RR:IT:VA W548287 AH
Category: Valuation
Assistant Field Director
Regulatory Audit Division
Nashville Branch Office
Nashville, Tennessee 37217
Dear Mr. Rutledge,
This is in response to your January 30, 2003 memorandum requesting internal advice concerning the dutiability of certain payments made by the importer of the subject merchandise to the licensee/agent. In addition, you request advice as to whether the licensee/agent is a bona fide buying agent given the terms of the two licensing agreements relating to the imported merchandise.
Although your request for internal advice included submissions from [*] (“counsel”) on behalf of [*] (“importer”), we note that counsel has since provided supplemental submissions, dated
April 23, 2003, May 8, 2003, and May 19, 2003. In addition, we held a telephone conference with counsel on May 5, 2003 where we addressed certain concerns and issues.
In addition, we note that the licensee/agent has provided copies of two license agreements pertaining to the subject case, the terms of which it requests we not disclose to the public. We will accordingly redact the pertinent information from the public version of our response. We will also identify the relevant documents as confidential in our file.
FACTS:
At issue is the importation of certain athletic footwear bearing the [*] and [*] trademarks. The licensors of the [*] and [*] trademarks, [*] and [*], respectively, each entered into a licensing agreement with [*] (“licensee/agent”), whereupon the licensors granted the licensee the right to use the trademarks in the manufacture, distribution, sale and promotion of athletic footwear bearing the subject trademarks.
The licensee/agent entered into a separate “buying agency agreement” with the importer, where the licensee/agent was appointed as its nonexclusive buying agent to act on behalf of the importer by placing orders or by purchasing merchandise for the importer’s account in China.
Transaction Documents
Counsel’s April 23, 2003 supplemental submission contains transactional documents, which counsel states serves as representative samples of the typical importation transaction of footwear bearing the [*] and [*] trademarks. In response to concerns we raised during our telephone conference, counsel provided two additional submissions, dated May 8, 2003 and May 19, 2003. These supplemental submissions evidence the purchasing process beginning with the importer’s initial purchase order for the imported footwear.
Purchasing Process
As the documentation package for each of the two trademarked goods are identical in form and substance, the following account of the purchasing process shall serve to illustrate the importation of footwear bearing each of the trademarks.
According to the transaction documents, the purchasing process for the trademarked merchandise runs as follows:
The importer presents a purchase order to the licensee, which identifies the terms of sale, the manufacturer and the goods ordered. The purchase order includes the FOB price for the merchandise, but separately itemizes other fees and charges, including one for a buying commission. The purchase order refers to licensee as vendor, but also includes licensee's name under “agent code.” [*] (“seller”) issues a commercial invoice to the importer for the same merchandise contained in the importer’s purchase order and makes specific reference to the importer’s purchase order number. The terms of sale match those set out in the importer’s purchase order and the manufacturer named is that shown on the importer’s purchase order, [*] (“manufacturer”). In addition, the commercial invoice price matches the FOB price stated in the importer’s purchase order.
In addition to these terms, the invoice contains certain declarations made by the seller, including one stating “a buying agent’s commission and royalty are payable by importer and the amounts are not included in this invoice amount.” Counsel provided copies of various certificates issued by the seller concerning inspection and the seller’s attestations regarding the .merchandise’s conformity to customs and laws and regulations and the importer’s purchase order specifications. Payment for the FOB price of the imported merchandise is evidenced by bank notice of payment from the importer to the seller.
Also included in the document package are two invoices issued by the licensee/agent to the importer, one for a buying commission equal to a certain percentage of the FOB price of the imported merchandise, the other for a royalty payment equal to a percentage of the FOB price of the imported merchandise.
Counsel has likewise provided proof of payment from the importer to the licensee/agent for the invoiced commission and royalty amounts.
Documentation
Buying Agency Agreement
An agreement, entitled Buying Agency Agreement (“agency agreement”), executed between the licensee/agent and the importer appoints the licensee/agent as the importer’s nonexclusive buying agent to act on the importer’s behalf in placing orders or by purchasing merchandise for importer’s account in China. Article 1 of the agency agreement stipulates “that such orders shall only be placed and such purchases shall only be made upon Agent’s [licensee/agent’s] receipt of written authorization from Principal [importer].”
