Dutiability of Certain Royalty Payments; Trademarks and Copyrights

HQ H307034 September 29, 2020 OT:RR:CTF:VS H307034 JW CATEGORY: Valuation Mr. Richard A. Mojica Miller & Chevalier Chartered 900 16th Street NW Washington, DC 20006 RE: Dutiability of Certain Royalty Payments; Trademarks and Copyrights Dear Mr. Mojica: This is in response to your letter dated November 18, 2019, on behalf of your client [[XX XXXXXXXXXX]], in which you requested a ruling letter from U.S. Customs and Border Protection (“CBP”), pursuant to 19 C.F.R. Part 177, regarding whether certain royalty payments are dutiable. CBP requested additional information on February 26, 2020 to issue a ruling letter. You provided additional information dated August 6, 2020. You have asked that certain information submitted in connection with this ruling request be treated as confidential. Inasmuch as this request conforms to the requirements of 19 C.F.R. § 177.2(b)(7), your request for confidentiality is approved. The information contained within brackets and all attachments to your request for a binding ruling, forwarded to our office, will not be released to the public and will be withheld from the published version of this ruling. FACTS: Your client is a subsidiary of [[XXXXXXXXXXXXXXXXX]] (the “Licensee” or “licensee”). Your client serves as the United States importer of record for merchandise imported according to sales contracts executed by the licensee. The merchandise is printed or graphic T-shirts. The Licensee proposes to purchase T-shirts from unaffiliated sellers/vendors located outside of the United States under sales contracts based on the Licensee’s Master Purchase Agreement. You indicate that the Master Purchase Agreement does not discuss or refer to any specific agreements related to intellectual property protections, licenses, or the payment of royalties, including the Sample License Agreement 1 and Sample License Agreement 2 discussed below. Then the Licensee proposes to arrange for printing of graphics onto these T-shirts either (a) within the United States by the licensee or a separate vendor; or (b) outside of the United States by the seller/vendor from which the Licensee purchased the T-shirts from. The printed graphics will have intellectual property (“IP”) in the form of trademarks or copyrights. The Licensee proposes to execute separate license agreements for use of this IP with third-party licensors that are based in the United States and not affiliated with either the Licensee or the sellers/vendors of the T-shirts. These license agreements will provide for the payment of royalties or license fees for use of the IP and will be modeled after one of two forms: (1) Sample License Agreement 1; or (2) Sample License Agreement 2. Sample License Agreement 1 will be executed with a U.S. third party licensor (generally, the ultimate rights holder) with no affiliation to either the Licensee or the seller/vendor of the T-shirts. Under Sample License Agreement 1, the royalties will include (i) a fixed or “guaranteed” amount regardless of sales; and (ii) a variable or “percentage” amount calculated based on the total net sales or retail sales, as applicable, of the licensed products in the United States. Sample License Agreement 1 grants from licensor to licensee “the non-exclusive right and license to use the Copyrights and the Trademarks in connection with the manufacture, distribution, sale, and advertising of the Licensed Products. . . .” Sample License Agreement 1 states that “[t]he Licensee shall have the right to arrange with another party to manufacture the Licensed Products or components thereof for exclusive sale, use, and distribution by the Licensee.” However, the “Licensor shall have the right at any time, to require that the Licensee not use a manufacturer.” Moreover, while Sample License Agreement 1 does not specifically refer to the Master Purchase Agreement, it requires that “[p]rior to manufacturing any Licensed Products or any components thereof, the Licensee agrees to enter into a written agreement with such manufacturer, in addition to any other agreement Licensee enters into with such manufacturer, in the form of Exhibit C attached hereto and made a part hereof (or such other form as is approved by Licensor in writing) (the ‘Manufacturer Agreement’).” (emphasis in original). If the licensee breaches these provisions related to manufacturers or if, inter alia, licensee fails to submit royalty statements and/or royalty payments, the “Licensor shall have the right to terminate this Agreement immediately. . . .” Exhibit C of Sample License Agreement 1, i.e., the Manufacturer Agreement, states with respect to the sale of licensed products that “[t]he Manufacturer agrees not to manufacture, print, sell, or distribute the Licensed Products or any components of the Licensed Products except as expressly permitted by the terms of this Agreement and pursuant to specific written instructions and purchase orders from the Licensee.” The Licensee “shall” have the right to terminate the Manufacturing Agreement if, inter alia, the agreement (i.e., Sample License Agreement 1) which licensee has with licensor covering the use of copyrights or trademarks on the licensed products is terminated. It is further stated that “[t]he Manufacturer recognizes that the manufacturing rights granted to it by the Licensee under this Agreement are based on the rights granted the Licensee by Licensor under their agreement, and that on the termination of their agreement this Agreement shall automatically terminate. . . .” Sample License Agreement 2 will be executed with a U.S. third party licensor (generally, another licensee that has been authorized to sublicense the IP) with no affiliation to either the