Unpacking Meyer Corp. v. U.S.

 There are many pages of text in Meyer Corporation v. United States, a recent decision of the U.S. Court of International. One hundred twenty, to be exact. I will try to give you the gist here. And, it turns out, the gist might matter.

There are two issues in this case. First, whether imported cookware is entitled to duty-free entry under the Generalized System of Preferences. Second whether the importer legally claimed that the sale price from the related vendor to a related reseller represented the transaction value under the "first sale doctrine."

The GSP issue is easier to explain, so let's start there. The clad cookware subject to this case was made in Thailand. At the time of entry, the merchandise was classifiable in 7326.93.0045 and qualifies for GSP duty-free entry if it satisfies the rule of origin. Under that rule, 35% of the value of the merchandise must originate in materials from or direct processing in Thailand. In this instance, a major input material was a metal disc from China. The value of that disc was required if the finished cookware was to satisfy the 35% rule. The only way for the Chinese metal to count toward the Thai content is if it undergoes a "double substantial transformation" as part of the production process.

From: US – Meyer Corporation (meyerus.com)

In this case, the disc was first lubricated and then subjected to "deep drawing," which is a process that shapes it into a pan. The government conceded that this was a substantial transformation. After deep drawing, the proto-pan was edge cut to make the height uniform. After that, the pan was degreased and the bottom flattened. The pan was then finished to remove sharp edges. At that point, it is a "shell" that is commercially sold to other manufacturers. For its own products, the producer subjects the semi-finished pans to additional finishing steps to remove dents and scratches, make the interior surface smooth, and the exterior surface shiny. Additional steps include re-flattening and laser marking to indicate volume and diameter. 

According to the Court, none of the steps after deep drawing constitute a substantial transformation because the subsequent steps did not change the name, character, or use of the pan. After deep drawing, the item is (again, according to the Court), an unfinished pan. At the end of production, it is a pan. There is no change in chemical composition that would constitute a change in character and there is no significant change in shape or form. After deep drawing, the item will be used as a pan and that does not change in subsequent production. Finally, plaintiff had evidence of only minimal sales of the intermediate product. 

Thus, the Court held that the blanks were not subject to a double substantial transformation. As a result, their value did not count toward the required 35%. Thus, the plaintiff failed to establish that it is entitled to GSP duty preferences.

On the first sale issue, things get more complicated.

Recall that after the Federal Circuit decision in Nissho Iwai, the law is well established that in a multi-tiered transaction, the importer may report of as the value of the merchandise a price derived from:

  1. A bona fide sale
  2. that is for export to the United States
  3. where the transaction was at arms' length AND
  4. the value is otherwise consistent with the law.
Plaintiff proposed numerous facts to establish that the transfer price from the related manufacturer to the reseller was established using normal industry practices. It also provided facts showing that the price from the vendor was sufficiently high to cover all costs of production plus a profit equivalent to the firm's overall profit. All of that goes to whether the price is an arms' length price. Customs generally determines the relevant profit by looking to the parent company. 

For its part, the Government focused on whether there are any "non-market" influences on the price. This is derived from the Federal Circuit decision in Nissho Iwai, which allows for first sale valuation but notes that the applicable value must be free of any "non-market influences that affect the legitimacy of the sales price." The Court noted that China is a non-market economy.

The value decision came down to multiple factors. Regarding the appropriate level of profit, the Court held that the tested firm need not be the parent. But, given the non-market status of China, the Court held that the real costs to be covered by the sale price are inherently suspect. Moreover, the parent holding company, according to the Court, "presumptively" had the ability to influence the vendor price through financial arrangements including access to credit and capital that would not be available to competitor companies. 

This is the point at which things go sideways for the Plaintiff. The parent company apparently did not come forward with financial records top establish its lack of influence over pricing. According to the Court, 

[G]iven that the parent has an interest in seeing these types of matters resolved favorably, it is therefore presumed to be forthcoming, even unprompted, to provide whatever CBP deems necessary to assist in their resolution, and the fact that in that regard there has apparently been considerable "'resistance" throughout this case to that not-unreasonable discovery request and the “assistance” that the parent could have provided its subsidiary to address necessary questions with respect to concerns over non-market influences, speaks volumes.

 The parties are required to cooperate in discovery. Also, plaintiffs will generally want to come forward with admissible evidence that supports their case. But, litigants are not generally required to produce materials that are not in their possession or control. I fully understand that the failure to do so might result in a lack of proof to support the case. But the Court's approach seems to be drawing a negative inference from the plaintiff's failure to voluntarily produce records held by a related but legally distinct company. That seems to be new. 

The last bit is also somewhat ominous. In its penultimate paragraph, the Court noted:

Second, and more broadly, as a result of its consideration of the issues presented here, this court has doubts over the extent to which, if any, the “first sale” test of Nissho Iwai was intended to be applied to transactions involving non-market economy participants or inputs. In that regard, the Court of Appeals for the Federal Circuit could provide clarification. 

This should give pause to everyone (and there are lots of them) using first-sale valuation from China (and Vietnam). Ultimately, the applicability of first sale depends on the facts of individual transactions and not on sweeping statements. But this notion that first sale may not apply to non-market economies seems like a stretch. Given that Nissho involved Japan–an extremely market economy–I suspect that the reference to non-market influences had nothing to do with the lack of capitalism. Instead, it might have been a reference to the sort of factors that influence price that are not basic economic considerations like cost of production and supply and demand. For example, the family discount or the purposeful loss for tax purposes. These are the very concerns that make related party transactions subject to additional scrutiny. 

As the Court said, this is a question for another Court and another day. It seems likely we will hear from the Federal Circuit on the particulars of this case, if not on the particulars of the Chinese governmental influence on pricing. 


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