Petition for Writ of Certiorari — SL Service, Inc. v. United States

(1) Supreme Court, U.S.

FILED

O4 206 AUG1 0 2004

No. QPRICE OF THE CLERK

IN THE

Supreme Court of the Gnited States

SL SERVICE, INC..,

Petitioner,

Vv.

UNITED STATES OF AMERICA,

Respondent.

Petition for a Writ of Certiorari

to the United States Court of Appeals

for the Federal Circuit

PETITION FOR A WRIT OF CERTIORARI

EVELYN M. SUAREZ CARTER G. PHILLIPS

WILLIAMS MULLEN STEPHEN B. KiNNAIRD*

1666 K Street, N.W. RICHARD H. MENARD JR.

Suite 1200 SIDLEY AUSTIN BROWN &

Washington, D.C. 20006 WOOD LLP

(202) 833-9200 1501 K Street, N.W.

Washington, D.C. 20005

(202) 736-8000

Counsel for Petitioner

August 10, 2004 * Counsel of Record

ce AR RTE TAA CTT, aiaaatiala Niniiiaaamsie

WILSON-EPES PRINTING Co., INC. — (202) 789-0096 - WASHINGTON, D. C. 20001

QUESTION PRESENTED

Whether the 50% duty on “expenses of repairs” performed

in foreign shipyards that is imposed by the federal vessel re-

pair statute applies to expenses (such as dry-docking) that are

not actual repair expenses, and would have been incurred

even if no repairs were performed.

(i)

il

STATEMENT REQUIRED BY RULE 29.6

Pursuant to Rule 29.6 of the Rules of this Court, petitioner

States that its parent corporation is CSX Corporation and that

no other publicly held corporation owns 10 percent or more of

petitioner’s stock.

All parties to the proceeding are listed in the caption of the

case.

ee —_

TABLE OF CONTENTS

ENG SREY © WERGINOURS E WlOP anna cinanncasccessencesncrsansssscsnacsncenes

STATEMENT REQUIRED BY RULE 29.6 ..............044

Be FAA 8 EEO sic sinssnsessenesscssscccncnnssrsescbassenes

EN cisessankensintsuceiissrsuniansdananosuniannataasinbancs

I TEI saiesibntasinasiaritshaasnsandscosobannadesasenssausnnenandsne

RELEVANT PROVISIONS OF LAW... csseeseeees

PRUNE SPE RWIS Sees inncesssnncanssisnasarnasanesonsnianes

REASONS FOR GRANTING THE PETITION..............

3

Il.

THE ARBITRARY DECISION OF THE FED-

ERAL CIRCUIT EXTENDS AND DEEPENS

CONFUSION IN THE CASE LAW THAT RE-

QUIRES THIS COURT’S RESOLUTION ............

A. “Expenses of Repairs” Was Reinterpreted In

SEIT ais cch cists anauteadanahcosasusiusinbadebcuacuiecanmusdaskets

B. The Federal Circuit Has Now Abandoned TJex-

C. The Federal Circuit’s Ruling Is Arbitrary ..........

THE FEDERAL CIRCUIT’S RULING _IN-

FLICTS SUBSTANTIAL HARM ON THE US.

MERCHANT FLEET WITH NO COUNTER-

OTE CIEE ED cscsiccsaxivnnnsennesiosedsvceisessanneianciness

II I ciccehsannssssininknisonsnsenanasnsasanansansdneniqenrensctinete

(iii)

iV

TABLE OF AUTHORITIES

CASES Page

American Viking Corp. v. United States, 150 F.

I. FEE. GA, FI sss snernnenencansitasrinscerions 13

Erie Navigation Co. v. United States, 475 F.

SU, BE Ge, CA BGG siniiceinstacccecsinsansccscinneas 8

International Navigation Co. v. United States,

148 F. Supp. 448 (Cust. Ct. 1957) oe 13

Mount Washington Tanker Co. v. United States,

505 F. Supp. 209 (Ct. Int’] Trade 1980), aff'd,

GES Fe SOR GE FA BGG D ovissicssscncnvicsccrsiisinces 13

Mount Washington Tanker Co. v. United States,

GGS F.2d SAO CCP. A., BGBE) cvciesesieservesscsnsscrcerss 23

Texaco Marine Servs., Inc. v. United States, 44

Eke Ti Be A, | eee ney EP passim

Skidmore v. Swift & Co., 323 U.S. 134 (1944) ....... 17

Sea-Land Serv., Inc. v. United States, 239 F.3d

Bf Bae | ere ee On 15,18

South Corp. v. United States, 690 F.2d 1368 (Fed.

EE Wi cdecncstichioidetannainiestdaiaresensaionccasceaaheaacs 7

United States v. Admiral Oriental Line, 18 _

Ae ec ee IID ashi ccaicrseltnidatucsihscsScapinciniaibiilitents 9

United States v. George Hall Coal Co., 134 F.

1003 (S.D.N.Y. 1905), aff'd, 142 F. 1039 (2d

Re WI cilia sotiicneniiasetiania eden clan cuannaneniaies 13

United States v. Mead Corp., 533 U.S. 218

GE Fini ccricihdeiedceemaned kein getieauiptacinsanieaionemuniouaincttess 17, 18

STATUTES AND REGULATIONS

Act of July 18, 1866, ch. 201, 14 Stat. 178.000.0000... 8

Military Cargo Preference Act of 1904, ch. 1766,

Fe EE icine sata adsdnenitiakdeensacedanaiinaiieain 5

Act of June 5, 1920, ch. 250, 41 Stat. 988.000.000.000... 3

Act of Dec. 17, 1943, ch. 345, 57 Stat. 603 0.0.0.0... 22

Military Cargo Preference Act of 1954, Pub. L.

Pe, Sy Ra, De, i Is Base cisssesinuitonacncicincn 5

Vv

TABLE OF AUTHORITIES—continued

Page

Omnibus Budget Reconciliation Act of 1981,

Pum. €.. PO. FFSS, DS BOM. FSP wicciascasvansievetarmsiions 5

The Shipping Act of 1984, Pub. L. No. 98-237,

Te I GIFT anisinninvinsdicenedinuichianiaaaciie bier Renae, 2

Department of Defense Authorization Act of

1985, Pub. L. No. 98-525, 98 Stat. 2492 ............. 5

Food Security Act of 1985, Pub. L. No. 99-198,

Fee Ns 8 UT ccostensasssinbedinida satiate 5

Maritime Security Act of 1996, Pub. L. No. 104-

Be, SO Rs DENT iechenistuieasiniddninlidniialade ao

Ocean Shipping Reform Act of 1998, Pub. L. No.

Oy 0 ee Ss CUE acct sicaichaiciickenidinseeacnenacs 5

Maritime Transportation Security Act of 2002,

Pub. L. No. 107-295, 2002 U.S.C.C.A.N. (116

SPU. ST Dxsnrsicadaondannncicnacnsdeisieinsianmatoniaaleasadiatine 3

Ris 1 Ie isvcesenvstndaediasaistelpiaieadeaaietoueatok iF

Oe aes EU \ttitsninianvinaicndisinniain 12

OD FEPROT sensei cananticcarieniaancatmeuainmnaceobation 12

SO WA. GI: & BOG scscteciiicciittlciuaiannsn 3

Foreign Repairs to American Vessels, 66 Fed.

