On Trademarks, Seizures, and Due Process
As you might imagine, U.S. Customs and Border Protection has a lot of enforcement tools in its law enforcement quiver. One of those is to prevent an importer from securing the payment of duty and release of merchandise with a continuous entry bond and, instead, to require a separate bond for every single entry. Hence, the name "single entry bond." Securing a single entry bond is an administrative hassle for the importer.
Another tool available to CBP is setting the bond amount. The higher the bond amount, the more up front cash the importer ties up and the harder it is for the importer to continue in business. At some point, the bond requirement can be so high that no surety will assume the risk as a price the importer can afford. That effectively puts the importer out of the importation business.
Why might CBP do this? Because they do not trust the importer. In the past, for example, enhanced bond requirements have been applied to ensure the collection of antidumping and countervailing duties.
Recently, CBP imposed a single entry bond requirement on a company called U.S. Auto Parts Network, which imports replacement grills for automobiles. According to CBP, U.S. Auto imported or attempted to import 30 shipments of grills that were contained counterfeit merchandise. In response, customs required single entry bonds valued at three times the value of the shipment. In other words, CBP said to U.S. Auto, "We don't think you are doing business in a manner consistent with the law, so we are going to make it very hard for you to continue."
Rather than roll over, U.S. Auto lawyered up and told CBP, "Well, come to think of it, we are not too happy about how you are doing business. In fact, we don't think you are doing business in a manner consistent with the law." The first salvo in this battle, at least at the Court of International Trade, is a motion for a temporary restraining order preventing CBP from imposing the single entry bond requirements. See U.S. Auto Part Network, Inc. v. United States (and a bunch of other named parties).
To understand the larger battle going on here, you need to understand the law regarding trademark enforcement at the border. The Lanham Act is the American trademark law. At section 42, the Lanham Act prohibits the importation any product that copies or simulates the name of a domestic manufacturer or registered trademark in such a way that causes confusion to the public regarding the true origins of the product. In contrast to our normal discussions around the Customs Law Blog, in this context "origin" means the producer or brand owner. Nike, for example, is supposed to be the origin of shoes bearing its swoosh mark. The Tariff Act follows suit and makes counterfeit goods subject to seizure and forfeiture. See 19 USC 1526.
A temporary restraining order is a big deal. It asks the Court to jump in with an order preventing a party from taking some action to prevent an irreparable harm to the movant. To succeed, the movant, in this case U.S. Auto, must show (1) that it will incur irreparable harm in the absence of such order or injunction; (2) that it is likely to succeed on the merits of the action; (3) that the balance of hardships favors the imposition of temporary equitable relief; and (4) that the requested temporary restraining order or injunction is in the public interest. This is the same standard we recently addressed in our Passover edition.
Irreparable harm is the kind of harm that cannot be fixed later through some other remedy such as money damages. Hence, the name (h/t to Brian Garner). According to U.S. Auto, it has not been able to find a surety willing to sign on to the risk of approximately $5 million per week. As a result, it cannot import and its business is effectively winding down. Although the Government characterized this as speculative harm, the Court found it to be a sufficient showing of irreparable harm.
Regarding the relative hardships, the Court balanced the potential end of U.S. Auto's business against CBP's significant expense in resources devoted to inspecting the imports, including the estimated thousands of hours necessary to inspect 90 containers currently at the port of entry. As between these two, the Court found the balance weighs in favor of U.S. Auto. After all, there is no chance of CBP going out of business despite the inconvenience.
The likelihood of success on the merits is, as you might imagine, what makes this interesting. U.S. Auto made four arguments. The first two revolve around the Administrative Procedures Act and the process CBP used to implement the single entry bond requirement. Under the APA, a final agency action can be overturned if, among other things, the action is arbitrary, capricious an abuse of discretion, or not in accordance with law. An agency action can also be overturned if it was taken without the required process.
According to the Court, the record establishes that 99% of U.S. Auto's imports were not suspected of being counterfeits. In other words : U.S. Auto was facing a corporate death sentence for 1% of its imports. That, according to the Court, is contrary to Customs' own mandate to set bond amounts to ensure compliance. And that is enough to show a likelihood of success on the merits of the APA claims.
U.S. Auto's third claim is that Customs' process did not permit the importer an opportunity to challenge the bond amount in a meaningful way. If true, this would be a violation of the fifth amendment requirement that no person is to be deprived of life, liberty, or property without due process of law. At it core, "due process" is notice and a meaningful opportunity to be heard. Although this may seem like a slam dunk, there is a problem. No one has a protected interest (either property or liberty) in continuing to engage in international trade. That precludes a showing of the likelihood of success on this count.
Turning to the public interest, U.S. Auto contends that allowing it to continue in operation while the case is decided on the merits is in the public interest. Specifically, it prevents the likely loss of over 350 jobs and provides the public with a source of cheaper replacement parts. The Government contends that the public is best served through the enforcement of the intellectual property laws and by allowing CBP to better allocate resources. The Court found the public interest favors enforcement of the trade laws.
