Antidumping Law: Issues and Applications in High Technology Industries
By Louis S. Mastriani
As Published in the Computer Law Reporter (April/May 1991)
U.S. producers of computer-related products and components have utilized the antidumping provisions contained in the Tariff Act of 1930 to protect against injurious sales of foreign products in the U.S. at less than fair value. High tech products which have been subject to antidumping investigations include high information content flat panel displays, personal word processors, semiconductors (64K DRAMs, 256K DRAMs, and EPROMs), 3.5-inch microdisks, cellular mobile telephones, high capacity pagers, laserlight scattering instruments, floppy disk drives, and digital readout systems. Certain common issues arise in investigations involving high tech products which have an effect upon Petitioner's and Respondent's potential for success in an antidumping investigation.
An antidumping investigation is a bifurcated administrative proceeding requiring separate affirmative determinations by the International Trade Administration of the Department of Commerce (the Department) and the International Trade Commission (the ITC). The Department determines whether a class or kind of merchandise is being, or is likely to be, sold in the U.S. at less than its fair value. 19 U.S.C. § 1673(I). The ITC determines whether sales of the imported merchandise either materially injures, threatens material injury to, or materially retards the establishment of the U.S. industry. 19 U.S.C. § 1673(2). If both of these determinations are affirmative, then an antidumping duty is imposed upon the imported merchandise equal to the amount by which the foreign market value exceeds the U.S. price for the merchandise.
II. THE ITC'S LIKE PRODUCT DETERMINATION
To make its material injury determination, the ITC must define the domestic industry affected by the less than fair value sales. The domestic industry comprises "the domestic producers as a whole of a like product." 19 U.S.C. § 1677(4). Therefore, the ITC must first determine the like product which the statute defines as "a product which is like, or in the absence of like, most similar in characteristics and uses with, the article subject to an investigation." 19 U.S.C. § 1677(10). Two recent ITC preliminary determinations contain useful discussions of the like product analysis applied in high tech antidumping investigations.
A. Electromechanical Digital Counters from Brazil, USITC Pub. 2273, Inv. No. 731-TA-453, April 1990) (prelim. negative determin.)
("Electromechanical Digital Counters")
In Electromechanical Digital Counters, the ITC majority (Eckes, Rohr, Lodwick and Newquist) analyzed the like product issue considering the traditional criteria of physical characteristics, end uses, interchangeability of products, channels of distribution, production processes, customer/producer perceptions, common manufacturing facilities and employees, and price. Based on the Department's description of the product in its Notice of Initiation, the ITC found the following three like product issues.
1. Whether Low-Cost, Miniature Electromechanical Digital Counters Should Be a Separate Like Product From Other Electromechanical Digital Counters
Apart from cost, the ITC majority found no other significant differences between low-cost, miniature digital counters and larger, high cost counters. Both counters were non-resettable and performed the same basic counting functions under similar circumstances. There was no evidence that both could not be used in similar end uses. The production processes, employees, distribution network and basic design for both types of counters were identical. Even in terms of size, the majority found only slight differences, and noted that the ITC has declined to find separate like products based only on size differences. Price was also found not to be a determinative factor.
2. Whether the Like Product Should Include Mechanical Counters
The Petitioner claimed that mechanical counters did not operate directly from electrical current and required the movement of a lever to operate the counting wheels. A respondent argued that all counters performed the same function--counting; that all counters can be designed for different types of uses; and that difference in size was not relevant because all could be made in any size. The ITC majority found that mechanical counters were distinct from electromechanical counters in operation, cost of production (because the latter require a special coil), and most end use applications.
3. Whether the Like Product Should Include Electronic Digital Counters
The ITC found a number of substantial differences in the characteristics, design and components of electronic digital counters and those of electromechanical or mechanical counters. For example, only electronic digital counters used solid-state circuitry to perform the counting functions, and displayed the count by LED or LCD digits. Some contained a built-in battery operated memory or an electronic EPROM. While some similarities were found to exist among the three types of counters, on balance, the ITC found that the evidence warranted not including electronic digital counters in the definition of the like product.
B. Laser Light-Scattering Instruments from Japan, USITC Pub. 2282, Inv. No. 731-TA-455 (May 1990) (prelim. affirmative determin.) (" LLSIs" )
In LLSIs the same Commissioners made up the majority as in Electromechanical Counters. That majority examined the following like product issues pursuant to the same standard analysis detailed above.
1. Whether Goniometers and Multiple Detector LLSIs Constitute Separate Like
There was no clear dividing line between these two products. Although certain physical differences existed, the majority found similar end uses, interchangeability and customer perceptions. However, the majority stated "We do not believe that the physical characteristics, use, interchangeability or customer perception factors either singly or in combination provide a sufficient basis for determining that goniometers and multiple-detector instruments are separate like products." (LLSIs. at 10).
2. Whether Low-Angle LLSIs and Multi-Angle LLSIs Constitute Separate Like Products
The majority stated that on balance, the similarities outweighed the differences, but noted that "[w]e will, however, reconsider the issue in any final investigation." (Prelim. at 12).
3. Whether Those Components of LLSIs Within the Scope of the Investigation Constitute a Separate Like Product
This involved examining whether components or "semi-finished" products should be included in the same like product as finished products. The ITC uses the following criteria to analyze this issue:
a. Necessity for further processing;
b. Costs of such processing and value added thereby;
c. Whether the article at an earlier stage of production embodies or imparts to the finished article an essential characteristic of function;
d. Whether there are independent markets for the finished and unfinished articles;
e. Degree of interchangeability of articles at different stages of production.
