author: BALDWIN, Judge.

text:
    CONTROL DATA CORPORATION, Appellant, v. The UNITED STATES, Appellee.
    Customs Appeal No. 5531.
    United States Court of Customs and Patent Appeals.
    July 25, 1974.

      William D. Outman, II, Washington, D. C., Baker & McKenzie, New York City, attorney of record, for appellant.
    Irving Jaffee, Acting Asst. Atty. Gen., Andrew P. Vance, Chief, Customs Section, Bernard J. Babb, New York City, for the United States.
    Before MARKEY, Chief Judge, and RICH, BALDWIN, LANE and MILLER, Judges.
   BALDWIN, Judge.

This appeal is from the decision and judgment of the Customs Court, Third Division, Appellate Term, 69 Cust.Ct. 274, A.R.D. 310, 352 F.Supp. 1392 (1972), wherein the Appellate Term unanimously reversed the decision and judgment of a single judge’sitting in reappraisement insofar as it sustained the importer’s claimed values, 64 Cust.Ct. 693, R.D. 11703 (1970).

The merchandise in issue consists of inner and outer memory planes which are constituent elements of high speed, digital computers. These memory planes áre designed so that they may only be used in a particular manufacturer’s computer. The memory planes were assembled in Hong Kong from U. S. origin component materials, supplied and consigned to the foreign assembler, Waltek, Ltd. (Waltek), a wholly-owned subsidiary of appellant. The memory planes were appraised on the basis of constructed value as defined by section 402(d) of the Tariff Act of 1930, as amended by the Customs Simplification Act of 1956 (19 U.S.C. § 1401a(d). The basic issue is whether the statutory-amount for profit (section 402(d)(2)) element of the appraised value is correct.

The record, a detailed summary of which appears in the opinion of the trial court, consists of the testimony of six witnesses and seven exhibits, all offered on behalf of appellant. Only the testimony of James Erickson and A. J. Lavoie and a summary of Exhibits 3, 4, and 6 need be repeated for an understanding of our disposition of this appeal.

James Erickson, Legal Assistant to the Treasurer of appellant testified that he sent four letters, introduced into evidence as appellant’s Collective Exhibit 3, to Ampex Corporation, Fabri-Tek, Electronic Memories and Lockheed Aircraft International requesting information as to whether each company, directly or indirectly, manufactured or assembled memory planes in Hong Kong. The letters further requested, if such manufacturing or assembling was being done, information relating to the amount or rate of profit attributable to such operations. Erickson testified with respect to the replies received from each of the above companies, which were introduced as appellant’s Collective Exhibit 4. He noted that inquiries had been sent to every known company in Hong Kong that manufactured or assembled memory planes. Each of the companies acknowledged the fact that they had subsidiaries assembling memory planes in Hong Kong, but each company declined to divulge any profit information. The pertinent portions of these reply letters are as follows:

“As a matter of business policy, however, we are not able to provide you with the rate of profit attributable to the operation in Hong Kong.”
“I am sorry that I am not at liberty to divulge the profit structure of our Hong Kong operation (as you can well understand), but I can assure you that the profit rate is not exorbitant and is consistent with normal markups realized in this type of industry.”
“We regret, however, that more specific information cannot be provided

Exhibit 6 is a copy of a work sheet sent to appellant by the U. S. Customs Service which illustrates the formula on your additional questions as this material is regarded as proprietary.”

“Prices paid to TDL [our subsidiary] are determined by negotiation, in advance, and cover both their cost and a reasonable level of profit (by U. S. standards).”

A. J. Lavoie, an import specialist with the U. S. Customs Service at Minneapolis, Minnesota, testified with regard to procedures and methods used in effecting appraised values for the subject merchandise. He stated that in March, 1966, he sent a request for information on Customs Form 6313 to appellant and that under date of March 22, 1966, he received a reply from appellant with the information that had been requested. The reply gave a cost breakdown of Waltek’s assembly charges for each memory plane assembly, which consisted of $2.63 for direct labor; $6.57 for overhead, general and administrative expenses, and selling expenses; and $5.47 for profit. Lavoie testified that the profit figure of $5.47 was converted into a percentage figure by adding the foreign factory’s cost of direct labor and general expenses and dividing this total into the foreign factory’s dollar figure for profit. Lavoie confirmed that the profit percentage, derived solely from the relation which profit bears to direct labor and overhead, was applied to those two cost items and against the cost of U. S. goods, ex-U. S. plant and against freight, brokerage and insurance to the foreign factory.

used to determine the appraised value of the imported merchandise on the basis of constructed value. The pertinent portion of Exhibit 6 reads as follows:

DETERMINE PERCENT OF PROFIT PRIOR TO “WORKING” CONSTRUCTED VALUE

Direct labor (1) $2.63

Overhead, Geni and Admin, expenses, and selling expenses (2) 6.57

Profit (3) 5.47

Total remittance $14.66

%■ of profit is determined by dividing the total costs (1) and (2) into the profit figure (3).

