Morgan Lewis

US President Joe Biden’s focus on Buy American Act domestic preference regulations and agency practices of implementing regulations and issuing waivers is likely to lead to an increased focus on federal government contractors’ compliance with heightened requirements.

As we previously reported, on January 27, President Biden signed the Executive Order on Ensuring the Future Is Made in All of America by All of America’s Workers (EO). In an attempt to strengthen Buy American policies, the EO—one of the first steps in the president’s Build Back Better Recovery Plan—reflects a continued increase in focus on domestic preference requirements in the federal procurement process. Among other things, the EO seeks to create a centralized review and approval process for waivers to government contractors across agencies by designating a Made in America director within the Office of Management and Budget (OMB) and by requiring senior agency involvement in the waiver process. In his public statements prior to signing the EO, President Biden warned that the administration will curb the practice of federal agencies waiving Buy American requirements “with impunity,” and that he has directed the OMB to review waivers to ensure they are used only in “very limited circumstances.”[1]

Beyond a crackdown on existing waivers, the EO requires the Federal Acquisition Regulation (FAR) Council to review whether information technology that is a commercial item should remain exempt from the domestic preference requirements. The EO also directs the FAR Council to consider proposing changes to the FAR provisions that would (1) revise how to define and measure domestic content of end products; and (2) increase the domestic content required for end products or construction material.[2]

While the EO’s focus is generally on the Buy American Act (BAA), its overarching policy of scrutinizing waivers is certain to have implications for other regulations that involve foreign sourcing in the procurement process. For example, the Trade Agreements Act (TAA), generally applicable to contracts valued at $182,000 or more,[3] waives the BAA and its preference for end products manufactured in the United States for foreign-sourced items from countries that have entered into trade agreements with the United States (identified as “designated countries”).[4] At least one legislator recently raised concerns that the TAA has “significantly curtailed” the effectiveness of Buy American policies and called on President Biden to restrict TAA waivers.[5] For now, the EO’s only TAA reference is a requirement that federal agencies report information on their spending based on TAA waivers, broken out by country of origin, to the Made in America director within 180 days and then on a biannual basis. Signaling that the administration is likely to consider this analysis as it contemplates next steps, President Biden stated that he will engage with trading partners “to modernize international trade rules, including those related to government procurement, to make sure we can all use our taxpayer dollars to spur investment that promotes growth and resilient supply chains.”[6]

Actions triggered by the EO could have significant consequences for many companies contracting with or supplying products or services to the federal government. Contractors will need to reevaluate whether the products they sell to federal government customers meet these new and more stringent BAA requirements. These contractors and suppliers should expect increased scrutiny of the certifications they provide regarding compliance with any applicable BAA and TAA requirements. Companies also must be cognizant of potential changes to the regulations and rules, which could impact downstream or sourcing procedures. With respect to both existing requirements and any regulatory changes that may be implemented as a result of the EO directives, companies will need to evaluate their procurement and supply chain processes. This should be part of a robust compliance program, which not only requires that the company regularly reviews its compliance with domestic preference requirements but also carefully considers and makes appropriate adjustments to ensure compliance.

The government’s renewed focus on Buy American policies may lead to increased enforcement activity, further underscoring the importance of managing related compliance risks of the complex (and often changing) legal landscape surrounding these policies, when they apply, and when they are waived. Contractors and suppliers should not be surprised if they more frequently find themselves facing Office of Inspector General and Justice Department investigations as well as potential significant False Claims Act (FCA)[7] liability (treble damages plus per-claim penalties of up to $23,331) if they lack adequate compliance systems to track country of origin for the products they sell to the federal government. Inaccurate BAA and TAA certifications also can lead to contract termination.

Federal courts have held that alleging FCA violations merely based on technical violations applicable to domestic preference rules, without more, does not satisfy the FCA’s materiality requirement, particularly in light of the US Supreme Court’s Escobar decision.[8] For example, in United States ex rel. Folliard v. Comstor Corp.,[9] the district court rejected the relator’s materiality argument based only on the regulations that implement the TAA, even though it acknowledged that the defendant was subject to these regulations.

However, the government’s renewed scrutiny of domestic preference laws and its increased enforcement of noncompliance may affect how courts will evaluate materiality. In particular, President Biden’s focus on bolstering Buy American policies as they apply to the federal government’s procurement process makes it more likely that the Justice Department and federal agencies will be more aggressive when there is potential noncompliance related to domestic preference rules. This shift in the government’s position may result in (1) agencies being less willing to continue receiving products or services after becoming aware of BAA or TAA noncompliance, or (2) a law, rule, or regulation that specifically designates compliance with domestic preference requirements as being material. Either of these instances could result in a materiality finding in future cases.

For government contractors, domestic preference programs and requirements are critical legal obligations. Compliance with these requirements likely will be subject to increased scrutiny—by the Justice Department, contracting agencies, and potential relators—in light of President Biden’s focus on tightening Buy American regulations and curbing contracting agencies’ practice of issuing waivers or exempting contractors from those requirements.

 

[1] Remarks by President Biden at Signing of Executive Order on Strengthening American Manufacturing (Jan. 25, 2021) (President Biden Jan. 25, 2021 Remarks).

[2] The required percentage of domestic content to qualify as a domestic end product was increased—along with the price preferences for domestic end products—for federal government procurement subject to domestic preference requirements under the BAA in a final rule issued on January 19, 2021 under the previous administration. Notably, the EO does not expressly revoke the January 19, 2021 final rule.

[3] This threshold is evaluated and revised every two years by the US Trade Representative. See FAR 25.402.

[4] See FAR 25.400(a).

[5] See Letter from Senator Tammy Baldwin to President Biden (Jan. 22, 2021).

[6] President Biden Jan. 25, 2021 Remarks, supra note 2.

[7] 31 U.S.C.A. §§ 3729–3733.

[8] As the Supreme Court held in Universal Health Servs., Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016), alleged failure to comply with contract requirements must be material to the government’s payment decision in order to violate FCA. Merely establishing the contractor’s noncompliance with a contractual provision is not enough.

[9] 308 F. Supp. 3d 56 (D.D.C. 2018).

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