United States v. UPS Customhouse Brokerage, Inc.

United States Court of Appeals for the Federal Circuit
2008-1409

UNITED STATES,

Plaintiff-Appellee,

UPS CUSTOMHOUSE BROKERAGE, INC.,

Defendant-Appellant.

Patricia M. McCarthy, Assistant Director, Commercial Litigation Branch, Civil
Division, United States Department of Justice, of Washington, DC, argued for plaintiff-
appellee. With her on the brief was Jeanne E. Davidson, Director. Of counsel on the brief
were Courtney E. Sheehan, Attorney, and Edward M. Greenwald, Attorney, Office of the
Associate Chief Counsel, United States Customs & Border Protection, United States
Department of Homeland Security, of Chicago, Illinois.

Terence J. Lynam, Akin Gump Strauss Hauer & Feld LLP, of Washington, DC,
argued for defendant-appellant. With him on the brief were Lars-Erik A. Hjelm, Tamer A.
Soliman and Monica P. Sekhon.

Joseph M. Spraragen, Grunfeld, Desiderio, Lebowitz, Silverman & Klestadt LLP, of
New York, New York, for amicus curiae. With him on the brief were Alan R. Klestadt and
Robert B. Silverman.

Appealed from: United States Court of International Trade

Judge Gregory W. Carman
United States Court of Appeals for the Federal Circuit
2008-1409

UNITED STATES,

Plaintiff-Appellee,

UPS CUSTOMHOUSE BROKERAGE, INC.,

Defendant-Appellant.

Appeal from the United States Court of International Trade in case No. 04-00650, Judge
Gregory W. Carman.
_______________________

DECIDED: August 11, 2009
_______________________

Before SCHALL, ARCHER, and MOORE, Circuit Judges.

ARCHER, Circuit Judge.

UPS Customhouse Brokerage, Inc. (“UPS”) appeals the Court of International

Trade’s judgment in favor of the United States. The Court of International Trade held

1) UPS misclassified certain merchandise under subheading 8473.30.9000 of the

Harmonized Tariff Schedule of the United States (“HTSUS”); 2) UPS’s misclassification

established multiple violations of 19 U.S.C. § 1641, which requires brokers to exercise

responsible supervision and control over their customs business; and 3) the United

States is entitled to a judgment in the amount of $75,000 against UPS. United States v.

UPS Customhouse Brokerage, Inc., 558 F. Supp. 2d 1331 (Ct. Int’l Trade May 28,

2008). We affirm the court’s holding that UPS misclassified merchandise under

subheading 8473.30.9000. Because the Court of International Trade erred in upholding
the Bureau of Customs and Border Protection’s (“Customs”) determination that UPS did

not exercise responsible supervision and control in violation of 19 U.S.C. § 1641, we

vacate that portion of the court’s judgment and remand for further proceedings.

Since 1985, UPS has been a licensed customs broker that prepares and files

customs entry documents on behalf of its clients. This case arises from UPS’s

classification entries under HTSUS heading 8473, which covers parts and accessories

of automated data processing (“ADP”) machines. From January through May 2000,

UPS classified the sixty entries at issue here under HTSUS subheading 8473.30.9000.

Customs claimed that the entries were misclassified because HTSUS 8473.30.9000

required the parts at issue to contain a cathode ray tube (“CRT”), rather than being part

of a computer that contained a CRT.

Customs initiated eight penalty actions against UPS covering the sixty alleged

misclassified entries as follows: three pre-penalty notices for $5,000 each on May 15,

2000, with each notice consisting of five entries; three pre-penalty notices for $5,000

each on July 11, 2000, with each notice consisting of five entries; and two pre-penalty

notices for $30,000 each on August 15, 2000, with each notice consisting of fifteen

entries. All eight of the pre-penalty notices alleged a failure to exercise responsible

supervision and control in classifying ADP parts under HTSUS subheading

8473.30.9000. On September 15, 2000, Customs issued three penalty notices for

$5,000 each based on the May 15 pre-penalty notices. UPS paid these penalties. On

September 26, 2000, Customs issued three more penalty notices for $5,000 each

based on the July 11 pre-penalty notices, and on October 19, 2000, Customs issued

2008-1409 2
two more penalty notices for $30,000 each based on the August 15 pre-penalty notices.

The penalties assessed totaled $90,000.

