Contractors Beware! Companies Using Huawei and Certain Other Chinese Telecommunications Products or Services May Become Ineligible for Federal Contracts

Wilson Sonsini Goodrich & Rosati
Contact

Wilson Sonsini Goodrich & Rosati

Citing a need to eliminate a perceived threat to the supply chain by certain China-based companies, the National Defense Authorization Act for Fiscal Year 2019 (NDAA) placed restrictions on the U.S. government’s ability to purchase products or services. The restrictions, which emanate from Section 889 of the NDAA, concern companies that use products or services from Huawei and other identified China-based companies.

Last year, the Federal Acquisition Regulation (FAR) Council implemented Section 889(a)(1)(A) of the NDAA (“Part A”) via amendments to the FAR on August 13, 2019. Since that date, agencies have been prohibited from procuring or obtaining equipment or services that use “covered telecommunications equipment or services”1 as a substantial or essential component or critical technology (see FAR 52.204-25). In addition, every offeror for a government contract has been required to represent prior to award whether or not it will provide covered telecommunications equipment or services and, if so, to furnish additional information about the covered telecommunications equipment or services (see FAR 52.204-24). Finally, contractors have been required to report within one business day any covered telecommunications equipment or services discovered during the course of contract performance (see FAR 52.204-25).

On July 14, 2020, the Federal Acquisition Regulation (FAR) Council issued an interim rule implementing Section 889(a)(1)(B) of the NDAA (“Part B”). Part B expands the prohibitions to also prohibit the government 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."

While the distinction between the narrower Part A and broader Part B prohibitions is not clear, it arguably can be summarized as follows: Part A prohibited the procurement of equipment or services that directly use specified Chinese technology; Part B more broadly prohibits the procurement of equipment or services from any contractor (or, as a practical matter, any subcontractor) that uses specified Chinese technology as a “substantial or essential component of any system,” used by the contractor (or subcontractor), even if that ‘tainted’ component is not directly relevant to the procurement. In other words, Part B suggests: ‘if the potential contractor or subcontractor uses specified Chinese technology, then that contractor or subcontractor is tainted and is off limits for federal procurement, whether or not the specified Chinese technology is directly relevant to the procurement.’

A summary of the significant aspects of the interim rule follow below.

The Prohibition

The interim rule amends FAR 52.204-25 to generally prohibit agencies “from entering into a contract, or extending or renewing 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.”

Unlike Part A’s prohibition, the prohibition for Part B will not flow down to subcontractors because the prime contractor is the only “entity” that the agency “enters into a contract.” Technically, this means that subcontractors and suppliers don’t have compliance obligations under Part B, but as a practical matter, since a prime contractor is required to make representations to the government (see below) whether it is using “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,” they will most likely want to understand whether their suppliers and subcontractors are using any of the covered telecommunication equipment or services. So, for example, while the FAR does not require subcontractors to make a representation as to their own use of covered telecommunications equipment or services, prime contractors may nevertheless require their suppliers/subcontractors to make a representation in furtherance of the prime’s own compliance obligations.

The Representation

The interim rule amends FAR 52.204.24 to require contractors to: 1) represent in the System for Award Management (SAM) that, after a making a "reasonable inquiry," whether it “use[s] covered telecommunications equipment or services, or use[s] any equipment, system, or service that uses covered telecommunications equipment or services” and 2) alert the government upon discovery of any such use in the course of a contract’s performance. The FAR Council specified that the scope of reasonable inquiry includes “a relationship with any subcontractor or supplier in which the prime contractor has a Federal contract and uses the supplier or subcontractor’s ‘covered telecommunications equipment or services’ regardless of whether that usage is in performance of work under a Federal contract.”