Licensee or the seller/vendor of the T-shirts. Sample License 2 is an agreement that “shall govern and control all Design Services [defined as any and all work, designs, marks, logos, or images that have been licensed for use on the Licensee’s products] provided by Licensor to [the Licensee].” Further, as part of this agreement “Licensor agrees to sublicense to [the Licensee] certain Licensed Properties for use on [the Licensee’s] products for sale within the Territory as part of the Program [defined as the Design Services and the production, marketing, and sale of certain Licensed Properties by [the Licensee] in the Territory.]” Under Sample License Agreement 2, the fees are defined to include: a royalty at a specified rate, and a “Design Fee” based on a percentage of the “Landed Cost of Licensed Product” (collectively, “Fees”). “Landed Cost of the Licensed Product” is not specifically defined in Sample License Agreement 2, however you state that it is in essence, “the invoice price of the product plus transportation fees, customs duties, import taxes, tariffs, etc.” Ruling Request at 7. The Licensee “shall pay Licensor all undisputed Fees within sixty (60) days of the end of the most recent calendar quarter.” Sample License Agreement 2 further provides that “[a]t its own expense, Licensor shall be solely responsible for the performance of all trademark, copyright, patent or other searches and clearances for all aspects of the Licensed Properties. Licensor shall secure in a timely manner in writing and pay for all licenses, consents, rights of publicity, approvals and/or permissions for the Licensed Properties necessary for the Licensee to: (1) manufacture or have manufactured the Licensed Products; (2) distribute and sell the Licensed Products in the Territory; (3) advertise and promote the Licensed Products by any means. . .; and (4) use, copy and publicly display any Licensed Properties provided by Licensor to advertise and promote the Licensed Products in the Territory. . . .” With respect to termination of Sample License Agreement 2, the agreement provides that it will continue until the first to occur of the following: a specific date; termination by convenience by the Licensee; or termination for cause by either party. Sample License Agreement 2 also does not specifically refer to the Master Purchase Agreement. You note that the options described above create four different import and royalty scenarios. The chart that you use to summarize these four scenarios is provided below: Royalties = Guaranteed Royalties + % of Net Sales (i.e., Sample License Agreement 1) License Fees = Royalties + Design Fee of % of Landed Cost (i.e., Sample License Agreement 2)  Manufacture Abroad; Printing in the United States Scenario 1: [The Licensee] executes purchase agreement for T-shirts with seller/vendor located abroad. Graphics applied in United States by [the Licensee] or separate vendor [The Licensee] executes IP agreement with U.S. third-party licensor. Royalty calculated based on guaranteed amount plus percentage of net sales. Scenario 2: [The Licensee] executes purchase agreement for T-shirts with seller/vendor located abroad. Graphics applied in United States by [the Licensee] or separate vendor. [The Licensee] executes IP agreement with U.S. third-party licensor License fee calculated based on fixed royalty plus percentage of Landed Cost.  Manufacture and Printing Abroad Scenario 3: [The Licensee] executes purchase agreement for T-shirts with seller/vendor located abroad. Graphics applied abroad by seller/vendor. [The Licensee] executes IP agreement with U.S. third-party licensor. Royalty calculated based on guaranteed amount plus percentage of net sales. Scenario 4: [The Licensee] executes purchase agreement for T-shirts with seller/vendor located abroad. Graphics applied abroad by seller/vendor. [The Licensee] executes IP agreement with U.S. third-party licensor. License fee calculated based on fixed royalty plus percentage of Landed Cost.   ISSUE: For each scenario, whether the royalties or license fees made to third parties in accordance with the sample licensing agreements are dutiable as part of transaction value. 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”), codified at 19 U.S.C. §1401a. The preferred basis of appraisement under the TAA is transaction value, defined in Section 1401a(b)(1), as the “price actually paid or payable for the merchandise when sold for exportation to the United States” plus amounts for enumerated statutory additions to the extent not otherwise included in the price actually paid or payable. Imported merchandise will be appraised under transaction value only if the buyer and seller are not related, or if related, the circumstances of sale indicate that the relationship did not influence the price actually paid or payable, or the transaction value approximates certain test values. 19 U.S.C. § 1401a(b)(2)(A)-(B). In the instant case, based on the information submitted, the seller of the merchandise is not related to the buyer, hence we assume that transaction value is the appropriate basis of appraisement. We will additionally assume, based on the information submitted, that the royalty payments are not part of the price actually paid or payable for the imported merchandise as they do not appear to be a part of the total payment, directly or indirectly, made, or to be made, for the imported merchandise by the buyer to, or for the benefit of, the seller. See, § 402(b)(4)(a) TAA. In the absence of evidence to the contrary, where, as here, the payments are made by the buyer to a party unrelated to the seller, such amounts are considered as separate from the price. See also e.g., HQ H174030 citing 19 U.S.C. § 1401a(b)(4)(A) (noting that “the royalty payments are not part of the price actually paid or payable for the merchandise by the buyer to, or for the benefit of, the seller.”). Therefore, in this decision, the issue to be addressed is whether the subject payments are included in transaction value solely from the perspective of whether they constitute additions to the price actually paid or payable. The additions include “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). Royalty payments may be included in the transaction value as part of the price actually paid or payable or as an addition thereto. See, e.g., General Notice, Dutiability of Royalty Payments, Vol. 27, No. 6 Cust. B. & Dec. at 1 (February 10, 1993) (“General Notice”); H.R. Rep. No. 317, 96th Cong. 1st sess., at 80 (1979). 