On December 17, 2004, the government brought suit in the Court of International

Trade seeking to enforce the unpaid portion of the penalties—i.e., $75,000. UPS

moved for summary judgment on the issue of whether 19 U.S.C. § 1641 limited

Customs to assessing a single penalty for all alleged violations preceding issuance of

the first pre-penalty notice or, alternatively, whether it limited Customs to an aggregate

monetary penalty of $30,000 for all alleged violations preceding issuance of the first pre-

penalty notice. 1 The court denied the motion. 2

Following trial, the Court of International Trade held that the computer parts were

misclassified and that the repeated misclassifications constituted multiple violations of

the statutory duty to exercise responsible supervision and control. The court then

concluded that Customs had demonstrated that UPS failed to exercise responsible

supervision and control and that Customs established that UPS violated

19 U.S.C. § 1641 on multiple occasions. The Court of International Trade further held

1
These issues were briefed by the parties in this appeal, but we decline to
consider them now because of our decision that the Court of International Trade erred
in upholding the underlying determination by Customs that UPS did not exercise
responsible supervision and control as required by 19 U.S.C. § 1641.
2
The Court of International Trade granted UPS’s motion to certify for
interlocutory appeal the question of whether under 19 U.S.C. § 1641 Customs:

may issue more than one penalty notice for a customs broker’s alleged
failure to exercise responsible supervision and control based upon the
customs broker’s alleged repeated misclassification of entered
merchandise over a period of time and on multiple separate entry
documents; and if so, whether the aggregate penalty sought from those
multiple penalty notices may exceed $30,000.

This court, however, denied the petition for permission to appeal.

2008-1409 3
that the United States was entitled to a judgment in the amount of $75,000, plus any

applicable interest that may be due.

UPS appealed, and we have jurisdiction pursuant to 28 U.S.C. § 1295(a)(5).

“The ultimate question in a classification case is whether the merchandise is

properly classified under one or another classification heading. We have consistently

viewed this as a question of law, see Sports Graphics, Inc. v. United States, 24 F.3d

1390, 1391 (Fed. Cir. 1994), because what is at issue is the meaning of the terms set

out in the statute . . . .” Bausch & Lomb, Inc. v. United States, 148 F.3d 1363, 1365

(Fed. Cir. 1998). Additionally, “[c]onstruction of a statute or regulation is a question of

law we review de novo.” Summers v. Gober, 225 F.3d 1293, 1295 (Fed. Cir. 2000).

“Despite our de novo review of interpretations of tariff provisions, classification

decisions by Customs interpreting provisions of the HTSUS may receive some

deference under the principles of Skidmore v. Swift & Co., 323 U.S. 134, 140, 65 S. Ct.

161, 89 L. Ed. 124 (1944).” MetChem, Inc. v. United States, 513 F.3d 1342, 1345 (Fed.

Cir. 2008) (citation omitted). Nevertheless, “Customs’ rulings are ‘not controlling upon

the courts by reason of their authority,’ Skidmore, 323 U.S. at 140, 65 S. Ct. 161, and

‘this court has an independent responsibility to decide the legal issue of the proper

meaning and scope of HTSUS terms.’” Id. (quoting Warner-Lambert Co. v. United

States, 407 F.3d 1207, 1209 (Fed. Cir. 2005)).

2008-1409 4
A

The first issue here is whether UPS properly classified merchandise under

HTSUS subheading 8473.30.9000.

A classification decision has two underlying steps: “first, construe the relevant

classification headings; and second, determine under which of the properly construed

tariff terms the merchandise at issue falls.” Bausch & Lomb, Inc., 148 F.3d at 1364-65.

“The HTSUS scheme is organized by headings, each of which has one or more

subheadings; the headings set forth general categories of merchandise, and the

subheadings provide a more particularized segregation of the goods within each

category.” Orlando Food Corp. v. United States, 140 F.3d 1437, 1439 (Fed. Cir. 1998).

“The proper classification of merchandise entering the United States is directed by the

General Rules of Interpretation (‘GRIs’) of the HTSUS and the Additional United States

Rules of Interpretation.” Id. GRI 1 states that “classification shall be determined

according to the terms of the headings and any relative section or chapter notes.”

GRI 1, HTSUS (2000). Accordingly, “[a] classification analysis begins . . . with the

language of the headings.” Orlando Food Corp., 140 F.3d at 1440.

UPS asserts that the subheadings of 8473.30 are properly read as dividing items

based on whether the machine of which they are a part contains a CRT. Thus, the

parts and accessories imported under subheadings 8473.30.6000 and 8473.30.9000

need not themselves contain CRTs, but merely the assembled machines must contain

CRTs. The government argues that such a position does not make sense since

subheadings under 8471 are divided according to whether the machines contain CRTs

2008-1409 5
(among other things), 3 and subheadings under 8473 are divided according to whether

the parts or accessories (of the machines of heading 8471) contain CRTs.

Heading 8471 is entitled “[a]utomatic data processing machines . . . ; magnetic or

optical readers, machines for transcribing data onto data media in coded form and

machines for processing such data.” HTSUS 8471 (2000). Heading 8473 is entitled

“[p]arts and accessories (other than covers, carrying cases and the like) suitable for use

solely or principally with machines of headings 8469 to 8472.” HTSUS 8473 (2000).

