CIT Appears to Open Door for Gov't to Collect Duties From Importers Challenging Denied Protests

The Court of International Trade in an Aug. 17 opinion appeared to leave the door open for the government to collect additional duties in court cases filed by importers challenging denied protests. In the latest in a series of recently issued decisions finding the government can't file counterclaims in denied protest cases, Judge Gary Katzmann reclassified a government counterclaim as a defense, but said importer Second Nature Designs may be liable for more duties if that defense prevails.

"Today's decision represents the 4th time in the past year that the CIT has ruled that Customs does not have a cause of action to assert a counterclaim for additional duties over and above those assessed upon final liquidation of an import entry," John Peterson, lawyer for Second Nature, said in an email. "While the court's opinion speculates that additional duties might be awarded if the Court's Jarvis Clark analysis suggests that the product should have been assessed a higher rate of duties, there would be a serious Constitutional issue if a tax assessment were to arise in the judicial branch."

Peterson was referencing Jarvis Clark v. U.S., a 1984 U.S. Court of Appeals for the Federal Circuit case that found the court's duty is to find the correct result in classification cases.

The current case involves botanicals imported by Second Nature that were originally liquidated under Harmonized Tariff Schedule subheading 0604.90.6000 as "Foliage, branches and other parts of plants...other," dutiable at 7%. Second Nature protested that they should be classified under the duty-free subheading 0604.90.3000 as "Foliage, branches and other parts of plants...dried or bleached" and sued to challenge the denied protests. The government then introduced a counterclaim, asking the court to reclassify 44 product styles as "artificial flowers" under subheading 6702.90.65, dutiable at 17% (see 2303030015).

In May, Second Nature filed to dismiss that counterclaim, arguing that no authority gave the government a cause of action to collect duties in excess of those assessed during final liquidation in cases filed to challenge denied protests, and that the governing statute, 28 USC 1581(a), was "designed exclusively for correcting determinations adverse to the importer" (see 2305180030).

Katzmann agreed the government lacked statutory authority for its cause of action but said "that alone does not warrant dismissal." Citing a CIT rule requiring the court to treat any mistakenly designated counterclaim as a defense, Katzmann reclassified the counterclaim and said the government is not barred from arguing for a different classification at a higher duty rate. CIT had ruled similarly in a line of three previous cases, beginning with a 2022 decision involving importer Cyber Power (see 2207200052).

Unlike in previous opinions by other judges, Katzmann said in a footnote that Second Nature "may be liable to the government for increased duties" if the court agrees with DOJ's preferred classification at a higher duty rate.

The court also severed and dismissed one entry for lack of subject-matter jurisdiction, saying that because the entry was assessed a zero percent duty, the issue was moot because Second Nature did not suffer an injury that the court could address. Unlike with the other entries, the government’s argument for reclassification can't be designated as a defense because there is no affirmative claim by Second Nature to which a defense can attach, Katzmann ruled.

(Second Nature Designs v. U.S., Slip Op. 23-116, CIT # 18-00131, dated 08/17/23; Judge: Gary Katzmann; Attorneys: John Peterson of Neville Peterson for plaintiff Second Nature Designs; Brandon Kennedy for defendant U.S. government)