Steel Products Procurement Act; Cost of Steel

United Blower, Inc. v. Lycoming Cty. Water & Sewer Auth., 2020 WL 3957316 (Pa. Cmwlth.) (unreported), allocatur granted Jan. 20, 2021, appeal docket 3 MAP 2021

This case involves application of § 1886 of the Steel Products Procurement Act, which provides in relevant part that:

If a product contains both foreign and United States steel, such product shall be determined to be a United States steel product only if at least 75% of the cost of the articles, materials and supplies have been mined, produced or manufactured, as the case may be, in the United States ….

Slip op. at 4, quoting 73 P.S. § 1886 (emphasis added by Commonwealth Court).

Commonwealth Court summarized the facts underlying the dispute as follows:

McCrossin is a contracting and construction management firm headquartered in Bellefonte, Pennsylvania. It was the general contractor for the Authority on the Project, and in July 2011, it entered into an agreement with the Authority to supply eight air blower systems. The purpose of these air blower systems is to move air from one area to another. Each system is large, mostly enclosed, and has few moving parts. The blower systems and blowers are powered by electricity.

In August 2011, [G.M. McCrossin, Inc. (McCrossin)] and the Authority agreed to a change order for McCrossin to supply and install three new digester blowers to replace existing blowers that otherwise would have remained at the Authority’s facility. The purpose of this change order was to allow for ease of maintenance in the future by providing digestive blowers from a single manufacturer. After approval of the change order, [United Blower, Inc. (UBI)] became a subcontractor on the Project. UBI is a Georgia-based company that provides engineering, fabrication, assembly, and testing services. UBI’s role was to supply the air blower systems required by the original specifications and for the replacement of the three digestive blowers as required by the change order.

UBI prepared a submittal for the blower systems which was, in turn, submitted by McCrossin to the Authority’s Project engineer, Brinjac Engineering (Brinjac). As part of the submittal, McCrossin provided Brinjac/Authority with an ST-3 form, verifying that 75% of the cost of the blowers was attributable to articles, materials, and supplies mined, produced, or manufactured in the United States. We note here that some of the materials used in the Project contained markings indicating that they were from China. The total amount paid by McCrossin to UBI for the eight blower systems and the three blowers was $239,800. The amount paid by the Authority to McCrossin for same was $243,505.

Slip op. at 5-6 (internal record citations omitted). The Authority questioned whether McCrossin and UBI provided products that complied with the Steel Act. The Authority held a hearing on the matter and issued an adjudication in which it determined that McCrossin and UBI were in violation of the Steel Act and required McCrossin and/or UBI to reimburse the Authority $243,505, the full cost of air blower systems and blowers provided to the Authority in connection with the project. McCrossin and UBI appealed the Authority’s adjudication to common pleas court (trial court), which remanded the matter to the Authority to be heard by an independent hearing officer. The hearing officer concluded that the blower assemblies and blowers were not United States steel products, per the Steel Act, based on the following reasoning:

During a hearing before the Hearing Officer, UBI’s owner and president, Mr. Miolee (President), testified to the way in which he identified components produced outside of the United States. As part of his determination of the total amount of foreign steel involved in Project, President applied a 10% reduction for items UBI had required from three other companies, all of which provided letters to the effect that their invoices encompassed costs involved with importation, warehousing, and outbound shipping costs of the products and that 90% of the invoiced dollar amounts represented the “foreign component of the product sold, leaving at least 10% of the value of the invoice as the domestic component.” Hearing Officer noted that the total cost of the foreign components, after reducing the invoices by 10% of the total amount, was $59,655, and that President then compared that cost to the amount charged to McCrossin, i.e., $239,800, and concluded that the foreign cost component was 24.88% of the total cost of the Project – even less if the $59,655 was compared to the total cost of the project, i.e., $243,505, the Authority paid to McCrossin.

Hearing Officer noted it was crucial to determine whether it was appropriate to reduce the invoice by 10% when attempting to discern the numerator of the fraction to use in calculating the percentage cost of foreign components in the Project. The Hearing Officer also acknowledged it was important to determine what the denominator of the fraction should be, i.e., the amount that McCrossin paid to UBI or the amount that the Authority paid to McCrossin for the blower assemblies and blowers. The Hearing Officer found that the Authority was invoiced $243,505 by McCrossin, and if that number was used as the total cost, then the calculation from UBI would show the cost of the foreign components to be 24.49% of the total. However, the Hearing Officer stated he believed the appropriate foreign cost figure to be $67,340, in part because he did not believe it was appropriate to allow the 10% deduction that President had applied for products from UBI’s suppliers. Hearing Officer determined that UBI’s suppliers sold foreign components to UBI, and that their invoices to UBI represented the “cost of the articles,” per the terms of the Steel Act. R.R. at 026, Adjudication at 11. Hearing Officer opined that the costs of importing, storing, and shipping the foreign components should not be deducted from the invoice amount, especially where, as here, the invoices did not break out those components. He believed this interpretation to be consistent with the language of the Steel Act and its requirement to be liberally construed to protect the use of domestic steel. Hearing Officer also determined it was most appropriate to view the total cost of the steel product as the cost to McCrossin, rather than the cost to the Authority. He opined that to determine otherwise would allow a contractor to manipulate the 75%/25% domestic/foreign split in the cost of the steel product by simply marking up the cost. The Hearing Officer further opined that, in order to comply with the requirements of the Steel Act, the cost to the contractor is the appropriate measuring stick, not the price that the contractor charges the customer, and using this method, the cost of the foreign components for the blower assemblies and blowers, in this case, was $67,340/$239,800, or 28% of the total. The Hearing Officer added that, if the denominator was changed to reflect the cost charged to the Authority, the result would still be steel products that were 27.7% foreign.

