HQ 545728: Payments for the right to use trademarks, trade names on apharmaceutical product; royalties;condition of sale; related parties

Native CBP ruling rendition. Applicability is fact-specific; modification/revocation relationships and original publisher date are retained. Publisher sentinel year0001 means unknown date, not a historical legal adoption.

                            HQ 545728
                                                                 
November 30, 1995
R:IT:V  545728 RSD

CATEGORY: Valuation

Sandra Friedman, Esq.
Barnes, Richardson & Colburn
475 Park Avenue South
New York, New York 10016

RE:   Payments for the right to use trademarks, trade names on a
pharmaceutical product;                        royalties;
condition of sale; related parties

Dear Ms. Friedman:

     This is in response to your letter dated July 24, 1994, on
behalf of the [XXXXXXXX] Corporation (hereinafter the buyer), in
which you request a ruling on the dutiability of royalty and
license fee payments made for the right to use a trademark, a
trade name, and know how in selling the imported product.  A copy
of the license agreement was forwarded to our office on January
20, 1995.  On March 27, 1995, a meeting was held at our offices
with you and in-house counsel of the buyer to discuss this
matter.  Subsequently, you made two additional submissions.  A
submission dated May 10, 1995, concerned the relationship between
the buyer and the seller.  The submission dated July 13, 1995,
contained a copy of a recent royalty invoice.  In your  letter of
January 20, 1995, you requested that we give confidential
treatment to the information contained in the licensing
agreement.  In a telephone conversation with you on November 30,
1995, you indicated that it would be satisfactory if we kept the
names of the parties, the name of the product, the chemical
ingredients, the quantity of the product distributed, the pricing
information, the amount of the royalties and license fees, and
the country of origin confidential.  This information is
bracketed and will not be disclosed in copies of this ruling made
available to the public. 

FACTS:

     The buyer is a U.S. company which makes and sells
pharmaceutical products.  It imports [XXXXXXXXXXXXX] (hereinafter
the licensed product), a pharmaceutical product in a controlled
released dosage form, made by the foreign company [XXXXXXXX]
(hereinafter the seller).  The licensed product was developed by
[XXXXXXXXX] (hereinafter the licensor) and bears the trademark
[XXXXX] (hereinafter the licensed trademark) owned by the
licensor.  The licensor is the parent company of the seller.

     In June of 1989, the buyer entered into a license agreement
with the licensor regarding licensed products.  The license
agreement also contains provisions regarding the supply of the
license product.  The preamble to the agreement indicates that
the licensor owns and controls certain proprietary information
with respect to the licensed product and that the buyer wishes to
market the licensed product in the territory during the term of
the agreement, and the licensor wishes to supply the buyer with
the licensed product for use and sale in the territory during the
term of the agreement.  The licensed product is defined in
section 1 of the agreement as the pharmaceutical product in a
controlled released dosage form developed by the licensor having
as its sole active ingredient [XXXXXXXXXXXXXXXXXXXXXXXX] and
marketed under the licensed trademark in [XXXXXX].  Under the
agreement, the licensor grants to the buyer and the buyer accepts
from the licensor the exclusive right and license to use and sell
the licensed product and to use the licensor's know-how for such
purposes.  The buyer agrees to use and sell the licensed product
solely under the trademark in the territory.   

     Section 4 of the agreement provides that the licensor agrees
to supply to the buyer and the buyer agrees to purchase from the
licensor, the buyer's total requirements of the licensed product
in the form of [XXXXXXXXXXXXXXXXXXXXXX] as described and set
forth in Enclosure 1 attached to the agreement.  In addition, the
licensor agrees to provide to the buyer [XXXXXXXXXXXXXXXXXXXXX]
free of charge for use as samples during the first year of sale
of the product.  In exchange for the exclusive license rights,
the buyer agrees to pay the licensor a royalty of [XXXX] percent
of its net sales in the United States and Puerto Rico, and a non-creditable license fee in the amount of [XXXXXXXXXXXXXXXXXXXXX]
payable in two installments.  The buyer is unrelated to either
the seller or the licensor.  

     Based on your submission, it appears that the licensor's
obligation to supply the licensed product to the buyer is
undertaken by the licensor's subsidiary, the seller.

ISSUE:

     Whether royalty and license fee payments from the buyer to
the licensor, a party related to the seller of the imported
product, for various rights associated with the use and sale of
the imported licensed product are dutiable? 

LAW AND ANALYSIS:

     Merchandise imported into the United States is appraised in
accordance with section 402 of the Tariff Act of 1930, as amended
by the Trade Agreements Act of 1979 (TAA: 19 U.S.C.  1401a). 
The preferred method of appraisement 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.  Although we have assumed for purposes of
this ruling that transaction value is the appropriate basis of
appraisement, no evidence has been provided to justify its use. 

      Section 402(b)(1) of the TAA provides for five additions to
the price actually paid or payable.  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. 

