Buy America Requirements for Federally Funded Rail Projects (2015)

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3 BUY AMERICA REQUIREMENTS FOR FEDERALLY FUNDED RAIL PROJECTS By Timothy R. Wyatt, Conner Gwyn Schenck PLLC I. INTRODUCTION A. Purpose of This Digest Federal grants for passenger and freight rail development typically have domestic preference conditions or “Buy America” requirements (some- times also known as “Buy American” or “Buy Na- tional” requirements). Most recently, in 2008, Congress enacted a Buy America provision appli- cable to grants for the High-Speed Intercity Pas- senger Rail (HSIPR) program administered by the Federal Railroad Administration (FRA). However, since 1978, passenger and freight rail develop- ment funds administered by the National Rail- road Passenger Corporation (Amtrak), Federal Transit Administration (FTA), and the Federal Highway Administration (FHWA) have been con- ditioned on Buy America compliance. Although the various transportation grant Buy America provisions often appear similar on their face, there are significant differences in the way they are interpreted and administered by differ- ent federal grant-making agencies. This has led to confusion and concern in the railroad industry among manufacturers of rail cars and locomo- tives, railroad construction contractors, and rail development grant recipients (e.g., state depart- ments of transportation (DOTs)) who procure rail construction and manufacturing services. The purpose of this digest is to provide guide- lines for complying with the various Buy America provisions, compiled into a single resource. The digest addresses the similarities and, most impor- tantly, the differences among the various Buy America provisions. The digest also details the legislative and administrative history (and, in some cases, the judicial history) that helps explain most of the differences in the way the various Buy America provisions are administered. Keep in mind, however, that as of this publication, signifi- cant rulemakings are pending from FHWA and FRA. B. History of Buy America Statutes Most Federal Buy America statutes have their origins in times of national economic distress. The original Buy American Act (BAA), applicable to direct federal procurements, was enacted by Con- gress in 1933 during the Great Depression.1 The legislative history suggests that Congress in- tended to ensure that only domestic construction materials and manufactured products (typically machinery such as turbines and generators) were procured for use in public works projects such as the Hoover Dam.2 As a general rule, the BAA for- bids the purchase of all foreign goods by federal agencies,3 although a number of exceptions are set forth in the statute.4 Congress did not clearly de- fine the exceptions, however, and BAA compliance standards have been established over the years by administrative regulations, executive orders, and court decisions. More than 80 years after its pas- sage, the BAA is still federal law and still applies to most direct procurements by federal entities, including the U.S. Department of Transportation (USDOT) and its agencies. However, most transportation development in the United States is procured not by federal enti- ties but by state and local transportation agen- cies, albeit often using federal grant funds ob- tained from USDOT agencies. In February 1978, in the midst of another turbulent economic and foreign policy period, the Congressional Steel Caucus asked the U.S. General Accounting Office (GAO) to investigate the procurement of foreign goods by state and local governments using fed- eral grant funds.5 In May 1978, the GAO re- sponded “that contracts awarded by State and local authorities under Federal grant programs are not covered by the Buy American Act, unless the statute authorizing the Federal assistance to 1 Lawrence Hughes, Buy North America: A Revision to FTA Buy America Requirements, 23 TRANSP. L.J. 207, 208 (1995). 2 76 CONG. REC. 1933, 3267 (1933); see also DANA FRANK, BUY AMERICAN: THE UNTOLD STORY OF ECONOMIC NATIONALISM 66 (1999). 3 41 U.S.C. § 8302(a)(1) (2013). 4 41 U.S.C. § 8302(a)(2) (2013). 5 FOREIGN-SOURCE PROCUREMENT FUNDED THROUGH FEDERAL PROGRAMS BY STATES AND ORGANIZATIONS 1, COMP. GEN. REP’T NO. ID-79-1, Docket Nos. B-162222, B-156489 (1978) (hereinafter Foreign Procurement 1978 Report).

