August 11, 2020

Volume X, Number 224

August 11, 2020

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August 10, 2020

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Federal Circuit Revolutionizes Country of Origin Analysis for Pharmaceuticals

The Federal Circuit Court of Appeals has just rejected the longstanding U.S. government position that the country of origin of pharmaceuticals in the context of U.S. government procurement is determined by where the active pharmaceutical ingredient (API) is made.  Acetris Health, LLC v. United States, 2018-2399, judgment of February 10, 2020.  In the Acetris case the API was made in India.  It was then shipped in bulk to the United States, where it was manufactured into tablets.  The central question in the case was whether the resulting tablets were a “U.S.-made end product” and thus qualified under the Buy American Act (BAA) to be sold to the Department of Veterans Affairs.

U.S. Customs and Border Protection (CBP) had ruled that the Acetris tablets were of Indian origin because the API was manufactured in India, which under CBP rulings meant that the processing in the United States was not sufficient to constitute a “substantial transformation” and therefore did not confer a new country of origin.

The Federal Circuit rejected the government’s position which was based upon that CBP ruling, holding that for federal acquisition purposes a pharmaceutical product is “manufactured” in the U.S. and qualifies for sale to the U.S. government when it is made into a tablet form in the United States.  The Court wrote:

The government cites the Supreme Court’s decision in Anheuser–Busch Brewing Ass’n v. United States, 207 U.S. 556 (1908), for the proposition that the terms “‘manufacture’ and ‘substantial transformation’ share a common meaning” (i.e., that there cannot be a “manufacture” without a “substantial transformation”).  Appellant’s Reply Br. 14–16.  To the government, Acetris’ products are not “manufactured” in the United States because they are not substantially transformed in the United States.  Even assuming (without deciding) that Acetris’ products are not substantially transformed in the United States,the government’s argument fails.  Under Anheuser–Busch, the “first sense” of the term “manufacture” is when “a new article is produced of which the imported material constitutes an ingredient or part.”  Anheuser–Busch, 207 U.S. at 562.  That definition is clearly satisfied here; the India-made API “constitutes an ingredient or part” of the tablets produced in New Jersey.  API “constitutes an ingredient or part” of the tablets produced in New Jersey. To be sure, Anheuser–Buschconstrued the word “manufacture” to also require that “a new and different article must emerge, ‘having a distinctive name, character, or use,’” 207 U.S. at 560 (quoting Hartranft v. Wiegmann, 121 U.S. 609, 615 (1887)), a construction that has since been referred to as the “substantial transformation” test.  But, under the FAR, a “U.S.-made end product” may either be (i) “manufactured in the United States”; or (ii) “substantially transformed in the United States.”  FAR § 25.003.  The language of the FAR reflects an intent not to require “substantial transformation” for analysis under the FAR; “manufacture” does not require substantial transformation.

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6  Acetris’ products may very well be substantially transformed in the United States, but we need not decide this question here.

By its decision, the Court has revolutionized country of origin analysis in the pharmaceutical industry by holding that processing into tablets in the United States is enough to constitute “manufacturing” and qualify the resulting products for U.S. government procurement.  By leaving legally open the question of whether such “manufacturing” constitutes a “substantial transformation,” however, the decision leaves a lingering uncertainty that is bound to cause compliance nightmares for pharmaceutical manufacturers.  Suppose Indian API is processed into tablets in the UK, and the question is whether the resulting product is of UK origin.  UK is a “WTO Government Procurement Agreement (WTO GPA) country” and a “designated country” under 48 C.F.R. section 25.003 (ecfr 2020) whose products can therefore qualify for U.S. government procurement under the Trade Agreements Act (“TAA”), like the U.S. end products in Acetris.  The definition of “WTO GPA country end product” in section 25.003, however, differs from the definition of “U.S.-made end product” at issue in Acetris in that it clearly requires a “substantial transformation” before API from a country that is not a designated country (e.g., India) is considered to be a WTO GPA country end product (e.g., an end product of the UK).  Acetris suggests, but does not actually decide, that such a UK tablet is the result of manufacturing that has transformed one product (raw API) into a different product (tablets).  Could a company, therefore, import such UK tablets with Indian API into the U.S. as products of UK origin and sell them to the U.S. government?  Before Acetris we were sure the answer was “no.”  After Acetris, the question is open, but the reasoning of Acetris suggests the answer may indeed be “yes.”  Acetris seems assured to spawn further litigation over the issue of country of origin for pharmaceuticals.

As a result of Acetris, companies affected by this issue have basically three options in scenarios like the one described above:  (1) The safest course would be to seek a ruling from CBP that the product is of UK origin because of the reasoning in Acetris, and then be prepared to appeal an adverse CBP decision to the Court of International Trade and Federal Circuit if necessary to have the matter decided.  The other alternatives in the scenario above are (2) to continue saying Indian country of origin unless and until future litigation by other companies establishes that the reasoning of Acetris is valid for the substantial transformation issue, or (3) start asserting UK as the country of origin and accept the risk that CBP may issue a penalty, and then defend that case on the basis of the reasoning in Acetris.

Copyright © 2020, Sheppard Mullin Richter & Hampton LLP.National Law Review, Volume X, Number 43

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About this Author

Curtis Dombek, Attorney, Lawyer, Governmental Contracts, Sheppard Mullin Law Firm
Partner

Curt Dombek is a partner in the Government Contracts, Investigations & International Trade Practice Group. Curt divides his time between the firm's Brussels and Los Angeles offices.

Areas of Practice

Mr. Dombek has practiced since 1983 in the field of international trade. He advises clients on the full range of international regulatory issues, including civilian and military export controls, trade sanctions and blocking orders, Customs matters, the Foreign Corrupt Practices Act, the USA Patriot Act, Free Trade Agreements, CFIUS reviews of foreign...

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