UNDER CERTAIN CIRCUMSTANCES COURTS MUST GIVE CUSTOMS' INTERPRETATIONS CONTROLLING WEIGHT
The U.S. Customs Service appealed a decision by the U.S. Court of Appeals for the Federal Circuit, upholding a ruling by the U.S. Court of International Trade (CIT) which denied judicial deference to Customs' interpretation of a provision of the Harmonized Tariff Schedule of the United States (HTSUS). The Supreme Court has heard and ruled on this case.
The case in controversy is United States v. Haggar Apparel Company. In this case Haggar shipped pre-cut fabric, thread, buttons, and zippers to a Mexican plant to be assembled there. The fabric had been treated in the United States with a chemical resin as part of a permapressing operation, which was completed in Mexico by subjecting the assembled garments to a pressing and an ovenbaking process. Haggar argued that the assembled garments were entitled to entry under the partial duty exemption allowed in subheading 9802.00.80 of the HTSUS, which covers articles assembled abroad of U.S. fabricated components, which have not been advanced in value or improved in condition while abroad, except for the assembly and "except by operations incidental to the assembly process such as cleaning, lubricating and painting." However, the government countered that the garments were ineligible for the preferential tariff treatment provided for in HTSUS 9802.00.80 since a Customs regulation, Section 10.16(c)(4), Title 19, Code of Federal Regulations (C.F.R.), specifically provides that permapressing is an operation "not considered incidental to the assembly."
The Issue
The issue squarely presented was whether the Customs regulation should be given judicial deference as that principle was set forth in a 1984 the Supreme Court decision, Chevron U.S.A., Inc. v. National Resources Defense Council, Inc., which held that, in certain circumstances, federal government agencies' decisions were entitled to deference by courts hearing cases where those decisions came to bear on the issue in controversy. This means that if a law passed by Congress is ambiguous or silent on an issue and the federal government agency charged with administering the law has interpreted the ambiguous provision and that interpretation is based upon a permissible construction of the statute, that is, there is some reasonable basis for the agency interpretation, courts will uphold the agency's interpretation, even if the judges think the interpretation is incorrect.
When the Haggar case was heard by the U.S. Court of International Trade (CIT) and the U.S. Court of Appeals for the Federal Circuit, both Courts held that Customs' interpretation of the HTSUS provision involved was not entitled to the deference provided in the Chevron case. The Court of International Trade ruled for the importer, finding that its obligations under the law to reach a correct decision was in conflict with Customs' demands for deference. The U.S. Court of Appeals upheld the CIT's ruling that Customs' decisions on classification matters cannot be granted deference by the Court since the Court is bound to issue a correct decision. Before the Supreme Court, Haggar also argued that the regulation in issue was an internal directive limited to customs officers. The Court gave short shrift to this argument, noting, among other things that this regulation was promulgated pursuant to statutory authority that did not indicate the regulations should have such a limiting scope as argued by Haggar. The Court also noted that the regulation was promulgated by the agency utilizing the notice and comment rulemaking process provided for in the Administrative Procedures Act (APA) before issuing the regulation; this does not support the argument that the regulation was intended as an internal directive.
As to the argument that granting deference to Customs' decisions would interfere with the CIT's responsibility to issue correct decisions, the Court found that this was not so. The Supreme Court found that the CIT could give the regulations proper effect as controlling law. In essence, the regulation would have as much authority as a statutory provision. The CIT would be expected to follow the regulation if it met with the Chevron requirements. As such, giving deference to the regulation would be consistent with reaching the correct decision.
Interestingly enough, Although the Court found that the statute involved (HTSUS 9802.00.80) was ambiguous, it remanded the case to the lower court so that the court could determine whether the regulation was a reasonable interpretation of the statute. Nevertheless, the important point has been established, the CIT must give deference to a Customs regulation in appropriate circumstances and doing so does not interfere with the CIT's responsibility to reach a correct decision.
The Decision's Impact
What can we expect from Customs in light of the Haggar case? First, we should note that the decisions on granting deference to agencies' interpretations are not limited to interpretations found in regulations; as an example, the Supreme Court has recognized the I.N.S.'s interpretations developed in its adjudication process as being entitled to deference in appropriate circumstances. We can expect Customs to push to include under of the umbrella of those interpretations entitled to deference as many of its decisions as possible.
Would this include ruling letters? In fact, the Court of Appeals for the Federal Circuit in a very recent decision addressed this point. In The Mead Corp. v. United States, the Court found that the differences between regulations and ordinary classification rulings issued by Customs are substantial enough to warrant that the Court refuse to extend the Haggar and Chevron decisions to these rulings. One of the differences the Court noted was the fact that there is statutory authority in the United States Code granting Customs the authority to issue regulations. Another is that when Customs issues a regulation under the "procedural rigors dictated by the APA," the regulation has the force of law. Moreover, a regulation must first undergo a notice and comment period during which interested parties can participate in the rule making through submission of written data, views, or arguments. Even after promulgation, a regulation is subject to petitions by interested parties who may seek to amend or repeal the new policy. The Court noted that in contrast, the procedural safeguards mentioned above do not accompany typical Customs rulings. (The Court recognized that rulings that effect a change of practice do undergo a notice and comment procedure, but declined to express an opinion as to what, if any, deference, such a ruling should be given since such a ruling was not involved in the case at hand.) The Court additionally found that Customs rulings are not, like regulations, intended to clarify rights and obligations of importers beyond the specific case under review.
The Court of Appeals also noted that the Supreme Court had found that Internal Revenue Service interpretative rulings "do not have the force and effect of law." Accordingly, the Court of Appeals has not afforded such rulings Chevron deference. Moreover, the Court found that Customs' classification rulings are in some ways an even less formalized body of interpretation than IRS revenue rulings. Consequently, absent a successful appeal to the Supreme Court by Customs, classification rulings and other similar types of interpretation will not be given Chevron deference.
However, I do not expect this case to be the last word on what types of Customs' decisions are entitled to Chevron deference; the Haggar ruling will no doubt be the subject of some interesting litigation in the years to come.