Procurement, Origin, and Perspective
The Court of Appeals for the Federal Circuit decided an appeal from the Court of Federal Claims that may have a significant impact on origin determinations by Customs and Border Protection as well as future cases from the Court of International Trade. The case is Acetris Health LLC v. United States.
As background, the Court of Federal Claims is a federal court set up by Congress to hear claims by private parties against the United States in cases that might result in money damages. The Court can grant equitable relief in government contract bid protests and has jurisdiction over the vaccine claims process (which is a whole other story).
Acetris is a bid protest case. The VA had been purchasing medicines from Acetris for some time. The drugs are produced in a facility in NJ that compounds the ingredients and then forms the material into pills of proper dosage. The active ingredients are made in India.
The VA asked Acetris for confirmation that it was in compliance with the regulations that govern procurement by federal agencies. Specifically, the VA needed Acetris to confirm that the drugs were either products of the United States for purposes of the Buy American Act or are products of a country that is party to the WTO Government Procurement Agreement and, therefore, available for procurement under the Trade Agreements Act. India is not a member to the Agreement and, therefore, is not a TAA country.
In the course of the administrative dispute, Acetris asked U.S. Customs and Border Protection to issue a ruling on the origin of the drugs for procurement purposes. Customs applied the substantial transformation test required in TAA cases. Customs also followed its prior determinations that the country of origin of pharmaceuticals is the country of origin of the active ingredient. As a result, CBP held that the drugs are products of India and not, therefore, subject to procurement by the VA (unless an exception applies).
Acetris filed a suit in the Court of International Trade while trying to work this out with the VA. Eventually, it challenged the VA's application of the procurement regulations in a second case it filed at the Court of Federal Claims.
There is a lot going on in this case. The parts that are of interest to lawyers who get excited about federal civil procedure have to do with mootness and jurisdiction. Briefly, in the administrative process, Acetris resubmitted its bid to the VA. In that process, for one of the 10 drugs involved, Acetris was the bidder with the highest price. Under the Federal Acquisition Regulations ("FAR"), Acetris would not be awarded the contract even if that drug was a product of the U.S. Consequently, the government argued the case is moot, meaning there is no relief to be granted and no reason to proceed. The Court noted that there are nine other drugs involved and the issue has a likelihood of coming up again, so the Court denied the motion to dismiss.
Another issue is that the CFC cannot entertain a case when another is already pending in another court and raises substantially the same claims. 28 USC 1500. This involves a bit of hair splitting. Customs and Border Protection has the power to issue origin rulings to determine whether products originate in a TAA country. It has no similar power under the FAR to determine whether a product is of the United States. This raises two different questions, only one of which could be before the CIT. As the Court put it:
By implication, that means the FAR claim was not properly before the CIT. The CIT case involved different legal tests and, therefore, did not bar the CFC from acting or the Federal Circuit from deciding the appeal.
There is a rabbit hole here that I am not heading down. But someone needs to look at, Xerox Corp. v. United States and see whether it was just overturned.
On to the merits, wherein we find the parts of interest to customs lawyers and the trade compliance professionals who have to deal with these things.
First, the Court swatted away the government's initial argument that the CBP ruling is binding on the VA. Rather, as the procuring agency, the VA is responsible for interpreting the procurement rules and applying them to its purchases. Apparently, in the course of oral argument, the Department of Justice admitted that there is no legal requirement that the VA defer to Customs' procurement rulings.
With respect to the TAA, the question for the VA to determine was whether the drugs, as purchased from Acetris, were products of India and, therefore, prohibited from procurement. According to the Federal Circuit:
Under the second TAA test, the question is whether the drugs were substantially transformed in India. If so, they would not be available for procurement. This the part of the case that very likely has broader consequences for Customs and the Court of International Trade.
The Federal Circuit's substantial transformation analysis states:
First, the Federal Circuit just blew up the premise that the origin of pharmaceuticals is ipso facto the country of origin of the active ingredient. While CBP has consistently applied this rule for years, the government was unable to find support for it in anything that would bind the Federal Circuit. That also means there is nothing that would bind the Court of International Trade, were the issue to come up anew. If there are CIT decisions following this approach, those decisions do not bind other CIT judges in subsequent cases. It is possible the approach would merit deference, but that is a pretty low bar and there is nothing about that rule that follows the normal name, character, use analysis that has been applied by the Courts for 100 years.
