Canada-U.S. Blog

Trade Lawyers Cyndee Todgham Cherniak and Susan K. Ross

BEWARE OF THE WHISTLEBLOWER!

Posted in Aerospace & Defence, Anti-Trust/Competition Law, Antidumping, Border Security, Buy America, Corporate Counsel, Criminal Law, Cross-border litigation, Cross-border trade, Customs Law, Excise Duty, Excise Tax, Government Procurement, Legal Developments, Trade Agreeements, Trade Remedies, U.S. Federal Government, Uncategorized

Originally published by the Journal of Commerce in February 2018

Customs and Border Protection (“CBP”) and other federal enforcement agencies seizing goods or imposing penalties is not unexpected. However, there are other consequences triggered by the actions of private actors which present equal danger to importers. In particular,  there is the False Claims Act (“FCA”), otherwise known as a qui tam or whistleblower case.   The potential of a whistleblower case is not new.  In the 1990’s, the possibility came to light trade by way of a penalty case pursued by CBP against Hitachi America Ltd, and Hitachi, Ltd.  It started when a former employee of the American company reported information and gave documents to CBP detailing certain payments which should have been included in the dutiable value of the imported goods and was not.  For most, this highly publicized lawsuit was the first time whistleblowing and duty payments were joined in the same breath.  There have been a number of FCA cases recently, and the payments to settle them now are generally considerable. So, it is worth asking – are your import declarations accurate? If not, who knows about those mistakes?  How quickly are you getting them corrected?

These cases begin when a whistleblower, called a relator, brings information to a government agency asserting a party (often the former employer who fired the person) is misdeclaring (in our case) information related to the duty collected on its imported goods.  The government then has the option to step into the whistleblower’s shoes and pursue the case, or decline to do so.  It is commonplace for the relator to file a lawsuit, which is put under seal (kept from public knowledge) until the relevant agency makes its decision. If the case is pursued, the government agency becomes the plaintiff in the pending lawsuit or if none is filed, the Dept. of Justice pursues the matter by way of administrative action. If it declines, the relator pursues the case on his or her own.  Either way, if the case is successful, the whistleblower gets part of the recovery.

A “false claim” is defined in 31 U.S.C. § 3729(G) as: “… any person who knowingly makes, uses or causes to be made or used, a false record or statement material to an obligation to pay or transmit money or property to the Government, or knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the Government, is liable to the United States Government for a civil penalty or not less than  $5,000 and not more than $10,000, as adjusted [for inflation] ; plus 3 times the amount of damages which the Government sustains because of the act of that person.” Person, of course, includes both individuals and companies.  These types of cases are referred to as reverse false claims because the assertion is money which should have been paid was not.

To be clear,  “knowing” and “knowingly” are defined to mean one has actual knowledge, or acts in deliberate ignorance or reckless disregard of the truth or falsity of the information. There is no requirement there is a specific intent to defraud.

For anyone who did not know or had forgotten about the Hitachi penalty case, the whistleblower issue came to light again in 2014 when a number of customs brokers and others received civil investigative demands from Justice regarding wooden bedroom furniture imports from China. The companies receiving the list was long, the companies asked about was longer, and the list of documents demanded was exhaustive!

The most recent case was publicized in January 2018, when Justice announced that Bassett Mirror Company agreed to pay $10.5 million to resolve allegations that it violated the FCA by knowingly making false statements on customs declarations to avoid paying antidumping duties on Chinese wooden bedroom furniture.  A similar case was settled in April 2016, when Z Gallerie LLC agreed to pay $15 million to settle allegations that it, too, misdescribed the type of furniture it was importing in order to avoid the antidumping duties due on Chinese wooden bedroom furniture imported.   Here, it was publicized the whistleblower would receive $2.4 million from the settlement!

In July 2016, China-based clothing manufacturers, Motives Far East and Motives China Limited, and their affiliated US importer, Motives, Incorporated, agreed to pay nearly $13.4 million for engaging in a double invoicing scheme, designed to defraud the United States out of millions of dollars in duty. The double invoicing scheme was described as one invoice which undervalued the goods and was presented as the basis for entry, and a second invoice called a “debit note” or “cost sheet” reflecting the higher, true cost of goods. Sound familiar?

In May 2017, Justice announced a settlement with Import Merchandising Concepts L.P., an executive and an agent who agreed to pay $275,000 to resolve allegations against them. The claim was again that Chinese wooden bedroom furniture was misclassified as non-bedroom furniture on the import documents.

More interesting is the 2014 case brought by Customs Fraud Investigations, LLC (“CFI”) against Victaulic Co. (“Victaulic”). Therein,  CFI sought damages and civil penalties. Victaulic is a producer of iron and steel pipe fittings manufactured in the U.S., China, Poland, and Mexico. CFI was described as conducting research and analysis related to potential customs fraud. CFI alleged that Victaulic failed to mark or mismarked its foreign-made pipe fittings with their country of origin and also falsified the related customs entry documents, so as to avoid paying the 10% marking penalty due on mismarked or unmarked foreign products.

In finding support for its allegations CFI relied on a commercial manifest reporting service to identify import shipments for Victaulic. Victaulic is a privately held company, so CFI had to resort to data available on the Internet, including sales on eBay, to estimate the value of the imports which it claimed were not properly marked.  Victaulic argued the information being provided was public.  The court spent some time considering the nature of the sources of CFI’s information against what is defined in the statute as public sources of information. It found the manifest reporting service to provide “public” information, but not eBay and other Internet sources.

