Allegheny Ludlum Corp. v. United States

Slip Op. 05-19

United States Court of International Trade

ALLEGHENY LUDLUM CORP., J&L SPECIALTY
STEEL, INC., BUTLER ARMCO INDEPENDENT
UNION, UNITED STEELWORKERS OF AMERICA,
AFL-CIO/CLC, and ZANESVILLE ARMCO
INDEPENDENT ORGANIZATION,
Plaintiffs, Before: Pogue, Judge

Court No. 03-00919
v.

UNITED STATES,

Defendant,

and

THYSSENKRUPP ACCIAI SPECIALI TERNI,
S.p.A. AND THYSSENKRUPP AST USA,

Defendant-Intervenors.

[Commerce’s Determination remanded]
February 8, 2005

COLLIER SHANNON SCOTT, P.L.L.C. (David A. Hartquist, Kathleen W.
Cannon, Eric R. McClafferty), for Plaintiffs.

Peter D. Keisler, Assistant Attorney General, David M. Cohen,
Director, Jeanne E. Davidson, Assistant Director, David
D’Alessandris, Trial Attorney, Commercial Litigation Branch,
Civil Division, U.S. Department of Justice, Robert E. Nielsen,
Senior Attorney, Office of the Chief Counsel for Import
Administration, United States Department of Commerce, for
Defendant United States Department of Commerce.

HOGAN & HARTSON, L.L.P. (Lewis E. Leibowitz, Lynn G. Kamarck),
for Defendant-Intervenors.
Court. No. 03-00919 Page 2

POGUE, JUDGE: Plaintiff (“Allegheny”) seeks this Court’s review of

Commerce’s application of its latest methodology for determining

when the privatization of a foreign firm extinguishes a subsidy

that is the basis for a countervailing duty order. The case arises

from the privatization of the Italian state-owned steel group ILVA.

ILVA, during much of the 1980's and early 1990's, was subsidized by

the Government of Italy (“GOI”) through major restructurings and

bailouts.1 After investigating the subsidies, but prior to ILVA’s

privatization, the Department of Commerce (“Commerce”) issued an

order imposing countervailing duties on ILVA’s importations into

the United States. See Stainless Steel Sheet and Strip in Coils

from Italy, 64 Fed. Reg. 30,624 (Dep’t Commerce June 8, 1999)

(final affirmative countervailing duty determination). Plaintiff

now challenges Commerce’s determination that these subsidies were

extinguished upon the privatization of ILVA and, therefore, the

modification of the countervailing duty order. The Court finds

that Commerce’s determination is not supported by substantial

evidence and remands this determination for further consideration

consistent with this opinion.

1
In Acciai Speciali Terni S.p.A. v. United States, slip op.
04-140 (CIT Nov. 12, 2004), the court analyzed a case similar to
the one at issue here under a different Commerce methodology.
The court found that that methodology employed an impermissible
“per se” test. Id. at 21.
Court No. 03-00919 Page 3

BACKGROUND

ILVA’s privatization was initiated on December 12, 1992 when

the Italian Council of Ministers gave their approval for the

privatization. See Dep’t of Commerce Mem. from Deputy Assistant

Sec’y, Imp. Admin., Group I to James J. Jochum, Assistant Sec’y for

Imp. Admin., Re: Issues and Decision Memorandum for the

Determination under Section 129 of the Uruguay Round Agreements

(Oct. 24, 2003), P.R. Doc. No. 332, Pl.’s Ex. 1 (“Determination”)

at 3. The GOI established a holding company, Istituto per la

Riconstruzione Industriale (“IRI”), to initiate a restructuring and

privatization plan. Id. The plan called for the demerger of ILVA

into two corporations: AST (the entity in controversy in this case)

and ILVA Laminati Piani S.R.L. (“ILP”), and placed the remaining

assets and liabilities in ILVA Residua which was to be liquidated.

Id. To advise with the sale of AST, IRI hired a private

consultant, Barclays de Zoete Wedd Limited (“BZW”), and

commissioned a valuation study by Istituto Mobiliare Italino

S.p.A.(“IMI”). Id. at 3,5. IRI requested that the latter devise

a valuation of AST so as to provide an “appropriate” rate of return

to prospective purchasers. Istituto Mobiliare Itlaliano S.p.A.,

Company Appraisal of “Acciai Speciali Terni” (August 25, 1993),

2
Documents contained on the public record are cited as “PR,”
followed by the document list in which they are contained,
followed by the document number. Documents in the confidential
record are cited as “CR,” followed by the document list in which
they are contained, followed by the document number.
Court No. 03-00919 Page 4

Pl.’s Ex. 5 at 3.

In December 1993, IRI publicly announced its intention to sell

AST and ILP through advertisements in the Italian and foreign

newspapers. Determination, P.R. Doc. No. 33, Pl.’s Ex. 1 at 3.

Interested parties were required to submit information about

themselves such as copies of their incorporation and bylaws. Id.

at 3 n.4. In response, nineteen private industrial and financial

entities had expressed interest by January 7, 1994. Id. at 4.

During this period, the bulk of AST’s debt was placed in ILVA

Residua. Determination, P.R. Doc. No. 33, Pl.’s Ex. 1 at 8. IRI

also commissioned another valuation study, by Pasfin Servizi

Finanziari (“Pasfin”), to determine what price it could get for

AST. Id. at 5.

