Petition for Writ of Certiorari — Haggar Apparel Co. v. United States

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. Suoreme Court. Us

No. 001171 JAN 17

Te Oe ae

IN THE

Supreme Court of the Gnited States

HAGGAR APPAREL Co.,

Petitioner,

Vv.

UNITED STATES OF AMERICA,

Respondent.

On Petition for a Writ of Certiorari to the

United States Court of Appeals

for the Federal Circuit

PETITION FOR A WRIT OF CERTIORARI

RONALD W. GERDES CARTER G. PHILLIPS*

GILBERT LEE SANDLER SIDLEY & AUSTIN

EDWARD M. JOFFE 1722 Eye Street, N.W.

SANDLER, TRAVIS Washington, D.C. 20006

& ROSENBERG, P.A. (202) 736-8000

1300 Pennsylvania Ave., N.W.

Washington, D.C. 20004 MARK E. HADDAD

(202) 638-2230 PAUL J. WATFORD

SIDLEY & AUSTIN

MARC W. JOSEPH 555 West Fifth Street

HAGGAR CLOTHING Co. 40” Floor

6113 Lemmon Avenue Los Angeles, CA 90013

Dallas, TX 75209 (213) 896-6000

Counsel for Petitioner

January 17, 2001 * Counsel of Record

Sebi Tt IONS I EARNER AE NABER IB ORE A NEEM RENE AOE ATEN

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

QUESTION PRESENTED

Whether 19 C.F.R. § 10.16(c) reasonably interprets the

Statutory phrase “operations incidental to the assembly

process” in Subheading 9802.00.80 of the Harmonized Tariff

Schedule of the United States.

(i)

PARTIES TO THE PROCEEDING AND RULE 29.6

DISCLOSURE STATEMENT

The only parties to the proceeding are the petitioner and

respondent as listed in the caption. Petitioner Haggar Apparel

Company is now known as Haggar Clothing Company.

Petitioner’s parent company is Haggar Corporation. No other

publicly held company owns 10% or more of petitioner’s

stock.

TABLE OF CONTENTS

Page

QUESTION PRESENTED ...................0...ccccccccccsssoseees i

PARTIES TO THE PROCEEDING AND RULE 29.6

DISCLOSURE STATEMENT .....00000......0..000ccccccsce. il

OR ie GF i incsnindnicsdnniasecccnctiicncsecncas iv

ESL Rs I CA CR |

a 1

STATUTORY AND REGULATORY PROVISIONS

EER Et Ta SRA Te sta ic el Dot Oocke 2

PU PRRMEINOD GIP BEMIS GIES .n..ccccccsccccssiscscccsecnecoeses 4

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

I vindith nites 7 BE eachalebsiotishncndamaeciankatsaial 21

(iii)

TABLE OF AUTHORITIES

CASES Page

American Petroleum Inst. v. EPA, 216 F.3d 50

ty WOM: A acest era gk a oe 15

Chang v. INS, 119 F.3d 1055 (3d Cir. 1997)......... 14

Chevron U.S.A. Inc. v. Natural Res. Def. Council,

| me git & gi, RRO passim

Cook v. Wiley, 208 F.3d 1314 (11th Cir. 2000) ..... 15

Iowa Util. Bd. v. FCC, 219 F.3d 744 (8th Cir.

a ctr suni eeconcutacin tei andancamsmeneree 15

In re Kaiser Aluminum & Chem. Co., 214 F.3d

ee er 14

Levi Strauss & Co. v. United States, 222 F.3d

I I MIs III i vetindnsnscsinixccsnscandepinaietias 10, 15

Marbury v. Madison, 5 U.S. (1 Cranch) 137

PIII <ckasciincaiecseisitesscanihiaiion abcek aiih Demis Be: 14

Miles v. United States, 567 F.2d 979 (C.C.P.A.

NORE PCRS a BE AYE apy REE eR 18

Motor Vehicle Mfrs. Ass'n v. State Farm Mut.

Auto Ins. Co., 463 U.S. 29 (1983)........0....0002. 13

NLRB vy. United Food and Commercial Workers

fk Bie f, . | ) Re ae neem nee 13

National Ass'n of Regulatory Util. Comm'rs v.

ICC, 41 F.3d 721 (D.C. Cir. 1994)..0000..00000000000.. 15

National Credit Union Admin. v. First Nat'l Bank

& Trust Co., 522 U.S. 479 (1998)... 12

Pauley v. Bethenergy Mines, Inc., 501 U.S. 680

III iti-cisinice elses pbidtiesilensisadepstleendabiagSdacaitay Nadas 12

Pharmanex v. Shalala, 221 F.3d 1151 (10th Cir.

PI icihiccsicdcapuaheintgpndieakcnideksandsckinke kine iaiataiies 15

Princess Cruises, Inc. v. United States, 201 F.3d

1352 (Fed. Cir.), cert. denied, 120 S. Ct. 2741

SRR RESO AA TRE OUT ae ER BW Mar Aan a aR 14, 15

Schweiker v. Gray Panthers, 453 U.S. 34 (1981). 12, 21

Smiley v. Citibank (S.D.), N.A., 517 U.S. 735

I Gicancsuntssacaontcicaeiandititensadti elton 13

TABLE OF AUTHORITIES

Page

Strickland v. Commissioner, Maine Dep't of

Human Servs. , 96 F.3d 542 (1st Cir. 1996)........ 14

United States v. Haggar Apparel Co., 524 US.

