Results for Compliance

Archaeological Pieces Under 9705 HTSUS

July 05, 2018
As of July 1, 2018, importers of archaeological pieces have to report their merchandise to U.S. Customs and Border Protection with new detail. That is because the U.S. has added a new statistical breakout for these items and two related statistical notes.

Prior to January of 2018, Heading 9705 provided, in its entirety:

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For people who trade in these items, those who study the legal and illegal trade in antiquities, and (presumably) enforcement agencies, lumping archaeological, historical, and ethnographic pieces together did not provide adequate detail about what is entering the country. As previously drafted, 9705.00.0070 covered items as diverse as a 1936 Bugatti race car and an Egyptian Stone Ushabti  from the 18th Dynasty.

Working on behalf of the U.S. Committee of the Blue Shield and with the support of several interested not-for-profit entities, we asked the 484(f) Committee to further divide this provision to separately identify, in particular, archaeological items.  The result is a new level of detail on the treatment of the items in Heading 9705 and new statistical notes to add clarity to the language. As a side benefit, there is now also a recognition that coins can, depending on age and how they were collected, constitute archeological pieces.

The new 9705 reads as follows:

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Note that the subheading for coins now includes the limitation "other than archaeological pieces." Beyond that, there are new breakouts at .75 for archaeological pieces and .80 for ethnographical pieces. Both breakouts reference statistical note 1, which reads:

For the purposes of statistical reporting number 9705.00.0075, "Archaeological pieces" are objects of cultural significance that are at least 250 years old and are of a kind normally discovered as a result of scientific excavation, clandestine or accidental digging or exploration on land or under water. For the purposes of statistical reporting number 9705.00.0080, "Ethnographic pieces", which may also be called "ethnological pieces" are objects that are the product of a tribal or nonindustrial society and are important to the cultural heritage of a people because of their distinctive characteristics, comparative rarity or their contribution to the knowledge of the origins, development or history of that people. See Customs and Border Protection (CBP) Informed Compliance Publication on "Works of Art, Collector's Pieces, Antiques, and Other Cultural Property".

To ensure that the reporting of archaeological pieces is not obscured in sets or collections imported as a whole, the tariff includes new statistical note 2, which reads:

For statistical reporting of merchandise provided for in subheading 9705.00.00, collections made up of articles of more than one type of cultural property, i.e., zoological, biological, paleontological, archaeological, anatomical, etc., shall be reported by their separate components in the appropriate statistical reference numbers, as if separately entered.
These new data present some important opportunities. To the extent importers are properly reporting the full tariff item and statistical suffix at the time of entry, Customs and Border Protection will have better data to focus on imports that might be subject to restrictions under the 1970 UNESCO Convention on the Means of Prohibiting and Preventing the Illicit Import, Export, and Transfer of Ownership of Cultural Property. That Convention is implemented in the U.S. as the Convention on Cultural Property Implementation Act ("CCPIA"), 19 USC 2601-2613 and in customs regulations at 19 CFR 12.104-12.109. Under these laws and regulations, the U.S. can extend protection to archaeological and ethnological materials from States that have ratified the Convention and for which the United States has entered into a bilateral agreement.  There is also a mechanism to unilaterally extend emergency protection. Covered items cannot be imported to the United States without documentation showing that their exportation was not in violation of the laws of the originating State or that their importation was otherwise permitted under the CCPIA.

For products not properly declared as archaeological or ethnographic pieces using the correct statistical suffix, the failure to do so might expose the importer to penalties under the customs laws. This is not new, but by separating archaeological and ethnographic pieces from historical pieces, an importer will not be able to assert that it item is a historical piece to disguise its true nature while reporting the correct statistical suffix covering historical pieces as well as archaeological and ethnographic pieces. The importer will now have to pick one and get it right.

While it is true that errors in statistical reporting do not usually result in a customs penalty, this circumstance is different in that the correct reporting goes to admissibility of the merchandise. For items subject to protection under the CCPIA--including those from Iraq and Syria that are protected under special legislation--admissibility depends on the documentation showing legal exportation. The new reporting requirements should help to flag those items and give Customs an additional point of enforcement action.

Why does this matter? Mainly because regardless of the source or nature of the item, the United States, as a party to the Convention has made a policy decision that it wants to help countries preserve their cultural heritage by working to reduce illicit trade in these items. On top of that, there is strong evidence indicating that the illegal sale of looted artifacts has been a source of operating income for terrorist organizations and that this has resulted in significant destruction to priceless sites. See, for example here and here. We are hopeful that these and possibly future changes to the HTSUS will provide Customs, researchers, and traders with better data from which to monitor legal and prevent illegal trade in cultural property.
Archaeological Pieces Under 9705 HTSUS Archaeological Pieces Under 9705 HTSUS Reviewed by Unknown on July 05, 2018 Rating: 5

Let's Talk About Bugs

June 26, 2018
The United States Department of Agriculture has the important obligation to protect American farms, orchards, forests, parks and backyards against the damage that can be caused by plant diseases and pests that enter the United States through our ports of entry. This is derived from the Plant Protection Act, 7 USC 7701. For commercial importers, the most common pest vector is the humble wooden pallet, which can house and transport a number of pests including horntails (AKA wood wasps).

From http://mobugs.blogspot.com/
The problem with these critters and many like them is that they bore into trees to lay eggs. That can result in bugs emerging from processed lumber or even from completed structures.

When pests are discovered by Agriculture Inspectors at port of entry, the USDA will issue an Emergency Action Notice. Generally, the EAN requires that the offending shipment be turned around and exported from the U.S. 7 CFR 319.40-3. To prevent that from happening, the USDA has adopted a system under which wood packing material may be imported if there is adequate evidence of it having been treated to prevent infestation. The required treatment must be consistent with the international ISPM-15 standard and the material must be marked accordingly.

There has been a lot of recent enforcement action on this of late. In September, CBP issued a notice stating that "to motivate" compliance, it was alerting the trade that CBP may issue penalties for single violations. This was a change from the prior practice of not issuing a penalty until there had been five violations. CBP further noted that there would be no yearly reset for calculating repeat violations. See CSMS #17-000612 (Sep. 26, 2017).

One company that ran afoul of the wood packing material ("WPM") rules is Andritz Sundwig GmbH. Andritz imported $39.5 million in machinery for the production of steel and aluminum in two shipments. For each shipment, it received an Emergency Action Notice demanding the exportation of the cargo. Rather than comply with the EAN, Andritz filed a protest challenging the exclusion and requested accelerated disposition to get the case before the U.S. Court of International Trade. The resulting case is Andritz Sundwig GmbH v. United States.

Andrtiz asked the Court to review the denial of the protest and the demand for immediate exportation. Andritz also asked for declaratory judgment that the EANs are invalid. Andrtiz wanted the Court to order CBP to permit the merchandise to be separated from the WPM and the WPM fumigated.

In response, the United States moved to dismiss the case on the grounds that the Court of International Trade lacked subject matter jurisdiction over the dispute.

In most cases, a denied protest is subject to review at the CIT. That is usually non-controversial. However, a protest of the exclusion of merchandise is slightly different than the typical protest over classification, value or rate of duty. Exclusion can only be protested when it is "under any provision of the customs laws." 19 USC 1514(a)(4).

The authority for the EAN, according to the CIT, is not the "customs laws." Rather, it is the Plant Protection Act. The EAN states that the Department of Agriculture is the supervisory agency involved. As a result, the CIT held the denied protest was not properly before it. Moreover, the case was not within the Court's residual jurisdiction, which also relates generally to tariffs, duties, quantitative restrictions (other than for public health and safety) and the administration thereof.  The case belongs in the U.S. District Court for the Southern District of Texas, to which the case was transferred.

