Daimlerchrysler Corp. v. United States

Slip Op. 00-124

UNITED STATES COURT OF INTERNATIONAL TRADE

______________________________

:

DAIMLERCHRYSLER CORPORATION, :

:

Plaintiff, :

:

v. : Court No. 99-03-00178

:

UNITED STATES, :

:

Defendant. :

______________________________:

[Cross-Motions for Summary Judgment Denied.]

Dated: September 29, 2000

Barnes, Richardson & Colburn (Robert E. Burke, Lawrence M.

Friedman and Robert F. Seely), for plaintiff.

David W. Ogden, Assistant Attorney General, Joseph I.

Liebman, Attorney-in-Charge, International Trade Field Office,

Attorney, Commercial Litigation Branch, Civil Division, United

States Department of Justice (Saul Davis), Paula Smith, Office of

Assistant Chief Counsel, United States Customs Service, of

counsel, for defendant.

OPINION

RESTANI, Judge: This Customs duty matter is before the court

on cross-motions for summary judgment. No discovery has taken

place and both parties seek judgment based on the factual record

and the court’s findings in Chrysler Corp. v. United States, 19

CIT 353 (1995), aff’d, 86 F.3d 1173, 1996 WL 132263 (Fed. Cir.

1996) (unpublished opinion) (“Chrysler”). Each party also

alleges that if judgment is not granted on its theory of the law

CT. NO. 99-03-00178 PAGE 2

applicable to the facts, material facts remain to be decided and

judgment may not be granted to its opponent.

JURISDICTION AND STANDARD OF REVIEW

The court has jurisdiction pursuant to 28 U.S.C. § 1581(a)

(1994). The court shall grant summary judgment if the pleadings,

depositions, answers to interrogatories, together with any

affidavits, if any, show that there is no genuine issue as to any

material fact and that the moving party is entitled to summary

judgment as a matter of law. USCIT Rule 56(a).

BACKGROUND

The 1991 to 1994 entries of automobiles at issue include

domestic sheet metal parts which are exported and assembled into

the finished automobiles in Mexico, and in the course of that

assembly undergo a complicated painting process. Plaintiff seeks

exemption from duty for the sheet metal parts under item

9802.00.80 of the Harmonized Tariff Schedule of the United States

(codified at 19 U.S.C. § 1202 (1994)) (“HTSUS”). Item HTSUS

9802.00.80 reads as follows:

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.

CT. NO. 99-03-00178 PAGE 3

HTSUS 9802.00.80, Supp. I. (1999).

In Chrysler, the court opined that it was bound by the

holding of General Motors Corp. v. United States, which dealt

with the same type of product and a similar paint process.

Chrysler, 19 CIT at 354 (citing General Motors Corp. v. United

States, 976 F.2d 716 (Fed. Cir. 1992) (“GM”)). In GM, the court

followed a line of cases beginning with United States v. Mast

Indus., Inc., which limit operations “incidental to the assembly

process” to minor operations. GM, 976 F.2d at 719 (citing United

States v. Mast Indus., Inc., 668 F.2d 501, 505 (Fed. Cir. 1981)).

In GM, the court held that the following legislative history

supported that view:

The amended item 807.00 would specifically permit

the U.S. component to be advanced or improved “by

operations incidental to the assembly process such as

cleaning, lubricating, and painting.” It is common

practice in assembling mechanical components to perform

certain incidental operations which cannot always be

provided for in advance. For example, in fitting the

parts of a machine together, it may be necessary . . .

to paint or apply other preservative coatings. . ..

Such operations, if of a minor nature incidental to the

assembly process, whether done before, during, or after

assembly, would be permitted even though they result in

an advance in value of the U.S. components in the

article assembled abroad.

GM, 976 F.2d at 719 (citing H.R. Rep. No. 342, 1965 U.S.C.C.A.N.

3,416, 3,448-449). GM and Chrysler also followed Mast in

applying a set of quantitative comparisons to determine whether

the process claimed to be incidental to assembly was “minor.”

CT. NO. 99-03-00178 PAGE 4

See GM, 976 F.2d at 719 (listing three factors to ascertain

whether operation is minor); Mast, 668 F.2d 506 (same); Chrysler,

19 CIT at 355 (listing two of the factors dispositive in that

case).

The parties are now before the court because Mast has been

undermined by the Supreme Court’s decision in United States v.

