Federal Circuit Upholds Constitutionality of Duty Payment Requirement for Challenging Denied Protests

The U.S. Court of Appeals for the Federal Circuit on June 30 affirmed the constitutionality of a longstanding requirement to pay duties before bringing most customs cases to court (here). International Custom Products had appealed the case from the Court of International Trade, arguing that requiring the now-bankrupt importer to pay $28 million in duties violated its due process right to a hearing. In yet another twist in ICP’s decade-long struggle involving entries of white sauce that the courts have found were the subject of an improperly revoked ruling, the Federal Circuit found that the conditions set by law for challenging protest denials are inviolable, despite the unpleasant circumstances of ICP’s case.

The case is one of several challenging a notice of action issued by CBP in 2005 that reclassified ICP’s white sauce, which the agency had classified as “sauce” dutiable at 6.6% in a 1999 ruling, as “butter and dairy spreads” dutiable at an out-of-quota rate of $1,996 per kilogram. The notice of action caused ICP’s duty liability to rise by 2,400 percent, eventually bankrupting the company. Although CBP reliquidated most of the white sauce entries following a Federal Circuit decision that found the 2005 notice of action improperly revoked the 1999 ruling without the required notice and comment (see 14041501), 13 entries remained in dispute.

Under 19 USC 2637(a), challenges of denied protests can only be filed at CIT if the importer has paid all duties owed. ICP claimed it was unable to pay the $28 million it owed on the 13 entries. CIT reluctantly ruled in 2013 that the nonpayment meant ICP couldn’t have its day in court (see 13090501). In oral argument held by the Federal Circuit in May, a Justice Department lawyer acknowledged that ICP would likely prevail on the 13 entries if it took the normal route under 28 USC 1581(a) of challenging the denied protest and paying the duties, but refused to back down on the question of whether ICP could challenge CBP on the entries without paying the duties owed (see 1505120049).

On appeal, the Federal Circuit affirmed the lower court’s decision, pointing to the law’s long history of requiring payment of duties since 1845. Lawsuits against the government can only be brought if specifically authorized by an explicit “waiver of sovereign immunity,” such as the provision under 19 USC 1581(a) allowing importers to file lawsuits against the government to challenge denied protests. The requirement to pay duties is a condition on that waiver, so the importer has to meet that condition in order to overcome the government’s immunity, said the Federal Circuit. In similar cases involving tax law, the Supreme Court has held that it is constitutional for the government to require payment of taxes before bringing suit, noted the appeals court.

The Federal Circuit also found no violation of ICP's due process rights occurred because CBP did not deprive the importer of constitutionally-protected liberty or property. There is no constitutional right to import merchandise at a given classification and duty rate, it said. Nor is there even a constitutional right to import or export, said the Federal Circuit. Even if ICP is guaranteed the right to a hearing, it could have paid the duties on a single entry and requested that CBP suspend liquidation on the rest, it said. "The statutory scheme and pre-payment requirement are not unconstitutional simply because ICP failed to timely avail itself of the provided procedures," said the court.

ICP will now "likely seek an en banc" rehearing of the case by all the judges on the Federal Circuit, as opposed to the three judge panel that affirmed the CIT decision, said ICP's attorney, Gregory Teufel of OGC Law. The three-judge panel "recharacterized" one of ICP's key arguments in the case when it found ICP had no constitutionally-protected property interest, he said. According to Teufel, ICP did not argue it had the right to import at a given duty rate, but instead that it had a right to rely on the 1999 ruling. "ICP, unlike an importer with no ruling, had a valid property interest in the ruling at issue," he said. "It was disappointing to see the Federal Circuit sidestep rather than address that distinction." The Justice Department did not respond to a request for comment.

The Federal Circuit's finding that ICP had to challenge a denied protest and pay duties despite its financial hardship showed the limited options for importers in duty challenges, said John Peterson of Neville Peterson, who submitted a brief on behalf of the American Association for Exporters and Importers. "The ICP decision is another indication that the CIT's residual jurisdiction has been so narrowly construed as to be almost meaningless. It should also remind importers that while payers of other taxes have the option, under certain circumstances, to challenge taxes without paying them first, importers do not have that option. If an importer does not have the power to pay a disputed duty bill, the government can essentially put them out of business".