TE Gs cssnttensssitncictbeardibiaenigeniaaiime ice 7

United States v. Haggar Apparel Co., 526 U.S.

Ds sincscsncibiiiissistiand gical cee passim

United States v. Mast Indus., Inc., 668 F.2d 501

es cis tlewintidhicri etic ced 6

United States v. O'Hagan, 521 U.S. 642 (1997).... 13

Velazquez v. Legal Servs. Corp., 164 F.3d 757

SRR erry eons i4

Zimmerman v. Oregon Dep't of Justice, 170 F.3d

PRE Ma ae | 15

STATUTES

19 U.S.C. § 1202, subheading 9802.00.80............. 5,17

ye Sg RNIN err peer I 7, 20

DRS hides heticanhdakencconsoniidahs 6, 20

PP ede be Oe ee isintianntitiecin ana ceca a passim

SCHOLARLY AUTHORITIES

Kenneth C. Davis & Richard J Pierce, Admini-

strative Law Treatise (3d ed. Supp. 2000).......... 15

Ronald M. Levin, The Anatomy of Chevron: Step

Two Reconsidered, 72 Chi.-Kent L. Rev. 1253

GRE chinisnwksticiaidcmucanaciaaaacaie aE 12

OTHER AUTHORITY

Black’s Law Dictionary (6th ed. 1990)................. 17

IN THE

Supreme Court of the Ginited States

No. 00-

HAGGAR APPAREL Co. 4

Petitioner,

Vv.

UNITED STATES OF AMERICA,

Respondent.

On Petition for a Writ of Certiorari to the

United States Court of Appeals

for the Federal Circuit

PETITION FOR A WRIT OF CERTIORARI

OPINIONS BELOW

The July 27, 2000, opinion of the Court of Appeals for the

Federal Circuit, following remand from this Court, is reported

at 222 F.3d 1337. See Appendix (“App.”) la-12a. The July

12, 1996, opinion of the Court of International Trade (App.

13a-28a) is reported at 938 F. Supp. 868. The October 22,

1997, opinion of the Federal Circuit (App. 29a-32a) is

reported at 127 F.3d 1460.

JURISDICTION

Haggar Apparel Company’s petition for rehearing was

denied on October 19, 2000. App. 33a. The jurisdiction of

this Court is invoked under 28 U.S.C. § 1254(1).

STATUTORY AND REGULATORY

PROVISIONS INVOLVED

Subheading 9802.00.80 of the Harmonized Tariff

Schedule of the United States, 19 U.S.C. § 1202, provides

that, with respect to:

Articles . . . assembled abroad in whole or in part of

fabricated components, the product of the United States, —

which (a) were exported in condition ready for assembly

without further fabrication, (b) have not lost their

physical identity in such articles by change in form,

shape or otherwise, and (c) have not been advanced in

value or improved in condition abroad except by being

assembled and except by operations incidental to the

assembly process such as cleaning, lubricating and

painting[, the duty that is to be paid is to be calculated]

upon the full value of the imported article, less the cost

or value of such products of the United States... .

Subsections (b) and (c) of 19 C.F.R. § 10.16 provide

as follows:

(b) Operations incidental to the assembly process.

Operations incidental to the assembly process whether

performed before, during, or after assembly, do not

constitute further fabrication, and shall not preclude the

application of the exemption. The following are

examples of operations which are incidental to the

assembly process:

(1) Cleaning;

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

preservative coating;

(3) Application of preservative paint or coating,

including preservative metallic coating, lubricants, or

protective encapsulation;

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

amounts of excess materials;

(5) Adjustments in the shape or form of a

component to the extent required by the assembly being

performed abroad;

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

similar products exported in continuous length;

separation by cutting of finished components, such as

prestamped integrated circuit lead frames exported in

multiple unit strips; and

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

pressing, and folding of assembled articles.

Any significant process, operation, or treatment other

than assembly whose primary purpose is the fabrication,

completion, physical or chemical improvement of a

component, or which is not related to the assembly

process, whether or not it effects a substantial

transformation of the article, shall not be regarded as

incidental to the assembly and shall preclude the

application of the exemption to such article. The

following are examples of operations not considered

incidental to the assembly as provided under subheading

9802.00.80, Harmonized Tariff Schedule of the United

States (19 U.S.C. § 1202):

(1) Melting of exported ingots and pouring of the

metal into molds to produce cast metal parts;

(2) Cutting of garment parts according to pattern

from exported material;

(3) Painting primarily intended to enhance the

appearance of an article or to impart distinctive features

or characteristics;

(4) Chemical treatment of components or assembled

articles to impart new characteristics, such as

showerproofing, permapressing, sanforizing, dying or

bleaching of textiles;

(5) Machining, polishing, burnishing, peening,

plating (other than plating incidental to the assembly),

embossing, pressing, stamping, extruding, drawing,

annealing, tempering, case hardening, and any other

operation, treatment or process which imparts significant

new characteristics or qualities to the article affected.

STATEMENT OF THE CASE

1. Haggar Apparel Company designs, manufactures, and

markets a wide variety of men’s apparel products. The

apparel products at issue in this case are men’s permanent-

press trousers, which were assembled in Mexico from fabric

manufactured at textile mills in the United States. App. 14a.

