HQ 545824 - Internal advice request 53/94 regarding royalty payments made to a trademark holder for a license to manufacture and sell products with the trademark in the United States; Proceeds - United States International Trade Commision Rulings

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HQ 545824

August 28, 1995

VAL R:C:V 545824 RSD

CATEGORY: VALUATION

District Director of Customs
1000 2nd Avenue
Room 2200
Seattle, Washington 98104

RE: Internal advice request 53/94 regarding royalty payments made to a trademark holder for a license to manufacture and sell products with the trademark in the United States; Proceeds

Dear Sir:

This is in response to your memorandum dated September 9, 1994, concerning an internal advice request 53/94 submitted by Milton Bradley Co./Parker Brothers, a division of Hasbro Inc., regarding the dutiability of royalties related to the "Clue Mystery Puzzle" game paid to Waddingtons Games, Ltd. of Great Britain. Your memorandum was forwarded to our office by the National Import Specialist who also prepared a memorandum dated November 1, 1994, on this matter. A copy of the Milton Bradley's internal advice request and licensing agreement accompanied your memorandum. We regret the delay in responding.

FACTS:

Milton Bradley Co. (Milton Bradley) purchases and imports a bagged magnifying glass from Waddingtons Games, LTD. (Waddingtons) of Great Britain. The magnifying glass is incorporated into a game called "Clue Mystery Puzzle." The game is a jigsaw puzzle, which is sold with a booklet giving clues to solve a mystery. The magnifying glass is used to enable the puzzler to observe the clues in the book. The only imported part for the game is the magnifying glass and all other parts of the game are made in the United States.

Milton Bradley is affiliated with Kenner Parker Toys Inc., which is also related to Parker Brothers. In 1987, Parker Brothers entered into a licensing agreement with Waddingtons concerning the use of the CLUE or CLUEDO trademarks. These trademarks are owned by Waddingtons and relate to board games, which are also copyrighted by Waddingtons. In the 1987 agreement, Waddingtons granted to Parker Brothers the exclusive right and license to manufacture or to have manufactured and to sell, in the countries listed in a schedule A incorporated into the agreement, the national versions of a board game for sale under the trademark Clue or Cluedo. The term "game" was defined in the agreement to include not only the complete boxed game but also all parts and components. In exchange for these rights, Parker agreed to pay Waddingtons ten percent of the net sales value of the complete packaged units of Clue sold by Parker Brothers under the agreement and five percent of the net sales value of all parts and components of Clue separately packaged and sold by Parker Brothers under the agreement. The importer did not separately package and sell the magnifying glass. Rather, it was included as part of the complete packaged game.

In December 1992, the parties extended the license agreement to apply to the Clue Mystery Puzzle game. This addendum to the license agreement sets forth the terms and conditions applicable to this game. Specifically, it provides that Parker Brothers pay Waddingtons ten percent of the net sales value of each item of the Clue Mystery Puzzle game sold by Parker Brothers or a Parker Brothers affiliate in the licensed territory. In addition, each Parker Brothers' affiliate in the extended license territory was required to pay Waddingtons a ten percent royalty on sales of the Clue Mystery Puzzle game. There were no minimum royalties with respect to the Clue Mystery Puzzle game. In the third quarter of 1993, the amount of royalties paid to Waddingtons was $20,747.47. Based on information provided by the importer, it is our understanding that royalties are paid only on the sales of the complete Clue Mystery Puzzle games in the United States and not on sales of the individual pieces or components included in the complete packaged games.

ISSUE:

Are the royalties paid by Milton Bradley to Waddingtons additions to the price actually paid or payable for the imported merchandise either as royalties or proceeds under sections

LAW AND ANALYSIS:

As you know 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 is transaction value, which is defined as the "price actually paid or payable for merchandise when sold for exportation to the United States," plus certain enumerated additions. Two of the statutory additions to the price actually paid or payable are found in sections 402(b)(1)(D) and (E) which provide for additions to the price actually paid or payable for:

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

(E) the proceeds of any subsequent resale, disposal or use of the imported merchandise that accrue, directly or indirectly to the seller.

The issue of whether transaction value is proper in this case has not been raised in the internal advice request. For purposes of this ruling, we will assume that transaction value is the proper basis of appraisement.

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

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

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

The question of whether the royalty payments are dutiable or not was analyzed in our notice on the dutiability of royalty payments, which was published in the Custom Bulletin on February 10, 1993, commonly referred to as "Hasbro II". In that notice we indicated that several questions must be answered in order to determine whether a royalty payment is related to the imported merchandise and thus required as a condition of sale. As set forth in the notice the questions are: (1) was the imported merchandise manufactured under the patent? (2) was the royalty involved in the production or sale of the imported merchandise? and (3) could the importer buy the product without paying the fee? 27:6 Cust. B. & Dec. 1 at 9-11. Negative responses to the first and second questions, and an affirmative response to the third, suggest that a royalty payment is non-dutiable under section 402 a(b)(1)(D) of the TAA.

