In December 2016, in a key decision of first impression, the Court of International Trade determined that military flashlights, whose components were imported from China but whose assembly was carried out in Vermont, were not "substantially transformed" under the TAA. See Energizer Battery, Inc. v. United States, Slip Op. 16-116 (Ct. of Intl. Trade, Dec. 7, 2016). Under the Federal Acquisition Regulation (FAR), products and construction materials derived from a TAA "designated country" must be manufactured or "substantially transformed" within that country in order to be treated the same as U.S.-made products for Government procurement purposes. See FAR 25.4, 52.222-5. The Court's interpretation of "substantial transformation" made China—which is not a "designated country" under the TAA—the "country of origin," rather than the United States; thus, the decision effectively prohibited the acquisition of the military flashlights.
In the Energizer Battery case, the Court carefully analyzed each of the factors generally discussed in substantial transformation determinations, including whether there had been a change in character, use, or name to the Chinese components as a result of U.S. assembly. In rejecting any finding of substantial transformation, the Court held that: (1) there is no change in character, where the imported flashlight parts do not undergo a "physical change" because the post-importation processing consists of "assembly," (2) there is no change in use, when the "end-use" of the imported flashlight parts was "pre-determined at the time of importation," (3) that the name of each article as imported remained the same as that article in the completed tool, and thus there was no change in name of the imported flashlight parts; and further that (4) where U.S. operations involved assembly that may consist of many steps, but involved "connecting" and "attaching" and not processing or "further working" of the imported materials, it was simple assembly and not substantial transformation.
So, what does this mean for the government contracting community?
Based on a clear statement of "Buy American" from President Trump in his inauguration speech, a targeted emphasis on American-made goods and enhanced support for U.S. businesses under the new Administration is anticipated. While President Trump's comments have not been specifically tied to eligibility under the TAA and the Buy American Act yet, it is anticipated that additional pressures—whether from industry, whistleblowers or government investigations—may quickly force the issue of whether a good made from imported parts and components is eligible for U.S. Government acquisition into the forefront. Thus, contractors need to examine their supply chain, engage with suppliers, and internally assess whether products have been "substantially transformed" under U.S. Customs laws and interpretation pursuant to the comprehensive analysis set forth in Energizer Battery.
Source: http://www.cit.uscourts.gov/SlipOpinions/Slip_op16/16-116.pdf