Violations of “Buy American” Laws Can Be Grounds for Lawsuits Under the False Claims Act

By Susan Schneider Thomas

In a two-part Executive Order (“EO”) issued earlier this month, the president took steps towards his campaign promise to promote “Buy American” and “Hire American” policies. This post focuses only on the “Buy” side of the EO.  Any tightening of Buy American policies at the federal procurement level raises the potential for violations that can be actionable under the False Claims Act (“FCA”).

Federal agencies have been directed to implement a tighter Buy American policy based on maximizing the use of American-made content in federal procurements and minimizing exemptions..

Statutory and Regulatory Background of Buy American Requirements

 By way of background, government contracts frequently include restrictions on the country of origin of the products that the government is purchasing. These are commonly referred to as “Buy American” requirements, although not all such requirements are created equal. The Buy American landscape is crowded and confusing, even to the point of having parallel statutes named the Buy American Act (41 U.S.C. §§ 8301-8305) and the Buy America Act (49 U.S.C. 5323(j) and 23 U.S.C. § 313) (which is different from the Buy American Act). Perhaps even more confusing, the Buy American Act does not actually force the government to buy American-made products, it only creates a preference. Thus even where the Buy American Act applies, the government can still purchase a foreign-made end product under various conditions, including disclosure by a vendor that it will be providing foreign products and price considerations.

The two main laws in this area are the 1933 Buy American Act (“BAA”), which requires the government to give preference to U.S.-made products in federal procurements whenever practicable, and the 1979 Trade Agreements Act (“TAA”), which largely supersedes the BAA by allowing items made in scores of designated countries with which the U.S. has certain trade agreements to be substituted for American products.  “Designated countries” are countries that U.S. trade policy chooses to favor — whether because the United States has entered into a free trade agreement (such as the North American Free Trade Agreement or the U.S.-Korea Free Trade Agreement) or because the country is small and still developing (as with Afghanistan or Haiti). FAR 25.003 lists these countries, and the list is updated regularly. Other pertinent statutes and regulations include the Berry Amendment, requiring the U.S. Department of Defense and Department of Homeland Security, to give preference to domestic food, textile and specialty metal sources and Defense Federal Acquisition Regulation Supplement 225.7017, singling out products such as photovoltaic devices to receive domestic manufacturing preferences. The country of origin restrictions typically apply also when Congress appropriates funds or grants to state and local governments. Additionally, many states may also impose separate “Buy American” or “Buy Local” requirements of their own.

Possible Tightening of Requirements and Enforcement

The tightening of the Buy American policies as announced by the current administration can potentially take many different directions.  For example, under the current regulatory interpretation used to fulfill the BAA’s “substantially all” requirement, the cost of U.S.-sourced components must make up more than 50 percent of the total cost of an end product for that product to be considered U.S-made, while a commercial off-the-shelf item is only required to be manufactured in the U.S., regardless of where its components come from.  There has already been some Congressional support to raise the sourcing requirement through the Buy American Improvement Act, introduced in February, but agencies could also simply decide to increase the percentage of required U.S.-sourced components or restrict the extent of leeway given on commercial off-the-shelf items.  Additionally, changes in trade agreements or types of trade agreements that qualify for exceptions under the TAA could substantially alter the Buy American standards.

The White House has also signaled that it might allow federal contracting officers to take into account the impact of unfair trade practices like “dumping” — the selling of items below cost to drive out competition — or other problematic assistance from foreign governments that arguably make American products less commercially competitive.  The U.S.-made components requirements could also be applied further down the manufacturing chain to subcomponents, making it harder for manufacturers to demonstrate that their products qualify for Buy American procurement.

FCA Lawsuits Stemming from Violations of Buy American Requirements

Presumably, any or all of these changes could lead to more regulatory or procurement violations, and thus be accompanied by opportunities to assert FCA violations in lawsuits filed by whistleblowers.  One possible violation would be companies that get bogged down in the specifics of different statutes and regulations and simply try to certify, on an across-the-board basis, that their products comply with Buy American regulations.  Such broad assertions may well constitute false certifications.  Similarly, falsely claiming that items were manufactured in designated countries would violate the laws.

As is true with most FCA lawsuits, however, the devil is in the details.  Precisely what laws or regulations are being violated?  Are the requirements clearly articulated?  Were the violations committed with knowledge, recklessness or deliberate indifference to the statutory or regulatory requirements? Are the violations material to the government’s decision to enter into the procurement order or contract, or to continue paying under that contract?  Experienced FCA counsel can help you assess whatever perceived violations you may have observed and determine whether there is an FCA case worth pursuing.

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By | 2018-03-25T14:06:53+00:00 April 28th, 2017|Contractor Fraud|