Un. BG Fre CEE. By, DOO Peeentinniicamsiticndaneaninn 16

DCF es BO srscscsdscsnstninsactoccnnniaclnielaanices 1, 8,9

GE CFR, © LEO siieccccinriniicaaaaien 6

WD ssiessniscnisiinssisaittinn cubichacinaticlaciatanteniapaniticiis 6

ye OUI setssaiscnindsnhsammeehisundaebonniniciignian 6

OD PEPE ON cnticntsenssesiedgeameeaaatnnie 6

BF FE MIS snrviscanssttenterenshacinicsianonmattatniaaaians 6

ADMINISTRATIVE DECISIONS

T.D. 39443, 43 Treas. Dec. Int. Rev. 99 (1923)...... 13

Carriers, 23 Cust. B. & Dec. 777 (Cust. Serv.

SPD irs sisaeniniceschinsinieiniiaainiaiaieainatbnmaidaasaaeanna 8

vi

TABLE OF AUTHORITIES—continued

Page

Vessel Repair, 13 Cust. B. & Dec. 1395 (Cust.

SEY... FEF ihatsansinixinnnsineinneabectieenceeceneaa maamaainils 8

Vessel Repairs, 14 Cust. B. & Dec. 1061 (Cust.

BOAY TR inikssinrcsssistinginniceaeaeas 8

LEGISLATIVE HISTORY

H.R. Rep. No. 104-229 (1995), reprinted in 1996

CLC AIA. BORE sasnsasassessuiniestesseleciaaacnas 2, 3

136 Cong. Rec. H7211 (daily ed. Sep. 5, 1990)...... 9

ADVISORY OPINION

Duty on Repairs for American Vessels, 33 Op.

Ait’y Gan, 4354 C1FES siiscincniciommncnncnsan 8

SCHOLARLY AUTHORITIES

H. David Bess & Martin T. Farris, U.S. Maritime

Policy: History and Prospects (1981) ........::0.06+ 7

Andrew Gibson & Arthur Donovan, The Aban-

doned Ocean: A History of United States Mari-

Cine Paley (IIB eesicnsnsissncatanmancanotanman 5

Lawrence M. Hadley, Note, The Fifty Percent Ad

Valorem Duty on Foreign Ship Repairs: Scope

of Application and Proposals for Elimination,

24 Geo. Wash. J. Int’] L. & Econ. 415 (1990)..... 8

OTHER AUTHORITIES

Customs Headquarters Memorandum No. 115194 - -

from Larry L. Burton, Chief, Entry Procedures

& Carriers Branch, to Chief, Residual Liquida-

tion & Protest Branch, U.S. Customs Service

(Dec. 19, 2000), available at http://rulings.

CRIB BY cisssenisansncseannricaneinanen 19

=

Vii

TABLE OF AUTHORITIES—continued

Robert Little, Ships Without Sailors (pt. 2 of 2):

U.S. Merchant Fleet Sails Toward Oblivion.

DE. UN, PAR G, DIE iscnssccxnssnansninecacvraasssecaniccnces

Raymond J. Decker, U.S. GAO, Rep. No. GAO-

03-15, Actions Needed to Improve Force Pro-

tection for DOD Deployments Through Do-

mestic Seaports (Oct. 22, 2002).....ccecccessesceseeees

Customs Headquarters Memorandum No. 113474

from William G. Rosoff, Chief, Entry & Carrier

Ruling Branch, to Chief, Liquidation Section,

U.S. Customs Service (Oct. 24, 1995), avail-

able at http://rulings.customs.gov...........ccccc0s00000.

Customs Headquarters Memorandum No. 113291

from Stuart P. Seidel, Assistant Commissioner,

Office of Regulations & Rulings, to All Vessel

Repair Liquidation Units (May 31, 1995) ...........

Memorandum from Stuart P. Seidel, Assistant

Commissioner, U.S. Customs Office of Regu-

lations & Rulings, to New Orleans Regional

Director (Jan. 18, 1995), available at 1995 WL

NT OF sdsiulicnivahteuuapndadaiaiemanicesigaaeciisaaa ition

U.S. Mar. Admin., 2002 Annual Report (2003)......

U.S. Mar. Admin., Maritime Security Program,

available at http://www.marad.dot.gov/

programs/msp/msp.html (last visited Aug. 10,

TE tices ceninicsbinicainbdieaadanmanminaeusedacn ic

U.S. Mar.. Admin., U.S.-Flag Merchant Fleet

(2003), available at http://www.marad.dot.gov/

marad/statistics/US-Flag-History.pdf ............0....

Page

No

AE ERNIE NRRL AA OT TNE “2 . eer rt Ee

PETITION FOR A WRIT OF CERTIORARI

Petitioner SL Service, Inc. (“SL Service”) respectfully re-

quests that this Court grant its petition for a writ of certiorari

to review the judgment of the United States Court of Appeals

for the Federal Circuit.

OPINIONS BELOW

“he opinion of the Federal Circuit is published at 357 F.3d

. v8 (2004) and appears in the /.ppendix of this Petition

(“App.”) at la-12a. The Federal Circuit’s unpublished order

denying the petition for rehearing and rehearing en banc ap-

pears at App. 22a-23a. The opinion of the Court of Interna-

tional Trade granting summary judgment on behalf of SL

Service is published at 244 F. Supp. 2d 1359 (2002) and ap-

pears at App. 13a-21la.

JURISDICTION

The court of appeals entered judgment on February 4, 2004,

and denied a timely petition for rehearing on April 12, 2004.

This Court extended the time for filing a petition for certiorari

to and including August 10, 2004. This Court has jurisdiction

under 28 U.S.C. § 1254(1).

RELEVANT PROVISIONS OF LAW

The federal vessel repair statute is codified at 19 U.S.C.

§ 1466 and is reproduced at App. 24a-28a.

The Customs Service regulations implementing the vessel

repair statute appear at 19 C.F.R. § 4.14 and are reproduced at

App. 29a-39a. ahaa

2

STATEMENT OF THE CASE

This case presents an important question of federal law

with serious implications for the U.S.-flag shipping industry.

A divided United States Court of Appeals for the Federal Cir-

cuit has impermissibly broadened a 19th-century tariff statute

in a way that flouts the letter and the spirit of the statute and

departs from a century of Customs Service practice. Moreo-

ver, the Federal Circuit’s new interpretation of the statute is

arbitrary and directly contravenes that court’s own prior in-

terpretation announced just a decade ago. The substantial ad-

ditional, unwarranted duties that U.S.-flag ships will have to

pay as a result of the decision below will further weaken an

American merchant marine industry already laboring under

severe competitive disadvantages. The decision of the Fed-

eral Circuit thus warrants this Court’s review.

