On August 29, 2018, the United States circulated a request for consultations to the World Trade Organization (WTO) members. The US has requested that the WTO help resolve a dispute between the US and Russia concerning additional duties imposed by Russia on certain US goods.

A request for consultations is similar to other forms of dispute resolution. The request for consultations formally initiates a dispute in the WTO. If after 60 days of consultations, the parties have not been able to resolve the dispute, the complainant may request adjudication by a panel.

In its claim initiated earlier this week, the US claims that the additional duties imposed by Russia are inconsistent with provisions of the WTO’s General Agreement on Tariffs and Trade (GATT) 1994, and appear to impair the benefits accruing to the US under GATT 1994. The US claims that Russia is imposing duties on US goods, and that it is not imposing comparable duties on similar products originating in the territory of other WTO members.

The claim also includes a statement that Russia appears to be applying duty rates that are greater than those in Russia’s WTO schedule of concessions. The “schedules of concessions” is a document that reflects specific tariff concessions and other commitments a member gives in the context of trade negotiations.

 

In recent remarks, Deputy Attorney General Rod Rosenstein announced significant revisions to the Department of Justice’s (DOJ) policies for enforcing the Foreign Corrupt Practices Act.  The policy revisions make permanent many of the aspects of the FCPA Pilot Program which began in 2016 and sought encourage voluntary self-disclosures of FCPA violations by formalizing the benefits to corporations for doing so.  The recent policy revisions even went a step farther than the Pilot Program, announcing that if company voluntarily discloses FCPA violations, fully cooperates in the government’s investigation, and makes timely and appropriate remediation, there will be a presumption that the DOJ will resolve the company’s case through a declination to prosecute.

This policy revisions reinforce that the DOJ is focused on prosecution culpable individuals.  Indeed, Deputy Attorney General Rosenstein noted that “[i]t makes sense to treat corporations differently than individuals, because corporate liability is vicarious; it is only derivative of individual liability.”

While the DOJ appears to have made it even easier for companies to insulate themselves from liability if they turn over the individual bad actors, there are still many difficult decisions to be made by companies contemplating self-disclosure. Each of the requirements for unlocking the benefits of corporate disclosure – voluntary disclosure, full cooperation, and appropriate remediation – have specific criteria and pose nuanced questions for executives and directors to consider.

First, under the revised FCPA enforcement policy, the self-disclosures must be genuinely voluntary (i.e., prior to the “imminent threat” of disclosure or government investigation) and must be made within a “reasonably prompt time” after discovery of the violation.  This creates some potential issues for directors and officers who may learn of potential violations and seek to conduct an internal investigation to gather more information.  The policy revisions do not further define an “imminent threat” or “reasonably prompt” period, but company must be aware that protected investigations may jeopardize their ability to make an effective voluntary disclosure.

Second, full cooperation may be onerous.  Although the policy revisions do not contain an exhaustive list of the types of cooperation that the DOJ will expect, it does instruct that companies should “proactively” disclose all relevant facts and evidence.  Accordingly, companies must determine the appropriate scope of their disclosures (and may need to do so even if an internal investigation is not complete because concerns regarding the timeliness of the disclosure have arisen).  Moreover, the instruction that the companies take a proactive approach to disclosures appears to add additional pressure on companies to make broad disclosure (but not data dumps which could frustrate DOJ investigations) or risk failing to meet the full cooperation criterion.

Third, remediation efforts must be genuinely aimed at and capable of correcting the source of the violation.  The DOJ acknowledges that there will be variances based on the size of the company and the nature of the underlying violation; however, companies should be prepared to commit necessary resources to develop and implement ethics and compliance programs that will demonstrably improve the company’s ability to stop future violations.

Finally, another condition that has been made permanent is the requirement that the company pay all disgorgement, forfeiture, and/or restitution in full.  Depending on the amount in question, the ability to pay in full may be a difficult practical issue for a company.  Nevertheless, as part of the gateway to non-prosecution, a company must address the issue and develop a strategy for obtaining the necessary funds as it approaches voluntary self-disclosure.

Robust compliance programs remain the critical first step for companies seeking eradicate FCPA violations from their corporate culture.  As Deputy Attorney General Rosenstein noted, criminals try to evade law enforcement, but must first evade internal controls and compliance programs, therefore, “[h]onest companies pose a meaningful deterrent to corruption.”  Fostering a culture of compliance, dedicating sufficient resources, and ensuring that compliance personnel have access to management and the board were all cited by Deputy Attorney General Rosenstein as hallmarks of effective compliance and should be at the core of any compliance program.

