Court of International Trade

Just in time for the holiday season, the U.S. Court of International Trade (“CIT”) recently held that certain components of a Santa Claus suit were of such quality that they should be subject to apparel duties, not the free duty assessed on costumes and other “festive articles.”

The articles at issue were imported by Rubies Costume Co. (“Rubies”) as a complete Santa Clause costume. Included in the “premier” set, which carried a retail price of $100, were red polyester and acrylic pants, jacket and hat – adorned with white faux fur, of course – white gloves, shoe covers, a belt, wig, beard, and sack. Upon importation, U.S. Customs and Border Protection (“CBP”), evaluated each of the components and determined that the jacket and pants were classifiable under chapter 61 as “wearing apparel” and assessed duties of 32% and 28.2%, respectively.  In addition, CBP determine that the gloves and sack were also subject to duties.

Rubies filed a protest, arguing that the Santa suit should be classified under heading 9505 as a “festive article” which in not ordinarily worn other than as part of Christmas festivities.  Rubies argued that, like the other costumes that it imports, the Santa suit is worn by those who want to depict Santa Claus and any practical utility in the garments is merely incidental.  CBP argued, essentially, that the articles are of such quality that they function as apparel and were appropriately classified as such.

The CIT defined the issue of the case as follows: “[t]he issue is not whether the Santa Suit is a costume or apparel as those terms are colloquially understood; rather, the issue is whether the Santa Suit is ‘fancy dress , of textiles, of chapters 61 or 62’ or a ‘festive article,’ as those terms are defined in the HTSUS and relevant case law, which is a legal question.”  The Court focused on Chapter Note 1(e) to chapter 95 which states that “fancy dress, of textiles, of chapter 61 or 62” are barred from classification under chapter 95.  In light of this unequivocal exclusion, the CIT needed only to determine whether the jacket and pants are properly classified as “fancy dress” under the law. The Court rejected the testimony of Rubies’ expert testimony regarding fashion theory and comparisons with couture gowns as the height of “fancy dress.” Instead, the CIT, in an extensive review of prior case law, determined that components of the Santa suit were above a threshold or floor of minimum quality to be properly considered “fancy dress.”  Unlike cases where low quality costumes that lacked finished edges, closure hardware, or the general durability to be worn repeatedly were found to be “festive articles,” the Santa suit components were fully finished, listed as dry-clean only, and had stitching of ordinary durability.  Accordingly, the CIT found that the jacket and pants met legal definition of “fancy dress” and, as such, were expressly excluded from classification under chapter 95. The CIT applied a similar analysis for the gloves and sack which were of similar quality.

Cases with familiar subject matter are great for headlines, but can also highlight important inconsistencies between ‘gut’ expectations and the legal outcome of a product classification.  Most people may not hesitate in thinking that a Santa Claus suit, regardless of quality, is inherently a festive costume.  However, as the CIT demonstrated, tariff classifications do not turn on colloquial definitions.  Rather, as here, the legally binding chapter notes and precedential opinions defined the outcome in a manner that might surprise the casual observer.  Experienced counsel can ensure that classification (and duty) expectations are consistent with prevailing law.

In a recent decision, the United States Court of International Trade (CIT), upheld the classification of United States Customs and Border Protection (CBP) with regard to fiber optic telecommunications modules, finding that the “optical” quality of fiber optics trumped their use for data transmission.

ADC argued that, although fiber optic technologies use light (transmitted along glass cables), the technologies, including the modules at issue, are not “optical” instruments.  Further, ADC argued that the classification for optical products should be limited to articles that relate to the light spectrum visible to the human eye.

The CIT was not persuaded.  In a clinical application of the General Rules of Interpretation (GRIs), the CIT’s analysis centered on the common meaning of “optical.”  CIT found no ambiguity in the term optical (i.e., relating to light) nor any limitation in common definitions to the light spectrum which is properly considered optical. Having found no ambiguity in the term optical, pursuant to the GRIs, CIT determined that the modules were prima facie classifiable under subheading 9013 as “other optical appliances and instruments”.  CIT dispensed with ADC’s argument that its preferred classifications was equally apt, citing the relative lack of precision in subheading 8517.62.00’s description of data transmission machines and a significant note to Chapter 85 which expressly excluded from Chapter 85 all articles covered by Chapter 90.