4 State and local authorities explicitly provides for application of the Buy American Act.”6 The GAO concluded that federal assistance programs ad- ministered by FRA, FHWA, and Amtrak “do not address the issue” of domestic preferences, and the grant program administered by FTA actually “prohibits domestic preference.”7 Shortly thereafter, Congress enacted Buy America provisions applicable to Amtrak,8 as well as FTA and FHWA,9 as amendments to transpor- tation appropriations bills, with the intent to ex- tend the BAA requirements to the transportation grant programs.10 The 1978 transportation grant Buy America provisions used almost identical statutory language to the BAA, with certain key terms and exception conditions left undefined. Beginning in 1982, however, the Buy America provisions applicable to FHWA and FTA were sig- nificantly revised by Congress11 to include more specific, quantitative criteria for those agencies to determine whether an exception was triggered, or whether it was appropriate to grant waivers from the requirements. FHWA and FTA have also is- sued formal regulations and undertaken public rulemaking, often at the direction of Congress, to provide grant recipients with additional guide- lines on Buy America compliance.12 A number of Buy America waiver determinations made by FHWA and FTA are also publicly available to pro- vide additional guidance, if not legal precedent, to assist grant recipients with understanding the waiver criteria.13 In response to FHWA and FTA rules, regulations, and waiver determinations, Congress has periodically refined the statutory 6 FEDERAL ASSISTANCE TO STATE AND LOCAL GOVERNMENTS AND OTHER ORGANIZATIONS FOR SELECTED PROGRAMS, Enclosure II, at 6, COMP GEN. REP’T NO. ID-78-40, Docket Nos. B-162222, B-156489 (1978) (here- inafter Federal Assistance 1978 Report). 7 Foreign Procurement 1978 Report, supra note 5, App. 1, at 13–14. At that time, FTA was known as the Urban Mass Transportation Administration (UMTA). To avoid confusion, both FTA and UMTA are referenced interchangeably herein as “FTA.” 8 See infra § II.B.2. 9 See infra § III.A. 10 Hughes, supra note 1, at 215 (“Rep. Robert W. Edgar (D-Pa.) explained that the [BAA] (enacted in 1933) applied only to direct federal procurements, and not to grants-in-aid. Rep. Edgar's amendment would encompass grants-in-aid projects within the Buy Amer- ica requirement.”). 11 See infra § III.A. 12 See infra §§ III.B.3, III.C.3. 13 See infra §§ III.B.4, III.C.4. language applicable to FHWA and FTA, typically to close what it perceives to be “loopholes” used by grant recipients to purchase foreign goods.14 The national financial crisis of 2007–2008 was accompanied by a new wave of Buy America pro- visions applicable to transportation grants. In 2008, Congress enacted a Buy America provision applicable to FRA grants for HSIPR projects.15 In 2009, the American Recovery and Reinvestment Act (ARRA) stimulus bill, which provided sub- stantial funding for FRA, FTA, FHWA, and Am- trak programs, included its own Buy America provision.16 ARRA also provided for expanded en- forcement and monitoring of the Buy America provisions associated with ARRA-funded pro- jects.17 The increased scrutiny of Buy America provisions associated with ARRA led to increased recognition of how apparently similar Buy Amer- ica provisions are administered very differently by different federal agencies. There have subse- quently been a number of efforts in Congress to both streamline and strengthen the various Buy America provisions,18 but as of this publication there remain sharp differences. C. Buy America Statutory Issues 1. Coverage and Applicability Applications of Buy America provisions in transportation grant programs for rail develop- ment can typically be divided into two categories: construction materials and manufactured prod- ucts (including rolling stock). Even the original BAA, which on its face applies equally to all direct procurements of goods by the federal government, has been divided into administrative regulations outlining different procedures for construction materials19 and manufactured products (or “sup- plies”).20 This section addresses considerations for grant recipients in determining which materials must be domestic on a federally funded project. a. Construction Materials.—The 1933 BAA nominally prohibited federal agencies from pur- chasing any foreign construction materials of any kind, including steel, cement, wood, and even 14 See infra §§ III.B.2, III.C.2. 15 See infra § II.A.2. 16 American Recovery and Reinvestment Act of 2009, Pub. L. No. 111-5, § 1605(c), 123 Stat. 115, 303 (2009). 17 Id. § 1524, 123 Stat. at 291. 18 See, e.g., infra § III.B.2. 19 48 C.F.R. subpt. 25.2 (2013). 20 48 C.F.R. subpt. 25.1 (2013).

