• HQ H304606
• Jun 24, 2021

• Type : Valuation • HTSUS :
•  Related:   545187; 546120; 548560; 548331; 545998; 460360; H019749; H281093; H137435   

OT:RR:CTF:VS H304606 CMR/TRS

U.S. Department of Homeland Security
Regulatory Audit and Agency Advisory Services
1699 Phoenix Parkway, Suite 200
College Park, GA 30349
Attn: Amy Moore, Field Director

RE: Request for Internal Advice; Deduction of Royalty Payments from United States Sales Price; Fallback Deductive Value Calculation; Prior Disclosure

Dear Ms. Moore:

This is in response to your request of June 1, 2020, for a decision from this office regarding whether certain royalty payments paid by an importer for licensed trademarks and patents related to the assembly in the United States of imported components [article kits] into finished [articles] (hereinafter, [articles]) are deductible from the United States domestic sale’s price of such [articles] as a general expense under the deductive value methodology. The Office of Regulatory Audit and Agency Advisory Services (hereinafter, Audit) has determined that such royalty payments are an expense of production and are not deductible as a general expense. The importer disagrees with Audit’s determination and, through counsel, submitted a request for internal advice, dated October 31, 2019, along with exhibits to support the importer’s view that such payments are deductible.

The importer, through its counsel, has asked that certain information submitted in connection with this internal advice request be treated as confidential. Inasmuch as this request conforms to the requirements of 19 C.F.R. § 177.2(b) (7), confidentiality will be extended to the names of the parties and certain specifics of the royalty agreement. In addition, United States Customs and Border Protection (CBP) will withhold information regarding the type of goods at issue. The information contained within brackets will not be released to the public and will be withheld from the published version of this decision.

This office has considered the information submitted in the internal advice referral including submissions from the importer’s counsel and the referral memorandum from Audit setting forth that office’s view. In addition, we have considered responses to questions posed to the importer’s counsel, the submission from importer’s counsel dated January 25, 2021, comments made during a meeting held on January 27, 2021, between the importer’s counsels and members of this office, and the supplemental submission from importer’s counsel received on March 2, 2021. FACTS:

While Audit was performing a Risk Analysis Survey Assessment (RASA) on the importer, and before the RASA was finalized, the importer submitted a Prior Disclosure to CBP informing CBP that the importer had erred in using transaction value as the method of appraisement for imported merchandise purchased from its related party seller. The importer stated that the relationship influenced the price and thus, transaction value could not be used. The importer suggested that the merchandise which was the subject of the prior disclosure should be appraised based upon a fallback deductive value method. The Prior Disclosure addresses importations of the subject merchandise during the years 2013 through 2018.

The Machinery Center of Excellence and Expertise referred the matter to Audit to determine if the importer’s suggested method of appraisement was appropriate and if the importer’s methodology to calculate the revenue owed was reasonable. Audit performed a technical assist and determined that the importer’s suggested use of fallback deductive value appraisement was reasonable. However, Audit determined that the importer’s methodology to calculate the revenue owed was incorrect. Specifically, the importer deducted royalty payments due under a licensing agreement with a related party, other than the seller, covering specific trademarks (including trade dress) and patents. The importer claims these payments are deductible as general expenses. However, Audit believes these royalty payments are dutiable as costs related to the assembly of the imported components into complete [articles] in the United States.

According to the licensing agreement, the licensor, [the entity], is the assignee of the patent rights and trademark rights which are the subject of the agreement. The licensing agreement, entered into on April 27, 2011, with an effective date of June 1, 2009, grants to the importer, and the related party seller, “an exclusive license to manufacture, assemble and/or sell Licensed Products according to the [Brand] Patents and an exclusive license to use the [Brand] Trademarks together with the manufacturing, assembly and/or sale of Licensed Products.” “Licensed Products” are defined in the agreement as follows:

Licensed Products shall include [articles], related accessories for such [articles] such as [XXX], and related promotional items such as clothing, beverage containers, and writing instruments. Upon the request of the Licensor, [the importer] will submit samples of any and all Licensed Products bearing [Brand] Trademarks to Licensor for review and approval.

The royalty for the licensing rights is a set percentage of the importer’s net sales of Licensed Products and is paid on an annual basis. “Net sales” are specifically defined in the agreement as the importer’s gross sales less certain specified deductions. In addition, the patents and trademarks which are the subject of the licensing agreement are specifically identified in Schedules A and B of the agreement.

Audit believes the royalty payments at issue, specifically the patent royalties, are costs related to the assembly in the United States of the imported components into the finished [articles]. As the calculation of the royalty payments does not distinguish between the trademark royalties and the patent royalties, but groups these together, and there is no means by which to distinguish the amount paid for one type of royalty versus the other, Audit believes the entire royalty payment should be considered a cost of production.

Counsel for the importer states that the importer “uses the trademarks licensed under the subject royalty agreement in connection with its marketing and sale of the [i]mported [p]roducts in the U.S.” Counsel further states that “[t]he [p]atents referred to are used solely for the [articles] actually manufactured in the U.S., which are not a part of this matter. No patents or patented processes are used to assemble the [article kits].” Counsel presents the issue as whether royalty payments paid on a periodic basis based on the annual net sales of licensed merchandise are deductible from the U.S. sales price in a deductive value calculation. Counsel presents a letter from a Certified Public Accountant, employed by the tax service provider for the importer, stating that the “Royalty has been treated as a ‘Period Expense’ related to the overall sales of Licensed Products and reported as an ‘Other Deduction,’ which is booked as a general expense for US GAAP for financial reporting purposes.” This letter further states that “[t]he Royalty is an expense incurred as part of the selling process which generally takes place over a period of time.” Moreover, the statement provides that “[t]his classification has been consistently reported by the Company going back at least, if not prior, to the fiscal year ended March 31, 1998.” In addition, counsel has submitted a letter from the company that has “served as the principal independent auditors responsible for auditing the internal accounting books and financial records of [the seller] since 2002, and [the importer] since 2013.” In the letter, the author states that he has reviewed the license agreement and the importer’s accounting entries for the payments made pursuant to the license agreement. The letter’s author states that the importer “has properly booked its royalty payments under the License Agreement for financial reporting purposes as a general expense in accordance with U.S. Generally Accepted Accounting Principles (U.S. GAAP).” Further, counsel points to the timing of the obligation to pay the royalty after importation and the sale of the assembled [articles] from their imported components as being indicative that the royalty is a general expense and not a cost of production.

This office has reviewed the patents listed in Schedule A of the agreement to determine their applicability to the [articles] at issue which are assembled from the imported components. Based on information provided by the importer’s counsel in response to questions posed by this office, it appears that three of the patents (one being identified as a patent application) listed in Schedule A are utilized in producing imported components which are used in assembling the finished [articles] in the United States. In the case of one patent, CBP has been informed that it is used only for certain component parts for assembly in only a limited number of [articles]. Another patented component is utilized in some as an included accessory, but not in all of the finished assembled [articles]. Only one patent, which expired in 2018, involved two components used in all of the finished assembled [articles].

