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Court Reverses Own Decision on Standing to Challenge Reclassification with Favorable Duty Rate Change

Tuesday, March 04, 2014
Sandler, Travis & Rosenberg Trade Report

The Court of International Trade reversed an earlier decision Feb. 25 and determined that a yarn importer does have standing to challenge a U.S. Customs and Border Protection reclassification that gives it a favorable duty rate but could negatively impact its sales to garment manufacturers. However, the court then ruled that CBP’s reclassification was indeed correct.

Sandler, Travis & Rosenberg attorney Arthur Purcell notes that this case did not focus on “finding the correct result,” which is the court’s mandate in suits filed under 28 USC 1581(a) following the denial of a protest, but instead required the plaintiff to overcome a presumption of the reasonableness of CBP’s legal findings regarding the scope of the tariff provision simply because the case was filed under 28 USC 1581(i). While CBP’s legal findings under 1581(a) review are afforded no deference, under 1581(i) CBP need only show that its findings are consistent with the administrative record and not arbitrary or capricious, which “is a tougher standard for importers to overcome.”

This case was filed by Best Key Textile Inc. in an effort to overturn U.S. Customs and Border Protection’s revocation of a ruling on the classification of its proprietary “BKMY” yarn. CBP initially classified the yarn as metalized yarn under HTSUS 5605.00.90 (13.2% duty), but the revocation ruling concluded that the yarn is properly classified as synthetic filament yarn of polyesters under HTSUS 5402.47.90 (8% duty).

In a December 2013 decision, the CIT dismissed the case after determining that the revocation ruling resulted in a lower tariff on Best Key’s yarn and thus posed no threat of irreparable harm to Best Key. The CIT rejected the company’s arguments that it has suffered harm because its customers (foreign garment manufacturers) may no longer purchase its yarn unless the garments they make from it can be imported by other “strangers to this action” (garment importers) under the favorable duty rate accorded to garments made of metalized yarn.

The CIT now states that while it is “highly questionable” whether a CBP ruling that lowers the rate of duty on a product the plaintiff has no expressed intention of importing can result in aggrievement or adverse effect to the plaintiff, it is the plaintiff’s product that is the subject of the ruling at issue in this case and the court has undoubted exclusive jurisdiction over the general administration and enforcement of this type of matter pursuant to 28 USC 1581(i)(4).

The CIT then proceeded to uphold CBP’s revocation ruling that the yarn at issue is classified under HTSUS 5402.47.90. In that ruling CBP held that the Explanatory Notes to HTSUS heading 5605 “clearly contemplate that not every product combining yarn and metal in some fashion will be considered a metalized yarn for tariff purposes” and that “the mere presence of metal in the yarn does not automatically result in classification in heading 5605.” Instead, CBP found (by examining dictionaries and other materials as well as consulting with industry sources) that the common and commercial meaning of “metalized yarn” indicates that it is commonly understood to mean either a pre-existing yarn consisting of any textile material combined with metal or a plastic film deposited with metal and slit into yarn, generally used for decorative purposes, whereas the yarn at issue is produced by adding nanometals to polyester slurry and is not used in decorative applications. The court found that CBP’s determinations are not arbitrary or capricious and that it therefore may not substitute its judgments in their place.

The CIT deemed “especially persuasive” CBP’s analysis of Best Key’s claim that any amount of metal added to impart some desirable quality beyond visibility qualifies the product as a metalized yarn. CBP reasoned that if the claimed quality is not obviously discernible it must at least be measurable, which implies at least a minimum threshold or quantum of proof that the imparted, desired quality is in fact imparted. However, CBP’s lab analysis found only a trace of metals in the yarn at issue at a level apparently consistent with naturally occurring content or leftover intermediate processes. CBP therefore concluded that to classify any fiber with such little metal content under heading 5605 “would expand the heading far beyond its current scope.”

The court also rejected Best Key’s arguments that (1) CBP unlawfully communicated with Best Key’s competitors and domestic industry lobbyist groups as part of the process of determining whether to revoke the initial ruling, (2) CBP erroneously characterized those organizations’ positions on the issue of whether the subject yarn is a metalized yarn, (3) there was a “lack of thoroughness” in CBP’s revocation ruling because the agency did not follow up on information received from industry officials, and (4) CBP arbitrarily applied an unstated and ambiguous de minimis standard of metal content in determining that the subject yarn is not a metalized yarn.

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