With nineteen potential bidders, IRI inaugurated the second

stage of the bidding process. Id. at 4. In this stage, IRI

required that the interested parties submit preliminary, non-

binding cash offers for 100 percent of AST’s shares. Id. Pursuant

to these requirements, four parties submitted non-binding purchase

offers. In March, IRI set forth the requirements for the final

stage of bidding, compelling submission of final offers by May 13,

1994 (allowing two months to conduct due diligence), see id., and

requiring a guarantee for the purchase of AST, see Dep’t of

Commerce Mem. from Deputy Assistant Sec’y, Imp. Admin., Group I to

James J. Jochum, Assistant Secretary for Imp. Admin., Re: Issues
Court No. 03-00919 Page 5

and Decision Memorandum for the Determination under Section 129 of

the Uruguay Round Agreements Act (Oct. 24, 2003), C.R. Doc. No. 11,

Pl.’s Ex. 9 (“Confidential Determination”) at 6. There is also a

suggestion in the record that IRI would favor bids from parties

that included Italian investors. Determination, P.R. Doc. No. 33,

Pl.’s Ex. 1 at 6. Only two parties submitted final bids: KAI

Italia S.r.L. (“KAI”) (Defendant-Intervenor TKAST’s predecessor in

interest) and Ugine (a French steel producer). Id. at 4. However,

IRI disqualified Ugine’s final bid as nonconforming with the

bidding requirements, because it did not bid for 100 percent of

AST’s shares, and thereby awarded the sale to KAI. Id. KAI, in

part, based its bid on a valuation study prepared by Morgan

Grenfell in May which it submitted as part of the Record.

Confidential Determination, C.R. Doc. No. 11, Pl.’s Ex. 9 at 7.

The amount bid for AST was well in excess of the two market

valuation studies prepared for AST and above that prepared by KAI’s

own consultant. Id. Additionally, after the final bids were

submitted and Ugine had been disqualified leaving KAI as the only

purchaser in the running, IRI empowered BZW to further negotiate

with KAI to improve the offer. Confidential Determination, C.R.

Doc. No. 11, Pl.’s Ex. 9 at 3. As a result of these negotiations,

KAI ended up paying more than it had bid for AST. Id.
Court No. 03-00919 Page 6

PROCEDURAL HISTORY

This case arises from an administrative review made pursuant

to Section 129 of the Uruguay Round Agreements Act, 19 U.S.C. §

3538 (2000) (“Section 129"). The Section 129 review followed the

World Trade Organization Appellate Body’s Decision (“WTO”) in

United States – Countervailing Measures Concerning Certain Products

from the European Communities, WT/DS212/AB/R (Dec. 9, 2002).

Section 129 authorizes Commerce to revise its determinations to

make them consistent with WTO decisions. See 19 U.S.C. § 3538(b).

Plaintiff brought a timely appeal of the Section 129 Determination

and the Court has jurisdiction over Allegheny’s complaint under 28

U.S.C. § 1581(c).

STANDARD OF REVIEW

The Court reviews Commerce’s decision to determine whether

it is supported by substantial evidence and in accordance with

law. 19 U.S.C. § 1516a(b)(1)(B)(2002).

DISCUSSION

Under Commerce’s new methodology for determining when the

privatization of a firm extinguishes a subsidy,3 Commerce creates

3
Promulgated in 2003, Commerce’s new methodology seeks to
address concerns raised by the Federal Circuit’s opinion in
Delverde Srl v. United States, 202 F.3d 1360, 1365 (Fed. Cir.
2000) (“Delverde III”) as well as by the WTO.
Court. No. 03-00919 Page 7

three stages of inquiry in which the presumption that a subsidy is

countervailable shifts between the importer and interested parties

looking to impose a countervailing duty. First, Commerce asks

whether a countervailable subsidy was conferred prior to the sale

of the company. Notice of Final Modification of Agency Practice

Under Section 123 of the Uruguay Round Agreements Act, 68 Fed. Reg.

37,125, 37,127 (Dep’t Commerce June 23, 2003) (“Methodology”). If

Commerce finds that a non-recurring subsidy was conferred, Commerce

creates a baseline presumption that the subsidy is countervailable

over the corresponding useful life of the recipient’s assets. Id.

Nevertheless, an interested party may rebut this presumption

where that party demonstrates that a “privatization occurred in

which the government sold its ownership of all or substantially all

of a company or its assets . . . and that the sale was an arm’s-

length transaction4 for fair market value.” Id. (emphasis added).

If the sale was not an arm’s-length transaction for fair market

value, Commerce will find that the presumption has not been

overcome and the subsidy will remain countervailable. Conversely,

if Commerce concludes that the sale was at arm’s-length for fair

4
The definition of an arm’s-length transaction used by
Commerce is “a transaction negotiated between unrelated parties,
each acting in its own self-interest, or between related parties
such that the terms of the transaction are those that would exist
if the transaction had been negotiated between unrelated
parties.” Determination, P.R. Doc. No. 33, Pl.’s Ex. 1 at 4-5.
Neither this definition nor Commerce’s finding that the sale
occurred at arm’s-length is at issue in this case.
Court. No. 03-00919 Page 8

market value, any “pre-sale subsidies will be presumed to be

extinguished in their entirety and, therefore, non-

countervailable.” Id.

Despite a finding that the assets have been sold at arm’s-

length for fair market value, an interested party may rebut this

latter presumption of extinguishment upon a demonstration that “at

the time of the privatization, the broader market conditions

necessary for the transaction price to reflect fairly and

accurately the subsidy and benefit were not present, or were

severely distorted by government action (or, where appropriate,

inaction),” id. (footnote omitted), such that “the transaction

price was meaningfully different from what it would otherwise have

been absent the distortive government action,” id. at 37,128. If

a party demonstrates that broader market distortions existed, the

subsidy will remain countervailable; if a party does not

demonstrate such distortions, the duties will be deemed

extinguished. Id.

In this case, TKAST concedes that AST did receive non-

recurring countervailable subsidies from the GOI; therefore, this

issue is not in dispute. However, TKAST submits that the

presumption that the subsidy remained countervailable was overcome

by the sale of AST in an arm’s-length transaction for fair-market

value and that distorting factors did not upset an inference that

the sale extinguished the subsidy. Allegheny does not challenge
Court. No. 03-00919 Page 9

Commerce’s methodology. Rather, Allegheny contends that Commerce’s

determinations violated its own methodology and are not supported

by substantial evidence as discussed below.

