Overview
In a February 10, 2020 decision, the Federal Circuit (CAFC) affirmed the Court of Federal Claims (COFC) decision sustaining a protest that challenged the US Department of Veterans Affairs' (VA) interpretation of what constitutes a "US-made end product" under the Federal Acquisition Regulation (FAR) provisions implementing the Trade Agreements Act (TAA). Acetris Health, LLC v. United States, No. 2018-2399, slip. op. (Fed. Cir. Feb. 10, 2020).[1] The CAFC also affirmed the COFC’s holding that a procuring agency must make an independent assessment of whether a product qualifies as a "US-made end product" and cannot simply rely on Customs and Border Protection (CBP) country of origin (COO) determinations.[2]
Background
Acetris involved a VA pharmaceutical procurement. Acetris was a domestic pharmaceutical distributor that acquired the pharmaceutical tablets at issue from a third party that manufactured those products at a facility in New Jersey. The tablets that Acetris proposed to sell to the VA were manufactured from a number of ingredients sourced from both US and foreign countries, including India. Prior to filing its protest, Acetris had requested and received a COO final determination from CBP regarding the tablets at issue. The CBP found that the manufacturing process at the New Jersey facility did not result in substantial transformation in the US and that the tablets were a product of India for purposes of US government procurement under relevant CBP precedent – which provided that the source of a pharmaceutical product’s active ingredient (API) determined the product's COO. See 83 Fed. Reg. 5118, 5132-33 (Feb. 5, 2008).
The VA solicitation included the TAA clause at FAR 52.225-5 and the accompanying TAA Certification at FAR 52.225-6. In both pre-proposal questions and in discussions, Acetris and the VA addressed the issue of whether the VA would consider Acetris' products to be TAA and FAR compliant as "US-made end products" because they were manufactured in the United States. However, the VA ultimately rejected Acetris' position based on the CBP's final determination. Acetris nonetheless submitted a proposal, which the VA rejected "'because the manufacturing location' of [Acetris' tablets] – India – 'is not a [TAA] designated country'" and made award to another, lower priced offeror.
The COFC Decision
The COFC granted Acetris declaratory and injunctive relief, rejecting the government’s interpretation of the TAA and FAR. Agreeing with Acetris' interpretation, the COFC found that Acetris' products were "manufacture[d] . . . in a facility located in Dayton, New Jersey," that the VA's interpretation of the TAA and the FAR implementing regulations was incorrect, and that exclusion of Acetris' products was therefore improper.[3]
Regulatory Framework
The purchase restriction in FAR 25.403(c) implements the Trade Agreements Act and provides that, in acquisitions covered by the WTO GPA, "[the government may] acquire only US-made or designated country end products." See also FAR 52.225-5(b) (same). FAR 25.003 defines a "US–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 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." See also FAR 52.225-5(a) (same). In comparison, "designated country products" must be "wholly the growth, product, or manufacture of a [designated country]; [or] In the case of an article that consists in whole or in part of materials from another country, has been substantially transformed in a [designated] country 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 25.003 (emphasis added); see also FAR 52.225-5(a) (same); 19 U.S.C. § 2518(4)(B).
The CAFC Decision
Contracting Officers Must Independently Determine Whether an Offered Product is a US-made end product
As an initial matter, the CAFC rejected the government's contention that the CBP's Country of Origin (COO) determinations are "binding" on the VA, leaving the VA no discretion to conduct an independent COO analysis as to whether the product being offered qualifies as a "US-made end product." The CAFC agreed with the COFC, finding that the "procuring agency" is "responsible for determining whether an offered product qualifies as a US-made end product."[4] In that regard, the CAFC appears to have agreed with the COFC's conclusion that the TAA only authorizes the CBP to determine the eligibility (COO) of "foreign" (non-US) end products and that it does not have authority to determine if an end product is a "US-made end product" under the FAR TAA clause.[5]
Neither the TAA nor the FAR Barred the VA from Procuring Acetris' Products
The CAFC affirmed the COFC's determination that the VA erred in its interpretation of the TAA and the FAR in concluding that Acetris' tablets were a product of India and in rejecting Acetris' position that the pills qualified as US-made end products.
