INTERNATIONAL TRADE AND CUSTOMS LAW NEWSLETTER PREPARED FOR THE CLIENTS AND FRIENDS OF THE FIRM, FOR VIEWING ON THE WORLD WIDE WEB.

Volume XI, Number 9
December, 1997

SUPREME COURT
TO HEAR HMT
APPEAL

The U.S. Supreme Court has granted a writ of certiorari in the case of United States Shoe Corp. v. United States, and will decide the issue of whether the Harbor Maintenance Tax, 26 U.S.C. Section 4461 et. seq., is unconstitutional as applied to waterborne exports. Oral arguments in the case will be conducted in February, 1998, and the Justices' decision should be issued before the Court adjourns its current session next June.

The Supreme Court's decision to hear the HMT appeal reflects the significance of the Constitutional issues presented in that litigation. It does not necessarily indicate any dissatisfaction with the Federal Circuit's decision holding the export HMT to be unconstitutional. Historically, most cases involving interpretation of the Constitution's Export Clause have advanced to the Supreme Court. Most recently, in the 1996 IBM v. United States decision, the Court struck down a tax on foreign insurance premiums, holding that it operated as an unconstitutional levy on exported goods.

The key issue for the Supreme Court will be whether the export HMT is constitutionally permissible as a "user fee", charged to defray the costs of maintaining ports, harbors and inland waterways. The Federal Circuit rejected the government's "user fee" argument, holding that exporters were not directly "users" of port facilities, and that there was no correlation between the fee charged and each exporter's "use" of the ports.

Pending the Supreme Court's decision in the United States Shoe appeal, exporters should continuing paying the HMT, and prosecuting administrative and judicial appeals for refunds.

Copies of the parties' briefs addressed to the certiorari petition are available from our offices [GTR 97-901].

CUSTOMS ISSUES
"FINAL" REASONABLE
CARE CHECKLIST

The United States Customs Service has published Treasury Decision 97-96, which sets out a "final" checklist for importers to consult in carrying out their legal obligation to use "reasonable care" in conducting Customs business. The guideline is in the form of a series of questions addressing importers' general procedures for ascertaining their obligations under the Customs laws and regulations, together with procedures for determining the tariff classification and dutiable value of imported goods, the country of origin and marking requirements applicable to same, and compliance with intellectual property rights requirements.

Customs has styled its "reasonable care" checklist as a non-exhaustive formulation of the legal standard, which can be expanded or modified without changing the Customs regulations. However, Customs stresses that each situation must be considered on its own merits.

Copies of Treasury Decision 97-96, together with our firm's memorandum analyzing it, are available from our offices [GTR #97-902].

COURT THROWS
OUT "WHISTLE BLOWER"
LAWSUIT ON TEXTILE
TRANSSHIPMENTS

A Federal District Court in Columbus, Ohio has dismissed the American Textile Manufacturer Institute (ATMI)'s "whistleblower" lawsuit, filed under the Federal False Claims Act, which had asserted that The Limited, a major apparel retailer, together with certain of its officials and vendors, knowingly conspired to import and sell apparel which had been unlawfully transshipped in order to evade textile quotas. In United States ex. rel ATMI v. The Limited, No. C-2 97-776 (November 13, 1997), U.S. District Court Judge John Holschuh ruled that the FCA only applies to cases involving attempts to receive monies from the government, or to withhold money or property otherwise required to be tendered to the government. It does not apply, the Court held, to allegations of misconduct which, if proved, might result in the assessment of penalties against the alleged violator. Thus, to the extent the ATMI's case was based on the theory that unlawful transshipments -- which did not directly deprive the government of duties -- might result in the assessment of civil penalties or liquidated damages, it was not cognizable under the FCA.

Even to the extent that the misrepresentation of origin might have extended to false country of origin marking, for which a 10% ad valorem special marking duty can be assessed, the Court ruled that the marking duty assessment was not automatic, and thus would not support an FCA claim.

While the Customs Service elected not to exercise its right to conduct the ATMI "whistleblower" case, it did file an amicus brief, setting out its position that false or fraudulent acts relating to duty assessments were properly within the scope of the FCA, and could be prosecuted by "whistleblowers".

Copies of the United States ex rel. ATMI v. The Limited decision are available from our offices [GTR #97-903].

ATMI SEEKS RECUSAL
OF JUDGE, VOWS TO
FIGHT ON

Notwithstanding the dismissal of its much-publicized FCA suit, ATMI has vowed to press its case. Shortly after the Court's decision was announced, ATMI filed a motion for rehearing and asked Judge Holschuh to recuse himself, on the ground that the Judge was being represented in a criminal matter by one of the law firms representing The Limited, and had failed to disclose this relationship to the parties. Without alleging that the Judge's dismissal of its lawsuit was biased, ATMI charged that the undisclosed relationship created such an appearance of impropriety as to require the judge the recuse himself from the case.

ATMI also asserted that it did not become aware of the judge's legal problems and representation until after the decision dismissing its case was announced.

