US Court of Appeals for Federal Circuit Vacates US Court of International Trade Decision That Would Have Let Customs Reject Declared Value Based on “First Sale” Rule or “Related-Party” Prices If Non-Market Economy “Influenced” Buyer or Seller

A recent (August 11, 2022) US Court of Appeals for the Federal Circuit ("CAFC") opinion, Meyer Corp., US v. United States,¹ has relieved many concerns that a previous decision by the US Court of International Trade ("CIT")² had caused for global supply chains.  Under the CIT's previous decision, an importer's calculation of dutiable value could not lawfully apply the "first sale" rule if "related-party" transactions involved non-market economies ("NME") such as China or Vietnam.  The CAFC has now vacated that CIT decision and remanded it for further consideration, on grounds that the CIT misconstrued an earlier CAFC opinion and improperly required China's NME status not to affect invoiced prices.  According to the CAFC, the applicable statute requires only that the relationship between buyer and seller not affect such prices.

The importer in Meyer purchased China-origin cookware sets and Thailand-origin cookware sets including China-origin components.  Both sales channels involved a related middleperson in Thailand, although a second middleperson in China also sometimes participated.  One of the questions at issue was whether the importer's calculation of dutiable value could lawfully use the "transaction value" price that a related middleperson paid to a related manufacturer, even if both were located in Thailand (i.e., the "first sale" price). 

CIT's Misinterpretation of Statutory Framework

The statutorily preferred means for appraising imported goods' dutiable value is the "transaction value" method.³  "Transaction value" is defined as "the price actually paid or payable for the merchandise when sold for exportation to the United States," plus certain enumerated additions and minus certain statutorily required deductions.⁴  An importer may use the "transaction value" method, however, only in certain circumstances.  Specifically, the importer ordinarily must be able show: 

1. That the invoiced transaction used to determine the imported goods' value was a bona fide sale—i.e., that in the transaction, someone actually "sold" the imported goods;
2. If so, that this sale of the imported goods—even when located at the upstream end of a multi-tiered chain of sales and resales—was "for exportation to the United States" (a.k.a. the "first sale" rule);
3. That "sufficient information" supports any statutorily required additions to and deductions from invoiced prices for this sale; and
4. If the imported goods' buyer and seller are "related" entities, that "the price actually paid or payable" nevertheless reflects arm's-length principles.⁵

Regarding the second and third of the four prerequisites for applying the "transaction value" method, the original CIT Meyer decision, which the CAFC has now vacated and remanded, had held that the "first" sales at issue did not have sufficient documentation (a) to disprove the existence of any possibly hidden subsidy resulting from China's NME and (b) to prove that prices reflected arm's-length principles.  

In reaching these conclusions, the CIT's original decision had generalized that US customs law might prohibit importers from basing reported dutiable value on the "transaction value" of the goods if the sale to a middleperson were between related parties and the goods were either—

• Produced in an NME country like China and Vietnam; 
• Produced in a market-economy country like Thailand, but incorporating NME inputs; or
• Bought or sold by an NME entity, regardless of where the goods or the inputs that they incorporated originated. 

The CIT opinion's language had been broad, with potentially widespread implications for global supply chains: ". . . this court has doubts over the extent to which, if any, the ‘first sale' test . . . was intended to be applied to transactions involving NME participants or inputs."⁶

Much of the reasoning in the CIT's original Meyer decision had relied on an expansive reading of one small phrase in a famous prior CAFC decision commonly known as Nissho Iwai.⁷ In Nissho Iwai, the CAFC held that the importer had properly based the transaction value of certain imported subway cars on the "first-sale" price that a foreign purchasing agent had paid to a foreign manufacturer, rather than the higher price that a US importer had paid to a wholly owned US subsidiary of the foreign purchasing agent.⁸  The facts necessitated this outcome in Nissho Iwai because the foreign manufacturer's production of the cars "for a specific United States purchaser" implied that, when the middleperson placed its order, the cars were "intended ‘for exportation to the United States' and had no possible alternative destination."⁹ The importer's calculation of dutiable value could use this "first sale," the Nissho Iwai CAFC observed, mostly because the subway cars were clearly destined for the United States—but also because the sale satisfied all other statutory requirements.  In explaining the latter detail (what made the sale "statutorily viable"), the Nissho Iwai CAFC had written, in pertinent part:  "The manufacturer's price constitutes a viable transaction value when the goods are clearly destined for export to the United States and when the manufacturer and middleman deal with each other at arm's length, in the absence of any non-market influences that affect the legitimacy of the sales price" (emphasis added).¹⁰

