Bestfoods v. United States, PLAINTIFF-APPELLEE

• Decision Date: 26 July 2001
• Docket Number: DEFENDANT-APPELLANT,No. 00-1547,PLAINTIFF-APPELLEE,00-1547
• Citation: 260 F.3d 1320
• Parties: (Fed. Cir. 2001) BESTFOODS (FORMERLY KNOWN AS CPC INTERNATIONAL, INC.),, v. UNITED STATES,
• Court: U.S. Court of Appeals — Federal Circuit

Page 1320

260 F.3d 1320 (Fed. Cir. 2001)

BESTFOODS (FORMERLY KNOWN AS CPC INTERNATIONAL, INC.), PLAINTIFF-APPELLEE, v. UNITED STATES, DEFENDANT-APPELLANT.

No. 00-1547

United States Court of Appeals for the Federal Circuit

July 26, 2001

Appealed from: United States Court of International Trade

John M. Peterson, Neville, Peterson & Williams, of New York, NY, argued for plaintiff-appellee. With him on the brief were Curtis W. Knauss; and George W. Thompson, of Washington, DC.

Armando O. Bonilla, Attorney, Commercial Litigation Branch, Civil Division, Department of Justice, of Washington, DC, argued for defendant-appellant. With him on the brief were David M. Cohen, Director; and Jeanne E. Davidson, Deputy Director. Of counsel on the brief was Louis W. Brenner, Jr., Attorney, Office of General Counsel, Department of the Treasury, of Washington, DC. Also of counsel on the brief were Sandra L. Bell, Supervisory Attorney Advisor; and Monika R. Brenner, Attorney Advisor, Office of Regulations & Rulings, U.S. Customs Service, of Washington, DC

Before Newman, Circuit Judge, Archer, Senior Circuit Judge, and Bryson, Circuit Judge.

Archer, Senior Circuit Judge.

Senior Judge James L. Watson

The United States appeals from the judgment of the Court of International Trade holding that 19 C.F.R. §§ 102.13(b) is arbitrary, capricious, an abuse of discretion, and otherwise contrary to law. Bestfoods v. United States, 110 F. Supp.2d 965 (Ct. Int'l Trade 2000). This regulation withholds de minimis treatment under the federal marking statute from most agricultural products. Concluding that 19 C.F.R. §§ 102.13(b) is a valid exercise of discretion by the United States Customs Service ("Customs"), we reverse.

BACKGROUND

Bestfoods makes Skippy peanut butter in Little Rock, Arkansas. The peanut butter is manufactured from peanut slurry, a gritty, peanut-based paste. Most of the peanut slurry in Bestfood's peanut butter is made in the United States, but 10-40% of the peanut slurry is made in Canada from peanuts grown elsewhere.

In January 1993, Bestfoods sought an administrative ruling from the United States Customs Service ("Customs") that it was not required to indicate under the federal marking statute, 19 U.S.C. §§ 1304(a), that its peanut butter was partially of Canadian origin. The federal marking statute requires "article[s] of foreign origin . . . imported into the United States [to] be marked in a conspicuous manner . . . to indicate to an ultimate purchaser the English name of the country of origin of the article." 19 U.S.C. §§ 1304(a) (1994). However, where foreign materials or raw ingredients are included as components in a product manufactured in the United States, the marking statute may not be triggered if the foreign ingredient is substantially transformed in the manufacture of the final product. In arguing that it was not required to mark its peanut butter as a product of Canada, Bestfoods initially contended that the Canadian peanut slurry was substantially transformed in the manufacture of the peanut butter.

Customs determined, however, that Bestfoods was required to mark its product to indicate the Canadian origin of the peanut slurry. In reaching this conclusion, Customs applied regulations promulgated pursuant to the North American Free Trade Agreement ("NAFTA"), Dec. 17, 1992, Can.-Mex.-U.S., 32 I.L.M. 289 (1993); 19 U.S.C. §§ 3312 (1994) (approving and implementing the NAFTA). Those regulations replaced the traditional case-by-case substantial transformation test with a "tariff shift" method. 19 C.F.R. §§ 134.1 (b) (2000); 19 C.F.R §§ 102.11 (2000). Under this tariff shift method, a good, or component of a good, is considered of United States origin if the subsequent manufacturing processes in the United States are sufficient to change that good or component's tariff classification. 19 C.F.R §§ 102.11. Peanut slurry and peanut butter are classified under the same tariff classification, HTSUS 2008.11.10. Therefore, because the peanut slurry does not undergo a tariff shift in the processing, Customs determined that the peanut butter containing this Canadian slurry must be marked to indicate the Canadian origin of the slurry.