Permanent-press garments are those that maintain a smooth,

wrinkle-free appearance without ironing or pressing, even

after they have been washed and worn. Jd; J.A. 31.' The

permanent-press characteristics are achieved in different ways

depending on the type of fabric used to make the garments.

For trousers made from a cotton-polyester blend, Haggar

had the fabric treated with a chemical resin at textile mills in

the United States before shipping the fabric to Mexico for

assembly. App. 14a. -- To achieve permanent-press

characteristics, heat must be applied to the fabric. J.A. 33.

Thus, after assembly, the completed trousers were pressed

and then baked in an oven for 12-15 minutes. App. 14a; J.A.

33. The same permanent-press characteristics could have

been achieved without the ovenbaking process, simply by

pressing the trousers for an additional two to three minutes.

J.A. 57. Haggar found ovenbaking less expensive than

' “J A.” refers to the Joint Appendix filed in United States v. Haggar

Apparel Co., 526 U.S. 380 (1999) (No. 97-2044), when the case was first

before the Court.

further pressing, however, because the ovenbaking process

was automated and involved the use of fully depreciated

equipment. App. 23a; J.A. 41-42, 57. After ovenbaking, the

trousers were tagged, packaged, and shipped back to the

United States. App. 15a.

Haggar also made trousers from all-synthetic fabric.

Trousers made from the all-synthetic fabric had to be pressed

in order to achieve permanent-press characteristics, but the

fabric did not require chemical treatment or ovenbaking.

App. 14a. Haggar shipped the all-synthetic fabric to Mexico,

where the components were assembled and the trousers were

then pressed. After pressing, the trousers were tagged,

packaged, and shipped back to the United States. See id at

15a.

2. Upon arrival in the United States, Haggar’s trousers

were subject to customs duties. Ordinarily, a duty would be

imposed on the full value of the imported goods. However,

the tariff provisions enacted by Congress provide a partial

duty exemption for certain goods that are assembled abroad

but whose components were made in the United States. As

relevant here, Subheading 9802.00.80 of the Harmonized

Tariff Schedule of the United States (HTSUS), 19 U.S.C.

§ 1202, provides that the duty owed on such goods is to be

calculated based upon “the full value of the imported article,

less the cost or value of [the components made in the United

States],” if certain conditions are met. The condition at issue

in this case requires that the American-made components sent

abroad for assembly not have been “advanced in value or

improved in condition abroad except by being assembled and

except by operations incidental to the assembly process such

as Cleaning, lubricating and painting.” 19 U.S.C. § 1202,

subheading 9802.00.80.7

* The HTSUS took effect on January 1, 1989. App. 3an.1. The text of

Item 807.00 of the Tariff Schedule of the United States (TSUS), which

applied prior to January 1, 1989, is identical to Subheading 9802.00.80.

The Customs Service has promulgated a _ regulation

interpreting the phrase “operations incidental to the assembly

process” as used in Subheading 9802.00.80. The regulation

attempts to define those operations that may be classified as

incidental and those that may not. See 19 C.F.R. § 10.16. As

relevant here, that regulation provides: “Any significant

process, operation, or treatment other than assembly whose

primary purpose is the . . . physical or chemical improvement

of a component . . . shall not be regarded as incidental to the

assembly and shall preclude the application of the exemption

to such article.” Jd. § 10.16(c). The regulation then provides

several examples of operations not deemed incidental to

assembly, including the “[c]hemical treatment of components

or assembled articles to impart new characteristics, such as

showerproofing, permapressing, sanforizing, dying or

bleaching of textiles.” Jd. § 10.16(c)(4). The regulation also

provides several examples of operations that are considered

incidental to assembly, such as “sorting, pressing, and folding

of assembled articles.” Jd. § 10.16(b)(7).

3. Haggar sought a partial duty exemption for its

permanent-press trousers under Subheading 9802.00.80 of the

HTSUS, on the ground that the pressing of the all-synthetic

trousers, and the pressing and ovenbaking of the cotton-

polyester trousers, were operations incidental to the assembly

of the garments. The Customs Service granted the exemption

for the all-synthetic trousers, but denied the exemption for the

cotton-polyester trousers, despite the fact that the method of

producing both types of trousers “involve[d] the same

assembly and pressing process.” App. 14a. The only differ-

ence was that the cotton-polyester trousers were ovenbaked

instead of given a more-expensive extended pressing.

Haggar paid the required duties and then brought a refund

suit in the Court of International Trade, which has exclusive

jurisdiction to review protests of classification determinations

by the Customs Service. See 28 U.S.C. § 1581(a). Applying

the multi-factor test established in United States v. Mast

Industries, Inc., 668 F.2d 501 (C.C.P.A. 1981), the court

concluded that the ovenbaking operation was incidental to the

assembly process and thus did not disqualify Haggar’s cotton-

polyester trousers from the partial duty exemption under

Subheading 9802.00.80. App. 25a.

The government attempted to defend the Customs Service’s

classification of the goods by relying on 19 C.F.R. § 10.16(c).