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). It is CBP’s position that payments made by the buyer to a party related to the seller are indirect payments made to, or for the benefit of, the seller. All such payments are included in transaction value unless it is established that they were made in exchange for something other than the imported goods. See Generra Sportswear Company v. United States, 905 F.2d 377 (Fed. Cir. 1990), and Chrysler Corporation v. United States, 17 CIT 1049 (1993). With respect to the dutiability of royalty payments and license fees, the Statement of Administrative Action to 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 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 the 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, 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 toward dutiability. When analyzing the factors identified in the 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 (“HQ”) 547148, dated September 12, 2002. To obtain a ruling 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 in the ruling request. See General Notice, “Notice to Require Submission of Royalty and Purchase Supply Agreements in Ruling Requests Regarding Dutiability of Royalty or License Fees,” Vol. 29, No. 36, Cust. B. & Dec. at 10, dated September 6, 1995. See also 19 C.F.R. § 177.2(b). Here, along with your request letter, you submitted Exhibits A to C, which included, respectively, “relevant excerpts from” the Master Purchase Agreement, Sample License Agreement 1, and Sample License Agreement 2. See Exhibits A to C. However, on February 26, 2020, in accordance with the General Notice, CBP noted that to obtain a ruling letter, copies of all the relevant agreements, including the Master Purchase Agreement, Sample License Agreement 1, and Sample License Agreement 2 would have to be provided. This was provided by you as part of a package dated August 6, 2020. Specific sections of the Corporate Vendor Manual were also provided by you as part of the package dated August 6, 2020. Your request presents four scenarios. Each will be discussed in turn below. Scenario 1 In this scenario, the Licensee will execute the Master Purchase Agreement with a seller/vendor located abroad. The Licensee will purchase the imported merchandise from the seller/vendor under sales contracts based on the Master Purchase Agreement which does not specifically reference Sample License Agreement 1. Simultaneously, the Licensee will enter into Sample License Agreement 1 with a U.S. third party licensor (who is not related to the seller/vendor) to use certain trademarks and copyrights on licensed products. The Licensee will arrange for the printing of graphics with the trademarks and copyrights as defined in Sample License Agreement 1, onto the imported merchandise (i.e., blank T-shirts) after the merchandise has been imported into the United States. These graphics will be printed in the United States by either the Licensee, or a separate vendor (not the original seller/vendor from which the Licensee purchased the imported merchandise). In this scenario, based on the information provided by you, the responses to the three questions articulated in the General Notice are as follows: Was the imported merchandise manufactured under patent? Based on the information submitted, we are unable to determine whether the imported merchandise is manufactured under patent. See e.g., Exhibit A at 3.8 (stating, “Vendor/Seller shall be responsible for obtaining and complying with all licenses, waivers and permissions required for Vendor/Seller’s performance under this Agreement and any POs. For example, but not by way of limitation, if a license under a third-party’s patent rights is required to make, use, sell, offer for sale, import or otherwise exploit the Goods and Services provided by Vendor/Seller, Vendor/Seller shall be responsible for securing such license.”). However, whether the imported merchandise is manufactured under patent is not critical to the determination of dutiability of the royalty payments addressed in the subject licensing agreement, i.e., Sample License Agreement 1, because the agreement addresses payment of royalties in connection with trademark and copyright licensing. See e.g., HQ 545528, dated August 3, 1995 (noting the same). The royalty payments outlined in Sample License Agreement 1 relate to the grant from licensor to licensee, the right and license to use certain copyrights and trademarks. Was the royalty involved in the production or sale of the imported merchandise? No, in this scenario, the royalty payments made by the Licensee are not involved in the production or sale of the imported merchandise. The royalty payments made by the Licensee under Sample License Agreement 1 are to a third party who is unrelated to the seller of the imported merchandise. See e.g., HQ H174030, dated November 15, 2011, at 4 (“With respect to the second question, because the royalty is paid to a third