One thing to note is that the CBP administrative message notes that a penalty for an EAN would be issued pursuant to section 1592 or section 1595a of Title 19 of the U.S. Code. Title 19, as you likely know, is "Customs Duties," and penalty cases (at least under 1592) are routinely before the CIT. This makes me think that the CIT has not seen the last case involving an APHIS penalty.

Also, as a matter of grammar, I am not following the government's lead and stating that goods subject to an EAN must be re-exported. To me, that implies that they merchandise was previously exported from the U.S. I think the better usage is that the goods need to be exported, for the first time. Anyone have a reason why I am wrong about that?
Let's Talk About Bugs Let's Talk About Bugs Reviewed by Unknown on June 26, 2018 Rating: 5

Recently, On Discovery

December 31, 2017
This has nothing to do with Michael Burnham or tardigrades.
Discovery disputes are pretty uncommon in the Court of International Trade, and for good reason. Most CIT cases, these days, are “on the record” reviews of antidumping and countervailing duty decisions from the Department of Commerce or International Trade Commission. Those cases do not involve discovery about which to have a dispute. Most customs cases are tariff classification cases in which there is not often a real dispute about the nature of the imported product. That means the cases turn on questions of law, not fact, thereby limiting the genuine (if not perceived) need for discovery.
Penalty cases area a whole different world. In penalty cases, the Department of Justice is often trying to figure out what happened and, more important, what it can prove. That means penalty cases often involve a lot of discovery requests from the government directed at the defendant and its personnel. For its part, the defendant often wants to know what the government THINKS happened and what the government THINKS it can prove. As a result, the defendant often seeks discovery of, among other things, Customs and Border Protection’s or Homeland Security Investigation’s Report of Investigation, which is the extremely tedious document that details the government’s investigation into the alleged violation. While the defendant is at it, the defendant will usually request any other relevant documents it thinks might exist and illuminate what has been happening.
The CIT Rules permit the use of the same discovery tools as are available in any U.S. District Court. Among those are depositions (Rule 30), interrogatories (Rule 33), and requests to admit (Rule 36). A party that believes a request has exceeded the permitted scope of discovery may move for a Protective Order to halt or limit the allege discovery abuse (Rule 26(c)).
Two recent decisions from the Court of International Trade have waded into the scope of permitted discovery. Both decisions are in the case United States v. Greenlight Organics, Inc. (slip op. 17-167 and 17-168).
The first decision involves Greenlight’s motion to compel the United States to produced 145 documents over which the government has asserted privilege. As background, the United States produced 2,861 documents, withholding 145. For those 145, as required by Rule 26(b)(5)(A), it provided a privilege log identifying the document along with its sender, recipient, date, subject, and the privilege claimed.
In this case, the government asserted the “deliberative process” and “law enforcement” privileges. These privileges protect the deliberations of agency officials from disclosure and encourage frank discussions of legal and policy matters related to the law enforcement decision-making process. Once the government successfully asserts the privileges, the burden shifts to the requesting party to show a “compelling need” to overcome the privilege.
To make a successful claim of these executive privileges, the government must do more than merely assert it. Following a decision of the U.S. Court of Appeals for the DC Circuit, Landry v. F.D.I.C., the Court of International Trade held that the government must:
1.       Make a formal claim of privilege via the head of the agency or his or her delegate;
2.       Submit an affidavit showing “actual personal consideration by that official;” AND
3.       Provide a detailed explanation of what the document is and why it falls within the scope of the privilege.
In this case, the government failed to submit the required affidavit. Having failed to do so, the United States has failed to successfully assert the privilege. Consequently, the Court ordered the United States to do so before ruling on the merits of the privilege claim.
Given the lack of a fully asserted claim for privilege, the Court found it premature to rule on Greenlight’s request for in camera review of the documents. In camera review is where the judge requires the party to produce documents for her private review so that the judge can make a fully informed decision on the merits of the claim of privilege and the other party’s need for production. The Court also declined to act on Greenlight’s motion to compel production.
The second Greenlight decision involves two competing motions. In the first, the United States seeks to compel responses to several discovery requests. The second involves Greenlight’s motion for a protective order preventing much of this inquiry by the government.
Here, I am going to cut to the chase so that I can discuss the underlying issue, which is, to my mind more important for the average reader of this blog. The government’s requests go to the personal involvement of the two corporate principals in the classification and valuation of the imported merchandise. In other words, the requests appear directed at determining whether those individuals were responsible for the alleged fraud or negligence. The requests also go to the personal finances of those individuals.
This should send a shiver of concern up the spine of corporate officers and compliance personnel. Greenlight Organics is the defendant in this case, not the individual officers. However, as a reminder, the dustup surrounding the 2014 Federal Circuit decision in Trek Leathermeans that “any person” can be liable for a violation of Section 1592, the customs penalty law. Thus, the individuals, acting as agents for the actual importer Greenlight, might be personally liable for their actions related to the alleged violation.
Because of this legal reality, the government asserted that its questions about the two individuals were related to the case against Greenlight and also to the possibility of claims against the individuals. The first part makes sense. If an officer or employee of Greenlight made a material false statement or omission, then Greenlight is liable for the violation. If that person made the false statement knowing it to be false, then Greenlight would potentially be liable for fraud—the highest level of culpability under the statue. Consequently, the Court allowed the inquiry into the personal involvement in the suspect decisions.
But what about claims against the individuals and the requests for personal financial information? Greenlight objected to these questions because the two individuals are not defendants in the case. The complaint, which sets out the plaintiff’s claims, does not allege individual wrongdoing or individual liability. According to Greenlight, that makes this line of inquiry outside the scope of the complaint and, therefore, outside the scope of appropriate discovery.
The Court disagreed. Citing Supreme Court precedent, the Court of International Trade noted discovery rules are liberally interpreted to permit discovery on any matter that may bear on an issue that is or may bean issue in the case. Discovery, in other words, is not limited to the complaint. According to the government, that is the point. It explicitly stated that it wanted the discovery “to assist it with determining whether to amend its complaint to include charges of individual liability against Greenlight’s officers.” According to the Court, this falls within the liberal nature of discovery and is, therefore, appropriate.
Because of all this, Greenlight’s motion for a protective order preventing much of this effort was denied.
So what is the take away from this? First, it is a reminder that the government can and will pursue charges against individuals for corporate imports. That underscores the importance of compliance generally and, for compliance personnel, the importance of documenting efforts to correct non-compliance by, when necessary elevating the issue to upper management. Second, these decisions are an important reminder that in a de novo penalty case, the original complaint does not fix the scope of the claims that can be brought by the United States.
But, is that the right result? A couple things make me wonder. First, Rule 26 sets out the scope of discovery. As presently constructed, the Rule allows discovery:
regarding any nonprivileged matter that is relevant to any party’s claim or defense – including the existence, description, nature, custody, condition, and location of any documents or other tangible things and the identity and location of persons who know of any discoverable matter. For good cause, the court may order discovery of any matter relevant to the subject matter involved in the action. Relevant information need not be admissible at the trial if the discovery appears reasonably calculated to lead to the discovery of admissible evidence.
I have always read the Rule’s focus on claims and defenses as limiting discovery to joined issues. That means claims and defenses as reflected in the complaint and the answer. That is, of course, inconsistent with the result here, so it is not legal advice. I thought discovery was only permitted on  matters related to the subject matter of the action but not related to a claim or defense “for good cause.” Again, that appears to be an incorrect reading.
It is worth noting that the U.S. Federal Rules of Civil Procedure used in the districts courts modified the corresponding FRCP 26 to remove the good cause test and also removed the condition that “information need not be admissible at the trial if the discovery appears reasonably calculated to lead to the discovery of admissible evidence.” See FRCP 26. The CIT rules will probably make a similar change at some point. What, if any, impact that has on the future application of CIT Rule 26 remains to be seen. It appears to indicate that the focus remains on claims and defenses while laying on top of that a condition that the request be proportional to the stakes of the case. 
A second issue has to do with the nature of the action. A penalty case in the Court of International Trade is not an empty hook on which the United States can hang any theory of liability against the importer and the individuals involved. Rather, it is a collection case in which the United States seeks to recover the penalty Customs already assessed in the administrative process. Absent a perfected administrative claim against an individual or entity, there is no claim to assert in Court. The only de novo aspects are that the Court decides whether the United States has proven in court the facts necessary to substantiate the already asserted claim. Based on the facts proven in court, the CIT can order the defendant to pay the full claim, a lesser amount, or nothing at all. This is the rule of exhaustion of administrative remedies in a penalty case as explained in United States v.Nitek Electronics, Inc., and UnitedStates v. Optrex America, Inc.
Discovery is a preliminary stage of litigation. A lot can and still might happen in this case as it proceeds. If new claims are brought, the Court may be asked to address the question of whether the claims were properly perfected at the agency level. There may also be questions of whether the statute of limitation has expired on any new claims. This could come in the form of a motion to dismiss or motion for summary judgment.
For now, we know that the discovery rules are to be liberally construed and that Greenlight will likely have to turn over the requested information. We also have a stark reminder of the importance of legal compliance both for corporate entities and for individuals. The rule of Trek Leather is that Customs need not pierce the corporate veil to assert liability against individuals who were personally involved in making material false statements or omissions. Continue to document your compliance efforts and push back wherever you perceive potential non-compliance.
There is certainly more to follow in this case.

