Counter-Counterclaim Decision

This is a two-parter covering three decisions including Second Nature Designs Ltd. v. United States. This part covers an interesting procedural question with implications for importers deciding whether to file a challenge to a customs decision in the Court of International Trade. In this case, that decision was the proper classification of decorative objects made from branches, wood, dried flowers, and other material. Customs classified these items in HTSUS item 0604.90.60 other foliage, branches and other parts of plants . . . dried . . . or otherwise prepared (7%). Plaintiff believes the merchandise is properly classifiable in 0604.90.30 covering the same merchandise except in "dried or bleached" form (free). 

From Second Nature Designs

This first decision does not resolve the classification. It goes to whether the United States properly asserted a counterclaim against the plaintiff. A counterclaim is a claim the defendant asserts against the plaintiff. Here, after Second Nature sued the United States over the classification of the imports, the United States appears to have reconsidered the classification and decided that some of the merchandise should have been classified in tariff item 6702.90.65 as artificial flowers and foliage. If correct, that merchandise should have been liquidated at 17%.

Counterclaims are fairly standard in federal litigation. The Federal Rules of Civil Procedure recognize counterclaims at Rule 13. Rule 13 at the Court of International Trade similarly recognize that defendants may state a counterclaim, usually in the Answer to the complaint. Moreover, Congress specifically granted to the CIT exclusive jurisdiction to hear counterclaims provided "(1) such claim or action involves the imported merchandise that is the subject matter of such civil action, or (2) such claim or action is to recover upon a bond or customs duties relating to such merchandise." 28 USC 1583. That grant of jurisdiction, however, does not create a cause of action. That has to arise from some other authority.

In a 2022 decision also involving Second Nature, the Court of International Trade held that there is no legal authority permitting the Government to assert a counterclaim seeking a different classification.

If that were the end of the matter, that would be an important change in the nature of litigation before the CIT. Lawyers who practice in this area know that a terrible outcome would be going to court to seek a reduced rate of duty and corresponding refunds only to have the outcome be a third classification not previously asserted by the importer or by Customs and resulting in not just a lack of a refunds but an actual increase in the duties owed. That's a nightmare. 

This case and similar decisions including Cyber Power Systems seem to make that outcome less likely. The decision in Cyber Power explicitly concludes that "Nothing in the provisions of the statute upon which Defendant relies gives the United States a cause of action to assert a counterclaim challenging CBP’s classification." 

But, as is often the case, the law is more complicated. In a 1984 decision called Jarvis Clark Co. v. United States, the U.S. Court of Appeals for the Federal Circuit had to sort out the burdens on plaintiffs challenging tariff classifications. There is a long story here. All you need to know is that in the old days, plaintiffs had to meet a dual burden to succeed. First, the plaintiff had to show that Customs' classification was incorrect. Next, the plaintiff had to also prove that its proposed classification was correct. Even if the Government was obviously wrong, if the plaintiff's classification was not demonstrably correct, the plaintiff would still lose. That was onerous and I am glad I never had to deal with it.

According to the Jarvis Clark decision, Congress fixed that problem in the Customs Courts Act of 1980. That is the statute that created the CIT. In doing so, Congress gave the CIT the power to order additional adjudicative or administrative steps that are necessary "to enable [the Court] to reach the correct decision." Under this law, the current understanding is that in classification cases the CIT is to determine the correct classification even if that is not a classification asserted in the pleadings. 

The CIT's obligation to find the correct result appears to be independent of any requirements of pleadings. According to Cyber Power, "Defendant is not barred from arguing for a different classification at a higher duty rate." In that case, the Court simply changed the proposed counterclaim into a defense to the plaintiff's claim. In Second Nature, the CIT followed the same path and allowed the United States to assert its preferred classification not as a counterclaim but as a defense. 

In the end, this does not seem to change the fundamentals of classification litigation. Assuming this analysis holds up on the inevitable appeal, it may change the way the Government responds to complaints. But, it seems we are just moving the same argument from the counterclaim bucket to the defense bucket. Traditionally, a defense is asserted to undercut the plaintiff's claim, rather than to seek a remedy. That makes a defense a somewhat awkward mechanism for this. Even that fact may not be meaningful. As long as the Court has to get to the right result and has the power to enforce that result through reliquidation or a money judgment, the Government might take that position that all it needs to do is make the argument in its brief without any prior pleading. 

What might change is discovery. Normally, parties can seek discovery of information that is relevant to a claim or defense. If the Government cannot assert a counterclaim, but the Court has to get to the right result, the basis for discovery relating to an alternative classification would likely need to be that it is relevant to the defense. Otherwise, I (for one) might move for a protective order. Let's not get too far down that road. Some way or another, the Court is going to get what it needs.

Part Two on the substance of this classification will follow.