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Federal Circuit Clarifies Meaning of “U.S.-Made End Product” under FAR Trade Agreements Act Clause

AOL - Govt Contracts

Last week, the U.S. Court of Appeals for the Federal Circuit issued an opinion substantially clarifying how supplies delivered to the Government can qualify as “U.S.-made end products” under the contract clauses implementing the Trade Agreements Act (“TAA”). As many contractors know, compliance with the TAA clause is required for supply contracts valued at or above $182,000 that are subject to the World Trade Organization Agreement on Government Procurement (“WTO GPA”). See Federal Acquisition Regulation (“FAR”), 48 C.F.R. § 52.225-5; Department of Defense FAR Supplement (“DFARS”), 48 C.F.R. § 252.225-7021. This includes the Federal Supply Schedule contracts administered by the General Services Administration and the Department of Veterans Affairs (commonly known as the GSA Schedule and the VA Schedule).

In Acetris Health, L.L.C. v. United States,1 the Court held that “[a] product need not be wholly manufactured or substantially transformed in the United States to be a ‘U.S.-made end product.’” The Court explained that “[i]nstead, such products may be . . . ‘manufactured’ in the United States from foreign-made components.” The Court rejected the Government’s contention that the manufacturing process must involve a “substantial transformation” to be considered a U.S.-made end product. Rather, “under the FAR, a ‘U.S.-made end product’ may either be (i) ‘manufactured in the United States’; or (ii) ‘substantially transformed in the United States.’” The Federal Circuit’s decision has three important take-aways for supply contractors subject to the FAR and DFARS TAA clauses.

First, the Court clearly stated that contracting agencies are responsible for making their own product qualification decisions, and are not bound by the country of origin determinations issued by U.S. Customs and Border Protection (“CBP”). In Acetris Health, the VA argued it was bound by CBP’s country of origin determinations, which had long held that the country of origin of a pharmaceutical’s active ingredient dictates the overall product’s origin. In rejecting this view, the Court said, “the procuring agency . . . is responsible for determining whether an offered product qualifies as a U.S.-made product.” This holding is notable, as contractors have often looked to CBP’s advisory rulings and final determinations on country of origin under the TAA as authority.

Second, the Court’s opinion confirms that it is easier for a product manufactured in the United States to qualify as a “U.S.-made end product” than it is for a product manufactured in one of the TAA “designated countries” to qualify as a “designated country end product” (i.e., a product from a qualifying foreign country). In rejecting the Government’s argument that the end product (pharmaceutical pills) was a product of India, the Court applied the TAA’s country of origin test and found the pills were not: (1) “wholly the growth, product, or manufacture” of India; or (2) “substantially transformed” into a new and different product in India. Instead, the Court found the pills were U.S.-made end products because the contractor manufactured the pills in New Jersey (albeit using foreign components). Based on this holding, supply contractors can comply with the TAA clauses as long as they manufacture their products in the United States, regardless of the source of the components. By contrast, for the same product to qualify as a “designated country end product,” it must satisfy the TAA country of origin test, which requires that the product be wholly manufactured or substantially transformed in the designated foreign country. This is a higher burden.

Third, the Court’s opinion also makes clear that U.S.-made end products under the TAA clause will not necessarily qualify as “domestic end products” under the clauses implementing the Buy American Act (“BAA”). Under the BAA clauses , to qualify as a “domestic end product,” a U.S.-manufactured product must either (1) satisfy a “cost of components test” in which the cost of the end product’s components “mined, produced, or manufactured in the United States exceeds 50 percent of the cost of all its components,” or (2) qualify as a commercially available off-the-shelf item, as that term is defined in the FAR. Under the Court’s ruling, it will be substantially simpler and more straightforward for a product manufactured in the United States to qualify as a “U.S.-made end product” under the TAA than a “domestic end product” under the BAA.

Visit our website to learn more about V&E’s Government Contracts practice. For more information, please contact Vinson & Elkins lawyers Jamie Tabb, Dave Johnson, or Ryan Stalnaker.

1 Acetris Health involved the provision of pharmaceutical pills to the U.S. Department of Veterans Affairs. The pills in question were manufactured in the United States, but included an active ingredient that was sourced from India.

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.