Customs and the Constitution

Do the U.S. Constitution’s procedural protections governing the deprivation of life, liberty and property apply in the context of import regulation? That question may deserve a skeptical response, especially in light of the longstanding principle that “engaging in foreign commerce is not a fundamental right protected by notions of substantive due process.” [1] But even if there is no substantive right to engage in foreign commerce, is there nonetheless a right to procedural protections, under the due process clause of the U.S. Constitution, when the government takes action to restrict importation? Judicial precedent states that such guarantees exist, but they have been narrowly construed; procedural due process challenges have generally been unsuccessful in the trade remedies field [2].

A recent decision by the Court of Appeals for the Federal Circuit, however, reveals that constitutional constraints may in fact govern the procedures by which importers are subject to trade-restricting decisions of U.S. agencies. Royal Brush Mfg., Inc. v. United States involved an allegation that Royal Brush, an importer of pencils, transshipped Chinese-origin pencils through the Philippines in order to evade U.S. antidumping duties imposed on pencils from China. [3] U.S. Customs and Border Protection (CBP) opened an investigation under the Enforce and Protect Act of 2015 (EAPA) [4], and conducted a “verification” at the site of the Philippine manufacturer. CBP obtained information, including production orders, invoices, and photographs of equipment, from which it concluded that the Philippine facility was incapable of producing the quantity of pencils that Royal Brush had imported into the United States. In part on the basis of this information, CBP determined that Royal Brush had evaded the AD duties on imports of pencils from China. However, the information obtained by CBP was treated as confidential and was not released to Royal Brush or its counsel, because CBP’s regulations do not authorize the release of confidential information obtained in an EAPA investigation. [5]

Royal Brush appealed to the U.S. Court of International Trade (CIT), which remanded the case and ordered CBP to provide public summaries of the confidential information, but it rejected Royal Brush’s argument that it was entitled to review the confidential information itself. The CIT stated that “Congress has not mandated that Royal Brush be afforded such access and Royal Brush has not shown that due process requires it.” [6] On remand, CBP prepared public summaries of the confidential information, but the redactions emptied the public versions of content – for example, replacing a photograph with the word “photo,” and replacing numbers with the word “number.” [7] The CIT found that CBP complied with its regulatory obligations “by providing the necessary public summaries of the confidential information,” and again held that “Royal Brush has not established that CBP has failed to provide Royal Brush the process that it is due.” [8] Accordingly, the CIT affirmed CBP’s remand determination.

The CIT’s decision raises the question, what process is due? [9] This is particularly important in a situation – such as under EAPA – where Congress has not specified through legislation the procedures by which confidential information is to be managed, unlike AD/CVD proceedings, in which those procedures are laid out in elaborate detail. [10]

The Court of Appeals answered that question, and reversed. [11] It explained that there is one “relatively immutable” principle of due process, which is that “the evidence used to prove the [g]overnment’s case must be disclosed to the individual so that he has an opportunity to show that it is untrue.” [12] The Court of Appeals quoted several of its prior decisions, as well as those by other courts regarding the due process requirement that a party be granted access to the information on which the Government relies in reaching an adverse determination. The Court found that there is “no legitimate government interest here in refusing to provide confidential business information to Royal Brush,” given that the Government’s concerns about the “necessity of secrecy can be alleviated by issuing a protective order,” as in AD/CVD cases. [13]

The Government, in defending the CBP’s actions, contended that neither the EAPA nor CBP’s regulations provide a mechanism, such as a protective order, under which confidential information could be disclosed to Royal Brush or its counsel. “In other words,” the Court of Appeals summarized the Government’s position, “the government can avoid compliance with due process requirements by the simple expedient of failing to provide for a protective order in a statute or regulation.” [14] The Court rejected that contention: “We are aware of no case supporting any such extraordinary theory, and it is untenable on its face. The right to due process does not depend on whether statutes and regulations provide what is required by the constitution.” [15] The Court found that CBP has the “inherent authority” to issue protective orders [16], and it turned the Government’s logic on its head – reasoning that the absence of an authorizing statute does not prevent CBP from issuing protective orders in the absence of a statutory or regulatory provision prohibiting it from doing so. [17] On the latter point, it could be argued that, since the Court found that a party’s due process right to confront the evidence used against it emanates from the Constitution, a statute or regulation prohibiting the issuance of protective orders would be unconstitutional, and hence could not lawfully prohibit the disclosure of the information to the targeted party under some sort of protective mechanism. But the Court of Appeals in Royal Brush was not called on to address that difficult situation. [18]