party who is unrelated to the seller of the merchandise, the royalty is not involved in the production or sale of the imported merchandise.”). The imported merchandise is manufactured abroad by factories unrelated to the Licensee or the U.S. third-party licensor. Moreover, in this scenario, the copyright and trademarks outlined in Sample License Agreement 1 are not applied to the imported products until after the products enter the United States. They are applied exclusively in the United States by either the Licensee or a separate vendor, not the original seller/vendor. The royalty is paid in consideration for the license “to use the Copyrights and the Trademarks in connection with the manufacture, distribution, sale, and advertising of the Licensed Products in the Territory via the Approved Retail Outlets.” At the time of importation, the imported products bear no copyrights or trademarks as defined in Sample License Agreement 1. Could the importer buy the product without paying the fee? Yes, in this scenario, the importer can buy the product without paying the royalties to the U.S. third party licensor who is not related to the seller/vendor of the T-shirts. As noted in the General Notice, supra, the answer to this question goes to the heart of whether a payment is considered to be a condition of sale. While royalties paid to third parties for the use, in the United States, of trademarks related to the imported merchandise are generally not dutiable, the SAA provides that such payments will nevertheless be treated as dutiable if they represent a condition of the sale for exportation. Payments that must be made for each imported item are a condition of sale. Under the TAA, such payments may be dutiable as royalties, as part of the price actually paid or payable, or as proceeds. Royalty payments are also a condition of sale when they are paid on each and every item imported and are inextricably intertwined with the imported merchandise. However, where the payments are optional are not inextricably intertwined with the imported merchandise, or are paid solely for the exclusive right to manufacture and sell a product using the imported merchandise in the United States, 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, 199; see also HQ H077419, dated April 5, 2011. In this scenario, the copyrights and trademarks outlined in Sample License Agreement 1 are not applied to the products until after the products enter the United States, and the royalty payments in Sample License Agreement 1 are in connection with trademark and copyright licensing. At the time of importation, the merchandise bears no copyrights or trademarks as used in Sample License Agreement 1. We also find that the royalty payments are not proceeds of a subsequent resale, disposal or use of the imported merchandise. The licensor and the vendor/seller are unrelated; accordingly, provided that no portion of the royalty payments accrues, directly or indirectly, to the sellers, the royalty payments would not constitute an addition to the price actually paid or payable under 19 U.S.C. 1401a(b)(1)(E). See also 19 C.F.R. § 152.103(b)(1)(v). Accordingly, in scenario 1, the royalty payments paid by the licensee to third party licensors pursuant to the terms of the Sample License Agreement 1 are not dutiable under section 402(b)(1)(D) or (E), as royalties or as proceeds of subsequent resale. Scenario 2 In this scenario, the Licensee will execute the Master Purchase Agreement with a seller/vendor located abroad. The Licensee will purchase the imported merchandise from the seller/vendor under sales contracts based on the Master Purchase Agreement, which does not discuss or refer to any specific agreements related to the payment of royalties, including Sample License Agreement 2. Simultaneously, the Licensee will enter into Sample License Agreement 2 with a U.S. third party licensor (who is not related to the seller/vendor) for Design Services and for licensor to sublicense to the Licensee certain Licensed Properties for use on the Licensee’s products for sale in a specified territory. Sample License Agreement 2 is a separate contract from the Master Purchase Agreement, and does not specifically reference the Master Purchase Agreement. The Licensee will arrange for the printing of graphics with the trademarks and copyrights as contemplated by Sample License Agreement 2, onto the imported merchandise (i.e., T-shirts) after the merchandise has been imported into the United States. These graphics will be printed in the United States by either the Licensee, or a separate vendor (not the original seller/vendor from which the Licensee purchased the imported merchandise). In this scenario, based on the information provided by you, the responses to the three questions articulated in the General Notice are as follows: Was the imported merchandise manufactured under patent? Based on the information submitted, we are unable to determine whether the imported merchandise is manufactured under patent. See e.g., Exhibit A at 3.8 (stating, “Vendor/Seller shall be responsible for obtaining and complying with all licenses, waivers and permissions required for Vendor/Seller’s performance under this Agreement and any POs. For example, but not by way of limitation, if a license under a third-party’s patent rights is required to make, use, sell, offer for sale, import or otherwise exploit the Goods and Services provided by Vendor/Seller, Vendor/Seller shall be responsible for securing such license.”). However, whether the imported merchandise is manufactured under patent is not critical to the determination of dutiability of the royalty payments addressed in the subject licensing agreement, i.e., Sample License Agreement 2, because