Volvo, Substantial Transformation and Proof of Life

[Updated, but just to fix my terrible typing.]

First, let's get the easy part out of the way. Yes, I am alive. My side projects, including this blog, have been collateral damage in the trade war. I have been diligently working on client matters and other projects. I'm not sorry for that, but I am unhappy it has reduced my blog to a shadow of what I want it to be. I never want the blog to be stale, but it happens. I will note that there have been very few customs decisions from the Court of International Trade and Court of Appeals for the Federal Circuit. On the other hand, there have been a few trade cases that have important implications for importers and, you may have noticed, there have been a lot of agency and presidential actions. Be sure to watch my Twitter feed for breaking news. In the meantime, I am trying to get rolling again.

Speaking of rolling, let's talk about the recent ruling Customs and Border Protection issued to Volvo. The ruling is HQ H302821 (Jul. 26, 2019). This is one of several recent origin rulings in which an importer asked CBP to confirm that the country of origin of a product assembled outside of China from materials that are at least in part from China is something other than China. Several have gone poorly (for example this, this and this.).

Much of the reasoning in these and similar rulings draws on the notion that assembly alone is not sufficient to produce a substantial transformation where the assembled parts had a predetermined end-use at the time of the assembly. This has led me to stomp around my office shouting that most assembled products are unlikely to satisfy this test. Modern assembly plants pull together pre-made components to make larger items. The fabrication of those components is often, but not always, outsourced to another facility. This allows parts to arrive just in time and be immediately provisioned to the line for use in assembly.

The example I often use when ranting about this is cars. It is hard to think of a major car part that does not have a predetermined end-use. It is also hard to image a production process that is more substantial and more transformative than making cars. Nevertheless, CBP seems to disagree.

First, let me not oversell my case. The Volvo ruling does not concern a traditional assembly process that starts with loose parts and ends with a vehicle. It involves what is known as knock down assembly. In this process, components were shipped to or sourced in China where they were assembled into major subassemblies. Those subassemblies and other major components were then shipped to Sweden. The Chinese subassemblies include painted bodies (sides, doors, tailgates, rear view mirrors, roofs, etc.); engine modules (engines, transmissions, front brakes, and radiators); and suspension modules (rear sub-frame, electric motors, rear suspension, rear brakes). Other components imported to Sweden include the hood, fuel tank, battery modules, instrument panel, seats, wheels, etc. In Sweden, all of those components came together to form a passenger car.

The issue presented to Customs was whether the vehicles built in Sweden from the Chines subassemblies and components are products of China or of Sweden. This matters for two reasons. First, vehicles of 8703.80.00, which these are, are subject to 25% Section 301 duties when they are products of China. Second . . . well . . . it's a Volvo; I suspect the company does not want to have to label them as products of China if they can avoid it.

To make the country of origin determination for purposes of the 301 duties, Customs applies the long-established (but ever changing) substantial transformation test. We should add some context before we move on.

The Court of Customs and Patent Appeals faced a country of origin marking question in United States v. Gibson-Thomsen Co., 27 C.C.P.A. 267 (1940). In that case, the imported merchandise was toothbrush and hairbrush handles from Japan. Id. at 268. At the time of importation, the handles were properly marked to indicate Japan as the country of origin. After importation, holes were drilled into the handles and bristles inserted and embedded into the holes. Id. at 269. This process removed the country of origin marking.

After reviewing the relevant law and regulations, the Court found:

nothing in the statute nor in its legislative history to warrant a holding that the Congress intended to require that an imported article, which is to be used in the United States as material in the manufacture of a new article having a new name, character, and use, and which, when so used, becomes an integral part of the new article, be so marked as to indicate to the retail purchaser of the new article that such imported article or material was produced in a foreign country. On the contrary, we are of opinion that the Congress intended . . . to cover only such imported articles as do not lose their identity as such when combined with other articles. 