1 and 2 total $9.20

3 5.47 59.46%' profit.

Having found percent of profit then work constructed value net cost of U. S. Goods sent abroad $33.56

Add frt, brokerage, ins. to fgn factory :48

totals 34.04

direct labor 2.63

geni exp 6.57 9.20

profit 59.46%' applied on total of 34.04 and 9.20 which is 43.24 25.71

$68.95

Appellant contends that $5.47 is the correct amount for profit to be used in computing the constructed value; whereas appellee claims that $25.71 is the correct amount for profit.

The trial court found the above profit computation — $25.71—to be improper and stated:

It is obvious that the assembler had no expenses for the material components and merely bore the expenses of assembly. The percentage which his profits bear to his expenses will be much larger than if he were the actual manufacturer and had to purchase the materials. For this reason it is totally unrealistic, in recreating or simulating the cost of production, to generate a percentage in this manner. This results in the anomaly of an amount for profit greater than the total actual cost of assembly and profit.
Defendant, in its brief asserts that “the appraising official found an amount of profit which would have been realized had there been a cost of materials incurred by the exporter.” This commendable sentiment is precisely what was not done here.
The appraising official began without considering the cost of materials at all. He first determined a percentage of profit by dividing the total costs (direct labor, overhead, general and administrative expenses), into the profit. He then, for the first time, brought cost of materials into the consideration by applying said profit percentage to the total sum of cost of component materials, freight, direct labor and general expenses. Thus his procedure in determining the profit percentage was inconsistent with his later application of that percentage. Had the appraising official been treating the assembler as a manufacturer, as would have been the proper procedure, he would never have computed a profit percentage by ignoring cost of materials entirely. This is a fundamental error in the ascertainment of an amount for profit since the percentage was generated without regard for cost of materials and then an amount arrived at with full regard for cost of materials.

Since the memory planes were assembled from components which were the product of the United States, they were subject to item 807.00 TSUS treatment wherein duty is assessed upon the full value of the imported article less the cost of the American components. For that reason, the trial court further stated:

One of ironies of this method of computation is that it places the present importer in a worse position when he is supplying the components than if he were to purchase the entire completed article from the assembler. In effect what was done here is actually very close to the levying of duty on the cost of materials, directly contrary to the provisions of item 807.00. The procedure used [h]as the effect of expanding the value of the article by amounts directly related to the cost of materials making the later elimination of the cost of American materials a meaningless act.

The trial court then found that since only the method of computation .used was incorrect, appellant could rely upon the underlying values for labor, overhead expenses, and profit which remained presumptively correct under the separability doctrine. The trial court noted that were it not for that presumption of correctness, appellant would not have met its burden of proof in showing that its amount for profit was one which is usually reflected in sales by producers of merchandise of the same general character. The court, citing N. M. Albert Co., Inc. United States, 59 Cust.Ct. 788, R.D. 11417 (1967), held that appellant had not shown the required diligence in ascertaining the profits of competing manufacturers, insofar as appellant’s inquiries were directed to the parent companies, rather than their Hong Kong subsidiaries.

In unanimously reversing the trial court’s judgment, insofar as it sustained appellant’s claimed values, each judge of the Appellate Term wrote a separate opinion accompanying the court’s Per Curiam opinion.

Judge Richardson opined that the court lacked jurisdiction as to some of the consolidated appeals. On the entry papers of some of the importations, the consignee is Norman G. Jensen, Inc., not appellant. Since appellant is not the consignee of the instant merchandise, and there is no evidence in the record that appellant is the agent for the consignee, Judge Richardson would have dismissed those appeals on the ground that appellant lacked standing to prosecute those appeals.

As to the other appeals, Judge Richardson agreed with the trial court that the appraiser’s method of computing a statutory profit did not comply with the requirements of section 402(d). However, he disagreed with the trial judge that appellant could reply upon the separability doctrine for the element of profit, since that element was the very /element in dispute between the parties. Since he found the record barren of any evidence of the profit derived from sales of merchandise of the same general character which would support the profit figure contended for by appellant, Judge Richardson opined that the appraisement must stand as being presumptively correct.

Judge Landis was satisfied that the coui’t had jurisdiction of all the appeals particularly in view of the absence of any challenge by appellee to appellant’s standing. Judge Landis further concurred in the result reached by Judge Richardson as to the remaining importations and held that result equally applicable to the appeals which Judge Richardson would have dismissed for lack of jurisdiction.