Recently, On Discovery Recently, On Discovery Reviewed by Unknown on December 31, 2017 Rating: 5

Welcome to Android & CustomsMobile

November 04, 2017
This is going to be one of my old-school posts mostly about something other than customs law. It is about my history with mobile devices and my current heartache. Deal with it. At the end, I get to a more relevant review of the CustomsMobile app.

Around 2001, I used something called a Handspring Visor with a VisorPhone attachment. It was basically a Palm Pilot with a slot for extension modules, and its was both functional and cool.


When that stopped being cool, around 2004 I switched over to a Palm Treo 650. That was a great device. It was compact, had a web browser and, if I remember right, would sync with my work email and contacts. That was great until a guy I know doused it in coffee. I wrote about that in 2005. In 2006, I replaced that with a new Treo 700p, which I also wrote about. That post garnered one of my favorite comments ever, from then-New York Times tech columnist David Pogue.

After that, I had brief dalliance with Android in the form of a Motorola Droid A855. One of the original "Droids," that was set by default to loudly say "Droid" as a notification. I actually still have that phone. It is surprising small and heavy. It has a sliding, physical keyboard that is so small I am surprised I ever considered it usable.

Then came Windows Phone 7 on a Samsung Focus. Watch this ad.


I stuck with Windows Phones from then on. I had a terrific Nokia Lumia 920. That was a solidly build, beautifully designed phone that worked exactly as expected with Windows Phone 8 and 8.1. Beyond the main interface and its "live tiles," a unique thing about Windows Phone at that point was that it pulled together lots of feeds into hubs. If I looked at a person in my People Hub, I would see their online activity across Facebook and Twitter, plus emails and text messages. Or, something like that. It has been a while but it worked well.

When Windows Phone 10 became a thing, my 920 would not do the upgrade and I moved on to a Lumia 950. Again, this was a rock solid, if somewhat underwhelming design. For a "flagship" phone, it was surprisingly modest. Still, it worked beautifully and integrated perfectly with all of my work functions. Having Office programs on the phone meant I could easily edit Word and PowerPoint documents on the fly and Outlook had complete access to my contacts and calendar.

I know that by 2015 there were plenty of ways to accomplish all this on an iPhone or Android device, but the simplicity of being in one ecosystem was efficient and appealing. On top of that, I still enjoy the live tiles and the overall user interface. Cortana, the built in virtual assistant is surprisingly helpful, automatically noting things like booked flights and package deliveries. For a while, I was half-jokingly proud to say I was one of the 1% of Americans who understood how a decent mobile device should look and work.

The problem with being a one percenter is that few developers will produce software for your platform. This lead to the so-called app gap between Windows devices and iOS and Android. Overtime, the apps available for my bank, my pharmacy, my airline of choice, and others either disappears or were left orphaned with no new features and no support. Other apps never appeared at all. That is true for paying parking meters, hailing cabs, controlling my internet connected home thermostats, and other basic functions. For the most part, I was able to live without these apps. Much of the functionality of the apps can be accomplished through the company's mobile site, but it is not quite as easy as a single click to launch the app.

Then three things happened almost simultaneously. First, I had to buy a car. The new car includes iOS and Android connectivity and balked at my Windows Phone, calling it an "incompatible" device. I could use the basic Bluetooth compatibility, but I felt somewhat disrespected by my own car. At about the same time, a high-ranking exec at Microsoft went on the record saying that the continued development of new features for what is now called Windows Mobile is not a priority for the company. He also said he personally uses an android device to benefit from the availability of apps. A short time later, Microsoft announced that it would end its Groove music streaming service (though not the player software). I don't actually use the streaming service, but this seemed like a further retreat from mobile.

At that point, I was done. Today, I am carrying an LG V30 Android phone. For the most part, I dislike the user interface tremendously. I find that that it takes more swipes and presses to accomplish some tasks. But, I have loaded the Microsoft Launcher and all the Microsoft applications to get most of the same level of integration with my work systems. I linked my phone to the new Fall Creators Update version of Window, giving me notifications on my PC. So that is good. I also now have full compatibility with my car and a second app to manage charging (it's a plugin hybrid). And, I have regained access to the formerly missing apps including tickets for my commuter rail so that I may no longer be the last guy on board with a paper ticket. I guess that is good.

I still miss my 950. Cortana, the Windows virtual assistant, is available on Android but requires more steps to activate, which is too bad. I wish Microsoft had been able to create a third ecosystem in consumer mobile devices. It appears that its current plan is to try to coopt Android as much as possible, which I guess is a good business play.

Which brings me to CustomsMobile, which my Android phone now has installed as an app. If you are a customs lawyer or compliance pro, this is an extremely useful app. The app is basically an information aggregator that puts key customs information on your phone.

For me, the key components are likely to be rulings and the HTSUS. Rulings are up to date and searchable. The app also has several "canned searches," for frequently searched topics such as "responsible supervision" and "NAFTA." Search results can be sorted by relevance or date. The HTSUS is set out by Section and Chapter for easy navigation. It is also searchable. Once in the text, the tariff numbers are links to a rulings search for that provision. That functionality should be familiar to anyone who uses CROSS. The General Rules of Interpretation, along with all the General Notes, are included. One nice value added feature is that the General Notes are given titles, meaning you do not need to remember that General Note 12 is NAFTA and General Note 4 is GSP, for example.

CustomsMobile also contains features that might be of particular interest to lawyers, and not just customs lawyers. Specifically, it has the entirely of the U.S. Code, not just Title 19, and the full Code of Federal Regulations. Once in a search, users can expand or contract the scope from just Title 19 to all titles or particular chapters. For example, a search for "bonds" in CFR Title 19 produces 425 results. Limiting that to Chapter 1, covering CBP, produces 261 results. Limiting that further to Part 133 gets me to the seven relevant provisions for bonds relating to alleged intellectual property violations. Search options include boolean operators, wild cards, word proximity and other useful features. Lawyers who use Lexis or Westlaw will be familiar with these forms of search syntax.

Other info included in CustomsMobile is port contact information, arranged by state and searchable CSMS administrative messages. These are handy and are probably very useful for brokers and compliance professionals. The last chunk of data Customs Mobile includes is AD/CVD messages from the CBP database. These are good to have access to, but do not serve the function that most people want. What would be super useful is a table of deposit rates by order. Right now, you need to go back through Federal Register notices and ADD/CVD messages to try to find rates. I believe, but don't know for certain, that the rates are available in ACE or ABI. After all, brokers must be able to identify that to complete the entry process.