The court declined to appiy the regulation, however, because

it concluded that “[sJubsection 10.16(c) conflicts with the

plain language” of Item 807.00 of the TSUS (the predecessor

to Subheading 9802.00.80 of the HTSUS). App. 26a. The

court noted that Item 807.00 “does not prohibit operations

which merely impart new characteristics to the article being

assembled as the regulation provides, but in fact permits a

duty allowance for such improvements to the article so long

as the operation imparting those characteristics was incidental

to assembly.” Jd. at 26a-27a (emphasis omitted). Based on

Federal Circuit precedent, the court rejected the government’s

argument that the customs regulation was entitled to

deference under Chevron U.S.A. Inc. v. Natural Resources

Defense Council, Inc., 467 U.S. 837 (1984). App. 27a.

4. The government appealed to the Federal Circuit,

which has exclusive jurisdiction to review decisions of the

Court of International Trade. See 28 U.S.C. § 1295(a)5).

The Federal Circuit affirmed. App. 29a-32a. The court of

appeals agreed with the trial court’s application of the Mast

factors, and held that customs regulations relating to tariff

classifications are not entitled to Chevron deference. Jd. at

31a.

5. This Court granted the government’s petition for a

writ of certiorari. 524 U.S. 981 (1998). The government’s

petition raised two questions: (1) whether customs

regulations relating to tariff classifications are entitled to

deference under Chevron; and (2) if so, whether 19 C.F.R.

§ 10.16(c) is a reasonable interpretation of the statutory

phrase “operations incidental to the assembly process” under

Subheading 9802.00.80. This Court reversed on the first

question, holding that the Federal Circuit erred in declining to

apply the Chevron framework to tariff classification

regulations. United States v. Haggar Apparel Co., 526 U.S.

380 (1999).

The Court declined to reach the second question on which

certiorari had been granted, leaving to the Federal Circuit on

remand the task of determining in the first instance “how the

regulation at issue fares under the Chevron framework.” /d.

at 395. The Court stated that it found this to be a “difficult

question,” in light of the “substantial arguments” Haggar had

raised “challenging the regulation’s interpretation of the

statutory language as well as the application of the regulation

to the particular process and goods at issue here.” /d. at 394-

95. Specifically, with respect to the application of the

regulation, the Court noted that the Customs Service had

granted a duty exemption for the all-synthetic trousers yet

denied an exemption for the ovenbaked cotton-polyester

trousers, “notwithstanding the fact that the permapress

characteristics could have been achieved on the trousers

involved here by pressing them for an additional period of

time in lieu of ovenbaking.” /d at 395. In addition, the Court

noted that the Customs Service sought to apply the

regulation’s reference to “[c]hemical treatment of components

... Such as... . permapressing,” 19 C.F.R. § 10.16(c)(4), even

though “it is undisputed that the chemical resin was applied to

the trousers in the United States.” 526 U.S. at 395.

6. On remand, the Federal Circuit held that “19 C.F.R.

§ 10.16(c) is a reasonable interpretation of HTSUS

9802.00.80 (and TSUS 807.00), and that Customs properly

applied the regulation in this case.” App. 5a. The court of

appeals began its Chevron analysis by observing that “the

Supreme Court has already answered the first question:

HTSUS 9802.00.80 is ambiguous for Chevron purposes.” Jd

at 6a. The court thus proceeded directly to the second step of

Chevron’s analysis. But the court viewed its task as limited

to determining only whether the regulation’s interpretation of

the statutory phrase “operations incidental to the assembly

process” was “contrary to the intent of [c]ongress, as divined

from the statute and its legislative history.” /d at 6a-7a

(internal quotation marks omitted). The court upheld the

regulation because, in its view, the categorical approach taken

by the Customs Service in defining operations not incidental

to assembly was not contrary to congressional intent, and use

of that approach inevitably required the drawing of fine lines.

Id. at 9a. The court did not address any of Haggar’s other

“substantial arguments” concerning the validity of the

regulation or the specific categories applied in this case.

Though this Court had specifically highlighted the issue,

the court of appeals also made no effort to determine whether

the line Customs had drawn between Haggar’s “pressing” and

“permapressing” operations was arbitrary and irrational. Nor

did the Federal Circuit confront the fact (also highlighted by

this Court) that the “chemical treatment” referred to in the

regulation actually occurred in the United States. The court

of appeals instead noted that the ovenbaking process occurred

in Mexico, and that this application of heat “causes the

chemical change in the fabric, imparting the ‘permapress’

qualities.” /d at 12a. But the court did not explain how

ovenbaking could rationally be distinguished from pressing of

the all-synthetic trousers, since both processes occurred in

Mexico and imparted “permapress” qualities to the garments.

The court’s observation that the cotton-polyester trousers “left

the United States without permapressed qualities . . . [and]

returned permapressed,” id, was no answer, because that was

equally true of the all-synthetic trousers, for which Customs

had provided a partial duty exemption under Subheading

9802.00.80.

REASONS FOR GRANTING THE PETITION

This Court previously granted certiorari on the same

question presented here: whether 19 CFR. § 10.16(c)

reasonably interprets -the statutory phrase “operations

incidental to the assembly process.” Although the Court did

not resolve that issue in United States v. Haggar Apparel Co.,

526 U.S. 380 (1999), the Court expressly stated that it found

this to be a “difficult question.” /d at 395. The Court also

directed the Federal Circuit to address Haggar’s “substantial

arguments” regarding the irrationality of Customs’ applica-

tion of this regulation here, and specifically Customs’ distinc-

tion between “pressing” and “permapressing” operations. /d.

at 394-95.

