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(Reuters) - Navistar International Corp (NAV.N) will not be permitted to pay fines in order to sell heavy-duty diesel truck engines that fail to meet U.S. pollution standards, a federal appeals court ruled on Tuesday.
The company's shares closed 5.5 percent lower at $27.15 on the New York Stock Exchange, after being down more than 12 percent at Tuesday's low, on concerns Navistar will lose business to its competitors.
The Environmental Protection Agency in January made an interim final rule (IFR) that allowed manufacturers of heavy-duty diesel engines to pay penalties in exchange for the right to sell non-compliant engines.
"The EPA took this action without providing formal notice or an opportunity for comment, invoking the 'good cause' exception provided in the Administrative Procedure Act," the U.S. Court of Appeals for the District of Columbia Circuit said in the ruling on Tuesday. "Because we find that none of the statutory criteria for good cause are satisfied, we vacate the IFR."
The ruling could limit Navistar's ability to continue shipping trucks until the company complies with the EPA's 2010 standard, and could cause the company to lose market share, Wells Fargo said in a research note.
Navistar said it disagrees with the court's ruling and will ask for a rehearing.
The company said it will continue to work with the EPA regarding the emissions levels. "Navistar continues to make and ship engines and our customers will continue to receive the products they ordered with EPA certified engines."
Navistar's shares have been volatile since last week, when the company reported an unexpected quarterly loss and activist investor Carl Icahn boosted his ownership stake to 12 percent from 10 percent.
The second-quarter loss of $172 million came after Navistar took a charge to cover the rising cost of repairing engines sold in 2010 and 2011.
It also warned of new delays in its quest to gain regulatory approval of a new diesel engine design.
"The court said today that Navistar's day of reckoning is fast approaching when it will not be able to sell noncompliant engines in the U.S," Vicki Bryan, senior high-yield analyst at Gimme Credit, said in a note. "That reckoning already has arrived for Navistar's investors, and we doubt that even takeover rumors - of which we are skeptical - will keep the stock afloat until this crisis is resolved."
The case is Mack Trucks Inc et al v. EPA, U.S. Court of Appeals for the D.C. Circuit, No. 12-1077.
Reporting by Lynn Adler in New York; Editing by Matthew Lewis and Tim Dobbyn