Customs Law

Vance Writing Competition

2025-04-05T18:16:00.003-05:00

Andy Vance was a legendary figure in customs law and litigation. After a career at the Justice Department, he joined Barnes, Richardson & Colburn as a partner in the NY office. Sadly, I just missed the opportunity to work with him. The CITBA writing competition named in his honor is a great opportunity for J.D. and LL.M. students to demonstrate their interest in and knowledge of customs and international trade law. Plus, there is a monetary prize. Papers are due in June 2. See the details below.

2024-2025 Andrew P. Vance Memorial Writing Competition Call for Papers
- Wednesday, January 29, 2025
- | Posted by CITBA Staff
The Customs and International Trade Bar Association (CITBA) and Georgetown Law School are pleased to announce 2024-2025 Andrew P. Vance Memorial writing Competition. The competition is welcoming papers with an in-depth analysis of a current issue relevant to customs and international trade law. Entrants must be currently enrolled in a J.D. or L.L.M. program at any of the nation's law schools. Papers must be submitted here to Georgetown Law by June 2, 2025 at 11:59 p.m. ET. For a list of past winners and to see sample papers, please click here for the CITBA website
Submissions should be typewritten, double-spaced on 8 ½ x 11-inch paper. The paper shall not exceed 40 pages in length, including footnotes. Papers must include footnotes, not endnotes. Papers should be in 12pt. Times New Roman font and have one-inch margins (right, left, top, and bottom). Noncompliance with these requirements may affect evaluation or result in disqualification.
Please include the following on the cover sheet of your paper: Full name, address and telephone number Law school and year Date of submission of paper Do not include any identifying information in the text of the paper itself. A committee of practicing attorneys and professors with relevant expertise will judge the papers. The following factors will be considered: Legal analysis Thoroughness and depth of topic Evaluation of judicial precedents, statutes, and regulations Writing style Form and quality of citations Conformity with rules of competition Two prizes will be awarded by CITBA: $1000.00 first prize $500.00 second prize

Mitigating 232 Penalties - I'm Back

2025-02-19T21:53:00.001-06:00

I realize I have been gone for a while. The first Trump Administration generated enough compliance work, litigation, and general chaos to keep me too busy and too stressed to do many things. One such thing was writing this blog. I did it mainly because I enjoy the process, and it forced me to stay on top of cases from the Court of International Trade and Court of Appeals for the Federal Circuit. Explaining those decisions in what I intend to be an approachable style helped me understand them.

Over the past year, I have at times considered restarting the blog and never found the time or inspiration. Apparently, that has changed.

You may have noticed that the second Trump administration is off to a fast start in the trade space. We have new 10% tariffs on goods from China and 25% tariffs on an expanded list of steel and aluminum products. The 232 exclusion process has been shuttered. Reciprocal tariffs are being floated, as are potential tariffs on cars, pharmaceuticals, and chips.

Source: Wallpaperaccess.com

What stirred me to write is a section at the end of the Steel EO from February 10. The section of concern is paragraph 12, just before the Annex. The section reads:

CBP shall prioritize reviews of the classification of imported steel articles and derivative steel articles and, in the event that it discovers misclassification resulting in non-payment of the ad valorem duties proclaimed herein, it shall assess monetary penalties in the maximum amount permitted by law and shall not consider any evidence of mitigating factors in its determination. In addition, CBP shall promptly notify the Secretary regarding evidence of any efforts to evade payment of the ad valorem duties proclaimed herein through processing or alteration of steel articles or derivative steel articles prior to importation. In such circumstances, the Secretary shall consider the processed or altered steel articles or derivative steel articles for inclusion as derivative steel articles pursuant to clause 5 of this proclamation.

The aluminum order does not contain that limitation on the consideration of mitigating factors.

The consideration of mitigating factors was written into the law by Congress. It shows up at 19 U.S.C. § 1592(b)(2), which says “Such person shall have a reasonable opportunity under section 1618 of this title to make representations, both oral and written, seeking remission or mitigation of the monetary penalty.”

In Section 1618, Congress made the Commissioner of Customs the final decision maker on the penalty amount. The law says the “Commissioner of U.S. Customs and Border Protection, if he finds that such fine, penalty, or forfeiture was incurred without willful negligence or without any intention on the part of the petitioner to defraud the revenue or to violate the law, or finds the existence of such mitigating circumstances as to justify the remission or mitigation of such fine, penalty, or forfeiture, may remit or mitigate the same upon such terms and conditions as he deems reasonable and just, or order discontinuance of any prosecution relating thereto.”

The traditional way of thinking about this is that an Executive Order cannot undo that grant of authority. Congress would need to do that. The language in the EO is an example of what some lawyers believe is the "unitary executive." Under that approach, the President is in control of the Executive Agencies and Congress cannot limit that authority. Whether that works or not will surely be litigated if there is an effort to assess a significant penalty. The President issued a statement today extending his control to so-called independent agencies. That order states only he and the Attorney General may determine the correct interpretation of laws for the agencies. The question of Presidential control over Executive Department and independent agencies is certainly headed to the Supreme Court.

Keep in mind that the steel EO does not limit the Court, which will independently set any penalty and will consider mitigating factors based on the evidence presented to it.

Assuming Customs follows the EO and the maximum penalty is going to be assessed, the Order says it will be the “maximum amount permitted by law.” That raises the question of what is the maximum penalty?

The maximum amount is set in 19 U.S.C. § 1592(c) and depends on the circumstances, even in the absence of mitigation. In the case of a violation that occurs as a result of negligence, the maximum penalty without mitigation is 2x the unpaid duties, taxes, and fees. The importer is also required to pay the lost revenue with interest. If the violation resulted from gross negligence, the maximum permitted is 4X the lost revenue along with the payment of the withheld revenue and interest. Gross negligence means that the importer was willfully or knowingly careless, failed to follow directions, or had other aggravating factors. For fraud, the maximum penalty is an amount not to exceed the domestic value of the merchandise. Note that domestic value is entered value plus duties, transportation, and a profit. Nothing in the EO does away with considerations of culpability when setting the maximum penalty. If an importer proves simple negligence, the maximum penalty allowed by law is 2X and cannot be elevated to fraud levels.

An important point is that § 1592(c)(4) further limits the maximum penalty when the importer voluntarily discloses the circumstances of the violation and tenders the loss of revenue plus interest.. The amount is higher for fraud cases. That is the "prior disclosure" process, which is probably familiar to anyone who has read this far. The EO may or may not have lasting impact on penalties under Section 232. It will, however, likely spur prior disclosures by companies that discover potential violations. Paying the duties and interest is often better than fighting about whether there is really a violation.

Speaking of that, this is a good time to remind everyone that a penalty can only be assessed when there is a violation. A violation means the importer (or another interested party) made a material false statement or omission regarding the entry of the merchandise as a result of negligence, gross negligence, or fraud. The reverse is that a mistake of fact or clerical error is not a violation if the importer acted with "reasonable care." That means it is incredibly important to document your critical entry processes (e.g., classification, valuation, rate of duty determinations). You should have a "reasonable care" document showing how you arrived the information reported to CBP on the entry. Relying on the supplier or a person not familiar with the relevant requirements is not sufficient. When enacting the Reasonable Care standard, Congress noted that evidence of reasonable care includes consultation with internal and external experts and seeking rulings from Customs. Experts in this circumstance include brokers, accountants, and lawyers familiar with the requirements. So everyone should go pull some entries and see if you have trace the data back to records demonstrating reasonable care. Whether the result is right or wrong, the exercise of reasonable care is an important step in avoiding penalty cases and the questions that sparked this whole post.

This was fun. I'll have more to follow.

eWriters and Protests

2024-05-18T16:48:00.001-05:00

When I saw that the Court of International Trade decision in Kent Displays involves the classification of "a battery powered flexible eWriter device containing a pressure sensitive liquid crystal writing film," I had a moment of technology-geek excitement. That feeling stemmed from my personal conversion from yellow legal pads to a reMarkable "paper tablet."

Before I wax on in an ode to the reMarkable, let's deal with this case.

Kent Displays imported a product called the Dashboard, which it describes as a green replacement for paper. The device is based on a "bistable cholesteric reflective LCD." This review is of a different product from Kent Displays, but probably gives a good idea of how the Dashboard works. Here is an image from Kent Displays of its Blackboard Smart Pen Reusable Notebook.

Kent had been importing this product under HTSUS item 9013.80.7000, which at the time of entry covered:

Liquid crystal devices not constituting articles provided for more specifically in other headings; lasers, other than laser diodes; other optical appliances and instruments, not specified or included elsewhere in this chapter; parts and accessories thereof: Other devices, appliances, and instruments: Flat panel displays other than for articles of heading 8528, except subheadings 8528.52 or 8528.62.

The rate of duty applicable to this tariff item was free. That is in the past tense because President Trump imposed a 25% tariff under Section 301.

Understanding that to be the correct tariff classification, Kent took the reasonable proactive step and applied for an exclusion from Section 301 (at regulations.gov, Document ID USTR-2018-0025-0282). For reason that are unclear to me, there is some dispute as to whether the request was approved. That is unclear because on September 26, 2019, the USTR sent a letter to Kent Displays notifying it that the government "has determined to grant" the requested exclusion. That exclusion covered products classified in 9013.80.7000 that meet the description of "Flexible pressure sensitive LCD panel display devices used as a surface for electronic writing (described in statistical reporting number 9013.80.7000)."

The problem for Kent was that when CBP liquidated an entry of Dashboards, it classified the goods in 9013.80.7000 but declined to apply the exclusion. Kent protested CBP's decision to apply Section 301 duties but did not protest the main classification in Heading 9013.

Apparently, during the protest review Customs decided that the goods are correctly classified as other electrical devices with an individual function in HTSUS item 8543.70.9960. That item, at the time was subject to a 2.6 rate of duty but no Section 301 duties. Customs did Kent a solid and did not rate advance the entry. Unfortunately, President Trump got around to extending Section 301 duties to 8543.70.9960, which brings the classification and the application of the exclusion back to the front burner.

This case raised a number of interesting questions. The first is whether CBP had the authority to change the classification when the importer had not protested it. Liquidation, one might think, made that classification final and conclusive.

The Court rejected this argument for two reasons. First, when an importer (or other authorized party) files a protest, it is challenging the liquidation of the entry. That liquidation, therefore, is neither "final" nor "conclusive." During its review of the protest, Customs may reconsider the entry as a whole to ensure that it receives the correct legal treatment. That is a risk to the importer and should be considered when protesting. The basis for this decision is explained in Cyber Power Systems (USA) Inc. v. United States, which had a somewhat similar fact pattern. As in this case, in Cyber Power, Customs found while reviewing a protest relating to Section 301 duties that the merchandise was incorrectly classified but did not reclassify the merchandise to a tariff item with a higher rate of duty. As a result, the Court did not decide whether CBP can find that a classification with a higher rate of duty is applicable when reviewing a protest that asserts a different challenge.

The second relevant point is that the Court of International Trade has an independent obligation to get to the right classification. This is true even if the government does not or per Cyber Power cannot assert a counterclaim. Under this rule, from a case called Jarvis Clark, the Court should ensure that it has determined the correct classification and can order CBP to reliquidate the entry accordingly. If additional duties are owed, it can issue a judgment in favor of the United States in the amount owed.

According to the CIT, Kent's argument that the classification of its ewriters was not protested and was, therefore, final would mean that the Court does not have the ability to determine the correct classification. As a result of Jarvis Clark and Cyber Power, the Court rejected that approach. No one asked me, but I note those two things are not exactly the same. It is possible that the classification is final if not protested UNLESS the unhappy importer files a summons. At that point the CIT would be empowered to find the correct classification. Prior to that, CBP's authority would be limited to reviewing the protested decision.

Next, what is the right classification for these items?

Heading 8543 covers "Electrical machines and apparatus, having individual punctions, not specified or included elsewhere in this chapter . . . ." On its face, that does not preclude any overlap with articles of Chapter 90. However, Section XVI, Note 1(m) states that the section, and hence Heading 8543, does not cover articles of Chapter 90. Moreover, the Explanatory Notes indicates that 8543 does not cover articles "covered more specifically by a heading of any other Chapter of the Nomenclature." Consequently, if the Dashboard is an article of Chapter 90, it cannot be classified in 8543.

Heading 9013, at the time of the relevant entries, covered "Liquid crystal devices not constituting articles provided for more specifically in other headings . . . ." According to the 2018 version of the Explanatory Notes, "liquid crystal devices" are entered on a "piece" basis or cut into special and particular shapes. Liquid crystal devices classified in 9013, therefore, are not finished articles such as the Dashboard ewriter.

The Court considered and rejected several other possible classifications. Heading 9017 was an interesting option. It covers "Drawing, marking-out or mathematical calculating instruments (for example, drafting machines, pantographs, protractors, drawing sets, slide rules, disc calculators); instruments for measuring length, for use in the hand (for example, measuring rods and tapes, micrometers, callipers), not specified or included elsewhere in this Chapter." Drawing instruments seems a reasonable description of these products, but the EN indicates the heading covers apparatus and instruments that facilitate the act of drawing. Those items include, for example, compasses, set squares, and protractors. The Dashboard is more like the paper than it is like these devices, which presumably could be used on the Dashboard (careful with the compass point).

Having excluded other options, the Court concluded that the correct classification of the Dashboard is in 8543 and, therefore, the Section 301 exclusion on flexible ewriters described in 9013 does not apply.

Coming back to the reMarkable, I think it is a nearly perfect device for lawyers. It is essentially a legal pad that never runs out of pages and ensures I never lose my notes. I can take notes in a meeting or while doing research and immediately save those notes as PDFs to the appropriate client file. That is an improvement over having to find the correct pad, scan the notes, and save them. For me, that's all I expected and that is what the reMarkable does really well. There is a keyboard available for the reMarkable, but I never wanted a keyboard for my legal pads. That is why I also have a laptop.

I know people might be thinking that you can take notes on any pen-enabled tablet. That is true. But the experience of writing on a reMarkable is much closer to the experience of writing on paper. Other tablets with a glass screen have less drag on the pen and don't feel as natural. The matte surface of the reMarkable feels like paper. It can also convert handwriting to text when connected to Wi-Fi and search text notes. Honestly, I never do that. A subscription cloud service allows notes to be edited perpetually. In my workflow, I do not use the cloud service. Like paper notes, once I save my reMarkable notes, they are a fixed record. Anything new will be a new note.

I have read many comments about all the things the reMarkable cannot do. Some of those are legitimate gripes. Yes, the screen is only grey scale. A color screen would be nice. On the current model, I can choose ink and highlighter colors, but can only see the real color in the saved PDF. The reMarkable also lacks basic tools not related to writing. For example, there is not even a simple calculator, clock, or dictionary. There are third-party solutions filling some of those gaps. There is no backlight which makes using it as an ebook reader less than great. On the other hand, I did not buy the reMarkable to replace my phone or laptop. Other devices, including the Kindle Scribe have additional features and may be worth considering, but I am very happy with my device as a replacement for paper notes. Also, and this is more important than it may sound, the lack of additional features on the reMarkable encourages uninterrupted concentration. That is a valuable feature.

Crikey and Zut Alors, What is a Diary?

2024-04-23T10:38:00.003-05:00

For more than 20 years, I have had the privilege of organizing the Dominick L. DiCarlo – US Court of International Trade Lecture at the University of Illinois – Chicago Law School (FKA the John Marshall Law School). One of the great pleasures of this experience has been working with Court of International Trade judges who have graciously participated as keynote speakers.

