1996 Developments in Customs and Trade Law

January 1, 2003
By: Matthew T. McGrath and Lawrence M. Friedman

A number of significant developments have taken place in international trade law over the past twelve months; only some of the most important changes will be touched on here in the area of regulations, judicial, and World Trade Organization decisions.

Summary Of Custom's Regulatory Initiatives For 1996
The most important regulatory developments in Customs law for 1996 concern the formulation and development of regulations to implement the Customs Modernization Act ("Mod Act").1 Few final regulations were published but, in an effort to generate discussion and industry input as to the effectiveness and the language for the anticipated regulations, the agency published several documents on the Customs electronic bulletin board (CEBB)2 and invited comment and suggestions for improvement.

The "Reasonable Care" Standard
On January 22, 1996, Customs published on the CEBB a "discussion draft" to encourage comments regarding agency interpretation of the Mod Act's directive that an importer use "reasonable care" in connection with its importing operations.3 This document included four alternative proposals that may be implemented, if at all, together or separately. The proposals included changes to 19 C.F.R. § 141, the publication of position statements in the Customs bulletin, the publication of a reasonable care "checklist," and the publication of "case analyses" as examples of reasonable care. It is anticipated that the regulations, when promulgated, will draw largely from the alternatives enumerated here and any comments on these suggestions. As a matter of law, the failure to exercise reasonable care constitutes negligence under 19 U.S.C. § 1592. However, as a matter of policy, Customs could consider alternatives to penalty enforcement action such as counseling and compliance programs.

Several core concepts involved in the reasonable care standard are discernable from the four proposals. It is clear that reasonable care places some burden on the Customs Service to inform the trade community of the requirements for compliance. Customs states in this "discussion document" that the following of an "Informed Compliance or other informational publication . . ." demonstrates reasonable care until the publication is superseded, amended or supplemented.4 The failure to follow one of these publications "will generally constitute the failure to exercise reasonable care."

The primary burden, however, remains with the importer. All of the proposals require the importer to be familiar with the relevant statutes, regulations, rulings and interpretations, tariff schedules (including interpretive and explanatory notes), judicial and administrative decisions, as well as "other publications." The importer must also be informed as to the terms of the import transaction, the description, use, composition and origin of the merchandise, and in certain cases, the production steps which were performed on their merchandise prior to importation. Customs also points out that gathering this knowledge is likely to require the coordination of many departments of a large corporation. Finally, Customs must be provided with the information necessary for Customs to determine whether the merchandise should be released from Customs' custody and the accuracy of the declared value, classification and rate of duty, as well as any other requirements of law.

Importers who use a customs "expert" must still show that reasonable care was exercised. The expert should be qualified to handle the importer's commodities or specific Customs issues. Reasonable care also requires that all material facts be disclosed to the expert, and that in most cases a written record should be maintained.

Requesting a binding ruling is another example of reasonable care. Ruling requesters are required to follow the ruling upon entry of merchandise covered by the ruling, and identify the ruling on the entry documentation. In return, Customs will, under most circumstances, liquidate the entry in accordance with the ruling. Importers who have not requested the ruling but believe that an existing published ruling covers the circumstances of their importation may choose to follow the published ruling however, the importer does so "at its peril." If a party wishes to follow one of several apparently conflicting rulings, reasonable care dictates that the party notify Customs of the rulings which are being disregarded or distinguished, as well as the ruling being followed.

Rulings to Expire, More Information Required Under Draft Customs Rulings Regulation
The Customs Service issued draft proposed revisions to its administrative rulings regulations, on the Customs Electronic Bulletin Board (CEBB),5 which would increase the documentation requirements for ruling requests, and require the requester to certify that no other similar issue is pending before any customs office or the courts. Also, under the proposal, unless an extension is granted, rulings will automatically expire three years after issuance. The U.S. Customs Service intends to process the comments it received in response to this draft before issuing a proposed rule for publication in the Federal Register.

Proposed Changes to Penalty Procedures
The Customs Service has also issued "discussion draft" regulations regarding penalty procedures and mitigation under 19 C.F.R. §§ 171, 172 in an effort to conform these rules the Mod Act and Customs' administrative reorganization plan.6 Several components of this proposal merit consideration at this time. First, Customs wishes to avoid running up against the statute of limitations where a court may find a lower degree of culpability than originally alleged. Under the proposal, therefore, Customs reserves the right to require a waiver of the statute of limitations as a condition precedent before accepting a supplemental petition in any case where the statute will be available as a defense to all or part of that case within one year from the date of decision on the original petition for relief.

