TITLE: B-309982, Pacific Lock Company, October 25, 2007
BNUMBER: B-309982
DATE: October 25, 2007
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B-309982, Pacific Lock Company, October 25, 2007

   DOCUMENT FOR PUBLIC RELEASE
   The decision issued on the date below was subject to a GAO Protective
   Order. This redacted version has been approved for public release.

   Decision

   Matter of: Pacific Lock Company

   File: B-309982

   Date: October 25, 2007

   James H. Roberts, III, Esq., Van Scoyoc Kelly PLLC, for the protester.

   Nicole E. Goldstein, Esq., Edward H. Meyers, Esq., and Robert S. Ryland,
   Esq., Kirkland & Ellis LLP, an intervenor.

   Robert L. Mercadante, Esq., Defense Logistics Agency, for the agency.

   Paula J. Haurilesko, Esq., and Ralph O. White, Esq., Office of the General
   Counsel, GAO, participated in the preparation of the decision.

   DIGEST

   Protestor's allegation that the agency failed to apply the proper criteria
   in determining that protestor's offered padlocks did not comply with the
   solicitation's requirement for U.S.-made locks is denied where the agency
   reasonably concluded that a lock consisting of components made in China
   but assembled in the United States did not meet the requirements of the
   Trade Agreements Act.

   DECISION

   Pacific Lock Company (PLC) protests the rejection of its proposal from the
   competitive range under request for proposals (RFP) No. SPM5L5-07-R-0056,
   issued by the Defense Logistics Agency (DLA), Defense Supply Center
   Philadelphia (DSCP), to purchase low security padlocks and padlock sets.
   PLC contends that the agency failed to use the proper criteria in
   determining that its products were not "U.S.-made end-products," as
   required by the RFP.

   We deny the protest.

   The RFP, issued on February 5, 2007, contemplated the award of one or more
   fixed-price, indefinite-quantity contracts for low security padlocks and
   padlock sets. RFP at 1, 7, and 55. The solicitation required offerors to
   provide "U.S.-made, qualifying country, or designated country end
   products..."[1] RFP at 79. The solicitation also incorporated the clause
   at DFARS 232.225-7021(a)(12), which provides that

     U.S.-made end product means an article that --

       (1) Is mined, produced, or manufactured in the United States; or

       (2) Is 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.

   RFP at 35.[2] [Emphasis added.]

   PLC and three other companies submitted offers in response to the
   solicitation. Agency Report (AR) at 10. The other three companies
   indicated that their parts were manufactured in the United States,
   Germany, and Mexico, respectively. Id. PLC's proposal was less clear about
   where its locks would be made; the initial proposal advised only that PLC
   was relocating its manufacturing operations from China to the United
   States, leaving the agency uncertain about whether the company intended to
   provide a U.S.-made end product. AR, Tab 6, Proposal. In response to a
   request for clarification from the agency, PLC advised that all of the
   components used in its locks would be manufactured in China and assembled
   in the United States, and provided cost information. AR, Tab 12, PLC
   letter, May 3, 2007, at 2, 5, and 7.

   In evaluating PLC's proposal, the contracting officer looked to prior
   determinations by the Bureau of Customs and Border Protection, Office of
   International Trade (OIT), and particularly to one OIT determination
   addressing four scenarios for manufacturing locks. AR at 6. In two of
   these scenarios, OIT found that substantial transformation did not occur
   where locking devices were assembled in the United States from imported
   parts. TydenBrammall, 41 Cust. B. & Dec. No. 10 at 8, (Feb. 28, 2007) at
   4, 5. In the other two scenarios, locking devices were assembled in the
   United States, and domestic parts comprised a significant portion of the
   lock or a significant percentage of the total cost, leading OIT to
   conclude that the locking devices were substantially transformed. Id. at
   4, 6. Based on its review of the OIT decision and the materials provided
   by PLC, DLA found that PLC's plan to use components made in China but
   assembled in the United States did not meet the requirement for a
   U.S.-made end product. AR at 6.

   DLA notified PLC by letter that its proposal had been rejected. The agency
   letter stated, in relevant part,

     It is DSCP's decision that Pacific Lock's proposed assembly of end item
     padlocks in the United States from 100% Chinese components does not meet
     the requirement of substantial transformation for conversion of its lock
     components to a U.S.-made end product....The determinations rendered by
     the Office of International Trade (OIT) find substantial transformation
     to exist only when foreign components are combined with significant
     domestic components and/or significant domestic production costs are
     involved...

