In ruling HQ H303881 (April 30, 2021), Customs and Border Protection (CBP) discussed the classification of certain footwear incorporating Nike wearable technology (“Nike Adapt BB” or “Adapt”). The Adapt platform has five primary components:

  1. Bluetooth® system-on-chip (SoC)
  2. Sensor pack consisting of a gyroscope, accelerometer, and capacitive sensor
  3. System and subsystem components including three microcontroller unit (MCU) processors, flash memory and a wireless power receiver
  4. Auto-lacing platform with an optical quadrature rotary encoder and a low-resistance, high-torque, DC motor
  5. “Performance basketball shoe” housing

When imported, the Nike Adapt BB contains one pair of shoes (incorporating the above electronics components), a wireless charging pad, a USB cable/wall charger combo and operating manual packaged together for retail sale.

Nike provided a list of the components along with proposed classifications: Bluetooth SoC (heading 85.17), sensors (heading 90.31), system technologies (data processing – heading 85.42; memory – heading 85.23; auto-fit technology – heading 85.01; wireless charging pad – heading 85.04), and Shoe – heading 64.04

Both CBP and Nike agreed that the Adapt is a composite good made of different components, and therefore, it is appropriate to classify it in accordance with GRI 3(b), which states:

  • Mixtures, composite goods consisting of different materials or made up of different components, and goods put up in sets for retail sale, which cannot be classified by reference to 3 (a), shall be classified as if they consisted of the material or component which gives them their essential character, insofar as this criterion is applicable

Nike claimed that the essential character is imparted by the Bluetooth transceiver and therefore classified under subheading 8517.62.00, HTSUS, which provides for “Telephone sets, including telephones for cellular networks or for other wireless networks; other apparatus for the transmission or reception of voice, images or other data, including apparatus for communication in a wired or wireless network (such as a local or wide area network), other than transmission or reception apparatus of heading 8443, 8525, 8527 or 8528; parts thereof:  Other apparatus for transmission or reception of voice, images or other data, including apparatus for communication in a wired or wireless network (such as a local or wide area network):  Machines for the reception, conversion and transmission or regeneration of voice, images or other data, including switching and routing apparatus.” However, CBP disagreed and believed that the essential character is imparted by the Adapt shoe, and thus should be classified as footwear.

Essential Character

Nike cited to Structural Industries v. United States, which provides that “the component which imparts ‘essential character’ will ‘vary as between different kinds of goods,’ but is generally understood to be the component ‘which is indispensable to the structure, core or condition of the article, i.e., what it is.’ 360 F. Supp. 2d 1330, 1336 (Ct. Int’l Trade 2005).”

They believed it was the Adapt’s transceiving subsystem that is indispensable to the Adapt’s core and condition.

CBP disagreed. The agency explained that “although the Adapt may enable the wearer to enhance his or her experience via a smartphone or other device, the wearer must actually wear them and use them as footwear.  If the wearer chooses to enable some or many of the additional features or capabilities, that is his or her option; that is the way the Adapt platform will gather data and subsequently transmit data to the user.  However, the wearer will always use the Adapt as footwear.” Furthermore, CBP stated that “the Bluetooth SoC is just one of the electronic components of the Adapt.  This article provides wireless capability to the module, which is in turn also incorporated within the footwear.  In [CBP’s] view, the act of providing wireless connectivity supports the primary function of the electronic module, which is imparted by the fitness sensors or the auto-lacing platform.  The act of wirelessly exchanging that data with a host device is a support or secondary function.  The function of the Bluetooth chip, in theory, could be replaced by a wire, but there is no way to replace the sensor assembly, it is the component that proves to be indispensable.  This makes it clear that the wireless function is a support function and not the essential character when viewing the electronic module on its own.”

Comparison to “Similar” Devices

Nike had also compared the Adapt to wrist-worn “smart” devices, which monitor health and provide the user data on physical activities and were classified under heading 8517, HTSUS. They presented various rulings pertaining to these devices (HQ H260060 (July 14, 2015), HQ H257947 (July 14, 2015), along with others). Additionally, Nike presented rulings that classified goods with embedded Bluetooth module under heading 8517, HTSUS, despite having utilitarian functions (see NY N237289 (Feb 6, 2013) and NY N307688 (Dec 11, 2019)).

