Customs Wins in Latest Round of Permapressing Saga

Goldstein, Frazer & Murphy LLP

...But Don't Count Haggar Out

This spring, the U.S. Supreme Court handed down its long-awaited decision in the Haggar Clothing Co. permapress case. To hear the U.S. Customs Service tell it, the decision was a major victory for the agency On the other hand, from the perspective of Haggar, the case is far from over and the importer may yet collect a large duty refund.

Both are right. Clearly, Customs has gained ground legally with this significant decision, in which the Supreme Court indicated that Customs' demands for judicial "due deference" in the permapressing matter were valid. But Haggar could still win if the lower courts conclude that the Customs regulation at issue is unreasonable.

In any event, while Haggar -- and Levi Strauss & Co., which has a slightly different case pending -- continue to pursue their causes through the courts, importers should expect Customs to push to expand the circumstances under which its decisions should be accorded the maximum amount of judicial respect.

The Supremes Decide on the Situation

In a unanimous April 21 decision, the Supreme Court showed little patience with the views of the U.S. Court of International Trade (CIT) and the Court of Appeals for the Federal Circuit (CAFC), which have repeatedly rejected Customs' demands for due deference (see "Background on the Case," page 72).

First, said the Supreme Court, the Customs tariff regulation in question (related to the 9802 tariff provision that outlines which articles are eligible for duty breaks) was issued following a notice-and-comment rulemaking process. That means that there was an opportunity for the public to present its views before the regulation was finalized.

Generally the Supreme Court noted, such regulations are entitled to judicial deference, and the courts should not assume otherwise absent specific regulatory or statutory directions.

Second, the Supreme Court asserted that the specialized nature of the CIT and the CAFC was relevant to their ability to apply a particular set of facts to a regulation, not to whether the regulation could be disregarded. The Supreme Court instructed the CIT and CAFC that the standard is not whether the regulation "represents the best interpretation of the statute, but whether it represents a reasonable one." The expertise of the CIT simply means that it is "well positioned to evaluate customs regulations and their operation in light of the statutory mandate to determine if the preconditions for Chevron deference [as defined in a 1984 Supreme Court case] are present," the Supreme Court stated.

The high court also was unimpressed with arguments that it was a long-established historical practice not to give deference in customs cases. In the Supreme Court's view, the history was not convincingly uniform or clear.

All but two members of the Supreme Court declined to consider the second question before them, which actually went to the substantive issue: whether the permapress regulation is reasonable. Instead, the court remanded that question back to the CAFC to reconsider, applying the proper standard of review. There it will be up to Haggar to argue that the baking of its garments is, from the standpoint of the statute, just as incidental to the assembly process as a pressing-only operation.

Interestingly, however, the other two justices issued a concurring opinion in which they stated that they would have been willing to consider the issue of whether the regulation is reasonable. Further, probably much to the chagrin of Haggar, they stated that in their view, "the regulation is clearly valid" because "one can certainly discern a meaningful difference between merely pressing a synthetic fabric, on the one hand, and using ovenbaking (or perhaps extended pressing) to treat a fabric to which another substance has been added. Based on that difference, the Service could logically conclude, in accord with its understanding of its own regulation, that only the latter is a form of 'chemical treatment' excluded from a duty exemption."

How Far Will Customs Stretch the Decision?

The case is now back before the CAFC, which also is still considering the Levi case, which involves the question of whether stonewashing a garment is incidental to assembly for purposes of the 9802 duty exemption. (The Customs Service says no.) Given the CAFC's previous disposition of the Haggar case, including some very strong language in Haggar's favor, it is quite possible that the court will continue to find for Haggar, even under the Supreme Court-mandated standard of review. Doing so, however, will likely require the CAFC to directly address the arguments of the two Supreme Court justices who opined that the regulation is reasonable.

