Duest

The Federal Circuit has affirmed the Court of International Trade's holding that a surety is be liable for statutory interest but not for equitable interest when the importer defaults on the payment of antidumping duties. What follows is heavy on law, short on fact, and important to sureties and also importers. The case is United States v. American Home Assurance Company.

When importers fail to pay duties, taxes, and fees to the U.S. government, the government can collect interest on the unpaid portion. If the importer defaults, the surety becomes liable up to the value of the bond, unless the surety has a defense it can assert (and [spoiler] actually asserts it). In this case, the importer defaulted on the payment of antidumping duties and Customs tried to collect the duties and interest from the surety. There was no question about the liability for the duties. The questions presented has to do with interest.

There are multiple bases for the interest. First, interest is available to the United States under 19 U.S.C. 1505(d), which states:

If duties, fees, and interest determined to be due or refunded are not paid in full within the 30-day period specified in subsection (b), any unpaid balance shall be considered delinquent and bear interest by 30-day periods, at a rate determined by the Secretary, from the date of liquidation or reliquidation until the full balance is paid. No interest shall accrue during the 30-day period in which payment is actually made.

Separate from that, 19 U.S.C. 580 provides:

Upon all bonds, on which suits are brought for the recovery of duties, interest shall be allowed, at the rate of 6 per centum a year, from the time when said bonds became due.

On top of that, there is a thing called "equitable prejudgment interest," which is not statutory and derives from the judicially perceived need to compensate the United States for the loss of the use of money owed to it from the time the obligation to pay accrued until a judgment ordering payment is entered. This is a traditional rule established by judges, not by Congress.

Starting with equitable prejudgment interest, the United States appealed the Court of International Trade's decision to deny prejudgment equitable interest. The Federal Circuit held that equitable remedies are generally unavailable when there is an adequate statutory remedy. Section 580 would appear to provide a statutory remedy at the relatively high rate of 6%, making the government whole. There is, however, a wrinkle in this case in that the recent Trade Facilitation and Trade Enforcement Act of 2015 expressly permits the government to recover both equitable prejudgment interest and statutory interest under section 580.

Nevertheless, equitable interest remains equitable in nature. The fact that Congress recognized that the Court of International Trade might award equitable interest does not mean the CIT must do so. Here, the Federal Circuit held that the CIT properly considered the equitable factors and concluded that the government was sufficient compensated by the statutory interest. Thus, the denial of additional equitable interest was proper.

Regarding the section 580 interest, the issue was not the availability of the remedy, which is clearly permitted under the statute. Rather, the surety argued that the CIT improperly permitted section 580 interest to be calculated on top of the section 1505(d) interest, putting interest on interest. The surety also argued that the relevant date for when interest should start to run is the date of denial of the protest rather than the first demand for payment.

On the first question, the Federal Circuit interpreted section 508 as clearly permitting interest on the entire bond amount, including 1505 interest. This would obligate the surety to pay interest on interest up to the amount of the bond. Regarding timing, the Court said section 508 is "clear and unambiguous" that the interest clock begins to run on the government's first formal demand.

The issue with respect to section 1505 interest was different. This is the legal question of whether the surety waived its right to content the interest by failing to challenge the denial of the protest and pay the duties and fees owed. The underlying rationale here is that decisions by Customs imposing charges or exactions on an importer are final and conclusive unless a protest of law suit contesting the liquidation is properly commenced. A surety is permitted to challenge a charge or exaction through an administrative protest. The fact that the interest is assessed after liquidation, does not change its nature as a protestable charge. Here, Customs denied the protest. At that point, is the defendant wanted to challenge the charge, it needed to file a summons in the Court of International Trade. For whatever reason, AHAC chose not to exercise that right and the decision became final and conclusive.

The latter point is very important. Where an importer or surety disagrees with Customs' efforts to collect duties, taxes, fees or interest, it must challenge the charge or exaction. Failing to protest will result in a final and conclusive assessment and will divest the importer or surety of the right to challenge it when sued in the CIT. I'm not happy with this result. It produces a waiver of defenses that many importers may not understand or appreciate. It is, however, the law.

Apparently, the administration has pivoted to its trade agenda. Yesterday, we saw the draft letter to Congress outlining the modest goals for NAFTA renegotiations. I also tweeted the announcement that Kevin McAleenan would be nominated to Commissioner of Customs and Border Protection. The last recent action is the Executive Order issued yesterday "Establishing Enhanced Collection and Enforcement of Antidumping and Countervailing Duties and Violations of Trade and Customs Laws."

What's this about?