Last week, we presented the 22^nd edition during which I had the opportunity to interview the Honorable Jane A. Restani. In a discussion on the interpretation of the Harmonized Tariff Schedule, Judge Restani mentioned her recent decision in Blue Sky the Color of Imagination, LLC v. United States and asked whether I would post on the decision here. I had recently exchanged emails about the case and mistakenly thought I had already posted this. To ensure that I have not misled a judge or the audience at the event, here is that post.

The question presented in this case was the classification of paper notebooks that contain calendars. The notebooks are “planners” of a sort I did not realize still exist in physical form. They include full-page monthly and weekly calendars with spaces to write notes. The planners have a spiral binding and additional pages to record contact information. Here is an example, although I am not certain it was one of the models at issue.

Customs classified the merchandise in “other paper products” in Heading 4820 as “Registers, account books, notebooks, order books, receipt books, letter pads, memorandum pads, diaries and similar articles, exercise books, blotting pads, binders (looseleaf or other), folders, file covers, manifold business forms, interleaved carbon sets and other articles of stationery, of paper or paperboard . . . .” The importer challenged the liquidation and argued that the merchandise should be classified in Heading 4910 as “Calendars of any kind, printed, including calendar blocks.”

As with most tariff classification cases, there were no questions of fact in dispute. Presumably, the Court had examples of the product and everyone could agree on their physical character and use. The case comes down to whether the planners are articles that are “similar” to diaries of Chapter 48 or are “calendars” of Chapter 49. According to the Explanatory Notes, the difference between goods of Chapter 48 and 49 is the role of any printed material. Chapter 48 articles may contain considerable printed material as provided the printing is subsidiary to the primary use including, for example, “diaries.” Chapter 49 on the other hand, covers “calendars,” provided the printing gives the article its essential character.” One way I might boil this down is that Heading 4820 products are for writing while 4910 products are for reading or reference.

To the extent the planners contain grids that illustrate the days of the year in an orderly manner, they can serve as a reference to determine the day and date. That makes them functionally calendars under the normal dictionary definitions of that term. But, the Court noted, the planners also contain spaces in which to record information about daily activities, contacts, and any other marginalia that strikes the user. Moreover, the EN to 4910 indicate that heading does not cover memo pads and diaries that incorporate calendars. Consistent with the Explanatory Notes, this might have been enough to resolve the matter in favor of the government.

The plaintiff argued that the Court should ignore the EN because the meaning of “calendar” is clear and unambiguous. But the hard question was not what constitutes a “calendar.” The hard bit was whether the planners are “diaries” or articles similar to diaries. This is where things took an unusual turn.

The court is required to determine the meaning of tariff terms based on their common and commercial meanings. To do that, the court can look to dictionaries and other reliable sources and it can rely on its own understanding of the words. The Harmonized System is not written solely for an American audience. In fact, the intention to provide a “harmonized” means by which all parties to the Convention can uniformly classify merchandise to the sixth HS code digit. According to the Court, in the absence of an Additional US Note or similar indication of congressional intent, the Court will presume that HTSUS embodies the international nomenclature. There is no such indication here.

That raises the question of the international meaning of “diary,” which informs the meaning of articles “similar to” diaries. Because the English text of the HS is intended to be implemented in both the US and the UK, the Court considered the British meaning of “diary.” This is not a new or novel approach. In a case involving Victoria’s Secret, the Court noted that Heading 6109 covers “T-shirts, singlets and other vests, knitted or crocheted.” In that context, the Court applied the British meaning of vest and held it was limited to undershirts. In the recent Jing Mei decision, the Court referenced the British meaning of “mounting” as including an embellishment or ornament to classify several auto trim components. Moreover, the HS is also drafted and published in French. The rule on interpreting treaties that are officially in two languages is, when possible, to interpret them to be in concert, not conflict. While the HS is not exactly a treaty, the Court applied these principles to avoid injecting disharmony into the Harmonized System.

Turning to British dictionaries, the Court found that “diary” can mean “a book in which you write things that you must remember to do.” Another meaning is “calendars containing daily memoranda on matters of importance to people generally, or to members of a particular profession . . . .” In French, the HS uses the word “agenda,” the meaning of which includes “a notebook with a calendar” or “appointment book.” In other words, a planner. Consistent with that, the Court concluded that the planners are diaries, which are excluded from 4910.

That analysis makes perfect legal sense and is consistent with the guidance found in the Explanatory Notes. It is also advantageous in the larger context in that it preserves (and encourages) uniformity in the interpretation and application of the Harmonized System.

But this decision also serves as a very practical reminder that tariff classification is sometimes more complicated than compliance professionals anticipate or appreciate. That is, in many ways, an artifact of trying to draft a single document that describes all the possible physical goods in the universe in language that can be understood universally. That system is inherently imperfect. The WCO has undertaken a study of the “health” of the system. The Interim Report, identifies a number of areas of potential improvement including efforts to make the General Rules of Interpretation more prominent and less subjective and to clarify the Chapter and Section Notes. Looking for international ambiguities across local versions of English and French should be on that agenda. At the same time, the International Trade Commission can be on the lookout for variations and add clarifying Additional U.S. Notes. The HTSUS is a complicated legal text. But it is also supposed to be a document the trade community can reference and interpret based on the “common and commercial meaning.” Ideally, that should not require cross referencing British and French dictionaries, let alone Canadian, Australian, and others. Here’s hoping the WCO efforts and the ITC make significant advances in simplifying (or at least clarifying) the HTSUS.

Ninestar and UFLPA Exhaustion

2024-04-07T16:07:00.003-05:00

Exhaustion is a key doctrine in administrative law. When applicable, it requires that a party unhappy with an agency’s determination complete the administrative appeal process before turning to the courts for judicial review. Requiring exhaustion typically promotes judicial efficiency by ensuring that disputes are resolved at the agency and, if they are not, that there is a complete record of the agency process. Exhaustion also ensures that the judiciary respects the executive agencies and their expertise.

There are, on the other hand, times when the courts will find that exhaustion is not necessary or appropriate. Such is the case in Ninestar Corporation et al. v. United States et al., a decision of the U.S. Court of International Trade.

Ninestar is also interesting because it is one of the first cases in the CIT involving the Uyghur Forced Labor Prevention Act, known as UFLPA. In my hiatus from active blogging, I missed the rise of UFLPA as a major compliance topic. So, let's catch up a bit.

U.S. law has long prohibited the importation of products that are produced wholly or in part by convicts or forced or indentured labor including forced or indentured child labor. 19 USC 1307. Enforcement of § 1307 was limited until Congress amended the law to remove the so-called "consumptive demand exception," in the statute as part of the Trade Facilitation and Trade Enforcement Act in 2016. Section 1307 applies globally. Responding to growing concerns of systematic forced labor policies in China targeting Muslim Uyghurs and other ethnic minorities, Congress passed and the President signed the UFLPA into law on December 23, 2021.

As a side note, the UFLPA is one of those laws that is inexplicably not codified as one would expect. It shows up as a note to 22 USC 6901, which is a general provision stating Congressional finding regarding trade and human rights issues relating to China. The sausage-making that happens in Washington is often opaque and confusing, but it certainly seems that adding UFLPA to § 1307 would have been entirely reasonable and put the law in a place compliance people would expect to find it.

As a second side note, if you are wondering what constitutes forced labor, read the International Labor Organization Indicators of Forced Labor.

UFLPA creates a rebuttable presumption that good produced in whole or in part in the Xinjian Uyghur Autonomous Region ("XUAR") of China are subject to § 1307 and, therefore, prohibited from entering the United States. Importers of merchandise detained or excluded under UFLPA may submit information to overcome that presumption. That means proving by clear and convincing evidence that the goods were not produced in whole or in part in XUAR and, therefore, presumption does not apply. In the alternative, the importer can attempt to show that although produced in whole or in part in XUAR, the merchandise did not benefit from any forced labor.

Having merchandise excluded from the United States is a significant penalty. That means, potentially, not being able to deliver goods to customers, the resulting lost sales, the loss of manufacturing materials, potentially idling workers, etc. Supply chain disruptions can get ugly quickly. Also, there is the very real and very serious reputational harm that can occur when a company is publicly identified as having forced or child labor in its supply chain.

Currently, an importer of goods subject to detention under a § 1307 Withhold Release Order may export, which is not a "loophole" and is entirely consistent with the statute which functions to prohibit the admission of the merchandise. Customs has stated that it may seize the products of forced labor and may impose a civil administrative penalty on an importer of goods made with forced labor. According to DHS's strategy document on the preventing imports of Chinese products of forced labor, authority for that lies in 19 USC 1592 and 1595a.

The Department of Labor maintains a list of items found to be produced by child or forced labor here.

At this point, we have not even gotten to the issue in Ninestar. I will reserve my right as blogger-in-chief to return to the scope of CBP's penalty and seizure authority in another post.

The issue presented in Ninestar relates to the activities of the Forced Labor Enforcement Task Force, which is an interagency organization tasked with monitoring and enforcing the forced labor laws. It started as part of the USMCA and has expanded in scope. The FLETF is headed up by the Department of Homeland Security, including representation from Customs. Under the UFLPA, the government was required to come up with a strategy to prevent the importation of products from China that were produced with Forced labor. As part of that strategy, the government is required to publish lists of entities that produce goods in whole or in part with forced labor; work with the government in XUAR to recruit, receive, or otherwise exploit forced labor; or export such products. UFLPA § 2(d)(2)(B).

FLETF has done that and included Ninestar on the list as an entity that has worked with the government of XUAR "to Recruit, Transport, Transfer, Harbor or Receive Forced Labor or Uyghurs, Kazakhs, Kyrgyz, or Members of Other Persecuted Groups out of Xinjiang." The listing also includes a procedure a listed entity may follow to request removal from the list. The request must include information demonstrating that the entity does not or no longer meets the criteria for being included in the list. Entities requesting removal may also request a meeting with FLETF to make an oral presentation on the issue.

This is where we finally get to exhaustion.

Ninestar did not request that FLETF remove it from the list. Instead, it sued DHS, CBP, and the FLETF. As initial relief, Ninestar asked the Court to impose a preliminary injunction prohibiting FLETF from acting in furtherance of the listing. Ninestar also asked the Court to invalidate the listing under the Administrative Procedure Act ("APA"). The government responded that Ninestar is not entitled to a preliminary injunction because it never asked to be removed from the list, meaning it failed to exhaust the administrative process. In response, Ninestar argued that the APA does not require exhaustion and that requiring exhaustion would not be prudent in this case.

Compared to other federal courts, the Court of International Trade has a unique relationship to APA exhaustion. Where the CIT has exclusive jurisdiction and unless stated otherwise, the law requires that "the Court of International Trade shall, where appropriate, require the exhaustion of administrative remedies." 28 USC § 2637(d). The "where appropriate" is an enormously powerful phrase because, unless cabined by other language or precedent, it signals to the Court that Congress is giving the judge discretion to do the right thing. The judges, however, may not range freely. The Court of Appeals has said that the CIT should require exhaustion "absent a strong contrary reason." As CIT Judge Katzmann succinctly put it, the Court should "require exhaustion broadly, excuse it carefully."

But there is a complicating factor here. The APA has its own exhaustion requirement. This rule, at 5 USC § 704, states that only final agency action is subject to judicial review. It goes on to state in remarkably confusing language that, as interpreted by the Supreme Court, exhaustion of the administrative process is required prior to judicial review only (1) when a statute requires it or (2) the agency's rules require an administrative appeal before judicial review and the agency action is inoperative pending that review. If neither of those conditions are present, the Court is not free to require exhaustion.

There is no statute or agency rule requiring exhaustion. According to Ninestar, that means that the APA prevents the CIT from exercising discretionary (or technically "prudential") exhaustion. It must, therefore, address the matter before it.

The Court did not agree. According to the Court, § 2637(d) is the relevant statutory requirement for exhaustion; it just happens to be one that is tempered by judicial discretion. In other words, in the CIT exhaustion is the default requirement except in those circumstances where prudential considerations indicate exhaustion is not required. Reading § 2637(d) as the statute that requires exhaustion (with exceptions) resolves the conflict between the APA and § 2637.

Turning to whether prudential considerations weigh in favor of requiring exhaustion, the Court noted that there are four circumstances in which the Court has not required exhaustion:

the issue presented is purely a question of law, which the court can resolve;
the plaintiff has not had timely access to the agency's confidential record;
there was a relevant court decision after the agency decision and the court decision materially affected the issue; or
raising the issue at the administrative level would have been futile.

The relevant criterion in this case is that Ninestar did not receive timely access to the confidential record, nor did it receive an adequate explanation of why it had been listed. All it knew was that it had been listed because FLETF found it to be working with the government of XUAR "to recruit, transport, transfer, harbor or receive forced labor or Uyghurs, Kazakhs, Kyrgyz, or members of other persecuted groups out of Xinjiang." This is merely a statement of the legal conclusion and does not provide any factual basis on which the determination was made. Without that information, any effort Ninestar were to undertake before the FLETF would have required it guess at the evidence it was trying to refute. Prudential considerations of efficiency and deference to agency expertise should not force the affected party into a proceeding where it dispute or contextualize the evidence against it. Given that circumstance, the Court held that requiring Ninestar to exhaust its administrative remedies is not "appropriate."

That means the Court went on to consider the merits of Ninestar's requested preliminary injunction.

Preliminary injunctions are extraordinary relief and are, therefore, hard to come by. That was the case here. I am not going to extend this post too much further to review that part of the decision. The merits of UFLPA decisions are going to be before the Court in this or in other cases. It is sufficient to note that the court found:

The record contains an explanation of some facts that support the agency decision including Chinese government documents and statements from an informant;
The Court agreed, preliminarily at least, that the government correctly applied the "reasonable cause to believe" standard to the listing decision rather than the higher "preponderance of the evidence" standard;
There is record evidence that Ninestar was listed based on actions occurring after the UFLPA was in enacted;
Ninestar failed to produce sufficient evidence of irreparable harm;
Finally, balancing the hardships between Ninestar and the public interest of preventing the entry of goods that benefit from forced labor, the Court found the weight tips in favor of the public interest.

That is a lot (58 pages to be precise) and I skipped over important law. I am certain we will be back to this. The topic is important. Compliance and the avoidance of dealing in products of forced labor should be an obvious goal for everyone involved. Unfortunately, that is not always true at the far ends of some supply chains. Beyond the business concerns, this is one of the few compliance activities importers undertake that have real human consequences on the far ends of supply chains. New tools and newly available data make those far ends more visible and, therefore, easier for the government to enforce and also harder for businesses to ignore.

Precious Tritium

2024-03-30T11:53:00.005-05:00

One thing I have learned as a customs lawyer who does a lot of classification work is that there are millions of odd items moving in international trade the existence of which I am completely ignorant. Such is the case of the gaseous tritium light sources used in, among other things, firearm sights. These things use tritium sealed in a glass that has been coated in phosphor. The radioactive tritium decays, releasing beta particles, which interact with the phosphor causing it to emit light. In other words, it creates light with no external power source. Pretty cool.

Tritium is, of course, a real thing. It is an isotope of hydrogen. We know this from the excellent documentary "Spider-Man."

This comes up in relation to the Court of International Trade decision in Trijicon, Inc. v. United States in which the importer challenged the tariff classification of several versions of the gaseous tritium light sources ("GTLS"). The plaintiff uses them to make gun sights. The question presented was whether the GTLS are classifiable in Heading 9022 as apparatus based on the use of beta radiation as the plaintiff contended. Customs classified the GTLS as lamps and lighting fittings in Heading 9405.

The Explanatory Notes give some guidance on what constitutes an "apparatus" of Chapter 90 by stating that they are usually, but not always, "characterised by their high finish and high precision." Moreover, they are used mainly in medical and scientific applications and have an aperture designed to allow the radiation to escape in one direction.