5 “mined” materials such as aggregate or sand.21 Likewise, the original Buy America provisions applicable to FTA, FHWA, and Amtrak nominally applied to all purchases of construction materials using funds appropriated for those agencies. Over time, however, most transportation grant Buy America provisions have increasingly focused on steel, with products such as cement and asphalt being expressly removed from coverage of most (but not all) such provisions. In recent years, most transportation grant Buy America provisions have expanded to also cover iron. Recipients of federal grants for construction projects, and their contrac- tors, should consider whether the applicable Buy America provision is limited to steel and iron or whether all construction materials are covered. Note, however, that even if the applicable Buy America provision excludes construction materials other than steel and iron, mechanical systems such as heating, ventilation, and air conditioning (HVAC) incorporated into the construction project are typically covered by the applicable Buy Amer- ica provision as “manufactured products.” Also, the grant recipient or its construction contractor should determine whether the constructed facility itself is considered a “manufactured product” un- der the applicable Buy America provision, in which case domestic content requirements may extend to all of its components (i.e., construction materials other than steel, iron, and mechanical systems). b. Manufactured Products.—The 1933 BAA nominally required that federal agencies purchase only domestic manufactured products (those “that have been manufactured in the United States substantially all from” domestic components—i.e., from goods that were themselves “mined, pro- duced, or manufactured in the United States”).22 The language of the BAA, its legislative history, and the rules implementing it suggest that Con- gress intended to establish domestic preferences for machinery—mechanical and electrical end products that result from assembly of mechanical and electrical components—to ensure that assem- bly processes take place in the United States and that the components come from domestic suppli- ers.23 Over time, however, manufacturing proc- esses have become more sophisticated than “mere assembly,” encompassing complex processes, in- cluding chemical and even biological processes. 21 41 U.S.C. § 8302(a)(1) (2013). 22 41 U.S.C. §§ 8302(a)(1), 8303(a)(2) (2011). 23 See 76 CONG. REC. 1933, 3267 (1933); see also FRANK, supra note 2, at 66. Notably, FTA has adopted a sophisticated defini- tion of manufacturing to refer to the “substantial transformation” of the constituent goods or mate- rials.24 This has the potential to extend coverage of the applicable Buy America provisions to “manufactured products” beyond machinery, e.g., to encompass construction materials (other than raw materials) such as cement that are not “as- sembled” but undergo some refinement, treat- ment, or other transformative processes. In the procurement of “rolling stock” (e.g., vehicles, lo- comotives, and rail cars) that result from the as- sembly of other manufactured products, the ques- tion also arises whether the applicable Buy America provision and its exceptions are to be evaluated at the level of the assembled rolling stock, or at the level of each individual manufac- tured component. The answer will vary depending on the applicable grant provision. 2. Exceptions, Exclusions, and Waivers Most Buy America provisions have some form of the following five exceptions or waivers, all of which originated with the BAA. Although these exceptions appear similar on their face, this digest addresses the very significant differences that exist among the various transportation grant Buy America provisions with respect to how these ex- ceptions (or waivers) are administered. Impor- tantly, in most cases under the transportation grant Buy America provisions, the grant recipient must obtain a formal waiver from the federal grant agency, even if the criteria for an exception apply. a. Domestic Content.—The 1933 BAA required federal agencies to purchase only those manufac- tured products that had been “manufactured in the United States substantially all from articles, materials, or supplies mined, produced, or manu- factured in the United States.”25 However, in a 1954 Executive Order, the phrase “substantially all” was interpreted to allow manufactured prod- ucts to be considered domestic unless “the cost of the foreign products used in such materials con- stitutes fifty per centum or more of the cost of all the products used in such materials.”26 Therefore, federal agencies could purchase manufactured products containing foreign components as long as domestic components constituted at least 50 per- cent of the end product (by cost), and the final as- 24 49 C.F.R. § 661.3 (2013). 25 41 U.S.C. § 8302(a)(1) (2013) (emphasis added). 26 Exec. Order No. 10,582, 19 Fed. Reg. 8,723 (Dec. 17, 1954).

