Sunday, January 15, 2017

Lock Washers: Scope and Suspension

Here, we continue our dive into the intersection of customs and trade law. The Court of International Trade decision in United Steels and Fasteners, Inc. v. United States, raises interesting issues about how scope decisions from the Department of Commerce impact customs entries awaiting liquidation. If you are a traditional customs compliance professional who does not often delve into trade questions, buckle up. This will be bumpy.

This case involves the antidumping duty order on Helical Spring Lock Washers from China. The scope of this particular order covers:

circular washers of carbon steel, of carbon alloy steel, or of stainless steel, heat-treated or non-heat-treated, plated or non-plated, with ends that are off-line. HSLWs are designed to: 1) function as a spring to compensate for developed looseness between the component parts of a fastened assembly; 2) distribute the load over a larger area for screw or bolts; and 3) provide a hardened bearing surface. The scope does not include internal or external tooth washers, nor does it include spring lock washers made of other metals, such as copper. The lock washers subject to this investigation are currently classifiable under subheading 7318.21.0000 of the Harmonized Tariff Schedule of the United States (HTSUS). Although the HTSUS subheadings are provided for convenience and customs purposes, our written description of the scope of this investigation is dispositive.
The order was first published in 1993.

In 2013, American Railway Engineering and Maintenance-of-Way Association ("AREMA") submitted a scope clarification request to Commerce concerning a specialized type of washer made to its own standards. These washers have modest helicality, a square or rectangular cross section, do not meet the ASME standards referenced in the ITC Report in this case, are specifically for railway use, and (among other things) are 50% to 130% thicker than typical helical spring lock washers. Shakeproof Assembly, the petitioner in the original dumping case and a defendant intervenor in the CIT, responded to the scope request arguing that the washers are within the scope of the order and, furthermore, requesting that Commerce instruct Customs to suspend liquidations and request cash deposits for all unliquidated entries back to the start of the administrative review.

Commerce ultimately held that the washers are within the scope of the order. Commerce also ordered Customs to retroactively suspend liquidations back to the date of the order.

This raises two obvious questions. First, is Commerce right about the scope? Second, should Customs have retroactively suspended liquidations?

The Scope Part

Petitioners and Commerce cannot always specify exactly what merchandise comes within the scope of an antidumping (or countervailing duty) order. Orders tend to specify some products and include general terms to catch similar products. When an interested party needs certainty about a product, it may apply to Commerce for a scope clarification under 19 CFR 351.225. In some cases, Commerce will decide the scope issue on the basis of the language of the order under 19 CFR 351.225(d) without commencing a formal inquiry. If that is not possible, Commerce can initiate a formal scope inquiry under 19 CFR 351.225(e).

If an interested party disagrees with the scope determination, it can challenge the decision in the Court of International Trade. The Court will uphold a scope determination that is supported by substantial evidence on the record. That is a highly deferential standard that means the Court may have to uphold a Commerce Department decision even if the judge disagrees with the result. Generally, these decisions can only be overturned where there is a lack of evidence in the administrative record to support them.

Commerce found that the AREMA washers are helical spring lock washers and that the distinguishing characteristics were not sufficient to remove them from the scope of the order. According to Commerce, the design and function of the AREMA washers minimalize helicality [Note: that is a phrase to consider] but did not strip them of their helical function. Commerce was helped in this regard by language in the petition noting that a "significant portion of the larger sizes [of helical spring lock washers] are used for installation of railroad tracks." That seems to be directly addressed at AREMA's product.

Plaintiff raised a number of arguments to show that Commerce's decision was not supported by substantial evidence. First, the fact that these washers are made to AREMA standards, rather than the more common ASME standard. This was not sufficient given that the administrative record shows no requirement that in-scope washers be made to any industry specification. Similarly, the fact that helical spring lock washers generally have a trapezoidal cross-section is not an exclusion of washers with other cross-sections. The Court also found that record evidence supports Commerce's finding that the unique thickness-to-diameter ratio of the AREMA washers did not remove them from the order. In the end, the Court rejected Plaintiff's arguments and found that Commerce's determination was based on substantial evidence in the record. So, the AREMA washers are in scope.

The Liquidation Part

To a degree, that is all background to the second question. To my mind, this is the more interesting part.

