Amicus Curiae Brief — SL Service, Inc. v. United States

(2) ae ry U.S.

No. 04-206 NOV 12 2004

THE CLERK |

IN THE

Supreme Court of the United States

SL SERVICE, INC..

Petitioner,

¥.

UNITED STATES OF AMERICA,

Respondent.

Petition for a Writ of Certiorari to the

United States Court of Appeals

for the Federal Circuit

BRIEF AMICI CURIAE OF HORIZON LINES, LLC;

AMERICAN OCEAN ENTERPRISES, INC.;

AMERICAN ROLL ON ROLL OFF CARRIER, LLC;

AMERICAN SHIPPING GROUP; CENTRAL GULF

LINES, INC.; MATSON NAVIGATION COMPANY,

INC.; TECO OCEAN SHIPPING;

THE TRANSPORTATION INSTITUTE; AND

WATERMAN STEAMSHIP CORP.

ROBERT S. ZUCKERMAN *

HORIZON LINES, LLC

4064 Colony Road

Suite 200

Charlotte, NC 28211

(704) 973-7012

Counsel for Amicus Curiae

November 12, 2004 * Counsel of Record

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

TABLE OF CONTENTS

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STATEMENT REQUIRED BY RULE 37.3 ..........000000.

INTERESTS OF AMICI CURIAE...........cccccccsccssscssessceeees

PPR RIOD csieeneinscsnsscasnesensenssn sunananinisliiiiaanncinnsiacneven

Required Regulatory Inspections ..............c0.ccccceeeees

THO Vessel Repair Statute ............0...c<cccsscrssessecsessess

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

I.

II.

III.

THE INHERENTLY INCONSISTENT

INTERPRETATIONS BY THE FEDERAL

CIRCUIT IN TEXACO AND SL SERVICE

CREATE CONFUSION IN IMPLEMENTING

AND ADMINISTERING THE’ VESSEL

REPAIR) STATUTE AND THEREFORE

REQUIRE THIS COURT’S INTERVENTION...

A. The Federal Circuit’s Decision Calls into

Question its [Earlier Interpretation of

“Expenses of Repairs” in Texaco ............cccccce00ee

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

THE FEDERAL CIRCUIT’S RULING HARMS

THE U.S. MERCHANT FLEET .................ccccscecees

Sea icticichinlaancindenucisctogbeaseiiiesaiahsaiimmasencssinen

(i)

YN A + ff =

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TABLE OF AUTHORITIES

CASES Page

Am. Ship Mgmt., LLC v. United States, 162

F.Supp.2d 671 (Ct. Int’ Trade 2001) oo... 14

Am. Viking Corp. v. United States, 150 F. Supp.

FRB Gt, Gh, TORE cntevitininnindediniiinn 10

Chevron U.S.A., Inc. v. Natural Resources

Defense Council, Inc., 467 U.S. 837 (1984)........ 12 |

Int’! Navigation Co. v. United States, 148 F.

