CBP Can't Use 'Bypass' Liquidations When Considering Prior Customs Treatment, CAFC Rules

"We are very pleased with the court’s decision today," said Patrick Reed of Simons & Wiskin, counsel for Kent. "The decision upholds an important legal principle that protects importers against retroactive changes in an existing consistent Customs treatment of imported goods and assures that legal changes will only be prospective."

A 2005 CBP ruling classified these bike seats as bike accessories in Harmonized Tariff Schedule heading 8714, in a provision dutiable at 10%. Accordingly, between 2008 and 2010, Kent entered its bike seats under that heading through New York. But after CBP liquidated a competitor's children's bike seats under a duty-free provision of heading 9401, Kent filed protests seeking that classification for its own entries. CBP granted the protests, reliquidating the relevant entries at the new duty-free heading. Unsatisfied, Kent then sought to revoke the 2005 ruling.

While it waited for the protests of the New York entries to be resolved, Kent began importing its bike seats through the Port of Long Beach, California, under the old 8714 heading. These entries were deemed liquidated -- making these bypass liquidations -- and its protests on those Long Beach entries were denied.

The importer filed suit at CIT, where it alleged that the proper classification of the kids' bike seats was heading 9401 and that the protest denials modified a treatment previously accorded to Kent by CBP and departed from a de facto EUP. CIT held that the merchandise was properly classified under heading 8714 but denied Kent's treatment previously accorded and EUP claims (see 2008260036).

Kent appealed the decision, arguing that, among other things, CIT was wrong to include these bypass liquidations in considering the treatment previously afforded to it by CBP (see 2105250053). The importer cited the language of the applicable statute, which said that any duty classification decision that would modify the treatment previously accorded by CBP to identical transactions must be made by notice and comment.

In the statute, a customs practice constitutes "treatment previously accorded," if it satisfies three criteria: (1) an actual determination by a customs officer, (2) the decision-making officer having responsibility for the subject matter on which the determination was made, and (3) CBP's consistently applying this determination on a national basis for a two-year period. Kent argued that when CBP denied its Long Beach protests, it violated the treatment previously afforded its New York entries without the necessary notice and comment period.

In weighing whether treatment previously accorded existed in this instance, CBP used the Long Beach bypass liquidations to show that the treatment of the bike seats was different -- a position supported by CIT. Kent said that the only actual determinations made by customs officers put the seats under heading 9401, since a bypass liquidation is not an actual decision made by a customs officer. The regulation prevents consideration of the automatically liquidated entries since they were subject to protest and therefore non-final, Kent argued.

"A plain reading of the regulation supports Kent’s position," the Federal Circuit said. "The touchstone of the treatment previously accorded inquiry is the consistency of Customs decisions with respect to the subject merchandise. The requirement for examination or Customs officer review is wholly consistent with the limitation in § 177.12(c)(1)(ii) that 'Customs will give no weight' to unexamined entries, without regard to whether those unexamined entries are used as positive or negative evidence of treatment."

The government argued that the bypass liquidations could in fact be used since they merely implemented CBP's 2005 ruling. "The fact of the 2005 Ruling, however, does not render the bypass entries any more appropriate for consideration than if the 2005 Ruling had never been made," the decision said. "Nor does it undermine Kent’s assertion of a treatment previously accorded. The Long Beach entries were not the only entries in play." The New York entries were the only ones with actual determinations.

"The court correctly ruled that where some of an importer’s shipments were processed under the automated bypass procedures without review by any Customs official, they are not evidence of a Customs treatment and cannot be used against the importer," Reed said. "Now we hope that the government will abandon its attempt to defend the illegal retroactive Customs action in this matter, instead of burdening our client and the lower court with further proceedings."

The opinion wasn't all good news for Kent, however, as the court sided against the importer on whether there was no de facto EUP. The Federal Circuit can overturn CBP's decision on an EUP only when there's a "clear abuse of discretion," and Kent failed to prove this, the court said. To establish there wasn't an EUP, or a practice where CBP consistently classified a particular type of merchandise under a specific HTS heading prior to some distinct point in time, the Department of Justice relied on the facts that the 2005 ruling was never revoked, the Long Beach entries were classified under heading 8714 and hundreds of entries at 14 U.S. ports over a 10-year period classified the same goods under heading 9401, among other evidence.

(Kent International, Inc. v. U.S., Fed. Circ. #21-1065, dated 11/03/21, Judges Alan Lourie, Richard Linn and Timothy Dyk. Attorneys: Patrick Reed of Simons & Wiskin for plaintiff-appellant Kent; Monica Triana for defendant-appellee U.S. government)