Slip op. at 9-11 (internal record citations and footnotes omitted). The case returned to the trial court, which remanded the matter back to the Authority and the Hearing Officer for a determination of a remedy.  Following a hearing, the Hearing Officer issued a subsequent adjudication as to the remedy, which the Authority adopted, determining that McCrossin and UBI had violated the Steel Act and, thus, should be required to refund to the Authority the total amount of $243,505 paid to McCrossin for Project. The Hearing Officer reasoned that “the [Steel] Act draws a clear line – a steel product is a United States steel product or it is not” to conclude that he could not fashion a remedy based on the percentage of the product that failed to meet the 75% domestic steel requirement of the Steel Act.  Slip op. at 13. McCrossin and UBI appealed the Authority’s determination to the trial court.

The trial court reversed the Authority’s adjudication on the basis that the Hearing Officer did not properly calculate the United States-based content of the equipment under review. Commonwealth Court summarized the trial court’s reasoning as follows:

 the Hearing Officer did not account for the fact the Authority received three blowers gratis and, thus, those blowers should have been excluded from the overall foreign content calculation. The Trial Court noted that, with the three blowers excluded from the calculations, the foreign content of the blower systems purchased by the Authority would fall to a level less than 25% and would bring McCrossin and UBI within the range of Steel Act compliance. In addition, the Trial Court determined that the Hearing Officer should have taken into account evidence of UBI’s vendors’ “markups,” and if this 10% of the total cost had been considered, the percentage of foreign content would have been lower than 25%. Tr. Ct. Order at 2. In addition, Trial Court determined that, “while UBI’s entire blower system may not fall within the definition of ‘electrical machinery,’ the electric motors which power the blower systems would.” Tr. Ct. Order at 5. Trial Court noted that, because Authority initially examined UBI’s blower systems component-by-component to ascertain the origin of each, potential exclusions from the Steel Act should have been considered in the same manner, and all electric motors should have been omitted from the foreign cost calculations. Tr. Ct. Order at 5.

Slip op. at 13-14. The Authority appealed to Commonwealth Court, arguing that the trial court erred in removing the three blowers from the calculation and in failing to explain the calculations it performed to arrive at its determination relative to the 75/25% split. Specifically, the Authority argued:

… none of the blowers in the Project were provided gratis, UBI paid $67,340 for the foreign steel components of the blower system purchased by the Authority, and McCrossin paid $239,800 to UBI for the system. The Authority adds that the three additional blowers were included as part of the $239,800 invoice to McCrossin, and the blowers were not free or exempt from the Steel Act simply because McCrossin issued a no-increase change order to induce the Authority to accept UBI blowers instead of the originally specified Dresser Roots blowers. The Authority posits that the Hearing Officer correctly rejected the claim that any blowers were free or should otherwise be excluded from the total cost calculation. The Authority argues the purpose of the change order was ease of maintenance, as the Authority believed ongoing maintenance would be more efficient if all digestive blowers in the facility were from the same manufacturer. The Authority contends that McCrossin took and kept the three existing Dresser Roots blowers as part of the exchange and that the change order was to benefit McCrossin, not the Authority. The Authority contends it was willing to accept UBI equipment only if three additional blowers were retrofitted to replace three existing Dresser Roots blowers, because Dresser Roots blowers were originally specified to be used in order to be consistent with the Authority’s existing infrastructure.. The Authority further contends that, to find that these three blowers were exempt from compliance would frustrate the purpose of the Steel Act because it would allow a contractor to manipulate the cost associated with foreign steel components in order to meet the 75%/25% requirement of the Steel Act.

Slip op. at 17-18 (internal record citations omitted).

The Commonwealth Court affirmed, reasoning:

Given the Steel Act’s focus on determining specific percentages of steel involved in a final product, and the reference to the cost of the project to the public entity, we must arrive at both a numerator and denominator – as both the Hearing Officer/Authority and the Trial Court did. In this regard, and in accordance with our opinion herein, we see no error by the Trial Court when it used $59,655 as the numerator of the equation in determining the foreign component of the steel product provided by UBI. As for the denominator of the equation, the Steel Act unquestionably puts its focus on the public agency’s payment to the contractor. In the present matter, that would implicate the $243,505 paid to McCrossin by the Authority. However, here, it is not clear to us which total amount UBI was considering when it signed the ST-3 form, i.e., the $239,800 it was paid by McCrossin or the $243,505 McCrossin was to be paid (and ultimately was) by Authority. R.R. at 0597, ST-3 Form. Regardless, both calculations result in a foreign component under 25% ($59,655 divided by $243,505 results in a percentage of 24.5%, whereas $59,655 divided by $239,800 results in a percentage of 24.9%). Thus, there was no violation of the Steel Act.

Slip op. at 27-28

The Pennsylvania Supreme Court granted allocatur, limited to the following issue:

Did the Commonwealth Court err as a matter of law in affirming the trial court’s calculation of the “cost” of steel products pursuant to the Steel Products Procurement Act, 73 P.S. § 1886, that requires “75% of the cost of the articles, materials and supplies [of a steel product to] have been mined, produced or manufactured” in the United States?

For more information, contact Kevin McKeon or Dennis Whitaker.