Because only one of the four factors weighed in favor of the Government, the Court granted the TRO. Under the terms of the order, CBP may continue to require a single entry bond at three times the value of the portion of the shipment believed to be counterfeit merchandise. In other words, CBP may impose the enhanced bond requirement on the 1%, not the 99% of U.S. Auto's imports.
I'll tell you right now: this is an important and interesting case to watch. A related issue is being litigated in the Federal District Court in Delaware, where LKQ Corporation and Keystone Automotive Industries are challenging CBP's conclusion that replacement automotive grills are counterfeit. In that case, the importers are arguing that the doctrine of functionality prevents the grills from infringing trademarks.
Note that the trademarks involved are the shape and configuration of the grills, not the corporate or model logo affixed to the car. BMW, for example, has a distinctive grill that is reminiscent of spread wings or of kidneys, depending on your sensibilities. That design is a registered trademark.
The doctrine of functionality holds that a product configuration cannot be treated as a trademark where the feature is essential to the function of the article or is competitively necessary to use the feature in the market place. The argument in this case is that an aftermarket replacement grill for a BMW, for example, must be shaped to fit the vehicle. Furthermore, no one would buy a replacement grill for a fancy BMW that did not look like the original. As such, the replacement grills are protected by the doctrine of functionality. That means they do not infringe the trademarks or the trademarks are invalid as applied to the replacement parts.
On the other hand, motor vehicle grills are immediately identifiable. That is why this vehicle sets off so much cognitive dissonance. You know that Rolls grill does not belong on that VW bug.
It is important to note that these cases are about the parts. This is not about some knock-off car manufacturer using the BMW grill on a car in a way that would confuse the car buyer of the source of the car. That would likely be infringement. Also, my assumption here is that the buyers of the replacement grills are not being led to believe that they are buying BMW OEM parts. That is a question of fact going to the way the sale is made and the products packaged.
Another important question is whether trademarks are even the proper tool to protect these parts. The LKQ complaint notes that design patents are available to protect the non-functional aspects of industrial design and that design patents have a limited life. That is a contrast to trademarks, which can be perpetual as long as they are used.
If the plaintiff's successfully show that there is no infringement, then the seizures are not legal and the plaintiffs should be free to continue their businesses without CBP interference. Of course, invalidating a trademark is a big deal. The rights holders will not take this threat to their business without a fight. Thus, this is shaping up to be a customs law case with major collateral impact. So, keep watching.
Also, I should point out that all three companies in both suits are represented by the same intellectual property boutique. So, this is a well coordinated strategy. That will also make this fun to watch.
As a side note to the plaintiffs' lawyers, should it come up, please go strong toward overturning the argument that there is no property interest in continuing an established business that depends on international trade. It seems that the government should not be able to effectively kill a company without the owners and beneficiaries of the enterprise having a constitutional right to be heard. Sometimes when something feels wrong, it turns out it feels that way for a reason.
Another tool available to CBP is setting the bond amount. The higher the bond amount, the more up front cash the importer ties up and the harder it is for the importer to continue in business. At some point, the bond requirement can be so high that no surety will assume the risk as a price the importer can afford. That effectively puts the importer out of the importation business.
Why might CBP do this? Because they do not trust the importer. In the past, for example, enhanced bond requirements have been applied to ensure the collection of antidumping and countervailing duties.
Recently, CBP imposed a single entry bond requirement on a company called U.S. Auto Parts Network, which imports replacement grills for automobiles. According to CBP, U.S. Auto imported or attempted to import 30 shipments of grills that were contained counterfeit merchandise. In response, customs required single entry bonds valued at three times the value of the shipment. In other words, CBP said to U.S. Auto, "We don't think you are doing business in a manner consistent with the law, so we are going to make it very hard for you to continue."
Rather than roll over, U.S. Auto lawyered up and told CBP, "Well, come to think of it, we are not too happy about how you are doing business. In fact, we don't think you are doing business in a manner consistent with the law." The first salvo in this battle, at least at the Court of International Trade, is a motion for a temporary restraining order preventing CBP from imposing the single entry bond requirements. See U.S. Auto Part Network, Inc. v. United States (and a bunch of other named parties).
To understand the larger battle going on here, you need to understand the law regarding trademark enforcement at the border. The Lanham Act is the American trademark law. At section 42, the Lanham Act prohibits the importation any product that copies or simulates the name of a domestic manufacturer or registered trademark in such a way that causes confusion to the public regarding the true origins of the product. In contrast to our normal discussions around the Customs Law Blog, in this context "origin" means the producer or brand owner. Nike, for example, is supposed to be the origin of shoes bearing its swoosh mark. The Tariff Act follows suit and makes counterfeit goods subject to seizure and forfeiture. See 19 USC 1526.
