CANNABIS INDUSTRY PLAYERS NEED TO TAKE CONTROL OF THEIR SUPPLY CHAINS

Supply chain planning is important to players in the legal cannabis industry. Processing and harvesting equipment which might be lawful to own in one state might be prohibited “drug paraphernalia” in another. This requires industry members to take care in routing domestic movements of their wares.

As the industry emerges from the legal shadows and matures, one area where companies need to pay greater attention to their supply chains is in arranging the import of their merchandise. For years, many firms concerned with possible Customs interdiction of their goods purchased goods on “Delivered Duty Paid” (DDP) terms, or allowed their foreign suppliers to arrange shipping and Customs clearance of their goods. Now, even as concerns about the admissibility of this merchandise are receding, new problems are coming to light.

In some cases, foreign shippers, anxious about having their own names associated with the importation of cannabis-related articles, designated “straw man” companies to act as U.S. Importer of Record – companies which are not part of the commercial transactions. Since the Importer of Record must be the “owner” or “purchaser” of the merchandise, Customs often rejects entries on the ground that the named IOR lacks the right to make entry. Worse yet, in cases where Customs detains or seizes goods imported by a “straw man” importer, the U.S. purchaser – who may have spent large sums on purchasing the goods – finds itself in the uncomfortable position of coming forward and proving its interest in the shipment.

In a number of recent cases, it has come to light that shippers have falsely undervalued merchandise – in some cases, by extreme margins (in one case, a roughly $6,000 value declared for goods the importer paid over $400,000 for). The purchaser may be able to reclaim its goods, but will need to file a new Customs entry and pay more duties than it had budgeted for the transaction. If the goods are of Chinese origin, and subject to Section 301 tariffs of 25%, the duty bill may be high enough to call into question the viability of the company’s business model.

In the past, undervaluation may have gone undetected due to CBP’s unfamiliarity with cannabis-related merchandise – for example, is a component for a vaping device worth five cents or five dollars? But as more of these goods are imported, CBP is moving up a learning curve that will allow it to more readily spot undervaluation of these goods.

Companies in the legal cannabis industry need to start taking a detailed look at their import supply chains and Customs clearance procedures.

Please contact a Neville Peterson LLP professional if you have questions concerning these subjects.

THE EVOLVING LEGAL LANDSCAPE FOR IMPORTING CANNABIS-RELATED GOODS

The legal landscape surrounding the importation of cannabis “drug paraphernalia” has seen a remarkable turn in recent years that requires continued vigilance within the industry. A diverse range of cannabis products are needed to serve the  needs of the cannabis industry at each level of the supply chain. Whether focused on plant growth, harvesting, processing, storage, packaging, or consumption, the cartoonishly broad definition of “drug paraphernalia” in the federal code can encompass nearly any item a cannabis-touching company uses in its operations.[1]

At present, U.S. Customs and Border Protection (CBP) refuses admission to US imports of drug paraphernalia pursuant to 21 U.S.C. § 863(a)(3), which makes it “unlawful for any person (1) to sell or offer for sale drug paraphernalia; (2) to use the mails or any other facility of interstate commerce to transport drug paraphernalia; or (3) to import or export drug paraphernalia.” However, this import prohibition is by no means absolute—a federal exemption to the prohibition requires that CBP consider whether a person has been “authorized” by a “local, State, or Federal law” to “manufacture, possess, or distribute” drug paraphernalia. And yet, CBP, for more than 30 years, refused to entertain this exemption.

Until the 2010 legalization of recreational marijuana in Washington State and Colorado, no State or local government had clearly “authorized” manufacturing, possession, or distribution of cannabis or any other drug paraphernalia.[2] The immediate success of the cannabis industry in these early entry states shows the need for sophisticated, cannabis-focused growing, harvesting, storage, processing, and related equipment, much of which is imported into the U.S.

Undeterred by these States’ legalization efforts, CBP maintained its refusal to apply the (f)(1) exemption under any circumstances. In an August 2020 customs ruling,[3] CBP argued that even though some states have legalized cannabis, the only “authorization” that matters is Federal authorization, which, of course, did not exist. Citing the Supremacy Clause of the U.S. Constitution, the ruling rejected applying the (f)(1) exemption for individual states, stating:

It is clear that any interpretation of e.g., California or Washington, state law to permit the importation of drug paraphernalia would be in 'positive conflict' with 21 U.S.C. § 863.

CBP’s position was clear: it would strictly apply federal law over state law, even in states where cannabis possession was legal, and even though the federal law explicitly require consideration of whether a State law has authorized possession, distribution or manufacture of cannabis paraphernalia.

However, the landmark 2022 Court of International Trade decision in Eteros Technologies USA Inc. v. United States delivered a clear rejection of CBP’s position. CBP detained and later excluded an importation of “motor frame assemblies” which would be manufactured with other components to create a market-leading cannabis trimming machine known as the “Mobius.”

Eteros, represented by Neville Peterson,  sued CBP in the US Court of International Trade (CIT), arguing that Washington State’s legalization of recreational marijuana and repeal of its prior prohibition against cannabis paraphernalia effectively “authorizes” its importation under 21 U.S.C. § 863(f)(1). Eteros urged CIT Judge Gary Katzmann to draw upon the US Supreme Court’s interpretation of “authorization” in Murphy v. NCAA[4]—a case relating to sports gambling “authorizations”—to conclude that the repeal of a State law banning a particular activity (e.g., gambling, possession of cannabis paraphernalia), effectively “authorizes” that activity. The Court agreed with Eteros, holding that the lifting of Washington State’s prohibition against cannabis-related “drug paraphernalia” indeed “authorized” persons to fit within the exemption to the Controlled Substances Act found at 21 U.S.C. § 863(f)(1). And with that, the (f)(1) exemption was given life.

Despite Eteros’ legal victory and the CIT’s broad holding, the impact on CBP's enforcement policies was not immediately apparent and its enforcement of the import prohibition continued unabated. When questioned, the agency represented to importers that the positions articulated in its August 2020 ruling were unchanged, and that because that ruling had never been revoked, the agency was obligated by regulation[5] to follow it.

This untenable position could not stand, and yet, due to the narrowness of the jurisdictional powers of the CIT, the Court could not be reenlisted to order a belligerent agency to acknowledge its decision in Eteros.

Recently CBP was forced to to acknowledge the Eteros decision in a Customs Ruling issued to an importer seeking to bring paraphernalia into the United States through Washington State.  In November, CBP published Customs Ruling N335656, which marked a noteworthy shift in the agency’s handling of cannabis-related paraphernalia importation. This ruling, specific to Washington State, confirms that importers of marijuana-related drug paraphernalia through Washington State ports are exempted from the federal prohibition according to 21 U.S.C. § 863(f)(1).

This acknowledgment by CBP is significant but because the agency limited its application of the exemption geographically to the State of Washington, additional vigilance by the industry is required. Because the ruling invites importers to apply for additional rulings involving imports through ports in States other than Washington, we see this as a clear indication that CBP is open to expanding its application of the exemption, but only if importers force them to.

Fortunately, the cannabis industry is full of strong-willed companies with a healthy appetite for forcing resolution. Securing a customs ruling is an excellent avenue for importers to lawfully address an agency that has elevated its own regulations and policies above the law, and above the Court’s interpretation of that law. Importers will want to obtain a customs ruling to interpret the laws of every State that has repealed prior prohibitions relating to cannabis paraphernalia, to better facilitate the importation of goods used to harvest, process, and store cannabis materials.

This approach may pave the way for a more harmonized legal framework that better integrates state-level cannabis legalization with federal importation regulations.

For further insights or assistance in this area, feel free to contact us. Our team at Neville Peterson LLP is dedicated to staying at the forefront of legal developments in  the customs and trade laws affecting the legal cannabis industry.

[1] 21 U.S.C. § 863(d) offers a cartoonishly broad definition for “drug paraphernalia,” stating in part:

The term “drug paraphernalia” means any equipment, product, or material of any kind which is primarily intended or designed for use in manufacturing, compounding, converting, concealing, producing, processing, preparing, injecting, ingesting, inhaling, or otherwise introducing into the human body a controlled substance, possession of which is unlawful under this subchapter. It includes items primarily intended or designed for use in ingesting, inhaling, or otherwise introducing marijuana,[1] cocaine, hashish, hashish oil, PCP, methamphetamine, or amphetamines into the human body, such as—

[2] Legalization of medical marijuana in States prior to 2010 certainly served to authorize some persons, but it would be difficult, if not impossible, to demonstrate that an importation of paraphernalia is intended only for card carrying medical marijuana license holders. This hurdle was observed in United States v. Assorted Drug Paraphernalia Valued at $29,627.07 & Jason Fernandez, No. 18-143, 2018 WL 6630524 (D.N.M. Dec. 19, 2018)

[3] See Customs Headquarters Ruling HQ H306125 (August 5, 2020) (concerning ElevareCo Saber vaporizer).

