HQ 116025 - Ruling Request on Application of 19 U.S.C. § 1641 and 19 CFR § 111.24 to the Sharing of Customer Background and Aggregate Revenue Information with Non-Broker Affiliates - United States International Trade Commision Rulings

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HQ 116025

September 29, 2003

ENT-1-RR:IT:EC 116025 GG

CATEGORY: BROKERS

Lars-Erik A. Hjelm, Esq.
Tamar A. Soliman, Esq.
Akin Gump Strauss Hauer & Feld LLP
1333 New Hampshire Avenue, N.W.
Washington, D.C. 20036-1564

RE: Ruling Request on Application of 19 U.S.C. § 1641 and 19 CFR § 111.24 to the Sharing of Customer Background and Aggregate Revenue Information with Non-Broker Affiliates

Dear Mr. Hjelm and Ms. Soliman:

This is in response to your ruling request dated July 28, 2003, made on behalf of your clients, UPS Supply Chain Solutions, Inc. (“UPS/SCS”) and UPS Customhouse Brokerage, Inc. (“UPS/CHB”). Our ruling also takes into account the information you conveyed in your conference call to us on October 10, 2003. The issue raised is whether UPS brokerages may share certain customer background and aggregate revenue information with affiliated companies that are not licensed brokers. Our response follows.

FACTS:

UPS/SCS and UPS/CHB are Delaware and Kentucky corporations, respectively, and are licensed brokerage subsidiaries of United Parcel Service, Inc. (“UPS”). As part of its sales and service efforts, UPS seeks to identify additional sales and services opportunities across the UPS family of companies. Under the contemplated arrangement UPS/SCS and UPS/CHB would share customer background and aggregate revenue information with other UPS affiliates. The type of information to be shared is as follows:

Customer Background Information:

The name of the customer;
The customer point of contact, i.e., the job title and name of the customer point of contact, as well as the phone number and e-mail address; Address information, i.e., division, department and physical address of the customer associated with the particular UPS account; Internally-generated UPS identifiers, i.e., UPS-assigned ID numbers of the customer, the UPS shipper number, whether the customer is an active or inactive account, and the identification of the UPS subsidiary or business unit associated with the account; and Historical data, i.e., the customer’s URL address, the identification of the industry in which it does business, and the product it produces as defined by the UPS subsidiary or business unit.

Aggregate Revenue Information:

Aggregated gross revenue, net revenue and profit to UPS/SCS and/or UPS/CHB. This represents the aggregated revenue and profit to UPS/SCS and/or UPS/CHB of the customer’s account, and not the revenue to the customer from any transaction or set of transactions. This also includes a designation of whether the internal revenue figure is actual (booked), planned (original business plan), or forecasted (updated business plan).

ISSUE:

Whether the proposed sharing of customer information violates the requirement as prescribed by 19 CFR § 111.24 that a broker keep client records confidential.

LAW AND ANALYSIS:

Section 641(f) of the Tariff Act of 1930, as amended (19 U.S.C. § 1641(f)), provides in pertinent part that the Secretary [of the Treasury] may prescribe:

[S]uch rules and regulations relating to the customs business of customs brokers as the Secretary considers necessary to protect importers and the revenue of the United States, and to carry out the provisions of [19 U.S.C. § 1641], including rules and regulations governing the licensing of or issuance of permits to customs brokers, the keeping of books, accounts, and records by customs brokers, and documents and correspondence, and the furnishing by customs brokers of any other information relating to their customs business to any duly accredited officer or employee of the Customs Service.

Brokers are subject to certain recordkeeping requirements, which are set down in sections 111.21 through 111.27 and Part 163 of the Customs Regulations (19 CFR §§ 111.21-111.27; 19 CFR Part 163). One of these requirements is that brokers maintain the confidentiality of client records. In this regard section 111.24 provides:

The records referred to in this part and pertaining to the business of the clients serviced by the broker are to be considered confidential, and the broker must not disclose their contents or any information connected with the records to any persons other than those clients, their surety on a particular entry, and the Field Director, Regulatory Audit Division, the special agent in charge, the port director, or other duly accredited officers or agents of the United States, except on subpoena by a court of competent jurisdiction.

The term “person” is defined in section 111.1 of the Customs Regulations to mean “individuals, associations, and corporations.” UPS/SCS and UPS/CHB, both corporations, wish to provide information to related affiliates, which although not expressly stated are assumed to be separately incorporated sister subsidiary companies or divisions of sister corporations. Parent and subsidiary corporations are separate legal persons, notwithstanding common ownership. See Customs Service Decision (C.S.D.) 81-40; and HQ 223804, dated June 29, 1992. Therefore, absent client consent, UPS/SCS and UPS/CHB may not share client information with their related affiliates if the information is of the type subject to restricted disclosure under section 111.24.

