Daimlerchrysler Corp. v. U.S.

• Decision Date: 18 March 2004
• Docket Number: No. 03-1192.,03-1192.
• Parties: DAIMLERCHRYSLER CORPORATION, Plaintiff-Appellant, v. UNITED STATES, Defendant-Appellee.
• Court: U.S. Court of Appeals — Federal Circuit

361 F.3d 1378

DAIMLERCHRYSLER CORPORATION, Plaintiff-Appellant, v. UNITED STATES, Defendant-Appellee.

No. 03-1192.

United States Court of Appeals, Federal Circuit.

March 18, 2004.

Lawrence M. Friedman, Barnes, Richardson & Colburn, of Chicago, IL, argued for plaintiff-appellant. With him on the brief was Harvey Karlovac.

Saul Davis, Senor Trial Counsel, International Trade Field Office, Civil Division, Commercial Litigation Branch, the United States Department of Justice, of New York, NY, argued for defendant-appellee. With him on the brief were Robert D. McCallum, Jr., Associate Attorney General; and David M. Cohen, Director; of the United States Department of Justice, of Washington, DC; and John J. Mahon, Acting Attorney in Charge; and Aimee Lee, Attorney, International Trade Field Office. Of counsel on the brief was Karen P. Binder, Attorney, Office of the Assistant Chief Counsel, International Trade Litigation, Bureau of Customs and Border Protection, of New York, NY.

Richard H. Abbey, Miller & Chevalier Chartered, of Washington, DC, for amicus curiae Alliance of Automobile Manufacturers, Inc. With him on the brief was Michael T. Brady.

Before CLEVENGER, DYK, and PROST, Circuit Judges.

PROST, Circuit Judge.

DaimlerChrysler Corporation ("DaimlerChrysler") appeals the decision of the United States Court of International Trade denying application of a partial duty exemption pursuant to subheading 9802.00.80 of the Harmonized Tariff Schedule of the United States ("HTSUS"). DaimlerChrysler Corp. v. United States, 2002 WL 31421861, slip op. (Ct. Int'l Trade Oct. 25, 2002). In light of the Supreme Court's decision in United States v. Haggar Apparel Co., 526 U.S. 380, 119 S.Ct. 1392, 143 L.Ed.2d 480 (1999) ("Haggar I"), we conclude that the Court of International Trade erred in applying Customs' regulation regarding painting to deny DaimlerChrysler its partial duty exemption. Accordingly, we reverse.

BACKGROUND

The merchandise at issue consists of DaimlerChrysler trucks from the 1993 and 1994 model years. DaimlerChrysler assembled the cargo boxes for the trucks at a plant in Celeya, Mexico, and assembled the complete trucks in Lago Alberto, Mexico. Assembly at both sites involved sheet metal components sent from the United States. As part of the assembly process, DaimlerChrysler subjected the truck cab and cargo box to a complicated treatment process. This process began with the application of a series of coatings to prevent corrosion and similar damage (collectively known as the primer coats). After baking the components to set the primer coats, DaimlerChrysler applied the final two coatings — a color coat and a clear coat (collectively known as the top coats). Because it believed that the painting process was incidental to assembly, DaimlerChrysler sought a partial duty exemption under HTSUS 9802.00.80.

Applying its regulation, which distinguishes between decorative and preservative painting, Customs found that DaimlerChrysler's application of the top coats did not qualify for duty-free treatment because it was appearance related and therefore not incidental to assembly. DaimlerChrysler subsequently filed suit in the Court of International Trade challenging Customs' ruling. That court affirmed Customs' ruling. DaimlerChrysler, 2002 WL 31421861, slip op. at 13. With respect to whether the top coats were preservative or decorative, the Court of International Trade found that, as a whole, the coatings were primarily intended to preserve. Id. at 7, 8. For analytical purposes, however, it divided DaimlerChrysler's process into two distinct operations (based on the use of the term "operations" in subheading 9802.00.80), separating the application of the primer coats from the application of the top coats because of the intervening baking step. Id. at 9. Although the court found that the top coats provided some preservative feature, id., it further found that they were "designed primarily to enhance the appearance of the vehicle and to impart to it distinctive features or characteristics, such as color, gloss, and [distinctness of image]." Id. at 11 (emphasis added). Consequently, it concluded that DaimlerChrysler's top-coat painting process did not qualify for the duty exemption under subheading 9802.00.80. Id. at 11-12.