A. THE SIGNIFICANCE OF A FAIR MARKET VALUE DETERMINATION

Under the countervailing duty law, a firm receives a subsidy

if it gets something it did not pay for, i.e., when a government

sells assets for less remuneration than the assets are worth, the

buyer receives a benefit from that government. See 19 U.S.C. §

1677(5)(E)(iv) (a benefit includes the sale of goods “provided for

less than adequate remuneration”); cf. United States – Imposition

of Countervailing Duties on Certain Hot-Rolled Lead and Bismuth

Carbon Steel Products Originating in the United Kingdom,

WT/DS138/AB/R (May 10, 2000) at 25 (“The question whether a

‘financial contribution’ confers a ‘benefit’ depends, therefore, on

whether the recipient has received a ‘financial contribution’ on

terms more favorable than those available to the recipient in the

market.”). As applied to the purchase of a firm which has received

a prior subsidy, if a buyer does not remunerate the government for

the value of the company plus the value of the subsidy at the time

of purchase, then the buyer receives a benefit. For example, if a

firm is valued at $100 million, and the government contributes a

$50 million value to the firm, then the value of the firm is $150

million (assuming no depreciation or appreciation between the time
Court. No. 03-00919 Page 10

of the subsidy and sale and that the contribution actually

conferred an economic value of $50 million5).

The fair market value of the company takes into account all of

a company’s liabilities and assets including assets that were

incurred with government support. Therefore, the payment of fair

market value means that the purchasing firm did not receive more

than it paid for (assuming the government did not distort the

market in a manner affecting the sale.) That the aggregation of

the monetary amount of past subsidies is not an appropriate

benchmark for whether the purchase price reflected the value of the

subsidies has been firmly established and warrants no further

consideration here. See Acciai Speciali Terni S.p.A. v. United

States, slip op. 04-140 at 21 & n.13 (CIT Nov. 12, 2004), Allegheny

Ludlum Corp. v. United States, 246 F. Supp. 2d 1304, 1310, 26 CIT

___, ___, (2002).

Appropriately, Commerce’s inquiry focuses on whether the sale

price was at fair market value. When a company or assets are sold

under a transparent competitive bidding system, the potential

5
The observation that the value of a given subsidy may have
depreciated, or not have conferred future value to a firm, was
discussed in Allegheny Ludlum Corp. v. United States, 246 F.
Supp. 2d 1304, 1310, 26 CIT ___, ___, (2002). That a subsidy may
not confer an actual economic value equal to the monetary amount
of the subsidy simply reflects the reality that the government
often has other interests than economic profit such as full
employment or granting favor to certain constituents. For
example, the government may have provided the upkeep of obsolete
facilities to keep workers employed even though such upkeep would
not be justified in terms of cost feasibility.
Court. No. 03-00919 Page 11

buyers will, at least theoretically, push the purchase price to its

fair market value. Therefore, the winning firm will not get more

value than that for which it paid.6 However, this theoretical

analysis assumes that the bidding process will drive the sale price

so as to reflect the value of the company (including the subsidy)

and its assets. This assumption is somewhat precarious under the

facts and circumstances of a privatization. The seller, a

government which has manifested an interest in conferring benefits

on domestic industries by virtue of past subsidies, may have

motives other than recouping the highest price for the company and

its assets, and therefore may constrain or manipulate the sales

process to benefit domestic industries or serve some other

governmental interests. Delverde III, 202 F.3d at 1369. One

cannot simply assume that the invisible hand of the market will

work its magic where there are so many interests at work and the

hand of the government is so visible. See United States –

Countervailing Measures Concerning Certain Products from the

European Communities, WT/DS212/AB/R (Dec. 9, 2002) at 61 (during

privatizations “market conditions are not necessarily always

6
This assumes, among other things, that the threat of
countervailing duties is not factored into the purchase price.
If they are, the purchase price will be reduced. Therefore, if
the United States does not impose countervailing duties, the
purchaser will obtain a windfall, i.e., the amount of money that
buyers thought would be countervailed. This point was not
addressed by either party and the Court will not raise it sua
sponte.
Court. No. 03-00919 Page 12

present and they are often dependent on government action.”). That

the sale process may be open to manipulation, or otherwise

distorted, is recognized by 19 U.S.C. § 1677(5)(F) and case law.7

See, e.g., Allegheny Ludlum v. United States, 367 F.3d 1339 (Fed.

Cir. 2004), cf. Saarstahl AG v. United States, 78 F.3d 1539, 1544

(Fed. Cir. 1996). Both require Commerce to look behind a sale to

ensure that competitive bids were made, and that the government did

not distort the terms of the sale, such that the sale price truly

reflected the value of the privatized company or assets as would be

assigned by the market in a sale between private parties under the

terms of the sale. Cf. Allegheny, 367 F.3d at 1347.

Commerce’s new methodology recognizes this concern insofar as

it frames “the basic question [of whether a subsidy has been

extinguished as] whether the full amount that the company or its

assets (including the value of any subsidy benefits) were actually

worth under prevailing market conditions was paid, and paid through

monetary or equivalent compensation.” Methodology, 68 Fed. Reg. at

37,127. Accordingly, “[a] primary consideration in this regard

normally will be whether the government failed to maximize its

7
Pursuant to 19 U.S.C. § 1677(5)(F):

A change in ownership of all or part of a foreign
enterprise or the productive assets of a foreign
enterprise does not by itself require a determination by
the administering authority that a past countervailable
subsidy received by the enterprise no longer continues to
be countervailable, even if the change in ownership is
accomplished through an arm's length transaction.
Court. No. 03-00919 Page 13

return on what it sold, indicating that the purchaser paid less for

the company or assets than it otherwise would have had the

government acted in a manner consistent with the normal sales

practices of private, commercial sellers in that country.”8 To

conduct this inquiry, the new methodology sanctions two approaches:

(1) an inductive approach, using a benchmark analysis wherein

Commerce compares the sales price with “comparable benchmark

prices” and (2) a deductive approach using a process of sale

analysis wherein Commerce looks at “process factors” to determine

if the sale was manipulated or distorted such that the bid accepted

by the government would not reflect the fair market value of the

company or assets. Id.

