Motorola, Inc. v. U.S.

• Decision Date: 01 February 2006
• Docket Number: No. 05-1041.,No. 05-1025.,05-1025.,05-1041.
• Citation: 436 F.3d 1357
• Parties: MOTOROLA, INC, Plaintiff-Cross Appellant, v. UNITED STATES, Defendant-Appellant.
• Court: U.S. Court of Appeals — Federal Circuit

436 F.3d 1357

MOTOROLA, INC, Plaintiff-Cross Appellant, v. UNITED STATES, Defendant-Appellant.

No. 05-1025.

No. 05-1041.

United States Court of Appeals, Federal Circuit.

February 1, 2006.

Michael E. Roll, Pisani & Roll, of Los Angeles, California, argued for plaintiff-cross appellant. Of counsel were Mark S. Zolno and William R. Rucker.

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.

Before LOURIE, RADER, and BRYSON, Circuit Judges.

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, Headquarters Ruling, HQ 961050, which was issued in response to an earlier protest by Motorola concerning different circuits.

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 19 U.S.C. § 1625(c)(2). That statute obligates Customs to publish for notice and comment any interpretive ruling or decision that would "have the effect of modifying the treatment previously accorded by the Customs Service to substantially identical transactions." Because Customs failed to comply with that statutory requirement, the court held that Customs could not depart from the treatment Customs had previously accorded to substantially identical circuits.

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 not "substantially identical" to the circuits that had been entered previously, and therefore that Customs did not violate section 1625(c)(2) by applying the Headquarters Ruling to those circuits. As a result, the court ruled that entries of the four circuit models that were "substantially identical" to the models that had been admitted on a duty-free basis had to be liquidated duty free, while the other four circuit models could be classified under subheading 8536.30.80 and assessed a duty of 3.2 percent.

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 19 U.S.C. § 1625(c)(2) with respect to some of the circuits at issue and remand for further proceedings.

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(l)(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 the circuit, "in the mass before the semiconductors and discrete components are added to the substrate." The Headquarters Ruling explained:

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 court has described the Explanatory Notes to the HTSUS as instructive, but not binding. See, e.g., Rubie's Costume Co. v. United States, 337 F.3d 1350, 1359 (Fed.Cir. 2003); Marubeni Am. Corp. v. United States, 35 F.3d 530, 535 n. 3 (Fed.Cir. 1994). However, we do not interpret the trial court's opinion to have treated the Explanatory Note as binding.

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...