Friday, August 21, 2015

Finality of Liquidation and the Loss of Defenses

Most people assume that when sued by the United States for unpaid customs duties, taxes, fees, and interest, the defendant will have an opportunity to assert all available defenses to the claim against it. That is technically true. The question is which defenses are available. United States v. American Home Assurance Co., has made the answer to that question a bit clearer, but maybe not in a good way.

American Home ("AHAC") is the surety on a number of bonds covering the importation of mushroom and crawfish tail meat from China. Both of those products are subject to antidumping duty orders. Customs and Border Protection liquidated the entries and assessed antidumping duties. When the importer defaulted, the government tried to collect from AHAC and informed AHAC of its intent to seek post-judgment interest. AHAC protested the demands for payment of duties and interest. Customs denied the protests.  Therein lies the problem.

Section 1514 of the Tariff Act of 1930 (19 USC 1514) makes a liquidation final and conclusive on all parties including the United States, unless the someone files a valid protest. If the protest is denied, the importer or surety can file a summons in the Court of International Trade challenging the denial. Absent a summons, the denied protest renders Customs' decision final and conclusive. Finality is a bar to an importer's efforts to seek a refund of overpaid duties and also a bar to a duty recovery action by Customs. If there was a violation through fraud, gross negligence, or negligence, Customs can try to collect duties and interest going back five years, but that is the exception.

This case is a little different because the claim for interest was not asserted at liquidation. Rather, it came in the first demand for payment on the bond that CBP made to the surety, AHAC. AHAC attempted to defend the interest claim against it, but was shut down.

According to the Court, the interest assessment is a protestable charge or exaction. The decision to impose interest was not ministerial or automatic. Rather, Customs had to apply law and facts to determine whether AHAC might be held responsible for interest. Consequently, CBP made a protestable decision. The fact that the charge or exaction was first asserted after liquidation does not change the fact that it was protestable and, in fact, protested.

Because AHAC did not challenge the denied protests in the Court of International Trade, the denial became final and conclusive. As a result, according to the Court, AHAC must pay the interest claimed up to the value of the bonds.

This raises all kinds of hackles.

What this means is that an importer who is dissatisfied with a denied protest has no choice but to pay Customs or go to the Court of International Trade as a plaintiff. Normally, that is what one would expect and it is not a tremendous problem. However, there is a statute that requires that plaintiffs pay all of the disputed duties, taxes, and fees before commencing the action in the CIT. That means that if the protesting party cannot afford to pay the duties allegedly owed (as sometimes happens) and cannot file a lawsuit, the act of filing the unsuccessful protest will have waived any opportunity to assert defenses in the eventual collection action. That is a terrible result that hurts the importer coming and going.

In the long run, will this create a disincentive to file protests? It might. If my product is being improperly assessed at a high rate of duty but I don't have the money or wherewithal to litigate in the CIT, what is my best option? Previously, I might have filed a protest and then decided how to go forward if it were denied. Now, am I better off making entries at the lower rate of duty contrary to instructions from CBP, but with internal and external evidence of reasonable care? Eventually, CBP will make that into a penalty case in which I will be able to assert all of my defenses. Clearly, that is a risky strategy because the penalties will be more severe than the duties unless I have a rock-solid case of reasonable care. But, importers do disagree with Customs and Customs is not always right. In some (likely rare cases) that may be the best way to proceed.

One important final point: Although I am saying I don't like the result, I am not saying it is wrong. In fact, with a limited amount of time spent on research, I can't see why it might be wrong. I generally think that defendants have the right the right to assert all available defenses in civil actions brought by the United States. This case does not violate that principle. But, it limits the scope of available defenses where there is a denied protest. That seems like a big price to pay. But, the finality of liquidation is a shield as well as a sword. Often, an importer will seek refuge in the fact that the liquidation is final and cannot be revisited by Customs. This is the same principle, although it favors the U.S. There is a certain symmetry to that.

Thursday, August 20, 2015

Ruling of the Week 2015.24: How Wide is Your Bike Lock?

Although I have actually been on my bike a shamefully few times this year, I remain interested in all things related to cycling, particularly commuting by bike. A key tool for a bike commuter is a good, solid lock. Thus, I noticed H168717 (July 17, 2015) in the August 12, 2015 Customs Bulletin. You will need to scroll to page 90 to find the ruling.