Haggar Apparel Co., 526 U.S. 380 (1999) (“Haggar”). The parties

agree that Haggar, which involved the same statute but a

different product - permapressed pants, has eliminated the Mast

comparison tests. What they do not agree on is whether Haggar

also removed the minor operation limitation of Mast. Plaintiff

contends that in the course of removing the Mast quantitative

tests, and deferring to Customs’ regulatory qualitative approach,

the Supreme Court in Haggar held that “painting” was

unambiguously established in the statute as a qualitative

category of operation that preserves the exemption from duty of

the affected part. Plaintiff relies on the following language of

Haggar:

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

determining some specifics of the policy (finding that

painting, for example, is incidental to assembly). For

purposes of the Chevron analysis, the statute is

ambiguous nonetheless, ambiguous in that the agency

must use its discretion to determine how best to

CT. NO. 99-03-00178 PAGE 5

implement the policy in those cases not covered by the

statute’s specific terms.

Haggar, 526 U.S. at 393 (emphasis added).

Thus, plaintiff argues, in deciding that the statute was

ambiguous as to permapressing and other processes not mentioned

in the statute, so that Customs could establish regulatory exempt

and nonexempt categories of unmentioned operations, the Supreme

Court declared the three categories of operations mentioned in

the statute, “cleaning, lubricating and painting,” unambiguously

“incidental to assembly” and not subject to Customs regulations.1

Defendant, on the other hand, argues that the word

“painting” cannot be read in isolation, that the statute as a

whole is ambiguous, and that the regulations reasonably clarify

the statute. The regulation at issue reads, in relevant part, as

follows:

§ 10.16 Assembly abroad.

(a) Assembly operations. The assembly operations

performed abroad may consist of any method used to join

or fit together solid components, such as welding,

1

Prior to the Supreme Court’s decision in Haggar, Customs’

regulations were all but irrelevant to interpretation of HTSUS

9802.00.80. See Haggar Apparel Co. v. United States, No. 97-

1002, 2000 WL 1035747, at *2 (Fed. Cir. July 27, 2000) (“Haggar

II”). The court did not defer to regulations, but rather applied

the Mast test. Id. In Haggar, the Supreme Court required the

court to apply the analysis of Chevron, U.S.A., Inc. v. Natural

Res. Def. Council, Inc., 467 U.S. 837, 842-44 (1984), to

regulations interpreting tariff provisions. Haggar, 526 U.S. at

393-94.

CT. NO. 99-03-00178 PAGE 6

soldering, riveting, force fitting, gluing, laminating,

sewing, or the use of fasteners, and may be preceded,

accompanied, or followed by operations incidental to

the assembly as illustrated in paragraph (b) of this

section. The mixing or combining of liquids, gases,

chemicals, food ingredients, and amorphous solids with

each other or with solid components is not regarded as

an assembly.

(b) Operations incidental to the assembly process.

Operations incidental to the assembly process whether

performed before, during, or after assembly, do not

constitute further fabrication, and shall not preclude

the application of the exemption. The following are

examples of operations which are incidental to the

assembly process:

(1) Cleaning;

(2) Removal of rust, grease, paint, or other

preservative coating;

(3) Application of preservative paint or coating,

including preservative metallic coating, lubricants, or

protective encapsulation;

(4) Trimming, filing, or cutting off of small

amounts of excess materials;

(5) Adjustments in the shape or form of a component

to the extent required by the assembly being performed

abroad;

(6) Cutting to length of wire, thread, tape, foil,

and similar products exported in continuous length;

separation by cutting of finished components, such as

prestamped integrated circuit lead frames exported in

multiple unit strips; and

(7) Final calibration, testing, marking, sorting,

pressing, and folding of assembled articles.

(c) Operations not incidental to the assembly

process. 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 such

article. The following are examples of operations not

considered incidental to the assembly as provided under

CT. NO. 99-03-00178 PAGE 7

subheading 9802.00.80, Harmonized Tariff Schedule of

the United States (19 U.S.C. 1202):

(1) Melting of exported ingots and pouring of the

metal into molds to produce cast metal parts;

(2) Cutting of garment parts according to pattern

from exported material;

(3) Painting primarily intended to enhance the

appearance of an article or to impart distinctive

features or characteristics;

(4) Chemical treatment of components or assembled

articles to impart new characteristics, such as

showerproofing, permapressing, sanforizing, dying or

bleaching of textiles;

(5) Machining, polishing, burnishing, peening,

plating (other than plating incidental to the

assembly), embossing, pressing, stamping, extruding,

drawing, annealing, tempering, case hardening, and any

other operation, treatment or process which imparts

significant new characteristics or qualities to the

article affected.

