Peloton has filed a lawsuit against the US Government in the United States Court of International Trade – which has been given the identifier “PELOTON INTERACTIVE, INC. v. United States of America”, with a case number 20-01572. Peloton is trying to appeal, and be excepted from, having to abide by tariffs on products made in China that impact more than $500 billion worth of imports to the US. At the time of the lawsuit, Peloton states that they have paid more than $3,985,420.22 worth of tariffs to the government, and have done so without passing the price to the consumer. Peloton is asking that they be excluded from future tariffs, and be given a refund.
Peloton is not the only company that finds themselves in this situation. In fact, there are hundreds of companies that have filed similar lawsuits in September. The first company to do so was HMTX Industries LLC, under the lawsuit MTX Industries LLC, et. al. v. United States of America, et. al., which was filed on September 10th. This kicked off an avalanche of companies filing similar complaints – Peloton filed theirs on September 18th. If you compare the lawsuit from Peloton to the lawsuit from HMTX, you’ll find they are nearly identical, and some sections match word for word. The reason for all the lawsuits in September? There is a two year statute of limitations, which runs out sometime at the end of September 2020.
The core issue at the heart of the lawsuits is all of these companies import products, or components, from China, and have been forced to pay tariffs that have been added in the last year or two. Starting in the summer of 2018, the Office of the U.S. Trade Representative (USTR) began enforcing tariffs on certain products made in China. This was done under the authority Section 301 of the Trade Act of 1974, which authorizes the USTR to be able add duties & tariffs in order to fight back against trade acts of a foreign government that harm US commerce. The USTR started an investigation into China in August 2017, and found that China was not protecting the intellectual property of US companies, as products were imported from China to the US. As such, the USTR created tariffs on $34 billion worth of products in June 2018, known as “List 1”. In August 2018, a second round of products worth $16 billion, known as “List 2” was taxed. A bigger tariff went into effect in September 2018 for $200 billion worth of products in “List 3”. Finally, $300 billion worth of products had tariffs added in May 2019 within “List 4”
All of the lawsuits, including Peloton’s, allege roughly the same thing: that while the first 2 rounds of tariffs (List 1 & List 2) on around $50 billion worth of products, were legally justified, the two following rounds of tariffs (List 3 & List 4) on over $500 billion worth of products are illegal. The legal argument being made by Peloton, HMTX, and all the other companies attacks the tariffs on at least 3 different grounds:
- Violation of section 304 of the Trade Act, which says actions must take place within 12 months of the investigation. Since the investigation began in August 2017, List 3 (added in September 2018) and List 4 (May 2019) are invalid.
Section 304 of the Trade Act (19 U.S.C. § 2414) required USTR to determine what action to take, if any, within 12 months after initiation of that investigation. USTR issued two rounds of tariffs (known as List 1 and List 2) under the findings of the investigation, affecting $50 billion in imports. Subsequently, and after the time limit required by the Trade Act, USTR issued new tariffs on an additional $500 billion of imports from China, known as List 3 and List 4.
- Violation of section 307 of the Trade Act, which limits how the USTR can expand tarrifs, and the reasons they are allowed to do so
Section 307 of the Trade Act (19 U.S.C. § 2417) does not permit USTR to expand the imposition of tariffs to other imports from China for reasons untethered to the unfair intellectual property policies and practices it originally investigated under Section 301. USTR issued List 3 and List 4 tariffs in response to China’s retaliatory duties and other unrelated issues, stating that the List 1 and List 2 tariffs were “no longer appropriate.” But the relevant provisions of the Trade Act (19 U.S.C. § 2417) do not permit USTR to expand the imposition of tariffs to other imports from China for reasons untethered to the unfair intellectual property policies and practices it originally investigated under Section 301. Rather, § 2417 permits USTR only to delay, taper, or terminate the actions it has already taken, and not to increase them more than ten-fold as Defendants did in this matter.
- Violation of the Administrative Procedure Act (“APA”).
As discussed below, USTR (1) failed to provide sufficient opportunity for comment; (2) failed to consider relevant factors when making its decision; and (3) failed to connect the record facts to the actions it took.
Peloton concludes the lawsuit requesting that the government refund, with interest, money that Peloton has paid to the government as the result of List 3 & List 4 tariffs. Additionally, they request that the government be barred from applying List 3 & List 4 against Peloton in the future. And of course, there is a request for costs and “reasonable attorney fees”
As part of the IPO process last year, Peloton released a prospectus, which detailed the current status of the company as well as some analysis. One of the standard sections every company must detail as part of the IPO process is “Risk Factors”. This section requires the company to denote risks and uncertainties the company may face in the future, which might impact performance or stock price. One of the sections the company noted was “Increases in component costs, long lead times, supply shortages, and supply changes could disrupt our supply chain and have an adverse effect on our business, financial condition, and operating results.” We’ve covered the long lead times recently in another article. However, the company went into more detail on the topic of tariffs:
Moreover, volatile economic conditions may make it more likely that our suppliers may be unable to timely deliver supplies, or at all, and there is no guarantee that we will be able to timely locate alternative suppliers of comparable quality at an acceptable price. Further, since the beginning of 2018, there has been increasing rhetoric, in some cases coupled with legislative or executive action, from several U.S. and foreign leaders regarding tariffs against foreign imports of certain materials. Several of the components that go into the manufacturing of our Connected Fitness Products are sourced internationally, including from China, where the United States has imposed tariffs on specified products imported therefrom following the U.S. Trade Representative Section 301 Investigation. These tariffs have an impact on our component costs and have the potential to have an even greater impact depending on the outcome of the current trade negotiations, which have been protracted and recently resulted in increases in U.S. tariff rates on specified products from China. Increases in our component costs could have a material effect on our gross margins. The loss of a significant supplier, an increase in component costs, or delays or disruptions in the delivery of components, could adversely impact our ability to generate future revenue and earnings and have an adverse effect on our business, financial condition, and operating results.
This lawsuit, and the tariffs in List 3 & 4, is the scenario Peloton was alluding to in this section of their prospectus.
If you would like more insight into some of the legal arguments being made, you can read some analysis of the first lawsuit from HMTX (which Peloton is mirroring) here. And you can read Peloton’s full legal complaint & lawsuit here.
We’ll continue to provide updates on future developments for this, and Peloton’s other legal cases, as details emerge.