Set. SEG Cemet, GE, BGT DP vscsncrmsasninecnsesnnienevssvene 10

Mount Washington Tanker Co. v. United States,

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

G65 F226 DOO ACA A, TRIED srntecsticretasonencss 9-10

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

LORS CPE. CR: BROOD vxcceeeieieineas 11-12

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

F.3d 1539, 1544 (Fed. Cir. 1999) ........ 7, 10, 11-12, 13

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

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

Car. FED <isicincsomienncasatane camebeameaeana 10

STATUTES AND REGULATIONS

19 U.S.C. § 1401a(b)(1)(C) (2001) ..eessseecseessseesseees 1

19 U.S.C. § 1466 (2001) ceeccceccssecssseeccsecsssecsssecssseee 3, 6,

19 U.S.C. § 1514(a)(2) (2001) ceecsecccececseecssecssecesvees

28 U.S.C. § 1295(a)(5) (2001) .eecseccsseccsecsseeesseseseees

28 U.S.C. § 1581 (2001) cececcecccseccssccsseecsecssseessueesees 1,

46 U.S.C. App. § 883 (2000) ..ce.cseccsscsssecsseccsseesseees

19 CF.R. § 4.14 (Apr. 1, 2004) wo.cccccccccsseessseesssees 6,

19 C.F.R. Part 174 (Apr. 1, 2004) ....cccccccssecssseesseees

46 C.F.R. § 2.01-10(b) (Oct. 1, 2003) ...c.csescssessseee-

§ 90.05-1(a) (Oct. 1, 2003) ..ecccseccsseesseees

§ 91.01-1 (Oct. 1, 2003) cceccceccsseecssesssees

§ 91.40-3(a)(1) (Oct. 1, 2003) ....eecseeeo0e

-FHPhhPryIye OO~AIWOMN

ili

TABLE OF AUTHORITIES—Continued

Foreign Repairs to American Vessels, 66 Fed.

BN, TE Fe CREE, BO, BOE) cesvcsncssssesscenasesnasese

ADMINISTRATIVE DECISIONS

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

OTHER AUTHORITIES

Customs Headquarters Memorandum No. 113291

from Stuart P. Seidel, Assistant Commissioner,

Office of Regulations & Rulings, to All Vessel

Repair Liquidation Units (March 3, 1995)

available at 1995 WL 156403 ..........ccceceeseeeeees

Memorandum from Stuart P. Seidel, Assistant

Commissioner, U.S. Customs Office of

Regulations & Rulings, to New Orleans

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

IIIT, sicnsdcniadcas bhasbuksaicabakintnaoelpnaniabenntens

BRIEF AMICUS CURIAE

On written consent of all parties pursuant to Rule 37.3(a),

Horizon Lines, LLC, American Ocean Enterprises, Inc.,

American Roll On Roll Off Carrier, LLC, American Shipping

Group, Central Gulf Lines, Inc., Matson Navigation Com-

pany, Inc., Teco Ocean Shipping, the Transportation Institute

and Waterman Steamship Corp. (the “industry represen-

tatives” or “Amici”) respectfully submit this brief amicus

curiae in support of the Petition for a Writ of Certiorari to the

United States Court of Appeals for the Federal Circuit made

by SL Service, Inc.!

INTERESTS OF AMICI CURIAE

Horizon Lines, LLC (“Horizon”) is the nation’s leading

Jones Act container shipping and logistics company, ac-

counting for approximately 37% of total U.S. marine con-

tainer shipments from the continental United States to Alaska,

Puerto Rico, and Hawaii/Guam, the three major non-

contiguous Jones Act markets. Under the Jones Act, 46

U.S.C. App. § 883 (2000), enacted in 1920, domestic U.S.-

maritime trade is restricted to U.S.-owners of U.S.-built and

flagged vessels manned by predominantly U.S. citizen crews.

Horizon operates the largest Jones Act containership fleet

with 16 vessels and approximately 21,700 cargo containers of

varying specifications, and provides comprehensive shipping

and logistics services in these markets. Typically, 15 of

Horizon’s vessels are actively deployed at any given time,

with one spare vessel reserved for relief while another

undergoes U.S. Government-required periodic inspections,

generally requiring dry-docking. Having a spare ship

' In accordance with Supreme Court Rule 37.6, Amici state that no

party or entity other than amici made any monetary contribution to the

preparation or submission of this brief. Amici customs counsel, Williams

Mullen, which is also co-counsel for the petitioner, co-authored this brief.

2

allows Horizon to offer continuity of service, critical to

its customers.

All of Horizon’s vessels are regulated or classed by the

United States Coast Guard (“USCG”) and the American

Bureau of Shipping (“ABS”), which together impose and

enforce rigorous inspection criteria. Horizon’s vessels are

maintained according to its own strict maintenance guide-

lines, which meet or exceed U.S. governmental requirements.

Horizon’s careful maintenance procedures protect and pre-

serve its fleet to the highest standards in the industry.

