In a striking recent decision, the U.S. Court of Appeals for the Federal Circuit ruled in Acetris Health, LLC v. United States, ___ F.3d ___, 2020 WL 610487 (Fed. Cir. Feb. 10, 2020), that active pharmaceutical ingredients (APIs) are no longer the deciding factor for country of origin determinations under the Trade Agreements Act (TAA). The Court also held that the procuring agency, not the U.S. Customs and Border Protection (CBP), must independently determine whether a good (or drug or device) is eligible for procurement as a "U.S.-made end product" as required under Federal Acquisition Regulations (FAR), the implementing regulations of the TAA.

Case background and regulatory framework:

At issue in Acetris was the Department of Veteran Affairs' (VA) interpretation of restrictions on the procurement of foreign origin pharmaceutical products under the TAA and the FAR. The FAR requires that, with some exceptions, government agencies must buy goods that are "U.S.-made or designated country end products." FAR 25.403(c). A "U.S.-made end product" may be either: (i) "manufactured in the United States" or a TAA designated country; or (ii) "substantially transformed in the United States" or a TAA designated country. FAR 25.003. Pursuant to 19 CFR 177.21 et seq., CBP issues country of origin advisory rulings and final determinations. In making these determinations, CBP has long held that the country from which a pharmaceutical product's API is sourced generally dictates its country of origin. Acetris, 2020 WL 610487 at *6.

In Acetris, the plaintiff was a pharmaceutical distributor that specialized in providing pharmaceuticals to the federal government. After seeking an advisory opinion, CBP determined that Acetris's pharmaceutical products originated in India because their APIs were made in India, a non-TAA designated country, and the manufacturing process in the United States did not constitute a "substantial transformation" of the APIs. See 83 Fed. Reg. 5132-33 (Feb. 5, 2018). Relying on CBP's determination, the VA determined it could no longer purchase certain pharmaceutical products from Acetris because the products were non-TAA compliant. The U.S. Court of Federal Claims (COFC) granted Acetris declaratory and injunctive relief, holding that the VA misinterpreted the TAA and the FAR. The VA appealed.

Shifting standard for TAA and FAR compliance:

In recent years, a product's country of origin has been the source of much litigation. Acetris represents a dramatic shift from a nearly 70-year-old practice of determining a pharmaceutical product's country of origin under the TAA based on the source of the product's API. The Federal Circuit's decision shifts the interpretation of the TAA country of origin requirements to the origin of the end product, rather than the origin of the product's individual components. Specifically, the Court explained that it is the "final product that is procured - here, the pill itself - rather than the ingredients of the pill" that determines a product's country of origin, and that because the product at issue was not wholly manufactured or substantially transformed in India, it was not a "product of India" for the purposes of the TAA. Acetris 2020 WL 610487 at *24. Further, the Court, in affirming the COFC's ruling, expressly rejected the government's position that CBP country of origin determinations are binding on federal agencies. The Court also clarified that a product may be "manufactured" or "substantially transformed" in the United States to qualify as a U.S.-made end product under the FAR, but it does not need to meet both requirements.

The Acetris decision's impact:

The Acetris decision provides clarity on the application of the FAR and TAA in government procurement and adds flexibility for contractors with pharmaceutical products with APIs from non-TAA designated countries. The fact that the country of origin of a company's end product no longer will be determined by a single component or ingredient will make it easier for contractors and pharmaceutical companies with manufacturing facilities in the United States to sell their products to federal agencies, especially those who perform compounding work in the United States. The decision upends the common practice of contracting officers relying on CBP for determinations of country of origin and injects considerable uncertainty into the industry's reliance on CBP country of origin determinations to support conclusions for procurement purposes. The decision also creates uncertainty regarding what standards contracting officers will apply in determining whether an end product was "manufactured" in the United States. Unless the FAR is amended, the Acetris decision likely will add unpredictability to the country of origin determination process in government procurement, and may result in potential inconsistency between CBP's country of origin determinations for importers of pharmaceutical products or medical devices and country of origin determinations for government procurement purposes.

The government has not yet disclosed whether it will seek Federal Circuit en banc or Supreme Court review of the Acetris decision. In the interim, contractors and pharmaceutical companies should closely monitor how courts apply the Acetris decision, and whether there is any legislative or regulatory action taken as a result of the Federal Circuit's decision.