Tuesday, January 23, 2018

The Unbearable Unambiguity of Laws

Someday, when I am done practicing and looking for a final way to stay engaged, I would like to teach Administrative Law to JD students. I often tell student that, for what I do, the single most important class I took in law school was not any class with "international" in the course description. It was Administrative Law. My practice is all about what the federal government can and cannot require of importers and exporters and what must be required of the federal government. That is administrative law.

Two recent decisions from the Court of Appeals for the Federal Circuit put this nicely in focus.

The first is Capella Sales & Services Ltd. v. United States. This is one of those cases with a relatively straight-forward analysis that leads to a bad result. Capella entered aluminum extrusions from China. At the time its entries liquidated, Commerce had determined the countervailing duty deposit rate to be 374.15%. Capella did not challenge the rate and, as a result, there was no injunction preventing the liquidation. Subsequently, other importers did challenge the rate, which was found to be grossly incorrect. The correct rate was determined to be 7.37%. After that decision, Commerce, as it is required to do, published a notice of the judicial determination "not in harmony with" its determination. Subsequent liquidations would be at the lower rate.

If you have any empathy, you feel for Capella. It had terrible timing. Earlier imports might have escaped the preliminary determination entirely. Later imports would have benefited from the lower rate. More legally, it appears that Customs and Border Protection liquidated entries at a rate that was determined to be unlawful. Surely, Capella should have some way to recoup the difference.

Unfortunately, that is not how the law is written. The statute requires that entries be liquidated in accordance with the determination of the Commerce Department. 19 USC 15106a(c)(1). The only exceptions are (1) where a court has ordered an injunction against liquidation and (2) where the entry is after the Federal Register Notice of a decision contrary to Commerce's determination. Alternatively, (3) an interested party can request an administrative review of the applicable rate under 19 USC 1675(A)(2)(C). There is no factual dispute that Capella's entries do not fit into one of these categories.

Capella basically argued for a writ of rachmones. It asked the court to take note of the unusual circumstances of a 375% deposit rate compared to a roughly 7% assessment rate. In light of that, it asked the Court to find that the statutory scheme was ambiguous, giving the Commerce Department discretion (and presumably a mandate) to liquidate at the lower, "correct" rate. The textual basis for that conclusion was reed thin.

Citing the Chevron doctrine, Court noted that where Congress has specifically addressed a question, the Court's role is to give effect to the law as written. Here, it found that Congress made no exception for the bad circumstances of this case despite knowing exactly how to draft such exemption. Given the lack of ambiguity, the Federal Circuit affirmed the liquidations at the higher rate.

The second case is Glycine & More, Inc. v. United States. Here, the issue is whether Commerce can change the meaning of a regulation by publishing an informal interpretation in a "guidance" document. The regulation at issue is 19 CFR 351.213(d)(1) which explains what Commerce is supposed to do when an interested party requests an administrative review and subsequently withdraws the request.

The regulation states:

The Secretary will rescind an administrative review under this section, in whole or in part, if a party that requested a review withdraws the request within 90 days of the date of publication of notice of initiation of the requested review. The Secretary may extend this time limit if the Secretary decides that it is reasonable to do so.

In this case, a party that requested review submitted a notice of the withdrawal and requested an extension of the 90 days to complete the request after the 90-day period had run. Commerce refused to extend the period and, therefore, continued the reviews. The requesting party refused to participate and was assigned a 453.79% deposit rate on the basis of facts otherwise available and an adverse inference. That certainly hurt.

Commerce did so based on an interpretive notice from 2011 stating that Commerce will not grant extensions "unless the requestor demonstrates that an extraordinary circumstance has prevented it from submitting a timely withdrawal request." The Court of International Trade held that Commerce's interpretation of its regulation was unreasonable and defeated the purpose of the regulation.

On appeal, the Federal Circuit applied the same analysis it applies to an agency interpretation of a statute, which is what we discussed above. If the regulation is clear, "it is the duty of the courts to enforce it according to its obvious terms and not to insert words and phrases so as to incorporate therein a new and distinct provision."

The Federal Circuit found no ambiguity. It found that prior to the 2011 Notice, the regulation was understood to provide Commerce with wide discretion to exercise its judgment to grant extensions in reasonable circumstances. After the 2011 Notice, the regulation was interpreted to limit that discretion to "extraordinary circumstances." No such limitation exists in the text. According to the Court, that is an "incompatible departure from the clear meaning of the regulation." Commerce cannot re-write the regulation through an informal guidance notice. It must follow the formal notice-and-comment rulemaking process.