Royal Brush will be remanded to CBP, which will be required to develop a protective order under which it may release the information on which it has relied to the company’s counsel. In addition, the Government has recently requested a voluntary remand in at least one other case in light of the Royal Brush decision [19], and it is likely that CBP will establish a procedure for issuing protective orders in EAPA proceedings, to avoid similar disputes regarding the due process rights of targeted importers. This is particularly urgent as EAPA proceedings have become more active in recent years. More broadly, the Court of Appeals’ decision undoubtedly will have implications for other proceedings in which CBP is involved and which currently do not provide for the disclosure of confidential information to parties under protective order.

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Through his 40 years of experience in the international trade regulatory field, Neil Ellis has litigated numerous cases involving the U.S. trade laws before the administrative agencies, U.S. courts, and in WTO dispute settlement proceedings. Please contact us at neil@neilellislaw.com with questions you may have regarding trade litigation issues.

[1] NEC Corp. v. United States, 151 F. 3d 1361, 1369-70 (Fed. Cir. 1998).

[2] See, e.g., NEC Corp., supra; PSC VSMPO-Avisma Corp. v. United States, 688 F. 3d 751, 761-62 (Fed. Cir. 2012); Gilda Indus. v. United States, 446 F. 3d 1271, 1284 (Fed. Cir. 2006) (no due process right to “additional procedural protections” in challenging USTR action under Section 301); Transpacific Steel LLC v. United States, 4 F. 4th 1306, 1333-35 (Fed. Cir. 2021) (rejecting equal protection argument regarding application of Section 232 steel tariffs).

[3] Royal Brush Mfg., Inc. v. United States, 75 F. 4th 1250 (Fed. Cir. 2023).

[4] 19 U.S.C. § 1517.

[5] The CBP regulation governing EAPA procedures does establish rules governing the submission of confidential information, which specifies that the submitting party must also prepare public summaries “in sufficient detail to permit a reasonable understanding of the substance of the information.” 19 C.F.R. § 165.4(a)(2). However, unlike the rules governing the treatment of confidential information in AD/CVD proceedings, neither Congress nor CBP has authorized the release of the confidential information in an EAPA investigation to the party that is the target of the allegations or its counsel.

[6] Royal Brush Mfg., Inc. v. United States, 483 F. Supp. 3d 1294, 1308 (Ct Int’l Trade 2020).

[7] 75 F. 4th at 1254. The Court of Appeals found that “{t}he public summaries . . . provided no meaningful information.” 75 F. 4th at 1259.

[8] Royal Brush Mfg., Inc. v. United States, 545 F. Supp. 3d 1357, 1369 (Ct Int’l Trade 2021).

[9] See, e.g., NEC Corp., supra, 151 F. 3d at 1371 (“. . . NEC is due a fair and honest process; the question that remains, then, is what process is due.”)

[10] See 19 U.S.C. § 1677f.

[11] This note focuses on one particular aspect of CBP’s handling of confidential information – namely, its refusal to provide the evidence on which it relied to Royal Brush or its counsel. CBP’s denial of Royal Brush’s request for an opportunity to submit rebuttal information was also rejected by the Court of Appeals, but that topic is not explored further here.

[12] 75 F. 4th at 1257 (quoting Greene v. McElroy, 360 U.S. 474, 496 (1959)).

[13] 75 F. 4th at 1259.

[14] 75 F. 4th at 1260.

[15] Id.

[16] 75 F. 4th at 1260, 1262.

[17] Thus, the Court of Appeals implicitly rejected the CIT’s statement that “CBP is precluded from disclosing {confidential information} by statute and regulation.” 545 F. Supp. 3d at 1367 (emphasis added).