The court of appeals failed to conduct either inquiry.

Instead, the court simply addressed whether Customs could

reasonably have adopted a category-based approach to

classifying those processes that are incidental to assembly.

Having decided that Customs could regulate on the basis of

categories, the Federal Circuit summarily affirmed the

Customs decision below. It therefore never reached the

specific and difficult questions raised by Customs’ arbitrary

application of its regulations, for which this Court specifically

remanded.

The Federal Circuit’s failure to provide any meaningful

analysis of the rationality of Customs’ exercise of discretion

is not limited solely to this case. In a companion case, Levi

Strauss & Company v. United States, 222 F.3d 1344 (Fed.

Cir. 2000), petition for cert. filed January 17, 2001, the court

failed to consider not only the irrationality of the application

of the categorical scheme to the goods at issue, but also

whether the particular subcategory at issue could itself be

reconciled with the statute. The Haggar and Levi cases thus

confirm that the Federal Circuit has effectively granted the

Customs Service unreviewable discretion both to adopt

categories that are not incidental to assembly, and to apply

those categories at will. The Federal Circuit’s failure to

review the agency’s exercise of discretion conflicts with this

Court’s mandate in Haggar, with Chevron, and with the

court’s fundamental obligation to review timely challenges to

If left uncorrected, the decision below will have nationwide

impact. The Federal Circuit exercises exclusive appellate

jurisdiction over customs classification disputes, and thus is

the only appellate forum in which challenges to classification

regulations may be heard as a matter of right. That court’s

refusal to require any reasoned explanation from Customs for

the categorical lines it has drawn will deprive litigants in

customs disputes of the ability to seek redress for arbitrary

agency action. Indeed, now that the Federal Circuit turns a

deaf ear to questions that this Court has declared are

substantial, future litigants have no realistic hope of getting

the Federal Circuit to address their comparable claims. The

petition should therefore be granted in light of the exceptional

importance of the issue raised and the manifest error of the

Federal Circuit’s holding.

1. In remanding for further proceedings, this Court

confirmed that Haggar had raised substantial questions

concerning the validity of the agency’s interpretation of the

statutory language and of its application of the regulation to

the goods et issue here. 526 U.S. at 394-95. The lower

court’s failure to address these questions on remand reflects

not only its misreading of the Court’s decision in Haggar, but

an equally fundamental misperception of its crucial obligation

to conduct arbitrariness review under step two of Chevron.

The two-step test this Court established in Chevron U.S.A.

Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837

(1984), has become a familiar part of American admini-

strative law. Under the first step, courts must determine

whether “Congress has directly spoken to the precise question

at issue.” /d at 842. If so, the court “must give effect to the

unambiguously expressed intent of Congress,” id at 843, by

rejecting any administrative interpretation of the statute that is

contrary to that intent, id at 843 n.9. However, if the statute

“is silent or ambiguous with respect to the specific issue,” the

court must proceed to the second step, which requires the

court to determine “whether the agency’s answer is based on

a permissible construction of the statute.” Jd at 843. Subse-

quent cases have made clear that “permissible” in this context

is synonymous with “reasonable.” See, e.g., National Credit

Union Admin. v. First Nat'l Bank & Trust Co., 522 U.S. 479,

500 (1998); Pauley v. Bethenergy Mines, Inc., 501 U.S. 680,

699 (1991).

The Court’s cases have not explicitly defined the

circumstances under which an agency’s interpretation of a

statute, although not contrary to clear congressional intent,

may nonetheless be deemed unreasonable. See Ronald M.

Levin, The Anatomy of Chevron: Step Two Reconsidered, 72

Chi.-Kent L. Rev. 1253, 1261 (1997) (noting that the Court

has never invalidated an agency’s interpretation of a statute

under step two of Chevron). But the Court provided some

guidance on this score in Chevron itself. There, the Court

stated that when agencies issue regulations to fill gaps left in

the statutory scheme, such regulations “are given controlling

weight unless they are arbitrary, capricious, or manifestly

contrary to the statute.” 467 U.S. at 843-44. Directing courts

to engage in arbitrary-and-capricious review under step two

was in line with the Court’s pre-Chevron cases. In Schweiker

v. Gray Panthers, 453 U.S. 34 (1981), for example, the Court

held that, when Congress has delegated authority to an agency

to interpret statutory terms, a court may not “abdicate

review’; rather, the court must ensure that the agency did not

exceed its authority and that “the regulation is not arbitrary or

capricious.” /d at 44. In post-Chevron cases, as well, the

Court has indicated that determining whether an agency’s

interpretation is “reasonable” requires an assessment of

whether that interpretation is arbitrary or capricious. See,

e.g., United States v. O’Hagan, 521 U.S. 642, 673 (1997);

Smiley v. Citibank (S.D.), N.A., 517 U.S. 735, 741-42 (1996).

The court of appeals clearly departed from established law

by failing to engage in any arbitrariness analysis below. As

noted above, the Federal Circuit conceived of its role under

Chevron’s second step as determining only whether the

regulation “was contrary to the intent of [cJongress.” App. 7a

(internal quotation marks omitted). That limited review,

however, was only half of the equation. Before pronouncing

the agency’s interpretation of the tariff statute reasonable, the

court of appeals was also obligated to assess whether, within

those broad parameters, Customs had rationally exercised its

discretion to interpret the statute. See NLRB v. United Food

and Commercial Workers Union, 484 U.S. 112, 123 (1987).