Heading 9405 includes specialized lamps using any light source. Important for this discussion, 9405 is limited to lamps and light fittings not elsewhere specified or included. That means that if the GTLS are classifiable as apparatus of 9022, they cannot be classified in 9405.

The first issue the Court took up was whether a GTLS is an "apparatus" for purposes of classification in 9022. As usually happens, the parties proffered multiple and conflicting definition of "apparatus." The main two are "a set of materials or equipment for a particular use" and "a complex machine or device."

On the first, the plaintiff argued that the GTLS is made up of "materials" that serve a particular purpose. This approach makes sense in that the definition of apparatus requires "materials or equipment." The use of "or" indicating that those are two distinct categories. The Court disagreed and read "materials" as things that also serve a particular function, presumably contributing to the function of the whole apparatus. The GTLS consists of a glass capillary, phosphor coating, and tritium gas. According to the Court, none of those materials serves a particular function in isolation. They only provide illumination when combined.

I understand this analysis, but on this point I respectfully dissent. The tritium serves an independent function of emitting beta radiation; the phosphor coating serves the independent function of absorbing beta particles and emitting photons. While not mechanical or electrical, the combination of these elements strikes me as a set of materials put together for a particular use. This give meaning to "materials" that is distinct from "equipment." The GTLS is a device composed of a set of several materials and that set performs a useful task.

The Court next considered an alternative definition of apparatus as a "complex device." It is a light source, which does not seem particularly complex compared to the items listed eo nomine in 9022. Even smoke detectors, which are listed at 9022.29.40, have a number of active elements including a source of ionizing radiation, a battery, and a speaker to sound the alarm. The materials that make up the GTLS are static and only interact in a passive, natural process. The Court focused on the individual components rather than the imported whole, but the whole is not particularly complex.

The Court next focused on the fact that the GTLS are not beta particle emitters. There is no aperture allowing the particles to exit the tube. This is taken from the EN, which describes the apparatus of 9022 as having the "radioactive substance [] placed in a container, normally of steel coated with lead (bomb), which has an aperture designed to let the radiations pass in one direction only." The GTLS are not designed to release beta particles in one direction. They do release light, but that is not the type of radiation contemplated in 9022.

The Court, therefore, found that the GTLS are not classifiable as apparatus based on the use of beta radiation.

Moving on, the remaining question was whether they are "lamps." The Court noted several reference documents including plaintiff's own documents in which the GTLS are described as lamps. And, there is no limitation in the Explanatory Notes as to the constituent materials of lamps. Lamps is a broad term for things that provide illumination. The mere fact that the products work because of the presence of beta radiation does not exclude them from 9045.

Because they are not apparatus of 9022 and are lamps of 9045, the CIT granted the government's motion for summary judgment.

HTSUS Snippets and Fragments

2024-03-27T18:34:00.001-05:00

For the most part, the Harmonized Tariff Schedule of the United States has an internal logic and consistent format that eases navigation. Most of us who work with the HTSUS can easily communicate about Sections, Chapters, Headings, and Subheadings. There is, however, the occasional need to talk about the fragments of text that are neither subheadings, nor tariff items, nor statistical breakouts. They are the un-numbered lines. Take, for example, 8504.90, the subheading for parts of electrical transformers and similar products.

8504.90 is the subheading. The first tariff item below the subheading is 8504.90.20 covering printed circuit assemblies that fit within the scope of the un-numbered language between 8504.90 ("Parts") and 8504.90.20 ("Printed circuit assemblies"). There are two more of these un-numbered subdivisions below 8504.90.41.

Normally, this oddity would not merit any discussion. For classification purposes, it is pretty clear that these un-numbered snippets of text limit and define the scope of what follows indented below. That is not controversial.

However, the legal impact of those un-numbered categories did merit discussion from the Court of International Trade in Spirit Aerosystems, Inc. v. United States, which is a drawback case. "Drawback" is the procedure of requesting a refund of duties paid on previously imported merchandise because it has been destroyed or exported from the United States. There are many variations on this involving, for example, goods used in manufacturing and goods exported without having been used. Under "substitution drawback," claimants are permitted to match duty-paid imports to other exports or destroyed merchandise provide the goods are sufficiently similar.

Normally, exported or destroyed merchandise is eligible to be substituted for unused merchandise drawback purposes when it falls within the same 8-digit subheading as required by statute (19 USC 1313(j)(2)(A)). However, this rule does not apply where the 8-digit tariff item begins with "other," unless the imported merchandise and the exported or destroyed merchandise are classified in the same 10-digit statistical number.

The "statistical reporting numbers" in the example above are the 00, 10, and 30. This level of detail has traditionally been used for economic analysis and reporting, with no impact on duty. However, they have become increasingly relevant as, for example, Section 301 duties may vary at the 10-digit level.

In this case, Spirit imported aircraft parts under tariff item/statistical reporting number 8803.30.0030. The item 8803.30.00 covers, "Other parts of airplanes or helicopters." That "Other" means the exception to the 8-digit rule applied. Below that is the un-numbered line "For use in civil aircraft." Indented below that are two statistical breakouts at 15, "For use by the Department of Defense or the United States Coast Guard," and 30, "Other."

Here is how it looks (in the 2020 version relevant to this case):

Customs denied Spirit's drawback claims because 8803.30.00 starts with "Other" and Spirit did not prove that the exported or destroyed merchandise was in the same 10-digit breakout as the imported merchandise. Spirit argued that the "For use in civil aircraft" snippet, which the Court refers to as "numerically unaligned text," is the 10-digit level that covers statistical breakouts 15 and 30. This makes perfect sense when you look at the HTSUS above and see that the breakout at 60 for "Other" is at the same level as the numerically unaligned text.

If the indents mean anything, that text is the 10-digit level and the lines at the indented level below are within the unaligned text. Right?

Despite the elegance of this simple argument, the Court was not convinced. According to the Court, the plain meaning of the drawback statute is that the 10-digit level is the text adjacent to the statistical suffix, regardless of its level of indent. That means civil aircraft parts for use by the DOD or Coast Guard are not interchangeable with "Other" parts for use in civil aircraft.

As a result, the Court granted summary judgment to the United States, ending the case (at least at this level).

Liquidation Un-Deemed by CIT

2024-03-23T12:13:00.005-05:00

What happens when Customs decides that an entry was "deemed liquidated" while the entry is suspended by the Commerce Department? Apparently, nothing. That is the gist of the decision in Fraserview Remanufacturing Inc. v. United States, a (relatively) recent decision from the Court of International Trade.

The facts of this case are a bit complicated. The imported merchandise was softwood lumber from Canada, which is subject to an antidumping and countervailing duty order. As part of the administrative process, on March 19, 2020, Commerce ordered that CBP suspend the liquidation of the 80 entries subject to this case. Customs, however, mistakenly scheduled the entries for manual liquidation. Inexplicably, Customs, citing "system errors," failed to actually liquidate them. After noticing the failed (and incorrect) effort to liquidate the entries, CBP marked the entries as having been deemed liquidated by operation of law on August 7, 2020.

"Deemed liquidation" occurs when CBP fails to liquidate an entry within six months after receiving notice from Commerce that it has lifted the suspension of liquidation. 19 USC 1504(d). Customs published notice of these "liquidations" on September 2 and 3, 2020.

When the plaintiff realized that Customs considered the entries to be liquidated, despite the suspension, it reached out to CBP asking that the agency reset the status to unliquidated. Customs responded that the 180-day period in which to protest the liquidation had passed and, therefore, the entries were final.

Not having a valid denied protest, the plaintiff filed suit in the Court of International Trade under the court's "residual jurisdiction." 28 USC 1581(i). As happens almost every time a plaintiff asserts jurisdiction under (i) to challenge a mistake Customs made, the United States moved to dismiss the case on the grounds that the plaintiff failed to protest the liquidation. Absent a protest, the argument goes, the liquidation is final and the plaintiff has no legal recourse.

The thing about this case, though, is that the entries should never have liquidated to start with. Both parties seem to agree with that. There is caselaw (even if in the legal netherworld of "nonprecedential" decisions) stating that erroneous liquidations can, and therefore, should be protested. The government leaned into that, putting the responsibility on the importer to monitor liquidations and file protests accordingly. This is consistent with the government's current position in the Section 301 litigation that Customs actions can only be undone by reliquidation and that reliquidation is impossible without a timely protest.

The interesting question in this case is whether liquidation every actually happened. Remember, the first mistake was that CBP scheduled the entries to liquidate contrary to Commerce's order to suspend liquidation. Then, Customs tried and failed to liquidate the entries in accordance with its erroneous understanding of the instructions. Given that everyone agrees the entries should not have liquidated, this seems like a perfectly good way for the that the United States to fix its mistake and resolve the case.

Instead, Customs argued that its notice of the deemed liquidation is a protestable event, making it the equivalent of a liquidation. That may be true for a manual liquidation, for which notice is treated as the evidence of liquidation. A deemed liquidation is different. Under the customs regulations, a deemed liquidation occurs on the expiration of the six-month period after suspension ends, not notice. 19 USC 1504(d) and 19 CFR 159.9(c)(2). Here, Commerce did not lift the suspension so deemed liquidation was never triggered.

Moreover, the current version of the protest statute, 19 USC 1514, requires that the importer (or other authorized party) file the protest within 180 days of the liquidation. For deemed liquidations, that is the actual date of liquidation, not the notice. Because the notice is irrelevant to the protest clock and because the deemed liquidation never actually occurred, the entries are still suspended, exactly as they should have been. The Court, therefore, denied the motion to dismiss and ordered CBP to reset the entries to unliquidated status. When the AD/CVD process is complete, Commerce will tell Customs what to do and we will all hope Customs does it right.

Hybrid Sheep and the Lacey Act

2024-03-20T09:26:00.006-05:00

The Lacey Act, as you likely know, prohibits the international movement of plants and animals that were harvested illegally. Typically, a violation involves a company that imported wood or wood products for use in production or for resale. Less commonly, by which I mean never until just now, does the violation involve the importation of parts of wild mountain sheep from Kyrgyzstan as part of a plot to clone the sheep to produce breeding males to make hybrid giant sheep for private hunting in Montana. That real live plot, recently noted in a Department of Justice press release, sounds like the hobby or side hustle for the villain in a James Bond movie.

Thanks to Tom B. for the tip and the nudge to do this update.

The crazy facts are that the owner of an "alternative livestock ranch" in Montana violated the Lacey Act when he conspired with others to import "parts" of Marco Polo argali sheep. These are among the largest sheep in the world and are native to the Pamir Mountains of central Asia. According to DOJ, they can weight more than 300 pounds and have horns that span five feet.

The idea was to use the imported samples to clone a male Marco Polo and then use that male to impregnate ewes of other species, creating a "giant" hybrid sheep for "captive hunting." This was not just an idea, the ranch owner got as far as having actual cloned sheep embryos and produced a single pure-bred male Marco Polo named "Montana Mountain King." That ram's semen was actually used to artificially inseminate ewes.

It is not clear how the Lacey Violation occurred. Possibly, the killing and/or butchering for export in Kyrgyzstan was illegal under local or international law. More likely, the problem for the rancher-turned-defendant is that the species ovis ammon, of which the Marco Polo is a subspecies (ovis ammon polii), is listed on Appendix II of the Convention on the International Traffic in Endangered Species (CITES). Appendix II lists species that are not yet recognized as threatened with extinction but need protection from unregulated trade to prevent that risk. Importing Appendix II animals or products derived from them requires an export permit from the source country. Presumably, that was not obtained.

Here is a related law-school hypothetical for you: What if they did this Jurassic Park-style with an already extinct, and therefore not endangered, species? This is not too crazy of an idea. People seem to be actively working toward de-extinction for a mammoth and a thylacine ("Tasmanian tiger"). At least initially, it seems those creatures or hybrid (e.g., half mammoth-half elephant) would be unregulated. Or, they may fall into some more generic regulation prohibiting the keeping of "exotic" or invasive species. Whatever, when it is possible for me to have a pet dodo (raphus cuculattus), I'm in.

Also, while I am thinking of CITES, do not smuggle birds, even if they are cereal mascots.

Counter-Counterclaim Decision

2023-10-01T17:03:00.004-05:00

This is a two-parter covering three decisions including Second Nature Designs Ltd. v. United States. This part covers an interesting procedural question with implications for importers deciding whether to file a challenge to a customs decision in the Court of International Trade. In this case, that decision was the proper classification of decorative objects made from branches, wood, dried flowers, and other material. Customs classified these items in HTSUS item 0604.90.60 other foliage, branches and other parts of plants . . . dried . . . or otherwise prepared (7%). Plaintiff believes the merchandise is properly classifiable in 0604.90.30 covering the same merchandise except in "dried or bleached" form (free).

From Second Nature Designs

This first decision does not resolve the classification. It goes to whether the United States properly asserted a counterclaim against the plaintiff. A counterclaim is a claim the defendant asserts against the plaintiff. Here, after Second Nature sued the United States over the classification of the imports, the United States appears to have reconsidered the classification and decided that some of the merchandise should have been classified in tariff item 6702.90.65 as artificial flowers and foliage. If correct, that merchandise should have been liquidated at 17%.

Counterclaims are fairly standard in federal litigation. The Federal Rules of Civil Procedure recognize counterclaims at Rule 13. Rule 13 at the Court of International Trade similarly recognize that defendants may state a counterclaim, usually in the Answer to the complaint. Moreover, Congress specifically granted to the CIT exclusive jurisdiction to hear counterclaims provided "(1) such claim or action involves the imported merchandise that is the subject matter of such civil action, or (2) such claim or action is to recover upon a bond or customs duties relating to such merchandise." 28 USC 1583. That grant of jurisdiction, however, does not create a cause of action. That has to arise from some other authority.

In a 2022 decision also involving Second Nature, the Court of International Trade held that there is no legal authority permitting the Government to assert a counterclaim seeking a different classification.

If that were the end of the matter, that would be an important change in the nature of litigation before the CIT. Lawyers who practice in this area know that a terrible outcome would be going to court to seek a reduced rate of duty and corresponding refunds only to have the outcome be a third classification not previously asserted by the importer or by Customs and resulting in not just a lack of a refunds but an actual increase in the duties owed. That's a nightmare.

This case and similar decisions including Cyber Power Systems seem to make that outcome less likely. The decision in Cyber Power explicitly concludes that "Nothing in the provisions of the statute upon which Defendant relies gives the United States a cause of action to assert a counterclaim challenging CBP’s classification."

But, as is often the case, the law is more complicated. In a 1984 decision called Jarvis Clark Co. v. United States, the U.S. Court of Appeals for the Federal Circuit had to sort out the burdens on plaintiffs challenging tariff classifications. There is a long story here. All you need to know is that in the old days, plaintiffs had to meet a dual burden to succeed. First, the plaintiff had to show that Customs' classification was incorrect. Next, the plaintiff had to also prove that its proposed classification was correct. Even if the Government was obviously wrong, if the plaintiff's classification was not demonstrably correct, the plaintiff would still lose. That was onerous and I am glad I never had to deal with it.

According to the Jarvis Clark decision, Congress fixed that problem in the Customs Courts Act of 1980. That is the statute that created the CIT. In doing so, Congress gave the CIT the power to order additional adjudicative or administrative steps that are necessary "to enable [the Court] to reach the correct decision." Under this law, the current understanding is that in classification cases the CIT is to determine the correct classification even if that is not a classification asserted in the pleadings.

