VAL OT:RR:CTF:VS H127377 EE
Mary E. Gilmer
W.L. Gore & Associates, Inc.
551 Paper Mill Road, P.O. Box 9206
Newark, DE 19714-9206
RE: Dutiability of Royalty Payments; Trademark Licensing Agreement
Dear Ms. Gilmer:
This is in reply to your letter, dated June 1, 2010, and your supplement letter, dated October 6, 2010, on behalf of W.L. Gore & Associates, Inc. (“Gore”), concerning the dutiability of certain payments made by importers to Gore in consideration for the right to use the Gore trademark, and the U.S. sales and support services provided by Gore to the importers.
FACTS:
Gore manufactures laminated fabric of its proprietary ePTFE membrane joined to separately-purchased fabrics. These GORE-TEX® laminates are converted by unrelated boot manufacturers in China into a waterproof, breathable bootie. The bootie is incorporated into footwear that is purchased and imported into the U.S. by unrelated footwear companies or retailers.
You state that Gore provides an extensive guarantee for products that bear its trademark. Gore maintains a 3-4 person support team in the U.S. fully devoted to consumer outreach and warranty support on behalf of its licensed customers. In addition to this customer support, Gore also provides sales support services to its licensed customers, who are the importers of the finished footwear. These services include retailer training, press releases, point-of-sale displays, advertising, trade show support, extended warranty assistance, etc. related to products sold under the GORE-TEX® brand. Gore further provides U.S.-based design assistance such as leather testing and style approval to its licensed customers.
You state that presently, Gore sells laminate, seam-tape and boot gaskets (“linear materials”) to footwear manufacturers overseas. The selling price of the laminate currently includes the right to use Gore’s trademark in connection with the production, sale and marketing of the footwear. Gore now proposes to charge separate prices for:
use of the trademark and U.S.-based sales and support services; and
the liner materials, at a price that covers all production costs, manufacturing overheads, hangtags and labels and a profit (without the value of the trademark and U.S.-based sales and support services).
You state that instead of selling to the overseas manufacturers, Gore will sell the liner materials to its U.S. customers and “drop ship” these liner materials to the overseas footwear manufacturers at no charge. The importer will declare the value of the drop-shipped liner materials as a dutiable assist when the finished footwear is imported into the U.S. Gore’s customers, the importers, will pay a separate Trademark and Service Fee for the trademark and U.S. marketing/sales and support services. You state that the fee will be paid either in two stages: a) as an initial flat fee of a certain percentage of the forecasted sales for the upcoming twelve months; with b) monthly fees based on a percentage of list price for licensee’s purchases of the liner materials from Gore in the U.S. or a flat percentage of the list price.
You provided a copy of the Trademark Licensing Agreement, the Draft Fee Agreement, and the Terms of Sale between Gore and the importers. You also provided a copy of a generic purchase agreement template between a certain importer and an overseas manufacturer.
ISSUE:
Whether certain payments made by the importers to Gore for the right to use the Gore trademark and the U.S. sales and support services provided by Gore to the importers are dutiable.
LAW AND ANALYSIS:
Merchandise imported into the United States is appraised in accordance with section 402 of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C. § 1401a). The primary method of appraisement is transaction value, which is defined as “the price actually paid or payable for the merchandise when sold for exportation to the United States,” plus amounts for certain statutorily enumerated additions to the extent not otherwise included in the price actually paid or payable, including the value, apportioned as appropriate, of any assist; any royalty or license fee related to the imported merchandise that the buyer is required to pay, directly or indirectly, as a condition of the sale of the imported merchandise for exportation to the United States; and the proceeds of any subsequent resale, disposal or use of the imported merchandise that accrue, directly or indirectly, to the seller. 19 U.S.C. § 1401a(b)(1)(A)-(E). If, for any reason, sufficient information is not available with respect to the additions to the price actually paid or payable, the transaction value of the imported merchandise is treated as one that cannot be determined. 19 U.S.C. § 1401a(b)(1).
The term “price actually paid or payable” is defined as “the total payment (whether direct or indirect…) made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller.” 19 U.S.C. § 1401a(b)(4)(A). In Generra Sportswear Company v. United States, 905 F.2d 377, 380 (Fed. Cir. 1990), the Court of Appeals for the Federal Circuit determined that so long as a payment is made “to the seller in exchange for merchandise sold for export to the United States, the payment properly may be included in transaction value, even if the payment represents something other than the per se value of the goods.” However, the payment will be excluded if the importer demonstrates that the payment was completely unrelated to the imported merchandise. See Chrysler Corporation v. United States, 17 Ct. Int’l Trade 1049 (1993).