Industry Background

The U.S.-Flag Fleet. The U.S.-flag commercial fleet is vi-

tal to the strength and security of the nation. In addition to

the economic importance of the merchant shipping industry,

the U.S.-flag fleet fills the strategic need for an American-

owned marine transportation system (without which U.S. im-

porters and exporters would be wholly dependent on foreign

interests) and serves as a naval and military auxiliary in times

of war and emergency.' These important national interests

' U.S.-flag ships, manned by American civilian mariners, play a central

role in staging and supporting military operations, providing the sealift

capacity needed to undertake and sustain an overseas engagement. See

U.S. Mar. Admin., Maritime Security Program, available at

http://www.marad.dot.gov/programs/msp/msp.html (last visited Aug. 10,

2004). The Defense Department simply is not capable of effecting the

necessary cargo movements at a bearable cost. For instance, nearly half of

the cargo for the 1991 Persian Gulf War was carried on U.S.-flag ships

crewed by civilian mariners. See H.R. Rep. No. 104-229, at 10 (1995),

reprinted in 1996 U.S.C.C.A.N. 3521, 3522. Relying on foreign-flag ves-

sels to meet the sealift needs of the military during wartime would place

vital supply lines in the hands of foreign interests, presenting obvious and

3

depend on the regular operation of commercial vessels flying

the American flag, a reliable pool of trained civilian mariners

to man them, and the ability and willingness of the private

maritime industry to make the necessary capital investments.

For these reasons, it has long been a staple of federal policy

“to develop and encourage the maintenance of a merchant

marine.” Act of June 5, 1920, § 1, ch. 250, 41 Stat. 988, 988.

As Congress declared in the landmark Merchant Marine Act

of 1936,

[i]t is necessary for the national defense and develop-

ment of its foreign and domestic commerce that the

United States shall have a merchant marine (a) sufficient

to carry its domestic water-borne commerce and a sub-

stantial portion of the water-borne export and import

foreign commerce at all times, (b) capable of serving as

a naval and military auxiliary in time of war or national

emergency, (c) owned and operated under the United

States flag by citizens of the United States, insofar as

may be practicable, (d) composed of the best-equipped,

safest, and most suitable types of vessels, constructed in

the United States and manned with a trained and effi-

cient citizen personnel.

46 U.S.C. app. § 1191. The policy remains unchanged today,

as evidenced by the Maritime Security Act of 1996, Pub. L.

No. 104-239, 110 Stat. 3118, enacted to “assure the retention

by the United States of an active, privately owned, U.S.-flag

and U.S.-crewed merchant shipping fleet to meet national and

foreign commerce needs and to provide sustainment sealift

capability in time of war or national emergency.” H.R. Rep.

unacceptable risks. See Raymond J. Decker, U.S. GAO, Rep. No. GAO-

03-15, Actions Needed to Improve Force Protection for DOD Deploy-

ments Through Domestic Seaports 8 (Oct. 22, 2002). The merchant ma-

rine also has important frontline roles in detecting and preventing threats

to port security. See, e.g., Maritime Transportation Security Act of 2002,

Pub. L. No. 107-295, § 101(13), 2002 U.S.C.C.A.N. (116 Stat. 2064) 2067

(codified at 46 U.S.C. § 70101 note).

4

No. 104-229, at 9 (1995), reprinted in 1996 U.S.C.C.A.N.

3521, 3521.

But the fleet is waning. From its heyday after World War

II when the U.S.-flag merchant fleet carried nearly half the

world’s seaborne cargo, the fleet has steadily shrunk as cargo

increasingly is shipped under flags of foreign countries of-

fering tax incentives and lax regulations. From a post-war

high of 1268 ships of at least 1000 gross tons in 1951, the pri-

vate U.S.-flag fleet had declined to 237 vessels in 2003. U.S.

Mar. Admin., U.S.-Flag Merchant Fleet (2003), available at

http://www.marad.dot.gov/marad_statistics/US-Flag-

History.pdf. In this environment, American shipping compa-

nies operate on razor-thin margins, which are squeezed by

— stark differentials in operating costs and regulatory burdens

and by subsidies to foreign merchant fleets.’ Increases in the

cost of doing business can be devastating, driving some vessel

owners out of the trade and slashing the already lean profits

of those that remain. Investment capital has dwindled, with

the predictable impact on operations and recruiting.

Among other disquieting concomitants of this trend, the ci-

villian manpower and sealift capability for overseas military

engagements have fallen to dangerously low levels. See id.

Yet the-strategic need for a viable U.S.-flag fleet is perhaps

greater than in living memory. Given the extent of America’s

military commitment around the world, its unprecedented de-

pendence on foreign trade for vital commodities, and the vul-

nerability of the nation’s ports and related infrastructure, a

vital U.S.-flag merchant fleet is not a luxury. In the words of

the agency charged with overseeing the merchant marine:

Ninety-five percent of the Nation’s overseas trade moves

by water, but only about three percent is carried by the

> A U.S.-flag ship typically costs as much as $4 million more in annual

operating costs than an identical ship flying a foreign flag. Robert Little,

Ships Without Sailors (pt. 2 of 2): U.S. Merchant Fleet Sails Toward

Oblivion, Balt. Sun, Aug. 6, 2001, at Al.

i

5

U.S.-flag fleet. This has disturbing implications for

America’s national security and economic vigor. With-

out a U.S.-flag fleet, the Nation’s foreign commerce and

auxiliary sealift capability would depend entirely on for-

eign-flag ships.

U.S. Mar. Admin., 2002 Annual Report 5 (2003).

In recognition of the continuing importance and the shaky

condition of the flag fleet, Congress has acted several times in

recent decades to enhance the fleet’s competitiveness. In

1981, Congress granted shipowners temporary but vital relief

from the requirement that government-preference cargo be

shipped on U.S.-built vessels. See Omnibus Budget Recon-

ciliation Act of 1981, Pub. L. No. 97-35, tit. XVI, 95 Stat.

357, 751.2 The Shipping Act of 1984, Pub. L. No. 98-237, 98

Stat. 67, created an enhanced antitrust exemption for confer-

ence rate-setting by U.S.-flag ship owners and sanctioned

their participation in foreign consortia—protections aug-

mented by the Ocean Shipping Reform Act of 1998, Pub. L.

No. 105-258, 112 Stat. 1902. Also in 1984, Congress estab- —

lished a commission to “study problems relating to

[the] ... merchant marine” and to recommend remedial ac-

tion. Department of Defense Authorization Act of 1985, Pub.

L. No. 98-525, § 1536(b), 98 Stat. 2492, 2633. When these

piecemeal remedies proved unequal to the pressures on the

merchant fleet, Congress in the Maritime Security Act of

* Under the Cargo Preference Acts of 1904 and 1954, 100 percent of

U.S. military cargoes, 50 percent of U.S. government non-military car-

goes, and 75 percent of agricultural assistance exports must be carried on

U.S.-built ships. See Military Cargo Preference Act of 1904, ch. 1766, 33

Stat. 518; Military Cargo Preference Act of 1954, Pub. L. No. 664, ch.