The issue is the proper classification of Master Lock cable locks. Customs originally classified the locks in HTSUS item 8301.10.50 as "Padlocks: not of cylinder or pin tumbler construction: Over 6.4 cm in width." That tariff item has a duty rate of 3.6%. Master Lock argued for classification in item 8301.10.20, which covers locks with a width not over 3.8 cm and has a duty rate of 2.3%.

I am going to save myself two thousand words by saying, this is what we are talking about:

8020D: Picture from Amazon
8119DPF: Picture from Amazon
You can see where this is going, right? The sole question is, "What is the correct way to measure the width of these locks?"

There are a couple of possible answers. First, it might be the length between the red lines in the top picture. That seems to encompass the width of the locking mechanism. The curved inserts on each side would be considered other parts of the assembly; probably extensions of the cable. Another way to measure the width is to consider it to be the distance between the far ends of the "shoulders." This extends the width further.

While you think about that, ask yourself this illuminating additional question: How long is the lock?

Think about it.

The answer matters.

It turns out that CBP has not been measuring the width of the lock at all. Rather, it has been measuring that segment of the length made up by the lock itself. "Length" refers to the longest dimension of a body. Put another way, length is the longest straight line that can be drawn through a body. Based on that, CBP has always included the cable in the length of the lock. It is, therefore, inconsistent (and incorrect) to treat the length of the lock as its width.

Customs and Border Protection has made a course correction. It now recognizes that the width is the line perpendicular to the length. As a result, it is approximately, this:

Note that the picture here is based on a picture in the ruling. It appears to me that W does not include the height of the "shoulder." This image is one I made to approximate what is in the ruling. Don't rely on it as an exhibit.

Having re-measured the locks, Customs agreed with Master Lock that they are classifiable in 8301.10.20 as being less than 3.8 cm in width. That is a win for Master Lock and a good decision by CBP.

Saturday, August 08, 2015

Ruling of the Week 2015.23: How Smart is Your Watch?

Smart watches are cool new technology. Generally, I want cool new technology. I'm not so interested in a smart watch, at least not at the moment. One reason for this is that I am firmly commitment to my Windows Phone. I have little interest in a watch that requires me to have an iOS or Android phone. Microsoft does not sell a smartwatch, although its former partner Nokia was shopping one. I have some interest in a Microsoft band, which is supposed to have impressive utility for cycling. But, I hear there is a new version on the horizon, so I am waiting. That said, I am struggling to get my current bike computer (a Polar CS300) working. So, I am also kind of jonesing for a Polar M450. These are clearly my first world issues.

A more relevant consideration for this blog is the proper tariff treatment of a smartwatch. Customs recently settled the issue, at least with respect to a Samsung "Gear" Live Android smartwatch. See HQ H257947 (July 14, 2015).

The watch uses Bluetooth wireless technology to communicate with a paired smartphone and, therefore, to the internet. The user interacts with the watch through a touchscreen. There are two classes of application that can run on this particular smartphone. Some are local and run directly on the phone. Others require a connection to a paired phone. Paired applications require the phone to do the heavy data processing, network connectivity, and data storage. An unpaired watch is not able to perform these tasks beyond the limited data storage and processing capabilities of the watch itself. One such feature is the ability to display the time, as a watch really should do.

So, for classification purposes, is this a wrist watch of Heading 9102 or is it a composite good classifiable elsewhere? In the old days, we would have asked, "Is it more than a watch?" Or, is it something else entirely?

Customs and Border Protection initially determined that the Samsung smartwatch differs significantly from watches of 9102. Specifically, it includes electronic components not normally seen in watches including an AMOLED display, CPU, 512 MB of RAM, 4 GB of internal flash memory, and several sensors. Although this watch can display the time, it is designed to allow users to display and manipulate data. The fact that it is worn on the wrist and displays time is not enough to make it a watch.

Customs then constructively disassembled the watch to look at all of its components. It found a radio transceiver of 8517, sound recording and reproducing apparatus of 8519, a video display of 8521, and sensors of 9029 and 9031. Customs them treated the watch as a composite good consisting of all of these components. Based on GRI 3(b), the correct tariff classification for the watch would be the classification of the single component that imparts the essential character.

Essential character is a tricky concept. The item that imparts essential character will vary depending on the nature of the components, their value, quantity, bulk and role in the use of the finished item. Here, Customs found that the Bluetooth connectivity was of primary importance to the operation of the smartwatch. Consequently, Customs found that the radio transceiver imparts the essential character and classified the smartwartch in tariff item 8517.62.00. This is a duty-free provision.