[4] Murphy held “[t]he repeal of a state law banning sports gambling … gives those now free to conduct a sports betting operation the ‘right or authority to act.’” 138 S. Ct. at 1474.

[5] See 19 CFR 177.9, stating that rulings are the official position of CBP and are binding on all ports of entry.

SAY GOOD-BYE TO FINALITY OF LIQUIDATION?

“Finality of liquidation” has long been a core principle of American Customs law.  When an importer files an entry of merchandise, Customs and Border Protection “CBP” has up to one year to “liquidate” that entry, making the final determination as to the classification, value, rate of duty and admissibility of the merchandise.  In some circumstances, Customs can extend the liquidation period to as many as four years.

             Once an entry “liquidates” however, there are only two events which can block the liquidation from becoming final as to both the importer and the Government.  The first is if Customs “reliquidates” the entry within ninety (90) days of the original liquidation.  The other is if the importer protests the liquidation within one hundred eighty (180) days after the liquidation date.   

It has long been nearly a tenet of faith that once an entry is liquidated and final nobody can provide any relief.  But a recent decision of the United States Court of International Trade shakes that faith.  

            AM/NS Calvert LLC v. United States, Slip Opinion 23-129 (September 6, 2023) involves three consolidated cases brought by firms challenging the Commerce Department’s denial of their applications for product-specific exclusions from Section 232 national security tariffs imposed on steel products.  The three plaintiffs invoked the CIT’s “residual” jurisdiction, 28 U.S.C. § 1581(i) to challenge the denials as having been done in contravention of the requirements of the Administrative Procedure Act.  But over time, the import entries for the plaintiffs’ products had been liquidated and made final.  The Commerce Department agreed to remand the cases to the agency for further consideration – but noted that, even if the agency changed its mind and granted the exclusions, the plaintiffs would not receive any relief because their entries were liquidated and final. The Court, per Judge Miller Baker, was not so sure of that.  

The Court noted that, since the plaintiffs were challenging decisions of Commerce, rather than Customs, they had no grounds to protest CBP’s ministerial liquidation of their entries.  Nor did they have any way to enjoin Customs from liquidating the entries.  But this did not render the actions moot, the Court found. Judge Baker held that since the court had had broad remedial powers under the Administrative Procedure Act (APA) it could, if it found an APA violation, set aside final liquidation and order a refund of Section 232 tariffs assessed.  The Court held that it could order such equitable relief, so long as no statute prohibited it.  

That leads to the question – does any statute prohibit the Court from granting the relief of setting aside “finally liquidated” entries?  Section 514(a) of the Tariff Act, 19 U.S.C. §1514(a), says that liquidation of an entry is final unless the entry is reliquidated or the liquidation is timely protested. In the past two years, the Court has issued several decisions holding that the statutory finality of liquidation prevents Customs from asserting counterclaims in Customs protest actions.  Why would that finality not attach in the AM/NS Calvert case? 

The answer probably lies in the fact that the AM/NS Calvert case is not a “Customs” case, even though Customs assesses the duties in a ministerial manner. The plaintiffs might have tried to bring their cases to court by protesting the liquidation of entries, but were not required to, since the decision being challenged was fundamentally not a “Customs” decision.  So they proceeded under the CIT’s residual jurisdiction grant, charging a violation of the Administrative Procedure Act. While the APA does not provide for the award of money damages, it does allow courts to provide the equitable remedy of “restitution” of funds unlawfully taken as the result of any APA violation.  

Ultimately, if the AM/NS Calvert court finds an APA violation, it could award the plaintiffs the equitable restitution of funds collected by Customs – even though the legal remedy of protest is foreclosed. Indeed, the Court could conduct a hearing on the amount of restitution, and award relief without requiring reliquidation of the Customs entries at all.

  A similar situation is currently playing out in HMTX Corp. v. United States, the broad-based APA challenge to the legality of the Section 301 duties appearing in Lists 3 and 4A of the Section 301 retaliation lists. The entries on which the challenged duties were assessed are being liquidated, but in most cases not protested – because the CIT has established that it can provide equitable restitution notwithstanding the “liquidated and final” status of the Customs entries.  

Thus, finality of liquidation is truly final when Customs is making the decisions entrusted to it by law. But when Customs is acting at the behest of another agency, liquidation status may not matter. The Calvert court indicated that, if Commerce changed its mind on remand and granted the exclusions, they were to be applied to all of the plaintiffs’ unliquidated duties. held that it had the power to order the reliquidation of entries otherwise finally liquidated.  It remanded the case to Commerce with instructions for the Agency to apply any relief it may grant to the plaintiff’s unliquidated entries of merchandise, and suggested that relief might be available in respect of liquidated and final entries.  

Another longstanding rule of Customs law was that all decisions merge in the liquidation of an entry. But the Courts have now pivoted in the direction that only decisions made by Customs itself, and not those for which it is taking direction from another agency, are necessarily subject to protest and the rules regarding protests. In the future, a dismayed importer may have to decide whether reaching for that Customs Form 19 protest is the right move.

ROYAL BRUSH DECISION RESTORES SOME BALANCE TO TRADE SCENE

The Federal Circuit’s July 27, 2023 decision in Royal Brush Manufacturing Inc. v. United States No. 2022-1226, represents an important step in returning equity and fairness to the rough-and-tumble world of unfair trade remedies.

In Royal Brush, the Federal Circuit ruled that an importer targeted by a complaint filed under the False Claims Act Enforce and Protect Act (EAPA) has the right to see all of the evidence being used to justify the determination to impose special duties on its imports.

The case arises under EAPA, a statute designed to combat evasion of antidumping and countervailing duty orders. The law allows an interested party to submit to Customs an allegation that one or more persons has engaged in evasion of AD or CVD measures. Customs’ Trade Remedy Law Enforcement Division (TRLED) investigates the allegation and may impose provisional dumping or countervailing duties on the targeted importer’s entries. Often, the first time a targeted importer learns that an EAPA complaint has been filed against it is when CBP begins assessing provisional duties on its imports. And that is where the “fun” starts. Importers accused of EAPA violations have the burden of proving, administratively before TRLED, that “evasion” is not occurring. And CBP, under the guise of protecting “confidential” information, often declines to show the importer the evidence on which its determination is based.

As the Court of International Trade recently held that EAPA is a “strict liability” statute, under which the culpability of the importer is irrelevant [see Ikadan System USA v. United States, Slip Op. 23-88 (June 13, 2023)], an importer’s access to the information used to charge it becomes particularly important.

In Royal Brush, the importer was charged with evasion of the antidumping order against Cased Pencils from the People’s Republic of China. Customs contended that the pencils which Royal Brush imported from the Philippines were in fact Chinese, contending that a visit by Customs attachés to the Philippine factory indicated that the plant did not have sufficient capacity to produce the quantity of pencils that Royal Brush was importing. However, this information, together with production capacity calculations, was withheld from Royal Brush during administrative proceedings. The Court of International Trade ordered Customs to produce “redacted” copies of the reports, but the numbers essential to Royal Brush’s defense were removed from the report summaries. The Federal Circuit held that the practice of withholding evidence violated the importer’s due process rights, in violation of the Fifth Amendment to the Constitution.

After concluding that it had jurisdiction over the appeal—Royal Brush’s entries had been liquidated with assessment of dumping duties—the Federal Circuit examined CBP’s findings. These included findings that the Philippine manufacturer “must have been shipping large volumes of pencils to the United States from sources other than its own production facilities” based on calculations made by the agency. The findings also were grounded in the CBP attaché report which supposedly “unequivocally demonstrate[d] repackaging of Chinese pencils into boxes labeled as made in the Philippines and destined for the United States”. But Customs had declined to release this information to Royal Brush, claiming that neither EAPA nor its implementing regulations contain procedures for the release of confidential information under a protective order.

The Court of Appeals was not impressed. Constitutional due process, it held, required that a party subject to a sanction such as that imposed under EAPA had a constitutional right to see the evidence upon which the Agency’s determination was based. That EAPA and its regulations did not contain a procedure for release of confidential data under protective order was meaningless:

Customs, the CAFC held, has inherent authority to fashion such a mechanism. The Court set aside CPB’s evasion finding (but did not refund Royal Brush’s duties, because that was not the focus of the complaint before it).

In a world where trade remedy laws and regulations are becoming increasingly stacked against importers, the Royal Brush decision is a welcome relief, indicating that importers are entitled to the same constitutional protections as taxpayers in other areas.

CBSA PROPOSAL WOULD INCREASE DUTIES FOR MANY; PUBLIC COMMENTS DUE BY JULY 26, 2023

The Canada Border Services Agency (CBSA) has proposed amendments to Canada’s Value for Duty Regulations which would amend the definitions of “sale” and “purchaser in Canada” for purposes of determining the dutiable “transaction value” of imported merchandise. While the proposal is styled as one to “level the playing field” between Canadian resident importers and Non-Resident Importers (NRIs), it would increase the dutiable value of a wide range of goods imported into Canada by resident and nonresident importers alike. It would also complicate immensely the task of making entry of imported goods with CBSA.

