La Perla Case Summary

Overview of La Perla v. United States

La Perla contests customs’ valuation of three garments of clothing imported from its related supplier, Gruppo La Perla (GLP).  The court holds that US Customs correctly valued the import price of these items based on the price which La Perla charged US customers, a price very similar to the price which GLP charged to it’s US Customers other than La Perla.

La Perla Fashions and Legal Background

La Perla Fashions was incorporated in New York in 1991 as a subsidiary of Gruppo La Perla (GLP), an Italian manufacturer of swim wear, lingerie, sleepwear, foundation garments and ready to wear. La Perla imports and distributes garments for GLP. Prior to 1991 GLP sold directly to US retail customers.

Importers often attempt to utilize the three tiered structure to lower duties in order to maximize profits. Since duties are assessed based on the price paid by the US based company to import the item, the foreign parent charges a lower price to its related US company; the profits earned by the subsequent sale to third parties are synonymous with the profits of the parent since the US related company is just a subsidiary.

Here, the three tiered transaction was between Italian based GLP, La Perla, a subsidiary of the foreign company based in the US, and La Perla’s US customers whose ownership is unrelated to GLP or La Perla. GLP manufactures clothing and sells it to La Perla, which subsequently sells to its US companies.

The main issue of the case is whether, for the purpose of assessing duties, customs properly valued three garments transferred between GLP and La Perla.

Through the governing statute, 19 U.S.C. § 1401a, Congress directs Customs to value imported merchandise according to the terms of the sale for unrelated parties in arms-length transactions. Congress identifies that where parties are not at arms length, and specifically where a three tiered structure such as the one at hand is in place, parties may be motivated to lower the valuation of goods to avoid duties.

Such trade arrangements would decrease US revenues, so congress has established rules for fair pricing among un-related parties. According to 19 U.S.C. § 1401a(b)(2), there are four possible scenarios which determine the valuation of goods. First, if the parties are related, but the relationship did not affect the price, then the price actually paid will be used by customs to assess duties. Second, the transaction price actually paid may be used if it is very similar to “the transaction value of identical merchandise, or of similar merchandise, in sales to unrelated buyers in the United States”  at or about the same time of the sale. Third, the transaction price actually paid may be used if it closely approximates the deductive value (DV) or computed value (CV) of similar merchandise exported to the United States at or about the same time as the imported merchandise. Fourth, if none of the first three scenarios apply, a price other than the actual transaction price will be established by Customs or a court, which will likely determine that price by referencing the standards set forth in the above three criteria.

Example of a garment to be valued:

Case arguments and holding

     La Perla appeals  lower court ruling and contends that the transactions between it and GLP were properly valued according to the statue’s option to value goods sold in related party transactions according to deductive vale and constructed value. The lower court affirmed customs’ original valuation “pursuant to 19 U.S.C. § 1401a on the basis of La Perla's selling prices to its customers in the United States.” 

    To determine which of the fours above scenarios was appropriate to use in the case at hand, the La Perla court considered each case. First it analyzed whether the parties were at arms length and whether any relationship effected pricing.  In this case, the parties stipulated that they were related parties, and that the relationship effected the pricing between them. The court thus eliminated the first of the aforementioned pricing scenario. It specifically noted that the relevant question in determining how to analyze the transaction price of goods for assessing duties is not whether there was an agency relationship between the exporter and the US importer. The relevant question is simply whether the relationship effected the pricing, which the parties had stipulated.

    With the first scenario for pricing eliminated, La Perla could only win if it proved that it’s dealings fell into either the second or third categories above. The court next analyzed the second pricing scenario. GLP was selling the same products to unrelated third parties at within two percent of the price that La Perla was selling the imported merchandise to its US customers. This dynamic underscored that the relationship between GLP and La Perla was likely closer the one that congress feared: the La Perla corporation is more of a pass-through entity to avoid customs duties. The court notes that La Perla offered little evidence to show that any discounts it received were due to volume discounts, or that they were attributable to any other commercially reasonable discounts that arms-length parties would negotiate. It thus rejects the possibility of using a valuation in the second scenario.

    To satisfy the third scenario, La Perla argued that the prices it paid GLP closely approximated the deductive and computed value of the subject merchandise … satisfying § 1401a (b)(2).”  It argued that the numbers it used to compute DV and CV were based on the internationally recognized generally accepted accounting principles (“GAAP”).  Customs argued that these records were unverifiable by their auditor and that the evidence was inadmissible because it was merely summary information.  Moreover, customs argued that the statute directs that the calculation of DV and CV should be based on “identical or similar merchandise” that is manufactured by the same manufacturer but is sold to an unrelated party or, if such merchandise is unavailable, similar merchandise manufactured by another entity.