Pursuant to the agreement, the licensee/agent undertakes to perform duties on behalf of the importer including visiting the sellers in China to examine samples offered for sale by the sellers and submitting such samples to the importer when requested. See Agency Agreement,
Article 2.A. In addition, the licensee/agent agrees to inspect the merchandise on behalf of the importer and undertakes to use its best efforts to obtain satisfaction from the sellers, on the importer’s behalf. Id. Art. 2.8. The licensee/agent also agrees to arrange for packing of the merchandise and to review the seller’s commercial invoices for correctness. Id. Art. 2.E. The licensee/agent also agrees to verify conformity with certain Customs laws and regulations.
Art. 2.F and Art. 2.G. In exchange for the performance of these services, the principal agrees to pay the agent a commission not to exceed 8% of the F.O.B. value of the merchandise purchased for the account of principal. Art. 8.A.
Article 14 of the agency agreement addresses the limitations on the agent’s authority in underscoring that in the absence of an express written authorization by the importer, the agent may not bind or commit the principal in any manner.
License Agreements
[*] License Agreement
At issue are two license agreements to which [*] is a party as licensee. The first between [*] and [*] (“licensor”) grants the licensee the exclusive and nonassignable right to use the [*] trademark within the Distribution Sales Licensed Territory, defined in the agreement as the United States and the manufacturing territory, defined as China. Article 2.1. Specifically, the licensee is granted the right to use the [*] trademark in the manufacture, distribution, sale and promotion of athletic footwear. Id.
In exchange for the rights granted in the license agreement, the licensee agrees to pay the licensor a royalty fee or a minimum royalty, whichever is greater on the first cost sales of the licensed products sold by the licensee. Article 5.1 The agreement defines “first cost sales as the total number of units of the licensed products manufactured, multiplied by the sum of the unit costs of manufacture, materials, labor and packaging; however, if licensee’s actual price to its non-affiliate customers is higher than as calculated, the actual price shall replace the list price in the calculation. Id.
Third Party Manufacturers
The agreement further provides that the licensee may have licensed products manufactured for it by third party manufacturers (emphasis added). Article 7.1. For purposes of the agreement, “third party manufacturers” means such manufacturers as are listed in Schedule 7.1a. The agreement states that licensed products made for the licensee by third party manufacturers shall be deemed manufactured by the licensee. Id.
In the event the licensee engages a third party manufacturer, the licensee is required to ensure such manufacturer executes a letter agreement in the form set forth in Schedule 7.1b of the license agreement. In addition, the licensee must guarantee the third party manufacturer’s compliance with the quality standards set forth in the agreement. Id. Moreover, the licensee/agent remains primarily and completely responsible to the licensor for the acts of such third party manufacturers under all the provisions of the agreement and the acts of such third party manufacturers shall be deemed to be the acts of the licensee, according to the license agreement. Id. The licensor retains the right to inspect, evaluate and approve all third party manufacturers. Id.
The letter agreement, which all third party manufacturers are required to sign, is contained in Schedule 7.1a as a form letter entitled “Letter to Third Party Manufacturer.” The letter begins by stating “you have been engaged as a third party manufacturer of licensee in connection with its agreement with [*] to manufacture to the order of the [licensee] …. The letter also states that “in no event shall you sell any products or materials displaying or incorporating the Properties [the trademark] to anyone other but the Company [licensee].”
Quality Control
Article 7.2 of the license agreement states that “all licensed products manufactured by or for licensee and sold or distributed by licensee under the licensed trademarks shall conform to licensee’s quality standards,” which are set out in the agreement (emphasis added). In addition, in Article 7.4 the “licensee agrees to sell its production of licensed products under the Licensed Trademarks directly to approved retailers and approved wholesalers for resale within the Licensed Territory only.” Article 7.4 further directs, “Licensee shall send written notice to all approved wholesalers, with a copy of such notice to Licensor, advising them of the Licensed Territory.”
Finally, Article 7.7 obligates the licensee to guarantee its ultimate consumer the quality, materials, and workmanship of the licensed products. In the event the ultimate consumer is dissatisfied with the products and the licensee fails to satisfactorily recompense the customer, the licensor may opt to either replace the product or refund the customer the purchase price. The licensee is obligated to reimburse the licensor for providing such remedies.
