CAFC Orders U-Turn in Ford Transit Case

The U.S. Court of Appeals for the Federal Circuit has issued the much-anticipated decision in Ford Motor Company v. United States. For many who have been watching this case closely, the most important takeaway is what the Court did not do. This decision does not in any way question the ongoing validity of tariff engineering for duty savings. Tariff engineering is the practice of designing products to meet the requirements for classification in a tariff provision with a beneficial rate of duty. The law on that is unchanged.

So, what did just happen?

First, I recommend you go back and look at the prior blog posts on this case. There is a lot of background I do not want to reiterate here. In particular, read this and this. The short version of the story is that Ford Motor Company sells a vehicle in the U.S. known as the Transit Connect. The vehicle meets all U.S. safety requirements for passenger vehicles and is built off the Ford Focus passenger vehicle platform. When imported, these vehicles have rear seats, rear seat belts, rear windows, and other features that are indicative of a passenger vehicle. These features, particularly the presence of seats are also antithetical to using the vehicles for the transport of goods. With just that information, it would be clear that the Transit should be classified as a passenger vehicle of HTSUS Heading 8703.

There is, however, more to the story. Immediately after importation, the Transits undergo a refit during which the rear seats, seat belts, and windows are removed. The floor in also modified to eliminate depressions where a rear-seat passenger might rest her feet. This modification creates a smooth and uninterrupted area behind the driver seat. In other words, some of the Transits, after importation, became cargo vehicles. Customs and Border Protection viewed that process as creating a fictional or temporary product that was a disguised cargo vehicle. As a result, Ford paid a duty of 2.5% rather than 25%.

The U.S. Court of International Trade found that Ford's process was a legitimate exercise of tariff engineering. Rather than hold that Ford's process is an illegal "disguise" or "artifice" to deprive the United States of duties owed, the CIT performed a methodical classification analysis and found that the vehicles, in their imported condition, were passenger cars and should be treated as such regardless of the subsequent modification.

On appeal, things did not go very different, except in terms of the result.

The legal analysis for proper tariff classification always starts with applying the terms of the headings and legal notes to determine whether the imported item falls within the scope of the heading. That is General Rule of Interpretation 1 and is often the only rule that needs to be applied to reach a classification. 

The first potentially applicable heading is 8703, which covers:

Motor cars and other motor vehicles principally designed for the transport of persons (other than those of heading 8702), including station wagons and racing cars . . . .

The Federal Circuit immediately identified an issue in how to address this language. The Court of International Trade treated this as an eo nomine heading, meaning it describes an item by name or physical characteristics, not by its use. As a result, the CIT did not take use or intended use into consideration. Rather, it focused on physical characteristics, which it found to be indicative of a passenger vehicle.

If, on the other hand, this heading describes a product by use, evidence of use consistent with the language would be relevant. Typically, a use provision is clearly designated as such. For example, Heading 0504 covers, among other things, guts "prepared for use as sausage casing." Heading 3305 covers "Preparations for use on the hair." The law recognizes that words other than "for use" can communicate that the tariff language is limited by use. On the other hand, the rule is also clear that a limitation based on use should not be read into an eo nomine provision.

From: https://rear-view-mirror.com/2014/08/03/the-chimera/

There is, however, a recently created chimera of classifications. These are classifications that, while called eo nomine include a description that "inherently suggests a type of use." This comes primarily from GRK Canada a case involving the classification of "wood screws," which are not screws made of wood. As such, the description inherently suggests that wood screws are used to fasten wood. In addition to GRK, the Federal Circuit relied on its decision and the CIT analysis in Marubeni America Corp. v. United States, the case that classified modern SUV's as passenger rather than cargo vehicles. In that case, the Court of International trade took note of, for example, the vehicle's "intended purpose of transporting persons" and reviewed marketing materials showing use to transport people.

Based on that, The Federal Circuit read "principally designed for the transport of persons" as language inherently suggesting use as a passenger vehicle. And that is the decisive moment for Ford. 

Having determined that use is a relevant consideration, the Court then turned to whether the Transit Connect fits within the terms of 8703. The Court first recognized that "[t]he structural design features favor a finding that the subject merchandise is designed for transport of passengers."