Finding that the components were dedicated to use in the finished product and essential to the product's operation, the majority included them in the same like product as the finished product, notwithstanding that the components were not interchangeable with the finished product.
C. Analysis of Whether the ITC Has Broken Out Like Product Based On Technology
Cases employing the traditional like product analysis examine technology in discussing physical characteristics. Technology, however, also has a major influence on the remaining factors considered in the like product analysis.
Sony made a technology argument (without success) in Sony Corp. v. United States, 712 F. Supp. 978, 981-82 (Ct. lnt'l Trade 1989) (See discussion in Section III below). Likewise, in Phototypesetting and Imagesetting Machines and Subassemblies from the Federal Republic of Germany, USITC Pub. 2281, Inv. No. 731-TA-456 (May 1990) (prelim. determination) ("Phototypesetting Machines"), claimed differences in technology failed to convince the ITC that there existed multiple like products. There, the information obtained in the investigation distinguished "high end" and "low end" imagesetters by their respective prices (the prices of "high end" imagesetters was double that of "low end" imagesetters) and at least one of the following features: faster speed, higher image accuracy and resolution, use of the "drum recorder" technology, and advanced color composition capabilities. See Phototypesetting Machines at 10-15 and Appendix A-5.
In his dissent in 3.5" Microdisks and Media Therefor from Japan, USITC Pub. 2170, Inv. No. 731-TA-389. (March 1989) (final determination) ("3.5" Microdisks"), Commissioner Cass contrasted the nature of production technologies involved in high density and double density disks. He examined coercivity (a measure of magnetic energy), coating thicknesses and (related to the latter) ability to produce high-density disks in commercial quantities, and relative independence of the respective consumer markets. Commissioner Cass found that a greater degree of technical interchangeability was evident between the two products than the preliminary investigation's evidence indicated, but that all of the other factors led to the conclusion that the two products were separate like products. See 3.5" Microdisks at 44-48.
In High Information Content Flat Panel Displays and Subassemblies Thereof From Japan, USITC Pub. 2311, Inv. No. A-588-817 (September 1990) (prelim. determination) ("Fiat Panel Displays") the Commission concluded, for purposes of the preliminary determination, that there is only one like product. This like product is comprised of HIC flat panel displays and dedicated subassemblies thereof. In support of this conclusion the Commission found that, although there exist acknowledged differences between LCD, EL and Plasma displays such as medium of display, lack of absolute interchangeability and different production processes, these differences were insufficient to warrant dividing like product along technology lines. The Commission also stressed the similarities between the types of Flat Panel Displays, including similar applications, physical characteristics, interchangeability at the design phase and channels of distribution.
The Commission determined that CRTs and displays which contain less than 120,000 pixels were not included in the like product.
In finding subassemblies were included in the like product definition, the Commission stressed the evidence indicating that subassemblies are dedicated for use in HIC flat panel displays and that no independent market or use exists for these components. While acknowledging Respondents' argument that only display glass should be included in the like product definition, the Commission concluded that, based on the present record, it could not find "clear dividing lines establishing which subassemblies should be separate like products from each other or from finished articles."
The Acting Chairman of the Commission, Anne E. Brunsdale, filed an opinion containing her additional views. This opinion is both encouraging and enlightening. The Chairman stated at the beginning of her opinion that it is her belief that the Commission "does not yet have a sufficiently complete understanding of the dynamics of this industry to choose from among the conflicting conclusions which might be drawn from the preliminary record." The purpose of her opinion, therefore, was to outline those issues which are worth "considerable attention" in the final investigation.
Two issues with respect to like product that the Chairman believes must be explored in great depth at the final investigation are: (1) the distinctions among the different technologies of HIC Flat Panel Displays, and (2) the Commission's decision to include subassemblies as part of the like product. In her comments the Chairman specifically suggests the possibility of an intermediate like product definition which distinguishes passive-matrix LCDs from other HIC Flat Panel Displays. With respect to the subassembly issue, she suggests that a distinction between display glass and other subassembly components may be appropriate.
Special attention should be paid to the ITC's negative modification/revocation determination in Liquid Crystal Display Television Receivers from Japan, USITC Pub. 2042, Inv. No. 751-TA-14 (December 1987) (final determination) ("LCD Receivers"). The original 1971 dumping order in that case had concerned only television receivers, with no limitation on any particular type of display, because LCD technology was not commercially feasible. The ITC indicated that it would only modify or revoke the order if convinced that LCD TVs had no domestic like product and did not compete with any domestic product. LCD Receivers at 7-8. The foreign producers and domestic importers attempted to convince the ITC that LCD TVs differed from conventional cathode ray tube (CRT) TVs in four respects: (1) they are far smaller and lighter and use self-contained power sources; (2) they have completely different production technologies; (3) they are truly portable and used primarily outside the home; and (4) they are marketed and distributed in different channels and are priced in a manner that is not competitive with CRTs. LCD Receivers at 8.
The same principal characteristics and use; they are equipped to receive a broadcast television signal and produce a video image. Those opponents also argued that in prior TV receiver investigations, the ITC had not found different like products based on differences in the features of individual component parts.
