United States: International Client Alert, November 2007

WTO Panel Says United States Cotton Subsidies Still Violate The WTO Agreement; U.S. Service Providers May Bear The Brunt Of Sanctions

On October 15, 2007, a WTO Panel issued its final determination that the United States still was not in compliance with its obligations concerning subsidies to the U.S. cotton industry. This decision opens the way for Brazil to impose sanctions on U.S. exports to Brazil until the United States is in compliance, although such sanctions still need to be approved. While the most recent decision has not yet been made public, both the United States and Brazil acknowledge the outcome. Brazil has not indicated whether it will seek to impose sanctions immediately or await further developments in the United States.

In March 2005, the WTO Members adopted a finding by the Appellate Body that the United States had violated its subsidy commitments under the WTO Agreement, with respect to subsidies to cotton. The Appellate Body further confirmed the panel decision that those subsidies had caused serious prejudice by depressing world prices for cotton. The United States was given until September 21, 2005 to comply with the decision. In October 2005, Brazil sought authorization to impose sanctions because the United States had not yet complied with the decision. In November 2005, Brazil and the United States suspended the arbitration to determine the extent of such sanctions, pending actions by the United States to comply.

Although the United States has subsequently modified some of the programs found to be violating the WTO and eliminated the Step 2 cotton program, Brazil claims that the United States has not sufficiently complied with the decision and that Brazil is still seriously prejudiced by these subsidies. Therefore, in August 2006, Brazil requested a panel to determine whether the United States had complied with the previous ruling. As noted above, the panel found that the United States had not complied. The United States has 60 days after the panel decision is circulated to all the WTO Members, to determine whether to appeal the panel decision. It is possible that this decision could result in changes to the Farm Bill currently before Congress, but it is too early to determine the ultimate impact on the Farm Bill.

If this panel decision is adopted, Brazil may resume its request to impose sanctions. In 2005, when Brazil initiated its compliance complaint, it requested the right to impose approximately $1 billion in annual sanctions. Brazil also proposed to impose the sanctions in the form of suspended market access concessions for various U.S. service providers in areas such as communications services, construction, financial services, etc. as well as to eliminate certain intellectual property protections for copyrights, trademarks, patents, etc. Nevertheless, press reports indicate that, according to Brazil’s Agriculture Minister, Brazil may not retaliate in this case.
For additional information on this or other trade remedy matters, please contact Peggy Clarke.

DOC Determines China Paper Producers Benefit From Subsidies and Dump Paper in the United States

The Department of Commerce ("DOC") issued its first final affirmative finding of subsidies in a non-market economy country. Reversing a more than 20-year position that countervailing duty ("CVD") laws do not apply to non-market economy countries, DOC found both that the CVD laws do apply and that Chinese exporters of coated free sheet paper (the glossy paper used for art books, text books, and similar publishing ventures) received subsidies equal to between 7.40% and 44.25% ad valorem. In addition, DOC also found that the exporters were selling the product in the United States below normal value (dumping) at rates ranging from 21.12% to 99.65% ad valorem. If the International Trade Commission determines that imports of the paper are injuring the U.S. industry, then countervailing duty and antidumping duty orders will be issued, requiring cash deposits of estimated duties at the rates found by DOC.

This final decision confirms the DOC’s preliminary decision that DOC has the authority after all to impose countervailing duties against non-market economies. See International Client Alert, April 25, 2007 for more information on the preliminary CVD determination. DOC states that its 20-year position was not that CVD law did not apply to non-market economies but that, while such economies were subject to the law, subsidization was a meaningless concept in a Soviet-style, centrally-planned non-market economy. In contrast, according to DOC, there is enough pricing and planning flexibility for Chinese companies that subsidies could effect their production behavior but too much government control to change China from a non-market economy for dumping purposes. Moreover, although its memorandum on the applicability of the CVD law to China at the time of the preliminary determination indicated that DOC might need to change its non-market economy methodology in antidumping proceedings where there was a companion CVD case, in the final determination DOC refused to change its methodology when calculating the dumping margin. While not unexpected, the decisions were a blow to the Chinese government. Since the case was initiated, several other CVD investigations against China have been initiated.

China appears prepared to challenge the decisions. Prior to the issuance of the preliminary determination, the Government of China had sought an order from the Court of International Trade ("CIT") enjoining the continuation of the investigation pending a ruling on the applicability of countervailing duty law to NME countries. The CIT, however, declined to issue an injunction saying that the issue was not ripe for appeal. One can expect that China will appeal this final CVD decision to the CIT, assuming an order is issued. Moreover, China has already challenged the preliminary determination at the WTO. China requested consultations regarding both the CVD and the antidumping preliminary determinations in September. The United States and China consulted in Geneva on October 12. The final determinations were announced on October 18. While China will need to request consultations separately on the final determinations, one can expect that it will do so.
For additional information on this or other trade remedy matters, please contact Peggy Clarke.