In this case, Commerce made a threshold determination that the

sale was at arm’s-length because the seller, AST, and the

purchaser, TKAST, were unrelated. Determination, P.R. Doc. No. 33,

Pl.’s Ex. 1 at 4-5. Accordingly, it proceeded into its second line

of analysis to determine whether the arm’s-length sale was at fair

market value. Commerce concluded that there was “no evidence in

the record of any contemporaneous sales of companies comparable to

AST nor any appropriate market benchmark price.” Determination,

P.R. Doc. No. 33, Pl.’s Ex. 1 at 5. Consequently, Commerce,

8
The Court notes that Commerce did not discuss the norm
regarding the sale of steel companies, or any company, in Italy
or elsewhere. Without this benchmark, it becomes difficult for a
Court to review a determination that a given sale process is, or
is not, atypical.
Court. No. 03-00919 Page 14

applying its methodology, was to base its conclusion solely on

whether it could infer that fair market value was paid from the

manner AST was sold. In considering the sale process, Commerce

identified a non-exhaustive list of factors: (1) Did the government

perform an objective analysis of the value of the company? (2) Were

there artificial barriers to entry which precluded potential

competitors from not participating in the process? (3) Did the

government accept the highest bid? and (4) Were there committed

investment requirements?9 Determination, P.R. Doc. No. 33, Pl.’s

Ex. 1 at 5 (citing Methodology 68 Fed. Reg. at 37,127).

Looking at these factors, Commerce observed that there were

9
Allegheny at times attempts to read the methodology
strictly and, under this strict reading, alleges that Commerce
did not apply its own methodology to the facts. For example, at
one point Allegheny claims that a government must “accept the
highest bid” to extinguish the subsidy. See Pl.’s Rule 56.2 Mem.
Law Supp. Mot. J. Agency R., at 18-19 (“Pl.’s Mem.”). According
to Allegheny, given that the word “highest” is a word of
comparison, because the GOI only considered one bid, its
acceptance thereof could not have been the acceptance of the
“highest” bid. Therefore, according to Allegheny, the
methodology requires a finding that the subsidy was not
extinguished because the GOI did not accept the “highest bid.”
The Court considers this hyper-technical reading of the
methodology unpersuasive. These factors are non-exhaustive and
are intended to assist Commerce in determining whether fair
market value was paid which it is required to do by law;
moreover, these factors must be read in a manner that promotes
the ultimate goal of determining whether fair market value was
paid. Application of the factors enunciated in Commerce’s new
methodology, without regard to how these factors promote the
ultimate goal of determining whether fair market value was paid,
is a misapplication of Commerce’s methodology, Methodology, 68
Fed. Reg. at 37,127, and accordingly is not in accordance with
law, Allegheny Ludlum, 367 F.3d at 1344.
Court. No. 03-00919 Page 15

some anomalies in the sale of AST. Most significantly, although

the bidding process started with nineteen interested firms, all the

firms except TKAST dropped out of the competition or were

disqualified. Determination, P.R. Doc. No. 33, Pl.’s Ex. 1 at 4.

More specifically, the GOI (a) required bidders to guarantee their

bids, Confidential Determination, C.R. Doc. No. 11, Pl.’s Ex. 9 at

6; (b) gave a short period to conduct due diligence, Determination,

P.R. Doc. No. 33, Pl.’s Ex. 1 at 6; (c) turned over incomplete

documents to the bidders, Confidential Determination, C.R. Doc. No.

11, Pl.’s Ex. 9 at 5; (d) may have required the winning firm to

have a partnership with an Italian firm,10 Determination, P.R. Doc.

No. 33, Pl.’s Ex. 1 at 6; and (e) required committed investments

such as restrictions on alienation and maintenance of production

and employment at certain levels, Confidential Determination, C.R.

Doc. No. 11, Pl.’s Ex. 9 at 7-8. Commerce found that these

restrictions may have deterred firms, especially foreign firms,

from bidding on AST. Determination, P.R. Doc. No. 33, Pl.’s Ex. 1

at 6. Nonetheless, Commerce found that these factors did not

seriously distort the sales process and that the sale price was

higher than that reflected in objective valuation studies conducted

by third parties. Determination, P.R. Doc. No. 33, Pl.’s Ex. 1 at

5, 12, Confidential Determination, C.R. Doc. No. 11, Pl.’s Ex. 9

10
Commerce did not make a definitive factual finding in this
regard. Commerce noted that there was suspicion that this was
the case. Determination, P.R. Doc. No. 33, Pl.’s Ex. 1 at 6.
Court. No. 03-00919 Page 16

at 7. As Commerce concluded:

On the one hand, there were some real and perceived
barriers in the bidding process that might have limited
the number of potential purchasers. On the other hand,
there is substantial record evidence that the
privatization of AST was accomplished through a fair-
market-value transaction.

Id. at 8. Allegheny alleges that Commerce’s analysis does not

comport with its methodology and its conclusion is unsupported by

substantial evidence. The Court disagrees with Allegheny’s former

contention but agrees that Commerce’s decision is not supported by

substantial evidence.

i. PROCESS FACTORS DO NOT SUPPORT AN INFERENCE THAT FAIR
MARKET VALUE WAS TENDERED

The Court agrees with Allegheny that an inference that the

sale process resulted in a sale at fair market value is not

supported by substantial evidence as explicated by Commerce in its

determination. Allegheny contends that if TKAST’s competitors had

dropped out of the competition, a rational bidder would not be

induced to offer the full market value for the company. Pl.’s Mem.

at 18; cf. Enserco, L.L.C. v. Drilling Rig Noram 253, 126 F. Supp.