In addition, this office has reviewed the trademarks listed in Schedule B. Two of these trademarks involve the trade dress of the [articles], that is, the three-dimensional shape and design of the [articles].

ISSUE:

Whether the royalty payments paid by the importer to a related party for the patent and trademark rights conferred by the royalty agreement and related to the manufacturing, assembly and/or sale of the [articles] at issue are non-deductible costs of production of the [articles] assembled in the United States from their imported components, that is the [article kits], or are general expenses which are deductible under the deductive value methodology of 19 U.S.C. § 1401a(d).

LAW AND ANALYSIS:

Merchandise imported into the United States is appraised for customs purposes 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 primary method of appraisement is transaction value, which is defined as “the price actually paid or payable for the merchandise when sold for exportation to the United States,” plus amounts for certain statutorily enumerated additions to the extent not otherwise included in the price actually paid or payable. See 19 U.S.C. § 1401a(b)(1). When transaction value cannot be applied, then the appraised value is determined based on the other valuation methods in the order specified in 19 U.S.C. § 1401a(a).

While transaction value may be used by related parties when the transaction is an “arm’s length” transaction and can be demonstrated as such, in this case, the importer has determined that transaction value cannot be used as its relationship with the seller influences the price of the imported components. Further, the use of the identical or similar merchandise method of valuation is not available as we are unaware of any identical or similar merchandise produced in the same country as the merchandise at issue and imported to the United States.

The next method available by which to appraise the merchandise is the deductive value method at 19 U.S.C. § 1401a(d). The imported [article] components which are assembled in the United States prior to sale as [articles] are not sold in their condition as imported. Therefore, 19 U.S.C. § 1401a(d)(2)(A)(i) and (ii) are not applicable as they require the imported merchandise to be sold in its condition as imported within set periods of time. However, 19 U.S.C. § 1401a(d)(2)(A)(iii), commonly referred to as the “superdeductive method,” may be applicable in this situation. In accordance with 19 CFR 152.105(c)(3), the importer must elect at the time of filing the entry summary to appraise the imported merchandise under this valuation method. However, in this matter we are reviewing the proper method of appraisement for merchandise which was improperly appraised based upon the transaction value between related parties wherein the relationship influenced the price. Therefore, we can consider whether appraisement under the superdeductive value methodology is proper.

Nineteen U.S.C. § 1401a(d)(2)(A)(iii) provides:

If the merchandise concerned was not sold in the condition as imported and not sold before the close of the 90th day after the date of importation of the merchandise being appraised, the price is the unit price at which the merchandise being appraised, after further processing, is sold in the greatest aggregate quantity before the 180th day after the date of such importation. This clause shall apply to appraisement of merchandise only if the importer so elects and notifies the customs officer concerned of that election within such time as shall be prescribed by the Secretary.

The focus of deductive value is establishing a unit price for the merchandise being appraised. See 19 U.S.C. § 1401a(d)(2)(B). Once a unit price is determined, that price is subject to the deductions set forth in 19 U.S.C. § 1401a(d)(3)(A). That paragraph provides:

[T]he price determined under paragraph (2) shall be reduced by an amount equal to —

(i) any commission usually paid or agreed to be paid, or the addition usually made for profit and general expenses, in connection with sales in the United States of imported merchandise that is of the same class or kind, regardless of the country of exportation, as the merchandise concerned;

(ii) the actual costs and associated costs of transportation and insurance incurred with respect to international shipments of the merchandise concerned from the country of exportation to the United States;

(iii) the usual costs and associated costs of transportation and insurance incurred with respect to shipments of such merchandise from the place of importation to the place of delivery in the United States, if such costs are not included as a general expense under clause (i);

(iv) the customs duties and other Federal taxes currently payable on the merchandise concerned by reason of its importation, and any Federal excise tax on, or measured by the value of, such merchandise for which vendors in the United States are ordinarily liable; and

(v) (but only in the case of a price determined under paragraph (2)(A)(iii)) the value added by the processing of the merchandise after importation to the extent that the value is based on sufficient information relating to [the] cost of such processing.

In this case, the importer seeks to use “fallback” superdeductive value under 19 U.S.C. § 1401a(f). The reason given for not using the superdeductive value under 19 U.S.C. § 1401a(d) involves differences in the number of [articles] imported from one year to the next and the number sold in one year to the next. The number imported may be more or less than the number sold within a one-year period. Some imported components may be assembled into an [article] and sold in less than 90 days and others may stay in inventory significantly longer, being assembled and sold well after 180 days of importation. However, some may be assembled and sold in-between the 90th and 180th day of importation. Importer’s counsel submits that due to fluctuations in the numbers imported and sold within an annual period, with some sold after having been imported in a previous year, fallback superdeductive value provides the only methodology to calculate the usual profit and general expenses for the merchandise concerned.

Counsel notes that Audit agreed with the fallback deductive method presented, with the exception of the deduction of royalty payments as part of general expenses. However, we note that the methodology presented departs from the deductive value methodology of the statute by relying upon an average unit price, as opposed to using the statutorily required unit price at which merchandise is sold in the greatest aggregate quantity. The “fallback” method of 19 U.S.C. § 1401a(f) allows for appraisement of merchandise “on the basis of a value that is derived from the methods set forth in [subsections (b) through (e)], with such methods being reasonably adjusted to the extent necessary to arrive at a value.” Counsel submits that the “average” price used in the importer’s calculations is not a true average price, but “resembles more of a weighted average.” Counsel explains that this is because “every dollar of annual sales of a particular SKU was accounted for in the calculation.” See Counsel’s submission, dated November 20, 2020. Counsel also submits that the importer “does not keep records of the greatest number of units sold at a particular price in a particular period. It has no reason to do so.” Furthermore, counsel submits that “[a]ny attempt to try and establish the statutory starting point would need to be done by hand, consuming hundreds of hours making it totally impractical.” However, a review of a company generated spreadsheet of 2013 sales information obtained from the company’s Enterprise Resource Planning (ERP) system with regard to one model of [article] enabled CBP to determine the price at which the greatest number of units were sold.

We do not agree that allowing an average price per unit is a reasonable adjustment of the deductive value method or superdeductive value method set forth in 19 U.S.C. § 1401a(d). Furthermore, as some of the imported components may be assembled into [articles] and sold after the 90th day and before the 180th day after the date of importation, it may be possible to apply the superdeductive value method using the value obtained for the merchandise at issue or identical or similar merchandise as the merchandise at issue. As such, resort would not need to be made to a “fallback” superdeductive value. Therefore, we recommend that Audit revisit the acceptability of the importer’s proposed fallback superdeductive value method calculation.