Regarding the claimed technological differences, the opponents referred to prior investigations in which the ITC determined that different technology or production processes do not necessarily establish different like products:
Indeed, they argue that the only technological or production related differences are in the production of the screen, not the receiver as a whole. Moreover, they noted that, while direct competition between LCD TV's and CRT TV's was currently in the smaller screen sizes, the Commission should not confine its analysis to the static picture but must consider the dynamics of the market and the allegedly inevitable and imminent development of large screen LCD TV's that would compete directly with large screen CRT TV's. LCD Receivers at 9.
Notably, Commissioner Rohr stated that although he agreed with the majority's determination that the appropriate like product definitive to be used in the investigation was "all television receivers," he also recognized that the determination was a close question:
Technological change is an important aspect of the modern commercial world and one to which the Commission must be sensitive. Even with articles of commerce that may look much alike and perform much the same function, there comes a time when the technological differences between them become so great as to preclude a reasonable man from considering them to be the same product. This was a critical issue in this investigation.
LCD Receivers at 15 (Additional views of Commissioner Rohr). Commissioner Rohr, however, opined that the parties advocating review had not presented a sufficient case for those technological changes. Id.
D. Why the Trinitron Argument Failed (Ct. Int'l Tra (Sony Corp. v. United States, 712 F.Supp. 978 (Ct. Int'l Trade 1989 1989))
The U.S. Court of International Trade (CIT) rejected both arguments in Plaintiff Sony's challenge of the ITC's final determination in Color Picture Tubes from Canada, Japan. the Republic of Korea, and Singapore, Inv. Nos. 731-TA-367 through 370.
1. Substantial Evidence Supported a Single Like Product Finding
The CIT held that substantial evidence on the record supported the ITC's determination to include the Sony Trinitron color picture tube (CPT) in the like product finding with all CPTs, instead of finding a separate like product. Sony argued that the record showed that the Trinitron CPTs reflected a significantly different technology and manufacturing process.
Sony pointed out three technological distinctions in its Trinitron CPT: a) color selecting mechanism (Trinitron: aperture grill v. Other CPTs: shadow mask); b) number of electron guns (Trinitron: 1 gun emitting three beams v. Other CPTs: 3 guns emitting separate beams); and c) shape of the thick glass faceplate (Trinitron: cylindrical shaped faceplate v. Other CPTs: either rounded corner convex faceplates or "full square" screens with square corners and a nearly flat faceplate).
The CIT made the following findings regarding these asserted technological distinctions: a) Shadow masks and aperture grills serve the same purpose and function. Both are color selection mechanisms that channel electron beams emitted by the electron gun to the phosphor dots located on the inside of the faceplate; b) All CPTs require an electron gun(s) to generate electron beams; and c) The different shape of the faceplates does not outweigh the underlying similarities between the various screens, nor their common function, which is to display a color image.
Sony pointed out two distinctions in its manufacturing process: the manufacture of the color selecting mechanism and the cathode design of the electron gun, which Sony asserted made the Trinitron CPT unique and not interchangeable with other color picture tubes. The CPT quickly disposed of this argument by reiterating that the distinctions between the Trinitron and other CPTs "does not mean that the Trinitron is not 'like' other CPTs within the meaning of the relevant statutes. Nor is it disputed that the end use, i.e. television viewing sets, is the same for Trinitron CPTs as for other CPTs." 712 F. Supp. at 983.
2. Exclusion of the Trinitron CPT From the Injury Determination
The CIT rejected Sony's argument that the Trinitron CPT should have been excluded from the ITC's final injury determination on the ground that it occupies a "discrete and insular segment of the market" not in competition with other CPTs. The CIT noted that Sony had cited no statute for its proposition, nor did it appear able to do so. The court rejected as a baseless analogy Sony's argument that because the ITC can make a "like product" determination that is narrower in scope than the Department's "class or kind" determination, it could also exclude certain products from its ultimate injury determination. 712 F. Supp. at 984.
The CIT recognized that the ITC has provided exclusions from injury determinations in limited circumstances. The ITC, however, apparently has not done so since 1984, and the few cases providing for an exclusion were revocation investigations where outstanding antidumping or countervailing duty orders were already in place.
E. The Effect That the Inability to Secure Financing Or Attract Investment Has on Injury Analysis
In recent cases, the ITC has asked U.S. producers to describe any actual or potential negative effects on investments and ability to raise capital. See, e.g., Flat Panel Displays; Gray Portland Cement and Cement Clinker from Japan, USITC Pub. 2297, Inv. No. 731-TA-461 (July 1990) (prelim. determination), Appendix E; Phototypesetting and Imagesetting Machines and Subassemblies Thereof from the Federal Republic of Germany, USITC Pub. 2281, Inv. No. 731-TA-456 (April 1990) (prelim. determination), Appendix E. The ITC acquired some information on this subject in Fresh and Chilled Atlantic Salmon from Norway, USITC Pub. 2272, Inv. No. 701-TA-302 (April 1990) (prelim. determination) because the industry was a relatively new one in the domestic market. The information, however, does not appear to have influenced the material retardation issue. See id. at 15-18. The ITC also requested this type of information in the Flat Panel Displays preliminary investigation, and plans to do so in the final investigation.
In the LLSIs investigation, the ITC indicated that capital investment was only one of a number of factors considered in its "condition of the domestic industry" analysis, some of the others being production, shipments, capacity utilization, employment, wages, financial performance, and R&D expenditures. In that case, however, the industry tended to have "quite small" capital investments, so that factor was of little weight. LLSIs at 17.