Section 111.24 protects client records and the information contained in those records. The term “records” is defined in section 111.1 of the Customs Regulations (19 CFR § 111.1) in the following manner:

“Records” means documents, data and information referred to in, and required to be made or maintained under, [Part 111], and any other records, as defined in § 163.1(a) of this chapter, that are required to be maintained by a broker under part 163 of this chapter.

According to section 111.21(a) of the Customs Regulations (19 CFR § 111.21(a)), Part 111 records are “records of account reflecting all [the broker’s] financial transactions as a broker”, including “copies of all his correspondence and other records relating to his customs business.” Examples include billing records, proof of payment of duty refunds to clients where the broker was importer of record, etc. See Treasury Decision (T.D.) 98-56. In contrast, Part 163 records consist of “any information made or normally kept in the ordinary course of business that pertains to any activity listed in [19 CFR § 163.1(a)(2)].” (19 CFR § 163.1(a)(1)). The listed activities are:

Any importation, declaration or entry;
The transportation or storage of merchandise carried or held under bond into or from the customs territory of the United States; The filing of a drawback claim;
The completion and signature of a NAFTA certificate of origin; The collection, or payment to Customs, of duties, fees and taxes; or Any other activity required to be undertaken pursuant to the laws or regulations administered by CBP.

Section 111.24 thus covers a broad range of records.

The stated position of UPS/SCS and UPS/CHB is as follows:

The confidentiality regulation at 19 CFR § 111.24 does not prohibit a broker from sharing with non-licensed affiliates client background and aggregate revenue information that does not relate to the transaction of customs business, so long as these affiliates do not have any involvement or access to the customs business of the broker.

The companies present a three-tier argument in support of this position, which will be examined below.

Counsel first emphasizes that the language and legislative history of 19 U.S.C. § 1641 evince a statutory intent to limit CBP’s regulation of customs brokers to activities involving the transaction of specifically defined customs business, and not to other commercial activities in which a broker may engage. It maintains that the broker confidentiality regulation cannot be construed to prohibit sharing information that does not relate to the transaction of customs business. Counsel bases its conclusion on the language of 19 U.S.C. § 1641 itself and the legislative history underpinning the statute. In outlining its argument, counsel focuses on amendments made to the broker statute in 1984, when Congress added language explicitly limiting the regulatory authority of Customs to those regulations “relating to the customs business of customs brokers” (19 U.S.C. § 1641(f)). Congress at the same time also added a definition of “customs business”, which in its 1984 format was as follows:

The term “customs business” means those activities involving transactions with the Customs Service concerning the entry and admissibility of merchandise, its classification and valuation, the payment of duties, taxes, or other charges assessed or collected by the Customs Service on merchandise by reason of its importation, and the refund, rebate, or drawback of those duties, taxes, or other charges.

An additional amendment occurred in 1993, when document preparation and activities relating to such preparation were added to the “customs business” definition.

Counsel for UPS/SCS and UPS/CHB cites to some of the legislative history of the 1984 amendments to shed light on the intent behind these changes. We extract the following passage from page eight of the ruling request:

The 1984 legislation was introduced in the Senate by its sponsor, Senator Max Baucus. See 130 Cong. Rec. 26018-26021 (1984). In introducing the proposed revisions, Senator Baucus cited to several problems with the system of regulating customs brokers that had been in place under the pre-1984 law, including the following:

For a second example, some companies that provide brokerage services also provide other trade-related services like freight forwarding and inland transportation; Customs has attempted to regulate certain aspects of these services as incidental to customs brokerage, even though non-brokers could perform the same services without becoming subject to Customs regulation.

Id. at 26021. To resolve these and other problems, the NCBFAA and the Customs Service “worked on this legislation for several years, and both agree[d] that this bill embodies a fair compromise. Id. at 26020. As Senator Baucus stated, “[T]he bill makes clear that Customs can only regulate the performance of specifically defined customs business, not the performance of other related services.” Id. at 26021 (emphasis added).

It is the position of UPS/SCS and UPS/CHB that, based on the statutory language and its underlying intent, CBP’s authority to regulate customs brokers is limited to matters “relating to the customs business” of brokers as that term is specifically defined in 19 U.S.C. § 1641(a)(2). Under this interpretation they argue that the scope of section 111.24 is circumscribed by this limitation. This is because while CBP may require and regulate the retention and release of books, accounts, and records, it may only do so with respect to books, accounts, and records relating to transactions of activities enumerated in the definition of “customs business.” Thus, the argument goes, records and other information not relating to the performance of the specifically defined customs business set forth in the statute do not fall within the scope of the broker confidentiality requirement.

