Citgo Petroleum Corp. v. U.S. Foreign Trade-Zones Bd.

• Decision Date: 03 May 1996
• Docket Number: No. 95-1390,TRADE-ZONES,95-1390
• Citation: 83 F.3d 397
• Parties: CITGO PETROLEUM CORPORATION and Lake Charles Harbor And Terminal District, Plaintiffs-Appellants, v. THE UNITED STATES FOREIGNBOARD; Mickey Kantor, Secretary of Commerce, as Chairman and Executive Officer of the Foreign-Trade Zones Board; Robert E. Rubin, Secretary of the Treasury, as a Member of the Foreign-Trade Zones Board; Togo D. West, Jr., Secretary of the Army, as a Member of the Foreign-Trade Zones Board; and Executive Secretary of the Foreign-Trade Zones Board, Defendants-Appellees.
• Court: U.S. Court of Appeals — Federal Circuit

Page 397

83 F.3d 397

18 ITRD 1257

CITGO PETROLEUM CORPORATION and Lake Charles Harbor And Terminal District, Plaintiffs-Appellants, v. THE UNITED STATES FOREIGN TRADE-ZONES BOARD; Mickey Kantor Secretary of Commerce, as Chairman and Executive Officer of the Foreign-Trade Zones Board; Robert E. Rubin, Secretary of the Treasury, as a Member of the Foreign-Trade Zones Board; Togo D. West, Jr., Secretary of the Army, as a Member of the Foreign-Trade Zones Board; and Executive Secretary of the Foreign-Trade Zones Board, Defendants-Appellees.

No. 95-1390.

United States Court of Appeals Federal Circuit.

May 3, 1996.

Appealed from: U.S. Court of International Trade; Judge Carman.

William F. Demarest, Jr., Holland & Hart, Washington, D.C., argued for plaintiffs-appellants. With him on the brief were Adelia S. Borrasca, and Charles M. Floren, CITGO Petroleum Corporation, Tulsa, Oklahoma.

Susan Burnett Mansfield, Commercial Litigation Branch, Civil Division, Department of Justice, New York City, argued for defendants-appellees. With her on the brief were Frank W. Hunger, Assistant Attorney General, David M. Cohen, Director, Washington, D.C., and Joseph I. Liebman, Attorney in Charge, International Trade Field Office. Of counsel was Robert J. Heilferty, Office of Chief Counsel for Import Administration, U.S. Department of Commerce, Washington, D.C.

Before CLEVENGER, SCHALL and BRYSON, Circuit Judges.

BRYSON, Circuit Judge.

Appellant Citgo Petroleum Corp. sought to have one of its oil refineries designated a "foreign-trade subzone" in order to obtain favorable treatment under the customs laws. The United States Foreign-Trade Zones Board approved the request subject to the condition that import duties be paid on foreign crude oil used as fuel in the refinery. The plaintiffs challenged the imposition of that condition, but the Court of International Trade upheld the Board's action. We affirm.

I

Congress has authorized the creation of certain areas within the United States, known as foreign-trade zones, which are accorded special treatment under the customs laws. The Foreign-Trade Zones Board is responsible for designating the foreign-trade zones and foreign-trade subzones, which are foreign-trade zones created for a single business enterprise.

Businesses operating within foreign-trade zones or subzones are given favorable customs treatment with respect to merchandise they bring into the zones from abroad. For example, a company that ships raw materials into a foreign-trade zone, processes the raw materials into finished products, and then exports the finished products is not required to pay duties on the raw materials, as they are deemed never to have entered the customs territory of the United States. Similarly, a company that ships raw materials into the zone, manufactures finished products in the zone, and imports those products into the United States may be eligible to pay duties on the finished products rather than the (often higher) duties that would otherwise be assessed on the raw materials. See Armco Steel Corp. v. Stans, 431 F.2d 779, 782, 784-85 (2d Cir.1970).

Citgo operates a refinery in Lake Charles, Louisiana. The company ships foreign crude oil to the refinery, performs refining operations on it, and sells the refined products in the United States and abroad. Not all of the refined products leave the refinery, however. After the crude oil goes through the first refining stage, some of the resulting product is used to fuel the refinery itself. It is the customs treatment of that consumed fuel that is at issue in this case.

In 1986, the Lake Charles Harbor and Terminal District submitted an application to the Foreign-Trade Zones Board on behalf of Citgo, requesting that the Board create a subzone consisting of Citgo's Lake Charles refinery. The Board approved the subzone in 1989, subject to several conditions. One of the conditions, the so-called "fuel-consumed condition," required Citgo to pay import duties on the portion of the imported crude oil that was ultimately used to fuel the refinery operations. Citgo began operating under the benefits of the subzone grant, but it challenged the lawfulness of the fuel-consumed condition, arguing that the Board was not authorized to impose such a condition and that its imposition in Citgo's case was arbitrary and capricious. After an initial decision and appeal to this court on a jurisdictional issue, see Conoco, Inc. v. United States Foreign-Trade Zones Bd., 790 F.Supp. 279 (Ct. Int'l Trade 1992), rev'd, 18 F.3d 1581 (Fed.Cir.1994), the Court of International Trade directed the Foreign-Trade Zones Board to explain why it had imposed the fuel-consumed condition and a second condition that is no longer at issue, Conoco, Inc. v. United States Foreign-Trade Zones Bd., 855 F.Supp. 1306 (Ct. Int'l Trade 1994). On remand, the Board explained that it had concluded that allowing Citgo to use duty-free foreign crude oil in the refining process would be contrary to the public interest because it would give Citgo an unfair competitive advantage over domestic refiners.

