A variety of arcane domestic-preference regimes apply to many Federal procurements – the Buy American Act (BAA), the Trade Agreements Act (TAA), the Berry Amendment, and the Cargo Preference Act, to name a few. In Acetris Health, LLC v. United States, the Court of Appeals for the Federal Circuit recently denied a Government appeal and clarified the test used to determine if a pharmaceutical product – or any other product – is compliant with the TAA. This significant decision rejects the longstanding analytical approach used by U.S. Customs and Border Protection (CBP) for pharmaceuticals as well as the reliance of the Department of Veterans Affairs (VA) on the CBP’s judgment for purposes of Federal procurement.
The Governing Law
Two statutes are the source of most restrictions on the Government’s ability to procure supplies of foreign origin: the BAA and the TAA.
The rules governing whether the BAA or TAA applies to a particular procurement are fairly confusing, and the analysis required to determine BAA compliance is quite different from the analysis for TAA compliance, and neither is particularly intuitive. The BAA was designed to keep foreign products from competing on an equal footing with American-made products. The Federal Circuit has succinctly summarized the main features of the BAA:
The first of these statutes to be enacted, the Buy American Act of 1933 (“BAA”), provides in relevant part that:
[O]nly manufactured articles, materials, and supplies that have been manufactured in the United States substantially all from articles, materials, or supplies mined, produced, or manufactured in the United States, shall be acquired for public use unless the head of the department … determines … their cost to be unreasonable.
41 U.S.C. § 8302(a)(1) (emphasis added). A 1954 Executive Order, now implemented in the FAR, specifies that the unreasonable cost exception to the BAA applies where the lowest domestic offer by a large business is over 6% higher than the lowest foreign offer, and the lowest domestic offer by a small business is over 12% higher than the lowest foreign offer. 48 C.F.R. (“FAR”) § 25.105. Congress has also exempted commercial-off-the-shelf (“COTS”) products from the “substantially all” requirement, 41 U.S.C. § 1907, so a COTS product “manufactured” in the United States is BAA-compliant even if it is manufactured from predominantly foreign components, FAR § 25.101(a)(2).
Thus, the BAA considers both an end product’s component articles, materials, and supplies (unless it is a COTS item) and the end product’s place of manufacture, and has a built-in exception applied via a price premium analysis.
The TAA is far more recent and, when it applies, provides an exception to the BAA. The Federal Circuit explained the TAA in this way:
The second of these statutes is the TAA. The TAA was designed to encourage foreign countries to enter reciprocal government-procurement trade agreements. Those agreements prohibit foreign countries from discriminating against American-made products and prohibit the United States from discriminating against foreign-origin products. Under the statute, countries that have entered into such agreements, and that do not discriminate against American-made products, are allowed to compete for U.S. government procurements on non-discriminatory terms. At the same time, products from countries that have not entered into such trade agreements are barred from government procurements. Countries that have entered into such agreements are described as parties to the World Trade Organization (“WTO”) Agreement. …
The TAA generally prohibits the procurement of “products of a foreign country or instrumentality” that is not party to the WTO agreement or otherwise “designated” by the President for purposes of the TAA. 19 U.S.C. § 2512(a)(1). The TAA’s country-of-origin test defines “a product of a country” as:
An article is a product of a country or instrumentality only if (i) it is wholly the growth, product, or manufacture of that country or instrumentality, or (ii) in the case of an article which consists in whole or in part of materials from another country or instrumentality, it has been substantially transformed into a new and different article of commerce with a name, character, or use distinct from that of the article or articles from which it was so transformed.
19 U.S.C. § 2518(4)(B) (emphasis added). Note that, although a finding that an article is the “product” of a non-designated foreign country generally precludes the Government from procuring it, the statute does not require that the Government affirmatively determine that an article is a “product” of the United States or a designated country as a prerequisite to a procurement of that article.
The FAR implements the TAA in regulation and harmonizes it with the BAA. As relevant here, the FAR’s Trade Agreements clause provides that a contractor shall “deliver under this contract only U.S.-made or designated country end products.” FAR 52.225‑5(b). The FAR defines “U.S.-made end product” as:
U.S.-made end product means an article that is mined, produced, or manufactured in the United States or that is substantially transformed in the United States into a new and different article of commerce with a name, character, or use distinct from that of the article or articles from which it was transformed.
