In ruling NY N308615, Customs and Border Protection determined the classification of face/facial sheet masks from China. The first item is described as a “Radiant Glow Face Mask”. It is a liquid preparation packaged for retail sale in a 20ml pouch. The user is directed to apply the preparation in a thin layer to a cleansed face, leave on for up to 20 minutes, then rinse. The remaining items are three facial sheet masks: a “Brightening Facial Sheet Mask”, a “Hydrating Facial Sheet Mask”, and a “Purifying Facial Sheet Mask,” all packaged for retail sale in 20ml pouches. The sheet masks are white paper masks with cutouts for the eyes, nose and mouth, saturated in a liquid preparation. The user is directed to press the mask into cleansed skin, around edges of the nose, and the cheeks, leave on up to 20 minutes, remove the mask and discard.

CBP determined that the applicable subheading for the four Face/Facial sheet masks will be 3304.99.5000, HTSUS, which provides for Beauty or make-up preparations and preparations for the care of the skin (other than medicaments), including sunscreen or sun tan preparations; manicure or pedicure preparations: Other: Other: Other. The rate of duty will be free.

Pursuant to U.S. Note 20 to Subchapter III, Chapter 99, HTSUS, products of China classified under subheading 3304.99.5000, HTSUS, unless specifically excluded, are subject to an additional 25% ad valorem rate of duty. At the time of importation, the Chapter 99 subheading, i.e., 9903.88.03, in addition to subheading 3304.99.5000, HTSUS, must be reported.r

Crowell & Moring has released Litigation Forecast 2020: What Corporate Counsel Need to Know for the Coming Year. The eighth-annual Forecast provides forward-looking insights from leading Crowell & Moring lawyers to help legal departments anticipate and respond to challenges that might arise in the year ahead.

For 2020, the Forecast focuses on how the digital revolution is giving rise to new litigation risks, and it explores trends in employment non-competes, the future of stare decisis, the role of smartphones in investigations and litigation, and more.

The story focusing on international trade, “Importing: Risky Business,” focuses on how for companies that import goods into the U.S., new, expansive tariffs have made business much more complicated and expensive — and have increased risk from a legal standpoint.

Be sure to follow the conversation on Twitter with #LitigationForecast.

In ruling NY N308621, Customs and Border Protection (CBP) determined the classification of Balenciaga’s Speed Footwear (Style numbers 530349 W05G0 1000 and 560235 W1HP0 1000). The products are closed toe/closed heel, above-the-ankle, slip-on footwear with outer soles of rubber or plastic materials. The sock-type uppers are composed of knitted textile materials. Both styles feature foxing-like bands applied to and molded at the soles and overlapping the uppers ¼ of inch or more. The foxing-like bands cover 73 percent of the circumference of the shoes. Style #530349 W05G0 1000 has an F.O.B. value of $193 per pair. Style # 560235 W1HP0 1000 has non-functional decorative laces and an F.O.B. value of more than $15/pair.

CBP determined that the applicable subheading for the referenced items is 6404.19.9030, HTSUS, which provides for footwear with outer soles of rubber, plastics, leather or composition leather and uppers of textile materials: footwear with outer soles of rubber or plastics: other: other: valued over $12/pair: for men. The rate of duty will be 9% ad valorem.

With regard to the applicable rate of duty, the men’s Balenciaga’s Speed Footwear Style 530349 W05G0 1000 and 560235 W1HP0 1000 are also provided for in subheading 9902.14.49, HTSUS, which provides for footwear for men, valued over $24/pair, covering the ankle but not covering the knee, with outer soles of rubber or plastics and uppers of textile materials (provided for in subheading 6404.19.90). This subheading provides for a temporary reduction in the rate of duty for the subject footwear if it meets the prerequisites of this tariff provision. Accordingly, the footwear is entitled to beneficial treatment under HTSUS subheading 9902.14.49. The rate of duty is 8.1% ad valorem.

Our retail multinational clients often ask if there is an effective way of protecting intellectual property rights (IPR) in China. While traditional enforcement remedies in China have been ineffective in the past, customs border protection schemes in recent years have provided a cost effective tool to protect the IPR of brand owners in the retail industry.

