CIT Decision Focuses on State of Substantial Transformation Test

Oct. 12, 2020

In Cyber Power Sys. (USA) v. United States, No. 20-00124, 2020 Ct. Intl. Trade LEXIS 136 (Ct. Int'l Trade Sep. 2, 2020), the Court of International Trade discussed the current state of the “substantial transformation” test in Customs cases. The decision comes in the context of an importer challenging the exclusion of merchandise. Customs and Border Protection alleges that the products have been incorrectly marked as originating in the Phillipines rather than in China. The importer protested the exclusion, and CBP denied the protest. Plaintiff sought an injunction ordering CBP to release the merchandise as marked. While the Court denied the injuction, it offered insight into the current state of the substantial transformation test.

While it is well-established that a substantial transformation occurs “when an article emerges from a manufacturing process with a name, character, or use which differs from those of the original material subjected to the process,” United States v. Gibson-Thomsen Co., Inc., 27 C.C.P.A. 267, C.A.D. 98 (1940); Anheuser Busch Brewing Ass’n v. United States, 207 U.S. 556, 562 (1908); Belcrest Linens v. United States, 741 F.2d 1368, 1372 (Fed. Cir. 1984); Superior Wire v. United States, 867 F.2d 1409, 1414 (Fed. Cir. 1989) recent decisions have made predictable application of the test difficult. The CIT acknowledged the difficulty, stating, “[w]ith 80 years of application in various contexts (country of origin marking, government procurement, voluntary restraint agreements, Generalized System of Preferences eligibility, drawback eligibility), the substantial transformation test should, one would anticipate, be fairly straightforward to apply. It is not.”

The current wrench in the substantial transformation works is whether the change in name, character, or use applies to the product as a whole or on a component-by-component basis. The government procurement case at the center of this debate is Energizer Battery, Inc. v. United States, 190 F. Supp. 3d 1308 (Ct. Int'l Trade 2016). In that case, 50 components were imported into the U.S. and assembled into a flashlight. Following a component-by-component analysis, the Energizer court concluded that because the flashlight components (the lens, etc.) all retained their specific names, character, and use when assembled into the finished flashlight, there was no substantial transformation. The court in the Cyber Power decision found this conclusion “somewhat counterintuitive” and noted that “on a practical level a finished flashlight does have a different name, character, and use than a pile of 50 unassembled constituent components.”

The court in Energizer focused on the issue of pre-determined end-use. CitingNat'l Hand Tool Corp. v. United States, 16 Ct. Int'l Trade 308 (U.S. 1992), Ran-Paige Co. v. United States, 35 Fed. Cl. 117 (1996), and Uniroyal, Inc. v. United States, 3 Ct. Int'l Trade 220, 542 F. Supp. 1026 (1982), the court found that when end-use was pre-determined at the time of importation, generally, there is no change in use. As the Cyber Power court noted, this “component-by-component approach to the substantial transformation test would seem to make it practically insurmountable for subsequent-country, pre-determined assembly to ever constitute further work/substantial transformation of an article.”

The Cyber Power court pointed to two cases where the component-by-component substantial transformation analysis was rejected. In another government procurement case, Acetris Health, LLC v. United States, 949 F.3d 719, 731 (Fed. Cir. 2020), Court of Appeals for the Federal Circuit found that “the ‘product’ is the final product that is procured—here, the pill itself—rather than the ingredients of the pill.” There the court went on to find that there was no binding authority holding that a pharmaceutical product's country-of-origin is determined by the country in which its active pharmaceutical ingredient (API) was manufactured, and the tablets' components were not "substantially transformed" into tablets in India. The CIT also expressly rejected a component-by-component analysis in Uniden America Corp. v. United States, 24 CIT 1191, 1195–98, 120 F. Supp.2d 1091, 1095–1099 (2000). In this case over the qualification of cordless telephones under GSP, “[t]he major flaw in Customs' argument is its erroneous assumption that the substantial transformation test must be applied to each detachable component rather than to the article as a whole in order to satisfy the "product of" test.” The court went on to find that each cordless telephone component underwent a change in both name and use when it became the finished cordless telephone.

To make sense of the conflicting approaches to substantial transformation, the Cyber Power court suggested considering how the courts’ conclusions where influenced by the underlying statutory and regulatory purposes. This approach could mean a different “substantial transformation” test for every context, as in, the standard used for GSP might not be the same one used for procurement. It is not clear at this point if the CIT laying the groundwork for a major reconciliation of the substantial transformation tests, but it is apparent that the substantial transformation test remains ambiguous despite 80 years of application.

Should you have questions about substantial transformation in any context, do not hesitate to contact an attorney at Barnes, Richardson & Colburn, LLP.