Appeals Court Clarifies Evidence Required to Obtain Value Allowances for Defective Merchandise

International Alert

In a case involving warranty repairs on imported vehicles, the U.S. Court of Appeals for the Federal Circuit (CAFC) affirmed a decision by the U.S. Court of International Trade (CIT) clarifying the extent to which U.S. Customs will grant allowances for reduced dutiable value due to defects in imported merchandise, Saab Cars USA, Inc. v. U.S., No. 04-1268, -1416, slip op., Fed. Cir. Jan. `7, 1006. The Courts made clear that, to claim a reduction in dutiable value, an importer must present specific evidence that subsequent repairs were undertaken to correct defects which existed at the time of importation.

Under U.S. Customs regulations (19 CFR § 158.12), allowances from dutiable value may be claimed for merchandise that is partially damaged at the time of importation. Saab Cars USA (Saab) sought a partial refund of duties that it paid on imported cars that turned out to have defects. These defects fell into two categories: those which were repaired at the port of importation (port repair expenses), and those which were repaired later by dealers, after customers brought the vehicles to the dealers for repair (warranty repairs). U.S. Customs rejected Saab’s allowance claim for both categories of defects, and Saab brought an action at the CIT.

The CIT applied a three-pronged analysis to determine whether Saab could claim the allowances that Customs had rejected. Under that analysis, Saab was required to show that it had contracted for “defect-free” goods. Second, it was required to link the defective merchandise to specific entries. Finally, Saab was required to prove the amount of the allowance for each entry. The CIT ruled that, based on the evidence, the dutiable value of Saab’s vehicles should have been reduced by the cost of the port repair expenses. Because Saab failed to submit evidence linking the cost of later warranty repairs to defects that existed at the time of importation, however, the CIT denied claims for those warranty repairs.

Saab appealed the CIT’s mixed ruling to the CAFC, and, in its recent decision, the CAFC affirmed. With respect to the valuation adjustment for port repairs, the CAFC determined that databases supplied by Saab that clearly tracked the relevant vehicle repairs sufficiently established that the defects had existed at the time of importation, due to the proximity of the relevant port repairs to the time of importation.

However, with regard to allowances for the cost of later warranty repairs, the CAFC upheld the CIT’s decision that Saab had failed to prove that these “latent” defects existed at the time of importation. Saab had submitted computer printouts listing the customers’ complaints, the mileage on the vehicle at the time of repair, and a description of the repair, but the CIT concluded that the importer had the burden of proving that the defects existed at importation, and that the evidence presented by Saab was not sufficiently specific to meet this burden of proof. Thus, allowances for these latent defects were not granted.

In its decision, the CAFC was careful to note that Customs regulations do not disallow the possibility of relief for latent defects discovered after importation. In the opinion of the appeals court, “the regulation permits allowances for merchandise that the port director finds, at any time, to have been partially damaged at the time of importation.” However, in order to claim such an allowance, evidence must specifically link the latent defect to the time of importation. In light of this decision, importers with significant warranty repairs on dutiable goods should carefully review their procedures and systems for collecting information about the repairs and defects and assess their adequacy.

While USTR’s report identifies many goals for changes in China’s trade policies, the first priority goal in the area of trade implementation and compliance is to greatly enhance China’s IPR protection. USTR has promised to use all options available to bring about changes in China’s trade policy. Some of these options include expanding USTR’s trade enforcement capacity by establishing an unprecedented China Enforcement Task Force, to be headed by a Chief Counsel for China Trade Enforcement, and to add personnel in China for various functions. With respect to IPR issues, USTR’s report proposes continuing several existing programs and implementing new ones:

  • continuing to ensure full and transparent enforcement of U.S. trade remedy laws and agreements with respect to China, including Section 337 for IPR violations in import trade, and continuing to seize, at the U.S. borders, counterfeit products and other unfair imports;
  • adding additional IPR Attaches or dedicated IPR Foreign Service Nationals in Beijing and Guangzhou, and an additional IPR Foreign Service National position in Beijing;
  • expanding the Commerce Department’s IPR small and medium enterprise Advisory Program (providing companies free one-hour consultations with experienced IPR attorneys on China IPR issues), as well as enhancing Commerce’s procedure for passing along to the Chinese government cases of IPR infringement involving U.S. rights holders who have been unable to effectively protect their IPR in China;
  • beginning U.S. Customs technical exchanges with Chinese authorities on risk assessment, risk management tools, and regulatory issues to improve China’s enforcement of IPR at its own borders. In addition, the government will step-up law enforcement cooperation between U.S. customs, immigration, and criminal law enforcement authorities and their Chinese counterparts to reduce China’s exports of IPR infringing goods and address transnational IPR cases;
  • conducting seminars that bring together U.S. government experts on IPR and legislative drafting with the National People’s Congress in China, with a goal of improving the legislative framework for the protection and enforcement of IPR; and
  • engaging in further dialogue regarding China’s participation in additional global trade institutions, including a reform of Chinese copyright laws to allow a 2006 accession by China to the World Intellectual Property Organization’s (WIPO) Internet Treaties.

USTR’s report notes generally that, absent tangible evidence that China is acting responsibility with respect to trade issues, popular support for the U.S.’s more than two-decade-old policy of constructive economic engagement with China could be in danger. In USTR’s estimation, the time has come to readjust trade policy with China. The report concludes China should be held accountable for its actions, and required to live up to its responsibilities, including opening markets and enforcing intellectual property rights.

The preceding policies and programs are intended to achieve this readjustment in the area of IPR, and bring about China’s increasing participation in the global economy as a fair trading partner. For companies with IPR problems involving China, this refocusing of efforts by USTR could present an ideal time to introduce issues for consideration as part of the broader bilateral trade agenda.

For further information, please contact:

Richard Abbey,, 202-626-5901

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