A temporary restraining order is a big deal. It asks the Court to jump in with an order preventing a party from taking some action to prevent an irreparable harm to the movant. To succeed, the movant, in this case U.S. Auto, must show (1) that it will incur irreparable harm in the absence of such order or injunction; (2) that it is likely to succeed on the merits of the action; (3) that the balance of hardships favors the imposition of temporary equitable relief; and (4) that the requested temporary restraining order or injunction is in the public interest. This is the same standard we recently addressed in our Passover edition.
Irreparable harm is the kind of harm that cannot be fixed later through some other remedy such as money damages. Hence, the name (h/t to Brian Garner). According to U.S. Auto, it has not been able to find a surety willing to sign on to the risk of approximately $5 million per week. As a result, it cannot import and its business is effectively winding down. Although the Government characterized this as speculative harm, the Court found it to be a sufficient showing of irreparable harm.
Regarding the relative hardships, the Court balanced the potential end of U.S. Auto's business against CBP's significant expense in resources devoted to inspecting the imports, including the estimated thousands of hours necessary to inspect 90 containers currently at the port of entry. As between these two, the Court found the balance weighs in favor of U.S. Auto. After all, there is no chance of CBP going out of business despite the inconvenience.
The likelihood of success on the merits is, as you might imagine, what makes this interesting. U.S. Auto made four arguments. The first two revolve around the Administrative Procedures Act and the process CBP used to implement the single entry bond requirement. Under the APA, a final agency action can be overturned if, among other things, the action is arbitrary, capricious an abuse of discretion, or not in accordance with law. An agency action can also be overturned if it was taken without the required process.
According to the Court, the record establishes that 99% of U.S. Auto's imports were not suspected of being counterfeits. In other words : U.S. Auto was facing a corporate death sentence for 1% of its imports. That, according to the Court, is contrary to Customs' own mandate to set bond amounts to ensure compliance. And that is enough to show a likelihood of success on the merits of the APA claims.
U.S. Auto's third claim is that Customs' process did not permit the importer an opportunity to challenge the bond amount in a meaningful way. If true, this would be a violation of the fifth amendment requirement that no person is to be deprived of life, liberty, or property without due process of law. At it core, "due process" is notice and a meaningful opportunity to be heard. Although this may seem like a slam dunk, there is a problem. No one has a protected interest (either property or liberty) in continuing to engage in international trade. That precludes a showing of the likelihood of success on this count.
Turning to the public interest, U.S. Auto contends that allowing it to continue in operation while the case is decided on the merits is in the public interest. Specifically, it prevents the likely loss of over 350 jobs and provides the public with a source of cheaper replacement parts. The Government contends that the public is best served through the enforcement of the intellectual property laws and by allowing CBP to better allocate resources. The Court found the public interest favors enforcement of the trade laws.
Because only one of the four factors weighed in favor of the Government, the Court granted the TRO. Under the terms of the order, CBP may continue to require a single entry bond at three times the value of the portion of the shipment believed to be counterfeit merchandise. In other words, CBP may impose the enhanced bond requirement on the 1%, not the 99% of U.S. Auto's imports.
I'll tell you right now: this is an important and interesting case to watch. A related issue is being litigated in the Federal District Court in Delaware, where LKQ Corporation and Keystone Automotive Industries are challenging CBP's conclusion that replacement automotive grills are counterfeit. In that case, the importers are arguing that the doctrine of functionality prevents the grills from infringing trademarks.
Note that the trademarks involved are the shape and configuration of the grills, not the corporate or model logo affixed to the car. BMW, for example, has a distinctive grill that is reminiscent of spread wings or of kidneys, depending on your sensibilities. That design is a registered trademark.
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| Source: Motor Trend |
On the other hand, motor vehicle grills are immediately identifiable. That is why this vehicle sets off so much cognitive dissonance. You know that Rolls grill does not belong on that VW bug.
It is important to note that these cases are about the parts. This is not about some knock-off car manufacturer using the BMW grill on a car in a way that would confuse the car buyer of the source of the car. That would likely be infringement. Also, my assumption here is that the buyers of the replacement grills are not being led to believe that they are buying BMW OEM parts. That is a question of fact going to the way the sale is made and the products packaged.
Another important question is whether trademarks are even the proper tool to protect these parts. The LKQ complaint notes that design patents are available to protect the non-functional aspects of industrial design and that design patents have a limited life. That is a contrast to trademarks, which can be perpetual as long as they are used.
If the plaintiff's successfully show that there is no infringement, then the seizures are not legal and the plaintiffs should be free to continue their businesses without CBP interference. Of course, invalidating a trademark is a big deal. The rights holders will not take this threat to their business without a fight. Thus, this is shaping up to be a customs law case with major collateral impact. So, keep watching.
Also, I should point out that all three companies in both suits are represented by the same intellectual property boutique. So, this is a well coordinated strategy. That will also make this fun to watch.
As a side note to the plaintiffs' lawyers, should it come up, please go strong toward overturning the argument that there is no property interest in continuing an established business that depends on international trade. It seems that the government should not be able to effectively kill a company without the owners and beneficiaries of the enterprise having a constitutional right to be heard. Sometimes when something feels wrong, it turns out it feels that way for a reason.
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