TLF-Federal-Procurement-Insight-12.jpg

Navigating the Trade Agreements Act for Foreign Service Providers in U.S. Government Contracts

Prospective foreign contractors looking to obtain service contracts with the U.S. Government must satisfy the requirements of the Trade Agreements Act (TAA). The TAA was enacted in 1979, generally providing reciprocal treatment in government procurement with countries that have signed bilateral and multilateral trade agreements with the U.S. The United States Trade Representative (USTR) has been delegated the President’s authority under the TAA to waive requirements of restrictive domestic preference regulations, such as the Buy America Act (BAA), for prospective contractors from countries that qualify under the TAA. Under the Federal Acquisition Regulations (FAR) 25.402(a)(2), the relevant test for determining the application of the TAA to services is the country in which the firm providing the services is established. To determine the country in which a prospective contractor is established, the government considers where the prospective contractor is incorporated or maintains its principal place of business or headquarters.

Issues concerning the applicability of the TAA in service contracts may be raised in the form of bid protests. In B-405296, B-405296.2, B-405296.3, the Government Accountability Office (GAO) applied the TAA test for service contracts to a cloud computing data center requirement solicited by the General Services Administration (GSA). In sustaining the protest, the GAO described the TAA test for service contracts in the context of a requirement limiting the location of non-U.S.-based cloud computing data centers. In the procurement at issue, the GSA sought to establish a blanket purchase agreement (BPA) amongst the holders of the Federal Supply Schedule (FSS) 70 contract. The BPA contemplated the acquisition of cloud computing services, including emails, office automation, records management, migration, and integration services. These services were further divided into sub-categories before being split into two contract line item numbers (CLIN) for pricing purposes. The first CLIN was for U.S.-based prices and required all data and data centers to be in the U.S. The second CLIN required offerors to provide non-U.S.-based pricing applicable to any data or data centers in TAA-designated countries and formed the basis of the bid protest.

The protestors argued that the solicitation provision requiring prospective contractors to locate their foreign data centers in TAA-designated countries was unduly restrictive of competition. The protestors stated that the requirement had no basis in law or regulation and that the government did not demonstrate a legitimate need for such a restriction. Therefore, the protestors challenged both the restrictive nature of the data center location requirement and GSA’s legitimate need for the limitation. These properly raised protest allegations shifted the burden of proof on the government to establish that the location requirements were reasonably necessary to meet its needs. In response, the GSA explained that the solicitation had initially limited the data center locations to the continental United States. However, during the pre-solicitation period, the Office of Management and Budget (OMB) and the USTR advised the GSA that such a solicitation would be unduly restrictive of trade. They requested that the GSA expand the geographic scope of the data center requirements, permitting data center locations outside the U.S. In drafting the expanded requirement per OMB and USTR requests, the GSA contracting officer (CO) had no pre-approved list of countries acceptable to house U.S. Government data. That is, the GSA CO did not have any basis to exclude specific countries at the expense of others. Due to this lack of framework for exclusion of countries of particular concern such as Cuba, Iran, North Korea, and China — the CO turned to TAA-designated countries to ensure at least some trade framework existed between the U.S. and the Government of the foreign country in which a data center under the prospective GSA BPA could be located.

The GAO sustained the bid protest, determining that the GSA CO arbitrarily restricted the data center locations to TAA-designated countries. In the decision, the GAO clarified that when agencies analyze the country of origin for services under FAR 25.402(a)(2) to ensure compliance with the TAA, they must generally focus on where the company providing the services is established rather than where the services are being performed. Therefore, in the solicitation at issue, compliance with the TAA would be determined by where the prospective cloud provider's business is established and not where the data centers that process and store the government data are located. In other words, the location of the prospective cloud provider’s data centers would not be determinative of TAA compliance. The GAO further stated that the GSA failed to meaningfully explain its decision to restrict data center locations to TAA-designated countries. Specifically, the GSA failed to explain how or why the government data stored in TAA-designated countries would present a lower security risk than data stored in non-TAA-designated countries. In conclusion, the GAO determined that the existence of a trade framework with TAA-designated countries did not, by itself, satisfy the Government’s burden of providing a reasonable explanation for establishing the solicitation restriction. Since the government failed to carry its burden of providing an adequate explanation for limiting non-U.S.-based data centers to TAA-designated countries, the GAO sustained the bid protest.

As the largest single consumer in the world, contracting with the U.S. federal Government is naturally viewed as a desirable avenue of expansion for foreign companies. The TAA ensures that the U.S. government offers reciprocal treatment in public procurement to countries that have entered into bilateral and multilateral free trade agreements with it. Generally, issues of TAA applicability arise in the context of permitting federal procurement of commercial products from TAA-designated countries. However, issues relating to the applicability of the TAA to federal service contracts may sometimes arise. Contractors should be mindful that in such cases, the country of performance of the contract may not ultimately be outcome-determinative for the purposes of TAA compliance. This is especially the case in situations where the country of performance is different from the country where the offeror is incorporated or maintains its principal place of business. When determining the country of origin for the purposes of TAA applicability in such cases, the focus of the inquiry must be on where the company providing the services is established rather than where the services must eventually be performed.