The court next turned to whether the 10% marking penalty meets the definition in the FCA of monies that would be due to the government and ultimately held that monies which result only when the government exercises its discretion do not qualify for recovery under the FCA. Ultimately, when looking at all the facts asserted, the court determined CFI had failed to provide proof the pipes were mismarked or not otherwise legally marked and so the case was dismissed with prejudice. However, that decision was overturned earlier this year by an appellate court.

This latest decision about the CFI v. Victaulic claim is being touted as opening the door to many similar cases.  Companies would be smart to check with their Labor and Employment counsel to make sure to cover potential information about errors and wrongdoing in their personnel exit interviews. Of course, good policies and procedures seeking compliance from the outset are key, so how recently did you update your policies and procedures, and make sure your staff is properly trained?  How recently did you audit your transactions? False Claims Act cases are obviously not limited to duty collection. So, beware of the whistleblower!

The Government of Canada Has Not Appointed Needed Canadian International Trade Tribunal Members

Posted in Antidumping, Canada's Federal Government, Customs Law, Government Procurement

Canada is nearing a trade law crisis point that, quite frankly, is avoidable and easily solved.  There are too few permanent members of the Canadian International Trade Tribunal (“CITT”) for the workload.  Section 3 of the Canadian International Trade Tribunal Act provides for the appointment of a Chairman and six (6) permanent members to the CITT.  Currently, there are only three (3) permanent members of the CITT (Peter Burns (appointed in 2014), Rose Ritcey (appointed in 2014) and Jean Bédard (appointed in 2014), one member is the acting Chairman (Jean Bédard). Serge Fréchette is a temporary member of the CITT appointed under a contract that expires on April 4, 2018 (no one knows if that contract will be renewed).  Ann Penner (appointed in 2014) and Daniel Pétit (appointed in 2013) have completed their first 4 year terms and have not been reappointed – they are still at the CITT completing files. The Government of Canada can and should solve this problem quickly by making appointments of 3-4 members to the CITT, including a Chairperson.  Canada has many trade law specialists – it is possible to have a gender balanced CITT with representation across Canada.

The CITT is an independent, Canadian quasi-judicial administrative tribunal that adjudicates a variety of international trade cases and matters. The CITT is the place to go to receive a fair, timely, transparent and effective resolution of a trade-related dispute and/or government-mandated inquiry/dispute, provided that the trade-related dispute is within an area of the Tribunal’s jurisdiction.

The types of international trade cases and matters within the CITT’s jurisdiction include:

  • customs valuation appeals;
  • customs origin appeals;
  • tariff classification appeals;
  • appeals of advance customs rulings;
  • excise tax (e.g., levied on certain petroleum products, heavy automobiles and air conditioners designed for automobiles) appeals;
  • reviews of procurement-related issues (mostly involving the Government of Canada) (also known as “bid challenges”);
  • antidumping/countervailing duty preliminary injury inquiries;
  • antidumping/countervailing duty injury inquires;
  • antidumping/countervailing duty interim reviews;
  • antidumping/countervailing duty expiry reviews;
  • antidumping/countervailing duty public interest inquiries;
  • antidumping/countervailing duty circumvention proceeding appeals;
  • appeals of antidumping/countervailing duty rulings;
  • exporter rulings relating imposition of antidumping and countervailing duties;
  • global safeguard inquiries;
  • reviews requested by the Government of Canada related to tariffs, trade and economics; and
  • textile references requests by domestic producers for tariff relief on imported textile inputs for production.

The lack of permanent CITT members will soon cause caseload crisis. There are only three permanent CITT members (including the Chairman) to hear all the antidumping and countervailing injury inquiries (always panels of 3), all expiry reviews and interim reviews on AD/CVD Orders (always panels of 3), all antidumping and countervailing duty appeals (always panels of 3), all safeguard inquiries (always panels of 3), all customs and excise appeals (single member panel) and all federal government procurement bid challenges under numerous free trade agreements (single member panel) and any textile reviews of governor-in-council or Minister of Finance references.  Quite frankly, it is not humanly possible to do all this important international trade work in the current environment with so few people.  The amount of information involved in any trade related matter is substantial.  Getting the answers right is important.

Antidumping and countervailing duty injury inquiries have tight statutory deadlines and will have to take priority.  Domestic industry complainants spend hundreds of thousands (if not millions) of dollars bringing AD/CVD complaints and often millions of dollars of business (sometimes tens or hundreds of millions of dollars) is at stake.  The statutory deadlines mean that decisions must be finished on time or they will not be worth the paper they are written on.

This means that customs and excise appeals, which do not have statutory deadlines, will have to wait until CITT members have time to hear them.  It also means that the CITT will not have the resources to conduct expedited government procurement bid challenges of federal government contracts.  This will hold up the ability of the federal Government of Canada to award contracts and purchase goods and services where an issue arises. Decisions on interim reviews will take longer to be issued.  Justice delayed will have a negative impact on trade and trade relationships.

