Fashion Intel & Analysis

In this TDM:


Mexico TPL (1) Embargoes

On Friday, CBP confirmed that Mexico Tariff Preference Level 1 (Cotton and Man-Made Fiber Apparel made from fabric of any origin) embargoed with goods offered on May 17, 2010 at 2:50 p.m. Mexico TPL (1) is the first to TPL embargo in 2010, and has been the first to embargo every year since 1999. As a reminder, imports of these garments continue to enter the U.S., but they are charged the standard duty rate.

CITA Publishes Procedures for Considering Requests for Textile and Apparel Safeguard Actions on Imports from Oman

In Friday’s Federal Register, the Committee for the Implementation of Textile Agreements (CITA) announced the procedures for textile and apparel safeguard actions under the U.S.-Oman Free Trade Agreement (FTA). The FTA states that if an increase in U.S. imports from Oman of a textile product damage or threaten to damage the U.S. industry, the U.S. may impose a Safeguard tariff equal to the Most Favored Nation tariff rate.

The timeline for a Textile Safeguard under the U.S.-Oman FTA is relatively quick.  CITA will determine within fifteen working days whether to accept a petition. If the petition is accepted, CITA will publish a Federal Register notice requesting comments on the petition, allowing thirty days for comments. The final determination will come sixty days after the close of the comment period. In addition, CITA may also self-initiate a Textile Safeguard case, following the same timeline. These procedures are effective immediately.

Click here to read the Federal Register notice.

Congressmen Develop Legislation Prohibiting Trade Preferences for Textiles and Apparel from Cambodia

Representatives William Delahunt (D-MA) and Dana Rohrabacher (R-CA) recently released a draft of the Cambodian Trade Act of 2010. If passed, the bill would prevent the U.S. from forgiving or reducing any debt owed by the government of Cambodia. More importantly, the legislation also prohibits the U.S. from offering any trade preferences for textiles, apparel, or footwear made in Cambodia. The representatives say the legislation is a response to Cambodia's deportation of Uighur refugees back to China in December 2009. The bans on trade preferences would enter into force on the date they are signed into law.

Baucus and Levin Introduce Jobs Bill; Expands Wool Trust Fund and Cotton Trust Fund and Duty Suspensions

On May 20, Senate Finance Committee Chairman Max Baucus (D-MT) and House Ways and Means Committee Chairman Sander Levin (D-MI) released a summary of the American Jobs and Closing Tax Loopholes Act. While the legislation deals mainly with job creation and tax programs, it also includes a few trade provisions that are supposed to promote U.S. businesses.

Among these is an increase in funding for the Wool Trust Fund by diverting other apparel tariff revenues. The exact mechanism for this funding is not clear from the bill summary. Payouts from the Wool Trust Fund are available only to a limited number of U.S. manufacturers that meet certain criteria. The program was created by the 2004 Miscellaneous Tariff Bill to encourage more domestic wool production. While initial funding for the Fund was $5.3 million, revenues shrank over the past two years, decreasing payouts. The legislative proposal says that it will use tariffs collected from the imports of other apparel products in order to maintain the Trust Fund at the 2004 funding level.

The legislation also renews two expired cotton provisions, the Cotton Trust Fund and several duty suspensions that expired along with the last Miscellaneous Tariff Bill.  These provisions are supposed to help U.S. companies throughout the cotton supply chain. The bill would renew both provisions until December 31, 2013.

Sidley Austin Releases Update on Federal Appeals Court Case Involving Imports from China and Vietnam

Expanding on the update included in the May 17th Textile Development Memo, Sidley Austin LLP released an International Trade Update about the U.S. Court of Appeals for the Federal Circuit action to strike down a U.S. Department of Commerce regulation used to value labor rates in anti-dumping proceedings involving products from non-market economy (NME) countries. The surprising invalidation of the regulation, which has been in effect for thirteen years, introduces new uncertainty in the Department’s dumping calculations and is anticipated to cause dumping margins to decline on labor-intensive products from NME countries, primarily China and Vietnam.

Click here to read the Update.

