Importing Gray Market Goods – The Omega v. Costco Case

"Critical Implications of Costco v. Omega on the Gray Goods and the First Sale Doctrine" CLE Program is now available at lawline.com here

Lawline.com now has available a continuing legal education (CLE) course that I served as faculty on regarding a case that dealt with an importation of “gray market goods.” Specifically, it had to do with the Supreme Court’s December 2010 affirmance of the case heard in the 9th Circuit Court of Appeals entitled, Omega S.A. v. Costco Wholesale Corp., 541 F.3d 962 (9th Cir. 2008). (For more information on gray market goods, see my Dec. 20, 2010 post)

To give a little background, Omega, a popular high end watch company, is the owner of a “Globe” watch design that is registered with the US Copyright Office. It also has its trademark registered with the US Patent and Trademark Office.

Omega had a production of watches manufactured overseas that bore the Omega trademark and the copyprighted Globe design.

Costco thereafter purchased the foreign manufactured Omega watches bearing the copyright and trademark, and imported them into the United States for sale in its US stores at a price of $1,299, which was significantly less than Omega's US retail sales price of $1,995.

Costco did so however, without the authorization of Omega, which according to Omega, was in violation of the Copyright Act’s prohibition on unauthorized importations.

In its defense, Costco raised what is known under Copyright law (and not Customs law) as the “First Sale Doctrine.” This doctrine places a limitation on the exclusive rights of a copyright owner (19 USC §109a) which in this case is Omega.

Ultimately, the 9th Circuit Court of Appeals position was that using this defense was permissible only where the disputed copies of a copyrighted work were either made or previously sold in the US with the authority of the copyright owner. That is, Costco could not use it as a defense in this instance.

The Supreme Court agreed.

For an in-depth discussion on some possible implications of this decision on imports, check out our program on lawline.com by clicking here.

Questions/comments? Email me at clark.deanna@gmail.com or post below.

The Complexity of Fabric Classification

I picked up an Emilio Pucci scarf recently and have been enjoying learning about all of the different ways of wearing it. Its size is approximately 3 ft x 3 ft and while I bought it to wear as a cover up on the beach, I’ve been discovering its many variations as a shawl and scarf.

While wearing it the other day in my office, I found myself researching fabric issues and I couldn’t help but think about how appropriate it was given that I was wearing a large (and gorgeous) piece of cloth!

The issue I was looking into had nothing to do with the material of my new accessory but rather that of bonded fabrics and the identification of where nuances arose as between the general rule on bonded fabrics and “pile” fabrics. I was also trying to determine if there were any differences when the fabric was knit versus crocheted.

Finding this answer required an analysis of the Textile Section Notes of the tariff (Harmonized Tariff Schedule of the United States, “HTSUS”) and in particular, Chapters 59, 60 and 61. Let me explain how the tariff is organized.

The tariff is arranged by Section which generally categorizes similar merchandise. It has titles such as “Vegetable Products,” (Section II), “Plastics and Articles Thereof, Rubber and Articles Thereof” (Section VII), and “Footwear, Headgear, Umbrellas, Sun Umbrellas, Walking Sticks, Seatsticks, Whips, Riding-Crops and Parts Thereof; Prepared Feathers and Articles Made Therewith; Artificial Flowers; Articles of Human Hair” (Section XII).

At the beginning of each Section are “Notes” unique to all of those Chapters within the Section. Similarly, in the first part of each Chapter are Notes specific to the tariff provisions within that Chapter, along with Additional U.S. Notes that are unique to imports coming into the United States.

With regards to “Textile and Textile Articles,” the tariff provisions for these types of imports are found in Section XI, Chapters 50 through 63.

Making determinations on fabrics can be tricky due to reasons such as the type of combination of fibers, if such fibers had been brushed or cut during the processing thereby creating a “pile,” if fabric is adhered to another type of fabric, or if fabric has been coated or impregnated with a medium that contains varying percentages of a rubber and plastic combination.

The methodology for the classification of goods under the HTSUS is governed by what are known as the General Rules of Interpretation (GRI). The first GRI provides that classification determinations are made in accordance with the terms of the headings of the tariff schedule and any relevant Section or Chapter Notes.