In Article 9.3 of the license agreement, the licensor provides a list of items that it reserves the right to approve with respect to the licensed products. These include the retail outlets and wholesale distributors that will purchase the licensed products from the licensee or its manufacturing sources; point of purchase displays; advertising; the distribution methods used by licensee to dispose of “seconds” and “irregulars” and the labels, hangtags, and other packaging to include with or on the licensed product. Id.
[*] License Agreement
Pursuant to a “License and Royalty Agreement” entered into by [*] and [*], the licensor grants the licensee, the license to use the licensee’s trademarks in connection with the design, manufacture, distribution and sale of certain categories of athletic and casual footwear. In exchange for the rights granted in the agreement, the licensee agrees to pay a royalty, which is calculated as a percentage of the licensee’s net sales. Article 5d.
The Article 7 of the license agreement likewise contains quality control provisions requiring among other things, that the licensee provide the licensor samples of the licensed products prior to their manufacture or sale. The agreement further stipulates, “the articles produced and sold by [licensee] shall be of high quality … and shall be offered primarily by [licensee] or its wholesalers for ultimate sale through normal retail stores, mail order catalogs and television direct sales marketing (emphasis added).” Article 7(b). The licensor in addition reserves its right to inspect the licensee’s inventory and may at its discretion order the removal of the licensed marks from inferior articles or the withdrawal of the licensed product from the regular market. Id.
Importer’s Submission
Counsel maintains that the relationship between the importer and the licensee/agent constitutes a bona fide buying agency relationship in that the importer exercises ultimate control over the purchasing process and that the duties fulfilled by the licensee/agent are typical of a buying agent. Counsel accordingly argues that the licensee/agent’s commissions are not dutiable additions to the price paid or payable for the imported merchandise.
Counsel argues that royalty payments paid to the licensee/agent by the importer are not statutory additions to the price paid or payable for the imported merchandise. While acknowledging that it has not seen the complete version of the license agreements at issue, counsel notes that it reviewed the control provisions of the agreement, and concluded that they constitute standard clauses in a trademark license agreement, bearing no relation to the dutiability of the royalty payments. Counsel avers that control provisions have no impact on the dutiability of royalty payments and where royalty payments are paid to a party not related to the seller, as in the instant case, they are not dutiable.
Regulatory Audit Submission
Based on the licensing agreement provisions, you contend that the licensee/agent is not functioning as a buying agent with respect to the subject importation transactions. You maintain that the licensee/agent is in fact performing at the very least as a selling agent if not the actual seller, making the commissions paid to the licensee/agent dutiable.
In support of your conclusion, you note that the licensee/agent is the only party granted the right to sell the licensed products according to the terms of the two license agreements. You also contend that the·”seller” is likely nothing more than a distributor of the goods for the licensee/agent, given the unanswered question as to how the seller ever acquired the right to sell the licensed products in the first place.
Furthermore, you assert that the licensee/agent is too deeply involved in the selling end of the importation transaction to qualify as a bona fide buying agent. In addition to being the only party authorized to sell the licensed products you point out that the licensee/agent is required to guarantee the ultimate consumer certain standards of quality and to maintain, at its own expense, product liability insurance covering the licensed products at issue. Given that the licensee/agent has trademark rights for the very merchandise the importer is purchasing, you question representations made by the licensee/agent in the buying agency agreement that it has no ownership interest in, or control of, or any financial interest in the factories selling the merchandise or the merchandise offered for sale.
Given these circumstances, you conclude the licensee/agent’s role in the subject transactions has exceeded the bounds of a bona fide buying agent.
As to the issue of royalty payments, you state your opinion that the royalty payments in question qualify as dutiable additions to the price paid or payable in that they are involved in the production and sale of the imported merchandise and that the payments are a condition of sale for the merchandise exported to the United States. In demonstrating the involvement of the royalty payments, you contend that the royalties are directly related to the production and sale of the imported licensed products and note that the amount of the royalty is based on the price paid by the importer.
You also claim that the royalty payments are not optional. Although there is not a written contract between the importer and the licensee/agent regarding the payment of the royalty, you believe that the importer understands that the royalty must be paid in order to purchase the merchandise. In addition, you note that the importer’s purchase orders reflect the royalty payments in their estimated landed cost, suggesting linkage between the sales and royalty agreements.
Based on these observations, you conclude that the importer could not buy the imported merchandise without paying the royalty fee, thereby making the royalty payments a condition of sale.