The proposal would require transaction value to be determined on the basis of the “last sale” in Canada which has been arranged or contemplated prior to the importation of the goods in question. It would affect goods which, prior to importation, are “subject to an agreement, understanding or any type of arrangement – regardless of its form – to be transferred, in exchange for payment, for the purpose of being exported to Canada, regardless of whether the transfer of ownership of the goods is completed before the goods are imported”.

The proposal would redefine the term “purchaser in Canada” to mean the purchaser in the “last sale” of the goods, “regardless of whether the person is the importer of the goods or when the person makes payment in respect of the goods”.

The proposal would calculate dutiable value according to the prices in sales which are currently considered purely domestic Canadian sales, and not sales “for export to Canada”. While other countries have adopted a “last sale” rule for determining dutiable “transaction value” of goods, no country, to our knowledge, has adopted a rule so expansive as the one CBSA is proposing now.

The proposal could affect a wide range of imports into Canada by resident and non-resident importers alike, particularly in cases where the importer has, prior to importation, arranged a sale to a Canadian retailer.

How the Proposal Would Work

While Canada’s Customs Act does not define the term “sale”, the Supreme Court of Canada ruled two decades ago that a “sale” for customs valuation purposes, is the transfer of title to goods in exchange for consideration. Canada (Deputy Minister of National Revenue) v. Mattel Canada Inc., 2001 SCC 36 [2001], 2 SCR 100. The proposed new rule would jettison that definition in favor of a much broader one.

CBSA’s new proposal would define the “sale” as the last sale to a customer in Canada – by anyone – as an “agreement, understanding or any other type of arrangement, regardless of its form – to be transferred, in exchange for payment, for the purpose of being exported to Canada, regardless of whether the transfer of ownership of the goods is completed before or after the goods are imported”. So long as the agreement or understanding exists before the goods are imported, it is taken as the “sale for export to Canada”. How would this work?

Current State: Importer X imports goods into Canada for which it paid the foreign producer $20 per unit, FOB foreign port of entry. Prior to importation, however, Importer X has received a purchase order or forecast from a Canadian retailer to acquire the goods for $40, in a domestic transaction.

Currently, the value for duty (VFD) of these goods is $20 per unit.

Under CBSA Proposal: If, prior to entry of the goods, a Canadian retailer has placed a purchase order or forecast to buy the goods for $40 in a domestic transaction, then under the CBSA proposal, the value for duty would be the $40 to be paid by the Canadian retailer. The proposal says nothing about a deduction for international freight and Customs duties, which by law are not dutiable.

If the retailer has arranged a resale to a Canadian customer before the goods are imported, that price would become the basis of dutiable value. How the importer could know about such a sale is unexplained.

CBSA’s rulemaking proposal contains several examples of transactions causing goods to be sent to Canada, and showing the “last sale” which forms the basis of transaction value. The cadence is clear. Only if a Canadian importer purchases “on spec” for its own inventory, or purchases goods for its own use, will the price paid by that importer be the basis for “transaction value”.

Decades ago, the United States briefly took the position that the “sale for export” to the United States was the sale which “most directly caused the goods to be imported”. See, e.g., Brosterhous, Coleman & Co. v. United States, 14 CIT 307, 737 F. Supp. 1197 (1990). However, two years later, in the landmark case of Nissho-Iwai American Corp. v. United States, 982 F.2d 505 (Fed. Cir. 1992), the Court of Appeals for the Federal Circuit expressly rejected this approach and took pains to overrule the Brosterhous decision, embracing the “first sale” rule which the United States follows to this day.

Is the CBSA Proposal Even Administrable?

While other countries, most notably the European Union, have adopted a “last sale” approach to Customs appraisement, these have generally led to appraising goods based on prices paid by the importer of record. The Canadian proposal goes much further, determining “transaction value” on the basis of post-importation domestic sales, and even based on vague “understandings”. It goes beyond what the Customs Act, and the WTO Valuation Agreement on which it is based, allows. CBSA’s proposal would place extreme burdens on importers, their customers and CBSA itself.

Today, the transaction value of imported merchandise is generally reflected in the invoice which travels with the goods. Under the CBSA proposal, this would no longer be the case in many circumstances:

Example: On July 1, Importer A orders 1000 widgets from a foreign manufacturer at a price of $5.00 each, in a sale “for export to Canada”. On July 15, Customer B places a purchase order with Importer A for 200 widgets at a price of $7.00 apiece. On July 20, customer B places a purchase order with Importer A for 150 widgets at a price of $8.00. The shipment of widgets arrives in Canada on August 1.

Under CBSA’s proposal, 650 of the imported widgets would be valued at $5.00 apiece; 200 widgets would be valued at $7.00 apiece; and 150 widgets valued at $8.00 apiece, because the sales to Customers B and C occurred before “importation”. This assumes that Customers B and C did not themselves resell the goods, or have an arrangement to resell them, before the date of importation. If they did, most likely Importer A would have no way of knowing this.

Also, how can CBSA say that the sales to Customers B and C caused the widgets to be exported to Canada, since all the goods were committed to Canada by Importer A’s purchase order, before Customers B and C had placed orders?

Canadian importers and their Customhouse brokers would be tasked with examining resales in order to file accurate entries, and would no doubt be required to file many post-importation adjustments.

Other potential problems:

• CBSA auditors would need to examine not only importers’ purchases, but their sales (and potentially resales by other parties);

• CBSA would presumably apply its new definition of “transaction value” to Regional Value Content (RVC) calculations under the United States-Mexico-Canada Agreement (USMCA) , making it more difficult for traders to satisfy RVC requirements and obtain USMCA “originating” status for their goods;

• Importers would make excess payments of Goods and Services Tax (GST) if, for example, a product is valued at $2000 on the import entry and the importer resells the product for $1500;

• Importers might incur supply-chain inefficiencies, for example by receiving all imports into their own inventories, not accepting sales orders until imported goods are in inventory, and ceasing “drop shipments” of imported goods to customers.

• The United States does not currently require firms to file electronic export information (EEI) with the Census Bureau for exports to Canada, instead relying on Canadian import statistics to measure trade balances. If Canada’s import statistics begin reflecting prices in resales in Canada, rather than the value of the goods when exported from the U.S., the U.S. government might start requiring EEI filings for goods being sent to Canada.

Opportunity for Public Comment

CBSA is accepting public comment on the proposal through July 26, 2023. Should you wish to comment, or if you have questions regarding the proposal, please contact a Neville Peterson professional.

DUTY DRAWBACK: CLAIMANTS MAY NEED TO “ROOT HURT”

The tight-knit group of drawback professionals serving American importers and exporters (sometimes referred to by Customs as “drawback vigilantes”) is watching with interest and not a little concern as an interesting case makes its way through the United States Court of International Trade. In Spirit Aerosystems Inc. v. United States, Court No. 20-00094, the question presented is whether the “article descriptions” contained in eight-digit “tariff rate” and ten-digit "statistical” descriptions in the Harmonized Tariff Schedule of the United States should be interpreted or expanded to include language in provisions of the tariff which does not appear in an enumerated line of the tariff schedule.

That’s enough to make one’s eyes cross. But this technical issue could have implications – good and bad – for companies pursuing tens of millions of dollars in claims for “substitution unused merchandise drawback”, 19 U.S.C. §1313(j)(2). To better understand the issue, it’s helpful to trace a little history.

A BRIEF HISTORY OF DRAWBACK SUBSTITUTION

Historically, drawback was a refund of duties paid on imported merchandise which was used to produce an article that was subsequently exported. Since the imported merchandise was not “consumed” in the United States, Congress saw fit to refund 99% of duties paid such merchandise, retaining the residual 1% to fund the costs of operating the drawback program. Over time, manufacturing drawback was expanded to grant refunds on duties where the exported goods were made with domestic or imported, duty-free goods which were “substitutable” with the duty-paid imports.

Drawback moved beyond the manufacturing realm in 1980, when Congress authorized what was known as “same condition drawback” [currently 19 U.S.C. §1313(j)(1)]. If goods were imported, and exported within a certain time in the “same condition” as when imported, without having been “used” in the United States, a drawback could be claimed. While simple in concept, the law was more difficult to apply. For example, if imported pharmaceuticals were exported without having been used in the United States, were they in the “same condition” as when imported, if they had aged past their expiration dates?

“Substitution same condition drawback” [now 19 U.S.C. §1313(j)(2)] entered the law in 1984. It provided that drawback could be claimed on imported, duty-paid goods if “fungible” goods were exported within a certain time. “Fungible” was defined as being “commercially interchangeable for all purposes”. Once again, simple in concept, difficult to apply. For example the Court of International Trade ruled that imported and exported jeans – physically identical in all respects – were not “fungible” because certain consumers had a subjective preference for jeans from one country over jeans from the other. Customs ruled that physically identical cans of peaches were not “fungible” because the imports were Kosher and the exports were not.

