Dutiability of royalty and license fees; Sufficiency of documentation; Trademarks; Unrelated parties

June 23, 2014 HQ H234735 OT:RR:CTF:VS H234735 YAG CATEGORY: Valuation Field Director, Office of Regulatory Audit U.S. Customs and Border Protection, Port of Charlotte 2001 Cross Beam Drive Charlotte, NC 28217-2856 RE: Dutiability of royalty and license fees; Sufficiency of documentation; Trademarks; Unrelated parties Dear Field Director: This is in response to your internal advice request, dated October 16, 2012, concerning the dutiability of royalty or license fees paid by Greenbrier International, Inc. (“Greenbrier”) (a purchasing entity of Dollar Tree Stores, Inc.) to a third party licensor unrelated to Greenbrier, or the manufacturer of the imported merchandise for the right to use the licensor’s trademark. FACTS: On March 2, 2010, Greenbrier purchased and imported into the United States “3-inch PU foam Marvel 360 balls” from an unrelated manufacturer in China, Shanghai Foreign Trade (“Foreign Trade”). The terms of sale of the imported merchandise were FOB Shanghai as indicated on the purchase order and commercial invoice provided for our review. During its review of the transaction, the Office of Regulatory Audit identified a royalty payment related to the imported goods. This royalty payment was made by Greenbrier to the unrelated third party licensor, Rand International (“Rand”), which acquired the rights to use the trademarks appearing on the imported merchandise from Marvel. Rand used to be the vendor from whom Greenbrier purchased the imported goods, but the business arrangement was reorganized, and Greenbrier paid Foreign Trade directly for the cost of the imported goods and then made a separate payment to Rand for the royalty fees and profit Rand would have made during the sale. Greenbrier provided us with an email, dated July 2, 2009, substantiating this agreement. Rand has since declared bankruptcy and gone out of business. It appears that pursuant to November 9, 2009 letter from Marvel’s general counsel to Dollar Tree Stores, Inc., Greenbrier paid the royalty directly to Marvel, since Rand was in bankruptcy. Therefore, it appears that Marvel is the actual licensor in this case. According to multiple emails received from Greenbrier (and the agreement letter, dated July 2, 2009), the royalty payment was calculated based on the quantity of the merchandise imported multiplied by the determined royalty/profit margin for the particular shipment (the royalty amount was made up by a specific percentage of the FOB price to be paid to Marvel and a specific percentage of the FOB price to be paid to Rand). Greenbrier stated that they no longer have any purchases requiring royalty payments such as these that occurred. Greenbrier argues that these royalty payments were not dutiable since the payments were made to a third party licensor for the use of trademarks in the United States. On March 12, 2014, CBP requested copies of any royalty or license agreements and any other agreements relating to the payment of the royalty or license fee in question and governing the sale of the imported merchandise between Greenbrier and Foreign Trade. Greenbrier provided the following: (1) a letter, dated November 9, 2009 from Marvel’s general counsel, authorizing Greenbrier to import the merchandise from approved factories and in approved quantities, bearing Marvel’s trademark and manufactured under license agreement 4059 and its subsequent amendments by Rand; (2) a letter, dated August 24, 2010, acknowledging that Rand has the right to authorize Greenbrier to use the Rand logo; (3) confirmation from Marvel, dated December 30, 2009, stating that Rand is authorized on behalf of Marvel to sell and distribute particular products, containing Marvel’s trademarks; and, (4) the invoice and the purchase order containing terms and conditions of sale between Greenbrier and Foreign Trade. CBP requested Greenbrier to provide license agreement 4059 and its subsequent amendments, since Greenbrier received the authorization to import the merchandise pursuant to this agreement. Greenbrier responded that they did not have a copy of this agreement because it was an agreement between Marvel and Rand, and Greenbrier was authorized by Marvel to use Marvel’s trademarks. Thus, no royalty or license agreement, specifying the terms and provisions surrounding the royalty payments from Greenbrier to Marvel, was provided. ISSUE: Whether the royalty or license fee should be included in the transaction value of the imported merchandise as royalties under section 1401a(b)(1)(D). 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”) and codified at 19 U.S.C. §1401a. The preferred method of appraisement under the TAA is transaction value, defined as “the price actually paid or payable for the merchandise when sold for exportation to the United States,” plus certain enumerated additions, including “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.” 19 U.S.C. §1401a(b)(1)(D). This addition applies only if it is not already included in the price actually paid or payable. In this case, the Office of Regulatory Audit identified additional royalty payments paid to a third party licensor, unrelated to either the seller or the buyer of the imported merchandise, for the use of the licensor’s trademark. In order to obtain a decision with respect to the dutiability of royalty or license fees, copies of any royalty agreements relating to the payment of the royalty or license fees in question and any purchase or supply agreements relating to the sale of the imported merchandise for exportation to the United States must be submitted to CBP with the request. If there are no such written agreements, this must be indicated. See General Notice, Notice to Require Submission of Royalty and Purchase/Supply Agreements in Ruling Requests Regarding Dutiability of Royalty or License Fees, 29 Cust.B. & Dec. No. 36, dated September 6, 1995. In this case, importations occurred in 2010. There were no purchase or supply agreements provided; however, we note that Greenbrier provided its purchase order pertaining to the transaction in question, which identifies terms and conditions governing the sale of the merchandise between Foreign Trade and Greenbrier. The terms and conditions of this purchase order do not mention the royalty payments or any provisions relating to such payments between Greenbrier