Haggar impact uncertain

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January 1, 2003

Many Customs lawyers and importers are struggling to understand what the unanimous Supreme Court decision in United States vs. Haggar Apparel will mean in everyday involvement with Customs. Will the Haggar decision have far-reaching effect -- or was the issue that was addressed one that does not reach much beyond the facts of that case?

Unfortunately, that seems likely to be the subject of further dispute.

The court held April 21 that a Customs Service regulation dealing with the interpretation of a classification provision was entitled to deference under an earlier Supreme Court holding called the Chevron decision. Deference means that a court will not reverse a Customs decision -- even if in the court's own judgment another result would be better -- unless it is found to be unreasonable.

Briefly, in Haggar, the Supreme Court addressed whether deference was due a Customs regulation that sought, in part, to define categorically "operations incidental to assembly" permitted under subheading 9802 of the Harmonized Tariff Schedules of the United States.

The rule at issue was a so-called full-dress regulation, meaning that, before it was adopted, a proposed regulation had been published in the Federal Register and an opportunity had been provided for interested parties to comment.

Processing that qualifies as "incidental to assembly" is entitled to a duty exemption upon importation of articles incorporating U.S.-fabricated components. The plaintiff in Haggar exported trouser components that had been chemically treated in the United States so that the completed trousers were rendered "wrinkle-free" when baked in an oven (a process known as "permapressing") in final processing in Mexico.

The Customs regulation disallowed permapressing as an operation incidental to assembly. In contrast, other trousers sewn of fabric that had not been chemically treated in the United States prior to exportation, but had been similarly processed, were given the duty allowance.

Most readers, I suspect, will instinctively respond that this result is absurd. The Supreme Court, wisely, decided not to reach the question of whether the regulation in issue was a "reasonable" interpretation of the underlying statute, and remanded the case to the Court of Appeals for the Federal Circuit for further consideration of this issue.

It is extremely rare in the Customs classification area for the Customs Service to issue regulations that attempt to define the parameters of a particular classification provision. However, subheading 9802 is a "special" classification provision. Its subject matter is not the classification of a widget, as is the norm, but deciding the base amount upon which to calculate duties.

Therefore, it presents Customs with a limited opportunity to address, by regulation, specific examples of operations deemed to be within and without the scope of "operations incidental to assembly."

As a rule, Customs classification decisions are announced either in the issuance of a binding ruling letter addressed to a party upon the specific facts of a contemplated transaction, or in the denial of a protest against a decision made upon the liquidation of an entry. The Haggar case did not present these scenarios to the court, and therefore, it is fair to conclude that such administrative actions are not affected by the Supreme Court's decision. Whether or not the Customs Service will agree is another matter.

Customs can announce or change a pre-existing classification in several other ways, which fall within an area that may now also become the focus of an argument for deference by the Customs Service.

One is the Customs Modernization and Informed Compliance Act requirement that any ruling letter that Customs contemplates revoking must first be the subject of notice and comment.

Typically in such notices, the Customs Service will announce that other rulings that it has identified as dealing with substantially the same facts are also being revoked by the notice. The recipients of these other rulings do not receive direct notification from Customs that their binding ruling letter has been revoked.

Customs also infrequently publishes for notice and comment its intention to issue an "interpretative rule." Generally, this is intended to inform the public that the agency has studied a particular product classification and has decided to explain how such products will be classified in the future.

Does the decision in Haggar mean that any action by the Customs Service that is preceded by a formal notice and comment period must now be evaluated under a deference standard?

As I've noted, the regulation in Haggar is a rare anomaly, and a fair reading of the Supreme Court's decision does not extend beyond using a Chevron deference analysis to anything but a properly promulgated regulation.

However, as reasonable as this view is, I suspect that we are about to embark upon a period of time when the Customs Service will advocate that more than just the rare properly promulgated regulation be accorded deference.