Horizon has dry-docked 34 vessels since December of

1999. It sends requests for bids along with a detailed

specification to a minimum of six shipyards, in the United

States as well as foreign shipyards in the vicinity of the

vessel’s routes. Horizon will often switch ships between

services to obtain the most beneficial location and scheduling

for the dry-dockings. The present disparity in bid cost and

projected completion time between U.S. and foreign ship-

yards often results in the work being done in foreign

shipyards. Horizon has been working with several U.S. yards

to reduce those disparities.

American Ocean Enterprises (“AEO”) is the parent of

American International Car Carrier, Inc. (““AICC”), which

operates three U.S.-flag car carrier vessels under time charter

to American Roll On Roll Off Carrier, LLC (“ARC”).

Operating in foreign commerce between Europe and the U.S.

east coast, these ships undergo ship repair in foreign ship-

yards. The decision in this case thus affects AOE as well

as ARC.

American Shipping Group and its subsidiaries are privately

held U.S. corporations that own and operate seven U.S.-built,

U.S.-flag commercial cargo vessels qualified to operate in

Jones Act trades. Currently, two vessels are serving Alaska,

two are serving Puerto Rico, one is chartered into service to

3

Hawaii and two are chartered to the United States military.

Several of these vessels have been repaired in foreign

shipyards in the past, and any or all of them could be repaired

in foreign shipyards in the future.

Central Gulf Lines, Inc. (“Central Gulf’) and Waterman

Steamship Corp. (“Waterman”) are U.S. citizen owned and

controlled companies that own and operate numerous U.S.-

flag commercial vessels in the foreign trade of the United

States. Central Gulf and Waterman strongly oppose the

imposition of duties under 19 U.S.C. § 1466 upon dry-

docking, general service and other non-vessel repair expenses

incurred for work performed on their U.S.-flag vessels that is

otherwise required by the U.S. Coast Guard or appropriate

vessel classification societies. The onerous duties are not

authorized by the statute for such non-repair work, and they

adversely affect the competitiveness of Central Gulf,

Waterman and other U.S.-flag commercial vessel owners and

operators engaged in the U.S. foreign trade.

Matson Navigation Company, Inc. is a Hawaii corporation

and is a principal Jones Act carrier in the Hawaii and Guam

trades. Matson is a wholly-owned subsidiary of Alexander &

Baldwin, Inc., a Hawaii corporation. Matson currently owns

or operates 13 ships, four barges and one integrated tug-barge

and has also provided rail, highway, air, ocean and other

surface transportation and other third-party logistics serv-

ices for North American shippers. Under its current vessel

schedule configuration Matson has deployed nine ships and

three barges in the Hawaii trade, one barge in the Mid-Pacific

trade, and three ships in the Guam Pacific trade, and two

ships are in lay-up. All of the vessels are U.S.-flag vessels,

and the ships are manned by U.S. citizen crews. The U.S.

Coast Guard administers and regulates the international and

flag state requirements for Matson’s vessels. ABS is the

classification society for all of Matson vessels. Matson’s

vessels are subject to regular inspection and drydocking as

4 me

well as a preventive maintenance program. The vessels

periodically undergo repairs and modifications in both U.S.

shipyards and foreign facilities. Since 2000, Matson’s owned

or operated vessels have been repaired, been modified or had

scheduled drydockings in foreign shipyards 16 times.

Teco Ocean Shipping (“TOS”) operates a fleet of 11 U.S.-

flag vessels and ocean-going integrated tug and barge units

ranging in size from 19,200 deadweight ton (“dwt”) to over

40,000 dwt. TOS has been in business with U.S.-flag vessels

since 1959 and is primarily in the dry bulk coastwise trades of

the United States. TOS regularly drydocks in Asia, the

Mediterranean and Latin America and will continue to do so

into the foreseeable future.

The Transportation Institute is a Washington, D.C.-based

non-profit organization dedicated to maritime research,

education and promotion. The Institute supports a wide range

of programs that promote the strength of America's marine

transportation capability.

STATEMENT

Required Regulatory Inspections

U.S. flag commercial vessel operators are subject to num-

erous regulations, the most important of which are USCG and

ABS.” These bodies have been regulating, by rule and by on-

site inspection, the design specifics; construction and on-

going operation and testing of Amici’s vessels. Non-com-

pliance with USCG and ABS rules and regulations would

? U.S. flag vessels are required to undergo regular inspections by the

USCG and ABS. See 46 C.F.R. §§ 2.01-10(b), 90.05-1(a), 91.01-1 (Oct.

