International Client Alert, July 5, 2006

On June 14, 2006, the House Financial Services Committee passed and reported out, by a vote of 64-0, its proposed legislation relating to the procedures under which the Committee on Foreign Investments in the United States ("CFIUS") reviews acquisitions of U.S. firms and interests by foreign firms and foreign governments. The Senate’s reform proposal had been passed out of the Senate Foreign Relations Committee on March 30 and was discussed in detail in our Client Alert, dated April 26, 2006.

The House’s proposed legislation is similar in some respects to its Senate counterpart. Like the Senate proposal, the House bill clarifies that CFIUS’s consideration of national security issues should include considerations of matters relating to critical infrastructure. Both the Senate and House proposals require a mandatory investigation of acquisitions where the foreign acquirer is controlled by a foreign government. Increased oversight by Congress is contemplated by both proposals, as is a separate review of transactions by the Director of National Intelligence. Both proposed bills establish mechanisms for monitoring compliance with agreements entered into between CFIUS and potential acquirers as a condition for approval of the acquisition.

Several significant provisions of the Senate proposal are not included in the bill reported by the House committee. First, the House proposal does not adopt the Senate proposal’s requirement that makes filing of notices with CFIUS mandatory in the case of acquisitions that affect critical national infrastructure. Nor does the House bill require CFIUS to develop a country list identifying the level of risk of each country associated with acquisitions of U.S. interests by the government of, or entities located in, such country. The House bill also does not mirror the Senate proposal to provide notice to state governors in the case of proposed takeovers of any "critical infrastructure" in that governor’s state.

Finally, the House and Senate proposals have several provisions which, although broadly similar, take somewhat different approaches. Both bills provide a mechanism for extending the period of time for CFIUS to review and investigate the case. The House proposal permits the 45-day investigation period to be extended by an additional 45 days whereas the Senate provision permits the initial 30 day review period that precedes a formal investigation to be extended by up to 30 days. Both the House and Senate bills contain provisions to permit CFIUS to monitor compliance with agreements made by foreign acquirers. However, only the Senate bill provides for jurisdiction by federal courts to enforce such agreements. Both bills also provide for increased reporting by CFIUS to Congress. Under the Senate bill, CFIUS must provide notice to the Senate upon commencement of the investigation and upon completion of the investigation. The House bill only requires notice at the completion of an investigation and, like the Senate bill, requires that CFIUS provide reasons for its actions. The House bill provides additionally for semi-annual reports by CFIUS to Congress whereas the Senate bill provides for annual reports.

It seems highly likely that these two proposals will be adopted by the respective chambers of Congress given that both were voted out of committee by unanimous bipartisan votes. Predicting what will come out of the conference committee to resolve the differences between the two bills is a somewhat risky undertaking, but it seems reasonable to hazard several guesses. Clearly the reform legislation will make clear that national security issues include concerns relating to critical infrastructure. Additionally, it is safe to bet that the reform legislation will now make the 45-day investigation mandatory in instances where the foreign acquirer is controlled by a foreign government. Less certain but still probable, the conference committee bill will probably include a mandatory notice provision for critical infrastructure acquisitions. And although it is certain that the ultimate legislation will include provisions to extend the statutory time periods and to provide for more extensive reporting to Congress, it is difficult to predict whether the conference committee will agree upon the House or Senate versions on these topics.

July 24th Deadline for Comments on Proposed Regulations to Exempt Supplies for Emergency Relief from Antidumping and Countervailing Duties Ailing Duties
Article by Peggy Clarke

The U.S. Department of Commerce ("Department") has published proposed procedures for determining whether to exempt imported supplies for use in emergency relief work from antidumping and/or countervailing duties. Written comments received by July 24, 2006 will be considered in crafting the final regulations.

The proposed regulations are an outgrowth of the building supply shortages faced in the wake of last year’s devastating hurricanes. Section 318(a) of the Tariff Act of 1930, as amended (19 U.S.C. § 1318(a)), has long authorized the President to declare the importation free of duty of "food, clothing, and medical, surgical, and other supplies for use in emergency relief work." The term "other supplies" is not defined but would presumably cover building materials such as cement, lumber, and various steel products. In keeping with the statute, the regulations do not limit their application to any particular merchandise.

Section 318(a) has not previously been invoked. While there have been building supply shortages previously, prompting six western governors to write the Secretary seeking relief from antidumping duties on Mexican cement in early August 2005, this provision has not been used nor have duties been lifted in short supply situations. The aftermath of hurricanes Katrina and Rita and fears of a repeat this year have apparently led to these proposed regulations. Secretary Gutierrez announced the proposed rules during a trip to Florida that included a review of hurricane preparations. This is not the first action the Department has taken. In April, the Department and the Government of Mexico concluded an agreement settling the long-standing antidumping order on cement from Mexico (see the April 26, 2006 International Client Alert for a discussion of that agreement).