The Executive Order notes that as of May 2015, the United States has failed to collected $2.3 billion in antidumping and countervailing duties. Often, the liable importer is a foreign entity without assets in the U.S. or is insufficiently capitalized to pay the duties. Either way, the duties are uncollectable. To address this, Customs imposes bond requirements and, in certain cases, Commerce requires cash deposits of duties. As is, the bonding requirements can be onerous. In some cases, the surety requires cash collateral to issue the bond, meaning the surety is taking no risk and the importer may as well pay the duties up front (if it can). I have personally seen companies put out of business because they could not secure sufficient bonds. That, of course, is the nature of doing business in merchandise that is allegedly unfairly traded and, as they say, a risk of doing business.



What the Executive Order does is require that the Secretary of Homeland Security must develop a plan to require certain importers of merchandise subject to an antidumping or countervailing duty order and who pose a risk to the revenue of the United States to provide security through a bond or other legal measure. The plan must be developed within 90 days of the date of the order.

The new part of this might turn out to be the risk assessment for certain importers. The Order specifies that it applies to "covered importers." These are defined as new importers or importers for which Customs and Border Protection has a record of incomplete or late payment of antidumping or countervailing duties. One obvious concern this raises is that an honest importer who discovers a failure to deposit antidumping or countervailing duties might be penalized for making a disclosure and voluntary tender. The penalty would come in the form of increased bond requirements. The reasonable response to that might be that the importer benefitted from an artificially low bond during the time it was withholding the duties. For similar reasons, this will raise the stakes in post-entry audits where unpaid dumping and countervailing duties are discovered. Clearly, the biggest burden will fall on new importers who will likely see increased bonding requirements.

Also within 90 days, the Secretary must develop a plan "for combatting violations of United States trade and customs laws for goods and for enabling interdiction and disposal, including through methods other than seizure, of inadmissible merchandise . . . ." I am curious what interdiction and disposal methods the government might deploy other than seizure (and the forfeiture that generally follows). There is exclusion and re-exportation, but that does not lead to "disposal."

Regarding the protection of intellectual property rights at the border, the Executive Order requires that the government share, to the extent permitted by law, with rights holders information necessary to determine whether there has been an IPR rights infringement and information regarding merchandise that has been abandoned before seizure. Right now, that information is withheld because CBP treats it as commercial proprietary information. The impact of this might be to allow the rights holders to sue infringers in U.S. courts or to seek exclusion orders from the International Trade Commission.

Finally, the order tells the Attorney General to recommend prosecution practices and allocate appropriate resources to "ensure that Federal prosecutors accord a high priority to prosecuting significant offenses related to violations of the trade laws." This is interesting in that is appears to be focused on criminal violations. I say this because the trade enforcement lawyers who deal with penalty cases are not "prosecutors;" they are in the Civil Division at Justice. Even the Assistant U.S. Attorneys who handle seizures do so in civil matters. Does that mean we can expect more prosecutions of individuals for trade-related fraud and false statements? It seems so.

Keeping in mind that the collection of antidumping and countervailing duties has been a priority enforcement issue for years and that the United States has put significant resources toward the interdiction of products violating U.S. intellectual property rights, this Order seems to be telling CBP: "Keep at it." There is some specific instructions to apply risk assessments to importers of goods subject to antidumping and countervailing duty orders. I suspect, but can't prove, that people at CBP would tell you that the agency was already doing that.

I have previously pointed out the few cases that I see as ending in an injustice, even where the result is legally correct. These cases always lead me to ask whether anyone in a position of power in the United States Government asked whether the ultimately successful litigation position was actually the right thing to do. Sometimes, it is not. Capella Sales & Services Ltd. v. United States, is one of those cases.

The background you need to understand this case is that there has been a long-running dispute over the proper calculation of the countervailing duty deposit rate imposed on aluminum extrusions from China. In May of 2011, Commerce initially calculated the all-others rate applicable to companies in China that were not assigned their own or a separate rate as 374.15%. Following some litigation, Commerce reduced the deposit rate to 137.65%. Finally, after additional litigation, the deposit rate was reduced to 7.37% in October of 2015.

At the time of entry, importers of aluminum extrusions subject to the order are required to deposit estimated countervailing duties based on the prevailing rate stated in Commerce Department instructions to Customs and Border Protection. Importers who are unsatisfied with the applicable rate are permitted to request administrative review of the order and can have the liquidation of their entries suspended pending a final determination of the proper rate of the CVD.

Capella, the plaintiff in this case, did not do that. While all that trade litigation was happening, Capella made four entries of merchandise. At the time of entry, Capella was not aware that the merchandise it was imported was subject to the CVD order. As a result, it did not deposit any countervailing duties. It also did not participate in the case, despite being notified by Customs that its merchandise was subject to the order. As a result, Customs liquidated the entries with 374.15% CVD, which was the then-current rate in the Commerce Department instructions. After the rate was determined to be 137.65%, Capella filed a case in the Court of International Trade seeking to recover the CVD it deposited in excess of the amount ultimately found to be correct.

