VAL R:C:V 545379 CRS
Mr. David Misheikis
Claire's Boutiques, Inc.
1501 North Michael Drive
Wood Dale, IL 60191-1095
RE: Royalty payments to unrelated third party not a condition of sale of the imported merchandise
Dear Mr. Misheikis:
This is in reply to your ruling request of July 2, 1993, submitted on your behalf by Expeditors International of Washington, Inc., regarding the dutiability of certain royalty payments. Copies of a letter from counsel O'Donnell, Byrne & Williams, dated June 10, 1993, and a signed Settlement and License Agreement (the agreement), dated March 1, 1993, were enclosed with your submission. We regret the delay in responding.
FACTS:
Claire's Boutiques, Inc. ("Claire's") purchases ornamental, stretchable hairbands from various foreign sellers and imports them into the United States. In connection with these importations, Claire's pays a royalty to Ms. Rommy Hunt Revson (the "licensor"), the owner of a U.S. design patent relating to the imported hairbands, as provided for under the terms of the agreement. The licensor is a U.S. citizen and is not related to Claire's or to the foreign sellers of the imported merchandise.
There are two aspects to the agreement. The first concerns the settlement of a dispute regarding the alleged infringement of the U.S. design patent owned by the licensor. Pursuant to article II of the agreement, the licensor released Claire's from all claims of patent infringement relating to sales of ornamental, stretchable hairbands that occurred prior to the effective date of the agreement, in consideration of a lump sum payment.
In addition, under article III of the agreement, the licensor has granted Claire's a non-exclusive license sell, manufacture, or have manufactured, ornamental, stretchable hairbands (the "licensed products") that embody the design protected by the licensor's patent. According to counsel, the patent only covers the design of the licensed products and does not extend to the process by which the hairbands are manufactured. In consideration of these rights and pursuant to article IV of the agreement, Claire will make quarterly payments to the licensor equal to: (1) five percent of the net selling price of licensed products sold by Claire's at retail; and (2) eight percent of the net selling price of the licensed products sold by Claire's at wholesale. Finally, the agreement also requires that Claire's pay a non-refundable advance fee, the amount of which is credited against any royalties due.
ISSUE:
The issue presented is whether the payments in question are royalties such that they constitute an addition to the price actually paid or payable of 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 (TAA; 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." 19 U.S.C. § 1401a(b)(1). However, transaction value is an acceptable basis of appraisement only in certain circumstances, e.g., where the buyer and seller are not related, or where related, the relationship does not influence the price actually paid or payable. 19 U.S.C. § 1401a(b)(2)(A). For purposes of this ruling we have assumed that transaction value is the appropriate basis of appraisement.
Section 402(b)(1) of the TAA provides for five additions to the price actually paid or payable including any royalty or license fee related to the merchandise the buyer is required to pay, directly or indirectly, as a condition of the sale of the imported merchandise for exportation to the U.S. In certain cases royalties may also be dutiable under section 402(b)(1)(E) of the TAA as a proceed of a subsequent resale, disposal or use of the imported merchandise that accrues directly, or indirectly, to the seller. In this instance, however, the payments are not made to the licensor and do not accrue in any manner to the seller. Accordingly, they do not constitute proceeds under section 402(b)(1))(E) of the TAA.
In regard to the dutiability of royalty payments, the Statement of Administrative Action (SAA), which forms part of the legislative history of the TAA, 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. 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, 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.
Customs has established a three-part test for determining the dutiability of royalty payments (the "notice"). 27:6 Cust. B. & Dec 1 (February 10, 1993). The test consists 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? 27:6 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.
You contend that the royalties paid by the licensee/buyer under article IV of the agreement do not constitute additions to the price actually paid or payable of the imported hairbands under section 402(b)(1)(D) of the TAA. In the instant case, the imported merchandise (adjustable hairbands) is protected by the licensor's design patent. The first question therefore yields an affirmative response, suggesting that the payments are dutiable.
The second question posed by the notice is whether the royalty is involved in the production or sale of the imported merchandise. This question expands the analysis of question one. 27:6 Cust. B. & Dec. at 10. The payments at issue are made for the right to use the licensor's patent in connection with the manufacture, distribution and sale of the imported merchandise. However, the licensor's patent protects the ornamental design of the hairband, rather than the process by which the article itself is manufactured. In this regard, the SAA states that whereas "royalties and license fees for patents covering processes to manufacture the imported merchandise will generally be dutiable," royalties paid to third parties for use, in the U.S., of copyrights and trademarks related to the imported merchandise will generally not be dutiable. Here, the licensor's patent covers the design of the licensed merchandise rather than the process by which it is manufactured. The patented design is therefore associated with the appearance of the hairband, specifically, its ornamental qualities and attributes. In this respect we consider the payments, for purposes of section 402(b)(1)(D) of the TAA, to be akin to royalties and license fees paid for the right to use copyrights and trademarks. Furthermore, the payments are made to third parties. Accordingly, it is our position that the royalty at issue is not paid for rights associated with processes to manufacture the imported merchandise.
The second question also indicates a royalty payment may be dutiable if is involved in the sale of the imported merchandise. In Imperial Products, Inc. v. United States, 425 F. Supp. 852, 77 Cust. Ct. 66 (1976), aff'd, 570 F.2d 337, 65 CCPA 38 (1978), the court held that a royalty paid on imported brush heads for the exclusive right to manufacture and sell a product using the imported brush heads in the U.S. was a right separate from the purchase price of the merchandise and therefore not dutiable. Here, the royalty is paid by Claire's to the licensor for the non-exclusive right to use the licensor's design in connection with the manufacture and resale by Claire's of the imported, licensed merchandise. In Headquarters Ruling Letter (HRL) 544436, dated February 4, 1991, this office determined that a royalty was involved in the sale of imported merchandise where the individual sales agreements and purchase contracts were subject to the terms of the royalty agreement. Furthermore, no evidence has been submitted to indicate that the royalty will be linked to the sale of the imported merchandise. Consequently, based on the information presented, the second question yields a negative response.
The third question asks whether the importer could buy the imported merchandise without having to pay the fee. This question goes to the heart of whether a payment is considered to be a condition of sale. 27:6 Cust. B. & Dec. at 11. The agreement provides that the payments will be based on the net selling price, in the U.S., of the imported merchandise; it also requires the payment of a non-refundable advance fee which will be credited against any amounts otherwise due under the terms of the agreement. The advance fee is due regardless of whether there are any sales of the licensed products. On the other hand, the royalty is not paid to the sellers, nor has any evidence been presented which would suggest that the royalty is linked to the individual sales agreements or purchase contracts for the imported merchandise, e.g., a requirement by the sellers that Claire's pay the royalty to the licensor. Moreover, you have indicated that the royalty payment is not referenced in the purchase contracts or other documentation between Claire's and the sellers. Accordingly, it appears from the information submitted that Claire's can purchase the hairbands from the sellers of the goods without having to pay the royalty. 27:6 Cust. B. & Dec. at 11. Consequently, the royalty does not appear to be a condition of sale and, therefore, is not an addition to the price actually paid or payable for the merchandise under section 402(b)(1)(D) of the TAA.
HOLDING:
The payments made by Claire's to the licensor pursuant to the agreement do not constitute an addition to the price actually paid or payable under section 402(b)(1)(D) of the TAA.
Sincerely,
John Durant, Director
Commercial Rulings Division