the agreement addresses payment of royalty fees in connection with trademarks and copyrights, rather than patents. See e.g., HQ 545528 (noting the same). As noted in Sample License Agreement 2, “Licensor is in the business of licensing images, logos and designs for use on apparel. . . .” Was the royalty involved in the production or sale of the imported merchandise? No, in this scenario, the royalty payments made by the Licensee are not involved in the production or sale of the imported merchandise. The royalty made by the Licensee under Sample License Agreement 2 is to a third party who is unrelated to the seller of the imported merchandise. See e.g., HQ H077419 at 4. The imported merchandise is manufactured abroad by factories unrelated to the Licensee or the U.S. third-party licensor. Moreover, in this scenario, the trademarks and copyrights contemplated in Sample License Agreement 2 are not applied to the imported products until after the products enter the United States. They are applied exclusively in the United States by either the Licensee or a separate vendor, not the original seller/vendor. At the time of importation, the imported products bear no trademarks or copyrights as contemplated by Sample License Agreement 2. Could the importer buy the product without paying the fee? Yes, in this scenario, the importer can buy the product without paying the royalties to the U.S. third party licensor who is not related to the seller/vendor of the T-shirts. The Licensee’s ability to purchase the product, here blank T-shirts, is not dependent on the royalty payments outlined in Sample License Agreement 2, but rather the terms as set forth in the Master Purchase Agreement, which does not specifically reference Sample License Agreement 2. Here, while the royalty payments are not optional, the payments are not paid to the vendor/seller, and there is no evidence that ties the royalty to a sale agreement for the imported merchandise, e.g., a requirement by the seller that the buyer pay the royalty to the licensor. In fact, in this scenario, the copyrights and trademarks contemplated in Sample License Agreement 2 are not applied to the products until after the products enter the United States. Based on your representations in the ruling request and Sample License Agreement 2, there is nothing in Sample License Agreement 2 that will obligate the importer to pay royalty fees for merely purchasing the blank T-shirts and bringing them into the United States. See e.g., HQ H077419, dated April 5, 2011. Indeed, at the time of importation there are no trademarks or copyrights of the type contemplated by Sample License Agreement 2 on the product. We also find that the royalty payments are not proceeds of a subsequent resale, disposal or use of the imported merchandise. The licensor and the vendor/seller are unrelated; accordingly, provided that no portion of the royalty payments accrues, directly or indirectly, to the sellers, the royalty payments would not constitute an addition to the price actually paid or payable under 19 U.S.C. 1401a(b)(1)(E). See also 19 C.F.R. § 152.103(b)(1)(v). Accordingly, in scenario 2, the royalty payments paid by the licensee to third party licensors pursuant to the terms of Sample License Agreement 2 are not dutiable under section 402(b)(1)(D) or (E), as royalties or as proceeds of subsequent resale. Scenario 3 In this scenario, the Licensee will execute the Master Purchase Agreement with a seller/vendor located abroad. The seller/vendor will print the graphics with the trademarks and copyrights as defined in Sample License Agreement 1, onto the merchandise (i.e., T-shirts) abroad (prior to importation into the United States). Simultaneously, the Licensee will enter into Sample License Agreement 1 with a U.S. third party licensor (who is not related to the seller/vendor) to use certain trademarks and copyrights on licensed products. As part of Sample License Agreement 1, the Licensee must also enter into a Manufacturing Agreement with the seller/vendor. The Licensee will purchase the imported merchandise from the seller/vendor under sales contracts based on the Master Purchase Agreement and Manufacturing Agreement. In this scenario, based on the information provided by you, the responses to the three questions articulated in the General Notice are as follows: Was the imported merchandise manufactured under patent? Based on the information submitted, we are unable to determine whether the imported merchandise is manufactured under patent. See e.g., Exhibit A at 3.8 (stating, “Vendor/Seller shall be responsible for obtaining and complying with all licenses, waivers and permissions required for Vendor/Seller’s performance under this Agreement and any POs. For example, but not by way of limitation, if a license under a third-party’s patent rights is required to make, use, sell, offer for sale, import or otherwise exploit the Goods and Services provided by Vendor/Seller, Vendor/Seller shall be responsible for securing such license.”). However, whether the imported merchandise is manufactured under patent is not critical to the determination of dutiability of the royalty payments addressed in the subject licensing agreement, i.e., Sample License Agreement 1, because the agreement addresses payment of royalties in connection with trademark and copyright licensing. See e.g., HQ 545528 (noting the same). The royalty payments outlined in Sample License Agreement 1 relate to the grant from licensor to licensee, the right and license to use certain copyrights and trademarks. Was the royalty involved in the production or sale of the imported merchandise? Yes, in this scenario, the royalty payments made by the Licensee are involved in the production and sale of the