Volkswagen of America, Inc. v. United States

Slip Op. 03-104

UNITED STATES COURT OF INTERNATIONAL TRADE

BEFORE: RICHARD W. GOLDBERG, SENIOR JUDGE

VOLKSWAGEN OF AMERICA, INC.,

Plaintiff,

v. Court No. 96-00132

UNITED STATES,

Defendant.

[Plaintiff’s motion for summary judgment is denied, and
Defendant’s motion for summary judgment is denied.]

Date: August 13, 2003

Law Offices of Thomas J. Kovarcik (Thomas J. Kovarcik)for
plaintiff Volkswagen of America, Inc.

Peter D. Keisler, Assistant Attorney General; John J. Mahon,
Acting Attorney in Charge; Barbara S. Williams, Civil Division,
Commercial Litigation Branch, United States Department of
Justice; Yelena Slepak, Office of Assistant Chief Counsel,
International Trade Litigation, United States Bureau of Customs
and Border Protection, Of Counsel, for defendant United States.

OPINION

GOLDBERG, Senior Judge: In 1994 and 1995, Plaintiff Volkswagen

of America, Inc. (“VW”) imported automobiles from foreign

manufacturers Volkswagen Aktiengesellschaft (“VWAG”) and Audi

Aktiengesellschaft (“Audi”). VW then sold the imported

automobiles to customers in the United States under consumer

warranties. After importation, VW discovered some automobiles

were defective. Pursuant to the consumer warranties, VW repaired
Court No. 96-00132 Page 2

the defects, and tracked the repairs by the individual Vehicle

Identification Numbers (“VINs”). VW also maintained computer

records of the cost for each warranty repair, and was reimbursed

by VWAG and Audi for all warranty repairs.

VW appeals the United States Customs Service’s1 (“Customs”)

denial of the following protests in its complaint: 5301-95-

100342, 5301-4-100550, 5301-5-100072, 5301-5-100178, 5301-5-

100279, 5301-95-100342, 1803-94-100041, 1803-94-100042, 1803-94-

100072, 5401-94-100010, 5401-94-100019, 5401-94-100016, 5401-93-

100022, 5401-93-100026, 5401-93-100078, 1101-95-100590, 1101-95-

100499, 1101-95-100679, and 1101-95-100708. These protests cover

sixty-nine entries; however, VW maintains that it is only moving

for summary judgment on eighteen of the entries. VW also states

in its Reply Brief that it “moves to sever and dismiss from this

action other entries and protests included in the Summons that

are not set forth in Appendix 1.” The Court will grant VW’s

motion to dismiss the other entries from the case, without

prejudice. Therefore, the Court retains jurisdiction over the

following: entry numbers 110-1030393-9, 110-9691248-7, 110-

9691645-4, 110-1030968-8, 110-9691813-8, 110-1030670-0, 110-

1
The United States Customs Service has since become the
Bureau of Customs and Border Protection per the Homeland Security
Act of 2002, § 1502, Pub. L. No. 107-296, 116 Stat. 2135, 2308-09
(Nov. 25, 2002), and the Reorganization Plan Modification for the
Department of Homeland Security, H.R. Doc. 108-32, p. 4 (Feb. 4,
2003).
Court No. 96-00132 Page 3

7609214-4, 110-9691328-7, 110-7609254-0, 110-7609111-2, 110-

7157040-9, 110-7157943-4, 110-7157110-0, 110-7157246-2, 110-

7158048-1, 110-7157706-5, 110-7157464-1, 110-7157491-4. These

entries are contained in protest numbers 1101-95-100708, 1101-95-

100679, 1101-95-100590, 1101-95-100499, 5301-4-100550, 5301-95-

100342, 5301-5-100178, 5301-5-10072.

I. STANDARD OF REVIEW

This case is before the Court on VW’s motion for summary

judgment and Customs’ cross-motion for summary judgment. The

court will grant summary judgment “if the pleadings, depositions,

answers to interrogatories, and admissions on file, together with

the affidavits, if any, show that there is no genuine issue as to

any material fact and that the moving party is entitled to a

judgment as a matter of law.” USCIT R. 56(d). A party opposing

summary judgment must “go beyond the pleadings” and by his or her

own affidavits, depositions, answers to interrogatories, and

admissions to file, designate “specific facts showing that there

is a genuine issue for trial.” Celotex Corp. v. Catrett, 477

U.S. 317, 324 (1986). “While it is true that Customs’ appraisal

decisions are entitled to a statutory presumption of correctness,

see 28 U.S.C. § 2639(a)(1), when a question of law is before the

Court, the statutory presumption of correctness does not apply.”

