US Magnesium LLC v. United States

US Magnesium LLC v. United States
839 F3d. 1023 (Fed. Cir. 2016)
Authored by John Farmer

Statement of Facts: Magnesium can be produced using a method known as the Pidgeon process. During the Pidgeon process, dolomite, a material which contains magnesium, is crushed and formed into briquettes. The briquettes are then placed on stainless steel retorts. These retorts are placed under a vacuum and heated. The magnesium content of the briquettes vaporizes and then condenses into crowns of solid magnesium. The retorts used in this process must be replaced roughly every 60 days.

To evaluate anti-dumping measures regarding magnesium metal imports, in 2011 the Department of Commerce (“Commerce”) released a report concerning the Pidgeon process. In that report, Commerce decided on the normal value for magnesium by evaluating the value of the materials used in the Pidgeon process. The normal value is used to decide anti-dumping margins, by comparing the export price of a product with the price at which it is sold domestically. However, “when merchandise is exported from a nonmarket economy country, the normal value is constructed [. . .]” using a variety of factors. 839 F3d. 1023, 1024. In making the decision, Commerce classified the various components used in the process as either direct or indirect materials in the manufacturing process. The distinction involved determining whether the materials were used “as a direct cost of production, or as factory overhead.” 839 F3d. 1023, 1032. The normal value was predicated on the values of the direct materials.

Commerce’s administrative review listed the steel retorts as an indirect material when determining the normal valuation constructed by Commerce for magnesium metal, which affected the applicable anti-dumping margins. U.S. Magnesium challenged Commerce’s decision to classify the steel retorts as an indirect material.

Commerce entered an anti-dumping order concerning magnesium metal imported from the People’s Republic of China in May of 1995. Pure Magnesium from the People’s Republic of China, 60 Fed. Reg. 25, 691 (Dep’t of Commerce May 12, 1995). Fifteen years later, in May of 2010, Commerce provided a notice of opportunity to seek review of that order to interested parties. Tianjin Magnesium International (“TMI”) and US Magnesium, foreign and domestic producers of magnesium, respectively, requested that Commerce review export duties imposed on TMI. In 2011, Commerce published a review of magnesium exported from the People’s Republic of China. US Magnesium cited new evidence which challenged the decision to classify steel retorts as indirect materials in the production process, arguing that the decision was due to a fraudulent misrepresentation TMI made during the review process. Commerce deemed the challenge untimely. US Magnesium appealed the decision, and the United States Court of International Trade (Trade Court) remanded the case to Commerce to consider in light of the new evidence. Commerce determined that the new evidence did not constitute fraud on the part of TMI, and did not change the outcome of the decision to classify the retorts as an indirect material.

Procedural History: US Magnesium appealed to the Trade Court, challenging Commerce’s administrative review of magnesium exports from China with respect to steel retorts. The Trade Court sustained the final determination made by Commerce in 2015. TMI appealed to the Federal Circuit.

Question Presented: Whether the cost of steel retorts used in the Pidgeon process was correctly classified by Commerce as an indirect material in determining the normal value of exported magnesium metal from the People’s Republic of China.

Holding: Yes. In a majority opinion written by Circuit Judge Bryson, and joined by Chief Judge Prost, the Federal Circuit affirmed the Trade Court’s decision and sustained Commerce’s Final Results Redetermination to classify the steel retorts as an indirect material in determining the normal value of exported magnesium.

Reasoning: The court cited to 19 U.S.C. § 1516a(b)(1)(B)(i), which states that reviews of Commerce’s classifications of anti-dumping duties must be upheld unless “unsupported by substantial evidence on the record, or otherwise not in accordance with law.” They then examined whether substantial evidence had been provided to sustain the decision made by Commerce.

US Magnesium proffered several arguments as to why Commerce’s classification of the steel retorts did not meet the burden required to uphold the decision under the substantial evidence standard of review. First, it pointed to documents provided by TMI’s supplier which categorized the retorts as a direct cost. However, Commerce argued that although the supplier categorized the retorts in that manner, “TMI’s supplier grouped other expenses together with retorts, even though those other items are not considered material inputs.” 839 F3d. 1023, 1027. The Federal Circuit determined that, regarding the supplier’s documents, Commerce had shown that its determination was supported by substantial evidence.