And where, as here, that issue was in doubt, the agency was

required to provide a “satisfactory explanation” for drawing

the lines as it did. See Motor Vehicle Mfrs. Ass'n v. State

Farm Mut. Auto Ins. Co., 463 U.S. 29, 43 (1983). The court

below, however, made no attempt to determine whether the

agency’s interpretation of Subheading 9802.00.80 was

arbitrary or capricious under these standards.

As a result, the Federal Circuit never addressed this Court’s

specific concerns regarding the rationality of Customs’

interpretation of the statutory phrase “operations incidental to

the assembly process.” For example, the court of appeals

failed to require any explanation from Customs for the

agency's decision to treat Haggar’s pressing of the- all-

synthetic trousers differently from the ovenbaking of the

cotton-polyester trousers, even though both processes were

used to impart the same permanent-press characteristics to the

garments. The rationality of that distinction was particularly

Suspect since, as the Court noted, “the permapress

characteristics could have been achieved on the trousers

involved here by pressing them for an additional period of

time in lieu of ovenbaking.” Haggar, 526 U.S. at 395. Nor

did the court of appeals require Customs to address the

Court’s concern that, although the agency’s regulation

referred to the “[c]hemical treatment of components” abroad,

see 19 C.F.R. § 10.16(c)(4), Customs applied the regulation in

this case even though “it is undisputed that the chemical resin

was applied to the trousers in the United States,” Haggar, 526

U.S. at 395. By failing to address these issues, the court of

appeals left Haggar, as well as importers in future cases, at

the mercy of Customs’ arbitrary interpretation of important

tariff provisions.’

This case thus raises serious separation of powers concerns.

As this Court established in Marbury v. Madison, 5 U.S. (1

Cranch) 137 (1803), “[iJt is emphatically the province and

duty of the judicial department to say what the law is.” /d at

177. Mandating deference to an agency’s interpretation of the

law, as Chevron requires, is in considerable tension with this

principle. An acceptable balance has been struck under

Chevron only because courts must still review the rationality

of an agency’s construction of a statute, and ensure that the

agency’s construction is consistent with congressional intent.

The Federal Circuit has upset that balance, however, by

granting the Customs Service free rein to define governing

law, without regard to the constraints imposed by Congress

and without any meaningful review by the courts.

The Federal Circuit’s failure to engage in any form of

arbitrariness review under Chevron’s second step is in

conflict with the approach followed in a majority of the

circuits. See Strickland vy. Commissioner, Maine Dep't of

Human Servs., 96 F.3d 542, 547 (ist Cir. 1996); Velazquez v.

Legal Servs. Corp., 164 F.3d 757, 763 (2d Cir. 1999); Chang

v. INS, 119 F.3d 1055, 1060 (3d Cir. 1997); In re Kaiser

* The Federal Circuit's failure to scrutinize the rationality of customs

regulations is not an isolated occurrence. In Levi Strauss, the court en-

gaged in no analysis at all of the regulation’s consistency with the statute

or its application to the specific stonewashing process at issue there.

Similarty, in another post-Haggar case, the court failed properly to engage

in analysis under Chevron’s second step and upheld a regulation that

defined the statutory terms “journcy” and “originated” in a manner that

produced wholly irrational results. See Princess Cruises, Inc. y. United

States, 201 F.3d 1352, 1361 (Fed. Cir.), cert. denied, 120 S. Ct 2741

(2000).

Aluminum & Chem. Co., 214 F.3d 586, 591 (Sth Cir. 2000);

Towa Util. Bd. v. FCC, 219 F.3d 744, 749 (8th Cir. 2000);

Zimmerman v. Oregon Dep't of Justice, 170 F.3d 1169, 1173

(9th Cir. 1999); Pharmanex v. Shalala, 221 F.3d 1151, 1154

(10th Cir. 2000); Cook v. Wiley, 208 F.3d 1314, 1319 (11th

Cir. 2000). These courts have expressly stated that, in order

to be found reasonable under Chevron’s second step, an

agency’s interpretation of a statute must withstand review

under an arbitrary-and-capricious standard. The District of

Columbia Circuit is substantially in accord. See, e.g.,

American Petroleum Inst. v. EPA, 216 F.3d 50, 57 (D.C. Cir.

2000) (noting overlap between Chevron’s second step and

arbitrary-and-capricious review); National Ass'n of

Regulatory Util. Comm'rs v. ICC, 41 F.3d 721, 726-27 (D.C.

Cir. 1994) (same). See also Kenneth C. Davis & Richard J.

Pierce, Administrative Law Treatise § 7.4, at 264 (3d ed.

Supp. 2000) (noting “complete overlap” between the analysis

required under step two of Chevron and arbitrary-and-

capricious review under State Farm). While the law on this

point is not as clear in the Fourth, Sixth, and Seventh Circuits,

the Federal Circuit appears to stand alone in its disregard of

fundamental Chevron principles for step two.

