Valuation: A New Hope
Who doesn't like a good value case now and again? Value cases are kind of like Star Wars movies; they pop up once every few years and move the story along a little bit at a time. Sometimes, we get a new perspective from an upstart judge and sometimes a veteran steps back in to right the ship until the inevitable reboot. It seems like it is have been a while since the Court of International Trade weighed in on what constitutes a dutiable addition to value. So, it is a good time for us to catch up on Trimil, S.A. v. United States and see what is truly cannon and what it part of the expanded universe of valuation legends (AKA CBP rulings). And, always remember that the Star Wars saga begins with a trade war.
This needs to be quick, as I am going to the movies soon (as you might have guessed).
Trimil (who, with no judgment, I picture as an individual looking like Watto) is an importer of Armani branded clothing. At the time of entry (including the subsequent reconciliation), Trimil reported the dutiable value of the merchandise as what it paid the manufacturer plus design and advertising fees and a trademark royalty it paid to Armani (or an Armani affiliate). After the entry was finally liquidated, Trimil protested and claimed that the additional fees paid to Armani are not dutiable. Customs and Border Protection denied the protest and Tramil brought suit in the Court of International Trade.
The advertising and design fees were paid for assistance in developing the market for Armani trademarked clothing in the Unites States. The amount of the fee was based on Trimil's net revenue. The trademark license gave Trimil the ability to manufacture, purchase, and sell Armani-labeled products in the United States. The royalty was based on sales. Both sets of agreements included minimum payments. All of the agreements could be terminated if Trimil failed to make the required payments or, I assume, in the case of a blockade of Naboo.
With that in mind, recall that the transaction value of imported merchandise is defined in 19 USC 1401a(b) as the price actually paid or payable for the merchandise when sold for exportation to the United States, plus certain statutory additions. Among the relevant additions is "any royalty or license fee related to the imported merchandise that the buyer is required to pay, directly or indirectly, as a condition of the sale of the imported merchandise for exportation to the United States."
Another relevant addition is an "assist," which is anything of value provided by the buyer free of charge or at a reduced cost that is used in conjunction with the production of the imported merchandise or in its sale for export to the United States. This is 19 USC 1401a(h). Assists can include tangible goods (e.g., raw materials) or services (e.g., design and engineering). However, engineering undertaken in the U.S. is excluded from the dutiable value of an assist.
Customs famously asserts that all amounts paid by the buyer to the seller or in connection with the purchase of the merchandise are presumptively dutiable and the burden is on the importer to show that the amount should be excluded. See, for example, HQ H294766 (May 31, 2018). For the importer to do that, it must show that the payment was for something other than the merchandise and is not one of the additions to value enumerated in the statute. See, e.g., Chrysler v. United States, 17 CIT 1049 (1993)(which is so long ago that I can't find an open link to it, making me feel as old as Yoda).
Regarding the design fees, these are pretty clearly dutiable assists. The fees went to Italian designers who created models, selected fabrics, and reviewed prototypes. Even Trimil agreed these were dutiable. Don't read too much into this. There is a line between dutiable engineering and merely creating drawings or specifications. It has to do with the difference between telling the manufacturer what to make and leaving it to the manufacturer to make the thing and, on the other hand, telling the manufacturer how to manufacture something. The latter is dutiable, the former may not be. See, e.g., HQ 547487 (Jun. 23, 2000). It all makes sense, from a certain point of view.
The advertising fees were paid by Trimil to Armani for Armani's efforts to advertise and market the merchandise in the U.S. The Court noted that the statute is clear on what constitutes part of dutiable value. It states that the transaction value is "the price actually paid or payable for the merchandise when sold for exportation to the United States, plus . . . the amounts attributable to the items (and no others) described in subparagraphs (A) through (E) . . ." 19 USC 1401a(b). Thus, if the advertising fee is not a listed statutory addition, then it is not dutiable. Moreover, the price paid or payable is the amount paid (or payable) to the seller or for the benefit of the seller.