The representation will be required for all contracts awarded on or after August 13, 2020 and for future delivery orders under existing indefinite delivery/indefinite quantity contracts. Citing an "unacceptable level of risk" to the government resulting from the use of the covered telecommunications equipment or services, the rule requires use of the representation in all contracts, including those for commercial items or micro-purchases (less than $3,500).2

Where an offeror reports that it uses covered telecommunications equipment or services, the contracting officer will require the offeror to provide an explanation of that use with its proposal; absent a waiver under FAR 4.2104, an offeror will be ineligible for award.3

If there is a silver lining, it is the “reasonable inquiry” standard the interim rule specifies. "Reasonable inquiry" means "an inquiry 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. A reasonable inquiry need not include an internal or third-party audit.”4 Therefore, a “reasonable inquiry” can be based on information already possessed by the contractor and there is no requirement to contact every supplier to determine the origin of certain equipment or services that the supplier may use. A well-documented review, detailing the documents reviewed and steps taken should be conducted to support the required representation.

The Expectation

The rule warns that failure to submit an accurate representation "constitutes a breach of contract that can lead to cancellation, termination, and financial consequences" and therefore "it is important for contractors to develop a compliance plan that will allow them to submit accurate representations to the Government in the course of their offers." The rule goes on to observe that “a robust, risk-based compliance approach will help reduce the likelihood of noncompliance” and that the FAR Council “assumes” that in the first year of the effectiveness of Part B, contractors and subcontractors will develop compliance plans. The FAR Council goes on to specify suggested components of the compliance plans:

  • Familiarization with the rules and compliance obligations
  • “Corporate Enterprise Tracking,” in other words, operationalizing of the “reasonable inquiry” required to make the required representation
  • Education of the relevant contractor personnel on the contractor’s compliance plan
  • Where a contractor is using covered telecommunications equipment or services, implementation of procedures to replace the equipment with compliant equipment
  • Making the required representation to the government and alerting the government if use of covered telecommunications equipment or services is discovered
  • Where a contractor is using covered telecommunications equipment or services seeks a waiver:
    • development of a phase-out plan to remove existing covered telecommunications equipment and services; and
    • providing the information required for the waiver to the government, including the phase-out plan and a complete laydown of the presence of the covered telecommunications equipment or services.

Based on this guidance, contractors would be well advised to formulate compliance plans using the FAR Council’s recommendations as a guide.

The interim rule will present challenges to government contractors, both large and small, who should review the rule carefully and would be well-advised to start planning for how they will comply soon as the interim rule is set to become effective on August 13, 2020.5 Comments on the interim rule are due on or before September 14, 2020.


[1] The statute covers certain telecommunications equipment and services produced or provided by Huawei Technologies Company or ZTE Corporation (or any subsidiary or affiliate of those entities) and certain video surveillance products or telecommunications equipment and services produced or provided by Hytera Communications Corporation, Hangzhou Hikvision Digital Technology Company, or Dahua Technology Company (or any subsidiary or affiliate of those entities).

[2] If exercising an option or modifying an existing contract or task or delivery order to extend the period of performance, contracting officers shall include the clause.

[3] The interim rule sets forth the waiver requirements in amendments to FAR 4.2104. Waivers cannot extend beyond August 13, 2022, meaning compliance can be delayed but not avoided.

[4] The FAR Council indicated that it is considering expanding the scope of the rule to include "to the offeror and any affiliates, parents, and subsidiaries of the offeror that are domestic concerns." Should the rule be expanded, this would mean an offer would need to be able to make the FAR 52.204.24 representation not only as to itself, but as to these other related entities—including those who do no business with the government whatsoever—resulting in a significantly increased compliance burden.

[5] While certain amendments have been proposed to be added to the National Defense Authorization Act (NDAA) for Fiscal Year 2021 that would delay the implementation of Section 889 until August 2021 and would also limit what would qualify as an impermissible "use," whether those amendments will ultimately be included in the NDAA is not clear.

Written by:

Wilson Sonsini Goodrich & Rosati
Contact
more
less

Wilson Sonsini Goodrich & Rosati on:

Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide
- hide

This website uses cookies to improve user experience, track anonymous site usage, store authorization tokens and permit sharing on social media networks. By continuing to browse this website you accept the use of cookies. Click here to read more about how we use cookies.