936, 68 Stat. 832; Food Security Act of 1985, Pub. L. No. 99-198, § 1142,

99 Stat. 1354, 1491-92. American shipowners took advantage of the 1981

dispensation to acquire more than 30 ships from foreign yards, a substan-

tial and much-needed boost to the aging flag fleet. See Andrew Gibson &

Arthur Donovan, The Abandoned Ocean: A History of United States

Maritime Policy 257-58 (2000).

88

6

1996, Pub. L. No. 104-239, 110 Stat. 3118, created a regime

of substantial operating subsidies.

Coast Guard Inspections. All vessels flying the U.S. flag

are required to undergo regular examinations or inspections

by the United States Coast Guard and the American Bureau of

Shipping (“ABS”).* See 46 C.F.R. §§ 2.01-10(b), 90.05-1(a),

91.01-1. Under Coast Guard rules, these examinations must

occur at least two times in a five-year period, with no more

than three years elapsing between any two examinations. See

Id. § 91.40-3. These examinations require the vessels to be

taken out of service for a period of time to be dry-docked,

typically two weeks or more. /d.

Because of the high cost of dry-docking a large cargo ship

and the substantial opportunity cost of having the ship out of

commission, owners and operators of American-flag vessels

commonly arrange for nonemergency repairs and modifica-

tions to be performed while a ship is in dry dock for Coast

Guard and ABS inspections.

Over the years, it has become increasingly difficult and

costly for American-flag vessels to schedule inspections at

United States shipyards. Many domestic shipyards have

shifted their work primarily or even exclusively to construc-

tion and repair of Navy and Coast Guard ships, with much of

the remaining availability reserved for passenger cruise lines

able and willing to pay top dollar. Consequently, fewer and

fewer domestic shipyards have the docking capacity and

scheduling to meet the requirements of large commercial ship

* ABS is a private organization that certifies ships as seaworthy. Be-

cause it is required for insurance purposes, certification by a recognized

entity (ABS is the second-largest, after Lloyd’s Register in Britain) is ef-

fectively a prerequisite of modern commercial shipping. Under the Coast

Guard’s Alternate Compliance Program (see 46 C.F.R. pt. 8), ABS and

certain others are delegated authority to inspect and certify U.S.-flag

ships. Therefore, ABS inspections and Coast Guard inspections are usu-

ally one and the same.

7

owners. Sometimes no domestic shipyard is available or will

even bid on a project; at other times, the only domestic yard

that is available is markedly less efficient and more expensive

than equivalent yards in most foreign ports—typically re-

quiring at least 50 percent more time for a given job, at about

triple the cost. In many cases, therefore, owners of U.S.-flag

vessels have little or no choice but to contract with foreign

shipyards to comply with Coast Guard and ABS inspection

mandates.

The Vessel Repair Statute

The federal vessel repair statute imposes a 50 percent duty

on the cost of repairs made in foreign countries on U.S.-flag

vessels. The statute provides in relevant part that

the expenses of repairs made in a foreign country upon a

vessel documented under the laws of the United States to

engage in the foreign or coasting trade . . . shall, on the

first arrival of such vessel in any port of the United

States, be liable to entry and the payment of an ad valo-

rem duty of 50 per centum on the cost thereof in such

foreign country.

19 U.S.C. § 1466(a). The statute was enacted in 1866 to aid a

domestic shipbuilding industry that had been decimated by a

perfect storm of Civil War casualties, war-panic divestments

of merchant ships, and the rise of iron ships coincident with a

steep tariff on iron and steel. See H. David Bess & Martin T.

Farris, U.S. Maritime Policy: History and Prospects 23-24

(1981). Since then, the statute has been reenacted from time

to time with modifications (primarily to ameliorate its impact

on ship owners), but the language quoted above remains

largely unchanged since the original enactment.

Self-evidently, one purpose of the statute is to protect the

American shipbuilding and ship-repairing industry by encour-

aging the use of American shipyards for repairs to U.S.-flag

vessels. See South Corp. v. United States, 690 F.2d 1368,

1372 (Fed. Cir. 1982) (en banc) (“In enacting § 1466(a) Con-

8

gress sought to protect and encourage American ship repair

facilities.”); Erie Navigation Co. v. United States, 475 F.

Supp. 160, 163 (Cust. Ct. 1979) (“the purpose of section

1466(a) was to protect the American shipbuilding and repair-

ing industry”); Duty on Repairs for American Vessels, 33 Op.

Att'y Gen. 432, 434 (1923) (statute’s goal is “to protect the

American manufacturer of ship parts”).

The statute’s concern for shipbuilders and dockworkers,

however, is balanced by a concern for the interests of ship

owners and operators, and Congress has always taken care not

to upset that balance. For example, the duty is not meant to

apply where a vessel’s return to the U.S. for repairs is impos-

sible or impracticable. As originally enacted, the statute ap-

plied only to vessels “engage[d] in the foreign and coasting

trade on the northern, northeastern and northwestern frontiers

of the United States,” thus excluding ships too far away prac-

ticably to return to the U.S. for repairs.” The modern equiva-

lent of that limitation is an exemption for vessels that are at

sea for two years or more. 19 U.S.C. § 1466(e). Also, the

statute authorizes the remission of duties on the cost of for-

eign repairs occasioned by stress of weather or other casual-

ties. /d. § 1466(d); see 19 C.F.R. § 4.14(h)(2).

And where the statute does apply, it does not reach all work

performed in foreign shipyards. Costs associated with Coast

Guard and ABS inspections, including work incidental to in-

spections, are not subject to duty. Vessel Repairs, 14 Cust. B.

& Dec. 1061 (Cust. Serv. 1980); Vessel Repair, 13 Cust. B. &

Dec. 1395 (Cust. Serv. 1979). Modifications, alterations, and

additions to the hull and fittings of a vessel are not subject to

duty. Carriers, 23 Cust. B. & Dec. 777 (Cust. Serv. 1989);

> Act of July 18, 1866, ch. 201, § 23, 14 Stat. 178, 183-84. With this

geographic limitation, Congress aimed to confine the burden to those ves-

sels “that could most easily purchase and conduct repairs in the United

States.” Lawrence M. Hadley, Note, The Fifty Percent Ad Valorem Duty

on Foreign Ship Repairs: Scope of Application and Proposals for Elimi-

nation, 24 Geo. Wash. J. Int] L. & Econ. 415, 420-21 (1990).

—

9

see United States v. Admiral Oriental Line, 18 C.C.P.A. 137

(1930).° The statute expressly exempts from duty the cost of

equipment, repair parts or materials for LASH barges, as well

as the costs of spare parts and materials for which duties have

been paid. 19 U.S.C. § 1466(h); see 19 C.F.R. § 4.14(h)(4);

Customs Headquarters Memorandum No. 113291 from Stuart

P. Seidel, Assistant Commissioner, Office of Regulations &

Rulings, to All Vessel Repair Liquidation Units (May 31,

1995). Compensation paid to regular crew members in con-

nection with dutiable repairs is also exempt. 19 U.S.C.