Back to the drawing board. In 1993, Congress re-christened “same condition” drawback as “unused merchandise” drawback, and replaced the “fungibility” test with a factors-based test of “commercial interchangeability”. Again, the test was vague. Courts invented the concept of a “hypothetical reasonable purchaser” to evaluate interchangeability. When your standard of proof it “hypothetical” anything, you’re in trouble. And this firm spent years litigating the exquisite issue of whether imported asparagus trimmed with a band saw was “commercially interchangeable” with asparagus trimmed with a hand tool. [Really: there’s only one genus and species of asparagus – it was all about the trimming. But we won].

Fast-forward to 2018, when the drawback provisions of the Trade Facilitation and Trade Enforcement Act of 2015 entered into force. They provided that imported and exported goods are substitutable for drawback purposes if they are classified under the same eight-digit tariff subheading. Unless that subheading started with the word “Other”. In that case, the drawback claimant looked to the ten-digit statistical subheading. But if the 10-digit statistical heading also began with the word “other”, no drawback would be paid. All that a drawback claimant had to fear was falling into a dreaded “Other: Other” provision. But seriously, how often would that happen, right? What could go wrong?

Enter Spirit Aerosystems

SPIRIT AEROSYSTEMS’ DILEMMA

Spirit Aerosystems, a company that services commercial aviation, exported and imported certain aircraft parts which were classified under HTS Subheading 8803.30.0030. Let’s put that provision in context:

8803.30.00 Other parts of airplanes or helicopters;

For use in civil aircraft:

8803.30.0015 For use by the Department of Defense or United States Coast Guard

8803.30.0030 Other

Spirit had fallen into one of the dreaded “Other: Other” categories. Further, Customs had undertaken a project to enumerate all of the “Other: Other” provisions in the tariff, and programmed its Automated Commercial Environment (ACE) drawback system to reject drawback claims invoking those tariff provisions. Spirit’s claim was rejected at first and ultimately denied. The company protested the denial and is now challenging it before the CIT.

WHAT IS AN “ARTICLE DESCRIPTION”?

Section 313(j)(5)(A) of the Tariff Act says directs Customs to look to the “article descriptions” associated with eight-digit tariff headings. It states that “merchandise may not be substituted for imported merchandise for drawback purposes based on the 8-digit HTS subheading number if the article description for the 8-digit HTS subheading number under which the imported merchandise is classified begins with the term “other”.

So we drop down to the 10-digit statistical heading. But 19 U.S.C. §1313(j)(5)(B) says the drawback claimant can claim based on 10-digit statistical subheadings, but only if “)the article description for that 10-digit HTS statistical reporting number does not begin with the term “other”.

Customs essentially placed a ruler parallel to the 8- and 10-digit provisions in the tariff. Both started with the word “other”, hence, Customs said, Spirit Aerosystems was out of luck for drawback.

But not so fast, Spirit Aerosystems is saying. What, exactly, is the “article description for the 8-and 10-digit provisions in question”? At the 10-digit level, should it not incorporate the non-enumerated superior language which says “For use in civil aircraft?” If you incorporate that language, the “article description” for the 10-digit statistical subheading does not begin with “other”, and drawback should be paid. If you look at the language of statistical subheading 8808.30.0030, it simply says “Other”. How is that a description of any article, one might ask?

Does it not need the context of the superior, unenumerated language, to make any sense? And that is the core of the argument Spirit is advancing in its lawsuit. Should not the non-enumerated language “For civil aircraft” be considered part of item’s 8808.30.0030’s “article description”, in which case the “article description” would not start with “other”? While we won’t burden our readers with a detailed description, Spirit’s arguments are grounded in various canons of statutory construction – which is interesting since the 10-digit statistical provisions of the tariff are not part of the statutory text of the document. But they are made relevant by the provisions of 19 U.S.C. §1313(j)(5).

“ROOT HURT”

The article title says drawback vigilantes may have to “root hurt”. New York baseball fans understand the phrase, which arises each summer when the Yankees and Mets play each 0ther, especially when both teams are in pennant races. One of Gotham’s teams is going to win the game, but at the expense of the other team. Ouch!

Perhaps Spirit Aerosystems will win its case. And good for them. But there are several other places in the tariff (provisions for wines, for example), where statistical provisions which name particular wines appear under the non-enumerated phrase “Other”. As noted above, the word “Other” is not an “article description” for anything.

Ideally, the CIT might be persuaded to employ a rule of lenity to interpret the concept of what is an “article description”. If the nonenumerated heading above an “Other” provision contains descriptive language (e.g., “For civil aircraft”), it should be taken into account. On the other hand, if the nonenumerated language is merely “Other”, it can be argued that perhaps this is not part of an “article description” and should be disregarded. A win-win for the drawback community, if it can be carried off.

In the meantime, drawback claimants are sweating it out.

If you have any questions regarding this issue (or are just a “drawback vigilante” looking for a sympathetic ear), please contact a Neville Peterson LLP professional.

UFLPA a Game Changer for U.S. Importers

The Uyghur Forced Labor Prevention Act (UFLPA) is a game changer for companies that import goods from China, particularly from Xinjiang Province. While Section 307 of the Tariff Act has long banned imports of goods made using forced or prison labor, the UFLPA raises the stakes by creating a “rebuttable presumption” that all goods from the Uyghur region of China, or containing inputs therefrom, are made using forced labor and are to be excluded from entry. The new law expands CBP’s authority to investigate and block imports of such goods. It also requires CBP to publish a list of all goods and companies whose goods have been blocked from entry due to forced labor concerns. It is crucial for importers to understand the implications of this new law and take the necessary steps to ensure compliance.

To prepare for potential investigations by CBP, it is essential for businesses to conduct supply chain audits and review their import procedures. This includes identifying potential risks of forced labor in the supply chain, implementing measures to mitigate those risks, and documenting these efforts. CBP has also imposed additional reporting requirements, including a controversial “UFLPA region alert” postal code reporting requirement applicable on certain imports beginning March 18, 2023.

CBP is likely to focus on goods produced in Xinjiang and may increase its use of Withhold Release Orders (WROs) to detain goods that are believed to be produced with forced labor. It is important for businesses to be prepared to respond to CBP investigations and allegations of non-compliance.

Notably, the ULFPA does not apply merely to goods produced in or shipped from Xinjiang province, but any goods with Xinjiang content—either materials or labor. So the fact that a producer is not headquartered in, or shipping from, the Xinjiang region does not provide shelter from the ULFPA. The product at issue need not even originate in China—importers of shirts made in, and shipped from, Australia have received UFLPA inquiries.

This point is driven home by the experience of apparel importers whose garments contain cotton. Approximately 60% of China’s cotton is grown and harvested in the Xinjiang region. To demonstrate the absence of forced labor material in a cotton shirt, an importer may likely need to delve into the source of the fabric in the shirt, the source of the yarn used to make the fabric, and to then determine where the cotton in the yarn was grown, harvested and ginned. This effort to prove by “clear and convincing evidence” the absence of Xinjiang region cotton may even need to involve the use of advanced forensic techniques.

The UFLPA amends the federal statute 19 U.S.C. § 1307 and creates a rebuttable presumption that forced labor affects all goods made in China’s Xinjiang Uyghur Autonomous Region (XUAR) or in whole or in part by entities that enable the use of forced Uyghur labor. Once Customs detains a shipment over a UFLPA inquiry, importers have 30 days to present “clear and convincing evidence” that the detained goods were not made, in whole or in part, in the XUAR/with forced Uyghur labor. CBP has released guidance on the implementation of the UFLPA, providing information on how CBP will process detentions, exclusions, and seizures; the types of evidence that CBP will expect importers to provide to overcome the rebuttable presumption of forced labor usage; and guidance on the enforcement of the UFLPA for specific products such as cotton, tomatoes, and polysilicon that are currently covered by existing WROs under 19 U.S.C. § 1307.

“Clear and convincing evidence” is an enhanced standard of proof, often very difficult to satisfy. To rebut the UFLPA rebuttable presumption, an importer may need to show that it has implemented a due diligence system to prevent forced labor from affecting its supply chains, can trace the supply chain for imported goods and materials incorporated therein, and, in the case of high-risk merchandise, kept production records that document the entire supply chain and demonstrate that raw materials or components from the XUAR or made with forced Uyghur labor have not been commingled with non-XUAR inputs.

To date, importers have had very little success in securing the release of imported goods which have been the subject of UFLPA exclusions. In reviewing ULFPA exclusions challenged in the U.S. Court of International Trade (CIT), the Court will impose the statute’s “clear and convincing evidence” standard—a difficult but not insurmountable climb for potential litigants. The better course for importers is to focus on serious pre-emptive planning efforts. Importers of Chinese-origin goods, or those made with Chinese inputs, will need to review their supply chains to determine if they have UFLPA risks; this may prompt firms to change their sourcing approaches, where possible, or to audit their supply chains to confirm the absence of forced labor content in their goods.