    Ultimately, the court declined to accept La Perla’s calculation of deductive value or computed value as the standard by which to figure the transaction value because of the lack of reliability of the DV and CV calculation. First, La Perla failed to provide adequate records for congress to verify its DV and CV numbers, and “value comparisons using allocations of costs verified and in compliance with GAAP do not necessarily provide the Court with accurate information with respect to the import statute in the U.S.”  The DV and CV calculations  were rejected because of their lack of reliability. Moreover, the court held that the reluctance of La Perla to provide those records created doubt as to what they contained.

On the other hand, Customs’ analysis was not wholly accurate. The court disagreed with Customs’ reading of the statute “that computed and deductive value calculations must be derived from an unrelated manufacturer or exporter.”  Notably, “[t]he [c]ourt rejects La Perla's computed and deductive value calculations because of their lack of reliability, not their form.”

Analysis

    Upon first reading, one wonders why La Perla would bring this case to court and why it was managed as it was.  La Perla agreed to a single stipulation that eliminated two prongs of defense against customs’ valuation of their imports. Not only did it stipulate that the parties are related, it stipulated that the relationship between La Perla and GLP influenced the prices.  Stipulations mean that parties have agreed to a certain set of facts. Of course, good lawyers will only agree to a stipulation where it benefits their case. Customs’ lawyers’ motivation to stipulate is clear: they no longer had to offer evidence to prove the relationship of GLP and La Perla nor did they have to prove that the relationship in fact effected pricing. 

     In contrast, La Perla’s decision to agree to this stipulation is hard to understand. Either it did not have good lawyers, or it did indeed see a benefit to admitting to these bad facts.  The lawyers may not have understood that this stipulation basically ended the case for them, and believed strongly that the court would accept their DV and CV calculations despite the fact that they did not substantiate them to customs or the court with proper records.  On the other hand, the stipulation could have been a tactical choice. Typically, where a party agrees to stipulate to a bad fact, the party acknowledges that the evidence that would be admissible against them for proving that fact would be so strong that they do not want the judge or jury to hear it. Perhaps La Perla strategically decided that evidence customs would submit to prove the relationship and its effect on pricing was so strong that it would be a disadvantage to have it submitted. Presumably, La Perla was banking on its DV and CV calculations to carry the day.

Moreover, reading the case makes one wonder about the lawyers’ treatment of the fact that GLP sold to other un-related US customers at within 2% of the price that La Perla charged similarly unrelated us customers. It seems on its face that this fact, un-rebutted, would be the end of this case. Strikingly, La Perla’s brief states that there was no evidence in the trial court record to indicate that there had been sales of the merchandise in question between GLP and unrelated Us customers.

Subsequent Case Law

    Only two courts cite to La Perla to support their decisions regarding how to determine transaction value.   The most interesting La Perla citation is in VWP of America, Inc. v. U.S. (VWP) and indicates that the International Court of trade has not ruled on the proper DV or CV valuation standard “where a manufacturer sells unique merchandise to a single related importer in the US.”

     VWP cites to Law Perla for the proposition that "[t]he key to the resolution of valuation issues ... is establishing an objective market-based price of the subject merchandise."  The VWP court took issue with the fact that “the plaintiff's proffered deductive and computed values pertain not to ‘identical’ or ‘similar’ merchandise [which 19 U.S.C. § 1401a(b)(2)(B)(ii) calls for,] but rather to ‘the merchandise being appraised.’" In La Perla, the court specifically declined to read into the statue Customs’ argument that computed DV or CV calculations must be derived from an unrelated manufacturer or exporter. Moreover, the La Perla court states:

The Court can envisage scenarios where a manufacturer sells unique merchandise to a single related importer in the U.S. In this situation there would be no comparable unrelated third party transfer with which to compare cost information. Customs wishfully reads into the statute a condition for comparison to unrelated party sales from exporter to importer where there is none. Counterfeit.

     Where the VWP court finds that it is not proper to use the values of the identical merchandise produced to a manufacture and sold only to related parties, the La Perla court stated it could envision that very scenario. Thus, reading the two cases together, it seems that the International Court of Trade has not yet ruled on a clear standard for how to calculate DV or CV for merchandise where there is no other manufacturer of the same item and no arms length transaction for that merchandise. Both the La Perla court and the VWP court did not answer that question because they used other means to calculate the proper price on which to assess duties.