There are generally two customs IPR border protection schemes available in China: (i) the ex-officio or active protection scheme, and (ii) the passive protection scheme.

The precondition for active protection from China Customs is recording the IPR with the General Administration of Customs of China (GACC). Potential advantages for brand owners include the customs authorities monitoring for suspicious activities, inspecting import and export shipments, and working with the brand owners to identify infringing goods. If a specific shipment of goods is suspected of infringing a recorded IPR, China Customs has the ability to suspend the clearance of the goods, detain the goods upon the request of the brand owner after posting a deposit, and investigate the suspected infringement. If infringement cannot be determined, the brand owner can still pursue the case in court.

If a brand owner has not yet actively registered its IPR with the GACC, the passive protection scheme would apply. China Customs generally would not initiate an investigation on the detained shipments in the passive protection scheme. However, a brand owner may request the customs authority to detain a suspected shipment by providing evidence to prove the existence of infringement and a deposit equivalent to the value of the goods. The brand owner would then need to file a lawsuit in court within 20 working days or the customs authority would release the goods.

Around 50,000 valid IPR registrations have been recorded with the GACC up to September 2019. China Customs took over 49,700 border protection measures in 2018, resulting in seizures of over 47,200 shipments of goods suspected of IPR infringement. In 2018, 97% of the seizures were based on customs’ ex-officio actions, while only around 3% was initiated by brand owners under passive protection scheme.

Registration of IPR with GACC is FREE since 2015, so a brand owner has no reason not to register. To make customs IPR protection even more effective, a brand owner should maintain close contact with China Customs and offer product identification training sessions to customs officials located at ports where infringing products are most likely to enter or exit China. The more awareness a brand owner can bring to its products and potential infringement, the more effective border enforcement actions will be.

Today President Trump and Chinese Vice Premier Liu He signed a “Phase One” trade agreement, the first formal text agreement between the two sides since the United States initiated the Section 301 investigation in August 2017, which has since led to mounting U.S. and Chinese tariffs affecting bilateral trade.

The agreement does not specifically address any tariffs currently in place. Instead, it includes pledges by China to increase U.S. exports of certain goods by specified amounts above 2017 baselines by 2020 and 2021, along with commitments in the areas of intellectual property, technology transfer, agriculture (including agricultural biotechnology), financial services, and currency and foreign exchange. The agreement also includes a mechanism for bilateral consultation and enforcement.

Existing tariffs: While the Phase One trade agreement forestalled tariffs set to begin in December 2019 when it was first announced, the text of the Phase One trade agreement released today does not directly address U.S. or Chinese tariffs in place as a result of the trade dispute.

In December 2019, President Trump announced that 15% tariffs on $110 billion in imports would be cut to 7.5%. Beyond that, neither the U.S. nor China has pledged to cut additional existing tariffs. U.S. Treasury Secretary Steve Mnuchin and U.S. Trade Representative (USTR) Robert Lighthizer issued a joint statement on January 14 that “there is no agreement for further reduction in tariffs” at this time, which means that $370 billion in Chinese imports will continue to be subject to U.S. tariffs.

Expanding trade: China has pledged that it will increase import levels for some goods and services by specified amounts above 2017 import levels over a two-year period ending in 2021:

  • Certain manufactured goods, including autos, aircraft, electronics, some pharmaceutical products, and industrial machinery: Increase of $32.9 billion by 2020 and $44.8 billion by 2021;
  • Agricultural goods, including soybeans, meat, seafood, grains, and cotton: Increase of $12.5 billion in 2020 and $19.5 billion in 2021;
  • Energy products, including liquefied natural gas, crude oil, and coal: Increase of $18.5 billion in 2020 and $33.9 billion in 2021; and
  • Services, including financial services, travel, telecommunications, and information services: Increase of $12.8 billion in 2020 and $25.1 billion in 2021.

The agreement does not specify how China will increase import levels, leaving open questions as to whether China will increase state-ordered imports of certain commodities or encourage private sector imports through trade liberalization (or a combination of both). For U.S. companies in these sectors, there may be opportunities to demonstrate to U.S. and Chinese policymakers how they can help China meet these commitments through increased exports.

