? Does Moen go forward with the litigation knowing that it is owed a refund but will have to start paying 301 duties as long as that continues? Or, does it drop the litigation, forgo the refunds and avoid the 301 duties, knowing that when List 4 is enforced, it will owe more in 301 duties? That decision probably requires real math skills and a bunch of models based on how long the 301 duties stay in place. I suspect the whiteboards at Moen looked like this:

Moen decided that its best move was to drop the litigation. Makes sense. Except that the United States invested time and effort in the litigation and wanted a "win" to get the precedent from the Court on how to classify these items. For the United States, assuming it would have won, that is playing the long game about future cases. Consequently, the United States opposed Moen's motion to dismiss.

Under Court of International Trade Rule 41, granting a voluntary motion to dismiss falls within the sound discretion of the judge. The Court is to look to (1) the defendant's efforts and expenses; (2) the existence of excessive delay or lack of diligence on the part of the plaintiff; (3) whether there is an insufficient explanation for the need to dismiss; and (4) whether the defendant has filed a motion for summary judgment.

Here, there was no excess delay nor was there the lack of an explanation. The reason was clear, winning actually increased the current duty liability. The Government did expend time and effort to litigate the matter. Nevertheless, the Court recognized the reality that Moen is likely to litigate this issue when the 301 duties are removed. The effort, therefore, will not have been wasted.

Moreover, the dismissal of the action challenging the classification Customs applied at liquidation is a win for the government (although without a published opinion). This is the rare piece of litigation that might actually be a win-win.

The Science of Weighing and the Weighing of Science

New Image Global, Inc. v. United States is the sort of case we do not often see from the Court of International Trade. For starters, it involves excise taxes on tobacco rather than customs duties. Second, the challenge relates to Customs and Border Protection’s laboratory methodology. In the end, there is nothing groundbreaking here. It is, however, a good reminder that there are remedies available in the Court of International Trade that go beyond refunds for incorrect classifications. It also illustrates that pleadings matter. Finally, the case gives me an opportunity to go on a rant about the importance of good science in the courtroom and elsewhere.

The tax at issue is applicable to tobacco products and is assessed based on weight. The plaintiff imported tobacco “wraps,” which are tobacco products used to wrap other tobacco as cigarettes or cigars. The wraps as imported were packaged to retain moisture to let them be pliable enough to use as wrappers and also contained certain volatile agents for flavoring and other purposes. One such purpose appears to be producing a smoke that tastes of chicken and waffles.

"Royal Blunts" appears to be a brand name for New Image Global products.

See https://www.royalblunts.com/about-us/ 

CBP investigated potential underpayments of excise tax by New Image and decided the check the weight of some imports. The first time it did so, CBP removed the wraps from their packaging and let them dry for 24 hours. This direct method of weighing the product found the wraps to have an average weight of 0.71 grams. Subsequently, CBP modified its methodology to weighing the entire package as imported and subtracting the weight of the packaging. This methodology preserves the moisture and volatiles, meaning the result will be a heavier wrap. The indirect method found the weight to be average 0.915 grams. That means that New Image had under-reported the weight and underpaid the excise tax on entries that reported the weight as 0.75, based on the invoice description.

CBP attempted to collect the unpaid tax and New Image protested. CBP denied the protest and New Image filed a summons in the Court of International Trade.

There is an initial procedural issue to address. Plaintiff moved for summary judgment arguing that it had established as a matter of law and with no material facts in dispute that it was entitled to a refund of the excess taxes paid. The Government noted that the position taken in the motion did not align with the facts as initially asserted in the complaint. In its motion for summary judgment, the Government addressed the claims raised in the complaint. This raises two issues. First, the claims Plaintiff raised in the complaint that were not argued in the motion might be waived. Second, the arguments Plaintiff raised in the motion that do not correspond to claims in the complaint might not properly be before the Court.