Samsung Electronics America, Inc. v. United States, 23 CIT 2, 5,

35 F. Supp. 2d 942, 945-46 (1999) (citing Universal Elecs., Inc.
Court No. 96-00132 Page 4

v. United States, 112 F.3d 488, 492 (Fed. Cir. 1997))

(hereinafter “Samsung III”).

II. DISCUSSION

A. Jurisdictional Issues

The Court has “exclusive jurisdiction of any civil action

commenced to contest the denial of a protest, in whole or in

part, under section 515 of the Tariff Act of 1930.” 28 U.S.C. §

1581(a) (2000). Therefore, a prerequisite to jurisdiction by the

Court is the denial of a valid protest. Washington Int’l Ins.

Co. v. United States, 16 CIT 599, 601 (1992). Based on the

following analysis, the Court concludes that VW filed a valid

protest, and thus the Court has jurisdiction.

A protest is required to “set forth distinctly and

specifically” the following information: (1) “each decision . . .

as to which protest is made”; (2) “each category of merchandise

affected by each decision . . .”; and (3) “the nature of each

objection and the reasons therefor.” 19 U.S.C. § 1514(c)(1)

(2000). The implementing regulations expand the requirements,

specifying that the protest must include “[a] specific

description of the merchandise affected by the decision as to

which protest is made”; and “[t]he nature of, and justification

for the objection set forth distinctly and specifically with

respect to each category, payment, claim, decision, or refusal.”

19 C.F.R. § 174.13(a) (2002).
Court No. 96-00132 Page 5

In the seminal case Davies v. Arthur, 96 U.S. 148 (1877),

the Supreme Court articulated the rationale for the specificity

required of protests:

Protests . . . must contain a distinct and clear
specification of each substantive ground of objection
to the payment of the duties. Technical precision is
not required; but the objections must be so distinct
and specific, as, when fairly construed, to show that
the objection taken at the trial was at the time in the
mind of the importer, and that it was sufficient to
notify the collector of its true nature and character
to the end that he might ascertain the precise facts,
and have an opportunity to correct the mistake and cure
the defect, if it was one which could be obviated.

Davies, 96 U.S. at 151.

Customs contends that the protests filed by VW were not

distinct and specific since VW did not (a) tie specific repairs

to specific entries and give the dollar amounts for the repairs;

(b) state the amount of the allowance claimed; or (c) identify

the claimed defects. Under Customs’ reasoning, the protests’

deficiencies undermined the rationale for requiring specificity

in the protest, namely to notify Customs of the true nature of

VW’s protest so that Customs could correct any defect. Customs

argues that this case is similar to Washington, because the

claimed deficiencies in the protests would “‘eviscerate the

protest requirements mandated by Congress and effectively require

Customs to scrutinize the entire administrative record of every

entry in order to divine potential objections and supporting
Court No. 96-00132 Page 6

arguments which an importer meant to advance.’” Custom’s Brief

at 10-11 (quoting Washington at 604).

The Court concludes that Customs’ argument is not

persuasive. In the principal case upon which Customs relies,

Washington, the court held that an importer’s protest of a

Customs’ classification ruling was not valid because it did not

counter with its own asserted classification. In that context,

the Court found that the protests’ deficiencies required Customs

to analyze the entire administrative record to determine every

possible classification the importer could assert, and argue

against each possibility.

The critical distinction between this case and Washington is

that VW is not challenging a classification. There is no

alternative classification for VW to propose. Ideally, in

challenging a classification an importer would provide Customs

with the alternative(s) so that Customs could analyze sample

evidence to determine the classification for the entire shipment.

In this case VW has provided Customs with the regulation to

apply: VW protested the liquidation because of “latent defects.”

Unlike the protest in Washington, Customs does not have to

contemplate all of the statutory and regulatory provisions

pertaining to liquidation to determine why VW is protesting the

liquidation. Customs’ real concern with VW’s protests is that

the protests will require Customs to evaluate the evidence of
Court No. 96-00132 Page 7

each repair to determine if the repaired defect existed at the

time of importation, admittedly a time-consuming task. But the

task remains the same even if VW listed all of the various

defects in its protest. Customs would still have to analyze the

evidence of repairs for every automobile, since the defects

claimed are not uniform throughout the entries. Customs simply

cannot avoid sifting through the entire evidentiary record in

this type of claim.