Intellectual property: China has agreed to commitments strengthening protections for trade secrets (including from misappropriation via cyber intrusions), combatting online piracy, enhancing patent protections for pharmaceuticals, improving trademark and copyright enforcement, and preventing manufacture and export of pirated or counterfeit goods, including unlicensed use of software.

Technology transfer: China has agreed that it will not support or direct outbound foreign investment aimed at acquiring foreign technology, and that it will refrain from pressuring (formally or informally) U.S. entities to transfer technology through administrative or licensing requirements or as a condition of market access.

Agriculture: China has agreed to commitments related to sanitary and phytosanitary approvals for a range of agricultural imports, including dairy, infant formula, meat, grains, pet food, and biotechnology products.

Financial services: China has agreed to commitments relaxing controls and enhancing approval systems for U.S. financial services companies operating in China, including the removal of foreign equity limits for the insurance, securities and fund management, and futures sectors.

Macroeconomic policies and exchange rate: Both sides committed to make public disclosures of foreign exchange reserve and balance of payments data, and avoid competitive currency devaluations and manipulation of exchange rates.

Enforcement: On enforcement, the Phase One Agreement establishes new bilateral consultative bodies to discuss implementation of the agreement, including:

  • A “Trade Framework Group” chaired by the U.S. Trade Representative and a Chinese Vice Premiere, for semiannual, high-level consultation on the status of the agreement’s implementation;
  • A “Bilateral Evaluation and Dispute Resolution Office” within each government, led by a Deputy U.S. Trade Representative and a Chinese Vice Minister respectively, that will meet quarterly to assess specific issues and complaints; and
  • A re-established bilateral macroeconomic dialogue, led by the U.S. Secretary of the Treasury and a designated Chinese Vice Premier, that will meet “regularly.”

The Trump Administration has stated that it will enter into negotiations for a “Phase Two” agreement, seeking to address issues not covered in Phase One.

Further information on U.S. and Chinese tariffs currently in place can be found here

Keeping pace with the rapidly changing geopolitics in the region, the last week has brought a series of Iran-related sanctions developments with which global businesses need to keep up.  First, on January 10, the United States further escalated sanctions against Iran, creating new designation authorities for those “operating in” Iran’s construction, mining, manufacturing, and textile sectors under Executive Order 13902 (“EO 13902”).  These new measures come amidst the recent escalation of conflict between the U.S. and Iran.  With the issuance of EO 13902 the U.S. announced it is taking additional steps “to deny Iran revenue, including revenue derived from the export of products from key sectors of Iran’s economy that may be used to fund and support its nuclear program, missile development, terrorism and terrorist proxy networks, and malign regional influence.”1  Concurrently, the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) announced sanctions against key Iranian officials as well as several of the largest companies in the Iranian metals industries as well as certain Chinese and Seychelles based entities involved in the purchase and transport of certain metals from Iran.

Then, on January 14, in response to Iran’s most recent violation of its commitments under the Joint Comprehensive Plan of Action (“JCPOA”), the Foreign Ministers of France, Germany, and the United Kingdom (the “EU3”) announced (https://www.gov.uk/government/news/e3-foreign-ministers-statement-on-the-jcpoa-14-january-2020) that they were formally triggering the JCPOA’s dispute resolution mechanism.2  While the three countries reaffirmed their commitment to the JCPOA and the EU and United Nations (“UN”) sanctions remain in place, triggering the dispute resolution mechanism represents the most formal step that the European countries have taken yet to escalate their dispute with Iran and could, potentially, ultimately result in the collapse of the JCPOA and/or the reimposition of repealed EU or UN sanctions.