The CIT's obligation to find the correct result appears to be independent of any requirements of pleadings. According to Cyber Power, "Defendant is not barred from arguing for a different classification at a higher duty rate." In that case, the Court simply changed the proposed counterclaim into a defense to the plaintiff's claim. In Second Nature, the CIT followed the same path and allowed the United States to assert its preferred classification not as a counterclaim but as a defense.

In the end, this does not seem to change the fundamentals of classification litigation. Assuming this analysis holds up on the inevitable appeal, it may change the way the Government responds to complaints. But, it seems we are just moving the same argument from the counterclaim bucket to the defense bucket. Traditionally, a defense is asserted to undercut the plaintiff's claim, rather than to seek a remedy. That makes a defense a somewhat awkward mechanism for this. Even that fact may not be meaningful. As long as the Court has to get to the right result and has the power to enforce that result through reliquidation or a money judgment, the Government might take that position that all it needs to do is make the argument in its brief without any prior pleading.

What might change is discovery. Normally, parties can seek discovery of information that is relevant to a claim or defense. If the Government cannot assert a counterclaim, but the Court has to get to the right result, the basis for discovery relating to an alternative classification would likely need to be that it is relevant to the defense. Otherwise, I (for one) might move for a protective order. Let's not get too far down that road. Some way or another, the Court is going to get what it needs.

Part Two on the substance of this classification will follow.

Ellwood City Blues

2023-08-18T14:37:00.003-05:00

Despite being judicial review of agency action, principles of administrative law do not always apply to customs law. That is because most decisions by Customs and Border Protection affecting the importation of merchandise are subject to administrative review in the protest process and then judicial review on a de novo standard. That means the judge will make a decision based on the evidence presented to the court rather than the administrative record on which the agency based its decision.

For comparison, in a trade case, the court will uphold a Commerce Department dumping margin calculation as long as the decision is based on substantial evidence in the record and is otherwise in accordance with law. That means the agency can prevail even if the court would have reached a contrary conclusion. That is the opposite of, for example, a tariff classification case in which the court is required to reach the correct result based on the evidence before it with little regard for Customs' original decision. There is some nuance involving so-called Skidmore deference and the power of Customs' prior decision to persuade the court, but that is a pretty marginal circumstance. After all, if the CBP determination is sufficiently logical and consistent to persuade the judge, that just means it is how the judge would have decided on his or her own.

Even traditional on-the-record review in dumping and countervailing duty cases do not rely on the Administrative Procedure Act standard of review. The trade laws set the standard of review in 19 USC 1516a. Cases brought under the Enforce and Protect Act have their own standard of review in 19 USC 1517(g). The trade cases that directly apply the APA are those brought under the Court's so-called "residual jurisdiction" of 28 USC 1581(i), which has been getting a workout in challenges to Section 301 and 232 duties and is also relevant where Commerce's instructions to Customs, but not the underlying decision, are being challenged.

Despite all that, I am certain that the law school class that had the most day-to-day impact on my work life was Administrative Law, because sometimes agencies have to be held accountable for actions that are not specifically identified in the trade laws. These are bigger-picture issues including things like requiring that agencies follow their own regulations and follow notice and comment requirements for new regulations. That was true in Royal Brush, which we discussed in the last post, in which the Federal Circuit required Customs to comply with due process in EAPA investigations.

That is also where Ellwood City Forge Co. v. United States is relevant. This case involves a dumping order on something called a forged steel fluid end block. A normal part of a dumping case is an on-site verification of information the respondent foreign manufacturer or exporter provided. That requires international travel. In this case, that process got waylaid by COVID travel restrictions. As an expedient alternative, Commerce issued a written questionnaire in lieu of a verification. Commerce accepted and relied on that information as "facts available," but did not make an adverse inference.

The domestic petitioner argued that the information the respondent provided was incomplete or false and resulted in lower general and administrative expenses. That adjustment made an affirmative dumping determination less likely. When the petitioner sued, Commerce (eventually) moved for a voluntary remand to reconsider its position with respect to the information it collected via the questionnaire.

On remand, Commerce changed its treatment of the questionnaire response and determined that it had in fact verified the information, just not in person.

This is the nub of the controversy. Remands are generally limited in scope to what was ordered by the Court. Moreover, remands for further agency action usually require that the agency reconsider some specific fact or methodology and provide a fuller explanation of the decision the agency had already made. The decision to treat the questionnaire response as verified is not the decision Commerce had already made.

According to the Court of International Trade, in 2020, the Supreme Court gave agencies an additional path forward in a case called Dep’t of Homeland Sec. v. Regents of the Univ. of California, 140 S. Ct. 1891 (2020) (Regents). Under Regents, the agency can either provide a fuller explanation of its original decision or it can take new agency action and provide new reasoning. An agency that does the latter, must comply with the procedural requirements for a new action.

Here, the Court could not discern that Commerce had properly taken either available path. The remand decision was not a fuller explanation of a prior decision. Rather, in the remand, Commerce changed its position and treated the questionnaire response as verified. That, according to the Court is a new agency action. In the words of the Supreme Court, that is looking at the question "afresh." The problem for Commerce is that it failed to follow the procedural requirements for a new agency action. Those requirements include (1) explaining why it will not now conduct an on-site verification, (2) consideration of possible alternatives, and (3) explaining of how the new decision does not violate any of the Plaintiff's legitimate reliance interests.

As a result, the Court remanded the matter back to Commerce to act in accordance with Regents.

Target on Finality

2023-08-02T20:22:00.000-05:00

In the last post, about the Federal Circuit’s very important decision on due process and allegations of evasion of antidumping duties, I made a snarky, offhand comment that the government believes “liquidation is magic.” That was in the context of the government arguing that Customs’ liquidation of entries mooted an appeal, thereby taking away the importer’s right to further judicial review. I said that knowing full well that I still needed to write this post summarizing Target Corp. v. United States in which Target made what I want to be a valid and righteous argument that Customs’ improper liquidation of entries at a favorable rate of antidumping duty prevents the Court of International Trade from ordering Customs to collect the legally applicable duties. But it turns out that while liquidation is an important legal step, in at least one unusual circumstance it is not sufficiently powerful to overcome the full force of an Article III court.

Understanding this case requires a lot of background from a prior decision called Home Products, which I posted about here. Reading that post will provide useful context. The quick and dirty version is that Home Products involved the antidumping duty order on ironing boards from China. Target imported ironing boards and deposited estimated antidumping duties at the then-prevailing rate of 9.47%. Pursuant to a court order, the liquidation of those entries was enjoined while the parties to the dumping case argued about the correct rate.

In Home Products, after significant litigation, the Court of International Trade accepted a settlement resulting in an antidumping duty assessment rate of 72.29%. The Court lifted the injunction and Commerce directed Customs to reliquidate the entries at the correct rate of duty. Customs, however, liquidated 40 of Target’s entries at the 9.47% deposit rate. The government discovered the incorrect liquidations after the 90-day period in which Customs could reliquidate to correct its error. A very important note here: this reliquidation was not just an administrative error; it was contrary to the judgment from the Court of International Trade.

Target was not happy about having to pay additional duties on entries that were liquidated at a favorable rate. What followed was a lot of litigation in which Target tried to figure out how to use the Home Products case as a vehicle to preserve its favorable liquidations. That resulted in interesting procedural litigation on whether Target could intervene in Home Products. While intervention was not allowed, the CIT let Target participate as a non-party under the Court’s Rule 71. When the CIT eventually ordered Customs to reliquidate the entries consistent with its prior order, Target appealed.

Photo by Filip Mroz on Unsplash

The Court of Appeals for the Federal Circuit decided the appeal on procedural grounds. The Court held that Target might have appealed the CIT’s decision prohibiting it from intervening, but it did not, and the intervention issue was not before it. Moreover, the Court found that Target had not established that it satisfied the requirements to participate in the case as a non-party. As a result, the Federal Circuit dismissed the appeal. But, before slamming the door shut on Target, the Court noted that Target had protested the reliquidations and, if Customs denied those protests, Target can challenge the liquidations in its own case. The current case is exactly that challenge.

That set up a clash between the statutory finality of liquidation and the power of the Court of International Trade to issue orders to enforce its judgments. It also highlights a bigger-picture question about the power of the Court of International Trade to fashion a remedy in a lot of cases that involve liquidated entries but not the merits of the liquidation.

At this point, we need to discuss the finality of liquidation. The law (19 USC 1514(a)) provides that specified decisions of Customs are “final and conclusive upon all persons (including the United States and any officer thereof) unless a protest is filed . . . .” That means once CBP liquidates an entry, the classification, value, rate of duty, and other specified decisions within the jurisdiction of Customs are set in legal stone unless there is a valid protest filed or another exception applies. When the importer is happy with the treatment of the entry, the finality of liquidation is a good thing as CBP cannot go back and assess additional duties. When the importer disagrees with the liquidation, the 180-day protest deadline becomes vitally important. In the absence of a valid protest, any effort to challenge a protestable decision will be dismissed for failing to state a claim on which relief can be granted.

Exceptions to finality include the 90-day period in which CBP can voluntarily reliquidate the entry. The other major exception is where the liquidation was the result of a material false statement or omission by the importer or other person involved in the entry. In that circumstance, Customs can reliquidate the entry to collect the correct duties, taxes, and fees and can assess a penalty as well.

Next, a quick primer on the Court of International Trade. The Court was created in the Customs Court Act of 1980 as the successor to the Customs Court. The CIT is a court under Article III of the Constitution, meaning its judges are nominated by the President and confirmed by the Senate to lifetime appointments. It also means CIT judges can, and often do, sit in other courts. They can do this because they are, for all intents and purposes, district court judges. Like all federal courts, the CIT is a court of special and limited jurisdiction. Unlike other federal courts, the CIT has nationwide jurisdiction but relatively narrow subject matter jurisdiction. Important for this discussion, the CIT has “all the powers in law and equity of, or as conferred by statute upon, a district court of the United States.” 28 USC 1585.

Target’s argument was basically that the liquidation at 9.47% was final and Customs had no authority to reliquidate after the initial 90-day period for voluntary reliquidations. There are plenty of cases that support that argument. But the facts here are unique. The original erroneous liquidation appears to have been Customs’ fault and Customs’ decision to liquidate at the lower rate is arguably a protestable event, even though no one is going to protest a lower-than-expected liquidation (which is also not contrary to the importer). But the problem here is whether the reliquidation at the higher rate to correct the error was Customs' decision, making it a protestable event. Although the Federal Circuit seems to have found it to be without actually addressing the issue, it does not really matter. Commerce’s instructions to reliquidate at 72.9% appear to have been correct and consistent with the Court’s order and Customs had no choice but to follow the instructions. The question now before the CIT is whether that erroneous liquidation, done in violation of a valid Court order is binding on all parties, making the subsequent reliquidations invalid.

The Court rejected that notion. Basically, the Home Products case was properly before the Court of International Trade. As is often the case in the trade remedy cases, the outcome of that litigation impacted many enjoined entries including entries by importers like Target who were not party to the case. In other words, it is agreed that had CBP acted properly, it would have liquidated the entries at the higher rate as ordered by the Court. By failing to act in accordance with the order, CBP accidentally frustrated the remedy the Court granted to the petitioners in that case. Moreover, that remedy was agreed upon as part of a settlement, so it was arguably acceptable to lawyers representing exporters and producers.

Courts do not have to sit on their hands when someone interferes with the enforcement of an order or judgment. According to the CIT, statutory finality of liquidation does not interfere with the Court’s inherent ability to enforce its orders. That is most evident here where the underlying issue was the section 1516 review of a Commerce Department determination for which the liquidation was first suspended and then enjoined to prevent exactly this kind of mootness argument. See 19 USC 1514(b). In such cases, the law requires that the entries be liquidated in accordance with the final decision of the Court. The only way to ensure that happens is to recognize that finality of liquidation does not apply in trade remedy cases once the Court’s jurisdiction over the entries has been invoked. The liquidation-protest process does not divest the Court of the power to ensure that its final judgment is implemented. To find otherwise leads to the absurd possibility of the parties expending the time, money, and effort to litigate often complex trade matters before the Court only to find that their hard-won result (either way) can be frustrated by Customs making a mistake. That cannot be the result Congress had in mind when it passed the Customs Court Act of 1980, which gave the new Court of International Trade all the powers in law and equity that are necessary to provide complete relief.

This is a big case. It is a direct challenge to the scope of the authority of the Court and whether the CIT is truly a court of equal stature and power to the regional district courts. That seems to be what was intended. The quirky set of facts in this case may not be the best vehicle to make that determination, but I fully expect the Federal Circuit to have to weigh in.

CAFC: EAPA Process Really Does Violate Due Process

2023-07-28T15:04:00.001-05:00

Hot on the heels of my complaining about how the EAPA law and process is stacked against importers, the Court of Appeals for the Federal Circuit has issued an important decision that will have a major impact on how those cases work. If you are unfamiliar with evasion cases under the Enforce and Protect Act and how Customs and Border Protection handles them, go back and look at these two posts: Part 1, Part 2.

Royal Brush Manufacturing, Inc. v. United States, is the decision in an evasion case against Royal Brush involving pencils allegedly transshipped from China through the Philippines. Customs determined that there was evasion of an antidumping duty order based in part on evidence that was not disclosed to Royal. Specifically, Customs sent a representative to the facility in the Philippines to photograph the interior and provide a report. Customs refused to disclose all the photographs to Royal. Moreover, CBP's report concluded that the facility did not have sufficient capacity to produce the number of pencils allegedly made in the Philippines and exported to the U.S. In its report, Customs refused to disclose the numbers it used to calculate production capacity. Customs also withheld other information it gathered.

Photo by David Perkins on Unsplash

Royal challenged Customs' withholding of the information on which it based the affirmative evasion determination. The U.S. Court of International Trade ordered Customs to provide a summary of the redacted information (as it is required to do under the regulations), but also held that there is no requirement that Customs disclose business confidential information.

A second issue related to Royal's effort to respond to Customs' "Verification Report." Customs rejected the rebuttal on the grounds that it had not relied on any new factual information.

The CIT sustained Customs' determination and Royal appealed. In the meantime, and contrary to the way EAPA is supposed to work, Customs liquidated the subject entries, with antidumping duties assessed on two of them. As a result of the liquidation, the government tried to get the appeal dismissed as moot because the government believes that liquidation is magic.

On the mootness question, it is true that most issues involving the assessment of duties that result from a decision by Customs can only be challenged through the administrative protest process. The Court of International Trade can then review the denied protest. Absent a protest, the liquidation is final and conclusive. In this case, Customs assessed duties when it liquidated the entries and Royal did not protest. According to the government, that should end the matter.

The Federal Circuit did not agree. The EAPA statute includes a specific authorization to challenge the evasion determination that is distinct from challenging the liquidation. The evasion determination has consequences beyond the liquidated entries including the possibility that Customs will use it to bootstrap a penalty case, as is allowed under subsection (h) of the EAPA. That does not mean that Royal will get back the antidumping duties it paid. That issue was not brought before the Court, but it seems likely that a protest would have been needed to challenge CBP's erroneous liquidation. On the other hand. the Federal Circuit retained jurisdiction over the appeal, which is a good thing given the result.

The meat of this decision has to do with whether Customs may legally withhold relevant information from the imported to protect confidential business information. Presumably this is the confidential information obtained from the producer and not the importer's own info. At the outset, we can stipulate that Customs comes into possession of a lot of valuable confidential business information. Customs is and should be very careful to prevent disclosure of that information. The Trade Secrets Act applies to Customs employees and prohibits them from disclosing trade secret information "to any extent not authorized by law."

