A long-standing dispute over the approach to country of origin determinations under the Trade Agreements Act (“TAA”) may soon be resolved, as the Federal Circuit recently heard oral argument in one of two cases presently examining key aspects of this statute. Among other questions presented, the court may decide the standard for determining whether a product may be considered a U.S.-made end product — a question that could have far reaching implications for product manufacturers across all industries.

Statutory Background – The BAA and TAA

Acetris Health, LLC, v. United States, 2018-2399 (Fed. Cir. 2019) centers around two key supply-chain statutes: the Buy-American Act (“BAA”) and the TAA. The BAA implements a preference for the procurement of American-made goods by effectively imposing a penalty in the form of a price increase on offerors who propose goods that are not “domestic end products.” FAR 25.101(a). A domestic end product “(1) must be manufactured in the U.S.; and (2) the cost of its domestic components must exceed 50% of the cost of all components.” Id. The BAA generally applies to federal procurements in excess of $2,500, but there are a number of exceptions. Important here, the TAA has traditionally been treated as a waiver of all BAA requirements for procurements valued above a certain threshold, currently set at $180,000 for most non-construction procurements. FAR 25.402(b).

The TAA seeks to support free-trade agreements and initiatives by placing U.S. and designated countries’ products on equal procurement footing. If the TAA applies, it generally prohibits procurement from non-designated countries — such as China, India, and Indonesia — and opens procurement to end products that are “wholly the growth, product, or manufacture of” or substantially transformed in the U.S. or designated countries. 19 U.S.C. § 2518(4)(B). Because the TAA waives the BAA’s requirements in certain procurements, many have contended that when the TAA applies, its country of origin test allows for procurement of only those products that are either (1) wholly manufactured or (2) substantially transformed in the U.S. or a designated country. Id.

Litigation Background

Acetris, a manufacturer of generic pharmaceutical products, challenges the position that the TAA fully supplants the BAA and argues that the BAA’s definition of manufacturing still applies to products manufactured in the U.S. Accordingly, for products manufactured in the U.S. there is no need to demonstrate under the TAA that the product is “wholly” manufactured in the U.S. Acetris first presented this argument in a country of origin determination request before U.S. Customs and Border Protection (“CBP”). However, CBP concluded that under the TAA, “manufactured in the United States” means that the product must be “wholly the growth, product, or manufacture of that country.” 19 C.F.R. § 177.22(a). Thus, because Acetris’ drug products were not “wholly” manufactured in the U.S., the drug products could not be considered U.S.-made end products.

Acetris also argued before CBP that its drug products had a U.S. country of origin because the drug product components were substantially transformed there. A product has been substantially transformed when it is “a new and different article of commerce with a name, character, or use distinct from that of the article[s] from which it was so transformed.” 19 U.S.C. § 2518(4)(B). Relying on its prior decisions that focus on a product’s active pharmaceutical ingredient (“API”), CBP rejected Acetris’ position that “extensive additional processing” in the U.S. substantially transformed the India-sourced API into a stable drug product safe for public consumption, because the API retained its chemical and physical properties during U.S. processing, and the API’s medicinal use was unaffected. See 83 Fed. Reg. 5133 (Feb. 5, 2018). As a result, CBP ruled that India was the country of origin for those drug products because the API was manufactured there.

Acetris challenged CBP’s determinations in two lines of litigation. Most relevant here, Acetris filed a bid protest in the Court of Federal Claims (“CFC”) challenging the terms of a Department of Veterans Affairs (“VA”) solicitation that required prospective bidders to certify its products were TAA compliant using only the country of origin test. See Acetris Health, LLC v. United States, 138 Fed. Cl. 579 (2018). The VA determined that Acetris’ drug product was non-TAA compliant based on the prior CBP ruling that the drug product’s country of origin was India. Acetris disagreed with both the VA’s reliance on CBP’s ruling and the VA’s interpretation of the TAA, arguing that the TAA’s statutory country of origin test is not the only means to comply with the TAA. Rather, the VA should consider drug products TAA-compliant if they would otherwise comply with the BAA’s U.S.-made end product test by virtue of being manufactured in the U.S.

As a basis for this position, Acetris’ asserts that the TAA was not intended to increase the manufacturing threshold for those products that already meet the domestic end product definition under the BAA. Rather, under FAR Part 25.4, offers of designated country end products should expressly “receive equal consideration with domestic offers.” As a result, in Acetris’ view, if a product is already a domestic end product under the BAA—i.e., it is manufactured in the U.S.—it is unnecessary then to apply the TAA’s wholly manufactured or substantially transformed requirements that are used to determine the country of origin for non-domestic end products. By contrast, DOJ argues that the TAA fully supplants the BAA and, therefore, TAA compliance requires a showing that a product is either wholly manufactured or substantially transformed in the U.S. or a designated country, regardless of the BAA’s standards.

