Court of Federal Claims Sides with Company in Bid Protest Over Interpretation of the Trade Agreements Clause in a Solicitation for a Pharmaceutical Product

On July 10, 2018, the Court of Federal Claims found the Department of Veterans Affairs’ (“VA’s”) interpretation of the Trade Agreements clause to be arbitrary and capricious in Acetris Health, LLC v. United States, No. 18-433C (Fed. Cl. July 10, 2018) (the “Decision”). This action arose out of the VA’s rejection of an offer by Acetris Health (“Acetris”) in response to a solicitation to supply Entecavir Tablets to the VA and the Department of Defense. Acetris sued the United States seeking declaratory and injunctive relief. The Decision came on cross-motions on the administrative record.  (The government moved to dismiss Acetris’ bid protest for lack of standing. The Court disagreed, finding that Acetris did have standing to pursue its claims. Id. at 2-3.)

Before getting to the specifics of this case, we note that it is one of two actions filed by Acetris regarding these issues. The second action was brought by Acetris in the Court of International Trade (No. 1:18-cv-00040-RWG) and seeks a reversal of administrative rulings made by Customs and Border Patrol (“CBP”).  Notice of Issuance of Final Determinations Concerning Certain Pharmaceutical Products, 83 Fed. Reg. 5118-39 (Jul. 7, 2017).  Acetris had submitted requests for rulings from CBP on the country of origin of a number of products, including Entecavir Tablets. In those rulings, CBP determined that the country of origin of each of the products was the country of origin of its active pharmaceutical ingredient (“API”), finding that the manufacturing processes to put the products into final dosage form, which occurred in the United States, did not constitute substantial transformation of the API. This second action is ongoing.  (The government recently answered the complaint. Dispositive motions, if any, are due by July 17, 2019, and a trial, if necessary, is currently scheduled to begin October 17, 2019.)

Legal Background

We thought it would be useful to provide background on the various statutes and definitions at issue in this case.

The Buy American Act (“BAA”) generally restricts the goods that can be acquired by the federal government to “manufactured articles, materials, and supplies that have been manufactured in the United States substantially all from articles materials, or supplies mined, produced, or manufactured in the United States.” 41 U.S.C. § 8302(a). The Federal Acquisition Regulation (“FAR”), which implements this and other statutory provisions, uses the term “domestic end products” to describe the products that can be procured in accordance with the BAA, though that term is not used in the statute. See FAR 25.001(a)(1). A domestic end product is defined as “[a]n end product manufactured in the United Sates if–(i) [t]he cost of its components mined, produced, or manufactured in the United States exceeds 50 percent of the cost of all its components . . . or (ii) [t]he end product is a [commercially available off-the-shelf (“COTS”)] item.” Id. 25.003. A COTS item is a commercial item (which is an item of a type that is customarily used by the general public and has been offered for sale to the general public) that has been sold in substantial quantities in the commercial marketplace and offered to the government under a contract in the same form in which it is sold in the commercial marketplace. See id. 2.101. Most pharmaceutical products would likely be considered COTS items.

The Trade Agreements Act (“TAA”) allows the federal government to waive the BAA restrictions so that eligible products of designated countries would be treated as favorably as United States products. See 19 U.S.C. § 2511(a); see also FAR 25.402(a)(1). The federal government has exercised its TAA authority and waived the BAA restrictions for acquisitions meeting an acquisition value threshold and covered by trade agreements such as the World Trade Organization Government Procurement Agreement (“WTO GPA”) and Free Trade Agreements (“FTAs”). See FAR 25.402(a)(1), (b). For an acquisition covered by the WTO GPA, federal government purchases are restricted to “U.S.-made or designated country end products” unless there are no offers received for such products or the offers received are insufficient. Id. 25.403(c)(1). A “U.S.-made end product is “an article that is mined, produced, or manufactured in the United States or that is substantially transformed in the United States into a new and different article of commerce with a name, character, or use distinct from the article or articles from which it was transformed.” Id. 25.003. A “designated country end product” is an end product from the groups of countries subject to the identified trade agreements. See id.

For this case, the key term is “U.S.-made end product.” According to the Court, based on various provisions of the FAR, “domestic end products” are a subset of “U.S.-made end products.” In other words, a U.S.-made end product can be either a “domestic” end product or a “non-domestic” end product. Reading the definition of a U.S.-made end product and a domestic end product together, the Court finds that a “non-domestic” end product is a product that is substantially transformed in the United States. See Decision at 2-3.

Factual Background

According to the Decision, on March 28, 2018, Acetris submitted an offer to the VA in response to a solicitation for bids for a national contract for Entecavir Tablets. The solicitation incorporated by reference the Trade Agreements clause found at FAR 52.225-5 and included a Trade Agreements Certificate. The Trade Agreements clause contained the VA’s determination that the WTO GPA and FTAs applied to the acquisition and that “only U.S.-made or designated country end products” could be supplied under the contract.” FAR 52.225-5(b). Consistent with the Trade Agreements clause, the Trade Agreements Certificate required an offeror to certify that “each end product . . . is a U.S.-made or designated country end product” as defined in the Trade Agreements clause. The VA also directed offerors to make an additional certification not required by the Trade Agreements clause, that is, “whether or not the end product offered in response to this solicitation is [TAA] compliant.” The solicitation also required offerors to identify the country of origin for the end product and the API.