Applying this analysis to the brushes, the Court concluded that the brush handles:

are so processed in the United States that each loses its identity in a tariff sense and becomes an integral part of a new article having a new name, character, and use. We are of opinion, therefore, that, at the time of their importation, the involved articles were marked "in such manner as to indicate to" the "ultimate purchaser in the United States"—the manufacturer of toothbrushes and hairbrushes—the country of their origin—Japan. 

This conclusion by the Court of Appeals means that an imported brush handle, having the final shape and the clear intended end-use as a brush, was substantially transformed by the relatively simple operation of boring holes and embedding bristles in those holes. That is all that is necessary to substantially transform a Japanese brush handle into an American brush. Gibson-Thomsen remains a correct statement of the law and is often cited by Customs in its rulings without the context of the actual operations that resulted in a substantial transformation in that case.

Subsequent court cases have added details to this test. In Belcrest Linens v. United States, 573 F. Supp. 1149 (CIT 1983), aff'd 741 F.2d 1368 (Fed. Cir. 1984), the Court added that the determinative issue is the extent of operations performed and whether the parts lose their identity and become integral to the new article. This makes sense as it should not be the case that putting any two pieces together results in a substantial transformation. Customs applies this by saying that assembly operations that are minor or simple, as opposed to complex or meaningful will generally not result in a substantial transformation.

Note that this is a significant step away from the name, character, and use test that is the basis for substantial transformation. That test does not ask how the transformation occurred, only whether it was substantial. Under Belcrest, it is likely that the hairbrush considered in Gibson-Thomsen, would not be substantially transformed. But, the process at issue in Belcrest was cutting marked sections of fabric from a bolt, sewing them into pillowcases, adding a decorative thread, and packing them for resale. That is essentially one cutting step and one sewing step plus some less transformative operations. Nevertheless, in Belcrest, the Court found a substantial transformation from fabric to pillowcases.

The next step toward the Volvo ruling came in 1993 when the Court of International Trade decided National Hand Tool v. United States, 16 CIT 308 (Dicarlo, C.J.). [If you know my professional history, you will understand that what I am about to say is very personal.] National Hand Tool involved semi-finished forged tool parts (e.g., sockets and handles) that were subjected to finishing and some assembly in the United States. At the time of importation, the articles had their near final form and that form was not going to change as a result of the finishing operation. A flex handle remained a flex handle; it was just a heat-treated flex handle with a knurled grip. Faced with these facts, Chief Judge DiCarlo noted that "The use of the imported articles was predetermined at the time of importation." He also said, "The fact that there was only one predetermined use of imported article does not preclude the finding of substantial transformation."

This line of reason was taken up in Energizer Battery Inc. v. United States, 109 F. Supp 3d 1308 (CIT 2016). The issue there was the country of origin of a military-grade flashlight assembled in the U.S. with imported parts. This was a high-end device with electronics that provided control over how the light operated. The flashlight consisted of about 50 discrete parts including five LED's. Many of these parts were simple fasteners, others were specifically designed for this flashlight. The parts of the flashlight were ready for assembly when imported and did not require further manufacturing. Furthermore, the non-fastener parts were predetermined to be used in the assembly of the flashlights. The head assembly was made in China and contained the LED's, wires connecting the LED's to a printed circuit assembly.  With that in mind, the Court looked at National Hand Tool and noted that:

when assembly operations were manual and required some “skill and dexterity to put components together with a screw driver” but the names of each article and the form and character of each component remained unchanged, and the use of the imported articles was predetermined at the time of importation, the court did not find that substantial transformation had occurred . . . .

After a thorough analysis of name, character, and use; whether the assembly was minor or simple; and the predetermined end-use of the parts, the Energizer court found no substantial transformation. The conclusion was focused on the character test and the predetermined end-use was evidence of no change in character.

It is true that the flashlight could be disassembled and the original parts removed. Yes, they retain their original names and forms. Nevertheless, the flashlight is more than the sum of the parts. It is a functional light and a distinct article of commerce. The assembled functional flashlight is far more distinct from the parts than was the Japanese brush handle discussed in Gibson-Thomsen. Following Gibson-Thomsen, the focus should be on the nature of the imported material compared the finished article. Provided the assembly is not simple and the new item is a distinct article of commerce, the law indicates that the transformation is substantial.