With regard to the royalty payments, we agree with Audit that these payments are costs related to the assembly of the imported components and sale of the finished [articles]. While CBP has issued numerous rulings dealing with the dutiability of royalties under transaction value, there are very few rulings that address royalties under deductive value. Importer’s counsel cites to three rulings (Headquarters Ruling Letter (HQ) 545187, dated February 14, 1995; HQ H019749, dated July 22, 2008; and HQ H281093, dated May 7, 2018) in arguing that the royalty payments at issue are general expenses which are deductible under the deductive value method. Counsel submits that the royalty payments should be treated the same as other general expenses, such as rents, advertising, administrative expenses, and automobile expenses. With regard to HQ 545187 and HQ H019749, they make no mention of royalty payments, but only of the following types of expenses as deductible general expenses - operating expenses, i.e., salaries and wages, rent, taxes, travel, advertising, automotive expense, and contract services (HQ 545187), and per facility operating expenses, division sales expenses, field sales expenses, and allocation for cost of executive staff expenses (HQ H019749). As such, these rulings do not offer any support to counsel’s argument. While HQ H281093 does reference royalty payments, we believe it has been misread. In HQ H281093, the importer excluded a royalty expense solely related to its domestic automobile production and not related to the imported merchandise from the calculation of its general and administrative expenses deduction. As such, it does not offer any assistance in the case at hand. The only similarity between HQ H281093 and the situation herein is that the importer in this case claims the patent royalties only apply to [articles] manufactured by it in the United States, and not to the [articles] assembled in the United States from the imported components, some of which are the subject of patents.

Counsel raised HQ 546120, dated March 26, 1996, as CBP stated therein that “[i]f an expense was incurred after the merchandise was released from Customs custody it is likely that it would be a general expenses (sic) made in connection with the sale of the imported merchandise in the United States.” While this is true of expenses such as salaries and wages, rent, taxes, and other expenses referenced above that have been found to be general expenses, the timing of a royalty payment, or the triggering event for payment being a post-importation event, such as the sale of merchandise, does not affect CBP’s determination of whether a royalty should be considered dutiable under transaction value, or similarly, whether it is a general expense or a cost of production under deductive value. See HQ 548560, dated September 3, 2004 (“CBP has previously held that the method of calculating the royalty (e.g., on the resale price of the goods) is not relevant to determining the dutiability of the royalty payment”); see also, HQ H137435, dated January 5, 2012, wherein CBP stated with regard to the timing of payments and their dutiability as part of the price actually paid or payable:

With regard to the timing of the payment, this is not necessarily a relevant concern. In HRL 548331, CBP acknowledged that R&D payments may not result in the exportation of merchandise for a number of years, but decided that the issue of timing was an accounting issue and did not affect the dutiability of the payments. Additionally, in HRL 545998, the payments for the pre-clinical studies were due 60 days after receiving the results, not at a point related to an importation, and yet these payments were still considered dutiable as part of the total payment for the price actually paid or payable

As noted previously, the majority of rulings dealing with royalties involve transaction value, and not deductive value. However, just as with transaction value, the timing of the payment of a royalty or the timing of the triggering event, should not be determinative of whether the royalty is a cost of production or a general expense under deductive value. It is the nature of the expense that is determinative, not the timing of its payment.

Importer’s counsel maintains that the assembly of the imported components does not involve any of the subject patents. While it may be true that “no patents or patented processes are used to assemble” the subject [articles], we disagree that the patents and patent royalties are not applicable based on our reading of the patents and the licensing agreement. The previously referenced patents apply to imported components which are assembled with other imported components to create the finished [articles]. The licensing agreement grants to the importer “an exclusive license to manufacture, assemble and/or sell Licensed Products according to the [Brand] Patents.” [Emphasis added.] Counsel contends that the patents referred to in the licensing agreement are used solely for [articles] that are manufactured in the United States. However, the licensing agreement clearly refers to a license to assemble Licensed Products. The assembled [articles] are Licensed Products according to the licensing agreement. Furthermore, the assembled finished [articles] contain imported patented components.

In addition, certain trademarks go to the production of the [articles]. In this case, at least two of the registered trademarks are such trademarks. These trade dress trademarks involve the three-dimensional configuration of the goods as well as certain design elements. These trademarks are subject to protection under the Lanham Act, i.e., the Trademark Act of 1946 (15 U.S.C. § 1051 et seq.). See Sunbeam Prods. v. West Bend Co., 1996 U.S. Dist. LEXIS 12274; 39 U.S. P.Q. 2D (BNA) 1545 (S.D. Miss. 1996), aff’d, 123 F.3d.246 (5th Cir. 1997), wherein the court stated: “Ordinarily if a configuration of a product is subject to registration under trademark law, it is subject to being protected under trade dress.”

In Govino v. Whitepoles LLC, No. 416-CV-06981-JSW (KAW), 2017 U.S. Dist. LEXIS 203547, 2017 WL 6442187, (N.D. Cal. Nov. 3, 2017) involving infringement of, among other things, trade dress related to glassware, the court stated with regard to trade dress:

Trade Dress protection applies to “a combination of any elements in which a product is presented to a buyer,” including the shape and design of a product. Art Attacks Inc. v. MGA Ent. Inc., 581 F.3d 1138, 1145 (9th Cir. 2009) (citing J. Thomas McCarthy, McCarthy on Trademarks and Unfair Competition § 8:1, at 8-3 (4th ed. 2008)).

In Govino, the court examined patent infringements and trade dress infringement. The court recommended that plaintiff’s motion for default judgement be granted and with regard to the trade dress infringement, the court held that the defendants be “permanently enjoined and restrained from infringing the govino Trade Dress in violation of 15 U.S.C. § 1125(a) by developing, manufacturing, importing, advertising, and/or selling products that use trade dress that is confusingly similar to the govino Trade Dress, including but not limited to Defendants' "Neel", "Claire", and "Zelenka" product lines . . . and any product that is a variation thereof[.]”

In Sunbeam Prods., supra, Sunbeam sought a preliminary injunction to prevent West Bend Company from manufacturing and marketing a stand mixer which was nearly identical to Sunbeam’s top selling stand mixer, Model 2360 Mixmaster(R). The court found that Sunbeam’s Model 2360 was entitled to trade dress protection under the Lanham Act. As such, the court enjoined West Bend from, among other things, “[m]aking, using, or selling, alone or in combination with other products, words designations, designs or otherwise, any products embodying Plaintiff's Mixmaster(R) product design trademark, any confusingly similar design to Plaintiff's Mixmaster(R) product design or any colorable imitation of Plaintiff's Mixmaster(R) product design trademark. . . .”

Govina and Sunbeam, illustrate that trade dress may go to, and in those cases did go to, the configuration, shape or design of a good; and, that the remedy for trade dress infringement may include an injunction to prevent the manufacturing, production or assembly of an infringing good. In this case, the assembly of the imported components in the United States create the good which is, by its configuration, shape and design, the subject of the trade dress trademarks. Without the right to use the trade dress trademarks, the importer could not assemble the [articles] in the United States without infringing the registered trade dress in violation of the Lanham Act. In our view, the trade dress trademarks referenced in the licensing agreement (which confers the right to assemble the components according to the patents and confers the right to use the trademarks, including the trade dress trademarks, in that assembly), are directly related to the production or assembly of the imported components into the finished [articles]. While some of the trademarks at issue may not go to the production of the [articles], the trade dress trademarks clearly do. The subject trade dress trademarks protect the configuration, shape or design of the [articles]. They are, in essence, a part of the [articles] and not separable from them as trademarked symbols, words, logos, etc., are. These trade dress trademarks are similar to design patents. Both trade dress and design patents may deal with the configuration, shape or design of a good. See McCarthy on Trademarks and Unfair Competition, § 6:11 (5th ed.): “Dual protection from both design patent and trademark or trade dress law can exist where the nonfunctional configuration or shape of a container or a useful article serves to identify and distinguish the source of goods—that is, acts as a trademark identifying and distinguishing a single source for the goods.” See also, McCarthy at 7:91.

