Client Alert Government Contracts & Disputes

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March 8, 2016

Schumer Alleges False “Made in America” Representations on GSA Website: False Claims Act Inquiry to Follow? By C. Joël Van Over and Alexander B. Ginsberg

This alert also was published in the June 2016 edition of Pratt's Government Contracting Law Report.

Sen. Charles Schumer recently alleged, in a letter to the General Services Administration (GSA), and in an associated press release, that the U.S.Government’s policy of purchasing American-made products is being thwarted by “misleading” labeling on the GSA Advantage! website that falsely identifies certain foreign-produced products as “Made in America.”1 If true, the Government may contend that the companies in question are in violation of important statutes and regulations, and a federal investigation could be on the horizon.

Since at least the 1933 passage of the Buy American Act (BAA), the policy of the U.S. Government to purchase U.S.-made products has been firmly affixed in federal law. That statute, implemented in subart 25.1 of the Federal Acquisition Regulation (FAR), significantly restricts the Government’s purchase of supplies that are not “domestic end products.” The Trade Agreements Act of 1979 (TAA) establishes additional restrictions on purchases of products made outside the United States. Implemented in FAR subpart 25.4, the TAA prohibits the Government’s purchase of products and services, above certain dollar thresholds, that are not “substantially transformed” in the United States or a “designated country.”2 In permitting purchases from a “designated countries,” the TAA effectively waives the requirements of the BAA for those countries.3 In short, subject to certain exceptions and trade agreements, the Government is required by law to purchase products that originate from and/or are manufactured within the United States. Sen. Schumer’s recent allegations imply that certain contractors may be flouting these requirements. 1 See the press release from the office of Sen. Schumer. 2 “Designated countries” under the TAA are those listed in FAR Part 25.003, which includes countries that have signed

applicable internal trade agreements with the United States, are located in the “Caribbean Basin” or are among certain “least developed countries” identified in the regulation.

3 Enumerated exceptions also apply under the BAA and TAA regulations. The requirements of FAR 25 are implemented in contract clauses found at FAR 52.225-1 through 26.

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Specifically, Sen. Schumer issued a press release on January 21, 2016 in which he asserts that GSA Advantage!—GSA’s online purchasing system—lists “several” manufacturers’ products as “Made in America,” when in fact they are manufactured abroad.4 He alleges that federal agencies “are unwittingly buying mislabeled goods that were actually made overseas.” Sen. Schumer does not go so far as to identify the contractors whose products he believes are mislabeled as American-made, but he does identify one of his constituents—a New York manufacturer of flatware—as an example of a contractor that has been harmed by having to compete with falsely labeled products that were manufactured more cheaply overseas. He urges GSA to “get to the bottom of this mislabeling and correct it right away.”

This is a developing situation, and it remains to be seen whether Sen. Schumer’s allegations have merit and, if so, how such “mislabeling” came to pass. It is possible that the complexities of the BAA and TAA have contributed significantly to any confusion here. For example, because the TAA permits purchases from “designated countries” to essentially the same degree that it permits purchases of products originating from or “substantially transformed” in the United States, it certainly is possible for a contractor to be TAA-compliant even though its products are not “Made in America.” Exceptions to the BAA similarly permit a contractor to be BAA-compliant despite selling products that may not be “Made in America.”5

It may be the case that the nuances of these statutes will help counter Sen. Schumer’s allegations. For example, the BAA generally requires that the cost of “domestic components” of a purported “domestic end product” must exceed 50 percent of the cost of all components; a separate statute waives this requirement for commercially available, off-the-shelf (COTS) items.6 One can imagine a scenario in which Sen. Schumer’s complaint amounts to a technical distinction regarding products that include substantial foreign components but, nonetheless, are BAA-compliant and also legitimately “Made in America.” In a similar vein, the TAA’s definition of “U.S.-made end product” includes not only articles manufactured in the United States, but also those “substantially transformed in the United States into a new and different article of commerce with a name, character, or use distinct from that of the article or articles from which it was transformed.”7

There is little doubt, in any event, that the GSA Inspector General (IG) will review Sen. Schumer’s allegations. If they are not easily resolved, a broader IG investigation may follow or, potentially, a referral to the Department of Justice to pursue liability under the federal False Claims Act (FCA). The FCA imposes significant financial penalties for “knowingly present[ing], or caus[ing] to be presented, a false or fraudulent claim for payment or approval.”8 The FCA also prohibits contractors from making false statements “material to a false or fraudulent claim.”9 As many federal contractors know, the FCA is among the most potent weapons in the Government’s enforcement arsenal if it believes a contractor has in some way committed fraud in connection with a federal contract. The Government has pursued many FCA cases against contractors for alleged violations of the BAA and the TAA and has “recouped” hundreds of millions of dollars from such contractors, mostly by way of settlement.

Here, the Government ultimately could pursue FCA cases against contractors it believes intentionally mislabeled their products. In addition, Federal Supply Schedule contracts, such as those posted to GSA Advantage! typically require contractors to certify as to their TAA compliance by representing that “each 4 A review of the GSA Advantage! website confirms that individual products are identified as “Made In” a given country. 5 See FAR 25.103. For example, the BAA does not apply to articles, materials or supplies that “are not mined, produced, or

manufactured in the United States in sufficient and reasonably available commercial quantities and of a satisfactory quality.” FAR 25.103(b).

6 FAR 25.101(a)(2). 7 FAR 52.225-5. 8 31 U.S.C. § 3729(a)(1)(A). 9 31 31 U.S.C. § 3729(a)(1)(B).

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end product ... is a U.S.-made [or designated country] product.” If, for example, the Government believed that any of the contractors listing their products as “Made in America” failed to comply with this certification, the Government might pursue FCA liability on the theory of “false certification.”

This will be an interesting story for contractors to follow in the months ahead as GSA reviews the allegations in Sen. Schumer’s letter. All contractors advertising products listed on their GSA schedule contracts as “Made in America” may wish to consider their own proactive internal review, perhaps with the assistance of outside counsel. GSA has pursued numerous past FCA claims against contractors alleged to have violated TAA requirements relating to the origin of products sold under GSA schedules.

If you have any questions about the content of this alert please contact the Pillsbury attorney with whom you regularly work, or the authors below.

C. Joël Van Over (bio) Northern Virginia +1.703.770.7654 joel.vanover@pillsburylaw.com

Alexander B. Ginsberg (bio) Northern Virginia +1.703.770.7521 alexander.ginsberg@pillsburylaw.com

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This publication is issued periodically to keep Pillsbury Winthrop Shaw Pittman LLP clients and other interested parties informed of current legal developments that may affect or otherwise be of interest to them. The comments contained herein do not constitute legal opinion and should not be regarded as a substitute for legal advice. © 2016 Pillsbury Winthrop Shaw Pittman LLP. All Rights Reserved.