For purposes of this post, I am not going to detail the differences between the complaint and the motion. Just understand that there is a disconnect. Regarding claims raised in the complaint but not raised in the motion, the Court noted that the Plaintiff also failed to respond to those arguments when they were addressed in the Government’s motion. Thus, the Court found Plaintiff had waived them.

Regarding new arguments first raised in Plaintiff’s motion for summary judgment, the Court noted that CIT Rule15(b)(2) allows new issues to be “tried” when the parties consent either expressly or by implication. Because this is not a trial but a motion for summary judgment, there is a question of whether Rule 15(b)(2) applies. On the one hand, a trial is a specific thing and this is not a trial. That would indicate the Rule is inapplicable. On the other hand, the Court is working to resolve the matter and maybe that is all that “tried” means in the context of the Rule.

It turns out that no prior CIT or Federal Circuit case has resolved this question. There is, however, a lot of law from other federal courts on the corresponding Federal Rule of Civil Procedure. The Court chose to follow the majority rule and apply Rule 15(b)(2) in the summary judgment phase.

That leads to the question of whether the Government had consented to resolving the newly raised arguments. The Court noted that the Government had the opportunity to move to strike the new arguments and chose not to do so. Furthermore, the Government had fair notice and opportunity to respond to the new arguments. Together, according to the Court, that constitutes an implied consent.

That brings us to the merits. Did CBP act within its authority when it changed the weighing methodology to calculate the excise tax owed?

The gist of Plaintiff’s argument is that by not letting the moisture and additives evaporate from the tobacco, Customs improperly applied the tax to material that is not tobacco. The Government, on the other hand, noted that IRS practice has been to include filters and mouthpieces in the taxable weight because they are integral parts of the finished product. A similar conclusion was reached in a ruling issued by the Alcohol and Tobacco Tax and Trade Bureau (“TTB”). Using the indirect weighing methodology is also consistent with Customs’ practice of assessing duties and taxes on products in their condition as imported (not as dried out 24 hours later).

The Court found that the moisture and additives are part of the what makes the tobacco wraps suitable for their intended purposes. The additional weight comes from components (e.g., chicken and waffle flavoring) that are essential to the final product and, therefore, are part of the taxable weight.

Next, Plaintiff’s made the more direct argument that CBP’s change in methodologies was a results-oriented decision aimed at increasing New Image’s tax liability and that the indirect methodology is not scientifically valid.

On the first point, the Court found, essentially, that CBP was just trying to get the right weight, even though it was clear that the weight would be greater than under the previous methodology. There is nothing inherently wrong with CBP reevaluating its testing methodology in light of guidance from the TTB. Had CBP not done so, the result might be an unintended difference in the tax treatment of domestic product weighed by TTB and imports weighed by CBP.

Finally, we get to the question of whether indirectly weighing tobacco is a scientifically valid approach. Recall that CBP’s methodology was to weigh the entire package as imported. It then removed and weighed the packaging. By subtracting the weight of the packaging from the total, CBP derived the taxable weight of the tobacco.

When Customs cases involve the scientific validity of a testing methodology, the Court looks to factors established in a Supreme Court case called Daubert v. Merrill DowPharmaceuticals, which addressed the admissibility of scientific evidence. Under Daubert, the Court is to act as a gatekeeper to weed out testimony and other evidence that is not supported by basic science.

In my head, this is a big deal legal issue that has far greater impact in the district and state courts than the CIT. It comes up often in personal injury, medical malpractice, and products liability cases. The point of Daubert is generally to prevent junk science and biased “experts” from swaying the jury with scientific sounding nonsense.

Think about what is now euphemistically called “vaccine hesitancy.” The entire notion that vaccines cause autism and related conditions was never the consensus of scientific opinion and is fully discredited today. Daubert would prevent the discredited evidence from getting to a jury. On the other hand, in the unlikely event some new evidence comes to light that supports the proposition that vaccines are unreasonably dangerous, it could be admitted as evidence if it meets the Daubert criteria.