III. THE DEPARTMENT'S LESS THAN FAIR VALUE DETERMINATION
To make its less than fair value determination, the Department compares the U.S. price to the foreign market value (FMV) of the imported merchandise. The FMV of the imported merchandise is the price:
a) at which such or similar merchandise is sold or, in the absence of sales, offered for sale in the principal markets of the country from which exported, in the usual commercial quantities and in the ordinary course of trade for home consumption, [i.e. home market sales] or
b) if not so sold or offered for sale for home consumption, or if the [Department] determines that the quantity sold for home consumption is so small in relation to the quantity sold for exportation to countries other than the United States as to form an inadequate basis for comparison, then the price at which so sold or offered for sale for exportation to countries other than the United States [i.e. third country sales].
19 U.S.C. § 1677b(a)(1). If the Department cannot determine FMV based on home market sales, then notwithstanding third country sales, the Department determines FMV by calculating the constructed value of the merchandise. 19 U.S.C. § 1677b(a)(2).
This statutory language raises three main issues in high tech dumping investigations. First, the Department must determine whether there are sufficient home market sales of such or similar merchandise to use for the FMV determination. Second, high tech investigations usually involve sales of prototype and discontinued models which require the Department to determine whether such sales are in the ordinary course of trade for home consumption. Finally, if the Department must use constructed value to determine FMV, then the Department must determine how to calculate cost of manufacture of the product, and how to allocate research and development expenses, as well as general, selling and administrative expenses, and royalty income.
A. Product Comparability of Home Market Market Sales for Determining FMV
Title 19 U.S.C. §1677b(a) specifies the procedure for calculating FMV. According to the House Ways and Means Committee's statutory interpretation, Section 1677b(a) establishes that foreign market value shall be "determined by one of three methods, in order of preference: home market sales, third-country sales, or constructed value." House Committee on Ways and Means, Overview and Compilation of U.S. Trade Statutes, H.R. Doc. No. 14, 101st Cong., 1st Sess. 56 (September 18, 1989) (emphasis added). The Overview further explains:
If such or similar merchandise is sold in the market of the exporting country for home consumption, then foreign market value is to be based on such sales. If home market sales do not exist, or are so few as to form an inadequate basis for comparison, then the price at which such or similar merchandise is sold for exportation to countries other than the United States becomes the basis for foreign value. If neither home market sales nor third-country sales form an adequate basis for comparison, then foreign market value is the constructed value of the imported merchandise. Id.
Home market sales of high tech merchandise usually comprise a small volume of a Respondent's total sales for two reasons. First, producers of high tech products may custom design merchandise either for a specific OEM or for the market the product is sold in. Second, continually developing technology may result in home market sales of advanced models different from models sold in other markets. When the home market sales volume is low, the Department applies a 5% rule to determine the viability of using home market sales as a basis to calculate FMV.
The CIT has enumerated the standards for determining home market sales viability. Kerr-McGee Chemical Corporation v. United States, 741 F. Supp. 947 (Ct. Int'l Trade 1990). Specifically, the CIT stated that under the traditional viability analysis
[The Department] compares home market sales with third country sales and will find home market sales adequate for FMV purposes if they total five percent of sales to third countries (not the United States). To ascertain whether there is a viable home market, [the Department] asks whether 'the quantity of such or similar merchandise sold for consumption in the country' is so small in relation to 'the quantity sold for exportation' to third countries, 'as to be an inadequate basis for determining the foreign market value of the merchandise imported into the United States.' (citation omitted) [The Department] 'normally' uses 'five percent of the amount sold to third countries' as the cut-off point for its adequacy determination.
Id. at 954. The CIT further recognized that the 5% percent rule is merely a guideline for the Department to follow in order to determine viability, and, as such, "might not always provide an appropriate home market viability test." Id. at 955. The Department has applied this discretion to use third-country sales even when the Department has determined the viability of home market sales. Certain Small Business Telephone Systems and Subassemblies Thereof From Korea, 54 Fed. Reg. 53,141, 53,150, Comment 5 (Dep't Comm. 1989) (final determination). In Small Business Telephone Systems, the Department stated that the 5% viability rule, by its terms, only applies to "normal" circumstances. The Department determined that the volume of reported home market sales of identical and similar merchandise appeared insufficient to serve as an adequate basis for FMV. It further determined that by using third-country sales, it could base many more comparisons on identical and similar matches than if it used home market sales. Therefore, the purpose of applying the home market viability rule is so that the Department calculates FMV using the most similar merchandise to the goods sold in the U.S.
The proper application of the 5% viability rule is to compare home market sales to the value, rather than the quantity, of third-country sales. Certain Dried Heavy Salted Codfish From Canada. 54 Fed. Reg. 13,211, Comment 6 (Dep't Comm. 1989) (final administrative review).
The Department includes sales to related parties in determining the viability of the home market only when those sales have been made at arm's length. Color Picture Tubes From Korea, 52 Fed. Reg. 44,186, Comment 1 (Dep't Comm. 1987) (final determination). Where the facts indicate that a significant common stock ownership relationship exists between the parties, the Department will reject Respondent's home market sales for comparison purposes because Respondent has failed to establish an arm's length transaction. Fishnetting of Man-Made Fibers From Japan, 53 Fed. Reg. 10,264, Comment 3 (Dep't Comm. 1988) (final administrative review). Instead of using home market sales, the Department will use for FMV Respondent's third-country price to the first unrelated purchaser.