Although VW’s protests are distinct and specific in the

spirit of Davies, VW’s protests must contain the statutory and

regulatory required elements for a valid protest. Because VW has

set forth in its protest all of the required elements, VW has

filed valid protests and the appeal from them is properly before

the Court.

(1) VW’s protest identified the decision protested

The regulations require the protestant to identify the

decision “with respect to each category, payment, claim,

decision, or refusal.” 19 C.F.R. § 174.13(a). VW identified in

its protests each decision as to which the protest was made,

namely “the appraised value of the subject merchandise” in the

attached entries. The attachments listed the entry numbers for

entries of both defective and non-defective vehicles. Customs

contends that VW was required to identify each defective vehicle,

not simply identify entries that contained some defective
Court No. 96-00132 Page 8

vehicles. By including non-defective vehicles in the protests,

Customs complains it is required to go through every entry and

ascertain which vehicles were defective. The statute does not

require that level of specificity in the protest, and as

previously discussed, supra at 5-7, Customs cannot avoid sifting

through each entry to evaluate the evidence of defects.

(2) VW identified the category of merchandise

VW identified the only category of the merchandise at issue,

namely referring to “all merchandise covered by the above cited

entry,” and attaching the contested entries of automobiles to the

protest.

(3) VW identified the nature of each objection

VW set forth the nature of its objection and the reason

therefor in the identical language in protest numbers 1101-95-

100708, 1101-95-100679, 1101-95-100590, 1101-95-100499, 5301-4-

100550, 5301-95-100342, 5301-5-100178, 5301-5-10072:

Protest is hereby made against your decision,
liquidation, and assessment of duties on all
merchandise covered by the above cited entry. The
claim is that the appraised value of the subject
merchandise, and consequently the duties assessed,
should be reduced by a reasonable allowance for latent
defects and/or maintenance costs.

VW Protests. The language of the protests and the attachments do

not reference the specific vehicles that were defective or the

types of latent defects, or tie the defects to specific vehicles.

However, these are not fatal flaws in the protests. In Mattel v.
Court No. 96-00132 Page 9

United States, the court stated that the “one cardinal rule in

construing a protest is that it must show fairly that the

objection afterwards made at the trial was in the mind of the

party at the time the protest was made and was brought to the

knowledge of the collector to the end that he might ascertain the

precise facts and have an opportunity to correct the mistake and

cure the defect if it was one that could be obviated.” 72 Cust.

Ct. 257, 260, 377 F. Supp. 955, 959 (1974)(citing Bliven v.

United States, 1 Ct. Cust. 205, 207 (Ct. Cust. App. 1911)).

Customs contends the absence of precise facts makes the protests

invalid. However, the protest is the tool whereby the collector

seeks the precise facts. VW’s protests clearly contest the

appraised values of the entries because many of the vehicles

allegedly contained latent defects, and clearly request an

allowance commensurate with those defects.

On a more practical level, Customs cannot now claim that the

language of the protests was insufficient to appraise Customs

that the claims were sought under 19 C.F.R. § 158.12. The

protests in this case contained the same language as the protests

in the Samsung case. Customs did not challenge the language of

the protests in Samsung at any point during the administrative

proceedings or before the Court. The protests in Samsung read as

follows:

Protest is hereby made against your decision,
liquidation, and assessment of duties on all
Court No. 96-00132 Page 10

merchandise covered by the above cited entry. The
claim is that the appraised value of the subject
merchandise, and consequently the duties assessed,
should be reduced by a reasonable allowance for latent
defects and/or maintenance costs.

Samsung, Protest No. 1001-9-000182. It is disingenuous for

Customs to claim now that the language of the protests by VW is

insufficient when Customs has previously recognized the same

language as a valid protest under 19 C.F.R. § 158.12. And while

the Court is not constrained by Customs’ admission of

jurisdiction before the Court, it is persuasive here that when

Customs first answered VW’s complaint, Customs admitted that the

Court had jurisdiction over this matter. See Answer, ¶ 1.

There is one problem with VW’s protests that limits the

Court’s jurisdiction. It is clear that VW had in mind at the

time of protest defective automobiles that had already been

repaired; however, VW could not have had in mind defects to

automobiles that had not been repaired before the protests were

filed. Therefore, the Court does not have jurisdiction over the

automobiles that were repaired after the date VW filed its

protests with Customs.2 See Mattel, 72 Cust. Ct. at 260, 377 F.