[18] The Court of Appeals also brushed aside CBP’s argument based on the legislative history of the EAPA – namely, that a draft of the legislation expressly authorized CBP to issue protective orders, but that provision was deleted in a later iteration of the legislative text. Courts on occasion have interpreted a Congressional decision to delete a proposed statutory provision as evidence of legislative disapproval of the deleted provision. But the Court of Appeals declined to accept that logic, stating flatly that “there is no indication that Congress objected to protective orders.” 75 F. 4th at 1261.

[19] See Defendant’s Partial Consent Motion for Voluntary Remand, ECF No. 62, in Newtrend USA Co. v. United States, CIT No. 22-347 (Sept. 18, 2023).

Commerce’s Proposed Regulations and The Economics of Trade Remedies

As has been widely publicized, the U.S. Department of Commerce recently issued proposed amendments to its antidumping (AD) and countervailing duty (CVD) regulations. [1] These proposed amendments come in the wake of Commerce’s revisions to the regulations governing scope and anti-circumvention proceedings, as discussed in my note posted in October 2021. The new proposals cover a broad range of topics, both technical and substantive, several of which are novel and significant. In this note, I focus on one of the more far-reaching proposed revisions – namely, the expansion of the types of issues that the trade remedy laws are intended to address.

Traditionally, the AD and CVD laws have been understood as limited to specific types of economic conduct – predatory pricing (or price discrimination) in the case of AD, and government financial contributions that confer a benefit on foreign producers/exporters in the case of CVD. The proposed regulations will significantly expand that scope by authorizing proceedings to address the fundamental economic concept of externalities, as well as benefits to foreign production that are difficult to quantify, such as lax enforcement of labor, environmental, human rights, and intellectual property (IP) rules. The proposed expansion of the U.S. trade remedies regulations is consistent with the current Administration’s efforts to include non-traditional elements in trade agreements and in the standards by which international trade is to be judged.

Several aspects of this proposed expansion of the trade remedies regulations deserve attention.

First, the Proposed Rule would address not just actions taken (or financing provided) by foreign governments to support their producers and exporters, but also foreign government “inaction” in enforcing their laws in the fields of property rights (including IP), labor protections, human rights, and environment protection, where that inaction “evinces the existence of a financial contribution” to a foreign producer. [2] The Proposed Rule explains,

“We recognize that every country retains discretion to pursue its own priorities, whether through directed efforts to assist in the economic success of its domestic industries, such as subsidies and government assistance, or by implementing and enforcing certain laws, policies and standards for the public welfare. However, we also recognize that when governments take little or no action to implement or enforce such laws, policies, and standards, benefits may accrue to a company in a way that provides the company with a financial advantage over its competitors.” [3]

What is intriguing is not just the expansive reach of the Proposed Rule, but also that Commerce’s explanation uses language broader than that traditionally used to describe and justify the trade remedy laws. That is, Commerce’s explanation uses the economic terminology found in studies of externalities to describe the failure of markets to set prices that capture the social costs of production. Commerce explains that producers do not typically consider externalities (i.e., “the indirect societal costs of their production decisions”) when setting prices and calculating profits, and as a result, government regulation is necessary to ensure that those externalities are captured and the full “cost of compliance” is considered by producers. Classic sources in the economic literature, such as Coase and Samuelson, are cited in support of this principle. [4] The logical outcome of this analysis, according to Commerce, is that the failure of a foreign government to enforce its regulations confers a benefit on producers who are not required to fully internalize the social costs incurred through their productive activity.

Second, Commerce justifies the proposed rule in part by comparing the economic impact of government inaction across, rather than within, countries. The Proposed Rule states:

“These examples of foreign government inaction could result in costs and prices that are unreasonably suppressed and create an unlevel playing field between producers and suppliers in countries in which governments provide weak, ineffective, or nonexistent property (including intellectual property), human rights, labor, and environmental protections, and producers and suppliers in countries in which the governments provide and enforce such protections.” [5]

This reasoning seems to conflate the situation in countries where necessary rules don’t exist with countries where rules exist but are inadequately enforced. Put differently, the term “provide,” in the quoted text, is different from “enforce.” It would be difficult, if not impossible, to compare the “costs of compliance” [6] across countries when different countries impose different compliance obligations in the first place.

