Maybe the lessons are that we are all just tiny penguins beaming with an inner glow that only quickly depleting fossil fuels can generate and that we are all subject to the vicissitudes of that mercurial agency known as CBP. 

Most lawsuits involving international trade wind up in federal district court, but before the merits can be heard and to avoid dismissal, the plaintiff must establish that jurisdiction is proper. Here are two recent court cases that demonstrate how this issue can be played out.

What steps must a foreign company take to sue a domestic company in the USA in a contractual dispute over the sale of goods?  The court In D&G v. H.A. Import (United States District Court, S.D. New York, Feb 18, 2015) outlined the jurisdictional requirements under diversity for the foreign party to sustain a lawsuit in federal district court. Diversity is the power that a federal district court has to hear a civil matter between parties from different states or between a US person/entity and a foreign person/entity. The defendant, a California resident, ordered food products from the plaintiff, an Italian company. The Italian company delivered the food products but the California defendant only made a single partial payment and still owed over $96,000. The Italian company sued the California defendant in federal district court in New York. The California defendant argued that the lawsuit should be dismissed because the Italian plaintiff inflated its damages to meet the $75,000 threshold required under diversity. The court disagreed. The court reasoned that the Italian plaintiff successfully achieved complete diversity by having one party from Italy and the other from California and by pleading an amount in controversy that exceeded the $75,000 threshold. The court said that even without diversity, the Italian plaintiff could still sue under the court's treaty jurisdiction because the lawsuit involved the United Nations Convention on Contracts for the International Sale of Goods. The court noted that it also had supplemental jurisdiction because the Plaintiff sued under state contract law. What is fascinating, and is not discussed in the court's opinion, is that the Italian plaintiff sued in federal district court in New York. Neither of the parties is from New York and none of underlying activity or contacts seems to have happened in that state. It appears that the Italian plaintiff did some forum shopping that neither the court nor the California defendant seemed to mind.

But not all federal courts are so generous.

In Simmtech v. Citibank Korea (U.S. D New York, Feb 20, 2015), Simmtech, a Korean exporter sued Citibank Korea over investment transactions gone sour. Simmtech brought its lawsuit in federal district court in New York. Simmtech had already tried suing in Korea, but the Korean court dismissed finding the lawsuit to be "unfounded." Citibank Korea moved to dismiss the New York lawsuit, and the court agreed. The court based its reasoning on forum non conveniens, which means what it is sounds like and is based on convenience of the parties and of the court. In this particular lawsuit, the court distinguished between forum shopping and convenience. Under the court's logic, a foreign party should not sue in a federal district court purely to gain a tactical advantage in litigation, for example, because the damages are higher or discovery is easier. The court jurisdiction is proper if there is a practical reason based on convenience to the parties. If not, dismissal is in order if there is a court somewhere else that can more practically entertain the lawsuit. The court dismissed the lawsuit because Simmtech knew any judgment from a New York court would be more generous than a Korean court and because of the expense and effort to transport witnesses from Korea to New York. Forum non conveniens may be the fuzziest weapon that judges use to avoid hearing a case. It requires judges to undertake an "on this hand, but on the other hand" balancing that cannot be quantified or second guessed and that frowns upon lawyers doing what they do best, i.e., take every tactical advantage allowed under the law. 

Importers often overlook a vital defense to 19 USC § 1592 penalties: the Small Business Regulatory Enforcement Fairness Act of 1996. The defense is not well known because it was created way back during the Clinton Administration and because CBP does not like going out of its way to help importers avoid paying penalties. Even most customs attorneys (outside of our firm) do not know it exists, but that will probably not stop the sudden proliferation of articles similar to this one by copycat lawyers (you know who you are). CBP has not issuedregulations to guide importers who want to invoke the defense and its Mitigation Guidelines dedicate all of one sentence to explore its availability. 

Whether a § 592 penalty is remitted or mitigated remains firmly at the discretion of CBP. This can be a problem when dealing with an unaccommodating CBP official, but the defense can be a winner. The defense is separate and independent from other grounds for remission and mitigation found in CBP's Mitigation Guidelines. This defense levels the playing field for small importers who qualify, so it has a nice Davis vs. Goliath character. The qualifications are found in CBP's short memo which I reproduce in its entirety below. You may be surprised how large a company can be to qualify as a small business entity.  Most companies are allowed to have up to 500 employees. The defense is definitely not limited to Mom and Pops. While the qualifications seem straightforward, the rules are complex for companies who are affiliated or owned, managed, or operated by large companies or investors. 