CBP also disagreed with these comparisons and cited “significant differences.” The devices, also known as “smart watches,” are “worn on the user’s wrist and in most of the cases, despite their name, cannot set the correct time themselves unless they are paired with a ‘host’ device, such as a computer or laptop, tablet computer or mobile phone.  These wearable smart-devices not only gather data and transmit it to the host device, but interact directly with the user through touch, sight and sound (ex., display screen with or without touch-sensitivity, speakers, haptics).  They contain their own mobile operating system (OS) and can perform functions such as sending and receiving text messages, emails, mobile telephone calls, and remotely control music, to name a few.”

Value of Components

The ruling states that the “value of the Bluetooth SoC, sensors, memory, and other electronic components, when taken together, constituted the largest percentage of landed costs when compared to the footwear base and packaging.”  Furthermore, Nike argued that the “Adapt platform’s commercial value is unlocked by its Bluetooth transceiver. [Nike] note[s] that the expansive functionality offered by the Adapt is reflected in product costs and retail values that are significantly higher than those of analog footwear.”

CBP described the basketball shoe as “indispensable for the engagement of all of the ‘experience’ options” provided by the other components. Additionally, CBP stated the shoe “predominates in size, weight, function (if not the cost) and delivers the experience of walking, running, and training as compared with the ancillary use of the technological features.”

Ultimately, CBP determined that the Nike Adapt BB is classified under subheading 6404.11.90, HTSUS, as footwear with outer soles of rubber, plastics, leather or composition leather and uppers of textile materials, tennis, shoes, basketball shoes, gym shoes, training shoes and the like: other: valued over $12/pair. The general, column one rate of duty will be 20 percent ad valorem.

On May 5, 2021, Senate Finance Trade Subcommittee Chairman Tom Carper (D-DE), Ranking Member John Cornyn (R-TX), House Ways & Means Trade Subcommittee member Stephanie Murphy (D-FL), and Rep. Adam Kinzinger (R-IL) sent a letter to United States Trade Representative Katherine Tai requesting renewed consideration of the Trans-Pacific Partnership (TPP). In the letter, the group “acknowledge that much has changed in the years since the negotiation of the TPP” and “that any re-engagement in the Asia-Pacific region must also consider the merits and demerits of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which was signed by the 11 other TPP countries in 2018 without the United States.” The group also highlighted the United States-Mexico-Canada Agreement (USMCA) as proof that lawmakers can work in a bipartisan fashion and engage with “allies to write the rules of international trade.”

A full copy of the letter is available here

For more information about the TPP or CPTPP see our prior post below or contact  Robert Holleyman, Evan Yu, John Brew Frances P. Hadfield, or Clayton Kaier.

Trans Pacific Partnership Archives | International Trade Law (cmtradelaw.com)

Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) Archives | International Trade Law (cmtradelaw.com)

 

The U.K.’s National Security and Investment Bill was enacted into law as the National Security and Investment Act (the “NSI Act”) on 29 April 2021, with the new regime expected to come into force towards the end of this year. Over the coming months the U.K. government is to enact secondary legislation and provide further detail and guidance on the framework created by the NSI Act, including guidance on the regime’s extraterritorial scope and finalised definitions of the 17 sensitive sectors.

As stated in our previous alert, Is CFIUS One of the Few Things Crossing the Atlantic?, the new regime substantially reforms the U.K.’s foreign investment rules, introducing a hybrid system of mandatory and voluntary notifications on grounds of national security similar to reviews by the Committee on Foreign Investment in the U.S. (“CFIUS”).

During the NSI Act’s legislative review through the U.K. parliament, it was not fundamentally amended despite concerns raised by various stakeholders about the extensiveness of its scope. The regime under the NSI Act will broadly consist of the following:

  • Acquisitions of certain levels of shares or voting rights – with the lowest level being 25% – of target companies active in 17 sensitive sectors are subject to mandatory notification to the Investment Security Unit (the “ISU”), which sits within the Department of Business, Energy and Industrial Strategy. A mandatory notification will also be required where there is an acquisition of voting rights in such a company which enables the acquirer to pass or prevent any class of resolution governing the company’s affairs. The 17 sectors include defence, energy, communications, AI and various other advanced technologies which are likely to be relevant to the activities of many tech and healthcare companies.
  • Even below this 25% threshold, although not subject to the mandatory notification rule, the U.K. government will still have the power to review transactions if (at least) “material influence” is acquired in a target company where the Secretary of State reasonably suspects that the transaction may give rise to a risk to U.K. national security.  Material influence is a concept taken from the regular competition merger control regime. Certain acquisitions of assets (e.g. land, moveable property and intellectual property) may also fall under this regime.  This “call-in” power is not limited to the 17 identified sectors and transactions outside the mandatory regime which may pose a risk to national security can be retrospectively called in for review up to five years after closing, reduced to 6 months once the U.K. government becomes aware of the transaction (although what would amount to awareness here is subject to uncertainty).  Parties will need to consider carefully the merits of making a voluntary notification in such cases to avoid the ongoing risk of being called in. Inevitably, many will conclude that it is preferable to make precautionary notifications in order to mitigate this risk.
  • There are criminal and civil sanctions for breaches of the mandatory notification obligations and other non-compliance, with fines of up to 5% of worldwide turnover or £10 million (whichever is greater) and up to 5 years imprisonment for directors.
  • Transactions falling under the mandatory regime are subject to a standstill obligation – where they complete without clearance they will be void, unless subsequently validated by the U.K. government. Therefore, the need for any notification must be factored into the deal timetable in the same way as for regular merger control. Transactions which should have been notified and are not will be subject to review by the U.K. government for an indefinite period, but the U.K. government will only have 6 months to intervene once it becomes aware of the transaction.
  • There will be no turnover or market share thresholds below which transactions will fall outside the regime. So, transactions will not benefit from any de minimis thresholds, if they otherwise meet the criteria for notification and/or review.

Until the new regime comes into force, there is currently no formal mechanism for parties to submit notifications to the U.K. government. However, given that the NSI Act allows for the retrospective review of acquisitions completed after 12 November 2020, parties are advised to consider their M&A and FDI transactions in light of the new regime. Parties to any transaction which may fall within the mandatory notification regime would be wise to consider voluntarily engaging with the ISU in order to mitigate any uncertainty. For transactions outside the mandatory notification regime which may cause national security concerns, parties may also wish to consider such voluntary engagement with the ISU to mitigate transaction risk.

Despite putting in place these broad-ranging review powers, the U. K. Government has been at pains to emphasise its belief that the U.K. remains one of the world’s most open, attractive and welcoming destinations for foreign investment. Time and the practical application of these new powers will prove whether this belief is well founded. But there are strong grounds for optimism; the U.K. looks set to remain very much open for business.

Newly proposed legislation by Ohio Sens. Rob Portman (R) and Sherrod Brown (D) takes aim at “country-hopping,” whereby foreign companies shift production to third countries in order to evade U.S. antidumping and countervailing duties (AD/CVDs).

The bipartisan “Eliminating Global Market Distortions to Protect American Jobs Act” presented last week is just the latest volley in an ongoing battle by senior U.S. trade officials to counteract China’s expanding Belt & Road Initiative.

AD/CVD investigations are bifurcated between the International Trade Commission (ITC), which analyzes injury to the domestic industry, and the Department of Commerce, which determines the extent of necessary remedial measures, i.e., the amount of duties ultimately imposed.  The ITC’s injury analysis is currently limited to an examination of import data of the particular product at issue from the specific country in question, in light of key U.S. market indicators and domestic industry financial performance over the period of investigation.  The bill introduces the concept of “successive investigations,” which establishes additional injury criteria that may be examined by the ITC under two scenarios: (1) the same class or kind of merchandise investigated at the same time, or (2) the same class or kind of merchandise for which the ITC made an affirmative injury finding within the last two years.  The additional criteria essentially allow the ITC to consider the cumulative effects of dumped and subsidized imports of a specific product on a domestic industry across multiple countries and time periods, with respect to both the volume of imports and underpricing.

Commerce, for its part, generally undertakes a comparatively lengthy examination of foreign exporter data, including subsidies, costs of production, and sales over the period of investigation.  The earliest a petitioner may see relief is at the preliminary determination, 85 days after the date of initiation, at which point cash deposits reflecting the estimated duties owed are collected.  A final determination is not due for another 75 days.  These deadlines are subject to lengthy extensions at the discretion of the Secretary, and in the case of affirmative final determinations, at the request of exporters.  However, with respect to the two new scenarios outlined above, the bill would block such extensions absent a request by the petitioner.

The bill also proposes a series of measures to address “market distortions,” specifically with respect to Commerce’s analysis of foreign production costs in “particular market situations.”  Chinese producers are increasingly accused of leveraging Belt & Road Initiative infrastructure to effectively offshore operations to other countries, including subsidized inputs.  In such cases, the bill would require adjustments to a foreign producer’s reported cost data to reflect market value.  In other scenarios, even absent a finding of a “particular market situation,” a foreign producer’s reported cost data may be entirely substituted for market data if found “not reasonably reflective of market costs of production.”