Having found the washers to be in scope, Commerce instructed Customs to suspend liquidation of unliquidated entries of AREMA washers as far back as 1993, when the order was first entered. As a practical matter, that means newish entries that have not liquidated and entries subject to an existing injunction. According to the Court, this means entries between October 1, 2011 and September 30, 2013. If this retroactive application of the scope determination is correct, this is the kind of unanticipated potential liability that keeps importers awake at night.

Under the Commerce regulations, specifically 19 CFR 351.225(l)(3), if products are found to be within the scope of the order, Commerce is to instruct Customs to suspend liquidation and to require a cash deposit of estimated duties, "for each unliquidated entry of the product entered, or withdrawn from warehouse, for consumption on or after the date of initiation of the scope of inquiry." In this instance, there was no formal scope inquiry initiated under § 351.225(3). Commerce decided the issue on its own under § 351.225(d). According to Commerce, that means the regulation does not address this exact fact pattern and Commerce can instruct Customs to suspend liquidation back to the date of the order.

The CIT disagreed. First, the history of the regulation makes it clear that suspension of liquidation is a serious step that can have significant consequences for importers and foreign exporters and producers. But, the domestic industry is entitled to the protection of the order for all in-scope merchandise. To balance these interests, Commerce set the date of potential suspension as the date of initiation of the scope inquiry. Thus, while not addressing this circumstance, it is clear that Commerce intended the potential period of subject entries to be limited. Looking to a prior CIT decision, the Court found that Commerce is limited in its authority to request the suspension of duties, regardless of the formality of the proceeding. The Court of Appeals similarly limited Commerce's authority in scope inquiries to after the date of initiation. Without these limits, Commerce would always be able to request suspension retroactive to the date of the order simply by choosing to forgo a formal scope inquiry under 351.225(e) in favor of an informal proceeding under 351.225(d).

Commerce made a good argument that its decision in this scope case was the equivalent of a finding that the AREMA lock washers were always within the scope of the order. By limiting the ability of Commerce to request suspension back to the date of the order, the Court is allowing in-scope merchandise to escape the lawful order. That is true. But, the Court noted, Customs had not identified these products as in-scope. The importer saw the question as uncertain and, therefore, took the correct step of seeking a scope clarification. Under these circumstances, the importer is entitled to rely on Customs' treatment and not have liquidations suspended and cash deposits collected until after the (admittedly informal) scope inquiry was commenced. The exact timing of which remains to be seen. The Court remanded to Commerce to issue new instructions consistent with this decision.

This is a good result for importers of merchandise that is found to be within the scope of an order after entry. The potential liability for antidumping and presumably countervailing duties is limited to unliquidated entries made on or after the date of the scope inquiry. But, do not read too much into that. This is not a Customs penalty case. In theory, Customs can still find that the importer's failure to deposit dumping duties was the result of negligence, gross negligence, or fraud and impose a penalty in addition to collecting duties. Given that customs penalty can be two times the amount of the duties owed for simple negligence, it is possible that a customs penalty will fair outstrip the unpaid duties to be owed as a result of a properly timed suspension of liquidation. On the other hand, if the importer exercised reasonable care (and can prove it), then liquidated entries are final and no penalty would be appropriate.

Saturday, January 14, 2017

What the Frak?

Spin up the FTL drive and meet me in the CIC, the Federal Circuit has issued its first 2017 decision in an appeal from the Court of International Trade.

Here is the sitrep: The case in question is Schlumberger Technology Corp. v. United States. The merchandise in question is bauxite proppants. These are the bits of granulated bauxite used in hydraulic fracturing operations to hold open cracks in the rock structures and, thereby, allow for the efficient extraction of oil and gas . In other words, these little bits of bauxite "prop" open the cracks. The proppants are produced from bauxite ore taken from the earth (or, in Hebrew, "Adama") and milled to a powder then granulated to produce larger particles. The particles are sorted by size, dried and kiln fired.

Customs classified the proppants in HTSUS Heading 6909 as "Ceramic wares for laboratory, chemical, or other technical uses; ceramic troughs, tubs, and similar receptacles of a kind used in agriculture; ceramic pots, jars and similar articles of a kind used for the conveyance or packaging of goods . . . ." Schlumberger countered that the correct classification is in  Heading 2606 as "Aluminum ores and concentrates . . . ." During litigation, the government proposed an alternative classification in 6914 as "Other ceramic articles."