The Court of International Trade affirmed in a comprehensive opinion. Conoco, Inc. v. United States Foreign-Trade Zones Bd., 885 F.Supp. 257 (Ct. Int'l Trade 1995). The court held that the Board's authority to restrict subzone activities that are contrary to the public interest justified the fuel-consumed condition. The court also rejected Citgo's argument that the Board's decision to impose the fuel-consumed condition was arbitrary and capricious; the court noted that the Board found the condition to be in the public interest based on input from government analysts as well as other domestic refiners.

Just before the court issued its decision, the Board created a subzone for a refinery operated by Amoco Oil Company, but the Board imposed different conditions on Amoco than it had imposed on Citgo. Under Amoco's grant, fuel consumed in the subzone was still subject to duty, but the Board permitted Amoco to elect "nonprivileged foreign status" for crude oil used as fuel in the refining process. 60 Fed.Reg. 13,118 (Mar. 10, 1995). The effect of the change in the condition regarding consumed fuel was to reduce the duty rate for crude oil used as fuel to the duty rate for refined fuel, which is zero.

In response to the Amoco subzone decision, other refineries applied to have their subzone grants amended to mirror the Amoco conditions. The Board granted each of those requests, including one filed by Citgo. See 60 Fed.Reg. 41,054 (Aug. 11, 1995). Because of the new subzone condition, Citgo modified its challenge to the fuel-consumed condition by requesting only retroactive relief.

II

Citgo argues that the fuel-consumed condition imposed on Citgo violated the Foreign-Trade Zones Act, 19 U.S.C. §§ 81a-81u. In the alternative, Citgo contends that even if such a condition could be imposed in a proper case, the Foreign-Trade Zones Board acted both without a sufficient basis in the record and in a discriminatory manner when it imposed the fuel-consumed condition in this case.

A

Section 3 of the Foreign-Trade Zones Act, 19 U.S.C. § 81c, exempts from duty merchandise that is brought into a subzone for certain purposes. In Nissan Motor Mfg. Corp., U.S.A. v. United States, 884 F.2d 1375, 7 Fed. Cir. (T) 143 (Fed.Cir.1989), this court held that merchandise brought into a foreign-trade zone or subzone for a purpose other than one of the purposes enumerated in section 3 is not eligible for the favorable duty treatment accorded by the Act. The court in Nissan noted that one of the purposes that is outside the scope of the Act is consumption, so that an item that is brought into a zone or subzone to be consumed there is not entitled to statutory benefits. 884 F.2d at 1377, 7 Fed. Cir. (T) at 146-47. In this case, both the Board and the Court of International Trade found in light of Nissan that the crude oil used to make refinery fuel did not qualify for statutory benefits, because it was consumed in the zone, a purpose that the court in Nissan specifically identified as non-statutory.

Citgo seeks to distinguish Nissan by noting that the portion of the crude oil that was used to power the refinery's operations went through some refining before it was used as fuel. Unlike the machinery at issue in Nissan, Citgo argues, the fuel was brought into the subzone for an approved statutory purpose--manufacturing. That interim purpose, according to Citgo, qualifies the fuel for subzone treatment, even though the ultimate disposition of the fuel--consumption--is not within the scope of the statute.

We find it unnecessary to decide whether the Foreign-Trade Zones Act provides an exemption from customs duty for crude oil that is partially refined and then consumed in a foreign-trade zone. Instead, for the reasons given below, we conclude that even if the statute exempts refinery fuel from duty under those circumstances, the Foreign-Trade Zones Board was authorized to impose conditions, including the fuel-consumed condition, on Citgo's operations within the Lake Charles subzone.

Congress granted the Foreign-Trade Zones Board very broad regulatory authority over foreign-trade zones and subzones. See Armco Steel Corp., 431 F.2d at 785, 788. Although the statutory provisions that authorize the Board to regulate zone grants do not explicitly grant the Board the authority to condition zone grants, the statute authorizes the Board to "order the exclusion from the zone of any goods or process of treatment that in its judgment is detrimental to the public interest," 19 U.S.C. § 81o(c), and to "prescribe such rules and regulations not inconsistent with the provisions of [the statute]," id. § 81h. At the time the Citgo subzone was authorized, the Board's regulations provided that "[s]pecial conditions applicable to a particular zone may be required by the Board and inserted in the grant for that zone." 15 C.F.R. § 400.702 (1988).

We...