B. Exclusion of Sales of Prototype and Discontinued Models From the FMV Calculation As Sales Not in the Ordinary Course of Trade
The statute requires the Department to utilize only home market sales made in the usual commercial quantities and in the ordinary course of trade. To prove that sales of engineering prototypes do not fall within the statutory scope of sales in the ordinary course of trade, Respondent must establish that the sales deviated from normal "conditions and practices" in the trade under consideration with respect to merchandise of the same class or kind. 19 U.S.C. § 1677(15); Certain Fresh Cut Flowers From Costa Rica, 52 Fed. Reg. 6,852, Petitioner's Comment 4 (Dep't Comm. 1987) (final determination); Standard Carnations From Chile, 52 Fed. Reg. 3,152, Petitioner's Comment 2 (Dep't Comm. 1987) (final determination); Fresh Cut Flowers From Ecuador, 52 Fed. Reg. 2,128, Petitioner's Comment 3 (Dep't Comm. 1987) (final determination). Further, the Department requires a showing that Respondent made the prototype sales at quantities and prices different from home market sales to other customers. Certain Steel Pails From Mexico, 55 Fed. Reg. 12,245, Comment 6 (Dep't Comm. 1990)(final determination).
19 U.S.C. § 1677(15) defines the term "ordinary course of trade" as:
The conditions and practices which, for a reasonable time prior to the exportation of the merchandise which is the subject of an investigation, have been normal in the trade under consideration with respect to merchandise of the same class or kind.
See also 19 C.F.R. § 353.46(b) (1990). When interpreting this definition, the CIT reads the statute in conjunction with § 1677(16)'s definition of "such or similar merchandise", so that the interpretation of the term "ordinary course of trade" does not conflict with the hierarchies established by § 1677(16). Monsanto Company v. United States, 698 F. Supp. 275 (Ct. Int'l Trade 1988). The CIT considers sales "unsuitable for comparison purposes," (for example sales of obsolete merchandise) as not within the scope of the term "ordinary course of trade." Id.; but see IPSCO, Inc. v. United States, 687 F. Supp. 633 (Ct. Int'l Trade 1988). (Rather than classify the sales of experimental products as not within the ordinary course of trade, the court amortized the development costs of these products by making an adjustment to the constructed value.) Contrary to its interpretation in Monsanto, the IPSCO court interpreted § 1677(15)'s legislative history as requiring the inclusion of sales of obsolete merchandise in foreign market value because these sales fell within the "range of normal business practices." The legislative history of § 1677(15) does indicate that the Department should disregard below cost sales from home market sales when the Respondent establishes "the practice of systematically selling at prices which will not permit recovery of all costs." S. Rep. No. 1298, 93rd Cong., 2d Sess., reprinted in 1974 U.S. Code Cong. & Admin. News 7186, 7310.
The Customs Court interpreted the term "ordinary course of trade" with respect to experimental or testing sales in two cases. In Clayton Chemical & Packaging Co. v. United States, 331 F. Supp. 312 (Cust. Ct. 1971), the court rejected appellant's argument, based only on testimony, that merchandise purchased in small lots for experimental or testing purposes did not fall within the ordinary course of trade. The court stated that mere testimony as to the experimental nature of the sales did not suffice to establish that the sales fell outside the ordinary course of trade. The court ruled that it could make a reasonable inference that the sales did not occur within the ordinary course of trade only by considering all relevant sales along with testimony showing that only a small portion of those sales comprised experimental or testing sales. As support for this statement, the court relied on its ruling in United States v. H. Muehlstein & Co., 42 Cust. Ct. 760 (1959).
In Muehlstein, the court relied on the following facts to uphold the trial court's exclusion of three sales from the foreign market value determination because the trial court reasonably inferred that appellee made the sales for testing purposes. First, appellee produced the affidavit of a company official associated with the manufacture, processing and sale of all of his company's products. The court stated that such a person "was clearly in a position to know the purposes for which the merchandise was sold, and to state, as a fact within his own knowledge, that certain small quantities were sold for testing purposes." Id. at 764. Second, appellee established that testing of the material at issue did not constitute a "fugitive" use, and that, in the ordinary course of business, appellee did not sell the material for testing purposes. Finally, the court examined all of appellee 235 sales and found that only three of those sales comprised small quantities obviously sold for testing purposes rather than normal consumption.
The Department excludes experimental or prototype sales made only in the home market. Experimental sales made to U.S. customers are generally included in the calculation of U.S. price, but the Department adjusts the FMV calculation to account for the related extraordinary production costs. IPSCO, Inc. v. United States, 687 F. Supp. 633 (Ct. Int'l Trade 1988), later proceeding, 714 F. Supp. 1211 (1989) (hereafter "IPSCO 1" and "IPSCO II," respectively); Oil Country Tubular Goods From Canada, 51 Fed. Reg. 15,029 (Dep't Comm. 1986) (final determination). In the pending investigation involving Flat Panel Displays, however, sales of prototypes to the United States were excluded from analysis in the preliminary determination as being outside the ordinary course of trade.