DaimlerChrysler filed a timely appeal to this court. We have jurisdiction pursuant to 28 U.S.C. § 1295(a)(5).

DISCUSSION

The interpretation of HTSUS 9802.00.80 is an issue of law and therefore subject to de novo review. See Rollerblade, Inc. v. United States, 112 F.3d 481, 483 (Fed.Cir.1997). In addition, we review the related regulations promulgated by Customs by applying the two-step analysis of Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984). See Haggar I, 526 U.S. at 394, 119 S.Ct. 1392. First, if we determine that "Congress has directly spoken to the precise question at issue," then "that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress." Chevron, 467 U.S. at 842-43, 104 S.Ct. 2778. Second, "if the statute is silent or ambiguous with respect to the specific issue, the question for the court is whether the agency's answer is based on a permissible construction of the statute." Id. at 843, 104 S.Ct. 2778.

Subheading 9802.00.80 provides duty-free treatment for:

Articles ... assembled abroad in whole or in part of fabricated components, the product of the United States, which (a) were exported in condition ready for assembly without further fabrication, (b) have not lost their physical, identity in such articles by change in form, shape or otherwise, and (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.

HTSUS 9802.00.80 (emphasis added). With respect to painting, the relevant regulation draws a distinction between preservative and decorative painting. It treats the former as an operation incidental to the assembly process, 19 C.F.R. § 10.16(b)(3), but treats "painting primarily intended to enhance the appearance of an article or to impart distinctive features or characteristics" as an operation not incidental to the assembly process. 19 C.F.R. § 10.16(c)(3).

The issue on appeal is whether DaimlerChrysler's painting process, including the application of the primer coats and top coats, qualifies for duty-free treatment. Particularly, we must decide whether subheading 9802.00.80 unambiguously includes top-coat painting as an operation incidental to assembly. See Chevron, 467 U.S. at 842-43, 104 S.Ct. 2778. If, however, subheading 9802.00.80 is ambiguous with respect to top-coat painting, we must determine whether Customs' regulation, which distinguishes between preservative and decorative painting, is based on a permissible construction of the statute. See id. at 843, 104 S.Ct. 2778.

I

Subheading 9802.00.80 as well as its reference to painting have been the subject of prior cases. In General Motors Corp. v. United States, 976 F.2d 716 (Fed.Cir. 1992), this court specifically addressed the application of subheading 807.00(c) of the Tariff Schedules of the United States to a top-coat painting operation.¹ The facts in General Motors mirror those here; General Motors sought a partial duty exemption for top-coat painting on vehicles assembled in Mexico. The issue was "whether [top-coat] painting operations fall within the scope of `operations incidental to the assembly process such as cleaning, lubricating, and painting.'" Id. at 719. In construing the plain language of the statute, this court found that the "statute's reference to `painting' is simply an exemplar of an operation which is potentially `incidental to the assembly process,' not a definitive statement that all painting operations, no matter how extensive, are allowed under item 807.00(c)." Id. The court based its holding in large part on language in the legislative history indicating that operations were non-dutiable "if of a minor nature incidental to the assembly process." H.R.Rep. No. 89-342, at 49 (1965), reprinted in 1965 U.S.C.C.A.N. 3416. Thus, rather than focusing on painting as a whole, the court evaluated whether the application of a top coat was a minor or incidental operation. Relying on an evaluation of factors outlined in United States v. Mast Industries, Inc., 69 C.C.P.A. 47, 668 F.2d 501 (1981), the General Motors court found that top-coat painting was not an operation of a minor nature and therefore not incidental to the assembly process. Consequently, it reversed the Court of International Trade's decision granting General Motors a partial duty exemption.

Subsequent to the General Motors decision, the United States Supreme Court addressed the application and interpretation of HTSUS 9802.00.80 in Haggar I. In that case, Haggar sent cut fabric, thread, buttons, and zippers to Mexico for final assembly into pants. Upon completion, the pants went through a permapressing operation before being shipped back to the United States. Based on the performance of the permapressing operation, Customs refused to grant Haggar a partial duty exemption. The primary issue before the Court was whether Customs' regulations implementing the HTSUS were entitled to judicial deference; more particularly, whether they were subject to the analysis required by Chevron. In answering that question in the affirmative, the Court specifically considered HTSUS 9802.00.80 and noted that it established two different categories of operations incidental to assembly — one specific and unambiguous and the other general and ambiguous. "The statute under which respondent claims an exemption gives direction not only by stating a general policy (to grant the partial exemption where only assembly and incidental operations were abroad) but also by...