This case is without question the appropriate vehicle for the

Court to address the Federal Circuit’s failure to apply

Chevron properly to Customs’ decisions. If the Federal

Circuit has not applied the correct standard here, where this

Court itself pointed out the difficult questions to be

confronted, it certainly will not apply the correct analysis

under step two of Chevron in subsequent cases where a mere

litigant raises comparable issues. Unless this Court

intervenes now, the decision below will stand as the leading

case in the Federal Circuit on the application of Chevron’s

framework to customs regulations. And given the court’s

deficient analysis in the companion case below, Levi Strauss

& Co. v. United States, 222 F.3d 1344 (Fed. Cir. 2000), as

well as its earlier decision in Princess Cruises, Inc. v. United

States, 201 F.3d 1352 (Fed. Cir. 2000), see n.3 supra, there is

no reason to believe the Federal Circuit will correct this error

itself.

The Court should grant certiorari here to clarify that the

reasonableness test under Chevron’s second step requires

courts to examine whether an agency has exercised its

discretion to interpret a statute in an arbitrary or capricious

manner, and to make clear that agencies must adhere to

standards of rationality when they interpret statutes no less

than when they engage in purely policymaking functions.

2. Despite this Court’s express directive that the Federal

Circuit consider the “substantial arguments” Haggar had

raised “challenging the regulation’s interpretation of the

statutory language,” 526 U.S. at 394, the Federal Circuit

simply left most of them unaddressed. It thus failed correctly

to resolve the one aspect of step-two analysis that it did

undertake: determining whether the Customs Service’s

regulation was contrary to congressional intent.

Section 10.16 sets forth a general definition of the statutory

concept of operations “incidental to assembly,” and identifies

two types of non-incidental operations: those whose “primary

purpose is the fabrication, completion, physical or chemical

improvement of a component,” and those that are “not related

to the assembly process.” 19 CFR. § 10.16(c). The

regulation then lists several specific operations that are

deemed not to be incidental to assembly under the regulation,

and identifies “[c]hemical treatment of components or

assembled articles to impart new characteristics, such as .. .

permapressing” as one such operation. Jd § 10.16(c)4).

This regulation plainly conflicts with congressional intent for

three reasons.

First, in addressing the only argument that it did confront

relating to congressional intent, the Federal Circuit erred in

holding that the statute permits the Customs Service to

identify, in advance, certain operations that intrinsically are

“not incidental to assembly,” no matter what the facts

surrounding a particular assembly process or incidental

operation may be. That is not the inquiry that Congress

commanded. The statute asks not that an operation be

compared to “assembly” in the abstract, but that it be

compared to “the assembly process.” 19 U.S.C. § 1202,

subheading 9802.00.80 (emphasis added). Because each

article has its own assembly process, this language can

meaningfully be read to refer only to the specific assembly

process used to create the article whose duty is in question.

That the statute requires a comparative inquiry into the

significance of a given operation in light of a particular

assembly process, and not a classification ex ante, is further

evidenced by the plain meaning of the term “incidental,”

which compels a comparative inquiry. See, e.g., Black’s Law

Dictionary 762 (6th ed. 1990) (defining “incidental” as

“[djepending upon or appertaining to something else as

primary”). Given this language, the processes that Congress

identified in the statute can reasonably be understood only as

examples likely to be incidental to any assembly process, not

as a license to ignore the comparative inquiry otherwise

mandated by the statutory language.

Second, even if the Customs Service could permissibly

adopt a categorical approach in defining operations not

considered incidental to assembly, the agency erred by using

criteria for classifying permapressing operations that conflict

with the statute. Thus, the regulation classifies as non-

incidental those operations whose “primary purpose is the . . .

chemical improvement” of a component. 19 C.F.R.

§ 10.16(c). The “primary purpose” criterion sweeps far too

broadly, however, because — by definition — any operation

that is not intended to assemble an article (and hence is not

part of the assembly process) will have as its “primary

purpose” some object other than assembly. Yet the statute

plainly reveals that Congress intended to allow a duty

; 18

allowance so long as the operation, though not part of the

assembly process, was incidental to it.

Third, the classification itself is also impermissible because

it excludes from consideration operations whose primary

purpose is the “chemical improvement” of a component of the

article. Subheading 9802.00.80 of the HTSUS, however,

permits a duty allowance for American-made products

assembled abroad that “have not been advanced in value or

improved in condition abroad except by being assembled and

except by operations incidental to the assembly process such

as cleaning, lubricating and painting.” These words plainly

indicate that operations which do, in fact, advance the value

of a product or improve its condition do not, for that reason

alone, preclude an allowance. Rather, the ultimate question is

whether such improvement came about through operations

that are incidental to the assembly process. As the Federal

Circuit had previously recognized, “item 807.00 logically

assumes that there has been an advancement or improvement,

but limits the extent of the advancement in value or

improvement in condition to that which is brought about

solely by the act of assembly or operations incidental

thereto.” Miles v. United States, 567 F.2d 979, 983 (C.C.P.A.

1978).

The examples in subsection 10.16(c)(4) of operations

whose primary purpose is the “chemical improvement” of an

article are thus impermissible. To impart new characteristics

through chemical treatment is simply one way to improve the

condition or advance the value of an article. Thus, to identify

an operation, such as permapressing, that imparts new

characteristics barely begins the statutory inquiry; it does not

say anything about whether that operation was “incidental to

the assembly process.” Moreover, the Customs Service has

provided no explanation -- because the court of appeals never

required one -- of what separates the improvements listed in

subsection (c)(4) from those that are allowed.