There will be a corresponding impact on access to justice.  The CITT is the justice system for importers to seek redress.  The CITT is the justice system for potential bidders and bidders to seek redress when they are not treated fairly in federal government contracting. The CITT is the justice system for domestic producers who take the position that unfairly priced imports are entering Canada. The lack of members is a barrier to accessing that justice system expeditiously.  The current members will be stretched too thin to hear everyone in a timely manner.  The qualified and diligent ATSSC staff, who support the CITT members, will be overworked and may look for work elsewhere within the government.  Responsiveness will be affected as there is only so many hours in a day.

Hint to the Government: Yesterday, the Government of Canada announced 68 names of qualified Canadian trade lawyers and academics to a newly created NAFTA Chapter 19 Panel Roster.  The Order-in-Council will be published in the Canada Gazette on February 21, 2018.  There are many known trade law experts in Canada (many of whom are not on that list) who could be appointed to the CITT.  The Government has a binder of resumes and CVs.  There is no reason that the Government of Canada cannot make the necessary appointments to the CITT.

For more information, please contact Cyndee Todgham Cherniak at 416-307-4168 or at cyndee@lexsage.com.

Federal Court of Appeal Finds NEXUS Pass Confiscation Not Justified

Posted in Legal Developments, NEXUS

On February 8, 2018, the Federal Court of Canada released its decision in Gunwani Sodhi v. The Minister of Public Safety and Emergency Preparedness, 2018 FC 145 in which Justice Campbell found that the confiscation of Mr. Sodhi’s NEXUS membership by the Canada Border Services Agency (“CBSA”) lacked justification. This is the first Canadian judicial review decision where a NEXUS pass holder has been successful.  It is not the first success – we have successfully settled a number of judicial reviews and actions on behalf of NEXUS members and have been successful regularly at the informal Recourse Directorate review stage.

In the Sodhi case, Mr. Sodhi, a U.S. citizen, entered Canada on August 17, 2016 at the Whirlpool Bridge port of entry (near Buffalo/Niagara-by-the-Lake). At the Primary Inspection booth, Mr. Sodhi informed the CBSA officer that he was taking prescription medication for diabetes and high blood pressure to a family member in Canada.  That family member had recently visited Mr. Sodhi and forgot his medication. Mr. Sodhi was sent to the Secondary Inspection Area.  During the secondary inspection, the CBSA officer seized he prescription medication because Mr. Sodhi was not the person to whom the medication was prescribed and confiscated Mr. Sodhi’s NEXUS membership card.

It is not clear from the written reasons what the Seizing CBSA Officer wrote on any seizure paperwork.  However, the Recourse Directorate upheld the seizure under the Food and Drug Regulations.  The decision letter written by the Recourse Directorate (for the Minister) did not refer to section 7.1 of the Customs Act.  In the Memorandum of Fact and Law, the Department of Justice (“DOJ”) lawyer (the lawyer for the Minister) argued that the basis for the cancellation of Mr. Sobhi’s NEXUS membership was section 7.1 of the Customs Act, which prohibits the making of false statements to the CBSA.  The reason for the DOJ argument was that there must be a contravention of the Customs Act.  This was a critical precondition.

Justice Campbell considered Subsection 22(1) of the Presentation of Persons (2003) Regulations, which sets out the bases on which a NEXUS Membership may be cancelled.  Subsection 22(1) provides as follows:

22 (1) The Minister may suspend or cancel an authorization if the person:

(a) no longer meets the requirements for the issuance of the authorization;

(b) has contravened the [CustomsAct, the Customs Tariff, the Export and Import Permits Act or the Special Import Measures Act, or any regulations made under any of those Acts; or

(c) has provided information that was not true, accurate or complete for the purposes of obtaining an authorization.

Justice Campbell reviewed the Decision of the Minister that was issued by the Recourse Directorate and held that the DOJ lawyer could not present arguments concerning section 7.1 of the Customs Act as it was not part of the Minister’s Decision.  The case fell apart.

Justice Campbell then held that the Minister had made reviewable errors in the Decision.  The Minister’s letter indicated that there was a contravention of the Customs Act when in fact the alleged contravention was under the Food and Drug Regulations.  The Food and Drug Regulations are enforced by Health Canada and not the CBSA.  The CBSA were not authorized under the Food and Drug Regulations or the Presentation of Persons (2003) Regulations to cancel Mr. Sodhi’s NEXUS Membership.

Justice Campbell set aside the Minister’s Decision to maintain the cancellation of Mr. Sodhi’s NEXUS membership and referred the matter back to the Minister without instructions.  Justice This is a case that the Recourse Directorate should have settled.  It was clear that Mr. Sodhi was bringing prescription medication to a family member – this was not an importation of illegal drugs or drugs being misused in any way.  Mr. Sodhi exercised his legal rights and filed a judicial review.  The Federal Court saw the silliness of the CBSA position and would not allow the DOJ to correct deficiencies in the CBSA paperwork, including Recourse Directorate decision.Campbell awarded Mr. Sodhi costs of $1,500.

This was the right result. NEXUS cards are issued to trusted travelers. The CBSA enforcement manual gives the CBSA officers discretion.  That discretion should be used in a positive manner to give travelers the benefit of the doubt when the issue does not relate to illegal drugs or an attempt to evade Canadian taxes by failing to declare goods.  Far too often, a minor misunderstanding turns into a “gotcha” moment.  The CBSA should always ask themselves whether they still trust the traveler enough to continue to allow them to use the NEXUS lane.

