March 03, 2021

US Court Questions Whether Importers Can Rely on “First Sale” Rule on Imports of Goods from China or Other Nonmarket Economies


On March 1, 2021, the US Court of International Trade (“CIT”) issued a decision that casts doubt on whether US Customs and Border Protection (“Customs” or “CBP”) will consider sales from China and other nonmarket economies “first sales” under the “first sale rule” in multi-tiered transactions.1 The judge held that the plaintiff, a US importer, could not use the first sale rule to obtain a lower duty on cookware sets imported from China. If CBP relies on this court decision to develop a policy around refusing to allow the use of the first sale rule on imports from China and other nonmarket economies, numerous importers will be paying significantly higher duties as a result.

The First Sale Rule

The first sale rule was first articulated in the 1992 Federal Circuit case Nissho Iwai America Corp v. United States. It is applied to Importers of Record (“IOR”) importing goods into the United States through a multi-tiered transaction model—i.e., when there is an intermediary transaction before the product is imported (i.e., “entered for consumption”) in the United States. If certain factors are met, the rule allows IORs, when declaring the articles to Customs, to use the lower price of the goods paid in the first or earlier sale instead of the higher price paid in the last sale (usually by the IOR). In order for the first sale rule to apply, the transaction must meet the following requirements:

  1. The first sale transaction (i.e., the transaction between the manufacturer and the intermediary) must be a bona fide sale, including transfer of title to the goods.
  2. At the time of the first sale, the merchandise must clearly be destined for export to the United States.
  3. The manufacturer and the intermediary must be unrelated or, if related, conduct their transaction at arm’s length.
  4. The transaction must be absent any distortive nonmarket influences.

As the CIT points out, the last requirement has largely been ignored in previous cases, possibly because the test “generally [is] applied to transactions from market economy countries.” In Meyer Corp., however, the manufacturer was located in China, a country designated as a “nonmarket economy” under US law. Thus, the CIT asserted that the presence of distortive nonmarket influences was “not irrelevant.” While reliance on a country’s status as a nonmarket economy is normally relevant under other trade laws, such as the laws governing the imposition of antidumping duties, its application is novel in the customs law context and thus calls into question how CBP may apply this ruling to narrow use of the first sale rule in the future.

The Meyer Corp. Decision

The court determined that the US-based IOR failed to establish that it was entitled to use the transaction value between the China producer and its intermediary in Hong Kong in order to appraise the imported cookware. The court’s analysis was highly fact-specific and placed particular emphasis on the plaintiff’s failure to produce financial documents that could support its claims that the related companies operated independently and competitively with each other and that the Chinese government did not influence or assist in the transactions. However, the judge also opined that the court had “doubts over the extent to which, if any, the ‘first sale’ test . . . was intended to be applied to transactions involving nonmarket economy participants or inputs.”

Potential Future Impact

The judge’s statement calls into question whether goods from nonmarket economies are entitled to first sale treatment. (The United States currently designates China and Vietnam as nonmarket economies.) While his statement appeared to be dicta and thus not binding, it could influence CBP to deny first sale treatment for imports from China and other nonmarket economies.

It is possible, however, that individual IORs could establish an absence of distortive nonmarket influences even if the goods come from a nonmarket economy. The court suggested that, to establish this absence, IORs could look to antidumping duty proceedings involving nonmarket economy participants—specifically, the factors used by entities located in the nonmarket economy to obtain a duty rate other than the countrywide rate established by the US Department of Commerce. If that is the case, IORs would need to produce documentary evidence establishing the relevant parties’ independence from the nonmarket economy government.

For now, IORs and other interested parties must wait and see whether CBP will take advantage of the court’s dicta to decline first sale treatment to goods from nonmarket economies. In its opinion, the CIT suggested that the Federal Circuit should clarify this issue. It is not yet known, however, whether the plaintiff will appeal the decision. Even if it does, the Federal Circuit may decide to stay out of the fray by conducting a plaintiff-specific analysis, sidestepping the first sale rule issue.

1 Meyer Corporation v. United States, No. 13-00154, 2021 WL 777788 (Ct. Int'l Trade Mar. 1, 2021).

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