New BIS Export Enforcement Guidelines

As we start off this new year there are some important new changes to be aware of; this includes the Bureau of Industry and Security’s (BIS) proposed changes to export enforcement guidelines. This bureau is the agency responsible for enforcing the Export Administration Regulations (EAR), which handles all export enforcement cases. These proposed changes will impact how the BIS categorizes export violations, as well as how they determine the appropriate penalty for qualifying violations.

We must initially examine how violations will be categorized, because this will in-turn effect how they are penalized. First, BIS will categorize violation cases as either egregious or non-egregious. Four factors will be considered in determining the egregiousness of each case; a willful or reckless violation of the law, the awareness of conduct at issue, harm caused to the regulatory program objectives, and relevant individual characteristics. The other important factor at play for violation categorization is whether or not the violation was voluntarily self-disclosed. Self-disclosure was a factor of “great weight” prior to these changes,  but it now plays an even more pivotal role in determining the applicable monetary penalty.

The  proposed changes by the BIS have allowed for the creation of a base penalty matrix. This matrix takes into account the previously discussed factors, as well as the number of relevant EAR violations.  The base penalty amount is based on three different values; the maximum statutory amount, the transaction value, and the applicable schedule amount. The matrix will be structured as shown below;

matrix

The current “statutory maximum” penalty is twice the value of the transaction, not to exceed $250,000. The” transaction value” is defined as “the U.S. dollar value of a subject transaction” based on commercial invoices, bills of lading, Customs declarations, and other relevant documents. The “applicable schedule amount” referenced in the matrix is determined by referring to a table (not reproduced here) that categorizes various transaction values with corresponding penalty amounts. (Ex. If the transaction value is between $10,000 and $25,000, the corresponding schedule amount in the table is $25,000.) Once the base penalty has been determined, there are a set of factors that will be considered in determining whether the base amount needs to be adjusted. Aggravating factors increase the penalty, mitigating factors reduce the penalty, and general/other relevant factors are considered on a case-by-case basis and can either increase or reduce the penalty.

The overall goal of these changes is to make BIS penalty amounts more predictable and transparent. Additionally, these changes are intended to more closely align BIS procedures with those of the Treasury’s Office of Foreign Assets Controls (OFAC).  It is imperative for companies involved in export to understand these changes, as they could lead to higher penalties for export violations if implemented.  We have always urged clients to make Voluntary Disclosures quickly, and in most cases have avoided any penalty whatsoever.  Public comments regarding this proposal are due by February 26, 2016.

Dealing With Patent Trolls

Freight forwarders, Customs brokers, and carriers always provide shipment tracking to their customers. There are a variety of ways to do this; they may use their own software to track shipments, or they may track shipments by linking to another carriers’ website. There is nothing magical about this, yet this type of technology may be covered by patents or copyright. Logistics professionals deal with threats of patent infringement lawsuits asserted by patent owners, especially so-called patent trolls, increasingly.  Patent trolls are those who seek to enforce patent rights, but do not actually manufacture or supply services based on the patents.  They make a living just by demanding payment for the supposed infringement upon a right they themselves are unlikely to use.

The most aggressive company presently following that template in the shipping industry is ArrivalStar.  ArrivalStar is incorporated in the tax haven of Luxembourg, and it is one of the most litigious patent plaintiffs in the U.S.  In 2013 alone, it lodged 137 lawsuits across the country.   Defendants in its suits include the biggest names in logistics and transportation, such as FedEx, UPS, DHL, American Airlines, American Express, Continental Airlines, Delta Airlines, the Port Authority of New York and New Jersey, and others. Our brief analysis of ArrivalStar’s lawsuits indicate that none have actually gone to trial; most are settled quickly for an undisclosed sum.  In certain cases where the defendants vehemently fought back, ArrivalStar withdrew from the lawsuit, dropping its claims.  In some cases, its patents had been infringed and it did collect sizable license or other payments.