CIT DECLINES
JURISDICTION OVER
"WHISTLEBLOWER"
LAWSUITS

The ATMI decision notwithstanding, there are indications that whistleblower actions will continue to play an increasingly visible role in Customs and International Trade law. Recently, the U.S. Court of International Trade (CIT) ruled that it lacks jurisdiction over suits brought under the False Claims Act, even if they involve alleged violations of the Customs laws.

In United States ex rel. Felton and Phillips USA Inc. v. Allflex USA, Inc. Slip Op. 97-167 (December 3, 1997), a whistleblower alleged that an importer had unlawfully deprived the Customs Service of duties by misclassifying veterinary syringes as duty-free agricultural implements. The U.S. District Court for the Western District of Missouri, where the case was filed, held that the CIT had exclusive jurisdiction over the matter, as it involved the interpretation of the Customs laws, and ordered it transferred to the CIT. Judge Jane A. Restani, however, ruled that the CIT lacked jurisdiction over False Claims Act (FCA) cases, and ordered the case re-transferred to the District Court.

The CIT ruled that, under 28 U.S.C. Section 1582, it has jurisdiction over actions alleging violations of the Customs laws only when those actions are commenced "by the United States". While FCA "whistleblower" cases can be "conducted" by the United States, the Court held that they are all unquestionably brought by private parties. Although noting that deference is ordinarily owed to a District Court decision to transfer a case, and that consolidating all Customs issues in the CIT would promote uniformity of legal administration, the Court determined that it could not exercise jurisdiction over the matter.

Copies of the U.S. ex rel. Felton v. Allflex decision are available from our offices [GTR #97-904].

CANADA CHANGES
"TRANSACTION VALUE"
DEFINITION

Canada's government has issued a proclamation changing the definition of the dutiable "transaction value" of merchandise imported into Canada on and after September 17, 1997. The proclamation implements a 1995 statute which modified the definition of "transaction value" to restrict it to "the price actually paid or payable for the merchandise when sold for export to Canada to a purchaser in Canada". The proclamation effectively imposes a residency requirement on a purchaser in the transaction value sale, and precludes application of the "first sale" rule embraced by the United States in the landmark 1992 Nissho-Iwai American Corp v. United States decision.

The Canadian International Trade Tribunal (CITT) recognized the applicability of the "first sale" rule to Canadian imports in its 1994 Harbour Sales decision, and recently confirmed this understanding in the 1997 Moda Imports case. However, Revenue Canada, Customs & Excise, vehemently opposes the use of the "first sale" rule, and asked Parliament to amend the statutory definition of "transaction value" so as to preclude its application.

Canada's modification of the "transaction value" statute brings it into conflict with other nations which have implemented Customs valuation laws based on the GATT Customs Valuation Code. It remains to be seen whether Canada's actions will result in formal complaints to the World Trade Organization (WTO).

Copies of Canada's proclamation are available from our offices [GTR #97-905].

"MOD ACT" PROVISION
ON "SUSPENSION"
APPLIES TO PRE-MOD
ACT ENTRIES: CIT

A provision in the Customs Informed Compliance and Modernization Act regarding the "deemed liquidation" of previously suspended entries applies to pre-Mod Act entries, according to a recent U.S. Court of International Trade (CIT) decision.

In American Permac, Inc. v. United States, certain entries of drycleaning machinery were "suspended" pending a Commerce Department review to assess antidumping duties, and subsequent judicial review thereof. These proceedings were completed in 1989, but Customs did not liquidate the entries and assess the duties until more than 4 years later, in 1994. The Court held that the 1994 liquidations were invalid, as the entries were "deemed liquidated" at the rate and amount of duty asserted at the time of entry. This result was compelled, the Court concluded, by reason of the "Mod Act" provisions requiring that entries be "deemed liquidated" as entered, unless Customs takes action to liquidate them within six months after the suspension of liquidation ends. The Court held that this created an obligation on Customs to liquidate entries within 6 months of the date of liquidation -- even if the entries had been made before the December 8, 1993 effective date of the "Mod Act".

The Court stressed that it was not giving "retroactive" application to the Mod Act provision, but was rather applying it prospectively, based upon the entries' liquidation status at the time the Mod Act was enacted.

At the same time, the Court found that the amount of duties asserted at the time of entry included the amount of any antidumping bond which the importer had posted in lieu of cash deposits of estimated antidumping duties.

Copies of the American Permac decision are available from our offices [GTR #97-906].

FTC REAFFIRMS
"MADE IN USA"
STANDARD

To the great disappointment of many U.S. businesses, but to the delight of labor groups, the Federal Trade Commission (FTC) recently reiterated its traditional view that goods must contain "all or substantially all" domestic content in order to be labeled with the unconditional statement that they are "Made in USA". In a highly-publicized Statement of Enforcement Policy, the FTC reaffirmed that goods containing any substantial foreign content could not be advertised or labeled as "Made in USA" or with words of similar significance.

In reaffirming its "all or substantially all" standard, the FTC rejected its proposed Origin Guides which had been issued for public comment last year. These guides, in turn, were the product of a highly-publicized workshop on origin issues which the FTC conducted in 1995. The FTC policy statement does not set out any objective formula for determining when an article is "all or substantially all" domestic. Some foreign content is permissible in goods labeled "Made in USA"; however, the remoteness of the foreign input from the finished product is considered significant. For example, if foreign steel is used to make part of a disk drive for a computer, the computer might still be considered "all or substantially all" domestic. However, the same would not be true of a hand tool made from imported steel.

