CIT Faults Both CBP and Importer in Related-Party Apparel Valuation Dispute

Although CIT’s decision confirms CBP’s original appraisement method for now, it effectively denies a contingent government request to reliquidate the entries at a higher amount to reflect payments not originally included in the appraised value. The court also ruled on claims for duty-free treatment under the Caribbean Basin Trade Preference Act in its sprawling 53-page opinion.

Prices for Suit Jackets Set by Parent Company Executive

Macclenny imported the 46 entries of men’s suit jackets from Nicaragua in 2000 and 2001. The suit jackets were exported from Nicaragua by KB Manufacturing Company. KB assembled the suit jackets from fabric formed and cut in the U.S. sent by Macclenny.

Both Macclenny and KB were divisions of Bayer Clothing Group (BCG). While Macclenny was set up as BCG’s import/export arm, KB existed solely to supply Macclenny and BCG. It had no other customers. The prices Macclenny paid KB for the suit jackets were set by BCG’s Chief Operating Officer (COO). KB operated at a loss for every year of its existence, yet was never allowed to negotiate or decline an order from Macclenny.

After entry, the U.S. Customs Service, as it was known at the time, granted a request to suspend liquidation of the entries to look into valuation issues. Macclenny said the goods should be appraised using deductive value. Despite the relationship between Macclenny and KG, Customs decided the entries should be appraised using transaction value. The agency decided the relationship between KB and Macclenny had no effect on pricing based on a letter from Macclenny’s lawyer that said prices for KB’s suit jackets had been negotiated at arm’s length. Macclenny filed four protests on the valuation of the entries, including one that included a claim that several entries should have been liquidated duty free under CBTPA, and filed suit upon denial.

Neither Government Nor Importer Backs Up Claims

In court, the government said its decision to appraise the related-party transactions using transaction value was allowed under an interpretative note in the valuation regulations at 19 CFR 152.103(l)(1)(ii), which says transaction value can still be used when the buyer and seller are related, as long as the price has been set in a way consistent with normal industry pricing practices. It said BCG’s COO based the prices on company budgets in a way that would eventually allow KG to reap a profit.

The court said the government’s justification was “so generic and universal as to be largely meaningless.” The government didn’t give a detailed explanation on how exactly the budgets were used to calculate prices, said CIT. And it didn’t provide any evidence at all that the method BCG’s COO used to set prices was consistent with normal pricing practices in the garment industry, said the court. CBP’s guidance on the subject from 2007, “See What Every Member of the Trade Community Should Know About: Determining the Acceptability of Transaction Value for Related Party Transactions,” requires “sufficient evidence to establish the alleged circumstances of the sale” and “a thorough explanation of the circumstances surrounding the sale,” noted CIT, as well as “evidence that the . . . price was settled in accordance with . . . industry practices.” The government failed to hold itself to its own standard, the court said. “The evidence that the Government has marshaled to date is decidedly insufficient to support the use of transaction value here.”

But the court also rebuffed Macclenny’s arguments that Customs should have used deductive value. Deductive value can only be used if transaction value cannot, said CIT. Even if relationship affects price, transaction value would still be used if it “closely approximates” the value of similar or identical merchandise, or deductive or computed value,” said CIT. Neither party addressed whether use of transaction value would lead to a different result, it said.

“The bottom line is that -- unless and until it has been determined that the use of transaction value is not mandated by either the circumstances of the sale test or the statutory test values -- the statute simply does not permit appraisement based on deductive value, which is the result that Macclenny advocates,” said CIT.

Road Forward Unclear for Macclenny, Government

A letter sent by CIT Judge Delissa Ridgway to lawyers for Macclenny and the government outlined the options each side has going forward. Either side may again ask the court for judgment of their respective legal theories, including by fleshing out arguments on the way prices were set or the “test values” that should be used as comparisons to decide the correct method of appraisement, she said. That may include another lengthy discovery process in the case, which has been ongoing since 2005. The parties may also reevaluate their chances for success and, weighing the time and cost of further litigation, decide to settle.

Alternatively, the parties could prepare to proceed to trial, said Ridgway. But that would still require both sides to “expend major time and effort” in “refocusing and streamlining their cases,” she said. In coming to its Jan. 22 decision, the court already has “been forced to sift through the parties’ submissions and the record as a whole to try to piece together the parties’ respective cases,” said Ridgway. “We do not intend to do so again, and, needless to say, would not allow trial to go forward as a disorganized ‘free-for-all.’”

"We are still reviewing the court decision," said Macclenny's lawyer Jerry Wiskin of Simons & Wiskin. "No decision has been made on how we plan to proceed," he said. The Justice Department did not immediately respond to a request for comment.

(Macclenny Prods. v. U.S., Slip Op. 14-5, dated 01/22/14, Judge Ridgway)

(Attorneys: Jerry Wiskin of Simons & Wiskin for plaintiff Macclenny Products; Amy Rubin for defendant U.S. government)