Procedural History
In [*], our office previously addressed the dutiable status of certain commissions and royalty payments paid by the subject importer to the subject licensee/agent. The facts of the previous case were similar to the instant case, with the major difference being the identity of the “seller” of the merchandise. In [*], the seller of the merchandise was related to the licensee/agent. In the instant case, counsel states that the seller is unrelated to the licensee/agent.
In our previous ruling, we determined that both the commissions and the royalty payments made to the licensee/agent were dutiable. Our conclusion was based largely on the relationship between the seller and the licensee/agent. Having determined that the importer failed to meet its burden in demonstrating that the importer had control over the alleged buying agent and without information confirming the importer’s claims as to the duties fulfilled by the alleged buying agent, we concluded that the evidence was insufficient to establish the existence of a bona fide buying agency relationship. We considered the commissions to be for the benefit of the seller and therefore, part of the price paid for the merchandise.
Insofar as the royalty payments were made to a party related to the seller of the merchandise, we likewise, concluded that the royalty payments constituted indirect payments to the seller of the merchandise and therefore were part of the price paid or payable. In this previous case, we declined to address the issue as to whether the royalties were dutiable additions to the price paid pursuant to 19 U.S.C. § 1401a(b)(1)(D).
As the importer no longer deals with the related seller, and no relationship exists between the licensee/agent and the current seller of the merchandise, counsel argues that a different conclusion is warranted in this case.
We agree that the change in relationship between the parties materially alters our analysis in this case. We also note that we are relying on counsel’s representations regarding the relationship between the seller and the licensee/agent in this case. However, the importer still bears its burden in proving the bona fide status of its alleged buying agent, even absent a relationship between the seller and the agent. In addition, as noted in [*] we have yet to analyze the subject transactions for a determination as to the dutiable status of the royalty payments under
§ 1401a(b)(1)(D).
ISSUES:
Whether commissions paid by the importer to the licensee/agent should be added to the price actually paid or payable for the imported merchandise or excluded based on the existence of a bona fide buying agency relationship.
Whether royalty payments made by the importer to the licensee/agent constitute dutiable additions to transaction value pursuant to § 1401a(b)(1)(D).
LAW AND ANALYSIS:
Bona Fide Buying Agent
The primary method of appraising imported merchandise is transaction value. The transaction value of imported merchandise is defined as the price actually paid or payable for merchandise when it is sold for exportation to the United States plus certain statutorily enumerated items contained in the Trade Agreements Act of 1979 (TAA; 19 U.S.C. § 1401a(b)(1)). For instance, a selling commission incurred by the buyer with respect to the imported merchandise is one such item that is included in the transaction value. 19 U.S.C. § 1401a(b)(1)(8). Bona fide buying commissions, however, are not identified as additions to the price actually paid or payable and the courts have construed that they are not an element to be included in transaction value. See Rosenthal-Netter, Inc. v. United States, 12 CIT 77, 78, 679 F. Supp. 21, 23 (1988).
Many factors are considered when determining whether a bona fide agency exists between an importer and an alleged “buying agent,” including: the right of the principal to control the agent’s conduct; the transaction documents; whether the importer could have purchased directly from the manufacturers without employing an agent; whether the intermediary was operating an independent business, primarily for its own benefit; and the existence of a buying agency agreement. J.C. Penney Purchasing Corp. v. United States, 80 Cust. Ct. 84, 95-98, C.D. 4741, 451 F.Supp. 973, 983-985 (1978).
In addition, certain services performed by a purported buying agent have been identified as characteristic of those rendered by a bona fide buying agent. These services include compiling market information, translating, gathering samples, placing orders based on the buyer’s instructions, procuring the merchandise, assisting in factory negotiation, inspecting and packing merchandise, and arranging for shipment and payment. Id. at 984.
Furthermore, as it is important to establish that the purported buying agent is not in fact an independent seller, the subject transactions must be evaluated for indications that the agent is selling on its own account to the importer of the merchandise. In this regard, the agent would typically not take title to the merchandise. Id. at 986. The assumption of title by a purported agent is one indication that it was performing as an independent buyer and seller, but does not in itself preclude a finding that a bona fide buying agency existed. Id. Moreover, an archetypal agent will not bear the risk of loss for imported merchandise. Rosenthal-Netter, at 26. Finally, another indication that the purported agent is not performing as an independent seller, is whether or not the importer absorbs the costs of shipping and handling of the merchandise. New Trends, Inc. v. United States, 10 CIT 637, 641, 645 F. Supp. 957, 960 (1986).
