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Evolution & Current State of Substantial Transformation Test

Bloomberg Law

In this article, Richard Mojica, Connor Farrell, Lara Hakki, and Peter Kentz* discuss recent developments in the appropriate "substantial transformation" standard for country-of-origin determinations of imported products. Fundamentally, the substantial transformation standard asks if a product undergoes a change in name, character, or use. If so, then the country in which that change last took place is the country of origin. While the substantial transformation inquiry is a wholistic endeavor, courts will often focus their analysis either on (1) the individual components of an item or (2) the end item and its assembly process. In its 2016 Energizer decision, the U.S. Court of International Trade (CIT) implemented the former approach, analyzing the components of the item at issue. However, the CIT's 2020, 2022, and 2023 Cyber Power Systems decisions reflect an attempted return to focus on the item's assembly process. Despite the broad pronouncements in Cyber Power Systems III adopting the latter approach, a recent U.S. Customs and Border Protection (CBP) ruling illustrates that how courts should determine whether a substantial transformation occurred remains an open question. 

The authors conclude that despite Cyber Power Systems III's explicit rejection of a component-based approach to substantial transformation, the court's analysis seemingly implemented that approach anyway. CBP capitalized on this apparent incongruity and asserted the continued viability and utility of the component-based essence and predetermined use tests. Thus, although many were hoping for increased clarity as a result of the Cyber Power line of decisions, it remains unclear the correct approach and tests to utilize in determining the substantial transformation standard. While the continued uncertainty surrounding the substantial transformation standard is certainly not ideal, it's not all bad news. Until this question is answered, companies faced with country-of-origin determinations may be able to utilize this ambiguity to their benefit. This article reviews the history of substantial transformation, each of the Cyber Power decisions, and provides practical takeaways.

*Summer associate