The government's argument on this point was that there is no authorization by law in EAPA or elsewhere to disclose the confidential information. Unlike antidumping and countervailing duty cases, there is no statute or regulation that creates a protective order to prevent unauthorized disclosure. In the absence of that mechanism, the argument goes, Customs was not permitted to disclose the information to Royal.

None of that matters because the Constitution requires disclosure. The Federal Circuit referred to this as a "relatively immutable principle" of due process. The Court held that where an agency makes an adjudicative decision that seriously injures an individual, due process includes the right to know what evidence is being used against that individual. Business confidential information is not exempt from this constitutional requirement. For purposes of the Trade Secrets Act, the Constitution is the authorization by law.

Given the constitutional mandate to disclose, Customs has the "inherent authority" to create a protective order mechanism. That system can allow the importer access to the full record to evaluate and rebut the evidence against it while protecting the information from unnecessary public disclosure. According to the Court, "There is no basis for CBP to violate Royal Brush's due process rights by failing to provide the information on which it relied to Royal Brush." This holding is probably broad enough to mandate that Customs create a protective order system for EAPA, which it can do by adopting some version of the system the Commerce Department uses in trade cases.

The last issue was whether Customs improperly denied Royal the opportunity to rebut new evidence Customs added to the record following "verification" in the Philippines. This also has a constitutional aspect but is directly addressed in the regulations at 19 CFR 165.23(c)(1):

If CBP places new factual information on the administrative record on or after the 200th calendar day after the initiation of the investigation (or if such information is placed on the record at CBP's request), the parties to the investigation will have ten calendar days to provide rebuttal information to the new factual information.

The government's argument was that this regulation did not apply because no new factual information was put on the record. This argument was refuted by Customs' own report indicating that new information was provided in the Verification Report. Thus, Royal established that it had a right to an opportunity to both see and rebut that information.

All in all, this is a big win for importers who are subject to an evasion investigation and their foreign exporters. This decision will necessarily add to the transparency of that process and allow importers a full opportunity to review and address the evidence against them. This aligns nicely with the "visceral and negative" reaction I described in the previous post on EAPA.

The decision may have broader implications as well. Importers have expressed similar concerns about the transparency of the forced labor enforcement process. A common refrain is that importers do not know what information Customs has gathered indicating that forced labor is being used in the supply chain and, therefore, the importer has no way to rebut that evidence. If this decision on the due process rights of importers subject to Customs' administrative adjudication applies generally, it may require that Customs make its administrative record fully available, including confidential information. That might be an interesting unintended consequence of this EAPA case.

Excavating Tariff Classifications

2023-07-27T17:27:00.000-05:00

A common error in tariff classification is to assume that some doodad used in or with a machine is necessarily classified as part of that machine. That is not always the case, which is why it is important to check the "relative" Chapter and Section Notes. For example, Section XVI, Note 2(a) states, that "Parts which are goods included in any of the headings of chapter 84 or 85 (other than headings 8409, 8431, 8448, 8466, 8473, 8487, 8503, 8522, 8529, 8538 and 8548) are in all cases to be classified in their respective headings . . . ." That means, for example, that a valve of Heading 8481 will usually be classified as a valve without regard to the machine into which it is assembled. The heading for the valve prevails over, for example, 8431, which covers "Parts suitable for use solely or principally with the machinery of headings 8425 to 8430." The latter including goods of Heading 8429, meaning "Self-propelled bulldozers, angledozers, graders, levelers, scrapers, mechanical shovels, excavators, shovel loaders, tamping machines and road rollers," which is really the topic of this post.

In Norca Engineered Products, LLC v. United States, the Court of International Trade classified cast-iron counterweights for self-propelled mini excavators. There was no dispute that the mini excavators are machines of Heading 8429. Moreover, the weights, which are used on the excavators to prevent them from rolling over are classifiable as parts of the machines classifiable in Heading 843. That means the weights are classifiable in subheading 8431.49 as "other" parts of these machines and then in 8431.49.90 as "other parts."

Typically, that would resolve the case. Legally, tariff classification is complete at the 8-digit level. The additional two-digit statistical suffix is often (but not always) a compliance afterthought because the suffix does not usually impact duties, taxes, and fees. These, however, are not typical days in customs law as the Section 301 duties imposed on products from China continue to raise issues. Here, the statistical suffix controls whether the merchandise is within the scope of an exclusion from Section 301 duties.

If the counterweights are parts of "backhoes," they are classifiable in 8431.49.9044 and not excluded from Section 301 duties. If, as plaintiff contends, the counterweights are parts of "other machines" of 8429, they are excluded from Section 301. That means the resolution turns on the nature of the finished machines, which are Doosan Bobcat mini excavators.

Source: Product Brochures - Bobcat Company

So, when is a backhoe a backhoe? According to the United States, a backhoe is a mechanical excavator that has a bucket and an arm the extends and excavates by drawing the bucket back toward the power unit. That seems to describe the product based on the picture. But Norca pointed to a number of commercial sources including John Deere, Caterpillar, and CASE Construction Equipment to show that the commercial understanding of backhoe is distinct from an excavator.

Normally, the Court interprets the HTSUS consistent with the common and commercial meaning and those are presumed to be the same. If one side argues that a more specific commercial meaning is intended to prevail over the common meaning, that party has to meet a higher burden. Norca tried to do that with evidence of the commercial understanding that backhoes do not have the ability to rotate through 360 degrees, which these machines can do.

The Court did not buy this argument because, according to the decision, the HTSUS provides for backhoes with 360-degree rotation. This follows because HTSUS subheading 8429.51 covers excavators of the front-loading type. Subheading 8429.52 covers non-front-loading excavators and segregates them into two distinct groups: those that can rotate 360 degrees and those that cannot. That group is then further broken down into backhoes, shovels, clamshells and draglines. Of those, the only possible classification is "backhoes," which means Norca's assertion that backhoes cannot rotate is incorrect.

Given that the machine in question is a backhoe, the counterweights are parts of backhoes of 8429, they are classified in 8431.49.9044, making them subject to the Section 301 duties.

EAPA Part 2 - What's The Problem?

2023-07-06T10:03:00.005-05:00

In my last post, we covered the mechanical aspects of evasion investigations conducted by U.S. Customs and Border Protection. These are cases CBP may initiate on its own, but which seem to more usually be initiated following an allegation by a domestic producer that an importer has evaded the payment of antidumping duties, countervailing duties, or both. The most common means of evasion is transshipping a product subject to an AD or CV duty order through a country not subject to the order and misidentifying the country of origin.

In this post, I want to run through some of the concerns that have been expressed by importers (and their lawyers) dealing with EAPA cases. You'll see that these cases require a whole new approach to customs enforcement. Because judicial review in EAPA is limited to facts in the agency record with a very deferential standard of review, these look a lot more like antidumping and countervailing duty cases minus the safeguard of complete information disclosure to the parties. As you'll see below, a lot of this feels unjust to customs lawyers who are used to a being able to deploy standard litigation tools including discovery and witness testimony to prove their case.

As an example, you should take a look at Leco Supply, Inc. v. United States, but similar to the last post, I am not going to review that decision in detail. It is just a good example of the issues importers are raising. The underlying issue in Leco was as challenge to CBP's finding that Leco has evaded antidumping duties on wire hangers from Vietnam by declaring that the hangers originated in Laos. The evidence in the case indicates, among other things that the supplier provided potentially counterfeit certificates of origin and payment records.

First, and separate from the specific legal issues, an often-unstated frustration is the very practical concern that importers can only do so much. I wrote about this for Law360. For decades, importers have generally understood their obligation to be to exercise reasonable care in reporting accurate and complete information to Customs. That includes the country of origin of merchandise and whether the imports are subject to an antidumping or countervailing duty order. Customs has, for years, talked about taking a risk-based approach to enforcement. Customs, for example, "uses risk-based analysis and intelligence to pre-screen, assess and examine 100 percent of suspicious containers." The office formerly known as Regulatory Audit "uses a risk-based approach to assess compliance with trade laws and regulations . . . ."

For importers, compliance risk management generally starts with gathering information from a potential supplier. That information will include the physical nature of the merchandise in sufficient detail to allow the importer to determine the tariff classification. Sometimes, that information comes from the importer, who may have designed the item or provided a detailed specification to the seller. In cases where the importer is buying an existing product, it can examine the merchandise and make its own determination as to its physical characteristics. Or the buyer/importer can specify the exact nature of the product in the purchase order and other documents, making the exporter contractually responsible for supplying merchandise that matches the order.

Because customs value is usually (but not always) based on the price to the buyer in the United States, value is also something importers can usually report with a degree of confidence. Value is, however, sometimes a problem for importers who are not familiar with the complex valuation rules. Value is also complicated by factors such as related party transactions, imports that are not subject to a sale, and the application of first sale for value.

Origin is a much tougher risk to manage. First, there are multiple and inconsistent rules at play. Second, the standard substantial transformation test based on a change in name, character, or use has become overly burdened with additional factors including the so-called "essence test" and whether the imported parts have a pre-determined end use. While there is some indication that the Courts may add clarity, for now, clarity is not abundant.

The underlying assumption in most commercial transactions is that the seller is not lying to the buyer. Buyers assume that sellers who do not deliver merchandise matching the order understand they are not likely to receive subsequent orders. That also applies to merchandise quality, on time delivery, price, and other elements of the deal.

On top of the business and economic considerations, importers who are smart and worried about compliance take additional steps to confirm that they are getting the merchandise ordered and that the purchase does not create other risks. In this context, the "additional risks" might include, for example, the presence of forced labor in the supply chain, a determination that the merchandise is subject to Section 301 duties, or that it is subject to AD/CV duties due to its actual country of origin. Methods reasonable importers employ to limit those risks include:

Contract terms (up to and including indemnification for losses)
Certificates of origin
Certificates of conformity, test reports, mill certificates, and other quality documents
Supplier codes of conduct
Third party audits
Site visits to observe manufacturing and confirm that the equipment, materials, and personnel exist in sufficient quantity to make the goods

All of the documentation depends on the trustworthiness of the supplier. Third party audits are of varying quality and not always possible given local laws. Site visits are great but are not always practical and even they can be manipulated by an unscrupulous supplier.

This relates to evasion cases because it is likely that the supplier not the importer is doing the "evasion." See, for example, the allegedly counterfeit documents in the Leco case. The importer has probably sought out a new supplier or worked with the old supplier to move production with the intention of managing duty liability and reducing compliance risks by avoiding rather than importing goods from the subject country. The importer has no interest in evading an order that it honestly believes it is legally avoiding. Duty avoidance, as opposed to evasion, is legal and prudent.

What is happening in these cases that is causing so much heartburn for importers?

Photo by Markus Winkler on Unsplash

First, there is a perceived lack of transparency. An EAPA determination is subject to judicial review on the record CBP compiled during the investigation. That record is likely to contain confidential business information. Unlike the antidumping law, EAPA and the implementing regulations do not require that Customs use a protective order to allow the importer or its lawyers to review confidential information upon which CBP may have based the decision.

In contrast, antidumping and countervailing duty investigations involve a lot of highly proprietary business information that is disclosed to interested parties subject to a detailed protective order. This allows the parties to understand the basis for the determination and, as necessary, rebut that information. In the EAPA context, without a protective order, Customs provides a public summary of the confidential information. Customs also provides redacted (or "bracketed") versions of documents in the record.

Lawyers have had a bad reaction to this process. We generally believe that those subject to an enforcement action that can result in a significant liability should have access to all the relevant information on which the government has relied in making that decision. That access to information may allow parties to refute the claim and provides confidence that the process was fair.

The problem is that a visceral and negative reaction based on principle and practice in a related but distinct process is not a legal basis on which to challenge a decision. The argument has been that the lack of access to the full record violates the importer's due process rights under the fifth amendment to the Constitution. Also, EAPA cases are not penalty cases (at least initially). This is about duty collection, so the interests are not the same.

Due process comes in two forms. Procedural due process requires that the importer be given notice of the claim against it and a meaningful opportunity to be heard. Substantive due process relates to circumstances in which the plaintiff has been deprived of "life, liberty, or property without due process." Engaging in international trade is not a right that is a protected liberty or property interest. On the procedural claim, the Courts have so far held that as long as the public summaries are sufficiently detailed to permit the importer to understand the substance of the information, the importer has an adequate opportunity to respond and, therefore, to be heard. Thus, the issue turns on the risk that the undisclosed information would have changed the outcome of the investigation versus the government's interest in performing its function with reasonable burdens. That is a fairly high bar for those challenging the public summary process. So far, that has not been successful.

The next issue is that EAPA is being interpreted as a strict liability statute. We covered this in the previous post. Let's just reiterate that while "evasion" sounds like a purposeful or at least a negligent act, it is not according to the law as interpreted to date. All that matters is that merchandise subject to an AD or CV duty order was imported without the deposit of the corresponding duties. As it stands, even where the importer exercises "reasonable care," the EAPA process can result in a significant bill for unexpected duties possibly because the supplier misunderstood the law or lied about the facts.

"At least," you might be thinking, "this only relates to the currently unliquidated entries, not the past five years as in a penalty case." I have bad news for you: nothing prevents Customs from commencing a penalty case on the basis of information it gathers during the EAPA process. While the importer might have a meritorious defense of reasonable care, that case is going to be hard to mount after CBP has already determined that the importer is evading the AD/CV duty order.

Next is the standard of review. The Court will uphold an EAPA determination that is not arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law. This standard is deferential to Customs. The Court need not actually agree with the outcome as long as CBP has provided a reasonable explanation that comports with the evidence in the record that both supports and detracts from the conclusion.

"Arbitrary and capricious" is a big departure for customs lawyers who are used to penalty cases and denied protest cases being subject to de novo review. That standard of review means that the Court makes an independent decision based on the admissible evidence presented to it in open court (or in the paper equivalent). I recognize the irony of arguing for a protective order process to emulate the information disclosure in a trade case while also arguing that the standard of review should be de novo as it is in a customs case. That is cake I would both like to have and to eat.

Related to this, as the Court recently stated in Sky View Cabinets, in EAPA cases is there are no rules that prevent Customs from considering hearsay evidence as part of its administrative determination. As a reminder, hearsay is an out of court statement introduced to prove a fact. In a traffic accident case, an example of hearsay would be "John told me that the driver was texting when the accident happened." Whether the driver was texting is an important fact and John's out of court statement is hearsay. Unless one of the many exceptions applies, John needs to show up in Court and make that statement under oath and subject to cross examination.

In a penalty or denied protest case, hearsay rules apply and keep out that kind of unreliable evidence. That is the context in which customs law usually happens. But, in an EAPA case, Customs can consider hearsay evidence up to and including statements and information from domestic producers that might be based on third party reports commissioned by the domestic party.

From the perspective of the importer, there is a lot to complain about in the EAPA process. The lack of complete disclosure and the deferential standard of review stack the deck toward the domestic industry. While that may seem to be a reasonable measure to enforce AD/CV duty orders, the result may be serious unexpected liability for importers who genuinely believed they engaged in reasonable diligence to ensure that that they were complying with the law. When Customs concludes that the importer is wrong about the origin or nature of the goods and that evasion has occurred, it does not matter to the United States that the supplier may have mislead the importer either as the result of a genuine misunderstanding of the law or out of simple dishonesty. Under this law, the importer has no defense based on its efforts at compliance.

It is a very hard time to be an importer. Supply chain visibility is the new currency of trade compliance. Importers need to know what goes into their products, where it comes from, and who processed it. That is true for forced labor compliance, the application of Section 301 duties, antidumping and countervailing duties, and other trade remedy measures. Not all importers are honest, but when conscientious importers are led astray by bad information or diligence that in hindsight was inadequate to identify deception, the risks are enormous. Nothing in the EAPA statute or enforcement process recognizes that.