The advertising fee was paid to Armani, not to the seller. Thus, the question was whether it was "for the benefit" of the seller. The Court held that the advertising fee benefitted both Trimil and Armani by supporting the post-importation resale marketing in the U.S. The benefit to the manufacturers is, according to the CIT, tangential to the post-entry benefits to Trimil and Armani.
On top of that, the Court pointed to a CBP regulation specifically stating that advertising and marketing undertaken by the buyer are not indirect payments to the seller and that royalties for copyrights and trademarks paid to a third party are generally selling expenses. 19 CFR 152.103. Based on this, the Court distinguished the advertising fee from a royalty or license and found it to not be a dutiable addition to transaction value.
Next up is the trademark royalty, which was separate from the advertising fee discussed above. Here, the government's position was that because Trimil's right to have the Armani merchandise produced was dependent on its continued payment of the license fee, that fee was for the benefit of the manufacturer. Similar to its analysis of the advertising fee, the Court found this to be too broad of a reading of the statute. In relatively strong language (as these things go) the Court said:
That's a good result for Trimil and for importers. This decision, assuming it stands, adds clarity to the analysis of advertising and royalty expenses paid to third parties and brings balance to the force. It also highlights that the condition of the sale requirement for a royalty to be dutiable cannot be inferred where the manufacturer is unrelated to the owner of the intellectual property. The reality may well be that the manufacturer does not care at all about the trademark owner's interests. Ultimately, that is between the importer and the trademark owner and might play out in an trademark infringement case without impacting the dutiable value of the merchandise.
On the other hand, it is also true that if Armani were to terminate the trademark license, any subsequently produced merchandise imported to the U.S. would be as counterfeit as a Darth Vader motorcycle cop toy and, as a result, subject to seizure. So, don't think for a minute that this valuation decision creates a license (so to speak) to violate trademark agreements with third parties.
This needs to be quick, as I am going to the movies soon (as you might have guessed).
Trimil (who, with no judgment, I picture as an individual looking like Watto) is an importer of Armani branded clothing. At the time of entry (including the subsequent reconciliation), Trimil reported the dutiable value of the merchandise as what it paid the manufacturer plus design and advertising fees and a trademark royalty it paid to Armani (or an Armani affiliate). After the entry was finally liquidated, Trimil protested and claimed that the additional fees paid to Armani are not dutiable. Customs and Border Protection denied the protest and Tramil brought suit in the Court of International Trade.
The advertising and design fees were paid for assistance in developing the market for Armani trademarked clothing in the Unites States. The amount of the fee was based on Trimil's net revenue. The trademark license gave Trimil the ability to manufacture, purchase, and sell Armani-labeled products in the United States. The royalty was based on sales. Both sets of agreements included minimum payments. All of the agreements could be terminated if Trimil failed to make the required payments or, I assume, in the case of a blockade of Naboo.
With that in mind, recall that the transaction value of imported merchandise is defined in 19 USC 1401a(b) as the price actually paid or payable for the merchandise when sold for exportation to the United States, plus certain statutory additions. Among the relevant additions is "any royalty or license fee related to the imported merchandise that the buyer is required to pay, directly or indirectly, as a condition of the sale of the imported merchandise for exportation to the United States."
Another relevant addition is an "assist," which is anything of value provided by the buyer free of charge or at a reduced cost that is used in conjunction with the production of the imported merchandise or in its sale for export to the United States. This is 19 USC 1401a(h). Assists can include tangible goods (e.g., raw materials) or services (e.g., design and engineering). However, engineering undertaken in the U.S. is excluded from the dutiable value of an assist.
Customs famously asserts that all amounts paid by the buyer to the seller or in connection with the purchase of the merchandise are presumptively dutiable and the burden is on the importer to show that the amount should be excluded. See, for example, HQ H294766 (May 31, 2018). For the importer to do that, it must show that the payment was for something other than the merchandise and is not one of the additions to value enumerated in the statute. See, e.g., Chrysler v. United States, 17 CIT 1049 (1993)(which is so long ago that I can't find an open link to it, making me feel as old as Yoda).