In the instant case, the payments by the importers are made in consideration for the use of the Gore trademark and the U.S.-based sales and support services provided by Gore to the importers. You state that neither Gore nor the importers are related to the sellers. Since the payments are made to Gore which is neither a seller of the merchandise nor related to the seller, we find that they are not included in the price actually paid or payable for the imported merchandise in accordance with Generra. Despite having concluded that the payments at issue are not part of the price actually paid or payable, it still remains to be determined whether they should be added to the price actually paid or payable under the provision for royalties.
With respect to the dutiability of royalty payments and license fees, the Statement of Administrative Action (“SAA”), which forms part of the legislative history of the TAA, provides, in pertinent part, that:
Additions for royalties and license fees will be limited to those that the buyer is required to pay, directly or indirectly, as a condition of sale of the imported merchandise for exportation to the United States. In this regard, royalties and license fees for patents covering processes to manufacture the imported merchandise will generally be dutiable, whereas royalties and license fees paid to third parties for use, in the United States, of copyrights and trademarks related to the imported merchandise, will generally be considered as selling expenses of the buyer and therefore will not be dutiable. However, the dutiable status of royalties and license fees paid by the buyer must be determined on a case-by-case basis and will ultimately depend on: (i) whether the buyer was required to pay them as a condition of sale of the imported merchandise for exportation to the United States; and (ii) to whom and under what circumstances they were paid. For example, if the buyer pays a third party for the right to use, in the United States, a trademark or copyright relating to the imported merchandise, and such payment was not a condition of sale of the merchandise for exportation to the United States, such payment will not be added to the price actually paid or payable. However, if such payment was made by the buyer as a condition of the sale of the merchandise for exportation to the United States, an addition will be made. As a further example, an addition will be made for any royalty or license fee paid by the buyer to the seller, unless the buyer can establish that such payment is distinct from the price actually paid or payable for the imported merchandise, and was not a condition of the sale of the imported merchandise for exportation to the United States.
Statement of Administrative Action (“SAA”), H.R. Doc. No. 153, 96 Cong., 1st Sess. (1979), reprinted in Department of the Treasury, Customs Valuation under the Trade Agreements Act of 1979 (1981), at 48-49.
In the General Notice, Dutiability of Royalty Payments, Vol. 27, No. 6 Cust. B. & Dec. at 1 (February 10, 1993), U.S. Customs and Border Protection (“CBP”) articulated three factors or questions that assist in determining whether the royalty payments in question are related to the imported merchandise and are a condition of sale such that they are dutiable. As set forth in the notice, the questions are:
1. Was the imported merchandise manufactured under patent?
2. Was the royalty involved in the production or sale of the imported merchandise?
3. Could the importer buy the product without paying the fee?
The General Notice indicates that affirmative answers or responses to the first and second questions, and a negative response to the third, point towards dutiability.
When analyzing the factors identified in the above-cited general notice, CBP has taken into account certain considerations, which flow from the language set forth in the SAA. These include, but are not limited to, the following:
(i) the type of intellectual property rights at issue (e.g., patents covering processes to manufacture the imported merchandise will generally be dutiable);
(ii) to whom the royalty was paid (e.g., payments to the seller or a party related to the seller are more likely to be dutiable than are payments to an unrelated third party);
(iii) whether the purchase of the imported merchandise and the payment of the royalties are inextricably intertwined (e.g., provisions in the same agreement for the purchase of the imported merchandise and the payment of the royalties; license agreements which refer to or provide for the sale of the imported merchandise, or require the buyer's purchase of the merchandise from the seller/licensor; termination of either the purchase or license agreement upon termination of the other, or termination of the purchase agreement due to the failure to pay the royalties); and
(iv) payment of the royalties on each and every importation.
See, e.g., Headquarters Ruling Letter (“HQ”) 547148, dated September 12, 2002.
In this case, based on the information provided, the responses to each of the three above-listed questions are as follows:
Was the imported merchandise under a patent?
With respect to the first question, the license fees relate to trademarks and not patents. Therefore, the response to the first question is in the negative.
Was the royalty involved in the production or sale of the imported merchandise?