By Brenda A. Jacobs and Pete Kasperowicz, Sidley Austin LLP

In this TDM:


Supreme Court Gets Fashionable

NFL Fumbles Antitrust Exemption for Headwear IP License,
But Supreme Court Withholds Touchdown for Apparel Maker

The U.S. Supreme Court unanimously ruled today that the National Football League is not a single entity immune from the antitrust laws when it comes to giving a manufacturer or brand an exclusive license to produce merchandise for all of the teams in the league.  It will be up to a district court, however, to decide whether the collective action of the teams is reasonable and therefore permissible under the antitrust laws.

The case was brought by American Needle, which until 2000 was one of a number of non-exclusive licensees permitted to manufacture NFL apparel.  When the league, through National Football League Properties (NFLP), an entity created in 1963 "to develop, license and market" the IP of the 32 individual teams, decided to grant Reebok an exclusive 10 year license, and canceled its contract with American Needle, the company sued, charging that the Reebok deal was an illegal restraint of trade in violation of the Sherman Antitrust Act.  American Needle – which was just one of many companies that saw their contracts canceled -- argued that the NFL and NFLP were in violation of Section 1 of the Sherman Act, which makes illegal "every contract, combination in the form of a trust or otherwise, or, conspiracy, in restraint of trade."  The NFL and NFLP, and virtually every other major sports league from soccer to basketball to hockey to stock car racing, countered that the licensing company was incapable of conspiring within the meaning of Section 1 because it was a single entity.

 The Supreme Court refused to simply accept the NFLP as a single entity, insisting upon looking at "substance rather than form."  The issue, said the Supreme Court, "is whether the agreement [by the NFLP] joins together ‘independent centers of decisionmaking.' . . . If it does, the entities are capable of conspiring under Section 1, and the court must decide whether the restraint of trade is an unreasonable and therefore illegal one."  The Supreme Court concluded that the conduct of the 32 individual teams is subject to Section 1 "at least with regards to its marketing of property owned by the separate teams": 

To a firm making hats, the Saints and the Colts are two potentially competing suppliers of valuable trademarks.  When each NFL team licenses its intellectual property, it is not pursuing the "common interests of the whole" league but is instead pursuing interests of each "corporation itself."  . . . Decisions by NFL teams to license their separately owned trademarks collectively and to only one vendor are decisions that "depriv[e] the marketplace of independent centers of decisionmaking" . . . and therefore of actual or potential competition.

While the Supreme Court concluded that the decisions by the NFLP regarding the teams' separately owned IP constitute "concerted action" for purposes of the antitrust law, with the NFLP considered an "instrumentality" of the teams, it remanded the case back to the lower court for an analysis of whether the restraint activity is permissible under a "Rule of Reason."  That is a flexible test under which the legality of a restraint is judged by whether it "merely regulates and perhaps thereby promotes competition or whether it is such as may suppress or even destroy competition."  That battle, which will focus largely on the facts, means that American Needle may have a long way to go to get over the goal line.

Watch Out For Copyright Decision

It is also worth noting that the Supreme Court has agreed to consider yet another issue of direct relevance to the fashion industry, this time involving gray market goods.  Costco Wholesale Corp. appealed to the Supreme Court when the Ninth Circuit Court of Appeals ruled that Costco had infringed the copyright of Omega SA by importing into the U.S. and distributing watches in the U.S. that had been manufactured abroad.  The watches bear Omega's  U.S. copyrighted "Omega Globe Design" on their underside. 

Under copyright law, a copyright holder's rights extend only to the first sale of a copyrighted good – the so called "first sale doctrine."   At issue is what was the first sale for these U.S. copyrighted goods.  Costco says the first sale occurred when it legally purchased the watches outside the U.S., which would "exhaust" Omega's copyright claim.  Omega, however, argues that the first sale doctrine does not provide a defense against the infringement because the watches were made overseas; that would make Costco's sale of the watches to its customers the first sale, which would be unauthorized.   

The Supreme Court has previously held that the first sale doctrine provides a defense where U.S. manufactured goods were first sold overseas and then imported back into the United States without the authorization of the copyright owner.  Now it will decide whether there same defense applies to foreign manufactured goods bearing a U.S. copyright.


