Wednesday, December 10, 2014

GRK Backlash

GRK Canada, Ltd. is a big deal. I have already posted about it twice (here and here) and this is a third time. It goes to the very heart of how Customs and Border Protection and the U.S. Court of International Trade should interpret the Harmonized Tariff Schedule of the United States. If you are a diligent compliance professional, this is likely far more important to your day-to-day work life than is the decision in Trek Leather, which has caused much teeth gnashing.

Recall that the issue in GRK is the proper tariff classification of "wood screws." The Court of International Trade looked very closely at the physical characteristics of the screws and did not focus on the apparent common use of the screws, which is to fasten wood. Unable to differentiate between wood screws and self-tapping screws on the basis of physical characteristics, the CIT employed General Rule of Interpretation 3(c) and classified them as self tapping screws, the last tariff provision in numerical order. The Federal Circuit reversed and held that the CIT should not ignore the use of the product when the eo nomine designation (i.e., the name of the thing) suggests a particular use.

I was unhappy with that analysis, which is almost wholly irrelevant. On the other hand, GRK Canada was also unhappy. That matters because the company was able to file a petition for rehearing en banc in which it asked the entire Court of Appeals to reconsider. The Court has done so and rejected the petition over a strong dissenting opinion written by former-CIT judge Evan Wallach and former trade practitioner Jimmie Reyna. That dissent is worthy of a very close read.

The dissent correctly notes that there are several distinct types of tariff items. The first are eo nomine, meaning that the tariff text describes the item by name. Tariff items covering "woodwind instruments," "beverages," and "motors" are eo nomine provisions. Another type of tariff item is the use provision in which classification is determined based on the use of the item. For example, HTSUS item 8413.70.10 covers "Stock pumps imported for use with machines for making cellulosic pulp, paper or paperboard." Another example is 8477.10.40, which covers injection molding machines "for use in the manufacture of optical media." A third type of tariff classification is the basket provision, which is not relevant here.

When construing an eo nomine item, the Court (and by implication Customs and Border Protection and importers) must look to the text of the heading and then to the relevant legal notes that define the scope of the heading. That is General Rule of Interpretation 1. The Court must then determine whether the item in question fits within that scope.

Classifying in a use provision works differently. Under Additional U.S. Rule of Interpretation 1(a), the scope of the a heading or tariff item controlled by use is determined by the principal use of goods of the same class or kind. The class or kind is determined under the co-called Carborundum factors. But, ARI 1 is only applicable in cases where the tariff classification is based on use. GRI 1 through GRI 6 do not implicate the use of the product and most classifications are resolved by the application of GRI 1. Because of these two distinct analytic approaches, the Federal Circuit has repeatedly said that it will not read a use limitation into an eo nomine provision unless the name of the article inherently suggests a type of use.

That last bit about the name of the article suggesting a use is the problem here. In its original opinion, the Federal Circuit latched on to that and said "[O]nce tariff terms have been defined, it may be the case that the use of subject articles defines an articles' identity when determining whether it fits with the classification's scope." From that, the Federal Circuit held that it was appropriate to look to the Additional U.S. Rule of Interpretation to distinguish articles by name based on their use.

This is the heart of the problem the dissenting judges see. It is, to put it in pop culture terms, crossing the streams. We all know that is dangerous.

According to the dissent, "Any suggestion that the ARIs may need to be reached in the context of an eo nomine analysis is foreign to our classification case law, and conflicts with the clear statutory language of the ARIs." Furthermore, the dissent sees sloppy language [Note: that's my term] mixing up "intended use," "predominant use," and "primary use," which does not clarify the analysis. There are two kinds of use: principal and actual. Any use analysis should be based on one or the other.

The majority of the Federal Circuit is not wholly without support. There is an old case called Quon Quon in which the Court of Customs and Patent Appeals took a similar approach. But, that case was under the old TSUS, not the HTSUS and the current GRI and ARI did not control. So, this is a different statutory context. More recently, the Federal Circuit decision in Camelback seems to indicate that use is a factor in some eo nomine classifications. We previously discussed how that case deviated from traditional HTSUS analysis (even though I was OK with the result). The dissent says Camelback is an exception because the addition of the liquid bladder transformed the backpack into something other than what would be within the scope of the eo nomine description. Use was not the primary driver of the decision in Camelbak.

The dissent then makes a very interesting observation: "Indeed, if an eo nomine heading did 'inherently suggest[] a type of use,' it would appear proper to convert it to a use provision." Where have I heard that before? Oh, right here, where I said it. The dissent goes on to say "[I]f, as the majority holds, the subheadings at issue are truly defined by use, the majority should have reconsidered the parties' legal stipulation that the relevant subheadings are eo nomine. A narrower holding that, although the subheadings appear to be eo nomine, they are as a matter of law use provisions governed by the use analysis, would have avoided disruption of our well-settled precedent."

Amen to that.

This case is headed back to the CIT where I have no idea what will happen.

1 comment:

Cole Kain said...

Very interesting issues. From my personal experience, "wood screws" and "self-tapping screws," as well as "machine screws" and "sheet metal screws," etc. all have different common meanings - based upon their use. This coming from someone who cannot complete a DIY project without doing it twice and then only with at least three trips to the hardware store. It seems that all the problems flow from the legal definition of the terms of the statute, which despite the stipulation is the court(s) job. It also seems that the CIT wouldn't be crossing the streams if it determined at the outset that the terms are use provisions, or at least the term "wood screw" is. Fly swatter?