     In regard to the dutiability of royalties and license fees,
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 imported
merchandise and 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(b)(1)(D) of
the TAA.

      The first question posed by the notice is whether the
imported merchandise was manufactured under patent.  Although the
information submitted with the ruling request does not indicate
whether or not the imported merchandise was manufactured under
patent, you claim that the product was not manufactured under
patent. 

     The second question indicated in the notice, whether the
royalty is involved in the production or sale of the imported
merchandise, can be determined on information contained in the
licensing agreement furnished with the ruling request.  The
agreement provides that the royalties and license fees are paid
by the buyer, to the licensor, for the exclusive right and
license to use and sell the imported product and to use
licensor's know-how for such purposes.  The agreement also
provides that the licensed product is to be sold under the
licensed trademark.

     While it does not appear based on this language that payment
of the royalty is in involved in the production of the
merchandise, we conclude that such payment is involved in its
sale.  Even though the continuing royalties do not become due
until the imported product is resold in the United Sates or
Puerto Rico, the license agreement connects the payment of the
royalties with the sale of the imported product to the buyer. 
Not only does the license agreement provide that buyer must
purchase its total requirements for the product from the
licensor, it specifies the terms of sale, including the purchase
price.  In addition, section 5 of the agreement provides in part
that "if ... the Base price plus royalty payable by the buyer ...
results in a cost-of-goods (including royalty) equal to or
greater than [   ] percent of the buyer's Net Sales of Product in
the Territory, the buyer shall have the right to manufacture or
to have manufactured Product for its own account and the licensor
shall deliver to the buyer the necessary technical information
for such manufacture."  These provisions closely tie the payment
of royalties with the sale of the imported merchandise.  Thus we
find that the payment of royalties is involved in the sale of the
imported licensed product. 

     The third question posed by the notice is whether the
importer could buy the imported merchandise without paying the
royalty fee i.e., whether the payments are a condition of sale. 
While royalties paid to third parties for use in the U.S., of a
trademark related to the imported merchandise are generally not
dutiable, the SAA provides that such payments will nevertheless
be treated as dutiable if they represent a condition of the sale
for exportation.  SAA reprinted in, Dept. of Treas., Customs
Valuation under the TAA at 49.  Royalty payments are a condition
of sale when they are paid on each and every importation and are
inextricably intertwined with the imported merchandise; but if
the payments are optional and not inextricably intertwined with
the imported merchandise, or are paid solely for the exclusive
right to manufacture and sell in a designated area, they are not
a condition of sale. See  Imperial Products, Inc. v. United
States, 425 F.Supp. 852, 77 Cust. Ct. 66 (1976).

     In this instance, the royalties and license fees are paid by
the buyer, to a party related to the seller, for the use of the
licensed trademark and for know-how in selling the licensed
product.  In HRL 545361, dated July 14, 1995, we ruled that
certain trademark royalties were dutiable when paid to the seller
or a party related to the seller, but not where they were paid to
a third party unrelated to the seller.  We noted that where the
licensor and the seller are the same person, and the payment is
made to the licensor/seller, we consider the royalty to be a
condition of the sale of the merchandise for exportation to the
U.S.  The payment is not optional, but must be made to the
licensor in its capacity as seller of the merchandise.  We
believe that the same principle must apply in this case because
in order to buy the product, the buyer also had to agree to pay a
royalty to the licensor and the royalty had to be paid on each
and every importation.  Our conclusion that the buyer had to pay
royalties in order to buy the product is supported by the
language of section 2 of the licensing agreement.  In section
2.1, the licensor grants to the buyer the exclusive right and
license to use and sell the product, and to use the licensor's
know-how for such purposes.  Section 2.2 states that the buyer
agrees to use and sell the product solely under the licensed
trademark in the territory.  Furthermore, in the same agreement
the licensor agrees to supply and the buyer agrees to purchase
all the buyer's total requirements of the product.  Therefore, it
is evident that the royalty payment was not optional.  In other
words, in order to buy the licensed product, the buyer had to
agree to pay the royalty and license fee on each and every
importation of the license product.  The licensor's obligation to
supply the licensed product to the buyer is undertaken by the
licensor's subsidiary, the seller.  Under these circumstances, we
find that payment of the royalties is a condition of sale of the
of the imported product.  

     Based on the above considerations, we find that the royalty
payments should be added to the price actually paid or payable
under section 402(b)(1)(D) of the TAA.  Having reached this
conclusion, we do not address whether these payments could be
considered dutiable proceeds under section 402(b)(1)(E) of the
TAA.

HOLDING:

     Pursuant to the foregoing, and assuming that transaction
value is the appropriate method of appraisement, payments made by
the buyer to the licensor constitute additions to the price
actually paid or payable of the imported licensed product under
section 402(b)(1)(D) of the TAA.

                         Sincerely,



                             Acting Director
                             International Trade Compliance
Division