Regarding the design fees, these are pretty clearly dutiable assists. The fees went to Italian designers who created models, selected fabrics, and reviewed prototypes. Even Trimil agreed these were dutiable. Don't read too much into this. There is a line between dutiable engineering and merely creating drawings or specifications. It has to do with the difference between telling the manufacturer what to make and leaving it to the manufacturer to make the thing and, on the other hand, telling the manufacturer how to manufacture something. The latter is dutiable, the former may not be. See, e.g., HQ 547487 (Jun. 23, 2000). It all makes sense, from a certain point of view.
The advertising fees were paid by Trimil to Armani for Armani's efforts to advertise and market the merchandise in the U.S. The Court noted that the statute is clear on what constitutes part of dutiable value. It states that the transaction value is "the price actually paid or payable for the merchandise when sold for exportation to the United States, plus . . . the amounts attributable to the items (and no others) described in subparagraphs (A) through (E) . . ." 19 USC 1401a(b). Thus, if the advertising fee is not a listed statutory addition, then it is not dutiable. Moreover, the price paid or payable is the amount paid (or payable) to the seller or for the benefit of the seller.
The advertising fee was paid to Armani, not to the seller. Thus, the question was whether it was "for the benefit" of the seller. The Court held that the advertising fee benefitted both Trimil and Armani by supporting the post-importation resale marketing in the U.S. The benefit to the manufacturers is, according to the CIT, tangential to the post-entry benefits to Trimil and Armani.
On top of that, the Court pointed to a CBP regulation specifically stating that advertising and marketing undertaken by the buyer are not indirect payments to the seller and that royalties for copyrights and trademarks paid to a third party are generally selling expenses. 19 CFR 152.103. Based on this, the Court distinguished the advertising fee from a royalty or license and found it to not be a dutiable addition to transaction value.
Next up is the trademark royalty, which was separate from the advertising fee discussed above. Here, the government's position was that because Trimil's right to have the Armani merchandise produced was dependent on its continued payment of the license fee, that fee was for the benefit of the manufacturer. Similar to its analysis of the advertising fee, the Court found this to be too broad of a reading of the statute. In relatively strong language (as these things go) the Court said:
[M]erely because the fees are paid as part of a series of agreements that touch on all parts of the larger transaction resulting in eventual sale of the clothing in the United States does not somehow make the seller-manufacturers beneficiaries of Trimil’s payment under the Agreements. As with the advertising fees, Trimil paid the fees to third party Armani, and all of the rights and obligations under the contracts accrued to or were performed by the actual parties to the contracts. Again, Trimil’s right to affix Armani trademarks, and resell the clothing in the United States as Armani-trademarked products, provides no quantifiable benefit to the seller manufacturers from the trademark royalty fees paid. The claimed benefit—placement of an order by Trimil with the seller-manufacturers—is too far removed from the payment of the trademark royalty fees to [the Armani affiliate] to make them part of the price actually paid or payable to the seller-manufacturer.That still leaves the question of whether the trademark fee is a royalty, which is explicitly listed in section 1401a as a dutiable addition to value when they are required to be paid as a condition of the sale for exportation to the United States. Here, the issue is whether the trademark royalty paid by Trimil to Armani is a condition of the sale by the unrelated manufacturer to Trimil. The government did not point to anything in the agreement between Trimil and the manufacturer making payment of the Armani royalty to requirement for the purchase of the apparel. The fact that Armani might cancel its agreement with Trimil was not sufficient to make the payment of the royalty a condition of the sale for exportation.
That's a good result for Trimil and for importers. This decision, assuming it stands, adds clarity to the analysis of advertising and royalty expenses paid to third parties and brings balance to the force. It also highlights that the condition of the sale requirement for a royalty to be dutiable cannot be inferred where the manufacturer is unrelated to the owner of the intellectual property. The reality may well be that the manufacturer does not care at all about the trademark owner's interests. Ultimately, that is between the importer and the trademark owner and might play out in an trademark infringement case without impacting the dutiable value of the merchandise.
On the other hand, it is also true that if Armani were to terminate the trademark license, any subsequently produced merchandise imported to the U.S. would be as counterfeit as a Darth Vader motorcycle cop toy and, as a result, subject to seizure. So, don't think for a minute that this valuation decision creates a license (so to speak) to violate trademark agreements with third parties.
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