US Magnesium’s second argument was that Commerce had deviated from its own standard test for determining whether a material is direct or indirect for evaluating the normal value. The test looks at: “1) whether the input is physically incorporated into the final product; 2) the input’s contribution to the production process and finished product; 3) the relative cost of the input; and, 4) the way the cost of the input is typically treated in the industry.” Certain Steel Nails from the People’s Republic of China, 78 Fed. Reg. 16651, 78 ITADOC 16651, Issues & Decision Memorandum, at Comment 4 (Dep’t of Commerce Mar. 5, 2013). US Magnesium contended that the retorts met both the second and fourth factor. However, Commerce determined its classifications of the retort were primarily based on the first factor, and since the retorts were not incorporated into the final product, they did not classify them as direct input. The Federal Circuit agreed with Commerce’s argument that no one factor was conclusive, nor were they the only factors to be considered. Rather, the Federal Circuit agreed with Commerce’s interpretation of Certain Steel Nails from the People’s Republic of China, that the correct standard of review considered all four factors as relevant but not determinative and also considered the totality of circumstances surrounding the review. The Federal Circuit again determined that Commerce had provided sufficient evidence to support its determination as reasonable, the applicable standard of review.

US Magnesium’s third argument was that Commerce did not follow its own guidelines regarding classification of frequently replaced components of the production process. They argued that precedent established a one-year minimum to qualify overhead, whereas the retorts are replaced every 60 days. Additionally, US Magnesium argued that Commerce had conflated ‘physical incorporation’ with ‘traceability’. US Magnesium contended that because the retorts were consumed during production, Commerce had incorrectly classified them as not traceable to specific magnesium products.

However, regarding the argument about frequently replaced components, the Federal Circuit cited cases in which a timeframe much shorter than a year had been used by Commerce in making its decision, such as Certain New Pneumatic Tires Off-the-Road Tires from the People’s Republic of China, in which a component was replaced every 2-8 days. 77 Fed. Reg. 14,495, 77 ITADOC 14,495, Issues & Decision Memorandum, at Comment 3 (Dep’t of Commerce Mar. 5, 2012). The court also rejected US Magnesium’s proposed interpretation of traceability as overly broad, and pointed to Commerce’s interpretation of traceability as correct, stating that traceability concerned “items that are continuously consumed during the production process and must continuously be replaced.” 839 F3d. 1023, 1030. The court ruled that it was reasonable for Commerce to have concluded in its assessments that the retorts were not directly traceable to specific magnesium products because they were not continuously consumed and replaced at a rate that would make them direct components.

US Magnesium’s fourth argument was that Commerce had neglected to consider industry wide practices regarding the classification of retorts. However, Commerce held that US Magnesium had provided inconclusive evidence in this regard. The Federal Circuit affirmed, stating that it was “reasonable for Commerce to find that no industry-wide practice had been shown.” 839 F3d. 1023, 1031.

Dissenting Opinion: Circuit Judge Newman opined that the majority had incorrectly balanced the factors of the Certain Steel Nails from the People’s Republic of China test. She argued that Commerce itself had previously – and in this case – contended that the first factor of the test, physical incorporation into the final product, was not determinative. The dissent pointed to the three other factors, regarding the material’s usage, cost, and industry practice regarding classification. Judge Newman opined that using the totality of circumstances, as well as the 4-part test, the retorts should be considered direct materials, and that Commerce had failed to provide sufficient evidence to rebut this argument. She pointed to the relative cost of the retorts in the production process, as well as US Magnesium’s evidence of industry-wide accounting practices regarding the retorts, as signs of their misclassification as indirect materials. She stated that “[d]irect input was shown to be the most reasonable, objective, and fair method of accounting for the cost of retort consumption in the Pidgeon process. There was not substantial contrary evidence.” 839 F3d. 1023, 1034.

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