   Protest, Enc. 1. [Emphasis in the original.]

   PLC filed an agency-level protest on July 2, challenging the rejection of
   its proposal. The agency denied the agency-level protest, and this protest
   followed.

   PLC contends that DLA improperly rejected its proposal because the agency
   used the wrong criteria in assessing whether PLC's padlocks could be
   considered U.S.-made end products. More specifically, PLC objects to DLA's
   determination that, because the company did not use any domestic
   components in its padlocks and/or incur significant production costs in
   the United States, PLC's padlocks could not be viewed as substantially
   transformed in the United States. Protest at 4.

   As discussed above, the solicitation requires an offeror to either (1)
   produce an item in the United States (or other designated or qualifying
   country), or (2) show that the item was substantially transformed here.
   Since PLC acknowledges that the components of its padlocks were
   manufactured in China for assembly in the United States, it is clear that,
   for PLC's padlocks to meet the U.S.-made end product requirement, the
   company must be able to establish that the Chinese-made lock components
   are "substantially transformed" during the assembly process in the United
   States.

   Neither the FAR nor DFARS provides guidance or examples to illustrate the
   circumstances under which an article is "substantially transformed" into a
   new and different item. Therefore, for clarification DLA looked to
   determinations by the OIT, which is responsible for issuing advisory and
   final determinations relating to whether an article can be considered a
   U.S.-made end product. [3] OIT decisions have held that, with respect to
   locks, substantial transformation occurs when (1) foreign components are
   combined with significant domestic components and/or (2) significant
   domestic production costs are involved.[4] Prior decisions of our Office
   have also looked to these determinations for guidance. See, e.g., Becton
   Dickinson AcuteCare, B-238942, July 20, 1990, 90-2 CPD para. 55.

   The protester contends that more assembly of its locks occurs in the
   United States than occurred in the first scenario discussed in the
   above-referenced OIT decision, and that, therefore, its locks should be
   viewed as substantially transformed in the United States. We disagree. The
   OIT decision did not establish the cited scenario as a bright line beyond
   which any additional assembly would automatically constitute substantial
   transformation. Instead, the decision outlines several scenarios so that
   agencies and vendors offering products can look to these scenarios for
   guidance.

   In our view, the determination reviewed by DLA, which specifically
   addressed locks, reasonably led the agency to conclude that--as to
   locks--the agency should look for a showing that at least a portion of the
   lock components were domestically produced and/or that significant
   domestic production costs were involved. Since PLC failed to make either
   of these showings, we conclude that DLA reasonably decided that PLC's
   proposal did not comply with the terms of the solicitation.[5] See CSK
   International, Inc., B-278111; B-278111.2, Dec. 30, 1997, 97-2 CPD para.
   178.

   The protest is denied.

   Gary L. Kepplinger
   General Counsel

   ------------------------

   [1] "Designated" countries are listed at DFARS sect. 252.225-7021(a)(3);
   "qualifying" countries are listed in DFARS sect. 225-872-1. China is not
   included in either list; therefore, to be considered for contract award,
   PLC's locks were required to meet the definition for "U.S.-made end
   product."

   [2] These clauses implement provisions of the Trade Agreements Act (19
   U.S.C. sect. 2501 et seq.).

   [3]19 C.F.R. sections 177.21 et seq. (2007).

   [4] PLC argues that DLA did not consider any other means of determining
   whether its products met the "U.S.-made end product" requirement. In fact,
   the record here shows that DLA has invited PLC to engage in a dialogue
   about how its products might eventually meet the requirements of the Trade
   Agreements Act. AR, Tab 9, DLA email, May 3, 2007.

   [5] PLC also implies that, by evaluating the cost of the lock components,
   the agency conducted a Buy American Act-type review, even though
   procurements covered by the Trade Agreements Act are exempted from Buy
   American Act requirements. See DFARS sect. 225.103(a)(i)(B). To meet Buy
   American Act requirements for a domestic end product, the item must be
   manufactured in the United States, and domestic and qualifying country
   components must comprise more than 50 percent of the cost of all the
   item's components. FAR sect. 25.101(a). In our view, DLA's cost evaluation
   was simply an attempt to determine whether PLC's locks were substantially
   transformed using the interpretation provided by OIT determinations; we
   see nothing improper in the agency's review of PLC's costs in reaching
   this conclusion.