I. Scope of New Authority

EO 13902 grants the U.S. Secretary of the Treasury, and therefore by delegation OFAC, the authority to impose blocking sanctions on persons who:

  • “Operate in” the construction, mining, manufacturing, or textile sectors of the Iranian economy;
  • “Operate in” any other sector of the Iranian economy as may be determined by the Secretary of the Treasury, in consultation with the Secretary of State;
  • Knowingly engage in a significant transaction for the sale, supply, or transfer of significant goods or services used in connection with one of the aforementioned sectors;
  • Have materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of, any person identified above; or
  • Are owned or controlled by, or acted on behalf of, any person identified above.

EO 13902 also provides a “secondary” sanctions authority targeting foreign financial institutions (“FFIs”). Specifically, the order authorizes the United States to prohibit or impose strict conditions on the U.S. correspondent or payable-through account of an FFI determined to have either knowingly conducted or facilitated any significant financial transaction in connection with (1) the targeted sectors or any other sector of the Iranian economy as may be determined by the Secretary of the Treasury, in consultation with the Secretary of State, or (2) for, or on behalf of, any other persons blocked under EO 13902.

OFAC has not yet announced any sanctions pursuant to EO 13902.

II. New Iran-Related Designations Under Existing Authorities

In a simultaneous action, OFAC announced sanctions against eight senior Iranian regime officials, seventeen Iranian metals producers and mining companies, a network of three China- and Seychelles-based entities, and a vessel involved in the transport of Iranian metal products.  These new measures consist entirely of blocking sanctions that were imposed pursuant to various existing authorities.  Notable designations include:

  • Senior Iranian government officials, including the Secretary of Iran’s Supreme National Security Council, the Deputy Chief of Staff of Iranian armed forces, and the head of the Basij militia of the Islamic Revolutionary Guards Corps (“IRGC”) for activities involving the IRGC and connection to Iran’s Supreme Leader;
  • Iran Aluminum Company, Al-Mahdi Aluminum Corporation, National Iranian Copper Industries, top companies operating in the Iranian aluminum and cooper sectors, which are sectors subject to U.S. sanctions;
  • The largest steel and iron manufacturers in Iran, including Mobarakeh Steel Company, which is the biggest steel producer in the Middle East, for operating in the Iranian iron and steel sectors, also sectors subject to U.S. sanctions; and
  • Pamchel Trading Beijing Co. Ltd., a Beijing-based trading company, Power Anchor Limited, a Seychelles-entity, and Hongyuan Marine Co. Ltd., located in Zhejian, China, for purchasing and transporting Iranian steel and providing critical goods needed for Iranian metal production.

III. EU3 Triggering of JCPOA Dispute Resolution Mechanism

On January 14, in response to Iran’s January 5 announcement that it “discards the last key components of its limitations in the JCPOA, which is the ‘limit on the number of centrifuges,’”3 the EU3 announced that they had “been left with no choice, given Iran’s actions, to register . . .  our concerns that Iran is not meeting its commitments under the JCPOA”4 and to formally trigger the JCPOA dispute resolution mechanism.

That step has no current effect on the sanctions landscape.  All UN and EU sanctions that were relaxed under the JCPOA remain relaxed.  Indeed, the EU3 stated that they were utilizing the mechanism “in the sincere hope of finding a way forward”5 while “preserving the agreement and remaining within its framework” and the EU3 “once again express our commitment to the JCPOA and our determination to work with all participants to preserve it.”6

Instead, triggering the dispute resolution mechanism started a formal process that was provided for in the terms of the JCPOA:

  • The matter has now been referred to a “Joint Commission,” comprised of the remaining JCPOA participants (Iran, China, Russia, the EU3 and the High Representative of the European Union for Foreign Affairs and Security Policy).  The Joint Commission has 15 days to resolve the issue, unless that time period is extended by consensus.
  • After that time period, any participant can refer the dispute to the Ministers of Foreign Affairs of the remaining parties (“Ministers”) if it considers the dispute to not be resolved.  The Ministers then have 15 days to resolve the issue unless that time period is extended by consensus.
  • In parallel or in lieu of Ministers’ Consideration, a party can also refer the matter to an “Advisory Board” made up of three members: one appointed by the EU3, one appointed by Iran, and one appointed independently.  The Advisory Board has 15 days to provide a non-binding opinion on the compliance issue.
  • The Joint Commission then has no more than 5 days to review the opinion of the Advisory Board.
  • If, after this process, the EU3 still consider the issue to not have been resolved to their “satisfaction” and if the EU3 considers the “issue to constitute significant non-performance,” then the EU3 would be permitted to treat the issue as “grounds to cease performing its commitments under the JCPOA in whole or in part” and/or bring the issue to the UN Security Council (“UNSC”).7
  • If the issue is brought to its attention, the UNSC is required to vote on a measure that would continue the sanctions relaxation in place today.  If such a measure does not pass within 30 days, then the UNSC’s previous sanctions regimes will be re-imposed.