FAR 52.225-5(a) (emphasis added). Note that, unlike the BAA, the TAA and its implementing clause do not require an analysis of the country of origin of a manufactured item’s components. Note also that, unlike the country of origin definition in the TAA’s statutory text, the FAR does not use the adverb “wholly” when discussing where an article is mined, produced, or manufactured.
The protester, a contractor to the VA and other agencies, was a distributor of generic pharmaceuticals. As relevant here, the protester supplied Entecavir tablets (used to treat hepatitis B) that were manufactured in New Jersey, using an active pharmaceutical ingredient that was made in India. India is not a “designated country” subject to preferential treatment under the TAA and its implementing regulations.
During performance of a prior contract, the VA “requested” that the protester seek country-of-origin determinations from CBP for certain of its products, including Entecavir, as the VA had been informed that the protester may be supplying drugs that were not TAA-compliant, as required by its contract. CBP, following its own longstanding practice, determined that Entecavir was a product of India because the pharmaceutical’s active ingredient was made in India and allegedly no substantial transformation had occurred in the United States. The protester accepted a no-cost cancellation of its incumbent contract to avoid a termination for default.
The VA then issued a new solicitation for Entecavir, again subject to the TAA. In response to a question by the protester, the VA stated that CBP’s prior determination was final and therefore any Entecavir made with an Indian-origin active ingredient would be deemed non-compliant with the TAA and unacceptable. The protester filed a timely pre-award protest, challenging the VA’s interpretation of the TAA and arguing “its products, though manufactured using foreign-made [active ingredients], are not ‘products of’ India (under the TAA) and are ‘U.S.-made end products’ (under the FAR) because they are manufactured into tablets in the United States.”
The Court of Federal Claims agreed with the protester, and the Government appealed. The Federal Circuit concurred with the result of the lower court’s decision, while adjusting the analysis and remedy.
Before reaching the merits of the protest, the Court addressed an interesting question of standing. Notwithstanding its pending protest, the protester submitted a proposal in response to the challenged solicitation. The Government showed that the protester’s proposed price was the highest received, in a procurement conducted on a lowest price technically acceptable basis. Because the protester had no chance at award, even if its tablets were found to be TAA‑compliant, the Government moved to dismiss the case on the basis that the protester suffered no injury-in-fact, the case was moot, and the protester lacked standing to protest.
The Court agreed with the Government that the protester no longer had standing to challenge the current solicitation in light of a price that precluded it from award. The Court found, however, that the VA was “virtually certain” to conduct similar procurements in the future and, absent the VA’s erroneous application of the TAA, the protester was “very likely” to bid on those procurements. The Court noted that the Court of Federal Claims had jurisdiction over suits objecting to “any alleged violation of statute or regulation in connection with a procurement or a proposed procurement,” and that its own precedents held that “‘in connection with’ is very sweeping in scope.” the Court held that the protester had standing with respect to future procurements expected in the relatively near future. The Court found that the protester had a substantial chance of securing future contracts for similar products and that the VA’s stated interpretation of the TAA caused the protester a “non-trivial competitive injury.” Therefore, the protester was an interested party with standing to bring the protest.
Addressing the merits of the protest and the Court of Federal Claims’ analysis, the Federal Circuit first rejected the Government’s argument that CBP’s country-of-origin determination was binding on the VA. The Court held that it is the procuring agency, not the CBP, that is “responsible for determining whether an offered product qualifies as a U.S.-made end product.” Contrary findings of the CBP are entitled to no deference.
The Court also rejected the Government’s argument (which repeated the CBP’s finding) that the protester’s Entecavir tablets were products of India because that was the country of origin of the tablets’ active pharmaceutical ingredient. The Court held that the “product” at issue here – and the only thing regulated by the TAA – was “the pill itself,” not the pill’s various ingredients. The tablet itself was not a “product of India” because the tablet was not “wholly the . . . manufacture” of India, nor was it “substantially transformed” in India, as provided in the TAA’s country-of-origin test. 19 U.S.C. § 2518(4)(B). Because the statutory country-of-origin test applies only in the negative – i.e., prohibiting procurement of products of a non-designated country, but not also requiring that the product be found to be a product of the United States or another designated country – the Court held that the statute did not bar the protester’s product: “Accordingly, since the TAA only excludes products from government procurement if they are ‘products of’ a foreign country like India, the TAA does not bar the VA from procuring Acetris’ products.”
