Can Agencies Rely on CBP Rulings in Enforcing the Trade Agreements Act?

A new ruling says that Federal agencies can’t always rely on country-of-origin rulings by Customs and Border Protection (CBP) when applying the Trade Agreements Act to their contracts. The case dealt with an acquisition of Hepatitis B pill by the Department of Veterans Affairs (VA). The difficulty in parsing the regulations suggests that they need revision, if not a complete rewrite.  

VA Sets Out to Buy Some Medicine – And Runs In Buy-National Policies

Acetris Health was in the running for a contract with the VA to supply the agency with Entecavir, a generic Hepatitis B medication. The pharmaceutical company was to source Entecavir tablets from a US manufacturer that produced them using an active ingredient imported from India (as well as other ingredients from the U.S. and other countries). CBP had previously determined that Acetris’ tablets were of Indian origin, based on their rules. VA’s procurement was subject to the Trade Agreements Act, and the agency followed CBP’s determination, ruling Acetris was ineligible for the contract (since India is not a “designated country”). Acetris protested, and their protest was sustained at the COFC.


How Buy-National Requirements Relate to VA’s Procurement

Although there is increased emphasis on Government purchases of domestically-made goods, there is nothing new about buy-national rules in Federal acquisition. The two main rules are (1) the Buy American Act (BAA), which provides a price advantage for products that meet domestic content rules, and (2) the Trade Agreements Act (TAA), which requires that the origin of the goods be the U.S. or a “designated country” (such as a WTO participant). Procurements subject to the TAA are exempt from the BAA, to avoid conflicting requirements.

The VA’s procurement, in this case, was bound by the TAA, as implemented in the Federal Acquisition Regulation (FAR). As such, the products procured had to be manufactured or “substantially transformed” in the U.S., or in a designated country. Since India is not one of the designated countries, Acetris’ product had to be either American made or transformed on US soil.

As part of their customs functions, CBP had previously ruled that Acetris’ Entecavir was not manufactured or transformed in the U.S. Entecavir’s active ingredient came from India, and CBP rules make that fact crucial for the transformation test. Regarding the issue of being manufactured here, CBP regulations require goods to be “wholly” manufactured in the U.S to gain that designation. So Entecavir failed CBP’s test, again because the active ingredient came from somewhere else.

While Acetris appealed CBP’s ruling, the VA went ahead with their procurement. Resting on CBP’s ruling, VA held that Acetris’ tablets were non-compliant under the Trade Agreements Act and removed the pharma company from the competition. So Acetris filed a bid protest at the COFC contesting the VA’s determination.


The COFC Scours the FAR

The COFC went though an extremely detailed and discursive review of the regulations. The area of the FAR in question is particularly convoluted due to the additions that have been made to it over time. But the Court ultimately found that CBP’s business about a product not being “wholly” manufactured in the U.S. wasn’t part of the FAR regulations and therefore inapplicable. It was enough for the product to be “manufactured.” Because the CBP’s test was different, the Court determined that VA couldn’t rely on its ruling. According to the Court, it was VA’s duty to make an independent determination. And since VA had relied on the wrong test, its TAA determination failed. Even if they ultimately decided Acetris’ tablets were ineligible, it was a decision the agency would have to make and document on its own, using the correct standard.


Future Implications of COFC’s Ruling

It turns out that, ironically, Acetris was never truly a frontrunner for VA’s contract. While the company’s protest against CBP’s ruling was pending, the VA’s evaluation was released, revealing that Acetris was not the low offeror. The court ruled on the protest, however, because Acetris had offers pending on other buys that had the identical issue.

For Acetris, this serves as a test case as the company, just founded in 2016, vies for future contracts to supply medication that is made similarly. For the VA, the ruling purports to apply generally to all the agency’s procurements. Thus, it will be interesting to see if the Government appeals COFC’s ruling. And likewise, we’re still awaiting a separate appellate court ruling on the CBP decision.

Although this particular case binds only the VA, the issue is one that other agencies will have to ponder. Because this case has potentially far-reaching implications, it seems that a rewrite of the FAR rules is in order. This section of the FAR is particularly complicated and needs to be more user-friendly. And there are important policy decisions at stake. How much domestic production is required to qualify for U.S.-origin? When should procuring agencies be able to follow CBP determinations? Now the Government has the opportunity to make the appropriate policy determinations and express them clearly.

Acetris Health, LLC v. United States, No. 18-433C, Jul. 20, 2018.

For more on this case, listen to my interview on Federal News Radio’s “Federal Drive with Tom Temin”.

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