United States: International Client Alert, April 2007

Commerce Implements Some WTO Zeroing Findings

The Department of Commerce ("DOC") recently concluded section 129 proceedings to recalculate the original dumping margins in 12 cases in order to implement a WTO Appellate Body decision on zeroing: Certain Hot-rolled Carbon Steel from the Netherlands; Stainless Steel Bar from France; Stainless Steel Bar from Germany, Stainless Steel Bar from Italy; Stainless Steel Bar from the United Kingdom; Stainless Steel Wire Rod from Spain; Stainless Steel Wire Rod from Sweden; Stainless Steel Wire Rod from Italy; Certain Stainless Steel Plate in Coils from Belgium; Stainless Steel Sheet and Strip in Coils from Italy; Certain Cut-to- Length Carbon-quality Steel Plate from Italy; and Certain Pasta from Italy. (See the October 11, 2006 International Client Alert for information on zeroing and the WTO.) Section 129 of the Uruguay Round Agreements Act provides for implementation of WTO decisions by DOC's Import Administration at the request of the United States Trade Representative ("USTR").

On April 10, 2007, DOC issued the final decisions in the 12 section 129 proceedings. For these decisions, DOC reopened the records from the original investigations to recalculate the margins. As a result, for two investigations, DOC concluded that all margins would have been zero or de minimis and indicated its intent to revoke those orders: Certain Hot-Rolled Carbon Steel from the Netherlands and Stainless Steel Wire Rod from Sweden. In four other cases (Stainless Steel Bar from France; Stainless Steel Bar from Germany; Stainless Steel Bar from Italy; and Stainless Steel Bar from the United Kingdom) only certain companies' margins were zero or de minimis. DOC indicated its intent to exclude those individual companies from the orders. Ironically, because of changes in the mix of margins that were included in the calculation, in several cases the "all others rate," i.e., the margin that applies to companies that are not specifically investigated and do not have company-specific margins, has increased.

For those orders being revoked or companies being excluded from the existing order as a result of these proceedings, only entries made on or after the date USTR asked the Department to implement the decisions will be affected. The European Union ("EU") contended, however, that this action only partially implemented the WTO decision. The EU expressed concern that entries prior to the effective date of the decisions will still be subject to duties, despite the finding that no duties should ever have been imposed on them.

Additionally, the EU complained that the United States still has not implemented the WTO Appellate Body decision faulting DOC's use of zeroing in 16 administrative reviews. Finally the EU faulted DOC's calculation of the "all others rate." DOC has not yet implemented the WTO decision regarding shrimp from Ecuador. For existing orders, any country seeking to have investigation margins recalculated without zeroing presumably needs to go through WTO dispute settlement, because DOC will not apply its methodology change retroactively.
For further information on this or other trade remedy issues, please contact Peggy Clarke or Carolyn Lindsey.

If your name is Daniel Garcia, don't even think of applying for an apartment, a job, a mortgage or a car loan. Because you'll be denied. Thanks, apparently, to increased use of the Office of Foreign Assets Control's Specially-Designated Nationals ("SDN") list to scan routine domestic transactions from used car sales to lease applications.

This is the conclusion of a report issued recently by the Lawyers Committee for Civil Rights of the San Francisco Bay Area. The report trots out a half-dozen horror stories of OFAC screening gone wrong and finds:

• A couple whose mortgage application was denied simply because the husband's middle name "Hassan" was listed on the SDN list as an alias for one of Saddam Hussein's sons;

• A couple whose first home purchase couldn't close because the first and last name of the husband, both common Hispanic names, matched a name on the SDN list;

• An individual who couldn't purchase a car simply because his last name, Muhammad, caused a credit agency to report that he was a hit on the SDN list

• An individual that could not pick up $50 that had been sent to him by a money transfer service because his first and middle names were Mohammed Ali;

• A PayPal customer named Yusuf Mohammed who had his account closed; and

• A man who couldn't buy a treadmill because his first name is Hussein.

The problem occurred in these instances for one of three reasons: (1) the company didn't know how to properly identify a hit; (2) the company didn't want to take time to determine if a proper hit was a false positive; or (3) even if the company was willing to take that time, the SDN entry lacked sufficient identifying information (e.g. no date or place of birth) to determine whether the hit was a false positive.

