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

Volume XIV, Number 2
May, 1999

SUPREME COURT:
CUSTOMS REGS
GET JUDICIAL
DEFERENCE

In a decision of major significance for the administration of the Customs laws, the U.S. Supreme Court has ruled unanimously that reasonable Customs regulations which interpret the law are entitled to deference from reviewing courts. The 9-0 decision in United States v. Haggar Apparel Co., (April 21, 1999) holds that, notwithstanding the specialized expertise of the U.S. Court of International Trade (CIT) and the Court of Appeals for the Federal Circuit, those courts must defer to Customs' reasonable interpretations of the law, as set forth in published regulations. However, the Supreme Court ruled that importers may challenge the reasonableness of Customs' regulations, and the authority for their issuance.

In Haggar, Customs refused an apparel importer's claim for an HTS subheading 9802.00.80 duty allowance in respect of certain trousers, assembled in Mexico from U.S.-origin components, because the slacks had been subjected to an oven baking operation, designed to impart a permanent crease, while abroad. The Court of International Trade, after a detailed trial, held that the oven-baking operation was "incidental to assembly" and thus did not disqualify the garments from the exemption. However, Customs asserted that the Court should have deferred to the agency's regulation, which provided that "permapressing" was a disqualifying operation. In holding for the importer, both the CIT and CAFC ruled that Customs' regulation was not entitled to any special deference, since the CIT reviewed Customs' determinations "de novo".

The Supreme Court disagreed, holding that Customs regulations, like other agencies' rules, were entitled to judicial deference under the doctrine announced in the high court's 1984 Chevron U.S.A. Inc. v. Natural Resources Defense Council decision. Notwithstanding the specialized nature of the reviewing courts, the Justices held, there was no reason why they should not give deference to properly-issued agency regulations which contain reasonable interpretations of the law.

However, the Supreme Court remanded the case, so that Federal Circuit could determine whether Customs' "permapressing" regulation is a reasonable interpretation of the requirements for HTS subheading 9802.00.80 allowances.

HAGGAR DECISION
COULD HAVE
MAJOR IMPACT

The Supreme Court's Haggar decision brings the Customs Service into the 21st Century on a par with other Federal agencies whose regulations enjoy judicial deference. It will no longer be sufficient for importers challenging Customs' application of an interpretative regulation to show that their interpretation is better than the agency's; Customs' view must be shown to be unreasonable or contrary to law. This will obviously make it harder for importers to prevail in the courts when confronted with an adverse Customs regulation.

Many in the trade community fear that Customs will use the Haggar decision as a pretense for codifying in regulations some of the agency's most controversial interpretations of the Customs laws, particularly in the area of "reasonable care".

However, Chevron deference does not give Customs a "blank check" to impose its views on all areas of the law. Courts have repeatedly indicated that Chevron - type deference is not due to an agency's regulations where Congress, by statute, has expressly spoken to the issue at hand. Moreover, no deference is due where an agency has acted beyond the scope of its lawful authority, or where the agency's view is "unreasonable".

The Haggar decision will only have relevance in cases where Customs' decision is based on a specific published regulation. Decisions of individual Customs officials, while enjoying a "presumption of correctness", will not be entitled to deference from the Courts, unless the decision is based on a specific interpretative regulation.

Copies of the Haggar decision, together with a memorandum analyzing it, are available from our offices [GTR #99-201].

CUSTOMS VALUE:
SUBSIDIARIES
CAN'T BE
IGNORED

The Customs Service, in making dutiable value determinations, may not disregard a foreign seller's U.S. subsidiary simply because it considers it to be the "alter ego" of the exporter, the U.S. Court of Appeals for the Federal Circuit recently held. The CAFC's decision in VWP of America, Inc. v. United States is a major victory for many small U.S. importers.

In VWP of America, a Canadian woolens mill which previously had sold fabrics directly to unrelated U.S. customers, established a small, thinly-capitalized U.S. subsidiary, to whom it sold the fabrics at lower prices. The subsidiary, in turn, resold the goods to U.S. customers which had previously bought directly from the Canadian parent. The importer asserted that the price from the Canadian mill to the U.S. subsidiary represented the dutiable "transaction value" of the imported fabrics. However, the Court of International Trade (CIT) ruled that the subsidiary was nothing more than the "alter ego" of the Canadian mill, and should be disregarded for purposes of determining transaction value. Effectively "merging" the Canadian parent and the U.S. subsidiary into one, the CIT ruled that the only bona fide "sale for exportation to the United States", for value purposes, was the sale to the U.S. customers. The CIT's decision opened the way for Customs to subject U.S. "sales subsidiaries" of foreign manufacturers to extreme scrutiny when they acted as importers of record.

The Federal Circuit, however, vacated and remanded the CIT's determination, holding that there was no legal basis to disregard the subsidiary, unless the subsidiary was clearly a fictitious entity, or the parent-subsidiary transaction had been a "sham". Where the subsidiary is an actual legal entity, the Court held, it was necessary for Customs to determine whether there had been a bona fide sale from the parent to the subsidiary, and whether the price in such a related party sale could serve as the basis for dutiable "transaction value". Because the CIT had simply disregarded the sale to the subsidiary, and had not determined whether the related party sale was acceptable for value purposes, the CAFC remanded the case to the lower court for its consideration.

