Court of International Trade

In a recent opinion, the US Court of International Trade (CIT) found that certain fabric covered pool floats should be classified as plastics — not textiles — for tariff purposes.  Despite the textile elements of the floats, the sequential application of the General Rules of Interpretation led the CIT to find that the air-filled plastic bladder which allowed the product to float in water gave the floats their “essential character.”

The products at issue are floats for a swimming pool which a generally designed with an outer perimeter containing a plastic bladder which is covered with fabric.  Inside the perimeter is a fabric mesh which “suspends” the user’s body at or just below the water’s surface.  The floats also contain a flexible steel rod around the perimeter which allowed the floats to be folded neatly for storage and then “sprung” into a usable position. US Customs and Border Protection (CBP) had classified the floats as textiles under subheading 6307.90.98 for “[o]ther made up articles, including dress patters: Other: Other” and subject to a 7% duty.  The producer of the floats asserted that the products should be classified under subheading 3926.90.75 for “[o]ther articles of plastics and articles of other materials of headings 3901 to 3914: Other: Pneumatic mattresses and other inflatable articles, not elsewhere specified or included” and subject to 4.2% duty.

At the core of the dispute was the intersection of the textile and plastic elements of the the products. The CIT began its analysis under General Rule of Interpretation (GRI) 1 and determined that neither proposed heading, 6307 or 3926, fully described the floats which contained significant components of both textile and plastic.  CBP argued that, like life jackets which are classified as textiles, the were no separate components to the textile floats which required evaluation beyond GRI 1. Nevertheless, the Court found the textile and plastic components to be distinct and, therefore, pursuant to GRI 2, the mixed-material products were to be evaluated in accordance with GRI 3. Under GRI 3(b), if a material or component of the imparts the “essential character” of the good, then product should be classified based on that defining material or component.

CBP argued that the product was entirely covered in textiles and, significantly, without the textile mesh which suspends the user, the float would not function as intended.  The CIT, however, determined that the air-filled plastic bladders around the perimeter where the component which gave the floats their essential character.  As the Court found, even if one conceded that the mesh component is necessary for proper function, without the bladders, the mesh would lack support to help the user float. Accordingly, the CIT determined that heading 3926 was the correct heading.

In a separate part of its opinion, the CIT declined to classify certain floats designed for babies as general exercise equipment in part because the packaging lauded the products ability to keep babies “comfortable and happy.”

 

On June 27, 2018, a coalition of U.S. steel users, the American Institute for International Steel (“AIIS”), and two steel trading companies filed a complaint in the United States Court of International Trade (“CIT”) challenging the Trump Administration’s imposition of a 25% tariff increase for steel products.  AIIS’ challenge, however, is not made to the scope of the tariff or the countries effected, but to the constitutionality of the tariff itself.

The tariff increase is was enacted in March 2018 under Presidential Proclamation 9705. The President has authority to make such proclamations pursuant to Section 232 of the Trade Expansion Act of 1962 (19 U.S.C. 1862).  Section 232 directs the Secretary of Commerce, upon the application of any department, agency or interested party, to undertake an investigation of the effect of the importation of a product on national security.  The President then has 90 days to determine whether to concur with the finding of the Secretary with respect to the potential national security implications of a product.

AIIS alleges that Section 232 is an unconstitutional delegation of Congress’s exclusive authority to lay duties and regulate commerce with foreign nations under Article I of the U.S. Constitution.  Specifically, AIIS asserts that the broad definition of “national security” under Section 232 lacks an “intelligible principle” to circumscribe the President’s authority under the statute. Under Section 232, the President may consider the “close relation” of economic warfare and our national security, including the effect on domestic industries and the “weakening of our internal economy” in making a determination regarding the imposition of tariffs in the name of national security.

As evidence of the alleged lack of an intelligible principle, AIIS points to the fact that the President is not required consider, for example, the source of products (i.e., whether the products are imported from close allies), the specifications and use of the products as they relate to national security concerns (i.e., the fact that some steel imports are used to manufacture weapons or other products that aid national security), or the possible negative economic ramifications of protectionism on national security grounds (i.e., economic retaliation).  In addition, Section 232 does not contain any provision for judicial review of the President’s determination.

The government has not yet filed a response to the Complaint and whether the Court will entertain these constitutional challenges remains to be seen.  Nevertheless, as protectionist policies and threats of trade wars continue to mount, all industries must continually evaluate not only the effect of changes in relevant tariffs, but consider whether novel challenges such as those raised by AIIS may be necessary to protect the rights of industry members.

On Tuesday, May 29, 2018, the U.S. Court of International Trade (CIT) ruled that the anti-dumping and countervailing duties for steel nails from Vietnam do not apply to zinc wall anchors.

In August 2016, OMG Inc. asked the Department of Commerce to determine whether wall anchors were within the scope of the anti-dumping and countervailing duties imposed on steel nails imported from Vietnam. The Department of Commerce determined that zinc wall anchors from Vietnam that were imported by OMG Inc. fit unambiguously within the scope of the anti-dumping and countervailing duty orders.

The CIT considered the common meaning of the term “nail” by consulting dictionary meanings and trade usage, and it reversed the previous scope ruling from the Department of Commerce. The CIT determined that because OMG’s zinc anchor is a unitary article of commerce, the entire product must be considered as a whole, and the entire item did not fit within the definition of a nail. Based on trade usage, the pin (a component) is considered a nail, but the unitary article of commerce is considered an anchor, not a nail.

The CIT remanded the case to the Department of Commerce for further consideration consistent with the CIT’s opinion.

The case is OMG Inc. v. United States, case number 1:17-cv-00036-GSK, in the U.S. Court of International Trade. You can read the full opinion here.