Our not-so-hypothetical SDN Daniel Garcia (not one of the Lawyer's Committee's examples) has a common Hispanic name and his SDN entry has no place of birth or date of birth that would allow a simple ID check to verify that the hit was a false positive. See for yourself:

GARCIA, Daniel, Avenida Insurgentes Sur No.
421, Bloque B Despacho 404, C.P. 06100,
Mexico, D.F., Mexico; Manager, Promociones
Artisticas (PROARTE)(individual)[CUBA]

Needless to say as more and more companies with less and less screening experience screen customers against the SDN list, anyone named Daniel Garcia might consider changing his name.

The Lawyer's Committee report raises two interesting issues. First, although the real SDN has the legal right to challenge his designation, the mistaken SDN has neither the right to challenge the designation nor to obtain an official determination that he or she isn't the real SDN. OFAC's refusal to provide such an avenue of relief is, indeed, hard to rationalize. OFAC is giving more rights to the alleged terrorist than to an ordinary American.

Second, because of the abundance of common Hispanic and Middle Eastern names on the SDN list, careless use of the list may hide unlawful discrimination in the provision of housing, credit, or employment. A company that simply refuses to provide service to a hit without taking steps to verify whether the hit really is an SDN will have a hard time justifying that the SDN list was the real reason for the denial rather than an intent to discriminate based upon national origin.
For further information on this item or on the Office of Foreign Assets Control, please contact Clif Burns.

Two recent decisions by the Court of Appeals for the Federal Circuit ("CAFC") address different aspects of the treatment of affiliated companies in antidumping duty proceedings.

In Viraj Group v. United States, the CAFC upheld the decision of the U.S. Department of Commerce ("DOC") "collapsing" the Viraj Group in the final determination of stainless steel bars from India and reversed the Court of International Trade ("CIT"). "Collapsing" refers to treating affiliated producers as a single producer. DOC regulation, 19 C.F.R. § 351.401(f ), states that DOC will normally collapse where the producers have "production facilities for similar or identical products that would not require substantial retooling of either facility in order to restructure manufacturing priorities."

In this case, DOC had found that one of the affiliated producers would not require significant retooling and had collapsed the producers, even though in an antidumping proceeding involving the same companies but a different product DOC had determined not to collapse the same producers, and the CIT had agreed. Here, the CIT found the regulation required DOC to find that both producers would not require significant retooling and that, in making the decision, DOC should consider its "major input" rule (if a producer buys a major input from an affiliated supplier, DOC uses the higher of (1) the price paid to the affiliated supplier, (2) the normal market price of the input, or (3) the cost of producing the input for its calculations). The CAFC reversed, finding that DOC's interpretation that only one of the producers' facilities needed to have insignificant retooling costs was consistent with the goal of the regulation: to prevent manipulation. Moreover, the CAFC stated that the CIT's instruction to consider the impact of the major input rule when determining whether to collapse (rather than after determining not to collapse) would establish an impermissible results-oriented approach to the collapsing decision. Because the decision to collapse is fact-specific, the CAFC implied that it was reasonable to collapse producers for one product but not for another product where the facts supported each such decision.

In Crawfish Processors Alliance, et al. v. United States (Ct No. 2006-1269), the CAFC found that DOC had acted inconsistently with the law and its own regulations in finding two companies, Fujian Pelagic Fishery Group Co. ("Fujian") and Pacific Coast Fisheries Corp. ("Pacific Coast") not to be affiliated even though Fujian claimed to own 5 percent of Pacific Coast's common stock. The CIT had upheld DOC's finding of no affiliation. When the exporter and importer are affiliated, the issue is not one of collapsing but, rather, what U.S. sales are used for comparison purposes. DOC looks at the U.S. sales to the first unaffiliated entity. In this case, because DOC found the two companies not to be affiliated, it used the sales between Fujian and Pacific Coast instead of using Pacific Coast's sales to its customers.

The CAFC rejected both DOC's interpretation of the law and regulation and DOC's findings of fact. DOC found that the companies had not established that Fujian owned 5 percent of the stock during the relevant period. The statue defines "affiliated" companies as including "any person directly owning, controlling, or holding with power to vote, 5 percent or more of the outstanding voting stock or shares of any organization and such organization," which DOC interpreted to require the transfer of cash or merchandise to show ownership. Fujian had signed a promissory note to pay for the shares it purchased that did not become due until after the period of review. DOC determined that during the period of review, Fujian had "paid" for approximately half of the amount it owed Pacific Coast through the supply of merchandise, but had not "paid" for the rest and did not therefore own the shares. Fujian and Pacific Coast had provided the Washington state stock certificate showing that Fujian owned 5 percent of the common shares as well as the promissory note. The CAFC found that neither the statute nor DOC's regulation required evidence of the transfer of cash or merchandise to prove ownership and that such a requirement was an impermissible interpretation. Moreover, the CAFC found that the stock certificate and the promissory note were sufficient proof of ownership of the shares such that the two companies should be considered affiliated.
For additional information on this or other issues concerning trade remedy matters, please contact Peggy Clarke or Carolyn Lindsey.