The Acetris bid was ultimately rejected by the VA. According to the Decision, “the VA informed [Acetris] that it had rejected [Acetris’] proposal ‘because the manufacturing location’ of [Acetris’] Entecavir Tablets–India–‘is not a [TAA] designated country.’” Decision at 10 (citation omitted). In documentation prepared by the VA that described its source selection decision, the VA relied on the CBP decision finding the country of origin of Entecavir Tablets to be India as there was no substantial transformation in the U.S. or a TAA designated country. Id. at 10-11.

Decision

The legal standard in a bid protest case provides that “a reviewing court shall set aside the agency action if it is ‘arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.’” Id. at 19 (citations omitted).

Acetris asserted that the VA improperly: “(1) construed and applied the solicitation’s Trade Agreements clause, (2) included a provision in the solicitation that was contrary to the Trade Agreements clause, and (3) relied on the CBP’s country-of-origin determination rather than independently construing and applying the solicitation’s Trade Agreements clause.” Id. at 20.

On the first claim, the Court agreed with Acetris’ argument that the Trade Agreements clause allows the VA to purchase U.S.-made or designated country end products and that all domestic end products qualify as U.S.-made end products. The Court found that the record made it clear that the VA did not consider the term “U.S.-made end product” to include domestic end products, which caused the VA to misconstrue the Trade Agreements clause to give priority to TAA-compliant products as assessed by the TAA rule of origin test over what it viewed as non-TAA-compliant drugs, based on its flawed interpretation. See id. at 23. The VA’s failure to properly construe the Trade Agreements clause was arbitrary, capricious, and contrary to law.

On the second claim, the Court agreed with Acetris that it was arbitrary and capricious for the VA to require manufacturers to certify that the offered products were Trade Agreements Act compliant. Id. at 23-24. However, the Court found that the VA was entitled to direct offerors to identify the country of origin of the product as it “is relevant (even if not sufficient) to determining whether the Entecavir Tablets qualified as U.S.-made end products of a domestic nature (manufactured in the United States), U.S.-made end products of a nondomestic nature (substantially transformed in the United States), or designated country end products.” Id. at 24.

On the third claim, the Court agreed with Acetris that the VA should have made its own determination regarding whether the offer complied with the Trade Agreements clause rather than relying on the CBP’s prior ruling. In coming to this decision, the Court stated that “it is apparent that CBP is empowered to determine whether a product is ‘wholly’ manufactured in a foreign country in accordance with the [TAA’s] rule of origin, but is not empowered to determine the threshold question of whether an offered product is a U.S.-made end product (particularly, whether an offered product is a domestic end product) pursuant to the Trade Agreements clause.” Id. at 25-26.

The Court granted most of the relief requested by Acetris. The Court declared the following:

• The term ‘U.S.-made end product,’ as used in the Trade Agreements clause, includes ‘domestic end products,’ as that term is defined in the FAR.
• The VA’s failure to construe the term ‘U.S.-made end product,’ as used in the Trade Agreements clause, to include ‘domestic end products,’ as that term is defined in the FAR, was arbitrary, capricious, and contrary to law.
• It was arbitrary and capricious for the VA to require manufacturers to certify that the offered products were ‘[Trade Agreements Act] compliant.’
• The VA’s failure to independently assess whether plaintiff’s Entecavir Tablets qualified as U.S.-made end products under the Trade Agreements clause was arbitrary, capricious, and contrary to law.

In addition, the Court enjoined the VA in future procurements from:

• construing the term ‘U.S.-made end product’ in the Trade Agreements clause as excluding products manufactured in the United States (in other words, domestic end products), and
• relying on CBP rather than independently ascertaining whether an offered product is manufactured in the United States (in other words, a domestic end product) pursuant to the definition of the term ‘U.S.-made end product.’

Id. at 31.

Any appeal of the decision would be made to the Federal Circuit and would need to occur within 60 days from the date of the decision – i.e., by September 9, 2018.

Follow-Up

There appear to be at least a couple of questions that remain unanswered by this Decision.

First, the Court did not weigh in on how the VA should interpret the term “manufactured in the United States” that is present in the definition of a domestic end product. If the VA were to interpret this term similarly to substantial transformation, Acetris may be back in the same place it was before. However, if a broader definition is used, then the Acetris Entecavir Tablets could be considered to be a U.S.-made end product that could be considered for award regardless of the country of origin of products in competing offers. Acetris argued that the Court should declare that the term “manufactured in the United States” should have the same meaning as that in the definition of “place of manufacture” in the clause implementing the BAA, that is “the place where an end product is assembled out of components, or otherwise made or processed from raw material into the finished product that is to be provided to the Government.” FAR 52.225-18. If this definition were to be used, a pharmaceutical put into final dosage form in the United States would be considered a domestic product and therefore a U.S.-made end product, even if the API were manufactured in a non-designated country. However, the Court did not address Acetris’ proposed definition or otherwise address the proper interpretation of “manufacturer in the U.S.,” leaving it to the VA to do so.

Second, the issue of the interpretation of substantial transformation that has been advanced by the CBP for pharmaceutical products was not addressed by the Court because it was not raised by Acetris in this case. (It is the subject of Acetris’ case that is pending before the Court of International Trade.) Interestingly, although the TAA was intended to permit consideration of offers of designated country end products in a non-discriminatory manner compared to U.S.-made end products, this Decision coupled with the current CBP interpretation of substantial transformation would result in differential treatment of a product with API from India that is put into final dosage form in the United States compared to a product with API from India that is put into final dosage form in a WTO GPA country such as France. The former would be considered a U.S.-made end product as a result of being a domestic product, while the latter would not be considered a designated country end product because of the lack of substantial transformation in a designated country.

We will continue to follow these two cases and provide updates as we have them.