Second, in response to the decision in Trayco, Inc. v. United States,7 where an importer was allowed to pay a mitigated penalty "under protest" and later judicially challenge the applicable degree of culpability, Customs proposes to refuse payments made "under protest." Customs proposes that any mitigation payment will act as an accord and satisfaction; the payment of a mitigated penalty will serve as an election to resolve the case through the administrative process, the right to sue for a refund will be waived. If these changes remain in the final rules, importers who dispute the amount of a mitigated penalty will be required to wait for Customs to sue in the CIT for the entire unmitigated amount.

Third, Customs proposes to concurrently notify the principal and the surety of claims for liquidated damages and penalties which are secured by a Customs bond. The petitioning period, will also run concurrently, but will be extended to allow for coordination between the parties.

Proposed Record keeping Regulations Place New Burdens on Importers
March 5, 1996 Customs released a "discussion draft" of the regulatory amendments8 needed for the implementation of the record keeping requirements of the Mod Act.9 The proposal adds a new part to the regulations and expands the class of parties that are required to retain Customs-related records. In addition to importers and their agents, the regulations will apply to parties indirectly involved in importing including purchasing agents, designers, carriers, cartmen, bonded warehouse proprietors, foreign trade zone operators and drawback claimants. The records affected fall into two categories: (1) supporting records that relate to the information on declarations provided to Customs, including "notes, worksheets, and other papers necessary for reconstructing or understanding the records, including appropriate back-up procedures," and (2) entry records, which are defined in a list published by Customs pursuant to 19 U.S.C. § 1509(a)(1)(A).10

All records must be retained in their original format unless alternative methods of storage have been approved in writing. All record keepers must designate a Record keeping officer and a backup officer. Written procedures, a description of the storage medium, effective data transfer, storage, retrieval procedures, audit trail, self-surveillance and other protections must be built into the record keeping system.

Certified Record keeping agents are also allowed under the proposal. The proposal does not spell out whether the use of a third party record keeper would reduce the liability of the primary record keeper. Importers and others required to keep records under the proposal must not assume that their customs broker will retain the records he is supposed to, even though in practice, they could obtain missing records from the broker. Primary responsibility will usually fall on the primary record keeper.

Draft Protest Regulations Issued
The Customs Service also recently issued draft proposed revisions to its protest regulations.11 Matters subject to protest now explicitly include notices of redelivery and reconciliation entries. Additionally, the draft proposal clarifies the circumstances under which a Port Director may deny an application for further review ("AFR") without having to forward it to Customs Headquarters or to the National Commodity Specialist Division. Allegations in an AFR that the protest decision is inconsistent with an existing ruling or decision must be stated with particularity. Also, under the proposal the Port Director may request further review by Customs Headquarters or the Director of the National Commodity Specialist Division.

If the Director of the National Commodity Specialist Division determines that an AFR forwarded to him should be denied on substantive grounds, then the protest will be referred to Customs Headquarters for a disposition. It is proposed that conferences will only be available for decisions that Customs contemplates to be adverse to the protestant's position.

The proposed regulations clearly state that an importer must follow the protest decision when making subsequent entries containing the same merchandise at all Customs field offices. If a protest decision is received with respect to merchandise which is currently being entered, the Customs field office handling the current entry must be notified. Failure to do so may result in the rejection of current transactions and the imposition of penalties.

Customs Issues Prior Disclosure Regulations for Comment
Customs has published in the Federal Register a notice of proposed rulemaking on new "prior disclosure" regulations.12 Under section 1592,13 heavy penalties, in addition to the payment of any unpaid duties, can be imposed on importers found violating the customs laws. The prior disclosure statute provides an avenue of protection from these steep penalties by allowing a person who violates a customs law and discloses it to Customs before, or without the knowledge of, the commencement of a formal investigation. In return for this disclosure Customs may reduce or eliminate the penalty.

The new regulations define "commencement of a formal investigation" as the date, recorded in writing by Customs, "when facts and circumstances were discovered, or information was received, that caused Customs to believe" that a possible 1592 violation occurred. If an importer is denied the benefit of prior disclosure, and Customs initiates a formal investigation, then a copy of that writing must be forwarded to the importer.

Another significant proposed modification would give Fines, Penalties and Forfeitures ("FP&F") Officers leeway to defer investigations of unintentional violations until the disclosing party has had the opportunity to fully explain the situation. The proposed regulation provides that the disclosing party may request additional time to get information necessary to complete the claimed prior disclosure before the matter is referred for investigation.

