Friday, February 06, 2015

Best Key Overturned

With this post, I am momentarily caught up.

Best Key Textiles Co. Ltd. v. United States has been a bit convoluted from the get go. The company makes, but does not import, metalized polyester yarns. It got a ruling from Customs and Border Protection that classified the yarn in HTSUS item 5605.00.90, which has a rate of duty of 13.2% ad valorem. Armed with this, Best Key got a second ruling on a "pullover garments" called a "Johnny Collar." Best Key's strategy seemed to be to confirm that it was making metalized yarn of 5605.00.90, which has a relatively high rate of duty, and then confirm that apparel made of that yarn would be subject to a relatively lower rate duty applicable to apparel of "other textile materials." Incongruously, Customs classified the Johnny Collar as being of polyester, thereby giving it a higher 32% rate of duty.

Best Key requested that Customs review the Johnny Collar classification. In doing so, it also reviewed the yarn classification. In a blow to Best Key, Customs revoked both rulings. It determined that the yarn was improperly classified and re-classified it as polyester yarn. Polyester yarn has a lower 8% rate of duty. The Johnny Collar ruling was also revoked and replaced, but the classification stayed the same.

That means that Best Key's actual product, if imported as is, receives a lower rate of duty. Usually that is a win for the manufacturer. Here, it is not. Best Key does not import yarn. It sells yarn to foreign producers who sell garments to be imported to the U.S. If the yarn is metalized, the garments receive a lower rate of duty. Ultimately, that is the win Best Key wants.

In the Court of International Trade, Best Key challenged the ruling revocation on the Johnny Collar, which it does not make or import. Initially, the Court said that Best Key had not established jurisdiction in the Court, but it later changed that position and reviewed the case on the merits. The CIT based it jurisdiction on 28 USC 1581(I)(4), which is a residual provision granting the CIT exclusive jurisdiction over actions commenced against the United States that arise out of any federal law providing for "administration and enforcement with respect to," among other things, revenue from imports, tariffs, and duties.

In this appeal, the United States argued that the CIT was correct that first time and the lower court never had jurisdiction over Best Key's claims. The opinion, by former CIT Judge Wallach, agrees with the United States. As a result, the CIT decision is vacated and remanded to be dismissed.

As the courts have stated repeatedly, the primary means of securing jurisdiction for review of a tariff classification is through a denied protest and then a summons under 28 USC 1581(a). If that avenue is available, the would-be plaintiff cannot get into the Court of International Trade on another basis (with a few exotic exceptions). Here, 1581(a) the protest avenue was available and not "manifestly inadequate" as a means of relief. According to the Federal Circuit, "any producer who imports items made from Best Key's yarn and believes the merchandise should be subject to a lower duty rate should protest the classification and challenge any denial of its protest before the CIT." Moreover, it would appear that Best Key could do that it imported a bunch of Johnny Collars on its own account and protested the liquidations.

There was another possibility for Best Key. Under 28 USC 1581(h), a party can challenge a pre-importation ruling if the party can demonstrate that it will be irreparably harmed unless given an opportunity for review. This sounds good, but does not help Best Key. Best Key was not harmed by the ruling on its product. Rather, at least according to the Court of International Trade, the ruling on yarn favors Best Key's product. The real issue is the potential harm a potential importer of a potential product made from Best Key's metalized yarn. In other words, Best Key, is on indirectly harmed and is trying to protect the rights of strangers to the case. There is, therefore, no "case or controversy" involving Best Key and, under pesky Article III of the Constitution, no case to be had.

Because the CIT did not proceed on the basis of (h) jurisdiction, the Federal Circuit did not address it. But, the same rule applies. If the party can avail itself of a protest and (a) jurisdiction, it needs to do so.

Personally, I wonder about that in this case. Since Best Key admits that it neither makes nor imports apparel, should it be required to do so to manufacture (a) jurisdiction? This indirect injury as the result of a prospective ruling seems to be exactly the kind of thing that makes (a) unavailable or inadequate. There is no way to quantify how much damage will be done to Best Key as a result of the Johnny Collar ruling leading its customers to other yarns. That is irreparable harm. I think (h) might deserve a second look.

Please, can I have a week or so without any new customs decisions?


Anonymous said...

This case presents a catch-22 dilemma. Best Key is irreparably harmed by its lost business due to the higher duty on clothes made with its yarn. But if the harm cannot be quantified then how can irreparable harm be claimed, let alone proved? Would an affidavit from an importer (attesting to the fact that it avoided importing products made with Best Key's yarn) allow the court to grant jurisdiction?

Larry said...

Maybe. I am curious what other practitioners think. It strikes me that the classification of garments made from Best Key's yarn directly impacts its market position in a way that cannot be corrected via a protest. But, the Court is correct that Best Key could make a test importation of the garments and protest the liquidations. This would get the matter resolved on the merits without having to invoke (h) or (I) jurisdiction.