POLICY STATEMENT REGARDING VIOLATIONS OF      
19 U.S.C. § 1592 BY SMALL ENTITIES
4820-02-P
DEPARTMENT OF THE TREASURY
UNITED STATES CUSTOMS SERVICE
(T.D. 97 - 46)
62 F.R. 30378 (June 3, 1997)

AGENCY: U.S. Customs Service, Department of the Treasury.
ACTION: General Notice.    

SUMMARY: On March 29, 1996, the President signed the Small Business Regulatory Enforcement Fairness Act of 1996. Section 223 of that law requires an agency to establish a policy or program which reduces, and under appropriate circumstances, waives civil penalties for violations of a statutory or regulatory requirement by a small entity. As a first step in implementing this law, we are setting forth in this document the circumstances and procedures whereby the assessment of a civil penalty under the provisions of 19 U.S.C. § 1592 will be waived for violations committed by small entities.

FOR FURTHER INFORMATION CONTACT: Alan Cohen, Penalties Branch, Office of Regulations and Rulings, 202-927-2344.   

SUPPLEMENTARY INFORMATION:

On March 29, 1996, the President signed the Small Business Regulatory Enforcement Fairness Act of 1996, Pub. L. 104-121, 101 Stat. 847. Section 223 of that law requires an agency to establish a policy or program which reduces, and under appropriate circumstances, waives civil penalties for violations of a statutory or regulatory requirement by a small entity.

CUSTOMS POLICY STATEMENT REGARDING VIOLATIONS OF 
19 U.S.C. § 1592 BY SMALL ENTITIES

Section 592 of the Tariff Act of 1930 (19 U.S.C. § 1592) prohibits persons, by fraud, gross negligence or negligence, from entering or introducing, attempting to enter or introduce, or aiding and abetting the entry or introduction of merchandise into the commerce of the United States, by means of statements or acts that are material and false, or by means of omissions which are material. Under Customs discretionary authority pursuant to sections 592(b)(2) and 618, Tariff Act of 1930, as amended (19 U.S.C. §§ 1592(b)(2) and 1618), Customs has published national guidelines applicable to its statutory authority to assess civil penalties against persons who violate 19 U.S.C. § 1592. These guidelines provide for a reduction in the initial assessment of civil penalties, and a reduction in the penalties amount found to be ultimately due, because of the presence of specified mitigating factors.

In considering petitions filed pursuant to sections 592(b)(2) and 618, mitigating factors which apply to small entities include: (1) reasonable reliance on misleading or erroneous advice given by a Customs official; (2) cooperation with the investigation beyond that expected for an entity under investigation; (3) immediate remedial action, including the payment of the actual loss of duties prior to the issuance of a penalty notice and within 30 days of the determination of the duties owed; (4) inexperience in importing, provided the violation is not due to fraud or gross negligence; (5) prior good record, provided that the violation is not due to fraud; (6) the inability of the alleged violator to pay the penalty claim; (7) extraordinary expenses incurred by the violator in cooperating with the investigation or in undertaking immediate remedial action; and (8) actual knowledge by Customs of a violation not due to fraud, where Customs failed to inform the entity so that it could have taken earlier corrective action. This list of factors is not exclusive.

In compliance with the mandate of the Small Business Regulatory Enforcement Fairness Act of 1996, the Customs Service is implementing a procedure whereby, under appropriate circumstances, the issuance of a penalty notice under 19 U.S.C. § 1592(b)(2) will be waived for businesses qualifying as small business entities. Specifically, an alleged violator which has been issued a prepenalty notice under 19 U.S.C. § 1592(b)(1) may assert in its response to the prepenalty notice that it is a small business entity, as defined in section 221(1) of the Small Business Regulatory Enforcement Fairness Act of 1996, and in 5 U.S.C. § 601, and that all of the following circumstances are present: (1) the small entity has taken corrective action within a reasonable correction period, including the payment of all duties, fees and taxes owed as a result of the violation within 30 days of the determination of the amount owed; (2) the small entity has not been subject to other enforcement actions by Customs; (3) the violation did not involve criminal or willful conduct, and did not involve fraud or gross negligence; (4) the violation did not pose a serious health, safety or environmental threat, and (5) the violation occurred despite the small entity's good faith effort to comply with the law.  

