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Bestfoods v. United States

January 25, 1999

BESTFOODS (FORMERLY KNOWN AS CPC INTERNATIONAL, INC.), PLAINTIFF-APPELLANT,
v.
UNITED STATES, DEFENDANT-CROSS APPELLANT.



Before Newman, Schall, and Bryson, Circuit Judges.

The opinion of the court was delivered by: Bryson, Circuit Judge.

Appealed from: United States Court of International Trade Senior Judge Bernard Newman

Appellant Bestfoods, formerly known as CPC International, Inc., makes Skippy brand peanut butter. Bestfoods makes the peanut butter from peanut slurry -- a gritty, peanut-based paste -- in its processing plant in Little Rock, Arkansas. Most of the peanut slurry that is used to make peanut butter at the Little Rock plant is made in the United States, but between 10 and 40 percent of the peanut slurry is made in Canada from peanuts grown elsewhere.

In January 1993, Bestfoods sought an administrative ruling from the Customs Service that the federal marking statute, 19 U.S.C. § 1304, did not require it to mark its peanut butter to indicate that it was made in part in Canada. The marking statute provides that an article of foreign origin must "be marked in a conspicuous place . . . in such manner as to indicate to an ultimate purchaser in the United States . . . the country of origin of the article." 19 U.S.C. § 1304(a). The marking statute is not triggered simply because some of the components or ingredients of an article made in the United States are of foreign origin. On the other hand, if the article, as sold in this country, is essentially the same as when it was imported, i.e., if the article has not undergone a "substantial transformation" following its importation, the marking statute requires that the article be marked to indicate its foreign origin. See United States v. Gibson-Thomsen Co., 27 C.C.P.A. 267 (1940). The Court of Customs and Patent Appeals in the Gibson-Thomsen case held that a product undergoes such a "substantial transformation" if, as a result of manufacturing or processing steps in this country, the imported product loses its identity and is transformed into a new product having "a new name, character and use." 27 C.C.P.A. at 273.

Bestfoods argued before Customs that the peanut slurry it imported from Canada underwent a substantial transformation, within the meaning of the Gibson-Thomsen test, when it was made into peanut butter at Bestfoods' Arkansas plant. Peanut slurry, Bestfoods argued, is a different product from peanut butter under the Gibson-Thomsen test, because it differs from peanut butter in name, character, and use. Bestfoods therefore claimed that it was the "ultimate purchaser" of the peanut slurry, within the meaning of the marking statute, and should not be required to mark its processed peanut butter in a way that would identify it as a product, in part, of Canada.

Customs rejected Bestfoods' argument and ruled that Bestfoods had to mark its peanut butter to indicate its Canadian content. In so ruling, Customs relied on regulations promulgated pursuant to the North American Free Trade Agreement (NAFTA), Dec. 17, 1992, Can.-Mex.-U.S., 32 I.L.M. 605 (1993). Those regulations, codified at 19 C.F.R. Part 102 and 19 C.F.R. § 134.35(b), employ the so-called "tariff shift" method for determining whether goods have undergone substantial transformation following their importation and therefore do not need to be marked to indicate their foreign origin. That is, the regulations provide that an article imported from a NAFTA country will be considered to have undergone a substantial transformation only if processing or manufacturing steps in this country are sufficient to change the article's tariff classification. Because peanut slurry and peanut butter share the same tariff classification, as defined by the regulations, Customs determined that the peanut slurry did not undergo a substantial transformation when it was converted into peanut butter at the Arkansas plant. Customs therefore concluded that Bestfoods was not the "ultimate purchaser" of the Canadian peanut slurry, within the meaning of the marking statute, and that the finished peanut butter incorporating the imported peanut slurry had to be marked to reflect its Canadian origin.

Bestfoods filed an action in the Court of International Trade challenging Customs' ruling. The company argued that the 1994 NAFTA regulation was invalid to the extent that it departed from the Gibson-Thomsen "name, character, and use" test for determining whether a good had undergone a "substantial transformation" after importation.