The VWP of America decision is a potentially important victory for U.S. subsidiaries of foreign manufacturers and exporters. Copies of the decision and our firm's analysis thereof can be obtained by calling our firm. [GTR #99-202].

CUSTOMS PROPOSES
GUIDELINES FOR
RECORDKEEPING
PENALTIES

The U.S. Customs Service is seeking public comments on proposed "guidelines" for the assessment and mitigation of civil recordkeeping penalties under Section 509 of the Tariff Act of 1930, as amended by the 1993 Customs "Mod Act". The recordkeeping penalty statute authorizes Customs to impose substantial civil penalties on importers and others engaged in Customs business who fail to make, keep and produce to Customs on demand certain entry records specified on the agency's so-called "(a)(1)(A)" list. Maximum penalties can be as high as $10,000 per merchandise release in the case of negligent violations of recordkeeping requirements, and up to $100,000 per release in the case of "willful" violations.

Customs' proposed guidelines would set penalty amounts according to "ranges", based on the value of the goods to which the records in question relate. For negligent recordkeeping violations, the initial penalty would be set at between 20 and 40% of the value of the merchandise involved, or from $5000 to $10,000 whichever is less. For willful violations, the guidelines would set penalties at between 45 and 75% of the value of the goods, or $50,000 to $100,000, whichever is less. "Mitigating" factors could result in lower final penalties, while "aggravating" factors could result in higher penalty assessments.

Customs' decision to set penalty amounts according to the value of the merchandise involved is an unexpected twist, not specifically contemplated in the penalty statute. It also underlines the severity of the recordkeeping penalties which Customs is proposing. The value-based penalty range for "negligent" recordkeeping violations, for example, is equal to the maximum civil penalty which could be imposed under Section 592 of the Tariff Act for substantive "non-revenue" violations of the Customs laws.

The proposed guidelines also define the concepts of "negligent violations" and "willful violations", and discuss the issuance of warning letters and penalty notices to firms which have been certified for participation in Customs' voluntary Recordkeeping Compliance Program.

Customs is seeking comments on the proposed guidelines through June 1, 1999. Since Customs is likely to make extensive and aggressive use of its recordkeeping penalty powers, the guidelines represent a major development in Customs law. For copies of the proposed guidelines and a memorandum analyzing them, please call our offices [GTR #99-203].

CAFC: INTEREST
NOT OWED ON
DUTY DRAWBACK
REFUNDS

Claimants who recover drawbacks by means of a protest are not entitled to receive interest on the recoveries, the U.S. Court of the Appeals for the Federal Circuit recently held. In Novacor Chemical Co. v. United States, Customs had paid accelerated drawback to a claimant, but then demanded repayment of the monies when the drawback claim was denied. The claimant subsequently filed a successful protest and its drawback was returned to it. The claimant then challenged Customs' failure to pay interest on the recovered amounts. The U.S. Court of International Trade (CIT) last year held that the drawback collections constituted a form of "additional duties", for which the Customs "Mod Act" authorized the payment of interest.

The Federal Circuit reversed, holding that the "Mod Act's" reference to "increased duties" related to import duties. Since the payment or denial of drawback did not involve any adjustments to import duties, the CAFC ruled, they did not fit within the scope of the Mod Act's interest provision. As an award of interest against the government requires an express waiver of sovereign immunity, the Federal Circuit held, there was no basis for an award of interest. The CAFC also rejected the argument that a notation designating the drawback bill as one for "supp[lemental] duty" transformed the charge into an "additional duty" which could bear interest under law.

Copies of the Novacor Chemicals decision is available from our offices [GTR #99-204].

HMT ON
INTERSTATE
MOVEMENTS
UPHELD

The Harbor Maintenance Tax (HMT), previously held unconstitutional when applied to goods exported from the U.S. to foreign countries, is not unconstitutional as applied to water shipments of goods from one State to another, the U.S. Court of International Trade (CIT) has ruled. In Florida Sugar Terminal & Marketing Assn. v. United States, Judge Jane A. Restani held that shipments of merchandise from one state to another have never been considered "exports" for purposes of the Export Clause of the Constitution. She further noted that the Supreme Court had on various occasions upheld Federal and state taxation of goods shipped from one state to another. While recognizing that some judges have suggested that interstate transport of goods might constitute an "export" for certain purposes, the CIT held that it was constrained to apply the prevailing view of the law espoused by the Supreme Court, and so could not hold the HMT unconstitutional as applied to interstate movements. Copies of the Florida Sugar Terminal decision may be obtained from our offices [GTR #99-205].

NAFTA: MEXICO
DEVISING "YEAR 2001"
PROGRAMS

Faced with loss of competitiveness in its maquiladora industry when the North American Free Trade Agreement's "drawback sunset" provisions take effect on January 1, 2001, Mexico's government is devising Sectoral Programs to reduce or eliminate external tariffs on various articles, depending upon their actual use.