The evaluation heirarchy set forth in the GRIs dictated the outcome of this decision. Although ADC’s modules are machines used for data transmission, their optical qualities made Chapter 90 the proper classification. Experienced counsel can help navigate the GRIs and other technical import rules and regulations and add certainty to an importer’s bottom line.

In recent decision, the Court of International Trade entered a $1.6 million award against shoe importer, Sterling Footwear, Inc. (“Sterling”), for what it found to be grossly negligent product misclassification.  Granting the U.S. Government’s motion for summary judgment in part, the Court left open the possibility of additional penalties of up to $20.8 million once the liability of Sterling’s owner and a related company  are determined at trial.

The Court found that in 337 entries between 2007 and 2009, Sterling had misclassified footwear as “rubber tennis shoes” under subheading 6402.91.40 of the Harmonized Tariff Schedule of the United States (“HTSUS”) which covers footwear for which 90% of the exterior of the shoe or boot is covered with rubber or plastic.  When U.S. Customs and Border Protection (“CBP”) examined samples from the entries, it found that the shoes had rubber soles but that the upper part of the shoes were made of fabric and connected by a foxing band (a strip of material that covers and secures the joint between the upper and lower part of the shoe).  Therefore, the shoes were not properly classified under subheading 6402.91.40 and were subject to a higher duty.

CBP sent several notices to Sterling regarding the misclassification.  CBP also met with Sterling leadership and their broker to explain the basis of their conclusions with regard to classification.  Despite these communications with CBP, Sterling took no action to amend their entries or defend its classification, prompting CBP to undertake a comprehensive investigation of Sterling’s voluminous entries. The Court found that — despite their assertions to the contrary — Sterling’s leadership had instructed its brokers as to how the shoes should be classified and disregarded the broker’s input.  Significantly, Sterling took no efforts to change the classification of its products after CBP’s notices of misclassification.

In light of the Court’s finding that the misclassification was the result of gross negligence, Sterling and the other defendants face a potential penalty totaling four times the actual and potential losses to the government.  In this case, $1.6 million in actual loss (mitigated down from $2 million through protests and surety payments) has already been awarded; however, $3.2 million in potential losses from misclassified entries have been identified by the government.  The $5.2 million penalties for actual and potential losses, which can be quadrupled in light of the grossly negligent conduct, leaves a potential penalty of $20.8 million still to be determined.

While proper classification of goods is every importer’s goal, this case illustrates that one must heed the instructions of CBP with regard to classification.  If you dispute CBP’s position there are avenues to challenge classifications both retrospectively and prospectively.  Doing nothing in response to CBP notices, however, is simply not an option.  Proper counsel can help you navigate classification issues before entries arrive in the U.S. and are essential if you receive a notice from CBP.

In a recent opinion, the Court of International Trade upheld the determination by U.S. Customs and Border Protection (CBP) that certain doorknobs imported by home-improvement retailer Home Depot are properly classified as locks and subject to a higher duty than other doorknobs.

In essence, the dispute came down to a question of whether a doorknob that locks is (i) a doorknob or (ii) a lock.

Doorknobs are classified heading 8302 of the Harmonized Tariff Schedule of the United States (HTSUS) which covers “[b]ase metal mountings, fittings and similar articles suitable for . . . doors . . . .”  The relevant Explanatory Notes clarify that heading 8302  “covers general purpose classes of base metal accessory fittings and mountings, such as are used on furniture, doors, windows, coachwork, etc”  and that the term “[m]ountings, fittings and similar articles suitable for buildings” includes “handles and knobs for doors, including those for locks and latches.” Doorknobs classified under heading 8302 are subject to 3.9% duty.

Locks, on the other hand, are classified under HTSUS heading 8301 which covers “[p]adlocks and locks (key, combination or electrically operated), of base metal.” Locks classified under heading 8301 are subject to a 5.7% duty.

Home Depot argued that its products, doorknob sets consisting of exterior and interior doorknobs with trim, a latch component, strike plate, keys, and installation hardware, were plainly doorknobs under heading 8302.  Home Depot argued that the products were an “improved” doorknob with a lock function. CBP argued that products were, first and foremost, locks to secure an exterior door, as evidenced by the “key-operated” nature of the products.  The Court agreed with CBP, finding that the doorknobs were part of the lock, specifically, they were the lever used to open the lock.  The Court also cited Home Depot’s testing and advertising of the knobs as locks.  The Court clarified that doorknobs without this locking function are still properly classified under heading 8302.