Yet to be made clear is how broad an impact the Supreme Court's decision will have on other challenges to Customs Service decisions. Importers should anticipate that the agency will seek to broaden the application of the due deference rule to all of its regulations and to many classification decisions protested by importers. It has been suggested that the Supreme Court decision will even serve as an incentive for Customs to invest in the regulation writing process.

With respect to classification decisions, Customs could try to demand more deference from the CIT and CAFC because of the Supreme Court's reference to the fact that the regulation at issue was subject to the notice-and-comment process. Consider, for example, the process the Customs Service now uses to notify the importing public that it is considering revoking a particular binding ruling. The agency publishes (in its twice-monthly Customs Bulletin) a notice of the ruling to be revoked, along with a copy of the proposed replacement ruling, and gives the importing public 30 days to submit comments. Following consideration of those comments, the ruling may be revoked and, the new position will apply to all similar rulings, whether they were specifically identified in the notice or not.

On the other hand, the Supreme Court's decision deals only with a regulation interpreting a special type of classification, one that determines the way in which duties will be calculated. It does not address the more typical classification ruling, such as a ruling that determines whether a garment is underwear or sleepwear, or a suit versus separates. A strong argument could be made that neither a basic classification ruling nor one that was issued via a public notice-and-comment revocation process should be considered the same as regulations and therefore be subject to Chevron due deference.

Until these new questions are resolved, however, importers considering challenging Customs' decisions in court are going to have an additional factor to weigh before proceeding. Litigation is never cheap, but the more uncertainties and novel issues added, the greater the risks and costs.

Brenda A. Jacobs is Counsel in the Customs and Trade Group of the law firm of Powell, Goldstein, Frazer & Murphy LLP in its Washington, D.C., office. She may be reached at tel.. 202-347-0066, by e-mail at bjacobs@pgfm.com or on the Web at www.pgfm.com.

BACKGROUND ON THE CASE

As explained in the December 1998 "Trade View" column (see "R-E-S-P-E-C-T -- What U.S. Customs Wants from the Courts"), the Supreme Court agreed to hear arguments in January 1999 on whether the customs regulation issued to implement U.S. Harmonized Tariff Schedule (HTSUS) subheading 9802 was entitled to deference, and if so whether the customs regulation was reasonable.

The Supreme Court review was requested by the Customs Service because the U.S. Court of International Trade (CIT) and the U.S. Court of Appeals for the Federal Circuit (CAFC) had expressly refused to give deference to a Customs regulation which says that permapressing abroad precludes classification under HTSUS 9802.

Customs argued that under a 1984 Supreme Court case, Chevron U.S.A. v. Natural Resources Defense Council Inc., the courts are required to give "due deference" to agency decisions. If deference is given, then the courts are limited to considering whether a particular regulation is a "reasonable interpretation and implementation of an ambiguous statutory provision."

The CIT and the CAFC had consistently and bluntly concluded that because they are "specialized courts," with "exclusive jurisdiction" over international trade matters, they are charged with conducting "de novo" reviews of Customs actions. Therefore, they said, they were not required to accord deference to the views, including the regulations, of the Customs Service.

Specifically at issue was whether 19 C.F.R. section 10.16(c) was entitled to deference. That regulation states: "Any significant process, operation, or treatment other than assembly whose primary purpose is the fabrication, completion, physical or chemical improvement of a component, or which is not related to the assembly process, whether or not it effects a substantial transformation of the article, shall not be regarded as incidental to the assembly and shall preclude the application of the exemption to the article. The following are examples of operations not considered incidental to assembly ... (4) Chemical treatment of components or assembled articles to impart new characteristics, such as showerproofing, permapressing, sanforizing, dyeing, or bleaching of textiles."

The regulation was promulgated in 1975 to implement what is now HTSUS 9802, which provides a partial exemption from duties for: "Articles ... assembled abroad in whole or in part of fabricated components, the product of the United States, which ... (c) have not been advanced in value or improved in condition' abroad except by being assembled and except by operations incidental to the assembly process such as cleaning, lubricating and painting."

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