The CFC agreed with Acetris, concluding that the VA improperly construed the TAA as excluding the purchase of products that qualify as domestic end products under the BAA. Acetris, 138 Fed. Cl. at 599-601. Additionally, the CFC stated that the VA erred when it solely relied on CBP’s ruling, rather than conducting its own assessment of whether the product was a U.S.-made or domestic end product. Id. at 603. DOJ appealed the CFC’s determination to the Federal Circuit on both procedural and substantive grounds.

In a second line of litigation and concurrent with the CFC proceeding, Acetris filed suit in the Court of International Trade (“CIT”) directly challenging CBP’s ruling that Acetris’ U.S.-based processing of the API sourced from India was insufficient to meet the substantial transformation test required by the TAA. Acetris Health, LLC v. United States, 1:18-cv-00047-RWG (CIT). The CIT stayed this case pending resolution of DOJ’s appeal in the Federal Circuit, but our summary of the CIT proceeding is available here.

Parties’ Arguments on Appeal

On appeal to the Federal Circuit, the DOJ argued that Acetris’ protest at the CFC should have failed for jurisdictional reasons. In DOJ’s view, Acetris lacked standing because Acetris offered the highest-priced solicitation response[1] of three offers in a lowest-price, technically-acceptable (“LPTA”) procuremet and would not have won the award regardless of the proper interpretation of TAA compliance. Additionally, DOJ argued that the CFC’s jurisdiction had been usurped by the CIT proceeding. On the merits, DOJ and Acetris reiterated their arguments at the lower court: DOJ asserted that the TAA’s country of origin test—whether a product is wholly manufactured or substantially transformed—is the only test that applies for a TAA-subject procurement. In contrast, Acetris contended that in addition to the country of origin test, if a product is manufactured in the U.S., whether wholly or not, it is a TAA compliant product.

Federal Circuit Focus at Oral Argument

At oral argument, the Federal Circuit seemed less focused on the intersection of the BAA and TAA and instead zeroed in on procedural questions, as well as the proper application of the substantial transformation test. The panel pressed Acetris on its standing to protest, questioning whether Acetris was prejudiced by the VA’s interpretation of the TAA when it had no chance to win the solicitation as the highest priced of three bids in a LPTA competition. Acetris alleged that if the VA interpretation is correct — that the drug product is non-TAA compliant and thus ineligible to bid — then it would not be able to participate in any future solicitations for the product. Acetris sought to draw a parallel to Veterans Contracting Group v. United States, 133 Fed. Cl. 613, 618 (2017), where the CFC determined that a small business contractor was improperly removed from a VA database specifically for small business set-asides, impeding its ability to compete in future procurements. DOJ pushed back on this attempted parallel in rebuttal, by distinguishing review of a SBA decision, where the Federal Circuit clearly would have jurisdiction, from the instant case where, in DOJ’s view, the mootness of the issue precluded jurisdiction.

Additionally, the panel challenged Acetris to distinguish the operative facts of the proceedings before the Federal Circuit from those before the CIT to determine whether jurisdiction before the Federal Circuit is proper. Acetris argued that before the Federal Circuit is the issue of whether the VA applied the proper interpretation of the TAA in its solicitation, whereas the focus of the CIT litigation is the technical and scientific process of substantial transformation. Finally, with respect to substantial transformation, the Federal Circuit seemed persuaded by the idea that the processing that takes place in the U.S. is necessary for the product to be safe for consumers to consume, and therefore, the product should be considered a U.S.-made end product.

Key Takeaways

The Federal Circuit panel declared that that the TAA and BAA statutes and their implementing regulations are “not clear at all,” but did not tip its hand on the complex issue of statutory interpretation. Going forward, although the court could resolve this matter on procedural grounds, a decision on the merits could lend further support to the view that TAA compliance can be demonstrated by meeting the BAA’s test for a U.S.-manufactured product or satisfying a more lenient substantial transformation standard. Although the particular facts presented by Acetris involve drug products, a decision from the Federal Circuit on the merits of this case could have the potential to impact supply chains across all industries — either by clarifying that TAA compliance allows for only partial manufacturing in the U.S. or by ushering in a lower standard for demonstrating substantial transformation of a product in a designated country. Therefore, contractors selling to the U.S. government, including those offering commercial items, would be well advised to keep apprised of the court’s decision in this matter.