Counsel submits that trademark law treats all trademarks the same. The implication is that CBP should treat all trademarks the same. However, trademark law and customs valuation law have different purposes. Trademark law centers on the protection of source identifiers, i.e. marks. Customs valuation law centers on the proper appraisement of merchandise imported into the United States. Under the deductive value methodology, or fallback deductive value, CBP must consider the impact and role of the trademarks at issue to the production of the merchandise, which is a non-issue under trademark law considerations. As stated above, we believe the trade dress trademarks are directly related to the production or assembly of the subject [articles]. In our view, these trade dress trademarks are inextricably linked to the production of the [articles]. As such, royalties for the use of these trade dress trademarks are costs of production and part of the cost of goods sold. They are not general expenses deductible under the deductive value method of appraisement.

Counsel submits that the royalties at issue are booked by the importer as a general expense in accordance with U.S. GAAP. Specifically, counsel states: “CBP may not, by statutory mandate, reject information that is submitted by an importer if the preparation of that information was in accordance with generally accepted accounting principles. 19 U.S.C. § 1401a(g)(3); see also, infra.”

In support of the characterization of the royalties as general expenses, counsel has submitted letters from the importer’s tax service provider and the auditing company stating that the royalties are booked for financial reporting purposes as a general expense in accordance with GAAP. Counsel further cites 19 U.S.C. § 1401a(g)(3), which states:

For purposes of this section, information that is submitted by an importer, buyer, or producer in regard to the appraisement of merchandise may not be rejected by the customs officer concerned on the basis of the accounting method by which that information was prepared, if the preparation was in accordance with generally accepted accounting principles. The term “generally accepted accounting principles” refers to any generally recognized consensus or substantial authoritative support regarding—

(A) which economic resources and obligations should be recorded as assets and liabilities;

(B) which changes in assets and liabilities should be recorded;

(C) how the assets and liabilities and changes in them should be measured;

(D) what information should be disclosed and how it should be disclosed; and

(E) which financial statements should be prepared.

The applicability of a particular set of generally accepted accounting principles will depend upon the basis on which the value of the merchandise is sought to be established.

Counsel asserts that as the importer books the royalties as a general expense, and such action is in accordance with GAAP, CBP must accept this characterization of the royalties and allow the deduction of the royalties as a general expense for purposes of the deductive value method of appraisement. We disagree.

In Merck, Sharp & Dohme Intern. v. United States, 20 CIT 137, 144, 915 F. Supp. 405, 411 n.5 (CIT 1996), which the importer’s counsel dismisses as not applicable to this matter, Merck relied upon 19 U.S.C. § 1401a(g)(3) to argue “that all cost of production information that is consistent with GAAP must be accepted for appraisement purposes.” However, the court stated, in relevant part: “. . . GAAP, as a general matter, is only an accounting method, and does not speak to whether a[n] item may be dutiable for Customs purposes.” CBP does not read the court’s statement to be limited, as counsel does, to purposes of calculating the value of an assist. We read the court’s statement to have a broader application in situations involving financial information prepared in accordance with GAAP and the determination of whether a particular financial item is or is not dutiable. It is the agency’s responsibility to determine the dutiability of certain items, such as royalties, in appraising merchandise; we will not abdicate our role to an importer’s accountant.

Counsel points out that the government lost in Merck, citing a portion of the decision which states that “. . . the defendant failed to present any evidence, either directly or through cross examination of Merck's witnesses, showing that the costs that Merck excluded were clearly production related.” We believe we have shown that the trade dress trademark royalty payments are clearly production related and, as such, are costs of production.

Furthermore, in Peerless Clothing International, Inc. v. United States, 33 CIT 24, 602 F. Supp. 2d 1309 (CIT 2009), the court stated:

Customs is not compelled to accept an importer's allocation that complies with GAAP in its country of origin. [citation omitted]. Customs determines the "applicability" of a GAAP compliant appraisement "depend[ing] upon the basis on which the value of merchandise is sought to be established." 19 U.S.C. § 1401a(g)(3). [footnote omitted]. Legislative history confirms that the statute "should not be construed in a manner which forces [Customs] to accept the information solely because it is prepared and submitted in a manner which is in accordance with [GAAP]". S.R. No. 96-249, at 118 (1979), reprinted in 1979 U.S.C.C.A.N. 381, 504 (emphasis omitted). . . .

While importer’s counsel does not believe that the court’s statements regarding GAAP in Peerless are applicable here, we believe they are. GAAP is nothing more than an accounting method based on flexible accounting concepts. “GAAP rules are flexible and permissive. The choice of accounting principles is determined by management after due attention to historical, economic, and tax considerations.” See Arthur Acevedo, The Fox and the Ostrich: Is GAAP a Game of Winks and Nods?, 12 Tenn. J. Bus. L. 63 (2010). This office requested information regarding the underlying GAAP principles or rules upon which the importer’s tax service provider and auditing company relied in concluding that the royalty expenses are properly booked as selling expenses. Rather than providing this information, counsel submitted excerpts from the Accounting Standards of the U.S. Department of Energy (“DOE”). While such information is relevant for a company doing business with the DOE, it is not relevant here and does not warrant consideration.

Furthermore, counsel posits that because other companies identify sales-based royalty expenses as selling expenses in their 10-K annual reports filed with the United States Securities and Exchange Commission (U.S. SEC), CBP must accept the importer’s characterization of their sales-based royalty expenses as selling expenses which fall within general expenses. However, this office found 10-K annual reports of other companies filed with the U.S. SEC wherein sales-based royalty expenses were characterized as part of the cost of goods sold. The fact that 10-K annual reports of other companies may be found reflecting sales-based royalty expenses as either selling expenses, i.e., general expenses, or as part of the cost of goods sold merely reflects the flexibility of GAAP rules, as discussed above, and the relevancy of the facts of each company’s circumstances. It is the facts in this matter that are relevant to our decision as to the proper characterization of the royalty payments made by the importer to its related party, not how other companies characterize such payments in their 10-K annual reports, nor how the importer’s accountants choose to characterize these payments.