As noted above, Commerce concedes that different countries will have different enforcement priorities. And it appears to recognize the obvious point that the trade remedy laws of a single country – such as the United States – are not a suitable engine to ensure that the entire global economy accedes to a given level of labor, environmental and IP standards. However desirable such global standards may be, they must be established through multilateral (or at least bilateral) agreement, as seen in the United States’ negotiation of agreements that include such standards. But if that is true, then it would be difficult for CVD rules to be applied through a comparison of general policies regarding cost internalization in one country against another, despite what Commerce seems to be saying at several points in the Proposed Rule. [7]

Third, the Proposed Rule would apply the “inaction” principle in several ways. A finding that a foreign government failed to enforce its rules would impact CVD determinations in two ways, and one in AD. The first CVD impact is direct, if limited. A proposed new regulation, 19 C.F.R. 351.529, would provide that a failure by a foreign government to impose or collect “fees, fines, and penalties” from a producer/exporter would be treated as a countervailable subsidy. This would be limited, presumably, to situations in which the other criteria for countervailability – most importantly, specificity – were also found to exist. The countervailable benefit would be measured as the amount of the fee that was not collected, or the amount of interest foregone in the case of deferred payment of a fee. [8]

The second CVD impact is less direct, but it raises more fundamental issues. The Proposed Rule would amend section 351.511(a)(2) of Commerce’s regulations, concerning the benchmark used to determine whether a foreign government is providing goods or services at “less than adequate remuneration.” The proposed amendment would authorize Commerce to consider whether “certain prices are derived from countries with weak, ineffective, or nonexistent property (including intellectual property), human rights, labor, or environmental protections.” If so, those prices could be excluded from the benchmark against which the provision of goods or services by the government under investigation to its producers/exporters would be measured. As the quoted language makes clear, the exclusion of the third country’s prices from the benchmark would be based on broad social and economic findings – far broader than the “fees, fines, and penalties foregone” principle. Importantly, however, the financial impact of those broad findings – i.e., the “weak, ineffective or nonexistent” legal protections – would not have to be quantified, thus avoiding what would entail a very complex exercise.

In the AD space, the proposed impact of the “inaction” principle focuses on the calculation of dumping margins for non-market economy (“NME”) countries – primarily China and Vietnam. In calculating the dumping margin for an NME producer, Commerce does not determine the “normal value” (“NV”) of the merchandise exported to the United States on the basis of the prices charged by that producer in its home country. Rather, it bases NV on the value of the inputs (“factors of production” or “FOPs”) used to produce the subject merchandise in a “surrogate” market economy country at a level of economic development comparable to the NME. [9] The Proposed Rule would authorize Commerce to disregard a proposed market economy surrogate value if, inter alia, that value is “derived” from an industry, region or country with “weak, ineffective, or nonexistent property (including intellectual property), human rights, labor, or environmental protections.” [10] Thus, for example, if the environmental protections or IP enforcement in proposed surrogate countries for China, such as Romania or Malaysia, are found to be inadequate, and if they “undermine the appropriateness” of the value of a significant FOP, then Commerce could disqualify that surrogate country’s data to value the FOP.

Finally, on a procedural matter, Commerce has invited comments on the Proposed Rule, which are due by July 10, 2023. The Proposed Rule will certainly be subject to careful review by Commerce before it is finally promulgated, and the provisions discussed in this note may undergo substantial revision. In addition, however it is finally formulated, the Proposed Rule will almost certainly be subject to challenge, either in domestic litigation – as exceeding the scope of the AD/CVD laws and Commerce’s authority as granted by Congress – or the WTO – as exceeding the scope of the AD/SCM Agreements to which the United States acceded – or both.

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Through his 39 years of experience in the international trade regulatory field, Neil Ellis has worked extensively with his clients in evaluating and commenting on proposed amendments to U.S. statutes and regulations. If you have questions regarding the Proposed Rule – either the specific topics discussed in this note, or otherwise – please feel free to contact us at neil@neilellislaw.com.