Targeting Health Care Companies: SEC Investigates Possible FCPA Violations on Foreign Sales of Orthopedics Products

Five major health care companies announced new investigations into their international sales activities by the Securities and Exchange Commission (the "SEC"). Biomet Orthopedics Inc. ("Biomet"), DePuy Orthopedics ("DePuy), Smith & Nephew Inc. ("Smith & Nephew), Zimmer Holdings Inc ("Zimmer") and Stryker Corp. ("Stryker"), all major orthopedics firms, announced the receipt of notification that the SEC intends to informally investigate possible Foreign Corrupt Practices Act ("FCPA") violations. Medtronic Inc. ("Medtronic"), a manufacturer of implantable devices, also reported having received such notification. While the companies recently reached a settlement agreement with the Department of Justice ("DOJ") concerning their future activities within the U.S. domestic market, the SEC proceedings will finally address the issue of possible Foreign Corrupt Practices Act ("FCPA") violations based on their dealings in the foreign markets. The SEC’s actions signify increased scrutiny over the overseas marketing activities of companies in the health and medical fields. It is particularly noteworthy in that the SEC appears to have targeted a specific segment of that industry. The FCPA prohibits individuals and U.S. companies and their agents from giving or promising to give anything of value to foreign government officials in order to obtain or retain business (among other things).

In contrast to the largely private sector health care system in the United States, physicians and other health care officials outside the U.S. are often employed by state-owned hospitals. As a result, they are considered foreign officials under the FCPA. Providing hospitality, travel, free samples, free or subsidized training or other benefits can run afoul of the FCPA’s anti-bribery provisions. In recent years, several health care companies – among them Diagnostic Products, Syncor International Corporation (now a unit of Cardinal Health, Inc.), Shering-Plough and Micrus Corporation – have faced punishment under the FCPA for bestowing lavish gifts and other benefits on government-employed physicians in order to win business. U.S. companies must scrutinize every instance in which anything of value may be given to doctors and staff abroad, even if the same behavior would be reasonable and acceptable in the U.S.

The new SEC investigations follow the settlement by many of the same orthopedics firms of investigations by the DOJ earlier this year as briefly mentioned above. Bioment, DePuy, Smith & Nephew and Zimmer allegedly violated federal anti-kickback laws by giving orthopedic surgeons consulting deals as rewards for using company products. The companies paid a combined total of $311 million in fines, and must implement new internal controls and enhanced monitoring procedures. Stryker was not fined, but agreed to the monitoring and internal control reforms. The DOJ has agreed to defer prosecution so long as the companies fully comply with the terms of the settlement.
For additional information on this or other FCPA issues, please contact Bill Steinman

Duped or Duplicitous?

The Bureau of Industry and Security ("BIS") just released the decision of an Administrative Law Judge recommending a 15-year denial of export privileges to Megatech Engineering, a Mumbai-based distributor of MTS Systems products, and three of its employees. At issue were unlicensed exports of two MTS Systems products to the Indira Gandhi Centre for Atomic Research ("IGCAR"), a company on BIS’s Entity List. Based on the ALJ’s recommendation, Megatech and the named employees have been added to the Denied Persons List.

Megatech and the individual respondents argued before the ALJ that they were duped by IGCAR which set up front companies and then diverted the exported products from those companies. The ALJ rejected this argument on two grounds.

First, the ALJ noted that the orders that were allegedly destined to the front companies were negotiated by Megatech with an individual that Megatech knew to be an employee of IGCAR. This wasn’t a red flag as much as it was a smoking gun.

Second, the ALJ noted that Megatech departed from its routine procedures with respect to the sales that were diverted to the IGCAR. Normally, MTS Sytems employees would travel to India for installation and final acceptance of products sold by Megatech to its customers in India. For the sales at issue, however, the Indian customer traveled to the United States for pre-shipment inspection, and MTS Systems trained a Megatech engineer to install the equipment and handle final acceptance in its stead. This change guaranteed that MTS Systems would not travel to India to discover that the front companies were not the final end user of the products.

