Bestfoods (Formerly Known as Cpc International, Inc.) v. United States
Docket: 00-1547
Court: Court of Appeals for the Federal Circuit; July 26, 2001; Federal Appellate Court
The United States Court of Appeals for the Federal Circuit reversed a judgment from the Court of International Trade regarding the validity of 19 C.F.R. 102.13(b), which denies de minimis treatment for most agricultural products under the federal marking statute. Bestfoods, the plaintiff, produces Skippy peanut butter primarily from U.S.-made peanut slurry, but uses 10-40% Canadian peanut slurry. In 1993, Bestfoods sought a ruling from the U.S. Customs Service, asserting that it was not required to mark its peanut butter as partially Canadian because the Canadian ingredient was substantially transformed during production. However, Customs required the marking, applying NAFTA regulations that replaced the substantial transformation test with a "tariff shift" method. Under this method, since both peanut slurry and peanut butter share the same tariff classification (HTSUS 2008.11.10) and no tariff shift occurs during processing, Customs ruled that the peanut butter must indicate the Canadian origin of the slurry.
Bestfoods appealed to the Court of International Trade, contending that Customs had incorrectly shifted from the case-by-case substantial transformation test established in United States v. Gibson-Thomsen Co. The court sided with Bestfoods, remanding the case to Customs for reassessment under the Gibson-Thomsen standard. Upon remand, Customs maintained that the peanut slurry did not experience substantial transformation, prompting Bestfoods to appeal again, resulting in the court affirming Customs' finding.
In an initial appeal, the Federal Circuit partially reversed and vacated the lower court’s decision, affirming Customs’ application of regulations under NAFTA and allowing Bestfoods to present alternative arguments regarding these regulations. Bestfoods subsequently argued that the exclusion of agricultural products from the de minimis exception in 19 C.F.R. 102.13(b), which stipulates that incorporated foreign material below certain thresholds is exempt from marking requirements, was arbitrary and capricious. The Court of International Trade concurred, invalidating 19 C.F.R. 102.13(b) and extending the de minimis rule to agricultural products like Bestfoods' peanut butter.
The United States appealed this decision, asserting that 19 C.F.R. 102.13(b) was a valid exercise of Customs' discretion and should not have been invalidated. The Federal Circuit reviewed the case de novo, noting that the federal marking statute authorizes the Secretary of the Treasury to create regulations for marking imported goods. The court emphasized that it must defer to administrative agency regulations unless they are deemed arbitrary or not in accordance with the law. The United States maintained that the regulation aligns with historical Customs practices and the NAFTA framework, arguing the Court of International Trade's invalidation was improper, a view with which the Federal Circuit concurred.
The regulation 19 C.F.R. 102.13(b) is upheld as lawful and not arbitrary or capricious. The federal marking statute, 19 U.S.C. 1304(a), and NAFTA marking rules do not mandate a de minimis exception for agricultural products, as the statute broadly requires marking of all foreign articles, with specific exceptions that do not include a general de minimis exemption. Customs' strict enforcement of this marking requirement for agricultural products aligns with its historical practices, such as requiring orange juice manufacturers to disclose all sources of foreign concentrate. The absence of a de minimis exception for agricultural products serves to align the marking requirements with NAFTA's country of origin rules for preferential tariff treatment, which also excludes agricultural products from de minimis treatment. The argument by Bestfoods that this lack of a de minimis exception contradicts the Alcan Aluminum decision is rejected, as that case involved foreign materials at a significantly lower threshold (less than 1%) compared to the 7% standard in the marking regulations. Thus, the regulations are affirmed as not arbitrarily withholding the 7% exception from agricultural products.
Bestfoods' arguments against the regulations are rejected on several grounds. The company claimed that Customs improperly excluded the de minimis exception for agricultural products due to unfounded consumer safety concerns, arguing that addressing food safety is beyond Customs' purview. However, Customs is authorized to implement the federal marking statute and NAFTA marking rules, which aim to inform consumers about the origins of foreign goods. The agency's consideration of consumer concerns regarding foreign materials in agricultural products falls within its discretion, and referencing health and safety does not imply a usurpation of other agencies' roles.
Bestfoods also argued that the regulations produce illogical outcomes, as they do not require disclosure of certain foreign ingredients if they are substantially transformed during manufacturing. The court found that Customs' treatment of such ingredients aligns with the NAFTA Marking Rules and is not arbitrary. Additionally, Bestfoods incorrectly asserted that potentially harmful foreign non-agricultural additives are exempt from marking requirements; the de minimis exception applies to all foreign materials in specified agricultural products.
Finally, Bestfoods contended that regulations force domestic products to be labeled as foreign due to minor foreign components. After thorough consideration, the court concluded that the regulations do not produce absurd results when interpreted correctly. Consequently, the court ruled that 19 C.F.R. 102.13(b) is valid and reversed the Court of International Trade's judgment invalidating the regulation.
Costs will be borne individually by each party involved. Regulation 102.13 outlines that foreign materials not undergoing a required change in tariff classification or failing to meet other specified criteria can be disregarded in determining a product's country of origin, provided their value does not exceed 7% of the product's total value (or 10% for goods under Chapter 22 of the Harmonized System). However, this de minimis rule does not apply to goods classified under specific chapters (1, 2, 3, 4, 7, 8, 11, 12, 15, 17, or 20) of the Harmonized System. The United States Customs Service, part of the Department of the Treasury, is responsible for enforcing these regulations. A previous decision by Customs relaxed marking requirements for juice manufacturers due to economic concerns, but this was based on specific evidence of harm and does not suggest a general leniency in enforcement. The rules also exclude de minimis treatment for certain other products.
