MOTOROLA, INC., Plaintiff-Cross Appellant, v. UNITED STATES, Defendant-Appellant.
05-1025, -1041
United States Court of Appeals for the Federal Circuit
February 1, 2006
Amy M. Rubin, Attorney, Commercial Litigation Branch, Civil Division, United States Department of Justice, of New York, New York, argued for defendant-appellant. With her on the brief were Peter D. Keisler, Assistant Attorney General and David M. Cohen, Director; and Barbara S. Williams, Attorney in Charge, International Trade Field, Office, of New York, New York. Of counsel on the brief was Chi S. Choy, Attorney, Office of Assistant Chief Counsel, United States Customs and Border Protection.
Appealed from: United States Court of International Trade
Senior Judge Nicholas Tsoucalas
BRYSON, Circuit Judge.
This appeal from the Court of International Trade concerns the appropriate tariff classification for eight models of circuits used in battery packs for cellular phones. Motorola imported the circuits in 1998 and declared them to Customs under subheading 8542.40.00 of the Harmonized Tariff Schedule of the United States (“HTSUS“). That subheading covers “hybrid integrated circuits” and allows such circuits to be entered duty free.
After reviewing the entries, Customs rejected Motorola‘s proposed classification and liquidated the entries in October of 2000 under subheading 8536.30.80. That subheading covers “other apparatus for protecting electrical circuits” and carries a duty rate of 3.2 percent ad valorem. Customs based its decision on a May 1, 2000,
Motorola protested Customs’ decision to classify the eight circuit models under subheading 8536.30.80. After Customs denied the protest, Motorola filed this action in the Court of International Trade. Following full briefing, the court issued a ruling in which it granted part of the relief Motorola sought. Motorola, Inc. v. United States, 350 F. Supp. 2d 1057 (Ct. Int‘l Trade 2004).
At the outset, the court rejected Motorola‘s challenge to the classification decision, agreeing with Customs that all eight models were properly classified under subheading 8536.30.80. However, the court agreed with Motorola that Customs’ previous liquidation of more than 900 entries of similar circuits as “hybrid integrated circuits” under duty-free subheading 8542.40.00 constituted the “treatment” of those goods as “hybrid integrated circuits” within the meaning of
With respect to four of the eight models at issue, the court held that the Headquarters Ruling on which Customs relied had the effect of modifying the treatment previously accorded to substantially identical transactions, and that Customs therefore violated section 1625 by failing to publish that ruling for notice and comment before applying it to Motorola. The court held, however, that the other four circuit models were
Each party appeals from those aspects of the judgment unfavorable to it. We affirm the court‘s decision upholding Customs’ classification of Motorola‘s circuits, but we vacate the court‘s decision that Customs violated
I
The first issue is whether the trial court erred in upholding the classification of the subject circuits under HTSUS subheading 8536.30.80 rather than subheading 8542.40.00. Motorola contends that all eight of the circuits at issue in this case should have been classified under subheading 8542.40.00.
Note 5 to Chapter 85 of the HTSUS provides that “headings 8541 and 8542 shall take precedence over any other heading in the tariff schedule which might cover [the subject goods].” Thus, if Motorola is correct that heading 8542.40.00 is an appropriate subheading for its eight subject circuits, the circuits should have been classified under that subheading, even if they might also have been covered by another subheading.
Heading 8542 covers “Electronic integrated circuits and microassemblies; parts thereof.” Subheading 8542.40.00 covers “Hybrid integrated circuits.” Note 5(b)(ii) of chapter 85 of the HTSUS defines the terms in the heading and subheading as follows:
5. For the purposes of headings 8541 and 8542:
. . .
(b) “Electronic integrated circuits and microassemblies” are:
(i) Monolithic integrated circuits . . . .
(ii) Hybrid integrated circuits in which passive elements (resistors, capacitors, interconnections, etc.) obtained by thin- or thick-film technology and active elements (diodes, transistors, monolithic integrated circuits, etc.) obtained by semiconductor technology, are combined to all intents and purposes indivisibly, on a single insulating substrate (glass, ceramic, etc.). These circuits may also include discrete components.
(iii) Microassemblies . . . .
HTSUS, ch. 85 (1998). The parties’ disagreement as to whether Motorola‘s circuits fit within the Note‘s definition of “hybrid integrated circuits” focuses on the requirement that the active and passive elements be “combined to all intents and purposes indivisibly, on a single insulating substrate.”