1, 2003). According to U.S. Coast Guard regulations, these inspections

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

(Oct. 1, 2003). This usually requires dry-docking of the vessel, taking the

vessel out of service for two weeks or more. Jd.

5

result in the vessel not being able to operate. USCG

compliance is required by law. ABS compliance is necessary

to obtain insurance.

The on-site inspection/survey, as was involved with the

SEA-LAND PACIFIC in this case, would normally require

vessels owned or operated by Amici to be put in dry-dock for

a thorough inspection of the entire exterior hull, rudders,

anchors and propeller shafts, most of which can be inspected

only when the vessel is high and dry. Additional inspections

always done at the time of dry-dock include internal

inspections of major components in the propulsion system

such as propulsion boilers, propulsion turbines, condensers

for the propulsion steam, etc. These inspections are

performed coincidentally with USCG and ABS inspections

while the ship is in dry-dock since the propulsion plant cannot

be run while in dry-dock. The dry-dock period provides the

time to inspect the internals of these units.

By way of example, USCG attends approximately 10

percent of Horizon Lines’ vessels’ inspections because

Horizon uses the optional Alternate Compliance Program.

Under this program, USCG has delegated much of its

inspection authority to the ABS to save USCG time and to

reduce duplication of inspections. ABS inspections almost

always take place while the ship is in dry-dock. Most major

shipyards have provided offices to ABS inspectors/surveyors

to make on-site inspection more efficient for ABS as well as

the ship operators.

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

and the substantial cost in having a ship out of service, most

ship owners or operators will arrange for necessary non-

emergency repairs and modifications to be performed at the

same time when the ship is in dry-dock for USCG and ABS

inspections.

6

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 pertinent 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 valorem duty of 50 per centum on the cost thereof in

such foreign country.

19 U.S.C. § 1466(a) (2001).

The Bureau of Customs and Border Protection (“Cus-

toms”) has detailed regulations, 19 C.F.R. § 4.14 (Apr. 1,

2004), for the assessment and collection of duties under the

vessel repair statute. Customs requires the vessel operator to

declare and enter all costs associated with foreign shipyard

work, whether or not dutiable. Typically, the entry submitted

by a Customs Form (“CF”) 226 is accompanied with a

spreadsheet listing hundreds of line items detailing the

specific work and characterizing each individual item as

dutiable or not.’ Each item must be accompanied by an

invoice from the shipyard. Sometimes, it takes weeks or even

months to obtain these invoices, requiring the vessel operator

to obtain extensions of time from Customs to submit such

evidence of cost in support of the vessel operator’s

application for relief. See 19 C.F.R. § 4.14 (f) and (i) (Apr. 1,

2004). Needless to say, these regulatory requirements,

intended to allow Customs to determine dutiability of the

* For example, all expenditures made at shipyards must be declared and

entered on the CF 226, even if subject to a free trade agreement such

as the North American Free Trade Agreement (“NAFTA”). 19 C.F.R.

§ 4.14(a).

7

specific item of work, impose a tremendous additional burden

on U.S.-flag ocean carriers and operators.

When the vessel repair entry is submitted as complete,

Customs reviews each line item to determine whether

Customs views the specific expense as a dutiable “expense of

repair” or as subject to specific statutory duty exemptions.

The vessel owner or operator may then disagree with

Customs’ finding by filing an administrative protest under 19

C.F.R. Part 174 (Apr. 1, 2004); see also 19 U.S.C. §

1514(a)(2) (2001) and 19 C.F.R. § 4.14()(3) (Apr. 1, 2004).

If the protest is denied, a summons may be filed with U.S.

Court of International Trade as was done with the SEA-

LAND PACIFIC, 28 U.S.C. § 1581 (2001).