Coming back to bonded fabrics, Note 2 to HTSUS Chapter 59 (entitled, “Impregnated, coated, covered or laminated textile fabrics; textile articles of a kind suitable for industrial use”) provides a general rule for bonded fabrics, stating that where a knitted or crocheted fabric is coated, impregnated, laminated or covered, then it would be classified in HTSUS Chapter 59.

Despite this general rule however, Note 1(c) to HTSUS Chapter 60 (entitled, “Knitted or crocheted fabrics”) sets forth an exception to this rule where the imported merchandise involves a knit pile fabric that is coated, impregnated, laminated or covered. Under this circumstance, these fabrics are classifiable within Chapter 60, under Heading 6001, and not under Chapter 59.

Moreover, Additional Legal U.S. Note one (1) to HTSUS Chapter 60 provides a specific definition for the term “long pile fabrics.” As defined, these are “fabrics made by inserting fibers from card silver into the loops of the ground fabric during knitting.” In everyday language, this simply means that a certain manufacturing process must have been utilized in order to qualify under this provision.

Needless to say, making classification determinations can sometimes seem like solving a puzzle as multiple Chapters and Notes need to be analyzed before any conclusions can be drawn.

Questions/comments? Post below or email me at clark.deanna@gmail.com

The Fashion Industry and Accountability for the Basic Human Rights of Foreign Laborers

Fall 2011 New York Fashion Week which has just wrapped up here in NYC, has increasingly brought more issues to the forefront, including the currently trendy dialogue around “sustainable fashion” along with the well known - yet still undealt with - issue of eating disorders that many models struggle with.

One lesser known and far less glamorous issue has to do with foreign labor in the fashion industries. Textiles, and hence apparel, are made primarily overseas using labor that is less expensive than could be found in the United States. That obviously is no secret, however, disproportionately high working hours, wages that barely cover the rent let alone providing an adequate standard of living, hazardous working conditions, child labor and forced labor are all realities that exist in the industry as well.

Designers or license holders who rely on foreign labor to manufacture products with their logos on it (see my previous post for an explanation about licenses, license holders and royalties) have, in my view, a duty of accountability to ensure basic human rights towards laborers all the way down the line back to the factory.

This concept of importer oversight “down the line” is not unusual within the international trade community. An example of this is US Customs C-TPAT (Customs-Trade Partnership Against Terrorism) program, which causes importers to “vet” their supply chain for security purposes all the way back to the factory in exchange for a more expeditious customs clearance. As a result of this program, changes to factories such as adequate ventilation, locks on doors and basic sanitation upgrades have been implemented due to an importer’s demands that such changes be put into place.

While industry standards grossly lack foreign labor accountability, I am pleased to report that some licensor’s do in fact, require not just those licensee’s who import products with their logos to maintain certain labor standards, but they likewise require that those importers have their manufacturers agree to these terms as well.

To give you an idea of some of these contract terms that protect laborer rights and attempt to provide an “ethical code of conduct” if you will, here are some sample clauses below:

* Child Labor: Licensee and its Suppliers will not purchase products or components thereof manufactured by persons younger than fourteen (14) years of age or younger than the age of completing compulsory education in the country of manufacture where such age is higher than fourteen (14). Licensee and its Suppliers further acknowledge and agree that they will not use any child labor in the manufacturing, packaging or distribution of Licensor merchandise. In no case shall any child younger than fourteen (14) years of age or younger than the age of completing compulsory education in the country of manufacture where such age is higher than fourteen (14) be employed in the manufacturing, packaging, sales or distribution of Licensor merchandise.

* Forced Labor: Licensee and its Suppliers will not purchase products or components thereof from suppliers that use forced labor, prison labor, indentured labor or exploited bonded labor, or permit their suppliers to do so. Licensee and its Suppliers acknowledge and agree that they will only employ persons whose presence is voluntary and that they will not utilize any forced or involuntary labor, whether prison, bonded, indentured or otherwise.

* Contract Labor: Licensee and its Suppliers shall not use workers obligated under contracts which exploit them, which deny them the basic legal rights available to people and to workers within the countries in which they work or which are inconsistent with the principles set forth in this Code of Conduct Legal and Ethical Business Practices: Licensee and its Suppliers must fully comply with all applicable local, state, federal, national and international laws, rules and regulations including, but not limited to, those relating to wages, hours, labor, health and safety, and immigration.