IKADAN and EAPA

2023-06-24T16:55:00.000-05:00

I have not yet addressed cases brought under the Enforce and Protect Act ("EAPA"). These are important and controversial cases, so we need to change that. Also, there have been a few at this point, so we need to get going.

As a starting point, EAPA is part of the Trade Facilitation and Trade Enforcement Act of 2015. It sits in the customs laws at 19 USC 1517. The act seeks to address the "evasion" of antidumping and countervailing duties by means of written, oral, or electronic statements (or data) that contain material and false statements or omissions that result in "any cash deposit or other security or any amount of applicable antidumping or countervailing duties being reduced or not being applied with respect to the merchandise."

The act is directed at imports of "covered merchandise," which is products that, when imported, are subject to antidumping or countervailing duties. "Interested parties," who are most likely domestic producers of the covered product, may make an allegation to Customs that an importer is evading the deposit of estimated duties or the payment of duties. This may be, for example, the result of an incorrect tariff classification, false statement of origin, understated value, or another alleged scheme.

Upon receiving an allegation, Customs is required to evaluate it and determine whether it contains information that "reasonably suggests" evasion. If so, Customs initiates an investigation and has 300 days (which it can extended to 360) to make a determination of whether covered merchandise was entered through evasion. Within 90 days of initiation, Customs may impose "interim measures." That means it may suspend further liquidations of entries made after initiation and extend liquidations of entries made prior to initiation.

After an affirmative determination, Customs can suspend the liquidation of any unliquidated entry made on or after the date Customs initiated the investigation. Customs can also extend the liquidation of any unliquidated entry of covered merchandise made prior to the date of initiation. The importer will then be required to post cash deposits on those entries.

In summary, EAPA forces CBP to investigate allegations of evasions of AD/CVD orders. Where there is a reasonable indication of evasion, Customs can prevent liquidations to ensure that any AD/CV duties ultimately determined to be owed are paid. When in doubt about the scope of the order, Customs can refer that question to Commerce.

The initial determination is the responsibility of the Trade Remedy & Law Enforcement Directorate. An importer or the interested party that made the allegation can, within 30 days of the determination, seek review of the decision within Customs. Customs must make a review decision within 60 days. The review is handled by Regulations and Rulings. After that, whichever side remains angry about the decision (positive or negative) can seek judicial review in the U.S. Court of International Trade. That case must be filed within 30 days of the administrative review decision.

The scope and standard of review in an EAPA case is pretty narrow. These cases are done as a review of the agency record. That means no new evidence, no discovery, no witnesses, and no trial. The Court's role is not to determine the facts. Instead, the Court only decides (1) whether Customs followed the required procedures and (2) whether Customs' conclusion is "arbitrary, capricious, an abuse of discretion or not otherwise in accordance with law." The Court, therefore, will uphold a decision that is based on "a reasoned analysis or explanation." The decision must include a rational connection between the facts in the record and the ultimate decision. At least for the moment, if there is any ambiguity or gap in the law, the Court will defer to Customs' reasonable interpretation of the statute. This is the threatened Chevron doctrine.

These cases are much more like antidumping and countervailing duty cases than like traditional de novo customs litigation. The limited scope of review and deferential standard of review make this pretty perilous for the importer.

Evasion should not be confused with circumvention, though both are tools to enforce AD/CVD orders. Circumvention is a diabolical rule that allows the Commerce Department to find that merchandise that is otherwise outside the scope of the order or from a country not subject to the order is nevertheless subject to the order. Commerce can do this when, for example, it finds that although made in a non-subject country, the product was made from materials from the subject country and was made with comparatively minimal processing. Circumvention can also apply where the product did not exist at the time of the order or is a minor variation of the product covered by the scope of the order.

Unlike circumvention, EAPA is aimed at merchandise that is (arguably) within the scope of the order but is entered without the deposit of the AD/CV duties.

Ikadan Systems USA v. United States is a recent example of judicial review of EAPA enforcement actions. Rather than get into the specifics of Ikadan, I am going to use it as a jumping off point to illustrate how EAPA cases work and why importers should be concerned about them.

First, in a "normal" customs penalty case, a violation does not exist unless the someone made a material false statement or omission as a result of negligence, gross negligence, or fraud. Ikadan argued that "evasion" of duties should also require some level of culpability and not just a false statement or omission (which might be a good faith error). The Court held that the EAPA does not contain a discussion of culpability and, therefore, the Court deferred to what it considered to be Customs' reasonable interpretation of the statute as imposing strict liability, without regard to whether the importer acted negligently or knowingly. The only exception in the statute is for true clerical errors, which indicates that Congress intended this to be a strict liability mechanism.

Next, in a "normal" antidumping or countervailing duty case, Customs' role in interpreting the scope of the order is pretty limited. Commerce is the agency with primary authority to interpret and, as needed, clarify the scope of an order. And yet, for entries to happen, Customs routinely makes scope determinations. These should be the easy calls where merchandise is either in or out of the scope. All of the "gray area" should be resolved by Commerce.

In an EAPA case, Customs is specifically required to make a decision on whether the merchandise is within the scope of the order. If that is unclear, Customs can refer the question to Commerce for guidance.

The tricky part is that there is a disconnect in terms of judicial review. The question before the Court in an EAPA case is whether Customs' decision was arbitrary and capricious. That means determining whether Customs made a reasoned decision that is in accordance with law even if the Court might not agree with that decision. Customs is likely to rely on published Commerce Department scope rulings. But the question before the Court will not be whether those underlying ruling are correct. The question will only be whether Customs' application of those rulings was reasonable. At least in the EAPA context, that seems to give Commerce a pass when Customs does not seek scope guidance and relies on prior scope rulings.

Ikadan also challenged Customs' decision to suspend the liquidation of entries of merchandise that Ikadan believes to be outside the scope of the order. The Court declined to take up that issue because of its limited role in reviewing only Customs' determination of whether evasion has occurred, not the administrative steps Customs takes to implement that decision. The application of the EAPA finding to particular entries is, according to this decision, subject to the protest and de novo review process.

Let's end this here. I will come back with a second post on the constitutional challenges to EAPA.

Update on the Vaquita

2023-06-19T17:22:00.004-05:00

On June 14, 2023, the U.S. Court of International Trade approved the voluntary dismissal of a case brought by a group of environmental organizations to force the U.S. government to take action to force Mexico to better implement steps to protect the grievously endangered vaquita. Prior posts on related legal efforts in this matter are here and here. The vaquita is a small porpoise that is endemic to Mexican waters in the Gulf of California. Unfortunately, its range overlaps with totoaba, which is subject to illegal fishing because the totoaba's swim bladder is prized in China for its apocryphal effectiveness in traditional medicine. As a result of illegal totoaba gill net fishing, there are 10 to 13 vaquitas remaining in the world. Unless there are dramatic changes in the bycatch of vaquita, the vaquita is will likely become extinct.

The decision is not legally very important because the parties reached a settlement and there was no need for the Court to make important findings of facts or law. The decision is, however, an important report on the perilous status of the vaquitas and on American efforts to pressure Mexico to act.

This case involved the Pelly Amendment to the Fishermen's Protective Act of 1967 and the Convention on International Trade in Endangered Species of Wild Fauna and Flora ("CITES") as legal levelers the plaintiffs asked the United States employ to protect the vaquita. Under CITES, the vaquita (Phocoena sinus) is an Appendix I animal, meaning it is among the most threatened of species. The Pelly Amendment requires that the Secretary of the Interior certify to the President that a foreign country is engaging in trade in a manner that diminishes the effectiveness of any "international program for endangered or threatened species. CITES is clearly such a program.

In 2014, the Center for Biological Diversity sent a letter to the Secretary of the Interior asking that the Secretary make that certification with respect to the vaquita. The Secretary never responded and the plaintiffs filed suit in the Court of International Trade.

Subsequently, the United States took some actions to pressure Mexico on this issue. For example, the United States raised the issue to the CITES Standing Committee, which then asked Mexico to strengthen its protections. That step and follow-up from the CITES organization prompted Mexico to take additional concrete steps.

Then, in April of this year, the parties reached an understanding that the Secretary of Interior to complete its review under the Pelly Amendment. The Court stayed the case pending that decision from the Interior Department. On May 18, 2023, the Secretary certified to the President that nationals of Mexico were engaging in taking of or trade in totoaba and the bycatch of the vaquita diminishing the effectiveness of CITES. The President must notify Congress of any action he takes to encourage conservation of the vaquita and the totoaba. So far, no such statement has been made.

The Court held a short conference on this matter, which was recorded and available to the public. Counsel for the plaintiffs explained that the settlement should not be understood to indicate that the vaquita is safe. Rather, it means only that this one avenue of legal recourse has been completed. The prior case involving the Marine Mammals Protection Act resulted in an injunction prohibiting the importation of certain products of Mexico. The third legal avenue yet to be completed is under Chapter 24 of the USMCA. The Commission for Environmental Cooperation is the tri-lateral bureaucracy that investigates complaints concerning ineffective enforcement of environmental laws in North America. In April 2022, the CEC recommended the development of a factual record, which should have been submitted to the CEC Council by July 5, 2022. The public record ends there, and it is unclear whether the factual record was submitted.

Closing its decision, the Court reiterated its prior statement that "every death [of the vaquita] brings it perilously close to disappearing from the planet forever . . . [T]he need for vigorous international enforcement against its continuing threat is a compelling one. . . The panda of the sea, the little cow, is irreplaceable."

The NRDC has a good summary of the litigation over vaquita conservation here. You can also contribute to the NRDC from that page to support its work.

A Bowl of “Other”

2023-06-15T20:02:00.000-05:00

Tariff classification can sometimes produce surprising results. Such is the case with Nature’s Touch Frozen Foods v. United States, a recent decision of the U.S. Court of International Trade. The seemingly simple issue was the correct classification in the Harmonized Tariff Schedule of the United States of mixtures of frozen fruit and of frozen fruit with vegetables. The competing headings are, in relevant part, 0811 “Fruit and nuts . . . frozen” and 2106 “Food preparations not elsewhere specified or included.”

Nature’s Touch argued for classification in 2106 on the grounds that the Heading 0811 does not encompass mixtures of fruits or of fruits and vegetables. Heading 0813, for example, covers "Fruit, dried, other than that of headings 0801 to 0806; mixtures of nuts or dried fruits of this chapter." There is no similar indication in 0811. Moreover, plaintiff noted that the subheadings in 0811 also do not mention mixtures; they identify only individual fruits including "Strawberries" and "Raspberries, blackberries, mulberries, loganberries, black, white or red currants and gooseberries (other than kiwi fruit)."

Photo by Adél Grőber on Unsplash

Because the fruits were cut, frozen, and combined into the mixtures prior to importation, there is a reasonable basis to conclude as a matter of normal English usage that the merchandise, which is clearly “food,” had been prepared and is, therefore, described by Heading 2016.

The Government, after some wavering, settled on the argument that the fruit mixtures are classified in Heading 0811 and that the subheading should be determined from the classification of the included fruits with the correct classification being the individual tariff item that is last in numerical order. That is an application of General Rule of Interpretation 3(c).

Comparing only the possible headings, as is proper, the Court recognized that if the fruit mixtures are classifiable in heading 0811, they cannot be classified in 2106, which applies only to food preparations "not elsewhere specified or included." Regarding the merchandise that consists entirely of fruit (without any vegetables in the mix), the Court held that “fruit” is a commonly understood to refer to individual fruits (e.g., a bushel of apples is "fruit") as well as to combinations of different fruits (e.g., “a bowl of fruit”). As a result, the language of Heading 0811 ("[f]ruit . . . frozen") does not excluded mixtures.

Turning to the mixtures of fruits and vegetables, the analysis was somewhat more complex because "fruit . . . frozen" does not fully describe the merchandise. Moreover, the Court concluded that the presence of vegetables in the mixtures was sufficient to change the commercial identity of the fruit. The Court noted that the vegetables were highlighted on the packaging. As a result, the Court concluded it could not classify the fruit and vegetable mixtures as fruit using only GRI 1 and it turned to Heading 2106.

To fit under Heading 2106, the mixtures need to be "food preparations." While there was no debating that the fruit and vegetable mixtures are "food," that was not true of "preparations." Looking at prior case law and the Explanatory Notes, the Court found that "preparation" requires that the material be processed in a way that makes it appropriate for a specific application. That means the fruit and vegetables must undergo processing beyond what is inherent in their nature as food and beyond mixing fresh ingredients. The Explanatory Notes exclude from "preparations" fruit and nut mixtures that can be consumed independently, which the Court deemed as similar to the frozen mixtures at issue. That was sufficient to exclude the merchandise from Heading 2106.

Because GRI 1 did not settle the question, the Court had to apply the next GRI, in order. Most relevant is GRI 3(b), which requires that:

Mixtures, composite goods consisting of different materials or made up of different components, and goods put up in sets for retail sale, which cannot be classified by reference to 3(a), shall be classified as if they consisted of the material or component which gives them their essential character, insofar as this criterion is applicable.

Heading 0811 was still in play. Heading 2106 had been eliminated because the mixtures are not "preparations." The Court, however, identified Heading 0710 as the next contender. That heading covers frozen vegetables. As between those two possibilities, the Court found the fruit to predominate in the mixtures and to impart the essential character. That means the correct heading is 0811.

Usually, getting to the heading level is the hard part and arriving at the subheading is a matter of being able to read down the page. Such is not the case here.

The problem for everyone is that "mixtures" do not appear in any of the subheadings of 0811. Instead, the heading contains a series of individual fruits (and nuts), followed by the residual item "other" at 0811.90.80. The plaintiff and the government argued that the structure of the heading indicates that it is not intended to include mixtures in any subheading. As a result, the subheading should be determined by applying GRI 3(c) which states:

When goods cannot be classified by reference to 3(a) or 3(b), they shall be classified under the heading which occurs last in numerical order among those which equally merit consideration.

Under this approach, the components of each mixture would be classified and the combination classified based on the component that appears last in numerical order. Thus, a mixture of strawberries of 0811.10 (11.2%) and bananas of 0811.90.10 (3.4%), would be classified as bananas. This theory presents an opportunity for tariff engineering your imported fruit salads, which should always include duty-free blueberries.

The Court disagreed. First, it noted that many of the tariff items in 0811 cover more than one fruit. For example, 0811.20.20 covers "Raspberries, loganberries, black currants and gooseberries (other than kiwi fruit)." It seems to have been non-controversial that a mixture of all of these fruits would be classified in 0811.20.20. That implies that the tariff items are sufficiently broad to cover mixtures of different fruits.

Personally, that seems to be putting a lot of weight on the "and" in the list. To me, without the benefit of either research or a client in this fight, it seems that if it is true that 0811.20.20 covers combinations of the fruits listed there, the consistent reading of the "and" would be that the item covers only combinations of all those fruits and not a subset of the listed fruits. But we know that is not how the HTSUS works. As a counter example, the subheading under Heading 4202 covers "Trunks, suitcases, vanity cases, attaché cases, briefcases, school satchels and similar containers." That subheading covers the individual items without regard to combinations. There is, I guess, no reason subheadings in 0811 might not cover both for mixtures and the individual listed items.

Once it is determined that the tariff items in Heading 0811 encompass mixtures, the question remains what to do with the particular mixtures at issue. On this issue, the Court found that the residual "other" at the end of the heading was sufficiently broad to cover mixtures of multiple fruits or fruits and vegetables. This means that while strawberries are classified in 0811.10.00 and raspberries in 0811.20.20, mixtures of the two are classified in 0811.90.80. The Court held that result followed from GRI 1 (per GRI 6, as applied at the subheading level). As a result, it did not need to find the essential character of the mixture for purposes of GRI 3(b) nor did it have to rely on the last HTSUS item in numerical order under GRI 3(c).