In determining whether a bona fide buying agency exists, courts will consider the totality of evidence by examining all relevant factors and the particular facts of each case. J.C. Penney, at 983. Although, no single factor is determinative in finding a buying agency relationship, the primary consideration is the right of the principal to control the actions of the agent with respect to matters entrusted to it. Id.
The Buying Agency Agreement
As envisaged in the buying agency agreement, the relationship between the importer and alleged buying agent appears to comport with the general indicia of a bona fide buying agency. The enumerated services to be performed by the buying agent, in this case, are consistent with those performed in a typical buying agency relationship.
The agency agreement clearly sets forth that the “agent” is to act only upon the receipt of the importer’s written authorization, which is indicative of the importer’s control over the purported agent’s conduct. In addition, nothing in the agency agreement precludes the importer from purchasing merchandise directly from the manufacturers, which, as noted previously, serves as further indication of a bona fide buying agency.
Transaction Documents
Although the buying agency relationship as envisioned in the agency agreement appears to comport with the general indicia of a bona fide buying agency, an agency agreement is only evidence the parties intended to create an agency relationship. Rosenthal-Netter, at p. 27. Thus, documents evidencing the implementation of the transactions must substantiate that the parties succeeded in creating such a relationship. Id.
The Importer’s Control of the Alleged Buying Agent’s Activity
As previously noted, the central issue in determining the existence of a bona fide buying agency relationship is the right of the principal to control the actions of the agent in the relevant importation transactions. J.C. Penney, at 983. In this regard, the importer must demonstrate that it could elect to directly purchase the merchandise from the seller and that for all intents and purposes, the “agent” serves merely as a conduit for the importer’s purchase and importation of the subject merchandise. Id.
Where an importer accords too much discretion to an alleged buying agent and assumes a passive role during the purchasing process, the relationship will not constitute a bona fide buying agency. Rosenthal, at 24; New Trends, at 960. An importer’s failure to issue explicit directives to an alleged buying agent, according the agent excessive discretion in the purchasing process, will disqualify the relationship from consideration as a bona fide buying agency. Jay-Arr Slimwear Inc. v. United States, 12 C.I.T. 133; 681 F.Supp. 875, 879 (1988).
As to the issue of control, counsel provided a series of e-mail messages between the importer and the licensee/agent, which counsel notes are typical of the exchanges between the two parties concerning purchase orders, dates of delivery, quality issues, etc. Counsel avers this correspondence, along with the transaction documentation, demonstrates that the importer has ultimate control of the transactions at issue.
We disagree as to the persuasive effect of this e-mail correspondence. The content of this e-mail correspondence does not necessarily evince a buying agency relationship between the parties. While the correspondence does demonstrate the importer’s exchanges with the licensee/agent regarding its quality approval of certain shipments, etc. it does not exhibit the importer’s control over the purchasing process. This type of exchange could have occurred between buyer and seller or buyer and selling agent and does not establish the importer’s dominant control over transactions involving the licensee/agent.
In fact, the transaction documentation suggests the importer undertook a passive role with regard to transactions involving the licensee/agent and the purchase of the subject trademarked merchandise. In a typical buying agency relationship, the importer/buyer exerts considerable discretion in the choice of sales terms, manufacturers, the seller of the merchandise, etc.
Although the importer’s purchase order contains a reference to the manufacturer, [*], we note that this particular manufacturer is one of a few approved manufacturers of the trademarked imported merchandise identified in the license agreement between [*] and the licensee/agent. In addition, it is unclear who chooses the seller in this case, as the name of the purported seller, [*], is not contained on the importer’s purchase order. In fact, the one reference to vendor on the purchase order names the licensee/ agent.
It is furthermore not dear that the importer exercises any control with respect to the choice of the seller of the merchandise and the manufacturer of the merchandise. For all intents and purposes these selections are predetermined by the terms of the license agreement between the licensee and the licensor. It appears that the importer does not exercise the requisite degree of control over its transactions involving the alleged buying agent.
Centrality of Licensee/Agent’s Role
As stated, a bona fide buying agent performs as a mere conduit for an importation transaction, and does not assume a role beyond that of facilitator. Given the circumstances of this case, it appears evident that the importer could not purchase the subject footwear without the intervention of the licensee/agent. In this instance, the centrality of the alleged buying agent’s role with respect to the purchase and importation of the subject merchandise belies its purported role as buying agent.
