Koru North America v. US

• Decision Date: 23 November 1988
• Docket Number: Court No. 88-04-00293.
• Parties: KORU NORTH AMERICA, Plaintiff, v. UNITED STATES, Defendant.
• Court: U.S. Court of International Trade

701 F. Supp. 229

KORU NORTH AMERICA, Plaintiff, v. UNITED STATES, Defendant.

Court No. 88-04-00293.

United States Court of International Trade.

November 23, 1988.

Coudert Brothers, Robert L. Eisen and Michelle S. Benjamin, New York City, for plaintiff.

John R. Bolton, Asst. Atty. Gen., Washington, D.C., Joseph I. Liebman, Attorney in Charge, Intern. Trade Field Office, Commercial Litigation Branch, U.S. Dept. of Justice Michael P. Maxwell and Barbara Epstein, New York City, of counsel, Karen P. Binder, U.S. Customs Service, New York City, for defendant.

OPINION

TSOUCALAS, Judge:

Plaintiff, Koru North America, brings this action to contest the United States Customs Service's (Customs) exclusion of frozen Hoki fillets that entered through the port of Seattle under entry # XXX-XXXXXXX-X on February 23, 1988. Upon determining that plaintiff improperly marked the subject merchandise as a "Product of New Zealand," rather than as a "Product of the Soviet Union," for country of origin purposes, Customs issued a Notice of Redelivery with respect to these goods. Plaintiff claims that since the product was correctly marked, Customs improperly issued the Notice of Redelivery.

Background

The fish, known as the "New Zealand Hoki,"¹ were caught off the shores of New Zealand within its Exclusive Economic Zone (EEZ).² They were caught by ships chartered by Fletcher Fishing, Ltd. (Fletcher), the largest fishing company in New Zealand, while flying the flags of New Zealand, Japan and the Union of Soviet Socialist Republic.³ The fish were beheaded, detailed, eviscerated and frozen aboard the ships within New Zealand's EEZ, then landed and offloaded in New Zealand where they were commingled and stored under Fletcher's control. The initial processing aboard the vessel had to conform with all of New Zealand's fishing laws and regulations.

Once ashore, the fish were inspected and certified by the New Zealand Ministry of Agriculture and Fisheries as being of New Zealand origin, fit for human consumption and caught in conformity with the requirements imposed by New Zealand.

The fish were then sent to Korea for further processing; they were thawed, skinned, boned, trimmed, glazed, refrozen and packaged for exportation to the United States.

The merchandise arrived in the United States in cartons marked "Product of New Zealand." Customs issued a Notice of Redelivery against the merchandise in its condition marked as imported. Customs' position is that the fish caught and commingled should be labeled "Product of the Soviet Union, Japan and New Zealand," based on the doctrine of the Law of the Flag. It reasons that since the EEZ is outside the territorial waters of a country, it is the high seas, and that fish caught on the high seas are products of the country of the flag of the catching vessel. Plaintiff, on the other hand, claims that the fish are products of New Zealand since they were caught within New Zealand's EEZ on behalf of a New Zealand company, and were at all times owned by that company.

At the hearing of this action and in their briefs, the parties presented arguments as to whether the fish are a product of New Zealand or a product of the Soviet Union, but sought to reserve judgment on the issue of whether the product was substantially transformed in South Korea, thereby rendering it a product of South Korea for country of origin purposes.

At the direction of the Court at oral argument, the parties briefed the issue pertaining to substantial transformation and agreed that the fish were substantially transformed in South Korea. The following discussion sets forth the Court's rationale for finding that substantial transformation occurred in South Korea.

Discussion

A. The Law of the Flag

On the high seas, the country of origin of fish is determined by the flag of the catching vessel. Procter & Gamble Mfg. v. United States, 60 Treas. Dec. 356, T.D. 45099 (1931), aff'd, 19 CCPA 415, C.A. D. 3488, cert. denied, 287 U.S. 629, 53 S.Ct. 82, 77 L.Ed. 546 (1932).⁴ In international law, a ship on the high seas is considered foreign territory, functionally, "a floating island of the country to which it belongs." Thompson v. Lucas, 252 U.S. 358, 361, 40 S.Ct. 353, 64 L.Ed. 612 (1920). See also Robbins (Inc.) v. United States, 47 Treas. Dec. 261, T.D. 40728 (1925) (fish are characterized by their first taking).