2
VW styled its request for re-liquidation as § 1514
protests, most of which were filed within 90 days of liquidation,
and therefore were timely protested. Section 158.12, which
provides for a refund of duties if the goods were defective at
the time of importation, has no time limit to request the refund.
Because VW filed its request as a protest, the Court does not
opine at this time on whether VW could have filed a request for
reconsideration under § 1520 or directly under § 158.12, and then
protest a denial of that request. See, e.g., HRL 547062, May 7,
Court No. 96-00132 Page 11

Supp. at 959 (“a protest . . . must show fairly that the

objection afterwards made at the trial was in the mind of the

party at the time the protest was made”). As a result, the Court

does not have jurisdiction over vehicles repaired after the

individual protest dates of each of the eighteen entries.

B. The Evidence Submitted by VW

19 C.F.R. § 158.12 allows an importer to claim an allowance

in value for merchandise partially damaged at the time of

importation.3 “A protestant qualifies for an allowance in

dutiable value where (1) imported goods are determined to be

partially damaged at the time of importation, and (2) the

allowance sought is commensurate to the diminuation in the value

of the merchandise caused by the defect.” Samsung III, 23 CIT at

6, 35 F. Supp. 2d at 946. Customs opposes VW’s claims under §

158.12 because (A) § 158.12 does not cover damaged goods when the

1999 (In a section § 158.12 claim, protestant first filed a claim
under § 520(c) of the Tariff Act to seek a reduction in the
appraised value because the goods were defective when imported.
Protestant later filed a protest when the § 520(c) claim was
rejected.).
3
The relevant part of § 158.12 reads:

(a) Allowance in value. Merchandise which is subject
to ad valorem or compound duties and found by the port
director to be partially damaged at the time of
importation shall be appraised in its condition as
imported, with an allowance made in the value to the
extent of the damage. However, no allowance shall be
made when forbidden by law or regulation . . . .

19 C.F.R. § 158.12 (2002).
Court No. 96-00132 Page 12

damage was not discovered at importation; and (B) VW has not

provided adequate evidence to overcome the presumption of

correctness afforded Customs’ denial of VW’s protests.4

(1) Section 158.12 Covers Damage Undiscovered at Time of
Importation

Customs’ first challenge to the substance of VW’s claim

under § 158.12 is that this section does not apply to latent

damage which was undiscovered at the time of importation. VW,

however, argues that the section applies to defects existing at

the time of importation, even if those defects remain

undiscovered until some time after entry.

For the reasons articulated in Saab Cars USA v. United

States, Slip Op. 03-82 (July 14, 2003), this Court rejects

Customs argument that the port director has to discover the

defects at the time of importation. Therefore, § 158.12 applies

to defects existing at the time of importation, whether or not

the defects were discovered by the port director at the time of

importation.

(2) VW has shown that material issues of fact exist in its
claim for an allowance under 19 C.F.R. § 158.12

Customs requires the protestant to establish the elements of

19 C.F.R. § 158.12 by clear and convincing evidence. See Samsung

III, 23 CIT at 6, 35 F. Supp. 2d at 946 (approving this

4
Customs also challenges VW’s claims because some repair
claims allegedly include overhead expenses under 19 C.F.R. §
158.12. The Court will reserve that issue for trial.
Court No. 96-00132 Page 13

evidentiary standard). In Samsung III, the Court set forth three

requirements for an importer to successfully claim an allowance

under 19 C.F.R. § 158.12. First, the importer must show that it

contracted for “defect-free” merchandise. Samsung III, 23 CIT at

4-5, 35 F. Supp. 2d at 945. Second, the importer must be able to

link the defective merchandise to specific entries. Samsung III,

23 CIT at 6, 35 F. Supp. 2d at 945-46 (citing Samsung II, 106

F.3d at 379, n.4). Third, the importer must prove the amount of

the allowance value for each entry. Id.

Regarding the first requirement, VW has easily shown that it

contracted for “defect-free” merchandise. VWAG and Audi, the

manufacturers, agreed to pay for the costs of repairing defects

in the merchandise. See Samsung II, 106 F.3d at 379 (agreements

between manufacturer and importer that some merchandise will be

defective merely acknowledges the commercial reality that some

goods will be defective, and does not mean that the importer

contracted for defective merchandise). VW also warranted to its

customers that the goods were free of defects. See id. (evidence

that importer warranted to its customers that the goods were

defect-free demonstrated that importer ordered defect-free

merchandise). And finally, VW, VWAG, and Audi, have a close

corporate relationship, implying that VWAG and Audi would not

sell VW defective merchandise. See id. at 379 (the close

corporate relationship between manufacturer and importer implies
Court No. 96-00132 Page 14

that the importer would not provide defective equipment to its

consumers).