Counsel for UPS/SCS and UPS/CHB, in the second tier of its general argument that section 111.24 does not prohibit a broker from sharing with non-licensed affiliates client background and aggregate revenue information, contends that such information is internally-generated and unrelated to the transaction of customs business. It thus links the second tier back to the first. However, before determining whether the information is indeed unrelated to the transaction of customs business, we will first examine the premise put forth by UPS/SCS and UPS/CHB that CBP may regulate only those matters that relate directly to one of the specific activities included within the statutory definition of “customs business.”

Counsel in presenting its first-tier argument places its reliance on what it deems to be the plain meaning of 19 U.S.C. § 1641(f) and on the underlying legislative history. UPS/SCS and UPS/CHB focus on the use of the words “relating to the customs business of customs brokers” within the statutory text to arrive at the conclusion that CBP’s regulatory authority extends only to those activities that specifically fall within the “customs business” definition. However, in our opinion such a conclusion misconstrues section 641(f), because an accurate interpretation is only possible when the quoted words are viewed within the context of the entire sentence in which they appear. The entire, previously cited, sentence in section 641(f) is as follows:

The Secretary [of the Treasury] may prescribe such rules and regulations relating to the customs business of customs brokers as the Secretary considers necessary to protect importers and the revenue of the United States, and to carry out the provisions of [19 U.S.C. § 1641], including rules and regulations governing the licensing of or issuance of permits to customs brokers, the keeping of books, accounts, and records by customs brokers, and documents and correspondence, and the furnishing by customs brokers of any other information relating to their customs business to any duly accredited officer or employee of the Customs Service.

Counsel’s interpretation of this provision, i.e., that CBP’s regulatory oversight is strictly limited to those matters falling within the “customs business” definition, is at odds with the presence of the phrase “including rules and regulations governing the licensing of or issuance of permits to customs brokers” within the same provision. By indicating that licensing and permitting activities relate to the customs business of customs brokers, it is evident that the term “customs business” within the context of 19 U.S.C. § 1641(f) is to have a broader meaning than its definitional meaning. This is because licensing and permitting activities by necessity precede any of the enumerated activities specified in the statutory definition of “customs business”, in that brokers can only commence the transaction of customs business for clients upon being licensed and permitted. Read in conjunction with the legislative history, which cautioned against CBP regulation of other trade-related services such as freight forwarding and inland transportation, section 641(f) can only be interpreted as giving CBP regulatory authority over all aspects of a broker’s customs brokerage operations, but not over any ancillary trade services that are also offered by that same broker. Thus, we reject the proposition put forth by counsel for the two UPS brokers that section 641(f) strictly limits CBP’s regulatory authority over brokers to those matters falling within the statutory definition of “customs business.” In doing so we also reject the notion that the only information protected under section 111.24 is information taken directly from a particular customs business transaction with CBP.

Even though there is a difference of opinion as to the extent of the authority conferred by 19 U.S.C. § 1641(f), we view such difference as irrelevant for purposes of determining whether the proposed disclosure of information is permissible. For in our view disclosure would be proscribed under either interpretation of section 641(f), including the more restrictive one favored by UPS/SCS and UPS/CHB. This is because the identity of a client is information that appears on entry documents, and thus does relate to the transaction of “customs business.” This fundamental fact belies counsel’s assertion that “the identification of a customer as a recipient of . . . brokerage services offered by UPS/SCS or UPS/CHB, is not information that is related to or concerned with any of the identified transactions concerning ‘customs business.’” We would note in this regard that there are specific fields on both the CF 3461 entry and CF 7501 entry summary that require information about a client’s identity and location, whether that client is the importer of record or the ultimate consignee in the transaction. Since section 111.24 protects both the contents of, and information connected with, covered records, the identity of a party to an entry transaction must be kept confidential.

In the same manner that a broker should not reveal client name and address information that is derived directly from entry records, nor should the broker disclose information that would indirectly enable client identification. Thus the disclosure of the other types of UPS/SCS and UPS/CHB client background information, i.e., customer point of contact, internally generated UPS identifiers, and historical data, would also be proscribed by section 111.24.

The prohibition against the disclosure of a client’s identity renders the issue of the sharing of aggregate revenue information moot, because such sharing as contemplated by the UPS brokerages would result in the identity of the client being revealed. However, even if it were possible to shield the client’s identity, in our view aggregate revenue information relating to a particular client in and of itself would be confidential under section 111.24. This is because revenue information is obtained from billing records, which are specifically identified in T.D. 98-56 as Part 111 broker records. Such records, their contents or any information connected thereto are protected under section 111.24. Counsel argues that aggregate revenue information represents the value of a client’s business to a broker and has no relationship to, and reveals no information about, any one customs business transaction, and as such is subject to disclosure. However, this strictly transactional view of the scope of section 111.24 has been previously discussed and rejected.