Another source CustomsMobile might consider porting over to the app is the CBP IPR database. This is a searchable database of trademarks and copyrights recorded with Customs for border enforcement. This is handy for anyone looking to make a deal to import branded products from unauthorized sellers overseas.

Does CustomsMobile make me happy that I am now carrying an Android device? No. Does it lessen the pain? Absolutely. It is a valuable tool for quick reference when away from my main computer and that can be a valuable tool. Given that it is free, CustomsMobile belongs on every customs compliance professional's phone.

[Editorial Note: I am aware that blogs sometimes endorse products without disclosing that the blog received promotional consideration. Just to be clear, CustomsMobile did not know I was posting this and did not pay me in any way. Also, just to be clear, I am not opposed to monetizing the blog.]


Welcome to Android & CustomsMobile Welcome to Android & CustomsMobile Reviewed by Unknown on November 04, 2017 Rating: 5

Nairobi Protocol

May 23, 2017
The Court of International Trade has taken an interesting hard look at the Nairobi Protocol to the Florence Agreement on the Importation of Educational, Scientific, and Cultural Materials, which is popularly known as just the Nairobi Protocol. For purposes of Sigvaris, Inc. v. United States, the important point is that the Nairobi Protocol permits duty-free entry to the United States for articles that are specially designed or adapted for the use or benefit of the blind or other physically or mentally handicapped persons. The merchandise at issue here is graduated compression hosiery, arm-sleeves, and gauntlets.

The merchandise is all designed to apply a certain amount of pressure the extremities to help prevent the pooling of blood or other fluids as might happen in people with certain vascular and lymph conditions. The hosiery was designed for use by people with early stage chronic venous disease. The arm sleeves and gauntlets were for people with lymphedema, which causes sever swelling in the arms and is common among women who have undergone a mastectomy.

I’m going to jump to the conclusion here. Legally, a person is said to be handicapped if they have a chronic or permanent condition that results in substantial difficulty undertaking the basic activities of life such as caring for one’s self, walking, speaking, seeing, learning or working. People with early stage chronic vascular disease can experience leg fatigue, heaviness in the legs, varicose veins, and swelling. But, 25% of sufferers experience no symptoms and those that experience symptoms do not have trouble completing basic life tasks. Thus, people with early stage chronic vascular disease are not handicapped for purposes of the law. The hosiery, therefore, is not entitled to duty-free entry under the Nairobi Protocol.
The result is different for lymphedema, which is the inability to circulate lymph fluid. It can result in pain, swelling, and ulcerations. The swelling can be so severe that it results in the inability of the patient to use the affected arm. That is, according to the Court, a handicap. As a result, the compression arm sleeves and gauntlets qualify for duty-free entry under the Nairobi protocol.
That is all well and good. It makes perfect sense and is a good analysis for anyone thinking of using the Nairobi Protocol.

Despite that, I keep returning to a single line in the decision. That line states: “The Court does not give credible weight to the Government’s assertion that a person with one arm is able to perform life’s major activities without substantial limitation.”
I don’t think I have ever written a blog post in which I have criticized a lawyer’s argument. I am hesitant to do so here. But, I really want to explore how that argument got into the briefs. I understand the factually correct assertion that people with one arm are fully capable of independent living. Two things about that fact, though, bear consideration. First, much of that independence may be facilitated by apparatus that would qualify for duty-free entry under the Nairobi Protocol. This would be true, for example, of prosthetic limbs (but not parts thereof). The existence of other Nairobi Protocol material should not undercut the ability of these products to qualify for duty-free importation.

Assuming the argument was that a person with one arm can live and work independently without any mechanical or other technological support, one should wonder what evidence for this proposition the Government provided.
Let’s be 100% clear. I am in no way, shape, or form implying that people with a physical challenge cannot live independent lives without external support. I am also not saying that there are no examples of successful and independent one-armed people. There are. All I am saying, and all the Court said, is that it is not credible to argue that a person with one arm does not have a permanent condition that causes substantial difficulty completing basic life tasks. As I type this post in the cramped quarters of American Airlines coach class, I am struck by the difficulty presented by the prospect of typing with one hand. Dragging a suitcase through an airport with only one arm would make it impossible to simultaneously use a smart phone or carry a drink in the other hand, as is the ubiquitous condition in modern airports. Riding a bike can be done with one hand, but two is far easier and safer. While I think I could drive easily with one arm, I learned just yesterday that I can barely change a tire with two perfectly good arms when one lug bolt is 80% stripped (but that is another story). I am sure that monitoring my daily activities would lead to a long list of tasks that would be far more difficult without two good arms.

My question about this stands: how did it get into the brief? Giving everyone the benefit of the doubt, was there some more subtle argument that was not well conveyed in the opinion? The opinion is thorough, so that does not seem to be the case. Was it the best argument available given the fact that lymphedema sometimes results in the inability to use an arm? If so, did the Department of Justice just go along with Customs and Border Protection’s views?
This matters because it goes to the nature of the relationship between lawyers and clients and to the public policy of the United States. Lawyers sometimes need to tell their clients that the best argument is not good enough, that the law does not support the reality the client wants. That can be a hard conversation, but hard conversations are part of the job. This is, I think, true for all lawyers but especially so for those lawyers who have the privilege of representing the United States government. While a private party, with a purely financial interest in securing a duty refund, might take a shot at a weak argument, the United States should be pursuing arguments that support the policy objectives of the United States while also preserving and protecting the revenue. It is hard to see how proffering the argument that having one good arm is not a handicap that merits the relatively minor impact on the American economy of duty-free access to the market is good public policy.

I would be very happy to be talked out this position. Is there some issue of international harmonization at stake? Is there some evidence of actual fraud? If you have insight into the reasoning, please drop a comment.
Nairobi Protocol Nairobi Protocol Reviewed by Unknown on May 23, 2017 Rating: 5

The "It's May? I Better Catch Up" Edition

May 17, 2017
There have not been many specifically customs-related cases from the courts of late. There have been plenty of rulings, in fact there have been rulings every week. I just have not had a chance to blog them. That is why things have been slow here. I have been tossing out the occasional tweet on agency actions and newsworthy developments. If you are not doing so already, please follow my Twitter feed @customslawblog or check it in the box on this page.

In the meantime, the Court of International Trade issued an opinion in United States v. International Trading Services. This decision is fairly uncomplicated decision the defendant in this penalty case failed to show up and defend itself. If you recall the earlier decision in this matter, you will understand why. The corporate client dissolved, leaving the lawyer, in his mind, without a client to represent. The lawyer tried to formally withdraw from the case but was rebuffed by the Court which held that the legal entity remained subject to suit under Florida law and, therefore, still needs a lawyer.

The underlying penalty here has to do with the incorrect classification of sugar on eight entries. The error resulted in just under $300 thousand in unpaid duties. The United States, on behalf of Customs and Border Protection, moved to collect the duties and a penalty of two times the unpaid amount. The defendant did not respond. As result, there was no real doubt that the Court would impose a penalty. The question was how much.

This is a good decision to read because it very logically walks through the process the Court of International Trade undertakes to assess a penalty. The first question is whether there was a material false statement or omission in connection with the entry of merchandise. A statement or omission is material if it would tend to alter Customs' appraisement or the importer's liability for duties. An incorrect classification that results in the underpayment of duty is material. Once the Court identifies a material false statement or omission, the defendant has the burden of proving that it did not result from negligence, gross negligence or fraud. As the defendants did not respond, the facts asserted in the motion are treated as true. That means there was no question as to liability.