Of course, the change in procedures should have been a red flag not only to Megatech but also to MTS Systems. So, not surprisingly, MTS Systems agreed in March 2006 to a $36,000 civil penalty. The charging documents against MTS Systems noted that an employee working on the exports at issue sent an email stating that "all kinds of flags are being raised here." Those "flags" weren’t specified, but chief among them had to be the change in routine installation and acceptance procedures.
For more information on this or other export control issues, please contact Clif Burns.

The Bureau of Industry and Security ("BIS") recently designated five Chinese companies under BIS’s Validated End User Program. Because of that designation, certain dual-use items can be exported to those companies in China without an export license.

The first reviews from China are now in. And they aren’t good:

The government yesterday criticized the United States over a new system that’s likely to reduce China’s imports of hi-tech products. Wang Xinpei, spokesman for the Ministry of Commerce, expressed "strong dissatisfaction" over the US move, as the "US side did not have enough consultation with China to reach a consensus on implementing the new VEU system". The United States should not visit any companies registered in China for VEU screening without permission from the Ministry of Commerce, Wang said.

We have previously criticized the VEU program because it was unlikely that China would permit on-site inspections as part of that process. The statement by the Chinese spokesman confirms that, although it is not entirely clear that BIS actually visited the Chinese sites of the companies granted VEU status. It does seem likely, however, that the companies at least agreed to future on-site visits — one of the factors set forth as a consideration for granting VEU status under section 748.15 of the Export Administration Regulations

More significantly, one has to wonder if there is a veiled threat behind the puzzling statement that the VEU program "will reduce China’s imports of high-tech products." If the VEU program operates as anticipated by BIS, it would increase such imports. Perhaps this statement is a harbinger that China may take internal measure to block the program. After all, from the Chinese perspective at least, the VEU program would give advantages to the VEU companies but not to their Chinese competitors. That might serve as a motive for China to block imports to the VEU companies unless they withdrew from the program.

Of course, this is just speculation based on a somewhat puzzling statement in a Chinese state-owned news outlet. But it will be interesting to see if China does adopt countermeasures.
For more information on this or other export control issues, please contact Clif Burns.

CAFC Roundup: Court’s Delay Renders Litigation Moot and Other Matters

The U.S. Court of Appeals for the Federal Circuit ("CAFC") recently held that when imports are deemed liquidated under 19 U.S.C. § 1504(d), this renders moot further court action concerning a U.S. Department of Commerce ("DOC") determination of an antidumping duty rate as it affects these imports. In this case, despite a motion for a preliminary injunction to enjoin liquidation, the imports were deemed liquidated because the Court of International Trade ("CIT") failed to rule on that motion within six months after the lifting of the suspension of liquidation, the statutory deadline for liquidating the entries. While the CIT eventually granted SKF’s motion to enjoin the liquidation of SKF’s covered entries, the CAFC held this was improper.

The importers in the case, SKF USA, Inc., SKF France S.A., and Sarma (collectively, "SKF"), imported ball bearings subject to an antidumping duty order. SKF eventually sought an administrative review of the antidumping duties and later filed an action with the CIT to challenge the results of that review. The parties also filed a motion requesting the CIT to enjoin U.S. Customs and Border Protection ("Customs") from liquidating the entries pending the outcome of the court challenge.

As provided by 19 U.S.C. § 1504(d), Customs must liquidate an entry of goods within six months after receiving notification that the DOC has completed its administrative review and removed the suspension of liquidation. If Customs fails to liquidate an entry within that time frame, the entry is deemed liquidated at the amount of duty deposited by the importer at the time of import. Because the CIT failed to rule on SKF’s motion to enjoin liquidation before the six-month statutory period ended, the covered entries were automatically deemed liquidated. Once entries are liquidated, the statutory scheme does not provide for reliquidation and the courts can not effect the duties assessed at the time of liquidation. Therefore, this court challenge action was rendered moot by the automatic liquidation.

The CAFC confirmed its previous decisions that the six-month deadline for liquidation begins running when the DOC publishes the final results of its administrative review in the Federal Register, not when the DOC later issues liquidation instructions to Customs. The CIT had determined that there was a "de facto" injunction because the Government originally consented to SKF’s motion for an injunction on liquidation. However, the CAFC rejected this, noting that only the trial court has the power to enjoin liquidation. The revised antidumping rate by the DOC would have been valid only if the CIT had enjoined liquidation before the statutory time frame expired. Thus, the CAFC vacated the CIT’s judgment and remanded with directions to dismiss the case as moot.