If you run into difficulty and your NEXUS Card is cancelled, consider filing a request for decision.  Here are some articles we have written:

What Were The Top 10 Reasons for NEXUS Card Cancellations in 2017?

How Can I Get My NEXUS Card Back When It is Cancelled/ Confiscated By The CBSA?

Do Not Pass GO: Forgetting Your Receipts Gets You A Ticket To CBSA Secondary Inspection

Alcohol And Tobacco: Two Things That Cause CBSA Officers To Not Apply Common Sense

Canada Day: Survival Guide For Canada-US Cross Border Travel

Canadians Living In Border Cities at Risk for NEXUS Pass Confiscations

Canadian Resident NEXUS Travelers Should Bring Traveller Declaration Card to Report Purchases to CBSA

For more information, please contact Cyndee Todgham Cherniak at 416-307-4168 or at cyndee@lexsage.com. Alternatively, visit www.lexsage.com.

What is ACMPR?

Posted in cannabis

ACMPR is an acronym for “Access to Cannabis for Medical Purposes Regulations“, also known as Canada’s medical marjuana law. The Access to Cannabis for Medical Purposes Regulations are promulgated under the Controlled Drugs and Substances Act.

The ACMPR is Canada’s response to the Federal Court of Canada’s February 2016 decision in Allard v. Canada which is a precedent setting Charter challenge of Canada’s prior medical cannabis laws.

Under the ACMPR, individuals can register with the Minister of Health to produce cannabis and this will continue under the new regulations.  The application process starts with the ACMPR, Production for Own Medical Purposes and Production by a Designated Person Registration Form, which is filed with Health Canada

Bombardier Is The Big Winner

Posted in Aerospace & Defence, Anti-Trust/Competition Law, Antidumping, Cross-border deals, Cross-border trade, Customs Law

In a result that was shocking to most, on Friday, January 26, 2018, the International Trade Commission announced a finding of NO material injury to American industry (read Boeing) and so voted to NOT impose either antidumping or countervailing duty on Bombardier’s 100 to 150 seat jets.  This brings to an end a very high profile trade dispute between the two countries, while many others still remain. No telling how this decision will, if at all, affect the on-going NAFTA renegotiations.

The actual report detailing the findings of the Commissioners is due to be released no later than March 2, 2018. See https://www.usitc.gov/press_room/news_release/2018/er0126ll898.htm for a link to where the report will be posted.

Is your organization ready for the new CPTPP?

Posted in Canada's Federal Government, Corporate Counsel, CPTPP, TPP-1, Trade Agreeements

On January 23, 2018, Canada, Australia, Brunei, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam reached an agreement in principle for a multi-country free trade area. The Trans-Pacific Partnership Agreement has been renamed and will be called the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (“CPTPP”).

We don’t yet know when the CPTPP will be implemented but it does appear that the 11 nations plan to finalize details and formally sign the CPTPP in March. Although few details are publicly available, it is not too early to start to assess how your organization will be impacted.

Increased market access will both benefit Canadian organizations with new market opportunities and create new competitive challenges. Canadian organizations and those in the other 10 participating nations soon will be able to access each other’s markets under the new CPTPP rules.

To fully assess the opportunities for your organization, it is important to keep in mind that Canada already has trade agreements or arrangements with some of the other 10 participating nations (Chile and Mexico, Australia), so there is going to be an overlap with the new CPTPP.

Today, your organization may be using one of the existing agreements to move your products into or source products from those markets.  For example, a Canadian manufacturer may ship to Mexico under NAFTA, or to Chile under the Canada-Chile Free Trade Agreement.

Consider the following:

  1. When the CPTPP is implemented, will it be better for your organization to use the new agreement or continue to ship/import under the existing agreement?
  2. If immediate use of the CPTPP won’t save your organization duty costs or improve efficiencies, will a later transition be advantageous; perhaps when the duties under CPTPP have gone to zero? If so, when should you plan to transition?
  3. A transition will mean new rules of origin, new reporting requirements and documentation.  It also may mean that you will need to or you will have the opportunity to seek out new sources or customers to improve costs/revenues and efficiencies.

For example, for products produced in Canada and shipped to Mexico:

(a) If they qualify for preferential duty treatment under CPTPP, you will be able to export them to the CPTPP partner countries at lower duty rates for most products.  The tariffs for many goods will not go to zero immediately but will be phased out over a transition period. It is important to understand how quickly your products will transition to zero under this new agreement; and

(b) If your organization currently uses NAFTA to export those goods, you will have established sourcing patterns to ensure that you meet the NAFTA rules of origin for shipments to Mexico. Likely, you have a reporting structure and procedures in place to ensure that you meet the NAFTA content, reporting and documentary requirements.  Mexico is also a CPTPP partner so consider whether you could use that agreement to export your goods to Mexico and, perhaps, to other CPTPP countries as well.  Under CPTPP your suppliers (e.g. those from the U.S.), and compliance procedures may need to change. The rules of origin and other requirements under the CPTPP will be different from those under NAFTA.  This means that you may want to consider which of NAFTA or CPTPP best serves your organization’s goals.  Does CPTPP give you the opportunity to assess your sourcing patterns and compliance processes? Will it give you the ability to access new customers? If so, what changes will be required? What changes are now open to your organization that could result in lower cost and more cost-efficient sourcing patterns (e.g. switching from a U.S. supplier to one of the other CPTPP countries or even from China) while still permitting you to meet the CPTPP rules of origin.