The Court of International Trade agreed with Bestfoods' challenge to the regulation that defined the ultimate purchaser of a NAFTA good by using the tariff-shift approach. The court held that the regulation improperly abrogated the case-by-case substantial transformation test as set forth in the Gibson-Thomsen case. See CPC Int'l, Inc. v. United States, 933 F. Supp. 1093 (Ct. Int'l Trade 1996). When the NAFTA implementation legislation was passed, the court reasoned, Congress was aware of the Gibson-Thomsen test, which had long been applied to define the term "ultimate purchaser" for purposes of the marking statute. If Congress had meant for the term ultimate purchaser to be defined differently for NAFTA and non-NAFTA goods, the court explained, that intention would have been reflected in the legislation or the legislative history. The court therefore remanded the case to Customs to determine whether, under the traditional Gibson-Thomsen test, Bestfoods would be required to mark its peanut butter.

On remand, Customs again ruled that Bestfoods had to mark its peanut butter. Under the Gibson-Thomsen test, Customs concluded, the imported peanut slurry was not substantially transformed by being processed into peanut butter, because the essential character of the finished peanut butter was imparted by the peanut slurry, part of which was of Canadian origin.

Bestfoods again sought relief from the Court of International Trade, this time arguing that Customs had misapplied the Gibson-Thomsen test. The court, however, rejected Bestfoods' argument. It held that peanut slurry is a form of peanut butter, and that the processing Bestfoods uses to convert peanut slurry into peanut butter did not alter the essential character of the product. The court also rejected Bestfoods' argument that the amount of Canadian peanut slurry that it used in making its peanut butter was not sufficient to trigger the marking requirement. Accordingly, the court upheld Customs' ruling that Bestfoods was required to mark its peanut butter in a manner indicating that it originated in part from Canada. See CPC Int'l, Inc. v. United States, 971 F. Supp. 574 (Ct. Int'l Trade 1997).

The government has appealed from the decision of the Court of International Trade holding the NAFTA regulations invalid, and Bestfoods has appealed from the court's decision holding that the Bestfoods is required to mark its peanut butter under the Gibson-Thomsen standard. Because we agree with the government that the NAFTA regulations are valid, it is unnecessary to address Bestfoods' appeal.

In response to the government's appeal, Bestfoods argues that Customs' NAFTA regulations, and 19 C.F.R. § 134.35(b) in particular, improperly jettisoned the Gibson-Thomsen "name, character, and use" test for applying the federal marking statute in favor of the tariff-shift approach. According to Bestfoods, that change constituted an impermissible regulatory amendment of a longstanding construction of the marking statute. For the reasons set forth below, we hold that the Secretary of the Treasury acted lawfully in promulgating regulations applying the tariff shift methodology to determine whether goods imported from NAFTA countries are subject to the marking requirements of 19 U.S.C § 1304(a).

1.

Annex 311 of NAFTA, entitled "Country of Origin Marking," requires the parties to establish "marking rules" to govern when a party to the agreement can require an article imported from another NAFTA country to be marked to indicate the article's country of origin. See NAFTA Annex 311, ¶¶ 1, 2. The definitional provisions of Annex 311 make clear that the marking rules must employ the tariff-shift method for determining whether a particular good is a good of the exporting country or whether it has been sufficiently altered after importation to qualify as a good of the importing country. The term "ultimate purchaser" is defined to mean "the last person in the territory of an importing Party that purchases the good in the form in which it was imported," and the phrase "the form in which it was imported" is defined to mean "the condition of the good before it has undergone one of the changes in tariff classification described in the Marking Rules." NAFTA Annex 311, ¶ 11. Annex 311 further requires each NAFTA country to exempt from any country-of-origin marking requirement any good of another NAFTA country that "is to undergo production in the territory of the importing Party by the importer, or on its behalf, in a manner ...


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