imported merchandise. While the royalty made by the Licensee under Sample License Agreement 1 is to a third party who is unrelated to the seller of the importer merchandise, that fact alone is not determinative. See e.g., HQ H174030, dated November 15, 2011 at 7 (“[T]he fact that royalty payments are made to an unrelated third party is not entirely determinative. . . . “). Here, unlike in Scenario 1 (where only blank T-shirts were imported), the imported merchandise is the licensed product, i.e., T-shirts containing graphics with the trademarks and copyrights as defined in Sample License Agreement 1. The royalty is paid in consideration for the license “to use the Copyrights and the Trademarks in connection with the manufacture, distribution, sale, and advertising of the Licensed Products in the Territory via the Approved Retail Outlets.” In the past, CBP has held that a royalty was involved in the sale of imported merchandise when the individual sales agreements and purchase contracts were subject to the terms of the royalty agreement. See e.g., HQ 544436; HQ 545361. Here, while you represent that the individual sales agreements and purchase contracts do not specifically reference Sample License Agreement 1, we note that there is nonetheless a Manufacturing Agreement. This Manufacturing Agreement must be entered into as a condition of Sample License Agreement 1. Further, it must be entered into, prior to manufacturing any of the licensed products, by the manufacturer (i.e., seller/exporter) and the Licensee. Notably, it states in the Manufacturing Agreement that “[t]he Manufacturer agrees not to manufacture, print, sell, or distribute the Licensed Products or any components of the Licensed Products except as expressly permitted by the terms of this Agreement and pursuant to specific written instructions and purchase orders from the Licensee.” (emphasis added). Moreover, the termination of the Manufacturing Agreement is tied to the termination of Sample License Agreement 1, and termination of Sample License Agreement 1 is permissible if licensee fails to submit royalty payments. Finally, we note the provision in Sample License Agreement 1 that the licensee must notify the licensor in writing if licensee proposes to sell any licensed product at a price which is less than 10% above the licensee’s manufactured cost of such licensed product. The licensor shall have a right of prior approval of this proposal, and if licensor approves, then the parties agree to negotiate with regard to a higher percentage royalty to be payable by licensee. Contrary to your assertion, we find that these provisions provide the U.S. third party licensor with control over the Licensee’s selection of manufacturers and the production process, which exceed that granted from the “standard IP protection, quality control, and corporate responsibility provisions.” Ruling Request at 15. Thus, we find that the royalties are related to the production and sale of the imported licensed products. If the Licensee does not pay the royalty fees to the licensor, then Sample License 1 could be terminated, and if Sample License Agreement 1 is terminated that may also terminate the Manufacturing Agreement, and thus the manufacturer may not be permitted to manufacture or sell the licensed products. Further, while Sample License Agreement 1 provides the licensee with the right to arrange for the manufacturer, the licensor nonetheless retains the right to require at any time that the licensee not use a manufacturer. In addition, we note that there is an additional approval provision in Sample License Agreement 1 that states, “[p]rior to manufacture, marketing or sale of any Licensed Product, Licensee shall submit each Licensed Product to Licensor for its prior written approval at each stage of development (e.g., concept and sample). . . .” Without such approval, the imported products could not be manufactured or sold. Accordingly, based on the above considerations, we conclude that the payment of royalties is tied to the production and sale for exportation to the United States of the imported products, and the answer to question two is yes. Could the importer buy the product without paying the fee? Yes, in this scenario, the importer can buy the product without paying the royalties to the U.S. third party licensor who is not related to the seller/vendor of the T-shirts, i.e., the royalty payments are not a condition of sale. The royalty payments contemplated in Sample License Agreement 1 are not paid on each and every importation, and are not inextricably intertwined with the imported merchandise. Although the payment of royalties is required and not optional, the payment is not to the seller, but rather to the U.S. third party licensor unrelated to the seller. Further, Sample License Agreement 1 states that “all royalties due to Licensor shall accrue upon the sale [and not each and every importation] of the Licensed Products, regardless of time of collection by Licensee.” Moreover, payment of the royalties is not triggered by each and every importation, rather payment of the guaranteed royalties is based on specified dates, and “Licensee shall pay all royalties owing to Licensor under this Agreement for any calendar quarter within 60 days following the end of the calendar quarter in question.” Thus, the Licensee may be able to purchase the imported merchandise from the seller/vendor located abroad without having to pay the royalty to the unrelated U.S. third party licensor. Moreover, it is our understanding from your letter dated November 18, 2019 that the purchase orders to the seller/vendor referenced in the Master Purchase Agreement do not make reference to the royalties and are not included in the price paid to the