Complicating your assessment is the uncertain status of NAFTA.  If the three parties are able to negotiate a new/updated trade agreement, we don’t know what it will look like; whether the rules of origin will change or even be attainable by your organization.  This reinforces the need to fully understand your options and have a plan.

When the final rules of origin and transition period schedules are publicly released, you should carefully review and compare the duty rates your organization is paying today or those that may be available under an existing trade agreement. Assessing new markets and new sourcing opportunities now, and being ready to transition quickly when we have better information about NAFTA and the specific rules under CPTPP, will best position your organization to have a competitive advantage in this rapidly changing trading environment!

Should you have any questions or would like assistance developing or executing a CPTPP implementation plan, please do not hesitate to contact Heather Innes at heather@lexsage.com or 416 530 1234.

Canadian Customs Duties and the Trump Tax Changes – What Do They Have In Common?

Posted in Customs Law, origin, U.S. Federal Government, valuation

On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act (the “Trump Tax Act”).  The Trump Tax Act materially changes U.S. corporate tax laws and incentivizes U.S. companies with overseas operations to either return home to the United States and/or repatriate money home to the United States.

As companies are attempting to figure out how the Trump Tax Act affects them, I am going to throw another curveball. Have you thought about the Canadian customs duties consequences?  If you have a related party transaction and the U.S. company sells goods to a Canadian subsidiary (or imports the goods via a Canadian branch or office) for resale in the Canadian market, the payment (repatriation) of additional monies (compensation) in response to the Trump Tax Act from the Canadian subsidiary to the U.S. parent could be considered to be “subsequent proceeds” for Canadian customs purposes.  Similarly, a non-resident U.S. importer may import goods into Canada for resale.  The Canada Border Services Agency (“CBSA”) may want to receive additional customs duties on any subsequent proceeds that arise in connection with Trump Tax Act tax planning or response.

Canada imposes customs duties on the value for duty of goods as determined by one of six valuation methods. Pursuant to paragraph 48(5)(v) of the Customs Act, the value of any part of proceeds of any subsequent resale, disposal or use of the goods by the purchaser that accrues to the vendor (directly or indirectly) must be added to the price paid or payable and form part of the transaction value of the goods (the term “subsequent proceeds” simplifies this provision). If post importation an amount of additional compensation is accrued, the importer must file a B2 Adjustment Request and allocate the additional compensation on a transaction-by-transaction, H.S. Code-by-H.S. Code basis. It might not matter that the payments are for Trump Tax Act planning purposes, the CBSA may see an opportunity to receive additional customs duties and the payment may fall within the subsequent proceeds rules.  If the goods are subject to customs duties and there is no NAFTA relief (either because there is no NAFTA or the goods are not considered to be originating under NAFTA), then additional customs duties and GST/HST will be payable.  In other words, Canada gets a portion of the repatriated funds.

The CBSA takes the position that subsequent proceeds includes any type of payment made by the importer to the exporter (or a third party for the benefit of the exporter) after importation of the goods into Canada.  Since the Trump Tax Act repatriation will be a payment, the CBSA may want to look at it more closely and ask whether there is any connection to the imported goods.  If the repatriated funds are profits on the sale of those goods in Canada, they may satisfy the legal conditions to be subsequent proceeds.

So, in answer to the question “What do Canadian customs duties and the Trump Tax Act have in common”? Both governments receive revenues.

For more information about Canada’s rules for subsequent proceeds, you may wish to review D13-4-13 “Post-importation Payments of Fees “Subsequent Proceeds”.  If you would like to discuss how to reduce the likelihood that the CBSA will view a payment as subsequent proceeds, please call Cyndee Todgham Cherniak at 416-307-4168 or email cyndee@lexsage.com.

New Tariffs: Trade War Washing Ashore?

Posted in Antidumping, Corporate Counsel, Cross-border trade, Customs Law, Imports Restrictions, Legal Developments, Trade Remedies, World Trade Organization

Yesterday, January 22, 2018, U.S. Trade Representative (USTR) Robert Lighthizer announced the imposition of safeguard tariffs on solar cells and modules.  Much has been said in the general press about this case, but only now is the key point starting to register, and is something international traders immediately thought about  – is President Trump starting a new trade war with China?

By way of a quick summary, after seeking relief  through the antidumping and countervailing duty laws and not getting  the desired market relief,  Suniva, later joined by SolarWorld, invoked Section 201 of the Trade Act of 1974.  The appropriate petition was brought, the International Trade Commission (ITC) conducted the required  proceedings, found detrimental harm, and made recommendations to the President. While disagreement among the Commissioners was acknowledged, most favored an increase in duties, and President Trump agreed.  Safeguard tariffs have been imposed for four years – the maximum length of time permitted – on a per year basis – 30%, 25%, 20% and 15%.  The USTR announcement also states the first 2.5 gigawatts of imported cells are excluded from the safeguard tariff.  A critical point here is these safeguards are being imposed on both the cells and the modules, regardless of where made, as would be expected from a global safeguard, but the solar cells are overwhelmingly made in China.