In the final tier of its argument that client background and aggregate revenue information may be disclosed to related affiliates, counsel for UPS/SCS and UPS/CHB asserts that policy reasons favor confirmation that the broker confidentiality regulation does not prohibit sharing the information. It begins by reiterating that Congress has recognized the legitimate interest of brokers in providing non-Customs services to their clients without interference from CBP. Counsel also notes that CBP acknowledged the limits of the scope of its authority in T.D. 86-161 when, in response to comments on the implementation of the regulations promulgated in response to the 1984 broker amendments, the agency wrote:

Customs traditional mission is to assess and collect duties on imported merchandise; to prevent fraud and smuggling; and to control carriers, persons, and articles entering and departing the U.S. In carrying out its mission, Customs must, to a certain extent, regulate the business of brokers. This includes requiring the retention of records relating to their adherence to the laws and regulations administered and enforced by Customs. Customs will not go beyond the scope of its mission.

Counsel thus seems to suggest that an unfavorable determination by CBP would amount to an unlawful interference in other ancillary trade services offered by UPS/SCS and UPS/CHB. While we agree that CBP’s role under 19 U.S.C. § 1641 is limited to providing oversight over customs brokers and their brokerage operations, we disagree with counsel’s implication that an unfavorable ruling would be tantamount to CBP exceeding its authority. Our reasons are twofold. First, CBP in interpreting section 111.24 is not exercising unauthorized oversight over other commercial services offered by the two UPS brokers, because the related companies, not UPS/SCS or UPS/CHB, provide those supplementary services. Second, CBP in its actions is not unlawfully intervening in the business of the unlicensed affiliates, because this ruling is binding only on the two UPS brokerage subsidiaries, not on the affiliates. The affiliates, unless subject to other restrictions independent of Customs law, are free to share client information with whomever they choose, regardless of the ruling’s outcome. Thus CBP in issuing this ruling is not going beyond the scope of its mission.

Counsel makes reference to two rulings issued by CBP, HQ 114758, dated November 7, 2000, and HQ 114111, dated September 1, 1999, and argues that for policy reasons they should be narrowly construed. The first ruling allowed a broker to outsource its human resources department, but required that certain safeguards be in place to ensure that the requirements arising from 19 U.S.C. § 1641 not be compromised. Among those safeguards was that the identity of clients and files not be disclosed to the corporate entity which now ran the human resources department. The other ruling addressed the issue of whether a broker could outsource certain financial or administrative functions. CBP concluded that this might be possible, provided the new service provider had no access to, or involvement in, the actual customs business work of the broker, and provided the records of the clients of the broker, and the information contained therein, were not disclosed to the new service provider. Since CBP’s conclusions in those two rulings with respect to confidentiality are in accord with those reached herein, we see no need to give them a narrow construction for purposes of this ruling.

Counsel also maintains that for policy reasons CBP should not interpret the confidentiality regulation in such a manner that would prevent customs brokers from sharing client information with their related affiliates. In essence, UPS/SCS and UPS/CHB argue that it is a common business practice for related companies to share information, and is a practice that benefits the customers as well as the companies. To prevent brokers from engaging in this common business practice of sharing information, it is argued, would put them at a competitive disadvantage in relation to other international trade service providers that are not licensed brokers. We recognize that the sharing of information among related companies may be a common business practice. However, to our knowledge most companies are not subject to specific confidentiality rules. In becoming licensed, brokers agree to abide by the rules governing brokers, including the one pertaining to the confidentiality of client records. To overcome this obstacle to business expansion, brokers need merely request, and receive, a written release from the client authorizing disclosure of client information. Absent such a release, brokers that engage in information sharing would be subject to disciplinary action for violating the confidentiality requirements of 19 CFR § 111.24.

Finally, counsel notes that the affected companies have previously received indications from CBP that the sharing of information is allowed. Specifically, CBP in 2001 advised UPS in an information letter that confidentiality requirements would be relaxed during the merger between two brokers, and in addition UPS in December 2002 reportedly received e-mail confirmation from the Office of Field Operations that the proposed dissemination of general customer information among related affiliates would be allowed. With respect to mergers, it is recognized that merging brokers may at some point have to share customer information during the integration process. Some leeway is deemed necessary to enable the transition to occur, as demonstrated by the aforementioned information letter and by the Position Statement published in the Federal Register on August 27, 1992 (57 FR 3083), which allows a grace period for merging brokers to obtain new powers of attorney. The situation currently under review does not involve a merger or consolidation. Consequently, the same latitude does not apply. On the issue of the e-mail, a copy of which was not enclosed with the ruling request, such a communication does not constitute a binding ruling as defined by 19 CFR 177.1(d)(1).

HOLDING:

The proposed sharing of the customer information as outlined in this ruling is prohibited under 19 CFR § 111.24.

Sincerely,

Glen E. Vereb
Chief

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