Consequently, Commerce must reconsider its denial of the requested extension as if the 2011 Notice did not exist.

And that is an administrative law two-for-one post.

Wednesday, January 10, 2018

The Case of the Substitute Radical

While I had big plans for this post, time and work have intervened. I will skip the chemistry lesson and tell you what you need to know. This is the upshot from the CAFC decision in Chemtall.

The classification issue boils down to whether acrylamide tertiary butyl sulfonic acid ("ATBS") is an amide or a derivative of an amide. An amide is a class of chemicals that is defined by a carbon atom double bonded to an oxygen atom and to a nitrogen atom. The carbon atom is bonded to a radical designated R1. The nitrogen atom is bonded to two radicals designated R2 and R3. That makes for molecule that looks like this:

The issue here is the composition one of the radicals. Is the product still an amide if one of the radicals is bonded to the sulfur compound SO3H? If so, the product is classifiable in 2924.19.11 as an amide (3.7%). If not, it is classifiable in 2924.19.80 (6.5%).

Here's the answer: most secondary chemistry resources define amides as having only hydrogen or hydrocarbyls bonded to the nitrogen. The sulfur compound is neither. Furthermore, Chemtall's expert testimony that an amide can contain a substituted radical was not, according to the Court, persuasive. The non-binding Explanatory Notes were not clear on this point. Thus, Chemtall failed to convince the Court that the CIT decision was incorrect. The Federal Circuit affirmed, leaving the classification as 2924.19.80.

Two interesting asides appear in the decision, both of which reinforce fundamental points of tariff classification law. The first is that a dictionary definition is most persuasive if it appears close in time to the promulgation of the statutory language. In this case, the 1986 edition of two dictionaries were favored because they were closest in time before the 1989 enactment of the HTSUS. Second, the two-digit statistical suffix forming the 9th and 10th digits of the tariff item (and corresponding language) are not relevant to the interpretation of the tariff. This decision will probably be cited for those two propositions more than anything else.

Yes, the title of this post is intended to sound like a Sherlock Holmes mystery. If I did not have a real job, this post would follow suit.

Sunday, January 07, 2018

Contain Yourself

The Container Store v. United States has an interesting history. It involves the tariff classification of elfa "top tracks" and "hanging standards." Top tracks are the horizontal mounting members that can be affixed to a wall. The hanging standards are vertically connected to the top tracks. The hanging standards have slots that can be used for mounting attachments such as shelves, baskets, and drawers allowing consumers to build customs storage solutions. I am pretty sure this is what we are talking about:

This may ring a bell with you, because we have been down this road before. We discussed the CIT decision in this case here. And, before that, we addressed the same question in a case called storeWALL

The reason this issue is back before the Court of Appeals for the Federal Circuit is that in customs law, few things are ever final and beyond subsequent question. Each time an importer has a classification dispute with Customs and files a protest, the denied protest can be the basis of a separate lawsuit. For reasons of history and Supreme Court precedent (that might be worth a second look), a CIT decision stating the classification of the merchandise does not preclude either party from challenging the decision again and re-litigating it. For the lawyers reading this, despite what you may have learned in Civil Procedure, normal rules of res judicata do not apply to customs litigation. 

In the first Container Store case, Judge Ridgway followed the Federal Circuit decision in storeWall and concluded that the merchandise is classifiable in Heading 9403 as parts of unit furniture. Apparently, the United States government was not happy with that result, and re-litigated the issue. This time, the case landed on the desk of Judge Barnett who reached a different conclusion. According to Judge Barnett, the metal components at issue here differ from the plastic storeWall products. He found that Chapter 94 Note 1(d) excludes the merchandise, which he found to be "parts of general use." Accordingly, they should be classified in Heading 8302. 

Heading 8302 covers:

Base metal mountings, fittings and similar articles suitable for furniture, doors, staircases, windows, blinds, coachwork, saddlery, trunks, chests, caskets or the like; base metal hat racks, hat-pegs, brackets and similar fixtures; castors with mountings of base metal; automatic door closers of base metal; and base metal parts thereof:
Heading 9403, on the other hand, covers "Other furniture and parts thereof . . . ."

Note 2 to Section XV states that parts of general use include "[a]rticles of heading  . . . 8302." Container Store does not dispute that parts of general use of Heading 8302 are excluded from Heading 9403. It argued, however, that the merchandise is not parts of general use. Spoiler: The Federal Circuit agreed with The Container Store.