As to the jurisdictional issue, Judge Newman noted that appellant’s attorney had signed the notices of appeal and under that signature line appeared the notation “(Consignee or Agent)” and, under the provisions of section 501(a) of the Tariff Act of 1930, as amended by the Customs Simplification Act of 1953 (19 U.S.C. § 1501), appeals are authorized to be filed in the name of an agent of the consignee. Since the government had not challenged in any manner appellant’s standing, Judge Newman thus held there was no burden upon appellant to. prove its status as an agent and, therefore, he would not dismiss any of the appeals on jurisdictional grounds.

Judge Newman further stated with respect to the merits of the appeal that:

In my view, there is a presumption of correctness attaching both to Waltek’s profit figure utilized in the Government’s computation ($5.47), and the profit figure the district director derived from the latter figure by a computation ($25.71) which he included in the constructed value. Waltek’s profit has the status of a “subsidiary finding” by the district director solely as to the amount of Waltek’s profit, and thus is presumptively correct only to that extent. On the other hand, the amount of profit which the district director included in the constructed value ($25.71) has the status of a presumptively correct “subsidiary finding” that such amount was “equal to that usually reflected in sales of merchandise of the same general class or kind as the merchandise undergoing appraisement”, as required by * * * [Section 401(d) (2)(402(d) (2))].
Since there is no presumption that Waltek's profit was “equal to that usually reflected in sales of merchandise of the same general class or kind” (because it was not the profit included in the appraised value), appellee had the burden of establishing by proof the profit usually reflected in sales.

Having found that the above burden had not been met by appellant, Judge Newman joined in the reversal of that portion of the lower court’s decision which sustained appellant’s claimed profit amount.

In holding that appellant had not met its burden of proof, Judge Newman expressed the view that even granting that appellant had shown the required diligence in ascertaining the profits of competing companies, the “diligent effort” rule was not applicable in this case because section 402(d)(2) refers to sales of merchandise,' rather than sales of services such as those performed by Waltek.

OPINION

Bearing in mind that statutes, such as section 501(a), which give a right of appeal are to be liberally construed, Wilmington Shipping Co. v. United States, 52 CCPA 76, C.A.D. 861 (1965), we agree with the rationales of the majority of the Appellate Term, supra, as to the jurisdictional issue raised sua sponte by Judge Richardson. Accordingly, we hold that this court has, as did the Appellate Term, jurisdiction of all the instant appeals.

Upon examining the profit computation method at bar, we have reached the same conclusion as that of the trial court and Judge Richardson- — the method used by the appraising official to compute the constructed value was erroneous. The evidence, particularly Exhibit 6, clearly shows that the appraising official adopted an artificial and unrealistic standard for computing Waltek’s profit, rather than using the standard prescribed in section 402(d)(2). The $25.71 profit amount computed is particularly demonstrated to be illogical and unrealistic when it is compared to Waltek’s total costs of $9.20 for labor and overhead — a profit of approximately 279.5% of its total costs. Accordingly, we hold that the appraising official, in computing a profit percentage without considering the cost of materials, erred in then applying that profit percentage to the cost of the materials — a cost which was never incurred by Waltek.

However, appellant, in order to overcome the presumption of correctness attaching to the appraisement, must still establish that his profit amount of $5.47 is “an amount for . . . profit equal to that usually reflected in sales of merchandise of the same general class or kind as the merchandise undergoing appraisement . . . .” Section 402(d) (2). Appellant urges that this burden of proof has been met for two alternative reasons.

Appellant first submits that the doctrine of separability is applicable to the instant appraisement. Therefore, appellant contends that it is entitled to rely upon the presumptive correctness of the appraising official’s subsidiary finding that Waltek’s actual profit is $5.47 and that this amount should serve as the profit element of the constructed value. We, as did Judge Newman, agree with appellant that the doctrine of separability is applicable, but only to the extent that appellant’s $5.47 amount may be considered presumptively correct as Waltek’s actual profit. But whether or not its $5.47 actual profit amount satisfies the requirements of section 402(d)(2) is the very heart of this controversy, insofar as the pfofit amount is the sole item in the appraisement that appellant has challenged. To that extent, the doctrine of separability does not create a presumption of correctness that Waltek’s actual profit complies with the requirements of section 402(d)(2). See United States v. Fritzsche Bros., Inc., 35 CCPA 60, C.A.D. 371 (1947).

Assuming, arguendo, that it could not rely upon the doctrine of separability to meet its burden of proof, appellant asserts that the record demonstrates that it has expended diligent, although unsuccessful, effort to ascertain the profits of the other Hong Kong manufacturers of merchandise of the same general kind. Therefore, appellant contends that the profit actually realized by Waltek should suffice as the profit element of section 402(d)(2).

This court has on occasion permitted the profits actually earned by a manufacturer to be used as the profits required by section 402, when either there are no other manufacturers of merchandise of the same general class or kind or when diligent inquiry has failed to elicit the required information from other manufacturers, if they are in existence. United States v. Jovita Perez, 36 CCPA 114, C.A.D. 407 (1949). See also John V. Carr & Son, Inc. v. United States, 52 CCPA 62, C.A.D. 860 (1965) and United States v. Maier, 21 CCPA 41, T.D. 46378 (1933).