It is a good result, but I have serious questions about whether it is right. What worries me about the analysis is the laptop on which I am currently typing. It has internal memory, a hard drive for storage, a CPU, a display, and can run applications written for its operating system. It also has Bluetooth and WiFi wireless capabilities. And, it is classified in 8471 as an automatic data processing machine, not as a radio transceiver.

I realize that the functionality of the smartwatch is extremely limited when not paired with a phone. That is not true of my laptop, but that is a matter of degree. My laptop is far more useful when connected to a network. Moreover, in the modern "cloud first" world, the location of the data and the processing capability is far less important than the ability to get to and use that data. To me, the watch is much more analogous to a "thin client" or "dumb terminal" than it is to a radio transceiver. Customs has previously classified thin client terminals, which rely on remote storage and data processing power, as units of ADP machines in Heading 8471. If I were classifying the smartwatches, I would give strong consideration to that analysis.

Here's the other thing that bugs me about this ruling. Customs was quick to dissect the watch into its components before trying to classify it as a whole. I think that would have lead to Heading 8471. We don't look at a passenger car and say it is part car, part radio/entertainment center, part air conditioner. We look at the whole thing and see if it is a passenger car. Here, the collection of devices form a coherent whole that is designed to allow for data input and manipulation. That's how I might address this.

The outcome is likely the same: duty free. So,this is not one of those things that is likely to get litigated. It is entirely theoretical and, therefore, perfect fodder for a blog post.

About that Lion and the Lacey Act

A lot has been said about the Minnesota dentist who killed Cecil the lion in Zimbabwe. From the perspective of this blog, the question being asked is whether the American dentist violated any U.S. laws. The short answer is that I don't know for certain whether any criminal laws have been violated.

What has come up in the trade context is whether the hunter violated the Lacey Act. Since Lacey impacts trade, it pops up in my practice and is worth a short exploration.

The Lacey Act was first passed in 1900 and is an early conservation law. As originally enacted, it protected animals from illegal hunting through criminal and civil penalties. The law also prohibits trade in protected animal and plant species that are hunted or harvested illegally.

It is a crime to import into the United States any injurious animals including brown tree snakes, big head carp, zebra mussels, and flying fox bats. 18 USC 42. Exceptions can be made for properly permitted (and dead) zoological specimens and certain "cage birds." A violator may be imprisoned  and fined.

More relevant is that the Lacey Act also makes it illegal to import any plant or animal taken in violation of a foreign law or regulation. 16 USC 3372. This is an important compliance issue for anyone that imports animal and plant products. If you happen to import wood to make violins, for example, you need to know that the wood was harvested legally. Assuming you purchase from a supplier who is a few steps removed from the actual person that cut down the tree, how can you prove that the wood was legally harvested? Keep in mind that the Act applies to derivative products as well. This is a paperwork and due diligence process familiar to importers who have to comply with lots of similar regulations. And, it is important. That is what Gibson Guitars learned when it agreed to pay $300,000 to settle a Lacey Act case.

So, what about Cecil and the dentist? The press has reported that Cecil was illegally lured out of a wildlife sanctuary. That makes the killing illegal under Zimbabwe law (at least that is what I have read). So, did the hunter violate the Lacey Act? Not yet. The Lacey Act only kicks in when the illegally taken wildlife is imported, exported, sold, or otherwise subject to interstate or foreign commerce.

The press also reported that Cecil was decapitated and skinned. I don't know much about hunting, but I do know something about spooky home d├ęcor. To me, that sounds like the hunter had the intention to mount Cecil's head and turn his pelt into a rug. Unless he has a home in Zimbabwe, that likely means he was planning to import said lion head and skin to the U.S. That, my friends, would be a violation of the Lacey Act.

It is unclear whether any part of Cecil was actually imported. So, it does not appear that there was a violation of U.S. law. Press reports also indicate that the U.S. has not charged the hunter with a violation of any U.S. law. I suspect the Department of Justice and the Fish & Wildlife Service are smart enough to ask about the present location of the remains. That's why the real issue for the dentist is whether he will be extradited to Zimbabwe for prosecution there.

Friday, July 31, 2015

Ruling of the Week 2015.22: Beam Me Up

I see we are close to perfecting the Star Fleet-style impulse engine. It also appears that we are working on teleportation, one atom at a time. That got me wondering what Star Trek inspired devices might have been the subject of a Customs classification ruling. What I found is the Star Trek Flash Badge imported by the Kellogg Company to be included as a prize in boxes of cereal.