In doing so, the CAFC agreed with the COFC that the tablets were not a "product of" India, explaining first that the relevant inquiry should focus on what the "end product" is and where the "final product is produced." According to the CAFC, "it is clear from the TAA that the 'product' is the final product that is procured – here, the pill itself– rather than the ingredients of the pill."[6] The court then held that Acetris’ tablets were not a product of India for TAA purposes because they were not "wholly . . . the manufacture" of India, and because "the tablets' components are not 'substantially transformed' into tablets in India."[7] Accordingly, the court concluded that "since the TAA only excludes products . . . if they are 'products of' a foreign country like India, the TAA does not bar the VA from procuring Acetris' products."[8]
The CAFC also held that Acetris' tablets qualified under the FAR's TAA clause because the tablets were "manufactured" in the United States. The court noted that the FAR did not adopt the TAA test for determining the COO of foreign end products, which, as noted above, requires that non-US products must be "wholly the growth, product or manufacture of that country" or substantially transformed there, in defining "US-made end products."[9] Rather, FAR 25.003 defines a "US-made end product" as one 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.
Relying on the "plain language" of the FAR and its regulatory history, the court went on to hold that "[a] product need not be wholly manufactured or substantially transformed in the United States to be a 'US-made end product.' Instead, such products may be—as Acetris' products are— 'manufactured' in the United States from foreign-made components,"[10] and as such, eligible for government procurement.
Finally, the CAFC rejected the government's position that "manufactured" in the United States requires that the product be "substantially transformed" in the United States. The court explained that "[t]he language of the FAR reflects an intent not to require 'substantial transformation' for analysis under the FAR; 'manufacture' does not require substantial transformation." It also noted that "[i]f the government is dissatisfied with how the FAR defines ‘'US-made end product,' it must change the definition, not argue for an untenable construction of the existing definition."[11]
Although the CAFC affirmed the COFC's decision, the CAFC noted that it found the COFC's order "imprecise and confusing," and thus remanded the case, instructing the lower court to declare that:
- Under the TAA, a pharmaceutical product using [active pharmaceutical ingredient] from India does not, because of that fact, thereby become the "product of" India; and
- Under the FAR, the term 'US-made end product' may include products manufactured in the United States using [active pharmaceutical ingredient] from another country.[12]
Discussion
It is too early to fully assess the extent to which the CAFC's decision will be applied beyond the specific facts presented in Acetris and its potential implications for federal procurement. Nonetheless, some potential issues include:
- Whether CAFC's view on the limits of the CBP's authority to make COO determinations for government procurement purposes will affect the extent to which contractor's seek CBP rulings;
- The extent to which CO's will need to make determinations on whether an end product was "manufactured" in the US and therefore eligible for government procurement as a "US-made end product," particularly where a contractor has received an unfavorable CBP determination related to the substantial transformation test.
- What standards contractors and contracting officers will apply in determining whether an end product was "manufactured" in the US.
- Determinations of whether an end product was "manufactured" or "substantially transformed" in the United States are made on a case-by-case basis, considering the totality of the circumstances.
- Substantial Transformation: The TAA's substantial transformation test examines whether an end product "which consists in whole or in part of materials from another country or instrumentality, . . . 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."[13] For example, a change in a product's "use" may be found where "the end-use of the imported product [is] no longer interchangeable with the end-use of the product after post-importation processing."[14] Historically, relevant factors in CBP decisions assessing whether and where substantial transformation has occurred have included the location(s) where activities such as engineering, research and development, manufacturing and final assembly occur; the complexity and level of skill required in and the level of resources devoted to them; the origin and value of key components; the need for precision, specialized tools, or skilled labor during the manufacturing process, and the nature of post-assembly inspection and testing procedures. There is no exhaustive list and no one factor is determinative.[15] In determining whether substantial transformation has occurred, courts tend to give less weight to the product's assembly.[16]
- Manufacturing: Unlike "substantial transformation," there is no statutory or regulatory definition of what constitutes "manufacturing" for purposes of determining if an end product is US-made for purposes of the TAA. In the context of the Buy American Act, the Government Accountability Office (GAO) has provided some guidance on what constitutes "manufactured" in the United States, however, that guidance has not yielded a single or entirely consistent definition.[17] Generally, GAO has examined where the completion of a product in the form required for the government's use takes place, and whether operations performed on a foreign item generated new material or resulted in a fundamental change in an item.[18] However, GAO has also explained that "[i]t is not necessary for the process performed in the United States to result in a substantial or fundamental change to the physical character of an imported machine in order for it to constitute manufacture."[19] Typically, similar to a substantial transformation analysis, packaging or simple assembly does not constitute "manufacturing."[20]
- The absence of a clear definition of manufacturing leaves open the question of what constitutes a "US-made end product" where a product is not "wholly" manufactured in the United States and where substantial transformation has not necessarily occurred in the United States.[21]
- The extent to which the CAFC's holding that the COO test in the FAR TAA clause looks to the "final product" being procured rather than its components will affect CBP COO determinations.