In IPSCO I, the Respondent, IPSCO, argued that the Department erred by failing to exclude from U.S. price experimental sales made to U.S. customers. IPSCO stated that the experimental nature of the merchandise's production and its onetime availability compelled the conclusion that IPSCO made these sales outside the "ordinary course of trade." IPSCO requested the CIT to remand the Department determination with directions to determine whether IPSCO made the sales at issue in the ordinary course of trade. IPSCO I at 640.
The statutory definition of foreign market value contains the "ordinary course of trade" language that supported IPSCO's argument. See, 19 U.S.C. 1677b(a)(1)(A); 19 C.F.R. 353.46(a) (1990). The CIT rejected IPSCO's argument by literally interpreting the statutory "ordinary course of trade" language as applying only to foreign market value because the statutory definition of U.S. price does not contain a parallel provision. The court expressly stated the "if Congress intended to require the administering authority to exclude all sales made outside the 'ordinary course of trade' from its determination of United States price it could have provided for such an exclusion in the definition of United States price, as it has in the definition of foreign market value." IPSCO I at 641. The CIT, however, did remand for clarification the issue of whether the Department applied a blanket rule that requires the inclusion of all U.S. sales not made in the ordinary course of trade or whether the Department made a reasonable determination to include the sales at issue.
Additionally in IPSCO I the CIT ruled that the Department's adjustments to IPSCO's constructed value for the extraordinary production costs of the experimental merchandise resulted in a fair comparison with U.S. sales. Id. The Department acknowledged IPSCO's abnormally high production costs for the experimental products by normalizing IPSCO's demonstrated low yield rates during the period of investigation in order to amortize the start-up costs of the experimental products over future production. Id. at 638; Oil Country Tubular Goods From Canada at 15,032, comment 15. The yield rates, alone, provided sufficient evidence to the Department of the extraordinary costs incurred by IPSCO. This type of analysis has particular relevance to semiconductor and liquid crystal technologies where yield rates, especially those at the beginning of a product's life, have a profound effect upon costs of production.
In IPSCO II, IPSCO appealed the remand determination the Department made to comply with the CITs order entered in IPSCO I. In the remand determination, the Department upheld its prior exclusion of the experimental sales from U.S. price and, as requested by the CIT, clarified Department policy on this issue. The Department clarified that it does not apply a blanket rule requiring the inclusion all U.S. sales not made in the ordinary course of trade. Rather, the Department will exclude the following two types of U.S. sales from the fair value comparison: 1) sales which are not representative of the seller's behavior; and 2) sales which are so small that they would have an insignificant effect on the margin. IPSCO II at 1217. The first factor relates to the experimental sales analysis.
The CIT upheld the Department's remand determination that considered experimental sales representative of the sellers behavior because "it is not unusual for a company to sell experimental lines of merchandise and there is no reason to believe that other types of experimental pipe would not be marketed in the future." Id. Therefore, the mere classification of sales as experimental will never suffice to persuade the Department to consider the sales unrepresentative of a seller's behavior and to exclude the sales from U.S. price.
The CIT concluded that the Department has the discretion to exclude certain sales from U.S. price. Further, the Department should exercise this discretion "only in those limited situations in which [the Department finds that inclusion of certain sales which are clearly atypical would undermine the fairness of the comparison of foreign and U.S. sales." Id.
In a related proceeding, the CIT upheld the Department's exercise of this discretion to exclude certain sales from U.S. price. Sonco Steel Tube Div., Ferrum, Inc. v. United States, 694 F. Supp. 959 (Ct. Int'l Trade 1988), later proceeding, 714 F. Supp. 1218 (1989) (hereafter "Sonco I" and "Sonco II," respectively). In Sonco 1, the Respondent, Sonco, challenged the same final determination at issue in IPSCO I. Specifically, Sonco sought the exclusion from U.S. sales of merchandise that did not belong to Sonco and that Sonco disposed of only after the customer refused to claim it. In Sonco I, as in IPSCO I, the CIT rejected Sonco's argument that relied upon the statutory "ordinary course of trade" language, and remanded the issue for clarification of the Department's policy. In the remand determination, the Department considered the sales unrepresentative of Sonco's selling practices in the U.S. and excluded the sales from the fair value comparison. Sonco II at 1220.
High tech products which have been excluded from the Department's margin analysis include color televisions imported into the United States as "samples." Color Television Receivers From Korea, 53 Fed. Reg. 24,975, Comment 9 (Dep't Comm. 1988) (final administrative review). The Department excluded these sales because "[It]he televisions referred to as 'samples' were used for engineering or testing purposes, or were used as display models at electronic products shows and were either kept by the exporter or were destroyed." Id. Therefore, to support this finding, the Department relied on information Respondent provided on the record to show that transfer of ownership of the "samples" never occurred.
The Department has previously rejected Petitioners' argument that below-cost sales of a discontinued model did not comprise a sale in the ordinary course of trade and, therefore, should not be used for comparison purposes. Color Television Receivers From Korea, 53 Fed. Reg. 24,975, Comment 31 (Dep't Comm. 1988) (final administrative review). The Department did, however, conclude that when a Respondent discontinues a model in the home market but not in the U.S., then the Department will consider the below-cost home market sales as "not in the ordinary course of trade for comparison purposes as intended in the legislative history" and will properly disregard those sales from the comparison with U.S. sales of such or similar merchandise. The Department reasoned that if it did not adopt this view, then a Respondent could use the below-cost sales of a discontinued home market model to manipulate its dumping margin. As a parenthetical aside, the Department noted that it may have decided differently if Respondent had simultaneously discontinued sales of the such or similar U.S. model.