UFLPA is not going away. The recent Inflation Reduction Act authorized significant funding for CBP to expand its Forced Labor Division significantly. The requirement to list Chinese postal codes on certain entries will “flag” more entries for UFLPA review. And the requirement that importers, in effect “prove a negative” – the absence of forced labor content – by “clear and convincing evidence” is likely to mean that firms which do not map their supply chains now will be at a serious disadvantage when CBP challenges one of their shipments.

As a customs and international trade law firm, we understand the importance of staying compliant with the law and the potential consequences of non-compliance. Our experienced attorneys can provide guidance on how to review and update import procedures, conduct supply chain audits, and provide guidance on best practices to avoid forced labor. We can also assist with compliance documentation and support companies in responding to CBP investigations and allegations of non-compliance.

Now is the time for businesses to act to ensure compliance with the UFLPA. If you have any questions or concerns about how the UFLPA may affect your business, please do not hesitate to contact a Neville Peterson professional. We are here to help you navigate the new law and ensure compliance.

CONTROLLED SUBSTANCES ACT DOES NOT BAR IMPORTATION OF MARIJUANA PRODUCTION EQUIPMENT, COURT OF INTERNATIONAL TRADE RULES

The Federal Controlled Substances Act (CSA) does not bar the importation of equipment for processing marijuana where State laws authorize the possession and use of such equipment, according to an important new ruling by the United States Court of International Trade (CIT).

In Eteros Technologies USA Inc. v. United States, Slip Op. 22-111 (September 21, 2022), Customs officials at Blaine, Washington excluded from entry certain imported “motor frame assemblies”, which were designed to be used in cannabis harvesting equipment, asserting that the assemblies were “drug paraphernalia”, whose importation was barred by the CSA, specifically 21 U.S.C. §863(a)(1). This was in line with Customs’ position that the CSA barred importation of all “drug paraphernalia”, regardless of State law provisions.

The importer contended that, because Washington State had legalized the production, possession and use of marijuana, and excluded marijuana equipment from its definition of prohibited “drug paraphernalia”, the importation of the equipment was allowed by 21 U.S.C. §863(f)(1), which says that the Federal drug paraphernalia ban does not apply to “any person authorized by local, State or Federal law to manufacture, possess or distribute such items”.

The importer stipulated that its harvesting equipment fell within the Federal definition of “drug paraphernalia”. The parties also agreed that Washington State had legalized marijuana for recreational use in 2012. The dispute centered around whether Eteros, the plaintiff, was “authorized by . . . State . . . law to manufacture, possess or distribute” such items. Eteros argued that the lifting of Washington State’s prohibition against cannabis-related “drug paraphernalia” authorized it to import and possess the harvesting equipment. The Federal Government, however, argued that the concept of “authorized” required the importer to have a specific permit or license from the State to possess the goods.

Deeming the issue of what it means to be “authorized” to possess drug paraphernalia to be an issue of first impression, Judge Gary Katzmann concluded that a user-specific permit or license was not required. He relied on the U.S. Supreme Court’s decision in Murphy v. NCAA, 138 S. Ct. 1461 (2018), where the high court concluded that, by removing a ban on sports gambling schemes, the State of New Jersey had “authorized” its citizens to engage in sports betting. In particular, the CIT noted Justice Alito’s comment that “[t]he repeal of a state law banning sports gambling . . . gives those now free to conduct a sports betting operation the ‘right or authority to act’”. The Supreme Court determined that “[w]hen a State completely or partially repeals old laws banning sports gambling, it ‘authorize[s] that activity’”.

In like fashion, the Eteros court concluded that the Washington State legislature’s decision to lift the ban on marijuana paraphernalia “authorized” persons to possess such merchandise, and triggered the exception to the CSA found at 21 U.S.C. §863(f)(1). It rejected the government’s argument that a person-specific license or permit was required. The Eteros decision will likely open up sourcing choices for entities involved in the various States’ legal marijuana-related industries. However, the particular legalization scheme each State has adopted needs to be carefully evaluated against the Federal prohibitions and exceptions in the Controlled Substances Act.

FEDERAL CIRCUIT COURT OVERTURNS DECISION LINKING “NON-MARKET ECONOMY” STATUS TO CUSTOMS VALUATION RULES

In a much-awaited decision, the United States Court of Appeals for the Federal Circuit (CAFC) has ruled that the application of the Customs valuation laws is not affected by the question of whether imported goods or their components are from a “non-market economy” country.

In Meyer Corporation U.S. v. United States, No. 2021-1932 (Fed. Cir, August 11, 2022), the appellate court overturned a United States Court of International Trade (CIT) decision which held that “first sale” transaction values could not be applied to goods absent a showing that the goods, or the sale thereof, had not been influenced by unspecified “non-market economy effects”. The case raised concerns about whether goods from countries such as China and Vietnam could be appraised on the basis of “transaction value” at all.

The Meyer case involved the sale of cookware from foreign producers to middlemen, and the resale of the cookware from the middlemen to the United States importer, all sales being “for exportation to the United States”. Invoking the rule set out in Nissho-Iwai American Corp. v. United States, 982 F.2d 505 (Fed Cir. 1992), the importer claimed that Customs value could be based on the first “sale for exportation to the United States” which was made at “arms-length”.

However, the CIT held that more was required; because some of the merchandise was made in China, or contained Chinese-origin inputs, the importer was required to show that the goods were free of “nonmarket economy country distortions”, presumably practices such as dumping or subsidization.

The Federal Circuit roundly rejected this view, holding:

The trial court misinterpreted our decision in Nissho Iwai to require any party to show the absence of all “distortive nonmarket influences.” There is no basis in the statute for Customs or the court to consider the effects of a nonmarket economy on the transaction value. The statute requires only that “the relationship between [the] buyer and seller did not influence the price actually paid or payable.” 19 U.S.C. § 1401a(b)(2)(B). This provision concerns effects of the relationship between the buyer and seller, not effects of government intervention, and especially not with government intervention that affects the industry as a whole.

The Court noted that under the rules of the World Trade Organization/General Agreement on Tariffs and Trade [WTO/GATT], all countries are to be given equal treatment. Similarly, the WTO/GATT Customs Valuation Code was intended to be a code for valuation of imported materials regardless of origin. The CIT’s decision could, the appellate court reasoned, have resulted in separate valuation systems for different countries.

The court remanded this aspect of the lower court’s decision back to the CIT, with instructions for that court to determine whether the “first sale” of the goods was statutorily viable as a basis of Customs appraisement.

The decision is a major relief to the importing community, which was concerned that the CIT’s decision could limit the application of the Nissho-Iwai “first sale” rule – or of “transaction value” generally – to goods imported from non-market economy countries, such as China or Vietnam.

For further information on the Meyer Corporation decision and its impact, please contact a Neville Peterson professional.

GOVERNMENT COUNTERCLAIMS IN PROTEST CASES? NOT SO FAST, CIT SAYS

Ever since enactment of the Customs Courts Act of 1980, which gave the United States Court of International Trade jurisdiction over counterclaims, litigants and the government have assumed that Customs could assert a claim for the payment of more duties than were assessed upon liquidation of Customs entries. But two recent decisions of the CIT teach otherwise.

  In Cyber Power Systems (USA) Inc. v. United States, Slip Op. 22-85 (July 20, 2022), an importer was assessed a 25% ad valorem Section 301 tariff on certain Chinese-origin telecommunication cables. The importer protested the assessment, claiming that the cables were subject to a product-specific Section 301 exclusion. The government filed an Answer with a Counterclaim, asserting that the goods were not “telecommunications” cables, and were subject to a 2.6% duty rate, in addition to the 25% Section 301 assessment.

The importer moved to dismiss the counterclaim, arguing that the government had no cause of action to assert it. Once the entries in question had been liquidated, and the 90-day reliquidation period had lapsed, Customs was bound by the finality of liquidation. While the statute allowed for departures from finality, those were downward departures in favor of the importer – either through allowance of a protest, or enforcement of a CIT judgment in the importer’s favor. The Court agreed. The Court also agreed that its grant of counterclaim jurisdiction did not create a cause of action in favor of the government to assert counterclaims, where there was no statutory basis for such counterclaims. The court redesignated the asserted counterclaims as defenses.

Second Nature Designs Ltd. v. United States, Slip Op. 22-86 (July 25, 2022), arose in a slightly different procedural posture. The government had long ago filed its Answer, but now moved to submit an amended Answer with a counterclaim. Adopting the Court’s reasoning In Cyber Power, supra, the Court denied the government’s motion to amend with a counterclaim, but allowed it to file an amended Answer designating its claims as defenses.

The upshot of both decisions is that, even if the Court finds that the government’s asserted claims are correct, it may enter a declaratory judgment to that effect, but will not award a money judgment in favor of the government.  The decisions eliminate a potential risk factor for importers who choose to challenge CBP’s determinations in court.

For more information concerning these decisions, please feel free to contact a Neville Peterson professional.

