Trade Court Says Commerce Must Reconsider Position That All Merger Costs Are Not 'Extraordinary'
The Commerce Department must reconsider its explanation that all costs stemming from a merger are for expanding normal business operations and thus not extraordinary, the Court of International Trade ruled April 20. Judge Gary Katzmann said Commerce laid out this explanation "without citing to agency practice or court precedent, or any accounting principles supporting its position."
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Antidumping duty respondent Suzano had claimed its derivative losses as a result of acquiring Fibria were investment-related expenses and extraordinary, and should therefore be deducted from its costs of production in the 2018-19 antidumping duty review of uncoated paper from Brazil. The court previously remanded Commerce's inclusion of the losses in Suzano's COP on both points. In the present opinion, Katzmann upheld the agency's decision to find that the derivative losses were not investment-related, but again sent back Commerce's finding that the losses were not extraordinary.
On remand, Commerce said the derivative losses were not investment costs since they are operating expenses under Brazilian generally accepted accounting principles and "exclusively for hedging purposes in general cash flow management." The agency's explanation resulted in conflicting evidence regarding the purpose of the losses. Katzmann ruled that the tie goes to Commerce.
The judge said that deference is "appropriate considering that the court 'has consistently upheld Commerce’s reliance on a firm’s expenses as recorded in the firm’s financial statements, as long as those statements were prepared in accordance with the home country’s GAAP and does not significantly distort the firm’s actual costs.’"
The judge took issue with Commerce's findings that the losses were not extraordinary, saying "Commerce's reasoning is flawed with several inconsistencies." The agency explained that the definition of extraordinary relates to the underlying event which caused the gain or loss and that Suzano's acquisition of Fibria was simply an expansion of normal operations.
Katzmann said Commerce took the definition of extraordinary from the Floral Trade Council of Davis, Cal. v. U.S. case, but the case "reveals no such formulation." In fact, this case cuts against the agency's findings, since this opinion said that an agency is "allowed to prefer substance over form" in not following the financial statement's treatment of costs, but instead consider extraordinary events leading to the incurring of such costs.
The judge added that, contrary to Commerce's claims, the agency has not shown a standard practice of treating costs resulting from a merger as general and administrative expenses. "If such a practice exists, that practice would only extend to 'restructuring costs as a result of a merger,' not to any cost or expense related to a merger, such as derivative trading expenses," the opinion said.
With no judicial or administrative backing, the question then becomes whether Commerce adequately supported its position, the judge said. Katzmann ruled that an "acquisition such as the acquisition of Fibria may also change the organization and structure of the company and its operations, and as argued by Suzano, has the nature of a 'a unique, once-in-a-corporate lifetime event where Suzano acquired a larger company with a different scope and nature of operations.'" Given this, the agency must reconsider its position that the losses were not extraordinary, the judge ruled.
(Suzano S.A. v. United States, Slip Op. 23-56, CIT # 21-00069, dated 04/20/23; Judge: Gary Katzmann; Attorneys: Craig Lewis of Hogan Lovells for plaintiff Suzano; Antonia Soares for defendant U.S. government; Daniel Schneiderman of King & Spalding for defendant-intervenor Domtar Corp.)