OT:RR:CTF:FTM H302801 TJS
Mr. John R. Shane, Esq.
Wiley Rein LLP
1776 K Street, N.W.
Washington, DC 20006
RE: Country of Origin of Certain Wearable Electronic Smart Devices; Substantial Transformation
Dear Mr. Shane:
This is in response to your correspondence, dated December 13, 2018, requesting a binding ruling, on behalf of Fitbit, Inc. (“Fitbit”), concerning the country of origin of certain wirelessly-communicative, wearable electronic smart devices. You provided additional information to our office during our meeting on September 13, 2019 and filed supplemental submissions in April 2019, May 2019, and on September 17, 2019. Our ruling is set forth below.
You have asked that certain information submitted in connection with this ruling request be treated as confidential. Inasmuch as this request conformed to the requirements of 19 C.F.R. § 177.2(b)(7), your request for confidentiality was approved by correspondence from this office, dated June 3, 2019. Specifically, we granted your request for confidential treatment for the images provided in your initial submission; for the data and diagrams provided on April 12, 2019; and for certain supplier, cost, production and value information specified in your May 24, 2019, and September 17, 2019 submissions.
According to your submission, Fitbit manufactures wirelessly-communicative, wearable electronic smart devices. Specifically, the Fitbit devices at issue are two styles of Bluetooth-enabled smartwatches/fitness trackers, referenced as Style A and Style B. These smartwatches/fitness trackers will be comprised of components from Taiwan, China, and the Philippines, as follows:
Produced in Taiwan: The Bluetooth radio transceiver; central processing unit (“CPU”); printed circuit board; memory; and certain task-specific integrated circuits.
Produced in China: The touchscreen display; vibration motor; rechargeable lithium ion battery; plastic/aluminum housing; and the wristband.
Produced in the Philippines: The accelerometer and certain task-specific integrated circuits.
Style A devices use a combined Bluetooth transceiver/CPU component while Style B devices use separate Bluetooth transceiver and CPU components. You indicate that the combined transceiver/CPU component incorporated in Style A is offered to other customers, despite Fitbit having a heavy influence on the development of the component and being the sole customer as of our September 13, 2019 meeting. For Style B, Fitbit purchases an “off-the-shelf” Bluetooth transceiver from the manufacturer that is used in other devices, including non-wearable devices.
Surface-mount technology (“SMT”) is used to load a raw printed circuit board (“PCB”) with diodes, transistors, capacitors, resistors, memory chips, and other task-specific integrated circuits. Once the PCB is fully populated, it becomes known as a printed circuit board assembly (“PCBA”). According to your September 17, 2019 submission, both styles contain two PCBAs. The main PCBA includes the Bluetooth transceiver, Wi-Fi components, CPU, memory, the accelerometer, and other task-specific integrated circuits that gauge battery life and regulate power flow. The smaller, auxiliary PCBA focuses on the heart rate monitoring functions. During this SMT process, Fitbit would also install a limited software program that allows the user to set up the device and download the full operating system from Fitbit’s servers in the United States. The operating system for the devices is developed in the United States. The fully automated SMT process will take approximately six minutes to complete the main PCBA and two minutes to complete the heart rate monitor PCBA.
Final assembly operations occur on a typical assembly line and will take approximately seventeen minutes to complete one device. The assembly operations for the two product types differ slightly, but in both cases involve cleaning and laying out the housing and then installing the housing with the heart rate monitor PCBA, main PCBA, vibration motor, battery, and display. After the unit is assembled, it is tested and the wristband is attached. Finally, the product is packaged and readied for shipping. You state that the assembly workers in China require very little education or training. A high school diploma is not required and training takes about one to two weeks to become fully proficient in highly specific tasks.
In your initial December 13, 2018 submission, you presented a sourcing scenario wherein the SMT and final assembly operations would be performed in China. In your most recent submission, dated September 17, 2019, you provided two updated scenarios in which the SMT operations for both PCBAs would be conducted either in Taiwan or in a third country, such as Malaysia or Indonesia. Fitbit requests CBP’s ruling regarding the country of origin of its wearable electronic smart devices sourced by these updated scenarios. In all scenarios, the final assembly remains in China.
What is the country of origin for the Fitbit smartwatch/fitness tracker wearable devices?
