CIT Says Commerce Didn't Explain How It Weighed 'Substantial Transformation' Factors in Pencils Ruling

Importer School Specialty brought the case to challenge the scope ruling, which said the company's pencils, which use Chinese inputs, fell within the scope of the antidumping duty order, since they weren't "substantially transformed" in the Philippines. Commerce relied on four of its six regulatory "substantial transformation" factors in making its determination, all of which the importer challenged at CIT.

First, School Specialty contested Commerce's findings about the physical characteristics of the company's pencils and where the "essential characteristics" of the pencils are imparted. The importer argued that the agency erred in considering the characteristics of a single input, wood slats, rather than of a "finished pencil" made of a "graphite core cased in wood."

Baker said that it's not true that Commerce only considered the physical characteristics of the wooden slats, noting that the agency addressed the "export-country processing of each" Chinese-made input. Three of the four inputs -- graphite cores, ferrules and erasers -- weren't further processed in the Philippines, "meaning their essential characteristics were imparted in China," the judge said.

The court also disagreed with the importer's claim that Commerce's regulations preclude it from considering characteristics of a product's inputs, finding that "Commerce plainly has the discretion to consider the physical and essential characteristics both of inputs and the final product."

School Specialty argued that even if Commerce properly considered the inputs' characteristics, it improperly discounted the significance of various processing steps involving the wooden slats that took place in the Philippines. Baker held that Commerce "acknowledged" those steps and explained that "even with those measures, the wooden slats are 'prefabricated in China to the specific dimensions to be placed in School Specialty's pencil production machinery.'" While the processing steps might have led Commerce to reach a different conclusion, "it did not compel such a result," the judge said.

The importer next challenged the finding that the Chinese inputs were pre-determined for a specific end use at the time of importation, arguing that the regulation only provides for "consideration of the end use 'of the downstream product, not whether upstream inputs undergo prefabrication.'" Baker disagreed, finding that Commerce legally compared the "intended end use" of the Chinese inputs to that of all finished pencils as "was its prerogative given its flexibility in applying" the relevant regulatory factor.

School Specialty also challenged Commerce's finding that the nature and sophistication of the third-country processing weighted against a substantial transformation determination. The importer said the agency erred by carrying out a "mere comparison" between the downstream and upstream processing. School Specialty said Commerce didn't even refer to the "critical" construction steps involved in making the pencils and, even if all those steps constituted "mere 'assembly,'" the agency's simple counting of steps as a "proxy for sophistication" without analyzing each step is "overly simplistic."

The court again disagreed, finding that the importer "simply ignores the agency’s critical finding that the Philippine processing steps emphasized by the importer" weren't "transformative in their own right." The inputs were prefabricated in China to the "specific dimensions" of School Specialty's production machinery and had no use "outside of the manufacturing and assembly of cased pencils," and the importer didn't "contend otherwise," the court noted.

For two of the regulatory factors, which concerned the value added and level of investment in the Philippines, Commerce said the importer didn't provide enough quantitative information for the agency to rule in its favor. Baker supported this conclusion, holding that School Specialty's pictures and written description of the value added and investment in the Philippines are too qualitative for these factors, which are explicitly quantitative considerations.

The only argument made by the importer that Baker agreed with was the claim that Commerce failed to explain how it weighed all of these factors. The judge said the agency "simply announced its conclusion by talismanically invoking the 'totality of the factors.'" As a result, the court said, it doesn't know "on these facts why the agency concluded the various factors pointing against substantial transformation out-weighted the one supporting a contrary finding," despite upholding all of the factors individually.

Separately, School Specialty challenged CBP's supposed failure to substantively address a CBP ruling, which held, on the same facts, that the importer's products are a product of the Philippines. Baker said the customs ruling "was not probative," since it "contained no analysis" and summarily stated that the importer's pencils weren't substantially transformed. Commerce was right not to consider the ruling, the judge said.

(School Specialty v. U.S., Slip Op. 25-97, CIT # 24-00098, dated 07/31/25; Judge: M. Miller Baker; Attorneys: Nithya Nagarajan of Husch Blackwell for plaintiff School Specialty; Brian Boynton for defendant U.S. government; Felicia Nowels of Akerman for defendant-intervenor Dixon Ticonderoga)