§ 1466 (a).

At least once in recent years, a proposal to expand the reach

of the vessel repair statute beyond repair costs was brought to

Congress. In 1990, the Customs Service lobbied for an

amendment to the statute that would have allowed Customs to

collect duty on “all costs and expenses associated with” over-

seas repairs. The proposed amendment died in committee.’

° Customs has long distinguished nondutiable modifications from duti-

able repairs by considering the following factors: (1) whether there is a

permanent incorporation into the hull or superstructure of a vessel, either

in a structural sense or as demonstrated by means of attachment so as to be

permanently incorporated; (2) whether in all likelihood an item under con-

sideration would remain aboard a vessel during an extended layup; (3)

whether, if not a first time installation, an item under consideration re-

places a current part, fitting, or structure that is not in good working order;

and (4) whether an item under consideration provides an improvement or

enhancement in operation or efficiency of the vessel. See, e.g., Customs

Headquarters Memorandum No. 113474 from William G. Rosoff. Chief,

Entry & Carrier Ruling Branch, to Chief, Liquidation Section, U.S. Cus-

toms Service (Oct. 24, 1995), available at http://rulings.customs.gov.

’ This was one of a series of proposed amendments to the Customs

Modernization Act of 1990. The original proposal sent by the Customs

Service to the House Ways and Means Committee does not appear in the

public record. The transmittal letter is cited at 136 Cong. Rec. H7211,

H7214 (Exec. Comm. No. 3797) (daily ed. Sep. 5, 1990).

10

Background of the Case

From November 22 through December 1, 1995, the Sea-

Land PACIFIC, a U.S.-flag cargo vessel owned by Sea-Land

Service, Inc. (now known as SL Service), was dry-docked in

Hong Kong to undergo mandatory Coast Guard and ABS in-

spections, as well as nondutiable modifications. App. 15a. It

was agreed by the parties that the vessel was not in dry dock

for any time longer than necessary for the inspections and

modifications. /d. at 15a & 16a n.2. While in dry dock, the

PACIFIC underwent dutiable repair and overhaul work cost-

ing $565,357. On the ship’s re-entry, Customs assessed a 50

percent duty on the cost of that work, as required by the ves-

sel repair statute. However, Customs also assessed duty on

approximately half of the dry-docking general service ex-

penses, based on the share of the total expenditures occupied

by dutiable repair costs. App. 19a (“the dutiable and non-

dutiable dry-docking expenses were apportioned by Customs

according to the percentage corresponding to the value of du-

tiable repairs and non-dutiable expenses incurred” during the

period the ship was in dry dock). Based on the ratio of total

dutiable to nondutiable expenditures, $25,084 of the $49,896

in dry-docking general service expenses incurred by the PA-

CIFIC was subject to the 50 percent repair duty. The duties

attributable to the dry-docking expenses totaled $12,542.

SL Service timely filed an administrative protest challeng-

ing the assessment of duty on the dry-docking expenses.®

Upon denial of its protest, SL Service paid the contested du-

ties and filed an action in the U.S. Court of International

Trade (“CIT”) challenging the protest denial. The CIT held

that Customs had misapplied the repair statute and entered

summary judgment for SL Service. The court applied the test

* The total impact on SL Service extends well beyond the duties at issue

in this test case. In addition to the vessel repair duties on the PACIFIC,

challenged duties on 14 other entries of SL Service ships await the resolu-

tion of this case.

11

established by the Federal Circuit in Texaco Marine Services,

Inc. v. United States, 44 F.3d 1539 (Fed. Cir. 1994), which

interpreted the statutory phrase “‘expenses of repairs’” as

covering “all expenses (not specifically excepted in the stat-

ute) which, but for dutiable repair work, would not have been

incurred.” Jd. at 1544. The CIT held that under Texaco dry-

docking expenses would be dutiable only if Customs could

clearly identify dry-docking expenses that were “undertaken

solely for the purpose of repair.” App. 18a. “Therefore, only

the maintenance expense of dry-docking for the period of

time in excess of that necessary for a mandatory inspection

and/or modifications are dutiable under the Texaco test.” Id.

at 19a-20a. The court reasoned that, because the cost of dry-

docking was “an inevitable expense of a mandatory inspec-

tion,” and because Customs had admitted (and the record

clearly showed) that the PACIFIC was not dry-docked for any

period in excess of the time necessary for the mandatory in-

spections and modifications, none of the dry-docking ex-

penses was properly subject to the vessel repair duty. /d. at

19a-21a.

A divided panel of the Federal Circuit reversed. App. la-

12a. The majority held that dry-docking expenses may be

considered “expenses of repairs” under the vessel repair stat-

ute if repairs are made while the ship is in dry dock—even if,

as here, the reason it was docked in a foreign port was to un-

dergo nondutiable inspections. Jd. at 7a. And, the majority

endorsed Customs’ proposed apportionment method, creating

a new “dual purpose” test under which duty would be charged

on a portion of dry-docking expenses corresponding to the

proportion of dutiable expenses incurred while the ship was in

dry dock. /d. at 7a-8a.’

” For example, if a ship were in dry dock for modifications that cost

$2,000, and also undertook a repair costing $8,000, 80 percent of the dry-

docking costs would be subject to the vessel repair duty.

12

Judge Bryson dissented. He argued that “the dry-docking

expenses in this case should not be dutiable because those ex-

penses would have been incurred irrespective of whether or

not dutiable repairs had been performed.” App. lla. He ob-

served that the majority’s method of parsing and apportioning

dry-docking costs “finds no support in the vessel repair stat-

ute. ... [I]n fact, the statute contains no reference to appor-

tionment at all, which suggests that Congress did not have in

mind that Customs would subdivide ‘multiple cause’ ex-

penses into dutiable and nondutiable portions.” /d. at 12a.

REASONS FOR GRANTING THE PETITION

The decision below is arbitrary and threatens further to

weaken the U.S.-flag merchant fleet, and therefore demands

this Court’s review. The Federal Circuit’s new “interpreta-

tion” of the vessel repair statute not only departs from the

plain language of the statute, a century of Customs practice,

and common sense, but also is inconsistent with the Federal

Circuit’s own interpretation of the statute just a decade ago.

The decision below portends considerable harm to a merchant

marine that is already struggling, undercutting a long line of

federal remedial legislation designed to afford U.S.-flag ves-

sel owners relief from the duty. At the same time, the Federal

Circuit’s new rule does not further the purpose of the repair

statute, or effect any cognizable benefit that remotely com-

pensates for the injury to a vital national industry.

Moreover, because the Federal Circuit has exclusive ap-

pellate jurisdiction of cases involving disputes over customs

duties, see 28 U.S.C. §§ 1295(a)(5), 1581(a) & (b), the issues

raised by this case will not be further vetted in the lower

courts. In light of the importance of the issues for the mari-

time industry and the nation as a whole, the Court should re-

view the Federal Circuit’s decision.

