Important Clarifications in the Federal Circuit Acetris Decision

February 20, 2020

In addition to standing behind the plain language of the definition of a “US-made end product,” the court in Acetris Health, LLC v. United States provided new guidance regarding limits on Customs and Border Protection authority, application of the Trade Agreements Act to substantial transformation of a product, and the scope of the US Court of Federal Claims’ bid protest jurisdiction.

The US Court of Appeals for the Federal Circuit on February 10 affirmed the US Court of Federal Claims’ 2018 determination in Acetris v. United States, which we previously analyzed, that the plain language of the Federal Acquisition Regulation (FAR) Trade Agreements clause permitted Acetris to certify and offer products manufactured in the United States even if the products are not substantially transformed in the United States.

In the lower court case, Acetris argued that every iteration of the FAR since 1984 expressly permitted offers of domestic end products in contracts subject to the World Trade Organization’s Agreement on Government Procurement and the Trade Agreements clause, or, more broadly, since 1999 for all end products manufactured in the United States regardless of the source of the components.

The Federal Circuit further admonished that “[i]f the government is dissatisfied with how the FAR defines ‘U.S.-made end product,’ it must change the definition, not argue for an untenable construction of the existing definition.”

The Federal Circuit’s decision had three additional important takeaways.

Limit on CBP Authority

Prior to the Acetris bid protest, Acetris explained to the US Department of Veterans Affairs (VA) that the procuring agency, not CBP, was required to make the determination of whether Acetris’s products were manufactured in the United States under the FAR, as this determination is outside the scope of CBP’s authority. The VA stated that CBP’s rulings were wholly determinative of a product’s eligibility for acquisition under the FAR Trade Agreements clause and required Acetris to obtain a CBP country of origin determination for its products.

Acetris requested that CBP make a country of origin determination as required by the VA, and expressly requested that CBP include in that determination a statement (viewable by the VA) that CBP had no jurisdiction to opine on the meaning of “manufactured in the United States” under the FAR Trade Agreements clause. Had CBP done this, there likely would have been no Acetris contract terminations, no subsequent bid protest, and no resulting Acetris decisions. Instead, CBP determined that Acetris’s finished end product, which was manufactured in New Jersey, was not a US-made end product under the FAR because the active pharmaceutical ingredient (API) was sourced from India.

The Federal Circuit settled this issue once and for all, stating that “CBP had no colorable authority to opine on the FAR” and is authorized only to apply the Trade Agreement Act’s (TAA’s) “statutory country-of-origin test, which is different from the FAR’s test.”

The corollary to this, as stated by the court, is that the US Court of International Trade (CIT) has no colorable jurisdiction to “review the merits of a CBP decision on . . . FAR compliance.” Thus, at a minimum, for US-made end products, CBP country of origin opinions would not be determinative of product eligibility under the FAR.

Substantial Transformation Not in Accord with CBP’s Determination

Again, prior to the bid protest, CBP issued a determination that Acetris’s product (Entecavir tablets) was a product of India because the Indian API was not substantially transformed in the manufacturing of the prescription drug end product, which took place in New Jersey. This decision did not address Acetris’s arguments, including Food and Drug Administration distinctions between approved prescription drug products and raw chemical API, and, instead, repeated a standard answer CBP has given repeatedly in recent years.

CBP essentially held that, with few exceptions, the country of origin of a pharmaceutical is the country of origin of the API used in manufacturing that product. CBP’s position was that the raw API was not substantially transformed by the manufacturing process because the molecule was unchanged in the prescription drug formula.

In its decision, the Federal Circuit expressly determined that, even though the API was from India, Acetris’s Entecavir prescription drug product was neither wholly manufactured nor substantially transformed in India, and, therefore, it was not a product of India for purposes of US procurement under the Trade Agreements clause. In so doing, the court stressed that the TAA country of origin test does not ask whether a particular component has been transformed but rather where the end product purchased by the government was substantially transformed into that product.

As the Federal Circuit has jurisdiction over the CIT and its interpretations of the TAA, the effect of this decision on CBP substantial transformation determinations remains to be seen.

Scope of Bid Protest Jurisdiction in the Court of Federal Claims

Bid protest jurisdiction in the Court of Federal Claims is prescribed under 28 USC § 1491(b), which permits protests of interested parties objecting to “any alleged violation of statute or regulation in connection with a procurement or a proposed procurement.” Previously, both the Federal Circuit and the Court of Federal Claims have on multiple occasions explained that the “in connection with a procurement or proposed procurement” language is interpreted broadly to cover “all stages of the process of acquiring property or services, beginning with the process for determining a need for property or services and ending with contract completion and closeout.” In addition, a contractor needs to “demonstrate that the government at least initiated a procurement, or initiated ‘the process for determining a need’ for acquisition.”

We think of this as verticality in the procurement process. However, as the Federal Circuit decision in Acetris makes clear, Section 1491 also permits protests of interested parties in connection with “future procurements . . . likely to occur” in the relatively near future—in this case, future procurements of prescription drugs that could be anticipated essentially because supplies inevitably run low and existing contract vehicles for necessary drugs expire. Because the court concluded that Acetris would likely submit bids in future procurements and be confronted by the same VA legal position in those procurements, Acetris maintained its standing to challenge the agency’s action.

Having reached these conclusions, the court found certain aspects of the remedy granted by the lower court unclear and remanded the case for issuance of an order (1) declaring that

under the TAA, a pharmaceutical product using API made in India does not, because of that fact, thereby become a “product of” India, and under the FAR, the term “US-made end product” may include products manufactured in the United States using API made in another country; and (2) enjoining the VA from excluding Acetris’s products manufactured in Aurolife’s Dayton, New Jersey, facility from future procurements.

The government has 90 days to petition the Supreme Court for certiorari. We will provide updates as developments occur.

Morgan, Lewis & Bockius LLP lawyers were counsel on the Acetris case.