Eurodif S.A., et al. v. United States et al.: CAFC Refuses to Speculate on Impact of Previous Decisions

The CAFC recently dismissed an appeal by the Government, USEC Inc., and United States Enrichment Corp. (the latter two collectively referred to as "USEC"). The dispute concerned the application of the antidumping statute to certain sales. In preceding cases, Eurodif I and Eurodif II, the CAFC held that separate work unit ("SWU") contracts for the enrichment of uranium were contracts for services, not goods. Therefore, the low enriched uranium ("LEU") produced under such contracts was not subject to the antidumping statute because there was no sale of a good (i.e., the LEU). As a result of these decisions, the DOC excluded the LEU covered by SWU contracts from its recalculation of the duty margin for Eurodif and redefined the scope of the antidumping order on LEU from France to exclude any entry of LEU that is accompanied by a certification claiming that the entry is made pursuant to a SWU contact.

In the previous Eurodif cases, the CAFC did not address how the DOC should determine whether, in fact, future entries of LEU are made pursuant to SWU contracts. This case arises from that omission. In the case at hand, the DOC and USEC argued that the DOC should be permitted to suspend liquidation of future LEU imports until it determines on a transaction-by-transaction basis during an administrative review whether the SWU contract exception applies. USEC also argued the DOC should make clear that future LEU imports will not be found outside the scope of the antidumping law under certain enricher affiliations. The DOC and USEC’s challenge came not from the impact of the previous decisions on a particular entry, but out of concern that future imports would be liquidated without antidumping duties before the DOC could determine whether the sale was inside the scope of the order. The CAFC refused to speculate on what may or may not happen to the next LEU entry under a SWU contract. Correspondingly, the CAFC also held that USEC’s questions about classification of future LEU imports are equally unripe and non-justiciable. The Court held that neither the procedural nor the substantive questions of the appellants were ripe for decision. Therefore, the CAFC dismissed the appeals by the Government and USEC.

Corus Staal BV v U.S. et al.: CAFC Once Again Upholds DOC Zeroing Methodology

The CAFC recently affirmed a decision by the CIT holding that the DOC’s use of zeroing and the constructed export price classification in regards to the disputed sales transactions were valid.

The CAFC reiterated its previous holding that the DOC’s zeroing methodology is a permissible interpretation of the statutory provisions. As a result of World Trade Organization ("WTO") decisions regarding zeroing, the DOC had since recalculated the dumping margin without zeroing and, based on the resulting finding of no dumping, revoked its antidumping order. Corus argued that because of these developments, the DOC should remand the case in order to review the final results of its second antidumping review of the antidumping order. The CAFC held that the recent developments do not require a different finding in the case and noted that the DOC made clear its new zeroing policy would not apply to this particular administrative review. The CAFC stated it will accord the DOC substantial deference in the administration of the antidumping statute and will not overturn the DOC’s zeroing practice until the WTO’s ruling has been adopted pursuant to the specified statutory scheme.

U.S. v. Ford Motor Company: Importer May Unilaterally Waive the Statute of Limitations in Customs Penalty Matters

The CAFC recently vacated a decision by the CIT to dismiss three counts of the Government’s claim against Ford Motor Company ("Ford"). The claim sought civil penalties for fraud, gross negligence, and negligence pursuant to 19 U.S.C. § 1592(c) based on Ford’s incorrect designation of imported car and truck engines and transmissions. The CAFC upheld the CIT’s dismissal of the final count of the Government which sought the repayment of alleged lawful duties owed by Ford.

The CAFC decision to allow Customs to pursue civil penalties against Ford hinged on whether Customs’ failure to explicitly accept Ford’s offered waiver of the statute of limitations made the waiver ineffective, and thereby allowed the statute of limitations to run before the Government filed its claims. The CAFC reiterated the U.S. Supreme Court’s previous holding in Stange v. United States that a waiver is not a contract requiring acceptance. A waiver is voluntary and unilateral. Therefore, despite the Government’s failure to accept the waiver, it remained effective and prevented the statute of limitations from running before Customs brought suit.

Nevertheless, the CAFC dismissed Customs’ claim to recover $5.3 million in additional duties. The CAFC held that because the Court had previously found that Ford’s entries were deemed liquidated by operation of law (due to a finding of unreasonable delay on the part of the Government in its fraud investigation of Ford’s entries), Customs was only permitted to collect the amount of duties asserted on the entries at the time of their entry into the United States. Therefore, the Government had not been deprived of lawful duties resulting from a violation. Instead, Customs’ own unreasonable delay resulted in the Government losing the ability to pursue the § 1592(d) duties
For additional information on this or other trade remedy matters, please contact Peggy Clarke.

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