The proposed rules only address the Department’s action once the President has authorized the importation free of duty; they do not address any procedures with respect to the President’s initial authorization. Once the President has so authorized such exemption, the proposed regulations contemplate an import-by-import review of requests. The person in charge of sending the merchandise for which exemption from duties is being requested will need to submit a request to the Secretary in triplicate. The request must identify the relevant antidumping or countervailing duty order number and include a detailed description of the merchandise to be imported, the current HTS number, the price in the United States, the quantity, the proposed date of entry, the proposed port of entry, the mode of transportation, the destination, the use to be made of the merchandise, and any other information the Secretary should consider. If the Secretary approves the importation, he will notify the requestor and instruct the Bureau of Customs and Border Protection to allow entry without regard to antidumping or countervailing duties. Any merchandise that is used for a purpose other than that contemplated is subject to seizure and other penalty. The proposed regulations do not provide a time limit for the Department’s decision-making process nor any guidance on the criteria to be used in making that decision.

Those interested in commenting on the proposed regulations must do so by July 24, 2006 in order to ensure that their comments are considered.

CBP Expands C-TPAT Efforts
Article by Clif Burns and Peggy Clarke

The Bureau of Customs and Border Protection ("CBP") is stepping up enforcement of its Customs Trade Partnership Against Terrorism ("C-TPAT") program. CBP reported on May 16 that it has suspended or removed 145 C-TPAT members from the program. In addition, C-TPAT has established a secure communications portal for C-TPAT members that members will use to resubmit their updated security profiles annually.

Additionally, C-TPAT has increased the number of employees whose job is to validate firms as using the best security practices, with 118 current staff members and a goal of having 156 supply chain specialists by summer. CBP’s increase in staffing comes after the Government Accountability Office (the "GAO") issued a report in May 2005 criticizing CBP’s efforts to secure the supply chain. The GAO noted in its 2005 report that the majority of C-TPAT members were receiving benefits under the program even though CBP had only validated 11% of C-TPAT members. More recently, the GAO has criticized CBP’s validation process, finding several weaknesses that "compromise CBP’s ability to provide an actual verification that supply chain security measures in C-TPAT members’ security profiles are accurate and are being followed." CBP officials were questioned about the GAO’s findings at a Congressional subcommittee hearing in March.

On March 30, 2006, a GAO report again criticized CBP’s efforts with the C-TPAT program. The GAO found that CBP has not yet put controls into place to provide assurances that the Automated Targeting System ("ATS") targets high-risk cargo containers. The GAO indicated that CBP needs to implement a comprehensive, integrated system that analyzes security inspection results and incorporates them into ATS. The GAO, however, did conclude that CBP is taking steps to correct these shortcomings.

CBP established the C-TPAT program after September 11, 2001 as a voluntary customs clearance program. C-TPAT’s goal is to safeguard the U.S. and global supply chain. Under C-TPAT, members such as importers, brokers, carriers,and certain foreign manufacturers agree to put in place a set of security measures, subject to CBP validation, in return for benefits, including expedited customs clearance.

CBP has established a three-tiered system of benefits for members, depending on the members’ level of security. Benefits include a reduced number of inspections resulting in reduced border time, an assigned account manager, access to C-TPAT membership list, eligibility for account-based processes, and emphasis on self-policing. Tier I consists of "certified companies." Tier I companies receive reduced ATS scoring and have access to other programs that CBP has in place. Tier II consists of "validated companies." These companies’ shipments are subject to fewer inspections, and their shipments will be moved to the front of the inspection line when they are directed to secondary inspection for either a random inspection or other agency requirements. Tier III is reserved for "certified, validated companies who exceed minimum standards, and have adopted C-TPAT best practices." These companies are permitted to use C-TPAT container security devices and are subject to relatively infrequent random inspections. It should be noted, however, that although one of the benefits afforded under the program is fewer inspection delays, several C-TPAT-certified companies have complained that inspections have increased rather than decreased since they received their C-TPAT certification.

Companies seeking to become C-TPAT members must take certain actions to secure the supply chain, including: conducting a comprehensive self-assessment of the supply chain using C-TPAT security guidelines; submitting a supply chain security profile questionnaire to CBP; developing and implementing a program to enhance security through the supply chain in accordance with C-TPAT guidelines; communicating C-TPAT guidelines to other companies in the supply chain and working toward building the guidelines into relationships with these companies. Companies must conduct due diligence to ensure that their supply chain partners meet the security requirements.