The FTC had imposed a moratorium on enforcement of its "Made in USA" labeling standard while its rules were being reconsidered. Now, however, enforcement activities are expected to resume.

Copies of the FTC's Statement of Enforcement Policy are available from our offices [GTR # 97-907].

FESTIVE ARTICLES;
CUSTOMS ISSUES
INFORMED COMPLIANCE
GUIDE

Customs will adopt a limited definition of the term "festive articles" as it appears in the Harmonized Tariff Schedule of the United States (HTS), notwithstanding the recent U.S. Court of Appeals for the Federal Circuit decision in Midwest of Cannon Falls, Inc. v. United States (1997). In Midwest, the CAFC rejected several limitations which Customs had placed on the definition of "festive articles", and ruled instead that the term could encompass a wide array of both decorative and functional articles having holiday motifs.

Now, the Customs Service has issued a new "Informed Compliance" publication outlining in great detail the agency's position concerning what types of articles it will consider to be "festive articles" or "Christmas decorations", entitled to duty free treatment under HTS heading 9505. Customs will require that "festive articles" be sold prior to a particular holiday and that they be intended and used for entertainment and celebration. The publication lists the "festive" occasions which Customs will recognize, and, for both decorative and functional articles, the motifs which Customs will accept as "festive". Moreover, the publication contains an extensive listing of the types of products which will always be classified as "festive", and those which may, under certain circumstances, attain such classification.

In general, Customs' approach is that the term "festive articles" is a classification by use provision of the tariff. In order to bring a given article within the classification, and importer must show that it belongs to a class or kind of merchandise which is principally used for the specified purpose. An importer wishing to bring an article within the "festive articles" provision must be able to demonstrate its characteristics and uses through catalogues, advertisements or other forms of evidence.

Copies of Customs' Informed Compliance publication, together with our firm's memorandum of law analyzing it, are available from our offices [GTR # 97-908].

FTZS; CUSTOMS
RECONSIDERING
"WEEKLY ENTRY"
PROCEDURES

The U.S. Customs Service is apparently having second thoughts about its proposal to allow weekly consumption entries of goods withdrawn from non-manufacturing Foreign Trade Zones and subzones. Customs has previously proposed regulations which would make the weekly entry procedure -- currently available only to certain manufacturing FTZs -- also available to non-manufacturing zones. The agency has been flooded with applications from FTZs wishing to participate in a "pilot program" for weekly entries.

A recent Administrative Message, however, set a December 17, 1997 cutoff date for applications to participate in the weekly entry pilot program. Customs indicated that it was stopping entry into the pilot program pending issuance of final regulations making the procedure generally available. However, Customs also expressed concerns regarding the revenue impact of the weekly entry procedure -- particularly as it affects the Merchandise Processing User Fee (MPF), which is currently set at 0.21% ad valorem, and which is "capped" at a $485 per entry maximum. The "weekly entry" procedure for FTZs allows zone and subzone operators to achieve significant MPF savings.

Copies of Customs Administrative Message are available from our offices. [GTR #97-909].

WTO RULES AGAINST
U.S. IN FUJI-KODAK
DISPUTE

A World Trade Organization (WTO) dispute panel has ruled against the United States in a dispute alleging that Japan's government blocked U.S. exports by preventing Kodak photographic film from gaining a foothold in the Japanese marketplace. The U.S. government had pressed Kodak's claim before the WTO; but the dispute panel found that Kodak's failure in the Japanese market was not the result of government action or inaction.

U.S. officials blasted the decision, asserting that the WTO was unable to detect and punish subtle barriers to international trade. The U.S. government and Kodak were considering potential action against Japan -- either unilateral trade sanctions or WTO-permitted trade actions against Japanese goods. The Administration also vowed to work with the WTO to open Japan's photographic goods market to imports.

"FAST TRACK",
NAFTA PARITY
INITIATIVES FAIL

The Clinton Administration is reeling from several trade policy setbacks in Congress. Legislation to extend the President's "fast track" trade negotiating authority was withdrawn after it became evident the Administration did not have sufficient votes to secure passage. The withdrawal was a major blow for the Administration.

In a second setback for the Administration, the U.S. House of Representatives rejected H.R. 2644, the Caribbean Trade Partnership Act (CTPA). The CTPA would have provided tariff benefits for textile and apparel products made in Caribbean Basin Initiative Beneficiary countries, subject to compliance with rules of origin similar to those imposed on textile products under the North American Free Trade Agreement (NAFTA). The CTPA drew the ire of domestic textile manufacturers and labor groups, and others who objected to the bill's approach of providing "transitional" privilege for CBI-origin textiles, subject to the manufacturing country's entry into "NAFTA-like" trade pacts with the U.S.

For additional information concerning matters discussed in the Global Trade Report, please call Martin Neville, John Peterson, Maggie Polito or Arthur Purcell at (212) 635-2730 or George Thompson at (202) 861-2959.