Customs was seeking to recover about $691 thousand in penalties. But, setting the penalty amount is the responsibility of the judge, not Customs. The Court, therefore, walked through the 14 factors set out in a case called Complex Machine Works, which is worth a read for background. Here, Judge Barnett took the very helpful step of grouping those 14 factors into five broader categories. Those are:


  1. The defendant's character
  2. The seriousness of the offense
  3. The practical effect of the imposition of the penalty
  4. The economic benefit gained by the defendant
  5. Public policy concerns
The Court made a couple very important points. First and foremost is that the statutory maximum is not the default starting point for the penalty. The Court must consider the case on a clean plate. Starting at the maximum stacks the deck against the defendant by forcing it to argue down from the most severe penalty rather than having the Court consider the evidence to reach an appropriate result. The Court suggests starting at the midpoint and adjusting up or down as the evidence indicates.

Next, regarding cooperation, potential defendants should recognize that this is more than being pleasant through the course of the investigation. Customs' guidelines suggest mitigation where the defendant has exhibited "extraordinary cooperation beyond that expected from a person under investigation." Note that the CBP guidelines are not binding on the Court, although it did note their existence and apparently gave them some weight.

Related to this, the Court undercut somewhat the common argument that an importer had prior good behavior. This case involved eight separate entries. The Court characterizes this as defendant "serially misclassif[ying] entries accruing to Defendants a significant economic benefit." Does this mean that only the first entry would benefit from prior good behavior? My concern here is that in many cases the importer would not know about the error until several, possibly many, entries took place. Most errors are systematic in nature, not individual. My inclination would be to treat the error as the substantive decision rather than the entry and extend the benefit of good behavior regardless of the number of entries involved. Of course, that is only one of 14 factors, so the impact may be minimal.

Taking all of this into consideration, the Court found the maximum penalty to be appropriate. On top of that, the Court found it appropriate to grant prejudgment interest to the United States. 
The "It's May? I Better Catch Up" Edition The "It's May? I Better Catch Up" Edition Reviewed by Unknown on May 17, 2017 Rating: 5

Ruling of the Week 2017.9: Chronically Late

April 29, 2017
Had I been thinking and available to do it, I would have posted this on April 20. Sorry I am late.

Grab some snacks, because we are about to discuss HQ H282163 (Apr. 13, 2017), which addresses whether a storage case with multiple adjustable compartments and a combination lock closure is prohibited merchandise.

Why would that be the case? It might help to know that the cases go by the name "Stashlogix" and come in three modes: Go-Stash, Eco-Stash and Pro-Stash. In addition to the combination lock, other Stashlogix features include a "stash journal" to "help keep track of all those crazy names," a UV-proof jar that can be re-labeled, odor absorbing packs, and a labeling marker. The products are designed "based on the principles of functionality, security, and discretion." The company advertises that the cases are used to store valuable private items such as fire-arms and addictive pharmaceuticals.

Here is a picture of the "Pro-Stash" case:


As you might have figured out, the question is whether the Stashlogix cases are drug paraphernalia under 21 USC 863. If so, they are prohibited merchandise.

The law defined drug paraphernalia as follows:
any equipment, product, or material of any kind which is primarily intended or designed for use in manufacturing, compounding, converting, concealing, producing, processing, preparing, injecting, ingesting, inhaling, or otherwise introducing into the human body a controlled substance, possession of which is unlawful under this subchapter. It includes items primarily intended or designed for use in ingesting, inhaling, or otherwise introducing marijuana . . . .

The statute contains many examples of drug paraphernalia including variations on pipes, miniature spoons, wired cigarette papers, and cocaine freebase kits. None of the exemplars in the statute are carrying or storage cases. So why is this a problem?

In the ruling, Customs and Border Protection noted that similar UV-proof jars are sold with labels clearly indicating their connection to marijuana and related products. One example is labeled, in part, "THC," which is a reference to "tetrahydrocannabinol," the principal active ingredient in weed. Another UV-proof jar is decorated with a marijuana leaf. 

Customs also noted that one reseller of the bags, a site called 420Science.com, advertises them with other "stash bags" from a company called "Dime Bag," which is clever. Also, a site called The Stoner Mom wrote a favorable review of the Stashlogix cases. According to the review, the cases are "perfect for today's stoner parent."

[As I sit here, it occurs to me that I have been surfing headshops and stoner sites for an hour. For the next six months the internet will probably be serving me adds for all sorts of stonerware.]

The question is whether any of that matters. The Stashlogix bags are discrete. They do not have the stereotypical stoner markings such as pot leaf designs, variations on the flag of Jamaica, and pictures of Shaggy from Scooby-Doo.


Plus, jars are jars. They can be used for anything. If I were a chef, this might be a perfectly good way to protect, organize, transport and store [see what I did there?] spices and other valuable but non-perishable ingredients. Could it also be a travel bag? The jars might be useful for cosmetics and other preparations.

On the other hand, we should not blind ourselves to the reality of these bags. After all, they are called "Stashlogix" for a reason. According to Urban Dictionary, my favorite lexicographical resource, "stash" can refer to a "secret collection such as of drugs, pornography, etc." Also, according to Stoner Mom, the Stash Journals included with the bags are pre-printed with guides for rating the form and strain including categories for edible, oil, and powder, which (I am told) are forms in which weed and weed products can be consumed.

Getting back to the law, the statute also identifies several relevant factors. Those include:
  1. instructions, oral or written, provided with the item concerning its use;
  2. descriptive materials accompanying the item which explain or depict its use;
  3. national and local advertising concerning its use;
  4. the manner in which the item is displayed for sale;
  5. whether the owner, or anyone in control of the item, is a legitimate supplier of like or related items to the community, such as a licensed distributor or dealer of tobacco products;
  6. direct or circumstantial evidence of the ratio of sales of the item(s) to the total sales of the business enterprise;
  7. the existence and scope of legitimate uses of the item in the community; and
  8. expert testimony concerning its use.

Given all of this, the legal question is whether the Stashlogix cases are "primarily intended for use" and "designed for use" in, among other things, concealing a controlled substance. These are to be considered objectively and with respect to the likely use of the item, not a specific or individual use. My example of the well-organized chef, does not help if the most likely use is by the Stoner Mom and her stoner ilk.

So, what is the evidence of intended use and design?

First, the odor absorbing packets are described as providing "discretion." According to Customs and Border Protection, the intent and likely use of these packets is to conceal the odor of weed.

What about the UV-proof jars? Initially, I thought the intent was to preserve the contents by blocking UV light; like putting beer in an amber or green bottle. Apparently, my weed knowledge is limited. According to Customs, the specific type of glass involved here has the capacity to absorb UV light and also X-rays. That means the jars are designed and intended to help conceal, rather than preserve, the contents.

Marketing for the bags did not help. As mentioned, they are sold along side other bags that are more explicitly for the storage of pot by retailers expressly catering to stoners. It is hard to say whether that marketing should be imputed to Stashlogix. The fact that Stoner Mom and other bloggers find the bag useful is not really direct evidence of Stashlogix's design and intent.

On the other hand, Stashlogix does not seem to have gone out of its way to break that association. Stashlogix does not explicitly say it makes and imports stash bags for stoners. It says it provides locking cases for people looking to discretely store private items. Those private items could be prescription medications, weapons, or anything else. A post on its website includes this picture:

Note that the bag seems to contain a wallet, some sunscreen, and other items that do not look to be weed-related. A locking travel bag seems to be very useful at the waterpark or when forced into close quarters with people you don't know particularly well. It could also be very useful at home if someone required powerful medications that should not be left accessible to kids.

Customs did not buy any of that. It seems that the Stoner Mom and 420 Science made this case much harder than it might have been had Stashlogix been able to control its branding. The "Stash" part of its name does not help either. If I were giving the company legal advice, I would drop the stash journals too.