In a recently issued Final Determination, U.S. Customs and Border Protection (CBP) confirmed that the roasting of coffee beans substantially transforms the beans into a product of the country in which the beans were roasted.

Coffee producer Keurig Green Mountain (“Keurig”) requested the determination as to the country of origin assignment to green coffee beans that it imported into the United States and Canada and then roasted in those countries.  Specifically, Keurig sought the determination as it relates to the procurement of its products by the U.S. government and certain regulatory waivers for  “U.S.-made end products.”

CBP answered unequivocally that it has consistently held that the act of roasting coffee beans substantially transforms green coffee beans into a different article of commerce pursuant to 19 U.S.C. section 2518(4)(B).  Noting numerous letter rulings dating back to the mid-1980s, CBP concluded that “roasting” or “roasting and blending” substantially transformed green coffee beans for country of origin purposes.

Interestingly, CBP found that it did not have occasion to address whether other processes in coffee manufacturing would be considered substantially transformative.  For example, a portion of the green coffee beans at issue had been undergone a decaffination process in their country of origin, prior to importation into the U.S.  Accordingly, CBP did not address whether the decaffeination process alone would substantial transform a caffeinated bean to a new article of commerce.  Similarly, the beans at issue were roasted, flavored, ground, degassed, and packaged in the same country (either the U.S. or Canada).  Therefore, CBP did not have occasion to determine whether any of these other processes, alone or in combination, may create different articles of commerce throughout the coffee production process.

As is often the case, a seemingly conclusive determination by CBP can still leave open significant questions related to the issues not squarely placed before the agency. Experienced counsel can help business determine what avenues of trade remain open and which are truly settled issues.

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 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 its recent decision in United States v. Allen, 16-cr-898, the Second Circuit Court of Appeals held that testimony which is compelled pursuant to laws of foreign jurisdictions violates the Fifth Amendment right against self-incrimination when used as part of a U.S. prosecution.  The ruling may have a far-reaching impact on the U.S. Department of Justice’s (DOJ) enforcement of the Foreign Corrupt Practices Act, which often rely on evidence obtained by foreign investigators.

In US v. Allen, the defendants were accused of being part of a conspiracy to manipulate the London Interbank Offered Rate (LIBOR), a benchmark interest rate underlying financial instruments around the world. The LIBOR scheme and the defendants, U.K. nationals, were originally investigated by U.K. authorities.  As part of that investigation, the defendants were compelled to give testimony to the U.K.’s Financial Conduct Authority (FCA). The FCA is duly authorized to compel the testimony of those under investigation and there is no allegation that the circumstances under which the defendants’ testimony was compelled violated of U.K. law.  The defendants’ testimony before the FCA became the centerpiece of charges in the United States for wire fraud and conspiracy to commit wire fraud.

The Second Circuit voiced its concern that, even though the statements were obtained in accordance with U.K. law, the statements still constituted compelled statements under the Fifth Amendment to the United States Constitution.  Therefore, the Court found that the use of any such compelled statement  against the defendants in a criminal matter was a facial violation of the Fifth Amendment.  Accordingly, the Court overturned the defendants’ convictions and dismissed the indictment

The Court was unmoved by the DOJ’s arguments that their FCPA investigations and prosecutions, many of which rely on evidence obtained from foreign governments and compelled statements, would be undermined by an adverse ruling from the Court.  While it appears clear that FCPA prosecutions cannot rely on the contents of compelled statements as the basis for a U.S. prosecution, it remains to be seen how extensively Courts may apply the fruit of the poisonous tree doctrine.  Indeed, while confronting a defendant with compelled statement may run afoul of the Fifth Amendment, Court’s could question the admissibility other evidence collected by foreign authorities following or as a direct result of a defendant’s compelled statements.  While Constitutional Law scholars could likely fill volumes regarding such a debate, the practical effect on FCPA may unfold quickly as prosecutors will need to sure up their ongoing cases with admissible evidence if compelled statements are no long permissible.

Co-Author, Santos Ramos

On June 16, 2017, President Trump announced changes to United States’ Cuban sanctions regime which will stem the tide of liberalization that Obama Administration set in motion 2014. While the regulatory changes have not yet taken effect, the Department of Treasury’s Office of Foreign Assets Control (OFAC) released updated its online resources to reflect the Trump Administration’s forthcoming changes.  Most notably, under the announced changes, individual “people-to-people” travel will no longer be permitted and any trade or business ventures involving Cuba’s military, intelligence and security services is strictly prohibited.