Companies can be suspended or removed from the program as a result of negative validation findings. This usually happens when a supply chain specialist finds that a firm has not truthfully portrayed the measures that it has in place. Companies can also be suspended or removed as a result of a breach in the supply chain. Once a company has been suspended, they may be reinstated into the C-TPAT program by correcting deficiencies in compliance and security. According to CBP, the number of companies suspended or removed as a result of negative validation findings has decreased, whereas the number or suspensions as a result of a breach in the supply chain has remained consistent.

The U.S. Court of Appeals for the Federal Circuit ("CAFC") recently overturned two decisions of the U.S. Court of International Trade ("CIT") in Bratsk Aluminum Smelter v. United States (April 2006) and Caribbean Ispat Limited v. United States (May 2006). The CAFC addressed whether non-subject imports, the imports that are not alleged by the domestic industry to be causing harm, must be considered as an "other relevant economic factor" in the causation analysis. These cases expound upon the causation standard applied in antidumping and countervailing duty cases. Causation refers to the question of whether the domestic industry producing like products has been materially injured or threatened with material injury by reason of unfairly traded imports. Before antidumping or countervailing duties may be imposed, the U.S. Department of Commerce must find that the imports are dumped or subsidized and the U.S. International Trade Commission ("ITC") must find that the domestic industry is materially impaired or threatened with material injury by reason of these imports. This second element contains the causation requirement and is determined by analyzing the varying volume of imports, price effect of such imports, the impact of imports on the domestic industry and "other relevant economic factors."

In Bratsk, concerning silicon metal imports from Russia, the CAFC reaffirmed its decision in Gerald Metals, Inc. v. United States holding that non-subject imports must be considered when determining the cause of injury to domestic producers. The ITC had argued the Bratsk case was factually distinguishable from Gerald Metals and sought to limit the reach of Gerald Metals to only the specific circumstances found in that case. The CAFC held that the ITC still must address causation as in Gerald Metals and discuss non-subject imports. No uniform methodology is required, but all relevant data must be considered. The subject imports must have more than a minimal or tangential impact on, and temporal connection with, the suffering domestic industry. Referencing Taiwan Semiconductor Industry v. ITC, the CAFC reiterated in Bratsk that a significant volume and increased market share of subject imports is not enough to satisfy causation. Under these circumstances, non-subject imports may fill the void, rather than the domestic industry, and defeat the intent of the statute. In Bratsk, the silicon metal was an interchangeable good and data showed non-subject imports holding between 73 and 83 percent of the U.S. market. Further analysis of the non-subject imports is therefore required under Gerald Metals to make sure subject imports are not unfairly targeted and domestic industry receives the relief intended.

The CAFC also vigorously reinforced the ITC’s obligation to follow the holdings of the Court of Appeals. The ITC cannot simply ignore precedence by trying to distinguish prior holdings based on irrelevant factual differences. This comment by the CAFC highlights the importance of the newly decided cases at hand and clearly signals to the ITC that they must consider non-subject imports when determining causation in the future,

rather than attempt to avoid analysis with claims of differentiation. In Bratsk, in addition to upholding Gerald Metals, the CAFC also clarified who held the burden of proof in such investigations. The ITC must establish causation and injury and cannot shift that burden by requiring the subject importers to show that non-subject imports would be able to take over market share if subject imports were withdrawn (thereby decreasing the significance of the subject imports). The CAFC held it was the duty of the ITC to demonstrate causation and injury. More specifically, in Caribbean Ispat, the CAFC upheld Ispat’s argument that the ITC must assess the impact of all imports, when substitutable and competitively priced, in order to determine if the non-subject imports have a significant enough impact on the domestic industry to make the effect caused by the subject imports immaterial. Stated differently, the causation standard must address why eliminating the importation of, or raising the price of, country X’s product would help the domestic industry when country Y could possibly fill the gap in supply.

The CAFC decisions are also consistent with several WTO dispute decisions regarding the significance of "other factors" when determining injury and causation. The ITC must consider the effect of non-subject imports on the domestic market regardless of the significance of the subject imports when the imports in question are substitutable and priced competitively.

Domestic producers, importers, and foreign producers should take note of these decisions and be aware of the significance of non-subject competitors in the market. These non-subject imports could void domestic industry’s claims of injury by mitigating or severing the causal connection between subject imports and the relevant domestic industry. The ITC will now be forced to address the non-subject imports more extensively than has been its practice.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.