The uneontradicted evidence of record establishes that there were four .other Hong Kong manufacturers of merchandise of the same general class or kind, from whom appellant diligently attempted to ascertain the amount or rate of profit attributable to such manufacturing operations. We are not unmindful of the fact that appellant attempted to elicit this information from the American parent companies, rather than from their Hong Kong subsidiaries, but we do not find this fact to affect our analysis of whether or not appellant diligently sought the needed profit information. Nor do we find any support in the case law that the “diligent effort” rule is not applicable when sales of services, rather than merchandise, are involved. The determinative factors are that the companies to whom inquiries were made represented all known Hong Kong manufacturers, and the necessary information, which they declined to provide, was within their possession, as is clearly demonstrated by their replies, supra. Had their replies not indicated that they possessed such information, appellant would have then had to extend the scope of its inquiry to include directly eliciting information from the Hong Kong subsidiaries. Thus, we hold that appellant has satisfied the requirements of the “diligent effort” rule. In so doing, appellant has established that its profit amount of $5.47 satisfies the requirements of section 402(d)(2) and has overcome the presumption of correctness attaching to the appraisement.

For the foregoing reasons, appraisement of the imported memory planes at the constructed values found by the Customs Court, Third Division, Appellate Term is incorrect, and its judgment is reversed.

Reversed.

MILLER, J., concurs in the result.

      . Constructed value, (d) For the purposes of this section, the constructed value of imported merchandise shall be the sum of—
      (1) the cost of materials (exclusive of any internal tax applicable in the country of exportation directly to such materials or their disposition, but remitted or refunded upon the exportation of the article in the production of which such materials are used) and of fabrication or other processing of any kind employed in producing such or similar merchandise, at a time preceding'the date of exportation of the merchandise undergoing appraisement which would ordinarily permit the production of that particular merchandise in the ordinary course of business ;
      (2) an amount for general expenses and profit equal to that usually reflected in sales of merchandise of the same general class or kind as the merchandise undergoing appraisement which are made by producers in the country of exportation, in the usual wholesale quantities and in the ordinary course of trade, for shipment to the United States, and

        (3) the cost of all containers and coverings of whatever nature, and all other expenses incidental to placing the merchandise undergoing, appraisement in condition, packed ready for shipment to the United States.

      . 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 ...........................A duty upon the full value of the imported article, less the cost or value of such products of the United States * * *

      . We do not find that N. M. Albert Co., Inc. v. United States, 59 Cust.Ct. 788, R.D. 11417 (1967), relied upon by the trial court, precludes inquiries to a parent corporation from satisfying the “diligent effort” rule. Indeed, the only reference to subsidiaries in that case was to the effect that the foreign manufacturer was a subsidiary of an American company. The manufacturer was found not to have demonstrated due diligence insofar as there was an insufficiency of proof regarding the scope of its inquiry.


source: Caselaw Access Project

author: RICH, Judge.

license: Public Domain

text:
    Application of Jean-Claude Rene Georges BLONDEL et al.
    Patent Appeal No. 9150.
    United States Court of Customs and Patent Appeals.
    June 27, 1974.

      Ellsworth H. Mosher, Arlington, Va. (Stevens, Davis, Miller & Mosher), Arlington, Va., attorney of record, for appellants.
    Joseph F. Nakamura, Washington, D. C., for the Commissioner of Patents. Fred E. McKelvey, Washington, D. C., of counsel.
    Before MARKEY, Chief Judge, and RICH, BALDWIN, LANE and MILLER, Judges.
   RICH, Judge.

This appeal is from the decision of the Patent Office Board of Appeals affirming the examiner’s rejection of claims 1 and 3-6 of application serial No. 717,012, filed March 28, 1968, for “Phenthiazine Derivatives,” on the ground of obviousness in view of prior art, under 35 U.S.C. § 103. We reverse.

The issues are whether the claimed invention is prima facie structurally obvious and, if so, whether there has been a sufficient showing of unexpected advantageous properties to overcome prima facie obviousness.

The Invention

The invention, a new group of chemical compounds, will be understood from the claims on appeal. Claim 1 reads:

1. A phenthiazine derivative of the formula:
wherein R represents an alkyl, alkenyl or alkynyl group having 7-17 carbon atoms.

Claim 3 further limits R to specific alkyl, alkenyl, or alkynyl groups. Claims 4-6 are to species within the scope of claims 1 and 3. These derivatives are said to be long-acting neuroleptics, antiemetics and tranquilizers.