On March 14, the Bureau of Industry and Security ("BIS") added Maurice Subilia, Walter Lachman, and Fiber Materials, Inc. to the Denied Persons List and deprived them of their export privileges until November 2015.

Fiber Materials hasn’t apparently gotten that news since its web page still lists an "International Sales Office" in Biddleford, Maine.

Sublia, Lachman, and Fiber Materials were sentenced on November 21, 2005 for criminal export violations. Even though BIS participated in the investigation and prosecution of the case, it apparently forgot about the three defendants, which explains the seventeen month delay in adding them to the Denied Parties List.

The story behind the convictions of Subilia, Lachman, and Fiber Materials is interesting. The two individuals and the company were convicted of shipping a control panel for a hot isostatic press to India without a BIS license in 1988. At that time, hot isostatic presses were classified under ECCN 1312A. BIS and the Department of Justice argued that the "control panel" was covered because it was a "specially designed. . . component" for a hot isostatic press controlled under ECCN 1312A.

After the defendants were convicted in a jury trial, the judge granted a motion to set aside the verdict on the ground that the language "specially designed" was unconstitutionally vague. The government appealed to the First Circuit Court of Appeals, which reversed holding that the "specially designed" standard was not unconstitutionally vague.

The opinion of the Court of Appeals finding that the phrase "specially designed" was not unconstitutionally vague does so by providing a definition of "specially designed" which arguably is itself overly vague. The court noted that "specially designed" had two possible and separate meanings - either (1) a component that could be exclusively used for the controlled item or (2) a component designed with properties that make it capable of working with the controlled item but also capable of working with items that are not controlled. Because of the broad legislative goal behind the Export Administration Act, the Court held that the second definition, which is both broader and vaguer, applied.

The defendants had shipped the control panel as a part of a hot isostatic press that was of a size that was not controlled by ECCN 1312A and that therefore did not require a license. The prosecution occurred because the control panel could also be used with a larger hot isostatic press that would be covered by the ECCN thereby making it, allegedly, a "specially designed" component for a larger controlled hot isostatic press. The Court of Appeals, by applying the broader definition, affirmed that view; and, as a result, Messrs. Subilia and Lachman are currently wearing ankle bracelets, and Fiber Materials has lost its export privileges.

If that scares you, it should. If that rule is followed, a decision to export an item requires an analysis of whether every component of that item is capable of being used as part of a controlled item. Can the power supply of an uncontrolled item be used for the controlled version? Does it require a license even if the item with which it is being exported does not?

The Court of Appeals vaguely sensed this conundrum and so it tweaked its broader definition somewhat to add an intention requirement:

This distinction might have some force in the case of the control panel since there was evidence presented that it had been designed with capabilities that exceeded the requirements of the smaller press. But in many other instances, how is it to be determined whether the device is intended to work with the controlled item or just happens to work with the controlled item? That will be a difficult line to draw and one which the exporter draws at its own peril.
For further information on this item or on the Bureau of Industry and Security, please contact Clif Burns.

BIS Targets Foreign Employees Of Overseas Subsidiaries

The Bureau of Industry and Security has a new target: foreign employees of U.S. companies. BIS just posted an order, effective April 2, 2007, imposing a seven-year denial of export privileges on Stephen Lincoln, a citizen and resident of the United Kingdom. The order was the result of a settlement agreement between Lincoln and BIS.

According to BIS, Lincoln shipped U.S. origin software with an encryption module to Iran while he was the Sales Manager of the UK office of Buehler, Ltd., a U.S. company that manufactures scientific instruments and supplies for material analysis. The charging letter does not allege that Mr. Lincoln ever set foot in the United States or had any connection to the United States other than his employment by a U.K. subsidiary of a U.S. company.