Talcum powder is in the legal news today because there is a lot of litigation linking it to ovarian cancer. There is, however, scant scientific evidence linking the use of powder to cancer. There is some. A good survey is in this Washington Post article. The question is whether that evidence is sufficiently reliable to go to a jury and whether it is presented with appropriate context. Sadly, there is always a risk of a woman getting ovarian cancer. The legal question is whether a plaintiff can prove by a preponderance of the evidence that using powder caused a particular case of cancer. Under Daubert, an expert should not be permitted to testify on this without showing, among other things, that the evidence has been subject to peer review, the known or potential error rate, and that it is accepted in the scientific community. This last factor is where I question what is happening in the talc cases, but I admit I have not been in those courtrooms and do not have a fully informed view on what was presented.

How we consume and evaluate scientific information is important in many aspects of our lives. It impacts whether we waste money on homeopathic medicine, use genetic technology to efficiently grow crops and livestock to feed the world’s growing population, or take action to combat global climate change. Think about Daubert whenever you see claims of miracle cures, scaremongering articles on genetically modified foods, or other claims that simply seem too good (or bad) to be true. Critical thinking is a learned skill and Daubert provides a reasonable basis from which to start. You’ll need to do some digging to test the claim, but there are usually sources to help. Personally, I give extra weight to information from universities (.edu) and government agencies (.gov) as a way to sort through the motivated reasoning of companies making claims to support their own commercial interests.

In this case, the indirect method of weighing tobacco is consistent with a standard methodology of the U.S.Pharmacopeia and National Formulary, which may not be peer reviewed but is published. Evidence indicated that USP is an organization that sets validation standards. The Court also reviewed the error rate in Customs’ testing and found the results to be steady. Based on this review, the Court found the methodology to be valid.

Based on all of the forgoing, the Court found that New Image failed to show that Customs’ methodology was inconsistent with the law. Thus, it granted summary judgment in favor of the Government, which seems entirely reasonable.

What may be unreasonable is that I milked this for nearly 1700 word.

When is a Protest Allowed?

Lawyering is sometime a creative endeavor. As regulatory lawyers, that does not happen often enough. We rarely get the satisfaction of helping individuals resolve issues that impact their personal liberty or property. That’s OK. I am perfectly happy without a lot of human drama in my practice. On the other hand, I do enjoy stretching my creative lawyering skills.

In Erwin Hymer Group North America, Inc. v. United States, counsel for the plaintiff probably had some fun dealing with the issue presented. A reasonable way of describing what happened is this: Customs erroneously approved a protest that should have been suspended. When it failed to pay a refund on the protested entries, Hymer sued. Hymer’s argument comes done to the ancient proposition of school-yard jurisprudence “No take backs.”

As with all these procedural cases, the facts matter. When Hymers filed its protest, there was litigation already pending in the Court of International Trade on a similar question. Hymers asked Customs and Border Protection to suspend action on the protest until that case was decided. CBP agreed. The relevant CIT case was then stayed pending the outcome of a different case. That question was discussed here. Someone at CBP received Hymen’s protest, did some level of review, and checked the “Approved” box. Then, CBP sent the approved protest back to Hymer. Shortly thereafter, CBP noticed its error and let Hymer know that the protest was still in suspended status. In other words, CBP said “ignore that check mark, we are still withholding decision as you requested.”

Language also matters here. The protest form uses the word “Approved.” Technically, what happens to a protest is that it is “allowed” or “denied.” Hymer’s position is that “approved” means “allowed.” That remains is the core of this whole debate.

When Hymer sued, it faced a jurisdictional question. Normally, litigation about a protest challenges a denied protest. The Court of International Trade has exclusive subject-matter jurisdiction to decide challenges to denied protests. 28 USC 1581(a). But that section says nothing about lawsuits arising out of approved (or allowed) protests, such as this one trying to force Customs and Border Protection to pay a refund. If 1581(a) is not applicable, or does not provide adequate relief, then 1581(i) gives the Court “residual jurisdiction” to decide the case. That is how the CIT proceeded.  As a side note, the CIT held that CBP was not obligated to pay the refund because a protest is not finally “allowed” until CBP reliquidates it.