As part of the Fact Sheet announcement, there is a brief summary of the major findings underpinning the ITC’s decision. One need only consider that recitation to understand the focus of this case is China.  At the same time, we should not lose sight of the fact Mr. Lighthizer simultaneously announced tariff rate quotas to be imposed on residential washing machines in a 201 proceeding initiated by Whirlpool. There, the actions of two Korean competitors were complained about which were previously the subject of an antidumping case.  For this commodity, the tariff-rate quota is imposed for only three years:

While the domestic industry dynamics surrounding these distinct commodities is quite different,  there are murmurings in the general press about how the imposition of these safeguards is really intended to influence China’s behavior. Of course, the 232 proceedings dealing with steel and aluminum are also making their way through the process, with those decisions by the White House expected in April. As we go to press, the ITC’s recommendations regarding the steel case are confirmed as referred to the White House, whereas the same public confirmation remains pending for the aluminum case.

What international traders quickly realized about these 201 cases is:

1)         There is a provision in the World Trade Organization (WTO) accession agreements all members sign which permits countries to take what would otherwise be improper action against imports in cases where national security interests apply. Is such an exemption only applicable to the 232 cases?  If so, does that mean the solar cell/module and/or the residential washing machine case(s) might be subject to dispute resolution proceedings before the WTO? If so, how long will those cases take to be concluded, especially given the turmoil surrounding U.S. actions and WTO Appellate Body appointments?

2)         The fact the solar cell/module and washing machine safeguards were announced in the same Fact Sheet may provide a means for the Administration to argue its actions do not constitute retaliation against China as Korea is impacted by the second case, but will similar surroundings be available when the 232 decisions are announced?

When all is said and done, the key question for the world may well be how much is this the Administration’s unique way of trying to get China to engage in a specific manner regarding North Korea? In the meantime, we international traders know to ask:  how long will it take for China to retaliate and what goods or services will be most impacted?

We have a Deal: What are the next steps for Canada to implement the CPTPP?

Posted in Agriculture, Canada's Federal Government, Corporate Counsel, CPTPP, Cross-border deals, Cross-border trade, TPP-1

On January 23, 2018, Canada and Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam reached an agreement in principle that is the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (“CPTPP”) (formerly known as the TransPacific Partnership Agreement, TPP, TTTP-1, and TPP-11). The United States withdrew from TPP in January 2017.  It is expected that the signing ceremony will take place in Chile on March 8, 2018.

It is no coincidence that an agreement was reached on the first day of the sixth round of the NAFTA modernization re-negotiations in Montreal Canada.  Canada and Mexico are both signatories to NAFTA and CPTPP.  The CPTPP evolves many NAFTA provisions.  If the United States withdraws from NAFTA, Canada and Mexico can operate under the CPTPP or may choose to operate under NAFTA without the United States.  Both countries have a new option for bilateral trade.

Canada and Chile also have evolved. In 1997, Canada and Chile signed the Canada-Chile Free Trade Agreement.  In June 2017, Canada and Chile signed an amending agreement (which is not yet in force).  CPTPP further advances the trade relationship between Canada and Chile.

Global Affairs Canada has published an announcement and launched a webpage about the CPTPP. The text of the new side letters is not yet posted.  The CPTPP maintains the original TPP Agreement 9the agreement that included the United States) with minor modifications. There are a number of side letters.

The negotiated tariff schedules have been maintained and, as a result, custom duties on 95% of trade in goods between the parties will either be duty-free immediately or according to tariff reduction/elimination schedules. The tariffs are not reduced or eliminated on the day of signing the free trade agreement.  It is hoped that CPTPP will come into effect before the end of 2018.

The 11 countries, including Canada, must take domestic procedures to implement the CPTPP into domestic law.  Canada takes the following steps to implement a free trade agreement (or any treaty) in Canadian law?

Step 1: Signing Order (Instrument of Full Powers): This step should be taken before the signing ceremony. A signing order (that is, an Instrument of Full Powers) will designate one or more persons who have the authority to sign the treaty on behalf of Canada.

Step 2: Tabling the Treaty in the Parliament: The signed treaty is tabled in the House of Commons for discussion (not for a vote).  Before 2008, treaties were not brought to all members of Parliament.  In January 2008, Prime Minister Harper changed the procedures of ratifying treaties and added this step in order to improve transparency and the democratic process.  Global Affairs Canada has the 2008 Policy on its website. However, there is no vote on the treaty. There may be a full discussion about the treaty, but no opportunity to vote, undo the signature or change the text of the negotiated treaty.