The References

The references relied on are:

British patent 904,208 Aug. 22, 1962
Yaleetal. I 3,194,733 July 13, 1965
Yaleetal. II 3,350,268 Oct. 31, 1967

The British patent to Rhone-Poulenc S. A., assignee of the present application, discloses phenthiazine derivatives haying the formula

~A-Z wherein X is a di- methylsulphamoyl group, as in appel- lants’ compounds; A is, inter alia, a- (CH2)3-group; and Z can be a piperidi- no group having substituted thereon a group of the formula -CnH2nOR, where n is 2 and R is a hydrogen atom or a car- boxylic acyl group. These derivatives are disclosed as very active sedatives and antiemetics, in some cases having analgesic activity. Example XIV of the patent discloses the preparation of 3-di- methylsulphamoyl -10 - [3 - (4 - hy- droxymethyl-l-piperidyl) propyl] -phen- thiazine, which has the

3_N~_CH2OH The Patent Office regards this com- pound as structurally closest to appel- lants’ claimed compounds. It is the only species of the British patent where X represents dimethylsulphamoyl but this compound differs from \ claimed compounds as stated hereinaft-

er. Yale I, and Yale II which is treated' by the Patent Office as cumulative, dis- closes “phenothiazines” of the general

r wherein X can be various organic The cals, including trifluoromethyl, &emdash;CFS, alkenyl” may be higher alkyl, higher alkenyl, radi- higher alkynyl, and r is 1 or 2. Y terms “higher alkyl,” “higher or and “higher alkynyl,” as employed the patentees, include both straight and branched chain radicals of more than five carbon atoms. The preferred compounds have .6-14 carbon atoms. Yale I states that:

The compounds of this invention are therapeutically active substances which are utilizable as tranquilizing (or ataractic) agents. These compounds differ from the corresponding lower alkanoic acid ester derivatives or the free hydroxyl derivatives in that they are significantly longer acting when administered parenterally and thus, when injected subcutaneously, for example, in a suitable vehicle, yield a long acting tranquilizing drug. [Emphasis ours.]

The Rejection

The claims stand rejected for obviousness under 35 U.S.C. § 103 on the British patent in view of Yale I and II. The board held that the British patent “encompassed” the claimed compounds in its generic disclosure and that the compound of Example XIV, when taken with the generic disclosure, most closely approaches the claimed invention, the patent making it clear that hydroxymethyl and hydroxyethyl compounds are considered equivalent. The board felt it is clear that the British patent “contemplates all carboxylic acyl esters,” while admitting there is no specific teaching of a long chain acyl esterifying group, and that it would be obvious to increase the duration of activity by preparing an ester with a long chain acid in view of the Yale patents, particularly Yale I, which discloses the selection of long chain carboxylic acyl groups to esterify alkylol-substituted phenthiazines related to the British patent and to phenthiazines of the structure claimed. The board said Yale I states that longer lasting activity is produced where longer chain carboxylic acyl esterifying groups are introduced. The board’s reason for agreeing with the examiner’s holding of obviousness is summed up as follows:

It is clearly stated that longer lasting activity for the same purpose is produced where longer chain carboxylic acyl esterifying groups are introduced. It would thus be clearly obvious to the organic chemist to increase the duration of activity in the class of compounds taught in the British patent to select as the generically disclosed carboxylic acyl group a long chain group, thus anticipating [sic] . appellants’ claimed compounds.

Commenting on the affidavits or declarations, designated Garret I and Garret II, filed by appellants to show advantages in their products in the form of a quantitatively unexpected increase in the duration of activity, the board said:

The declarations, in our opinion, do not demonstrate any unexpected properties in the now claimed compounds. As indicated in Yale et al., longer activity is to be expected in longer chain esters. The declarations demonstrate little more than that. The reference compounds and the herein claimed compounds appear to be useful for substantially the same purposes, and the comparative showing of somewhat longer activity in a single area of a community of pharmaceutical activities does not persuade us of unobviousness of the selected members of the class depicted in the British patent for the same utility.

Appellants’ Position

Appellants’ position is, first, that the invention is not structurally obvious since the British patent disclosure, although perhaps generic to the invention, does not specifically teach appellants’ subgenus and there is no reason why one skilled in the art would select that sub-genus from the at least 384 genera encompassed within the broad general formula of the British patent. Appellants agree that the closest disclosure of the British patent is Example XIV, but point out that this compound differs from the claimed compounds in that it is an alcohol, not an ester, and that it is not the alcohol from which the claimed ester subgenus is derived since the alcoholic hydroxy group is joined to the piperidino ring through a methylene group, -CH2-, not an ethylene group, -CH2 • CH2-. Appellants further out that Yale’s structural formula differs from appellants’ sub genus in that Yale does not disclose that the substituent X may be dimethyl sulphamoyl and the hetero-cyclic ring joining the ester group to the phenthiazine nucleus is a piperazine ring in Yale, not a piperidine ring as in the compounds of the invention.