Currently, materials used to produce goods for export may enter Mexico under a maquiladora bond or "PITEX" bond, thereby avoiding the payment of Mexican external tariffs. However NAFTA's "drawback sunset" provisions will preclude such in-bond duty deferral schemes for goods exported from Mexico to the U.S. or Canada on and after January 1, 2001.

The first two Sectoral Programs announced will benefit Mexican manufacturers of electrical products and electronic products. Effective November 1, 2000, these programs will allow certain products and materials to be imported into Mexico duty free or at reduced duty rates, provided they are certified as being for use in certain designated electrical and electronic industry factories, in the production of specified goods. The duty-free or reduced-duty treatment would not be tied to exportation of finished products, and hence, would not violate NAFTA's "drawback sunset" provisions.

Copies of the decree announcing the Mexican Sectoral Program for the Electrical Products and Electronics Industries, plus a memorandum analyzing it, are available from our firm [GTR #99-206].

FTC ENFORCING
"MADE IN USA"
GUIDELINE

The Federal Trade Commission (FTC) is stepping up enforcement of its controversial "Made in USA" Guideline, which limits the use of unconditional "Made in USA" statements to products which are made wholly or almost wholly of U.S. materials and labor. A recent report from the agency indicates that the FTC has initiated more than 40 proceedings against firms whose labels are believed to violate the agency's guideline. The FTC has been carrying out its enforcement activities by checking origin labels on products sold at retail, examining catalogs and websites to ensure that origin notations are provided and are correct, and working closely with Customs officials and state attorneys general to address particular cases where the guideline might be violated. In addition, the FTC has been disseminating its "Made in USA" labeling guidebook, and giving speeches to trade groups to discuss the standard.

The FTC has also been stepping up enforcement of textile labeling rules under the Wool Products Labeling Act and the Textile Fiber Products Identification Act, and has been penalizing firms which violate the agency's care labeling regulations for garments. The FTC drew fire when, after considering its "Made in USA" guidelines from 1995 through 1997, it reiterated its wholly or almost wholly" standards, which many business commentators view as archaic in an age of global sourcing.

Copies of the FTC report may be obtained from our offices [GTR #99-207].

CUSTOMS FACES
UPHILL BATTLE
ON AUTOMATION
HARBOR FEE

The U.S. Customs Service, anxious for revenues to fund its Automated Commercial Environment, is facing a struggle in its effort to raise the needed funds. Customs' demands for a new data processing fee to fund ACE have prompted the formation of a private sector Coalition for Customs Automation Funding (CCAF), which is pressing Congress to directly appropriate funds for ACE. The government's quest for a new data fee received a setback recently, when Canada's Ambassador to the U.S. asserted that the fee would violate provisions of the North American Free Trade Agreement (NAFTA).

In addition, the Clinton Administration recently unveiled a "revised" proposal for a Harbor Maintenance Fee, which would replace the partially-invalidated Harbor Maintenance Tax. The Administration's proposal, which would tax vessel cargoes on a volumetric basis, has run into stiff opposition from vessel owners and bulk cargo shippers, who are mounting a campaign to defeat the proposal in Congress.

PROPOSES NEW
BROKER REGS

The U.S. Customs Service has proposed a comprehensive overhaul of Part 111 of the Customs Regulations, which governs the licensing and oversight of Customhouse brokers. Customs is seeking comments on the proposed regulations, which were developed in conjunction with the National Customhouse Brokers and Freight Forwarders Association.

The regulations cover all aspects of broker regulation, from licensing and permitting to recordkeeping, relations with Customs and clients, and procedures for broker license revocation and suspension actions, and the imposition of broker penalties. Copies of the proposed regulations are available from our offices [GTR #99-208].

CIT LOSES TWO
SENIOR JUDGES

The U.S. Court of International Trade is mourning the passing of two of its members. Senior Judge Bernard Newman passed away on April 22, at age 91. Appointed to the CIT by President Johnson, Judge Newman was still hearing cases up to the time of his death. Prior to joining the CIT, Judge Newman served as a judge in New York City family Court and New York State Supreme Court, all of this after a political career which included service as New York County Republican Leader.

Former Chief Judge Dominick DiCarlo also passed away suddenly on April 27, 1999, at age 71. Appointed to the CIT by President Reagan in 1984, Judge DiCarlo served as the Court's Chief Judge 1990 until early 1998. Prior to joining the CIT, Judge Di Carlo served in the New York State legislature, and as a senior official with the U.S. Department of State, directing international anti-narcotics efforts. Both of these respected jurists will be missed by their colleagues at the Court and by the bar.

For additional information concerning the items discussed in the Global Trade Report, call Martin Neville, John Peterson, Maggie Polito, Curtis Knauss or Maria Celis at (212) 635-2730, or call George Thompson, Mike Tomenga, Larry Bogard, Jack Detzner or Julia Peralta at (202) 861-2959.