Federal Circuit Rejects Government’s Interpretation of Trade Agreements Act Standard for Certain Pharmaceutical Products

Implications for Manufacturers

The court’s decision in Acetris marks a substantial departure from precedent, but its full impact at this stage is not yet clear. Nonetheless, there are some takeaways for manufacturers.

First, for the moment, the U.S. Department of Veterans Affairs (VA) can procure U.S. manufactured pharmaceutical products that are manufactured with nondesignated-country API, whereas previously the VA believed it was prohibited from doing so. Accordingly, such manufacturers have new opportunities to sell product to the VA.

Second, it is not clear whether the Acetris court’s U.S.-made end product analysis could be applied to nonpharmaceutical products, such as medical devices and other manufactured goods whether procured by the VA or by other U.S. government agencies. Accordingly, such manufacturers may have new opportunities to sell product to the VA or other U.S. government agencies.

Third, the court’s ruling introduces significant uncertainty into country of origin determinations for pharmaceutical products that are not finished in the United States. For example, the decision provides some evidence that the country of origin standard for pharmaceutical products was not as clear as the government has made it out to be. Therefore, it may be appropriate for manufacturers to consider other aspects of the manufacturing process and not only the country of origin of the API when determining the country of origin of pharmaceutical products.

Fourth, in light of the court’s comment — that to the extent the government is “dissatisfied” with the court’s statutory interpretation, it should seek to amend the FAR — pharmaceutical manufacturers, and manufacturers more broadly, should watch for revisions to the Federal Acquisition Regulation (FAR) Trade Agreements Act (TAA) clause or its definition of “U.S-made end product.”

Finally, manufacturers should be alert to the possibility that the government may seek en banc review at the Federal Circuit or appeal to the Supreme Court and, thereby, attempt to ameliorate the uncertainty introduced by this decision.

The Court’s Reasoning

The court specifically considered “whether Acetris’ products, which are made into tablets in the United States using API made in India, are ‘products of India’ for which procurement is prohibited” under the TAA. The court analyzed whether the procurement of the Acetris tablets was barred by either the TAA or the FAR, concluded that it was not, and in the process found that the “VA’s interpretation of the TAA and FAR was erroneous.”

The court first looked at whether the TAA barred the procurement. The court stated that the TAA prohibits procurement of “‘products of’ a foreign country like India.” The court rejected the government’s argument that the API determines the country of origin because the government had not identified any Supreme Court or circuit authority holding that the country of manufacture of the API was determinative of the country of origin of a pharmaceutical product. Instead, the court reasoned that to be a “product of a country” other than the U.S., the TAA requires that the product be either (1) “wholly the … manufacture of that country” or (2) “in the case of an article which consists in whole or in part of materials from another country … it has been substantially transformed 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 so transformed.” 19 U.S.C. § 2518(4)(B). To determine whether India was the country of origin of the tablets, the court found that the tablet does not satisfy the first prong of the TAA test because the finishing stages of manufacturing take place in the U.S rather than in India. The court then found that the tablet does not satisfy the second prong because the components of the tablet are not “substantially transformed” into the tablet in India. Thus, it concluded that the tablets were not products of India under the TAA.

Notably, the court’s decision provides no guidance as to how the VA, or any other agency, should determine what constitutes substantial transformation under the TAA. In ruling on the justiciability of the case, the court stated that CBP “had no colorable authority to opine on the FAR … which is a matter solely of procurement law” thereby excluding its historical role. While this statement accords with the court’s finding that the FAR uses a different standard than the TAA, it fails to recognize that agencies have generally used CBP’s rulings to determine whether substantial transformation has taken place under the second prong of the FAR test. Moreover, in a footnote, the court explicitly notes that the decision does not reach the question of whether Acetris’ U.S. manufacturing steps were sufficient to constitute a substantial transformation.

The court then looked at whether the FAR barred the procurement and found that it did not. Importantly to the outcome of this case and to the application of this ruling to other factual scenarios, the court highlighted that insofar as U.S.-made end products are concerned, the FAR, under FAR § 52.225-5, has not adopted the TAA’s country of origin test. Rather, the FAR requires the contractor to deliver “only U.S.-made … end products” where these are defined as “an article that is mined, produced, or manufactured in the United States or that is substantially transformed in the United States.” FAR § 25.003 (emphasis added).

The FAR definition of U.S.-made end product lacks the requirement that the product be “wholly” manufactured in the country of origin; thus, products manufactured in the U.S. from non-U.S. origin components may be considered manufactured in the U.S. The regulatory history confirms this distinction. The court concluded that under the “plain meaning of the FAR provision, Acetris’ tablets qualify as U.S.-made end products because they are “manufactured in the United States.” In reaching this conclusion, the court rejected the government’s argument that “manufacture” and “substantial transformation” share a common meaning such that there “cannot be a ‘manufacture’ without a ‘substantial transformation.’” If the government is “dissatisfied” with the court’s statutory interpretation, the court suggests the government amend the FAR’s definition of “U.S.-made end product.”

The court’s ruling also implicitly rejects Acetris’ argument, which the Court of Federal Claims had adopted, that the “domestic end product” standard used for the Buy American Act (BAA) was subsumed within the TAA’s definition of U.S.-made end product. To be a “domestic end product” under the BAA, the product (1) must be manufactured in the U.S. and (2) the cost of its domestic components must exceed 50 percent of the cost of all components or the product must be a commercially available off-the-shelf (COTS) item. FAR § 25.101(a). By rejecting the Court of Federal Claims reliance on the definition of “domestic end product,” the court has introduced, perhaps unintentionally, what appears to be an even lower standard for U.S.-made end products. Under the court’s ruling, all that is required to become a U.S.-made end product is to not be a foreign product under the TAA and to have finishing manufacturing take place in the United States. Whereas, under the BAA standard, to qualify as a “domestic end product” an item had to satisfy either the cost of components test or the COTS test in addition to having finishing manufacturing take place in the U.S. 

Limitations of the Decision 

Because of the fact-bound nature of the Acetris decision, it provides limited guidance to pharmaceutical manufacturers whose products are not finished in the United States. The Acetris case considers only a pharmaceutical product for which the finishing manufacturing stages take place in the U.S. The opinion provides no guidance on how to analyze the country of origin of products whose final stages of manufacturing take place outside the U.S. There is a real question about whether the standard used to determine what constitutes a “U.S.-made end product” can be applied to finishing manufacturing that takes place in non-U.S. countries, because the standard applicable to other countries is different under the FAR.

Specifically, FAR § 52.225-5 authorizes procurement of U.S.-made end products and designated country end products. Designated country end products include World Trade Organization Government Procurement Agreement end products, Caribbean Basin country end products, Free Trade Agreement country end products, and least-developed-country end products. These are all defined as articles that are “wholly the growth, product or manufacture” of such country (emphasis added). As explained above, the definition of U.S.-made end product requires only that the end product be “an article that is mined, produced, or manufactured in the United States.” Accordingly, partial manufacture in the United States is sufficient to establish “U.S.-made end product” status, whereas “designated country end product” status is not satisfied unless the item is “wholly manufactured in” the designated country.