REASONS FOR GRANTING THE PETITION

In 1994, the Federal Circuit in Texaco interpreted the

statutory phrase

‘expenses of repairs’ as covering all expenses (not

specifically excepted in the statute) which, but for

dutiable repair work, would not have been incurred.

Conversely, ‘expenses of repairs’ does not cover

expenses that would have been incurred even without the

occurrence of dutiable repair work.

Texaco Marine Services, Inc. v. United States (“Texaco”), 44

F.3d 1539, 1544 (Fed. Cir. 1994). This decision enunciated

what has became known as the “but-for” test within the

industry and by Customs. The Federal Circuit in Texaco

found the statute to be “clear” and not “ambiguous” and the

language to be “broad and unqualified.” Jd. Yet now, the

Federal Circuit, reversing a decision by the U.S. Court of

International Trade (“USCIT”), has articulated a different

standard, which as a matter of law and common sense clashes

with the “but-for” test. Its new “dual purpose” interpretation

stretches the statute even farther beyond repair-related

expenses. The statute is limited for a reason—to strike a

8

balance between the interests of U.S. shipyards and U.S.-flag

carriers and operators. The Federal Circuit’s decision here

upsets that balance and harms U.S.-flag carriers.

The decision below is arbitrary and is inconsistent with that

court’s own decision in Texaco, harming Amici's companies,

which operate in a highly competitive environment. The

Federal Circuit’s new “interpretation” of the vessel repair

statute not only departs from the plain language of the statute

but also conflicts with the Federal Circuit’s own

interpretation just a decade ago in Texaco. Further, contrary

to the intent of Congress, it allows Customs to arbitrarily

impose duties on work done abroad on U.S.-flag vessels.

The industry opposed the expansive view of the statute

espoused by the Government in Texaco. However, the

industry has adjusted to the Texaco “but-for” approach. The

Federal Circuit now expands the statutory term even farther

to impose duties on any expense incurred in a foreign ship-

yard, whether repair-related or not, by imposing a modified

“but-for” test for so-called “dual purpose” or “mixed

justification” expenses. The Federal Circuit’s decision has in

effect blessed Customs’ rewrite of the vessel repair statute to

impose duties on any item of work done in a foreign shipyard

even though the Federal Circuit lacks authority to do so. The

statute imposes duties not on all costs incurred in shipyards

abroad but only upon “expenses of repairs.” That was the

apparent reason for the Federal Circuit’s original “but-for”

test in Texaco. The Federal Circuit’s novel construction,

based upon common law tort doctrine, allows Customs to

impose the hefty 50 percent duty where it was not intended

by Congress. This harms U.S.-flag carriers. It deprives U.S.-

flag carriers and operators of the carefully constructed

limitations of the vessel repair duty created by Congress in 19

U.S.C. § 1466 (2001).

Moreover, it is disturbing to our industry that the issues

raised by this case will not be further examined in other lower

9

courts because the Federal Circuit has exclusive appellate

jurisdiction of cases involving disputes over customs duties,

see 28 U.S.C. §§ 1295(a)(5), 1581(a) and (b) (2001).. As

such, the Federal Circuit’s adoption of Customs’ arbitrary

duty assessment cannot be corrected absent a reversal by this

Court.

We concur with and adopt by reference herein the legal

arguments for review made by Petitioner SL Service. We

submit this Brief to illustrate the impact of the Federal

Circuit’s decision on U.S.-flag ocean carriers.

I. THE INHERENTLY INCONSISTENT INTER-

PRETATIONS BY THE FEDERAL CIRCUIT IN

TEXACO AND SL SERVICE CREATE CON-

FUSION IN IMPLEMENTING AND ADMINIS-

TERING THE VESSEL REPAIR STATUTE AND

THEREFORE REQUIRE THIS COURT'S

INTERVENTION .

A. The Federal Circuit’s Decision Calls into Ques-

tion Its Earlier Interpretation of “Expenses of

Repairs” in Texaco

Prior to the Federal Circuit’s decision in Texaco, Customs

took the position in its administrative rulings that the vessel

repair statute imposed duties only on the cost of foreign

repairs themselves, i.e., on “expenditures made for foreign

materials or for foreign labor employed in making repairs.”

