On July 23, 2020, the Office of the Under Secretary of Defense for Acquisition and Sustainment issued a memorandum designed to assist military departments with implementation of the interim rule. This memorandum restricts contracting officers from awarding contracts, issuing task or delivery orders, and exercising an option period or extending a period of performance with any contractor that uses covered telecommunications equipment or services as a substantial or essential component of any system, or as critical technology as part of any system, unless an exception applies or a waiver is granted. This memorandum provides critical guidance for contracting officers within the DoD and to members of the Defense Industrial Base who do business with the DoD.
New restrictions
Section 889(a)(1)(B) forbids executive agencies from working with contractors that use “covered telecommunications equipment or services,” even if that use is unrelated to the contractor’s federal business. The term “covered telecommunications equipment and services” includes all telecommunications equipment or services manufactured by specific Chinese companies or their subsidiaries or affiliates. The restrictions are extremely broad, and do not exclude internal company uses unrelated to federal contracting. The interim rule covers telecommunications and video surveillance equipment and services produced or provided by a number of Chinese-owned companies and any subsidiary or affiliate of those companies. (The companies are listed by name in the interim rule.) The statute’s use requirement is not limited to end products produced by these companies; it covers the use of any equipment, system, or service that uses covered telecommunications equipment or services as a substantial or essential component of any system, or as critical technology as part of any system.
The interim rule will require contractors to submit an additional representation with each offer, stating whether, after a “reasonable inquiry,” the offeror uses covered telecommunications equipment or services. The interim rule defines a reasonable inquiry as one “designed to uncover any information in the entity’s possession about the identity of the producer or provider of covered telecommunications equipment or services used by the entity.” Notably, a reasonable inquiry need not include an internal or third-party audit. To mitigate the administrative burden on offerors, the System for Award Management (SAM.GOV) will be updated to allow for these representations to be made annually.
Scope and flow down
For now, these restrictions will only apply at the prime contractor level, with no required flow down to the subcontractor level, but that may change in the future. The FAR Council is considering, as part of finalizing the rule, expanding the scope to require that these restrictions, which are set forth within FAR 52.204-24(b)(2), to apply to an offeror and any affiliates, parents, and subsidiaries of the offeror that are domestic concerns. The associated representations set forth within FAR 52.204-24(d)(2) would be expanded so that the offeror would represent on behalf of itself and any affiliates, parents, and subsidiaries that are domestic concerns, whether they use covered telecommunications equipment or services.
The FAR Council is requesting specific feedback regarding the impact of this potential change, as well as other pertinent policy questions of interest, in order to inform finalization of this and potential future subsequent rulemakings.
Possible expansion to international entities
For now, these restrictions only apply to domestic concerns. However, because the FAR Council seems to be signaling that the reach of the rule may ultimately be expanded, non-U.S. entities could eventually be impacted. The FAR Council is currently seeking input related to the potential impact of such an expansion.
One important question the FAR Council has posed for industry to weigh in on related to this issue is:
“What do companies do if their factory or office is located in a foreign country where covered telecommunications equipment or services are prevalent and alternative solutions may be unavailable?”
It is critical that corporate entities avail themselves of this opportunity to provide information to the FAR Council as it continues to shape the regulations in this space.
Compliance recommendations
Compliance is anticipated to be costly for many impacted contractors, but non-compliance will have an even greater impact. As a threshold matter, a contractor’s failure to submit an accurate representation to the government regarding its use of prohibited equipment will constitute a contract breach, which may ultimately lead to the termination of that contract. Additionally, contractors risk violating the False Claims Act, if, by using the prohibited technology, they submit false claims for payment to the government.
While the interim rule does include a waiver process, the waiver process is complex. Contractors will need to jump through hoops to obtain a waiver, to include consulting with the Office of the Director of National Intelligence.
The interim rule provides guidance on how contractors can adopt a robust, risk-based compliance approach to help reduce the likelihood of noncompliance and which contractors should take note of. Contractors are encouraged to consider the following as they update their compliance plans:
(1) Regulatory familiarization: contractors must read and attempt to understand the rule and necessary actions for compliance.
(2) Corporate enterprise tracking: contractors must determine through a reasonable inquiry whether they use “covered telecommunications” equipment or services as a substantial or essential component of any system, or as critical technology as part of any system.
(3) Education: contractors must educate their purchasing/procurement and materials management professionals to ensure they are familiar with the compliance plan.
(4) Cost of Removal: contractors, once use of covered equipment and services is identified, must implement procedures to replace existing covered telecommunications equipment or services and ensure new equipment and services acquired for use are compliant.
(5) Representation: contractors must provide representation to the government regarding whether they use covered telecommunications equipment and services and implement procedures to alert the government if use is discovered during contract performance.
(6) Cost to develop a phase-out plan and submit waiver information: contractors that will request a waiver should (a) develop a phase-out plan to phase out existing covered telecommunications equipment or services, and (b) provide waiver information to the government to include the phase-out plan and the complete laydown of the presence of the covered telecommunications equipment or services.
Takeaways
Federal contractors must take the national security interests of the general public seriously. This has become a matter of the the highest magnitude. This statute, the interim rule and the associated FAR clauses will ensure that contractors doing business with the U.S. government will keep public national security interests in mind when making decisions, by preventing them from using covered telecommunications equipment or services that present national security concerns. Ultimately, they will also assist federal contractors with the mitigation of supply chain risks associated with the use of covered telecommunications equipment or services. Contractors should seek assistance from legal counsel as they navigate these requirements and seek to comply. Feel free to contact the authors of this alert for more information.
Client Alert 2020-463