C. Issues That Arise When the Department Uses Constructed Value to Determine FMV
If neither home market nor third country sales are viable for calculating FMV, then the Department determines FMV based upon the constructed value (CV) of the merchandise. Basically, the Department determines CV by adding: 1) the cost of materials and fabrication or other processing; 2) the amount for general expenses and profit equal to that usually reflected in sales of merchandise of the same general class or kind as the merchandise under investigation; and 3) the cost of packing for shipment to the U.S. 19 U.S.C. § 1677b(e). The use of CV to determine FMV in high tech antidumping investigations raises such issues as the proper allocation of research and development (R&D) expenses, amortization of start up costs, general, selling and administrative (GS&A) expenses, and royalty income.
1. Allocation of R&D Expenses
The semiconductor antidumping investigations indicate that Respondents must establish a clear allocation of R&D expenses to the products under investigation in order to avoid the Department's resort to best information available (BIA). For purposes of calculating constructed value, a Respondent must determine total R&D expenses and properly allocate them to (1) general R&D, (2) product line R&D and (3) product-specific R&D categories. In 64K Dynamic Random Access Memory Components (64K DRAMs) From Japan, 51 Fed. Reg. 15,943 (Dep't Comm. 1986) (final determination), the Department used best information available in order to determine Respondents' R&D expense for the constructed value calculation. "The Department's method of accounting for R&D expenses encompassed the historic R&D for 64K DRAMs allocated over the market life of the product, which was considered part of the cost of manufacturing, and a proportional share of the current product line R&D and general R&D, which were considered to be part of the general expenses." Id. at 15944-15945. In the response to Respondent OKI's Comment 6 regarding the use of BIA for R&D, the Department stated that it "used data based on the experience of the Japanese semiconductor industry, which was obtained from public sources." Id. at 15949. In the response to Domestic Parties' Comment 9, the Department identified the public sources as Ministry of International Trade and Industry (MITI) figures on R&D for Japanese semiconductor manufacturers over a six month period, as reported by Hambrecht & Quest Inc. Id. at 15952. See also Erasable Programmable Read Only Memories ("EPROMs") from Japan, 51 Fed. Reg. 39,680, Pet. Comment 25 (Dep't Comm. 1986) (final determination) (The Department also utilized R&D information submitted by the Japanese industry to MITI. The Department has also used as BIA for R&D expenses the average R&D costs of the consolidated corporation. Cellular Mobile Telephones and Subassemblies from Japan, 50 Fed. Reg. 45,447, Resp. Hitachi's Comment 5 (Dep't Comm. 1985) (final determination) ("CMTs").
2. Allocation of Start-Up Costs
The Department defines start-up costs as costs that result from beginning production, usually relating to learning curve and other production flow expenses, and amortized over a reasonable amount of production. CMTs. In CMTs, the Department accounted for accepted start-up costs by amortizing the expense over the anticipated market life of the product.
Further, the Department capitalizes start-up costs prior to and during the early stages of production, and amortizes such costs over the sales during the market life of the product. EPROMs. Respondents, however, must directly identify costs with start-up in order to capitalize such costs. Cost adjustments that reflect the effects of production quantities lower than anticipated capacity utilization are not necessarily attributable to start-up.
3. Allocation of General, Selling and Administrative (GS&A) Expenses
The Department requires a proper allocation of all GS&A expenses so as to prevent such items that are actually cost of manufacturing expenses from being categorized as a GS&A expense. For instance, a division or department may be devoted to factory or manufacturing support, rather than administrative matters. Therefore, the Department would consider that department's overhead costs to be manufacturing costs, and not GS&A. For instance, in 64K DRAMs at 15945, the Department included overhead costs incurred by manufacturing subsidiaries in the cost of manufacturing, not the general expenses as Respondent presented in its submission.
In Titanium Sponge from Japan, 54 Fed. Reg. 13,403, 13,405, comm. 6 (Dep't Comm. 1989) (final administrative review), the Department included the SG&A expenses incurred by the subsidiary to produce a product not under review with the expenses incurred by the parent to produce the product under review. The Department allocated SG&A on the basis of the parent and subsidiary's consolidated sales revenue because Respondent did not provide a reliable cost of sales figure for the product under review.
4. Treatment of Royalty Income
In 64K DRAM's, Respondent sought a credit against the cost of production for royalty income earned from licensing 64K DRAM technology. The Department determined that the royalty income did not directly relate to the production of 64K DRAMs because the income resulted from expenditures for 64K DRAM research and development. Therefore, the Department allocated the product-specific research and development expenses for the period of investigation between the 64K DRAMs produced by Respondent and royalty income. See also. OKI comm. 18 at 15950.
In Television Receivers, Monochrome and Color, from Japan, 54 Fed. Reg. 13,917, 13,929, comm. 84 (Dep't Comm. 1986) (final admin. review), the Department excluded royalty income from production costs because Respondent failed to show a direct relationship to either the sales under review or current operations. Respondent had sought to have the royalty income deducted as an offset in calculating GS&A for purposes of constructed value.
At issue in the pending Flat Panel Displays investigation is the question of whether the Department will accept payments by customers for engineering R&D and non-recurring expenses as an offset to product-specific R&D expenses.
