Second Nature Designs Ltd. v. United States

654 F.Supp.3d 1301

SECOND NATURE DESIGNS LTD., Plaintiff, v. UNITED STATES, Defendant.

Slip Op. 23-116 Court No. 18-00131

United States Court of International Trade

August 17, 2023

John M. Peterson, Richard F. O'Neill, and Patrick B. Klein, Neville Peterson LLP, of New York, N.Y., for Plaintiff Second Nature Designs, Ltd.

Brandon A. Kennedy, Trial Attorney, Commercial Litigation Branch, Civil Division, U.S. Department of Justice, of New York, N.Y., for Defendant United States. With him on the briefs were Brian M. Boynton, Principal Deputy Assistant Attorney General, Patricia M. McCarthy, Director, Justin R. Miller, Attorney-In-Charge, Aimee Lee, Assistant Director. Of counsel on the brief was Alexandra Khrebtukova, Office of the Assistant Chief Counsel, International Trade Litigation, U.S. Customs and Border Protection of New York, N.Y.

OPINION AND ORDER

Katzmann, Judge:

Plaintiff/Counterclaim-Defendant Second Nature Designs Ltd. ("Plaintiff") brings this action against Defendant/Counterclaim-Plaintiff the United States ("Defendant" or "the Government") to contest the denial of its 19 U.S.C. § 1514 protest against the classification of and assessment of duty on certain entries of decorative items. Plaintiff raises two motions to dismiss at the pleadings stage. First, Plaintiff moves to dismiss the counterclaim pleaded by Defendant in its Answer to the Complaint for failure to state a claim under USCIT Rule 12(b)(6). See Pl.'s Mot. to Dismiss Def.'s Countercl. & Sever Entry No. 551-72801710, at 7-26, Mar. 2, 2023, ECF No. 34 ("Pl.'s Br."); Answer & Countercl. at 4, Feb. 14, 2023, ECF No. 29. In the alternative, Plaintiff moves to designate the counterclaim as a defense under USCIT Rule 8(d)(2). See Pl.'s Br. at 1. Second, Plaintiff moves to sever Entry No. 551-72801710 from the Amended Summons and dismiss it because no party has standing to challenge the denial of a protest of that entry by U.S. Customs and Border Protection ("Customs"). See Pl.'s Br. at 26-27; Am. Summons at 5, Jan. 30, 2023, ECF No. 28.

The court first holds that the Government fails to state a counterclaim in its Answer. The court redesignates the counterclaim as a defense under USCIT Rule 8(d)(2) and dismisses the motion to dismiss the counterclaim as moot. The court then grants Plaintiff's second motion by severing Entry No. 551-72801710 from the Amended Summons and dismissing it for lack of subject matter jurisdiction under USCIT Rule 12(b)(1).

BACKGROUND

This case involves the classification of numerous decorative items imported by Plaintiff in 149 entries filed with Customs from July 11, 2016, to December 23, 2016. See Am. Summons at 3-6. Plaintiff describes the merchandise as consisting "of certain various natural branches, flowers, wood, and similar merchandise which is dried and decorated," and "[s]ome products are arranged into various bouquets." Compl. ¶ 6. Plaintiff contests Customs's denial of its protest that followed Customs's liquidation of most of Plaintiff's entries under Harmonized Tariff Schedule of the United States ("HTSUS") subheading 0604.90.60¹ and assessed duty at the rate of 7 percent ad valorem, Compl. ¶¶ 8-10, and of the remainder of Plaintiff's entries under HTSUS subheading 0604.90.30,² a duty-free provision, see Mot. to Am. Summons, Jan. 30, 2023, ECF No. 26. The court granted a consent motion to amend the summons that struck all such duty-free entries except one, reducing the number of entries to 137. See Order, Jan. 30, 2023, ECF No. 27. This case proceeds in parallel with Second Nature Designs Ltd. v. United States, No. 17-00271, which arises from an earlier denial of protest by Customs and involves the disputed classification of similar merchandise over the same two HTSUS provisions at issue in this case. See Second Nature Designs, Ltd. v. United States ("Second Nature I"), 46 CIT —, —, 586 F. Supp. 3d 1334, 1337 (2022).

Plaintiff filed the Complaint on September 26, 2022, see Compl., Sept. 26, 2022, ECF No. 20, and the Amended Summons was deemed filed on January 30, 2023, see Am. Summons. Defendant's Answer, which included a counterclaim, was filed on February 14, 2023. See Answer & Countercl. On March 2, 2023, Plaintiff moved to dismiss the counterclaim and sever and dismiss Entry No. 551-72801710 from the Amended Summons. See Pl.'s Br. The Government contested both motions in a response brief, see Def./Countercl. Pl.'s Mem. of L. in Opp'n to Pl.'s Mot. to Dismiss Countercl. & Sever Entry No. 551-72801710, Apr. 6, 2023, ECF No. 37 ("Def.'s Br."), to which Plaintiff filed a reply, see Pl.'s Reply in Supp. of Mot. to Dismiss Def.'s Countercl., May 17, 2023, ECF No. 40.