Trolls usually avoid active lawsuits, either because they are afraid that their patent allegations will not withstand a challenge, or because they believe that there is actually little or no infringement by the defendants. They also avoid extensive litigation because they are concerned with the costs: simply mounting a patent infringement suit can cost $100,000 in a few short months, and actually taking a case to trial can easily exceed a million dollars in legal fees and costs over a period of years.  Since trolls are often bankrolled by investors whose sole purpose is to engage in litigation, or by law firms which work on contingency, they do not have the litigation motives of a normal business competitor. When defendants fight back, trolls often retreat because they would rather go after the targets who may give in more easily.

Conventional wisdom on how to best defend a patent case does not apply in the case of trolls, because that would be conservative, expensive, and time-consuming.  Small carriers, freight forwarders, or Customs brokers do not readily have the wherewithal to finance those suits. We have helped several logistics companies avoid suits by doing a proper analysis of their tracking systems and respective data components, and then responding clearly under the U.S. Patent Act with the defenses available to both patent troll and/or ArrivalStar-type demands. Alternatively, we have settled infringement claims without extended suit.  Any such demand must be taken very seriously, but with the knowledge that a mere demand does not mean infringement actually occurred.

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Transitioning to the ACE Portal

There is continual automation in the world of forwarding.  One change this week is the integration of the Automated Export System (AESDirect) into the Automated Commercial Environment (ACE) Portal.  Until recently, AESDirect has been the sole government electronic system used to input SED information on export shipments. Inputting this information accurately is of the utmost importance, as it is used in comparison to Customs entries to develop our national trade balance statistics. The idea behind integrating this system into the ACE Portal is that now ACE will be able to serve as a single hub for all transactions relating to imports and exports. All major agencies are transitioning to using this system; including the CPSC, FDA, DOT, and now Commerce. Theoretically, having all of this information located within a single source will create a more organized and easily accessible system for queries.

According to U.S. Customs and Border Protection, all existing AES functionality  has been incorporated into ACE. But while the two systems will be integrated, AESDirect will continue to exist as a stand-alone product.  This adoption of AESDirect into the ACE Portal will take time.  For now, ACE is still technically incomplete; testing to improve the system continues to take place. However, it is inevitable that this transition will eventually be complete, and at such time ACE will become the necessary outlet for appropriately reporting information regarding international exports. If you have any further questions regarding this transition, please visit the following link; http://www.cbp.gov/trade/automated/ace-faq.

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Drug Prototypes: Pharma And Customs Brokerage Pointers

We have seen terrible problems arise when pharmaceuticals for medical trials have been imported without sufficient coordination between the importer and its broker. The Product Development and Testing Act of 2000 (PDTA) was enacted as part of the Tariff Suspension and Trade Act of 2000 (Act).  Its purpose is to promote product development and testing in the United States, by allowing the importation on a duty-free basis of articles commonly referred to as ‘‘prototypes’’.  These must be used exclusively for product development, testing, evaluation, or quality control. Consequently, section 1433 of the Act amended the Harmonized Tariff Schedule of the United States (HTSUS) by inserting a new subheading 9817.85.01 in Chapter 98, HTSUS, to provide for the duty-free entry of prototype articles. Section 1433 of the Act also included a new U.S. Note 6 in Subchapter XVII of Chapter 98, HTSUS, to define the term ‘‘prototypes’’ as used in HTSUS subheading 9817.85.01.

Customs amended the Customs Regulations to add a new § 10.91, in accordance with the requirements of the PDTA.  What is does is: (1) establish procedures regarding the identification of prototypes at the time of their importation into the United States; and (2) establish procedures regarding the sale of prototypes as scrap, waste, or for recycling, after their intended use in product development, testing, and evaluation.