This question expands the analysis of the first question. See General Notice, “Dutiability of Royalty Payments,” supra, at 10. In the instant case, the importers pay the license fee to Gore, an unrelated third party, in consideration for the right to use the Gore trademark in the U.S. sale and marketing of footwear made using or incorporating GORE-TEX® material, and the U.S. sales and support services provided to the customers of the finished footwear. The license fees are not paid to the seller of the imported merchandise or to a party related to the seller. You state that the importers are not required to purchase the imported merchandise from a particular manufacturer. However, for quality assurance reasons, only Gore-certified manufacturers can incorporate Gore materials into Gore-trademarked products. Although Gore permits only certified manufacturers to receive and apply the Gore trademark badge and hangtags to finished footwear, there are many Gore-certified manufacturers. Additionally, Gore will certify a new manufacturer at the request of a footwear company without charge and will provide quality standards and performance criteria for water-proofness and breathability. Therefore, it does not appear that the royalty payments are involved in the production of the imported merchandise.
The Trademark Licensing Agreement and the purchase agreement template you provided indicate that the fees paid by the importers to Gore are not involved in the sale of the imported merchandise. CBP has determined that where the license agreement is replete with requirements regarding the sale of the imported merchandise, the royalty is involved in the production or sale of the imported merchandise. See HQ 546433, dated January 9, 1998; see also HQ 546033, dated March 14, 1996. In the instant case, the Trademark Licensing Agreement and the purchase agreement template do not reference each other. Additionally, you state that the payment of the Gore fees will not be linked to the purchase order or invoices between the sellers of the footwear and the importers. Accordingly, based on the information presented, we find that the license fee is not involved in the production or sale of the imported merchandise. Thus, the response to the second question is in the negative.
Could the importer buy the product without paying the fee?
The third inquiry goes to the heart of whether a payment is considered to be a condition of sale. See General Notice, “Dutiability of Royalty Payments,” supra, at 11. Royalty payments and license fees are a condition of sale when they are paid on each imported item and are inextricably intertwined with the imported merchandise. If the payments are optional and not inextricably intertwined with the imported merchandise, or if they are paid solely for the exclusive right to manufacture and sell in a designated area, they do not constitute additions to the price actually paid or payable under 19 U.S.C. § 1401a(b)(1)(D). See HQ 546675, dated June 23, 1999.
In this case, the importers can purchase the merchandise without the payment of the license fee. As previously noted, the license fees are not paid to the sellers nor linked to any agreement between the manufacturers of the footwear and the importers. You state that the importers do not have a requirements contract obligating them to buy only Gore liner materials. Although the importers cannot purchase Gore’s liner material without paying the fee, they can procure other materials for use in the production of the footwear. We recognize that the Trademark Licensing Agreement contains certain quality control provisions that allow Gore to monitor the quality of the products such as inspection of manufacturing operations, inspection and approval of designs, and testing prototypes or samples of products submitted to or otherwise obtained by Gore. In HQ 547134, dated July 27, 1999, CBP held that such “quality control clauses are standard in trademark license agreements, and license fees paid to third parties for use in the U.S. of trademarks are generally not dutiable.” See also HQ H034062, dated March 3, 2007; HQ W563382, dated May 25, 2006; HQ 547226,
dated July 27, 1999. Therefore, the fact that a Trademark Licensing Agreement contains provisions that allow the licensor to maintain control over the quality of the trademarked products does not in itself render the license fees stemming from that agreement to be dutiable as royalties. HQ H034062, dated March 3, 2007. Based upon the information presented, we find that the importers can purchase the merchandise from the seller without paying the license fee. Thus, the response to the third question is in the negative.
Finally, under 19 U.S.C. § 1401a(b)(1)(E), the proceeds of any subsequent resale, disposal, or use of the imported merchandise that accrue, directly or indirectly, to the seller will be an addition to the price paid or payable. Under this section, the "sellers" of the merchandise are the overseas manufacturers. The license fees are paid by the importers to Gore, an unrelated third party licensor. Since Gore is also unrelated to overseas manufacturers, the license fees do not constitute "proceeds to the seller" since these payments do not accrue to the benefit of the overseas manufacturers. Accordingly, the royalty payments are not dutiable as proceeds and are not an addition to the price actually paid or payable under 19 U.S.C. § 1401a(b)(1)(E).
HOLDING:
Based upon the information provided, we find that the license fees paid by the importers to Gore pursuant to the Trademark Licensing Agreement and the Draft Fee Agreement are not a condition of sale of the imported merchandise for export to the U.S. and do not constitute an addition to the price actually paid or payable for the imported merchandise under 19 U.S.C. § 1401a(b)(1)(D).
Reference to this ruling letter should be made in the entry documents filed at the time the subject goods are entered. See CBP Form 7501 - Instructions, Additional Data Elements (available online at: www.cbp.gov). If the entry summary has been filed without reference to this ruling letter, the ruling letter should be brought to the attention of the appraising officer at the port of entry.
Sincerely,
Monika R. Brenner
Chief
Valuation & Special Programs Branch