6 sembly location for the end product was in the United States. This was not an exception per se, since manufactured products with at least 50 per- cent domestic content were deemed to be “sub- stantially all” domestic. The original 1978 Buy America provisions applicable to FTA, FHWA, and Amtrak used this same “substantially all” language, perhaps implying that the same 50 per- cent domestic content standard applied to manu- factured products purchased with those grant funds. However, subsequent legislation has tended to quantify domestic content require- ments, rather than leave them open to executive or administrative interpretation, and the trend for Congress has been to impose stricter domestic content requirements than the BAA 50 percent rule. Grant recipients should also be aware that they may not be entitled to presume that a prod- uct automatically complies with the applicable Buy America provision just because the product satisfies the domestic content criteria in the legis- lation—grant recipients may still be required to request and receive a Domestic Content waiver from the federal grant agency. b. Price Differential.—The 1933 BAA included an exception that permitted federal agencies to purchase foreign goods if the price of comparable domestic goods was “unreasonable.”27 The 1954 Executive Order interpreted the cost of domestic goods to be “unreasonable” if it was higher than an adjusted bid to provide comparable foreign goods, where the adjusted foreign bid price is cal- culated by increasing the cost of the foreign goods in the bid by a minimum 6 percent “differential.”28 This 6 percent Price Differential provision is still applicable in the BAA regulations governing di- rect federal procurements.29 Because the BAA price differential is so low, and is applied only to the individual bid line items for foreign goods,30 the BAA does not pose a significant barrier against purchases of foreign goods. Foreign goods need only be moderately cheaper than comparable domestic goods in order for the cost of domestic goods to be considered “unreasonable” and thus qualify for this 6 percent Price Differential excep- tion. The original 1978 Buy America provisions applicable to FTA, FHWA,and Amtrak used this same “unreasonable” cost language, perhaps im- plying that the same 6 percent price differential 27 41 U.S.C. § 8302(a)(1) (2013). 28 Exec. Order No. 10,582, 19 Fed. Reg. 8,723 (Dec. 17, 1954). 29 48 C.F.R. § 25.105(b)(1) (2013). 30 48 C.F.R. § 25.501(a) (2013). applied to allow the purchase of foreign goods with those grant funds. However, the trend in subsequent legislation has been for Congress to establish specific price differentials in the legisla- tion, which tend to increase over time and are typically much larger than the BAA 6 percent price differential. Additionally, the trend in most (but not all) transportation grant Buy America legislation has been to apply the price differential to the entire bid that includes foreign goods, not just to the cost of foreign goods in that bid. As a result, it is very rare for a foreign bid to qualify for a Price Differential waiver from the transpor- tation grant Buy America provisions. c. Nonavailability.—The 1933 BAA permitted the purchase of foreign goods where comparable domestic goods “are not mined, produced, or manufactured in the United States in sufficient and reasonably available commercial quantities and are not of a satisfactory quality.”31 Although these terms were not clearly defined or quantified in the legislation, the Federal Acquisition Regula- tion (FAR) provides a list of classes of goods where it has been determined “that domestic sources can only meet 50 percent or less of total U.S. govern- ment and nongovernment demand.”32 Although federal agencies are required to perform some market research and specifically seek out domes- tic sources before purchasing goods on this list, federal agencies may purchase foreign goods on the list without a written waiver determination as long as their market research does not identify sources of comparable domestic goods.33 Further- more, if there are no domestic offers in response to an open solicitation, federal agencies are entitled to presume that domestic goods are not reasona- bly available, even if they are not on the FAR list.34 Buy America provisions in transportation grant programs tend to use nearly identical language as the BAA to allow the purchase of foreign goods where comparable domestic goods are not rea- sonably available. However, for the most part, federal agencies have not adopted the FAR list of unavailable goods for their grant programs.35 Some federal agencies have issued their own 31 41 U.S.C. §§ 8301(a)(2)(B), 8303(b)(1)(B (2013). 32 48 C.F.R. §§ 25.103(b)(1)(i), 25.104(a) (2013). 33 48 C.F.R. § 25.103(b)(1)(ii) (2013). 34 48 C.F.R. § 25.103(b)(3) (2013). 35 FTA is an exception, as it has expressly adopted the FAR list of unavailable goods for a Nonavailability waiver under the FTA Buy America provision. 49 C.F.R. § 661.7, App. A(a) (2013).