Although this matter is a question of customs law, CBP finds support in tax law for our view that the royalty payment for the right to use the trade dress trademarks is not a general expense., Although tax law, like trademark law, has a different focus and concern than customs law, the Internal Revenue Service (IRS) regulations regarding sales-based royalty payments support our view. The example set forth in 26 CFR § 1.263A-1(e)(3)(i)(B) to help illustrate the provisions of paragraph (e)(3)(i)(A), which addresses costs properly allocable to property produced or property acquired for resale, is apropos to the discussion herein as it involves the use of a trademark. The example, as it appears in the IRS regulations provides as follows:

(i) Taxpayer A manufactures tablecloths and other linens. A enters into a licensing agreement with Company L under which A may label its tablecloths with L's trademark if the tablecloths meet certain specified quality standards. In exchange for its right to use L's trademark, the licensing agreement requires A to pay L a royalty of $X for each tablecloth carrying L's trademark that A sells. The licensing agreement does not require A to pay L any minimum or lump-sum royalties.

(ii) The licensing agreement provides A with the right to use L's intellectual property, a trademark. The licensing agreement also requires A to conduct its production activities according to certain standards as a condition of exercising that right. Thus, A's right to use L's trademark under the licensing agreement is directly related to A's production of tablecloths. The royalties the licensing agreement requires A to pay for using L's trademark are the costs A incurs in exchange for these rights. Therefore, although A incurs royalty costs only when A sells a tablecloth carrying L's trademark, the royalty costs directly benefit production activities and are incurred by reason of production activities within the meaning of paragraph (e)(3)(i)(A) of this section.

See also, Treasury Decision (T.D.) 9652, 79 Fed. Reg. 2094 (January 13, 2014). In this example, the royalty is a sales-based royalty. The fact that the royalty the importer pays to the licensor for the trade dress trademarks is a sales-based royalty does not preclude it, as importer’s counsel argues, from being a cost of production.

In this case, we have found the trade dress trademarks to be costs of production of the finished goods in the United States. As such, the payments for the right to use these trademarks are not deductible under the deductive value method as general expenses. Furthermore, as written, the set percentage of net sales for use of the trademarks and patents as provided for in the licensing agreement applies whether one or more of the listed trademarks or patents is used. As the licensing agreement groups the patents and trademarks together as a whole charging a percentage of the importer’s net sales as the royalty fee, that fee, in its entirety, is not deductible as a general expense under the deductive value method of appraisement with regard to the goods at issue, but is allocable as a whole as a cost of production.

Finally, counsel submits that if CBP does not agree that the importer’s sale-based royalty payments are selling expenses, the agency must follow the procedures of 19 U.S.C. § 1625 because, as counsel states, “for more than 40 years CBP has classified royalties paid on the post-importation sale of merchandise as a selling expense.” However, counsel has failed to make a case for the necessity to undertake the § 1625 procedures. Counsel has failed to cite any rulings which would be in conflict with this decision should CBP determine in this case, based on the facts discussed herein, that the importer’s royalty payments are not a general expense, but part of the cost of goods sold. Nor has counsel provided any evidence for which § 1625 treatment would be required. A claim for § 1625 treatment must be based on legal arguments and evidence and cannot be made by simply asserting an overly broad statement.

The above analysis is based upon an assumption of the truthfulness of the information presented to CBP, including that the licensor is the owner of the patents and trademarks reflected in the licensing agreement, and that the importer therefore has a valid basis for transferring funds to the licensor as a royalty for the right to use the trademarks at issue. However, CBP has reason to believe that the importer is the owner of the trade dress trademarks and other trademarks listed in Schedule B (with the exception of those listed under the other related party licensee’s name, and which are not the subject of the current analysis). In particular, the importer has previously represented that it is the owner of, inter alia, the two trade dress registrations covering the design of certain [articles], namely U.S. Patent and Trademark Office (“USPTO”) Reg. Nos. [XXXXX], both filed [XXXX] and registered [XXXXX], which are listed in Schedule B of the licensing agreement. Based on this assertion, CBP questions the validity of the licensing agreement that the importer has provided to CBP to justify the royalty payments at issue.

The importer first asserted its ownership of the trade dress trademarks in representations made to the USPTO for purposes of registering those marks. It is well established that trademark applications must be filed by the owner of the mark. 15 USCS § 1051; T.M.E.P. § 1201. Indeed, if the application is filed in the name of someone other than the owner, the application is void ab initio, which is a statutory requirement that cannot be waived by a court or the USPTO. See Great Seats, Ltd. v. Great Seats, Inc., 84 U.S.P.Q.2d 1235, 1239 (TTAB 2007) (“[O]nly the owner of the mark may file the application for registration of the mark; if the entity filing the application is not the owner of the mark as of the filing date, the application is void ab initio.”); see also Lyons v. Am. Coll. of Veterinary Sports Med. & Rehab., 859 F.3d 1023, 1027, (Fed. Cir. 2017); Huang v. Tzu Wei Chen Food Co., 849 F.2d 1458, 7 USPQ2d 1335 (Fed. Cir. 1988); Conolty v. Conolty O'Connor NYC LLC, 111 USPQ2d 1302, 1309 (T.T.A.B. 2014); American Forests v. Barbara Sanders, 54 U.S.P.Q.2d 1860, 1999 WL 1713450 (T.T.A.B. 1999), aff'd 232 F.3d 907 (Fed. Cir. 2000). The importer acknowledges that it submitted a declaration to the USPTO pursuant to 15 U.S.C. §1051(a)(3)(D) that asserted that it is the exclusive user of the marks in the United States. See March 2 Submission, p. 3, para. 4. Notably, that same declaration includes a sworn statement that “the person making the verification believes that he or she, or the juristic person in whose behalf he or she makes the verification, to be the owner of the mark sought to be registered.” 15 U.S.C. §1051(a)(3)(A) (emphasis added). As stated in the text of the declaration, any willful false statements in such a declaration are punishable by fine or imprisonment or both pursuant to 18 U.S.C. 1001. The importer has not alleged that its declaration was false.

Following registration of its marks, the importer asserted its ownership of the relevant marks to CBP for purposes of recording its marks for border enforcement purposes. Indeed, in its application to record its rights with CBP for border enforcement in 2014 as the owner of the trade dress trademarks, the importer answered questions regarding the ownership of the marks as follows:

Is the trademark owner a U.S. citizen (corporate or personal)? – “YES” Is the subject trademark owned, used, or otherwise claimed by any parent company, subsidiary, or other entity, foreign or domestic, that is under common control or common ownership with, or shares any common control or common ownership with, the U.S. trademark owner? – “NO”

Further, we found no federal pleadings in which the importer has asserted that it is anything other than the owner of the marks at issue, and instead found that the importer repeatedly brought suit on the basis of its ownership of these rights. See, e.g., [XXX; XXX]. In sum, we found no evidence that the importer has ever publicly declared itself to be anything other than the sole owner of the marks at issue, until now.