China Still Indicating it Will Move at its Own Pace on Currency

Secretary of State Hillary Clinton and Secretary of the Treasury Timothy Geithner appear unlikely to bring back any readily apparent victories from Beijing. On the first day of the U.S.-China Strategic and Economic Dialogue (S&ED) meetings in Beijing, Chinese officials continued to indicate that they will move on currency reforms at their own pace, despite growing pressure in the U.S. for an immediate appreciation of the renminbi.

In his opening statement of the May 24-25 meetings, Chinese President Hu Jintao said China would only make gradual process on currency, and did not promise when this move might take place. Hu said China would "steadily advance" reform of its exchange rate policy, "under the principle of independent decision-making, controllability and gradual progress."

China is not expected to announce any currency reforms during the S&ED meetings, since China is reluctant to give the impression that reform is due to U.S. pressure. Additionally, China's recent agreement to consider an Iran sanctions resolution in the United Nations is widely seen as something that will make it harder for the U.S. to pressure China on currency. China's cooperation on Iran may also explain the overall lower expectations for any progress with China this year on economic issues, although China in recent weeks did appear to scale back an innovation program that the U.S. argued favored Chinese companies.

In his opening remarks, Geithner did not refer to currency specifically, but he said the U.S. and China share the goal of ensuring global economic stability. The Administration has long argued that China can contribute to stability by unpegging the renminbi from the dollar, which would give China more control over its interest rates. In a possible reference to currency policy, Geithner added that countries need to ensure competition on a level playing field.

The House Ways and Means Trade Subcommittee today held a hearing to discuss the status of security and trade operations at U.S. Customs and Border Protection, and heard how CBP Commissioner Alan Bersin plans to revamp CBP.  Bersin told the subcommittee that he wants to help legitimate trade by focusing enforcement efforts more on high-risk trade rather than low-risk trade.

According to Bersin, while this will help facilitate trade, it also means tougher efforts to combat illegitimate trade, and to that end he said he wants to stop the illegal transshipment of goods by working with U.S. trading partners, screening for high-risk shipments, and running post-release verification audits of goods. Bersin also said he supports exploring the possibility of making it easier for CBP to share information with U.S. right holders about imported goods that are suspected of violating U.S. IPR laws in an effort to boost enforcement efforts, and recommended a change the U.S. Trade Secrets Law to that end.  He also suggested that he would like to see changes in the system for collecting antidumping and countervailing duties.  A Treasury official testifying with Bersin, Deputy Assistant Secretary for Tax, Trade and Tariff Tim Skud, noted that the Departments of Commerce and Treasury will soon send a report to Congress on the pros and cons of a retrospective versus prospective collection system.

Cass Johnson of the National Council of Textile Organizations testified that there is “no more important” issue facing the U.S. industry than illegal transshipment.  Attacking both the importing community and foreign producers, he asserted that the textile industry sees evidence that companies producing yarns and fabrics overseas are illegally advertising themselves as U.S. companies in order to win NAFTA and CAFTA orders.  He called for disclosure to mills of information about the importer of record of garments made in preference and FTA countries, ostensibly to determine whether claims of U.S. inputs are supported.  He also pushed for an electronic verification system.

Rep. Bob Etheridge (D-NC) asked Johnson to explain “Operation Mirage,” which Johnson alleged uncovered that many new importers of goods from China are drastically undervaluing these imports.  Earlier, Etheridge asked Bersin how much specialized textile and apparel training CBP conducts for its staff; Bersin assured him there is such training.  Etheridge asked Bersin to provide that information in writing.

As expected, Johnson used his testimony to announce that tomorrow NCTO and several members of Congress from U.S. textile states will introduce the Textile Enforcement and Security Act of 2010, which he described as requiring the U.S. government to undertake more than a dozen new efforts aimed at stopping transshipment.

Today’s hearing was ostensibly aimed at informing subcommittee members as they try to put together a customs reauthorization bill. Subcommittee Chairman John Tanner (D-TN) said he was interested in testimony from all of the witnesses and that he wants their help as they consider a bill.

