Obtaining post-entry relief for duties paid on defective merchandise is a question that comes up frequently, and, unfortunately, in many instances, importers come up short. A recent example of this occurred in Volkswagen of Am. v. United States, __ F2d __, __ CAFC __ (Fed Cir 2007-1285, Decided July 16, 2008). In 1994 and 1995, Volkswagen ("VW") sought an allowance in the value of automobiles that were entered and liquidated by the U.S. Customs Service ("Customs") but which were later determined by VW to be partially defective. Customs denied many of VW's protests, including all of those for repairs made after the close of the protest filing time period. VW appealed Customs' denial by filing an action with the United States Court of International Trade ("CIT").

The CIT rejected many of the claims over the automobiles that were repaired before the date of protest because VW did not show that the defects existed at the time of importation. Volkswagen of Am., Inc. v. United States, 484 F. Supp. 2d 1314 (Ct. Int'l Trade 2007) (This decision is the subject of a separate appeal). The CIT also held that it did not have jurisdiction over automobiles repaired after the date VW filed its protests, because VW could not have been aware of the defects at the time of the protests were filed. VW separately filed a section 158.1 letter with Customs requesting an allowance in the value of the goods, which Custom had rejected, so VW appealed this denial to the CIT under the Administrative Procedure Act ("APA"), alleging jurisdiction under the trade court's "residual" jurisdictional grant. The Government moved to dismiss the case. While the CIT concluded it had jurisdiction, it denied the APA claim. On appeal, the CAFC said that the matter of the defective goods allowance relates to the proper appraisement of the merchandise, which becomes “final” upon the liquidation of the entry. In denying the claim, the CAFC said that § 158.12 does not create an independent cause of action outside the scope of a normal § 1514 protest, and that a claim for a reduction in the appraised value for partially damaged goods must, therefore, be brought in a protest of liquidation under § 1514.

How To Present Claims Under 19 C.F.R. Section 158.1

Typically, imported goods are appraised on the basis of their “transaction value,” which is defined as that total price paid or payable by the buyer to the seller for the exportation of the goods to the United States (19 U.S.C. § 1401a), plus certain enumerated additions to the extent they are not otherwise included in the price actually paid or payable. In order for imported merchandise to be appraised under transaction value, it must be the subject of a bona fide sale between the buyer and seller and it must be a sale for exportation to the United States. Goods will be subject to a different method of valuation if a sale is not involved.

The Statement of Administrative Action, which accompanied the new value law, provided that: “Where it is discovered subsequent to importation that the merchandise being appraised is defective, allowances will be made.” Statement of Administrative Action, H.R. Doc. No. 153, 96 Cong., 1st Sess., pt 2, reprinted in Department of the Treasury, Customs Valuation under the Trade Agreements Act of 1979 (1981), at 47. Customs provided for this in its regulations, by providing for an allowance in value to merchandise that is partially damaged at the time of importation. Customs regulations (19 C.F.R. § 158.12(a)) provide:

Allowance in value. Merchandise . . . found by the port director to be partially damaged at the time of importation shall be appraised in its condition as imported, with an allowance made in the value to the extent of the damage.

When making a claim under § 158.12, the importer must prove that it is entitled to an allowance in value by a preponderance of the evidence. See Fabil Mfg. Co. v. United States, 237 F.3d 1335, 1337 (Fed. Cir. 2001). Interpreting § 158.12, the courts have held that an importer qualifies for an allowance in value where the:

Imported goods are determined to be partially damaged at the time of importation, and
Allowance sought is commensurate to the diminution in the value of the merchandise caused by the defect.

Although relief to importers is clearly provided by this regulation, there are several factors that affect whether Customs will allow a claim for defective merchandise. For example:

What burden of proof does the importer bear when making such a claim?
What specific evidence does Customs require to support the claim?
Does it matter if the damage or defects were discovered immediately after entry at the port or at some later time and place?
Is it significant whether or not the importer expressly contracted with the supplier for defect-free merchandise?

A good case for providing helpful guidance in answering these questions is Saab Cars USA, Inc. v. U.S., No. 04-1268,-1416, (2006). Saab imported cars that it believed were free of all defects. It turned out, however, that some of the vehicles did have defects, some of which were discovered and repaired at the place of importation and others, which were identified later and repaired at the premises of a U.S. dealer. Saab filed claims with Customs asserting that under 19 C.F.R. §158.12, it should reduce the declared value of the imported automobiles to reflect the latent defects existing in the automobiles at the time they were imported. The documents Saab submitted in support of its claim included repair descriptions, repair dates, amounts paid, and documentation regarding the warranty agreement with the supplier. Nonetheless, Customs denied the claims and Saab filed an action in the CIT.

The CIT allowed Saab’s claims for the repairs made at the port immediately after importation on the basis that it was less likely that the problems were caused by “intervening circumstances” after the vehicles left the port for the dealer facilities. The Court reasoned that the immediacy of the repairs after entry reduced the level of detail required in the defect descriptions. However, as to the repairs that occurred later at the dealer facilities, the Court held that Saab did not submit sufficient information to support the claim that the cars sustained damage prior to their entry into the U.S. Specifically, Saab failed to describe how the particular component was defective and what kind of repair was done. The descriptions provided were not detailed enough for the Court to ascertain whether the alleged defects existed at the time of importation or not.

Citing earlier cases, the Court in Saab set forth three requirements for an importer to successfully claim an allowance under Section 158.12. Specifically, the importer must provide evidence:

That it contracted for defect-free merchandise,
That the defective merchandise can be linked to specific entries (i.e., the importer must know which entries the defective goods were imported under), and
As to the amount of allowance for each entry

Saab appealed the decision to the Federal Circuit, which affirmed the CIT’s decision, noting that the importer did not meet its burden of proving that the damage that was repaired at the dealer premises existed at the time and place of importation.