Cutting to the chase, the government can only win this case if the bauxite proppants are ceramic wares or other ceramic articles. HTSUS Note 1 to Chapter 69 states that the Chapter covers "ceramic products which have been fired after shaping." Looking to a dictionary, the Federal Circuit held that shaping means "to give a particular or proper form to by or as if by molding or modeling from an undifferentiated mass" or "to give definite or finished shape to  . . . ." The Federal Circuit then noted evidence that the finished proppants vary in size by as much as 100%. This, according to the Court, does not equate to have a definite or particular shape. Thus, the merchandise would be excluded from Chapter 69.

Another important argument that supports the same conclusion is based on the legal principle of noscitur a sociis under which we determine the meaning of the word by looking at the words around it. So, what are the examples of ceramic items included in Chapter 69? We see troughs, tubs and similar receptacles; ceramic pots, jars and similar articles; mortars and pestles; beakers; letters, numbers, and sign-plates; and heating apparatus. All of which are products of a definite form and are quite unlike the bauxite proppants of varying size. This argument, therefore, is old-school felgercarb.

What about Heading 2606? The HTSUS does not define "aluminum ore." However, Note 2 states that "ore" refers to "minerals of mineralogical species actually used in the metallurgical industry for the extraction of" certain metals including aluminum." But, the note makes clear that material may still be an ore "even if [it is] intended for nonmetallurgical purposes." I wonder why that last point was necessary since aluminum ore is an eo nomine term, making its use almost irrelevant. Bauxite is the mineral from which aluminum is extracted. A significant amount of aluminum probably goes into making these.

The Note, however, excludes products that "have been submitted to processes not normal to the metallurgical industry." Normal processes include crushing, grinding, screening, agglomeration into grains, and drying. These describe the process of making proppants. The fact that the steps were not related to the extraction of aluminum does not matter to the outcome. Nothing in the note requires that the processes be for the purpose of extracting metal from the ore. Lastly, contrary to the government's argument, Heading 2602 is not, by its terms or any other authority, limited to ores in primary forms as opposed to ready to use finished products such as proppants.

How did the government react to this result? My guess is something like this:

Friday, January 13, 2017

Ruling of the Week 2017.2: Emergency War Material Covers Failed NAFTA Claim

I like this ruling. It is HQ H273101 (Nov. 4, 2016).

This is a case where the importer made a NAFTA claim. When asked by Customs and Border Protection, the importer either could not or just did not support the claim. It happens. Sometimes, subsequent review turns up a problem with the NAFTA documentation. Sometimes, the broker should not have made the claim to start with. Lots of things happen in the real world.

This particular product is a multi-sensor electro-optical surveillance and targeting turret from Canada. As you might imagine, a multi-sensor electro-optical surveillance and targeting turret is a piece of military equipment. When the NAFTA claim failed, the importer asserted that the merchandise is entitled to duty-free entry as war material certified as such by a military procuring agency under HTSUS item 9808.00.30. It submitted the necessary certificates.

Customs liquidated the entry at the applicable 4.5% rate of duty and the importer protested. Customs granted the protest. It noted that in the absence of willful negligence or fraudulent intent, the importer can, prior to liquidation, submit documents to support a claim for free or reduced duties. The regulation that supports this is 19 CFR 10.112. Note that the regulation allows for the documents to be submitted even after liquidation but before the liquidation is final. That is a narrow window of 90 days following liquidation. See 19 USC 1501.

Why do I like this rulings? It is not just because the importer won. It is also because the importer, or its counsel, took a step back from a problem, surveyed its options, and found a creative solution. I also like it because it reaffirms for importers and brokers that the filing of the entry is not necessarily the end of the process. If there is a better option or a way to reduce duties after the entry summary has been filed, go ahead and submit the appropriate documents. There is money to be saved, go save it.

Thursday, January 05, 2017

Ruling of the Week 2017.1: Geeks Will Eat Anything

It is a new year and a lot has changed in the world. People in my field are either excited about the possibilities of major changes in trade policy or are horrified by the possibilities of major changes in trade policy.

I have had several calls about whether the U.S. will withdraw from NAFTA, impose new duties on goods made in Mexico by U.S.-based companies, and raise tariffs on goods from China. My answer so far has been, "I wish I knew." The new President and the new Congress will have a lot of authority under domestic law. The bigger questions will relate to how our trading partners respond. The U.S. has agreed many times to hold or lower duties. Going back on those promises will mean violating WTO obligations and multiple free trade agreements. Some people may not care. The U.S. remains fully sovereign and can violate any international agreements it choses. As a former partner used to say, "The WTO has no army."