Stashlogix is now in a tough spot. State laws have greatly expanded the ability of Americans to legally access weed. But, it remains subject to federal law. The law prohibits the importation of drug paraphernalia. You might think that Stashlogix could start sourcing its product in the U.S. to avoid the customs issues. Unfortunately, the law also prohibits the use of interstate commerce to transport drug paraphernalia. I hope these guys have a factory in Colorado because if this ruling sticks, that might be the best place to make and also sell the bags.

One interesting aside is that this ruling does not involve customs duties. It goes to whether Stashlogix can do business as an importer. That might be irreparable harm. This might be one of the vary rare cases in which 28 USC 1581(h) would give the U.S. Court of International Trade jurisdiction to review a CBP ruling without the importer having to make an entry and protest the liquidation. 



Ruling of the Week 2017.9: Chronically Late Ruling of the Week 2017.9: Chronically Late Reviewed by Unknown on April 29, 2017 Rating: 5

DiCarlo Lecture at JMLS April 20, 2017

March 30, 2017
I am proud to be moderating the 15th Annual Dominick L. DiCarlo Court of International Trade Lecture at the John Marshall Law School in Chicago on April 20, 2017.

John Marshall's Center for International Law was kind enough to start hosting this program in memory of the important contributions Judge DiCarlo made to the practice of trade law and to the three John Marshall alumni who served him as law clerks. The program will include a conversation with the Honorable Jennifer Choe-Groves about her transition from government and private practice to a judge of the Court of International Trade. We will also talk about the nature of practice before the specialized court. Following the Judge, there will be two informative CLE panels covering developments in trade compliance. Once will focus on developments in supply-chain risks such as the growing use of False Claims Act cases and changes in U.S. sanctions policies. The second panel will focus on numerous aspects of intellectual property protection at the border by U.S. Customs and Border Protection including the scope of 337 exclusion orders and review by the CIT.


DiCarlo Lecture at JMLS April 20, 2017 DiCarlo Lecture at JMLS April 20, 2017 Reviewed by Unknown on March 30, 2017 Rating: 5

Scope: Aluminum Extrusions and Finished Goods Kits

March 30, 2017
Understanding the scope of antidumping and countervailing duty orders is critically important for customs compliance professionals. It does a company no good whatsoever to find a low-cost producer of some product somewhere outside the U.S. only to later discover after importation that the merchandise is subject to an antidumping or countervailing duty. Given that antidumping and countervailing duties are often in excess of 30% and have been as high as 300%, this is a potentially serious concern. If Customs and Border Protection discovers the error and the error resulted from negligence, it can collect the unpaid duties plus penalties covering a five-year period. In some cases, that can be enough to bankrupt a small importer.

Before we get into this case, let me dispel a common misunderstanding. CBP "flags" HTSUS classifications that are potentially subject to an ADD or CVD order. As a result, many brokers and importers manage AD and CVD compliance through tariff classification. If the classification is not flagged, then the assumption is that the product is outside the scope of the order. If it is flagged, ADD and CVD (or both) must be deposited. The worst decision is to assign a different tariff classification to the merchandise in an effort to avoid an ADD or CVD order. That might constitute fraud and probably won't work anyway.

The real question is whether the imported item falls within the description of the merchandise subject to the order in the order itself. Tariff classification numbers are provided as a courtesy, for reference. They do not control scope determination.

That brings us to Meridian Products, LLC v. United States, a recent decision of the U.S. Court of Appeals for the Federal Circuit. The case involves the order covering aluminum extrusions from China. This is a broad order that covers any product of the specified kinds of aluminum provided that the product is made by an extrusion process. It generally covers parts and semi-finished articles. The order specifically excludes some finished goods and finished good kits that contain aluminum extrusions. Relevant to this case, the exclusion for finished good kits states that the order:

excludes finished goods containing aluminum extrusions that are entered unassembled in a “finished goods kit.”  A finished goods kit is understood to mean a packaged combination of parts that contains, at the time of importation, all of the necessary parts to fully assemble a final finished good and requires no further finishing or fabrication, such as cutting or punching, and is assembled “as is” into a finished product.  An imported product will not be considered a “finished goods kit” and therefore excluded from the scope of the [Orders] merely by including fasteners such as screws, bolts, etc. in the packaging with an aluminum extrusion product.
Meridian imported "trim kits" consisting of a decorative frame that surrounds, but does not attach to, large appliances like refrigerators and freezers. The imported kit includes the trim pieces, which are aluminum extrusions, a hexagonal wrench, fasteners, and assembly instructions. I think the trim around the oven in this picture is what we are contemplating:

From MeridianProduct.com


Whether this combination of goods is subject to the orders went to the Court of International Trade not once but four times. The CIT ordered three remands to the  Commerce Department for reconsideration. The CIT interpreted the finished goods kit exclusion as meaning that finished goods are excluded even if those finished goods consist only of aluminum extrusions and fasteners. According to the Court, the overall context of the order indicates that the inclusion of fasteners in the packaging of an unassembled finished good does not void the exclusion. Commerce disagreed, but felt constrained to follow the Court, which is why the issue went to the Court of Appeals.

On appeal, the Federal Circuit disagreed with the Court of International Trade. The primary reason being that the order explicitly limits the finished goods kit exemption. The petitioner and Commerce included that language about fasteners to accomplish something, so the Court needed to apply it. In this case, the application of that language indicates that the finished item to be assembled with the fasteners is not excluded because it is nothing more than the aluminum extrusions and fasteners.

The Federal Circuit also said that ignoring the fastener language renders the order meaningless. Similarly, the Court said that the CIT created inconsistency by reading the order to apply to aluminum parts imported individually but not to the same parts when imported as a kit with fasteners.

Personally, I think the source of the disagreement between the CIT and Federal Circuit is how the order treats finished goods. Before talking about kits, the order says:

The scope also excludes finished merchandise containing aluminum extrusions as parts that are fully and permanently assembled and completed at the time of entry, such as finished windows with glass, doors with glass or vinyl, picture frames with glass pane and backing material, and solar panels. 

This means that aluminum extrusions will not be subject to the orders when entered fully assembled as part of something else, like a picture frame. I think, and this is based on nothing other than trying to reconcile the two opinions, that the CIT viewed this as an indication that finished goods are outside the order whether imported assembled or disassembled. Given the language above, would a disassembled picture frame fall within the scope of the order? Yes, because it is not "fully and permanently assembled." The CIT saw the finished goods kit exclusion as taking care of that issue by permitting the disassembled picture frame to enter as non-scope merchandise, just like the assembled picture frame. I don't think the Federal Circuit would disagree with that result.

The problem is how to treat products that are finished goods consisting of nothing but aluminum extrusions and fasteners. Note that the examples above are all more than just aluminum extrusions. They are windows with glass, doors with glass or vinyl, and picture frames with glass and backing. Based on that, it appears Commerce would find Meridian's trim pieces to be within the scope of the order even if imported assembled. Reading the finished goods kit to exclude the disassembled article that would be in the scope of the orders if imported assembled, creates an anomaly that the Federal Circuit has avoided.

This is an important decision for two reasons. First, if you have scope issues, this decision provides an excellent primer on the scope process and how to analyze orders. Second, if you have been importing finished goods kits, you should reconsider your position. To fall within the exception, there should be more than aluminum extrusions and fasteners necessary to complete the product and everything should be in the box. Note that because the tool and instructions and not part of the finished product, they don't count toward the analysis of the exception.