* Work Hours: Licensee and its Suppliers shall not require their employees to work more than the limits on regular and overtime hours allowed by the law of the country of manufacture. Except under extraordinary business circumstances, Licensee's and its Suppliers' employees shall be entitled to one (1) day off in every seven (7) - day period. Licensee and its Suppliers must inform their workers at the time of their hiring if mandatory overtime is a condition of their employment. Licensee and its Suppliers shall not compel their workers to work excessive overtime hours.

* Wages and Benefits: Licensee and its Suppliers recognize that wages are essential to meeting employees' basic needs. Licensee and its Suppliers shall pay employees at least the minimum wage required by local law regardless of whether they pay by the piece or by the hour and shall provide legally mandated benefits.

* Overtime Compensation: Licensee and its Suppliers' employees shall be compensated for overtime hours at such premium rate as is legally required in the country of manufacture or, in countries where such laws do not exist, at a rate at least equal to their regular hourly compensation rate.

* Freedom of Association: Licensee and its Suppliers shall recognize and respect the right of employees to freely associate in accordance with the laws of the countries in which they are employed.

* Nondiscrimination: Licensee and its Suppliers shall not subject any person to discrimination in employment, including hiring, salary, benefits, advancement, discipline, termination or retirement, on the basis of gender, race, religion, age, disability, sexual orientation, nationality, political opinion, or social or ethnic origin.

* Harassment or Abuse: Licensee and its Suppliers must treat their employees with respect and dignity. No employee shall be subject to physical, sexual or psychological harassment or abuse.
Licensee and its Suppliers acknowledge and agree not to use corporal punishment or threats of violence.

* Health and Safety: Licensee and its Suppliers shall provide a safe and healthy working environment to prevent accidents and injury to health arising out of, linked with, or occurring in the course of work or as a result of the operation of employer facilities. Licensee and its Suppliers further acknowledge and agree that they will comply with all applicable workplace conditions, safety and environmental laws.

Clauses like these are an illustration of a movement in the right direction, however, much more can be done to prevent incidents of child labor, such as by providing the parents with livable wages.

Questions/comments? Post below or email me at clark.deanna@gmail.com

Royalties or Royalty?

Who is royalty? In the eyes of US Customs, no one is royalty.

And, despite the upcoming marriage of Prince William and Kate Middleton for which I recently saw had no “price tag” despite England’s weakened economy, this blog post is not about royalty, but royalties. (Ah, shucks… I know)

What are royalties? Generically speaking, a royalty is a fee paid by a party (known as a “licensee”) for usage of another’s (licensor’s) right. An example of this would be a payment made by an apparel importer (the licensee) for use of the recording artist “Justin Bieber’s” image on a t-shirt it imports. For those of you who don’t know, Bieber is a young Canadian R&B pop singer who is very popular with “tweens” – at least that’s what I’ve been told!

In this example, either Bieber, who is presumably the exclusive license holder, or the company that has merchandising rights relating to the use of his name or “likeness,” (which in everyday language essentially means, his image) would be entitled to payment – normally a percentage of the sales price of the good – upon the sale of the t-shirt. The terms setting forth what amount will be paid varies, and can run the gamut from 2% to 16% or much more.

So what do royalties have to do with international trade?

When it comes to figuring out how much to pay in duties, “transaction value” is one method (the preferred one actually) to use for determining an amount. As provided in 19 USC 1401a(b)(1),

“The transaction value of imported merchandise is the price actually paid or payable for the merchandise when sold for exportation to the United States, plus amounts equal to -. . . Any royalty or license fee related to the imported merchandise that the buyer is required to pay, directly or indirectly, as a condition of the sale of the imported merchandise for exportation to the United States . . . .”

Therefore, under certain circumstances (not all – it depends on the nature of the licensing agreement and the relationship of the buyer, seller, and license holder), royalty amounts should be added to the transaction value. To determine the dutiable status of royalties, two (2) factors should be examined:

(1) Whether the buyer was required to pay them as a condition of sale of the merchandise for exportation to the United States, and

(2) To whom and under what circumstances they were paid.

Payments made by the buyer to a third party (i.e., not the seller or a company related to the seller either usually) for the right to distribute or resell the imported merchandise will not be added to the "price actually paid or payable" for the imported merchandise if the payments are not a condition of the sale of the merchandise for exportation to the United States.

And just what is a “condition of sale?”