To qualify as a prototype, the merchandise must meet the requirements set forth in Note 6:

  • It must be originals or models of articles that (i) are either in the preproduction, production, or postproduction stage and are to be used exclusively for development, testing, product evaluation, or quality control purposes; and (ii) in the case of originals or models of articles that are either in the production or postproduction stage, are associated with a design change from current production (including a refinement, advancement, improvement, development, or quality control in either the product itself or the means for producing the product).
  • It may be imported only in limited noncommercial quantities in accordance with industry practice.
  • Except as provided for by the Secretary of the Treasury, prototypes or parts of prototypes may not be sold after importation into the United States or be incorporated into other products that are sold.
  • The imported item may not be subject to quantitative restrictions, antidumping orders, or countervailing duty orders, and
  • It must comply with all applicable provision of law and otherwise meet the definition of “prototypes”, if the articles are subject to licensing requirements or other laws, rules, or regulations administered by agencies other than the CBP.

The entry has very particular requirements. It must be done in accordance with procedures set forth in 19 C.F.R. § 10.91, which state in pertinent part:

  • Prototypes may be entered under subheading 9817.85.01, HTSUS, on CBP Form 7501 or an electronic equivalent.
  • The importer must declare the intended use at the time of entry.

19 C.F.R. §10.91 also set forth procedures regarding sale and disposition of prototypes and requirements regarding record keeping.

To avoid the disaster of irrevocable imposition of duty at the moment of release, probably the most important take away message here for customs brokers and importers is to (i) enter under subheading 9817.85.01, HTSUS on all entry documents, and (ii) explicitly declare the intended use as a prototype at the time of entry.

This blog post was authored by Dr. S. Shannon Liang. If you have any further questions about this topic or The Mooney Law Firm, please feel free to contact us today.

Subpoenas: What You Need to Know

A surprising number of our clients have received subpoenas in civil suits or from Federal agencies lately, and there tends to be a bit of confusion about what exactly the implied responsibilities are regarding subpoenas. As such, it seemed only appropriate to author a blog on the topic this week.

To start, let’s review what a subpoena is. Officially, a subpoena is a writ issued by a government agency to compel the production of evidence. Most often subpoenas will be issued by courts, although they can technically be issued by any court official, including lawyers. If a subpoena is being issued by a private party, such as a lawyer, it must be in relation to an active case. Otherwise, the subpoena will not be considered valid. This is not true for government agencies though; agencies have the ability to issue subpoenas for investigative purposes at any time. It is important to understand this distinction because you would not want to make the mistake of producing information in relation to a subpoena that is not actually valid.

It can be confusing when a client receives a subpoena from an agent of state government, or a state court, for information that is federally protected.   Customs brokers are beholden by law and regulation to keep their clients’ information confidential.   What if a state judge demands production of federal (Customs brokerage, for example) records?  This apparent conflict leaves people wondering exactly which agency they have a responsibility to: Federal licensing authorities and their regulations, or state courts and their rules? The answer is that you are subject to your state court judges. You sit within the jurisdiction of your state, therefore they have the power to make you produce even most federally protected documents. If state court judges are subpoenaing material for a strictly federal matter, they may not be able to do anything with the information obtained, but they do still have the power to make you produce it. This may seem counterintuitive, but it is important to understand how the system works.  This is especially important for federally licensed Customs brokers and freight forwarders to understand, as they will likely encounter this situation at some point in their careers.

One last important point to note is that when requesting you produce documents, most subpoenas will say you must appear “with” the required materials. However, it is almost never the case that you actually  need to physically appear. It is important to understand that subpoenas are not the same as depositions. With depositions, you are required to appear in person to give your recorded testimony; whereas with subpoenas, faxing or mailing the required information will almost always suffice.

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Please note: Contact your own legal counsel immediately should any of the above situations arise.  We are providing general information which may not be applicable to the actual situation you find yourself in.