13

I. THE ARBITRARY DECISION OF THE FEDERAL

CIRCUIT EXTENDS AND DEEPENS CONFUSION

IN THE CASE LAW THAT REQUIRES THIS

COURT’S RESOLUTION.

For more than a century, the vessel repair statute was un-

derstood, in keeping with its plain language, to impose a duty

only on the cost of foreign repairs themselves—on “expendi-

tures made for foreign materials or for foreign labor em-

ployed in making repairs.” T.D. 39443, 43 Treas. Dec. 99,

100 (1923). Expenses incidental to repair work were not

subject to duty under the statute. See, e.g., Mount Washing-

ton Tanker Co. v. United States, 505 F. Supp. 209 (Ct. Int’l

Trade 1980) (reversing assessment of duty on the cost of

transporting workers to perform repairs), aff'd, 665 F.2d 340

(C.C.P.A. 1981); International Navigation Co. v. United

States, 148 F. Supp. 448, 455 (Cust. Ct. 1957) (reversing as-

sessment of duty on the cost of transporting men and materi-

als for repair work); American Viking Corp. v. United States,

150 F. Supp. 746, 752 (Cust. Ct. 1956) (reversing assessment

of duty on the cost of lighting necessary to perform repairs).

Significantly, the cost of dry-docking a ship that undergoes

repairs in a foreign shipyard was held almost a century ago to

be nondutiable under the vessel repair statute. United States

v. George Hall Coal Co., 134 F. 1003, 1003 (S.D.N.Y. 1905)

(“the expenses of docking a vessel while undergoing repairs

in a foreign port is not subject to the payment of a duty”),

aff'd, 142 F. 1039 (2d Cir. 1906) (per curiam). In the George

Hall decision, the Board of General Appraisers (a predecessor

of the Court of International Trade) reasoned that such for-

eign dry-docking expenses were not dutiable because “‘[t]he

mere drawing up of a vessel on a dry dock:is not a part of her

repairs, but is rather a method of making an inspection of her

to determine whether any repairs are necessary.”"” Texaco, 44

F.3d at 1546 (quoting the Board’s ruling).

14

A. “Expenses of Repairs” Was Reinterpreted In

Texaco.

In Texaco, the Federal Circuit expanded the reach of the re-

pair statute by interpreting “expenses of repairs” to embrace

certain expenses incidental to dutiable repairs. In that case,

Customs had assessed duty on the costs of protective covering

equipment in preparation for ship repairs and of cleaning up

after the repairs; the ship owner objected on the ground that

the taxed items were not repair expenses. 44 F.3d at 1541-42.

The CIT entered summary judgment in favor of Customs, id.

at 1542. The Federal Circuit affirmed, holding that (notwith-

standing prior precedent) as a matter of plain language “ex-

penses of repairs” should be construed “as covering all ex-

penses . . . which, but for dutiable repair work, would not

have been incurred.” /d. at 1544. The Federal Circuit over-

ruled the Mount Washington, International Navigation, and

American Viking cases discussed above, see id. at 1546-47,

but insisted that its “but for” test was consistent with the

century-old George Hall Coal decision, which it interpreted

as “stand[ing] for the proposition that expenses that would

have been incurred irrespective of whether or not dutiable re-

pairs are performed are not dutiable as an expense of repairs.”

Id. at 1546.

Under Texaco’s newly minted “but for” construction of the

repair statute, a wide range of theretofore nondutiable ex-

penses ancillary to repair work (such as the cleaning expenses

at issue in Texaco) were brought within the statute’s ambit.

The Customs Service pointedly noted the sweeping change

effected by 7exaco in a letter ruling issued shortly after the

Federal Circuit’s decision:

It is readily apparent that this case has wide-ranging

ramifications with respect to Customs liquidation of ves-

sel repair entries. For example, as you well know we

currently do not consider the following foreign costs du-

tiable under the vessel repair statute: air, crane, dry-

docking charges, electricity, travel/transportation, launch

eC

15

use, lodging, security and staging. Absent these costs

being incurred pursuant to [non-dutiable work], they

would undoubtedly constitute [dutiable] “expenses of

repairs” under the “but for” test... .

Memorandum from Stuart P. Seidel, Assistant Commissioner,

U.S. Customs Office of Regulations & Rulings, to New Or-

leans Regional Director, Commercial Operations Division

(Jan. 18, 1995), available at 1995 WL 64779.

B. The Federal Circuit Has Now Abandoned Tex-

aco.

A decade later, in the decision below, a divided Federal

Circuit abandoned the Texaco “but for” test as the generally

applicable plain-language interpretation of the statutory

phrase “expenses of repairs,” and upheld for the first time the

imposition (contrary to 100 years of prior Customs practice)

of duties on dry-docking costs. The majority below did not

expressly overrule Texaco or a later case applying Texaco,

Sea-Land Service, Inc. v. United States, 239 F.3d 1366 (Fed.

Cir. 2001), but held that “[t]he precedential force of Texaco

applies only to single-purpose expenses.” App. 5a. If dry-

docking has “dual” purposes, by contrast, then Customs is

entitled to apportion expenses between nondutiable work and

dutiable repairs. /d.

The panel majority thus turned away from both the lan-

guage of the statute (which limits the vessel repair duty to

vessel repair expenses) and the “but for” gloss of Texaco, and

created a new rule whereby undertaking repairs has a ripple

effect, exposing vessel owners to potentially enormous liabil-

ity for expenses that have nothing to do with repairs. '°

'° The ruling affects a wide range of expenses in addition to the cost of

dry-docking itself. As Customs has noted, in a rulemaking dealing with

the vessel repair statute:

Drydocking is a major, but not isolated, expense in general ship repair

operations. Many other associated expenses and services are neces-

sary adjuncts to drydocking and are logicaliy inseparable from the

16

Not only did the majority’s holding depart from the repair

statute and from its recent 7exaco decision (as well as dec-

ades of pre-7exaco administrative and judicial precedent), but

it is wholly unjustifiable even on its own terms. To support

its new rule, the majority pointed to exceptions to the but-for

test of causation in tort law. The majority noted that in tort

law cause-in-fact may be established even if the injury would

have occurred because of a concurrent cause, citing the case

in which two negligently caused fires together destroyed

property. App. 6a-7a (citing McClellan v. St. Paul, M. & M.

Ry.. 59 N.W. 978 (Minn. 1894)). As an initial matter, it is

highly irregular to seek guidance from common law tort doc-

trine in construing a customs statute. As Judge Bryson

pointed out in dissent, under the vessel repair statute, “the

question is not whether and how to compensate the victim of

a wrong.” /d. at lla. Equally fundamentally, the cited tort

law doctrine does not support the result reached by the Fed-

eral Circuit. The evidence in the record does not establish

that the PAC/FIC had to be dry-docked in Hong Kong for

these repairs; rather, it was undisputed that the reason the ship

was dry-docked abroad was to comply with federal inspection

mandates. In other words, the repairs did not “cause” the for-

eign dry-docking, or any part of it.