3
The beginning of heading 8471 is as follows:

8471 Automatic data processing machines and units thereof;
magnetic or optical readers, machines for transcribing
data onto data media in coded form and machines for
processing such data, not elsewhere specified or included:

8471.10.0000 Analog or hybrid automatic data processing machines
8471.30.0000 Portable digital automatic data processing machines,
weighing not more than 10 kg, consisting of at least a
central processing unit, a key board and a display

Other digital automatic data processing machines:
8471.41.00 Comprising in the same housing at least a
central processing unit and an input and output
unit, whether or not combined
With cathode-ray tube (CRT)
8471.41.0035 Color
8471.41.0065 Other
8471.41.0095 Other

8471.49 Other, entered in the form of systems:
8471.49.10 Digital processing units entered with the
rest of a system, whether or not
containing in the same housing one or
two of the following types of unit:
storage units, input units, output units
With cathode-ray tube (CRT):
8471.49.1035 Color
8471.49.1065 Other
8471.49.1095 Other . . . .

2008-1409 6
Subheading 8473.30 is entitled “[p]arts and accessories of the machines of heading

8471.” HTSUS 8473.30 (2000). Subheading 8473.30 breaks out further into additional

differentiated subcategories:

8473.30 Parts and accessories of the machines of heading 8471:
Not incorporating a cathode ray tube:
8473.30.1000 Printed circuit assemblies
8473.30.2000 Parts and accessories, including face
plates and lock latches, or printed circuit
assemblies

8473.30.3000 Other parts for printers, specified in
additional U.S. note 2 to this chapter

8473.30.5000 Other

Other
8473.30.6000 Other parts for printers, specified in
additional U.S. note 2 to this chapter

8473.30.9000 Other

Subheading 8473.30 is specifically reserved for “[p]arts and accessories of the

machines of heading 8471.” HTSUS 8473.30 (2000). Thus, subheading 8473.30 is a

parts provision. The subheading does not include the machines themselves, as posited

by UPS. The machines themselves would fall under heading 8471. This, by itself,

undermines UPS’s argument.

UPS argues that the last antecedent rule supports its interpretation. This is

incorrect. Under the last antecedent rule, “a limiting clause or phrase . . . should

ordinarily be read as modifying only the noun or phrase that it immediate follows.”

Barnhart v. Thomas, 540 U.S. 20, 26 (2003). Applying this rule in the manner UPS

suggests strains logic and grammar. The main clause of subheading 8473.30 provides

“[p]arts and accessories of the machines of heading 8471.” Immediately following this

2008-1409 7
phrase, on the next line, and indented, is the text “[n]ot incorporating a cathode ray

tube.” This phrase does not, as UPS asserts, modify the phrase “the machines of

heading 8471.” The indentation of the phrase demonstrates that “[n]ot incorporating a

cathode ray tube” is a subset of the higher-level subheading of “[p]arts and accessories

. . . .” It is not a continuation of the phrase “machines of heading 8471.” Rather, the

prepositional phrase “of the machines of heading 8471” modifies “[p]arts and

accessories.”

The paragraph structure of subheading 8473.30 demonstrates that there are two

types of “parts and accessories”: those “not incorporating a cathode ray tube” and

“other.” The articles described in subheadings 8473.30.1000 through 8473.30.5000

cannot contain CRTs, as CRTs are explicitly excluded by the language “[n]ot

incorporating a cathode ray tube.” The articles described in subheadings 8473.30.6000

and 8473.30.9000 must contain a CRT, as that is the only classification possibility of

“other.”

Accordingly, in order to be classified in subheading 8473.30.9000, the

merchandise must be a part or accessory of the machines of heading 8471 and that

part or accessory must incorporate a CRT. Because the merchandise at issue did not

incorporate a CRT, we affirm the Court of International Trade’s holding that UPS

misclassified certain merchandise under subheading HTSUS 8473.30.9000.

Section 1641 of Title 19 is drawn to customs brokers. Subsection (b)(4) of

§ 1641 is entitled “[d]uties” and states “[a] customs broker shall exercise responsible

2008-1409 8
supervision and control over the customs business that it conducts.” “Responsible

supervision and control” is defined in 19 C.F.R. § 111.1:

Responsible supervision and control. “Responsible supervision and
control” means that degree of supervision and control necessary to ensure
the proper transaction of the customs business of a broker, including
actions necessary to ensure that an employee of a broker provides
substantially the same quality of service in handling customs transactions
that the broker is required to provide. While the determination of what is
necessary to perform and maintain responsible supervision and control
will vary depending upon the circumstances in each instance, factors
which CBP [Customs & Border Protection] will consider include, but are
not limited to: The training required of employees of the broker; the
issuance of written instructions and guidelines to employees of the broker;
the volume and type of business of the broker; the reject rate for the
various customs transactions; the maintenance of current editions of CBP
Regulations, the Harmonized Tariff Schedule of the United States, and
CBP issuances; the availability of an individually licensed broker for
necessary consultation with employees of the broker; the frequency of
supervisory visits of an individually licensed broker to another office of the
broker that does not have a resident individually licensed broker; the
frequency of audits and reviews by an individually licensed broker of the
customs transactions handled by employees of the broker; the extent to
which the individually licensed broker who qualifies the district permit is
involved in the operation of the brokerage; and any circumstance which
indicates that an individually licensed broker has a real interest in the
operations of a broker.