Despite decades of consistently asserting to CBP, the USPTO, and federal courts that the importer is the owner of the trade dress trademarks, the importer now asserts to CBP that it is a licensee of these trademarks, such that it must pay a royalty to the real owner of those marks, the licensor, and that it should be able to deduct the royalty payments that it pays to this foreign entity as selling expenses under the deductive value method of appraisement to reduce the amount of duties owed to the U.S. government. To support this assertion, the importer supplied CBP with a copy of the licensing agreement between the licensor, the importer, and the importer’s affiliate, (the related party seller), which we understand is or was the importer’s parent company. The licensing agreement indicates that the licensor is the assignee of patent and trademark rights that include, inter alia, the subject trade dress trademarks. The licensing agreement provides no date for this assignment and does not indicate what party assigned rights to the licensor. The licensing agreement further states that the licensor grants to the importer and the related party seller an “exclusive license to manufacture, assemble and/or sell Licensed Products according to the [Brand] Patents and an exclusive license to use the [Brand] Trademarks together with the manufacturing, assembly and/or sale of Licensed Products.” The [Brand] Trademarks are defined as those marks listed on Schedule B, which lists federal registrations that are owned by the importer, including both of the trade dress registrations at issue, and by the related party seller, as well as one state trademark registration owned by the importer. Use of the trademarks is subject to quality control measures set by the licensor.

CBP requested a copy of the document assigning the patents and trademarks to the licensor in order to establish the date of that assignment and confirm its validity and scope, but the importer’s counsel flatly refused to provide such evidence. We note that an assignment of registered rights must be in writing to be valid. See 15 U.S.C. §1060. Based on information provided by the importer’s counsel in its January 25, 2021 letter, however, we understand the assertion to be that the licensor obtained its rights not from the importer, but from importer’s founder, who “donated” his intellectual property rights to an [entity], namely the licensor, on May 31, 2010. See January 25, 2021 letter, page 2, paragraph 6. We note that this date is both years after many of the trademark registrations included in Schedule B were filed by the importer, including the two trade dress registrations at issue, and also almost exactly a year after the effective date of the licensing agreement, June 1, 2009. By way of explanation for the earlier-filed registrations, the importer indicates that the importer’s founder had previously granted a similar license to the importer, and the licensing agreement was just re-licensing those rights now that they were owned by the licensor. The importer provided no explanation for how the licensor was able to grant a license effective June 2009 for rights that it was allegedly assigned in May 2010.

The importer asserts that it was the appropriate applicant when the applications for the relevant marks were filed, and we see no basis to disagree with this assertion. The uncertainty is whether and how the licensor obtained any rights in those marks such that it became capable of issuing a license to the importer. Based on the information submitted by the importer, it is somewhat unclear whether there was ever an assignment from the importer to the licensor. Although importer’s counsel made it clear in conversations with CBP that the only assignment that is relevant was between the founder and the licensor, in its supplemental submission dated March 2, 2021, the importer asserts that “[r]ecording an assignment from the importer to the licensor with the USPTO is not mandatory” and that failure to record such an assignment is “solely [licensor’s] concern and has no bearing on the validity of the trademark registrations.” It is unclear why importer would make this assertion that it did not need to record an assignment if there had not been an assignment to record. Further, while recordal of an assignment with the USPTO is not required immediately after such assignment, it is necessary to notify the USPTO of a change in ownership when a registration is renewed. See T.M.E.P. § 1604.07(a-c) (explaining that Section 8 declarations of use must be filed by the owner, and that if the owner is not the same as the original owner, evidence must be supplied to demonstrate the chain of title). The relevant trade dress trademarks were both renewed in 2013, with the importer signing the relevant Declarations of Use as the owner. Given that the importer has not provided a copy of any assignment between it and the licensor to CBP or the USPTO, or even confirmed its existence, CBP can draw no other conclusion than that there has never been an assignment from importer to the licensor for the relevant rights that might give the licensor a claim of ownership over the relevant trademarks.

In examining the claims of ownership the importer has made about the importer and the licensor, comments of the Chief Judge of the Federal Circuit regarding ownership in In re Wella A.G., 787 F.2d 1549 (Fed. Cir. 1986) are instructive. In that case a German parent company, Wella A.G., attempted to register a mark when its U.S. subsidiary, Wella U.S., had previously registered (and still maintained) a number of registrations for similar marks. While the issue is distinct because only the importer has applied to register the marks in the U.S., and the importer is not a subsidiary of the licensor, the commentary is instructive given that it directly addresses the need to identify a single owner that has the right to register. Chief Judge Nies advised (with internal citations omitted for brevity):

Under section 1 of the Lanham Act, only the owner of a mark is entitled to apply for registration. If one who is not the owner seeks registration, the application must be denied and any registration which issues is invalid. In this case Wella A.G. avers in its application that it is the sole owner of rights in the WELLA marks in U.S. commerce. At the same time, the registrations of Wella U.S. evidence that Wella U.S. is the sole owner of such rights. If Wella A.G. is the sole owner of such rights, its subsidiary Wella U.S. cannot also be the sole owner of the same rights. Regardless of their being related companies, only one is the owner. Whether the relationship is that of licensor/licensee or parent/subsidiary, the one entity which controls the nature and quality of the goods sold under the mark is the owner…The question of who is the owner of a mark and, therefore, entitled to register is not a mere technicality. The presumptions of section 7(b) are inconsistent with the concept of a non-owner being the registrant. Moreover, it is particularly important in this case to determine whether the foreign corporation or the United States corporation is the owner since certain rights are available only if the registrant is a United States company. For example, 19 U.S.C. § 1526 (1982) gives a right to bar importations upon deposit of a registration with Customs Service only to U.S. companies.

In re Wella A.G., 787 F.2d 1549, 1554 (Fed. Cir. 1986). In sum, both the importer and the licensor cannot simultaneously be the owners of the trade dress trademarks. We further note that the licensor and the importer are not a parent and subsidiary according to the record, as the licensor is instead a[n] “[entity]” [XXXXXXXXX]. When there is no parent-subsidiary relationship, the determination of ownership is perhaps even more distinct as neither inherently controls the actions of the other. See, e.g., In re Pharmacia Inc., 2 U.S.P.Q.2d 1883, 1884, (T.T.A.B. 1987) (“We do not believe the mere fact that two sister companies are both controlled by a third company means that use by one of the sister companies automatically inures to the benefit of the other sister.”).

While CBP has no authority or inclination to determine the validity of a trademark registration or its registrant, it is certainly appropriate for CBP to confirm that a license is valid on its face before accepting that payments of royalties under such a license are deductible from the appraised value from which duties are assessed. CBP has requested that the importer explain the inconsistency between its prior representations to CBP and others that the importer owns the trade dress trademarks and the licensing agreement’s assertions that the licensor owns the trade dress trademarks. In a supplemental response dated March 2, 2021, submitted to CBP, the importer asserts:

“The [Brand] Trademark registrations listed in the 2011 License Agreement were applied for and obtained by [the importer], with the express authorization of its founder. [The importer], applied for and obtained these registrations years before [the entity] accepted [the founder’s] donation of his ownership interests in those marks in 2010. In fact, the oldest registration dates to [XXXX].” P. 2, paragraph 3. “All rights to use the [Brand] Trademarks registered in the name of [the importer] Inc. in the United States were assigned to [the importer], Inc., and [the importer], Inc.’s status as an assignee of [the entity] is clearly stated and unambiguously provided for in the License Agreement.” P. 4, paragraph 2, citing paragraphs 2 and 3 of the 2011 licensing agreement. “[The founder] donated his ownership interests in the [Brand] Trademarks to [the entity] in 2009, and [the entity] accepted his donation in 2010. As [the founder] had done prior to his donation to [the entity], [the entity] assigned or ‘licensed’ to [the importer] Inc. the exclusive right to use the marks in the U.S., the right to register the marks, and the right and obligation to maintain and enforce the marks, while adhering to product quality standards set by [the entity].” P. 5, paragraph 3. “Even if the registrations for the [Brand] Trademarks were theoretically invalid – which they are not – such invalidity would not change or in any way affect [the importer’s] obligation to pay royalties to [the entity]. This is because [the entity] is the owner of the common law rights to the [Brand] Trademarks and the License agreement is valid and binding on the parties.” The importer’s first assertion indicates that the importer’s founder consented to registration by the importer. This is certainly not surprising, as we would find it curious if a trademark application were filed contrary to the wishes of an applicant’s corporate executives. However, the assertion implies that some sort of formal consent was required. No consent was entered into the USPTO record for any of the relevant trademark registrations, and we are unclear why any such consent would be necessary. Company founders do not develop rights in trademarks based on the use of the mark by the company. Instead, the entity that first uses the mark owns the marks that it uses. See, e.g., Smith v. Coahoma Chem. Co., 46 C.C.P.A. 801, 805, 264 F.2d 916, 919 (C.C.P.A. 1959) (finding that a corporate officer did not own a mark used by the corporation); Paul Audio, Inc. v. Baoning Zhou, 2011 TTAB LEXIS 386, *34 (Trademark Trial & App. Bd. December 7, 2011) (rejecting an argument that the applicant was the owner of the mark because he was the majority shareholder and was actively involved in quality control, and instead holding that the corporate entity that used the mark was the valid owner). The fact that the importer’s founder was involved with the operations of the company did not provide him with any inherent rights in the marks used by the companies that he founded that would require an assignment, license, or consent. We are therefore uncertain how this indicates that the license is valid, rather than indicating that it is indeed the importer that owns the relevant rights.

With regard to the importer’s second assertion, namely that paragraphs 2 and 3 of the licensing agreement indicate that the importer is an assignee of the relevant rights, those paragraphs contain no such assertion. Instead, those paragraphs assert that licensor is an assignee of those rights. It is unclear from the licensing agreement who granted an assignment to licensor, but there is no mention of an assignment to the importer. Instead, the importer is a mere licensee in the context of the licensing agreement. It is possible that the importer is asserting that the licensing agreement is not a license but instead an assignment. In an earlier submission to CBP dated January 25, 2021, the importer asserted that the licensing agreement demonstrates that the importer is an “exclusive licensee” and that pursuant to case law, exclusive licensees are assignees and therefore a valid applicant/registrant of the marks with the USPTO pursuant to 15 USC § 1127, which states that “the terms ‘applicant’ and ‘registrant’ embrace the legal representatives, predecessors, successors and assigns of such applicant or registrant.” The importer cited Quabaug Rubber Co. v. Fabiano Shoe Co. for the proposition that “an exclusive licensee is an assignee.” 567 F.2d 154, 158 (1st Cir. 1977). Quabaug Rubber addressed whether the plaintiff had standing to sue for trademark infringement under Section 32 of the Lanham Act. Id. The registrant of the trademark registrations at issue was Vibram, but the suit was brought by a licensee, Quabaug, which had been granted “the sole right for manufacturing and selling in the whole territory of the United States of America.” Id. at 157. The court held that the exclusive licensee did not have sufficient rights to maintain the suit because it did not have the right to exclude either Vibram or Vibram’s non-U.S. licensees from importing or selling goods bearing the mark. Id. at 160. However, the court found Qabaug could bring a Section 1125(a) claim, because that statute permits “any person who believes that he is or is likely to be damaged to bring a civil claim.” Id. The importer takes the phrase used by the court -- “an exclusive licensee is an assignee” -- out of context to support its assertion that the importer is a permitted “registrant” because it is an exclusive licensee. The case cited by the Quabaug Rubber holding for the proposition that “an exclusive licensee is an assignee” in fact stated that “the grant of an exclusive and irrevocable right to use a mark in a designated territory is an assignment and not a mere license.” Ste. Pierre Smirnoff, Fls., Inc. v. Hirsch, 109 F. Supp. 10, 12 (S.D. Cal. 1952) (emphasis added). Therefore, the case cited by the importer does not support the position that an owner/registrant can be a licensee or that a licensee is an assignee. Further, we are not trying to establish whether the importer has standing to sue under Section 32 of the Lanham Act as an “exclusive licensee” when it is not a registrant. Instead, the importer is indeed the registrant of the relevant rights and is trying to establish that it should, nevertheless, be able to deduct royalties paid to a third party for the right to use trademarks that it registered. We find the cited authority unavailing as it does not speak to the issue under consideration. Even if we were to consider these assertions some sort of parallel argument to explain why the importer owns and registered the marks, the licensing agreement is not, on its face, an assignment. The licensing agreement provides that the licensor is responsible for quality control and maintains ownership of the marks, which undercuts any argument that it was a de facto assignment. See, e.g., L'Oreal USA, Inc. v. Trend Beauty Corp., 2013 U.S. Dist. LEXIS 115795, at *27 (S.D.N.Y. Aug. 15, 2013) ("When an agreement places obligations regarding the trademark on the alleged assignee and indicates that the trademark is owned not by the assignee but by the assignor, a court should read that agreement as a license and not as an assignment.). Therefore, there does not appear to be any assignment to the importer and, instead, the importer appears to have always been the valid owner of the relevant marks.

With regard to the third assertion cited above, the importer cites TMEP § 1201.01 for the proposition that an applicant can register a mark “based on its own exclusive use,” which is of course accurate, but does not stand for the proposition that an exclusive licensee is the proper registrant of a mark. The full section states: “In an application under §1 of the Trademark Act, an applicant may base its claim of ownership of a trademark or a service mark on: (1) its own exclusive use of the mark; (2) use of the mark solely by a related company whose use inures to the applicant’s benefit; or (3) use of the mark both by the applicant and by a related company whose use inures to the applicant’s benefit.” TMEP § 1201.01. The section is outlining the potential valid bases for a use-based trademark application. However, that section does not imply that an exclusive licensee could file an application based on its use that was licensed by a third party. Indeed, the section next states: “Where the mark is used by a related company, the owner is the party who controls the nature and quality of the goods sold or services rendered under the mark. The owner is the only proper party to apply for registration.” Id., citing Moreno v. Pro Boxing Supplies, Inc., 124 USPQ2d 1028, 1036 (TTAB 2017) (finding that a mere licensee cannot rely on licensor's use to prove priority); see also McCarthy on Trademarks and Unfair Competition § 19:53 (“A person merely using the mark under license from the owner cannot be the valid applicant or registrant. In a license relationship, the licensor is the party who does the controlling and must be the applicant for registration.”) Importer’s counsel asserted in a telephone conference with CBP that it was indeed the importer who controls the nature and quality of goods sold under the trade dress trademarks. However, in its March 2 letter, importer asserts that the product quality standards are set by the licensor, which is supported by the licensing agreement. Its assertion seems to be that the licensor is the real owner, but that the importer is still somehow the registrant.