The Clerk of the House of Commons distributes to all MPs (Members of Parliament) the full text of the treaty along with an Explanatory Memorandum about the treaty (often prepared by the negotiating team with input from the Minister responsible for the treaty).  The Explanatory Memorandum covers the following points:

  • Subject Matter: a description of the treaty;
  • Main Obligations: a description of the main obligations that will be imposed upon Canada by the treaty, should it be brought into force;
  • National Interest Summary: a description of the reasons why Canada should become a party;
  • Ministerial Responsibility: a listing of Ministers whose spheres of responsibility are implicated by the contents of the treaty;
  • Policy Considerations: an analyze as how the obligations contained in the treaty, as well as how the treaty’s implementation by Government departments are or will be consistent with the Government’s policies;
  • Federal-Provincial-Territorial implications: a determination of whether the obligations in the treaty relate in whole or in part to matters under provincial constitutional jurisdiction;
  • Time Considerations: details of any upcoming dates or events that make the ratification a matter of priority;
  • Implementation: a brief description of how the treaty will be implemented in Canadian law, including a description of the legislative or other authority under which it will fall (which will have already been determined by the Department of Justice);
  • Associated Instruments: information on any international instruments of any kind that are related to this treaty;
  • Reservations and Declarations: a description of any reservations or declarations;
  • Withdrawal or denunciation: a description of how the treaty could be terminated; and
  • Consultations: a description of the consultations undertaken with the House of Commons, self-governing Aboriginal Governments, other government departments and non-governmental organizations prior to the conclusion of the treaty, as appropriate.

The House of Commons then has 21 sitting days to consider the treaty before the Executive may take necessary steps to ratify the treaty (Step 4). The MPs often debate the treaty.

Step 3: Motion in House of Commons: When there is a majority government or sufficient support in the House of Commons, a motion will be tabled to recommend action, including ratification of the treaty.  The vote is not required.  The vote does not have legal effect.  If the vote fails, the government cannot be toppled.

Step 4: Order-in-Council (Instrument of Ratification): After the treaty has been in the House of Commons for 21 sitting days, the ratification of the treaty may occur.  The ratification process is controlled by Cabinet.  There is no requirement to pass legislation in the Parliament to ratify a signed treaty. The Governor-in-Council (Cabinet) prepares an Order-in-Council authorizing the Minister of Foreign Affairs to sign an Instrument of Ratification or Accession.

Step 5: Federal Implementing Legislation: Treaties must be implemented in Canadian law in order to have legal effect.  An implementing bill is tabled in the House of Commons.  The implementing bill contains the changes required to Canadian law at the national level to implement the provisions of the treaty.  The MPs debate the implementing bill and may suggest changes to the implementing laws.  The MPs cannot require changes to the substance of the treaty.  However, the MPs may ask questions of the Government and the questions must be answered.

After the implementing bill passes in the House of Commons, the implementing bill is sent to the Canadian Senate.  The implementing bill is debated in the Senate.  It is possible that the Senate will not pass the implementing bill.  This happened in 1988 when the Senate would not pass the Canada-United States Free Trade Agreement Implementation Act.  This triggered a federal election.

Step 6: Provincial/Territorial Implementing Legislation: It may be possible that implementing legislation is also required at the provincial level.

Step 7: Regulatory Changes: Often new regulations and/or changes to existing regulations are required to implement treaty provisions. The passing/changing of regulations is controlled by Cabinet.

Step 8: Taking Effect: The date that a treaty comes into force, or the terms and conditions necessary for the treaty to come into force, are established in the treaty itself.  CPTPP will be different than typical treaties in terms of when it will take effect.  We will comment on how the CPTPP will take effect after reviewing the text.

Step 9: Other Changes to Policies, Guides, Procedures of Government: Government departments will make necessary changes to government policies, guides, procedures, etc.  These changes take place over time and are not completed at the time the treaty takes effect.

More to follow…

For more information, please contact Cyndee Todgham Cherniak at 416-307-4168 or at cyndee@lexsage.com. Alternatively, visit www.lexsage.com.

Border Searches of Electronic Devices

Posted in Aerospace & Defence, Agriculture, Border Security, Constitutional Law, Corporate Counsel, Criminal Law, Cross-border deals, Cross-border trade, Customs Law, Export Controls & Economic Sanctions, Exports, FCPA/Anti-Corruption, Imports Restrictions, Intellectual Property, Legal Developments, Trade Agreeements, Trade Remedies

Earlier this month, MSK attorneys David Rugendorf and Frida Glucoft published an Alert summarizing the latest directive issued by Customs and Border Protection (CBP) regarding the search of electronic devices.  A copy of their original article can be found here –  Hold That Call International Travelers.  Given the  increasing likelihood of any traveler’s electronic devices being subjected to a search, whether arriving or departing the U.S. by air, ocean or land,  these recent changes warrant a deeper dive.

First, for those who want to read the actual document,  it is CBP Directive 3340-049A.  As the earlier Alert noted, CBP has the broad rights to search any individuals, luggage, and cargo entering and leaving the U.S. Searches of cargo are governed by other laws and regulations. This directive deals only with arriving and departing travelers and their devices.

We start at the beginning. The CBP Directive defines electronic devices as “computers, tablets, disks, drives, tapes, mobile phones and other communication devices, cameras, music and other media players,” a very broad definition, so arguing your device is not subject to inspection will likely not succeed.

The Acting Commissioner of CBP appeared before the Senate Finance Committee in June 2017 and, at the time, Mr. McAleenan testified that inspection of electronic devices did not include data not resident on the device. That approach has now been incorporated into CBP’s formal policies. Specifically, the Directive states:  “[t]he border search will include an examination of only the information that is resident upon the device and accessible through the device’s operating system or through other software, tools, or applications. Officers may not intentionally use the device to access information that is solely stored remotely [emphasis added].” The Directive goes on to instruct that CBP Officers (CBPO) should either request the traveler disable connectivity, such as by putting the device into airplane mode, or do so themselves if warranted by “national security, law enforcement, officer safety or other operational considerations.”  CBPOs are also reminded not to make any changes to the contents of the device. Inspecting the electronic device with the traveler present is considered a basic search. However, an advanced search may also be warranted.