Of course, issues as to the extraterritorial application of U.S. laws are merely legal niceties with which BIS cannot be bothered. However, U.S. law restricts extraterritorial application of U.S. law to two cases. First, a statute may have extraterritorial application where it clearly states an intent to have such application. EEOC v. Arabian American Oil Co., 499 U.S. 244, 248 (1991). Second a statute may have extraterritorial application where it is being used to punish extraterritorial misconduct that was intended to have an effect in the United States. Ford v. United States, 273 U.S. 593, 623 (1927). The classic paradigm of this second situation is where someone fires a shot across a border and kills somebody in the other country.

Nothing in the Lincoln case suggests that the second factor, extraterritorial effect, can justify punishment of a U.K. citizen for an export from the U.K. to Iran. Nor do the EAR or IEEPA, the authorizing statute, manifest a clear intent to exercise extraterritorial jurisdiction over foreign citizens in their home countries. Section 734.5 of the EAR is the only provision of the EAR that directly addresses the jurisdiction of the EAR over foreign persons outside the U.S. That section - titled "Activities of U.S. and foreign persons subject to the EAR" - provides that foreign persons are only subject to the EAR for violations of an order issued under the EAR. No order had been issued against Mr. Lincoln at the time of Mr. Lincoln's shipment of the software, and so that shipment violated no order under the EAR. Of course, now that Mr. Lincoln has consented to an order denying him export privileges, his future conduct may be held to be covered by the EAR.

But even if the U.S. could in theory exercise jurisdiction over Mr. Lincoln for his shipment of software to Iran, the U.S. couldn't exercise this jurisdiction in practice unless it could extradite him. The recently-adopted extradition treaty between the U.S. and the U.K., however, makes extradition seem at best a distant possibility. Article 2(4) deals with crimes committed outside the territory of the "Requesting State," which, in this instance would be the United States. Under the treaty, the crime would be an extraditable offense only if the laws of the U.K provide for punishment of U.S. citizens for extraterritorial violations of U.K. export laws, a dubious proposition at best.

So why didn't Mr. Lincoln tell the BIS simply to take a hike? Here we can only speculate, but my guess is Disneyland. Or perhaps the Grand Canyon. Mr. Lincoln didn't want to risk being arrested if he visited the U.S. on holiday so he thought that agreeing to the order, particularly inasmuch as he didn't have to pay a fine, was a simple way to avoid that problem.

Unfortunately, complying with the Order may be more difficult for Mr. Lincoln than he imagines. The Order entered is a typical BIS order that prohibits the person subject to the order from, inter alia, "receiving [or] using . . . any item exported or to be exported from the United States that is subject to the Regulations." Under section 734.3(a)(2), an item subject to the Regulations includes all "U.S. origin items wherever located."

Now this language makes perfect sense for an order denying export privileges to someone in the United States. It makes no sense whatsoever when applied to Mr. Lincoln, who will violate the terms of the order if he orders a Budweiser at the local pub, rents a DVD of "Casino Royale" at his neighborhood video store, or uses a computer running a Windows operating system. And by agreeing to the order, he has obviously made himself subject to U.S. jurisdiction as well as the absurd requirements of this order.

Perhaps Mr. Lincoln should rethink that trip to Disneyland.
For further information on this item or on the Bureau of Industry and Security, please contact Clif Burns.

In recent weeks, the United States has taken several trade actions against China. The Office of the U.S. Trade Representative ("USTR") took the first steps in addressing some of the many disputes involving China's intellectual property protections. Moreover, the U.S. Department of Commerce ("DOC") has preliminarily reversed its long-standing rule that countervailing duties do not apply to non-market economies ("NME").

On April 10, 2007, USTR requested two separate WTO consultations on intellectual property issues. In one case, USTR claimed that China violated its market access commitments for copyright-intensive products (e.g., books, movies, recordings). According to USTR, China maintains import and distribution restrictions on such copyright-intensive industries by restricting the right to import and distribute to a few stateowned trading enterprises in some instances. In addition, USTR claimed that these practices encouraged the rampant infringement that has long been a source of trade friction with China, by restricting access to noninfringing products and, thus, creating a market for pirated product. In the second case, USTR claimed that China has failed to protect and enforce intellectual property rights. USTR noted that the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights ("TRIPS") established minimum standards for the protection and enforcement of copyrights and trademarks. According to USTR, excessively high thresholds before criminal sanctions apply, stated in terms of value, profits, or numbers of pirated/counterfeit copies create a safe harbor for pirates and enable such pirates to operate on a commercial scale. Moreover, USTR claimed that Chinese law enables Customs authorities to move seized pirated/counterfeited goods back into commercial channels rather than destroying them and that TRIPS requires that such goods be removed from commerce.