(emphasis added).

UPS argues that Customs is required to consider all of the factors set forth in

19 C.F.R. § 111.1 when determining whether a broker exercised responsible

supervision and control. The government contends that deference is due Customs’

interpretation of its own regulation and that where a regulation consists of possible

factors, it is left to Customs’ discretion to weight the factors as deemed appropriate.

Deference is indeed due an agency’s interpretation of its own regulation. In fact,

such an interpretation will be upheld “unless it is plainly erroneous or inconsistent with

the regulation.” Bowles v. Seminole Rock & Sand Co., 325 U.S. 410, 414 (1945); see

2008-1409 9
also Auer v. Robbins, 519 U.S. 452, 461-62 (1997); Arbor Foods Inc. v. United States,

97 F.3d 534, 540 (Fed. Cir. 1996). Here, however, Customs’ interpretation of

19 C.F.R. § 111.1 was inconsistent with the regulation itself.

The regulation explains that what meets the “responsible supervision and control”

standard will vary in each case. However, § 111.1 lists ten “factors which [Customs] will

consider.” (emphasis added). “Will” is a mandatory term, not a discretionary one. See

New England Tank Indus. of N.H., Inc. v. United States, 861 F.2d 685, 694 (Fed. Cir.

1988) (noting the difference between the mandatory terms “will” and “will not” and

discretionary terms such as “should”). Thus, any interpretation of § 111.1 that does not

require consideration of the listed factors is clearly inconsistent with the plain language

of the regulation.

Customs, of course, has discretion in how it weighs each of the factors listed in

§ 111.1. Additionally, the regulation makes clear that Customs is free to consider other

factors in addition to those listed. See 19 § C.F.R. § 111.1 (listing “factors which

[Customs] will consider include, but are not limited to . . . .”). However, this discretion

does not absolve Customs of its obligation under the regulation to consider at the least

the ten listed factors.

The government argues that such an interpretation is unreasonable given that

not all of the factors listed in § 111.1 would apply in every instance. The applicability of

each of the factors to a particular situation is irrelevant. Customs can simply explain

that a particular factor does not apply and move on from there. Nothing in the

regulation suggests that such treatment is improper.

2008-1409 10
An agency must follow its own regulations. See Fort Stewart Sch. v. Fed. Labor

Relations Auth., 495 U.S. 641, 654 (1990) (“It is a familiar rule of administrative law that

an agency must abide by its own regulations.”). Here, Customs failed to do so. The

government argues that Customs did in fact consider the factors listed in § 111.1. As

evidence of this, the government points to a three-page excerpt in the record which

includes testimony by Supervisory Import Specialist Lydia Goldsmith. However, we do

not see where all ten factors were even mentioned in the testimony. Additionally, where

specific factors are discussed in the testimony, it is difficult to determine if those factors

were actually considered by Customs.

Because Customs did not consider all ten factors listed in 19 C.F.R. § 111.1, its

determination that UPS violated 19 U.S.C. § 1641 was improper. Accordingly, we

vacate that portion of the Court of International Trade’s judgment and remand for further

proceedings.

Our holding that Customs improperly concluded that UPS violated

19 U.S.C. § 1641 moots the remaining issues briefed by the parties, and we decline to

reach them. See United States v. Alaska S.S. Co., 253 U.S. 113, 116 (1920) (“[I]t is a

settled principle in this court that it will determine only actual matters in controversy

essential to the decision of the particular case before it.”); see also Elkem Metals Co. v.

United States, 468 F.3d 795, 803 (Fed. Cir. 2006) (concluding that because an amount

was properly excluded from constructed value, the issue of whether the party correctly

reported that amount was moot and need not be decided). These issues are whether

there were in fact multiple violations of § 1641 and whether Customs can impose

2008-1409 11
penalties aggregating more than $30,000, see 19 C.F.R. § 111.91 (“Customs may

assess a monetary penalty or penalties as follows: (a) In the case of a broker in an

amount not to exceed an aggregate of $30,000 . . . .”). Although these issues are

important to the parties and the industry, deciding them would be premature.

Accordingly, those portions of the Court of International Trade’s judgment addressing

these issues are vacated.

AFFIRMED-IN-PART, VACATED-IN-PART, AND REMANDED-IN-PART

COSTS

No costs.

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