Assuming, arguendo, that the claimed compounds are structurally obvious in view of the British patent, in case that point is ruled against them, appellants contend that this would not compel a finding of obviousness under § 103 if they have shown unexpected advantageous properties in their new compounds. Graham v. John Deere Co., 383 U.S. 1, 86 S.Ct. 684, 15 L.Ed.2d 545 (1966); In re Papesch, 315 F.2d 381, 50 CCPA 1084 (1963). They say this is so even though the utility of their compounds is in the same field as the utility of the prior art compounds if their compounds are substantially greater in effectiveness. In re Lohr, 317 F.2d 388, 50 CCPA 1274 (1963); In re Wiechert, 370 F.2d 927, 54 CCPA 957 (1967); In re Risse, 378 F.2d 948, 54 CCPA 1495 (1967) . They further contend that even though Yale may suggest that duration of activity of the compounds of the British patent may be extended by forming esters thereof with higher rather than lower acids, whereby the number of carbon atoms in the R group is increased, their compounds are nevertheless unobvious and patentable if their proofs show, as they contend they do, that the increase in duration of activity is greater than those skilled in the art would have any reason to expect.

OPINION

On the entire record, we agree with appellants that they have established unobviousness of their claimed compounds over the disclosures of the references.

The key consideration on the question of unobviousness is the duration of the activity of the invention compounds in certain tests which were performed on them as antiemetics administered to dogs (anti-apomorphine activity). Garret I, the first affidavit evidence submitted by appellants, established the superior duration of the activity of the invention compounds, in which the R substituent contains from 7 to 17 carbon atoms, relative to a Yale compound named “fluphenazine enanthate,” an ester wherein the R group contains 6 carbon atoms. These tests were made on 14 of appellants’ compounds. They showed all of the compounds tested to be superior in duration of activity to fluphenazine enanthate but were not accepted by the examiner as showing unobviousness and were criticized by him as not showing that the prolongation of activity was other than would have been expected from Yale’s disclosure, and as not having compared the closest prior art, namely, the sulfamoyl compound of British patent Example XIV (an alcohol) and its esters.

Appellants responded by submitting a second affidavit, Garret II, reporting on comparative tests on certain compounds, designated I, II, III, and IV, in which they undertook to show what one skilled in the art would expect from a knowledge of the references and that the invention compounds exceed that expectation. Compound I was fluphenazine enanthate, one of Yale’s preferred compounds, which has the formula

It will be noted that what corresponds to R in appellants’ claimed compounds, limited to those in which R contains 7-17 carbon atoms, contains 6 carbon atoms, i.e., the -CeH13 group. Garret II is first concerned with showing what increasing the number of those carbon atoms would be expected to do by way of prolonging the effectiveness of the drug as an antiemetic.

Compound II was fluphenazine decanoate, the same as compound I except that R is -C9H19. This too is one of the compounds disclosed by Yale, who suggests that R (or Y, as he designates it) should have from 6 to 14 carbon atoms, preferably 9 to 14. Appellants’ tests on compounds I and II of Yale’s series of trifluoromethyl (-CF3) compounds led the declarant Garret to conclude that the duration of activity of compounds I and II is of a similar order and not significantly affected by the number of carbon atoms in the R residue, that is by the increase from C6 to C9 in R.

Next, to meet the objection that appellants had not compared their compounds to the closest prior art, deemed to be British patent Example XIV and its esters, Garret tested compound III which was the heptanoic acid ester of British Example XIV, the R portion of which contains 6 carbon atoms. This compound had a duration of activity very similar to compounds I and II. Of the three, compound II (C9 in R) was somewhat better than the other two, but not significantly so.

Compound IV tested by Garret is a compound of the invention, corresponding to the formula of claim 1, wherein R is -C9Hi9, and which contains the dimethyl sulfamoyl group as did compound III. The results of the tests of the four compounds, given in both tabular and graph form in the affidavit, show that compound IV had a prolongation of activity very much greater than one would have expected on the basis of knowledge of the effect of increasing the number of carbon atoms in the R group of the Yale compounds I and II from 6 to 9. The increase in the prolongation of activity in appellants’ series of compounds, in going from 6 to 9 carbons in the R group, is, according to their calculations, unchallenged by the Patent Office, about 150% in excess of the reasonable expectation.

The board was nevertheless critical of appellants' tests, saying:

The declaration does not compare Compound III, representative of the British patent, with an ester containing an R group of 7 carbon atoms each included in claims 1 and 3, but compares a longer chain ester having 9 carbon atoms in the R grouping. This comparison, in our opinion, is insufficient since it does not compare the shortest chain compound now claimed with a representative reference compound. We have no reason to believe that a 7-carbon R group compound exhibits more than the expected increase in activity over the 6-carbon R group compound * * *. [Emphasis ours.]