By Brenda A. Jacobs and Pete Kasperowicz, Sidley Austin LLP

In this TDM:


NCTO Customs Bill Would Increase Textile and Apparel Regulatory Burden

ELVVS System for FTA Yarns and Fabrics Proposed, Along With Adjusted Bond Requirements

The U.S. textile industry is going after its customers, particularly those using free trade agreements and preference programs, with legislation that would greatly increase the burdens, risks and costs of importing textile and apparel products. According to a summary of the "Customs Enforcement and Textile Enforcement and Security Act of 2010," a bill that four congressmen from North and South Carolina are set to introduce tomorrow at the behest of NCTO, textile and apparel importers would be subject to a whole new enforcement regime, with any fines and penalties collected from them used to pay for investigations and for rewards to people who furnish information on import violations. 

NCTO's dream bill also would reportedly require that an electronic visa verification system be resurrected for yarns and fabrics used in FTA qualifying products, require a name and shame list of companies that allegedly commit intentional import violations, permit the adjustment of bonds for "high risk importers" and establish a non-resident importer program, under which an agent would have to be designated.  This last idea appears to be borrowed from another bill that was introduced earlier this Congress, the Foreign Manufacturers Legal Accountability Act, HR 4678 and S 1606, to require that exporters of consumer goods designate an agent in the event of a litigation for defective products. (That bill has not been acted upon since its introduction.)

While we have not yet seen the actual bill, other provisions in the NCTO-proposed bill reportedly include:

  • An increase in the number of import specialist strained in textile and apparel verifications at the 15 largest U.S. ports (by value) that process textile and apparel imports.
  • CBP operations staff would be assigned to three CAFTA-DR countries and China for the purposes of in country training and preference verification of textile and apparel products.
  • An increase in staff positions at Textile and Apparel Policy and Programs division in CBP headquarters and retargets them toward trade preference verifications. Headquarters staff has been significantly reduced over the last five years.
  • An Office of Textile and Apparel Trade Enforcement created within the Department of Justice to carry out all the functions relating to enforcement cases.
  • CBP authorized to seize textile and apparel goods imported under Trade Preference Areas and Free Trade Agreements rules, if fraudulent.
  • The scope of entities held accountable in the supply chain for intentionally undervalued transactions is "broadened."
  • Curtail the use of allegedly fraudulent 'blanket affidavits' by requiring additional information on affidavits for textiles and apparel imports.

NCTO's President, Cass Johnson, is expected to testify about the bill when he appears before the Ways and Means Trade Subcommittee this afternoon, at its hearing on customs issues.

Two Major CPSC Proposed Rules Published for Public Comment

With the publication in the Federal Register today of two proposed rulemakings by the Consumer Product Safety Commission, the clock has now started on a 75-day clock in which public comments can be submitted.  Both rules were hotly debated earlier this year in sessions that saw Democratic CPSC commissioners block several attempts by Republican commissioners to ease the regulatory burden on manufacturers and importers faced with implementing the Consumer Product Safety Improvement Act (CPSIA).

The first draft rule, "Conditions and Requirements for Testing Component Parts of Consumer Products," allows manufacturers, importers and retailers to rely on testing done by component manufacturers when they assemble components into a final product, but it sets out various guidelines for how this must be done. Generally, component tests can be relied on when they are "required or sufficient" to assess compliance, and when components are identical to the parts used in a final product. Companies that rely on component part testing must be able to trace components back to their source, and must keep documentation related to component testing. Entities that certify finished products as safe must also exercise "due care" in ensuring the safety of component parts.

Component testing for lead content in children's products is also allowed, although these component tests must be done by third parties, consistent with the broader CPSIA. Certificates for this testing must result in a certificate that accompanies the final children's product. The rule also allows companies to rely on third party phthalate tests.

The second rule, "Testing and Labeling Pertaining to Product Certification," sets out requirements for a reasonable testing program and for compliance and continuing testing for children's products. The proposal would also address labeling of consumer products to show that the product complies with certification requirements under a reasonable testing program for nonchildren's products or under compliance and continuing testing for children's products.

Companies involved with non-children's products must establish a reasonable testing program that includes five elements: product specification, certification testing to ensure compliance with any applicable product safety rule, a production testing plan, a remedial action plan to be employed when a product does not test to the standard, and recordkeeping.