Origin of Textile Products Changes From Site of assembly to Site of Cutting
On July 1, 1996, new rules took effect for determining the country of origin of a textile or apparel product for purposes of customs duties and quotas (except for products of Israel).14 "Substantial transformation" or value-added are no longer factors for determining whether an article originates in a particular country, instead, five alternative rules of origin are applied. In essence, the new rules result in origin being conferred in the country in which the pieces are assembled rather than the country where fabric is cut.

The five rules are applied sequentially with each subsequent rule being applied only if the origin can not be determined through the application of the preceding rule. In summary, the rules can be stated as follows:


1. Articles wholly produced in one country originate in that country.
2. Origin is conferred in the country in which each foreign material incorporated in the product underwent an applicable change in tariff classification.
3. (a) If "knit to shape" in one country, it originates in that country.

(b) most articles originate in the country where they are "wholly assembled."15

4. For multi-country processing or assembly, origin is conferred in the country where the most important assembly or manufacturing process occurred.16
5. origin is conferred in the last country where an important assembly or manufacturing process occurred.17

GSP Renewed Retroactively
Congress reauthorized the Generalized System of Preferences ("GSP") program on August 2, 1996.18 The new legislation, in addition to extending the program through May 31, 1997, makes several substantive changes to the prior law. First, it reduces the competitive need limit for imported products and alters the annual increase scheme from an indexed measure to an absolute one. Second, it grants the President explicit discretion in designating least developing country eligible products, limited only to non-statutorily exempt, non-import sensitive articles. Finally, it postpones for three years from denial the reconsideration of an article for eligibility.

Duty-free treatment was reinstated on GSP-eligible products on October 1, 1996. All duty-free articles imported after December 31, 1995 but before October 1, 1996 (1996 entries), are eligible for refunds. Refunds will be subject to interest payments calculated from the dates of deposit of estimated duties and based on quarterly IRS interest rates.

Passage of the reauthorizing legislation also resulted in the graduation of Malaysia from the GSP program,19 the removal of certain products from Pakistan on account of human-rights violations, and the relief of some de minimis products from the application of competitive need limits pursuant to decisions announced last November.

The USTR has resumed the reviews of the beneficiary countries' practices with respect to labor and intellectual property as well as the eligible products. It plans to complete these reviews by May, and will not conduct any reviews for 1996 due to its constraint in resources.

The Harbor Maintenance Tax
This year, the Court of International Trade had the opportunity to clarify three issues remaining from its 1995 decision, United States Shoe Corp. v. United States,20 in which it held that the Harbor Maintenance Tax (HMT) imposed under 26 U.S.C. §§ 4461-62 (1988 & Supp. V. 1993)21 is an unconstitutional tax on exports. First, the Court reviewed whether U.S. Shoe appropriately awarded a refund of the tax "together with interest and costs as provided by law."22 The Court recognized that without express congressional consent, the United States is immune from an award of interest23 to a successful plaintiff but agreed with the plaintiff and amici that this immunity was expressly waived by the statute. The Court found that while the HMT statute provides for the treatment of the tax as a duty for purposes of administration and enforcement,24 this clause serves to establish the agency responsible for collecting and processing HMT payments rather than to immunize the government from interest awards for overpayments. Since the payment of a money judgment based on the unconstitutionality of the tax is not related to the administration and enforcement of the tax, the statutory provision providing that "[i]n any judgment of any court rendered (whether against the United States, . . .) for any overpayment in respect of any internal-revenue tax, interest shall be allowed . . ."25 specifically waives the government's immunity from such interest payment.26

Second, the court decided that it would be inappropriate to certify a class of HMT claimants under CIT rule 23.27 Looking to the requirements of Rule 23(a),28 the Court found the prerequisites to class certification had been met,29 but that "the real point of debate" is whether, as an exercise of discretion, the Court should grant the motion.30 In light of the decision in U.S. Shoe, the pending appeal to the Federal Circuit and the stays pending appeal, the Court found it unlikely that conflicting decisions would arise. In addition, the Court was not concerned about limited funds from which to fashion a remedy. Therefore, class certification under Rule 23(b)(1) was inappropriate.31 Similarly, Rule 23(b)(2), relating to injunctive or declaratory relief, was inappropriate in light of the fact that the Court had already granted injunctive relief that should prevent the government from collecting the unconstitutional tax if the Court of Appeals affirms the decision. Moreover, the Court expressed concern about applying Rule 23(b)(2) to certify an all-inclusive class that would not permit claimants to opt out since the case now turns only on the availability of money damages rather than injunctive relief.

