HQ 545312 - Payments for alleged copyright infringement; dutiability of royalty payments; condition of sale; 19 U.S.C. § 1401a(b)(1)(D) - United States International Trade Commision Rulings

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HQ 545312

March 18, 1994

VAL CO:R:C:V 545312 CRS

CATEGORY: VALUATION

Sandra Liss Friedman, Esq.
Barnes, Richardson & Colburn
475 Park Avenue South
New York, NY 10016

RE: Payments for alleged copyright infringement; dutiability of royalty payments; condition of sale; 19 U.S.C. § 1401a(b)(1)(D)

Dear Ms. Friedman:

This is in reply to your letter of April 29, 1993, on behalf of ******************** (the buyer), concerning payments made to certain copyright holders (the licensors). Copies of written agreements between the buyer and the licensors were submitted for our review. Pursuant to your request, the names of your client and the licensors will be treated as confidential. We regret the delay in responding

FACTS:

The agreements between the buyer and the licensors are in settlement of disputes relating to the alleged infringements of copyrights owned by the licensors. The first agreement, dated December 2, 1992, is with *********************** (Licensor A) and concerns imported garments with a fabric design that allegedly infringed on a copyrighted fabric design owned by Licensor A. Under the terms of the agreement, the buyer agreed to pay Licensor A lump sum amount equal to a percentage of the buyer's net revenues from sales of the allegedly infringing merchandise through October 30, 1992, and a similar percentage amount on all subsequent sales through March 31, 1993. In consideration for these payments, Licensor A agreed to release the buyer from all claims of copyright infringement.

The second agreement, dated December 9, 1992, between the buyer and ********************* (Licensor B), concerns imported garments with a fabric design that allegedly infringed on a fabric design owned by Licensor B. Under the terms of the agreement, the buyer agreed to pay Licensor B a lump sum amount in respect of previously sold garments. In addition, Licensor B granted the buyer an exclusive license for a period of seven years to use the design in future in return for a percentage of net revenues from the sale of garments made therewith. In consideration for these payments, Licensor B agreed to release the buyer from all claims of copyright infringement.

The third agreement, dated October 23, 1992, between the buyer and ******************************** (Licensor C), concerns imported garments with a fabric design that allegedly infringed on a fabric design owned by Licensor C. Pursuant to the agreement, the buyer agreed to pay Licensor C a lump sum amount, in consideration for which, the licensor agreed to allow the buyer to exhaust its inventory of garments bearing the design and to release the buyer from any claims of copyright infringement relating to the sale of garments bearing the design.

There is no relationship between the copyright holder and the seller of the allegedly infringing merchandise under any of the three agreements. Orders for garments covered by the agreements but already imported were placed prior to the negotiation of the agreements. As a result, you maintain that the lump sum payments are not dutiable since they are not a condition of sale of the imported garments. In regard to future payments to Licensor B, you state that the payments do not benefit the seller since the seller is not obligated to remit any royalty. Consequently, you contend that these payments are not dutiable.

ISSUE:

The issue presented is whether the payments in question are dutiable royalties or proceeds such that they constitute an addition to the price actually paid or payable for the imported merchandise.

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 (19 U.S.C. § 1401a; TAA). The preferred method of appraisement is transaction value, defined as the price actually paid or payable for the merchandise when sold for exportation to the United States. 19 U.S.C. § 1401a(b)(1). For the purposes of this ruling we have assumed transaction value is the appropriate basis of appraisement.

Section 402(b)(1) of the TAA also provides for five additions to the price actually paid or payable including:

(D) any royalty or license fees related to the imported merchandise that the buyer is required to pay, directly or indirectly, as a condition of sale of the imported merchandise for exportation to the United States; and

19 U.S.C. § 1401a(b)(1). You contend that none of the royalties paid by the buyer are an addition to the price actually paid or payable pursuant to section 402(b)(1)(D).

