Issue 328, October 23, 2001
Last month, the Court of Appeals for the Federal Circuit handed down an important decision applying the standard of review recently established by the U.S. Supreme Court for Customs rulings. In U.S. v. Mead Corporation, decided earlier this summer, the Supreme Court ruled that Customs' classification rulings are entitled to "Skidmore deference," a limited standard of deference based on the ruling's "power to persuade." In light of Mead, the CAFC applied Skidmore deference in overturning the lower court's decision that favored the importer, and upholding the Customs ruling at issue in Heartland By-Products v. United States (No. 00-1287, -1289, Aug. 30, 2001).

In the Heartland case, the importer was avoiding a tariff-rate quota on sugar by importing a syrup created by adding water and molasses to the sugar in Canada, entering the product under a tariff subheading not subject to the quota, and then removing the molasses again after importation. While Customs had initially issued a ruling approving this practice, it revoked the ruling in 1999. Customs reasoned that the addition of molasses was the addition of a "foreign substance" (even though molasses is a natural by-product of sugar refining), and that it was not a genuine step in the manufacturing process, but rather an impermissible "disguise or artifice" intended to avoid the quota. The importer challenged the revocation in the CIT and won. Giving no deference to Customs, the CIT ruled that the revocation was arbitrary, capricious and unlawful.

Customs appealed this decision to the CAFC, and while the appeal was pending, the Supreme Court issued the Mead ruling. In light of Mead, the CAFC determined that Customs' revocation ruling in Heartland deserved deference under the Skidmore standard because Customs' decision had "power to persuade." According to the CAFC, the decision was based on (1) Customs' thorough consideration of the issue due to the notice and comment procedures involved in the revocation process, (2) the fact that the revocation was "supported by a logical and well-reasoned explanation," and (3) the fact that Customs has "specialized experience" in classifying goods. The CAFC agreed with Customs that the molasses added to the syrup was a "foreign substance" requiring classification in the tariff provisions subject to the sugar quota.

The Heartland case is important to importers for several reasons. First, it indicates that courts are willing to take on what is sure to be a complex task: deciding which classification rulings deserve which levels of deference. Also, the decision signals that there are limits on acceptable forms of tariff engineering, and that steps taken by an importer to achieve a lower duty rate or to avoid the application of a quota must be genuine steps in the manufacturing process. Most importantly, the decision indicates that courts will no longer necessarily substitute their own judgment for Customs' judgment when reviewing a classification dispute.

Our contributing writers, Richard H. Abbey and Sarah M. Nappi, are attorneys for Miller & Chevalier, Chartered in Washington DC and can be reached at rabbey@milchev.com or snappi@milchev.com respectively, or 202-626-5800.

Please note that due to the complex nature of the subject matter, Danzas AEI Please note that due to the complex nature of the subject matter, Danzas AEI Intercontinental cannot be responsible for actions taken by the reader in reliance on the information contained herein without prior consultation with Danzas AEI Intercontinental.