Relevant here are the Explanatory Notes to the Harmonized System. With respect to Heading 8302, the Notes state:

This heading covers general purpose classes of base metal accessory fittings and mountings, such as are used largely on furniture, doors, windows, coachwork, etc. Goods within such general classes remain in this heading even if they are designed for particular uses (e.g., door handles or hinges for automobiles). The heading does not, however, extend to goods forming an essential part of the structure of the article, such as window frames or swivel devices for revolving chairs.
According to the Federal Circuit, the top tracks and hanging standards form the indispensable structural framework of the modular storage unit. Based on the Explanatory Note, these items are excluded from classification in 8302. That means, the goods are not excluded from Heading 9403.

This should not be seen as upending the law on parts of general use. It remains true that parts of general use are to be classified as such even if they are specialized to a specific task. The Federal Circuit addressed this in its discussion of its prior Honda decision. That case involved the classification of an oil bolt, which is a specialized fastener that also includes features allowing it to transfer oil. Honda argued that it was classifiable as a vehicle part, not a bolt. The Federal Circuit disagreed. The difference here is that there was no reason to exclude the oil bolts from the classification for fasteners. Here, the Explanatory Notes indicate that structural components are not included in Heading 8302.

Because the top tracks and hanging standard are not classifiable in 8302, they are not parts of general use. Because they are not parts of general use, they are not excluded from 9403. Having reached that conclusion, and consistent with storeWall, the Federal Circuit concluded that this merchandise is best classified in 9403.90.80 as parts of unit furniture.

Note that this does not follow directly from storeWALL as a matter of stare decisis. This is related to but different than the lack of res judicata mentioned above. Stare decisis is the legal principle that cases should be decided based on precedent. This is a fundamental characteristic of the common law system used in the U.S., Canada, the U.K., and other jurisdictions. But, stare decisis only applies to the legal determinations and not to the questions of fact nor to legal determinations not part of the prior holding. In a classification case, whether the item fits in a particular heading is a question of fact. So stare decisis does not apply to the final classification determination. And, storeWall did not address the question of parts of general use and Heading 8302. So, while the result is the same as storeWALL, that decision did not dictate the outcome.

Thursday, January 04, 2018

Waterproof Footwear

A long time ago, I went to a local shoe store in search of a pair of fairly rugged work boots that I could wear in the winter when forced to work outside for some reason. I recall the sales guy telling me that a particular pair was 80% waterproof. Because I can sometimes be a jerk, I asked what that means and he just repeated that they are 80% waterproof. I asked whether that means they leak 20% of the time, or 20% of the water comes in, or that 80% of the surface area was 100% waterproof, which I am certain was the correct answer. He was unable to answer and this became a long-running joke in my house about the misuse of statistics.

I am reminded of that by LF USA, Inc. v. United States, a Court of International Trade Case involving the classification of plastic children's clogs. This is a pretty quick decision that focuses on the meaning of "waterproof." If the clogs are waterproof, they would be classified in Heading 6401, provided they also meet the other requirements. If not, they are classified as Customs determined is 6402. I envision these as Crocs-like products entirely of plastic. Surely, they would suffer no damage by being soaked in water for eternity. In that sense, they are waterproof. But, is that the legal meaning of the term?

There is no dispute about the nature of the merchandise, so this turns entirely on the meaning of the tariff.
Heading 6401 covers:

Waterproof footwear with outer soles and uppers of rubber or plastics, the uppers of which are neither fixed to the sole nor assembled by stitching, riveting, nailing, screwing, plugging or similar processes . . . .

Note 3 of the Additional U.S. Notes to Chapter 64 defines "waterproof" for purposes of Heading 6401 as "designed to protect against penetration by water or other liquids, whether or not such footwear is primarily designed for such purposes." The parties agree that the clogs at issue do not protect the foot against contact with water or other liquid. Plaintiff argued that the full heading shows that "waterproof" refers to the means of fixing the sole to the upper by some method other than stitching, nailing, plugging, etc. Presumably, those methods leave holes and render the shoe less than waterproof, perhaps only 80% waterproof.

The Court rejected this argument. It applied the legal note and dictionary definitions and found that footwear is waterproof when it is designed to protect against the penetration of water and other liquids. Given that clogs fail that test, the Court found in favor of the government and affirmed CBP's classification. The remaining issues in the case, thereby, fell to the wayside.

That should wrap up the CIT cases for 2017 that I will cover, I note that there are a few CAFC decision I missed when my work life got surprising busy in June. I'll catch up on those soon.