The proposed rules for children's products hold that third party testing must be done to ensure compliance with product safety rules, and that manufacturers must conduct periodic testing by a third-party entity.  Under the proposal, if children's products manufacturers have reasonable testing programs in place, this periodic testing can be done every other year, and if no reasonable testing program is in place, manufacturers must develop a periodic testing plan. The proposed rule does say that low volume manufacturers are not subject to the periodic testing requirements until they produce 10,000 units.

The proposed rule sets out other requirements that require testing regimes to be adjusted when material product changes or manufacturing process changes occur. Children's product manufacturers are also required to establish remedial action plans, and to keep testing records.

The CPSC's proposed rule on the public database has not yet been published in the Federal Register, but that is expected soon and will mark the beginning of yet another important comment opportunity.

By Brenda A. Jacobs, Sidley Austin LLP

In a highly significant development, the Court of Appeals for the Federal Circuit on Friday struck down a Commerce Department (DOC) trade remedy regulation that calculates the labor rates in non-market economy (NME) countries based on wage rates and national income from 61 market economy countries.  The decision likely means that in future antidumping duty investigations involving products of NME countries, DOC will use either:

  • the wage rate prevailing in the country that is selected as the surrogate for purposes of calculating the other "factors of production" used to determine the "normal value" of a product, or
  • a smaller universe of market economy countries at similar levels of development that produce comparable goods. 

That means dumping margins for products of NME countries could go down.

Friday's decision was rendered in a case involving wooden bedroom furniture from the People's Republic of China, which has been subject to an antidumping order since late 2004.  As in all NME cases, DOC does not use actual costs of production to determine the "normal value" of goods sold in the exporting country.  The assumption is that sales in NME countries do not operate on the basis of market principles of cost or pricing. Instead, DOC uses surrogate values. In NME investigations, for factors such as raw materials, energy, selling, general and administrative expenses, factory overhead and profit, DOC typically uses values from a single market economy country that is both economically comparable to the NME country and a significant producer of the merchandise under investigation.  However, for wage rates, DOC has applied a different basis for calculating the surrogate rate: DOC uses "regression-based wages reflective of the observed relationship between wages and national income in market economy countries."  The 61 market economy countries included in that calculation had annual per capita gross national incomes ranging from $420 (Pakistan) to $39,470 (Luxembourg). China's annual per capita GNI was $960.

The Chinese furniture manufacturers argued in court that the DOC regulation which treats the labor factor of production differently from all other factors of production and which relies upon data from countries with widely varying national incomes, rather than just those countries that are economically comparable with the PRC and significant producers of the product under investigation, is inconsistent with the requirements of the U.S. antidumping statute. The application of the DOC regulation, 19 C.F.R. Section 351.408(c)(3), resulted in a wage rate that was 300 percent higher than the wage rates in the Indian furniture industry, which was the surrogate for all other factors. 

The Federal Circuit, in an opinion written by Chief Judge Paul Michel, who is about to retire, held that the regulation violates two key requirements of the statute.  The statute requires the use of data from economically comparable market economy countries "to the extent possible."  It also requires the use of data "to the extent possible" from economically comparable market economy countries that are "significant producers of comparable merchandise."  DOC's regulation, however, improperly requires the use of labor value data 1) from countries that are both economically comparable and economically dissimilar to the NME at issue and 2) from countries that produce comparable merchandise and countries that do not, without any finding by DOC that relevant data was unavailable or otherwise unusable.

The Federal Circuit's ruling reversed a decision by the lower court, the U.S. Court of International Trade, which had upheld DOC's regulation. The appeals court has remanded the case back to DOC with instructions to determine the surrogate labor value using a method that complies with the requirements of the U.S. statute.  But the implications of this case are clearly far broader than just the furniture case.  With its existing regulation invalidated, DOC must now determine how it will value wage rates in NME industries in all antidumping cases going forward, including pending investigations and administrative reviews. 

The full decision in the case, Dorbest Limited et al. v. United States, Docket No. 09-1257, can be viewed at http://www.cafc.uscourts.gov/opinions/09-1257.pdf.