Turning next to the FAR’s Trade Agreements clause, the Government argued that the tablets were not compliant because they were neither “wholly” manufactured in the United States, and manufacturing the final tablets in New Jersey did not “substantially transform” the Indian active ingredient into a new product. This argument required the Government to read the adverb “wholly” from the statutory country-of-origin test, where it is present, into the FAR’s Trade Agreements clause, where it is not present. Nor, for that matter, is the adverb “wholly” present in the BAA or its regulatory implementation, either.
The Court noted that the Trade Agreements clause 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.” FAR 52.225-5(a) (emphasis added). The Court reasoned that, regardless of whether manufacturing the tablets substantially transformed the Indian ingredients into a new product, the definition of a compliant end product included any product that is “manufactured in the United States,” which the Entecavir tablets indisputably were, regardless of the source of their ingredients and other components:
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.
(Emphasis added.) Given the fact of domestic manufacture, the Court found it unnecessary to decide the separate question of whether the tablets also were substantially transformed in the United States. The FAR says either prong is enough to render an end product “U.S.-made” and thus compliant with the Trade Agreements clause. Therefore, under the TAA and its implementing regulations in the FAR, the VA incorrectly determined that the protester’s Entecavir was non-compliant with the TAA and its regulatory implementation in the FAR.
The Court concluded its merits discussion by observing: “If 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.”
The Court remanded the matter to the Court of Federal Claims, with instructions to adjust the relief granted, including a permanent injunction applicable to future procurements:
On remand, the Claims Court should declare that: (1) under the TAA, a pharmaceutical product using [active pharmaceutical ingredients] made in India does not, because of that fact, thereby become the “product of” India; and (2) under the FAR, the term “U.S.-made end product” may include products manufactured in the United States using [active pharmaceutical ingredients] made in another country. The Claims Court should also enjoin the VA from excluding Acetris’ products manufactured in Aurolife’s Dayton, New Jersey facility from future procurements.
- The rules for analyzing and applying the various domestic-preference regimes can be complicated and counter-intuitive, with requirements that change from one regime to the next, and a variety of exceptions and exceptions to the exceptions. If an offeror or contractor is unsure of its compliance obligations, it is prudent to seek legal counsel to navigate the labyrinth.
- The Federal Circuit sidestepped an argument that was central to the litigation at the Court of Federal Claims: whether a product that is BAA-compliant (as the protester’s was here) is necessarily also TAA-compliant. The protester argued (and the Court of Federal Claims concluded) that it was; the Government argued that it was not. In a footnote, the Federal Circuit found that analysis was irrelevant. As a practical matter, though, it is difficult to imagine a situation where an item would be BAA-compliant but not TAA-compliant under the holdings of this decision.
- The Federal Circuit has provided helpful guidance by clarifying that, so long as an end product is not “wholly the . . . manufacture” of or “substantially transformed” in a non-designated country, and is either “mined, produced, or manufactured in the United States [or other designated country] or . . . substantially transformed in the United States [or other designated country],” it is TAA-compliant. This is a far simpler test to apply than the one the VA attempted to impose.
- This decision’s only direct effect is on Federal procurements. The decision will not bind any agency for non-procurement purposes, such as country-of-origin determinations in connection with tariffs and other import duties. It remains to be seen whether CBP will accept the Federal Circuit’s analysis as persuasive authority in those non-procurement arenas and alter its country-of-origin analysis in general and as applied to pharmaceuticals. Suppliers that previously have unquestioningly relied upon CBP determinations for procurement purposes may wish to rethink that approach in light of Acetris.
- The Federal Circuit accepted the Court of Federal Claims’ finding that the process of converting Entecavir’s active pharmaceutical ingredient and other constituents into the final tablet form was “manufacturing” for purposes of the FAR’s Trade Agreements clause. Under both the BAA and the TAA, however, it is not always easy to determine where an end product was “manufactured,” and that potential complication will remain even under the Federal Circuit’s simplification of the TAA analysis.
- Potential offerors should scrutinize the domestic-preference provisions appearing in solicitations and, like the protester here, ask questions early and be prepared to protest before the date set for the receipt of proposals. If an offeror fails to object to improper solicitation terms before that time, any later protest of those terms generally will be dismissed as untimely.