CIT/Federal Circuit Litigation

On March 26, 2018, the U.S. Court of International Trade (CIT) dismissed U.S. Customs and Border Protection’s (CBP) attempt to collect $4.5 million in penalties against a Canadian textile company, Tricots Liesse 1983, Inc. (Tricots).  U.S. v. Aegis Security Insurance Co. and Tricots Liesse 1983 Inc., Slip. Op. 18-29.

Tricots produces quality knit fabrics and sells its fabrics to high-end U.S. swim and active wear producers. Fabric imports made from NAFTA yarn are duty free under the rules of origin (ROO) and fabric imports made from non-NATA yarn are duty free if the Canadian government issues Tariff Preference Level (TPL) certifications under the TPL quota program.  Tricots attempted to correct certain past NAFTA ROO claims by filing a disclosure with CBP and submitting TPL certificates issued by Canada.  However, CBP rejected Tricots’ disclosure and corrections saying the TPL certifications were untimely.  CBP issued Tricots an administrative penalty and duty demand, but did not provide Tricots an opportunity for an oral hearing during the administrative proceedings as required by statute.  After CBP filed suit against Tricots in the CIT to collect the $4.5 penalty and duties, Tricots filed a motion to dismiss the penalty claims because CBP failed to exhaust administrative remedies.

The CIT held that “[t]he facts demonstrate that, despite Tricots’ efforts, Customs did not follow the statutory injunction to provide the company with a ‘reasonable opportunity’ to make oral representations ‘seeking remission or mitigation of the monetary penalty’ following issuance of the notice of penalty, and thus did not provide Tricots with the statutorily required opportunity to be heard.”   The court added, “Accordingly, Customs failed to perfect its penalty claim and thus is barred from bringing it.”  The CIT found that the hearing was necessary before the government could bring its penalty claims in the CIT. The court rejected CBP’s arguments that Tricots failed to show it suffered “substantial prejudice” because of the government’s failure to hold a meeting where Tricots could make its arguments in person.  Now the court must decide if it should also dismiss CBP’s claims for duties.

This decision should help importers by ensuring that they receive a full and fair administrative hearing before CBP imposes a penalty.

Tricots is represented by Crowell & Moring attorneys John Brew, Frances Hadfield and Ade Johnson.

The U.S. Court of Appeals Federal Circuit handed a win to a U.S. importer of glycine from China on January 23 when it determined that the U.S. Department of Commerce (DOC) could not amend a regulation promulgated through formal notice and comment rulemaking by means of a guidance document.

Specifically at issue was the DOC’s policy regarding extensions of time to withdraw from anti-dumping duty review requests. In accordance with the Administrative Procedure Act, the DOC promulgated rules for evaluating timely and untimely withdrawals from an administrative review:

  • (d) Rescission of administrative review—(1) Withdrawal of request for review. The Secretary will rescind an administrative review under this section, in whole or in part, if a party that requested a review withdraws the request within 90 days of the date of publication of notice of initiation of the requested review. The Secretary may extend this time limit if the Secretary decides that it is reasonable to do so. See 19 C.F.R. § 351.213(d)(1).

However, in 2011, the agency published a guidance document that indicated that extensions would only be granted under extraordinary circumstances. This new position effectively changed the last sentence of the regulation.

In 2012, Chinese glycine exporter Baoding Mantong and U.S. producer of chemicals GEO Specialty Chemicals (GEO) separately requested an administrative review of an anti-dumping order on imports of glycine from China. After Commerce announced that it was initiating the review, GEO filed a notice to withdraw its petition for review towards the end of the 90-day period. Baoding Mantong also filed its notice of withdrawal, accompanied with a request for extension of time to file its withdrawal, shortly after the 90-day period expired.

Commerce denied Baoding’s request to extend the 90-day time limit for a withdrawal, thus causing the withdrawal to be ineffective. That led the U.S. importer of glycine manufactured by Baoding Mantong, Glycine & More, to appeal to the U.S. Court of International Trade (CIT), arguing that Commerce had violated its own regulation by amending the 2011 notice.

The CIT agreed with the plaintiff in 2015 and remanded the case, which led Commerce to issue Baoding an extension. GEO asked the Federal Circuit to overturn the CIT’s ruling because the CIT allegedly failed to give proper deference to the Secretary’s interpretation of its own amended regulation. However, the Federal Circuit aligned with the CIT and Glycine & More, arguing that the purpose of a guidance document is to clear up ambiguities within the regulation, not to amend the regulation in its entirety as the DOC had done in this instance.

The Federal Circuit in Pleasure-Way Industries, Inc. v. United States, 2017-1190 (Fed. Cir. 2018), recently confirmed that importers of motorhomes may not receive duty reductions for vans exported to Canada that were converted to motorhomes and returned to the US. In this case, the importer (Pleasure-Way) claimed that the 2.5% duty applicable to motorhomes (HTS subheading 8703.33) should only be assessed on the costs of converting vans into motor homes in Canada, and should not be assessed on the entire cost of the motorhome according to Harmonized Tariff Schedule of the United States (HTSUS) subheading 9802.00.50 (goods re-entered into the US after repair or alteration in Canada or Mexico).

Pleasure-Way is a manufacturer and seller of Class B motorhomes. Between January 2008 and September 2009, Pleasure-way bought 144 Sprinter vans and exported them for conversion into motorhomes which included fully plumbed bathroom and kitchen fixtures, water heaters, sleeping quarters, kitchen countertops with propane burners, microwave ovens, wall-mounted televisions, and refrigerators. The conversion also included installation of exterior features such as picture windows, porch lights, awnings, and running boards.

