Money, CBP Flexibility Concerns Fueled Contentious ICP Case on Notices of Action and Ruling Letters

“I think that the application of the law by Judge Carman makes sense,” said Lawrence Friedman of Barnes Richardson. “The alternative would be to create a loophole by which an Import Specialist can avoid the application of a binding ruling by rate advancing merchandise on a particular entry. That would not be consistent with the purpose of [19 USC 1625], which is to enhance an importer’s flexibility to rely on rulings by making them harder to change.”

Beyond the legal issues, the case was unusually hard-fought for a customs classification case, Friedman said. “In the current low-tariff environment, it is unusual for a classification dispute to carry this much importance for the importer and for Customs,” he said. “The heightened importance for both parties seems to have fueled a very contentious case.” The CIT opinion’s detailed discussion of witness credibility is unusual in these cases, said Friedman. “And, the flat-out accusation from a witness that the entire enterprise … was an alleged scheme to import butter without properly reporting it is, in my experience, very unusual,” he said.

Litigation Began in 2005 After ICP’s Duty Liability Increased by 2,400 Percent

The case dates back to 1998, when ICP requested a ruling on the correct Harmonized Tariff Schedule classification of its white sauce, a milkfat-based product. The resulting ruling, NY D86228 (here), was issued in 1999.¹ It said the principal use for ICP’s product was “a base for the commercial production of gourmet sauces and dressings,” and classified it as a sauce under HTS subheading 2103.90.9091, dutiable at 6.6 percent. ICP subsequently entered into purchasing and selling agreements.

According to Greg Teufel of Eckert Seamans, counsel for ICP in the case, CBP then found that the white sauce was actually being used as an ingredient in processed cheese. After testing allegedly revealed that ICP’s white sauce no longer conformed to the terms of the ruling letter, CBP in 2005 issued a Notice of Action that reclassified the company’s unliquidated entries, as well as all future entries, as “butter and…dairy spreads” under HTS subheading 0405.20.3000. Under this new classification, ICP’s white sauce was subject to quota. ICP didn’t have the required permit, so it was liable for duties at $1,996 per kilogram. Overnight, ICP’s duty liability on its unliquidated entries had increased by 2,400 percent.

ICP first brought suit immediately following the Notice of Action. CIT found in ICP’s favor, but the appeals court overturned the decision because the action should have been brought under customs protest denial jurisdiction. The government alleged that ICP owed about $300 million in duties, said Teufel. So rather than protest all of the entries, which would have required full payment, the company paid duties on one entry. After ICP’s protest on the entry was denied, it again filed suit in 2007, this time on the basis of the denied protest.

In two opinions in March 2008 and November 2012, CIT ruled that CBP’s Notice of Action was an “interpretive decision or ruling” that improperly revoked its 1999 ruling letter without the notice and comment period required by 19 USC 1625(c). At trial, CBP attempted to show that ICP’s white sauce did not conform to the requirements of the ruling letter, and that the ruling letter was in any case void because it was obtained fraudulently. According to CBP, the ruling letter was obtained in an attempt to avoid dairy quotas. CIT found in favor of ICP on both allegations.

Contentious Litigation Centered on Actual vs. Principal Use

“I think this decision signals that the court is not going to elevate form over substance,” said Teufel. If a Notice of Action actually a revokes a ruling, or takes other action subject to notice and comment periods and prospective limitations, then the court will treat it as such, he said. “This notice of action clearly was more than some informal, courtesy communication. It was an announcement of a decision by Customs, and effectively a revocation of the ruling letter,” said Teufel. The result of the case opens every Notice of Action up to scrutiny, and CBP can’t just use Notices of Action to skirt statutory or regulatory requirements, he said.

“Although it did cost millions to stick with the lawsuit, the government had taken away my ability to import a product that had been imported into the US for many years and for which my company had a binding tariff ruling since 1999,” said Dennis Raybuck, president of ICP. “In effect, the government stole hundreds of millions of dollars out of my pocket, along with the 300 good jobs my new sauce production facility would have provided over this very tough economic period,” Raybuck said. “I could do nothing to reverse that harm, but, I could at least defend my character, integrity, and reputation.”

According to Teufel, the genesis of the case was the government’s misplaced focus on the actual use of the white sauce as an ingredient in processed cheese. Instead, tariff classification is based on the principal use of the class and kind of good in question, he said. “Under the case law, [actual use] isn’t completely irrelevant. … But so long as a particular product's actual use doesn’t become the predominant use, or the principal use, of the class and kind in question, then it should not change the classification.”

Referring to the government’s argument at trial that the ruling letter was invalid because ICP mischaracterized the use of its white sauce, Teufel said there was no information to provide that was omitted, or any false information given. At the time ICP’s owner requested the ruling letter, he didn’t even have a customer for the product, Teufel said. “He didn’t know or anticipate he’d ever be selling to anyone using it in processed cheese. At the time he made the ruling request, nobody was using white sauce to make processed cheese,” he said.