19 C.F.R. § 10.16 (1999).

Plaintiff argues alternatively that its processes abroad

satisfy the regulation because the sheet metal parts are

assembled and treated only with “preservative paint or coating,”

which is “incidental to assembly” pursuant to 19 C.F.R.

§ 10.16(b)(3). Defendant argues that plaintiff’s operations are

a significant process that completes or improves the sheet metal

components and imparts distinctive or significant new features,

characteristics or qualities to the article affected. Thus, it

argues that the painting process is not “incidental to assembly”

as provided in 19 C.F.R. § 10.16(c)(3) & (5).

CT. NO. 99-03-00178 PAGE 8

DISCUSSION

I. The term “painting” in HTSUS 9801.80.00 does

not prohibit application of 19 C.F.R. § 10.16

to this case.

As Chrysler made clear, the court concluded therein that it

was bound by GM’s holding that any attendant paint processes must

be minor to qualify a part assembled abroad for duty exemption

under item 9802.80.00, and that the Mast factors applied in GM

required the conclusion that the painting process at issue was

not “incidental to the assembly process.” Chrysler, 19 CIT at

355. While both parties agree that the Mast quantitative factor

aspect of GM no longer applies, defendant argues that GM’s

interpretation of “incidental to the assembly process” as limited

to “minor” processes still controls.

The court finds it difficult to declare all of GM

effectively overruled based on the words of Haggar. The words of

Haggar cited by plaintiff can be read in various ways. They may

mean that “painting” is an unambiguous term. They also may mean

that as to “painting” the statute is less ambiguous. See Haggar,

526 U.S. at 393. No facts similar to the facts in this case were

before the Supreme Court in Haggar, while very similar painting

processes were before the appellate court in GM. Compare Haggar,

526 U.S. at 384-85 (addressing whether baking permapressed

garments was incidental to assembly process); and GM, 976 F.2d at

CT. NO. 99-03-00178 PAGE 9

717-18 (addressing whether topcoats applied to automobiles were

incidental to assembly process). Haggar had nothing to do with

painting processes. Furthermore, in Haggar II, the Court of

Appeals did not reject all of its previous jurisprudence on the

meaning of “incidental to the assembly process.” Rather, it

noted the “exemplars” in the statute and observed:

Customs has decided that some kinds of painting are

“incidental,” and others are not, the distinction in

the regulation being whether the paint operation is

primarily for preservative or for decorative purposes.

Compare, e.g., 19 C.F.R. § 10.16(b)(3) (listing

“[a]pplication of preservative paint or coating,

including preservative metallic coating . . .” as

incidental to the assembly process) with 19 C.F.R.

§ 10.16(c)(3) (listing “[p]ainting primarily intended

to enhance the appearance of an article or impart

distinctive features or characteristics” as not

incidental to the assembly process).

Haggar II, No. 97-1002, 2000 WL 1035747, at *4.

While this implicit approval of the regulation as to

painting might be dicta, the court has a difficult time rejecting

a statement that is in the very opinion that was required to

apply the Supreme Court’s statements in Haggar. Further,

although Customs’ “categorical approach” was approved in both

Haggar cases, Customs is not forbidden by either Haggar case from

prescribing additional general qualitative tests, as it does in

the regulation.

The court has already noted that a general qualitative

limitation of “incidental to the assembly process” is found in

CT. NO. 99-03-00178 PAGE 10

the relevant legislative history. The regulation reasonably

adopts this approach. It is true that general qualitative terms

such as “minor,” or “significant,” a regulatory term, are

difficult to assess. Presumably this is why Customs has tried to

define them by identifying categories of incidental or not

incidental operations, where possible. Nevertheless, Customs

cannot foresee every circumstance, and it is forced also to

employ general qualitative terms, as it does in 19 C.F.R.

§ 10.16(c)(3) & (5). This is consistent with the GM view of the

essential meaning of “incidental to the assembly process.” GM,

976 F.2d at 720. Thus, if GM still has any force, the

regulations carry out what remains of it.

The next question is, assuming arguendo that “painting” has

an unambiguous meaning in the statute, does that unambiguous

meaning of painting embrace what is at issue here so as to

prevent the application of the regulation? To answer this

question the court notes how it described in Chrysler the Mexican

operations on the sheet metal components imported from the United

States.