2d 443, 447 (S.D. Tex. 2000). TKAST and Commerce counter that

Allegheny has not accurately summarized the facts. See

Determination, P.R. Doc. No. 33, Pl.’s Ex. 1 at 12. Rather, when

TKAST bid for AST, at least one other bidder was still in the

competition and submitted a final bid (although later it was
Court. No. 03-00919 Page 17

rejected). Id.

Theoretically, at least where bidding is in a one-time winner-

take-all auction form, a competitor is induced to bid its valuation

of the company. Given that bidders only bid once under such an

auction model, a competitor cannot rebid a higher price if its

competitors outbid it. Therefore, assuming bidder A has no

knowledge of its opponent’s bid, if bidder A does not bid close to

the valuation of the company, another bidder will win, and bidder

A will lose the competition (and therefore a financial

opportunity). Consequently, TKAST contends, with the specter of

competition looming, TKAST had every incentive to bid a price it

considered to be fair market value. The Court agrees with TKAST

and Commerce that a reasonable inference can be drawn that TKAST

had an incentive to bid its valuation of AST. See Determination,

P.R. Doc. No. 33, Pl.’s Ex. 1 at 12.

However, the Court also agrees with Allegheny that this fact

alone is insufficient to prove that the sale price reflected the

fair market value of AST in light of Commerce’s findings that there

were real and perceived barriers in the bidding process. Because

of these barriers, the process itself does not provide a basis to

conclude that the GOI maximized the return on what it sold to

justify a fair market value determination. There is too much

uncertainty. TKAST may have bid in good faith on what it perceived

fair market value to be; however, it may have had special
Court. No. 03-00919 Page 18

knowledge, it may have wrongly assessed AST’s assets, or it may not

have been in the position to offer fair market value, such that in

a situation with multiple bidders, its bid would have been woefully

inadequate. This concern is particularly acute here, where the

short period of time permitted to conduct due diligence was

acknowledged by a bidder as a significant obstacle in crafting a

reliable valuation of AST. Confidential Determination, C.R. Doc.

No. 11, Pl.’s Ex. 9 at 5. Because of this complication, the Court

agrees with Allegheny that Commerce’s analysis of the sale process,

by itself, cannot support a reasonable inference that fair market

value was tendered, especially given that TKAST must overcome the

presumption that prior subsidies remain countervailable.

ii. OBJECTIVE VALUATIONS AND THE CONCLUSION THAT FAIR MARKET
VALUE WAS TENDERED

Commerce implicitly recognized this short-coming and proposed

an additional justification that the sale price was at, or above,

fair market value. See Determination, P.R. Doc. No. 33, Pl.’s Ex.

1 at 12 (“However, as discussed in the Analysis section above, we

continue to find that certain other aspects of the bidding process

might have served to limit the number of bidders. Nevertheless,

the three independent valuations of AST show that the GOI received

fair market value for AST . . . . The valuations provide relevant

evidence that the real or perceived restrictions did not result in
Court. No. 03-00919 Page 19

a non-competitive skewed process.”).11 Commerce looked at three

independent valuation studies of AST conducted by disinterested

third parties. Finding that the sale price was above AST’s

valuation in these studies, Commerce concluded that at least fair

market value was tendered by TKAST. Determination, P.R. Doc. No.

33, Pl.’s Ex. 1 at 12, Confidential Determination, C.R. Doc. No.

11, Pl.’s Ex. 9 at 9.

Before proceeding to analyze whether Commerce’s conclusion is

supported by substantial evidence, the Court notes that Commerce

discussed this as part of its “objective analysis” of its process

of sale analysis. According to the Court’s reading of Commerce’s

methodology, the process of sale analysis looks into the manner the

sale was conducted.12 Consequently, following Commerce’s “process”

11
The Court further notes that the Determination’s
discussion on fair market value incorporates the Confidential
Determination, Determination, P.R. Doc. No. 33, Pl.’s Ex. 1 at 4,
which placed weight on the fact that the bid was above the
valuation studies’ estimate, Confidential Determination, C.R.
Doc. No. 11, Pl.’s Ex. 9 at 9.
12
By way of comparison, 19 U.S.C. § 1592(e) authorizes
Customs to seek damages against parties who negligently or
fraudulently misclassify their products entering the United
States. According to the case law, a defendant may assert a
defense that he acted with reasonable care, inter alia, if he
obtained the advice of counsel, and relied on that advice, in
classifying his products. United States v. Optrex Am., Inc.,
slip op. 04-79 (CIT July 1, 2004). In allowing this defense, the
case law is not suggesting that counsel’s advice was accurate –
rather, if the Government is prosecuting a claim, most likely
that advice was wholly erroneous. Rather, it is the fact that
advice of counsel was sought which demonstrates that the
defendant exercised reasonable care. In other words, it is the
process of seeking advice that is probative, not the actual
Court. No. 03-00919 Page 20

methodology, it is the fact that a government sought objective

valuations, and relied on those valuations, that is important. But

by using the valuations to prove the sale price was for fair market

value, Commerce is comparing a resulting sale price to a benchmark.

Commerce is not using the valuations to prove the validity of the

procedure used to sell the company. In so doing, Commerce opens

the door to claims that the valuation studies were inaccurate.13

Moreover, by opening the door to a claim that it was not following

its own methodology, Commerce undermines its own contention that

there were no “benchmarks” by which to compare the sale price. In

fact there were: the valuation studies.