Next, the Federal Circuit zeroed in on the pill in its final form rather than on the condition of the active ingredient from India. This is critically important. Inherent in CBP's position is that the active ingredient came into existence in India and that subsequent production using the active ingredient as the base for a medicine does not produce a substantial transformation. This is in line with the many origin rulings CBP has recently issued finding that when a component part has a known end use and is further processed consistent with that end use, there is unlikely to be a substantial transformation. This follows, in part, from the CIT decision in Energizer, which I have discussed in detail here and here and which haunts my dreams.
If Energizer had been appealed, it appears possible (if not likely) that the Court of Appeals would have focused on the flashlight, not the imported parts as Customs has done following Energizer. Like the pills in this case, the question presented would have been whether the flashlights are a distinct article of commerce with a different name, character, or use when compared to the parts. The fact that the parts retained their individual names and functions after assembly is similar to the active ingredient which retains its name and function after compounding into a pill. In other words, the proper analysis is not the part before further processing and the part after further processing. The correct point of comparison is the part compared to the finished article.
If I am correct about that, then several recent rulings are likely incorrect. Most notably the Volvo ruling, which used pre-determined end use as one pillar of its analysis. The other pillar was the assertion that assembling a motor vehicle from five large subassemblies and multiple individual components is not complex enough to cause a substantial transformation. In a legal environment in which adding bristles to a brush handle and cutting and sewing pillow cases is complex enough to cause a substantial transformation, building street-legal luxury cars from subassemblies and loose parts is clearly a complex operation.
Back to Acetris. Because the pills were not substantially transformed in India (because they were made in Dayton, New Jersey), they are not products of India for purposes of the TAA. That means the VA is not precluded from purchasing them on that basis. Note that the VA could not buy the active ingredient, which would seem to be a product of India under one or the other of the TAA tests.
It turns out that the FAR also does not bar VA procurement of these drugs. The origin test under the FAR is looser than substantial transformation. The requirement is that a good be a US-made end product, which means that the article was mined, produced, or manufactured in the U.S. The government argued, based on several earlier cases, that "manufactured" either means or includes the requirement for a substantial transformation. The Federal Circuit noted that the regulation simply does not use that language. The absence of an express requirement for a substantial transformation, which is a long-established legal doctrine, indicates the FAR intended something other than that.
Having made it through all of that analysis, the Court of Appeals gave a well-earned win to Acetris. Moreover, if this decision refocuses attention on the end product, it is possible that the Court of International Trade might have an opportunity to tamp down some of the excesses of Customs' application of Energizer and add some clarity and predictability to origin law. To my way of thinking, that would be a big win for all of us who care about these things.
Two last things. First, a big hat tip to my law partner David Forgue who was the first person to point me to this case and who geared in to the larger implications before I saw it.
Next, to be fair to the government, there is another way to look at the TAA. Instead of asking was there a substantial transformation in India such that the pills are products of India, that question can be reformulated as did the further processing in the U.S. result in a substantial transformation of the Indian API into a U.S.-origin pill? I get that. But, the TAA does not ask that question. It asks whether the item is a product of a TAA country. Xerox deals with this by noting that the US is a TAA country. Again, I wonder about Xerox now. The Federal Circuit seems to be saying that TAA is about foreign origin and FAR is about domestic origin. There are two different tests and it is not necessary to shoehorn the TAA analysis onto domestic products when the FAR is right there. I do not think this is changes the approach to substantial transformation or the fact that this decision is applicable to non-preference origin determinations. But, I admit we will have to give it some time.
As background, the Court of Federal Claims is a federal court set up by Congress to hear claims by private parties against the United States in cases that might result in money damages. The Court can grant equitable relief in government contract bid protests and has jurisdiction over the vaccine claims process (which is a whole other story).
Acetris is a bid protest case. The VA had been purchasing medicines from Acetris for some time. The drugs are produced in a facility in NJ that compounds the ingredients and then forms the material into pills of proper dosage. The active ingredients are made in India.
The VA asked Acetris for confirmation that it was in compliance with the regulations that govern procurement by federal agencies. Specifically, the VA needed Acetris to confirm that the drugs were either products of the United States for purposes of the Buy American Act or are products of a country that is party to the WTO Government Procurement Agreement and, therefore, available for procurement under the Trade Agreements Act. India is not a member to the Agreement and, therefore, is not a TAA country.