LAW AND ANALYSIS:
Section 304 of the Tariff Act of 1930, as amended (19 U.S.C. § 1304), provides that, unless excepted, every article of foreign origin imported into the United States shall be marked in a conspicuous place as legibly, indelibly, and permanently as the nature of the article (or container) will permit, in such a manner as to indicate to the ultimate purchaser in the United States the English name of the country of origin of the article. By enacting 19 U.S.C. § 1304, Congress intended to ensure “that the ultimate purchaser should be able to know by an inspection of the marking on the imported goods the country of which the goods is the product. The evident purpose is to mark the goods so that at the time of purchase the ultimate purchaser may, by knowing where the goods were produced, be able to buy or refuse to buy them, if such marking should influence his will.” United States v. Friedlaender & Co., 27 C.C.P.A. 297, 302 (1940).
The country of origin marking requirements and the exceptions of 19 U.S.C. § 1304 are set forth in Part 134, Customs Regulations (19 C.F.R. Part 134). Section 134.1(b), Customs Regulations (19 C.F.R. § 134.1(b)), defines “country of origin” as the country of manufacture, production or growth of any article of foreign origin entering the United States. Further work or material added to an article in another country must effect a substantial transformation in order to render such other country the “country of origin” within the meaning of the marking laws and regulations. A substantial transformation is said to have occurred when an article emerges from a manufacturing process with a name, character, or use which differs from the original material subjected to the process. United States v. GibsonThomsen Co., 27 C.C.P.A. 267 (C.A.D. 98) (1940); Texas Instruments, Inc. v. United States, 681 F.2d 778, 782 (1982).
In determining whether the combining of parts or materials constitutes a substantial transformation, the determinative issue is the extent of the operations performed and whether the parts lose their identity and become an integral part of the new article. Belcrest Linens v. United States, 6 C.I.T. 204, 573 F. Supp. 1149 (1983), aff’d, 741 F.2d 1368 (Fed. Cir. 1984). If the manufacturing or combining process is a minor one that leaves the identity of the imported article intact, a substantial transformation has not occurred. Uniroyal, Inc. v. United States, 3 C.I.T. 220, 542 F. Supp. 1026 (1982).
In order to determine whether a substantial transformation occurs when components of various origins are assembled into completed products, CBP considers the totality of the circumstances and makes such determinations on a case-by-case basis. The country of origin of the item’s components, extent of the processing that occurs within a country, and whether such processing renders a product with a new name, character, or use are primary considerations in such cases. Additionally, factors such as the resources expended on product design and development, the extent and nature of post-assembly inspection and testing procedures, and worker skill required during the actual manufacturing process may be considered when determining whether a substantial transformation has occurred. No one factor is determinative. Substantial transformation, including the “name, character and use” test, was also at issue in National Hand Tool Corp. v. United States, 16 C.I.T. 308, aff’d, 989 F.2d 1201 (Fed. Cir. 1993). Therein, the Court of International Trade determined that certain mechanics’ tools did not undergo substantial transformation in the United States, and therefore, were not exempt from the marking requirements set forth in 19 U.S.C. § 1304. The court found that there was no change in name because each article as imported had the same name in the completed tool. The court also found that there was no change in character because the articles, which were either hot-forged or cold-formed into its final shape in Taiwan, remained the same after heat treatment, electroplating, and assembly in the United States. The court further determined that the use of the imported articles was predetermined at the time of entry – noting that each component was intended to be incorporated in a particular finished mechanics’ hand tool, except for one exhibit. Lastly, the court rejected the Plaintiff’s claim that the value added in the United States was relatively significant to the operation in Taiwan so that that substantial transformation should be found, noting that such a finding could lead to inconsistent marking requirements for importers who perform exactly the same processes on imported merchandise, but sell at different prices. Id.