[1] U.S. Dep’t Commerce, “Regulations Improving and Strengthening the Enforcement of Trade Remedies Through the Administration of the Antidumping and Countervailing Duty Laws,” 89 Fed. Reg. 29850 (May 9, 2023) (“Proposed Rule”).

[2] Id., 89 Fed. Reg. at 29858.

[3] Id.

[4] Id., 89 Fed. Reg. at 29859 n.29 (citing, among others, the classic article by Ronald Coase, “The Problem of Social Cost,” 3 J. L. & Econ. 1 (1960)).

[5] Id., 89 Fed. Reg. at 29859.

[6] Id.

[7] And indeed, challenges of general economic and welfare policies enacted by foreign countries may necessarily be limited by the “specificity” concept that underpins the CVD law. See 19 U.S.C. 1677(5A); WTO Agreement on Subsidies and Countervailing Measures, Arts. 1.2 & 2.

[8] The proposed regulation, 19 C.F.R. 351.529(b), explains that the deferral of the payment of a fee, fine, or penalty would be treated as a government-provided loan in the amount of the payment deferred.

[9] See 19 U.S.C. 1677b(c); 19 C.F.R. 351.408.

[10] Proposed Rule, 89 Fed. Reg. at 29875 (proposing new subsection 351.408(d)).

The Limits of Deference – Again

Returning to one of the themes discussed in my note posted in February of this year, the U.S. Court of Appeals for the Federal Circuit has recently issued two more decisions reflecting skepticism toward the reasoning of the U.S. Department of Commerce in anti-dumping cases. Such judicial skepticism generally has focused on the interpretation of statutory text, rather than the evaluation of factual evidence on the record. This is not surprising, given that appellate judges are removed from the process of building and parsing the complex factual records on which dumping determinations are made, and that the standard of judicial review of agencies’ factual determinations (“substantial evidence”) is a lenient one. The interpretation of text, on the other hand, is a more abstract legal task with which judges may feel more comfortable.

(Before I go too far with this simple vision of appellate review, however, I should note that there are – and must be – exceptions. To take one example, in SolarWorld Americas, Inc. v. United States, 962 F.3d 1351 (Fed. Cir. 2020), in which I was involved, the Court of Appeals studied very detailed Thai surrogate value data used to construct the normal value for Chinese exports of solar panels to the United States. The Court concluded that certain elements of the Thai data were aberrational, which resulted in artificially inflated dumping margins.)

The most recent example of the Court’s statutory construction is found in YC Rubber Co. v. United States, issued on August 29. The issue on appeal concerned the calculation of the “all-others” rate for cooperative but non-mandatory respondents in an anti-dumping annual review in which there was only one mandatory respondent (after the second respondent selected as a mandatory withdrew from the review). The statute provides that generally a dumping margin is to be calculated for each individual respondent, but it provides an exception in situations where there are too many, in which case Commerce may calculate individual margins for a “reasonable number” of respondents. 19 U.S.C. 1677f-1(c)(2). [1] Commerce is then directed to calculate an average “all-others” rate to be applied to the non-selected respondents on the basis of those individual dumping margins (with exceptions not relevant here). 19 U.S.C. 1673d(c)(5).

The central question on appeal was whether an “average” could be based on a single datapoint in the numerator and the number “1” in the denominator. Commerce has long thought it could calculate an average on this basis, and the Court of International Trade (CIT) agreed. The Court of Appeals reversed, explaining that the statutory phrase “reasonable number of exporters and producers” in section 1677f-1(c)(2) demonstrated a legislative intent that more than one mandatory respondent would be subject to individual analysis. And for the purpose of calculating the “all-others” rate, section 1673d(c)(5)(A) uses the phrase “the estimated weighted average dumping margins established for exporters and producers individually investigated” – again contemplating a number greater than one. [2]

The decision in YC Rubber may have a significant impact on the administration of anti-dumping reviews, because it appears to compel Commerce to select at least one new mandatory respondent in cases where it initially selected only two and one of them has subsequently withdrawn from the review. Doing so under the statutory deadlines may place significant time pressures on Commerce and the newly-selected respondent.

