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:

1 comment:

Michele Mitchell said...

Haha, you made me look up Felgercarb!

As always, interesting and well written. Thank you.