May 24, 2017

Government Contractors: Buy In to "Buy American" or Risk Enforcement

President Trump’s recent “Buy American and Hire American” executive order signals greater enforcement of Buy American Laws. The order requires all federal agencies to assess and revamp internal policies for implementing and enforcing the Buy American Act, the Trade Agreements Act and the Berry Amendment. Violations of these laws carry civil and potentially criminal penalties. All companies that are contractors, subcontractors or vendors to the U.S. government should expect greater scrutiny of their products’ countries of origin.

Buy American Laws

The federal government purchases nearly $500 billion annually in goods and services from private companies. Defense agencies account for half of these purchases. Contracts for the purchase of girders for bridges, bandages for VA hospitals, electronics for NASA shuttles, and mooring chains for the Navy occur every day and have a common condition – they likely require U.S.-produced products.

At their core, the various “Buy American” laws and the “Buy American” terms incorporated into U.S. government contracts require that all products sold to the federal government – including the military – be “domestic end” product, which is defined as either:

  • Product manufactured in the United States or a qualifying country.
  • Product for which at least 50 percent of the cost derives from components manufactured in the United States or a qualifying country.

A “qualifying country” is generally one with which the U.S. government has a trade agreement. China and Malaysia, for example, are not qualifying countries. These requirements often apply not just to the business that is under contract with the agency, but also to the company’s subcontractors. Finally, federal agencies may waive country of origin requirements in limited circumstances, such as unavailability of the item from a U.S. producer. Approximately half of states have some form of domestic preference requirement for certain state purchases as well.

Buy American Executive Order

The executive order seeks to maximize the impact of the Buy American laws. The Order mandates all federal agencies to:

  • Assess efforts to monitor, enforce and implement compliance with Buy American laws.
  • Assess the use of waivers.
  • Develop and propose policies that “maximize the use of materials produced in the United States.”

Greater enforcement of the Buy American Laws is likely. Beyond policy analysis and development, the Order mandates that “[e]very agency shall scrupulously monitor, enforce, and comply with Buy American Laws, to the extent they apply, and minimize the use of waivers, consistent with applicable law.” Waivers of Buy American laws and terms have never been easy to get from federal agencies, and agencies will likely be even stingier in light of the waiver review required by the executive order.

Buy American Enforcement

The Buy American laws and contract terms are enforced by federal agencies and the Department of Justice. If a contract term requires domestically produced product, a company intentionally or unintentionally supplying non-compliant foreign product is risking civil and criminal liability. The Department of Justice routinely announces settlements with companies that violate Buy American laws, most of them in the millions of dollars. Many settlements result from an initial subpoena and/or investigation by the Department of Justice or federal agencies (e.g., the Department of Defense).

Whistleblowers – often a business’s competitors or employees – may also initiate civil litigation if they suspect violations of the Buy American laws. Known as qui tam actions, these whistleblower suits are brought on behalf of the government and allege violations of the False Claims Act, usually based on a company issuing false certifications about its product’s country of origin. Qui tam actions are not public when filed. They remain secret until the government has had a chance to investigate. After investigating, the government may choose either to intervene and take over prosecution of the case against the government contractor or to allow the whistleblower to continue the action on its own. Qui tam plaintiffs are entitled to a share of any financial judgment or settlement, which may include treble damages and civil penalties.

In some cases, alleged violations are resolved without protracted litigation. But in others, proceedings can drag on for years. For example, the U.S. District Court for the District of Columbia recently denied summary judgment motions in a case involving an office supply manufacturer alleged to have sold non-compliant product to the U.S. Army (United States ex rel. Scutellaro v. Capitol Supply, Inc.). The case, initiated by a qui tam plaintiff, had already lasted over seven years. 

Enhanced enforcement has criminal implications, too. Just a few weeks ago, a federal jury in the U.S. District Court for the District of Alabama convicted a business owner on three counts of wire fraud for selling Chinese-made baseball caps and backpacks to the U.S. Army Recruiting Command (United States v. Burnett)

Implications for Government Contractors

Companies doing business with the federal government must be aware of the Buy American laws and the Buy American terms in their contracts or subcontracts with U.S. government agencies. Actively monitoring compliance is critical. Insufficient training or lax internal compliance auditing often leads to violations. If a company discovers that it is not complying with Buy American laws, self-reporting is likely required. And a commitment to cooperation with the government may mitigate damages, produce an early settlement and deter qui tam litigation.

Services and Industries

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