7 “general” nationwide Nonavailabillity waivers, allowing grant recipients or their contractors to purchase certain foreign goods that the agency has determined are not reasonably available, without requiring the grant recipients to specifi- cally request a Nonavailability waiver for those goods. However, unless the federal agency has issued a general waiver, the grant recipient typi- cally must specifically request a Nonavailability waiver when it is unable to identify domestic goods in sufficient quantities or satisfactory qual- ity, or, in some cases, when suitable domestic goods can not be made available within a reason- able time. The federal agency is typically under no obligation to grant a Nonavailability waiver for the purchase of foreign goods, even if comparable domestic goods are not actually available. d. Public Interest.—The 1933 BAA included an exception that permitted federal agencies to pur- chase foreign goods if the acquisition of higher- priced domestic goods would “be inconsistent with the public interest.”36 The FAR clarifies that the Public Interest exception to the BAA applies when the federal government “has an agreement with a foreign government that provides a blanket excep- tion to the Buy American Act.”37 Specifically, un- der the Trade Agreements Act, the BAA has been waived for transactions covered by the World Trade Organization (WTO) Agreement on Gov- ernment Procurement or other free trade agree- ments (FTAs).38 Most transportation grant Buy America provisions also include the possibility of the grant recipient obtaining a Public Interest waiver. However, the BAA standards for a Public Interest waiver for goods from foreign trading partners are largely inapplicable to the transpor- tation grant Buy America provisions. The WTO Agreement on Government Procurement and most FTAs do not apply to transportation grant pro- grams, because such agreements typically define “procurement” to exclude federal grant funds to states.39 It is typically unclear what would qualify for a Public Interest waiver from the transporta- tion grant Buy America provisions and, in most 36 41 U.S.C. §§ 8302(a)(1), 8303(b)(3) (2013). 37 48 C.F.R. §§ 25.103(a), 25.202(a)(1) (2013). 38 48 C.F.R. § 25.402(a)(1) (2013); see also Trade Agreements Act of 1979, Pub. L. No. 96-39, §§ 301, 303, 93 Stat. 144 (1979). 39 See World Trade Org., Agreement on Government Procurement, App. 1, United States, General Notes, WT/Let/672 (Mar. 22, 2005); North American Free Trade Agreement, Part IV: Government Procurement, ch. 10, § A, art. 1001. programs, Public Interest waivers are almost non- existent. One notable exception is FHWA, where Public Interest waivers have had, and continue to have, a significant impact, allowing FHWA grant recipients to purchase foreign manufactured goods.40 e. Small Purchase.—The BAA, like many fed- eral procurement statutes, is inapplicable to pur- chases where the entire contract value is less than the federal “micro-purchase threshold,” which is currently $3,000.41 Likewise, most transportation grant Buy America provisions have some thresh- old contract value below which the Buy America provisions do not apply. However, the cost thresh- olds vary widely, ranging from the $2,500 FHWA “de minimis” purchase value to the Amtrak $1 million contract price threshold. These varia- tions in the Small Purchase cost threshold from agency to agency can have a significant impact on whether the grant recipient is able to purchase certain foreign goods—where the cost threshold is very high (as with Amtrak), most ordinary pur- chases (other than larger construction contracts or rolling stock procurements) are exempt from the Buy America provision. If a contract qualifies for the Small Purchase exception under the terms of a given transportation grant Buy America provi- sion, the grant recipient generally does not need to request a waiver. In addition to the differences in the way federal agencies interpret and apply the various Buy America waivers and exceptions, there are a num- ber of other procedural issues related to the vari- ous transportation grant Buy America provisions where requirements and practices vary signifi- cantly from agency to agency. These issues are introduced briefly in the following text. In Sec- tions II and III infra, the issues are specifically addressed in the context of each transportation grant Buy America provision. 3. Notice-and-Comment Under the BAA, when federal agencies directly purchase foreign construction materials, they are generally required to make written findings justi- fying any purchase made under an exception to the BAA.42 Although there is no publication re- quirement, the federal agencies are required to make BAA waiver findings available for public 40 See infra §§ III.B.3, III.B.4. 41 41 U.S.C. §§ 1902(a), 8302(a)(2)(C), 8303(b)(1)(C) (2013). 42 48 C.F.R. § 25.202(b) (2013).

