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The following story is from the October 8 issue of International Trade Reporter
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Classification

Federal Circuit Hears Arguments
In Suit Alleging Tariff Discrimination

A three-judge panel of the U.S. Court of Appeals for the Federal Circuit Oct. 5 heard oral arguments in a precedent-setting challenge brought by an importer of men's gloves who is arguing that certain provisions of the Harmonized Tariff Schedule of the United States (HTSUS) run afoul of Equal Protection guarantees (Totes-Isotoner Corp. v. United States, Fed. Cir., No. 2009-1113, argued 10/5/09).

The case, which is being closely watched by the importing community because it could result in significant duty refunds, was before Circuit Judges Timothy Dyk, Alan D. Lourie, and Sharon Prost.

Plaintiff-Appellant Totes-Isotoner Corp., an importer of men's seamed leather gloves, is claiming that the HTSUS unconstitutionally denies it equal protection under the laws by imposing, without justification, a 14 percent ad valorem duty on men's seamed leather gloves but only a 12.6 percent duty on seamed leather gloves “for other persons” i.e., women and children.

Totes is bringing a constitutional challenge under the Fifth Amendment's due process clause, alleging that the HTSUS facially discriminates against it on the basis of gender and age in violation of due process guarantees.

Totes is asking for a declaration that the challenged rate is unconstitutional and wants refunds of all duties unconstitutionally assessed with interest.

Lower Court Proceedings

In the 2008 U.S. Court of International Trade decision, the CIT held that the constitutional claim presented was judicially reviewable and that Totes had both constitutional and prudential standing to pursue the action (25 ITR 1070, 7/17/08; 30 ITRD 1897). However, the CIT held that the challenged statutory provision was not facially discriminatory. Accordingly, the lower court said that Totes was required to plead and presumably prove that the provision had disproportionately burdened individuals on the basis of sex.

Both parties filed motions for reconsideration, which the CIT denied (25 ITR 1623, 11/13/08; 30 ITRD 2263). Totes then filed the current appeal (25 ITR 1787, 12/18/08).

Importers Burdened by Distinction

Arguing the case for Totes, John M. Peterson, Neville Peterson LLP, told the appeals court that, while the dispute is about gloves, the issues presented are much larger. Peterson told the court under questioning that importers are the class unconstitutionally burdened by the gender distinction.

Because the discrimination appears on the face of the statute, the burden shifts to the government to prove an “exceedingly persuasive justification” for the discriminatory classification, he told the panel.

Among other questions, Circuit Judge Prost asked Peterson what the impact would be if the alleged discrimination were based on the size of the glove. Peterson responded that such a case would not present a facially discriminatory statute like the one at issue.

Circuit Judge Lourie questioned whether the discrimination affected people or products. Peterson noted that the discrimination affects products that people use.

The lower court correctly found that Totes has standing to bring the case since Totes has alleged an injury from tariffs that unconstitutionally discriminate among similarly situated importers and similar imported property based on gender and age, according to Totes' brief.

Government Responds

Arguing the case for the government, Jeanne E. Davidson, director, Commercial Litigation Branch, Civil Division, Department of Justice, told the court that the trial court should have dismissed Totes' complaint because the claims raise non-justiciable political questions beyond the authority of the court.

Also, Davidson claimed that Totes did not have standing to bring the claims and that the CIT's exercise of jurisdiction under 28 U.S.C. § 1581(i) was improper.

Davidson also argued that Equal Protection claims must allege a government-created distinction among people and that Totes' complaint failed to do this. The imposition of a different tax on different products does not violate Equal Protection principles, she said. Under questioning by Circuit Judge Prost, Davidson said that Totes has not alleged that similarly situated importers are treated differently by the government-created distinction.

The government is arguing that Equal Protection claims must allege a government-created distinction among people. The HTUS categories do not distinguish between categories of people—they distinguish between categories of products, the government claimed.

After Circuit Judge Dyk commented on the standing issue, Davidson remarked that Totes was not bringing the action on behalf of consumers and that it would be a different matter if that were the case. Totes' allegation is that it pays one rate on one product it imports and another rate on another product it imports, Davidson said.

The government's brief said that there are at least 91 cases in the CIT for which proceedings are currently suspended and in which plaintiffs have filed complaints almost identical to the Totes complaint except for the underlying merchandise and respective HTSUS subheadings that may be directly affected by the Federal Circuit's opinion in this appeal.

Appeal Planned If Totes Does Not Prevail

Attorney Michael Cone, of Neville Peterson LLP, told BNA that how corporations are taxed impacts both pricing and the chain of supply, and nobody else—including purchasers and users of imported products—has any constitutional right to challenge import duties paid by importers.

Cone expressed the view that the judges for the most part did not telegraph their opinion on the merits of the case—except in the case of Circuit Judge Lourie, who he said made it clear on the political question issue that the courts are well situated to determine whether Congress and the president violated the Constitution in setting tariff rates.

“If the court strikes down this case, it will affect much more than just higher duties on men's gloves. For example, the court would also be giving its stamp of approval to duties our government collects every year on basketball and tennis shoes imported for females, which are $20 million higher than if they had been imported for men,” he said.

“Because we think that result would fly in the face of the modern understanding of equal protection, we expect the Federal Circuit to join other federal courts of appeals in recognizing that corporations can themselves suffer discrimination on the basis of gender, religion, or race,” he added.

Cone told BNA that Totes planned to file for certiorari with the U.S. Supreme Court if it did not prevail in the Federal Circuit.

By Rossella Brevetti

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