Takeaways

The Court found the disqualification of an offeror from a pharmaceutical procurement was in error based on a U.S. Customs and Boarder Protection (CBP) interpretation of the Trade Agreements Act of 1979 (TAA).
The CBP determined that the source of the pharmaceutical product’s active ingredient to be the “country of origin” of the product, regardless of whether the product was manufactured in the U.S.
The Court found the CBP’s interpretation of the TAA inapplicable because the pharmaceuticals at issue were manufactured in the U.S., meeting the definition of a “U.S.-made end product” under the Federal Acquisition Regulation (FAR).

BACKGROUND

The Buy American Act is the basic source of restrictions on the federal government’s purchases of foreign-produced products. As implemented through a Presidential executive order and regulations, the law imposes a “price preference” for purchases of U.S. origin goods, which can be 6% (for non-Defense procurements) to 50% (for Defense procurements). The application of the Buy American Act is modified when the United States is obligated by an international agreement—either the World Trade Organization (WTO) Government Procurement Agreement (GPA) or a free trade agreement such as the NAFTA—to accord non-discriminatory treatment to the goods of specific foreign countries. In those cases, when the procurement is being made by a covered agency and the value of the procurement is above the applicable threshold, no price preference is applied and the foreign good is evaluated in the same manner as U.S. goods. Those modifications are implemented under the authority of the TAA, which implements U.S. obligations under trade agreements.

When a procurement is above the value threshold for the WTO GPA to apply and, consequently, the TAA governs, the United States has implemented a blanket prohibition on purchases of goods from “non-eligible” countries if there is any offer of U.S. goods or goods from an eligible country. The purpose of this restriction is to encourage additional countries to enter into international trade commitments on government procurement. The restriction prohibits the U.S. government, in most instances, from purchasing any products from countries such as China and India, which are not members of the GPA.

Both the Buy American and TAA requirements are incorporated into the FAR, which governs the procurements of most federal government agencies.

In applying the TAA, the origin of an article not wholly the product or manufacture of a single country is determined by the rule of “substantial transformation.” 19 U.S.C. § 2518 (4)(B). An article is a product of a country if it has been substantially transformed there into a new and different article of commerce with a name, character or use different from that of the article or articles from which it was transformed. 19 U.S.C. § 2518(4)(B)(ii).

Substantial transformation is primarily a customs law concept, and the TAA expressly authorizes CBP to issue advance “final determinations” on the whether an article is or would be the product of a country eligible for preferential treatment. 19 U.S.C. § 2515(b)(1). There is a body of CBP rulings that serve as precedents in evaluating whether components have undergone substantial transformation and therefore lost their foreign origin when incorporated into a finished product.

Acetris Health Ruling

In the recent decision of Acetris Health, LLC v. United States, the U.S. Court of Appeals for the Federal Circuit upheld a decision by the U.S. Court of Federal Claims (COFC) finding the Department of Veterans Affairs (VA) improperly disqualified a protester (Acetris) from a pharmaceutical procurement because the VA found Acetris’ products to be of Indian origin in violation of the TAA. The VA appealed the COFC decision.

Acetris had previously obtained an advisory determination from CBP, which applied its own precedents in finding that the active pharmaceutical ingredient (API) of the pharmaceutical, which was imported from India, did not satisfy the substantial transformation test when it was processed in the United States into pills, and therefore the pills should be treated as being of Indian origin.

On the merits, there were two questions before the Court: (1) whether the CBP’s country-of-origin determination was binding on the VA, so as to leave no discretion for the VA to make an independent country-of-origin analysis; and (2) if not, whether Acetris’ products, which are made into tablets in the U.S. using an API made in India, are products of India for which procurement is prohibited by the TAA.

First, the VA argued that the CBP’s interpretation the TAA was binding and that the VA had no discretion to conduct an independent country-of-origin analysis. The Court found that it is the “procuring agency … that is responsible for determining whether an offered product qualifies as a U.S.-made end product.” Thus, the VA improperly deferred to the CBP determination.

Second, the Court found that the VA’s interpretation of the TAA and the FAR was erroneous, because it did not take into account that the definition of “U.S.-made product” is broader than the rule of origin for foreign-made products.” The Court noted that the FAR’s Trade Agreements Clause, FAR 52.225-5, provides in relevant part that “[t]he Contractor shall deliver under this contract only U.S.-made or designated country end products,” and that FAR 25.003 further defines “U.S.-made end product” as “an article that is mined, produced, or manufactured in the United States or that is substantially transformed in the United States.” The Court stated that, unlike the rule the TAA imposes on foreign-made products, under the FAR: “A product need not be wholly manufactured or substantially transformed in the United States to be a ‘U.S.-made end product.’ Instead, such products may be—as Acetris’ products are—‘manufactured’ in the United States from foreign-made components.” The Court concluded by warning Federal agencies that “[i]f the government is dissatisfied with how the FAR defines ‘U.S.-made end product,’ it must change the definition, not argue for an untenable construction of the existing definition.”

Importantly, although the Court broadly stated that “the FAR did not adopt the TAA’s country-of-origin test,” it appears that the Court was simply interpreting the FAR’s definition of “U.S.-made end product,” and not making a determination on whether a product has the origin of one foreign country or another. In addition, because in the TAA Congress expressly authorized CBP to make “final determinations” on whether products are from eligible countries for procurement purposes, it should not be assumed that procuring agencies will disregard such rulings when issued in that context. Rather, the lesson of Acetris Health appears to be that if the result of the substantial transformation test is not favorable, there may still be a possibility to qualify under the alternative “manufacturing” test under the different rule that applies to products completed in the United States.

Also importantly, the Court emphasized that it was not overruling CBP’s determination, which was issued under different rules and could only be reviewed in the first instance by the Court of International Trade.

It is too soon to tell what effect the case will have on agencies applying the TAA in Federal procurements. Some contracting officers may believe they are required to conduct an independent country-of-origin analysis of each offeror’s proposed products, and require offerors to submit detailed information on the origin of the products proposed to the government. The decision may also increase bid protest activity in this area.

It will continue to be advantageous to obtain final determinations from CBP on substantial transformation where a product is assembled or manufactured in one foreign country using components and other inputs from other countries. Moreover, it should still be helpful to obtain CBP determinations that imported components have been substantially transformed in the United States through a production process, thereby satisfying the substantial transformation prong of the “U.S.-made end product” test, as the procuring agency may find such determinations persuasive even if they are not binding in that context.