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

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition for Writ of Certiorari
- **Published:** January 1, 2004
- **Citation:** 543 U.S. 1034

## Text

(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

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386008_0985%3A1. Public record. Not legal advice.