What the Customs Service meant by the other general

criterion for classifying non-incidental processes — those

which are “not related to the assembly process,” 19 C.F.R.

- § 10.16(c) - is not clear. But that criterion provides no

additional support for the permapressing regulation. The only

factor mentioned in the regulations that would distinguish

“permapressing” from “pressing” (which is related to assem-

bly under the regulations) is that permapressing involves a

“[c]hemical treatment” that is intended “to impart new

characteristics,” id § 10.16(c)(4), and thus has as its “primary

purpose” the “chemical improvement” of the article, id

§ 10.16(c). Thus, at least for “permapressing,” the regula-

tion’s second, general criterion collapses into the first, plainly

invalid criterion.

3. Finally, had the court of appeals addressed the

difficult issues identified by this Court with respect to the

application of these regulations to Haggar’s goods, it could

not have affirmed the agency’s decision. As this Court

previously noted, the real issue here is not “permapressing,”

as specified in the regulation, because the most significant

step in the permapressing process — chemical treatment —

occurred in the United States. App. 14a; J.A. 37-38. The

only permapressing step that occurred abroad was curing —

the application of heat through pressing and ovenbaking. But

it is clear that curing alone is not enough to make the

permapressing regulation applicable, because it is undisputed

both that Customs granted a duty allowance on Haggar’s all-

synthetic trousers, and that these pants were cured by the

pressing done abroad. J.A. 33. If curing the all-synthetic

trousers is an operation incidental to assembly, then curing

the cotton-polyester trousers should be so, too.

If there is any issue here, then, it is whether the use of

ovenbaking in addition to pressing meaningfully distinguishes

the curing operation used for cotton-polyester fabric from the

pressing operation used to cure all-synthetic fabric. Any

attempt to analogize “ovenbaking” to the “chemical treat-

RE SS

3 SS Vee ad SRS pues oie rere ae aie

ments” listed in 19 C.F.R. § 10.16(c)(4), however, would be

wholly arbitrary. As noted above, it is plain that Customs

does not regard applying heat to fabric in order to impart new

characteristics as a “chemical treatment,” because it granted a

duty allowance for the all-synthetic trousers that were pressed

abroad in order to achieve the performance characteristics

associated with permanent press.

Indeed, if any regulation speaks to the issue, it is the

regulation that specifically identifies “pressing” as an opera-

tion incidental to the assembly process. See id. § 10.16(b)(7).

Under the Customs Service’s categorical approach, any

pressing operation that occurs after assembly should be

deemed incidental. The post-curing operation that begins

with pressing and is completed with ovenbaking, however,

could be accomplished just as effectively — although more

expensively — simply by pressing the pants for two or three

extra minutes, and forgoing ovenbaking altogether. J.A. 41-

42, 57. Thus, Customs has never explained why it is rational

that a more expensive curing process (extended pressing)

would automatically be deemed incidental to assembly, but a

less expensive curing process (pressing plus ovenbaking) is

not — even though each imparts the identical new char-

acteristics and improved condition to the garment. This is

precisely the sort of irrational distinction that renders an

agency’s interpretation of a statute arbitrary and capricious

under step two of Chevron.

4. The Federal Circuit’s decision to immunize from

arbitrariness review the Customs Service’s selection and

application of its regulations has enormous practical

importance for implementation of the Nation’s tariff laws.

The Federal Circuit has exclusive jurisdiction to review

decisions of the Court of International Trade, which in tum

has exclusive jurisdiction over classification disputes. See 28

U.S.C. §§ 1295(aX(S), 1581(a). The Federal Circuit’s rulings

on the validity of customs regulations thus have binding

effect nationwide. Furthermore, cases involving challenges to

classification regulations will always proceed to step two

under Chevron’s framework. For in classification cases,

Congress has never addressed the “precise question at issue,”

Chevron, 467 U.S. at 842; the precise question is which tariff

classification applies to the specific merchandise at issue. As

a result, the Federal Circuit will repeatedly be called upon to

apply step-two analysis in its role as essentially the sole

arbiter of claims that the Customs Service has interpreted

tariff classification provisions irrationally. As demonstrated

above, however, the Federal Circuit has “abdicated review” of

such claims, see Schweiker, 453 U.S. at 44, and only this

Court can correct that error.

The Federal Circuit’s failure to conduct arbitrariness review

in this context could have even greater significance depending

on the Court’s ruling in United States v. Mead Corp., No. 99-

1434 (U.S. argued Nov. 8, 2000). In Mead, the government

has argued that Chevron deference is owed not only to formal

regulations promulgated by the Customs Service, but also to

classification rulings issued by the agency in individual cases.

According to the government’s own estimates, the Customs

Service issues more than one thousand such rulings each year.

US. Brief at 38 n.26, United States v. Mead Corp., No. 99-

1434 (U.S. filed Feb. 29, 2000). Thus, if the Court accepts

the government’s argument in Mead, the Federal Circuit’s

misapplication of Chevron will effectively leave all importers

who are subjected to irrational classification rulings without

an appellate forum in which to obtain meaningful review.

CONCLUSION

The petition for a writ of certiorari should be granted.

Respectfully submitted,