Confidential Export Information

It is always important to ensure that you are completing international shipping documentation accurately.  One of the documents required for each single commodity  exported having a value exceeding $2,500 is a Shipper’s Export Declaration (SED).  SEDs essentially allow the Census Bureau to keep track of what is being exported from the United States.  Back when I started, in the Bronze Age, SED’s were yellow forms for most exports, and pink for goods in transit.  Today the SED filings are done via Census’ AES system, either via your link or on the web at AESDirect (https://aesdirect.census.gov/).  These filings are the means for compiling U.S. export statistics, which help the U.S. government in managing export control and, when compared to Customs’ entry information, generate balance of trade information.  Given that this information is used for critical national reporting measures, it is of the upmost importance that SEDs are completed both accurately and honestly.  To help promote honest reporting, SEDs are completely confidential.  As a result, you cannot be forced to produce copies of SEDs and you will never be required to disclose information reported within.  It cannot be disclosed to any party other than the Census: See 15 USC 30.60:

Confidentiality: The Electronic Export Information (EEI) contained in the Automated Export System (AES) isconfidential and is to be used solely for official purposes as authorized by the Secretary of Commerce.  The collection of EEI by the Department of Commerce has been approved by the Office of Management Budget.  Only the U.S. Principal Party in Interest (USPPI) or the USPPI’s agent may have access to its AES record.  It is prohibited to share the EEI Information with a Foreign Government or entity, or any other party for non-official purposes.”

The information you disclose on an SED is known as Electronic Export Information (EEI); this is the electronic data detailing your shipment which is collected by the government. There are certain regulations mandated when preparing an SED; to insure that you are in compliance with the requirements, please visit the guide published by the Census Bureau posted below. It is important to note that even though you cannot be forced to produce copies of an SED to any entity (with the exception of the United States government), you are still responsible for maintaining copies of shipping documents for a period of 5 years.  These documents are required to be kept for statistical purposes.  Be sure to download these excellent guides for your professional library:

Sources:

https://www.census.gov/foreign-trade/schedules/b/2011/correctwayforb.pdf

https://www.ups.com/media/en/sed_guide.pdf

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FDA Food Labeling Requirements

The Food and Drug Administration (FDA) is the entity responsible for monitoring and assuring that all foods sold within the United States are “safe, wholesome, and properly labeled.”  Because we get so many inquiries on the subject, I thought a blog on it would be appropriate.

There are various guidelines governing the way to properly label food products, and it is important to ensure you are operating within these regulations.  These rules apply not only to food produced within the United States, but also to food being imported from foreign countries. Here  we will examine a few general principles of labeling, but please be sure to visit the FDA’s Food Labeling Guide for further detail.  This site allows for the guide to be downloaded in various languages including English, Spanish, Arabic, Hindi, Chinese, and Japanese.

Before reviewing what should be included on an information label, let’s begin by discussing where exactly label statements must be placed. There are two important terms we need to understand here; the principal display panel and the information panel. The principal display panel (PDP) is defined as “the portion of the package label that is most likely to be seen by the consumer at the time of purchase.” The information panel is located directly to the right of the PDP, as seen from the perspective of a consumer facing the product.

labels1

These two sides of the packing will contain a lot of important information pertaining to your product.  According to the FDA,  the PDP must contain both the statement of identity and the net quantity statement for your product. Essentially, this means you need to include the name and amount of your food/product.  The information panel will contain more of the specific details.  The FDA requires that the information panel include “the name and address of the manufacturer, packager, or distributor, the ingredient list, nutrition labeling, and any required allergy labeling.”  These statements must appear together and without any intervening material separating them.

The formatting requirements of labels are very specific.  In general, the standard provided by the FDA is to “use letters that are at least one-sixteenth inch in height based on the lower case letter “o.” The letters must not be more than three times as high as they are wide.”  It is important to realize that while this is the general standard, different elements of the label will have their own specific requirements. For example, required type sizes for the statement of identity will be different from those for the Nutrition Facts label.

While we hope this post served as a good introduction, please visit the FDA page referenced above for the complete Food Labeling Guide; it will detail all requirements of FDA labels. For periodic updates on important topics such as this, subscribe to our blog today!

 

Source: “U.S. Food and Drug Administration.” Food Labeling Guide. 2013. Web. 22 Oct. 2015.

