Tuesday, January 25, 2011

(e) Jurisdiction: Let the Flood Gates Open

The Court of International Trade is, like all federal courts, a court of special and limited jurisdiction--just more so. If a case does not fall within the scope of 28 USC 1581-84, the CIT has no power to hear it. Some of the provisions of section 1581 have been effectively dormant. Until yesterday, that was true of 1581(e), which provides:

The Court of International Trade shall have exclusive jurisdiction of any civil action commenced to review any final determination of the Secretary of the Treasury under section 305(b)(1) of the Trade Agreements Act of 1979.

A section 305(b)(1) determination is a determination by Customs and Border Protection that an article is or would be a product of a foreign country or instrumentality for purposes of government procurement. What this is all about is the application of both the Buy American Act and the Trade Agreements Act of 1979. There is a lot of history here, and the opinion in Xerox Corp v. United States does a good job of summarizing it. What is important to know is that the BAA generally requires that government agencies provide a preference for the acquisition of U.S.-origin products. The determination of origin under the BAA is based on the goods having  been produced in the U.S. and having more than 50% domestic content.

The TAA, on the other hand, implements the WTO Government Procurement Agreement. Products from members to the GPA (which does not include all WTO members, making it "plurilateral"), receive treatment no less favorable than U.S. products for purposes of procurement. In other words, the preference is waived for products of GPA countries and certain other designated countries. To provide treatment no less favorable, the approach adopted has been to focus on whether the product was substantially transformed in the GPA country or other designated country. This created a paradox in which foreign products of countries eligible for GPA treatment received better treatment than U.S.-produced products that might not otherwise satisfy the BAA 50% rule. For years, that paradox was resolved by finding that foreign products further processed in the U.S. that undergo a substantial transformation in the U.S. are treated as U.S. goods for procurement purposes.

In Xerox, Customs issued a ruling on the origin of toner cartridges in which it held that the merchandise was not substantially transformed in the U.S. Customs, however, did not actually state the origin of the cartridges.  Xerox, (which, interestingly, was not the party that sought the ruling), challenged the determination claiming that there was a substantial transformation in the U.S.

Got all that? I can wait.

What this decision is about is only whether the Court of International Trade has jurisdiction. The government raised two arguments against the Court hearing the case. The first was that the ruling from Customs was not actually a final determination and was, therefore, not ripe for review. The basis for this is that the statute requires Customs to determine whether the merchandise originates in a designated country or instrumentality for purposes of the TAA. Rather, Customs only said that no substantial transformation occurred in the U.S. According to the government, that decision would not qualify the products for U.S. government procurement under the 50% content rule of the BAA.

Xerox, pointed out that this determination does not really relate to the BAA. Rather, since 1990, the government practice has been to treat products substantially transformed in the U.S. (so-called U.S.-made end products) as eligible for government procurement on the same terms as TAA/GPA goods. This resolves the paradox noted above. So, a determination that no substantial transformation occurred in the U.S. might be a final determination if that results in a determination that the goods are not entitled to TAA status. Also, the Court noted that Customs has issued many origin rulings applying this very reasoning. The government's litigation position, therefore, appears to be that all the prior rulings were invalid exercises beyond Customs' authority. The Court disagreed. However, because the determination was incomplete in that it did not affirmatively identify the country of origin, the Court remanded to Customs with instructions to do so.

The second argument was that the case did not present a justiciable controversy, which is necessary for federal jurisdiction. The Court rejected that argument on the grounds that a ruling in favor of Xerox would make the toner cartridges available for U.S. government procurement. As a result, the case presents a real controversy that can be resolved by judicial review.

So, now we will have to see what happens on the merits. After that, it is a sure bet that the U.S. will appeal to the Federal Circuit.

This is a very interesting development. First, it should help to put government contracting lawyers as well as CIT litigators on notice that the CIT is open for business when it comes to these disputes. Also, the government's arguments, if accepted, would fundamentally change the procurement process by re-installing the BAA vs. TAA paradox. Having U.S.-made end products at a competitive disadvantage for U.S. government procurement cannot be a politically acceptable result. Thus, if the CAFC reverses, you can bet Congress will act quickly to fix the result.


Anonymous said...

Caveat: This comes not from an expert but from a dabbler.

First, the 50% component cost test does not apply to commercially-available-off-the-shelf items. Toner cartridges certainly would be COTS. Therefore, irrespective of the TAA, the only requirement to be eligible for the BAA is that the toner cartridge be "manufactured" in the U.S. The government has conveniently failed to define "manufactured" but has recently stated in the context of ARRA guidance that "manufactured" for purposes of the BAA is NOT "substantial transformation." Nonetheless, the COTS rule eliminates (mostly) the BAA/TAA paradox.

Secondly, I believe that 19 CFR Pt 177, Subpart B, does not empower CBP to issue rulings, which are final determinations and are reviewable, with respect to whether a product "processed" (my word) in the US qualifies for the BAA. Rather, Subpart B only permits CBP to issue rulings (binding/reviewable) with respect to whether a product processed outside the US is substantially transformed and is, therefore, eligible for government procurement provided required contract thresholds are met.

CBP may issue non-binding, non-reviewable advisory opinions, however, if "the ruling requested cannot be issued for any other reason," such as (perhaps) the agency is without authority to do so. 19 CFR 177.22(b)(3). It would seem that CBP may have issued an advisory opinion with respect to the toner cartridges, if the request asked that CBP determine whether goods processed in the US are BAA-eligible. That advisory opinion (if that's what it was), at least so far as the regulations are concerned, is not reviewable.

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