China has 60 days from the date of the request for consultations to consult with the United States on these issues. After that, if no successful conclusion to the consultations results, either side may request that a panel be formed to address the dispute. If the panel (or the Appellate Body if the panel results are appealed) determines that China has violated its WTO commitments, China will either need to take steps to eliminate the violation or offer compensation to the United States. If China fails to do either, the United States could receive permission to retaliate against China, most likely by increasing tariff rates on certain imports from China.

In addition, on April 9, 2007, DOC issued a preliminary finding that Chinese coated free sheet paper was receiving countervailable subsidies. This finding preliminarily reversed a 20-year position that the countervailing duty provisions did not apply to non-market economy ("NME") countries, such as China. If DOC continues to apply this position in its final determination, it will impose countervailing duties on a nonmarket economy country for the first time.

In 1984, the Court of Appeals for the Federal Circuit upheld DOC's finding that the countervailing duty laws did not apply to NME countries. This conclusion was based on the nature of the non-market economy:

specifically, that because the markets were so distorted by government intervention and because companies were government owned, there could be no subsidies (or bounties or grants) within the meaning of the law. Since 1984, DOC has not initiated an investigation into subsidy practices in a NME country.

DOC explained its change in position in a memorandum accompanying the preliminary determination. DOC stated that its prior decision was not obligated by law but was a policy position and was appropriate for an era when NME countries followed a "soviet-style" approach. China, however, the DOC claimed is no longer a soviet-style economy, but rather a mixed economy that though still not sufficiently market-oriented to graduate from NME status, nevertheless could provide subsidies. It is worth noting that DOC continues to apply the NME methodology it apparently developed for soviet-style economies to China when making antidumping duty determinations. DOC acknowledged this in its memorandum, stating in the final sentence that this coated free sheet paper decision may require it to review its NME methodology. DOC has not initiated any review of such methodology in any ongoing case but may address this in its preliminary decision in the companion antidumping investigation of coated free sheet paper from China.

The Government of China had sought an order from the Court of International Trade ("CIT") enjoining the continuation of this investigation pending a ruling on the applicability of the countervailing duty law to NME countries. The CIT declined to issue an injunction, saying only that it did not have jurisdiction at this time to address the issue but that the issue could be raised at the end of the administrative investigation process.
For further information on this or other trade issues, please contact Peggy Clarke

The U.S. Department of State, Directorate of Defense Trade Controls ("DDTC") published new guidance for those seeking to register with DDTC as a manufacturer, exporter or broker. According to DDTC, the new guidance was necessary due to the large number of "low quality applications" received by DDTC.

While the guidelines apply to all registrations mentioned above, they are particularly instructive for the foreign commercial sales representatives of U.S. companies that must register as brokers under DDTC's interpretation of Part 129 of the International Traffic in Arms Regulations (the "ITAR"). Among the clarifications: 1) all checks written to DDTC must be drawn on a corporate account and not on a personal account; 2) the checks of foreign brokers may be drawn on non-U.S. bank accounts; 3) the transmittal letter must be submitted on corporate letterhead; 4) all applications must be typed and not handwritten; and 5) the broker registration of a U.S. parent company will cover its foreign subsidiaries, but only if the foreign subsidiaries were listed on the original application.

It is important to note that these guidelines are included on the following website: http://www.pmddtc.state.gov/registration_rwa_policy.htm, and in the "Helpful Hints" document and sample rejection letter contained on that website, therefore applicants must review each of those documents closely in order to ensure that they fully understand what DDTC requires for successful registration. For example, the correct mailing address is listed in the "Helpful Hints;" the mailing address on the registration application (DS-2032) itself is wrong.

Registration of foreign sales representatives for U.S.-origin defense articles (who meet the definition of a broker under Part 129) is required by DDTC, according to recent informal statements by DDTC officials. If a foreign sales representatives application is not filed, delayed or rejected, even for minor mistakes, a U.S. exporter risks civil fines and criminal penalties if that exporter utilizes the services of the unregistered foreign sales representative.
For additional information on this or other issues concerning trade remedy matters, please contact Clif Burns or Carolyn Lindsey.

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