One take away from the Court’s decision was its rejection of Home Depot’s argument that the products at issue were similar to other knobs that had been classified under heading 8302.  The Court reiterated that HTSUS does not call for a comparison of articles under a giving heading, but rather that each article is to be compared to the wording of the tariff provisions.  As advocacy to CBP and the Court is often by done by analogy to similar articles, it is important to always remain focused on the language of the tariff provision itself.

In a recent post, we discussed the lawsuit brought by battery behemoth Duracell against a company that it was importing “gray market” versions of its copper-topped products. In that action, Duracell has argued that the warranty that comes with its U.S. batteries is ten times longer than the warranty that comes with the batteries that Duracell sells to electronic manufacturers and which the defendant sought to import.  Accordingly, Duracell argued that this material difference in the warranty should permit it to block the importation of the unauthorized batteries under the Lever-rule which permits the restriction of gray market imports which are materially different from those generally offered to U.S. consumers.

Duracell’s battle to control gray market goods, however, is one fought on many fronts.

In the recently amended complaint in a separate action before the Court of International Trade, an Milecrest Corp., an importer and distributor of gray market Duracell batteries, challenged U.S. Customs and Boarder Protection’s grant of Lever-rule protection to Duracell.  Specifically, the Milecrest alleges that CBP failed to comply with the Administrative Procedure Act, 5 U.S.C. 551 et seq., when it granted Duracell Lever-rule protection in March 2017 based purported material differences in “label warnings, consumer assistance information, product guarantees, and warrant coverage.”  Milecrest alleges that CBP did not take required public comment before issuing the grant notice and, if it had done so, it would have been made aware that many of Duracell’s own products are not sold with label warnings, customer assistance information, guarantees, or warranty information on the batteries themselves, which would have undercut Duracell’s claim for Lever-rule protection.  In addition, Milecrest argues that the grant is arbitrary and capricious because CBP should have considered Duracell’s own non-conforming batteries and denied the request for protection.  Finally, Milecrest argues that the grant is vague because it fails to specifically identify the products to which it applies or what warnings, etc. will trigger Lever-rule protection and which products will be permitted to be imported.

An interesting aside, the Court recently rejected Milecrest’s efforts to proceed anonymously, holding that potential infringement lawsuits by Duracell were not a sufficient reason to warrant concealing the company’s identity in connection with this matter.

Duracell’s ongoing efforts to control gray market goods demonstrates how producers and importers must be constantly vigilant and take appropriate offensive as well as defensive positions regarding the same goods and the same core legal issues.  Proper counsel can help companies navigate when offensive legal action are advantageous and when defensive advocacy becomes required to protect ones’ business.

In a recent decision, the Court of International Trade shot down an importer’s argument that its Thanksgiving and Christmas-themed serve ware and dinnerware should be exempt from duties as instruments of “specific religious or cultural ritual celebrations.”

Copyright: alexraths / 123RF Stock Photo
Copyright: alexraths / 123RF Stock Photo

Subheading 9817.95.01 of the Harmonized Tariff Schedule of the United States (“HTSUS”) provides that no duty is to be assessed for: “[u]tilitarian articles of a kind used in the home in the performance of specific religious or cultural ritual celebrations for religious or cultural holidays, or religious festive occasions, such as Seder plates, blessing cups, menorahs or kinaras.”

The crux of importer, WWRD US LLC’s, argument was that the definition of “cultural ritual” was sufficiently broad so as to include the traditions of Thanksgiving and Christmas dinners.  The importer put forth a variety of definitions of the term “ritual”, including Merriam Websters’s definition of “a customarily repeated often formal act or series of acts.”

Judge Mark A. Barnett, however, derived the Court’s understanding of the scope of the subheading from the exemplars included therein.  While Judge Barnett did not question the cultural significance of the Thanksgiving and Christmas holidays, his opinion focused on the subheading’s requirement of “specific” rituals.  The exemplars, the Seder plate used during Passover, the menorah used during Hanukkah, and the kinara used during Kwanzaa, involved specific sequential rituals, not merely the observance of a recurring event such as Thanksgiving of Christmas dinner.

Ultimately, the ITC found that US Customs and Border Protection’s classifications and resulting duty rates, ranging between 3% and 6%, were proper.  While the importer’s creative classification argument was unsuccessful in this case, a zealous advocate can make a significant difference in the duties, and the bottom line, of any import transaction.