But, the WTO has the ability to authorize trade retaliation. That means our trading partners will likely raise tariffs on U.S. goods in retaliation for stiffer U.S. tariffs. That makes it harder for U.S. companies to export. Add to that the impact of U.S. tariffs making it harder to import. We could end up with a situation in which domestic producers face higher costs for imported raw materials and components and then can't export their finished goods. That is a bad scenario.

Despite those two paragraphs, I tend to be an optimistic person by nature. I don't really expect the professionals who will be running White House trade policy and Congress to brazenly flout trade agreements and obligations. I don't think anyone wants to start an old fashioned trade war. But, as I said, I can't see the future. It's possible.  We all need to be watching closely. No matter your business needs and policy desires, this is a good time to make sure you have your Senators and Representative on speed dial.

Happy New Year. 2017 will be interesting.

Which brings me to the ruling of the week, N126516 (Oct. 19, 2010), in which we learn that human beings will eat just about anything. In this case, we are talking about snacking on arthropods.

Item 1: Giant toasted leafcutter ants.

Via Wikipedia
Item 2: Oven-baked tarantula spiders.

Also Via Wikipedia
According to the importer, the ants are "grown specially for human consumption" and have a "nutty, bacon-like taste." The spiders, on the other hand are "crisp, crunchy, ready-to-eat snacks." The importer also requested a ruling on scorpions that have been farm raised, detoxified, and are uncooked. For whatever reason, CBP decided it was lacking the necessary information to rule on that tasty snack.

The actual classification of the ants and spiders did not seem to controversial. These are food items prepared and packaged for human consumption. There not being a more specific place these delicacies, CBP classified them as "other prepared or preserved meat, meat offal, or blood." When canned, the classification would be 1602.90.9080; un-canned it is 1602.90.9080.

The importer here is a company called Think Geek Inc. I believe this is its website. Let me just say that this is right in my wheelhouse. I would like one of these and this and this (XL) and even this. Take all my money. I might even trade tariff classifications for gift cards. What I don't want is to eat tarantulas. And, yes, I am fully aware that arthropods provide a valuable source of protein and calories. The fact of the matter is that I get too many calories as it is. Unlike Chicago-mix popcorn and frozen yogurt, I can pass up the spiders and ants.

Monday, December 26, 2016

The Three-Percent Solution

In real life, I represent importers and exporters who need to maintain compliance with U.S. laws and regulations concerning international trade. For the most part, that means customs law and export controls. As Bryan Garner once said at a seminar I attended, "hence the title" [of my blog].

One of the more complicated and potentially troublesome areas of compliance for importers involves antidumping and countervailing duty orders. The financial consequences of such an order can be dire for companies that entered into purchase contracts prior to the order or without knowing that an order applied to the goods. Often, the latter happens when suppliers assure the buyer that merchandise is either outside the scope of the order or from a source other than the subject country. Unfortunately, suppliers may be uninformed on the scope of the order, too happy to falsely state the origin of the product, or willing to misrepresent that it is otherwise outside the scope of an order. An unwary importer who ends up receiving a rate advance of 200%, for example, may be in for a world of financial and legal trouble.

Moreover, the scope of orders is becoming increasingly complex. The cases involving aluminum extrusions, tires, and solar products are good examples of complicated case scopes.

As a result, I am spending increasing time on scope and related questions for importer clients. My assumption is that readers of this blog are also seeing more of these issues arise. Consequently, I plan to address more of these cases here. I will not be getting into the weeds of determining subsidy and margin rates. But, to the extent the application of an antidumping or duty order impacts import compliance, I will make more of an effort to note it here.

That said, I give you Kyocera Solar, Inc. v. United States International Trade Commission. This case from the Court of Appeals for the Federal Circuit involves the antidumping and countervailing duty orders on Certain Crystalline Silicon Photovoltaic Products from The People's Republic of China and Taiwan. A common strategy for compliant importers facing the imposition of AD or CV duties is to re-source the product from a country not covered by the order. That can be a successful way to mitigate the impact of the order.