The plastic badges mimic the Star Fleet divisional insignia for Command, Engineering and Science plus insignia of the Klingon and Romulan Empires. Each badge contains a battery. switch and an LED. When the switch is depressed, the LED lights, illuminating the badge. According to Customs, the badges could not be worn and lacked any kind of pin to connect it to a uniform. Customs also noted that their entertainment value outweighed any utility.

Here's the interesting part. The badges were imported in bulk and then sent to cereal packaging plants to be inserted in boxes. The badges were not individually marked with their country of origin.

Let me stop here for a few observations. This ruling is from 2008 and these look to be J.J. Abrams-era badges. Here is the whole set, with a four-fingered Tony the Tiger Vulcan salute:

Here is another image of the whole set:

Of course, we should let our Geek Flag fly a little and mention that in the era during which recent Academy graduate James T. Kirk had command of the U.S.S. Enterprise (NCC-1701), the insignia was nothing more than part of the uniform. Its only function was to identify the wearer as being assigned to Command, Science, or Operations (which includes Engineering as well as Security). If you were unlucky enough to be assigned to a red-shirted job in Security, you were likely to be killed off without so much as a screen credit.

I'm concerned about this because these badges are "functional" in that they light up. That seems to indicate that they are mimicking some function in the original of which they are a model. That would lead to the conclusion that Kellogg's had somehow crossed the timeline and put a communicator badge of the sort used 80 years later on the NCC-1701-D by Captain Jean-Luc Picard and his crew into the context of a young Captain Kirk. Of course, the Picard-era badges did not light up, but let's put that aside.

There are a number of ways this may have happened. An easy hypothesis is that Q somehow sent them to Kellogg in 2008. This is contrary to the facts of the ruling, which state that the badges were made in China. Another possibility is that a member of the NCC-1701-D crew stumbled through a Guardian of Forever portal, thereby making a Next Generation communicator available to the reboot crew to be used by J.J. Abrams and Kellogg. I suspect that it the correct answer.

Because the badges were primarily articles of amusement, rather than actual communication devices, Customs classified them in HTSUS item 9503.00.00 as other toys, which are duty free.

But, what about the marking? In the ruling, Customs and Border Protection tells Kellogg that the badges are not properly marked with their country of origin. Do we agree with that? One might argue that if Kellogg is the purchaser and the outermost container that reaches Kellogg is marked "Made in China," which I am assuming it was, isn't that enough? After all, is the average cereal buying American concerned about the country of origin of the free toy included in the box?

That, however, is not the correct analysis. The prime directive of marking law [see what I did there?] is that every article of foreign origin must be marked with its country of origin in a conspicuous, legible, and permanent manner so as to indicate to the ultimate purchaser in the U.S. the English name of the country of origin. 19 CFR 134.11. Who is the ultimate purchaser of a free give-away? This ruling does not provide much analysis, but Customs has consistently held that it is the recipient, not the purchaser. For example, little shampoo bottles given to hotel guests must be marked with their country of origin. Umbrellas given to race track patrons also much be marked with their country of origin. So, Customs did Kellogg a favor and pointed this out.

I don't want to tread too far into the jurisdiction of Law and the Multiverse, but I do wonder about customs formalities in the 24th century. I don't ever recall hearing about the Enterprise transmitting a cargo manifest for review by local authorities. Nor do I recall hearing anything about duties being paid. Is that because Star Fleet is essentially a military operation? Keep in mind that much of the machinations of the Star Wars universe is driven by trade regulations. I suspect Lando Calrissian is all over the Cloud City customs regulations.

I feel like there is a future article in the application of customs law to Star Fleet and the Star Wars universe, but that will have to wait.

In the meantime, if you are a fan who enjoys a detailed rehash of all things Star Trek including an analysis of the morals, messages, and meaning of each episode, check out the Mission Log podcast. It makes Thursday my favorite commute into work (excluding days I ride).

Thursday, July 30, 2015

There is a Trial on the Horizon

Penalty cases are abundant these days.

In United States v. Horizon Products International, Inc., the government is seeking $394,794 in unpaid duties and penalties plus interest. The imported merchandise is plywood and the underlying issue is whether the wood was properly classified. Horizon conceded that the merchandise was misclassified and that it owes about $70,000 in unpaid duties. The issue is the remaining penalties and interest.