and Marvel. We also note that there is no royalty or license agreement provided for our review. When the intellectual property rights are licensed, the licensor usually requires that a royalty or license fee agreement be signed that specifies the rights and obligations of the licensor and the licensee. Greenbrier only provided a letter from Marvel (licensor), authorizing Greenbrier to import the merchandise bearing Marvel’s intellectual property manufactured under license agreement 4059 and its subsequent amendments by Rand. This letter does not specify the rights and obligations of Greenbrier and Marvel; however, it indicates the factories Greenbrier may purchase the imported merchandise from and quantities of the imported merchandise that Greenbrier is authorized to purchase. Thus, in the absence of the royalty/license and purchase agreements, we must determine this case on the basis of three facts known to us: (1) the royalty was paid to a third party licensor, unrelated to either the seller or the buyer of the imported merchandise, for the use of the licensor’s trademark in the United States; (2) the royalty payment was calculated based on the quantity of the merchandise imported multiplied by the determined royalty/profit margin for the particular shipment (the royalty amount was made up by a specific percentage of the FOB price to be paid to Marvel and a specific percentage of the FOB price to be paid to Rand); and, (3) licensor approved factories from which Greenbrier could purchase the imported merchandise and authorized quantities of the merchandise that Greenbrier could purchase. Under 19 U.S.C. §1401a(b)(1)(D), an addition to the price actually paid or payable is made for 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.” After reviewing the language of the statute along with the legislative history and prior case law, CBP looks to the following three questions as relevant in determining whether the requirements of 19 U.S.C. § 1401a(b)(1)(D) are met: Was the imported merchandise manufactured under patent? Was the royalty involved in the production or sale of the imported merchandise? and, Could the importer buy the product without paying the fee? See General Notice, Dutiability of Royalty Payments, 27 Cust.B. & Dec. No. 6, dated January 21, 1993. Affirmative answers to questions one and two and a negative answer to question three suggest that the payments are dutiable; negative answers to questions one and two and an affirmative answer to question three suggest that the payments are non-dutiable. In this case, based on the information provided in multiple emails and correspondence Greenbrier and Marvel, the answer to the first question is no. The imported merchandise was not manufactured under patent. With respect to the second question, the answer is yes, the royalty was involved in the sale of the imported merchandise. Even though the royalty was paid to a third party, unrelated to the seller of the merchandise, the fact that the payments were made to an unrelated third party is an important factor, but not determinative. Headquarters Ruling Letter (“HRL”) 546513, dated February 11, 1998 and HRL H077419, dated April 5, 2011. Additionally, it is the sale for exportation between Foreign Trade and Greenbrier which triggered the obligation to pay the royalty or license fees. According to the facts, the royalty payment was calculated based on the quantity of the merchandise imported, multiplied by the determined royalty/profit margin for the particular shipment. Additionally, Greenbrier could purchase the approved quantities of the imported merchandise from the factories approved by licensor. See HRL 546513. In the absence of the actual royalty/license agreement, which normally contains provisions with respect to the rights and obligations of the licensor and the licensee and provides CBP with the opportunity to examine and confirm the terms of transactions, these facts, taken together, lead us to conclude that the royalty was involved in the sale of the imported merchandise. Finally, we conclude that the payment of the royalty or license fees is a condition of the sale for exportation to the United States. Question three goes to the heart of whether the 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 and every importation and are inextricably intertwined with the imported merchandise. If the payments are optional and not inextricably intertwined with the imported merchandise, or 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). It is true that in this case the royalty or license fees do not involve production rights; however, these payments are deemed a condition of sale by other factors, such as the fact that these royalty fees are paid on each and every importation, as discussed in our analysis of the second question. Generally, the method of calculating the royalty is not important in determining if the royalty is an addition to the price actually paid or payable. See HRL H077419. However, it might be relevant in certain circumstances. See HRL 545194, dated September 13, 1995; and HRL 546513. In this case, in addition to the royalty being paid on each and every importation, licensor approved the factories from which Greenbrier could purchase the merchandise and the quantities of the imported merchandise. In the absence of the royalty and license agreement(s) and considering the above referenced facts, we find that the royalty payments are deemed to be a condition of sale, and, therefore, dutiable. HOLDING: Based on the information presented and in the absence of the royalty or license agreement governing the transaction between the parties in this case, we find that the royalty or license fees paid by Greenbrier constitute an addition to the price actually paid or payable for the imported merchandise under 19 U.S.C. §1401a(b)(1)(D). This decision should be mailed by your office to the party requesting Internal Advice no later than 60 days from the date of this letter. On that date, the Office of Regulations and Rulings will make the decision available to CPB personnel, and to the public on the CPB Home Page on the World Wide Web at www.cbp.gov, by means of the Freedom of Information Act, and other methods of public distribution.   Please do not hesitate to contact us at (202) 325-0042 if you have any questions or concerns. Sincerely, Monika R. Brenner, Chief Valuation and Special Programs Branch