Setting aside this methodological objection, Allegheny seeks

to discredit the valuations as having been engineered by the GOI to

boost projections of future rates of return at the expense of

devaluing the present value of AST.14 In assessing Allegheny’s

advice received.
13
The accuracy of the valuations may, or may not, be
relevant to whether a government sought objective advice and
reasonably relied on those valuations.
14
At oral argument, the Government and TKAST argued that
Allegheny did not raise this argument before Commerce and waited
until its reply brief to raise the argument in this proceeding.
The Court agrees that arguments not raised before Commerce may
not be raised before a reviewing court and that a party may not
raise an argument for the first time in its reply brief.
However, the Court deems that Allegheny adequately raised this
argument below, see Petitioner’s Case Brief, Attachment to Letter
from David A. Hartquist, Kathleen W. Cannon & Eric R.
McClafferty, Collier Shannon Scott, PLLC, to Sec’y of Commerce,
Re: Stainless Steel Sheet and Strip in Coils from Italy, C.R.
Doc. No. 9 at 12-14 (Sept. 26, 2003)at 12-14, and adequately
Court. No. 03-00919 Page 21

argument, the Court is mindful that courts grant considerable

deference to an agency’s review of valuation studies. Cf. New

Haven Inclusion Cases, 399 U.S. 392, 434-35 (1970) (“‘The judicial

function is to see to it that the Commission’s ‘estimate’ is not a

mere ‘guess’ but rests upon an informed judgment based upon an

appraisal of all . . . relevant . . . facts . . . , and is not at

variance with the statutory command.’”) (quoting Freeman v.

Mulcahy, 250 F.2d 463, 473 (1st Cir. 1957)) with Allegheny, 367

F.3d at 1344 (noting the Commerce must consider all the facts and

circumstances behind a privatization). Consideration of valuation

studies requires extensive fact finding and expertise a court does

not have when reviewing agency determinations. This does not mean

that agencies have carte blanche to ignore facts, misread studies,

or otherwise use valuation studies such that their factual findings

are unsupported by substantial evidence. Id. The agency must

explain its rationale in adopting a valuation study such that a

court may follow and review its line of analysis, its reasonable

assumptions, and other relevant considerations. Id.

Granting this deference owed to Commerce, the Court

nonetheless finds that, in this case, Commerce has not adequately

explained its adoption of the valuation studies, especially in

light of Allegheny’s objections. In its determination, Commerce

raised this argument in its initial brief before the Court, Pl.’s
Mem. at 21-27.
Court. No. 03-00919 Page 22

noted that “[w]e consider these studies timely as they were

conducted prior to the agreement on the final transaction price.

Further, the studies are objective and complete since they were

conducted by independent parties and contained information

typically considered by sellers contemplating such a sale.”

Determination, P.R. Doc. No. 33, Pl.’s Ex. 1 at 5. Allegheny

challenges the IMI study’s write-down of certain assets and

addition of certain “provisions” to AST’s balance sheet, and claims

that the two subsequent studies adopted these distorted values.

Pl.’s Mem. at 21-27. Commerce did not address these concerns in

its Determination.15 Nor did Commerce make a determination that the

studies reflected any of the committed investment requirements or

that the concurrent subsidies were reflected in the IMI or Pasfin

studies.16

15
In its market distortion analysis, Commerce argues that it
does not have to address the GOI decisions about which assets and
liabilities to place in AST because these decisions were not in
the nature of a governmental function or governmental regulation
but instead were similar to the action of a private seller.
Determination, P.R. Doc. No. 33, Pl.’s Ex. 1 at 14. This
response does not in any way validate Commerce’s decision to rely
on the valuations in determining fair market value.
16
The Court is mindful that Commerce only made an explicit
finding that the Morgan Grenfell valuation study considered AST’s
debt after AST’s debt write-down in December. See Confidential
Determination, C.R. Doc. No. 11, Pl.’s Ex. 9 at 7. Commerce
never indicated that the other two studies included the
concurrent subsidies or that any of the studies contemplated any
committed investment requirements. Cf. Confidential
Determination, C.R. Doc. No. 11, Pl.’s Ex. 9 at 7. The fair
market price for AST should reflect AST’s “core value” combined
with the value of any prior and concurrent subsidies (subsidies
Court. No. 03-00919 Page 23

It is not inappropriate for Commerce to rely on valuation

studies when, and to the extent, these valuation studies consider

all of the facts and circumstances of the value of a privatized

firm.17 However, when a valuation study, or valuations studies,

have not considered all the facts and circumstances, reliance

thereon is misplaced. Cf. Delverde III, 202 F.3d at 1367. Because

a court does ”not defer to the agency’s conclusory or unsupported

suppositions,” McDonnell Douglas Corp. v. United States Dept. of

the Air Force, 375 F.3d 1182, 1187 (D.C. Cir. 2004) (citing Motor

Vehicle Mfrs. Ass’n of United States, Inc. v. State Farm Mut. Auto.

Ins. Co., 463 U.S. 29, 43 (1983)), Commerce’s adoption of these

conferred during the privatization of a company) and committed
investment requirements. Accordingly, the prior subsidy and
concurrent subsidy analyses are inextricably linked when Commerce
infers fair market value from valuation studies. Consequently,
either the purchasing firm remunerated the government for of all
of these values or did not remunerate the government for all of
these values. Moreover, the Court notes that although some
conclusions may be logically deducible from the facts, e.g., that
the committed investments would lower the valuation therefore any
error would be harmless or that the IMI study was based on the
same level of debt write-off that actually occurred five months
after the study was commissioned, Commerce must make these
considerations explicit. Cf. Siderca v. United States, slip op.
04-133 (Oct. 27, 2004) at 29 n.15 (noting that the Court should
not be left to guess if Commerce considered certain facts and how
it reached its conclusions); see also infra note 18.
17
The Court is not implying that Commerce must accept or
reject a valuation study in total. Rather, it may be appropriate
for Commerce to adopt such portions as it deems relevant, add,
and detract values so as to determine the true valuation of
assets.
Court. No. 03-00919 Page 24

studies cannot be grounded in substantial evidence.18 Furthermore,

whatever the merits of Commerce’s and TKAST’s arguments before the

Court, such arguments cannot be a substitute for a reasoned

decision by the agency on the record. Al Tech Specialty Steel

Corp. v. United States, slip op. 04-114 at 51 (CIT Sept. 8, 2004)