seller/vendor. In light of the above, we find that the Licensee can purchase the merchandise from the manufacturer without paying the license fee as, for example, royalty payments do not need to be made on each and every importation. We also find that the royalty payments are not proceeds of a subsequent resale, disposal or use of the imported merchandise. The licensor and the vendor/seller are unrelated; accordingly, provided that no portion of the royalty payments accrues, directly or indirectly, to the sellers, the royalty payments would not constitute an addition to the price actually paid or payable under 19 U.S.C. 1401a(b)(1)(E). See also 19 C.F.R. § 152.103(b)(1)(v). Accordingly, in scenario 3, the royalty payments paid by the licensee to third party licensors pursuant to the terms of Sample License Agreement 1 are not dutiable under section 402(b)(1)(D) or (E), as royalties or as proceeds of subsequent resale. Scenario 4 In this scenario, the Licensee will execute the Master Purchase Agreement with a seller/vendor located abroad. The seller/vendor will print the graphics with the trademarks and copyrights as contemplated by Sample License Agreement 2, onto the merchandise (i.e., T-shirts) abroad (prior to importation into the United States). Simultaneously, the Licensee will enter into Sample License Agreement 2 with a U.S. third party licensor (who is not related to the seller/vendor) for Design Services and for licensor to sublicense to the Licensee certain Licensed Properties for use on the Licensee’s products for sale in a specified territory. The Licensee will purchase the imported merchandise from the seller/vendor under sales contracts based on the Master Purchase Agreement. Sample License Agreement 2 is a separate contract from the Master Purchase Agreement, and does not reference the Master Purchase Agreement. In this scenario, based on the information provided by you, the responses to the three questions articulated in the General Notice are as follows: Was the imported merchandise manufactured under patent? Based on the information submitted, we are unable to determine whether the imported merchandise is manufactured under patent. See e.g., Exhibit A at 3.8 (stating, “Vendor/Seller shall be responsible for obtaining and complying with all licenses, waivers and permissions required for Vendor/Seller’s performance under this Agreement and any POs. For example, but not by way of limitation, if a license under a third-party’s patent rights is required to make, use, sell, offer for sale, import or otherwise exploit the Goods and Services provided by Vendor/Seller, Vendor/Seller shall be responsible for securing such license.”). However, whether the imported merchandise is manufactured under patent is not critical to the determination of dutiability of the royalty payments addressed in the subject licensing agreement, i.e., Sample License Agreement 2, because the agreement addresses payment of royalty fees in connection trademarks and copyrights, rather than patents. See e.g., HQ 545528 (noting the same). As noted in Sample License Agreement 2, “Licensor is in the business of licensing images, logos and designs for use on apparel. . . .” Was the royalty involved in the production or sale of the imported merchandise? No, in this scenario, the royalty payments made by the Licensee are not involved in the production or sale of the imported merchandise. The royalty payments made by the Licensee under Sample License Agreement 2 are to a third party who is unrelated to the seller of the imported merchandise. The imported merchandise is manufactured abroad by factories unrelated to the Licensee or the U.S. third-party licensor. Under Sample License Agreement 2, the fees will be paid for Design Services, and an agreement to sublicense certain Licensed Properties for use on the licensee’s products. The fees are defined to include: a royalty at a specified rate, and a “Design Fee” based on a percentage of the “Landed Cost of Licensed Product.” “Landed Cost of the Licensed Product” is not specifically defined in Sample License Agreement 2, however you state that it is in essence, “the invoice price of the product plus transportation fees, customs duties, import taxes, tariffs, etc.” Ruling Request at 7. Further, Sample License Agreement 2 notes that The Licensee “shall pay Licensor all undisputed Fees within sixty (60) days of the end of the most recent calendar quarter.” In the past, CBP has held that where royalty payments are paid to third parties for rights such as these and such payments are not associated with processes to manufacture the imported merchandise, the payments are not dutiable under the royalty provision. See e.g.,, HQ H174030, dated November 15, 2011 at 6-7 (“Although the amount of royalties due are calculated based on a specified percentage of the purchase order cost of the received goods with payments sent to Timberlake each quarter based on the receipt of the goods, there is no indication that Timberlake directs how the licensed merchandise is manufactured and sold.”). Accordingly, we find that based on the information submitted, the royalties in question are not involved in the production of the imported merchandise. In addition, with respect to the sale of imported merchandise, based on the information provided, we find that the royalty payments are not made subject to the sale for exportation to the United States. In the past CBP has held that a royalty was involved in the sale of imported merchandise when the individual sales agreements and purchase contracts were subject to the terms of the royalty agreement. See e.g., HQ 544436; HQ 545361. In the instant case, the payment of the royalty fee is not conditioned upon the sale of the