Hymer appealed. On appeal, neither party raised the jurisdiction question. Nevertheless, the Federal Circuit saw it as an issue and ordered that it be addressed. That did not go well for Hymer.

According to the Federal Circuit, the CIT lacked jurisdiction to decide the case—at least when it did.

The starting point for this analysis is section 1581(a), which says:

The Court of International Trade shall have exclusive jurisdiction of any civil action commenced to contest the denial of a protest, in whole or in part, under section 515 of the Tariff Act of 1930.

Remember, this protest was marked approved. Hymer just wanted to get paid. On its face, 1581(a) does not seem to apply.

In contrast, 1581(i) says: 

In addition to the jurisdiction conferred upon the Court of International Trade by subsections (a)-(h) of this section and subject to the exception set forth in subsection (j) of this section, the Court of International Trade shall have exclusive jurisdiction of any civil action commenced against the United States . . . that arises out of any law of the United States providing for—

(1)  revenue from imports or tonnage; 

. . .

(4) administration and enforcement with respect to the matters referred to in paragraphs (1)-(3) of this subsection and subsections (a)-(h) of this section.

The law surrounding CIT jurisdiction has long been settled that subsections (a) and (i) are mutually exclusive. [Note to lawyers: Yes, I know the history of Harbor Maintenance Tax and jurisdiction, even that can be reconciled.] If the plaintiff can proceed under (a), it needs to do so. The only exception is where a protest would be manifestly inadequate. In that limited circumstance, the plaintiff can go directly to court.

The Federal Circuit reasoned that if the protest remains suspended, the plaintiff has a way to proceed under (a). First, it can wait until CBP takes final action on the protest. CBP might even approve the protest, making all this moot. If CBP denies the protest, then Hymer can file a suit on the merits in the CIT. If Hymer does not want to wait, it can request that CBP act immediately through a request for accelerated disposition. 19 USC 1515(b). That would most likely force CBP to deny the protest, in which case Hymer could get into Court under 1581(a). Either way, Hymer had an adequate way to secure relief under 1581(a) and the CIT was wrong to proceed under 1581(i).

Built into that analysis is the mostly unstated premise that CBP still has authority to act on the protest after it sent the apparent approval to Hymer. The CIT addressed this directly when it held that an “Allowance” is not final until the entry is reliquidated. Prior to that point, CBP can change its decision.

The Federal Circuit took a different view. Even assuming that checking the approved box and notifying the importer of the decision constitutes an allowance, the Federal Circuit stated that Customs has “inherent authority” to reconsider the allowance and to return the protest to suspended status. This conclusion is not necessary to the determination that the CIT lacked (i) jurisdiction and probably counts as dicta. On the other hand, it also has the potential to lead to interesting future litigation.

If CBP has inherent authority to reconsider its decisions, can it now reconsider any allowed protest? Reliquidation is statutorily final, so it would seem that CBP only has that inherent authority until the entry subject to the allowed protest is reliquidated. That is essentially what the CIT held in this case.

What about a denied protest? Currently, the law allows CBP to void the denial of a protest that was contrary to instructions, which is a pretty limited exception. 19 USC 1515(d). Does the inherent authority of CBP allow it to void a denial that is just plain wrong, without forcing the protestant to file a summons in the CIT? If this dictum is to be believed, it would appear to be the case. That is a potentially good—and possibly unanticipated—outcome of this case.

As for Hymer, I assume it either can’t win as a result of the CAFC decision in Pleasure-Way or that it will win its protest. If not, it seems to now be teed up for another round of CIT litigation on the merits. I also understand that the strategy adopted in this case was a smart effort to jump past the merits. Unfortunately, as smart as that was, it did not work.

