United States: Cracks in the Buy American Act: Changes in U.S. Preferences for Information Technology and Specialty Metals

In this time of outsourcing, free trade agreements, and globalization, the Buy American Act ("BAA") remains an outpost of U.S. protectionism. The BAA essentially requires the United States government to purchase domestic end products for procurements between a defined amount (generally between $2,500 and $193,000) and for certain designated articles. While subject to several exceptions, the BAA’s viability increasingly has been called into question in light of current international economic trends. Two recent decisions involving commercial information technology and specialty metals demonstrate that the U.S. government, while unwilling to abandon domestic preferences, is slowly bending to the realities of the global marketplace.

Over the past year, the United States government has taken a more aggressive stance towards BAA enforcement, subjecting major companies (Staples, Office Depot, for example) to multi-million dollar penalties for submitting non-U.S. domestic products. Yet in the midst of this apparent crackdown, the U.S. government recently decided to introduce a major exception to the BAA in the crucial area of commercial information technology. On January 3, 2006, the General Services Administration ("GSA"), Department of Defense ("DoD"), and NASA jointly issued an Interim Rule (the "Rule") exempting certain commercial information technology from the BAA’s requirements.¹ The Rule specifically amended Federal Acquisition Regulation ("FAR") § 25.103 by adding the following new exception:

Pursuant to FAR § 2.101, "information technology" means:

The term "information technology" includes computers, ancillary equipment (including imaging peripherals, input, output, and storage devices necessary for security and surveillance), peripheral equipment designed to be controlled by the central processing unit of a computer, software, firmware and similar procedures, services (including support services), and related resources. The term does not include any equipment that (i) is acquired by a contractor incidental to a contract; or (ii) contains imbedded information technology that is used as an integral part of the product, but the principal function of which is not the acquisition, storage, analysis, evaluation, manipulation, management, movement, control, display, switching, interchange, transmission, or reception of data or information. For example, medical equipment, where the information technology is integral to its operation, would not be considered commercial information technology exempt under the Rule.

Nevertheless, despite certain definitional restraints, the Rule opens up a significant new exception to the BAA for commercial information technology.² The Rule further anticipates that the above BAA exemption will continue indefinitely into the future. If the exception does not appear in a future appropriations act, however, then the Rule states that a prompt change to the FAR will be made to limit applicability of the exemption to the fiscal years to which it does apply. The net effect of the above exemption is that the following BAA clauses no longer apply in the acquisition of commercial information technology using fiscal year funds:

• FAR 52.225-1, Buy American Act – Supplies

• FAR 52.225-2, Buy American Act Certificate

• FAR 52.225-3, Buy American Act – Free Trade Agreements – Israeli Trade Act

• FAR 52.225-4, Buy American Act – Free Trade Agreements – Israeli Trade Act Certificate

DoD initially raised some objections to the Rule, most notably the security risks associated with foreign entities potentially gaining access to DoD information systems. Yet despite these concerns, the DoD issued a proposed rule on April 12, 2006 that incorporates the commercial information technology exception into the DFARS.³

A similar inconsistent pattern of heightened oversight accompanied by new proposed exceptions can be seen in the U.S. government’s enforcement of domestic specialty metals requirements. Since the early 1940s, the Berry Amendment has imposed restrictions on the purchase of certain non-U.S. articles, supplies and materials, both to protect U.S. national security interests and to ensure the existence of certain essential domestic industries necessary for the national defense. The domestic source restrictions cover such items as food, clothing, fabrics, and tools.

In 1973, Congress extended the Berry Amendment’s coverage to certain designated "specialty metals." The definition of a "specialty metal" includes:

• Steel (1) with a maximum alloy content exceeding one or more of the following limits: manganese, 1.65 percent; silicon, 0.60 percent; or copper, 0.60 percent; or (2) containing more than 0.25 percent of any of the following elements: aluminum, chromium, cobalt, columbium, molybdenum, nickel, titanium, tungsten, or vanadium;

• Metal alloys consisting of nickel, iron-nickel, and cobalt base alloys containing a total of other alloying metals (except iron) in excess of 10 percent;

• Titanium and titanium alloys; or

• Zirconium and zirconium base alloys4

The specialty metals definition includes an exception for certain qualifying countries, including most members of NATO.

While the Berry Amendment’s preference for U.S. specialty metals has been in place for more than 30 years, compliance—especially at the subcontract level—has not been rigorously enforced. Therefore, for national security considerations, DoD introduced an Interim Instruction (the "Instruction") on February 17, 2006 (subsequently revised on March 10, 2006) dealing with non-compliance with U.S. specialty metals requirements. The Instruction requires prime contractors to report to the appropriate contracting officer whether an item to be delivered under a DoD contract contains, or may contain, non-complaint specialty metals. Prime contractors are not only responsible for disclosing their own non-conforming products but also any non-compliant specialty metals supplied by their subcontractors.

In general, the DoD will not accept products containing nonconforming specialty metals unless notified in writing that an appropriate exception exists. However, the Instruction provides for a conditional acceptance for products containing non-conforming metals. In order to protect the government’s interest, a contractor must:

• Identify the lowest part, assembly, configuration item, system, configuration baseline, contract, and program;

• Identify impacted Critical Safety Items ("CSIs") along with the specialty metal involved. Documented evidence that the affected CSI meets all performance requirements should also be provided;

• Attach a copy of the conditional acceptance document (signed and dated by the appropriate contracting officer) authorizing the conditional acceptance to the receiving report;

• Attach, for fixed-price contracts, a schedule (signed and dated by the appropriate contracting officer) specifically identifying the amounts to be withheld at line item level to the receiving report.

The Instruction discusses various methods for calculating the amount to be withheld under a contract for violating the specialty metals requirement. Most notably, the withhold amount will not be calculated by determining the value of specialty metal in a part or component. The Instruction further states that the conditional acceptance option should be limited in application.

Therefore, the Instruction refocuses attention on the specialty metal requirements, especially at the subcontract level, since it provides only limited relief for non-compliant specialty metals. At the same time, as with commercial information technology exception, DoD appears to be softening its stance on the use of foreign products. On April 3, 2006, the DoD proposed certain legislative changes to Congress that would allow for the procurement of non-U.S. specialty metals that are not greater than (i) the simplified acquisition threshold (generally $100,000); or (ii) 10 percent of the price of such items, whichever is less. Other proposed changes by DoD to the Berry Amendment—including the use under certain conditions of commingled U.S. and foreign specialty metals—would further reduce the burden of complying with the specialty metals requirement. The political winds, however, may be blowing against the proposed changes of DoD. The House Armed Services Committee recently approved strict specialty metal requirements in the 2007 defense authorization bill (H.R. 5122), and further called for the establishment of a Strategic Materials Protection Board to ensure the availability of items critical to national security.

The Rule on commercial information technology and DoD’s proposed changes to the Berry Amendment represent an implicit recognition that enforcement of the BAA and other domestic preference programs has grown increasingly problematic in the era of globalization. While the U.S. government continues to vigorously enforce these requirements, cracks are beginning appear in the U.S. preference programs as well. The Reed Smith Export, Customs & Trade Group will continue to monitor developments and how they may impact U.S. government contractors.

This article is presented for informational purposes only and is not intended to constitute legal advice.