To figure this out, the initial questions to answer this inquiry should be:

1) Whether the imported merchandise was manufactured under patent;

2) Whether the royalty was involved in the production or sale of the imported merchandise, and;

3) Whether the importer could buy the product without paying the fee.

Given that licensing agreements are all written differently and can involve multiple related and unrelated parties using various payment structures, figuring out the dutiability of royalty payments is not necessarily a “cut and dry” issue. In fact, it can be quite complicated.

For more reading on US Customs rules regarding transaction value, check out their Value publication.

Questions/comments? Post below or email me at clark.deanna@gmail.com

Stay of Enforcement Lifted on CPSC Flammability Standards

Following a unanimous vote by the U.S. Consumer Product Safety Commission (CPSC), the stay of enforcement on certification for compliance with the flammability standards for non-children's products has been lifted in the following categories:

• Clothing textiles
• Carpets and rugs
• Vinyl plastic film

This means in everyday language, that an importer who fails to certify that CPSC flammability standards have been met on imported merchandise will now be subject to penalties which can exceed well over $100,000 USD.

Starting yesterday (January 26, 2011), an importer will no longer be “forgiven” when it fails to certify that an importation is compliant with CPSCs flammability rules. The compliance certificate indicating this is known as a General Conformity Certificate or “GCC.”

CPSC concluded in 2009 that when certain fabrics have not been treated with the inclusion of substances that could result in the addition of lead into the fabric, lead content testing was no longer required where it was 100% of, or any blend of, the following textiles.

1. Natural fibers, whether dyed or undyed, including cotton, ramie, linen, silk, alpaca, among others; and,

2. Manufactured fibers, whether dyed or undyed, including polyester, spandex, nylon, acrylic and rayon, among others.

Keep in mind that a GCC is still mandatory even where the underlying textile is exempted from CPSC requirements.

While the underlying testing of these fabrics is no longer required, manufacturers and importers still remain responsible for

(a) Providing a GCC with each shipment,
(b) Verifying that the product or material has not been altered or modified so as to cause lead to enter the material or product, and
(c) Assuring for themselves that the fabric is indeed exempt.

GCCs and copies of the test results upon which certification is based must be kept for 3 years. It also must be provided in a timely manner upon request by CPSC, or an importer can find itself subject to a penalty under the premise of having made a false guaranty. As the certifier that merchandise is compliant with CPSC rules, an importer must:

1. Be in possession of the original, or a copy of, the test certificate upon which the GCC is based, and

2. Retain the test certificate together with the original GCC for a minimum of 3 years after the production date.

A GCC must accompany the product whether imported or manufactured in the United States and be furnished to the product's distributors and/or retailers as these companies must also supply GCCs for their products to CPSC upon request.

CPSC requires that the GCC “accompany” a shipment [73 FR 68328, 11/24/08], and it permits a number of methods for doing so, including electronic “accompaniment.”

While the GCC may be made available online, given the reality of facilitating the movement of cargo and U.S. Customs’ physical handling of it, the agency looks for certain records as being included with a shipment. Therefore, its physical inclusion within the shipment is recommended.

Needless to say, it is critical that CPSC flammability rules and regulations are complied with now that enforcement activity will commence and penalty amounts have so tremendously increased. More information about factors CPSC may consider in assessing a penalty can be found at 16 CFR Part 1119, published in 74 FR 45101.

Questions/comments? Post below or email me at clark.deanna@gmail.com

OWIT-NY Wine Tasting Event This Thursday!

As Vice President to the OWIT-NY Board, I’d like to invite you to kick off 2011 with the New York Chapter of the Organization of Women in International Trade as we host a private wine tasting at the popular Morrell Wine, a premier wine and spirits store in Rockefeller plaza.

The evening will consist of a presentation and wine tasting of 6 wines (a mixture of red, white and dessert) from 6 different emerging wine-producing countries. During the tasting presentation there will be a selection of Murray’s cheeses and breads to complement the wines.

Join us to taste these international wines and cheeses and combine the satisfaction of working in international trade and the educational experience of understanding emerging wine markets.

Date: Thursday January 27, 2011
Time: Wine presentation 7:30 pm – 8:30 pm followed by networking and personalized wine shopping with Morrell's wine expert
Location: Morrell Wine Store
One Rockefeller Plaza (49th Street between 5th and 6th Avenues)
New York, NY
Cost: $50 for members and $55 for non-members

Space is limited, to ensure a seat please register online Click Here.

