Earlier this month, a medical device company settled allegations that it had violated the False Claims Act (FCA) by improperly certifying that it had complied with the Trade Agreements Act (TAA) when providing the U.S. Government with end products manufactured in Malaysia.  The TAA requires certain end products sold to the U.S. Government to be made in the United States or a country covered by a trade agreement with the United States.  End products manufactured in Malaysia, as well as India and the People’s Republic of China, are not compliant with the TAA.

The settlement resolved litigation that began in 2008 when a former employee alleged that the company sold orthopedic devices on a federal supply schedule administered by the U.S. Department of Veterans Affairs (VA) after purchasing the devices from a third-party manufacturer in Malaysia.  Although the TAA only applies to end products sold to the U.S. Government if the value of the end products meets a specific monetary threshold, the U.S. General Services Administration and the VA have taken the position that all end products sold on a federal supply schedule must comply with the TAA because the orders placed under a federal supply schedule are expected to meet the applicable threshold.  As a result, different country-of-origin requirements may apply to commercial contractors depending on whether they sell their products to the U.S. Government on the open market, through a federal supply schedule, or under a separate federal contract.  The company at issue had used multiple sales mechanisms to provide end products to the U.S. Government.

With respect to the company’s sales on the federal supply schedule, the former employee alleged that the company had imported end products from Malaysia and repackaged them in the United States before providing the end products to the U.S. Government.  In order to comply with the TAA, an end product must be “substantially transformed” in the United States or a country covered by a trade agreement with the United States.  Substantial transformation requires that an item or items be transformed into a new article of commerce with a different name, character, or use, which will generally not include repackaging.  The VA has indicated that it will not consider the inclusion of a noncompliant item in a medical “kit” created in an acceptable country to constitute substantial transformation for the purpose of determining compliance with the TAA.  However, components from a non-compliant country that are substantially transformed into an end item in the United States or a country covered by a trade agreement with the United States—such as Malaysian components that are substantially transformed into an end product in Germany—are compliant with the TAA.  Distinguishing between components and end items and determining whether substantial transformation has taken place often involve complex legal analyses that depend on the circumstances of each case.

The former employee alleged that the company did not keep track of country-of-origin information once it had repackaged the end products in the United States.  This presented a risk that compliant and non-compliant items would be comingled before their delivery to the United States.  Federal supply schedule contractors like the company at issue must make annual certifications relating to the TAA on the government-wide System for Award Management, which can serve as the basis for a claim under the FCA.  Although the company did not admit any wrongdoing under the FCA in settling the former employee’s claims, the company had previously disclosed that it had provided the VA with end products from Malaysia and the People’s Republic of China that were not compliant with the TAA—potentially as a result of the comingling of compliant and non-compliant items as implicated by the former employee’s claims.  In its prior disclosure, the company had also indicated that personnel making outsourcing decisions for commercial sales may have been unaware of the implication of those decisions for U.S. Government contracts.

The settlement serves as a reminder to commercial contractors that conducting due diligence regarding the country of origin of their products is typically necessary when doing business with the U.S. Government.  Commercial contractors should be aware of the potential risk of comingling end products when sourcing items from countries that are not compliant with the TAA.