Proving Merchandise Is Defective

In Samsung Electronics Am., Inc. v. United States (“Samsung III”), 35 F.Supp. 2d 942, 946 (Ct. Int’l Trade 1999), aff’d, 195 F.3d 1367 (Fed. Cir. 1999), the CIT explained that an importer must provide objective and verifiable evidence with some semblance of specificity with respect to the alleged defect in the merchandise.

An importer may establish that the merchandise appraised was damaged or defective at the time of importation through the submission of documentary evidence. HRL 548390, dated January 12, 2004, provides the following illustrative list of documents that may be necessary to prove a claim: (1) purchase contracts; (2) purchase orders; (3) specifications; (4) quality control reports; (5) internal and external correspondence addressing the relevant merchandise; (6) photographs; (7) samples; (8) affidavits; and (9) any other documentation, such as lab or inspection reports, that individually or cumulatively establishes that the merchandise was ordered and the condition of the merchandise at the time of importation.

Valuing the Defects- Repair Cost

Customs has examined agreements by the seller to compensate the buyer for allegedly defective merchandise on numerous occasions. In HRL 545231, dated November 5, 1993, Customs determined that the evidence presented, which consisted of an exchange of detailed correspondence between the importer and the manufacturer regarding the defective merchandise and evidence that the manufacturer compensated the importer for the defect, warranted an adjustment to the appraised value of the imported merchandise. See also, HRL 547062, dated May 7, 1999. Customs has cautioned, however, that merely because the vendor agrees to credit a buyer or reduce the price of the imported merchandise, it does not, by itself, establish that the merchandise was defective at the time of importation. See HRL 547060, supra. In another case, HRL 548507, dated January 25, 2005, Customs noted that it is not uncommon for a seller to make an adjustment to the price of the goods in order to retain the buyer of the goods as a future customer for whatever reason the buyer may not be completely satisfied with the goods. See also, HRL 548635, supra.

In HQ 545231, Headquarters accepted the settlement between the seller and the importer as a way of determining the validity of a defect claim noting:

We would note that although price rebates do not form the basis of an adjusted appraised value in situation where an adjustment due to defects is requested, they can serve as a means of determining the bona fides of a defective merchandise claim when the claimed defects or their extent are in question. Here, the refund, together with Bayside's sending notice to Shehzad of the defect and Shehzad's written acknowledgement of the same, suffice to permit an allowance in the value of the gloves to be made.

In HQ 548390 and HQ 545534, Customs ruled that if product that is subject to a 158.12 damage claim is repairable, that the repair costs themselves define the value of the defect, and no other associated charges may be considered as part of the value of the defect. In HQ 548390, dated January 12, 2004 Customs said that:

…CBP has consistently held that that the allowance permitted by law is only for the actual costs of merchandise that is capable of being repaired…. The repair costs in such instances constitute an accurate “measure of the extent of the damage of the merchandise”

The purpose of the adjustment in value is not to make the importer whole, but to accurately reflect the true value of the defective goods. Customs will reject secondary claims for freight, lab costs, etc. In HQ 548390, Customs said that:

The importer, consistent with the prior rulings and decisions of this office, is not entitled to recover the cost of transporting the imported merchandise to the repair facility, the cost of transporting the repaired merchandise from the repair facility to its customers, nor the "chargebacks" or "return authorizations" that amounted to the retail value of merchandise and were incurred because the merchandise, even after repair, was not suitable for sale.

In Headquarters Ruling Letter (HRL) 545534, dated May 15, 1995, it determined that shorts with faulty zippers were damaged at the time of importation. Counsel proposed that the allowance include costs associated with the importation, distribution and resale of the shorts after they were repaired. In response, Customs held that only the actual repair costs were allowable, stating:

We are of the opinion that the same conclusion applies here. An allowance in appraised value of the subject jackets may be made equal to the amount of actual repair costs only. The costs for overseeing and examining the repair work, the transportation of IKL people to and from Woopps and cartage of the merchandise between Woopps and the warehouse are not part of the actual repair costs and therefore are not a part of the calculation of the allowance.

Thus, Customs has only recognized two methods for determining the value of defects- the actual cost of repair, or, when the supplier has agreed to compensate the importer for defects, the amount of compensation.

Conclusion

Importers should be aware that, if they believe that the merchandise they import is in perfect condition but later learn it is defective, they may file claims and seek a reduction in value under the “defect allowance” provisions of section §158.11 or §158.12. Specific evidence to support the claim, however, will be required by Customs, and the level of documentation required will depend on where and when the damage is discovered. If the damage is discovered at a location away from the port and not immediately following entry, Customs may require specific and detailed information that the defects claimed were present at the time of importation.

If you have any questions with regard to this newsletter, please do not hesitate to contact George R. Tuttle, III at (415) 288-0428 or geo@tuttlelaw.com.

George R. Tuttle, III, is an attorney with the Law Offices of George R. Tuttle in San Francisco.

The information in this article is general in nature, and is not intended to constitute legal advice or to create an attorney-client relationship with respect to any event or occurrence, and may not be considered as such.

All rights reserved. Information has been obtained from sources believed to be reliable. However, because of the possibility of human or mechanical error by our offices or by others, we do not guarantee the accuracy, adequacy, or completeness of any information and are not responsible for any errors, omissions, or for the results obtained from the use of such information.

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