In the Headquarters Ruling on which it relied in this case, Customs determined that the Motorola circuits there at issue were not “hybrid integrated circuits” because they did not meet the “combined . . . indivisibly” requirement. The Headquarters Ruling looked to the Explanatory Notes to the HTSUS, which define the phrase in the HTSUS as follows:
The components forming a hybrid integrated circuit must be combined to all intents and purposes indivisibly, i.e. though some of the elements could theoretically be removed and replaced, this would be a long and delicate task which would be uneconomic under normal manufacturing conditions.
4 World Customs Org., Explanatory Notes, Note 8542(I)(2)(b), at 1700 (3d ed. 2002) (emphasis in original). The Headquarters Ruling interpreted the Explanatory Notes to require that the passive elements of the circuit be produced directly on the substrate of
Legal note 5(B)(b) requires an HIC [hybrid integrated circuit] to contain passive film components, and according to the EN [Explanatory Notes], they must be produced in the mass. We believe the drafters of the [HTSUS] intended the legal note and the EN to be read as a whole, one supporting the other. To that end, we interpret the [HTSUS‘s] definition of an HIC as formed by layering a thin or thick film circuit, in the mass (nondiscrete) directly on top of the substrate. Stated another way, an HIC begins with a printed circuit produced through film technology, see chapter 85 legal note 4 and the EN to heading 8534, to which are added components produced through semiconductor technology.
HQ 961050 (May 1, 2000).
Customs determined that the Headquarters Ruling was applicable to the eight circuit models at issue in Motorola‘s protest, and it denied Motorola‘s protest on that ground. The trial court agreed with Customs’ classification decision. The court explained that “whether or not Motorola actually removes or replaces some of the components forming the subject merchandise is irrelevant. The definition of hybrid integrated circuits does not contemplate the actions of a single manufacturer or importer.” While Motorola “does not remove or replace the components from the substrate or have the intention to do so,” the court concluded that Motorola had failed to offer evidence that it was “uneconomical or impractical to remove or replace the components from the substrate.” Accordingly, the court held that Customs had properly classified the circuits under heading 8536 of the HTSUS.
Motorola argues that the Headquarters Ruling on which Customs’ analysis was based was legally flawed because the trial court relied on limiting language from the Explanatory Notes requiring that the passive elements be formed directly on the substrate in order for a circuit to be classifiable as a “hybrid integrated circuit.” This
The trial court based its ruling not on an extra definitional element imported from the Explanatory Notes, but rather on the definitional statement in Note 5(b)(ii) that the components in a hybrid integrated circuit must be “combined to all intents and purposes indivisibly.” In interpreting that definitional language, the court looked for guidance to the Explanatory Note, which explains that the quoted language means that “though some of the elements could theoretically be removed and replaced, this would be a long and delicate task which would be uneconomic under normal manufacturing conditions.” 4 Explanatory Notes at 1700. As the trial court explained:
The Explanatory Note indicates that the indivisibility element is measured by whether it is uneconomical or impractical to remove or replace the components from the substrate. In the present case, Motorola has failed to present evidence indicating that the subject merchandise meet this requirement.
Because the court used the Explanatory Note for guidance as to the meaning of a definitional term and did not treat the Explanatory Note as setting forth an additional definitional requirement, we conclude that the trial court did not commit legal error by referring to the Explanatory Note.
The question that remains is whether the evidence established that Motorola‘s circuits satisfied the “combined to all intents and purposes indivisibly” requirement set forth in Note 5(b)(ii). We agree with the trial court that it did not. Motorola‘s evidence
Mr. Gyenes’ evidence merely established that in light of its quality controls and weighing of costs, Motorola found it unprofitable to remove and replace components of its circuits, but instead simply discarded any circuits that were defective. As the trial court held, however, the definitional language of Note 5(b)(ii)—“a long and delicate task which would be uneconomic under normal manufacturing conditions“—is objective. Although evidence concerning what Motorola does with particular circuits in its manufacturing process may be marginally probative, it does not establish whether those circuits meet the objective definition of “hybrid integrated circuits.” In light of the evidence from Customs’ expert that the subject circuits could be readily disassembled, the trial court properly concluded that Motorola had not met its burden in challenging the tariff classification. See
The second issue is whether some or all of the circuits at issue in this case should be entered duty free on the ground that Customs had previously treated the same or similar circuits as eligible for duty-free entry. Motorola argues that because Customs had previously treated the same or similar circuits as duty free and had not published its contrary Headquarters Ruling, HQ 961050, for notice and comment, it was required under
A
On October 22, 1992, and February 4, 1994, Customs issued two preclassification ruling letters (“PRLs“) to Motorola. A PRL is a letter from Customs to an importer advising the importer of the tariff classifications for certain of the importer‘s goods before the importer brings them into the country. Customs issues PRLs in response to written requests from importers or other parties.
