Trimil SA v. United States — CIT Finds Advertising Expenses and Trademark Royalties Non-Dutiable

In December, 2019 the Court of International Trade (CIT) issued its decision in Trimil SA v. United States, Slip Op. 19-161 (12/17/19). This promises to be a landmark decision regarding the non-dutiable treatment of advertising expenses and third party trademark royalties. The case was brought by a company involved in the importation of Armani apparel. The court closely examined two sets of agreements that provided for (1) design and advertising services and (2) for a trademark license. The agreements were between Trimil and a pair of related parties. Importantly, the licensors of the trademarks were unrelated to the apparel factories which were the sellers of the imported merchandise. In each case, the fees would be based on Trimil Corp.’s future U.S. sales.

The case did not go to trial but was decided in favor of Trimil by summary judgment. Trimil had conceded that the design services constituted dutiable assists. The court held that the advertising fees and the trademark royalty fees paid by Trimil were not dutiable—they did not comprise a part of “the price actually paid or payable” (the PAPP) for the imported merchandise, and did not fit within one of the statutorily authorized additions to the PAPP.

In the first instance, the fees were not paid to the seller nor were they for the benefit of the seller, as defined by statute, 19 U.S.C. § 1401a(b)(4)(A). In the CIT’s own words, the meaning of the phrase “to or for the benefit of the seller” should be given a narrow meaning.  The court accepted Trimil’s position that the fees fell “squarely within the context of post-import transactions.” Moreover, in the case of the royalty fee, the fees were not a condition of the sale, which is a criterion for dutiable royalty status. The court pointed out that the presence of legally enforceable condition could not be inferred where an express condition was absent from the contract. The fact that the non-payment of the royalty might lead to a halt in production does not make the royalty payment a condition of the sale of the imported goods. The court accepted Trimil’s argument that the trademark royalty fees were a “selling expense associated with the clothing’s resale value after importation into the United States.”

Impact of the Trimil Decision

First, the most striking thing about the case is that the government neither appealed the loss nor, at the time of this writing, issued a Limiting Treasury Decision.

So, as of now, the decision stands as the last word. Of course, the decision may spawn later court challenges by the government seeking to re-litigate these issues or by importers seeking to challenge other CBP interpretations.

This decision makes happy importers who think that CBP should interpret the statutes strictly. But importers have been reluctant to challenge CBP and shoulder the considerable expense of taking a case to trial. Thus rarely does the CIT hear an important valuation case and when a decision is reached the trade world takes notice. Perhaps importer passivity has emboldened CBP to unfairly apply Customs rules and regulations and maybe this case, a win for the importer, will inspire the customs Bar to challenge CBP more often. Importers may challenge other weak positions CBP has taken in recent years – see numerous criticisms to the pre-determined end use test for origin enunciated in Energizer Battery, Inc. v. United States, 190 F. Supp. 3d 1308 (2016).

The Trimil case also opens up a planning opportunity.. Importers can rely upon the Trimil case to artfully draft agreements to avoid dutiable value if fees for advertising expenses and trademark royalties are paid to third party licensors and the standards set out in Trimil are observed.

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