As support for its assertion that it is properly the registrant while licensor is the real owner, importer cites In re Wacker Neuson SE, which involved an application for the mark WACKER NEUSON, which was refused based on a prior registration for the mark NEUSON. 97 U.S.P.Q.2d 1408 (T.T.A.B. 2010). In that case, the Board found that a consent granted by the registrant of the NEUSON mark and the relationship between the registrant and applicant were sufficient to permit registration of the later-filed WACKER NEUSON mark. Id. at 1415. The question under consideration was not whether a licensee was a valid registrant, but rather the sufficiency of the consent granted by the prior registrant. However, the applicant did have a license for a portion of its mark. Id. The Board found that “While applicant's use of the NEUSON portion of its mark WACKER NEUSON is subject to a ‘licensing’ arrangement with registrant, there is nothing definitive in the agreement that ownership of the combined mark does not reside with applicant.” Id. at 1415. Put differently, the Board concluded that the registrant was the owner of the mark pursuant to the terms of the license, although the registrant had to license a portion of the mark from an affiliate. Because the Board found that the owner of the mark was the registrant, this case simply does not stand for the proposition that a licensee can also be considered the owner/registrant. It stands for the proposition that a portion of a mark can be licensed by the owner of a composite mark (i.e. a mark that contains one or more terms or elements). There is no composite mark at issue here. Further, the court was clear that the license was not for the mark being registered, which was owned by the applicant, but rather a portion of that mark that was owned by an affiliate. Importer’s assertion that a license for a mark is “by no means an uncommon arrangement” is false; they merely found one case in which a portion of a mark was licensed. The importer cites no precedent indicating that a mere licensee can be a valid registrant, and we are not aware of any such precedent.

Interestingly, as noted by the importer, the prior registrant in [a cited court case] is the same type of entity as the licensor. The importer has taken the position that, if the rights in the relevant marks had been assigned to licensor, it could not record such an assignment because that entity type cannot be a valid registrant given the restrictions imposed on it by [foreign] law. However, the registration at issue in [the cited case] is indeed held in the name of [party name redacted], which is identified in the USPTO records as [the same type of entity existing in the same jurisdiction as the licensor]. [citation and additional commentary omitted]. As a result, there do not appear to be any USPTO restrictions on registration of marks by this entity type. If the rights had indeed been assigned by the importer to the licensor, we fail to see why this was not recorded and why the importer would not disclose this assignment to CBP. We therefore must conclude that no such assignment from the importer to the licensor occurred. Absent such an assignment, we fail to see how licensor has any rights whatsoever to the relevant trade dress trademarks.

As a fallback, importer asserts that, even if the relevant trademark registrations were filed by the wrong party and are therefore invalid, importer would still be required to pay a royalty to the licensor because the licensor owns “common law” rights to the [Brand] trademarks that are also licensed pursuant to the licensing agreement. The trademarks that are the subject of the licensing agreement are listed on Schedule B to that agreement. The schedule contains the trade dress registrations, along with other registrations held by the importer and the related party seller. The schedule makes no reference to any additional rights, common law or otherwise that might be owned by the licensor (or its predecessor-in-interest, the founder) and licensed to the importer. We have not seen an assignment of any rights at issue. Based on the importer’s assertions, it is the importer who has always exclusively used the trade dress trademarks in the United States and the founder was merely an executive of the company. As a result, it is unclear why or how the founder of the company would have developed or owned any common law rights in the trade dress trademarks. Indeed, the importer asserts that it was the valid owner of the trade dress trademarks at the time they were filed. We have seen no assignment from the importer to the licensor after the relevant trademark applications were filed, as noted above. As a result, we conclude that, consistent with all of its prior assertions to the USPTO, CBP, and federal courts, the importer owns all rights in and to the trade dress trademarks in the United States.

Importer asserts that “Customs has explicitly stated that it recognizes trademarks or patents registered by the PTO and has no authority to question the validity of the registration.” See Letter dated March 2, 2021, citing HQ 460360 (dated June 30, 1995). We agree and conclude that accepting the position that the licensor is the true owner would require CBP to take a position that is contrary to the registrations at issue. It is the importer who is arguing that CBP should both recognize the validity of its ownership of these registrations in enforcing them against counterfeit imports by third parties, while simultaneously ignoring that ownership for purposes of calculating duties owed. Based on the record, we are not persuaded that the licensor owns any rights to the trade dress trademarks, or any other trademarks listed in Schedule B of the licensing agreement. The licensing agreement asserts that the licensor is the “assignee,” but we have seen no such assignment. The importer has consistently asserted its ownership of the rights until now. Based on its registered rights and the presumption of ownership therein, we conclude that the importer is the owner of the trade dress trademarks and, to quote a case cited by the importer to justify its registration of the marks, “the sole and exclusive owner of the marks and all the rights secured by their registration” Avedis Zildjian Co. v. Fred Gretsch Mfg. Co., 251 F.2d 530, 532 (2d Cir. 1958). We acknowledge that the importer’s acceptance of a license to use the trade dress trademarks is inconsistent with this conclusion. See, e.g., A & L Laboratories, Inc. v. Bou-Matic LLC, 429 F.3d 775, 781, 77 U.S.P.Q.2d 1248 (8th Cir. 2005) (“If A & L had owned the trademarks, it would not have needed DEC's permission to use them.”); Hot Stuff Foods, LLC v. Mean Gene's Enterprises, Inc., 468 F. Supp. 2d 1078, 1095 (D.S.D. 2006) (The existence of a license granted to a party is inconsistent with that party's claim to own the licensed mark.) Nevertheless, it is the interpretation most consistent with the majority of the facts in the record, most notably the presumption of ownership provided by the federal trademark registrations at issue and the fact that the only contrary evidence is a licensing agreement effective after the marks were registered and before the date that even the importer asserts the licensor obtained any rights in the marks at issue.

As CBP accepts that the importer is now and always has been the owner of the trademarks, then the licensing agreement is a nullity with regard to the trademarks. It is nonsensical for a party to pay for the right to use that which the party itself owns. Accordingly, the payments made by the importer under the licensing agreement to its “licensor” for the use of the trademarks cannot be characterized as royalties or general expenses and are not deductible as such under the deductive value method of appraisement. HOLDING:

The amounts identified as “royalty payments” from the importer to a related party “licensor” are not deductible as general expenses under the deductive value method of appraisement for the reasons stated herein. Furthermore, the fallback deductive value method calculation proposed by the importer is flawed and the Office of Regulatory Audit should review this calculation and its acceptability with consideration given to the comments set forth in this decision.

Sixty days from the date of this decision, the Office of Trade, Regulations and Rulings, will make this decision available for CBP personnel, and to the public on the CBP Home Page at http://www.cbp.gov by means of the Freedom of Information Act, and other methods of publication.

Sincerely,

Monika Brenner, Chief
Valuation and Special Programs Branch