The Tour du Toddlers

Today, riders are tackling the 14th stage of the Tour du France, climbing the col du Tormalet in the Pyrenees toward the village of Bareges. Take a look at the photos at this link. See how Peter Sagan (green jersey) and Vincenzo Nibali look somewhat tired? The best I could hope to do on this route is flag down the SAG wagon for a ride to the next lunch stop. The graphic below shows the elevation profile. According to the commentators, the first time this hill was included in the Tour, the stage winner called the race organizers "murderers."

Clipped from https://racecenter.letour.fr

Do you know what these guys are missing? A way to carry a toddler up the col.

If they wanted to bring the kids along for the ride, they could opt for the WeeRide Kangaroo Center-Mounted Bicycle-Child Carrier.

From WeeRide.com

This video shows the WeeRide in action and makes me think I did parenting all wrong:

Which brings me to Kent International, Inc. v. United States, a recent Court of International Trade decision answering the burning question: Is a seat that you strap to a bicycle a seat or is it a bike accessory?

This is not a frivolous exercise. The two competing tariff headings are 8714 covering parts and accessories of, among other things, bicycles and 9401 covering seats. All things being equal, the rule of relative specificity of General Rule of Interpretation 3(a) would tell you that "seats" is a more specific description of this device than "accessory." On top of that, Additional U.S. Rule of Interpretation 1(c) tells us that, in the absence of special language or context requiring otherwise, a classification covering parts and accessories shall not prevail over a specific provision for the item. Taken together, this could be a win for the plaintiff.

Unfortunately, "all things are not equal." Chapter 94, Note 1(h) states that "This Chapter does not cover . . . Articles of heading 8714." That means that if the WeeRide seats are classifiable as accessories of bicycles, they cannot be classified in Chapter 94 as seats. Here, the Court defined "accessory" as something extra that is added in a secondary way; a piece of optional equipment. That fits the WeeRide seat. Given that the seat is an accessory classifiable in 8714, it cannot also be described in 9401, without regard to GRI 3(a) or AUSRI 1(c). This is a GRI 1 classification.

Still, the plaintiff has a point. There is some confusing language in the Federal Circuit's 1997 Sharp Microelectronics decision. In that case, the Federal Circuit faced two conflicting headings and a note that seemed to give preference to one. But, the heading at issue in sharp covered "Liquid crystal devices not constituting articles provided for more specifically in other headings." This language essentially baked the rule of relative specificity into the heading, making it part of the GRI 1 analysis. Without similar instruction in the heading itself, plaintiff was not able to prevail.

Which brings me back to the Tour. The stage is now over and French rider Thibaut Pinot was victorious followed by another French rider and current overall leader Julian Alaphilippe, who keeps the yellow jersey. Apparently, it is a good time to be a French rider in France.

For me, I am hoping to start and finish the North Shore Century in what seems like just a few weeks. I'm busy, I'm traveling, and I think I am coming down with something. So, all in all, it is not a good time to be me on a bike.

ACE as Overlord

Apects Furniture International v. United States is such a painful example of customs litigation, that I have started and deleted draft posts a number of time. So, I am just going to bottom line it and move on my life.

The issue here is whether Aspects properly protested multiple liquidations on a single protest filed in the Automated Commercial Environment. The protests relate to a rate advance to collect antidumping duties on wooden bedroom furniture.

There are nine entries at issue. Apsects protests [spoiler] all nine in the system that Customs and Border Protection designed and made available to the trade. The narrative section identified a single relevant entry number, which was used as the "lead entry." The government asserted that the remaining eight entries were not properly subject to the protest. However, the Court pointed out, when Apects filed the protest, it (or its representative) used the function of the system that allows the user to "Add Additional Entry Numbers." In other words, CBP built out a system that allows importers to make multiple protests in a single filing by adding "additional entry numbers." But, when an importer did so, CBP apparently convinced the Department of Justice that the right thing to do is to penalize the importer for using the system as it is designed. This is the kind of thing that can drive a computer to murder.

