September 25, 2018

Domestic Preference Chaos: How the Court of Federal Claims Upset the Apple Cart and What Contractors Need to Know about Acetris Health

7 min

The Court of Federal Claims recently decided Acetris Health, LLC v. United States, No. 18-433C (July 10, 2018), construing the requirements of the Trade Agreements Act (TAA), along with its implementing regulations and contract clauses. Much has already been written about the decision and, in particular, the potential implications for procuring agencies that rely on U.S. Customs and Border Protection (CBP) determinations concerning the country of origin of an offered product. However, because the Court's decision implicates contractors' ability to compete for and comply with their federal government contracts, it is essential that contractors also understand the significance of the case. In particular, contractors may be wondering whether, in light of this decision, new or more detailed proposal information will be required to demonstrate their eligibility to compete for contracts with domestic preference requirements. With these concerns in mind, this article explores the practical implications of the Acetris ruling for government contractors and offers best-practice tips for proposal submissions.

Overview of Relevant Domestic Preference Requirements

The interplay between the Buy American Act (BAA) and Trade Agreements Act is complex, and, as the Acetris case demonstrates, there are several unsettled questions regarding the construction and interpretation of these domestic preference schemes.

In short, the Buy American Act restricts the goods that can be acquired by the federal government to "manufactured articles, materials, and supplies that have been manufactured in the United States substantially all from articles, materials, or supplies mined, produced, or manufactured in the United States." 41 U.S.C. § 8302(a); see also FAR 25.101(a) ("The Buy American statute restricts the purchase of supplies that are not domestic end products.").

The Trade Agreements Act allows the government to waive the Buy American restrictions where certain factors are met. The Act generally requires that for procurements of more than $180,000, federal government contractors must supply end products that are manufactured in the United States or in one of several designated countries. See 19 U.S.C. § 2511(a); FAR 25.403(c) ("[The government may] acquire only U.S.-made or designated country end products . . . ."); see also FAR 52.255-5(b) (implementing the TAA's requirements). For purposes of the TAA, an item is considered to be "manufactured" either (a) where it is wholly manufactured, or (b) where it is "substantially transformed" into the end product, even if its component parts were manufactured elsewhere. See 19 C.F.R. § 177.22(a); FAR 52.225-5(a) (defining "U.S.-made end product" as "an article that is mined, produced, or manufactured in the United States or that is substantially transformed in the United States into a new and different article of commerce with a name, character, or use distinct from that of the article or articles from which it was transformed"). In other words, there are two ways for a product to qualify as a "U.S.-made end product" under the TAA—to be wholly manufactured in the U.S. or one of the several countries designated by statute, or to be "substantially transformed" in the U.S. from component parts that may have originated in other countries.

Given the complexity of this analysis, agencies and contractors have regularly sought guidance from CBP to determine whether a product that is composed of nondomestic components has been "substantially transformed" in the United States such that it qualifies as a "U.S.-made end product" under the Buy American and Trade Agreements Acts.

The Bid Protest

Acetris Health, LLC is a domestic distributor of drugs and pharmaceutical preparations. In July 2017, after being advised by the U.S. Department of Veterans Affairs (VA) that the CBP was "'the sole federal entity with authority to make country of origin determinations'" under the TAA, as has long been the case, Acetris sought a CBP determination regarding whether an active pharmaceutical ingredient in one of its products was a U.S.-made end product. CBP ultimately determined that the active ingredient in Acetris's product was manufactured in India—thus making it a non-domestic offered product from a non-designated country—and that the pharmaceutical was not substantially transformed in the U.S. because it did not undergo a change in name, character, or use upon processing in the United States. Acetris disagreed with CBP's analysis and appealed the final determination to the United States Court of International Trade.

While its appeal was pending, Acetris submitted several proposals, including one to the VA and the United States Department of Defense, as an incumbent, to provide a drug composed of the particular active pharmaceutical ingredient in question. The solicitation incorporated by reference the Trade Agreements clause found at FAR 52.225-5, and required offerors to separately certify compliance with the TAA's requirements pursuant to FAR 52.225-6.

Adopting the CBP's analysis, the VA concluded that the company's product was not compliant with the TAA. Thus, the agency determined that Acetris's proposal would not be considered unless the drug being procured was otherwise unavailable from other offerors as a U.S.-made end product. Acetris filed a pre-award bid protest at the Court of Federal Claims, arguing, among other things, that the VA's "complete reliance on CBP" constituted "an abdication of its responsibility to interpret the contract terms" and was therefore arbitrary and capricious, an abuse of discretion, and contrary to the FAR. Acetris thus challenged CBP's authority to make country-of-origin determinations for TAA compliance purposes.

Ruling in favor of Acetris, the Court clarified that the term "U.S.-made end product," as used in the Trade Agreements FAR clause in the solicitation, included both products wholly manufactured in the United States and those that are substantially transformed in the United States. The Court held that the VA's request that offerors identify the country of origin for the offered end product's active pharmaceutical ingredient was not arbitrary and capricious because the agency was responsible for ensuring that all medication met the statutory requirements, i.e., whether the medication qualified as a U.S.-made end product of a domestic nature, U.S.-made end product of a nondomestic nature, or designated country end product. However, the Court found that the VA failed to independently assess whether the contractor's medication qualified as a "U.S.-made end product" under the TAA. While CBP was empowered to determine whether a product is "wholly" manufactured in another country, the Court ruled that the TAA did not authorize CBP to determine whether a product is U.S.-made or a domestic end product.

In sum, the Court reasoned that the VA was responsible for ensuring compliance with all pertinent laws when procuring goods, and the TAA did not provide that agencies may refer questions concerning TAA compliance to CBP or any other outside entity.

Practical Considerations for Federal Government Contractors

Although the Court's ruling applies only to VA procurements, it is projected to have a wide-ranging effect on other federal agencies, the pharmaceutical industry, and other manufacturers and contractors offering products to the federal government. In particular, the ruling is significant because it requires procuring agencies to "independently assess" whether an offered product is manufactured or "substantially transformed" in the United States. This holding has left open the question of whether agencies can continue to rely on CBP country-of-origin determinations, and what additional efforts procuring agencies must make to ensure TAA compliance.

The Court's decision also highlights important considerations for government contractors and implicates procurement compliance under the Trade Agreements Act, the Buy American Act, and possibly other domestic preference laws. For example, whereas contractors have traditionally been required to merely certify compliance with the TAA when submitting a proposal, a contractor might now consider including additional information in its proposal regarding the country of origin of its offered product, particularly where the product is not clearly manufactured in the United States, or where the product is composed of component parts from nondomestic, non-preferential countries. The addition of such information to a contractor's proposal may be prudent even where a procuring agency does not directly request such information, although contractors likely will have to weigh the potential benefit of including this additional information against other limitations, such as page restrictions. Contractors should also be prepared to answer questions about the country of origin of their offered products during question and answer periods, oral presentations, clarifications, and discussions. Moreover, contractors may begin to see more activity in bid protests where competitors challenge BAA or TAA compliance. In such instances it remains to be seen whether the GAO or the Court of Federal Claims will allow contracting officers to rely upon certifications or recommend that bids be resubmitted with sufficient information to allow agencies to make complete BAA/TAA determinations. Depending on the number and complexity of the product offerings, this could turn the proposal process into a voluminous data dump.

As agencies continue to grapple with the practical implications of the Acetris ruling, contractors should continue to monitor developments in the FAR, federal procurement policy, and agencies' unique procurement practices to understand how to best remain competitive in the federal marketplace.