Scope: Aluminum Extrusions and Finished Goods Kits Scope: Aluminum Extrusions and Finished Goods Kits Reviewed by Unknown on March 30, 2017 Rating: 5

This is a Test: The CPSC Webinar

March 03, 2017
This is a Test: The CPSC Webinar This is a Test: The CPSC Webinar Reviewed by Unknown on March 03, 2017 Rating: 5

Ruling of the Week 2017.5: Copper Scrap

February 05, 2017
There are a number of Chapter 98 tariff items that permit partial duty exemptions for items of the United States that are sent abroad and returned to the United States. Given the current trade rhetoric, it might be worth explaining why that is the case. After all, why give a benefit to companies that send goods abroad for further processing? The short answer is that the duty exemption encourages the use of U.S. origin materials in manufacturing abroad. After all, if there is going to be manufacturing abroad, the U.S. should encourage that it take advantage of U.S.-origin components and materials. The alternative is to manufacture abroad entirely from foreign components.

The HTSUS item at issue in HQ H281950 (Jan. 26, 2017) 9802.00.60, which provides a partial duty exemption for:
Any article of metal (as defined in U.S. note 3(e) of this subchapter) manufactured in the United States or subjected to a process of manufacture in the United States, if exported for further processing, and if the exported article as processed outside the United States, or the article which results from the processing outside the United States, is returned to the United States for further processing . . . .
To qualify, the metal article must be manufactured in the United States. The question presented in this ruling is whether scrap metal collected from industrial production in the U.S. is "manufactured in the United States." The scrap metal at issue here is copper. The question is potentially complicated by the fact that some of the original copper was domestic in origin while some was originally foreign. Some of the scrap will be derived from production processes. Some will just be collected in the form of obsolete U.S-origin wire.

From exportindia.com


 The tariff does not define "manufactured" in this context. In prior rulings, CBP has held that metal is manufactured when it is subject to operations such as "splitting, annealing, milling, rolling, brushing, and leveling." Here, the industrial scap results from the application of those manufacturing processes to copper. As a result, Customs held that the scrap was also manufactured in the U.S.

Customs has also held that the process of making metal into U.S.-origin products is sufficient manufacturing to allow used, obsolete products to be considered manufactured in the U.S. [Note: I realize that seems self-evident, but that's the fact of the matter.]

Consequently, in this case, all of the goods, when re-entering the U.S. after further processing abroad, qualify for the partial duty exemption. There are, of course, documentation requirements. If you are going to try this, look at 19 C.F.R. 10.9.


Ruling of the Week 2017.5: Copper Scrap Ruling of the Week 2017.5: Copper Scrap Reviewed by Unknown on February 05, 2017 Rating: 5

Ruling of the Week 2017.2: Emergency War Material Covers Failed NAFTA Claim

January 13, 2017
I like this ruling. It is HQ H273101 (Nov. 4, 2016).

This is a case where the importer made a NAFTA claim. When asked by Customs and Border Protection, the importer either could not or just did not support the claim. It happens. Sometimes, subsequent review turns up a problem with the NAFTA documentation. Sometimes, the broker should not have made the claim to start with. Lots of things happen in the real world.

This particular product is a multi-sensor electro-optical surveillance and targeting turret from Canada. As you might imagine, a multi-sensor electro-optical surveillance and targeting turret is a piece of military equipment. When the NAFTA claim failed, the importer asserted that the merchandise is entitled to duty-free entry as war material certified as such by a military procuring agency under HTSUS item 9808.00.30. It submitted the necessary certificates.

Customs liquidated the entry at the applicable 4.5% rate of duty and the importer protested. Customs granted the protest. It noted that in the absence of willful negligence or fraudulent intent, the importer can, prior to liquidation, submit documents to support a claim for free or reduced duties. The regulation that supports this is 19 CFR 10.112. Note that the regulation allows for the documents to be submitted even after liquidation but before the liquidation is final. That is a narrow window of 90 days following liquidation. See 19 USC 1501.

Why do I like this rulings? It is not just because the importer won. It is also because the importer, or its counsel, took a step back from a problem, surveyed its options, and found a creative solution. I also like it because it reaffirms for importers and brokers that the filing of the entry is not necessarily the end of the process. If there is a better option or a way to reduce duties after the entry summary has been filed, go ahead and submit the appropriate documents. There is money to be saved, go save it.
Ruling of the Week 2017.2: Emergency War Material Covers Failed NAFTA Claim Ruling of the Week 2017.2: Emergency War Material Covers Failed NAFTA Claim Reviewed by Unknown on January 13, 2017 Rating: 5

Substantial Transformation Redux

December 20, 2016

Note: I am writing this post while on vacation at an undisclosed location. The Internet here is lousy. I am paying a fair amount of money for "high speed access." Despite that, I feel like I am working on a vintage 3600 baud dial-up modem. Consequently, you will have to make do with two links. I might go back and fill in more when I have a decent connection.
We just talked about a Customs and Border Protection ruling in which I complained about CBP straying from the traditional substantial transformation test of looking for a change in name, character, or use to determine country of origin. Now we run up against Energizer Battery, Inc. v.United States, in which the Court of International Trade addressed essentially the same question. The CIT started out strong and raised my expectations that we would see a very detailed analysis of the test. We did get a thorough and logical opinion. But, I still have some concerns. So, let’s walk through this.

Under the Buy America portion of the Trade Agreements Act of 1979, 19 USC §§ 2511-2518, the U.S. government can procure material from countries covered by the Act. Those are countries that have signed on to the WTO Government Procurement Agreement and U.S.-free trade agreement partners. China is not an eligible country.

The case involves a flashlight assembled in Vermont. Virtually all of the approximately 50 components, including the light-emitting LED’s, the lens assembly, and wires that are pre-cut to size, come from China. After importation, the assembly process involves workers at two stations and takes approximately 7 minutes and 10 seconds. The value of imported materials is $12.96 and the finished cost of the flashlight is $23.55.

The only way to make these flashlights eligible for government procurement is to determined that they are products of the United States by virtue of the assembly operation in Vermont. That requires a substantial transformation. The test for a substantial transformation under the Trade Agreements Act is that the product is “a new and different article of commerce with a name, character, or use distinct from that of the article or articles from which it was transformed.” While there have been few cases applying this test in the context of the procurement agreement, this is the well-established test used for non-NAFTA country of origin marking, some drawback, and for other purposes.

Energizer sought a final ruling from Customs on whether the assembly of the flashlights in the U.S. resulted in a substantial transformation. Customs found that after assembly in the U.S., the LED’s continue to perform their intended function of emitting light and that the assembly process was not complex or time-consuming. Customs also noted the traditional name, character, or use test. Based on its analysis, Customs found no substantial transformation.

The first issue the plaintiff raised is that Customs’ focus on the LED’s and “essential character” is not part of the test for substantial transformation. That is manifestly true. The statute does not reference essential character. The Court, however, noted that it must decide the origin of the flashlight on its own, based on the evidence presented to it. The original analysis CBP performed is, therefore, of limited importance.

Given my most recent post on this question, I was very happy to see the Court of International Trade focus its attention on the name, character, or use test. The Court went so far as to say the “’essential character’ is not an established factor in the substantial transformation analysis, although some courts have looked to the ‘essence’ of a finished article in order to evaluation whether there has been a change in character as a result of post-importation processing.” Essential character is a useful concept for tariff classification. Separately, “essential identity” comes up in the context of U.S. goods returned. Neither is traditionally part of the substantial transformation test. So far, I am happy.

The Court then reviewed the history of the substantial transformation test from its roots in the 1908 Supreme Court decision Anheuser Busch Brewing Ass’n v. United States. Since that time, the test has become “flexible” and the outcome depends on the facts of each case.

The Court noted that a change in name is generally the least compelling evidence of a substantial transformation. That said, let’s keep in mind that the imported components were not called “flashlights.” They were LED’s, wires, screws, switches, and other components all with their own name.

Regarding name, the Court followed the lead of a prior CIT decision in a case called National Hand Tool v. United States. That case involved hand tools that were partially finished prior to importation and machined, etc. after importation. In all cases, the name of the article as imported remained the same as that article in the completed tool. From this, the CIT held that the question is whether the imported components retain their names after assembly into the flashlight. The switch, for example, remains the switch even when it is fully incorporated into the flashlight.