The Court found that certain "auxiliary design features" indicate that the vehicles were not principally designed for the transport of passengers. This includes the lack of headrests, "comfort wires" to provide passenger support, and tumble lock mechanisms on the rear seats. The second row of seats was also covered in a less expensive fabric. All of this was indicative of the temporary nature of the rear seats. Other important factors include the lack of rear seat handholds, rear side airbags, and an exposed metal floor. These design choices, according to the Court, facilitate the post-entry conversion of the Transit Connect into a cargo van.

Turning directly to address use, the Court evaluated the traditional criteria for determining principal use. These are the so-called Carborundum factors. Read about that here. [Side note: Although the Court specifically said otherwise, the practical consequence of this approach may be to effectively convert the eo nomine heading into a use provision.] Among the relevant Carborundum factors are use in the same manner as merchandise that defines the class and the expectations of the ultimate purchaser. Here, all of the Transit Connects at issue (there is a wagon model that is delivered as a passenger vehicle) were delivered as two-seat cargo vans without rear seats, seat belts, or footwells and might have had the rear windows replaced with opaque panels. Ford's internal research indicated that the vehicle has "little appeal" as a passenger vehicle. Its advertising was consistent in that it separately identified the wagon model, which has a different designation and which was not included in this case.

From this, the Court concluded that the Transit Connect is not principally designed for the transport of persons. That leaves it to be classified as a vehicle for the transport of goods, which is a loss for Ford. 

I have pretty serious reservations about this decision. The consideration of use in the application of an eo nomine classification provision remains troubling. I raged against this in 2014 when discussing GRK. I think it complicates matters for the average lay classifier and will produce less certainty for businesses than would a strong separation between the analytical streams. 

More to the legal point, I do not think it was necessary in this case. The language in 8703 is very specifically NOT about use. It is about DESIGN. That matters. Here, the Federal Circuit conflated design and use. The Federal Circuit basically says as much at page 12 of the slip opinion:

Although HTSUS Heading 8703 is an eo nomine provision, the “principally designed for” portion inherently suggests a type of use, i.e., “the transport of persons.” 

I fully recognize that the point of most engineering is to match design to use. A baseball bat crocheted from yarn might be a nice design but is unlikely to get much use in an actual game. [Thanks Etsy user.] On the other hand, this is a legal analysis and words have to be given their natural meanings. In this case, "principally designed for" has a meaning that is distinct from use. The WCO and Congress know how to indicate use when that it what is intended. We should not have to grapple with whether tariff language inherently suggests something; it should be on the page.

In Marubeni the Court of Appeals explained that "principally" means "in the chief place" and "done by design or purposefully as opposed to be accident or inadvertently." Applying that to "principally designed," the question is whether the transport or persons or of goods was the chief design consideration and whether those design elements were done purposefully. Once could rationally make that determination either way without needed to layer on the consideration of use. I think that is what the CIT intended both in Marubeni and in this case.

Doing that, I am struck by a few unavoidable (to me) conclusions. First, the Transit Connect is built off the passenger Focus platform, a decision that Ford made purposefully.  Next, Ford purposefully put seats in the middle of what might otherwise be a usable cargo area. The presence of the seats and foot wells actually interferes with the use of this vehicle as a cargo van. That was a purposeful decision. Similarly, rear windows are not generally considered an advantage in a cargo van. That means Ford purposefully decided to make a vehicle with an impediment to use as a cargo vehicle. These are not minor impediments; no competent engineer would do that when designing principally for cargo. 

In the bigger picture, the principal design achievement of the Transit Connect might have been to qualify as a passenger vehicle that is easily convertible into a cargo van. Yes, the vehicle needed to be street legal and popular enough as a van to justify the investment. Its design will certainly reflect that as well. I just find it hard to see how on these facts the Transit Connect, with a set of uncomfortable cheap seats in the middle of the cargo bed, was at the time of entry principally designed as anything other than a passenger vehicle that is easily and economically convertible into a cargo van. That is a legitimate design objective and a real thing not a disguise or artifice (which I know was not the question presented). 

There is likely more to come on this case. Just remember, if you hear it described as a blow to tariff engineering, that is wrong. Nevertheless, this decision is likely to make it harder to classify based solely on physical characteristics. That might have a larger than anticipated impact.