It is with respect to this objection that appellants assert that the information the board found lacking is in fact available by an indirect comparison of data of record. They state this argument in summary fashion as follows:

In Garret I the CT compound is shown to have a duration of activity considerably in excess of fluphenazine enanthate. In Garret II the C6 compound [compound III] is shown to have substantially the same duration of activity as fluphenazine enanthate [compound I]. Since Garret II describes tests carried out under substantially identical conditions to those of Garret I, it is possible to get a reliable indication of the duration of activity of the C7 compound and of .the other invention compounds described in Garret I compared to the C6 compound indirectly by comparing the duration of activity of each of the compounds under consideration with fluphenazine enanthate.

We have heretofore approved such indirect comparison in In re Fouche, 439 F.2d 1237, 58 CCPA 1086, (1971), upon which appellants rely. We note that the solicitor has not challenged our holding in Fouehe or attempted to answer appellants’ arguments based thereon but has merely asserted that appellants should have made a direct comparison. Appellants’ brief goes through a detailed, step-by-step analysis of the evidence in support of the conclusion to be drawn from the indirect comparison, which we will not undertake to repeat. Suffice it to say that we find it persuasive that the claimed compounds possess a duration of activity that is greater than would be reasonably expected by one skilled in this art from a knowledge of the performance of the prior art compounds.

We find nothing of record to indicate that workers in this field recognize the kind of predictability which the Patent Office seems to have taken for granted. On the contrary, we note the introductory .statement in the British patent says:

It has * * * been demonstrated that of the very large number of possible N-substituted phenthiazine compounds that have been proposed or tested by various workers, only comparatively few types have useful application in human or veterinary medicine and that both the nature and the degree of useful effect can radically alter even with apparently small changes in chemical structure.

We also note that Yale was not speaking, when commenting on the effect of the use of higher rather than lower acid ester derivatives, of phenthiazines in general or of the phenthiazines of the British patent (which are inclusive of appellants’ compounds) but of “The compounds of this invention,” meaning his own group, which have several “small changes in chemical structure” from appellants’ compounds, as pointed out above. The evidence shows that with the latter the effect of. increasing the number of carbon atoms in the R group is quantitatively quite different from the effect of increasing the number of carbon atoms in the corresponding group in the Yale series of compounds. We feel that appellants’ disclosures contribute something unobvious to the knowledge in this art and that their claims are commensurate with that contribution. We therefore reverse the rejection under § 103.

This conclusion with respect to the showing of a prolongation of the duration of activity beyond what could reasonably be expected by the man of ordinary skill in the art makes it unnecessary for us to pass on the issue of whether appellants’ claimed compounds are structurally obvious since, even if they are, the prima facie case which that would make for the Patent Office has been overcome by the evidence introduced by appellants. In re Papesch, supra.

The decision of the board is reversed.

Reversed.

      . Open-chained hydrocarbon radical, CiOEfcn-H.

      . Open-chained hydrocarbon radical, CnHm-i.

      . Open-chained hydrocarbon radical containing a triple bond.

      . See note 1, supra.

      .

      . See note 5, supra.

      . The dimethyl sulfamoyl group.


text:
    GENERAL INSTRUMENT CORPORATION, Appellant, v. The UNITED STATES, Appellee.
    Customs Appeal No. 5541.
    United States Court of Customs and Patent Appeals.
    June 27, 1974.
    Eugene L. Stewart, Washington, D.C., attorney of record, for appellant.
    Irving Jaffe, Acting Asst. Atty. Gen., Andrew P. Vance, Chief, Customs Section, James Caffentzis, New York City, for the United States.
    Before MARKEY, Chief Judge, and RICH, BALDWIN, LANE and MILLER, Judges.
   BALDWIN, Judge.

This appeal is from the decision and judgment of the United States Customs Court, 70 Cust.Ct. —, C.D. 4421, 359 F.Supp. 1390 (1973), overruling the importer’s protest against the denial of an allowance under item 807.00 TSUS for certain products of the United States constituting parts of black and white television deflection yokes imported from Taiwan. The yokes were classified under the provision for parts of television apparatus in item 685.20 TSUS and that classification is not disputed. We reverse.

The involved importations span a time period when two versions of item 807.00 were in effect. Item 807.00, as it was originally enacted in 1963, reads:

Articles assembled abroad in whole or in part of products of the United States which were exported for such purpose and which have not been advanced in value or improved in condition abroad by any means other than by the act of assembly--------A duty upon the full value of the imported article, less the cost or value of such products of the United States

Item 807.00, as amended by Public Laws 89-241 and 89-806, in effect in 1967 reads:

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 --------------------------------A duty upon the full value of the imported article, less the cost or value of such products of the United States

The merchandise in issue is magnet wire and lead wire, both of which were on spools when exported from the United States to Taiwan. The magnet wire is used for making the horizontal or vertical coils in the imported yokes. The lead wire is used for making the lead wire harness contained in the deflection yokes.