In the course of the administrative dispute, Acetris asked U.S. Customs and Border Protection to issue a ruling on the origin of the drugs for procurement purposes. Customs applied the substantial transformation test required in TAA cases. Customs also followed its prior determinations that the country of origin of pharmaceuticals is the country of origin of the active ingredient. As a result, CBP held that the drugs are products of India and not, therefore, subject to procurement by the VA (unless an exception applies).
Acetris filed a suit in the Court of International Trade while trying to work this out with the VA. Eventually, it challenged the VA's application of the procurement regulations in a second case it filed at the Court of Federal Claims.
There is a lot going on in this case. The parts that are of interest to lawyers who get excited about federal civil procedure have to do with mootness and jurisdiction. Briefly, in the administrative process, Acetris resubmitted its bid to the VA. In that process, for one of the 10 drugs involved, Acetris was the bidder with the highest price. Under the Federal Acquisition Regulations ("FAR"), Acetris would not be awarded the contract even if that drug was a product of the U.S. Consequently, the government argued the case is moot, meaning there is no relief to be granted and no reason to proceed. The Court noted that there are nine other drugs involved and the issue has a likelihood of coming up again, so the Court denied the motion to dismiss.
Another issue is that the CFC cannot entertain a case when another is already pending in another court and raises substantially the same claims. 28 USC 1500. This involves a bit of hair splitting. Customs and Border Protection has the power to issue origin rulings to determine whether products originate in a TAA country. It has no similar power under the FAR to determine whether a product is of the United States. This raises two different questions, only one of which could be before the CIT. As the Court put it:
The CBP had no colorable authority to opine on the FAR (i.e., the second CIT claim), which is a matter solely of procurement law. The CBP’s statutory authority to provide country-of-origin determinations comes from 19 U.S.C. § 2515(b)(1), which only authorizes “determinations . . . under section 2518(4)(B) of this title.” Section 2518(4)(B) provides the TAA’s statutory country-of-origin test, which is different from the FAR’s test.
By implication, that means the FAR claim was not properly before the CIT. The CIT case involved different legal tests and, therefore, did not bar the CFC from acting or the Federal Circuit from deciding the appeal.
There is a rabbit hole here that I am not heading down. But someone needs to look at, Xerox Corp. v. United States and see whether it was just overturned.
On to the merits, wherein we find the parts of interest to customs lawyers and the trade compliance professionals who have to deal with these things.
First, the Court swatted away the government's initial argument that the CBP ruling is binding on the VA. Rather, as the procuring agency, the VA is responsible for interpreting the procurement rules and applying them to its purchases. Apparently, in the course of oral argument, the Department of Justice admitted that there is no legal requirement that the VA defer to Customs' procurement rulings.
With respect to the TAA, the question for the VA to determine was whether the drugs, as purchased from Acetris, were products of India and, therefore, prohibited from procurement. According to the Federal Circuit:
An article is a product of a country or instrumentality only if (i) it is wholly the growth, product, or manufacture of that country or instrumentality, or (ii) in the case of an article which consists in whole or in part of materials from another country or instrumentality, it has been substantially transformed into a new and different article of commerce with a name, character, or use distinct from that of the article or articles from which it was so transformed.Here, final production of the drugs occurred in the US. Only the active ingredient was from India. The drugs, therefore, were not wholly the growth, product or manufacture of India.
Under the second TAA test, the question is whether the drugs were substantially transformed in India. If so, they would not be available for procurement. This the part of the case that very likely has broader consequences for Customs and the Court of International Trade.
The Federal Circuit's substantial transformation analysis states:
The government argues that Acetris’ tablets are products of India because the tablets’ API was made in India. But the government cannot identify any Supreme Court or Circuit authority holding that a pharmaceutical product’s country-of-origin is determined by the country in which its API was manufactured. To the contrary, it is clear from the TAA that the “product” is the final product that is procured—here, the pill itself—rather than the ingredients of the pill. Acetris’ tablets do not meet prong (i) of the TAA’s country-of-origin test for India because the tablets are not “wholly the . . . manufacture” of India. Acetris’ tablets similarly do not meet prong (ii) because the tablets’ components are not “substantially transformed” into tablets in India. Because an article is a product of a country “only if” prongs (i) or (ii) are met, Acetris’ tablets are therefore not a “product of” India. Indeed, the government concedes that under the construction of “product” that we have adopted (i.e., that “the pill is the product”), “the pill is not the product of India.” Oral Argument at 11:50–12:50.