Other proposals include –

  • Authorizing Commerce to consider and address subsidies offered to a producer in a country under investigation by a government located elsewhere.
  • Adjusting the definition of “ordinary course of trade” to increase scrutiny of and potentially disqualify reported home market sales if made in insufficient quantities at unusually high prices.
  • Reducing allowable duty drawback adjustments to export prices to reflect only the actual amount of duties rebated or not collected on inputs in fact incorporated into the merchandise under consideration.
  • Updating the process by which Commerce initiates a circumvention inquiry; shorten the period by which Commerce must respond to such inquiries; suspend liquidation and require cash deposits for all merchandise subject to a circumvention inquiry; and, make the findings of such inquiries applicable on a country-wide basis, subject to specific exceptions.
  • Requiring Commerce to investigate allegations of currency undervaluation as a countervailable subsidy if those allegations meet the statutory requirements, and further, standardize the comparison method used to determine the extent of the alleged currency undervaluation.

The full text is available here.

May 13, 2021 / 5:30 PM – 6:45 PM EST

Please join this free Thomas Reuters-sponsored webinar with a panel of experts, including Crowell & Moring Counsel Nicole Succar, as they discuss economic sanctions policy and enforcement under the Biden Administration, including what’s happened in the first four months and what we can expect over the next four years.

The discussion will include the latest developments in Myanmar, Russia and China and their impact on sanctions policy. The speakers will also discuss recent OFAC enforcement actions, the impact of court challenges to sanctions designations, the current status of the TikTok/WeChat “ban”, as well as other relevant and current topics, all of which will assist anti-financial crime professionals implement best practices for their institutions. The speakers will also speculate on how the Administration’s recent actions and statements will impact economic sanctions policy going forward.

Register here.

Thursday, May 6th / 12:00 PM – 1:30 PM EDT

US regulators have demonstrated that “check-the-box” screening is no longer sufficient for evaluating Bank Secrecy Act/Anti Money Laundering (BSA/AML) and sanctions compliance programs. The OCC, Federal Reserve, New York Department of Financial Services, and other major regulatory agencies have increased scrutiny on the effectiveness of Know Your Customer (KYC) processes, AML transaction monitoring, and sanctions screening processes.

Since releasing Supervisory Guidance on Model Risk Management in 2011, the OCC and Federal Reserve have provided little guidance to industry on addressing evolving screening expectations and new technologies that are developed to address BSA/AML and sanctions requirements. On top of the OCC/Fed requirements, NYDFS Part 504, effective 2017, has placed additional requirements for financial institutions to assess the “reasonableness, effectiveness, and relevancy” of their BSA/AML and sanctions filtering programs in accordance with their risk profiles. Industry is increasingly relying on independent and objective validations before certifying or submitting action plans to their regulators.

During this interactive session, subject matter professionals from Kharon and KPMG, along with Crowell & Moring LLP Counsel Nicole Succar, will discuss expectations for the model validation process and Part 504 certification process and suggestions to enhance key controls related to model configuration, data integrity, and program framework in order to improve sanctions detection effectiveness and efficiency.

Register Here

On April 30, 2021, the United States Trade Representative (USTR) released its annual Special 301 Report for 2021 on the adequacy and effectiveness of trading partners’ protection of intellectual property rights.

301 Report Highlights

  • The Report’s Executive Summary stated that a priority of the Biden administration is to craft trade policy in service of America’s workers, including those in innovation-driven export industries. The Report therefore serves a critical function by identifying opportunities and challenges facing U.S. innovative and creative industries in foreign markets and by promoting job creation, economic development, and many other benefits that effective IP protection and enforcement support.

 

  • USTR reviewed more than one hundred trading partners for the report, and placed thirty-two of them on the Priority Watch List or Watch List, listed below:
    • Priority Watchlist: Argentina, Chile, China, India, Indonesia, Russia, Saudi Arabia, Ukraine, Venezuela
    • Watch List: Algeria, Barbados, Bolivia, Canada, Colombia, Dominican Republic, Ecuador, Egypt, Guatemala, Kuwait, Lebanon, Mexico, Pakistan, Paraguay, Peru, Romania, Thailand, Trinidad and Tobago, Turkey, Turkmenistan, Uzbekistan, Vietnam

 

  • While the Administration continues to conduct a full review of U.S.-China relations, including trade issues, the USTR fact sheet states that recent steps to reform IP-related laws and regulations “require effective implementation and fall short of the full range of fundamental changes needed to improve the IP landscape in China.”  USTR also notes the large quantities of counterfeit supplies related to COVID-19 that originated from China.