T.D. 39443, 43 Treas. Dec. Int. Rev. 99, 100 (1923).

Expenses incidental to repair work were not considered by

Customs to be subject to duty under the statute. See, e.g.,

Mount Washington Tanker Co. v. United States, 505 F. Supp.

209, 216 (Ct. Int'l Trade 1980) (cost of transporting workers

* American Shipping Group concurs with and adopts by reference

herein only the legal arguments for review made by Petitioner SL Service

in Part I of its Petition for a Writ of Certiorari.

10

to perform repairs not dutiable), aff'd, 665 F.2d 340, 345

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

States, 148 F. Supp. 448, 455 (Cust. Ct. 1957) (cost of

transporting men and materials for repair work not dutiable);

American Viking Corp. v. United States, 150 F. Supp. 746,

752 (Cust. Ct. 1956) (cost of lighting necessary to perform

repairs not dutiable). In addition, the cost of dry-docking a

ship in a foreign shipyard was long held to be non-dutiable.

United States v. George Hall Coal Co., 134 F.1003, 1003

(S.D.N.Y. 1905), aff'd, 142 F. 1039, 1039 (2d Cir. 1906).

In Texaco, the Federal Circuit interpreted the statutory

phrase “expenses of repairs” more broadly as covering

expenses incidental to dutiable repairs. Specifically, the

Texaco court approved the imposition of duties on the costs

of protective coverings used in preparation for repairs and of

cleaning up after the repairs, reasoning as a matter of plain

language “expenses of repairs” should be construed “as

covering all expenses . . . which, but for dutiable repair work,

would not have been incurred.” 44 F.3d at 1541-42. The

Federal Circuit in Texaco found the statute to be “clear” and

not “ambiguous” as well as “broad and unqualified,” over-

ruling the Mount Washington, International Navigation, and

American Viking cases, see Texaco at 1544 and 1546-47, but

leaving George Hall Coal intact, stating that the “but for” test

was consistent with the George Hall Coal decision covering a

dry-docking expense, which it interpreted as “stand[ing] for

the proposition that expenses that would have been incurred

irrespective of whether or not dutiable repairs are performed

are not dutiable as an expense of repairs.” Jd. at 1546.

As aresult of Texaco, a wide range of expenses previously

considered non-dutiable by Customs (such as dry-docking,

air, crane, dry-docking charges, electricity, travel/trans-

portation, launch use, lodging, security and staging) were

brought within the scope of the statute by utilization of

Texaco’s “but-for” test. See Memorandum from Stuart P.

Seidel, Assistant Commissioner, U.S. Customs Office of

11

Regulations & Rulings, to New Orleans Regional Director,

Commercial Operations Division (Jan. 18, 1995), available at

1995 WL 64779, as clarified by Memorandum from Stuart P.

Seidel, Assistant Commissioner, U.S. Customs Office of

Regulations & Rulings, to New Orleans Regional Director

Commercial Operations Division (March 3, 1995), available

at 1995 WL 156403.

While acknowledging the applicability of the Texaco “but-

for” test to dry-docking and related services such as

transportation, towing, pilotage, rigging, staging and crane

use, Customs at the same time created another category of

expense “in circumstances in which a mixed justification for

dry docking is present.” Jt. App. 100-105. For these “mixed-

purpose” expenses, Customs imposed duty on the dry-

docking and general services expenses by apportioning duties

between the dutiable and non-dutiable work performed during

the dry-docking period.” This is the method of duty

assessment challenged by SL Service as contravening the

vessel repair statute and the Texaco “but-for” test.

A divided Federal Circuit just a decade later stunned the

industry in reversing the decision of the USCIT and ignoring

the plain meaning of the statutory phrase “expenses of

‘ According to the Declaration of Glen E. Vereb, Attorney-Advisor in

the Entry Procedures and Carrier Branch, Office of Regulations & Rulings

(“OR&R”), “[p]ro rata apportionment works in the following manner.

