Does your company sell medical devices to the U.S. Government, either directly or through a reseller or distributor? Are those devices or supplies manufactured at least partly in a country other than the U.S.? If you answered yes to both questions, then you need to understand the Trade Agreements Act and verify that your U.S. Government sales to date have complied with the law.
The Trade Agreements Act, or “TAA,” requires certain products sold to the U.S. Government to be manufactured in the U.S. or in one of the “designated countries” with which the U.S. has a free trade agreement or other special trade-related arrangement. Notably, the TAA applies to all Federal Supply Schedule contracts, including Schedule 65 II A (Medical Equipment and Supplies), Schedule 65 II F (Patient Mobility Devices), and Schedule 65 II C (Dental Equipment and Supplies). Contractors with these VA Schedule contracts must certify, in their proposals to the Government, that the products listed for sale on those contracts comply with the TAA. If such certifications turn out to be false, the contractor may face unwelcome consequences, including (i) a mandatory disclosure obligation, (ii) significant monetary liability under the False Claims Act, (iii) the potential of criminal charges, and (iv) debarment from U.S. Government contracting.
Two recent cases illustrate the TAA-related risk to medical device suppliers and manufacturers. Last fall, an international manufacturer agreed to an $8.3 million settlement with the U.S. Government to resolve a whistleblower lawsuit alleging that the company had violated the False Claims Act by falsely certifying the TAA-compliance of products sold through its VA Schedule contract. More recently, another medical device supplier agreed to pay $4.4 million to settle accusations that it had violated the TAA by selling to the U.S. Department of Defense surgical instruments manufactured in non-designated countries.
When it applies, the TAA requires end products delivered to Government customers to be “substantially transformed” in either the U.S. or a “designated country” identified in the Federal Acquisition Regulation (“FAR”). “Substantial transformation” occurs when a product is transformed from its component parts into a new and different article of commerce, with a name, character, or use distinct from its components. This “substantial transformation” test is borrowed from U.S. Customs and Border Protection (“CBP”), and its application is highly fact-specific. CBP rulings make clear that simple assembly or packaging does not result in substantial transformation, but manufacturing processes that are more sophisticated, time-consuming, and central to giving the end product its essential character are more likely to do so. To make a reasonable determination of an end product’s country of origin for TAA purposes, a contractor must perform a careful analysis of each step in the manufacturing process, often with reference to CBP rulings and guidance, and identify the point at which the product’s components are “substantially transformed.” If substantial transformation happens outside the U.S. or a designated country—for example, in China, India, or Malaysia—then the end product is NOT TAA compliant and it typically cannot be sold to the U.S. Government.
VA Schedule Contract Proposals
When a medical device company prepares a proposal for a VA Schedule contract, it must complete the certificate that accompanies the TAA clause at FAR 52.225-5. That certificate, which reads as follows, is a trap for the unwary:
(5) Trade Agreements Certificate. (Applies only if the clause at FAR 52.225-5, Trade Agreements, is included in this solicitation.)
(i) The offeror certifies that each end product, except those listed in paragraph (g)(5)(ii) of this provision, is a U.S.-made or designated country end product, as defined in the clause of this solicitation entitled “Trade Agreements.”
(ii) The offeror shall list as other end products those end products that are not U.S.-made or designated country end products.
Other End Products:
Line Item No. Country of Origin
[List as necessary]
Note the format of that certification: the company submitting the proposalcertifies by omission. That is, simply by leaving blank the lines in the certificate, the contractor informs the Government that the products it proposes to deliver are U.S.-made or designated country end products. So, as an example, if a company that sells medical devices manufactured in China—or spare parts or accessories made in China—submits a proposal for a VA Schedule contract, and that company fails to disclose in the TAA certificate that the device, spare part, and/or accessory is made in China, then every sale of those products to the government under the VA Schedule contract could lead to False Claims Act liability or worse.
An Ounce of Prevention
If your company is selling (or considering selling) medical devices into the U.S. Government market, either directly or through resellers or distributors, it pays to identify the country of origin for those devices and any other end products before they are obtained by a government end user. Doing so requires careful analysis and documentation at minimum, or pursuit of an opinion from CBP for maximum comfort. It also requires careful attention to manufacturing processes and sourcing decisions, to ensure that end products sold to Government customers remain TAA compliant over time, taking into account changes in suppliers and manufacturing locations.