Finally, turning to Rule 23(b)(3), the Court readily accepted that common issues of law and fact predominate, but in applying the Rule's four sub-factors,32 the court refused to accept that a class action would be superior to other avenues available.33 First, the Court found that the larger claimants would likely opt out of the class while smaller claimants have no interest in controlling individual actions.34 Second, the Court found that the litigation on the merits had progressed to the appellate stage and the resolution of the test case would resolve all of the filed claims.35 Third, Congress had already granted jurisdiction to the CIT,36 thus negating the need for another method of concentrating the HMT actions to a single forum. Finally, the Court found that a class action would not aid in the resolution of individual cases involving discovery questions and the amount of recovery.37

The Court then turned to a discussion of whether, as a matter or policy, it should impose a class action to protect small claimants who would not otherwise bring an action against the government, or whether to require these parties to bring individual cases using the CIT's unique test case and suspension procedure. On balance, the Court found that the procedures already undertaken to manage the litigation have functioned efficiently and that there was little advantage in certifying a class. In addition, the Court stated that Congress could decide to implement a process to permit small claimants a means of recovering the taxes they paid. As a result, the Court denied the motion for certification.38

The third HMT case decided by the CIT determined that the unconstitutionality of the HMT as applied to exports does not render the tax unconstitutional with respect to imports.39 The Court, framed its analysis on the test set out in Alaska Airlines, Inc. v. Brock.40 First, the CIT found that the import and export aspects of the HMT are fully capable of independent operation.41 Then, applying the second part of the Alaska Airlines test, the Court examined whether the Congress would have enacted the legislation without the flawed provision.42 The Court pointed to an express severability clause in the statute as evidence that Congress did not want the invalidity of one provision of the statute to affect any other provision.43 The Court also looked to the legislative history of the HMT law which expressly discussed the possibility that the HMT may be unconstitutional as applied to exports and sought to preserve the remainder of the Act.44 Finally, the Court rejected the plaintiffs' argument that it should read the severability clause as preserving the remaining portions of the Water Resources Development Act in the event the HMT is invalid but not as applying to the HMT on imports where the tax on exports is invalid.45

The saga of the HMT now moves to the Federal Circuit where the decision will be guided by the Supreme Court's 1996 decision in United States v. International Business Machines Corp.46 The Supreme Court found that a federal tax on insurance premiums paid to foreign insurers that are not subject to federal income taxes47 violated the Export Clause. Justice Thomas, writing for the Court in a six to two decision, found that the Export Clause prohibits nondiscriminatory federal taxes on goods in export transit.48 This decision obviously enhances the likelihood that the CAFC will uphold the CIT's determination that the HMT is an unconstitutional tax on exports.

Judicial Burdens
Another recurring issue in 1996 has been the correct application of the presumption of correctness that applies to Customs Service decisions. The genesis for this controversy was the Federal Circuit's 1995 decision in Goodman Manufacturing, L.P. v. United States.49 In Goodman the plaintiff had sought a ruling from Customs on the proper accounting for recoverable and irrecoverable waste generated in the zone during production. Customs ruled that the value of privileged foreign merchandise50 entered from the zone does not include the dutiable value of recoverable waste.51 In its review of a motion for summary judgment, the CIT held that Customs' decision was entitled to a presumption of correctness under 28 U.S.C. § 263952 and that Goodman had failed to overcome that presumption.53

On appeal, the Federal Circuit found that the CIT had improperly merged two distinct concepts: deference to an agency's reasonable interpretation of a statute it administers and the presumption that Customs' decisions have a proper basis in fact.54 The Court then held that because no questions of fact were at issue, "the presumption of correctness is not relevant."55 The Court went on to review Customs' statutory interpretation based upon the two-part deference test of Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc.56 In the end, the Court found both Goodman's and Customs' interpretation to be at odds with the statutory language and it reversed the CIT.57

This mid-course correction to Customs law set off something of a firestorm in the CIT that has burned throughout 1996. In E.M. Chemicals v. United States,58 Judge Wallach quoted Goodman for the proposition that plaintiffs must overcome both the presumption of correctness as to facts and the Court's deference to the agency's construction of the statute.59 Judge Newman followed suit in Marcor Development Corp. v. United States,60 however, the Judge did not apply the two-step Chevron approach and instead, under a de novo review, considered the common and commercial meaning of the statutory term "fish."61

Also this year, Judge Pogue thoroughly analyzed the application of Chevron to Customs Service decisions in deciding a motion for summary judgment with respect to the classification of cobalt alloy powders.62 Judge Pogue began his analysis by stating that classification cases come to the Court for de novoreview;63 the role of the Court is to find the correct classification64 even if that requires that the Court rely on information not before Customs at the time of the original decision.