The Customs Court briefly described the initial steps taken in Taiwan with the magnet and lead wire after its exportation from the United States in the following manner.

In the first stage of operations abroad wire which is used to make horizontal coils ... is despooled from the supply spool and formed into the primary shape of a horizontal coil by a winding machine. The coil is then removed from the winding machine and taped to prevent unraveling of its adjacent turns which at this point adhere to each other by means of the bonding material on its outer surface. After separation from the supply spool, the coil is cement dipped, dried, and precision shaped by machine pressing to fit the contours of a plastic liner on which it is subsequently mounted.
Next, ferrite cores are inserted into the winding machine for the making of vertical coils. The machine is then actuated and wire ... is despooled from the supply spool and vertically wound around the ferrite cores for a prescribed number of turns. The coils are then separated from the supply spool, removed from the machine, and taped to prevent unraveling of the turns.
In this manner two horizontal coils and two vertical coils are prepared for each yoke with the magnet wire.
Then, an appropriate number of “lead wires” . . . are drawn from supply spools and mechanically cut to desired lengths. The ends of the lead wires are mechanically stripped of insulating material for electrical connection purposes. The lead wires are then brought together with a plug assembly, woven into a cable harness, and secured with tape.
At this point we have a finished cable harness ready for cementing to a terminal panel. (Emphasis added).

The coils and harnesses produced are described as “second level sub-assemblies.”

The Customs Court held that since “both versions of item 807.00 contemplate the exportation from the United States of ‘components’ of the imported article, as distinguished from mere ‘products’ . . . ., the fundamental question ... is whether the subject wire was a component of the yoke when exported from the United States.”

The court found that since the wire products were sub-assembled when first used abroad, they could not be directly employed as components in the assembly of the imported yokes, without further fabrication. Therefore, the court found the holding of Amplifone Corporation v. United States, 65 Cust.Ct. 58, C.D. 4054 (1970) to be dispositive of the importer's claim and dismissed the importer’s protest.

Opinion

In the interim period since the Customs Court’s decision, this court decided the case of General Instrument Corporation v. United States, C.A.D. 1106, 480 F.2d 1402, 60 CCPA 178 (1973), familiarity with which is presumed, wherein we specifically rejected the rationale of the Amplifone case. Appellee, while acknowledging this court’s decision in General Instrument, asserts that the facts of the present case are distinguishable therefrom and that the rationale of E. Dillingham, Inc. v. United States, C.A.D. 1078, 470 F.2d 629, 60 CCPA 39 (1972) should be applicable to the facts of the instant case.

Citing Dillingham, appellee contends that the involved wire was subject to “further fabrication,” thus precluding item 807.00 treatment for the imported wire. In Dillingham, the importer sought item 807.00 treatment for certain fiber and fabric of which imported papermakers’ felts from Canada were composed. The fiber and fabric were products of American origin and the fiber had been sent to Canada in bulk, baled form. Item 807.00 treatment for the fiber was denied because the fiber component, before being assembled with the fabric, was subjected to further fabrication comprising the steps of “opening, oiling and carding.” It is these operations that appellee asserts are of the same degree as the despooling, cementing, winding, taping, etc., steps performed upon the wire in the instant ease, which steps appellee asserts should also be held to constitute further fabrication of the wire components.

We cannot agree with that assertion. The steps performed upon the wire after its exportation to Taiwan are not “further fabrication” ' steps, but rather assembly steps within the meaning of item 807.00. We can perceive no substantial differences between the instant assembly steps and those of General Instrument which were held not to constitute “further fabrication.” Furthermore, unlike the fiber component in Dillingham the instant wire, exported to Taiwan on spools, was capable of immediately entering into the assembly process to make the imported yokes.

As to the other requirments imposed by item 807.00, it should suffice to repeat what we said in General Instrument.

We find that all the articles in issue here meet those requirements. Concededly all are products of the United States and all went into the imported [deflection yokes]. The meaning of “fabricated” is broad and without doubt applies to the [spools of wire] which obviously were manufactured articles. The articles did not lose their physical identity in the [yoke] “by change in form, shape or otherwise.” As stated in United States v. Baylis Brothers Co., 451 F.2d 643, 646, 59 CCPA 9, C.A.D. 1026 (1971):
The legislative history makes it equally apparent, however, that Congress did not intend to exclude articles from item 807.00 merely because the American components had undergone some change of form or shape. The test specified in item 807.00 is whether the components have been changed in form, shape, or otherwise to such an extent that they have lost their physical identity in the assembled article. The term “physical identity” was used to exclude from item 807.00 those assembled articles whose American components are “chemical products, food ingredients, liquids, gases, powders,” and the like. [Footnote omitted].
Since the only changes in the exported articles were “by being assembled” or “by operations incidental to the assembly,” the items have not been “advanced in value” ....

The decision and judgment of the Customs Court is reversed.