The government has not yet indicated whether it will seek en banc or Supreme Court review of the Acetris decision. In the meantime, it will be important for contractors to closely monitor how courts apply the Acetris decision, and whether any legislative or regulatory action is taken in light of the CAFC's decision.
[1] Acetris v. United States, 138 Fed. Cl. 579, 586 (2018). Steptoe's 2018 alert discussing the COFC's decision can be accessed here.
[2] The CAFC also affirmed the COFC's denial of the government's motion to dismiss on mootness grounds, but rejected the COFC's reasoning. According to the CAFC, because Acetris submitted the highest-price offer of three offers in a lowest-price technically acceptable procurement, it "c[ould] not show prejudice resulting from the VA's purportedly flawed interpretation of the TAA and the FAR as applied to the [at issue] solicitation" – Acetris had no injury-in-fact with respect to the solicitation at issue. Acetris, 2018-2399, slip. op. at 11. With that said, the CAFC concluded that Acetris had standing because its challenge of the VA's interpretation of the TAA and the FAR was not limited to the instant solicitation, but included a challenge to future procurements for which Acetris was a prospective bidder. See id. at 12-14.
The CAFC also rejected the government's argument that Acetris' pending law suits in the Court of International Trade (CIT) divested the COFC of jurisdiction under 28 U.S.C. § 1500. The CAFC reasoned that Acetris' COFC claims were not barred by the doctrine of res judicata because the claims brought in the two fora were not the same. Id. at 14-18.
[3] Acetris v. United States, 138 Fed. Cl. 579, 586 (2018).
[4] CAFC slip at 18 (quoting Acetris, 138 Fed. Cl. at 602-03). Nor is a CO required defer to the CBP's determination. Id; see also Acetris, 138 Fed. Cl. at 602
[5] See CAFC (slip at 15); Acetris, 138 Fed. Cl. at 602; see also TAA, 19 U.S.C. 2511(a); 2515(b)(1); 2418(4)(A) & (B); and implementing regulations at 19 C.F.R. 177.21 & 177.22(a).
[6] See also FAR 52.225-4(a) (defining "end product" as "those articles, materials, and supplies to be acquired under the contract for public use").
[7] Acetris, 2018-2399, slip. op. at 19.
[8] Id. at 20.
[9] Id. at 20-21.
[10] Id. at 21.
[11] Id. at 22.
[12] Id. at 23.
[13] 19 U.S.C. § 2518 (4)(b); 19 C.F.R. 177.22(a); see also FAR 25.003.
[14] Energizer Battery, Inc. v. United States, 190 F.Supp.3d 1308, 1319 (Ct. Int'l Trade 2016).
[15] See id. at 319-20.
[16] See, e.g., id.
[17] See A. Hirsh, Inc. v. United States, Civ. A. No. 90-2179, 1991 WL 102984 (E.D. Pa. 1991) ("Over the years, the Comptroller General has adopted different, and sometimes conflicting, standards as to what constitutes 'manufacturing' under the Buy American Act.").
[18] See Gen. Kinetics, Inc., Cryptek Div., B-242052, May 7, 1991, 91-1 CPD ¶ 445; A & D Machinery Co., B-242546; B-242547, May 16, 1991, 91-1 CPD ¶ 473.
[19] Gen. Kinetics, 91-1 CPD ¶ 445.
[20] See TRS Res., B-285514, Aug. 7, 2000, 2000 CPD ¶ 128 ("We have explained, however, that limited domestic assembly or manufacturing operations which do not alter the essential nature of a component which is the core or essence of the end product being procured may not be used to circumvent the plaint requirement of the [BAA].").
[21] The CAFC did not reach the issue of whether Acetris' products were also "substantially transformed" at the New Jersey facility. This raises the question of whether the FAR and the TAA COO standards could produce different results.