The alleged violator will have the burden of establishing, to the satisfaction of the Customs officer issuing the prepenalty notice, that it qualifies as a small entity as defined in section 221(3) of the Small Business Regulatory Enforcement Fairness Act of 1996, and that all five of the above circumstances are present. In establishing that it qualifies as a small entity, the alleged violator should provide evidence that it is independently owned and operated; that is, there are no related parties (domestic or foreign) as defined in 19 U.S.C. § 1401a(g)(1), that would disqualify the business as a small business entity. Furthermore, the alleged violator must establish that it is not dominant in its field of operation. Finally, the alleged violator must provide evidence, including tax returns for the previous three years and a current financial statement from an independent auditor, of its annual average gross receipts over the past three years, and its average number of employees over the previous twelve months.

Each claim by an alleged violator that it qualifies as a small business entity will be considered on a case by case basis. In considering such claims, the Customs Service will consult the size standards set by the Small Business Administration, 13 C.F.R. § 121.201, for guidance in determining whether the alleged violator qualifies as a small business. If the alleged violator's claims for a waiver of the penalty under the Small Business Regulatory Enforcement Fairness Act of 1996 are not accepted and a penalty notice is issued, or if the alleged violator fails to assert a claim for a waiver of the penalty under this Act when the prepenalty notice is issue, the alleged violator may pursue its claim for a waiver of the penalty in a petition filed pursuant to 19 U.S.C. § 1592(b)(2).

This policies set forth in this notice are issued pursuant to the discretionary authority granted to the Secretary of the Treasury under 19 U.S.C. § 1618 to remit and mitigate penalties, and do not limit the government's right to initiate a civil enforcement action under 19 U.S.C. § 1592(e), nor do they limit the penalty amount which the government may seek in such an enforcement act, nor do they confer upon the alleged violator any substantive rights in such an enforcement action.

DATED: May 21, 1997 Acting Commissioner of Customs Samuel H. Banks

There’s only about two months of shopping days before Christmas, but it’s enough time to survey some of the most interesting tariff classification cases with holiday themes. Not just Christmas, but here we also look at Halloween and Thanksgiving. I am nothing if not ecumenical when it comes to tariff classification. What I find strange, beyond the items described in these cases, is the undeniable conclusion that Americans can’t celebrate the holidays without imported merchandise. 

Park B. Smith v. US (US Court of Appeals, Federal Circuit 2003) - Importing a festive article that is useful can get an importer into trouble. If your imported merchandise is too useful, if it is utilitarian, you risk losing your special  low-duty “festive article” status. You also have to prove that your imported merchandise is specifically associated with a particular holiday (this is where “aberrant” comes in). Here the court easily determined that sweaters with clearly Christmas (angels and “Silent Night”) motifs and Halloween (witch, devil, jack-o-lantern, candy corn, and spider web) motifs qualified as festive articles, but struggled over whether sweaters with a bat, spider, ghost, and black cat designs equally qualified because people might wear these sweaters outside of Halloween. How it reached that distinction and why it didn’t consider sweaters to be utilitarian (you would think that only certain frost bite could force anyone to don a candy cane sweater), the court doesn’t say, but it eventually decided that all of the sweaters were festive articles.

Russ Berrie & Company vs. US - The Court of Appeals for the Federal Circuit is about as high as classification cases go (the next level up is the US Supreme Court). In this opinion, the Federal Circuit Court of Appeals reversed the Court of International Trade and sided with CBP. The controversy revolved around Halloween and Christmas earrings with the following motifs: a Santa Claus; a snowman decorated with holly, wearing a top hat and holding a snowball; a teddy bear dressed in red and white Santa outfit and holding a present; red, green, gold bells with/or without red or green bows; a ghost; a jack-o-lantern; a Frankenstein monster; and a witch. The Court decided that these trinkets were imitation jewelry and not festive articles, a decision that I must question because reading the list of items got me in a festive mood. 

Rubie's Costume Company v. US - While deciding the classification of Halloween merchandise, this case laid down an important rule with a much broader affect. The Court of Appeals for the Federal Circuit again slapped down the Court of International Trade and sided with CBP. The importer claimed that courts should give no deference to tariff classifications from CBP. Not so fast, said the Federal Circuit Court of Appeals. CBP may not be the final word on classification, but courts must pay attention and be guided to a degree by the agency's expertise -- sometimes. The level of deference courts give to CBP's classification decisions depends on how well CBP did its job, i.e., "The weight of such a judgment in a particular case will depend upon the thoroughness evident in its consideration, the validity of its reasoning, its consistency with earlier and later pronouncements, and all those factors which give power to persuade, if lacking power to control." In this case, the Court of Appeals for the Federal Circuit found that it should defer substantially to CBP's classification ruling. Thus, court concluded that children's costumes of "Witch of the Webs", "Abdul Sheik of Arabia," "Pirate Boy," "Witch," and "Cute and Cuddly Clown" are properly classified as "festive articles" and not "wearing apparel," an obvious outcome if you are parent.

