California Industrial Products, Inc. v. U.S.

• Decision Date: 01 February 2006
• Docket Number: No. 05-1087.,05-1087.
• Citation: 436 F.3d 1341
• Parties: CALIFORNIA INDUSTRIAL PRODUCTS, INC., Plaintiff-Appellee, v. UNITED STATES, Defendant-Appellant.
• Court: U.S. Court of Appeals — Federal Circuit

436 F.3d 1341

CALIFORNIA INDUSTRIAL PRODUCTS, INC., Plaintiff-Appellee, v. UNITED STATES, Defendant-Appellant.

No. 05-1087.

United States Court of Appeals, Federal Circuit.

February 1, 2006.

Mark L. Austrian, Collier Shannon Scott, PLLC, of Washington, DC, argued for plaintiff-appellee. With him on the brief was Robin H. Gilbert. Of counsel was Michael R. Kershow.

Mikki Graves Walser, Attorney, International Trade Field Office, Commercial Litigation Branch, Civil Division, United States Department of Justice, of New York, New York, argued for defendant-appellant. With her on the brief were Peter D. Keisler, Assistant Attorney General; David M. Cohen, Director, of Washington, DC; and Barbara S. Williams, Attorney in Charge, of New York, New York. Of counsel on the brief was Chi S. Choy, Attorney, Office of Assistant Chief Counsel, International Trade Litigation, United States Customs and Border Protection, of New York, New York.

Before MICHEL, Chief Judge, SCHALL, and GAJARSA, Circuit Judges.

DECISION

SCHALL, Circuit Judge.

The United States appeals from the final decision of the United States Court of International Trade in California Industrial Products, Inc. v. United States, 350 F.Supp.2d 1135 (Ct. Int'l Trade 2004). In its decision, the court granted the motion of California Industrial Products, Inc. ("CIP") for summary judgment and denied the government's cross-motion for summary judgment. In granting CIP's motion, the court overturned the ruling of the United States Customs Service ("Customs")¹ that CIP was not entitled to manufacturing substitution drawbacks under 19 U.S.C. § 1313(b) (1994)² based upon its exportation of steel scrap. The court held that Customs erred in denying CIP's drawback claims because, before doing so, it failed to conduct notice and comment proceedings. Such proceedings were required under 19 U.S.C. § 1625(c), the court determined, because Customs' denial of CIP's claims represented, in the words of that statute, a modification of the favorable "treatment previously accorded by [Customs] to substantially identical transactions." The court held that Customs was bound by this previous favorable treatment. We affirm.

BACKGROUND

I.

Under 19 U.S.C. § 1313, a manufacturer is entitled to recover a portion of previously paid Customs duties on imported merchandise that is subsequently exported or destroyed. In essence, the statute operates to give a party a refund on Customs duties. The refund is called a drawback.³ Subsection (b) of section 1313 allows for manufacturing substitution drawbacks, through which a manufacturer may receive a drawback when the manufacturer substitutes the same "kind and quality" of goods for those that were actually originally imported. Section 1313(b) provides:

If imported duty-paid merchandise and any other merchandise (whether imported or domestic) of the same kind and quality are used in the manufacture or production of articles within a period not to exceed three years from the receipt of such imported merchandise by the manufacturer or producer of such articles, there shall be allowed upon the exportation, or destruction under customs supervision, of any such articles, notwithstanding the fact that none of the imported merchandise may actually have been used in the manufacture or production of the exported or destroyed articles, an amount of drawback equal to that which would have been allowable had the merchandise used therein been imported. . . .

19 U.S.C. § 1313(b). In order to receive a manufacturing substitution drawback pursuant to section 1313(b), a manufacturer files a drawback claim requesting payment. 19 C.F.R. § 191.2(i) (1995).⁴

For the purpose of simplifying the drawback claiming process for certain common manufacturing operations, Customs issues offers in the form of general manufacturing drawback contracts. Id. §§ 191.2(f), 191.41.⁵ A manufacturer who meets the requirements of a general manufacturing drawback contract may accept Customs' offer by submitting a letter notifying Customs of its intent to comply with the general contract. Id. §§ 191.2(f), 191.42(b). Customs then notifies the manufacturer of its receipt of the letter of intent. Id. § 191.43. The contract is effective for fifteen years from the date of Customs' acknowledgement of receipt.⁶ Id. The manufacturer may then file individual drawback claims that comply with the general drawback contract. Id. § 191.45. If an individual drawback claim is denied, the manufacturer may file a protest with Customs pursuant to 19 U.S.C. § 1514. An individual's right to a manufacturing substitution drawback under section 1313(b) is limited by 19 U.S.C. § 1313(l), which makes "the privileges provided for in this section . . . subject to compliance with such rules and regulations as the Secretary of the Treasury shall prescribe. . . ." 19 U.S.C. § 1313(l). The regulations are made binding on officers of Customs by 19 U.S.C. § 1502(b).