Also relevant to this appeal is a series of entries Motorola made between 1995 and 1997. During that period, Motorola imported circuits similar in some respects to the circuits at issue in this case. Customs liquidated those entries pursuant to what
In 1996, the Customs Port Director in Chicago reviewed 92 of the Motorola “bypass” entries and determined that the circuits in those entries should be classified under HTSUS subheading 8507.90.80, a residual subheading under the general heading for “electric storage batteries.” Goods classified under that subheading are not entered duty free. After Customs liquidated the 92 entries in May of 1997, Motorola protested, arguing that the entries should have been classified under subheading 8542.40.00. In response to Motorola‘s protest, Customs issued HQ 961050, but it did not publish the ruling for notice and comment. Although Customs denied Motorola‘s protest, it disagreed with both Motorola and the port director as to the proper
At the time HQ 961050 issued, Motorola had entered the circuits at issue in this case under HTSUS subheading 8542.40.00, but Customs had not yet liquidated those entries. In October of 2000, based on HQ 961050, Customs liquidated the entries under HTSUS subheading 8536.30.00. That action forms the basis for the dispute in this case.
B
A proposed interpretive ruling or decision which would--
(1) modify (other than to correct a clerical error) or revoke a prior interpretive ruling or decision which has been in effect for at least 60 days; or
(2) have the effect of modifying the treatment previously accorded by the Customs Service to substantially identical transactions;
shall be published in the Customs Bulletin. The Secretary shall give interested parties an opportunity to submit, during not less than the 30-day period after the date of such publication, comments on the correctness of the proposed ruling or decision. After consideration of any comments
In the trial court, Motorola first argued that HQ 961050 modified or revoked the two PRLs issued to Motorola in 1992 and 1994, and that Customs therefore violated section 1625(c)(1) by liquidating its goods under a different subheading without publishing the Headquarters Ruling for notice and comment. The court held that, although the PRLs were “interpretive ruling[s] or decision[s]” within the meaning of the statute, the Headquarters Ruling did not modify or revoke them because by their terms PRLs apply and bind Customs “only with respect to the items identified in the PRLs and not any other merchandise, even if [the other merchandise] is substantially identical.” Neither party has appealed that part of the court’ s judgment.
Motorola also argued in the trial court that liquidating its entries without publishing HQ 961050 violated Section 1625(c)(2) because it had the effect of modifying a “treatment previously accorded by the Customs Service to substantially identical transactions.” Specifically, Motorola argued that (1) the PRLs described above constituted a “treatment” of “substantially identical transactions,” and (2) Customs’ liquidation of more than 900 entries of similar circuits on bypass status constituted “treatment” of “substantially identical transactions.”
The trial court did not directly address whether the PRLs constituted “treatment” of “substantially identical transactions” for purposes of section 1625(c)(2). It did hold, however, that Customs’ liquidation of Motorola‘s bypass entries constituted “treatment.” Moreover, the court held that those liquidations were “substantially identical transactions” as to four of the eight circuit models at issue in this case. But it held that
1
In deciding that Customs’ liquidation of more than 900 of Motorola‘s bypass entries constituted “treatment” within the meaning of section 1625(c)(2), the trial court rejected Customs’ argument that the court should look to
Precision Specialty Metals involved a number of drawback entries that were liquidated over a four-and-a-half-year period. The parties disputed whether the liquidation of Precision‘s drawback entries constituted “treatment.” Noting that the legislative history “offers no guidance,” the court ruled that the word “treatment” denotes a consistent pattern of actions, and it construed the statutory term to mean that “importers may order their actions based not only on Customs’ formal policy, ‘position,’ ‘ruling,’ or ‘decision,’ but on its prior actions.” 116 F. Supp. 2d at 1044.
While that definition may be useful as a starting point, it does not answer the precise question presented here, which is whether bypass entries of the sort at issue in this case involve a sufficient degree of action by Customs to constitute “treatment.” When Customs liquidates bypass entries without inspecting the goods, it may be said to have “acted” in the sense that it has chosen not to scrutinize the entries more closely, but it is not clear on the face of the statute that Customs has “treated” the goods as being what the importer says they are. The question of what degree of action (as opposed to acquiescence) is sufficient to bind Customs is not an issue that Congress
In step two of Chevron, a court must determine whether the agency‘s answer to the question at issue is “based on a permissible construction of the statute.” Chevron, 467 U.S. at 843; see also United States v. Haggar Apparel Co., 526 U.S. 380, 385-86 (1999); Cathedral Candle, 400 F.3d at 1362. At the outset, we note that
[t]he determination of whether the requisite treatment occurred will be made by Customs on a case-by-case basis and will involve an assessment of all relevant factors. In particular, Customs will focus on the past transactions to determine whether there was an examination of the merchandise (where applicable) by Customs or the extent to which those transactions were otherwise reviewed by Customs to determine the proper
application of the Customs laws and regulations. For purposes of establishing whether the requisite treatment occurred, Customs will give diminished weight to transactions involving small quantities or values, and Customs will give no weight whatsoever to informal entries and to other entries or transactions which Customs, in the interest of commercial facilitation and accommodation, processes expeditiously and without examination or Customs officer review.