Regarding the pre-judgment interest on unpaid duties, the Court has the discretion to order or not order the payment of pre-judgment interest, which is intended to compensate the United States for the loss of the duties over time prior to payment. When deciding whether to award pre-judgment interest, the Court is supposed to provide full compensation while also considering several factors including:

  • The degree of personal wrongdoing on the part of the defendant
  • The availability of alternative investment opportunities for the plaintiff (i.e., the United States)
  • Whether the plaintiff delayed in bringing the action to recover the duties
  • Other considerations of fundamental fairness
 Here, the Court found no unreasonable delay by the United States and that the importer has not paid the outstanding duties. Thus, the Court ordered that Horizon pay prejudgment interest. I do have to wonder about the alternative investment opportunities. That factor essentially asks whether the U.S. would have done something useful or profitable with the money. I don't want to sound cynical, but I think that probably cuts against the U.S. getting interest, but that is just me.

Regarding the penalty amount, Horizon conceded the misclassification. That means there was a material false statement on the entry documents. My experience is that Customs and Border Protection will generally assume that means there was negligence or worse. That makes sense since the law puts the burden on the importer to show that it was not negligent. That's what this case is all about and why it is interesting. Horizon contends that there is an open question of fact as to whether it exercised reasonable care in making the entries.

What evidence does Horizon have that it exercised reasonable care? To start with, it used a reputable customs broker. Congress identified this as evidence of reasonable care in the legislative history to the Customs Modernization Act, but it is not a 100% defense.The government contends that Horizon has not shown this it actually worked with the broker in a "good faith effort" to ascertain the correct classification.

There are some records of communication with the broker in the form of faxes. [Side note: these entries are from 2006 and 2007, well past my presumed date of extinction for fax machines.] The faxes, according to the Court, "raise more questions than they answer . . . ."

The Court then makes a well received (by me) observation (the emphasis is mine):

The Government would like the court to infer that all the responsibility for the erroneous entries rests on the shoulders of Horizon, but the court could just as easily infer that the customs broker shares a portion (if not all) of the responsibility. Customs brokers, after all, have statutory and regulatory responsibilities to classify merchandise correctly. E.g., 19 C.F.R. § 111.29 (requiring customs brokers to “exercise due diligence . . . in preparing or assisting in the preparation and filing of records relating to any customs business matter”); see also 19 C.F.R. § 152.11 (“Merchandise shall be classified in accordance with the [HTSUS] . . . .”); 19 U.S.C. § 1641(d) (allowing Customs to penalize a broker who “has violated any provision of any law enforced by [Customs] or the rules or regulations issued under any such provision”); United States v. Santos, 36 CIT ___, ___, 883 F. Supp. 2d 1322, 1327-30 (2012) (sustaining as reasonable a § 1641 penalty on a motion for default judgment against broker who allegedly misclassified imported goods).

This is important. It shows an understanding by the Court that it can be reasonable for an importer to rely on a broker for classification advice. But, the facts matter. We need to know the relative involvement of the broker and the importer in the decision, the reasonableness of the broker's advice, and other factors that might indicate that the importer acted reasonably. The Court is wisely saying that where reliance on a broker is raised as evidence of reasonable care, it needs to look at the whole picture. It is not enough for CBP or the broker to fall back on the old saw that "the importer is ultimately responsible for the entry."

The Court, therefore, found a genuine issue of material fact in dispute. That means the case is not appropriate for summary judgment. It will, therefore, need to go to a trial if it is not settled.

There are two other issues worth a mention. First, Horizon made the argument that it should be excused from the penalty under the Small Business Regulatory Enforcement Fairness Act. This is a useful tool for small businesses that face a civil administrative penalty despite having acted in good faith. It does not apply here because Horizon has not paid the duties owed.

The last point is whether the Court should mitigate the penalty below the demand by Customs. That involves a detailed analysis of the "Complex Machine Works" factors. These are 14 factors the Court is to consider when reviewing the amount of a penalty previously imposed by Customs. This is another reason why this case is not ready for summary judgment.

It appears that Horizon and the U.S. government are going to be squaring off in court soon.

Wednesday, July 29, 2015

Tell the ABA to show me some love

The ABA publishes an annual list of its top 100 legal blogs (or "blawgs"). If you read this blog and find it useful, please let the ABA know via their nomination form.

Thank you. That ends our commercial message.

Tuesday, July 28, 2015

More on Zombies

I got a nice shout out from Law and the Multiverse today. The post is about a law review article on using zombies as teaching tools in law school. Read the post and then read the full article.