We’re product liability bloggers, so we don’t claim to know a lot about other drug-related subjects such as how “Buy American” requirements apply to federal procurement. But we can read, and the Federal Circuit’s unanimous decision in Acetris Health, LLC v. United States, ___ F.3d ___, 2020 WL 610487 (Fed. Cir. Feb. 10, 2020), appears to be important because it overturns what had been the established “rule-of-origin” procurement test that the Veterans Administration (and thus, we suspect, other federal health programs) used to exclude drugs with active ingredients of overseas origin. Id. at *8. Apparently the existing rule dates back to 1954. Id. at *1.
Given the quantities of drugs that these programs purchase, and the age of the regulation, we’d call this a big deal. The decision interpreted two key statutes. First, the government “shall . . . prohibit the procurement . . . of products . . . which are products of a foreign country” as to which there is no reciprocal trade agreement. 19 U.S.C. §2512(a)(1). Second, a “product” is “of a foreign country” when: it is either “wholly the growth, product, or manufacture of that country,” or “has been substantially transformed into a new and different article of commerce” in that country. 19 U.S.C. §2518(4)(B). See Acetris, 2020 WL 610487, at *2.
The “long held” rule of thumb that Acetris overturned was “that the source of a pharmaceutical product’s active ingredient generally dictates its country of origin.” Id. The claimant tabletized its product in the United States, but used an “active pharmaceutical ingredient” (“API”) manufactured overseas. Id. at *8.
Acetris held (we’re ignoring extensive non-merits discussion concerning whether the case could be heard) that the source of a drug’s active ingredient cannot be controlling under the statutory language quoted above:
The government argues that [claimant’s] tablets are products of [a foreign country] because the tablets’ API was made in [there]. 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 [statute] that the “product” is the final product that is procured − here, the pill itself − rather than the ingredients of the pill.
Id. at *8 (emphasis added). Further, “[t]he regulatory history . . . makes clear that the source of the components (here, the API) is irrelevant in determining where a product is ‘manufactured.’” Id.
The pills were neither “wholly” manufactured overseas, nor were had they been “substantially transformed” (that is, tabletized) overseas. Id. Since these pills met neither prong of §2518(4)(B)’s foreign origin test, they were not “products of a foreign country” under §2512(a)(1), so that “the [statute] does not bar the VA from procuring [claimant’s] products.” Id.
A product need not be wholly manufactured or substantially transformed in the United States to be a “U.S.-made end product.” Instead, such products may be . . . “manufactured” in the United States from foreign-made components. . . . Therefore, on the plain meaning of the [federal acquisition requirements], [claimant’s] products are “U.S.-made end products.”
Id. (footnote omitted).
Boom. Just like that, the government’s nearly 70-year-old practice of excluding any drug with an overseas-manufactured active ingredient from being purchased for federal health programs goes out the window. Rather, the statutory language controls. “If the government is dissatisfied” with how “U.S.-made end product” is defined, “it must change the definition, not argue for an untenable construction of the existing definition.” Id. at *9. Thus:
[T]he VA erred in interpreting the [statutes] to exclude pharmaceutical products that, like [claimant’s] products, are manufactured in the United States using API made in a foreign country. Such products are not . . . the “product of” the country in which their API was made, and are “U.S.-made end products.”
Acetris, 2020 WL 610487, at *10.
Some drug companies – those that import overseas-made active ingredients – will love this decision. Other drug companies – those whose products met the previous procurement standard that Acetris overturned – will not appreciate the additional competition. Either way, we think this decision is something our readers (at least those in-house) would want to know about.