An advanced search involves the CBPO connecting the device to an external piece of equipment.  This is typically done to “review, copy and/or analyze its contents.”  Such activity is warranted if there is a reasonable suspicion of illegal activity.  A traveler can assume this is happening if the CBPO takes the device into another room and does not come back for several minutes.  An advance search requires the approval of a supervisor, if one is available, and if not, a report must be made to a supervisor as soon thereafter as practical.

An interesting statement in the Directive is the search is to be “conducted in the presence of the individual” but that does not “necessarily mean that the individual shall observe the search itself.”  In other words, the CBPO is permitted to leave you standing in the search area while s/he takes the device elsewhere so its contents can be copied.

In August 2009, CBP and ICE jointly issued a policy statement about searches of electronic devices. Therein, CBP acknowledged the attorney-client and attorney work product privileges. That principal has been formalized in the current publication, which also acknowledges other situations where the data on the device may be sensitive or confidential.  When it comes to devices carried by attorneys, when requested to hand over the device, attorneys must immediately state it contains privileged and confidential data, and then the CBPO is directed to work with Associate/Assistant Chief Counsel’s Office and potentially also the Dept. of Justice in searching the device.  CBP will inspect any non-privileged materials on the device, but anything privileged may have to be referred to what CBP calls a “Filter Team,” the legal and operational staff that deals with privileged materials.   Anything copied by CBP which is determined to be privileged will be destroyed, except anything retained in accord with Counsel’s office “for purposes of complying with a litigation hold or other requirement of law.”  Given the number of lawsuits filed about searches of electronic devices and/or objecting to the scope of a particular search, this carve-out is not surprising.

One of the shortcomings of the August 2009 policy statement was it only recognized attorneys as being in a unique situation.  The 2018 directive does not completely overcome that shortcoming, but does go further.  For example,  doctors may have privileged information on their devices based on the doctor-patient privilege. An equally well-recognized privilege exists for priests and their penitents.  There are others, none of which are discussed.  On the other hand, CBP does mention medical records, work-related information carried by journalists, and business or commercial information that is confidential or sensitive. In each case, CBP states the information should be handled in accord with existing laws.

If presented with a device that is protected by a passcode or encryption, the CBPO is authorized to ask the traveler for the details needed to unlock the device.  If the traveler refuses, the device is likely to be detained. There is a supervisor approval process required before the CBPO may proceed, and the traveler is to be notified in writing the device is being detained. Of course, if one refuses to provide the unlock data, that will only raise the CBPO’s suspicion and will no doubt cause the traveler to be sitting around for quite a long time.

If a device is detained, CBP’s goal is to return it no later than five (5) days later, but, of course, there are provisions permitting a longer period of time if warranted and approved by a supervisor.  CBP is also permitted to seek technical assistance in many forms. For example, if the device cannot be unlocked, that assistance might be from the manufacturer. There might be subject matter experts who need to translate the files or weigh in on the importance or unimportance of the data found on the device. While CBP’s goal is to keep custody of the device and share electronically only information of concern, there are procedures stated which allow the device to be transferred to another agency.  That agency is expected to share its findings with CBP and return the device, unless there is a reason for that agency to retain the device and the data in order to enforce its own laws.

Throughout CBP Directive 3340-049A, CBP makes the point absent a mission related reason to keep it, if the data does not rise to the level of probable cause to believe a violation has occurred, the data will be destroyed.  In this case, CBP defines destruction to be “deleting, overwriting, or degaussing” in compliance with its own information systems handbook.

What is a traveler to do? First, bear in mind that if you are an American citizen, you can refuse to permit the search of your electronic device and still enter the country.  The opposite is the case if you are not an American citizen. If you are a foreign national and refuse to allow your device to be inspected, you can be denied entry.

In October 2017, we published an Alert about traveling with electronic devices, Tips for Traveling with Electronic Devices. The best practices we published then remain true now, with only a small bit of tweaking:

  • If you don’t absolutely need the device, don’t take it with you.
  • Keep in mind which of your devices has security settings and which do not. The ones which do not could be inspected, no matter the circumstances.
  • You can put the data which you later want to access in the cloud with strong password protection (be sure to disable the connection) and carry the equivalent of a burner phone. Otherwise, make sure all your programs are closed.
  • Do not keep more data on your device than you are willing to have exposed to CBP or ICE.
  • If you have photos on a device, store them in your cloud account and remove them from your device.
  • If you have programs open which link to data in the cloud, such as your social networks, your best option is to close those programs, but if time does not permit, at least put the device in airplane mode.
  • If you do get selected for secondary, you really only have two choices – give the CBPO the information s/he wants and make the search process go as quickly as possible* or be prepared to sit around for several hours and, in the end, possibly be forced to leave your device behind to be returned (perhaps) at some later undefined point in time.

*Of course, if you are an attorney or work for a lawyer or law firm, or are in house, you must immediately object to the search of the device so as to have the best argument possible the attorney-client and work product privileges apply, provided you have work related materials on your device.