This Federal Procurement Insight is provided as a general summary of the applicable law in the practice area and does not constitute legal advice. Contractors wishing to learn more are encouraged to consult the TILLIT LAW PLLC Client Portal or Contact Us to determine how the law would apply in a specific situation.

Related Insights

TLF-Federal-Procurement-Insight-8.jpg

Since the United States (U.S.) government is the single largest consumer in the world, contracting with the government is naturally viewed as a desirable avenue of expansion for many foreign companies. However, prospective foreign contractors looking to supply products to the U.S. government must navigate a somewhat complex regulatory maze of country-of-origin (COO) rules. These COO rules serve the function of implementing U.S. domestic preferences while fulfilling U.S. obligations to its trade partners under bilateral and multilateral international trade agreements. Interested foreign companies must satisfy the requirements of two main federal statutes that govern the U.S. government’s acquisition of foreign products. Enacted during the Great Depression, the Buy American Act (BAA) of 1933 is the primary domestic preference statute. Meanwhile, the Trade Agreements Act (TAA) of 1979 dictates the rules surrounding the U.S. government’s acquisition of products from a long list of countries with which it has bilateral or multilateral trade agreements. The Federal Acquisition Regulation (FAR) trade agreements clause at FAR § 52.225-5 harmonizes and implements the BAA and the TAA, requiring contractors to deliver “only U.S. made or designated country end products” in covered procurements.

more
TLF-Contract-Claims-Insight-12.jpg

The U.S. Federal Government often utilizes federal supply schedule (FSS) contracts to purchase commercially available off-the-shelf software (COTS) software from reputable pre-vetted software vendors. These FSS contracts are administered by the General Services Administration (GSA), and they eliminate the need for lengthy open-market solicitations for common COTS software products. FSS contracts permit agencies to purchase COTS software products quickly and efficiently from pre-vetted software vendors using pricing that reflects volume discounts due to GSA’s government-wide purchasing leverage. Generally, the COTS software product manufacturer’s end-user licensing agreement (EULA) is incorporated into the procurement contract and dictates the Government’s use of the COTS software. The term “contractor” has been expressly defined in 41 U.S.C. § 7107(7) as a “party to a Federal Government contract other than the Federal Government.” Therefore, in COTS software product purchases, since the pre-vetted software vendor has the FSS contract with the Government, the COTS software product manufacturer is generally not considered a contractor in the traditional sense because it is not a party to the Government contract. Accordingly, since the CDA does not permit appeals by anyone who is not a party to a Government contract, COTS software product manufacturers are generally unable to bring contract claims against the Government under the CDA. However, subcontractors and certain third parties may achieve privity of contract with the Government under particular circumstances, which allows them to bring claims against the Federal Government under the CDA.

more
TLF-Contract-Claims-Insight-38.jpg

A War Risks clause may be added to government contracts if performance is required in regions with a risk of war or war-like events. Such a clause helps allocate responsibility between the government and the contractor for any losses or damages caused by such events. While the Federal Acquisition Regulation (FAR) does not specifically contain a standard war risks clause, the defense supplement to the FAR (DFARS) includes clauses such as DFARS 252.228-7000, “Reimbursement for War-Hazard Losses.” Such a clause addresses the allowability of costs of war-hazard benefits for contractor employees. A War Risks clause can typically be negotiated between the government and the prospective contractor at the time of formation of the contract. As contracts in different regions have varying circumstances, risk allocation for specific events described in the War Risks clause should also be tailored and negotiated for each applicable contract. When disputes between the government and the contractor arise that implicate the War Risks clause, adjudicative forums such as the Boards of Contract Appeals or Federal Courts interpret the language of the War Risks clause to allocate increased costs liability between the parties.

more
TLF-Federal-Procurement-Insight-12.jpg

The federal government generally procures software as commercial items. The terms and conditions governing the use of commercial software are contained in the end-user licensing agreement (EULA), which is generally incorporated into the government contract. Since the Federal Acquisition Regulation (FAR) does not provide standard licensing agreements for commercial software, manufacturers or resellers must negotiate the terms of use of such software when the EULA is incorporated into the contract. Depending on the contract, the EULA can be incorporated into an individual order or the master agreement of a government-wide acquisition vehicle, such as a Federal Supply Schedule (FSS) contract.

As relevant to government contracts, the U.S. federal government waives its sovereign immunity for liability arising from contract claims under the Contract Disputes Act (CDA). However, the government may use the Sovereign Acts Doctrine as an affirmative defense against contractor claims. Standard contract provisions within the software manufacturer’s EULA may occasionally conflict with federal laws, including the government’s rights as a sovereign. Contractors must, therefore, review their standard EULA terms and negotiate specific clauses with the software manufacturer, if necessary, before submitting them to the government for incorporation into a government contract. While contractors should review all provisions with sovereign immunity implications, they should pay especially close attention to the following standard clauses before the EULA is submitted to the government for incorporation into a federal contract.

more

Navigating the Trade Agreements Act for Foreign Service Providers in U.S. Government Contracts

TILLIT LAW Federal Procurement Insights