5. Disposal of Fixed Assets
The Department excludes the gain on the sale of a real estate investment from general and administrative expenses. Sweaters Wholly or in Chief Weight of Man-Made Fiber from the Republic of Korea, 55 Fed. Reg. 32,659, 32,671, comm. 30 (Dep't Comm. 1990) (final determination). Respondent argued for the inclusion of the gain in general expenses because the Respondent had purchased and held the asset with the expectation that Respondent would use the real estate for production purposes. The Department, however, considered the gain resulting from the sale as investment income because the sale involved an asset unrelated to Respondent's production operations. Therefore, the Department included the gain in the calculation of the investment interest offset.
In Mechanical Transfer Presses from Japan, 55 Fed. Reg: 335, 337 (Dep't Comm. 1990) (final determination), the Department included the loss on the disposal of fixed assets in constructed value.
In Certain Small Business Telephone Systems and Subassemblies Thereof from Korea, 54 Fed. Reg. 53,141, 53,149, comm. 13 (Dep't Comm. 1989) (final determination), the Department included, as general expenses, gains and losses from the disposal of fixed assets. Respondent argued that the Department should exclude these expenses from the reported costs of production because the Korean generally accepted accounting principles (GAAP) allow for the classification of these items as extraordinary. expenses. This classification under Korean GAAP permits the exclusion of these items from the calculation of the operating income for the corporation. The Department acknowledged that it usually adheres with the GAAP of a Respondent's home country, but only when the foreign GAAP accurately recognizes the actual costs incurred by the company. In this investigation, the Department stated that the exclusion of gains and losses from the disposal of fixed assets represented the exclusion of actual costs incurred by Respondent in its manufacturing operations. "This exclusion results in an understatement of reported general expenses, which, when allocated to the subject merchandise, results in an understatement of reported per unit costs." Id.
In Antifriction Bearings (Other Than Tapered Roller Bearings) and Parrs Thereof from the Federal Republic of Germany, 54 Fed Reg. 18,992, 19,076, Comm. 10 (Dep't Comm. 1989) (final determination), the Department stated that it "views losses on the sale or disposal of fixed assets ... as a normal cost of producing the products which should be reflected in the product's COP .... The Department considers any income or credits generated by these transactions as an offset against the expense to arrive at the actual cost incurred by the company."
D. Scope Rulings
Interested parties may petition the Department for a ruling that a product or subassembly is of such a nature as to fall outside the scope of an antidumping order. 19 U.S.C. 1677j(d); 19 C.F.R. § 353.29 (1990). Scope analyses by the Department also include determinations of whether later-developed products are within the scope of an existing antidumping order covering a class or kind of merchandise.
In a recent scope ruling, the Department, faced with a newly filed petition on so-called "personal word processors," analyzed whether these products were already covered by the existing order on portable electric typewriters. The Department, relying on 19 U.S.C. 1677j(d) and 19 C.F.R. §353.29(h), analyzed the following factors:
a) Whether the later-developed product has the same physical characteristics as the merchandise under the existing order;
b) Whether the expectations of the ultimate purchasers of the later-developed product are the same as for the earlier product;
c) Whether the ultimate use of the earlier product and the later developed product are the same;
d) Whether the later-developed merchandise is sold through the same channels of trade as the earlier product;
e) Whether the later-developed merchandise is advertised and displayed in a manner similar to the earlier product.
See Portable Electric Typewriters from Japan, 55 Fed. Reg. 47,358 (Dep't Comm. 1990) (final scope ruling).
The Department found that the addition of an LCD, LED or CRT display and expanded and/or removable text memory did not exempt a portable electric typewriter from the existing antidumping order. The Department determined that certain later-developed portable electric typewriters, including personal word processors, were presumptively of the same class or kind as the portable electric typewriters within the scope of the order as long as they met certain prescribed physical criteria.
E. Government Importation Exemption
Under the Tariff Act of 1930, merchandise imported by, or for the use, of a U.S. government department or agency is generally subject to antidumping duties. 19 U.S.C. § 1677(20). There are, however, two exceptions to this rule. The first exception exempts government importations from antidumping duties if the merchandise has no substantial non-military use.
The second exception earlier product; and the second exception exempts importations for the DOD, if the merchandise comes from a country which has a signed Memorandum of Understanding (MOU) with the DOD. The merchandise must be imported by, or for the use of, the DOD, and the MOU must have been in effect on January 1, 1988 and must continue to be effective through a comparable or superseding agreement. A MOU is a bilateral agreement between the DOD and the Ministry of Defense of an allied or friendly country which calls for the waiver of "buy national" restrictions, customs, and duties in order to allow the contractors of the signatories to participate, on a competitive basis, in the defense procurements of the other country.
However, the issue of antidumping duty waiver has incurred the wrath of the Customs Service, the Department of Commerce, politicians and U.S. manufacturers, alike. It is, therefore, reasonable to expect some disagreement as to the interpretation of the requirement that the merchandise be imported by, or for the use of, the Department of Defense. Whether the word "merchandise" requires that the imported product must be the actual end-item being sold to the DOD or whether the phrase "for the use of' requires that the actual imported product must be for the use of the DOD has not yet been scrutinized. However, if the U.S. company overcomes the domestic source requirement and is awarded the defense contract, it will have a significant chance of obtaining an exemption from the antidumping duties assessed on the ball bearings, under 19 U.S.C. § 1677(20)(i).