PRESIDENT ESTABLISHES 24-MONTH MORATORIUM ON IMPOSITION OF ANTIDUMPING, COUNTERVAILING DUTIES ON SOLAR GOODS FROM SOUTHEAST ASIAN COUNTRIES

In a somewhat unprecedented development, President Biden today announced a 24-month moratorium on the imposition of antidumping and countervailing duties on solar panels and cells imported from four Southeast Asian countries – Cambodia, Malaysia, Thailand and Vietnam.

  The development comes in the midst of a series of Commerce Department anticircumvention investigations, designed to determine whether solar cells and panels from the four countries are evading antidumping and countervailing duty measures imported on solar cells and panels from the People’s Republic of China.

  Concerns over the possible retroactive assessment of high tariffs on solar products from the Southeast Asian countries have caused the cancellation or postponement of a large number of clean energy projects being undertaken in the United States. The newly announced moratorium is styled as a “bridge”, designed to allow United States energy companies to complete installation of solar projects using components from the Southeast Asian countries in question, without concern about possible crippling tariff assessments.

  Despite the President’s actions, Commerce’s anticircumvention investigations will continue. Presumably any tariffs announced as a result of the investigations will be imposed on goods imported on and after the date the Presidential moratorium on duty assessment lapses.

  This type of Presidential intervention in antidumping and countervailing duty matters is rare. It remains to be seen whether the proponents of the anticircumvention investigations will seek to challenge the President’s action in the United States Court of International Trade.

  In addition to imposing the tariff moratorium, the President invoked the Defense Production Act (DPA), directing increased production of United States-origin solar goods as well as other energy products including building insulation, heat pumps, electrolyzers, fuel cells and certain platinum group metals. The President is also seeking to stimulate domestic production of grid infrastructure products, such as transformers .

  In the government procurement area, the President is also creating new incentives for Federal government agency procurement of domestically-made energy products, including the creation of “Master Supply Agreements” for such goods, and providing “Super Preferences” for such procurement under the Buy American Act.

  If you have questions concerning these actions, please contact a Neville Peterson professional.

Administration to Review Section 301 Tariffs as Four Year Deadline Approaches

The United States Trade Representative (USTR) has issued required “60 day notices”, beginning the statutory process which requires that trade retaliation actions taken under Section 301 of the Trade Act of 1974 be reviewed after they have been in effect four (4) years. USTR is asking domestic “stakeholders” if they want the Administration to extend the current Section 301 retaliatory tariffs for Chinese goods, for products appearing on retaliation “List 1” ($34 billion in trade measures, effective July 6, 2018) and “List 2” ($16 billion in trade measures, effective August 23, 2018).

It should be stressed that USTR is not at this time seeking comments from importers and others who oppose extension of the Section 301 tariffs. As domestic interests request extension of tariffs, however, we expect that some oppositions will be filed in the comment portal.

The relevant statute, 19 U.S.C. §2417(c)(1), provides:

(c) Review of necessity

(1) If—

(A) a particular action has been taken under section 2411 of this title during any 4-year period, and

(B) neither the petitioner nor any representative of the domestic industry which benefits from such action has submitted to the Trade Representative during the last 60 days of such 4-year period a written request for the continuation of such action,

such action shall terminate at the close of such 4-year period.

The first step in the review process is the issuance of “60 day letters” to the stakeholders who petitioned for the Section 301 relief, asking if they have benefited from the relief and wish to see it extended. In this case, there were no petitioners – former USTR Robert Lighthizer “self-initiated” the Section 301 proceeding – but USTR is issuing a Federal Register notice asking interested domestic industries to express interest in extending the tariffs beyond the 4-year limit. It is also mailing the notice to all domestic parties who submitted comments supporting imposition of the tariffs.

USTR will open its Section 301 portal between May 7, and July 5, 2022, to receive requests to extend the List 1 actions. It will open the portal between June 24 and August 22, 2022 to receive requests to extend List 2 actions.

The issuance of the “60 day letters” imposes pressure on the Biden Administration, which to date has been loath to disturb the so-called “Trump Tariffs”, or to reopen an “exclusion process”, despite pleas from the business community, which has blamed the tariffs for helping to drive inflation. The Biden Administration would take political “ownership” of any tariffs extended beyond the current expiration dates.

The “List 3” tariffs, covering $200 billion in goods, are scheduled to expire in October, 2022, and USTR will likely send a new “60 day letter” at the appropriate time. The “List 4A” tariffs are not scheduled to expire until 2023.

The Administration also faces a June 30 deadline to report to the United States Court of International Trade concerning its handling of public comments leading to the issuance of the List 3 and List 4A tariffs. If the Administration does not provide an explanation demonstrating compliance with the requirements of the Administrative Procedure Act (APA), those tariffs may be set aside as invalid.

Please contact a Neville Peterson professional if you have any questions concerning these issues.

CIT Shoots Down $5.7 Million Customs Suit for “Withheld Duties”

Customs’ Automated Commercial Environment (ACE) is a notoriously un-secure system for doing government business. Someone with access to the system and a company’s EIN number can make entry of virtually any merchandise in that company’s name. Customs has little way of knowing if the party filing the entry holds a valid power of attorney from the named importer of record, or whether the entered goods actually belong to that party. An unscrupulous person with access to the system could do great damage.

  CBP’s lack of attention to identity theft in its system recently caused the United States Court of International Trade to dismiss a suit by the agency seeking to collect $5.7 million from a Los Angeles-area importer.

In United States v. Katana Racing, Inc., Slip Op 22-30 (March 28, 2022), an importer of tires, unwilling to assume liability for “safeguard” tariffs the administration had imposed on Chinese tires between 2009 and 2012, agreed to purchase Chinese tires on a “delivered duty paid” (DDP) basis from two Chinese suppliers. Given the sales term, the importer reasonably expected that the seller would handle Customs clearance and payment of the duties. Which the seller did, but, unbeknownst to Katana, listing Katana as the importer of record.

When, a few years later, Customs initiated a “quick response audit” of Katana’s entries, the company reported that it had no record of any of the sixty (60) entries CBP initially wanted to look at. Nonetheless, the company cooperated with Customs, and ultimately helped Customs dig up records concerning some 362 entries of merchandise which the company had purchased on DDP terms, and for which the company had no records. Katana had not advanced any of the duties deposited at entry, received any bills for Customs brokerage services, nor dealt with any of the dozens of Customs brokers making the entries – most of whom were strangers to it.

The CBP auditors ultimately calculated that, due to false statements made by the persons who filed the entries, duties had been underpaid by some $5.7 million. Katana requested, and was promised, the opportunity to receive notice of a penalty of a withheld duty claim and to make a presentation of its position before CBP. The company issued several statutes of limitation waivers while waiting for that process to begin. After a couple of year’s delay, Katana was contacted by new Customs officials at the automotive Center of Excellence and Expertise (CEE), who demanded payment of the $5.7 million and indicated that Katana would not be given the promised hearing to explain its position. Katana then withdrew its most recent statute of limitations waiver and CBP rushed to court with a lawsuit to collect the $5.7 million it claimed was due.

However, Senior Judge Thomas Aquilino dismissed the case, holding that CBP’s retraction of its promise to give Katana notice of violations and an opportunity to present its case justified the company’s revocation of its SOL waiver. As a result, Customs’ suit was untimely and was dismissed. The Court noted with some concern that while the evidence clearly showed that Katana had been defrauded by a supplier or freight forwarder, the agency had little curiosity in pursuing or even identifying those parties which had actually made the false statements submitted to CBP in entry forms. That Katana was named as the importer of record was not sufficient, the court held. CBP had not even alleged in its lawsuit papers that Katana was the party who made the false statements presented to the government.

In recent years, as DDP scams have intensified in the face of Section 301 tariffs on Chinese products, the identity theft problem experienced by Katana has increased and befallen numerous other importers. The CIT’s decision indicates that Customs should not passively assume that the party listed as the importer of record – especially against its will or without its knowledge -- is the party that will ultimately be liable for the underpaid duties.

For more information about this decision and other customs issues, please contact a Neville Peterson professional.

USTR Reinstates Section 301 Duty Suspensions for 352 Products

United States Trade Representative, Katherine Tai has announced the reinstatement of 352 product specific exclusions from the Section 301 retaliatory tariffs imposed on Chinese goods.

The reinstated exclusions had previously expired in late 2020. USTR had sought comments regarding the possible reinstatement of some 549 expired suspensions. The agency has now determined to renew 352 of them.

The exclusions have retroactive effect to October 11, 2020. They will continue in effect until December 31, 2022. Importers who have paid duties on affected products imported since October 11, 2021, should be able to obtain refunds of those refunds by filing post-summary corrections (PSCs) or protests with Customs.

There is still no word on whether the administration will reinstate the exclusion process to allow for new exclusion applications to be considered. There is intense pressure from business interests for a renewed exclusion process.

Please contact a Neville Peterson professional if you have questions regarding these renewed exclusions.