DISCUSSION

The court has subject matter jurisdiction under 28 U.S.C. § 1581(a), which grants to the Court of International Trade "exclusive jurisdiction of any civil action commenced to contest the denial of a protest, in whole or in part, under section 515 of the Tariff Act of 1930." 28 U.S.C. § 1581(a). The court's exclusive jurisdiction also extends to validly pleaded counterclaims involving the same "merchandise that is the subject matter of such civil action." Id. § 1583.

Motions to dismiss under USCIT Rule 12(b) allow litigants to dismiss any or all claims for relief in any pleading for lack of subject matter jurisdiction, see USCIT R. 12(b)(1), or for failure to state a claim, see USCIT R. 12(b)(6). A summons in a § 1581(a) action and a counterclaim stated in an answer are both pleadings to which USCIT Rule 12 applies. See USCIT R. 7(a)(2) (answers in § 1581(a) actions); DaimlerChrysler Corp. v. United States, 442 F.3d 1313, 1318 (Fed. Cir. 2006) (summons in § 1581(a) actions). When considering a motion to dismiss, the court must accept well-pleaded factual allegations to be true and draw all reasonable inferences in favor of the nonmoving party. Wanxiang Am. Corp. v. United States, 12 F.4th 1369, 1373 (Fed. Cir. 2021). To survive a motion to dismiss for failure to state a claim in particular, "a complaint must contain sufficient factual matter, accepted as true, to 'state a claim of relief that is plausible on its face.' " Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)).

I. Motion to Dismiss the Counterclaim for Failure to State a Claim

Defendant pleaded the following counterclaim in its Answer:

Defendant/Counterclaim-Plaintiff, United States, brings this counterclaim pursuant to 19 U.S.C. §§ 1503, 1505(b) & (c), the tariff code (19 U.S.C. § 1202 etseq.), and 28 U.S.C. §§ 1582(3), 1583, 2643(b) & (c), seeking an order from the Court reclassifying 44 styles of the subject merchandise, identified in paragraph 9 of this counterclaim, under subheading 6702.90.65, HTSUS, which carries a duty rate of 17 percent ad valorem. Pursuant to this reclassification of the imported merchandise, the Government seeks the recovery of additional duties owed, plus interest as provided by law, including interest pursuant to 19 U.S.C. § 1505(b), (c), and all pre- and post-judgment interest provided by law, from Second Nature.

Answer & Countercl. at 5.³ Defendant notes that this court's prior decisions have "held that the Government lacks a cause of action to assert counterclaims for underpaid duty on the same merchandise for which plaintiff claims a duty refund." Id. at 4 n.2 (citing Second Nature I, 586 F. Supp. 3d 1334; Cyber Power Sys. (USA) Inc. v. United States, 46 CIT —, 586 F. Supp. 3d 1325 (2022)). Having included the counterclaim to preserve its rights on potential appeal of that legal question, Defendant nonetheless requests that the motion to dismiss be denied. See id.; Def.'s Br. at 5.

Defendant fails to state a counterclaim. Three cases are persuasive here: Second Nature I, Cyber Power, and Maple Leaf Marketing, Inc. v. United States, 47 CIT —, —, Slip Op. 23-90 (June 14, 2023). In Second Nature I, the Government sought leave to amend its answer to include a counterclaim that the merchandise at issue should have been correctly classified under HTSUS subheading 6702.90.65, carrying a duty rate of 17 percent ad valorem, rather than HTSUS subheading 0604.90.60, under which Customs had initially assessed duties at 7 percent ad valorem. 586 F. Supp. 3d at 1337-38 & nn.3-4. The decision adopted the court's conclusions in Cyber Power, see Second Nature I, 586 F. Supp. 3d at 1338, which held that "Congress did not provide the United States with any statutory authority"—either expressly or impliedly—"to assert counterclaims challenging the liquidated classification and duty rate," Cyber Power, 586 F. Supp. 3d at 1333. And after the briefing for the instant motion was filed, this court in Maple Leaf "reaffirm[ed] the reasoning and conclusions of Cyber Power and Second Nature [I]" and redenominated the Government's counterclaim in that case—which cites the same statutory provisions invoked in this case—to reliquidate entries under an HTSUS subheading with a higher duty rate as a defense. Slip Op. 23-90, at 3-8.

So too here. The counterclaims in Second Nature I and this case both request reclassification of the goods at issue to HTSUS subheading 6702.90.65, which carries a higher rate than that of the duties initially assessed by Customs.⁴ The counterclaim here cites to 19 U.S.C. §§ 1503, 1505(b)-(c), the tariff code (19 U.S.C. § 1202 et seq.), and 28 U.S.C. §§ 1582(3), 1583, and 2643(b)-(c). See Answer & Countercl. at 5. The Cyber Power court, however, considered nearly all of those provisions in its search for authority. It concluded that none of them—either independently or "cobble[d] together"—established a cause of action for the Government to bring a counterclaim challenging the liquidated classification and duty rate. Cyber Power, 586 F. Supp. 3d at 1330; see also id. at 1330 ("Section 1202 only sets forth the HTSUS . . . ."); id. at 1330 n.9 (Section 1505 "is relevant only after the [CIT] orders reliquidation."); id. at 1331...