Moving on to character, the Court looked for a substantial alternation in the characteristics of the components. That requires more than a cosmetic change. Rather, the end-use of the imported product must not be the same as (or “interchangeable with”) the end-use of the product after post-importation processing. Here, the Court found that the shape and material composition of the components was unchanged, meaning there was (according to the Court) no change in character.

The Court also noted that that prior cases have found a substantial transformation less likely where the imported item has an intended end-use and the post-importation processing is consistent with that end-use. This is where I start to get concerned. Here, the parts were all imported for the purpose of manufacturing flashlights. The lens assembly, in particular, had no other apparent use. This does not bode well for Energizer.

Regarding use, Plaintiff argued that none of the imported components are useful as flashlights. The Court rejected that approach and held that the correct inquiry is whether the imported parts have a predetermined end-use at the time of importation. Here, the lens head is partially assembled at the time of importation, with four of the five LED’s attached and pre-cut wires soldered to the circuit board. This, and other components, have pre-determined end-uses as parts of the flashlight. Based on this, the Court found no change in use.

To my way of thinking, the unassembled components of a flashlight do not constitute a flashlight and cannot be used as such. As imported, they mostly have functions that are distinct from the function of a flashlight. A switch makes and breaks an electrical circuit. Wires conduct electricity.

The problem for Energizer is that LED’s emit light and the lens assembly directs light. Those are pretty close to the functions of a flashlight, although they are not sufficient to form a flashlight. Keep that in mind as we go forward.

Next, the Court looked at several subsidiary tests for substantial transformation. The most important of these tests is the nature of the assembly process. When assembly is simple, the question is whether it is “minor manufacturing and combining” as opposed to extensive operations resulting in the loss of identity of the imported component, which becomes an integral part of a new article. Summarizing, the Court stated, “However, 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.” The Court found that the production process constituted simply attaching one component to another. It is not a complex process.

Having found no change in name, character, or use and that the assembly process was not complex, the Court of International Trade held that the flashlight components from China were not substantially transformed by assembly in Vermont. Thus, the Court affirmed the final determination from Customs and Border Protection.

I’m not entirely comfortable with this for a few reasons. First, I need to say that this is a well-reasoned opinion and it is clearly following the lead of National Hand Tools. I think that is admirable for purposes of providing predictability and business certainty.

The problem is that as an advocate, largely for importers, I don’t like the result. It is very hard to apply in practice. It seems to me that this decision makes a substantial transformation in the context of assembly very difficult to establish. Most assembly can be reversed by disassembly. That means a switch will always be a switch and an LED will always be an LED even after assembly. This ignores the name changes from switch and LED to flashlight. Furthermore, the use of components will almost never be the use of the finished article, even when the components are imported specifically for incorporation into that finished product. Under the Court’s analysis, an engine assembled into a car remains an engine and does not change its character because it was intended for use as a car engine. Nor does it change its intended end use. But, an engine is not a car. I cannot drive an engine.

By focusing on the components before and after assembly, I fear the Court has set the bar too high. It seems that substantial transformation will occur when the imported part is subject to further fabrication prior to final assembly. The murkier question is when assembly is sufficiently complex to produce a substantial transformation. That will depend on the facts of the case. Unfortunately, it appears to me that under this analysis the complexity of the assembly process—which is not name, character, or use—is firmly part of the name, character, or use test. That seems to go beyond what was required under the 1979 Trade Agreements Act and similar CBP applications of the test.


Substantial Transformation Redux Substantial Transformation Redux Reviewed by Unknown on December 20, 2016 Rating: 5

Ford Case Transits to Trial

October 06, 2016
I've been waiting for a potentially block-buster decision in Ford Motor Co. v. United States, which is pending before the U.S. Court of International Trade. We now have a preliminary decision which is interesting, but is not yet in a position to bust any blocks.

This case is about the tariff classification of imported Ford Transit Connect vehicles made in Turkey. At the time of entry, all Transits have swing-out front doors with windows, second-row sliding doors with windows, and swing-out rear doors, some of which have windows. The imported vehicles also have two rows of seats, rear passenger windows, rear passenger seat belts, child-locks on the rear sliding doors, a rear cup holders in the front console, a full length cloth headliner, coat hooks, and a map pocket in the second row. Starting in 2010, Ford created a "cost reduced" second row seat for use in Transit vans. The second row seats lack headrests, "comfort wires," a tumble lock mechanism and labels. Finally, the rear seats are made of a "cost reduced fabric." There are two trim levels, so the details vary somewhat, but this should be enough detail to convey the point.

Shortly after customs clearance, but while still within the legal confines of the port of entry, the rear seats, rear door windows, and other passenger amenities are removed to convert the vehicles to the small cargo vans you probably see every day. They look like this:

There are passenger wagon versions of the Transit, but the case only involves vehicles that are ultimately delivered as cargo vans.

Why would Ford go to all this effort? Because in the 1960's, the US got into a spat with Europe over its duties on chicken imports from the US. In retaliation, the US imposed a 25% duty on trucks. That duty remains on the books today and is called "the Chicken Tax." The duty on cars for the transport of persons is, on the other hand, just 2.5%. That difference makes it worthwhile for Ford to import tall passenger cars and, after importation, convert them to trucks, saving 22.5%. That, ladies and gentlemen, is an example of tariff engineering. Or, as the government contends in this case, it is an impermissible "artifice or disguise" to avoid the correct assessment of customs duties.

Think about all the Transit Connect vehicles you see in the course of a day. I see lots. This is obviously a big deal case for Ford and for Customs and Border Protection. It is also a big deal in general because this case might set the parameters for legally acceptable tariff engineering. That's why it has been closely watched.

The starting point for this analysis is that the classification of an article must be ascertained by examining it in the condition in which it was imported. Processing subsequent to importation is generally not relevant. However, an importer cannot "resort to disguise or artifice" to avoid an applicable duty. That means that if the imported article "is not the article described as dutiable at a specific rate, it does not become dutiable under the description because it has been manufactured or prepared for the express purpose of being imported at a lower rate." The Court of International Trade expressed this as a "bright line test" of "does the article, as imported, fall within the description sought to be applied?"

Thus, if the imported Transit, with reduced cost seats and rear windows is, in fact, classifiable as a passenger car, then it will be classified as such regardless of subsequent modification. That is the important legal conclusion at this point of this case. What the Court is saying is that Ford's motive of reducing duty liability and subsequent processing does not dictate the classification. Rather, if the imported Transit vehicles, which are described as passenger cars, are passenger cars when imported, then Ford will win this case. That is a big deal, if it holds.

To determine whether the Transits are passenger cars, the Court of International Trade started to appy the analysis of a 1994 Federal Circuit case involving early sport-utility vehicles, Marubeni Am. Corp. v. United States. That case set out lots of features that indicate that a vehicle is designed primarily for passenger use or primarily for cargo use.

According to the Court, it has a lot of details about the vehicle as imported and post-conversion. But, it lacks some necessary information about the cost reduced rear seats. The Court believes that the missing information is necessary for it to apply Marubeni and make a final determination in this case. Consequently, the Court denied motions for summary judgment filed by both parties. That means that the parties will have to either present additional evidence, possibly in the form of an agreed set of facts, or the case will have to be decided following a trial on the open questions of fact.

Either way, we don't know the result yet. It appears that if (and I don't know this to be true) the rear seats installed in imported Transits are not adequate for passenger use, Ford may have a a problem. But, it might be that the seats are just awful and at the same time perfectly adequate for passenger use. Although some other facts may be at issue, this seems to be the sticking point. So, we need to wait for a complete result. Obviously, I will keep watching.
Ford Case Transits to Trial Ford Case Transits to Trial Reviewed by Unknown on October 06, 2016 Rating: 5
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