In Energizer Battery, Inc. v. United States, 190 F. Supp. 3d 1308 (2016), the Court of International Trade interpreted the meaning of “substantial transformation.” Energizer involved the determination of the country of origin of a flashlight, referred to as the Generation II flashlight. All of the components of the flashlight were of Chinese origin, except for a white LED and a hydrogen getter. The components were imported into the United States and assembled into the finished Generation II flashlight. The Energizer court reviewed the “name, character and use” test utilized in determining whether a substantial transformation had occurred and noted, citing Uniroyal, Inc., 3 C.I.T. at 226, that when “the post-importation processing consists of assembly, courts have been reluctant to find a change in character, particularly when the imported articles do not undergo a physical change.” Energizer at 1318. In addition, the court noted that “when the end-use was pre-determined at the time of importation, courts have generally not found a change in use.” Energizer at 1319, citing as an example, National Hand Tool Corp. v. United States, 16 C.I.T. at 311-312. Furthermore, courts have considered the nature of the assembly, i.e., whether it is a simple assembly or more complex, such that individual parts lose their separate identities and become integral parts of a new article.
In reaching its decision in Energizer, the court expressed the question as one of whether the imported components retained their names after they were assembled into the finished Generation II flashlights. The court found “[t]he constitutive components of the Generation II flashlight do not lose their individual names as a result [of] the post-importation assembly.” The court also found that the components had a predetermined end-use as parts and components of a Generation II flashlight at the time of importation and did not undergo a change in use due to the post-importation assembly process. Finally, the court did not find the assembly process to be sufficiently complex as to constitute a substantial transformation. Thus, the court found that Energizer’s imported components did not undergo a change in name, character, or use as a result of the post-importation assembly of the components into a finished Generation II flashlight. Virtually all of the components of the military Generation II flashlight, including the most important component, the LED, were of Chinese origin. Thus, the court determined that China was the correct country of origin of the finished Generation II flashlights for purposes of government procurement.
The Court of International Trade has also looked at the essential character of an article to determine whether its identity has been substantially transformed through assembly or processing. For example, in Uniroyal, Inc. v. United States, 3 C.I.T. at 225, the court held that imported shoe uppers added to an outer sole in the United States were the “very essence of the finished shoe” and thus the character of the product remained unchanged and did not undergo substantial transformation in the United States. Similarly, in National Juice Products Association v. United States, 10 C.I.T. 48, 61, 628 F. Supp. 978, 991 (1986), the court held that imported orange juice concentrate “imparts the essential character” to the completed orange juice and thus was not substantially transformed into a product of the United States.
In C.S.D. 85-25, 19 Cust. Bull. 844 (1985), CBP held that for purposes of the Generalized System of Preferences, the assembly of a large number of fabricated components onto a printed circuit board in a process involving a considerable amount of time and skill resulted in a substantial transformation. In that case, in excess of 50 discrete fabricated components (such as resistors, capacitors, diodes, integrated circuits, sockets, and connectors) were assembled onto a PCB. CBP determined that the assembly of the PCBA involved a very large number of components and a significant number of different operations, required a relatively significant period of time as well as skill, attention to detail, and quality control, and resulted in significant economic benefit to the beneficiary developing country from the standpoint of both value added to the PCBA and the overall employment generated thereby.
Per your most recent submission dated September 17, 2019, Fitbit requests confirmation that country of origin would result from where the SMT takes place, whether that be in Taiwan or in another third country, such as Malaysia or Indonesia. In support of this claim, you cite HQ H287548, dated March 23, 2018 and New York Ruling Letter (“NY”) N303008, dated March 8, 2019.
In HQ H287548, CBP considered the country of origin of a monochrome laser printer assembled in the United States with Vietnamese subassemblies and a Japanese-origin PCBA and firmware. In that ruling, CBP determined that the Japanese-origin PCBA and firmware together embodied the essential character of the laser printer because the firmware provided the control program for the printers and enabled the main PCBA to function as the electronic “brains” of the printers by controlling all printer functions. Moreover, the production of the subcomponents in Vietnam was inexpensive and did not require a sophisticated skill set to effect production. Likewise, the final manufacturing in the United States, which was concluded in 40 minutes (including testing), did not rise to the level of complex processes necessary for a substantial transformation to occur. Therefore, the country of origin of the laser printers was Japan for government procurement purposes.
In NY N303008, CBP considered the country of origin of cellphones that were produced in three stages. First, the PCBA was manufactured using SMT, tested, and loaded with the operating system in Taiwan, Malaysia, or Vietnam. Second, in China, the hardware was assembled together with the PCBA, housing, screen, keys/keypads, USB connectors, battery, and antenna, and then tested again. Third, the assembled devices were flashed with any customer-specific software in China and then packaged with peripherals in the United States. CBP held that PCBA imparted the essential character to the cellphones and that the assembly operations in China and the United States did not result in a substantial transformation of the PCBA. Therefore, the cellphones were considered a product of Taiwan, Malaysia, or Vietnam, depending upon which country the SMT processes took place.