The regulation no doubt advantages Customs by giving it the power to process transactions through expedited procedures without binding itself to a “treatment” of the goods processed in that manner. We believe, however, that Customs’ construction is a permissible one in light of the ambiguity of the term “treatment” as it applies to the issue presented in this case, i.e., entries liquidated under Customs’ “bypass” procedures. The regulation permissibly focuses on “whether there was an examination of the merchandise . . . or the extent to which [the] transactions were otherwise reviewed by Customs,” and gives no weight to transactions in which Customs did not examine the goods in question.4 It is reasonable to conclude that goods which are admitted pursuant to representations by the importer and are not independently examined or reviewed by the importer are not “treated” by Customs as classifiable under the category assigned to them. This portion of the regulation is therefore “based on a permissible construction of the statute” and warrants deference. Chevron, 467 U.S. at 842-43.
It makes no difference to our analysis that the regulation was promulgated in 2002, after the controversy arose and after this litigation began. So long as an agency‘s interpretation of a statute is not a “post hoc rationalization . . . seeking to defend past
Accordingly, we hold that the trial court erred in refusing to give Chevron deference to the interpretation of the word “treatment” provided in
2
As noted above, while the trial court held that Customs’ liquidation of more than 900 bypass entries constituted a treatment, it did not rule on the status of the two PRLs that Customs issued in 1992 and 1994. The court acknowledged that Motorola raised that issue, and it gave a detailed summary of the contentions of both Motorola and Customs. Further, the court noted Customs’ concession that four of the eight parts at
III
Motorola also challenges the trial court‘s ruling that the four parts at issue in this case that were used with lithium chemistry batteries were not “substantially identical” to the parts entered on “bypass” between 1995 and 1997. The result of the court‘s ruling on this issue was that, for those four parts, Motorola was denied the benefit of a prior “treatment previously accorded by the Customs Service to substantially identical transactions” under section 1625(c)(2). Motorola argues that the court essentially required outright identity between the parts instead of “substantial” identity, and it contends that the evidence it presented proved substantial identity under the correct legal standard.
We do not believe that the trial court applied the wrong legal standard. In support of its argument, Motorola points to a portion of the court‘s opinion in which the court stated that “[a]lthough the Lit[h]ium-ion Chemistry Assemblies and the Nickel Assemblies may be made in much the same manner and serve similar purposes, the two sets of assemblies fall short of being identical.” On the same page of the opinion, however, the court noted that “Motorola correctly asserts that to determine whether
Motorola further urges that this court should reverse the trial court on that issue, because the differences between the lithium chemistry parts and the bypass entry parts are no greater or more significant than the differences between the nickel chemistry parts and the bypass entry parts, and that Customs conceded that the latter set of differences did not defeat substantial identity. In light of Customs’ evidence as to the nature of the various circuits, however, it was reasonable for the trial court to hold that the nickel chemistry parts were “substantially identical” to the bypass parts, but that the lithium chemistry parts were not. We therefore affirm that aspect of the trial court‘s judgment.
IV
For the reasons stated above, we affirm the trial court‘s holding that Customs correctly classified all of the parts at issue under the Harmonized Tariff Schedule of the United States. We also affirm the court‘s holding that four of the eight parts at issue in this case were not “substantially identical” to the parts that Customs liquidated on bypass. We vacate the court‘s ruling that Customs violated
AFFIRMED IN PART, VACATED IN PART, AND REMANDED.
Notes
| This case | Bypass entries 1995-1997 | PRL 894316 (Feb. 4, 1994) | PRL 878763 (Oct. 22, 1992) |
|---|---|---|---|
| 5108189Z16 | 5104286T01 | 5015189R29 | 5015189R07 |
| 5180569A02 | 5104717T01 | 5015189R37 | 5015189R14 |
| 5180572T01 | 5104847T01 | 5015189R48 | 5015189R21 |
| 5104035T03 | 5104918T02 | 5015189R49 | 5015189R24 |
| 5104091T01 | 5104918T03 | 5015189R54 | 5015189R28 |
| 5180569A03 | 5105189R20 | 5015189R75 | 5015189R30 |
| 5180581T02 | 5105189R57 | ||
| 5180649T02 | 5105189Z17 | ||
| 5105189Z28 | |||
| 5186210A01 |