The net effect of the above process is that if the dispute is not resolved to the EU3’s satisfaction within the next 35 days (unless a longer process is agreed to by consensus), it would be permitted to re-impose some or all of its currently repealed sanctions as well as potentially trigger a process whereby the UNSC would do the same.

IV. Practical Considerations

These developments pose significant risk, primarily for non-U.S. companies, given that U.S. companies remain prohibited to conduct virtually all Iran-related activity unless a license applies.

First, the current risk of U.S. designation has now increased, not only for companies acting in the enumerated sectors (construction, mining, manufacturing, or textile), but for companies in any other sectors, given the open-ended nature of the EO 13902 designation authority.  Using a similarly drafted authority, in the Venezuela context, the United States has been willing to identify a new sector and to then designate a person for operating in that sector on the same day (e.g., the identification of the oil sector and the subsequent designation of Petroleos de Venezuela, S.A. for operating in that sector, on January 28, 2019).  While OFAC has not yet utilized its new EO 13902 authorities, it has shown itself willing to designate commercially integrated non-U.S. companies for Iran-related activity (e.g., COSCO Shipping Tanker Dalian) and there is no reason to expect they would not be willing to utilize this authority in the same way.

Second, there is now a very real risk that the entire JCPOA structure could be repealed.  While the EU3 has continued to reaffirm its commitment to the deal, the United States has withdrawn from the deal and Iran is in material noncompliance.  Unless the EU3 can identify a diplomatic resolution to the crisis—including, presumably, securing Iran’s agreement to begin complying with its own obligations, which seems increasingly unlikely given the U.S.-Iran geopolitical tensions—within the context of the JCPOA’s dispute resolution mechanism, by late February 2020, the EU could elect to begin to re-impose its own nuclear-related sanctions.

On December 26, 2019, the State Department issued an interim final rule that nearly mirrors the changes adopted by the Commerce Department in 2016. The new ITAR rule will allow for cloud based storage and handling in the U.S. and abroad of appropriately encrypted ITAR controlled software and technical data. It will take effect on March 25, 2020, but allows 30 days for public comment (until January 27, 2020) and perhaps further revision by DDTC, if warranted, prior to the effective date.

Similar to the approach adopted by BIS, DDTC’s interim final rule creates a new definition for “activities that are not exports, reexports, retransfers, or temporary imports,” including sending, taking, or storing unclassified technical data that is end-to-end encrypted in one of two ways: (1) using encryption modules that are FIPS 140-2 compliant; or (2) using other cryptographic means that provide security strength comparable to AES-128. DDTC expressly declined to adopt the EAR language that permitted encryption by “other equally or more effective cryptographic means” because DDTC felt that phrase lacked sufficient definition to ensure technical data was adequately protected. To qualify for the ITAR exclusion, the technical data or software may not be intentionally stored in a § 126.1 country or Russia, and the means of decryption may not be provided to unauthorized third parties. The provision of information to a foreign person that would cause or enable access to the decrypted technical data would require prior export authorization from DDTC.

Other events that no longer require prior DDTC authorization as a result of the rule include:

  • Launching items into space.
  • Transmitting or otherwise transferring technical data between U.S. persons within the United States (for example, U.S. persons can email controlled technical data to another US person located in the US, and even if that data temporarily transits outside the U.S. boundary, no DDTC export authorization is required).
  • Transmissions or other transfers of technical data between and among only U.S. persons in the same foreign country so long as they do not result in a release to a foreign person or transfer to a person prohibited from receiving the technical data (for example, U.S. persons located in foreign affiliate facilities can exchange technical data with each other without prior export authorization, provided no “release” to a foreign person occurs).
  • Movements of defense articles between states, possessions, and territories of the United States.

