U.S. Court of Appeals for the Federal Circuit

In a customs classification case, Chemtall, Inc. v. United States, the U.S. Court of Appeals for the Federal Circuit affirmed a U.S. Court of International Trade (“CIT”) ruling that the vinyl polymer acrylamide tertiary butyl sulfonic acid was properly classified under the Harmonized Tariff Schedule of the United States (“HTSUS”).

The Federal Circuit was called on to distinguish between “Amides” and “Other” in a heading of the HTSUS that covers amides, their derivatives and salts thereof. The case considered the appropriate duty rate for the product that Chemtall, Inc. (“Chemtall”) is importing.

The HTSUS is a hierarchical structure for describing all goods in trade for duty, quota, and statistical purposes. Goods are classified in accordance with the General and Additional U.S. Rules of Interpretation, starting at the 4-digit heading level to find the most specific provision and then moving to the subordinate categories. The United States International Trade Commission maintains and publishes the HTSUS. However, the Bureau of Customs and Border Protection of the Department of Homeland Security (“CBP”) is responsible for interpreting and enforcing the HTSUS.

The Federal Circuit affirmed the CIT determination that the chemical product of the plaintiff-appellant Chemtall, acrylamide tertiary butyl sulfonic acid, is not an amide, but rather is a derivative of an amide.

The significance of this categorization is that derivatives of amides are subject to a higher duty rate, which is almost double that of amide imports. The categorization that Chemtall argued applied carries a 3.7% duty rate. However, the federal judge affirmed the decision of the CBP to apply the higher 6.5% duty rate for the product.

The full opinion of Chemtall, Inc. v. United States, case number 2016-2380, in the U.S. Court of Appeals for the Federal Circuit can be found here.

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In U.S. v. Nitek Electronics, Inc., the Federal Circuit constrained the Department of Justice’s ability to seek import penalties based on a culpability level different than the level alleged by the Customs and Border Protection during the administrative penalty process.

Generally, when pursing penalties for lost import duties due to misclassification of goods under 19 U.S.C. § 1592, the Government must demonstrate a material false statement or omission amounting to fraud, gross negligence, or negligence.  Based on the level of culpability alleged by the Government, the burden of proof for the Government shifts significantly from clear and convincing evidence for fraud, proving the elements for gross negligence, and the mere burden of proving the act or admission (with the burden shifting the the importer to show that the act was not negligent) under a negligence theory.

In Nitek, the importer of gas valves disputed the CBP’s allegations of grossly negligent conduct during the course of the administrative penalty proceeding.  The matter was subsequently referred to the DOJ which pursued an enforcement action based on a negligence theory.  The Court of International Trade held that the  DOJ could not pursue penalties against an importer based on a different level of culpability than the level alleged by the CBP during the administrative proceeding.  The Federal Circuit affirmed the Court of International Trade’s decision, finding that the Government had not exhausted administrative remedies when it pursued an ‘independent’ claim based on negligence which was not present in the administrative proceeding.

Those close to the case are hailing the decision as a significant victory for importers who, in the past, have been unfairly forced to defend penalty actions brought under multiple theories by multiple agencies.  As the CBP is now likely to take additional care when investigating and selecting the theory which the government will pursue during the administrative proceeding, mounting a robust defense from the very outset of any administrative action is now an absolute imperative for importers.