18
Other anomalies give the Court pause. First, the price
TKAST bid for AST was actually higher than the valuation range
provided by the study it commissioned and the price it eventually
paid was significantly higher than the maximum valuation for AST.
Confidential Determination, C.R. Doc. No. 11, Pl.’s Ex. 9 at 7.
Second, IRI did not rely very heavily on its valuation studies.
After receiving a bid that was noticeably higher than the
projected value for AST, Confidential Determination, C.R. Doc.
No. 11, Pl.’s Ex. 9 at 7, IRI then proceeded to negotiate a price
for the following months, id. at 3. This does suggest that IRI
was interested in securing the highest obtainable price for AST,
but also, that it did not place great weight on the studies. At
oral argument, TKAST presented an explanation for this, i.e.,
that during the post-bidding negotiations changes occurred which
may have changed the value of the assets on the table. Oral
Argument Before Judge Donald C. Pogue in Allegheny Ludlum v.
United States, Jan. 18, 2005 at 1:58:56 (statement of Lewis E.
Leibowitz). However, this explanation did not appear in the
Determination and therefore constitutes a post-hoc
rationalization. Moreover, TKAST’s argument casts doubt on
whether any of the valuation studies was completely based on the
transaction that actually occurred. If there were negotiations
regarding the assets TKAST would assume, which changed from the
assets the valuation studies valued, then these valuation studies
could not have been “complete” or “timely.” To make a
determination as to whether a valuation study is timely or
complete, Commerce must make an express determination that a
valuation study valued the total package being sold, adjust the
valuation study to reflect the total package being sold, or
explain why any changes between the assets considered in the
valuation study did not materially deviate from the valuation of
the assets sold, if it wants to rely on valuation studies. In
sum, Commerce must make a determination that no benefit was
conferred because the purchaser fully remunerated the government
for the “package” of assets acquired – whatever form the
subsidy/subsidies assume(s). See 19 U.S.C. 1677(5)(B) &
(E)(iv); see also Delverde, 202 F.3d at 1364-67.
Court. No. 03-00919 Page 25

(citing Burlington Truck Lines, Inc. v. United States, 371 U.S.

156, 168-69 (1962)). Accordingly, the Court remands this case to

Commerce to consider Allegheny’s objections to the valuation

studies.19

B. IF FAIR MARKET VALUE WAS CONFERRED, ALLEGHENY HAS NOT OVERCOME
THE PRESUMPTION THAT FAIR MARKET VALUE EXTINGUISHED THE SUBSIDY

If Commerce concludes that fair market value has been

tendered, the presumption shifts, i.e., the presumption then

becomes that the subsidy was extinguished, but the presumption, in

turn, may be rebutted upon a showing that the sale process was

distorted through government intervention. Methodology 68 Fed.

Reg. at 37,127. The Methodology defines this consideration as

follows:

A party can, however, obviate this presumption of
extinguishment by demonstrating that, at the time of the
privatization, the broader market conditions[] necessary
for the transaction price to reflect fairly and
accurately the subsidy benefit were not present, or were
severely distorted by government action (or, where
appropriate, inaction).[] In other words, even if we
find that the sales price was at "market value," parties
can demonstrate that the broader market conditions were
severely distorted by the government and that the
transaction price was meaningfully different from what it
would otherwise have been absent the distortive
government action.

19
Allegheny has also raised objections as to Commerce’s
concurrent subsidies methodology. Because the Court has
considered concurrent subsidies in context of the prior subsidies
analysis, the Court deems any further discussion unnecessary
until Commerce issues a remand determination. Allegheny may
raise any properly preserved arguments at that time.
Court. No. 03-00919 Page 26

Id. (footnotes omitted); cf. United States – Countervailing

Measures Concerning Certain Products from the European Communities,

WT/DS212/AB/R (Dec. 9, 2002) at 62 (“However, governments may

choose to impose economic or other policies that, albeit respectful

of the market’s inherent functioning, are intended to induce

certain results from the market.”). The regulations further

specify what types of distortions will rebut the presumption that

fair market value has been extinguished:

1. Basic Conditions: For example, are the basic
requirements for a properly functioning market
sufficiently present in the economy in general as well as
in the particular industry or sector, including free
interplay of supply and demand, broad-based and equal
access to information, sufficient safeguards against
collusive behavior, effective operation of the rule of
law, and adequate enforcement of contracts and property
rights?

2. Legal and Fiscal Incentives: Has the government used
the prerogatives of government in a special or targeted
way that makes possible, or otherwise significantly
distorts the terms of, a sale in a way that a private
seller could not, e.g., through special tax or duty rates
that make the sale more attractive to potential
purchasers generally or to particular (e.g., domestic)
purchasers, through regulatory exemptions particular to
the privatization (or privatizations generally) affecting
worker retention or environmental remediation, or through
subsidization or support of other companies to an extent
that severely distorts the normal market signals
regarding company and asset values in the industry in
question?

Id.

Allegheny contends that through repeated bailouts and other
Court. No. 03-00919 Page 27

manipulations of the Italian steel sector, the GOI distorted the

market. Pl.’s Mem. at 28-31. Allegheny asserts that, without

government assistance, AST would have gone bankrupt long before its

privatization. Id. at 29-30. Although this consideration is not

a type of distortion envisioned by the methodology, because

Commerce must consider all of the facts and circumstances of a

privatization, the Court will read Commerce’s methodology broadly

and will consider all distortions raised by the parties that may be

lawfully considered relevant. See Fiskars, Inc. v. Hunt Mfg. Co.,

221 F.3d 1318, 1322 (Fed. Cir. 2000) (noting the presumption that

agencies act in accordance with law); see also Methodology Fed.

Reg. at 37,127 (noting the list includes only “some factors” that

might be considered). Nevertheless, even under this reading of

Commerce’s methodology, the Court is not persuaded that Allegheny’s

arguments are sufficient to carry its burden.