Customs Gives Maquiladoras and Other COVID-Stricken Manufacturers a Duty Break

A recent Customs Headquarters Ruling provides a dutiable value allowance for certain manufacturers whose operations were impacted by COVID shutdowns during 2020.

In Customs Headquarters Ruling H321226 of January 7, 2022, Customs held that a manufacturer operating a Mexican maquiladora could exclude from its computed value calculations certain plant costs incurred during the period the company’s plant was subject to a government-mandated COVID shutdown.

The ruling may be of assistance to maquiladora factories in Mexico, and others whose goods are appraised on the basis of “computed value” under Section 402(e) of the Tariff Act [19 U.S.C. Section 1401a(e)]. These plants typically manufacture or assemble goods for a United States parent, but do not sell the goods “for exportation to the United States.” Instead, their goods are appraised on the basis of “computed value” a cost-based appraisement method which values goods according to the cost of materials and fabrication, plus the manufacturer’s general expenses and profit.

Companies using “computed value” generally enter goods based on estimated values, and reconcile thee values at the end of their fiscal year. For 2020, numerous manufacturers got a rude shock when their year-long costs were allocated over lower production volumes, resulting in a much higher dutiable value than they had anticipated. This is because, during several months of government-ordered plant shutdowns, they had nonetheless incurred a number of plant overhead costs, and many had paid workers even though no goods were being produced. In its new ruling, Customs indicated that if these companies had tallied these COVID-related expenses as extraordinary costs in their books, they could be excluded from the computed value calculation. Stated another way, the value calculation would not include costs incurred during a period where no production was taking place. Many affected producers may still have unresolved reconciliation entries for 2020 plant costs, and CBP’s ruling may give them a basis to seek computed value adjustments and duty refunds.

Please contact a Neville Peterson professional if you have any questions regarding this matter or any other Customs and international trade topic.

Dead Rabbit? Recent CIT Ruling Upholds Traditional Customs Rules of Origin

In recent years, United States Customs and Border Protection (CBP) has been adopting increasingly novel interpretations of the rules determining the country of origin of imported goods. Largely in an effort to maximize collection of Section 301 tariffs on Chinese-origin products, Customs has wandered away from the traditional “substantial transformation” test of a change in “name, character or use”. Increasingly, Customs rules that a product originates in the country where its key component(s) come from, rather than the country where the article is made.

On February 24, 2022, an important decision of Court of International Trade called CBP’s practices into sharp question.

In Cyber Power Systems (USA) v. United States, Slip Op. 22-17 (February 24, 2022), the CIT reiterated that the traditional rule “substantial transformation” rule is the appropriate rule of origin for determining where goods originate, for both marking and Section 301 tariff purposes.

In so ruling, the CIT emphatically rejected several theories of origin argued by Customs – for example, that a good originates in the country where most of their component parts come from, or the country where their “essential component” was made – thus calling into question the validity of dozens of rulings CBP has issued to importers in recent years. The CIT also called into question an earlier decision, Energizer Battery Co. v. United States, 190 F. Supp. 3d 1318 (Ct. Int’l Tr. 2016) which suggested that “assembly operations could not result in a substantial transformation if the nature of the finished article was evident from the parts to be assembled.” According to the Cyber Power court, “[t]hat is not, and cannot be, the law.” Customs has weaponized the Energizer decision to disallow even extensive assembly operations from being “substantial transformations”. This leaves the “Energizer Bunny” dead, or on life support with bad prospects.

The Cyber Power decision, authored by Senior Judge Leo Gordon, emphasized that that disclosure of the origin of an article, rather than the article’s parts or components, is the goal of the marking statute, 19 U.S.C. §1304(a). Where Congress wants a company to disclose the origin of materials and components it knows how to do so, the court said, citing the American Automotive Labeling Act and laws requiring disclosure of corporate use of “conflict minerals”.

The CIT noted that, in the face of Federal government guidance urging countries to de-couple from China, Cyber Power did so, moving some of its Chinese production to a newly established Philippines facility. The Court agreed with Cyber Power that “disregarding this investment, the extensive manufacturing operations being conducted in the Philippines and the creation of new articles of commerce in the Philippines, and focusing solely on the source of parts, rather than the place where the finished article is produced, sets the Section 301 policy on its ear, and would produce enormous trade distortions.”

Recipients of CBP rulings or decisions holding that goods originated in countries where their parts or “essential components” originated, rather than the country where the product was assembled, are likely to seek reconsideration of those rulings in light of the Cyber Power decision. Many importers whose products were deemed to be Chinese-origin based on these tests, are likely to start protesting the assessment of Section 301 tariffs, and to seek refunds.

For additional information concerning this subject, please do not hesitate to contact a Neville Peterson professional.

Challenging the Imposition of Section 301 Duties on Chinese Imports: Summary of the Oral Argument in HMTX Industries, Inc. v. United States

On February 1, 2022, a three-judge panel of the United States Court of International Trade heard oral argument in the Section 301 litigation lead case, HMTX Industries LLC et al., v. United States. This case, in which some 6000 importers (and counting) have joined, seeks to have the Section 301 tariffs imposed on “List 3” and “List 4A” goods struck down as unlawful. Before the Court were cross-motions for judgment on the agency record, and the Government’s motion to dismiss.

Many expected the Court to issue questions in advance of the argument but ultimately the Judges determined to withhold advance questions and make inquiries from the bench.

The Government divided its argument into three issue areas, with one attorney presenting for each area:  (i) The Government’s motion to dismiss/justiciability; (ii) Statutory interpretation of section 301 of the Trade Act of 1974 (Sections 301-308); and (iii) issues arising under the Administrative Procedure Act (“APA”), including whether the foreign affairs exception applies. 

The Government’s position mostly followed arguments set forth in their moving papers though they tried to slip in a few subtle additions. The DOJ first argued that the lawsuits are nonjusticiable because they complain of actions taken by the President, rather than by an executive agency. Counsel for Plaintiffs responded by focusing on a textual analysis of the empowering statute, Section 301(b), noting that all Section 301 actions necessarily flow through the USTR, which is an agency susceptible to suit under the APA. Th e justiciability question received perhaps the least amount of attention from the bench, and it seems entirely predictable that the Court will have no difficulty concluding that the Section 301(b) actions were imposed by USTR in a manner that does not foreclose judicial review under the APA.

 The Court spent considerable time discussing the statutory interpretation issues, namely the allegations that neither Section 301 nor Section 307 modification authority empowered the imposition of Lists 3 and 4a tariffs. The Court focused on whether “modification” authority under Section 307(a)(1)(B) and (C) allowed the administration to “ratchet up” tariffs. Under subsection (B), any modification must be justified by a determination that “the burden or restriction on United States commerce of the denial of rights, or of the acts, policies, and practices, that are the subject of such action has increased or decreased.” Chief Judge Barnett explored at some length what potential justifications could be claimed from the record as a satisfactory basis to increase tariffs under Subsection 307(a)(1)(B), and he presented roughly three potential justifications, asking counsel for Plaintiff and the Government to answer whether the presented hypotheticals would satisfy the statutory modification requirements:

•  (1) if there were no change or worsening in the acts, policies, and practices that were the subject of the original Section 301 action (e.g., intellectual property theft, forced technology transfer), but merely a continuation such that from the passage of time, the burden has increased such that a modification of the action with a tariff increase is justified;

•  (2) if there were found to be an increase in the burden or restriction that was the subject of the original Section 301 action; and 

• (3) if there were an increased burden caused by retaliatory measures implemented by our trading counterpart (China) which served to offset the corrective nature of the original 301 action such that the burden on US commerce increases, and “modification” through an increase in Section 301 actions becomes justified.

Plaintiff’s counsel argued (persuasively, in our view) that the textual interpretations of Sections 301 and 307 universally support the plaintiff’s interpretation, that “modification” only allows a reduction in sanctions, questioning why, if the Government could invoke Subsection (C) whenever it sought to modify a prior action, it would ever invoke Subsection (B) (which requires a stated justification).

The Court also focused considerable time on the notice-and-comment process which led to the imposition of the Section 301 tariffs, and particularly whether the process was in violation of the APA. Counsel for HMTX reminded the Court of the Government’s obligations under the APA to respond to comments of stakeholders and to provide “reasoned decision-making” by the federal agencies involved. Counsel appearing on behalf of amici the National Retail Federation and five other trade associations also emphasized the APA requirements, reiterating that the USTR neither complied with the 1974 Trade Act procedural requirements, nor the APA notice and comment requirements. Separately, amici noted the harm the tariff have wrought on the members of their respective industries.

 The motions, which are likely to resolve the case, are now fully briefed and under consideration by the Court, which should issue its decision in the coming months.

Contact a Neville Peterson professional if you wish to discuss the litigation, and other international trade and Customs law issues.