The problem for Kyocera in this case is that the Commerce Department defined the scope of the investigation as covering cells and modules produced in Taiwan and modules "completed or partially manufactured" in other countries from cells produced in Taiwan. Kyocera was importing solar modules from Mexico that incorporate solar cells from Taiwan.

Separate and apart from this case, Kyocera is challenging the scope of the order as it applies to its imports from Mexico. Leave that aside for now. In this case, Kyocera raises the more interesting question of whether the International Trade Commission was required to treat the source of these products as Mexico or as Taiwan for purposes of its investigation of possible injury to the domestic industry.

The root of this question is 19 USC 1671d(b) (for countervailing duties) and 1673d(b) (for antidumping duties), which require that the ITC terminate an investigation if it determines that "imports of the subject merchandise are negligible . . . ." Negligible is defined in 19 USC 1677(24) as follows (with exceptions and details omitted here):

imports from a country of merchandise corresponding to a domestic like product identified by the Commission are “negligible” if such imports account for less than 3 percent of the volume of all such merchandise imported into the United States . . . .
The issue here is the meaning of "a country." According to Kyocera, Mexico is "a country" and is, therefore, entitled to its own negligibility test. Presumably, its exports would be less than the 3% threshold and, therefore, excluded from the order.

The International Trade Commission and the Court of International Trade both rejected that argument. Now, the Court of Appeals for the Federal Circuit has upheld the CIT. According to the Court of Appeals, the negligibility test is applied to the subject merchandise. Here, the order defines the scope as including cells from Taiwan finished into modules in other countries. Accordingly, the Kyocera products that include cells from Taiwan are still products of Taiwan even though finished in Mexico. Consequently, products finished in Mexico are not entitled to a separate negligibility analysis.

What is the lesson for importers? First and foremost, understand that scope is more than just the title of the Federal Register Notice. The scope of the order may, as it did here, encompass downstream or upstream products including products finished in other countries. When that is the case, it is not enough to just move finishing operations to another country. That will not necessarily remove the product from scope and might end up causing additional issues if the effort is seen as either evasion or circumvention.

Finally, as long as I am thinking about these things, keep in mind that HTSUS classification is not a reliable test for whether or not a product is in scope. Every order states that classification is provided for convenience, and that the description of the merchandise controls. The fact that an item is not flagged in ACE or elsewhere as within the scope of an order does not mean it cannot actually be within the scope of the order.

More to follow on this and related issues.

Tuesday, December 20, 2016

Substantial Transformation Redux

Note: I am writing this post while on vacation at an undisclosed location. The Internet here is lousy. I am paying a fair amount of money for "high speed access." Despite that, I feel like I am working on a vintage 3600 baud dial-up modem. Consequently, you will have to make do with two links. I might go back and fill in more when I have a decent connection.
We just talked about a Customs and Border Protection ruling in which I complained about CBP straying from the traditional substantial transformation test of looking for a change in name, character, or use to determine country of origin. Now we run up against Energizer Battery, Inc. v.United States, in which the Court of International Trade addressed essentially the same question. The CIT started out strong and raised my expectations that we would see a very detailed analysis of the test. We did get a thorough and logical opinion. But, I still have some concerns. So, let’s walk through this.

Under the Buy America portion of the Trade Agreements Act of 1979, 19 USC §§ 2511-2518, the U.S. government can procure material from countries covered by the Act. Those are countries that have signed on to the WTO Government Procurement Agreement and U.S.-free trade agreement partners. China is not an eligible country.

The case involves a flashlight assembled in Vermont. Virtually all of the approximately 50 components, including the light-emitting LED’s, the lens assembly, and wires that are pre-cut to size, come from China. After importation, the assembly process involves workers at two stations and takes approximately 7 minutes and 10 seconds. The value of imported materials is $12.96 and the finished cost of the flashlight is $23.55.

The only way to make these flashlights eligible for government procurement is to determined that they are products of the United States by virtue of the assembly operation in Vermont. That requires a substantial transformation. The test for a substantial transformation under the Trade Agreements Act is that the product is “a new and different article of commerce with a name, character, or use distinct from that of the article or articles from which it was transformed.” While there have been few cases applying this test in the context of the procurement agreement, this is the well-established test used for non-NAFTA country of origin marking, some drawback, and for other purposes.