Responding to public comments on the proposed cloud rules, the State Department also clarified:

  • The shipment or carriage of defense technology via a physical medium, such as a USB drive, in a properly encrypted state is not an export, reexport, or transfer.
  • State declined to provide a safe harbor to exporters who obtain contractual assurances from cloud services providers that data would not be stored in a § 126.1 country or the Russian Federation. Instead, State recognized the difficulty of controlling the actions of third parties and will “review potential violations on a case-by-case basis, subject to the totality of the facts and circumstances comprising the issue at hand.”
  • Data converted into clear text during transmission, for example by anti-virus software or spell-check, will not meet State’s end-to-end encryption standard.

In ruling NY N308147, Customs and Border Protection (CBP) determined the classification of certain baby monitors (i.e., models Baby Pixel Cadet, Pure HD, Baby Pixel ZoomHD, Baby Pixel ZoomHD Duo, LookOut 5.0″, LookOut Duo, Glimpse, Glimpse+, Explore Panoramic, In View 2.0, and In View 2.0 Plus). Each of the subject baby monitors consists of a camera with an AC/DC power cord and a battery-operated handheld monitor unit with AC/DC power charger that features a flat panel screen of various sizes between 2.8 – 5 inches.

CBP believes that when imported packaged for retail sale, this combination meets the tariff definition of a set as per GRI 3 (b). However, neither the camera nor the monitor can function independently of one another to achieve the function of a baby monitor. As a result, both the camera and the monitor contribute equally to the system’s function; therefore, both the camera and the monitor merit equal consideration in determining the essential character of this set. In past CBP rulings that examined similar sets that incorporated video monitors and video cameras. They found that no single component determined the system’s essential character, and, therefore in accordance with GRI 3(c), they were classified under Heading 8528, because it was the last numerical heading.

CBP determined that the applicable subheading for the subject baby monitors is 8528.59.2500, HTSUS, which provides for Monitors and projectors, not incorporating television reception apparatus; reception apparatus for television, whether or not incorporating radio-broadcast receivers or sound or video recording or reproducing apparatus: Other monitors: Other: Color: With a flat panel screen: Other: With a video display diagonal not exceeding 34.29 cm. The rate of duty will be Free.

Pursuant to U.S. Note 20 to Subchapter III, Chapter 99, HTSUS, products of China classified under subheading 8528.59.2500, HTSUS, unless specifically excluded, are subject to List 4A additional 15% ad valorem rate of duty. At the time of importation, the Chapter 99 subheading, 9903.88.15, in addition to subheading 8528.59.2500, HTSUS, must be reported.

On December 31, 2019, a federal district court in Texas (the “District Court, or “Court”) overturned  a $2 million fine levied by the Office of Foreign Assets Control (“OFAC”) against Exxon Mobil Corporation (“Exxon”) for alleged violations of the Ukraine-Related Sanctions Regulations (“URSR”).    OFAC had assessed that Exxon received a prohibited service from a designated person when it allowed Igor Sechin, a Specially Designated National (“SDN”), to sign eight contracts with Exxon in his official capacity as the President and Chairman of the Board of Russian state-owned oil company Rosneft, which was not itself designated as an SDN.  The case ultimately turned on the narrow question of whether Exxon had received fair notice that it was prohibited for U.S. persons like Exxon to deal with companies that are not designated by engaging with designated persons acting in their capacity as officials of the non-designated company.  While the Court concluded that Exxon did not receive that notice, thereby overturning OFAC’s penalty, OFAC now has clarified its position on this issue through guidance issued after Exxon’s contested actions, limiting the ultimate significance of the substantive aspects of the decision.  The Court’s decision could, however, have potential collateral effects on OFAC’s and other Administration official’s willingness to offer contemporaneous statements about the scope and meaning of recently issued sanctions.

