Two recent judicial decisions involving the Trade Agreements Act (“TAA”) build on a trend reflecting a more favorable enforcement climate for contractors grappling with domestic preference regimes. Earlier this year, the U.S. District Court for the District of Columbia dismissed a qui tam action that alleged fraud in connection with country of origin requirements imposed by the TAA. United States ex rel. Folliard v. Comstor Corp., 308 F.Supp.3d 56 (D.D.C. 2018) (finding the relator failed to adequately plead that the alleged TAA noncompliance was “material” to the Government’s payment decision). The decision marked a welcome early defeat of a False Claims Act case based on the enhanced materiality and scienter requirements of the Escobar decision.
Two recent federal court decisions appear to extend the trend of taking some of the bite out of TAA enforcement, and potential exposure for alleged noncompliance. Despite this welcome news, domestic preference programs remain a key legal obligation for government contractors (and an area likely to remain under scrutiny with the Administration’s professed focus on Buy American and Hire American initiatives).
The Clause vs. the Act
On July 16, 2018, the U.S. Court of Federal Claims (“COFC”) held that, under the Federal Acquisition Regulation’s (“FAR”) Trade Agreements Clause, 48 CFR § 52.225-5, the Government is authorized to purchase products manufactured in the United States regardless of the product’s country of origin under the Trade Agreements Act. Acetris Health, LLC v. United States, No. 18-433C, 2018 WL 3425071 (Fed.Cl. July 16, 2018).
Acetris filed a bid protest after the Department of Veterans Affairs (“VA”) refused to renew its contract to continue selling its Hepatitis B drug to the VA and Department of Defense (“DoD”). The VA based its denial on a Customs and Border Protection (“CBP”) decision that the country of origin for Acetris’ drug was India. The CFP found that the drug’s active pharmaceutical ingredient (“API”) was sourced from India and was not substantially transformed during the manufacturing process that took place in the United States. For more than 25 years, in determining the country of origin under the TAA, the CBP has held that a drug’s country of origin is based on the location where the drug’s API is manufactured. As a result, absent an agency waiver, generic drugs with APIs manufactured, for example, in India and China could not be sold to the VA or DoD.
The COFC held that because Acetris’ drug was manufactured at a facility in New Jersey, the TAA’s “substantial transformation” test did not apply—the Act’s substantial transformation test only comes into play if a product is manufactured outside of the United States. Thus, regardless that certain API for Acetris’ drug was sourced from India, the drug was manufactured in the U.S.
In reaching this decision, the COFC wrestled with the confusing...