Let's recap. Capella made some mistakes. It failed to recognize that it was importing merchandise covered by a countervailing duty order. It also failed to participate in the investigation or take any steps to prevent the liquidation of its entries. But, the United States Government also made some mistakes. Whatever it did wrong, it collected roughly 367% of excess CVD from Capella and other companies.

The question in this case is whether Capella has a means of recovering the excess CVD it paid. Sadly, the answer is no.

The Court of International Trade first had to resolve the question of whether it had jurisdiction to review the case. Here, Capella was not challenging the substance of the deposit calculation. In fact, it was happy with the final calculation. Capella's complaint was that Commerce failed to modify its instructions to Customs to retroactively modify the deposit rate. A challenge to Commerce's instructions falls within the Court's grant of subject matter jurisdiction in 28 USC 1581(i). So, jurisdiction is not the problem.

However, the government also moved to dismiss the case under rule 12(b)(6) on the grounds that Capella failed to plead a cause of action. Capella's argument was that by keeping money to which it was not entitled, the government was acting in a manner that is arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law. This makes sense. The Court already determined that the higher rate was not in accordance with law. What right should the government have to keep that money?

Unfortunately, there are procedural steps that need to be followed to preserve the right to recovery. As mentioned above, Capella did not participate in the investigation. It did not seek review of the deposit rate applicable to its products. Most important, it did not have the liquidation of its entries suspended or judicially enjoined. According to the statute, unless liquidation is suspended or enjoined, the entries will be liquidated in accordance with the Commerce Department instructions. If liquidation is enjoined pending litigation, the entries will liquidate in accordance with the final court decision.

Because Capella did not prevent the liquidation of its entries, Commerce acted properly when it liquidated the entries at the higher rate.

That, is a tough break for Capella, even if the result is not wrong. There is a principle of administrative law that requires parties to exhaust the administrative process to gain access to the Court. This is useful in most cases because it allows the agency to fully and completely review the matter and it creates a complete record for judicial review. There is also the rule that a statute means what it says. Both of these rules of law work against Capella.

But, most importers in this same situation and even those who made deposits at the time of entry did not envision such a dramatic change in the deposit rate. Participating the case is expensive and time consuming. Not enough importers will do it. The lesson of this case may be that importers should always participate in the reviews and always seek to have liquidations suspended as the only way to preserve the right to a refund should someone succeed in securing a lower deposit rate. That hardly seems efficient.

As it is, many importers have paid far too much and the domestic industry has received market protections far in excess of what the correct analysis would have mandated. No, the right, just, and efficient thing is for Commerce to amend its instructions to refund excess deposits paid. Since that will never happen, Congress should pass a bill refunding the excess duties paid by importers. Unfortunately, there may not be anyone in Congress who will stand up for the importers of aluminum extrusions.

For the past couple years, I have been on the record at numerous events and in numerous publications with various ideas for how to make tariff classification litigation more efficient and, therefore, more useful for importers. There are several good ideas floating around about this. Not the least of which is the Court of International Trade's recently announced pilot program for a "small claims" process. Others have done the lion's share of the work on that.

My big idea has been to promote early efforts to resolve the legal questions about how to interpret the Harmonized Tariff Schedule. My thought is that if everyone is reading the tariff the same way, the parties will know what facts matter and whether there is a real dispute. With the fact disputes eliminated or narrowed down, discovery can be focused and the parties can get to the controlling issues quickly. It's even possible that, once the parties know the meaning of the tariff terms, cases will be stipulated or settled.

I got here by analogizing tariff classification disputes to patent infringement cases. In a patent case, the judge interprets the patent claims following what's known as a Markman hearing. You can read all about that here, in the Brooklyn Journal of International Law.

Along comes Chemtall, Inc. v. United States, from the Court of International Trade to help me make my case. Chemtall is a complicated case involving more chemistry than I have seen since high school. The opinion is full of helpful diagrams of chemical structures. The product at issue is acrylamide tertiary butyl sulfonic acid or ATBS, for short. The classification question is whether that product is an amide. Since the structure of the produce is well understood, the only question is the definition of an amide.

According to the Explanatory Notes, an "amide" is a compound with an amide functional group and either hydrogen, alkyl radicals, or aryl radicals.

Plaintiff's position in this case is that "many" sources do not explicitly limit the definition of "amide" to those compounds with these functional groups and, therefore, it is possible to substitute a different structure. But, the Explanatory Notes provide a specific definition, which is going to be pretty persuasive. Further, the only source of support for this theory was the plaintiff's expert. Note that the expert is an expert in chemistry, not in interpreting the law. That is what judges are for.

The Court did not agree to expand the definition and applied the Explanatory Notes. That resulted in a win for Customs and Border Protection.

If the parties knew that definition early in the case, would it have taken three years to resolve the matter? Possibly, I was not involved and do not know what disputes might have been raised and resolved along the way.