For purposes of explanation, assume an entry has a total value of

$1,100,000 covering all expenses, of which $100,000 represents dry-

docking and general services. This amount is subtracted from the total

amount of the entry leaving $1,000,000. Of this remaining amount,

$600,000 represents dutiable expenses of repairs (60% of $1,000,000) and

$400,000 represents non-dutiable expenses (40% of $1,000,000).

Factoring the 60/40 ratio into the dry-docking and general services

charges, apportionment results in $60,000 in dutiable dry-docking and

general services costs and $40,000 in non-dutiable dry-docking costs.

Thus the total amount of dutiable repairs for this entry is $660,000.” Jt.

App. 76-78.

12

repairs” and the Jexaco “but for” test and approving Cus-

toms’ novel duty assessment based upon apportionment. The

majority below, not expressly overruling Texaco or a later

case applying Texaco, Sea-Land Service, Inc. v. United

States, 239 F.3d 1366 (Fed. Cir. 2001), reasoned that “[t]he

precedential force of Texaco applies only to single-purpose

expenses,” finding that if dry-docking has “dual” purposes

then Customs is entitled to apportion expenses between

nondutiable work and dutiable repairs. Instead of relying on

traditional statutory construction, as reflected by Chevron

U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467

U.S. 837, 843-45 (1984) and its progeny, the Federal Circuit

took the unusual approach of using common law tort doctrine

as applied to multiple tortfeasors to justify its deviation from

the statute and the court’s earlier decision in Texaco.

Such analysis has no place in interpreting a duty or tax

statute enacted to promote certain policy objectives. As noted

by Judge Bryson in his dissent, “[i]n the context of the vessel

repair statute . . . the question is not whether and how to

compensate the victim of a wrong. Congress has determined

that a duty of 50 percent on foreign repairs is the appropriate

amount to protect the American shipbuilding industry from

foreign competition; the question before us is simply whether,

in determining how to calculate that 50 percent duty, a

particular expense should be attributed to the cost of repairs.

And the answer to that question is best given by the formula

set forth in Texaco: that the expense is not an expense of

repair if it ‘would have been incurred irrespective of whether

or not dutiable repairs were preformed.’ 44 F.3d at 1546.”

App. 1 la-12a.

The result of the panel majority disregarding the limits of

the statute and its earlier decision in Texaco exposes U.S.-flag

owners and operators to substantial duty liability for expenses

13

that would have been incurred whether or not a dutiable

repair were performed.°

B. The Federal Circuit’s Ruling Is Arbitrary

The Federal Circuit itself in Texaco found the statute to be

clear and unambiguous covering expenses that would not

have been incurred but for the repair (regardless of whether

they were required by that repair). 44 F.3d at 1546. The

majority, however, permitted allocation without Causation;

i.e., the court sanctioned an accounting approach without

requiring any link between the dry-docking and associated

expenses and the repairs themselves. In the SL Service case,

there was no showing by the Government that the specific

repair items required dry-docking. See Spreadsheet iden-

tifying whether the particular item of work required or did not

require dry-docking and associated services. Jt. App. 838-

852. In fact, in many cases the repairs did not require dry-

docking. Under the formulaic approach taken by Customs

° 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

necessary adjuncts to drydocking and are logically inseparable from

the drydocking rule. These include such items as drydock block

arrangement, 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 others. 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 or

mandatory inspections if repairs are performed during the dry-dock

period.

14

wherein repairs, modifications and inspections occur simul-

taneously the dry-docking and general services expenses

would always be subject to duty. This would be the case

whether or not the charges would have been incurred

irrespective of the occurrence of repair work. Imposition of

duties under such circumstances is without basis in law and

thus arbitrary on the part of Customs.

U.S.-flag vessel owners and operators regularly place their

ships in dry-dock to comply with USCG and ABS mandatory

inspections. Because of the substantial costs associated with

taking a ship out of service to comply with such legal

requirements, the vessel operators/owners arrange for other

work during this period where the vessel is out of service.

The dry-dock and associated general service expenses are

driven by non-dutiable inspections and are incurred irre-

spective of the repair work. Such expenses cannot be

construed as necessarily required “but-for” repairs. Just

because the repair is performed during the dry-docking does

not mean the repair required dry-docking and related services.