Bestfoods appealed to the Court of International Trade, arguing that Customs had improperly replaced the traditional case-by-case substantial transformation test set forth in United States v. Gibson-Thomsen Co., 27 C.C.P.A. 267. The court agreed with Bestfoods, and remanded to Customs to determine substantial transformation under the Gibson-Thomsen test. CPC Int'l, Inc. v. United States, 933 F. Supp. 1093 (Ct. Int'l Trade 1996). On remand, Customs again concluded that the peanut slurry did not undergo substantial transformation, and Bestfoods again appealed to the Court of International Trade. The court affirmed Customs' determination. CPC Int'l, Inc. v. United States, 971 F. Supp. 575 (Ct. Int'l Trade 1997). Bestfoods then appealed to this court.

In that first appeal, we reversed-in-part and vacated-in-part, concluding that Customs had properly applied its regulations promulgated pursuant to NAFTA in its initial determination. Bestfoods v. United States, 165 F.3d 1371 (Fed. Cir. 1999). We also remanded the case so that Bestfoods could pursue any alternative arguments concerning Customs' application of the new regulations.

On remand, Bestfoods raised the new argument that 19 C.F.R. §§ 102.13(b) (2000) is arbitrary and capricious. This provision is a subsection of 19 C.F.R. §§ 102.13, and sets forth a de minimis rule that excepts from the marking requirement incorporated foreign material making up less than 7 percent of the overall value of the good (or 10 percent of the value for a good of Chapter 22, Harmonized System).¹ This de minimis exception is not applicable, however, to most agricultural products, as set forth in 19 C.F.R. §§ 102.13(b). Bestfoods argued on remand that the exclusion of agricultural products, such as its peanut butter, from the de minimis exception was arbitrary and capricious and, therefore, invalid. The Court of International Trade agreed with Bestfoods and entered judgment invalidating 19 C.F.R. §§ 102.13(b), effectively extending the de minimis rule of 19 C.F.R. §§ 102.13 to agricultural products such as Bestfoods' peanut butter. Bestfoods v. United States, 110 F. Supp.2d 965 (Ct. Int'l Trade 2000).

The United States now appeals that judgment, arguing that 19 C.F.R. §§ 102.13(b) is a valid exercise of Customs' discretion and was improperly invalidated.

DISCUSSION

We review the Court of International Trade's consideration of Customs' regulations, a pure question of law, de novo. See Texport Oil Co. v. United States, 185 F.3d 1291, 1294 (Fed. Cir. 1999). The federal marking statute expressly delegates to the Secretary of the Treasury the authority to promulgate regulations implementing the marking statute, in general, and as it specifically applies to goods imported from a NAFTA country.² 19 U.S.C. §§§§ 1304(a) and 1304(j) (1994); 19 U.S.C. §§ 3314(b) (1994). In reviewing the regulations promulgated pursuant to this grant of authority, we must defer to the administrative agency and, under the APA standard of judicial review, we must uphold these regulations unless they are "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law." 5 U.S.C. §§ 706 (1994); United States v. Mead Corp., 533 U.S. __, __ (2001); Chevron U.S.A. v. Nat. Res. Def. Council, Inc., 467 U.S. 837, 844 (1984).

The United States argues that 19 C.F.R. §§ 102.13(b) is a valid exercise of Customs' discretion in promulgating regulations to implement the federal marking statute and the NAFTA marking rules. It notes that the federal marking statute does not require any de minimis exceptions. Moreover, the limited de minimis exception in the regulations corresponds with Customs' past practice and harmonizes the marking regulations with similar country of origin rules associated with the NAFTA Tariff Preference Rules. Accordingly, the United States asserts that the Court of International Trade improperly invalidated 19 C.F.R. §§ 102.13(b). We agree.

The regulation at issue, 19 C.F.R. §§ 102.13(b), is not arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law. Neither the federal marking statute, 19 U.S.C. §§ 1304(a), nor the NAFTA marking rules, set out in Annex 311 of the NAFTA, requires a de minimis exception for agricultural products. Indeed, the federal marking statute does not provide specifically for any such de minimis exceptions. In general, it requires that "every article of foreign origin . . . be marked." 19 U.S.C. §§ 1304(a) (emphasis added).

The marking statute then sets out certain circumstances where a foreign product need not be marked. For example, no marking is required when the article cannot be marked (§§ 1304(a)(3)(A)) or the article was produced more than 20 years before its import (§§ 1304(a)(3)(I)) or where marking of the article in question would be economically prohibitive (§§ 1304(a)(3)(K)). In view of the broad statutory language requiring marking of all articles, except for the listed exceptions, we cannot conclude that Customs was required to allow further exceptions from the marking requirement.

As the United States points out, Customs' treatment of agricultural products under the NAFTA marking rules codifies its past practice of strictly enforcing the marking statute with respect to such articles. For example, in 1985, Customs determined that orange juice manufacturers were required to mark their products to identify every source of foreign concentrate included in their juice. C.S.D. 85-47, 19 Cust. B. & Dec. No. 593 (1985); Nat'l Juice Prods. Ass'n v. United States, 628 F. Supp. 978 (Ct. Int'l Trade 1986) (affirming Customs' decision on appeal).³

In addition, withholding the de minimis exception from agricultural products tends to harmonize the country of origin rules for marking purposes...