The license agreements grant the licensee/agent an exclusive right to use the licensed trademarks within the distribution and sales licensed territory, defined within the agreement as the United States. It is clear, therefore, that the subject merchandise bearing the licensed trademarks could not be sold to the importer in the United States without the intervention of the licensee. In other words, the importer could not have purchased the imported merchandise without the involvement of the licensee/agent.
Also, as stipulated in the [*] license agreement, the licensee/agent remains primarily and completely responsible for the acts of the third party manufacturers and their acts are deemed to be acts of the licensee/agent. Responsibility on the part of a purported buying agent for the actions of the manufacturer are atypical of responsibilities normally undertaken by a buying agent performing a minor role as facilitator. Moreover, the license agreement also requires the licensee/agent to remedy the customer’s dissatisfaction with the merchandise at its own expense, which again is atypical of the responsibilities assumed by a buying agent.
Incongruities of the license and agency agreement terms
In addressing the incongruities of the licensing agreement terms and the purported roles·assumed by the parties involved in the subject importation transactions, counsel remarks that this case merely involves a “conversion.” Counsel argues that notwithstanding the fact that the license agreements refer to the licensee/agent as the seller of the trademarked merchandise, the licensee/agent in fact performs as a bona fide buying agent with respect to the subject transactions. Counsel argues that in substance, the licensee/agent’s role expands beyond that envisioned in the license agreements.
Counsel elaborates this point in remarking that the licensors in this case desire to market and sell products bearing their trademarks to numerous retailers, but prefer to work with only one licensee. By entering into a license agreement with one party, in this case, the licensee/agent, the licensors are able to benefit from sales to various parties but can control the use of their trademark with greater ease by working with one licensee. In essence, counsel argues that the licensors are funneling sales of their trademarked merchandise through the licensee/agent.
In support of this contention and in response to our concerns raised during our May 5, 2003 telephone conference, counsel provided letters from the licensors acknowledging that [*] is performing as a buying agent with respect to the transactions at issue.
By letter dated December 20, 2001, [*] confirms licensee’s authorization to import athletic footwear bearing [*] trademarks into the United States and to sell and act as a buying agent for its retail customers. By letter dated December 20, 2001, addressed to Customs, [*] confirms that licensee is authorized to import athletic shoes bearing the [*] trademark which are manufactured by certain enumerated manufacturers, among those [*], the subject manufacturer. Omission of the licensee’s role as buying agent in this letter, counsel states, was an inadvertent oversight rectified by letter dated May 9, 2003 addressed to Customs wherein [*] consents to the importation of certain merchandise bearing the [*] trademark, with the licensee acting either as importer or buying agent for its retail customers. The subject letter also enumerates the permissible sources of the goods as China, with specific Chinese manufacturers also identified, one of which is the manufacturer in this case.
These letters appear aimed at facilitating and obtaining Customs clearance of the importation of trademarked goods. Given the totality of circumstances in this case and the fact that one of the two letters is dated after our conference with counsel, we are unable to accord this evidence compelling weight.
The importer’s reliance upon the participation of the alleged buying agent in the purchasing process and its relatively passive role with respect to the conduct of the purchasing process indicates that the relationship does not constitute a bona fide buying agency relationship. Moreover, the evidence indicates that the alleged buying agent’s activities center on the manufacture and sale of the trademarked imported merchandise, even if the licensee/agency is not the actual seller of the imported merchandise. As the licensee/agent’s activities cannot be disentangled from the sale of the subject merchandise, we conclude that the commissions paid to the alleged buying agent in this case constitute selling commissions, which are a dutiable addition to the price actually paid or payable.
Royalty Payments
§ 1401a(b)(1) of the TAA provides, in pertinent part, that the transaction value of imported merchandise is the “price actually paid or payable for the merchandise when sold for exportation to the United States,” plus certain statutorily enumerated additions. § 1401a(b)(1) of the TAA provides for additions to the price actually paid or payable for:
(D) 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
With regard to royalties, the Statement of Administrative Action (“SAA”), adopted by Congress with the passage of the TAA, provides that:
[a]dditions for royalties and license fees will be limited to those 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. 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, H.R. Doc. 153, Pt 11, 96th Cong., 1st Sess. (1979), reprinted in Department of the Treasury, Customs Valuation under the Trade Agreements Act of 1979 (October 1981), at 48-49.