The Court of Appeals’ reliance on statutory text to question Commerce’s reasoning is seen in another recent case, Hitachi Energy USA Inc. v. United States, 34 F.4th 1375 (2022). [3] Here, Commerce initially accepted a respondent’s reporting of expenses associated with its U.S. sales, but later, upon remand, revised its methodology. Commerce then claimed that information on certain U.S. expenses needed under the new methodology was missing from the record, but it refused to provide the respondent an opportunity to submit the missing evidence. Instead, Commerce applied partial “adverse facts available” (“AFA”) to determine the respondent’s dumping margin. The CIT affirmed Commerce’s decision, but the Court of Appeals reversed.

The Court of Appeals focused on the statute governing reporting deficiencies, 19 U.S.C. 1677m(d), which requires Commerce to “promptly inform the person submitting the response of the nature of the deficiency and . . . to the extent practicable, provide that person with an opportunity to remedy or explain the deficiency.” The Court rejected Commerce’s arguments as to why a deficiency notice was not required in this case, stating that “the statutory entitlement to notice and opportunity to remedy any deficiency is unqualified.” 34 F.4th at 1384. The Court also concluded that Commerce failed to demonstrate that the respondent had engaged in any of the “transgressions” listed in 19 U.S.C. 1677e(a), which would authorize recourse to AFA in determining the dumping margin under section 1677e(b).

But there are limits to judicial skepticism. Over the years, the Court of Appeals has shown a greater degree of deference toward agency decisions involving analysis of detailed factual records (despite the exception noted in my parenthetical above). It also has deferred to Commerce’s interpretation of statutory text in situations where the statute is perceived as ambiguous or silent, in which case the Court analyzes Commerce’s interpretation pursuant to the two-step Chevron framework. A very recent example of such deference is found in Shanzi Hairui Trade Co. v. United States, 39 F.4th 1357 (Fed. Cir. 2022), in which the Court of Appeals affirmed Commerce’s application of an AFA-based margin to compute the “all-others” rate in an annual review. The statute – specifically, the same section 1673d(c)(5) parsed in YC Rubber, discussed above – expressly excludes the use of AFA-based rates to calculate the all-others rate, but only in investigations. As to annual reviews, “Congress ‘left a gap for {Commerce} to fill’,” 39 F.4th at 1361 (quoting Chevron), and the Court of Appeals accepted the manner in which Commerce filled that gap. [4]

In sum, the Court of Appeals’ unsurprising, if imperfectly-consistent, hospitality toward text-based legal arguments should influence the manner in which parties challenge – and defend – decisions of the U.S. trade agencies.

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Through his 38 years of experience in the international trade regulatory field, Neil Ellis has litigated numerous cases involving the U.S. trade laws before the administrative agencies, U.S. courts, and in WTO dispute settlement proceedings. Please contact us at neil@neilellislaw.com with questions that you may have regarding trade litigation strategy.

[1] In the slip opinion, the Court unfortunately confuses the analysis by repeatedly referring to this statutory provision as “1677(c)” and “1677(c)(2)”. There are no such statutory provisions, and the text quoted in the opinion is actually found in sections 1677f-1(c) and 1677f-1(c)(2), to which the opinion sometimes correctly refers.

[2] The Court of Appeals noted that the CIT in fact had already adopted this interpretation of the statutory text in decisions issued over a decade ago. But that line of cases was ignored by Commerce over the years and distinguished by the CIT (erroneously, it turned out) in YC Rubber.

[3] In addition, as discussed in my February note, the Court of Appeals rejected Commerce’s textual interpretation in another recent case, regarding the so-called “particular market situation” statutory provision. Hyundai Steel Co. v. United States, 19 F.4th 1346 (Fed. Cir. 2021). I will forego repeating that discussion here, except to note that since that time, the Court of Appeals has reaffirmed its position by denying a motion for rehearing.

[4] As stated in my February note, however, there have been times when the Court of Appeals has refused to defer to Commerce’s interpretation of the statute, concluding that the legislative silence indicates a prohibition, not a “gap” that may be filled by Commerce. These alternative strands of judicial reasoning create an unresolved tension in the jurisprudence.