Appellate Court Rules that the Government May Procure U.S. Manufactured Drug Products Despite Use of Foreign Active Pharmaceutical Ingredients; Avoiding CBP’s Substantial Transformation Rule of Origin

On February 10, 2020, the U.S. Court of Appeals for the Federal Circuit (CAFC) issued a decision clarifying the interpretation of the Trade Agreements Act (TAA) and the Federal Acquisition Regulations (FAR) with respect to determining the country of origin of pharmaceutical products. The ruling effectively upheld the earlier decision by the Court of Federal Claims (COFC) issued in July 2018 finding the U.S.-manufactured drug product was a U.S.-made end product, notwithstanding the single-source foreign active pharmaceutical ingredient (API).

The ruling creates a dichotomy that allows U.S.-manufactured end products to be eligible for government procurement even if the foreign components themselves are not substantially transformed in the U.S. production and despite that U.S. Customs and Border Protection (CBP) would otherwise require that the finished product be marked with a foreign country of origin.

The decision is also noteworthy because it seems to expand the scope of the COFC’s bid protest jurisdiction to the extent that an Executive Branch agency’s interpretation of law or regulation could adversely impact the evaluation of the offeror’s proposal or otherwise disqualify the offeror from competing on future procurements.

Background

In Acetris Health, LLC v. United States, the CAFC considered the Department of Veteran Affairs’ (VA) restriction on the procurement of certain drugs manufactured by Acetris in New Jersey. The finished drug products were produced with a single Indian-origin API.

Prior to this decision, the VA interpreted the TAA, which bars the VA from purchasing products of certain foreign countries (e.g., India and China), and the FAR’s Trade Agreements Clause directing agencies to purchase “U.S.-made end products,” as requiring a substantial transformation of any foreign API to confer origin for TAA qualification.

It has long been CBP’s position that the country of origin of a single API dosage drug product is the origin of the API. With few exceptions, CBP has held that bulk API does not undergo a substantial transformation (defined as a change in name, character, or use) when converted into a single-API finished drug product. CBP issued to Acetris numerous rulings to this effect, which prompted the rejection by the VA and Acetris’ subsequent appeal.

CAFC’s Decision

In an important decision, the CAFC held that the focus of its TAA inquiry should be on the end “products” produced in the U.S. and sold to the VA, not the “products of” India. In so holding, the CAFC made consistent the application of the TAA and the implementing FAR regulations to pharmaceuticals as the law is applied to all other products that are acceptable for government purchase. The CAFC clarified that the “product” referenced in the TAA is the final product that is procured by the VA, the actual tablet itself, and not the ingredients of the tablet, i.e., the Indian-origin API. Consequently, because Acetris’ tablets are not “wholly the … manufacture” of India and are not “substantially transformed in India,” procurement of those products is not prohibited by the TAA.

The CAFC determined that the source of the API was irrelevant when evaluating whether the finished drug was a “U.S.-made end product” for purposes of the FAR Trade Agreement Clause and TAA. The court concluded that a product does not need to be wholly manufactured or substantially transformed in the United States in order to constitute a “U.S.-made end product,” and a U.S.-made end product may be manufactured in the United States from foreign-made components.

In determining that the VA’s interpretation of the TAA and FAR was critically flawed, the CAFC rejected the VA’s contention that CBP’s country-of-origin determinations are binding and precluded the VA from exercising discretion to conduct an independent country-of-origin analysis. The decision affirmed the COFC’s directive that the VA is not required to defer to CBP’s determination and must in fact independently determine whether a product qualifies as a U.S.-made end product.

Although the CAFC agreed with COFC’s holding that the VA misinterpreted the TAA and the FAR, the court nonetheless found the COFC’s decision to be “imprecise and confusing.” The CAFC remanded the case, directing the COFC to enjoin the VA from excluding Acetris’ products manufactured in New Jersey from future procurements and issuing a clear declaration that:

1. “under the TAA, a pharmaceutical product using API made in India does not, because of that fact, thereby become the “product of” India; and
2. “under the FAR, the term ‘U.S.-made end product’ may include products manufactured in the United States using API made in another country.”

The CAFC further admonished the government, noting, “if the government is dissatisfied with how the FAR defines ‘U.S.-made end product,’ it must change the definition, not argue an untenable construction of the existing definition.”

However, the CAFC did not affirm the COFC’s holding that the term “U.S.-made end product” includes “domestic end products” (i.e. BAA-compliant products), concluding that was an irrelevant inquiry in this case.

Takeaways

The CAFC’s ruling is great news for government contractors and is arguably applicable outside of the pharmaceutical context, particularly for the expansion of bid protest jurisdiction over future procurements. However, a government request for reconsideration en banc or formal appeal of the decision is anticipated.

What is clear from the decision, absent a successful appeal, is that for TAA purposes, the U.S. manufacture of a finished-dosage, single-API drug product is considered to be a U.S.-made end product eligible for procurement, regardless of the origin of the API.

Significantly, this same approach can arguably be applied in other contexts where domestically manufactured products produced from foreign inputs may now be considered U.S.-made end products under the TAA and be eligible for government procurement — even if the foreign inputs are not substantially transformed.

While the extent of the U.S. manufacturing operations required to be a “U.S.-made end product” remains unsettled, Company’s may want to reevaluate their U.S.-produced products that were previously withheld from TAA qualification under the substantial transformation test.

The CAFC’s decision should be limited to TAA and government procurement issues, however, as it is directly at odds with CBP’s entrenched stance on foreign-country-of-origin determinations. Given the difference in origin determination, it appears from the CAFC decision that a domestically manufactured product may be eligible as a U.S.-made end product and sold to the government under the TAA, yet nevertheless remain marked with its foreign country of origin pursuant to CBP’s substantial-transformation rules of origin.

In this regard, Acetris had brought a parallel case pending in the U.S. Court of International Trade (CIT) challenging CBP’s determination that the Indian API was not substantially transformed as a result of the U.S. production. The CIT case had been stayed pending resolution of the CAFC’s decision.

Now that the CAFC has made clear its interpretation of the TAA, it remains to be seen how the CIT will rule and which direction CBP will take for purposes of foreign-country-of-origin marking requirements and substantial-transformation analysis. Notably, as the CAFC determined that the U.S. manufacturing created a U.S.-made end product, it declined to decide whether Acetris’ products were substantially transformed in the U.S., leaving the issue of whether a drug product is “substantially transformed” subject to broad interpretation.

For questions regarding the above decision, please do not hesitate to contact the authors or any members of Faegre Drinker’s government contracts or customs and international trade teams .