8 inspection.43 Under the BAA, federal agencies are also generally required to submit an annual re- port to Congress detailing agency purchases of manufactured products with a foreign place of manufacture.44 Note, however, that there is no requirement under the BAA to report foreign components of products manufactured in the United States. There is also generally no re- quirement under the BAA for federal agencies to publish their intent to purchase foreign goods (in the Federal Register or elsewhere) for public no- tice-and-comment. The transportation grant Buy America provi- sions vary widely with respect to publication re- quirements for Buy America waivers. Federal grant-making agencies may or may not be re- quired to publish waiver requests from their grant recipients (in the Federal Register or elsewhere) for public notice-and-comment. Likewise, the agencies may or may not be required to publish (in the Federal Register or elsewhere) their final determinations to grant or deny waivers for their grant recipients, and they may or may not be re- quired to solicit public comments on their final determinations. The trend, however, is toward increased public scrutiny of transportation grant Buy America waivers. Before requesting a waiver, grant recipients must make themselves aware of the public notice-and-comment requirements un- der the applicable transportation grant Buy America provision. Furthermore, even where there is no publication requirement under the ap- plicable Buy America provision, waiver requests from grant recipients, and waiver determinations by the federal agency, may be available to the public upon request under public records statutes such as the Freedom of Information Act (FOIA).45 Transportation grant recipients should anticipate that their waiver requests will be made public, and that the waiver requests will be the subject of public opposition from organized labor and manu- facturing trade associations. 4. Bid Certification and Potential Penalties To a certain extent, transportation grant re- cipients must rely on their offerors (potential con- tractors or suppliers) to quantify the domestic content of their bids, or to identify foreign goods that they propose to deliver. However, Buy Amer- ica enforcement provisions vary widely from one transportation grant program to the next. Some 43 Id. 44 41 U.S.C. § 8302(b) (2013). 45 5 U.S.C. § 552 (2013). transportation grant Buy America provisions ex- pressly require bidders to certify Buy America compliance as a condition of bid responsiveness. In that case, grant recipients are obligated to re- ject a bid that fails to comply with the certifica- tion requirements of the transportation grant program, even if it is the lowest bid. Depending on the transportation grant provision, grant recipi- ents may or may not be entitled to rely on the bidder’s Buy America certification—in some cases, the grant recipients may be obligated to confirm compliance via post-award audits or otherwise. The grant recipient’s failure to perform its own enforcement obligations under the applicable transportation grant Buy America provision could result in bid challenges from disappointed bidders and loss of federal grant funds. Under direct federal procurements, a bidder’s false certification of compliance with the BAA could potentially subject the bidder to liability under the False Claims Act (FCA).46 Under the FCA, the contractor for a federal agency could be required to reimburse the government up to three times the government’s actual damages (e.g., the amount paid for the foreign goods), plus addi- tional monetary penalties.47 Furthermore, there are criminal penalties for knowingly and willfully making a fraudulent BAA compliance certifica- tion, including possible imprisonment.48 Under transportation grant programs, how- ever, if the bidder is required to certify compliance with the applicable Buy America provision, such certification is made to the grant recipient, not the federal government. Therefore, there is probably no liability under the FCA for false certi- fications of compliance with transportation grant Buy America provisions. However, bidders should be mindful of state statutes similar to the FCA, which could impose similar liability for false Buy America compliance certifications made to grant recipients who are state and local transportation agencies. Furthermore, under some (but not all) transportation grant provisions, Congress has prescribed criminal penalties for false Buy Amer- ica compliance certifications. Under most trans- portation grant Buy America provisions, contrac- tors making false Buy America compliance certifications are subject to suspension or debar- ment (making them potentially ineligible to re- ceive federal grant funds in the future), and the grant recipient faces the potential loss of federal 46 31 U.S.C. §§ 3729–3733 (2013). 47 31 U.S.C. § 3729(a)(1) (2013). 48 18 U.S.C. § 1001 (2013).