Accordingly, since the TAA only excludes products from government procurement if they are “products of” a foreign country like India, the TAA does not bar the VA from procuring Acetris’ products.Let's un pack this.
First, the Federal Circuit just blew up the premise that the origin of pharmaceuticals is ipso facto the country of origin of the active ingredient. While CBP has consistently applied this rule for years, the government was unable to find support for it in anything that would bind the Federal Circuit. That also means there is nothing that would bind the Court of International Trade, were the issue to come up anew. If there are CIT decisions following this approach, those decisions do not bind other CIT judges in subsequent cases. It is possible the approach would merit deference, but that is a pretty low bar and there is nothing about that rule that follows the normal name, character, use analysis that has been applied by the Courts for 100 years.
Next, the Federal Circuit zeroed in on the pill in its final form rather than on the condition of the active ingredient from India. This is critically important. Inherent in CBP's position is that the active ingredient came into existence in India and that subsequent production using the active ingredient as the base for a medicine does not produce a substantial transformation. This is in line with the many origin rulings CBP has recently issued finding that when a component part has a known end use and is further processed consistent with that end use, there is unlikely to be a substantial transformation. This follows, in part, from the CIT decision in Energizer, which I have discussed in detail here and here and which haunts my dreams.
If Energizer had been appealed, it appears possible (if not likely) that the Court of Appeals would have focused on the flashlight, not the imported parts as Customs has done following Energizer. Like the pills in this case, the question presented would have been whether the flashlights are a distinct article of commerce with a different name, character, or use when compared to the parts. The fact that the parts retained their individual names and functions after assembly is similar to the active ingredient which retains its name and function after compounding into a pill. In other words, the proper analysis is not the part before further processing and the part after further processing. The correct point of comparison is the part compared to the finished article.
If I am correct about that, then several recent rulings are likely incorrect. Most notably the Volvo ruling, which used pre-determined end use as one pillar of its analysis. The other pillar was the assertion that assembling a motor vehicle from five large subassemblies and multiple individual components is not complex enough to cause a substantial transformation. In a legal environment in which adding bristles to a brush handle and cutting and sewing pillow cases is complex enough to cause a substantial transformation, building street-legal luxury cars from subassemblies and loose parts is clearly a complex operation.
Back to Acetris. Because the pills were not substantially transformed in India (because they were made in Dayton, New Jersey), they are not products of India for purposes of the TAA. That means the VA is not precluded from purchasing them on that basis. Note that the VA could not buy the active ingredient, which would seem to be a product of India under one or the other of the TAA tests.
It turns out that the FAR also does not bar VA procurement of these drugs. The origin test under the FAR is looser than substantial transformation. The requirement is that a good be a US-made end product, which means that the article was mined, produced, or manufactured in the U.S. The government argued, based on several earlier cases, that "manufactured" either means or includes the requirement for a substantial transformation. The Federal Circuit noted that the regulation simply does not use that language. The absence of an express requirement for a substantial transformation, which is a long-established legal doctrine, indicates the FAR intended something other than that.
Having made it through all of that analysis, the Court of Appeals gave a well-earned win to Acetris. Moreover, if this decision refocuses attention on the end product, it is possible that the Court of International Trade might have an opportunity to tamp down some of the excesses of Customs' application of Energizer and add some clarity and predictability to origin law. To my way of thinking, that would be a big win for all of us who care about these things.
Two last things. First, a big hat tip to my law partner David Forgue who was the first person to point me to this case and who geared in to the larger implications before I saw it.
Next, to be fair to the government, there is another way to look at the TAA. Instead of asking was there a substantial transformation in India such that the pills are products of India, that question can be reformulated as did the further processing in the U.S. result in a substantial transformation of the Indian API into a U.S.-origin pill? I get that. But, the TAA does not ask that question. It asks whether the item is a product of a TAA country. Xerox deals with this by noting that the US is a TAA country. Again, I wonder about Xerox now. The Federal Circuit seems to be saying that TAA is about foreign origin and FAR is about domestic origin. There are two different tests and it is not necessary to shoehorn the TAA analysis onto domestic products when the FAR is right there. I do not think this is changes the approach to substantial transformation or the fact that this decision is applicable to non-preference origin determinations. But, I admit we will have to give it some time.
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