Plaintiff had some other arguments about whether the product was derivative and the meaning of the 10-digit statistical suffix. And, I certainly do not pretend to understand the chemistry. The great thing about being a lawyer is that I am confident I could understand it if and when it became necessary. That is not today.

What I find fascinating about this case is that THERE WERE NO FACTS IN DISPUTE. The only issue was how to read the tariff language. Much of the 13-page opinion was a careful explanation of the process of tariff classification, the standard of judicial review, and the nature of the product. The value of the expert testimony was a minimal consideration.

When there are no material facts in dispute, cases get decided on motions for summary judgment. That is how the majority of classification cases are resolved. If that is the case, doesn't it make sense to identify the question of law up front, resolve it, and then decide whether it makes sense to continue to pursue the case? If the case goes forward, the relevant facts should be fairly well known, making discovery more focused and the whole process more efficient.

Something like that is supposed to happen in patent cases through Markman hearings and it makes sense to me to try something like that in the Court of International Trade. People in the trade have started talking about applying Markman in tariff cases, which is a good thing. On the other hand, Markman was a patent case and has not direct relevance here. Consequently, I hereby declare that if and when this process takes hold in customs litigation, it be called a "Friedman hearing."

Discovery is the legal process through which each side to a law suit asks the other side to disclose the facts relevant to the claims and defenses. It usually consists of depositions of knowledgeable witnesses, written questions and requests for production. Discovery disputes are unusual in customs litigation. More often than not, the parties can reach an agreement on the material facts. The dispute is usually, but not always, over the conclusions to be reached from those facts after the applicable law is properly interpreted. When a discovery dispute does arise, people notice (and by "people" I mean "me").

Meyer Corporation, U.S. v. United States is about a discovery dispute. The underlying issue is that Customs and Border Protection audited Meyer and determined that its application of the first sale methodology of valuation was unacceptable. If you don't know what that means, go back and read this classic post from 2005. Customs also denied duty-free claims under the GSP. After the audit went negative, the importer ask Regulatory Audit to seek internal advice from Customs' headquarters. That internal advice resulted in ruling  HQ H088815 (Sept. 28, 2011)(note that the ruling is there but seems to be posted without all of the proper formatting). The ruling went against the importer, and the lawsuit followed.

From openminds.tv/UFO Investigations

In discovery, counsel for the plaintiff sought essentially all of the documents in Customs' possession relating to the audit and to the internal advice. That resulted in the production of nearly 10,000 pages and Excel files. Some of the contents were redacted on the basis of governmental privileges covering the deliberative process and law enforcement techniques. In addition, business proprietary information, attorney work product, and attorney-client privileged material was redacted. As required, the government produced a detailed privilege log explaining the reasons for the redactions. This was followed by eight depositions for current and former Customs personnel, at least one of whom was technically speaking for the agency.

Plaintiff then filed a motion to compel Customs to provide un-redacted versions of the documents.

The deliberative privilege is intended to protect the government's decision-making process. It gives governmental officials the ability to freely and openly discuss matters of policy without fear that those discussions will be subject to discovery. In other words, it hides what goes into the sausage that is administrative rule making and forces lawyers to challenge the result. Advisory opinions, recommendations, and inter-office skirmishes get ground up into the final product. Litigants are generally not permitted to hunt around for the helpful scrap of veal that went into the bratwurst.

To be covered by deliberative privilege, the relevant department head (or a designee) must formally assert the claim in an affidavit describing the information and his or her actual consideration of it. In this case, the affidavit came from the Acting Executive Director of Regulations and Rulings. In other words, one of the officials involved in making the decision.

The deliberative process is not absolute. If there is no other source for some information and the plaintiff's need for it outweighs the harm to the process, the information is discoverable. Further, if those deliberative documents are somehow applied by the decision maker as if they were law, the documents are discoverable. In other words, Customs can't say "we have a secret memo on this issue that says you lose."

The Court did not discuss the law enforcement privilege claim other than to say that the rule for asserting it is similar. So, I will leave that alone as well.

The Court of International Trade took the practical step of actually looking at the disputed un-redacted documents, without disclosing them to the plaintiff. According to the Court, all of the redactions are of business proprietary information, agency proprietary information, or work product prepared in anticipation of making one or more of these decisions.

Based on that review and the OR&R declaration, the Court determined that the claim of privilege was appropriate. None of the information had been made public elsewhere and no exceptions to the privilege apply.

The decision ends with "To the extend the plaintiff disagrees with Customs' analysis and denial of its protest, the burden in on the plaintiff to establish its entitlement to first-sale and GSP treatment in accordance with the facts and law established during judicial review that is de novo." My personal translation of that is "Hey plaintiff, you have the facts of your transactions, bring them to court and prove your case."