Trade Agreements Act Compliance Activity Increasing at VA

April 20, 2015

Companies should include internal TAA compliance reviews in their overall manufacturing compliance programs.

Every manufacturer of medical devices and pharmaceuticals that offers a product for sale to the federal government under Federal Supply Schedule (FSS) contracts administered by the Department of Veterans Affairs (VA) must disclose whether the item is manufactured in a country other than the United States or a designated country[1] within the meaning of the Trade Agreements Act (TAA).[2] The reason for such disclosure is because the VA may not include an item from a non-TAA country (such as India, China, or Malaysia) on a FSS unless the VA first determines that quantities of the end product from the United States or designated countries are unavailable to meet the government’s needs.[3] FSS solicitations for pharmaceutical and medical device schedule contracts contain a mandatory certification that each end product offered is a US-made or designated country end product, except for those end products listed in the certification along with their country of origin.[4] Additionally, manufacturers must annually update TAA certifications by certifying that the original information is current, accurate, and complete except for identified changes.[5] The VA has been increasing its scrutiny of contractor TAA certifications, so companies with FSS contracts should include internal TAA compliance reviews in their overall manufacturing compliance programs.

Last year, the first whistleblower case involving FSS sales of non-TAA-compliant medical devices settled. Since then, several device manufacturers have self-disclosed that items they offered for sale on the FSS were not TAA compliant. In recent months, the VA Office of Inspector General (OIG) has increased its oversight and enforcement of contractor compliance in this area. The OIG has initiated investigations into the country of origin of drugs offered under FSS contracts and questioned pharmaceutical manufacturers about the country of origin of drugs covered by the Veterans Health Care Act that were not available for purchase under their FSS contracts (as required by the statute).

At a recent conference, the VA OIG director of FSS compliance stated that the OIG considers certain factors in determining whether to refer a voluntary disclosure of noncompliance to the Department of Justice. The OIG considers the volume of sales of noncompliant products and harm to the government from the sales, if the noncompliance was inadvertent and how the error occurred, and the remedial action taken. The director said that it is necessary for a company to take a noncompliant item off a FSS contract and also noted that most of the device companies that have self-disclosed have offered to provide restitution.

It is the VA’s position that US Customs and Border Protection (Customs) is responsible for determining whether the country of origin of an item sold in the United States is the United States or a designated country. Thus, for TAA compliance purposes, the VA relies on Customs rulings and guidance when interpreting country of origin under section 304 of the Tariff Act of 1930, as amended[6]. Customs regulations define “country of origin” as the country of manufacture, production, or growth of any article of foreign origin entering the United States. The regulations further provide that work or material added to an article in another country must effect a “substantial transformation” to render such other country the country of origin. Pursuant to Customs decisions, a substantial transformation occurs when an article emerges from a process with a new name, character, or use different from that possessed by the article prior to processing. However, a substantial transformation will not result from a minor manufacturing or combining process that leaves the identity of the article intact. Although Customs rulings usually concern the treatment of imports, they have used this “substantial transformation” test to determine whether the country of origin of a product is the United States or a designated country.

Manufacturers of drugs and medical supplies and devices often sell to the government through wholesalers under contract with an ordering agency. These wholesalers, which the government refers to as “prime vendors,” process orders placed under the FSS contract and distribute the supplies to the ordering entity. Prime vendor contracts also include the TAA clause requiring country of origin disclosure when an item is manufactured outside the United States or designated country. Consequently, major wholesalers have requested that manufacturers participating in prime vendor programs certify that their products are TAA compliant even if government sales are a small percentage of their market. As the TAA country of origin constraints do not apply to products sold commercially, some manufacturers have developed alternative sources. However, even when using alternative sources is economically feasible, the contractor is responsible for maintaining inventory controls to prevent sales of noncompliant products to the government.

For pharmaceutical manufacturers, the country of origin issue can be particularly vexing. Although bulk chemicals are not fit for use as medication until processed in accordance with FDA requirements, Customs’ numerous rulings on the substantial transformation of bulk pharmaceuticals has ignored that reality. With few exceptions, Customs has consistently ruled that an active chemical ingredient remains substantially unchanged, even by processes that mix it with inactive ingredients, divide it into dosage amounts, and encapsulate or press it into tablets. Therefore, according to Customs, the country of origin of the active pharmaceutical ingredient (API) is also the country of origin of the finished product. Nevertheless, there are circumstances effecting a substantial transformation of the API of a product, and the country of origin analysis for drug products can be highly fact-dependent. Country of origin determinations can be similarly fact-specific for complex medical devices and software applications.

Because the VA is increasing its oversight activity in this complex area, manufacturers of drugs and medical devices and supplies should consider conducting internal reviews to ensure TAA compliance, particularly if there has been a manufacturing change affecting the certification. Assessing whether a manufacturing change affects country of origin should be a standard component of a company’s change of control process. In addition, if there is any question regarding the country of origin for purposes of TAA compliance, it may be prudent to obtain the advice of legal counsel or, in some cases, a ruling from Customs.


If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Washington, DC
Donna Lee Yesner
M. Elizabeth Bierman
Stephen E. Ruscus
Kathleen M. Sanzo

[1]. Countries qualifying as designated countries are listed in 48 C.F.R. §52.225-5(a).

[2]. 19 U.S.C. §2512.

[3]. 48 C.F.R. §25.403(c); 52.225-6(c).

[4]. 48 C.F.R. §52.225-6(a),(b).

[5]. 48 C.F.R. §52.204-8(c).

[6]. 19 U.S.C. §1304.