In the initial stages of assembly, sheet metal

components are welded together in the body shop. A

metal finishing operation takes place to locate and

detect any defects and to prepare the body for

painting. The parties disagree as to whether metal

finishing is part of the painting process. Although it

appears more closely related to the painting process,

resolution of this matter is not dispositive. The

CT. NO. 99-03-00178 PAGE 11

disputed processes all occur in connection with the

paint operation. This begins with cleaning, a

phosphate application to prepare the metal body for

primer, some sealing, anti-chip coating application,

baking, application of one or two color coats and a

clear coat, followed by more baking.

Chrysler, 19 CIT at 354 (footnote omitted). Because there was no

description in Haggar of “painting,” one cannot be sure whether

the Supreme Court would find that the term “painting” in the

statute means either all of the operations that are arguably part

of the painting process in this case, or those which might come

within a broad definition of the term “painting.”

Accordingly, the court concludes, as apparently the

appellate court did in Haggar II, that there is room for the

operation of the Customs’ regulation as to painting operations or

processes. That regulation is now the focus of the court’s

inquiry, as it was not in Chrysler.

II. The court’s decision in Chrysler does not resolve the

issue of the application of 19 C.F.R. § 10.16 to this

case.

19 C.F.R. § 10.16(b) recognizes “application of preservative

paint or coating, including preservative metallic coating,

lubricants, or protective encapsulation” as an operation

“incidental to the assembly process.” Section 10.16(c), however,

prohibits any “significant process, operation, or treatment . . .

whose primary purpose is the . . . completion [or] physical or

CT. NO. 99-03-00178 PAGE 12

chemical improvement of a component” from qualifying as

“incidental to the assembly process.” 19 C.F.R. § 10.16(c). It

goes on to include “[p]ainting primarily intended to enhance the

appearance of an article or to impart distinctive features or

characteristics” as non-qualifying. 19 C.F.R. § 10.16(c)(3). It

also regards as non-qualifying any operation which “imparts

significant new characteristics or qualities to the article

affected.” 19 C.F.R. § 10.16(c)(5).

The court in Chrysler was not required to apply the

regulation because the GM case had resolved the issue without

regard to the regulation. The court did opine that, of the paint

process as a whole, 70% was primarily for preservative purposes,

and as to the top coats it was “impossible to separate their

appearance-enhancing features from their preservative functions.”

Chrysler, 19 CIT at 355. The parties now seem to agree that all

of the steps prior to top-coating are preservative and would not

render the sheet metal parts dutiable. The dispute is now

expressly limited to the status of the top-coating processes.

The court in Chrysler did not restrict its analysis to top-

coating. Nor, as indicated, is the legal context the same as it

was in Chrysler. If the facts of this case turn out to be as

they were in Chrysler, the court would have to address the legal

issue of whether a process that is neither primarily preservative

CT. NO. 99-03-00178 PAGE 13

nor primarily appearance enhancing falls into § 10.16(b),

“incidental,” or § 10.16(c) “not incidental,” or whether the top

coats by themselves impart “significant new characteristics . . .

to the article affected. 19 U.S.C. § 10.16(c)(5).

The court declines to decide these issues in a vacuum. The

facts of this case may not be exactly as they were in Chrysler.

Either party may choose to put on different evidence which might

resolve the issue more clearly. See United States v. Stone &

Downer Co., 274 U.S. 225, 236-7 (1927) (judgment as to

classification of one entry is not res judicata as to another).

While stare decisis applies, there are exceptions to its

application. See Schott Optical Glass v. United States, 750 F.2d

62, 64 (Fed. Cir. 1984) (evidence may demonstrate decision was

clearly erroneous). See also J.E. Bernard & Co., 66 Cust. Ct.,

545, 552, 324 F. Supp. 496, 502-3 (1971) (in reappraisement case,

estoppel applied where matters in prior case were static,

factually and legally). Because of the change in the legal

climate, the parties will be allowed to offer new evidence,

although such evidence may be limited as befits the previous

CT. NO. 99-03-00178 PAGE 14

history of this matter. Accordingly, summary judgment is denied.

The parties shall submit a proposed Rule 16 order within eleven

days.

_______________________

Jane A. Restani

JUDGE

Dated: New York, New York

This 29th day of September, 2000.