Travel

Trump Administration’s new Cuban travel policies crack down on the potential for individual ‘vacation’ travel to Cuba. Under the Obama Administration’s reforms to the Cuban sanctions, individuals could travel to Cuba as long as they affirmed that they were engaged in permitted activities, such as educational and artistic study, news reporting, or other endeavors designed to promote and aid the Cuban people.  Under the newly announced changes, individuals will no longer be able to travel to Cuba on their own for “people-to-people travel” (i.e., educational travel that does not involve any academic study towards the pursuit of a degree and is not under the auspices of an organization). Group people-to-people travel will still be permitted as long as the group is led by a U.S.-based organization and maintains a full-time schedule of educational or other permitted activities. Unfortunately for those who may have already booked their tickets to Havana, the new regulation will not be prospective, meaning that any travel that does not conform with the new regulations (even if previously planned) will be prohibited.

Trade and Business

Companies seeking to do business in Cuba will also have to navigate stricter regulations. While trade and business ventures with the Cuban government remained restricted under the Obama Administration’s revised sanctions, the new rules will more clearly delineate entities which are associated with Cuban military conglomerate Grupo de Administración Empresarial SA (GAESA). GAESA, which is comprised of Cuban military, intelligence, and security services, has an extensive web of subsidiaries and ownership interests which some estimate touch as much as 60 percent of the Cuban economy. OFAC and Department of Commerce, Bureau of Industry and Security (BIS) will publish an extensive list of prohibited entities when the new regulations are completed. The new trade policy will be prospective, however, meaning that any contracts and licenses executed and issued prior to effective date of the new regulations will not be terminated.

What Should U.S. Companies Do?

U.S. companies which have already entered into contracts with a GAESA-related companies will be able to continue operating without any change. Any U.S. company seeking to begin or expand business in Cuba after the new policy takes effect, however, must heed the warning that any transaction with GAESA-related entities is prohibited. Moreover, while OFAC and BIS will strive to produce a comprehensive list of GAESA-related entities, it may prove to be a difficult and ever-evolving challenge.  Accordingly, despite any published list of entities, it will almost certainly remain the responsibility – and potential liability – of U.S. companies to know with whom they are conducting business. In addition, U.S. companies must be vigilant about any renewals of contracts or licenses with GAESA-related entities, as there has been little guidance as to whether renewing an existing contract will be considered continued operation or a new, prohibited engagement.

Almost one year ago, the Department of Justice (DOJ) announced that Norwegian Shipping company Wallenius Wilhelmsen Logistics AS (WWL) had agreed to pay a $98.9 million fine for its role in a conspiracy to control prices for roll-on, roll-off cargo (such as cars, trucks, and agricultural equipment) shipped to and from the United States.  At the time, the DOJ acknowledged that, in addition to the fine, WWL was cooperating in ongoing investigations and affirmed the Department’s commitment to holding “companies and executives” accountable.

Last week, the DOJ announced that the indictment against three current and former executives of WWL subsidiaries had been unsealed and that the prosecutions of these individuals were proceeding.  The indictment – presented to the grand jury in November 2016 – alleges that the individuals attended meetings and engaged in communications in which executives from several large shipping companies allocated customers and routes by agreeing to the amounts that each company would bid for certain contracts.

The DOJ also announced that these prosecutions represented three of eleven executives who have been charged in connection with this conspiracy. Four executives had plead guilty and were sentenced to prison terms. The rest are considered “international fugitives.”  Further, the DOJ again made clear that it remains committed to prosecuting individuals as well as corporations, stating: “WWL has pleaded guilty. Now we are working to ensure that its executives who conspired to suppress competition at the expense of American consumers will be held accountable.”

It appears that the DOJ is following through with the directives of the September 2015 Yates Memo and is no longer satisfied by large corporate fines.  The fact that four executives have been sentenced to prison, three are being actively prosecuted, and five more are considered fugitives — all almost a year after the $98.9 million fine headline — shows that the DOJ is genuinely re-focused on individual accountability.  Accordingly, compliance and whistle-blower programs must have new found importance not only to corporations, but to the individual officers, directors, and executives who may be held accountable for corporate malfeasance.