VW has shown there are material issues of fact regarding the

second factor. Samsung III required the importer to establish by

clear and convincing evidence which entries had defects at the

time of importation. 23 CIT at 7-9, 35 F. Supp. 2d at 946-47.

The importer in Samsung III did not provide sufficient evidence,

offering only the consumer warranties and internal documents

showing that claims for defects not existing at the time of

importation were rejected. 23 CIT at 7-8, 35 F. Supp. 2d at 947-

48. VW provides the evidence the Court in Samsung III sought:

descriptions of repairs to each vehicle, and connects each

vehicle repaired to a specific entry through the VINs. See

Samsung III, 23 CIT at 8, 35 F. Supp. 2d at 947 (“a claimant

should provide specific descriptions of the damage or defect

alleged and, in some manner, relate that defective merchandise to

a particular entry”). What remains for trial is development of

the factual record to “independently confirm the validity” of the

repair records, to establish that the defects did indeed exist at

the time of importation. Id.

The third and final requirement for a successful claim under

19 C.F.R. § 158.12 is a showing by clear and convincing evidence

of the amount of the allowances for each entry of the defective

vehicles. Samsung III, 23 CIT 9-11, 35 F. Supp. 2d at 948-50.
Court No. 96-00132 Page 15

VW has detailed repair records that indicate the costs for each

repair. Through the VINs, VW can tie the repair costs to each

entry. Trial is necessary to independently verify the amount of

the allowances. Therefore, VW has created a material issue of

fact regarding the amount of the allowances, which will be

resolved at trial.

III. CONCLUSION

Because material issues of fact remain, the Court denies

VW’s motion for summary judgment and denies Customs’ cross-motion

for summary judgment. Factual questions remain regarding whether

the defects existed at the time of importation, and the amount of

allowances tied to those defects. See Samsung II at 380, n.4

(“For purposes of the remand, we specially note that only those

defects in existence at the time of importation qualify for an

‘allowance’ in value. Samsung thus bears the burden of proving,

for instance, that the costs to repair defects under consumer

warranties were incurred to repair defects in existence at

importation, and not, for instance, those caused by its own

mishandling or by consumer misuse of the equipment.”). The

factual record to be developed at trial will include any new,

relevant evidence produced by VW to meet the burden of proof on

its 19 C.F.R. § 158.12 claim. See E.I. Dupont de Nemours and Co.

v. United States, 24 CIT 1301, 1302-04, 123 F. Supp.2d 637, 639-
Court No. 96-00132 Page 16

41 (2000) (pursuant to 28 U.S.C. § 1581(a), the importer is

permitted to present new evidence to develop the Court’s record).

_________________________________
Richard W. Goldberg
SENIOR JUDGE

Dated: August 13, 2003
New York, New York
 ERRATA

Volkswagen of America, Inc. v. United States, Court No. 96-00132,
Slip Op. 03-104, issued August 13, 2003.

• On page 12, the sentence “Customs requires the protestant to
establish the elements of 19 C.F.R. § 158.12 by clear and
convincing evidence. See Samsung III, 23 CIT at 6, 35 F.
Supp. 2d at 946 (approving this evidentiary standard)”
should read “Customs requires the protestant to establish
the elements of 19 C.F.R. § 158.12 by a preponderance of the
evidence. Fabil Mfg. Co. v. United States, 237 F.3d 1335,
1340-41 (Fed. Cir. 2001)”.

• On page 14, the sentence “Samsung III required the importer
to establish by clear and convincing evidence which entries
had defects at the time of importation. 23 CIT at 7-9, 35
F. Supp. 2d at 946-47" should read “Samsung III required the
importer to establish by a preponderance of the evidence
which entries had defects at the time of importation. 23
CIT at 7-9, 35 F. Supp. 2d at 946-47; see also Fabil Mfg.,
237 F.3d at 1340-41".

• On page 14, the sentence “The third and final requirement
for a successful claim under 19 C.F.R. § 158.12 is a showing
by clear and convincing evidence of the amount of the
allowances for each entry of the defective vehicles.
Samsung III, 23 CIT 9-11, 35 F. Supp.2d at 948-50" should
read “The third and final requirement for a successful claim
under 19 C.F.R. § 158.12 is a showing by a preponderance of
the evidence of the amount of the allowances for each entry
of the defective vehicles. Samsung III, 23 CIT at 9-11, 35
F. Supp. 2d at 948-50; see also Fabil Mfg., 237 F.3d at
1340-41".

August 18, 2003.