CAFC Hears Oral Argument in Massive Section 301 Case

Judge Todd Hughes led the inquisition into the claim made by the over 4,000 companies challenging the tariffs that the provision allowing the USTR to modify the tariffs only allows for a modest or incremental change. Meanwhile, Judge Rodney Gilstrap, the chief judge of the U.S. District Court for the Eastern District of Texas sitting on the CAFC by designation, expressed doubts about the government's claim that it can use Section 301 duties to address Chinese retaliation in this instance.

Pratik Shah of Akin Gump, counsel for the importers, opened the proceeding by strongly emphasizing two Supreme Court and Federal Circuit decisions from 2023 limiting the reach of the term "modification." The companies' claim is that the provision under which the USTR imposed its lists 3 and 4A Section 301 tariffs -- Section 307(a)(1)(B) -- only allows the agency to "modify or terminate" an existing tariff action. The parties said that the lists 3 and 4A tariffs, which covered around $320 billion in goods, can hardly be called a modification of the original $50 billion tariff action and, instead, represent a drastic increase.

Hughes dubbed this a "good argument," though he suggested that Congress potentially wanted to give the president and USTR "more flexibility and more power to deal with these trade issues." The judge suggested that the executive could choose to raise tariffs in this way as a "possible diplomatic way of doing negotiations."

Shah invoked the high court's ruling in Biden v. Nebraska and, more emphatically, CAFC's decision in Solar Energy Industries Association v. U.S. (see 2311130031), in which both courts generally held that "modify" means a "moderate, minor or incremental change." If USTR wants to drastically increase the duties it imposed in this way, it should follow the statute's full procedural requirements as opposed to using the modification authority, Shah said.

Hughes responded by suggesting possible ways to distinguish both Biden and SEIA. Regarding SEIA, the judge noted that the Federal Circuit's interpretation of the word "modification" came in relation to an analysis of a safeguard statute as opposed to Section 301, emphasizing that the safeguard statute has a "lot more conditions on it than the language we're talking about in" Section 307.

As for the high court's Biden decision, which rejected President Joe Biden's attempt to cancel a huge chunk of student loan debt, Hughes said he doesn't think the non-delegation issue presented in that case "is going to be applicable here."

In response to Shah's claims regarding the interpretation of "modification," DOJ attorney Emma Bond said the Biden decision doesn't apply, since it involved a federal agency making a "fundamental change" to a scheme designed by Congress, whereas, here, the USTR merely modified an action it took itself. In response to a question from Hughes asking at what point a court could find a tariff increase to be too dramatic to no longer be a modification, Bond said that no such limit exists. She said the word "'modify' wouldn't be the limitation there," citing the other "modification criteria" in the statute.

The second main topic discussed by the litigants concerned Section 307(a)(1)(B)'s requirement that a Section 301 tariff modification relate to an increased restriction on U.S. commerce due to the "acts, policies, and practices" that were the subject of the original Section 301 action. Gilstrap expressed particular interest in this point, sharply questioning the government's position.

The Texas judge asked how retaliatory tariffs from China are evidence of an increase in the practices from the original Section 301 investigation, which centered on Chinese intellectual property theft. To this, Bond repeatedly claimed that "retaliatory action was part and parcel of the acts, policies and practices that were investigated." The DOJ attorney said that USTR's original Section 301 report identified China's threat of retaliation against U.S. companies for speaking against its IP theft as an offending practice.

After Bond made her arguments, Gilstrap asked Shah, if retaliatory tariffs were part of the underlying problem, "how is anything other than absolute silence part and parcel" of the investigated practices? In response, Shah agreed, arguing that USTR was clearly referring to the threat of retaliation against "individual companies who refused to turn over their IP." He said this is "miles apart" from "country-wide retaliatory tariffs that were never investigated."

Hughes also probed this point, expressing a concern that, in the future, a president could use existing Section 301 tariffs to impose sweeping trade restrictions on China should it invade Taiwan. "That's clearly not connected to the original action, and it's, by any definition, not a modification," the judge said. "It's a new action."

A third topic discussed by the litigants involved Section 307(a)(1)(C) -- the provision that allows for modifications of the original tariff action if the original action "is no longer appropriate." While the U.S. claimed that the original action was deemed to no longer be appropriate given China's retaliatory tariffs, the private companies argued that this read of the provision would make (a)(1)(B) superfluous.

Gilstrap first pressed Shah on this point, asking how it's not a "logical reading" of the provision to allow USTR to find the original action inappropriate in light of retaliatory actions. In response, Shah appealed to various "statutory signals," including the fact that in the history of the Trade Act of 1930, the government has never used this provision to increase a tariff. Instead, the provision should only be used to eliminate tariffs, he said.

Hughes then asked Bond how (a)(1)(C) wouldn't "swallow up" (a)(1)(B), to which the DOJ attorney said (a)(1)(B) applies with regard to mandatory action, while (a)(1)(C) applies to discretionary action. In response, Shah argued that if USTR could increase tariffs through discretionary action in this way, it would only choose that route. He said there "will never be a discretionary action where USTR ever has to find an increase in burden" if the government's interpretation is adopted.

In addition, Shah addressed the government's claim that there's not a judicially manageable standard by which to review discretionary action under this provision. He argued that "this court has to find the plausible reading that unlimited and unreviewable power to take a $1 million trade action on a discrete thing and ratchet it up to a $1 trillion trade action on all trade with whatever country the president wants to, that runs smack into non-delegation doctrine problems."