Energizer sought a final ruling from Customs on whether the assembly of the flashlights in the U.S. resulted in a substantial transformation. Customs found that after assembly in the U.S., the LED’s continue to perform their intended function of emitting light and that the assembly process was not complex or time-consuming. Customs also noted the traditional name, character, or use test. Based on its analysis, Customs found no substantial transformation.

The first issue the plaintiff raised is that Customs’ focus on the LED’s and “essential character” is not part of the test for substantial transformation. That is manifestly true. The statute does not reference essential character. The Court, however, noted that it must decide the origin of the flashlight on its own, based on the evidence presented to it. The original analysis CBP performed is, therefore, of limited importance.

Given my most recent post on this question, I was very happy to see the Court of International Trade focus its attention on the name, character, or use test. The Court went so far as to say the “’essential character’ is not an established factor in the substantial transformation analysis, although some courts have looked to the ‘essence’ of a finished article in order to evaluation whether there has been a change in character as a result of post-importation processing.” Essential character is a useful concept for tariff classification. Separately, “essential identity” comes up in the context of U.S. goods returned. Neither is traditionally part of the substantial transformation test. So far, I am happy.

The Court then reviewed the history of the substantial transformation test from its roots in the 1908 Supreme Court decision Anheuser Busch Brewing Ass’n v. United States. Since that time, the test has become “flexible” and the outcome depends on the facts of each case.

The Court noted that a change in name is generally the least compelling evidence of a substantial transformation. That said, let’s keep in mind that the imported components were not called “flashlights.” They were LED’s, wires, screws, switches, and other components all with their own name.

Regarding name, the Court followed the lead of a prior CIT decision in a case called National Hand Tool v. United States. That case involved hand tools that were partially finished prior to importation and machined, etc. after importation. In all cases, the name of the article as imported remained the same as that article in the completed tool. From this, the CIT held that the question is whether the imported components retain their names after assembly into the flashlight. The switch, for example, remains the switch even when it is fully incorporated into the flashlight.

Moving on to character, the Court looked for a substantial alternation in the characteristics of the components. That requires more than a cosmetic change. Rather, the end-use of the imported product must not be the same as (or “interchangeable with”) the end-use of the product after post-importation processing. Here, the Court found that the shape and material composition of the components was unchanged, meaning there was (according to the Court) no change in character.

The Court also noted that that prior cases have found a substantial transformation less likely where the imported item has an intended end-use and the post-importation processing is consistent with that end-use. This is where I start to get concerned. Here, the parts were all imported for the purpose of manufacturing flashlights. The lens assembly, in particular, had no other apparent use. This does not bode well for Energizer.

Regarding use, Plaintiff argued that none of the imported components are useful as flashlights. The Court rejected that approach and held that the correct inquiry is whether the imported parts have a predetermined end-use at the time of importation. Here, the lens head is partially assembled at the time of importation, with four of the five LED’s attached and pre-cut wires soldered to the circuit board. This, and other components, have pre-determined end-uses as parts of the flashlight. Based on this, the Court found no change in use.

To my way of thinking, the unassembled components of a flashlight do not constitute a flashlight and cannot be used as such. As imported, they mostly have functions that are distinct from the function of a flashlight. A switch makes and breaks an electrical circuit. Wires conduct electricity.

The problem for Energizer is that LED’s emit light and the lens assembly directs light. Those are pretty close to the functions of a flashlight, although they are not sufficient to form a flashlight. Keep that in mind as we go forward.

Next, the Court looked at several subsidiary tests for substantial transformation. The most important of these tests is the nature of the assembly process. When assembly is simple, the question is whether it is “minor manufacturing and combining” as opposed to extensive operations resulting in the loss of identity of the imported component, which becomes an integral part of a new article. Summarizing, the Court stated, “However, when assembly operations were manual and required some ‘skill and dexterity to put components together with a screw driver’ but the names of each article and the form and character of each component remained unchanged, and the use of the imported articles was predetermined at the time of importation, the court did not find that substantial transformation had occurred.” The Court found that the production process constituted simply attaching one component to another. It is not a complex process.

Having found no change in name, character, or use and that the assembly process was not complex, the Court of International Trade held that the flashlight components from China were not substantially transformed by assembly in Vermont. Thus, the Court affirmed the final determination from Customs and Border Protection.

I’m not entirely comfortable with this for a few reasons. First, I need to say that this is a well-reasoned opinion and it is clearly following the lead of National Hand Tools. I think that is admirable for purposes of providing predictability and business certainty.

