Otter Products Redux

Way back in 2016, the Federal Circuit affirmed a Court of International Trade Decision finding that certain Otter Products device cases were not "similar to" the items listed in HTSUS Heading 4202, which covers various containers for personal effects including suitcases, camera cases, handbags, bottle cases, jewelry boxes and similar containers. Instead, the phone cases were properly classified as articles of plastic in Chapter 39. You can read my riveting coverage of that decision here. 

In a new(ish) Otter Products decision, the plaintiff asked the Court of International Trade to extend the favorable tariff treatment to entries that had been part of a voluntary prior disclosure to Customs and Border Protection.

My guess is that if you have found your way to this post, you are familiar with voluntary prior disclosures; but lets get that context on the table. An importer has an obligation to exercise reasonable care when reporting information to Customs concerning the merchandise that is coming into the country. That includes its value, which is (usually) the basis for calculating duty. When an importer makes a material false statement or omission that results in an under collection of duties, it is liable for the payments of unpaid duties and also a penalty. Penalties can be significant, ranging from two times the duties owed to the full value of the merchandise, depending on how unreasonable the importer acted.

If an importer is diligent in reviewing its processes and filings with the government, it sometimes discovers past errors. The law, 19 USC 1592(c)(4), states that if the importer notifies Customs of the error before Customs discovers it and commences a formal investigation, the maximum penalty Customs can assess on the importer is the interest owed on the unpaid duties. Voluntary prior  disclosures are, therefore, a valuable tool for importers trying to limit their potential liability. As a matter of policy, Customs encourages importers to make prior disclosures.

Otter made a voluntary prior disclosure to Customs relating to the value it reported for some of its products. As part of the disclosure process, it appears that Otter Products tendered (or was told to tender) unpaid duties based on the incorrect (and very high) rate applicable to goods classifiable in Heading 4202. After Otter products won the litigation, CBP refused to apply the favorable classification to the entries covered by the disclosure and, therefore, refused to refund the over payment. Otter Products went back to the Court of International Trade and asked it to require Customs to refund the excess that it had tendered.

There was a problem for Otter Products: jurisdiction. Its original case, which is what Otter wanted applied to the disclosure, was brought as a challenge to a denied administrative protest. That means it was brought under 28 USC 1581(a). So-called "(a) cases" have very specific parameters. To be properly before the Court, the plaintiff must have validly protested a liquidation and Customs must have denied that protest. Then, within 180 days, the protesting importer can file a summons to commence a case at the Court of International Trade challenging the denied protest. If the litigation is successful, Customs will reliquidate the entries covered by the protest and refund the difference, with interest.

The summons must list the specific denied protests and entries for the Court to have jurisdiction over the claims. That can be done by listing both the protest numbers and the entry numbers, but it is legally sufficient to list one or the other. [Please, do not take that as advice. List them both.] The summons in this case, on the contrary, did not the entries subject to the disclosure ands those entries were not the subject of a denied protest. Consequently, the entries were not properly before the Court and the Court could not grant the requested relief. 

There are a few open questions in my mind. Most important, did Customs make a demand for the payment of duties at the higher rate? If so, it seems possible that the demand (as opposed to the voluntary disclosure) might be a protestable decision. Second, is there any other way to get the excess payment back? There is a 1993 case called Trayco that finds a cause of action in the district courts to recover a penalty improperly collected by Customs. That may not extend to the duties, but is worth a look. There is also the question of whether finalizing the disclosure is a final agency action subject to the Administrative Procedure Act, which can be challenged under 28 USC 1581(i) without a protest. I think that last option has been tried unsuccessfully. None of those were presently before the Court, which specifically declined to opine on whether the disclosure created a protestable decision because no such protest had been made.

The lesson here, and I say this with the benefit of experience, hindsight and a written decision, is that whenever litigation (or even a protest) impacts a disclosure, consider not tendering until the litigation (or protest) is complete and ensure that you are clear with CBP that the resolution of the pending matter impacts the disclosure. You'll need to weigh the chances of success against the additional interest the importer may owe due to the delay. The math might weigh in favor of an early out via the disclosure. Another thing to do is to ensure that any tender to the government is held in a suspense account (which works kind of like escrow) so that refunds can be made if the disclosing party wins in the litigation or protest.

That, I think brings us up to date, which is a relief to me and I hope of use to you. There are a lot of interesting cases in the pipeline including the challenge to Section 301 List 3 and List 4A duties on products of China and a decision on how Customs is to apply substantial transformation to make origin determinations. I promise to post on those and hope to be able to post more regularly.