In a May 22, 2018 Opinion and Order, the U.S. Court of International Trade (“CIT) upheld the U.S. Department of Commerce’s (“Commerce”) use of a Thai nail producer, rather than a Dubai producer, as a surrogate for the calculation of anti-dumping duties to be assessed on two nail producers from the United Arab Eremites (“UAE”).  As a result, the nails will be assessed an 0.87% duty rate, not the 7.8% rate that the nails had been preliminary assigned.

In determining the appropriate anti-dumping duty to be assessed, Commerce had considered using, among others, the financial statements of Overseas International Steel Industry LLC (“OISI”), a Dubai-based subsidiary of one of the UAE nail producers at issue.  Commerce determined, however, that the subsidiary acted as “toll processor,” meaning that it was a service provider that used subcontractors to convert raw materials to finished products, but did not actually produce nails itself.  Accordingly, because OISI was not a producer, Commerce found that its financial records lacked some significant line items, including for material costs and inventory.  Therefore, Commerce determined that the financial records of a Thai nail producer, L.S. Industry Co. Ltd. (“LSI”), were a more fitting basis for its calculation of a constructed value profit on which the anti-dumping duties were based. As a result of using LSI’s financial statements, the anti-dumping duty calculation fell from the 7.8% rate contained in Commerce’s preliminary determination to 0.87%.

Before the CIT, a domestic nail producer argued that Commerce had erred in its determination that OISI was not the proper analog because OISI uses the same raw materials and production process as the UAE producer and that the financial statements sufficiently reflect all necessary information, such as material costs and inventory.

The CIT determined that, even if the domestic producer’s arguments were true, there was still not a sufficient basis to overcome “the presumption of administrative regularity” that insulates Commerce’s decision making.  The CIT found that Commerce had concluded that OISI was a toll producer and, therefore, did not consider its financial statements.  Instead, Commerce determined that LSI’s was the best surrogate and based its well-supported analysis on LSI’s financials.  Ultimately, the CIT found that there was no clear error demonstrated in the record which would warrant the Court’s substitution of its judgment for that of Commerce.

 

In an earlier post, we examined the U.S. Court of International Trade’s (CIT) opinion in which it sustained the U.S. Department of Commerce’s (“Commerce”) shift of position on antidumping duties for frozen fish fillets from Vietnam.

Two recently filed complaints brought before the CIT, however, have challenged Commerce’s application of antidumping duties to certain separate-rate respondents. The plaintiffs in the respective complaints, various Vietnamese fish fillet producers, allege that Commerce has improperly assigned them a duty rate from an outdated, prior review.

In the most recent administrative review of antidumping duties on Vietnamese fish fillets, Commerce calculated certain duties based on the sole mandatory respondent, GODACO Seafood Joint Stock Company (“GODACO”).  Commerce determined that GODACO failed to cooperate to the best of its ability and, accordingly, assigned duty rate of $2.39 per kilogram of fillets based on the adverse facts available. Commerce preliminarily applied this same antidumping duty to all non-mandatory respondents, including the plaintiff companies.

When Commerce released the final results of its administrative review on March 23, 2018, however, the plaintiff companies were assigned an antidumping duty of $3.87 per kilogram, the antidumping duty rate set as part of a new shipper review completed more than five years ago.

In the Decision Memorandum accompanying the results, Commerce asserted that it was bound to “pull forward” the prior duty rate under the CIT’s decision in Albemarle Corp. v. United States, Case No. 2015-1288, 2015-1289, 2015-1290 (May 2, 2016).  The plaintiff companies dispute the application of Albemarle, asserting that they have been unreasonably and punitively assigned a duty rate which exceeds the most recent antidumping duty by more than a dollar.  Moreover, the plaintiff companies note that duty rate assigned to them based on their status as separate-rate respondents is now higher than other Vietnamese companies who did not respond or cooperate with U.S. authorities in any way.

Commerce has not yet filed its response defending this alleged departure from agency practice.  If Commerce’s response relies on Albemarle as controlling precedent, however, it could signal a significant shift in the Department’s policies.

In a customs classification case, Chemtall, Inc. v. United States, the U.S. Court of Appeals for the Federal Circuit affirmed a U.S. Court of International Trade (“CIT”) ruling that the vinyl polymer acrylamide tertiary butyl sulfonic acid was properly classified under the Harmonized Tariff Schedule of the United States (“HTSUS”).

The Federal Circuit was called on to distinguish between “Amides” and “Other” in a heading of the HTSUS that covers amides, their derivatives and salts thereof. The case considered the appropriate duty rate for the product that Chemtall, Inc. (“Chemtall”) is importing.

The HTSUS is a hierarchical structure for describing all goods in trade for duty, quota, and statistical purposes. Goods are classified in accordance with the General and Additional U.S. Rules of Interpretation, starting at the 4-digit heading level to find the most specific provision and then moving to the subordinate categories. The United States International Trade Commission maintains and publishes the HTSUS. However, the Bureau of Customs and Border Protection of the Department of Homeland Security (“CBP”) is responsible for interpreting and enforcing the HTSUS.

The Federal Circuit affirmed the CIT determination that the chemical product of the plaintiff-appellant Chemtall, acrylamide tertiary butyl sulfonic acid, is not an amide, but rather is a derivative of an amide.

The significance of this categorization is that derivatives of amides are subject to a higher duty rate, which is almost double that of amide imports. The categorization that Chemtall argued applied carries a 3.7% duty rate. However, the federal judge affirmed the decision of the CBP to apply the higher 6.5% duty rate for the product.

The full opinion of Chemtall, Inc. v. United States, case number 2016-2380, in the U.S. Court of Appeals for the Federal Circuit can be found here.

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.