Its citafion of tort law causation doctrine notwithstanding,

the Federal Circuit did not simply modify the 7exaco “but

for” test and adopt a “cause-in-fact” test in determining ex--

drydocking rule. These include such items as drydock block ar-

rangement, sea water supply (for firefighting equipment), hose hook-

up and disconnection charges, fire watch services, the services of a

crane for drydocking-related operations, the provision of compressed

air, cleaning of the drydock following repairs, among numerous oth-

ers. These necessary services are costly, are supplied at nearly each

drydocking, and had until recently been considered to be classifiable

as duty-free.

Foreign Repairs to American Vessels, 66 Fed. Reg. 16,392, 16,393 (Mar.

26, 2001). Now all such expenses are subject to the vessel repair duty,

even if the ship was in dry dock by reason of nondutiable work.

17

penses of repair. Instead, the Federal Circuit adopted a very

different “necessary condition” test for so-called dual-purpose

expenses. Under this test, there does not have to be evidence

that the need for repairs was a cause in fact of the dry-docking

in a foreign port—for indeed there was no evidence that the

PACIFIC would have dry-docked in Hong Kong to perform

the repairs. The PACIFIC dry-docked in Hong Kong simply

because that was the best available port that would enable the

PACIFIC to meet its inspection obligations. Because the ship

would already be in dry dock, petitioner arranged for certain

repairs that eventually needed to be done (as well as any new

repairs that might be discovered while the ship was docked);

such repairs had no causal relationship to the Hong Kong dry-

docking. Petitioner thus would have prevailed below under a

cause-in-fact test (as well as under the Texaco but-for test).

Instead of looking to whether the need for repairs was an ac-

tual cause in fact of the foreign dry-docking, the majority be-

low looked instead to the nature of the repairs, and whether as

a general matter they could have been performed without dry-

docking at some point. The Federal Circuit thus in effect held

that dry-docking expenses are dutiable if dry-docking is a

necessary condition for implementing the repairs: i.e., in the

Federal Circuit's words, if dry-docking was “required by du-

tiable repairs.” App. 7a.

C. The Federal Circuit’s Ruling Is Arbitrary.

The Federal Circuit’s construction of the vessel repair stat-

ute is arbitrary in five separate respects. First, it is arbitrary

as a matter of statutory construction. The general rule is that

customs statutes are interpreted according to the ordinary

sense of the language used by Congress, see Texaco, 44 F.3d

at 1543, with courts entitled to give appropriate weight in re-

solving ambiguity to the persuasive interpretations of the

Customs Service under Skidmore v. Swift & Co., 323 U.S.

134 (1944). See United States v. Mead Corp., 533 U.S. 218,

234-35 (2001). In Texaco, as noted above, the Federal Circuit

rejected the longstanding agency and judicial construction of

18

the statute limiting duties to the actual expenses of repairs,

ruling as a matter of putative plain language that the term

“expenses of repairs” broadly covered other kinds of expenses

that would not have been incurred but for the repair (regard-

less of whether they were required by that repair). 44 F.3d at

1546. But now that putative plain meaning does not hold if

dry-docking serves so called “dual purposes” of inspection

and repair. In the latter circumstance, the simple term “ex-

penses of repairs” has the opposite meaning: dual-purpose

expenses like dry-docking are dutiable if they are required to

perform the repair (regardless of whether they would have _

been incurred but for the repair). App. 7a. Neither part of

this contradictory, hybrid test has anything to do with the

plain meaning of the simple term “expenses of repairs” in the

statute. The statute contemplates that an expense either is or

is not a dutiable expense of repair. Congress did not create

such a hybrid expense, as the Federal Circuit has done.

Second, the Federal Circuit’s new test is arbitrary as a

matter of administrative law. In Sea-Land, the Federal Cir-

cuit confirmed that its Texaco but-for test was a judicial con-

struction of the statute’s plain meaning from which the Cus-

toms Service was not free to depart. See Sea-Land, 239 F.3d

at 1372-73. Perhaps (if this case had gone en banc) the Fed-

eral Circuit could have decided to overrule Texaco and Sea-

Land and adopt a new, generally applicable interpretation of

the statutory term “expenses of repairs,” relying on the posi-

tions espoused by Customs to the extent of their persuasive-

ness as to statutory meaning. Mead, 533 U.S. at 234. Instead,

the majority left Texaco and Sea Land intact as precedent,

App. 5a, with the perverse result that the single term “ex-

penses of repairs” has a plain meaning from which Customs

cannot depart in some circumstances, and a different and

mutually exclusive meaning in other circumstances whereby

Customs’s newfangled apportionment test is upheld simply

because it is (in the panel majority’s view) “rational.” /d. at

7a.

19

Third, not only did the majority below give the vessel re-

pair statute a new and unreasonable interpretation, but also it

rubber-stamped the Customs Service’s capricious apportion-

ment methodology thai, as Judge Bryson pointed out, “finds

no support in the vessel repair statute.” App. 12a ( Bryson, J.,

dissenting).

The government’s method requires Customs to appor-

tion the costs in question between dutiable costs of re-

pair and other, nondutiable costs. The statute, however.

offers no guidance as to how such an apportionment

should be conducted; in fact, the statute contains no ref-

erence to apportionment at all, which suggests that Con-

gress did not have in mind that Customs would subdi-

vide “multiple causes” into dutiable and nondutiable re-

pairs.

Id. The majority’s claim that it accepted Customs’s appor-

tionment test out of deference to “Customs” long-standing

practice,” /d. at 8a, is disingenuous. The majority relied on

three letter rulings where Customs apportioned for one special

and minor kind of expense (the cost of obtaining a gas free

certificate). See id. For every other kind of ancillary expense

(including dry-docking), the longstanding practice of Cus-

toms was not to apportion, but simply to treat those nonrepair

expenses as nondutiable. If the majority had given long-

standing administrative practice its due (or abided by its own

interpretation in Texaco), it would not have embraced the

Customs Service’s contrived apportionment method.

Fourth, the Federal Circuit arbitrarily blessed an appor-

tionment method that is antithetical to its own construction of

the statute. If indeed the majority’s construction of the statute

were correct, the logical basis for apportionment should only

be those repairs that require dry-docking, see App. 7a. In-

stead, the Customs Service apportions on the basis of fotal

repair expenses. The numerator in the dutiable/nondutiable

ratio is not repairs requiring dry-docking, but simply “duti-

able repairs,” undifferentiated. Jd at 2a: accord Customs

20

Headquarters Memorandum No. 115194 from Larry L. Bur-

ton, Chief, Entry Procedures & Carriers Branch, to Chief, Re-

sidual Liquidation & Protest Branch, U.S. Customs Service

(Dec. 19, 2000), available at http://rulings.customs.gov.