We need not ignore National Hand Tool to reach that conclusion. The facts of the case matter. National Hand Tool is fundamentally about finishing operations on unitary forgings not assemblies. Finishing metal parts is different than bringing together multiple disparate parts to form a working whole.

Back to the Volvo ruling . . . .

Customs correctly reviewed all of this, but landed, as is seemingly always the case now, on Energizer for its the guiding principles. Customs noted that in Energizer the court focused on the fact that the components of the flashlight retained their respective names after they were assembled and had a predetermined end-use at the time of importation.

Here is the decisive paragraph from the Volvo ruling:

In the instant case, five subassemblies are manufactured in China from components from various countries.  The five subassemblies and other components from China with the exception of high voltage cables and wheels from Europe will then be assembled into the passenger vehicles in Sweden.  Unlike the situation in HQ H155115, HQ H118435, and HQ H022169, in this case, the complex assembly process occurs when producing the subassemblies in China.  With respect to the final assembly, we find the manufacturing processes of the five subassemblies in Sweden do not rise to the level of complex processes necessary for a substantial transformation to occur.  Further, the five subassemblies from China have a pre-determined end-use and do not undergo a change in use due to the assembly process in Sweden.  Accordingly, we find that based on the information provided, the subassemblies and the foreign parts that are imported to Sweden are not substantially transformed as a result of the assembly operations performed in Sweden.  

Given the history of substantial transformation, this result is almost certainly wrong. First, it ignores or diminishes the clear statement from National Hand Tool (which was repeated in Energizer) that a predetermined end-use does not preclude a finding of substantial transformation. Second, CBP simply waives off the complexity of assembling a motor vehicle from subassemblies as if these parts were Legos. There is no conceivable way that these vehicles come together in a process that is less complex than putting bristles on a brush handle or cutting fabric and sewing pillowcases. It is almost certainly more complex than the 7-minute process of making flashlights in Energizer.

Customs' current love affair with predetermined end-use as indicative of simple assembly and of there being no change in character is turning into the crutch it uses to deny substantial transformation claims. That is not a smart application of National Hand Tool and does not give due recognition to the facts of that case and its statement that predetermined end-use does not preclude finding a substantial transformation. This was noted in Energizer even though that case declined to find a substantial transformation.

If the Volvo process of building cars in Sweden from Chinese origin subassemblies is simple, that fact is sufficient to find that the vehicles are of Chinese origin. The predetermined end-use of the subassemblies is a fact to consider but should not be dispositive. To be simple assembly, the process in Sweden should be compared to making pillowcases in Hong Kong from fabric woven, marked, and embroidered in China. Cars have lots of big, heavy moving parts that need to be connected just so. The assembly implicates important safety and regulatory requirements. The workers are likely skilled and using expensive tools and other equipment. I may be making an unsupported factual assumption, but it is inconceivable to me that this is a simple process compared to sewing pillowcases or making hairbrushes.

This ruling calls into question the applicability of substantial transformation to all assembled goods including assemblies as complex as (non-knocked down) motor vehicles, aircraft, and farm equipment. Essentially, the law has moved to require a double substantial transformation, or at least further processing of the parts prior to assembly. This is almost explicitly stated in a series of rulings on the origin of electric motors. See, for example, N302707 (Mar. 18, 2019) in which CBP noted the presence of component-level production in Mexico.

Energizer might be correct in its result. The lens head contained the control electronics and the light emitting parts of the flashlight. Perhaps that subassembly is the essence of the completed item, meaning there is no change in character after assembly. Nevertheless, the language used in Energizer does not recognize the unique fact that National Hand Tool was about finishing operations and only tangentially about assembly. This lack of clarity has either driven CBP down the wrong path or has allowed CBP to narrow substantial transformation to such a degree that it would be unrecognizable to the Court that decided Gibson-Thomsen.

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.