XYZ/Milecrest Survives Motion to Dismiss

XYZ, it turns out, is a company called Milecrest Corporation.

This is the next chapter of the modern XYZ affair at the Court of International Trade. If you are not up to speed on what is happening, read my earlier posts (here, here and here).

In this Court of International Trade case, Milecrest has asked the Court of International Trade to review the decision by Customs and Border Protection to grant Lever Brother protection to Duracell-branded batteries. Granting that protection, as explained in the earlier posts, would make it more difficult for Milecrest to import and sell Duracell batteries. To do so, they will need to be marked indicating that they were not intended for the U.S. market and that they differ materially from the authorized product.

At this stage, Duracell and the United States have moved to dismiss the case arguing that Milecrest has not stated a claim for which it is entitled to relief or, in the alternative, that the Court of International Trade does not have jurisdiction over this dispute.

Regarding jurisdiction, the Court of International Trade, like all federal courts, is a court of limited jurisdiction. If this issue does not fall within limited matters assigned by Congress to the CIT, then it must be dismissed.

The problem for Milecrest is that although it may have asserted facts that, if true, would indicate a violation of the Administrative Procedure Act, those facts do not create jurisdiction. Rather, jurisdiction needs to be derived from 28 U.S.C. 1581(a)-(i). In this case, the relevant provision is subsection (h), which says:

The Court of International Trade shall have exclusive jurisdiction of any civil action commenced to review, prior to the importation of the goods involved, a ruling issued by the Secretary of the Treasury, or a refusal to issue or change such a ruling, relating to classification, valuation, rate of duty, marking, restricted merchandise, entry requirements, drawbacks, vessel repairs, or similar matters, but only if the party commencing the civil action demonstrates to the court that he would be irreparably harmed unless given an opportunity to obtain judicial review prior to such importation.

Duracell argued that the grant of Lever Brothers Protection is not a “ruling” for purposes of 1581(h). The Court reiterated its prior decision that granting this protection is a ruling because it is a written statement by CBP that was published as an interpretation of a regulation. Nothing in this motion changes that.

Next, the Court turned to whether Milecrest has sufficiently pleaded irreparable harm from the CBP ruling. To properly assert a case, a plaintiff at the Court of International Trade must provide a short and plain statement of the grounds for jurisdiction. Here, Milecrest asserted that it was seeking review of a CBP decision to restrict the importation of merchandise, that will if not reviewed cause it irreparable. According to the Court, that was sufficient. Furthermore, the connection between the Lever Brother ruling and harm to Milecrest is supported by sufficient allegations to allow the case to go forward.

Finally, Duracell argued that the law permitting CBP to restrict materially different gray market products is not intended to protect Milecrest, a parallel importer. As such, Milecrest does not have standing to raise this complaint. The Court disagreed. The law providing protection to Duracell necessarily results in the regulation of Milecrest, putting Milecrest in the “zone of interest” of the law. That gives it standing to sue.

After dispensing with an argument that Milecrest did not exhaust the administrative process, the Court found it has jurisdiction under 1581(h) to decide the case, if properly brought.

The next issue was whether Milecrest had properly stated a claim on which relief can be granted. To satisfy this requirement, Milecrest must have stated facts which, if assumed to be true, state a plausible claim for relief. Here, that means showing a final agency action with no other adequate administrative remedy. The granting of Lever Brothers protection is a final agency action. Congress has not provided any other means for Milecrest to seek relief, thus the action appears to be sufficiently well pleaded to survive the motion to dismiss.

In its first count, Milecrest claimed that CBP’s action was unlawful because it did not provide public notice and an opportunity for comment prior to making the decision. If Milecrest proves notice and comment is required and that CBP failed to follow that procedure, then Milecrest is entitled to relief. Thus, the motion to dismiss is denied.

Similarly, Milecrest has pleaded that the decision to grant Lever Brothers Protection was arbitrary, capricious, an abuse of discretion or was otherwise not in accordance with law. This count raises an important and fundamental question. Is CBP’s grant of Lever Protection overly broad in that it might grant Duracell protection against imports of batteries that are not physically and materially different from the authorized batteries on sale in the U.S.? If so, CBP will have exceeded its legal authority. This, according to the Court, is a plausible claim for relief.

Lastly, Milecrest claims that the ruling granting protection to Duracell is impermissibly vague because it fails to state how the batteries are physically and materially different from authorized batteries. As such, importers do not know what batteries might require labeling nor why. The Court also found this to be a well-pleaded count for relief.

Thus, this case will go forward. This is a good result for parallel importers. If this reaches a final judicial decision, this may be the first case that provides some guidance and possibly limits on the scope of CBP authority to limit parallel imports. Remember, these are legitimate products, not counterfeits. CBP has no authority to stop grey market products unless they are physically and materially different from the authorized U.S. counterpart. If CBP is overstepping and granting Lever Protection to products at the behest of the rights holder, this case may put a stop to that arbitrary overreach. If, on the other hand, Duracell and Customs show that the batteries are physically and materially different, the grant of protection will be upheld and Milecrest will have to begin labeling the products as unauthorized imports.