A couple things are worth noting, though neither observation is technically relevant for classification purposes. Never classify by rates. But this result means that mixtures of fruits that are not all classifiable in a single subheading of 0811 are going to bear the highest rate of duty (14.5%) applicable to goods of that heading. There is, in effect, a tariff penalty for importing mixtures. That is likely to be a surprise to the industry, which now needs to figure out how to go forward. Assuming this decision becomes final, it might pay to shift mixing and packaging to the U.S. or file protests to mount a new challenge. Interestingly, this is not the position the government advocated.

Finally, I know that we should only compare tariff provisions of the same level and that the statistical suffixes are not legal text for classification purposes (as the Court noted at footnote 11). Nevertheless, it is curious that the International Trade Commission felt comfortable placing "Frozen mixes only of combinations of strawberries, blueberries, red raspberries or blackberries" as a breakout under 0811.90.8085. That seems to indicate that 0811.90.80 is where mixtures go, even though it is not appropriate to consider that.

Broker Exam Challenge

2023-05-24T09:04:00.007-05:00

Judicial challenges to the grading of the customs brokers license exam are not very common, but they happen. Usually, I have not been super supportive of the plaintiffs. See my maybe too mean-spirited post from 2006. On the other hand, I have gained a lot of respect for Mr. Byungmin Chae, who has been fighting with Customs over his score since taking the April 2018 exam.

As background, broker license applicants who fail to pass the 80-question CBLE with a score of 75% or more may ask Customs to reconsider the grading on questions for which applicants believe they should have received credit. 19 CFR § 111.13(f). If Customs does not change the grade, applicant may seek further review by the Executive Director of the Office of Trade. Any applicant that is not satisfied with the results of that review may sue the United States and ask the Court of International Trade to review the exam scoring.

Photo by Museums Victoria on Unsplash

Mr. Chae missed passing the exam by eight questions, which is not bad given that the pass rate on this exam is suspiciously low. The un-appealed results for the April 2023 exam show a 5.5% pass rate. That, in and of itself, is problematic and calls into question the validity of the test design.

In his first-level administrative appeal, Mr. Chae earned credit for two additional correct answers. On further review, Customs awarded him three additional correct answers. Think about what that means. We have to assume Customs' thinks that its test questions are unambiguous and that there is one clearly most correct answer. Despite that, this applicant demonstrated to Customs satisfaction that five of its questions were ambiguous enough to allow there to be at least one additional "most correct" answer. After that process, he was still down two correct answers to pass.

In Court, he had to first get past a jurisdictional hurdle that I covered in this 2021 post. After the first round of judicial review, he received one additional correct answer.

That left Mr. Chae to appeal to the U.S. Court of Appeals for the Federal Circuit, in which he sought review of three questions. If he were to receive credit on two, he would earn his broker's license. Mr. Chae was not represented by counsel in his appeal.

Question 5
Which of the following customs transactions is NOT required to be performed by a licensed customs broker?

The answer Customs expected is "Transportation in bond." The answer Mr. Chae selected was "Foreign Trade Zone Entry."

Customs argued in support of its answer by citing 19 CFR §111.2(a)(1), which states that a license is not required for listed transactions including "Transportation in bond." Note, however, that the same section exempts "Foreign trade zone activities." Mr. Chae argued that a reasonable reading of his selected answer would be that it refers to the admission of merchandise into a zone, which is activity apparently with in the zone activities exception. Customs position is that Mr. Chae's selected answer refers to the transaction of entering merchandise into the commerce of the United States from a foreign trade zone. The Court of Appeals agreed with Mr. Chae that the question was ambiguous as to whether it referred to entry into or entry from as zone. That earned him one additional point and made him just one point short.

Question 27

Which of the following mail articles are not subject to examination or inspection by Customs?

The answer Customs designated as correct is "Diplomatic pouches bearing the official seal of France and certified as only containing documents." Mr. Chae selected the answer "Mail packages addressed to officials of the U.S. Government containing merchandise." The correct answer can be derived from 19 CFR §§ 145.37 and 145.38. The firsts section specifies the treatment of articles imported for the U.S. government. Subsection (c) of that regulation states:

(c) Official Government documents. Other mail articles addressed to offices or officials of the U.S. Government, believed to contain only official documents, shall be passed free of duty without issuing an entry. Such mail articles, when believed to contain merchandise, shall be treated in the same manner as other mail articles of merchandise so addressed.

On its face, the last sentence in the regulation seems to require that mail addressed to the U.S. Government be subject to normal entry procedures, including examination or inspection, when believed to contain merchandise. Mr. Chae pointed out, however, that nothing in the question indicates that the origin of the shipment is outside the United States. Because Customs has no authority to inspect domestic mail, he reasoned, this is an equally correct answer.

Given the context that this was a CBLE, although the Court did not explicitly say so, it appears to have accepted that it was unreasonable to presume the fact that the mail may be of domestic origin. Second, the regulation requires that government mail containing merchandise is subject to inspection. Thus, the Court did not award additional credit.

Question 33

Mr. Chae's final hope is a classification question involving "current-production wall art" mechanically printed on paper. Mr. Chae's answer was in Heading 9702, covering "Original engravings, prints and lithographs." The remaining answers are all in Heading 4911, which covers "Other printed matter, including printed pictures and photographs." The problem with classifying this merchandise in Chapter 97 is Chapter Note 3, which reads:

For the purposes of heading 9702, the expression "original engravings, prints and lithographs" means impressions produced directly, in black and white or in color, of one or of several plates wholly executed by hand by the artist, irrespective of the process or of the material employed by him, but not including any mechanical or photomechanical process.

This explicitly removes mechanically-printed lithographs. That leaves some debate about the correct subheading to choose among the remaining options, but Mr. Chae was out of luck on this one.

Although he did not receive sufficient credit to earn a passing grade, Mr. Chae, who (again) had no lawyer for his appeal, did an admirable job of making his case.

Here's hoping he has taken or will take the exam again. Good luck to him.

Limitations Periods for Penalties

2023-05-04T09:44:00.001-05:00

In United States v. Zhe "John" Liu, the defendant was accused of a running a scheme to avoid antidumping duties on wire hangers from China by transshipping them through other countries and incorrectly stating the country of origin. The government is seeking to impose a penalty of just under $1 million, which is the domestic value of the merchandise. The defendant moved to dismiss the complaint arguing that it is barred by the statute of limitation and that Mr. Liu is not a proper defendant because he did not import the goods.

Let's pause for a moment. First, the fact that this penalty is the domestic value of the merchandise may seem odd. It is not. The complaint asserts that the violation occurred as a result of negligence. Under 19 USC 1592, the penalty for negligence is usually up to twice the loss of revenue, which will usually be much less than the entered value of the merchandise. However, the statute says that when the violation results from negligence, the penalty can be the lesser of the domestic value or two times the loss of revenue. In this case, the antidumping duty rate was approximately 186%. According to the Court, the loss of revenue was $556,808. Two times that would exceed the value of the merchandise, which is why the penalty is based on the domestic value rather than the loss of revenue.

It is also a warning to importers of goods subject to antidumping duties. If things go bad, they can go seriously bad, but not worse than the domestic value of the goods (assuming a civil matter and negligence).

Second, note that the penalty is not based on the entered value; it is domestic value. There is a difference. Importers mays assume CBP has made an error when the penalty claim exceeds the entered value. "Domestic value" is not defined in the statute. Court cases have determined that it means the retail value of the merchandise or "the price at which the merchandise or similar merchandise was freely offered for sale in the ordinary course of trade." That is very likely to be the entered value plus duties, taxes, and fees, plus costs incurred in the U.S., plus a profit.

Back to the actual issue in this case.

The statute of limitations in a negligence case is five-years from the date of the alleged violation. 19 USC 1621. The complaint asserts that the violations occurred on entry. In an effort to show that the United States was too late to assert the claim, defendant argued that the negligence occurred before the first entry, when it "allegedly" cause or caused to be formed the company that imported the goods. The Court shut this down. According to the Court, the violation occurs when the merchandise enters the customs territory of the United States. That makes sense in that one might set up all of the legal entities necessary to negligently import merchandise and never get around to making an entry. To hold the government to a statute of limitation that starts to run before the entry or other document containing the material false statement or omission does not make sense. It is like holding someone liable for "prenegligence" in a civil version of Minority Report.

Photo by Hadija on Unsplash

The complaint also asserts a penalty based on Mr. Liu aiding and abetting a violation by others. Raising a similar argument, Liu claims that any behavior that constitutes aiding or abetting would have occurred prior to entry. The problem for this argument is that to be liable, one must "aid or abet" a violation and the violation does not occur until the entry. "Ergo, the statute of limitations for aiding and abetting violations of § 1592(a)(1)(B) due to negligence begins to run on the date of entry."

Finally, Liu argued that he should not be subject to a penalty because he was not the importer. This is a non-starter in the world after Trek Leather. On its face, section 1592 applies to any person who violates the statute. That applies to corporate officers of the importer and other individuals who were somehow involved in the importation that relied on a material false statement or omission. In this case, the complaint alleged facts indicating that Liu controlled and directed the operations the importer. That is sufficient to allow the claim to go forward.

The Court denied Liu's motion to dismiss.

Interest and Disclosures

2023-04-10T09:37:00.004-05:00

The Court of International Trade decision in Otter Products, LLC addresses a novel question about how loss of revenue is calculated in the context of a prior disclosure. Grab a snack, this is complicated.

First, for anyone who needs a reminder: An importer that makes a material false statement or omission in connection with the entry of merchandise as a result of negligence, gross negligence, or fraud has violated 19 U.S.C. 1592 and is, therefore, susceptible to penalties. Penalties can be severe, up to two times any unpaid duties when the violation results from negligence and four times the unpaid duties when the violation results from gross negligence. Plus, the importer must pay the duties. In the case of fraud, the penalty is up to the domestic value of the merchandise, which is the entered value plus duties and other adjustments to try to get an approximate retail value in the United States. Given that the statute of limitations is five years, this can add up very quickly. Oddly, the penalties for negligence and gross negligence can be even higher if the violation did not result in a loss of revenue, but that is a quirk of the math that is best considered a technical possibility.

Photo by Lilian Dibbern on Unsplash

An importer (or other person) that discovers a violation has the option to limit its potential liability by filing a "prior disclosure" with Customs and Border Protection. When there is a successful prior disclosure, the importer must tender any unpaid duties and the maximum the interest owed on the duties. This can be a very significant reduction in risk. Consequently, disclosures are fairly routine. And yet, they can be messy.

Otter had two overlapping customs issues to address in the 2010's. First, it discovered that it had failed to declare assists as part of the value of certain imports. That omission affected the value Otter reported and the collection of duty, making it a material omission. There was also an issue regarding the classification of the merchandise products. The duty difference in the classification was from 5.3% as entered to 20% as far as CBP was concerned. That is also material. The classification dispute also sparked litigation. Eventually, the Federal Circuit resolved the matter in favor of Otter. That means Otter actually overpaid duties when it disclosed what was initially believed to an underpayment due to the classification when, in reality, Otter had been correct, and the disclosure resulted in an overpayment.

After the Court decision confirmed the correct classification, Customs closed out the disclosures. As part of that process, Customs refunded the overpayments to Otter. The refund did not include interest, which is the issue before the Court in this case.

Before we get to the decision, we should look at the refunds themselves. Historically, a prior disclosure had been seen as a voluntary act by the disclosing party and, therefore, not subject to protests as a "charge or exaction" or a decision of Customs. In a case called Carlingswitch, the importer made a voluntary disclosure and tendered duties to Customs. Later, it was determined that the importer owed much more money. After that, the whole thing fell apart when someone noticed that the statute of limitations had passed, and Customs had no means to force the importer to pay. At that point, Carlingswitch sued to get its tender back. The Court of International Trade and the Court of Appeals both held that the voluntary tender of duties and potential penalties (presumably the interest), was not a charge or exaction giving rise to a right to a protestable decision. That appeared to make getting a refund of truly voluntary tenders impossible. If Customs makes a demand for payment, the situation is different and there may be a protestable event (see Brother Int'l Corp.)

After that, lawyers and importers adopted two strategies. Sometimes, they refuse to tender any money until the disclosure is complete and Customs confirms the amount due in writing to the disclosing party. This is permitted under the regulations. The downside to this approach is that interest keeps running and if the disclosure takes a long time (as they can do), it adds up. It also does not include a mechanism for contesting the amount owed.

The second approach is to make the tender early and request that it be deposited into a "suspense account," meaning it was held in accounting limbo until the disclosure was complete. That mechanism also allows Customs to refund the money. But it was not a regulatory process and, therefore, potentially subject to CBP discretion. That process also lacks a means of contesting the loss of revenue calculation (which sets the penalty caps).

Then in 1993, Congress passed The North American Free Trade Agreement Implementation Act, which included The Customs Modernization Act. The "Mod Act" made changes to the penalty statute that required amendments to the corresponding regulations. On September 26, 1996, Customs proposed amending the regulations relating to prior disclosures. As proposed, the section on tender read as follows:

(c) Tender of Actual Loss of Revenue. A person who discloses the circumstances of the violation shall tender any actual loss of revenue either at the time of disclosure or within 30 days after a Customs officer notifies the person in writing of the calculation of the actual loss of revenue. The Fines, Penalties & Forfeitures Officer may extend the 30 day period if it is determined there is good cause to do so. Failure to tender the actual loss of revenue finally calculated by Customs shall result in denial of the prior disclosure benefits.

Note that there is no reference in that proposed regulation to challenging the loss of revenue calculation. In the Notice and Comment phase, someone suggested that the proposal be amended to include a requirement that Customs refund any portion of the tender found to be in excess of the actual loss of revenue. Other comments suggested that the proposal be amended to provide a means of challenging or protesting Customs' calculation of the loss of revenue.

Customs agreed that there should be a mechanism to resolve a "legitimate dispute" between Customs and the disclosing party regarding the loss of revenue. As a result, Customs amended the proposal and published the current 19 CFR 162.74(c). Under that regulation, Headquarters review of the loss of revenue is allowed in limited circumstances and with significant strings attached. The disclosing party can seek HQ review of the loss of revenue where:

The claimed loss exceeds $100,000
The disclosing party tenders the claimed loss of revenue
Greater than one year remains on the statute of limitations
HQ review is limited to the basis for the loss of revenue calculation

If those circumstances apply, Customs Headquarters may review the calculation. If it finds there was an overpayment, Customs will refund the excess paid. However, the regulation also states that "Such Headquarters review decisions are final and not subject to appeal. Further, disclosing parties requesting and obtaining such a review waive their right to contest either administratively or judicially the actual loss of duties, taxes and fees or actual loss of revenue finally calculated by CBP under this procedure."

This raises a lot of question about whether it ever makes sense to contest the amount of the calculation administratively. If the importer does and Customs does not reduce the calculation, Customs may say that the importer has exhausted its rights to appeal; essentially, setting the loss of revenue calculation in stone (as far as Customs is concerned). Under Carlingswitch, the tendered amount might still be considered voluntary and not protestable. On the other hand, if the importer tendered as a means of qualifying for administrative review or following a demand from Customs, it might be protestable. Either way, it seems reasonable to assume Customs might cite the regulation in an effort to foreclose protests as an administrative challenge to the calculation.