Turning to Chevron, Judge Pogue stated that in Semperit Indus. Prod., Inc. v. United States65 the CIT expressly rejected the application of Chevron in classification cases and that this position has been impliedly adopted by the Federal Circuit.66 Chevron-style deference is incompatible with the statutory requirement for de novo review and the Court's obligation to reach a correct result; the Court should reject an incorrect classification even if it is based on a permissible interpretation of the statute.67

The Court distinguished Goodmanby finding that the Federal Circuit had not actually deferred to Customs. Instead, according to Judge Pogue, the Federal Circuit mentioned Chevronbut actually reviewed the decision de novo and reached the correct result. The result in Goodman, therefore, was consistent with the CIT's traditional approach to deference to Customs.68

The next important decision on this issue was Commercial Aluminum Cookware Co. v. United States.69 Here, Judge Carman took the Federal Circuit to task for failing to grant the presumption of correctness to Customs' legal and factual determinations. The Judge based his conclusion principally on the fact that the standard of review statute draws no distinction between facts and law.70 Judge Carman also relied on Arthur v. Unkart71 where the Supreme Court stated that the "decisions" of an officer acting in the discharge of his duty are presumed correct. Based on this and subsequent case law, Judge Carman applied the presumption of correctness to all of the subsidiary decisions involved in the ultimate classification determination. This includes Customs' legal analysis.72

Finally, in Verosol USA, Inc. v. United States,73 Judge Pogue directly addressed Judge Carman's analysis. Judge Pogue stated that the rule of Commercial Aluminum Cookware would require plaintiffs to carry a burden of proof as to the law and would greatly reduce the role of the CIT in classification cases.74 Citing Jarvis Clark Co. v. United States,75 Judge Pogue held that "[s]uch an approach would undermine the court's obligation to find 'the correct result, by whatever procedure.'"

In summary, Goodman opened the proverbial can of worms, and created significant dispute as to the appropriate standard to be applied in the review of Customs decisions. At least one panel of the Federal Circuit believes Customs Service decisions in classification and valuation cases are entitled to Chevron-style judicial deference on questions of law. More traditionally, these decisions would be reviewed de novo. Finally, the Federal Circuit and the majority of the CIT clearly believe the statutory presumption of correctness only attaches to Customs' findings of fact.76
It appears that the correct analysis is to treat the statute giving Customs the presumption of correctness as part of the assignment of the burden of proof in a trial de novo.77 Without an explicit statement of the presumption, it would be unclear whether, in the trial de novo, a plaintiff has the burden of overcoming Customs' decision or Customs has the burden of proving its decision to have been correct. This reading of the statute gives meaning to the agency's decision while preserving the role of the CIT in de novo review. Once in Court, it remains the duty of the trial judge to determine the correct classification by whatever means are available. This is, as the Court in Goodman recognized, completely separate from the question of deference to the agency on issues of law.

County of Origin Marking Rules
A final interesting Customs case concerned Customs authority to implement country of origin marking rules under the North American Free Trade Agreement (NAFTA).78 CPC International, Inc. planned to manufacture peanut butter in the United States from Canadian-origin peanut slurry. In response to CPC's request for a ruling, Customs applied its NAFTA marking rules for country of origin79 and determined that the finished peanut butter must be marked as a product of Canada.80 The importer challenged Customs' determination on the basis of their failure to apply the substantial transformation test under 19 U.S.C. § 1304(a) and as enunciated in United States v. Gibson-Thomsen, Co., Inc.81
The Court held that nothing in the NAFTA implementation Act or the Statement of Administrative Action suggests that Congress intended to amend the marking statute.82 According to Judge Newman, Congress intended that Gibson-Thomsen remain in effect "in addition to and independent of the NAFTA marking rules."83 Thus, the proper role for the NAFTA marking rules is that they be applied in addition to the substantial transformation test under Gibson-Thomsen.84 The Court considered and dismissed Customs' argument that the tariff shift based NAFTA marking rules are a "codification" of the existing law of substantial transformation.85 In a strongly worded opinion, Judge Newman held that by abrogating the substantial transformation test Customs exceeded its authority to promulgate regulations necessary to implement the NAFTA. An appeal of this decision is anticipated.

Review of Anti-dumping Cases
Finally, one antidumping case decided by the court this year is worth mentioning. In Zenith Electronics Corp. v. United States,86 the Federal Circuit reviewed the final results of an annual review on the dumping of color telev