It’s relatively rare for the United States Court of Appeals for the Federal Circuit (an intermediate federal appeals court immediately below the Supreme Court) to weigh in on the Trade Agreements Act, as it applies to federal government contracts. So, when we saw the Federal Circuit’s recent decision on the issue, we had just one thought: this has to make the blog. So, here it is.
Before launching into the case, a little background on the Trade Agreements Act (TAA). Generally, if the TAA applies to a U.S. Government contract, the contractor can supply a product from a foreign country, if that country has a free trade agreement with the United States. In other words, the U.S. Government won’t discriminate against its free-trade partners’ goods when it purchases supplies under certain circumstances (e.g., the contract is above the relevant threshold for the TAA’s application). To determine whether a good is from an eligible country under the TAA, the good must either be “wholly the growth, product, or manufacture of” a TAA-eligible country or it must be “substantially transformed into a new and different article of commerce with a name, character, or use” in a TAA-eligible country. 19 U.S.C. 2518(4)(B).
But not all countries have a free-trade agreement with the United States, including, very importantly, countries like China and India. So if a contractor offers a good to the U.S. Government that was made in India, for example, that good would not be TAA-compliant and the contractor could not supply that good for a government procurement.
Now the Federal Circuit’s recent case: Acetris Health, LLC v. United States, No. 2018-2399 (Feb. 10, 2020). There, VA purchased entecavir tablets (used to treat hepatitis B) from Acetris, which makes these tablets in New Jersey using an active ingredient made in India. In 2017, the VA asked Acetris to recertify its TAA compliance and requested that Acretis obtain a country of origin determination from the Custom and Border Patrol; Acretis duly obliged. CBP ruled that the tablets were products of India because their active ingredient was made in India and no substantial transformation occurred in the U.S. So, VA and Acretis agreed to a no-cost cancellation of the the contract.
Later, the VA issued a new solicitation for entecavir tablets and Acretis challenged–in the Court of Federal Claims–the VA’s reliance on the previous CBP ruling that its tablets were products of India. The court ruled in Acretis’ favor, holding that the tablets were manufactured in Acretis’ New Jersey facility and that VA’s interpretation of the TAA and its implementing FAR provisions were incorrect.
At the Federal Circuit, the Court rejected VA’s argument that CBP’s ruling left VA with no discretion to conduct an independent country of origin analysis. As the procuring agency, VA was responsible to determine whether the product was one made in the U.S. There was no requirement for VA to defer to CBP’s determination.
The Court then determined that the tablets–the final product being procured by the U.S. Government–were not products of India because they were neither (1) “wholly the . . . manufacture” of India nor were they (2) substantially transformed into tablets in India. Thus, because the tablets did not meet either prong of the TAA’s country of origin test, it was not a product of India.
The Court also found that the FAR did not bar Acretis’ entecavir tablets. Under the FAR’s TAA clause, FAR 52.225-5, a contractor must deliver “only U.S.-made or designated country end products.” And “U.S.-made end product” is defined as “an article that is mined, produced, or manufactured in the United States or that is substantially transformed in the United States.” The Court explained that the source of the components is irrelevant to determining where a product is manufactured. Thus, because Acretis manufactured the tablets in New Jersey, the product was a “U.S-made end product” that was TAA-compliant. Per the Court, “[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 . . . ‘manufactured’ in the United States from foreign-made components.”
So what’s the key takeaway? If the TAA applies to your contract, you can deliver a U.S.-made end product if it is merely manufactured in the United States–even if the components are foreign made. The product does not have to be one that is wholly manufactured in the United States, and it doesn’t have to be substantially transformed in the United States. Put differently, under the FAR’s TAA clause and for purposes of a U.S.-made end product, manufacture does not require substantial transformation.