Similarly, HQ H301910, dated August 5, 2019, concerned the country of origin of mailing machine engines used in certain postage meters. In that ruling, the body of the engine was assembled in China and then shipped to Japan where the Japanese-origin PCBA, print head, and print control and diagnostic firmware were installed. Testing and packaging also occurred in Japan. CBP determined that the main PCBA, the print control firmware, and the print head constituted the primary and fundamental essence of the mailing machine engine because these components controlled the engine’s function, operations, and enabled the printing of the correct postage. In particular, the main PCBA itself was composed of components essential to the fundamental function and primary purpose of the engine including the CPU, the memory, and the Field-Programmable Gate Array - all of which combined to form the “brain” of the machine. CBP held that, inasmuch as the main PCBA, the print control firmware, and the print head were all produced in Japan, the country of origin of the mailing engine machine was Japan.
We find that the instant case is similar to HQ H287548, NY N303008, and HQ H301910. In this case, the PCBAs impart the essential character of the smartwatches/fitness trackers. Here, the electronic components from Taiwan and the Philippines are incorporated into the PCBAs by SMT to form the “brain” of the device that enables the device to operate as intended. Specifically, the main PCBA incorporates the Bluetooth transceiver and the CPU, together allowing the device to process information and communicate with the user and Fitbit’s servers. This wireless communication and processing is fundamental to the primary use of the devices as smartwatches/fitness trackers. Furthermore, the accelerometer on the main PCBA and the heart rate monitor PCBA are essential for gathering information on the user’s fitness, which is another distinguishing function of the Fitbit devices.
The SMT operations result in a new and different product with an overall use and function different than any one function of the individual components. Each individual component serves a particular purpose or function once incorporated into the PCBA. Prior to the SMT operations, these components are stand-alone, general use items. For example, the Bluetooth transceivers are available to other customers and some are used in devices other than wearable smart devices. Only after they are assembled with other components on the PCBA do the Bluetooth transceivers serve Fitbit’s particular function of exchanging data gathered by the device’s sensors with the user’s paired mobile phone. Furthermore, once the PCBA becomes populated, it loses its character and identity as a blank platform used for holding and assembling all of the communications, processing, and electronic subcomponents, and becomes identified as a printed circuit board assembly. It is also during the SMT process that Fitbit’s software is installed in the PCBA. Until the PCBA is created, the device will not have the character or use of a smart device used for fitness tracking. The components cannot individually carry out the functions of a device suitable as a smart watch or for tracking the user’s fitness and activity. The unique and full functionality of Fitbit’s devices is only accessed once the components and subassemblies are integrated and populated into the PCBA. By being incorporated into the PCBA, the individual parts lose their identity and become an integral part of the new article.
The final assembly that occurs in China does not render the PCBAs into a product with a new name, character, or use. Attaching the PCBAs into the housing with the vibration motor, battery, display, and wristband does not alter their functional or physical attributes. Upon importation into China, the PCBAs have a predetermined end-use as the electronic “brain” of the Fitbit devices, consistent with the court’s analysis in Energizer. Additionally, the assembly operations in China are neither complex nor time intensive. The workers in China require little training to perform their individual task along the assembly line. Although the SMT process is fully automated and lasts merely six minutes, it requires complex, expensive equipment and a high level of expertise. The SMT process also involves more components and subassemblies in manufacturing the PCBAs than the final assembly in China. Therefore, we find that the SMT operations constitute a complex assembly process that results in a substantial transformation of the electronic components from Taiwan and the Philippines into a new and different article of commerce with a new name, character, and use distinct from the components. The country of origin for the subject Fitbit devices will be where the PCBAs are manufactured by SMT, whether that be in Taiwan or in another country such as Malaysia or Indonesia.
Based on the facts provided, the country of origin of Fitbit’s wirelessly-communicative, wearable electronic smart devices is where the PCBAs are manufactured by surface-mount technology, whether that be in Taiwan or in another country such as Malaysia or Indonesia.
Yuliya A. Gulis, Chief
Food, Textiles and Marking Branch