It is important to note that no one pointed to a regulation or even an instruction telling importers to list the additional entries in the narrative section. Nor is there a citation to authority telling protesting importers to notify CBP that the lead entry is representative of the additional entries.

Based on its theory that a Aspects failed to properly protest the eight additional entries, Customs moved to dismiss them for lack of subject matter jurisdiction. Without a valid protest, the argument goes, there can be no judicial review in the Court of International Trade.

The Court, rightly, saw through this on multiple grounds. First, Apsects complied with the regulatory requirement in 19 CFR 174.13(b) that allows for the identification of a lead entry and the "attachment" of additional entries because the protested entries all involve the same protestant, category of merchandise, and challenged CBP decision. Moreover, the general rule is that protests are to be liberally construed and will only be deemed to lack the required specificity when there is no indication as to the basis of the protest. On the facts presented, the Court found it clear that Aspects was making the same argument for each of the "additional entries." Given that, there was no need to reach the "severe" consequence of finding that the protests were invalid.

The Court could have stopped there, but it went further. It also invoked the Customs Modernization Act, which introduced "informed compliance" and "shared responsibility." Under these twin concepts, Customs must inform the public of the legal obligations imposed on importers and the public has the right to expect that CBP will not unilaterally change the rules without proper notice. Although the Court did not explicitly say so, I take from the invoking of these concepts that the Court viewed Customs as not having properly informed the public of the alleged requirement to reference additional entries in the protest narrative. By asserting that "rule" in this litigation, Customs appears to have unilaterally changed the requirements for a valid protest.

In that context, the Court found the government's argument to be unreasonable and "unreasonable" is a pretty strong term when used in a judicial decision. On top of that, the Court quoted a 2012 Supreme Court decision to describe the argument as “nothing more than a ‘convenient litigating position’ adopted by the U.S. Department of Justice in its reply." Quoting Christopher v. SmithKline Beecham Corp., 567 US 142, 155 (2012) which was further quoting Bowen v. Georgetown Univ. Hospital, 488 US 204, 213 (1988).

None of this gets to the real issue which is whether CBP properly liquidated entries of wooden bedroom furniture with 216% antidumping duties. The importer apparently believes is has both a scope argument and a procedural argument. Given the potentially dire impact of a presumably unexpected 216% rate advance, it is good that the Court of International Trade denied the partial motion to dismiss.

The larger point is that importers, brokers, lawyers, and the Court need to be certain that CBP does not use the important and welcome modernization of its systems as a means of creeping away from the legal requirements. Until a statute or regulation is changed, it is the law and everyone involved needs to follow it (including any recognized exceptions and limitations). We sometimes see situations where brokers or importers say that ACE or "the system" or "the software" require that something be done in a certain way. That just does not fly. Software is not a legally binding regulation. A Cargo Systems Messaging Service update is not a regulation and cannot take the place of formal public notice and comment. At best, it serves the policy of "informed compliance." If the policy announced in that CSMS is legally wrong, it is wrong.

This case may seem like a procedural one-off for customs nerds. It is not. It might be the first case in a future line of cases addressing how much flexibility administrative agencies have to migrate to new systems and the legal consequences of how those systems are engineered.

I, for one, do not welcome our new computer overlords.




Lastly, I leave you with this image (from IMDB) from the 1954 classic "Gog" staring  Richard Egan and Constance Dowling. For reasons I do not know, this movie occupies a space in the deep recesses of my lizard brain. I must have seen it on as a Saturday afternoon Creature Feature at some point in the 1970's. Reading the synopsis here will make it clear why my brain churned it up now. ACE is the robot. Those are the heroic lawyers in their cool jumpsuits, one of whom is wielding the stick of justice. I will leave it to the meme generators among you to work out what the guy on the left is up to.

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.