After ICP made it clear that it was challenging the government’s actual use approach, “and I think the government realized that approach was indefensible …the government then shifted, like a moving target. Throughout the case, the government latched onto anything they could,” Teufel said. “I don’t understand why ICP's arguments and explanations fell on deaf ears. It was as if the government decided that they were not going to believe anything we said and they were going to force us to prove every fact,” Teufel said. The result was an extremely contentious trial. “Anything they could argue to try to justify the outrageous action they took against ICP, they tried,” said Teufel.

“The government kept emphasizing the dollar amount at issue, and that’s why they explained they were litigating the case so hard,” Teufel said. The Notice of Action issue played a major role as well. The government wants to maintain maximum flexibility in how it deals with importers, so the issue of whether the Notice of Action was an “interpretive ruling or decision” will play a key role in the government’s decision on whether to appeal the CIT decision, Teufel said.

Possible CBP Appeal due to Ambiguity of CIT’s Opinion

Judge Carman’s ruling, while reasonable, creates ambiguity that CBP could try to exploit in such an appeal, said Brian Burke of Rode & Qualey. According to Burke, the opinion relies on differing interpretations of the word “decision” in 19 USC 1625 provisions on “interpretive rulings and decisions” and notice and comment requirements. Subsection 1625(a) requires that certain CBP “decisions,” such as ruling letters and internal memoranda, must be made available for public inspection and can be relied upon by an importer in exercising reasonable care. Rate advances notices or Notices of Action are not included under these requirements, he said.

The court then interpreted the word “decision” in Subsection 1625(c) on notice and comment requirements in two different ways, Burke said. The first time the word appears, where the statute qualifies what types of “decisions” may have notice and comment requirements, it is not limited by the form the decision takes. So unlike the term “decision” in Subsection 1625(a), he said, it includes Notices of Action. But in Subsections 1625(c)(1) and 1625(c)(2), which specify the situations where “decisions” may require comment, CIT returned to the Subsection 1625(a) definition that excludes Notices of Action, said Burke. “Given the context and purpose of the statute as a whole, [this] is the only reading that makes sense and accomplishes what Congress intended to accomplish,” he said.

But it opens the opinion up to challenges based on the rules of statutory construction, which can be cited to support the idea that the same word appearing twice in the same statute must be given the same meaning, Burke said. “I expect Customs will try to exploit this ambiguity in attacking Judge Carman’s decision, and the Court of Appeals could go along with them as a basis for overturning the decision,” he said.

Ruling Could Impose Burden on CBP and Importers

Others think CIT’s opinion could impose a burden on both CBP and importers. The opinion effectively elevates rate advances to the status of ruling letters, said Kelly Herman of Venable, formerly of CBP’s Office of Rulings and Regulations. By calling the rate advance an “interpretive ruling or decision” in its opinion, CIT has now made these Notices of Action binding on CBP, unless CBP allows for notice and comment, because 19 USC 1625(c)(1) requires notice and comment to revoke or modify prior “interpretive rulings or decisions,” she said.

Now, CBP personnel at the port will have to notify CBP’s Office of Rulings and Regulations every time they issue a notice of rate advance, because any other port taking a contrary position would be required to follow notice and comment procedures, Herman said. “Customs is going to have to be aware of every time a notice of rate advance has been issued, because that becomes a binding decision.”

CIT’s resolution of the matter also creates consequences for importers, Herman said. “Now, if you’re in the trade and you receive [a notice of rate advance], you now have an interpretive ruling or decision. And if you’re unhappy with it, you have to ask to have it revoked or modified, or else you’re stuck with it across the board,” Herman said. An importer may be stuck with a bad decision at a port, for example, but would now have to go through the headache of asking for revocation or modification from headquarters.

The facts of the case complicated matters for CIT in finding an equitable remedy for ICP. “Given that this importer was going to have to pay an exorbitant amount of money, I can see where the court really seems to be reaching to come up with some sort of equity to give them, some sort of recourse,” Herman said. ICP would have had to pay about $300 million to protest each entry if it had gone through the normal procedure of filing suit based on denied protests. “On the specific facts … what happened should never have happened. Once you have a binding ruling, that is binding forever more until they [CBP] goes through the process of revoking or modifying,” Herman said. But a court may not be able to say the precedent is only applicable under the same set of circumstances as the ICP case, she said.

“This case had been going on before I left to go to private practice,” Herman said. “When I was at Customs we were closely watching this because of the implications of what would happen.” Ultimately, if CIT’s decision is appealed, the appeals court may step back from calling rate advances “interpretive rulings or decisions,” she said. “I don’t know how they couldn’t. It’s completely inconsistent with the regulatory scheme that’s existing now.”

(See ITT’s Online Archives 12112123 for summary of CIT’s November opinion, and 08041150 for summary of CIT’s March 2008 ruling that the rate advance was an “interpretive ruling or decision.” See also ITT’s Online Archives 07022830 for summary of CAFC’s vacating of the first CIT ruling in favor of ICP, in 2007.)

¹The ruling was subsequently revoked by HQ 967780 (here), which forms the basis for another action brought by ICP based on CBP’s reliance on actual use instead of principal use of white sauce.