In this case, the imported merchandise, the magnifying glass, was not manufactured under patent. The royalty payment was made for the use of a trademark on the complete game and was not involved in the production or sale for exportation of the imported merchandise. Finally, it appears the importer could buy the magnifying glass without having to pay the royalty because there is no indication that the sale of the product is subject to the terms of the license agreement. The royalty agreement has no provisions regarding the purchase of any portion of the puzzle game, including the magnifying glass. Accordingly, based on the information presented we find that the royalty payments made to Waddingtons are not dutiable as royalties under section

Although the payments are not dutiable as royalties, we must also determine whether they would be considered proceeds of a subsequent, resale, disposal, or use of the imported merchandise under section 402(b)(1)(E). In HRL 544436 (C.S.D. 91-6; Vol 25 Cust. Bull. No. 18 dated February 4, 1991), commonly know as the "Hasbro ruling", the importer was required to pay a percentage of the "resale price" to the seller, for the imported merchandise, in addition to the price originally paid. The importer had been paying duties on these additional payments as "royalties' under section 402(b)(1)(D). Customs held that the payments were not dutiable under this royalty provision, but were dutiable under section 402(b)(1)(E) as "proceeds of subsequent resales" of the imported merchandise that accrued to the seller.

Customs subsequently reviewed the Hasbro ruling, by soliciting public comments thereon and published the General Notice on the Dutiability of "Royalty" Payment, referred to above and commonly known as the "Hasbro II" decision. Customs incorporated the analysis of the comments received. Hasbro II upheld the first Hasbro ruling and modified it to the extent the subject payment were found to be dutiable as either royalties under section 402(b)(1)(D) or as proceeds under section

Regarding proceeds, SAA provides the following:

Additions for the value of any part of the proceeds of any subsequent resale, disposal or use of the imported merchandise that accrue directly or indirectly to the seller, do not extend to the flow of dividends or other payments from the buyer to the seller that do not directly relate to the imported merchandise. Whether an addition will be made must be determined on a case-by-case basis depending on the facts of each individual transaction.

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

In your memorandum, you state that you believe that the royalties paid to Waddingtons should be partially dutiable as proceeds of subsequent sales in proportion to the value of the magnifying glass to the complete Clue Mystery Puzzle game. In prior cases where imported articles have been combined with U.S. components to make the finished goods, Customs has not attempted to apportion the proceeds of subsequent sales when royalties were paid based on the sale of the finished articles. In C.S.D. 92-12, 26 Cust. Bull. 424 (1992), HRL 544656, dated June 19, 1991, the importer was purchasing components for textile machines and combining them after importation with the U.S. components to produce the finished textile machines. The importer paid royalties to the overseas seller based on the "ex works" price of the finished machines which included U.S. components, not solely on the value of the imported components. We noted that a substantial portion of the payment was based on components that were not imported. As a result, we held that the royalty payments made by the importer to the overseas seller were not dutiable as proceeds under section 402(b)(1)(E) of the TAA. Similarly, in HRL 545770, June 21, 1995, fees were paid on the sale price of the final products made from both imported and domestic components. Because the payments were not based on the resales of the imported products and a substantial portion of the payments were based on domestic components incorporated into the end product, we held that the fees were not dutiable as proceeds. In either case, no attempt was made to apportion the potential proceeds based on the resale of the imported components used in making the finished articles.

In this case, royalties are paid to Waddingtons for the right to use a trademark on the finished Clue Mystery Puzzle game. The only imported component of the game, the magnifying glass, is combined with parts made in the United States to produce the complete Clue Mystery Puzzle game. The royalties are paid based on the sales in the United States of the entire finished Clue Mystery Puzzle games, not on sales of the imported magnifying glass. In other words, the licensing fees paid to Waddingtons are not based on resales, disposal, or use of the imported merchandise, but on sales of a different article, the complete game, which is overwhelmingly composed of domestic components. Accordingly, we find that the royalty payments made to Waddingtons also are not dutiable as proceeds under section 402(b)(1)(E) of the TAA.

HOLDING:

The royalty payments made by the importer to Waddingtons are not includable in transaction value as royalties or proceeds under either section 402(b)(1)(D) or 402(b)(1)(E).

Sincerely,

John Durant, Director
Commercial Rulings Division

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