In General Notice, Dutiability of Royalty Payments, 27 Cust. Bull. 12 (1993), Customs articulated three factors, based on prior court decisions, for determining whether a royalty was dutiable. These faders were whether: 1) the imported merchandise was manufactured under patent; 2) the royalty was involved in the production or sale of the imported merchandise; and
3) the importer could buy the product without paying the fee. Affirmative responses to factors one and two and a negative response to factor three would indicate the payments were related to the imported merchandise and a condition of sale, therefore, making the royalty payments dutiable additions.
Involved in the Production or Sale of the Imported Merchandise
The payments at issue are made for the right to use, manufacture, distribute, sell and promote the imported athletic footwear bearing the two licensed trademarks. In addition, as a condition for the rights granted in the license agreements, the licensors exercise a great degree of control over the manufacture and sale of the imported products, the approval of samples of the imported product, and even the approval of the buyer of the imported product, among other things. Given these circumstances, we conclude that the payments made for the use of the licensed trademarks are related both to the production and sale of the imported merchandise.
Condition of Sale
As indicated in the SAA, the dutiable status of royalty payments will in large part hinge upon whether the buyer was required to pay them as a condition of sale of the imported merchandise for exportation to the United States.
Although, generally speaking, royalty payments made to a third party unrelated to the seller are considered to be non-dutiable selling expenses of the buyer, the royalty payment will nonetheless become a dutiable addition to the price paid or payable for the imported merchandise, provided that it is shown that the payment of the royalties was a condition of sale for the imported merchandise for exportation to the United States. HRL 545361 dated July 20, 1995.
For instance, when royalty payments are made on each and every importation and are inextricably intertwined with the imported merchandise, such payments are held to be dutiable. Imperial Products, Inc. v. United States, 425 F. Supp. 852, 854. Evidence of linkage between the sale agreements and purchase contracts and the license agreements, e.g., a requirement by the seller that the buyer pay the royalty to the licensor is another such indication that the royalty payments are inextricably intertwined with the imported merchandise. HRL 544991, dated September 13, 1995; HRL 545361.
In HRL 547226, dated July 27, 1999, Customs addressed the issue of whether the importer could buy the product without paying the license fees, i.e. whether the payment of the fees was a condition of sale. In that ruling, we concluded that the importer could buy the merchandise from the seller without paying the license fee. Customs determined that there was no evidence to suggest linkage between the sales agreements/purchase contracts and the license fees. The purchase orders did not contain a reference to the payment of license fees. In addition, there were no indications that the seller required the importer to pay the license fees.
In HRL 547557, February 13, 2001, Customs addressed issues similar to those in the instant case. Specifically, we examined whether commissions paid to a buying agent, unrelated to the seller constituted a bona fide buying commission and whether royalties paid by the importer to a party unrelated to the seller represent dutiable additions to transaction value. As to the issue of royalty payments we noted that the licensor in that case exerted great control over the manufacture and sale of the products containing the mark at issue, but acknowledged that in general, quality control clauses are standard in trademark licensing agreements and do not necessarily mandate that the royalty/license fees are a condition of sale.
We concluded that although the licensor exercised great control over the sale and production of the imported merchandise bearing its mark, the fees paid by the importer were not part of the agreement with the manufacturer. We further determined that all indications were that the importer could purchase the merchandise and import it without paying the license fees. We based our determination on the finding that the fees did not appear to be linked to the purchase order or invoices between the sellers and the importer.
Linkage between Sale for Exportation and Royalty Payment
Counsel argues that the sale for exportation and the payment of royalties are mutually exclusive. Moreover, counsel avers that as these royalty payments are not made to a seller or a party related to the seller, Customs precedent dictates that we find these payments not to be a condition of sale for exportation.
The case at hand is distinguishable from those in which we determined that the payment of the royalty amounts was not a condition of the sale of the imported merchandise. Unlike 547226, where we did not find linkage between the purchase/sales agreements and the royalty agreements, in the instant case we note that the royalty amounts payable by the importer are included in the purchase order for the imported merchandise. The royalty payment amount is included in the landed cost calculation for the imported merchandise. The royalty amount is in fact added to the “buying commission” payable for the imported merchandise, given a total monetary value and labeled as “buying commission” on the purchase order. A mathematical breakdown of the listed “buying commission” amount reveals that it equals the value of the buying commission and royalty percentage amounts payable in the subject transactions, added together.