merchandise for exportation to the United States. Rather, Sample License Agreement 2 does not appear to condition the payment of fees on any particular event, it only says that the Licensee “shall pay Licensor all undisputed Fees within sixty (60) days of the end of the most recent calendar quarter.” Could the importer buy the product without paying the fee? Yes, in this scenario, the importer can buy the product without paying the royalties to the U.S. third party licensor who is not related to the seller/vendor of the T-shirts, i.e., the royalty payments are not a condition of sale. The Licensee’s ability to purchase the product is not dependent on the royalty payments outlined in Sample License Agreement 2, but rather the terms set forth in the Master Purchase Agreement, which does not specifically reference Sample License Agreement 2. CBP historically has ruled that a trademark royalty or license fee paid to unrelated third parties, regardless of the method of calculating the royalty, be it on the purchase price or net sales of the imported merchandise, is not dutiable. See, HQ H077419 at 5 citing HQ 545612. Here, all parties to this transaction are unrelated. We recognize the fact that the royalty payments made to an unrelated third party is not entirely determinative because the SAA provides that a royalty payment made by a buyer as a condition of the sale of the merchandise for exportation to the United States will be added to the price actually paid or payable. See HQ H004991, dated April 2, 2007. However, as indicated by CBP in many past rulings, the relationship of the parties, although not entirely determinative, is an important factor to consider in analyzing the transactions. See e.g., HQ 545361; HQ 548552. Further, although, Sample License Agreement 2 requires fixed royalty payments to the licensor, these payments are incurred regardless of whether or not the licensed products are purchased from unrelated manufacturers and imported into the United States. Further, while the Design Fee is calculated based on the “Landed Cost of the Licensed Product”; and thus upon the importation of each and every product, this is only the method of calculating the royalty. This does not necessarily mean that the payment of the fee is conditioned upon the sale of the merchandise for exportation to the United States. In fact, here the payment of the fee does not seem to be triggered by the sale for exportation; rather Sample License Agreement 2 only states that the Licensee “shall pay Licensor all undisputed Fees within sixty (60) days of the end of the most recent calendar quarter.” The overall license fee (which includes the Design Fee) is paid to the unrelated U.S. third-party licensor and is separate from the payments made to the foreign manufacturers. Moreover, based on the information submitted, we do not see anything in Sample License Agreement 2 that obliges the Licensee to pay any license fees for merely purchasing the licensed products abroad and importing them into the United States. See HQ 547226, dated July 27, 1999. It is also our understanding that the purchase orders to the seller/vendor under the Master Purchase Agreement do not make reference to the royalty fees and are not included in the price paid to the seller/vendor. Further, there is no provision in Sample License Agreement 2 that requires the Licensee to obtain approval from Licensor regarding manufacturers. Thus, we find that in this situation, regardless of the method of calculating royalty payments, royalty fees are paid for the use of the trademark in the United States and are not a condition of sale of the imported merchandise. We also find that the royalty payments are not proceeds of a subsequent resale, disposal or use of the imported merchandise. The licensor and the vendor/seller are unrelated; accordingly, provided that no portion of the royalty payments accrues, directly or indirectly, to the sellers, the royalty payments would not constitute an addition to the price actually paid or payable under 19 U.S.C. 1401a(b)(1)(E). See also 19 C.F.R. § 152.103(b)(1)(v). Accordingly, in scenario 4, the royalty payments paid by the licensee to third party licensors pursuant to the terms of Sample License Agreement 2 are not dutiable under section 402(b)(1)(D) or (E), as royalties or as proceeds of subsequent resale. HOLDING: Based upon the information provided, we find that the royalty and license fees paid by the importer to a third party licensor pursuant to Sample License Agreement 1 and Sample License Agreement 2 are not a condition of sale of the imported merchandise for export to the U.S. and do not constitute a dutiable addition to the price actually paid or payable for the imported merchandise under 19 U.S.C. § 1401a(b)(1)(D). Please note that 19 C.F.R. § 177.9(b)(1) provides that “[e]ach ruling letter is issued on the assumption that all of the information furnished in connection with the ruling request and incorporated in the ruling letter, either directly, by reference, or by implication, is accurate and complete in every material respect.  The application of a ruling letter by a CBP field office to the transaction to which it is purported to relate is subject to the verification of the facts incorporated in the ruling letter, a comparison of the transaction described therein to the actual transaction, and the satisfaction of any conditions on which the ruling was based.” A copy of this ruling letter should be attached to the entry documents at the time this merchandise is entered. If the documents have been filed without a copy, this ruling should be brought to the attention of the CBP officer handling the transaction. Sincerely, Monika R. Brenner, Chief Valuation and Special Programs Branch