Indeed, for the SEA-LAND PACIFIC the repairs in many

cases did not require dry-docking at all. Jt. App. 838-852.

In the case of the SEA-LAND PACIFIC, the U.S. Court of

International Trade properly found that “only the main-

tenance 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.” Am. Ship

Megmt., LLC v. United States, 162 F.Supp.2d 671, 675 (Ct.

Int'l Trade 2001). Thus, if the dry-docking were to extend

beyond the period necessary to perform mandatory

inspections we would not dispute the imposition of vessel

repair duties under the “but-for” test for the additional time

because those services were necessitated by the repair work

and not driven by the mandatory inspections or other non-

dutiable work such as a modification. As such, these charges

are repair expenses under the statute and the “but-for” test.

That is not the case where the dry-docking is compelled by

15

mandatory USCG and ABS requirements and the period of

dry-docking did not exceed the period of time necessary to

perform these mandatory inspections except under the

arbitrary and illogical ruling being appealed here.

The statute contemplates that an expense either is or is not

a dutiable “expense of repair.” Congress did not provide for

an “apportionment” of expenses between dutiable and non-

dutiable categories or for a partial assessment of duties. The

Federal Circuit’s approval of Customs’ Capricious appor-

tionment methodology, as Judge Bryson pointed out, “finds

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

dissenting). It is noteworthy that Congress has provided for

apportionment and partial duty assessment in other tariff

laws.’ In this case, Congress made no provision for partial

duty assessment but imposed duties only upon “expenses of

repairs.” If Congress intended to provide for apportionment

under 19 U.S.C. § 1466(a) it would have done so in clear and

unambiguous language.

Il. THE FEDERAL CIRCUIT’S RULING HARMS

THE U.S. MERCHANT FLEET

If allowed to stand unreviewed, the decision below will

have serious deleterious effects on the U.S.-flag fleet.

Periodic dry-docking is required by USCG regulations and

ABS requirements. Shipyard dry-docking and overhaul con-

stitute one of the largest expense items in a cargo vessel’s

operating budget. Since vessel operators need to have repairs

done virtually every time one of their vessels is in dry dock,

the duty assessment rule announced by Customs and ap-

” For example, in 19 U.S.C. § 1401a(b)(1)(C) (2001), Congress pro-

vides that for “assists,” the amount to be added to arrive at “transaction

value” is the value “apportioned as appropriate, of any assist.” Congress

has also provided for partial assessment of duties under subheadings

9802.00.40 and 9802.00.80, Harmonized Tariff Schedule of the United

States, which assess “a duty on the value of repairs or alterations” rather

than duty on the total value of the article.

16

proved by the Federal Circuit will have a significant negative

financial impact on U.S.-flag operators.

The impact of Texaco and now the Federal Circuit’s

decision in SL Service on apportionment represents an ever

increasing financial burden on U.S.-flag vessel operators.

U.S.-flag operating costs are already significantly higher than

those for foreign flag operators.

Iii. CONCLUSION

The decision below has no basis in the statute but, in a

strained effort to support Customs’ further imposition of

duties, instead resorts to an unconventional analysis based

upon common law tort doctrine to expand the parameters of

the statute. As such, the decision sanctions an arbitrary ruling

by Customs to impose duties on services where none was

provided by Congress. The court decision is also inconsistent

with the Federal Circuit’s own “but-for” interpretation in

Texaco, thereby likely leading to further confusion in

administration of the vessel repair statute. Finally, the

decision, if not reviewed, will result in a further onerous

financial burden placed only on U.S.-flag vessel operators by

their own government, which can only serve to benefit their

non-U.S. citizen competitors. For these reasons, the decision

of the divided panel should be reviewed by this Court.

Therefore, the petition for writ of certiorari should be

granted.

Respectfully submitted,

ROBERT S. ZUCKERMAN *

HORIZON LINES, LLC

4064 Colony Road

Suite 200

Charlotte, NC 28211

(704) 973-7012

Counsel for Amicus Curiae

November 12, 2004 * Counsel of Record