Fiduciary Responsibilities of Ocean Freight Forwarders Compared to NVOCCs

It is crucial to understand the type of relationship you have with someone, i.e. the duties and/or responsibilities owed to a party based on their interaction. Today we are taking a look at the fiduciary relationship, questions regarding which arise during Federal Maritime Commission (FMC) audits.  A fiduciary relationship is defined as, “a legal duty to act solely in another party’s interest.  Parties owing this duty are called fiduciaries, and the individuals to whom they owe the duty are called principals.”[1] Essentially, fiduciaries have a duty to act in the best interest of the principal, and this duty is breached when they make decisions based on self-interest or self-gain.   We are going to examine how this fiduciary relationship applies differently to the two types of FMC-licensed Ocean Transportation Intermediaries (OTIs): ocean freight forwarders compared to Non-Vessel Operating Common Carriers (NVOCCs).

A freight forwarder is a person or company which organizes export shipments. You can think of forwarders as travel agents for cargo; they book freight on a carrier on behalf of a client/shipper. A good forwarder will contact various carriers to find the most reasonable price for their client. They have a fiduciary responsibility to clients imposed on them by the FMC, meaning all decisions a forwarder makes must be in the best interest of the client.  Forwarders make their living based on a disclosed fee they charge; it covers the due diligence of shopping around different carriers as well as handling the booking and other documentation.  Ocean freight forwarders are required to disclose their fees along with the costs and any profit, and their invoices must invite inquiry.  See 46 CFR 515.32(d):

“The following notice shall appear on each invoice to a principal: Upon request, we shall provide a detailed breakout of the components of all charges assessed and a true copy of each pertinent document relating to these charges.” 

Since they are acting as an agent for a shipper and a fiduciary relationship does exist, there must be a high level of transparency with freight forwarders.

This is absolutely not the case with NVOCCs.  There is no fiduciary relationship between an NVOCC and its customer, and as a result they do not have to disclose their costs.  NVOCCs make their living by purchasing space on a vessel at a discounted price, and then reselling this space.  Vessel space is their inventory.  Since they are purchasing at a discounted price, NVOCCs create competitive advantage by reselling the space at a price lower than would the vessel operator.  Like anyone else selling from inventory, NVOCCs have no obligation to disclose the price they originally paid, and they are able to charge a mark-up when reselling.  NVOCCs have no fiduciary responsibility, but they do carry more liability because they issue contracts for carriage.  They must decide that the benefit of charging a mark-up is worth the additional risk imposed by the issuance of a bill of lading.

It is true that freight forwarders and NVOCCs interact and overlap in many ways, but it is critically important to understand the fiduciary difference in the types of relationships that exist between these two OTIs and their clients.

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[1] https://www.law.cornell.edu/wex/fiduciary_duty

New Customs Regulations Regarding Trademark Disclosure

On September 18, 2015, US Customs and Border Protection (CBP) published a final rule regarding the disclosure of information on goods suspected of bearing counterfeit trademarks or trade names. This new rule allows Customs to share more information with trademark owners about suspect goods. The most notable change is that Customs will share information was protected by the Trade Secrets Act. The new rule will become effective on October 19, 2015. Below is a description outlining the regulations of the rule, as well as the changes made regarding disclosure.

Detention

  • CBP may detain article suspected of bearing counterfeit marks for a period of up to 30 days
  • Within 5 business days from the date of detention, CBP will notify the importer in writing.
  • By this time (i.e., prior to the issuance of notice of detention), CBP may have disclosed to the trademark owner “limited importation information” such as
    • The date of importation
    • The port of entry
    • The description of the merchandise
    • The quantity
    • The country of origin

If CBP has not previously disclosed to the trademark owner “limited importation information,” it will disclose this information to the trademark owner concurrently with the issuance of notice of detention

7 Business Days After the Notice of Detention

  • If the importer fails to establish within 7 business days of the notice of detention that the detained merchandise does not bear a counterfeit mark, CBP may disclose the following additional information to the trademark owner:
    • Mark information that appears on the detained merchandise and/or its retail packaging (including labels), unredacted photos, images, or samples, serial numbers, dates of manufacture, lot codes, batch numbers, universal product codes, or other identifying marks appearing on the merchandise or its retail packaging (including labels), in alphanumeric or other formats.
  • The release of a sample to the trademark owner, subject to bond and return requirements