In regard to the dutiability of royalties the Statement of Administrative Action provides in relevant part:

Additions for royalties and license fees will be limited to those that the buyer is required to pay, directly or indirectly, as a condition of sale of the imported merchandise for exportation to the United States. In this regard, royalties and license fees for patents covering processes to manufacture the imported merchandise will generally be dutiable, whereas royalties and license fees paid to third parties for use, in the United States, of copyrights and trademarks related to the imported merchandise, will generally be considered as selling expenses of the buyer and therefore will not be dutiable. However, the dutiable status of royalties and license fees paid by the buyer must be determined on a case-by-case basis and will ultimately depend on: (i) whether the buyer was required to pay them as a condition of sale of the imported merchandise for exportation to the United States; and (ii) to whom and under what circumstances they were paid. For example, if the buyer pays a third party for the right to use, in the United States, a trademark or copyright relating to the imported merchandise, and such payment was not a condition of 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 sale of the merchandise for exportation to the United States, an addition will be made.

Statement of Administrative Action, H.R. Doc. No. 153, 96 Cong., 1st Sess., pt 2, reprinted in, Department of the Treasury, Customs Valuation under the Trade Agreements Act of 1979 (October 1981), at 48-49.

In addition, the Customs Service recently issued a notice regarding the dutiability of royalty payments (the "Notice"). 27:6 Cust. B. & Dec 1 (February 10, 1993). The notice established a test for determining whether a royalty payment was dutiable consisting of the following questions:

(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?

23:6 Cust. B. & Dec. at 9-11. Negative responses to the first and second questions, and an affirmative response to the third, point toward non-dutiability.

The instant case concerns payments made by the buyer under the settlement agreements negotiated between the buyer and the licensors whose copyrights the buyer allegedly infringed. In this respect the circumstances of the case are somewhat unusual. Thus in order to determine whether the payments made by the buyer under the agreements are dutiable, we will approach the analysis from the perspective of whether the payments would have been dutiable had they been made to the licensors ab initio, that is, had the buyer recognized a liability to the licensors when garments bearing the allegedly infringing designs were originally imported.

Given this assumption, the responses to the first and second questions are negative. The imported merchandise would not be considered to have been manufactured under patent since the royalty payments to the licensors would have been made for the right to use the copyrighted fabric design rather than for the imported garments. E.g., United States v. Rohner Gehrig & Co., Inc., 9 Cust. Ct. 591, R.D. 5724 (1942); Notice, 27:6 Cust. B. & Dec., at 10. Furthermore, since the royalty payment would be made for the right to use the fabric design in the U.S. in conjunction with the imported garments, that right would have separate from the purchase price of the garments. United States v. Imperial Products, Inc., 65 CCPA 38, C.A.C. 1203, 570 F.2d 337 (1978); Notice, 27:6 Cust. B. & Dec., at 10.

The Statement of Administrative Action notes that payments made to third parties for the right to use a copyright or trademark in the U.S. generally will be considered selling expenses of the buyer and will not be added to the price actually paid or payable so long as the payment was not a condition of sale. The thrust of the third question goes therefore to whether royalty payments made by the buyer are a condition of sale of the imported merchandise. The agreement between the buyer and Licensor B provides that, in exchange for an exclusive license to use Licensor B's fabric design for a period of seven years, the buyer will pay the latter a percentage of its net revenues from the future sale of garments using the design, in addition to any compensation for the alleged prior infringement. Since the royalty payments are made to a third party and are triggered by U.S. sales of the imported merchandise rather than by "the sale of the imported merchandise for exportation to the United States," it is our position that the payments by the buyer to the licensors would not have been considered a condition of sale under the above assumption. Consequently, the answer to the third question is "yes."

Accordingly, neither the lump sum payments nor the future royalty payments made by the buyer constitute additions to the price actually paid or payable under 19 U.S.C. § 1401a(b)(1)(D).

HOLDING:

The payments made by the buyer to the licensors under the agreements do not constitute additions to the price actually paid or payable under section 402(b)(1)(D) of the TAA.

Sincerely,

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