Thus, if a ship while in dry dock had inspection and modifi-

cation costs of $5,000, repairs of $5,000 that required dry-

docking, and repairs of $40,000 that did not require dry-

docking, then 90% of the dry docking expenses would be du-

tiable even though only 10% of the inspection, modification,

and repair expenses would fall within the Federal Circuit’s

“required by dutiable repairs” standard. The majority’s ap-

proach defies common sense and does violence to both the

text and the policy of the statute. '!

Finally, the Federal Circuit’s new method yields the incon-

gruous result that actual repair expenses become in many

cases a small part of the base on which “repair” duties are as-

sessed. By way of illustration, take two ships, each dry-

docked at a cost of $60,000. Each ship while in dry dock un-

dergoes ABS inspections costing $10,000 and dutiable repairs

costing $50,000 (the repairs do not require dry-docking for

any period exceeding that necessary for the mandatory in-

spections). Ship 1 undergoes no modifications, but Ship 2

spends $1 million on nondutiable modifications. On re-entry

to the U.S., Ship 1 will be assessed a 50% duty on $50,000 in

dry-docking expenses (because dutiable repairs accounted for

5/6 of total expenditures while in dry dock); Ship 2 will be

assessed a 50% duty on approximately $2,500 in dry-docking

expenses (because dutiable repairs accounted for just under

five percent of its expenditures).

This wide disparity cannot be justified on any reasonable

reading of the repair statute, because the disparity derives

principally from the happenstance of greater or lesser expen-

'' There is evidence in the record that not all the Hong Kong repairs re-

quired dry-docking. See J.A. 838, SL Serv. v. United States, 357 F.3d

1358 (Fed. Cir. filed July 21, 2003).

21

ditures that are not independently subject to duty under the

Statute. In the hypothetical above, Ship 1 pays $50,000 in to-

tal duties (on the repair and the allocable dry-docking ex-

penses); Ship 2 pays $21,250. Thus, Ship 1 pays almost

$30,000 more in duties, even though the two ships spent the

same amounts for dry-docking and repairs. And, considering

that dry-docking expenses often occupy a large share of the

costs incurred by a vessel in dry dock, the disparity hits hard

at the bottom line. Nor would the duty assessed on Ship | in

this hypothetical further the statute’s purpose, which is to

capture a share of the cost of ship repair. It is one thing to

tax, say, the cost of cleaning up after repairs; it is quite an-

other to assess a duty of $59,000 on a $50,000 repair. That is

not extrapolation. It is the creation of a new and substantial

liability, unrelated to the 50% duty assessed by statute.

Such a radical recasting of the vessel repair statute should

be a matter for Congress, not for the Customs Service or a

badly divided appeals court panel. It is especially unwar-

ranted when the Customs Service recently failed to interest

Congress in an amendment to the repair statute that would

have made dry-docking and other expenses “associated” with

repairs dutiable. Supra at 9. After that proposed amendment

failed, Customs undertook unilaterally to redefine the statute.

The Federal Circuit should not have allowed that, and this

Court should not permit the redefinition to stand.

Moreover, by imposing significant new operating costs on

U.S.-flag vessel owners, Customs and the Federal Circuit not

only transgress their institutional bounds, but also they di-

rectly undermine federal policy. As discussed supra at 5,

Congress over the past few decades has responded to the

flagging state of the merchant marine with legislation de-

signed to make the industry more competitive. Against this

backdrop, it is exceedingly unlikely that Congress would

sanction a major expansion of the vessel repair duty when the

commercial shipping industry is struggling merely to survive.

In fact, the nearest analogue is exactly to the contrary: in

22

1943, with the maritime fleet depleted by wartime losses (and

domestic shipyards operating at capacity), Congress sus-

pended the repair duty until the industry was back on its feet.

See Act of Dec. 17, 1943, ch. 345, 57 Stat. 601.

Il. THE FEDERAL CIRCUIT’S RULING INFLICTS

SUBSTANTIAL HARM ON THE U.S. MERCHANT

FLEET WITH NO COUNTERVAILING BENEFIT.

If allowed to stand unreviewed, the decision below will

have serious adverse effects on the U.S.-flag fleet. Dry-

docking is a routine part of doing business for commercial

vessel owners; indeed, as in this case, periodic dry-docking is

required by the Coast Guard rules governing U.S.-flag ves-

sels. And it is very expensive—shipyard dry-docking and

overhaul constitute one of the biggest items in a cargo ves-

sel’s operating budget (after fuel, labor, and onboard mainte-

nance and repairs). Since a merchant ship has repairs done

virtually every time it is in dry dock, the duty assessment rule

announced by the Federal Circuit in this case ensures that the

previously (and historically) limited vessel repair duty will

now capture a significant portion of the operating expenses of

U.S.-flag vessels.’

Moreover, set against these substantial harms is no identifi-

able benefit, apart from an uptick in federal revenue (a pyr-

rhic victory for the public fisc if the industry continues to de-

cline). The new rule does not further the purpose of the ves-

sel repair statute, which is “to encourage U.S. shipowners to

'? Even if a ship owner, to limit its exposure to vessel repair duties, re-

frained from having an expensive dutiable repair performed while the ship

was in dry dock in a foreign port, the owner would then have to dock the

ship again in the U.S. (for any repair requiring dry-docking). That is, a

vessel owner in this circumstance is given the Hobson’s choice between,

on the one hand, incurring substantial duties on foreign dry-docking and,

on the other, paying twice for dry-docking and taking the ship out of

commission for additional days or weeks—this on top of the declining

capacity of domestic shipyards and the often vastly higher costs of having

the work done in the United States.

23

employ U.S. labor whenever possible.” Mount Washington

Tanker Co. v. United States, 665 F.2d 340, 344 (C.C.P.A.

1981). As noted above, American shipyards are often un-

available to repair private cargo vessels (indicating that the

domestic yards are hardly starving for business). In almost all

cases, therefore, U.S.-flag vessel owners engaged in overseas

trade will have no realistic choice but to absorb the additional

duties, and thus become less competitive—or get out of the

business altogether. ;

In sum, the decision below has no warrant in the statute or

historical practice. Without any substantive change in the

vessel repair statute, the Federal Circuit has approved the as-

sessment of repair duties on dry-docking expenses that for a

century had not been dutiable and would not be dutiable un-

der the Federal Circuit’s prior “but-for” construction of the

statute. The test created by the Federal Circuit is arbitrary in

application, creates confusion in administration, and promises

further to weaken an industry with deep strategic importance

to our nation. For these reasons the holding of the divided

panel warrants review by this Court.

24

CONCLUSION

For the foregoing reasons, the petition for writ of certiorari

should be granted.

Respectfully submitted,

EVELYN M. SUAREZ CARTER G. PHILLIPS

WILLIAMS MULLEN STEPHEN B. KINNAIRD*

1666 K Street, N.W. RICHARD H. MENARD JR.

Suite 1200 SIDLEY AUSTIN BROWN

Washington, D.C. 20006 & WOOD LLP

(202) 833-9200 1501 K Street, N.W.

Washington, D.C. 20005

(202) 736-8000

Counsel for Petitioner

August 10, 2004 * Counsel of Record