CAFC Says Commerce Didn't Clearly Explain Surrogate Financial Ratios Calculation

The decision drew a dissent from Judge Leonard Stark, who said the majority provided relief that exporter and appellant Risen Energy Co. didn't ask for and said, in any case, Commerce's explanation of its decision was supported by substantial evidence, though it could have been clearer.

However, all three judges were in agreement that Commerce properly supported its surrogate value picks for Risen's backsheet and ethyl vinyl acetate (EVA) inputs.

To calculate the financial ratios, Commerce used a 2018 financial statement from Malaysian manufacturer Hanwha Q Cells Malaysia, ultimately coming away with a final overhead ratio of 21.7% for Risen. The agency divided what it found to be "overhead costs" by the costs for materials, labor and energy.

Commerce started with Hanwha's costs of goods sold, which totaled just over 2 million Malaysian ringgits. The agency then "sought to identify what proportion of the costs of goods sold represented" materials, labor and energy. A note to the financial statement said that of the total cost of goods sold, over 1.6 million ringgits are attributable to "inventories." Commerce said these inventory costs are "roughly synonymous" with the Malaysian company's total MLE costs, based on another note to the financial statement.

This second note said that costs incurred in bringing the inventories to their present location are accounted for as "direct materials and labour and a proportion of manufacturing overheads based on normal operating capacity." Commerce said this line is a reference "largely to energy costs" and not overhead. As a result, the agency said Hanwha's overhead expenses were "essentially the difference between its costs of goods sold and inventory costs."

Commerce concluded that since Hanwha specified that materials, labor and energy are included in the inventories element of its costs, the remaining costs weren't materials, labor and energy but rather overhead.

Dyk, writing for the majority, said this "theory does not appear to be supported by the financial statement upon which it relies." Including materials, labor and energy costs in "inventories" doesn't bar the possibility that "manufacturing overhead would also be included in inventory costs." Dyk held that, actually, "it appears that this is precisely what occurred here."

Commerce said its position is supported since the Hanwha statement was made in compliance with the International Financial Reporting Standards standard applicable to inventories. Dyk said this standard "does not support Commerce's approach," since it explains that inventories should include a "systematic allocation of fixed and variable production overheads." The court held that Commerce failed to explain why it was reasonable to understand the phrase "a proportion of manufacturing overheads" to refer largely to energy costs.

Stark disagreed with the majority, first noting that the relief granted by the court wasn't sought by Risen. The majority "points to nowhere that Risen actually argued either that Commerce’s explanation was insufficient or that the purported lack of substantial evidence has anything to do with the clarity of Commerce’s explanation," the judge said.

The dissent said there's a "crucial distinction" between a challenge to the substantiality of record evidence and an appeal on the "adequacy of an explanation." Risen's challenge presents the first type of challenge and should have led the court away from "imposing a remand sought by neither party," Stark said. While the majority said Risen explicitly sought a remand, Stark noted that the company's only reference to remand came as "an aside in the middle of its reply brief, which is untimely." Instead, Risen was clear that its goal was the reversal of the trade court's grant of judgment, the judge said.

In addition, Stark held that "Commerce had substantial evidence for its decision to allocate the unidentified costs to overhead." The judge said the agency "reasonably understood" the inventories section of Hanwha's statement "to be a category of costs that includes the cost of energy to make and move the items found in inventory," the decision said. Stark added that reasonable minds could differ on whether the unidentified costs in the statement could be allocated to materials, labor and energy or to overhead, but the possibility of drawing two different conclusions "does not prevent an administrative agency's finding from being supported by substantial evidence."

Where the majority and dissent agreed was on the questions of the surrogate values for Risen's backsheet and EVA inputs. In the review, Commerce used Malaysian Harmonized Tariff Schedule categories applicable to "plates and sheets" to value the inputs, rejecting Risen's bid to use data for "film" instead. On remand at the Court of International Trade, Commerce used two standards from the American Society for Testing and Materials relating to "film" and "sheet" to justify its position.

Dyk sustained the use of these standards as well as Commerce's interpretations of the standards to justify the agency's distinction between polyethylene sheet and film and decision to include Risen's input as sheet and not film. While Risen said the ASTM standards should be tossed since they don't specifically reference the solar industry, Dyk said the standards aren't limited to particular products and "appear to cover a broad array of plastic materials." Risen didn't offer any alternative industry standards or any other evidence distinguishing sheet and film, the court held.

(Risen Energy Co. v. United States, Fed. Cir. # 23-1550, dated 12/09/24; Judges: Timothy Dyk, Kara Stoll and Leonard Stark; Attorneys: Alexandra Salzman of deKieffer & Horgan for plaintiff-appellant Risen Energy Co.; Ashley Akers for defendant-appellee U.S. government; Jonathan Stoel of Hogan Lovells for plaintiffs-appellees led by Canadian Solar Inc.)