In HRL 547226, we specifically noted that the purchase order in question did not contain a reference to the royalty payment as an indication that linkage did not exist. In this regard, we note counsel’s assertions that the purchase orders constitute the sales agreement between the parties. Although not directly labeled on the purchase order, the inclusion of this amount indicates linkage between the purchase and royalty agreements.
Licensor’s Control over Importation Transaction
Counsel argues the necessity of incorporating quality control provisions in a license agreement for protection of the licensor’s rights to the mark and for preservation of the marketing value of the intellectual property. Counsel contends that such provisions have nothing to do with the merchandise or the right of the licensee to control the subject transactions. Moreover, counsel notes, quality control requirements in license agreements are necessary if the trademark owner is to retain its intellectual property rights in that failure to take reasonable steps to control the quality of the trademark could be construed as an abandonment of the trademark, causing the license to become invalidated.
Counsel refers to HQ 547226, dated July 27, 1999 wherein Customs stated that the mere fact that the license agreement permits the licensor to approve manufacturers and to be involved in the quality control process was not evidence that the license fee was a condition of sale of the imported merchandise.
While we recognize that quality control provisions are an integral part of a standard license agreement, we note that excessive control and intervention on the part of a licensor may exceed mere quality control considerations. Should a licensor’s role go beyond mere approval, supervision and quality control and signify control over the entire purchasing process, the importer’s obligation to make royalty payment will be for all intents and purposes a condition of the sale for exportation.
Seller Cannot Sell the Imported Merchandise without Payment of Royalty
In the instant case, the licensors’ influence and control over the entire purchasing process is such that the “seller” could not have sold the merchandise to the importer without the importer’s payment of royalty fees. In addition to the unresolved issue as to how the “seller” acquired the right to sell the trademarked merchandise, the facts suggest the seller performed a minor role in the subject importation transactions. The dominant parties in this case appear to be the licensee/agent and the licensors. The licensee/agent and the licensors are the parties driving the manufacturing and selling process, with the licensors’ approval of all major facets of the purchasing process. The licensee/agent and the licensors carry out their roles as they did before replacement of the related seller with the current seller. It is unclear what role the seller plays beyond issuance of the commercial invoices for the imported merchandise as the evidence does not contain evidence of the seller’s role in the negotiating process, the manufacture of the merchandise, etc.
Given the seller’s minimal influence on the purchasing process of the imported merchandise, it is ever more evident that the seller could not have sold the subject merchandise to the importer without the importer’s payment of the royalties. Failure to ensure the importer’s payment of the royalty amounts would undoubtedly lead the licensee/agent and the licensors to deal with a compliant “seller.”
Importer Cannot Purchase the Imported Merchandise without Paying the Royalty
Moreover, the license agreement requires the licensor’s approval of the buyer of the licensed products at issue, even enumerating those retailers and wholesalers that are approved as purchasers of the licensed products. The subject importer is included on this list. Absent the licensor’s approval of the importer as purchaser of the licensed products, the importer would not be able to purchase the imported merchandise. This conclusion is logical given that the licensee/agent is legally responsible for the enforcement of the license terms and the importer could not purchase the subject merchandise without the licensee/agent’s involvement. We also infer that the importer, desiring to remain an approved purchaser of the licensed products, implicitly agrees to make the subject royalty payments as a condition of the sale of the imported merchandise.
The above analysis demonstrates that there are implicit enforcement mechanisms ensuring the importer makes royalty payments with respect to the imported merchandise.
The royalty agreement provisions are inextricably intertwined with the entire purchasing process of the subject imported merchandise. Therefore, we conclude that the payment of the royalty is a condition of the sale of the merchandise for exportation to the United States. Accordingly, the royalty payments constitute dutiable additions to the price paid or payable for the imported merchandise pursuant to § 1401a(b)(1)(D).
HOLDING:
The relationship between the importer and the licensee/agent does not constitute a bona fide buying agency relationship, therefore the commissions paid to the licensee/agent are dutiable additions to the price paid or payable as selling commissions.
The royalty payments are involved in the production and sale of the imported merchandise and constitute a condition of sale of the imported merchandise for exportation to the United States.
Sincerely,
Virginia L. Brown
Chief, Value Branch