A recent ruling the by the U.S. Court of International Trade (CIT) has important implications for importers, government contractors, and manufacturers that make qualified origin claims when marketing products. In a case concerning compliance with the Buy America provision of the Trade Agreements Act (TAA) by a government contractor, the CIT ruled that mere assembly of foreign component parts does not constitute substantial transformation, and the resulting product cannot be considered to be of U.S. origin for government procurement purposes.
In Energizer Battery, Inc. v. United States, 2016 WL 7118538 (Ct. Intl. Trade 2016), the CIT upheld U.S. Customs and Border Protection’s determination that Energizer’s Generation II military flashlights are made in China, and therefore ineligible for sale to the U.S. government under the TAA. Energizer argued that domestic assembly of its foreign components amounts to substantial transformation into a product of U.S. origin.
The TAA amends the Buy America Act requirements in certain government contracts over a threshold amount. The BAA as amended by the TAA mandates that the federal government purchase products of U.S. origin, or originating from a member country of the World Trade Organization’s Government Procurement Agreement (GPA). China is not a member, so to determine that the Generation II flashlight is of Chinese origin is to make it ineligible for government purchase.
The “rule of origin” under Buy America mandates that an article is a product of a country if it is wholly made in that country or if it is composed in whole or in part of materials from another country that have been “substantially transformed into a new and different article of commerce with a name, character or use distinct from that of the article or articles from it was so transformed.” 19 U.S.C. § 2518(4)(B).
“Pre-Determined Use” At Time of Import Key To “Substantial Transformation” Analysis
The court recognized that this is a case of first impression, and that the process of determining substantial transformation is fact-specific. Therefore, the court’s analysis relied on fact patterns that were analogous in terms of the type of post-impression processing.
The decision noted that, “whether there has been a substantial transformation depends on whether there has been a change in the name or use of the components.” 23-24. However, the court focused not on “whether the components as imported have the form and function of the final product” but rather “whether the components have a pre-determined use at the time of importation.” 26. Here, the court found that because imported parts had a pre-determined usage at the time of import, their fulfillment of that use through assembly could not constitute substantial transformation.
Instead, the court suggests that the imported parts would need to undergo “further work” beyond mere assembly to be considered substantially transformed. What is required for “further work” would vary depending on the product at issue. As an example, the court discusses cases involving wooden chair components that require cutting, finishing, leveling, gluing, etc., before constituting a finished chair.
Implications for “Made in America” and Qualified Origin Claims in Advertising
The ruling could have implications for those who make “Made in America” or similar claims, including “Assembled in America,” in advertising to consumers and U.S. businesses. The Federal Trade Commission (FTC) has jurisdiction over origin claims used in advertising. In addition to requiring that “all or virtually all” of the product be sourced domestically or otherwise qualified, the FTC’s advertising substantiation requirements for “Made in USA”-type claims require “substantial transformation” of the article in the U.S. for either an unqualified “Made in USA” claim or a qualified “Assembled in USA”-type claim. The FTC defers to Customs in determining whether an article has been “substantially transformed.”
The FTC’s Guide to Complying With the “Made in USA” Standard makes clear that “screwdriver assembly” is not sufficient to constitute substantial transformation. Although the CIT did not use “screwdriver assembly” to describe Energizer’s process, the discussion of Energizer’s processes is similar to that used in FTC’s guidance. However, the FTC’s guidance does not reference the CIT’s “pre-determined use” standard and examples of “screwdriver assembly” discussed in the FTC’s guidance could be read consistently and inconsistently with the Energizer decision. Simply put, if “further work” is now a requirement, the bar for substantial transformation appears to be raised.
At the time of publication, Energizer has not yet appealed the CIT decision to the Federal Circuit, but it has until February 7, 2017 to do so. The CIT ruling potentially has wide implications for contractors with the U.S. government, importers seeking to comply with origin marking requirements, and marketers making “Made in USA”-type claims. The President’s inaugural message of his intent to “buy American” has spread awareness of this designation and will likely continue to do so. Given the popularity and usage of such claims in the coming years, any party making an assembly claim should consider reexamination of their own manufacturing structure to determine whether substantial transformation has taken place and that claim is still valid in light of this new guidance.