In addition to 19 U.S.C. § 1313(b) and the associated regulations, when dealing with drawback claims, the Secretary of the Treasury (the "Secretary") also must comply with the procedural requirements of 19 U.S.C. § 1625(c). Under section 1625(c), the Secretary must follow notice and comment procedures before issuing an interpretive ruling or decision that would change a preexisting "treatment." Section 1625(c) provides in relevant part:

A proposed interpretive ruling or decision which would —

(1) modify (other than to correct a clerical error) or revoke a prior interpretive ruling or decision which has been in effect for at least 60 days; or

(2) have the effect of modifying the treatment previously accorded by the Customs Service to substantially identical transactions;

shall be published in the Customs Bulletin. The Secretary shall give interested parties an opportunity to submit, during not less than the 30-day period after the date of such publication, comments on the correctness of the proposed ruling or decision. After consideration of any comments received, the Secretary shall publish a final ruling or decision in the Customs Bulletin within 30 days after the closing of the comment period. The final ruling or decision shall become effective 60 days after the date of its publication.

19 U.S.C. § 1625(c) (1994) (emphases added).⁷

In 2002, the Secretary promulgated regulations expressly defining "treatment previously accorded by the Customs Service to substantially identical transactions" as set forth in 19 U.S.C. § 1625(c). See 19 C.F.R. § 177.12(c) (2005). Subsection (c)(1)(i) sets forth what must be shown to establish "substantially identical transactions" that give rise to a "treatment." Subsection (c)(1)(ii) establishes guidelines for case-by-case inquiries as to whether particular transactions involve sufficient Customs review to form the basis of a "treatment." The evidentiary burden for establishing a "treatment" is set forth in subsection (c)(1)(iv). This case concerns subsection (c)(1)(iii), which limits the "substantially identical transactions" that may form the basis of a section 1625(c) "treatment" to only the transactions of the person alleging entitlement to section 1625(c)'s notice and comment process. 19 C.F.R. § 177.12(c)(1)(iii) provides in relevant part:

The issuance of an interpretive ruling that has the effect of modifying or revoking the treatment previously accorded by Customs to substantially identical transactions must be in accordance with the procedures set forth in paragraph (c)(2) of this section. The following rules will apply for purposes of determining under this section whether a treatment was previously accorded by Customs to substantially identical transactions of a person:

* * * * * *

(iii) Customs will not find that a treatment was accorded to a person's transactions if:

(A) The person's own transactions were not accorded the treatment in question over the 2-year period immediately preceding the claim of treatment. . . .

19 C.F.R. § 177.12(c)(1)(iii) (emphases added). Thus, under the regulations enacted in 2002, a "treatment" arises only as the result of "substantially identical transactions" involving the person claiming the benefit of section 1625(c). See id. § 177.12(c)(1)(iii)(A). Also in 2002, Customs repealed 19 C.F.R. § 177.9(e). That provision contained language suggesting that transactions could be "substantially identical" so as to form a "treatment" even if they did not involve the person claiming the benefit of section 1625(c).

II.

CIP operates steel conversion mills that manufacture flat-rolled steel sheet products. CIP purchases the steel it uses for its products from domestic trading companies, which previously paid Customs duties when importing the steel. These domestic trading companies factor the Customs duties into the price CIP pays them for the steel. In CIP's mills, cold-rolled sheets of steel are trimmed to the desired size, rolled in coils, and sold to customers. Trim or steel scrap is the material trimmed off the sheets and may be re-smelted to make new steel products. CIP exports the steel trim or scrap it produces in its manufacturing process and seeks to obtain drawback on this product.

On February 16, 1994, CIP sent a letter of intent to comply with Treasury Decision ("T.D.") 81-74, 15 Cust. B. & Dec. 176 (Mar. 31, 1981).⁸ CIP revised its letter of intent on October 25, 1995, to add several additional factories that would be operating under T.D. 81-74. T.D. 81-74 comprises a general drawback contract for manufactured steel articles composed of duty-paid steel or steel of the same kind or quality under 19 U.S.C. § 1313(b). Id. at 176-77. T.D. 81-74 creates a specific exception for "waste":

The drawback claimant understands that no drawback is payable on any waste which results from the manufacturing operation. Unless the claim for drawback is based on the quantity of steel appearing in the exported articles, the drawback claimant agrees to keep records to establish...