Unfortunately, I will not be able to make what is sure to be a really fun event, but I wanted to at least pass the message along in case you can!

Don't forget to follow us on Twitter.com/OWITNY for the latest news and events in international trade.

Questions/comments? Post below or email me at clark.deanna@gmail.com

Welcome to a New Year of Customs Audits!

While just a few weeks into the new year, I can’t help but notice that US Customs is off to the races with its auditing programs, one of which I will write about here known as a “Focused Assessment.”

The Focused Assessment program is a systematic risk-based approach to auditing in which the auditing team evaluates a company’s Customs and Border Protection (CBP) related internal controls to determine the likelihood of non-compliance and assess “risk.”

As shown by the definition above, and probably presumed by most importers when it receives the phone call indicating that an audit will be occurring in the (near) future, when US Customs comes in to do one, it already suspects some wrong doing on the part of the importer.

This does not mean, however, that an importer was knowingly or intentionally engaged in “risky behavior,” which can take many possible forms, such as classifying merchandise with an erroneous tariff number, or failing to add into the dutiable value of a product an item supplied by the importer (to its manufacturer) for incorporation into the merchandise ultimately imported, which is commonly referred to as an “assist.”

An example of this would be a women's sleepwear importer supplying bows to its vendor for attachment to robes or night gowns that it imports. Under US Customs regulations pertaining to “valuation” (which in everyday language, is the methodology for determining the dutiable value of imported merchandise), both the cost of the article supplied by the importer AND the cost of the freight to ship it to the vendor must be added to the invoice value of the imported merchandise. This of course, can be a tricky thing to calculate but alas, it is not the subject of this blog post so I will continue with my discussion on focused assessments. (If you have a valuation question, feel free to email me).

There are three (3) distinct phases to a focused assessment.

1. Pre-Assessment Survey: An evaluation of a company’s internal controls over US Customs related operations
2. Assessment Compliance Testing: “Transaction testing” used to measure compliance and/or to determine a loss of revenue (i.e., an amount of duties that the government believes should have been paid on certain importations), and
3. Follow-up Review: Verification of a company’s corrected action

The primary areas US Customs focuses on during an assessment are valuation, classification, anti-dumping/countervailing duties, transshipment and intellectual property rights. Secondary areas for assessment include, foreign trade zone activity, special trade programs, such as NAFTA (North American Free Trade Agreement) and special duty provisions, which are those found in Chapter 98 of the HTSUS (Harmonized Tariff Schedule of the United States).

Key features of a focused assessment include:

a) The identification of imports that represent the greatest risk of trade noncompliance
b) The evaluation of the adequacy of a company’s internal control system, and
c) Methods for improving future compliance by identifying risk and reducing it.

But how does US Customs go about evaluating the adequacy of a company’s internal control system? It does so by looking at the following five (5) specific components of a company.

The first is what US Customs refers to in its focused assessment literature as a company’s “Control Environment,” as this apparently “sets the tone of an organization, influencing the control consciousness of its people.” I must admit, even though US Customs attempts to keep importers informed, language such as this “control environment” definition leave little to be understood.

What it is really getting at however, is the question of “What procedures are in place to maintain checks and balances within a company across company activities?” And, given that US Customs is making this inquiry, this question is focused on a company’s import activities.

The second is “Risk Assessment,” that is, Customs recognizes that multiple external and internal risks are faced by each company, and that these risks must be identified and analyzed. It therefore wants to see that a company has made this identification of potential risks across company activities.

The third is known as, “Control Activities,” which are the policies and procedures in place to ensure that management directives are implemented.

The fourth area US Customs is looking at is categorized as “Information and Communication” wherein the identification and summation of information that supports all other control components is communicated throughout a company’s personnel and those entities it works with (that have reason to be communicated to, with respect to “controls.”)

The fifth and final area, is that of “Monitoring,” which evaluates a company’s internal systems.

An evaluation of these five components occurs in the pre-Assessment Survey portion of the focused assessment. Depending on the results of this survey, determines where US Customs goes next with its auditing actions.

In my experience, these audits are time consuming, disruptive to regular business, and may leave an importer in a sleep deprived state. All the more reason to stay both informed and on top of US Customs compliance guidelines.

Questions/comments? Post below or email me at clark.deanna@gmail.com.