Whealon v. US (US Customs Court, 3d Division, 1961) - Does a lecture hall within a Catholic seminary qualify as a house of worship, i.e., a place of thanksgiving?  That was the question confronting this court. Items for houses of worship came in duty free and the seminary was importing stained glass windows from France. Some praying was done in the lecture hall, but that was not its main purpose. Employing a surprisingly liberal reasoning, the court concluded that, yes, the lecture hall was a house of worship.

Wilton Industries v. US (Court of International Trade, 2007). This is just one of many tariff classification cases on festive articles. The irony with “festive articles” litigation is that they tend to be acrimonious. Acrimony seems out of place when classifying cute cookie-cutters that are in lovely holiday shapes. Classification litigation is all about convincing the government that your imported product should be classified under a low or no duty classification. The government, of course, prefers higher duty classifications because it’s in the business of collecting revenue. The resulting legal analyses from the courts read more like Monty Python than Oliver Wendell Holmes. For example, this court reasoned: 

Patterns used to make Christmas stockings are fundamentally different from festive-themed pans used to make Christmas baked goods, in several respects. Perhaps most significantly, sewing patterns can be used to make Christmas stockings year-round. While it would be aberrant to hang Christmas stockings on the mantle other than at Christmas time, it would not be aberrant to sew such stockings at other times of the year, in anticipation of (and in preparation for) the Christmas season. Thus, it would not be aberrant to use patterns for Christmas stocking year-round.  

Outside of tariff classification cases, no one ever wonders whether Christmas stockings are  “aberrant” (they wouldn’t be any fun if they were not), but bizarre rules are common in tariff classification. Tariff classification isn’t for the faint of heart or the ignorant of the esoteric classification rules. The decision in the Wilton Industries case can’t be summarized in a few words because the court classified a variety of cute kitchenware from a spectrum of holidays, including a pumpkin pie pan, a jack-o'-lantern nesting cookie cutter pan, a pumpkin cookie stamp, snowman pan, a poinsettia pan, and a cherub place card holders.  

Thanhauser v US (US Customs Court 1908) - This case is so old that Mark Twain was still alive when it was written. After reviewing even earlier cases, the Honorable Jasper Yeates Brinton (you won’t find a judge with a name like that nowadays) had to decide whether the imported goods were toys or christmas tree ornaments. The stakes were high. If toys, the duty rate would be 35%. If tree ornaments, the duty rate would be 60%.

Judge Brinton was palpably annoyed that Christmas tree ornament cases had a long history even in 1908. “As the briefs of the parties show distinctly, there has been more or less uncertainty for a good many years concerning the proper classification of articles that may be described in a general way as Christmas tree ornaments.” The controversy had raged for so long and vexed him to such a degree that he found it necessary to wrestle with the profound issue of what constitutes a Christmas tree ornament. With Solomonic certainty, he pronounced, 

In my opinion, the evidence shows that the fragile, flimsy articles in question, mainly composed of tinsel in different shapes- stars and rings and nondescript devices - are not intended, and are not suitable to be played with.

You know you're in trouble when the judge calls your goods "fragile and flimsy.” As for the argument that a child’s willingness to play with a thing rendered it a toy, Judge Brinton would have none of it. 

They amuse or entertain because they are adapted to decorate, and no doubt they entertain children when they are hung on a Christmas tree; but on such an occasion they entertain adults also in the same way, although the entertainment differs in degree. Moreover, it clearly appears that the articles in question are often used by confectioners, stationers, and other merchants to make their wares or their shops more attractive, and this use has little reference to the amusement of children.

And thus the courts have for well over one hundred years tried to figure out what makes a Christmas tree ornament, and there have been revealing milestones. 

For example, in Import & Export Service Co. v. US, this court in 1942 was busy determining the proper customs duty of Christmas tree ornaments from Nazi Germany! The case raises a mountain of unanswered questions, including, why were the Nazis sending us Christmas tree ornaments? Why were we allowing it?  Did we retaliate by exporting to Germany FDR masks and July 4 flags? 

Fortunately, most of the holiday classification cases have a far less sinister context, but they all seem to be trying to determine what may be undeterminable -- quantifying the ineffable qualities of holiday cheer.