First, under countervailing duty law, the inquiry focuses on

whether a purchasing firm received a financial contribution and

benefit. See Delverde III, 202 F.3d at 1367 (the statute requires

“Commerce to make a determination that a purchaser of corporate

assets received both a financial contribution and benefit from a

government, albeit indirectly through the seller, before concluding

that the purchaser was subsidized.”) (emphasis added), cf. Uruguay

Round Trade Agreements Act Statement of Administrative Action, H.

Doc. 103-316 at 257 (1994) (“subparagraph (E) reflects the
Court. No. 03-00919 Page 28

‘benefit-to-the-recipient’ standard which long has been a

fundamental basis for identifying and measuring subsidies under

U.S. CVD practice, and which is expressly endorsed by Article 14 of

the Subsidies Agreement.”). When a sale is for fair market value,

the true value of the subsidy has, at least theoretically, been

factored into the purchase price. At this price, a purchaser whose

reservation price is at fair market value should be indifferent to

buying the company or assets or investing its money elsewhere.

Consequently, the purchaser would not be the receiver of this

“benefit” as required by law.

For example, a government may build a state-of-the-art

facility for the production of widgets even though the factor costs

in that country, e.g., labor or resource costs, place that country

at a significant comparative disadvantage in the operation of the

facility. When the government sells the facility, theoretically,

these high factor costs will be considered in the purchase price –

they will depress the purchase price (from the construction price)

to reflect these high factor costs. The ultimate purchaser does

not necessarily receive a benefit because it pays the value of the

facility given market conditions (assuming the facility is sold

under competitive market conditions) – the market should price the

facility at the point where it is just profitable enough to justify

the operation of the facility. At least part of the money the

government spent would be a sunk cost (and sunk benefit) and does
Court. No. 03-00919 Page 29

not confer a benefit on the purchaser. Cf. Certain Steel Products

from Austria, 58 Fed. Reg. 37,217, 37,264 (DOC July 9, 1993) (final

affirmative countervailing duty determination).20

Second, as the WTO Appellate Body has recently concluded:

[O]nce a fair market price is paid for the equipment, its
market value is redeemed, regardless of the utility the
firm may derive from the equipment. Accordingly, it is
the market value of the equipment that is the focal point
of analysis, and not the equipment’s utility value to the
privatized firm.

United States – Countervailing Measures Concerning Certain

Products from the European Communities, WT/DS212/AB/R (Dec. 9,

2002) at 51. In this case, given that Commerce’s methodology

and its Section 129 determination are intended to implement

WTO rulings, this factor is relevant. See SEC v. Chenery

Corp., 318 U.S. 80, 87 (1943) (“The grounds upon which an

administrative order must be judged are those upon which the

record discloses that its action was based.”). Additionally,

the WTO Appellate Body decisions have persuasive weight here

20
The Court has some discomfort with the fact that a
government may induce its industry to compete against U.S.
industries through use of devices such as committed investment
requirements. For example, by a government requiring a company
to maintain production for a period of time, and so reducing the
purchase price to make this feasible, that government is
injecting distortions into the international market, i.e.,
creating potential competition that would not exist but for
government intervention. Nevertheless, the Court is constrained
by the case law to disregard this type of distortion because
there is no benefit to the purchasing firm. Such constraint,
however, does not limit the requirement that Commerce determine
that no benefit be conferred on the purchasing firm.
Court. No. 03-00919 Page 30

because nonconformance of U.S. practice may result in

retaliatory tariffs against U.S. exporters – a result that

negates the U.S.’s benefit from the international agreement.

Cf. McCulloch v. Sociedad Nacional de Marineros de Honduras,

372 U.S. 10, 21 (1963). Accordingly, were the agency to

construe an ambiguous statute so as to benefit domestic

interests in violation of international agreements,

retaliatory tariffs would result, a penalty which Congress

presumably would wish to avoid. Consequently, courts should

prefer adhering to international law standards unless

otherwise indicated by Congress. See, e.g., id. at 20-21; cf.

The Federalist No. 3, at 43 (John Jay) (Clinton Rossiter ed.,

1961) (“It is of high importance to the peace of America that

she observe the laws of nations towards [its treaty partners],

and to me it appears evident that this will be more perfectly

and punctually done by one national government . . . .); see

also Allegheny, 367 F.3d at 1348 (citing Murray v. Charming

Betsy, 6 U.S. (2 Cranch) 64, 118 (1804)) (“an act of Congress

ought never to be construed to violate the law of nations if

any other possible construction remains . . . as understood in

this country.”); Federal Mogul Corp. v. United States, 63

F.3d 1572, 1582 (Fed. Cir. 1995). Because Congress has not

statutorily created an unavoidable conflict with the WTO, cf.

The Chinese Exclusion Case, 130 U.S. 581 (1889), there exists
Court. No. 03-00919 Page 31

no reason not to look to the WTO for assistance in

interpreting U.S. law. See 19 U.S.C. § 3512 (“no provision of

any of the Uruguay Round Agreements, nor the application of

any such provision to any person or circumstance, that is

inconsistent with any law of the United States shall have

effect”) (emphasis added).

Allegheny appears to base its distortion argument not on

the market value, but on the utility value of these past

distortions. Based on the record as it stands, the Court

cannot conclude that these past distortions can provide a

basis to overcome the presumption that a purchase at fair

market value extinguished the subsidy.

CONCLUSION

Commerce’s determination that fair market value was tendered

is not supported by substantial evidence. On remand, Commerce must

reconsider its determination consistent with this opinion. If

Commerce continues to rely on the valuations studies, Commerce

should justify its use of the valuation studies in face of

Allegheny’s challenges. Finally, Commerce must reconsider its

analysis of concurrent subsidies in accordance with this opinion.

Commerce shall have until May 9, 2005 to submit its remand

determination. The parties shall have until May 23, 2005 to submit

comments on the remand determination. Rebuttal comments shall be
Court. No. 03-00919 Page 32

submitted by June 6, 2005.

SO ORDERED.

/s/ Donald C. Pogue
Donald C. Pogue, Judge

February 8, 2005

New York, New York