CBP Policy on Preference Claims Fertile Ground for Legal Challenge, Say Lawyers

The new CBP policy, announced in a letter to ports dated Aug. 11 (see 14081320), says protests may no longer be filed to claim post-importation benefits after under FTAs and preferential trade agreements that aren’t subject to the one-year time limit of 19 USC 1520(d). That means importers can no longer claim preferences after liquidation under the African Growth and Opportunity Act (AGOA), Generalized System of Preferences (GSP), the Caribbean Basin Economic Recovery Act (CBERA), the Caribbean Basin Trade and Partnership Act (CBTPA), the Civil Aircraft Agreement, Insular Possessions, Intermediate Chemicals for Dyes, the Pharmaceutical Products Agreement, and FTAs with Australia, Bahrain, Israel, Jordan, Morocco and Singapore.

The only way to claim preferences post-importation under these agreements will now be through post-summary corrections (PSCs) and post-entry amendments (PEAs). PEAs and PSCs can only be filed entry-by-entry. Protests had been a valuable tool because importers could file only one protest to claim preferences on a long list of entries, said Beata Spuhler of Drinker Biddle. “It’s just a more manageable mechanism,” she said. CBP did not immediately return a request for comment.

The change could most immediately hit importers who have entries that recently liquidated and were planning on filing a protest to claim preference. It’s too late for them to file claims using PSCs or PEAs, and CBP’s letter to the ports says any protests filed to claim duty preferences should now be “rejected as non-protestable.” It did not mention a grace period for entries that have recently liquidated.

Filing a protest anyway could be one way of getting the Court of International Trade involved, according to Spuhler and her colleague James Sawyer. Under 28 USC 1581(a), the trade court can hear challenges of denied protests. If CBP “rejects” the protest it raises the question of whether CIT would be able to hear the case, so Spuhler recommends filing any such complaint under both Section 1581(a) jurisdiction as well as Section 1581(i) “residual” jurisdiction for trade complaints with no other avenue available.

Any lawsuit would probably challenge the new policy on multiple grounds, said Sawyer. The change was procedurally flawed because CBP failed to provide for notice and comment on a change to an established agency practice as required under 19 USC 1625, he said. The legal basis of the new policy may also be challenged. The cases cited to justify the change only applied to NAFTA and the application of Section 1520(d), he said. But the trade agreements actually affected by the change in policy are exactly the agreements to which Section 1520(d) doesn’t apply.

The new policy conflicts with CBP’s own regulations at 19 CFR 10.112, which allows for the filing of documentation related to duty preferences any time before liquidation becomes final, said Sawyer and other customs lawyers. Liquidation only becomes final once protests can no longer be filed, which is 180 days after liquidation, said Alan Lebowitz of Grunfeld Desiderio. Courts have ruled that the one-year time limit for post-importation claims under Section 1520(d) overrules 19 CFR 10.112, said Lebowitz. Because post-importation claims under the agreements affected by CBP’s policy change aren’t covered by Section 1520(d), or any other legal provision, 19 CFR 10.112 should apply and importers should be able to file documentation on duty preferences until the protest deadline passes, he said.

This type of legal challenge could come “sooner rather than later,” said Lebowitz. It just depends on whether the right case comes along, and especially whether the amount of duty savings an importer stands to gain would justify the expense of a lawsuit, he said. “You need the right set of facts, you need the right client, most importantly you need an amount at issue,” he said. Nonetheless, Lebowitz says he “wouldn’t be surprised if there were already cases in the administrative pipeline that might lend themselves to litigation in terms of the amounts involved.”

Precedent Exists for Broader Legal Challenge of Policy

It may not be necessary to wait for a protest to be denied to challenge the policy in court, said John Peterson of Neville Peterson. CBP has already told importers that it will reject protests. A lawsuit could be filed under the Administrative Procedure Act challenging the creation of new rules without a formal rulemaking process, he said. That way, importers wouldn’t have to wait on CBP to decide on a protest. They could immediately ask for a preliminary injunction barring CBP from implementing the change until the court decides the case, said Peterson. With the policy change itself at issue, there’s a better chance that the court will declare the new policy invalid, he said.

There’s precedent for importers and trade groups banding together to challenge a CBP action, said Peterson. In the early 1990s, a coalition of trade associations and importers filed a lawsuit against a CBP Treasury Decision on the placement of origin markings on the packaging of imported frozen produce. CIT ruled that the Treasury Decision “was a substantive rule that had to be enacted as a regulation under the APA’s notice and comment procedures,” said Peterson.

There are several aspects of CBP’s new policy on the filing of protests to claim duty preferences that can be challenged, according to a memorandum issued by Neville Peterson. First, they are imposing a rule that importers must claim preferences in a certain way without implementing regulations. Second, there is currently no provision for “rejecting” a protest; under the current regulations, CBP must either allow or deny. Third, PSCs and PEAs aren’t even provided for in customs laws and regulations, much less identified as a way to claim duty preferences. Finally, the policy change would make it so 19 CFR 10.112 no longer covered the affected agreements. Each of these changes requires formal rulemaking procedures, including notice and comment, under the APA, says Neville Peterson. But CBP “made no effort to follow APA rulemaking procedures,” rendering the policy change “unlawful, null and void,” said the law firm.

CBP Could Face International Pressure, Informal Importer Pushback

Lawsuits aren’t the only pressure CBP may face over its new policy on post-importation claims, said Kelly Herman of Morgan Lewis. Preference claims are among the issues that are negotiated between countries before FTAs are implemented, said Herman, who participated in trade agreement negotiations and was a delegate to the World Trade Organization and World Customs Organization when she previously worked at CBP and the U.S. Trade Representative. For example, Section 1520(d) covers certain trade agreements because the countries that are part of those agreements agreed during negotiations to a one-year limit on post-importation claims, said Herman. But for the agreements that are subject to CBP’s new policy, no such provisions were included.

By effectively creating a one-year time limit for post-importation claims, CBP is “going above and beyond what’s in the agreements,” said Herman. There could be some blowback as a result, she said. “I can imagine some people might be going to USTR and complaining to them, and saying this wasn’t part of the agreement.”

In the meantime, for affected importers whose duty savings are too small to justify a lawsuit, Herman says they should make headquarters aware of their plight. Without formal rules in place, this is only a policy, and CBP has some flexibility, she said. Although the ports have been directed to implement it, importers should file a protest anyway, and try to get it to CBP headquarters for further review. At the same time, they should take their concerns to higher-ups at the Office of International Trade, including Acting Assistant Commissioner Richard DiNucci, so that they are noted, she said. The alternative of filing a lawsuit isn’t available to all, she said. “You have to have somebody who really had a lot of money on the line to really be able to take it to court, because otherwise it’s not typically worth it.”