Any Time

  • Notwithstanding the above, CBP may disclose to the trademark owner:
    • Photographs, images, or a sample of the suspect merchandise or its retail packaging (including labels), provided that identifying information (such as serial numbers, dates of manufacture, lot codes, batch numbers, universal product codes, the name or address of the manufacturer, exporter, or importer of the merchandise, or any mark that could reveal the name or address of the manufacturer, exporter, importer of the merchandise, in alphanumeric or other formats) has been removed, obliterated, or otherwise obscured.
  • DISCLOSURE TO IMPORTER: CBP will disclose to the importer unreadacted photographs, images, or an unredacted sample of the imported merchandise.

Conditions Of Disclosure To Trademark Owner Prior To Seizure

  • Upon disclosure of such information, CBP will state that some or all of the information being released may be subject to the protections of the Trade Secrets Act, and that CBP is only disclosing the information to the trademark owner for the purpose of assisting CBP in determining whether the merchandise bears a counterfeit mark.

Seizure

  • Upon a determination by CBP that the imported merchandise bears counterfeit marks, CBP will seize it.
  • CBP will disclose to the trademark owner comprehensive information within 30 business days from the date of the notice of the seizure, including:
    • The date of importation
    • The port of entry
    • The description of the merchandise from the notice of seizure
    • The quantity as set forth in the notice of seizure
    • The country of origin
    • The name and address of the manufacturer
    • The name and address of the exporter
    • The name and address of the importer
  • Upon proper request from the trademark owner, CBP may provided photographs, images, or a sample of the seized merchandise and its retail packaging to trademark owner.

Among other things, the change means that a lot of previously confidential business information, especially that of suppliers and manufacturers, will be provided to trademark owners now. This will have a very bad effect on legitimate gray market importers, whose trade relies on supplier data being kept confidential. That detriment, in turn, will likely mean higher consumer prices as gray market supplies are decreased.

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Compliant NRAs for Federal Maritime Commission Purposes

Traditionally, Non-Vessel-Operating Common Carriers (NVOCCs) compete for shippers’ business by publishing the amount they charge in rate tariffs that are made available to the public. However, as of April 18th, 2011, the Federal Maritime Commission approved the use of Negotiated Rate Arrangements (NRAs) as a new method for NVOCCs to establish rates.  We constantly receive inquiries from NVOCCs seeking guidance on proper preparation of these rate quotations.

According to the FMC, NRAs are “written and binding arrangements between a shipper and a licensed NVOCC to provide specific transportation service for a stated cargo quantity, from origin to destination, on and after a stated date or within a defined time frame.”[1] If an NVOCC correctly meets the conditions of using an NRA, then they are no longer obligated to publicly publish the rate they are charging.  The five conditions of creating an NRA compliant with the FMC’s rules are as follows:

  1. NRAs are only eligible to be used by NVOCCs.
  2. A notice of using an NRA must be posted in the tariff.
  3. All tariff access charges must be eliminated. An NVOCC using an NRA must provide the public with access to its rules tariff (the document outlining the regulations governing the shipment) at no charge.
  4. The shipper and the NVOCC must agree to the use of an NRA in writing prior to the NVOCC receiving the cargo.
  5. NVOCCs must keep their NRA documentation on file for a minimum of five years. NRAs don’t have to be officially filed with the FMC, but the agency must be able to audit NRA records on demand at any time within the relevant time period.

This FMC regulation transformed industry practices for ocean transportation by allowing NVOCCs the opportunity to be exempt from the tariff rate publication requirements set forth in the Shipping Act of 1984. The only downside here is that NRAs are non-amendable, and as such they retain much of the rigidity of old Tariff Line Item rates.  NRAs are a great tool for confidentially agreeing on short-term rates with shippers, but a different rate agreement may be more beneficial for long-term use.

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[1] http://www.fmc.gov/news/negotiated_rate_arrangement_exemption.aspx