In Trimil SA vs United States, Slip Op 19-161 (Dec. 17, 2019), the U.S. Court of International Trade (CIT) agreed with us and ruled that payments made by the importer to related parties for advertising fees and trademark royalties (collectively “Fees”) were not part of dutiable value. The advertising service provider and the trademark owner were also related to the vendors of the garments. All of these companies were part of the Armani family of companies. This is the first CIT decision on the dutiability of related fees, and the first judicial review of a number of U.S. Customs’ interpretations espoused in rulings on the dutiable value of goods purchased from related party vendors.
During the period in question, Trimil purchased goods from both related and unrelated vendors. Duties were paid under the Transaction Value basis of appraisement. The values for all of the imported goods were equal to the prices paid by the importer to the sellers of the goods and certain design assists provided by a related Armani company. The dutiable value of goods purchased from related vendors was increased to include payments made by the importer for the fees that were paid to companies related to the vendors. No duties were paid on the fees when the goods were purchased from unrelated vendors. This distinction as to the values of related and unrelated purchases was required based a number of Customs rulings going back to 1985 which held those trademark royalties paid to parties related to the vendors of the goods would be dutiable, whereas the same fees paid to parties unrelated to the vendors would be non-dutiable if certain conditions were met. The duties paid on the fees for related party purchases were paid by the importer at the time of entry. The additional duties on the related party purchases were protested, and the denied protests were summonsed to court.
The fees to be paid to the advertising service provider and the trademark owner were each calculated as a percentage of the sales prices of the goods sold in the U.S. by Trimil USA. As is often the case the service agreements had minimum payment clauses. The service agreements did not dictate where the goods had to be purchased or which companies had to produce the garments. But the agreements did include standard language permitting the licensor to approve the vendors who would make the garments, and they reserved the right to pass on the quality of the goods made bearing the trademarks. The fee agreements did not otherwise encroach on the purchase agreements for the goods that would be negotiated arms’ length between Trimil SA and its vendors.
The agreements for the purchase of the apparel did not reference the advertising and royalty agreements. The (related and unrelated) vendors knew that Trimil SA had a license to sell goods with certain Armani trademarks but they were not privy to the terms of these agreements. These agreements created two channels of trade with respect to these importations— one for the sale of garments for exportation to the U.S., and one for the payment of fees for goods sold in the U.S. bearing the registered trademarks. Neither set of agreements was conditioned on the other.
In issuing this holding the court rejected the following arguments raised by the government:
- Payments made by the importer to parties related to the seller were not presumed to be part of the price paid for the merchandise unless the importer could prove that the payments were not related to the goods. The government has been including language to this effect in its rulings in an attempt to expand the principals established in the landmark Generra case, but that case and that principal only involved payments to a vendor, not a party related to the vendor.
- Payments made for advertising fees and trademark royalties were not dutiable as they were not paid directly or indirectly to the seller and were not paid for the benefit of the seller. The mere fact that non-payment of these fees could result in the loss of future production of these trademarked goods did not mean that the payments of the fees were for the benefit of the seller. Each purchase contract for the apparel was independent of the service and royalty agreements. The importer did not have any long term commitments to the vendors of the garments. That is, the importer did not have to purchase goods from the vendors in the future, so there was no implied benefit to the vendor of the garments to be found in the service and royalty agreements which were singed well before any purchase agreements were contemplated.
- Transaction value is limited to payments made to or for the benefit of the seller, plus fees incurred for five statutory additions to value (selling commissions, assists, packing charges, certain royalties paid as a condition of the sale of the goods for export to the US, and resale proceeds shared with the seller) when those expenses are not included in the seller’s price for the goods. The court found that advertising fees did not fall into any of these five additions to transaction value. In doing so the court relied on a Customs regulation that we cited that characterized payments for such services as non-dutiable selling expenses of the importer. In doing so the court rejected the government’s claim that this regulation was not relevant in this case.
- The trademark royalties were not dutiable because they were not paid to the sellers of the goods, and the sales for exportation of the goods were not conditioned on the payment of these fees. The contracts for the sale of the goods were completed and paid for long before the trademark fees had to be computed and paid.