The problem is that as an advocate, largely for importers, I don’t like the result. It is very hard to apply in practice. It seems to me that this decision makes a substantial transformation in the context of assembly very difficult to establish. Most assembly can be reversed by disassembly. That means a switch will always be a switch and an LED will always be an LED even after assembly. This ignores the name changes from switch and LED to flashlight. Furthermore, the use of components will almost never be the use of the finished article, even when the components are imported specifically for incorporation into that finished product. Under the Court’s analysis, an engine assembled into a car remains an engine and does not change its character because it was intended for use as a car engine. Nor does it change its intended end use. But, an engine is not a car. I cannot drive an engine.

By focusing on the components before and after assembly, I fear the Court has set the bar too high. It seems that substantial transformation will occur when the imported part is subject to further fabrication prior to final assembly. The murkier question is when assembly is sufficiently complex to produce a substantial transformation. That will depend on the facts of the case. Unfortunately, it appears to me that under this analysis the complexity of the assembly process—which is not name, character, or use—is firmly part of the name, character, or use test. That seems to go beyond what was required under the 1979 Trade Agreements Act and similar CBP applications of the test.

Thursday, December 15, 2016

White Sauce Attorneys' Fees Upheld

You may recall that the Court of International awarded attorneys fees to the plaintiff in International Custom Products v. United States. This case has a very complicated litigation history. I will not review that here. You should go back and read the original post about the CIT decision on fees. Now, the Court of Appeals for the Federal Circuit has affirmed the CIT's decision. That is a substantial victory for the plaintiff.

What you need to know is that Customs and Border Protection issued a binding ruling to ICP on the classification of its "white sauce." Customs subsequent issued a Notice of Action reclassifying unliquidated entries under a different provision. CBP did not take steps to revoke or modify the prior ruling before taking this action. As a result of the reclassification, and the resulting application of dairy quota, the duty payable on this merchandise increased by 2400%. The subsequent litigation resulted in five judicial opinions including two prior decision of the Court of Appeals.

Under federal law, a court shall award attorneys fees to the non-governmental prevailing party unless the position of the United States "was substantially justified" or there are special circumstances making an award unjust. A position is substantially justified if it could satisfy a reasonable person. Stated in the positive, what that means is that a prevailing party in a case against the United States can be awarded fees where the government took an unreasonable position in the litigation or the administrative process.

The CIT held that Customs' use of the Notice of Action was rooted in its desire to avoid the more complicated, but required, process of revoking the ruling. That, according to the CIT, was not reasonable.

On appeal the United States raised several technical arguments. The most interesting of these is that because the Court of International Trade ruled in favor of the United States on the plaintiff's motion for summary judgment, thereby letting the case go to trial, the government's position was necessarily reasonably. The Federal Circuit had not previously addressed this question and, therefore, looked to guidance in the decisions of other circuits. The Seventh Circuit has held that surviving a motion for summary judgment creates a presumption that the position is reasonable; but that presumption can be rebutted. The Federal Circuit did not go so far as to find a presumption. Rather, it held that it must review the record as a whole to find reasonableness.

That probably brings this part of the case to an end. For those of us who litigate customs issues, this serves as a good reminder that it is possible to get fee awards when the U.S. has taken an unreasonable position. That is an unusual circumstance, but it is good to know the law.

Holiday Edition

This is one of those posts in which I tell you that there are many cases and rulings sitting on my desk, all of which I plan to use as the basis for upcoming blog posts. It is also the end of the year and the time when I contemplate the state of this blog. [Note: Shaking my fist at the ABA Journal] This has been a good blog year, despite having fallen behind on my coverage of rulings. My personal view is that the content remains of acceptably high quality combined with it usually being timely. So that's good. I did earn recognition from the Expert Institute; fifth place out of a large field is not too bad. Thanks for your votes.

I'll continue to plug along here and hope you stay with me in an 2017. As always, I sincerely appreciate my readers. At the recent Court of International Trade Judicial Conference and at a trade meeting in Chicago, folks introduced themselves as readers. That always makes me happy. I hope to see more of you at upcoming events. Feel free to comment on my posts, I would love to see more reader engagement.

That all sets the stage for me to say to you and your families, "Happy Seasonal Holiday of Your Personal Choosing" and a very Happy New Year to you all.