Stick to Trade, Not Consumer Advocacy, CIT Tells Commerce Department

The fact that a foreign manufacturer misrepresented facts to consumers, while representing them accurately to the Commerce Department’s International Trade Administration (ITA) in an antidumping investigation, does not allow ITA to use “Adverse Facts Available” to determine dumping margins, the Court of International Trade recently held.

In Dalian Meisen Woodworking Co. Ltd. v. United States, Slip Op. 21-158 (November 28, 2021) Judge M. Miller Baker put a quick and definitive end to ITA’s attempt to act as a consumer protection agency.

Dalian Meisen, a producer of Wooden Cabinets from the People’s Republic of China, falsely advertised its cabinets as being made of maple, when they were in fact made from birch, a less-expensive, lower quality wood. These misrepresentations were contained in marketing materials that were sent to consumers, and which were submitted to ITA in the course of that agency’s investigation of Chinese wooden cabinets. But, in reporting sales information and “factors of production”, Dalian Meisen correctly reported to Commerce that its cabinets were made of birch.

Citing the inconsistency between Dalian Meisen’s representations to consumers and the data reported to ITA, the agency decided to reject the company’s accurate submissions and assign the company an “Adverse Facts Available” rate – effectively, the highest rate that ITA could impose.

Not so fast, the Court of International Trade indicated. ITA’s use of “facts available” is designed to allow the agency to fill “gaps” in information reported to the Department concerning a respondent’s sales or factors of production – matters relevant to the calculation of an antidumping margin. While Dalian Meisen might have disclosed false advertising information to ITA, it did not withhold information necessary to the calculation of accurate antidumping margins. The CIT quickly put the agency in its place, explaining that “the Department [ITA] lacks any authority to investigate whether antidumping respondents engage in false advertising,

just as it lacks the authority to ask respondents why they violate environmental or antitrust laws, or why their executives are disreputable people”. Because Dalian Meisen provided complete and accurate information needed by ITA to calculate antidumping margins, the use of AFA was not authorized here. Thus, held Judge Baker,

The court accordingly remands so that Commerce can rethink this one. In the meantime, the Federal Trade Commission, state Attorneys General, and the plaintiffs’ class action bar may wish to take a close look at the producer’s swindling of its U.S. customers.

President’s Power to “Modify” Safeguards Relief Does Not Allow Him to Increase Measures, CIT Holds

The President’s power to “modify” import relief offered in a safeguards proceeding allows him to reduce the level of relief, but not to increase it, according to a pair of new decisions by the United States Court of International Trade.

In Solar Energy Industries Association v. United States, Slip Op. 21-154 (November 16, 2021), the Court held that the President could not increase safeguard measures after they had been imposed. A safeguards investigation of imports of solar cells and panels led to the imposition of increased tariffs and quotas on imports of these goods. However, the United States Trade Representative, in selecting the remedies to be imposed, exempted “bifacial solar panels” from the relief.

Subsequently, a domestic producer of bifacial solar panels urged the Administration to repeal the exemption and make bifacial solar panels subject to the safeguards measures. There followed a series of fractious lawsuits which challenged the expansion of the safeguard relief to include bifacial panels, but ultimately the USTR expanded the relief to include them. The plaintiffs in Solar Energy Industries Association challenged the extension of relief.

The CIT, per Judge Gary Katzmann, framed the issues for the Court as follows:

This case raises a number of questions regarding the interface of Proclamation 10101 with Sections 201–204 of the Trade Act. For example: (1) Do three letters (reflecting a majority of the domestic industry production) which seek the modification of safeguards constitute a petition as required by statute? (2) Is the requirement that a petition be submitted to the President satisfied by submission to the United States Trade Representative (“USTR”)? (3) Does the Proclamation’s withdrawal of the exclusion for bifacial modules violate the statutory temporal restrictions which must be met before new presidential action may be taken? (4) Was Proclamation 10101 issued in violation of the requirement that the President determine that an action will “provide greater economic and social benefits than costs”? (5) Can the word “modify” in Section 204(b)(1)(B) be read to permit increased restrictions on trade? The court concludes that with respect to the first four questions, the answer is “Yes.” With respect to the fifth question, the answer is “No.”

The final question formed the crux for the court’s decision.

The Court determined that Section 204(b) of the Trade Act of 1974, which authorizes the President to “reduce, modify, or terminate” actions taken pursuant to the safeguards statute, only allowed the President to liberalize safeguard measures, not increase them. The court focused on the meaning of the term “modify”, which it determined to mean “the limiting of a statement”. It concluded that the President could reduce safeguard measures, but not increase them. While the parties seeking to include bifacial solar panels in the safeguards measures had followed all the procedural requirements for seeking a modification, in the end, they were seeking a form of relief the President could not grant.

The Court issued a parallel determination in Invenergy Renewables Inc. v. United States, Slip Op. 21-155 (November 17, 2021).

The determination gives hope to plaintiffs who are urging the CIT to find that the President’s expansion of Section 301 retaliatory tariffs to new goods, long after his Section 301 investigation has concluded, was also beyond his statutory powers.

SDNY Holds Freight Forwarder Not Strictly Liable for Lanham Act Violations When Counterfeit Goods Are Shipped

Freight forwarders are not strictly liable for violations of the Lanham Act just because they handle the transportation of goods that turn out to be counterfeit, the United States District for the Southern District of New York held in a significant recent ruling.

In Nike Inc. v. B&H Customs Services, Inc. et al, 2021 US Dist. LEXIS 188715 (September 30, 2021), the United States District Court for the Southern District of New York ruled that the Section 1114 and 1125(a) of the Lanham Act did not impose strict liability for a freight forwarder who merely handles cargo that turns out to be counterfeit. Such a party may be liable for contributory infringement, the court said, if it is shown that it has knowledge the goods being shipped were counterfeit. This opinion, written by Judge Jesse L. Furman, represents a notable departure from the analysis of this issue in other jurisdictions.

In Nike v. B&H Customs Services, a freight forwarder and customs broker had been charged with counterfeiting in violation of the Lanham Act when the fifth shipment in a series they had handled turned out to contain counterfeit Nike footwear. Nike brought suit against the broker and the forwarder charging them with counterfeiting and trademark infringement under Section 114 and 1125(a) of the Lanham Act, trafficking in counterfeit goods in violation of Section 526 of the Tariff Act, as well as trademark dilution importation under the Lanham Act and violation of New York common law. The forwarder, Shine Shipping Limited and Shine International transportation (Shenzhen Limited) moved for summary judgment, holding they were not liable for the violations. Nike cross-moved seeking judgement that strict liability attached. In support of its claim of strict liability, Nike pointed to Section 1127 of the Lanham Act defining the term “used in commerce” to include the sale and transportation in commerce of the goods.

The court held that that the “use in commerce language” in Section 1127 was primarily intended to address registration of trademarks rather than the question of infringement. However, the Second Circuit Court of Appeals held that the definition applies to infringement cases as well. However, Judge Furman noted that Sections 1114 and 1115(a) of the Lanham Act require that an infringer’s “use” of a plaintiff’s trademark be in connection with the infringer’s own goods and services. The court concluded that even if transportation by the forwarder constitutes “use”, the Nike trademarks were not used in connection with Shine’s own forwarding business. To hold otherwise, the Court noted, would create extreme destruction in United States supply chains.

The court thus held that the mere transportation by the goods by Shine did not create strict liability for infringement. If the matter went to trial, and Nike could demonstrate that Shine was aware that the goods being transported were counterfeit, it might be held liable for inducing infringement. Proving such intent at trial, however, would be virtually impossible, since freight forwarders generally deal with sealed cargo, and identify the goods being carried only accordance with information provided on bills of lading, invoices and packing lists.

The Court indicated that its approach to this interpretation and application of the term “use in commerce” differs from those used in other Federal district courts, but concluded that no strict liability existed. It entered summary judgment in favor of Shine on all of the other counts.

It remains to be seen if Nike will pursue an appeal, but this case could be an important watershed in the growing trend of trademark owners looking to brokers, forwarders, and other international trade service providers as “deep pockets” in cases where these entities innocently provide services in respect of goods that turn out to be counterfeit.

USTR to Retain Section 301 Tariffs on Chinese Products But Re-Start Exclusion Process

United States Trade Representative Katherine Tai, in a speech delivered October 4, 2021, indicated that the Biden Administration has completed its 8-month review of China Trade policy, and settled on a “worker-centered” trade policy going forward. As part of this process, the Administration will be keeping in place the Section 301 retaliatory tariffs which the Trump Administration imposed on Chinese goods.

Responding to the needs of many United States manufacturers and consumers, USTR Tai indicated that her office will be reinstating the Section 301 “exclusion process,” under which thousands of specific products received exemptions from the Section 301 levies. A Federal Register notice announcing the exclusion process, its timing and its rules is expected in the near future.

Companies wishing to seek exclusions should begin assembling relevant information to support their applications. We are happy to consult on the best strategies for seeking exclusions for particular products.

We will keep clients informed of developments in this important story. In the meantime, if you have any questions, please do not hesitate to contact a Neville Peterson professional.