Under US law, “[g]oods re-entered after repair or alteration in Canada or Mexico” are only assessed duty on the costs of the repairs or alterations performed in Canada or Mexico. HTS subheading 9802.00.50. However, CBP regulations limit what constitutes qualifying “repairs or alterations” under this provision and state that the foreign activities must “not . . . create a new or commercially different good from[] the good exported from the United States,” and that the foreign activities must “not destroy the essential characteristics of . . . the good exported from the United States.” 19 C.F.R. § 181.64(a). The regulations also state that goods are not eligible for reduced duty treatment if the goods “are not complete for their intended use” when exported from the US to Canada or Mexico. 19 C.F.R. § 181.64(b).

Pleasure-Way had requested a ruling from CBP that the converted Sprinter Vans be classified under HTS subheading 9802.00.50. CBP initially granted the company’s request, but then changed its position. Based on the regulations, CBP determined that this provision does not apply to the motorhomes that were converted from vans. Pleasure-Way protested CBP’s decision and brought a case before the US Court of International Trade (CIT). The CIT ruled that Pleasure-Way was not entitled to lower duties because the operations in Canada created a new article of commerce and destroyed the essential character of the exported vans. The CIT relied on “changes to the pricing, the applicable tariff heading, the use, and the name of the vans.” Pleasure–Way Indus., Inc. v. United States, 38 I.T.R.D. (BNA) 1889, 2016 WL 6081818, at *6 (Ct. Int’l Trade Oct. 18, 2016).

The Federal Circuit affirmed the CIT decision and determined that Pleasure-Way, in changing the vans into motorhomes, created a commercially different good. The Federal Circuit focused on the CIT’s decision regarding differentiation in the marketplace. It determined that the motorhomes “no longer resembled the exported cargo vans,” and were “no longer classifiable as motor vehicles for the transport of goods.” The court also determined that the motorhomes were sold at “different price points than the exported vehicles.” Id. Therefore, the likely use and consumer base for the Sprinter vans as exported were broadly different from those for the motorhomes imported into the U.S. after leaving the Canadian conversion facility. Accordingly, the Pleasure-Way motorhomes were determined to be commercially different.

Importers may not take pleasure in this result – especially considering the fact that CBP had issued an affirmative ruling. Before investing in foreign operations based on duty reduction strategies, importers should understand that CBP has less than sixty days to revoke any previously issued ruling without notice and such revocation may be applied retroactively, provided the person to whom the ruling was issued has not acted in accordance with its terms and conditions. See, 19 C.F.R. §177.9(c) and §177.12(b); See also, HQ 963543, dated April 16, 2002. After having been in effect for sixty or more days, rulings become binding and may only be revoked prospectively after notice and comment procedures. 19 C.F.R. §177.12(b)(1)-(2)

On August 9, in the latest in a long-running battle between Ford and CBP over ‘tariff engineering’, Ford won a key victory at the Court of International Trade.

The CIT agreed with Ford that its Transit vehicles, imported with second-row passenger seats removed after importation, qualify for the lower tariff rate on passenger vehicles (2.5%), and are not subject to the higher “chicken tax” (25%) on cargo vehicles. The key facts as stated by the court include:

Ford manufactures the Transit Connect 6/7s in Turkey and imports them into the United States. Although these vehicles are made to order and are ordered as cargo vans, Ford imports them with a second row seat, declaring the vehicles as passenger vehicles . . . .  After clearing customs but before leaving the port, Ford (via a subcontractor) removes the second row seat and makes other changes, delivering the vehicle as a cargo van.

CBP took the position that the second row seat “is an improper artifice or disguise masking the true nature of the vehicle at importation,” instead of what Ford argued was legitimate tariff engineering. Customs defines ‘tariff engineering’ as “the longstanding principle that merchandise is classifiable in its condition as imported and that an importer has the right to fashion merchandise to obtain the lowest rate of duty and the most favorable treatment.”  In adopting Ford’s view, the court found that the vehicles, at the time of importation, are “principally designed for the transport of persons.”

The court’s analysis is a “must read” for anyone with more than a passing interest in customs classification. The case provides a robust articulation of an expansive and legitimate foundation for tariff engineering. Basing its analysis on important historical precedent, the court pins its finding for Ford in an 1891 Supreme Court ruling that classification must be made of the imported item “in the condition in which it is imported,” and an even earlier high court decision that ruled a manufacturer may purposely manufacture goods in such a manner as to “evade higher duties.” The court further analyzed more recent CIT decisions applying them to Ford’s extensive facts.

Given the long running nature of this dispute and the amount of difference in the two tariff rates, many observers expect Customs to appeal and so the last word may not yet be written on the Ford vehicles at issue or factual applications of ‘tariff engineering’.

In today’s trade debates, the historical background is worth remembering: the 25% duty on trucks (compared to 2.5% duty on cars) was imposed by the United States in the 1960s in retaliation against Europeans for imposing high tariffs on American chickens. It was later used against Japan as Japanese vehicles began to make serious inroads into American commerce.  That high duty remains in place 50 years later. Duties invoked in haste in trade wars can become permanent.

For more information, contact: John Brew, Jeff Snyder, Frances Hadfield; Barry Nemmers