A spate of recent multi-million dollar settlements has shown that medical device manufacturers are subject to substantial liability under the False Claims Act (FCA) if they misstate the country of origin of their products in violation of the Trade Agreements Act (TAA).1 The TAA requires that certain products sold to the U.S. government originate either in the United States or in one of the designated countries with which the United States has special trade agreements.2 Government contractors, therefore, are required to determine the proper country of origin of their products and certify that they are providing the government with TAA-compliant products. If this certification proves to be false, however, the contractor may be subject to substantial civil and criminal penalties under the FCA, including debarment and suspension or exclusion from Medicare.
Recent Settlements Most recently, a global manufacturer of medical device products agreed to an $8.3 million settlement to resolve a qui tam lawsuit alleging it violated the FCA by improperly certifying products as TAA-compliant.3The company allegedly failed to segregate TAA-compliant orthopedic devices from products that were repackaged in the United States but were originally imported from Malaysia (a non-designated country). As a result, the company could not ensure that all the goods it sold the Department of Veterans’ Affairs (VA) under its Federal Supply Schedule contract complied with the TAA as certified. The company voluntarily disclosed potential violations to both the VA and the Department of Defense inspector general. Nevertheless, a former employee filed suit under the FCA’s whistleblower provisions, which enabled him to receive a portion of the settlement amount. The Department of Justice (DOJ) declined to intervene in the case, but it was involved in the settlement by which the company paid $8.3 million without admitting to any wrongdoing. This is the first such FCA settlement for a medical device manufacturer based on TAA compliance.
The substantial FCA liability that medical device manufactures face for TAA violations is also demonstrated by cases in other sectors, like the recent $2.3 million settlement involving Samsung Electronics America, Inc. (Samsung).4 The Samsung case involved products that were made in China (a non-designated country) and sold to the government through resellers under General Service Administration Multiple Award Schedule (MAS) contracts. Samsung allegedly certified to the resellers that the products were made in designated countries, such as Korea and Mexico, and the resellers, relying on these representations, listed the Samsung products on their MAS contracts. Like the medical device case, the allegations against Samsung were brought by a former employee, although the DOJ did intervene in the Samsung case. The Samsung settlement serves as a stark warning to all medical device manufacturers that they can be held liable under the FCA not only for false certifications they make directly to the federal government, but also for false country-of-origin representations made by third parties that cause the contractors’ certifications to be non-compliant with the TAA.
Enforcement Trends As these recent settlements demonstrate, medical device manufacturers are coming under increased scrutiny with regard to TAA compliance. Whistleblowers have a strong financial incentive to report violations and initiate qui tam lawsuits, and the VA has been investigating potential violations with more frequency. It is also clear that the DOJ is increasing its use of the FCA as a tool to enforce the TAA, as it has for U.S. customs law. The reason is clear: in addition to the regulatory fines and sanctions that apply to violations of the Federal Acquisition Regulations and customs regulations, under the FCA, the government is able to seek treble damages and statutory penalties of $5,500 to $11,000, as well as suspension or debarment, for each false claim, thereby exponentially increasing the government’s potential financial recovery and settlement leverage.
Compliance Recent enforcement trends make clear that, more than ever, device manufacturers should take special care to correctly determine the country of origin of their goods. The risk of error in this context is particularly high for several reasons. First, many medical devices are manufactured with components and labor from non-designated countries, like China, India, Malaysia, Thailand, and Taiwan. Such devices may still be TAA-compliant if a manufacturing process that “substantially transforms” the components into a new article of commerce with a different name, character, or use takes place in either the United States or in a designated country. This so-called “substantial transformation test” is administered by U.S. Customs and Border Protection (CBP), and its application entails an often-complex, fact-specific analysis of CBP rulings, regulations, and guidance. Another factor that increases the risk of noncompliance is that device supply chains are not always static. Rather, the country from which material and labor inputs are acquired may change over time. Accordingly, manufactures must institute compliance controls that: (1) trigger the need to revisit country-of-origin determinations where appropriate and (2) ultimately prevent products originating in non-designated countries from being supplied to the government.
Advice of Counsel The advice of experienced counsel is more vital than ever considering the current enforcement environment and the potential vulnerability of medical device manufacturers under the FCA for TAA violations.