The CIT's original decision in Meyer had focused on the one expression from Nissho Iwai that we have italicized, "absence of any non-market influences," and made it into an additional required element, as if both necessary and separate from the four statutory requirements listed above.¹¹  This factor, the CIT wrote, "has generally been neglected"¹² but mattered in Meyer's facts because China "presumptively"¹³ remained an NME in customs valuation decisions no less than in US Department of Commerce trade-remedy proceedings.  In addition, the Meyer CIT assumed that, because the United States does not yet recognize China as a market economy, an importer had an added "burden of demonstrating" that the buyer procured the goods "at undistorted prices."¹⁴

CAFC's Vacating of CIT's Meyer Decision

According to the CAFC's new decision, the CIT in Meyer "misinterpreted Nissho Iwai to impose a requirement beyond what the statute and regulations demand."  Specifically:  

There is no basis in the statute for Customs or the court to consider the effects of a nonmarket economy on the transaction value.  The statute requires only that "the relationship between [the] buyer and seller did not influence the price actually paid or payable."  19 U.S.C. § 1401a(b)(2)(B).  This provision concerns effects of the relationship between the buyer and seller, not effects of government intervention, and especially not with government intervention that affects the industry as a whole.¹⁵

In using the phrase "absence of any non-market influences," then, the Nissho Iwai CAFC was "merely restating the statutory requirements for a transaction value, rather than introducing a new requirement separate from the arm's-length requirement."¹⁶  In vacating the CIT's decision, the Meyer CAFC accordingly re-affirmed the four pre-requisites that we have summarized above for using "transaction value" to calculate dutiable values and disparaged any imposition of an extra fifth requirement when transactions implicated NMEs.  Because the CIT's decision had relied on a "misreading" of Nissho Iwai, the CAFC vacated and remanded to the CIT for reconsideration.¹⁷

Outlook

If upheld, the CIT's original Meyer decision would have forced many importers to reassess their valuation methodologies or their sourcing patterns, because these often involve not only related-party transactions but also NME inputs, processing, suppliers, and middlepersons.  For now, the CAFC's action has made such reassessments unnecessary.  The Meyer case still breathes, because the CIT has yet to reconsider whether some other rationale than a presumptively "distortive"¹⁸ NME influence prohibits the importer from using the "first sale" price.  We will provide further updates if the CIT's remand redetermination changes the status quo that the CAFC's new decision has revealed and clarified.

The CAFC's opinion in Meyer Corp., U.S. v. United States is available on-line here.

_{1 Fed. Cir. Case No. 2021-1932, decided Aug. 11, 2022) (hereafter "Meyer CAFC").
2 Meyer Corp., U.S. v. United States, Slip Op. 21-26, Ct. No. 13-00154 (Ct. Int'l Trade Mar. 1, 2021) (hereafter "Meyer CIT").
3 19 U.S.C. §§ 1401a(a)(1)(A) and 1401a(b); compare to 19 C.F.R. §§ 152.101(b)(1) and 152.103.  
4 19 U.S.C. § 1401a(b).
5 19 U.S.C. § 1401a(b); also, 19 C.F.R. §§ 152.103(b)-(g), 152.103(i), 152.103(j)(1)(iv), 152.103(j)(2), and 152.103(l).  Generally, the claim that a price will reflect arm's-length principles means that the relationship between the seller and buyer will not improperly cause one of them to act against its own best interests and the price to be much higher or lower than it would have been were the seller and buyer not related.  The statute, regulations, and cases interpreting them, however, set forth specific tests for determining whether arm's-length principles have governed export prices. 
6 Meyer CIT at 120.
7 Nissho Iwai American Corp. v. United States, 982 F.2d 505 (Fed. Cir. 1992).
8 Id., 982 F.2d at 509.  
9 Id. 
10  Id.
11 See, e.g., Meyer CIT at 2-3, 13, 15, and 91-92 (quoting Nissho Iwai to require an absence of "non-market influences").
12 Id. at 3.
13 Id. at 16.
14 Id.
15 Meyer CAFC at 11.
16 Id. at 12.
17 Id.
18 Meyer CIT at 2, 5, 15, 115, and 118}

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