As mandated by Section 889 (a) (1) (A) of the 2019 National Defense Authorization Act ("NDAA"), the Defense Department, General Services Agency and NASA have issued the pre-publication version of an interim rule that bars executive agencies, government contractors (and subcontractors), and companies that receive government loans or subsidies, from procuring or obtaining equipment, systems or services from Huawei Technologies Company or ZTE Corporation and, in somewhat narrower circumstances, from Hytera Communications Corp., Hangzhou Hikvision Digital Technology Company, Dahua Technology Company and other companies that may be designated in the future. The interim rule, which amends the Federal Acquisition Regulation, will be published in the Federal Register on or before August 13, after which it will become effective. Issuance of the rule is no surprise, and its timing was driven by the implementation requirement of the NDAA – which Huawei already has challenged in court on constitutional grounds – not by trade war negotiating strategy.

Nonetheless, its issuance, the inclusion of three new named Chinese entities in addition to previously targeted Huawei and ZTE, and the tit-for-tat tenor that the Huawei dispute has assumed (with China now creating its own “Unreliable Entities List” in response to Huawei being added to the U.S. Entities List), may please some hardline members of Congress but may not help the trade war adversaries get to "yes".

The interim rule forbids executive agencies, contractors, subcontractors and companies receiving government loans and subsidies from procuring or obtaining equipment, systems or services that use "covered telecommunications equipment or services" as a substantial component of any system, or as a “critical technology” as a part of any system, after August 13, 2019.  "Covered telecommunications equipment" includes:

1. any telecommunications equipment manufactured by Huawei or ZTE, or any of their affiliates or subsidiaries;
2. for purposes of public safety, security of government facilities, physical security surveillance of critical infrastructure, and other national security purposes, equipment produced by Hytera Communications Corp., Hangzhou Hikvision Digital Technology Company, or Dahua Technology Company;
3. telecommunications or video surveillance services provided by any of those companies or using such equipment; or
4. telecommunications or video surveillance equipment or services provided by a company that the Secretary of Defense believes is owned or controlled by, or otherwise connected to, a "covered foreign country". The interim rule defines "covered foreign country" as the Peoples Republic of China, and adopts the broad definition of “critical technologies” that is used in the Foreign Risk Review Modernization Act.

The prohibition will be enforced through the federal procurement contract solicitation process, in part by including required disclosures and representations that are intended to reveal the presence of any covered telecommunications equipment or services in a system or network being procured by the government. Based on a risk assessment of the FAR Council, the determination has been made to apply the interim rule to acquisitions below the dollar floor of the Simplified Acquisition Threshold, as well as to the procurement of commercial and commercial-off-the-shelf ("COTS") items. The rule will apply to solicitations issued after August 13, 2019, to solicitations issued before August 13 where the award occurs subsequent to that date, as well as to, e.g., post-August 13, 2019 installments of pre-August 13 indefinite delivery contracts.

Comments on the interim rule will be received for a period of 60 days following publication of the interim rule in the Federal Register. The interim rule authorizes some limited one-time, case-by-case waivers where national security will not be impacted.

A separate, even more sweeping provision of the 2019 NDAA (Section 889 (a) (1) (B)), which forbids an executive agency from entering into a contract with an entity that uses 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, will be the subject of a separate rulemaking. Section 889 (a) (1) (B) requires that proceeding to be completed, and implementing regulations to be issued, by August 13, 2020.

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