Background

OFAC designated Sechin on April 28, 2014 pursuant to Executive Order 13661 of March 16, 2014 (“EO 13661”).  As a result, all of Sechin’s “property and interests in property” in the United States or within the possession or control of any U.S. person were “blocked,” and prohibited from being “transferred, paid, exported, withdrawn, or otherwise dealt in.”  EO 13661, § 1.  These prohibitions in section 1 included “the receipt of any contribution or provision of … services from any [designated] person.” Id. at § 4.

Sechin signed the eight contracts for Rosneft between roughly May 14 and May 23, 2014 (“Exxon Contracts”).  On August 13, 2014, OFAC issued frequently-asked-question (“FAQ”) 400, explaining that “OFAC sanctions generally prohibit transactions involving, directly or indirectly, a blocked person, absent authorization from OFAC, even if the blocked person is acting on behalf of a non-blocked entity. Therefore, U.S. persons should be careful when conducting business with non-blocked entities in which blocked individuals are involved; U.S. persons may not, for example, enter into contracts that are signed by a blocked individual.”  OFAC, FAQ 400, August 13, 2014.

On July 20, 2017, OFAC announced that it had assessed a $2 million civil penalty against Exxon for accepting the eight Exxon Contracts signed by Sechin.

The District Court’s Decision

The District Court agreed with Exxon’s argument, on cross motions for summary judgment, that OFAC violated Exxon’s constitutional right to Due Process by failing to provide fair notice that entering into the Exxon Contracts signed by Sechin was prohibited.

First, the Court held the text of the applicable OFAC regulations failed to provide fair notice that Exxon’s conduct was prohibited.  Although it determined that the applicable regulations prohibited the receipt of services from an SDN like Sechin, it held that they were not clear about when Exxon would be deemed to have received such a service.  In particular, the Court found that the rules were not clear about whether an action by an SDN that provides any incidental benefit to a U.S. person, as it found Sechin’s signing of the contracts had provided for Exxon, constituted “receipt,” or instead whether the service must have been undertaken specifically for the benefit of the U.S. person, which it found had not been true because Sechin acted in response to instructions from Rosneft.

Second, after finding that the text of the regulation did not provide fair notice, the Court considered the impact of public guidance and statements from OFAC and other Executive branch officials, and found that these also failed to provide fair notice.  The Court reasoned that OFAC could not rely on a previous FAQ from its Burma sanctions (FAQ 285) articulating its position that U.S. persons could have no dealings with the designated head of an undesignated entity, because OFAC’s Russia sanctions regulations specifically stated that “differing foreign policy and national security circumstances may result in different interpretations of similar language among the parts of this chapter.”

Exxon and the Government also argued over the significance of a number of statements by executive branch officials regarding the Russia sanctions program and the specific designation of Sechin.  Exxon pointed to statements by White House spokespersons and other Executive Branch officials, including but not limited to Treasury Department officials, that the designations were intended to target specific Russian persons and their personal assets and not companies they manage on behalf of the Russian state.  While the government argued that none of these public statements changed the plain meaning of the relevant regulations, the Court concluded that a “regulated party,” such as Exxon, would be “entirely justified to rely in good faith” upon these publicly released statements.  The confusion generated by these statements therefore created a further lack of fair notice.  (By contrast, the Court held that Exxon could not rely on media characterizations of the regulation based on interviews with unnamed Treasury officials, or on a comment by the White House Deputy National Security Advisor in a PBS NewsHour interview.)

Finally, the Court considered Exxon’s failure to inquire as to the meaning of the applicable regulations as a point against its argument that it lacked fair notice.  Ultimately, however, the Court held that the burden remains with the government agency to provide fair notice and that the other evidence that it had no done so weighed in favor of a finding that there had not been fair notice.

Practical Considerations

OFAC usually wins challenges to its sanctions, and this decision is noteworthy because it did not do so here.  Overall, however, the significance of the decision for the particular interpretive question at issue appears limited.  The District Court did not determine that OFAC could not interpret its regulations to prohibit Exxon’s conduct, only that it had not made such a prohibition clear at the time that Exxon took its actions.  OFAC has addressed this issue going forward, at least with respect to its Russia sanctions, with FAQ 400 and a related FAQ 398.

