Industry News

Court of Appeals Clarifies that "First Sales" Applies to China Products

Aug. 15, 2022
By: Ashley J. Bodden

On August 11, 2022, the Court of Appeals for the Federal Circuit (“CAFC”) issued its decision in Meyer Corp. v. United States. The case addressed both the eligibility of imported cookware for duty-free treatment under the Generalized System of Preferences and the availability of First Sale treatment for imports from China. The latter question had been the subject of significant concern in the trade community.

With respect to the Generalized System of Preferences claim, the Federal Circuit opinion affirmed the Court of International Trade (“CIT”) decision below that Meyer was not qualified to receive duty-free treatment for its cookware manufactured in Thailand. The CAFC reviewed this issue under the requirements of Torrington Co. v. United States, 764 F.2d 1563, 1567 (Fed. Cir. 1985), which require raw materials from a non-beneficiary developing countries to undergo a “double substantial transformation” in a beneficiary developing country to count towards duty-free treatment. Meyer’s cookware manufactured in Thailand came from steel disc imported from China. The manufacturers used a deep drawing process to produce the shells of the cookware, then turned the shells into finished cookware in a series of steps including trimming, wrapping in plastic, marking with the product’s specifications, punching holes for the handle, and attaching the handle. The CAFC agreed that the CIT correctly focused its inquiry on the manufacturing steps that showed that there was not a substantial change in character from the shells to the final product.

On the issue of first-sale price treatment, the CAFC found that CIT misinterpreted its previous decision in Nissho Iwai American Corp. v. United States, 982 F.2d 505 (Fed. Cir. 1992) when the CIT required the importer to show the absence of all distortive nonmarket influences. In essence the Court decided that the CIT was adding a new requirement for nonmarket economies that was neither in Nissho Iwai nor in the valuation statute. This additional “absence of distortion” requirement created the risk that Customs would value goods from different countries unequally. This is not contemplated in either the valuation code or 19 U.S.C. 1401a. Under the CIT’s rationale importers were concerned that First Sale for imports from China would essentially be impossible. The CAFC decision made clear that this is not the case.

Interestingly, the CAFC indicated that

with all this in mind, we read Nissho Iwai as merely restating the statutory requirements for a transaction value, rather than introducing a new requirement separate from the arm’s-length requirement.

This is significant because it shows that, notwithstanding Customs’ hostility to First Sale transactions, the CAFC regards First Sale as inherent in the statute. Therefore, First Sale can only be repealed by changing the statute. Since the statute’s language is intended to conform to the Valuation Agreement in the World Customs Organization, it is unlikely the statute will be changed.

Do not hesitate to contact any attorney at Barnes, Richardson & Colburn if you have questions about GSP, valuation, or the use of First Sale.