 

  • Given the importance of innovation and IP in developing the advances necessary for fighting the ongoing COVID-19 crisis, the Biden Administration is committed to trade policies that seek to save lives in this pandemic and ensure preparedness for the next one. USTR emphasizes that the U.S. “respects a trading partner’s right to protect public health and, in particular, to promote access to medicines for all” as affirmed in the Doha Declaration on the TRIPS Agreement and Public Health, while signaling that it “continues to seek adequate and effective protection for pharmaceutical and other health-related IP around the world to ensure robust American innovation in these critical industries to fight not only the current, but also future pandemics.”

 

  • In light of the Administration’s emphasis on environmental issues, the report notes that “strong IP protection and enforcement are essential to promoting investment in innovation in the environmental sector…IP provides incentives for research and development in this important sector, including through university research.”  This appears to be an area that will be developed out further in the future.
Tuesday,
May 4, 2021

12:00 – 1:00 pm EDT

REGISTER HERE

Digital assets have evolved in many ways since Satoshi Nakamoto published the Bitcoin whitepaper on October 31, 2008. Non-fungible tokens (NFTs) are the latest digital assets gaining popularity. 2021 has already featured some of the highest profile sales of NFTs such as the $69 million sale of Beeple’s “Everydays: the First 5,000 Days,” the $600,000 sale of the Nyan Cat meme, and the hundreds of millions of dollars of transactions have been effectuated since the launch of NBA Top Shot, an online-only marketplace where users can buy, sell and trade NBA highlights. Regulatory scrutiny of NFTs is unfolding and participants in the NFT ecosystem should be mindful not to unwittingly run afoul of applicable laws and regulations.

Join Crowell & Moring’s multi-disciplinary Digital Assets team for an open discussion of NFTs, a review of potentially applicable laws and regulations and their application in NFTs.

Moderator/Speaker:

  • Partner Michelle Gitlitz, global head of the firm’s Blockchain and Digital Assets Practice

Speakers:

  • Gauthier Zuppinger, Chief Operating Officer at NonFungible.com, a leading NFT valuation, consulting, and research company
  • Partner Caroline Brown, former attorney-advisor at FinCEN (the Financial Crimes Enforcement Network) and the Treasury Department’s Office of General Counsel, Enforcement and Intelligence and the DOJ’s National Security Division
  • Partner Michel Narganes, leading commercial and tech transactions partner, including those dealing with digital assets
  • Associate Carissa Wilson, practitioner focusing on IP, Torts, and Advertising & Media

We invite you to pose your questions now (via the registration page) and during the live event.

In ruling NY N318710 (April 12, 2021), Customs and Border Protection (CBP) discussed the classification of the “Lifetime Tailgate Game Combo.” The ruling states that the Game Combo comes with 2 fold-in-half tables, 8 beanbags, 6 ball toss sets, 2 6” table plugs, and 2 canvas accessory bags.  The tables are made of high-density polyethylene (HDPE) with molded holes for the bean bag toss and ladder golf games. When in use and in its upright position, it is a bridge-like table. When it is upside-down and in its semi-collapsed position, it functions as a game.

It consists of articles, classifiable in different headings, set up for retail sale together to carry out a specific activity (i.e., tailgating or a competitive game of ladder golf or bean bag toss. GRI 3(b) states in part that goods put up in sets for retail sale, which cannot be classified by reference to GRI 3(a), are to be classified as if they consisted of the component that gives them their essential character.  CBP found that the essential character of the Lifetime Tailgate Game Combo is the game, such that the bulk, quantity, and weight of the game tables, balls, beanbags, and accessory bags are all game-related.

CBP determined that the applicable subheading for the Lifetime Tailgate Game Combo is 9504.90.9080, HTSUS, which provides for Video game consoles and machines, articles for arcade, table or parlor games, including pinball machines, bagatelle, billiards and special tables for casino games; automatic bowling alley equipment; parts and accessories thereof: Other: Other: Other: Other. The rate of duty is Free.

Thursday, April 29, 2021 from 3:00 – 5:00 CEST (Central European Summer Time) / This event is online and free

Meet editors of journals on customs

This includes Crowell & Moring Partner Jeffrey Snyder, the editor of the Global Trade & Customs Journal.

The world of customs is constantly evolving. Reading a customs journal or news alerts regularly is a great way to keep your professional knowledge up-to-date and to deepen it on various relevant topics. Journals also offer the opportunity to exchange ideas with others in the field.

The event program can be found here.

To register, please click here.