Unless OFAC chooses to appeal the decision, its real impact is more likely to be broader and more practical.  Going forward, OFAC and other Executive branch agencies may be less willing to provide commentary on the meaning of OFAC sanctions regulations outside of carefully-vetted guidance such as OFAC’s FAQs, or formally requested interpretive guidance.  To the extent possible, the agency may also seek to ensure other administration officials do not opine on the scope or meaning of OFAC’s regulations without a similar level of careful vetting.  The agency may take greater care in FAQs and other formal guidance to explain the scope of its interpretations across its programs.  Retrospectively, the agency may look for dated guidance that might be read to contradict its current interpretations and seek to amend or withdraw such guidance.  Finally, it is possible that OFAC may heighten its scrutiny of proposed penalties before imposing them, and in particular may be more hesitant to impose a penalty where a regulated party can point to published guidance or remarks that contradict the agency’s position.  Regulated parties facing potential violations may wish to draw such contradictory guidance to OFAC’s attention where it exists in an effort to mitigate potential penalties.  In general, however, this decision does not substantially change or limits OFAC’s authority to broadly interpret the breadth of the sanctions regulations it is tasked with enforcing.

In ruling N307400, Customs and Border Protection (CBP) discussed the classification of the iHarvest Hydroponic System (iHarvest). The iHarvest is used to grow fruits and vegetables indoors. It incorporates plastic molds which are assembled to create the hydroponic system shell, pumps and hoses for irrigation, net cups to hold plants in place, LED lights and stands, as well as timers for the irrigation and lighting system. The unit contains five 6-Pot Units. The item measures approximately 60” (H) x 32” (W) x 14” (D). The components are all packaged together for retail sale.

CBP determined that the applicable subheading for the item is 8424.82.0090, HTSUS, which provides for “Mechanical appliances (whether or not hand operated) for projecting, dispersing or spraying liquids or powders; fire extinguishers, whether or not charged; spray guns and similar appliances; steam or sand blasting machines and similar jet projecting machines; parts thereof: Other appliances: Agricultural or horticultural: Other.” The rate of duty is 2.4% ad valorem.

Pursuant to U.S. Note 20 to Subchapter III, Chapter 99, HTSUS, products of China classified under subheading 8424.82.0090, HTSUS, unless specifically excluded, are subject to the List 2 additional 25% ad valorem rate of duty.  At the time of importation, 9903.88.02, in addition to subheading 8424.82.0090, HTSUS, must be reported.

CBP also discussed whether the subject merchandise would be considered for duty-free treatment as agricultural or horticultural machinery under subheading 9817.00.50, HTSUS, which provides for Machinery, equipment and implements to be used for agricultural or horticultural purposes. To fall within a special classification, a three-part test must be met.

First, the subject merchandise must not be excluded from the heading under Section XXII, Chapter 98, Subchapter XVII, U.S. Note 2, HTSUS. The subject merchandise is classifiable under the subheading 8424, HTSUS, and this subheading is not excluded from 9817. Second, the terms of the headings must be met in accordance with GRI 1, which provides that classification is determined according to the terms of the headings and any relative section or chapter notes. Third, the article must comply with the actual use regulations under 19 CFR 10.131 through 10.139. Subheading 9817.00.50, HTSUS, as required by GRI 1, states the unit must be “machinery”, “equipment” or “implements” used for “agricultural or horticultural purposes”.

It was CBP’s opinion that the subject merchandise is “equipment” which fulfills the requirement of a horticultural pursuit. Therefore, the iHarvest Hydroponic System is classifiable under subheading 9817.00.50, HTSUS, if the actual use conditions and requirements of Sections 10.131 through and including 10.139, Customs Regulations, are met.

Additional duties imposed by headings 9903.88.01, 9903.88.02, 9903.88.03 and 9903.88.04 do not apply to goods for which entry is properly claimed under a provision of chapter 98 HTSUS, except for goods entered under headings 9802.00.40, 9802.00.50, 9802.00.60, and 9802.00.80.