Any effort to seek judicial review would also run counter to this regulation. But it looks to me to be a stretch for a customs regulation to foreclose judicial review. On its face, it seems to violate the principle of separation of powers. An administrative agency cannot tell a federal court what it can and cannot decide. More specifically, no agency regulation can change the statutory jurisdiction of the Court of International Trade. Thus, this regulation seems to be there to discourage judicial because it creates an apparent obstacle that disclosing parties might want to avoid. As a result, the better practice may still be to withhold payment until the amount is resolved or to request that the tender be deposited into a suspense account to facilitate refunds of overpayments.

With that background, what is happening in the Otter decision?

While the classification litigation was happening, CBP held Otter's disclosures in abeyance. After the litigation was complete, Customs closed out the disclosures and refunded the overpayments. That refund caused the extended background discussion above. I assume the refund was granted because CBP had not acted on the disclosures so there was no final determination of the amount owed to be challenged and, therefore, no alleged waiver of and rights to judicial review.

All of that explains, I hope, how Otter got a refund of its voluntary tender. What Otter did not get was interest on the refund and that is what this case is about.

Since this case does not concern a denied valid protest, the plaintiff brought the case to the Court on its residual jurisdiction under 28 USC 1581(i). While subsection (i) gives the CIT exclusive jurisdiction over final agency actions relating to customs duties, taxes, and fees collected on imports (and other matters), it does not create a cause of action. To successfully bring a case, the plaintiff has to assert a cause of action for which the United States has agreed to be sued, that is, a waiver of sovereign immunity. In (i) cases, the waiver is usually the Administrative Procedure Act, which waives sovereign immunity where a final agency action has adversely affected or aggrieved the plaintiff.

On the other hand, there is a "no-interest rule," which precludes suits for interest against government agencies in the absence of a specific waiver of sovereign immunity. The Court noted that a waiver with respect to interest exists, for example, with respect to reliquidation to refund overpaid duties. 19 USC 1505(c). The Court then examined the law relating to prior disclosures and found that a disclosure does not result in a reliquidation. Given the lack of reliquidation and the failure of Congress to include a mechanism for including interest in the judgment in the context of an APA challenge to the calculation of the loss of revenue in a disclosure, the Court could find no waiver of sovereign immunity. As a result, it dismissed the case for lack of subject matter jurisdiction.

Value Allowances for Defects

2023-04-01T16:01:00.005-05:00

If you are bothering to read this blog, you likely know that most goods entering the United States are appraised on the basis of transaction value, which is the total price paid or payable for the merchandise when sold for export to the United States. For most transactions, that means the invoice price. But, the invoice price is usually based on some underlying assumptions about the nature of the goods. For example, if I order 1000 buckets for $250, I am doing so with the expectation that the buckets will actually hold water without leaking. When I enter the buckets, I will declare $250 as transaction value because, at that point, I still think the buckets will not leak. Customs will assess duty on the buckets using $250 as the value. In the ordinary course, that is how things should work.

Creative Commons License

Every now and then, things go haywire; and the buckets leak. Now what?

The customs regulations provide an opportunity to secure a refund of the excess duties paid on the full value as compared to the duties that would be owed on the leaky buckets. That opportunity is set out in 19 CFR 158.12(a) as an "Allowance in Value." The Court of International Trade is dealing with a claimed allowance in BRAL Corporation v. United States, in which the Court has recently denied a motion for summary judgment.

The issue in the case is the value of plywood from China. After importation and after it was used to make rolling doors and doors panels for delivery vehicles, the plywood started to delaminate. It was determined that the delamination occurred as a result of a subcontractor substituting inferior glue in the manufacturing process. This caused the U.S. door seller to get complaints and warranty claims from customers. As a result, BRAL, the importer, protested the liquidations and sought a value allowance and a corresponding refund of excess duties. Customs denied protest, leading to the litigation.

In court, as is often the case, both parties moved for summary judgment. That means the parties believe there are no material facts in dispute and that the judge has the information necessary to apply the law and make a decision. The facts, however, were not that clear.

An importer seeking a value allowance has to prove three things.

The existence of a contract for defect-free merchandise;
That the defect existed in the subject entries; and
The difference in value as a result of the defect.

On the first point, there was no written contract between the buyer and seller that specified the merchandise should be free of defects. There was, however, a period of time in which the buyer evaluated a number of samples to determine whether the plywood was appropriate for the intended use. BRAL argued that the testing and evaluation of samples shows its desire for defect-free plywood that was suitable for its intended use. The Court did not agree. Rather, it found that the lack of a written contract creates a question of fact as to the terms of the agreement between the parties.

This is a really good example of why commercial agreements sometimes contain a crazy level of detail for things that seem obvious. Lawyers who draft and review international purcahse agreements should right now be checking that all of their agreements contain language stating that "Merchandise shall be delivered free of defects, including latent defects, and suitable to its intended use." Or something similar. I took Contracts a very long time ago and that is not my area of expertise.

On the second point, plaintiff did not provide evidence showing that the defects were present in the protested entries. Plaintiff's position was that all of the merchandise after the date of the changed glue was defective and, therefore, could be linked to the subject entries. There is support for that in a prior case called Fabil in which the Court of Appeals held it was not necessary to show that the defect was present in specific entries where it was established that the defect as present in all entries. In this case, the parties did not agree that all of the plywood was defective. The United States pointed to entries that were not the subject of claims for allowances as evidence that perhaps not all entries contained defective merchandise. That created another material fact in dispute.

On the third point, the plaintiff introduced evidence to show that the plywood as improted should be valued as salvage at 18% of its original value. This value seems to be based on a statement from a domestic lumber supplier to BRAL's U.S. customer, who made the roll up doors and door panels. But, the relevant deposition testimony contained potentially conflicting information. As a result, there is an additional question of fact to be resolved.

Given the presence of questions of fact, the Court found this is not ripe for resolution via summary judgment. The Court denied both motions and ordered the partiers to prepare for trial.

The upshot of this is that claims for allowances are going to be subject to scrutiny before Customs cuts a refund check. The three elements are critical and it is important to have a detailed set of documents showing that all three elements can be proven. Despite it seeming obvious, Customs need not assume that the importer expected to receive defect-free merchandise. The burden to prove that falls on the importer.

Kent International Rides to Victory

2023-03-31T09:52:00.003-05:00

Kent International has been in a dispute with Customs over the classification of "Kangaroo Carrier" child safety seats for bicycles for so long that it has generated six judicial opinions. We last covered it here. In what imight be the last word, the Court of International Trade has handed a limited win to Kent.

Photo by James Wainscoat on Unsplash

This decision is not really about the classification. On the merits, the Court previously found that the seats are classifiable in Heading 8714 as accessories to bicycles. What was at issue in this decision is whether Kent was entitled to have some of the entries liquidated as "seats" in Heding 9401 because Customs and Border Protection's prior liquidations constitute a legal "treatment" of the merchandise as such.

A "treatment" is analogous to a ruling, except it just happens as a matter Customs' actions on entries. It is relevant here because once a "treatment" is established, like a ruling, it can only be modified going forward and only starting 60 days after notice and comment. 19 USC 1625(c)(2). The implementing regulations spell out when a treatment comes into existence:

(A) There was an actual determination by a Customs officer regarding the facts and issues involved in the claimed treatment;

(B) The Customs officer making the actual determination was responsible for the subject matter on which the determination was made; and

(C) Over a 2-year period immediately preceding the claim of treatment, Customs consistently applied that determination on a national basis as reflected in liquidations of entries or reconciliations or other Customs actions with respect to all or substantially all of that person's Customs transactions involving materially identical facts and issues;

The controversy in this case was over the third prong. First, how to define the 2-year period and, second, what it means for the prior determinations to have been on a "national basis."

The question of the 2-year period is one of those things that might seem clear, but it is not. The two years must be "immediately preceding the "claim of treatment." The claim occurs when there is an assertion of the right to claim the treatment. One way to define that is as the first enty for which Customs denied the claimed treatment. In other words, the first entry on which Customs told Kent it was changing the classification from seats to bike accessories.

Measured from the earliest entry at issue, which occurred at Long Beach and was subject to a protest, Kent does not satisfy the 2-year requirement. Kent, on the other hand, looks to the protest approval dates to find a later date. The Court agreed with Kent finding the basis for the treatment arose from Customs' decision to approve Kent's protests, not the classification on the initial entries. That protest approval happened in August of 2008. Customs applied that classification to entries through November of 2010. Until February of 2015, Customs took no further action regarding this classification. Then, in 2015, CBP issued a ruling reclassifying the merchandise. That event is what the Court referred to as the "inflection point" for the 2-year requirement. Moreover, the Court found that the treatment extended from 2008 to the ruling in 2015. However, only those entries that were protested after November 2010 are entitled to benefit from the treatment.

Regarding whether CBP applied the treatment consistently and on a national basis, the problem was that the relevant entries were all at the Port of Newark. Pass through entries at Long Beach do not count. Arguably, treatment at a single port is not national treatment. But, because only the Newark entries matter and there was no inconsistent treatment, the Court found that the treatment there constituted national treatment.

As a result, Kent proved the existence of a legal "treatment" for its entries from its 2010 protest to the Customs' 2015 ruling changing the classification. That means the Customs was required to go through the notice and comment process before changing that treatment. Customs failed to do that. That means that Kent is entitled to a refund of the duties it paid on that merchandise, even though the correct classification has been determined to be as bicycle accessories.

Decision on Section 301 List 3 and 4A

2023-03-20T18:16:00.004-05:00

The Court of International Trade has issued a decision in the lead case challenging the Section 301 duties on products of China covered by List 3 and 4A.

This case is almost unique in the number of plaintiffs and law firms involved. The most similar prior circumstance involving as much of the customs and trade bar was the litigation involving Harbor Maintenance Tax, which went all the way to the U.S. Supreme Court in 1998 resulting in a decision called United States v. U.S. Shoe Corp.

For purposes of this blog, this raises an issue. My firm, like dozens of other firms, has plaintiffs asserting the same claims. The matter is ongoing and, therefore, I don't want to say much about anything.

So here is the short version. The Court previously remanded the matter to the USTR to provide a better explanation of how the record demonstrates that the agency properly engaged with public comments in opposition to the List 3 and 4A tariffs including the size of the remedy and whether there were alternatives that might be available and effective. USTR did that and the Court found the explanation sufficient to overcome the plaintiffs' arguments. The Court, therefore, found that the USTR had acted within the requirements of administrative law when it made its decision.

Read the decision; it is interesting.

There is, undoubtedly, more to come in this dispute. Stay tuned.

Revenge of the Hobgoblin

2023-03-16T09:46:00.005-05:00

UPDATE: A kind reader let me know I misattributed the quote. It is not from Thoreau as originally reported. Thanks for the feedback.

There is a saying, attributed to Ralph Waldo Emerson that “Foolish consistency is the hobgoblin of little minds.” The point of that seems to be that doing something the same way solely for the reason of maintaining consistency is a poor strategy.

For trade compliance that is often true. The fact that a manager who retired from accounting in 1995 once said that none of your company’s tooling expenses are dutiable is not a solid reason for failing to report dutiable assists in 2023. Maybe in 1995 all the tooling was in the U.S., and it is now all over the globe. Consistency for the sake of consistency is not a good enough reason to maintain a compliance process. There should be some underlying reason to believe the process is legally correct.

On the other hand, inexplicable inconsistency can be evidence of fraud. An ongoing penalty case in the Court of International Trade is a good example. The case is United States v. Crown Cork & Seal USA, Inc.

The case contains a good overview of the penalty statute (19 USC 1592) and the levels of culpability it defines. Relevant here is a complaint asserting that “Crown” engaged in fraud or gross negligence when it entered some metal can lids from Europe as other articles of iron or steel in HTSUS item 7326.90.10 (free). The government asserts that the correct classification is in 8309.90.00 (2.6%) as stoppers, caps, and lids of metal. As a result of this misclassification, Crown allegedly underpaid $1.3 million in duties.

Photo by Pamela Callaway on Unsplash

The issue in this preliminary ruling is whether the complaint contains sufficient detail to plausibly show that the defendant committed fraud or gross negligence. As a general matter, a complaint must be sufficiently detailed to allow a reasonable inference that the defendant is liable for the misconduct alleged. It is not enough to merely state facts that, if true, are consistent with finding the defendant liable. The possibility of liability is not enough; the complaint must show that liability is plausible. One way to move from mere possibility to plausibility is to allege facts excluding the possibility of the defendant’s alternative theory. This all comes from two Supreme Court cases called Iqbal and Twombly.

The parties in this case agree that the classification Crown used at entry was incorrect. Crown contends that the complaint does not plead a plausible set of facts indicating either fraud or gross negligence. As a result, the defendant moved the Court to dismiss those two counts of the amended complaint. This is where the hobgoblin of consistency comes into play.

It turns out that Crown had also been importing metal can lids from Canada. These lids were duty free under NAFTA. The unfortunate fact for Crown is that it inconsistently classified its metal can lids. It classified the European lids in the duty-free provision in Heading 7326 while classifying similar lids from Canada in Heading 8309, which would be dutiable but for the NAFTA. Moreover, the complaint asserts that Crown did not rely on its customs broker (or presumably anyone else) for classification advice, making it impossible that it was following outside advice.

This inconsistent classification was beneficial to the importer, visible to the importer, and enough to elevate the complaint into the realm of plausibility. Thus, the Court denied the motion to dismiss for both negligence and gross negligence.

Crown also argued that the amended complaint fails to satisfy the special pleading rule applicable to fraud and mistakes. Under U.S. CIT Rule 9(b), which is similar to the Federal Rule of Civil Procedure, the facts constituting fraud or mistake must be stated with particularity showing the circumstances of the fraud or mistake. The defendant pointed out that the complaint does not identify any of its employees or employees of the broker who were responsible for the alleged fraud. Instead, according to the Crown, the complaint was “speculative and unsubstantiated.”

The Court did not agree. According to the Court, the Rule requires that the complaint state the “who, what, where, when and how” of the fraud. The amended complaint identified the two Crown Cork & Seal companies that were the importers. The amended complaint also identified 543 entries of metal lids with incorrect classifications. The Court held that was sufficient for purposes of Rule 9(b) and refused to dismiss the fraud count.

The defendant made the same Rule 9(b) argument about the gross negligence count. The Court addressed this quickly by noting that the rule applies only to “fraud or mistake” and not to “gross negligence.” The Court cited a case from the Southern District of New York for this. It is true that “gross negligence” is not stated in the rule.

Personally, I wonder about the scope of “mistake” as used in the Rule and whether it might include a negligent or grossly negligent misclassification. I do not recall this having come up. In customs penalty cases, a “mistake” is not enough to constitute a violation of section 1592. Negligence requires the lack of the degree of care expected of a reasonably prudent importer. But if a mistake is not a violation, Rule 9 seems to require more specific pleading for a case involving no violation and less specific pleading for a negligent violation. That seems anomalous.

A side point in this case is that it took a long time to get to this point. Customs appears to have been aware of the alleged violation for a decade and to have investigated for six years. Crown, likely wanting to cooperate in the process, provided a waiver of the statute of limitations. Very often, this is the correct thing to do. It allows both sides to fully investigate the matter and permits settlement discussions. Sometimes, it just delays the inevitable. Whether and when to waive the SOL is a difficult question that should not be taken lightly. Be sure to consult with counsel on that.

The key lesson from this is that Customs and Border Protection has import data and knows how to mine it for enforcement. Importers should do the same internally for compliance. If two parts have similar descriptions, functions, and composition, but are assigned different tariff classifications, that should be investigated. The different classifications should either be explained (and documented) or resolved. That may prompt a prior disclosure to CBP or, if there is no violation, just a correction for unliquidated and future entries. Again, that is a conversation to have with counsel.