On Monday, in the much-anticipated decision in Acetris Health, LLC v. U.S. 18-2399, the Court of Appeals for the Federal Circuit (the “Federal Circuit”) ruled that U.S. manufacture of a drug is sufficient to confer U.S. origin under the Trade Agreements Act (“TAA”) – regardless of the origin of its main component, the Active Pharmaceutical Ingredient (“API”).

The decision affirmed a lower court ruling by the U.S. Court of Federal Claims (“CoFC”) that had found that Acetris product manufactured in the U.S. with API from India was considered a “U.S.-made end product.”  While this case addresses the country of origin (“COO”) analysis for drug products, it has the potential to be applied more broadly to other manufactured items procured by the Federal government.

Case background. The Acetris case had involved a pre-award protest of a U.S. Department of Veterans Affairs (“VA”) national contract solicitation in which Acetris, a generic drug company, challenged the VA’s interpretation of the rules of origin in connection with that procurement.  The VA had applied the TAA rule of origin per the applicable FAR clause (48 C.F.R. § 52.225-5, implementing TAA, 19 U.S.C. § 2501 et seq.), and required a “substantial transformation” in the U.S. for Acetris’ product to be considered a “U.S.-made end product.”

Acetris had filed the CoFC case as one of two companion cases.  The other action, filed in the Court of International Trade (“CIT”) (No. 1:18-cv-00040-RWG) (the “CIT case”), predated the CoFC case, and involves an appeal of administrative rulings on TAA COO by U.S. Customs and Border Protection (“CBP”), the agency authorized to interpret COO in both the Customs and procurement contexts.  CBP had found that the COO of various Acetris drugs was the country where the API was made, having concluded that their U.S. manufacture did not give rise to a substantial transformation.  The rulings were in line with established CBP precedent.  The CIT case was stayed, pending resolution of the CoFC action.

Acetris argued at the CoFC that its product would meet the FAR procurement definition of “U.S.-made end product,” taking the position that the plain language of the definition should encompass products that are merely manufactured in the U.S.  This approach is less stringent than the TAA substantial transformation test.  A “U.S.-made end product” is defined, in relevant part, as “an article” that is “manufactured in the United States or that is substantially transformed in the United States[.]”  FAR § 25.003.

The CoFC agreed and required VA to apply the lower standard to its drug procurements prospectively.

Federal Circuit appeal.  On appeal, the government argued that the CoFC interpretation of the “U.S.-made end product” definition was inconsistent with the TAA, which requires the substantial transformation test to be applied when assessing product origin.  After dismissing various arguments regarding whether Acetris had standing to litigate the case, the Federal Circuit agreed in large part with the CoFC, and instructed the CoFC to declare (1) that a drug made with API from India is not necessarily a product of India per the TAA, and (2) the “U.S-made-end product” definition in the FAR may include products made in the U.S. with API from another country.  This holding, while specific to pharma products, is not expressly limited to the VA as a procuring agency.  The Federal Circuit also required the CoFC to enjoin VA from excluding the Acetris product from further procurements.

In its discussion, the Federal Circuit rejected the government’s argument that the CBP’s COO determinations are “binding” on the VA in a manner that would leave VA no discretion to conduct an independent COO analysis.  The Federal Circuit agreed with CoFC that “the procuring agency” is “responsible for determining whether an offered product qualifies as a “U.S.-made end product.”

The court did not opine, however, on whether affirming the lower court’s interpretation of the “U.S.-made end product” standard would result in disparate origin standards being applied as between the U.S. (where final manufacture is sufficient to confer U.S. origin) and its trade agreement partner countries – the TAA designated countries (which remain subject to the substantial transformation test).  Given that the TAA was meant to create parity between the U.S. and these trade partners, it is surprising that the court did not address this issue head on.

The Federal Circuit advised that “[i]f the government is dissatisfied with how the FAR defines ‘U.S.-made end product,’ it must change the definition, not argue for an untenable construction of the existing definition.”

What does this mean for contractors?

• This decision removes a significant impediment to Federal contracting for drugs made in the U.S. with API from non-designated countries.  Products “manufactured” in the U.S. by putting them into patient-administrable form are considered to have U.S. origin and may be offered to the Federal government under VA contracts.
• While the holding of the court appears limited to drug products, given the broad conclusions drawn by the panel, it is possible that this same principle could be applied to non-pharma product procurements by VA and potentially other Federal agencies.
• The decision may well result in discrepancies between procurement origin determinations and CBP determinations on Customs marking.  So, for example, in applying the TAA substantial transformation test, CBP could determine that a product such as Acetris’ Entecavir is a product of India, and require it to be marked as a product of India, while VA, applying the language in the FAR clause, would consider the same product to be a “U.S.-made end product” for Federal procurements.
• Finally, this new regime might be short-lived.  It could end if the decision is appealed to the Supreme Court and overturned, or if the FAR Council revises the FAR clause definition of “U.S.-made end product” to be consistent with the TAA.

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