Quitting When Ahead

Tariff classification litigation sometimes takes a relatively long time to run through the system. To be clear right at the top, I am not complaining about that. The pace is usually set with the consent of the parties. Classification cases do not involve the loss of liberty or property, no families are at risk, no one is being deported. Many of the usual policies that encourage speedy action simply do not exist. No one wants cases to needlessly languish. If the plaintiff wins, the public does end up paying interest with the refunds. On the other hand, the United States had been holding that money improperly. Also, if either party has a reason to press for a quick resolution, or it is clear that the case is amendable to a quick resolution, there are tools to make that happen.

Occasionally, the time it takes to litigate a case changes the facts on the ground. Moen, Inc. v. United States is an interesting example of that phenomenon. The case involves the classification of showerheads. The relevant entries were made in 2014 and the case was filed in 2015, which is pretty quick as these things go.

Customs and Border Protection classified the showerheads in Heading 3924 as "other household articles and hygienic or toilet articles of plastic . . . ." In 2014, the rate of duty on the merchandise was 3.4%. Moen believed that the correct classification was as mechanical appliances for spraying liquids in tariff item 8424.80.90. The rate applicable to the particular item was 1.8%, making for a reasonable potential return in the litigation.

As a result of the President's actions under Section 301, effective August 23, 2018 goods of 8424.89.90 from China are subject to a 25% rate of duty. That makes the litigation stakes very different. Someone at Moen needed to do some math to figure out whether the refund applicable to merchandise entered prior to the duty increase was worth the risk of paying a 25% duty on the merchandise for the foreseeable future. This is tricky math. The potential recovery is a known number. The future risk depends entirely on how long the 301 duties stay in place, which is an unknown. To complicate matters more, the original classification of 3924.90.56 is now on pending List 4, so it will likely be subject to additional duties going forward.

So, what to do? Does Moen go forward with the litigation knowing that it is owed a refund but will have to start paying 301 duties as long as that continues? Or, does it drop the litigation, forgo the refunds and avoid the 301 duties, knowing that when List 4 is enforced, it will owe more in 301 duties? That decision probably requires real math skills and a bunch of models based on how long the 301 duties stay in place. I suspect the whiteboards at Moen looked like this:

Moen decided that its best move was to drop the litigation. Makes sense. Except that the United States invested time and effort in the litigation and wanted a "win" to get the precedent from the Court on how to classify these items. For the United States, assuming it would have won, that is playing the long game about future cases. Consequently, the United States opposed Moen's motion to dismiss.

Under Court of International Trade Rule 41, granting a voluntary motion to dismiss falls within the sound discretion of the judge. The Court is to look to (1) the defendant's efforts and expenses; (2) the existence of excessive delay or lack of diligence on the part of the plaintiff; (3) whether there is an insufficient explanation for the need to dismiss; and (4) whether the defendant has filed a motion for summary judgment.

Here, there was no excess delay nor was there the lack of an explanation. The reason was clear, winning actually increased the current duty liability. The Government did expend time and effort to litigate the matter. Nevertheless, the Court recognized the reality that Moen is likely to litigate this issue when the 301 duties are removed. The effort, therefore, will not have been wasted.

Moreover, the dismissal of the action challenging the classification Customs applied at liquidation is a win for the government (although without a published opinion). This is the rare piece of litigation that might actually be a win-win.


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