Plaintiff maintains that "the maritime principle that the nationality of a vessel on the `high seas' is determined by the flag it flies, is of no relevance to this particular controversy, because the fish in question were caught in the EEZ by registered New Zealand fishing vessels on behalf of the New Zealand industry and against its share of the total allowable catch."⁵ Plaintiff's Reply in Support of its Motion for Partial Summary Judgment, and in Opposition to Defendants' Cross-Motion for Partial Summary Judgment and Dismissal at 18 (Plaintiff's Reply). Plaintiff additionally claims that the foreign ships became de facto "New Zealand fishing vessels" despite being foreign owned and flagged because: (1) the fish were caught by vessels under charter to the New Zealand company, Fletcher, for the specific purpose of enabling Fletcher to exhaust its Hoki quota allocation; (2) the vessels were controlled by Fletcher and New Zealand laws; Fletcher owned all the fish caught and processed by the vessels; the vessels, which were temporarily imported for home consumption whereby Fletcher entered into a deed of covenant of NZ $700,000.00 for each vessel, were thought of as New Zealand fishing vessels by the New Zealand Ministry of Agriculture; and (3) the Director General consented to registration of the vessels as "New Zealand fishing vessels." Plaintiff's Brief at 24-27. Thus, plaintiff asserts that the proper country of origin is New Zealand.

However, plaintiff's fiction of "de facto New Zealand vessels" ignores that even though the ships were registered in New Zealand for purposes of fishing within the EEZ, the ships maintained their Soviet registry, meaning, they flew the flag of the Soviet Union, applied Soviet law on board ship, and remained part of the sovereignty of the Soviet Union. The law of the flag has been found to "supersede the territorial principle ... because the ship `is deemed to be a part of the territory of that sovereignty whose flag it flies, and not to lose that character when in navigable waters within the territorial limits of another sovereignty,'" Lauritzen v. Larsen, 345 U.S. 571, 585, 73 S.Ct. 921, 929, 97 L.Ed. 1254 (1953) (quoting United States v. Flores, 289 U.S. 137, 155-59, 53 S.Ct. 580, 584-86, 77 L.Ed. 1086 (1933)), and "must prevail unless some heavy counterweight appears." Id. 345 U.S. at 586, 73 S.Ct. at 930. Cf. Hellenic Lines Ltd. v. Rhoditis, 398 U.S. 306, 90 S.Ct. 1731, 26 L.Ed.2d 252 (1970); Gulf Trading & Transportation Co. v. M/V Tento, 694 F.2d 1191 (9th Cir. 1982), cert. denied, 461 U.S. 929, 103 S.Ct. 2091, 77 L.Ed.2d 301 (1983) (sufficient and substantial contacts with the United States satisfy the "heavy counterweight" requirement). Therefore, since the subject merchandise was caught and initially processed on Soviet territory, it originates from that country.

Plaintiff misinterprets the application of rights conveyed through the establishment of an EEZ.⁶ The authority for establishing an EEZ derives from the United Nations Convention on the Law of the Sea (LOS Convention) where each country is provided with certain sovereign rights within its EEZ, specifically "sovereign rights for the purpose of exploring and exploiting, conserving and managing the natural resources, whether living or nonliving...." Article 56 of the LOS Convention. These rights need not be claimed by a coastal State to exist. See Art. 55, LOS Convention.

In interpreting the LOS Convention, plaintiff correctly observes that the fish are "natural resources within an area under New Zealand's sovereign jurisdiction and authority i.e., the EEZ," but carefully and correctly refrains from going so far as to state that the fish are natural resources of New Zealand. The distinction is significant because, according to the LOS Convention, a State is not provided with absolute sovereignty over the living natural resources within an EEZ. The State is only provided with "sovereign rights for the purpose of exploring and exploiting, conserving and managing the natural resources...." Id. "Sovereign rights" are not the equivalent of "sovereignty."⁷ The State, therefore, possesses nothing more than a preferential fishing zone within its EEZ, which has been recognized as:

not compatible with the exclusion of all fishing activities of other States. A coastal State entitled to preferential rights is not free, unilaterally and according to its own uncontrolled discretion, to determine the extent of those rights. The characterization of the coastal State's rights as preferential implies a certain priority, but cannot imply the extinction of the concurrent rights of other States.... The coastal State has to take into account and pay regard to other States....

1974 I.C.J. 1, 27.

Even though plaintiff would like this Court to equate the EEZ with the territorial sea, such a conclusion would be clearly improper, as certain elements of the high seas are retained in an EEZ. Specifically, the "freedoms ... of navigation and overflight and of the laying of submarine cables and pipelines, and other internationally lawful uses of the sea related to these freedoms...." Art. 58 of the LOS. In addition, a State is free in its territorial sea to prohibit fishing by foreigners, monopolize the fishing resources and the exploitation thereof, and fully control those waters. Within an EEZ, however, the State retains control of the fishing resources only for the purpose of optimum utilization and to prevent the unnecessary exhaustion of resources.⁸ In this regard, although the State retains the exclusive right to determine the amount...