Client Alert: As of August 13, 2020, federal contractors using equipment, systems, or services provided by certain Chinese entities “as a substantial or essential component” of any of the federal contractor’s systems, or as a “critical technology” of any of the contractor’s systems, cannot receive federal prime contracts or renew or extend existing federal prime contracts. This Client Alert provides the details on this upcoming prohibition.
The John S. McCain National Defense Authorization Act for Fiscal year 2019, Pub. Law. 115-232 (“2019 NDAA”), Section 889 (“Section 889”), entitled Prohibition of Certain Telecommunications and Video Surveillance Services or Equipment, imposed broad prohibitions against federal agencies acquiring, financing, or dealing with firms that use certain telecommunications and video surveillance equipment produced by, or telecommunications and video surveillance services provided by, five Chinese companies: Huawei Technologies Company (“Huawei”), ZTE Corporation (“ZTE”), Hytera Communications Corporation (“Hytera”), Hangzhou Hikvision Digital Technology Company (“HHDT”), or Dahua Technology Company (“Dahua”) (collectively “Chinese firms”). The equipment and services of the Chinese firms to which Section 889 applies is defined in Section 889 as “covered telecommunications equipment or services.”1
Section 889 contains two prohibitions impacting federal contractors, which operated in two phases, with “Phase 1” beginning on August 13, 2019 and “Phase 2” beginning on August 13, 2020. First, effective August 13, 2019, Phase 1 of Section 889 barred direct federal procurement of “any equipment, system, or service” that uses “covered telecommunications equipment or services” as a “substantial or essential component” or “critical technology.”2
Second, effective August 13, 2020, Phase 2 of Section 889 prohibits federal agencies from contracting with contractors that use such “equipment, system, or services” that make use of covered equipment or services as a “substantial or essential component” or “critical technology.” This second prohibition applies to all of the federal contractor’s products and services, irrespective of whether the contractor uses the prohibited equipment or services in performance of its federal governmental work. Thus, Phase 2 is considerably broader than Phase 1, as the second part of the ban prohibits a prime contractor from using the covered equipment or services even if the use is unrelated to the performance of work under a Federal contract. So long as the contractor uses the banned equipment or services as a “substantial or essential component” or “critical technology” as part of any system, that entity cannot receive prime contracts from the Federal government.
Implementation of Section 889 Phase 2
An interim FAR rule, effective August 13, 2020, was recently issued amending FAR subpart 4.21 to implement the Phase 2 ban and specify how the Phase 2 ban will affect existing and future government contracts.
Offerors and Prime Contractors Must Represent Whether They Use Banned Equipment or Services, after Undertaking a “Reasonable Inquiry.”
Under the interim FAR rule, starting August 13, 2020, for new federal prime contracts, offerors, when submitting their |proposal, must represent, based on having conducted a reasonable inquiry, whether it uses the covered equipment or services or uses any equipment, system, or service that uses the covered equipment or services. FAR 52.204-24. For existing contracts, starting August 13, 2020, the prime contractor must make this representation before the agency exercises an option period or otherwise extends the contract and before the agency issues an order under an indefinite delivery, indefinite quantity contract. If the offeror or prime contractor represents that it does use the banned equipment or services in the prohibited manner, the agency cannot award a new contract or order to that company, or exercise an option period or extend the contract, unless the agency receives a waiver.
Faced with this new representation requirement, offerors and prime contractor offerors will be required to conduct a “reasonable inquiry” into their operations to determine whether they use the covered equipment or services in the manner described by Section 889. Furthermore, this duty of “reasonable inquiry” extends to their supply chain, as discussed below.
Subcontractors not Expressly Covered, but Should Expect Prime Contractor Inquiries.
The representations and compliance required by Phase 2 apply only to prime contractors, because Phase 2 of the ban prohibits an agency from entering into/extending a prime contract with a prime contractor that uses the covered equipment or services. This means that subcontractors and suppliers are not required by the FAR to provide a representation whether they use the banned equipment or services for purposes unrelated to Federal government contracts and are not explicitly prohibited from using the banned equipment or services for purposes unrelated to Federal government contracts.
Because prime contractors, however, do have the requirement to undertake the “reasonable inquiry” to determine whether they comply with the Phase 2 ban, they will necessarily be required to examine their relationships with subcontractors and suppliers for Federal contracts to determine whether the subcontractor or supplier uses the covered equipment or services to support any of the prime contractor’s government contracts. Consequently, subcontractors supporting federal contracts, especially those at the first tier level, should anticipate inquiries from their prime contractors addressed to the Phase 2 issues. The extent of the prime’s inquiry will depend on the specific prime contractor and the information disclosed by the subcontractor or supplier to the prime contractor.
1 “Covered telecommunications equipment or services” is defined in Section 889(f)(3) to cover: (a) telecommunications equipment produced by Huawei or ZTE (and their subsidiaries and affiliates) and equipment, (b) telecommunications and video surveillance equipment, if used for various public safety, security, surveillance, or national security purposes, and produced by Hytera, HHDT or Dahua (and their subsidiaries and affiliates), (c) telecommunications or video surveillance services either provided by one of the Chinese firms or that uses equipment covered by (a) or (b), and (d) telecommunications or video surveillance equipment produced by, or services provided by, entities owned, controlled by, or otherwise connected to the Chinese government.
2 Phase 1 was implemented by Federal Acquisition Regulation (“FAR”) subpart 4.21. Under FAR 4.21, every Federal prime contractor must represent whether the contractor will provide the covered equipment or services to the Government in the performance of its government contracts. FAR 4.2103. Unless the agency has received a one-time waiver of the ban, the contractor is prohibited from using the covered equipment or services in the performance of a government contract and must represent it will not use the covered equipment or services to receive the contract. FAR 4.2102–4.2104. Phase 1 also applies to all subcontractors and suppliers under a government contract, meaning that all subcontractors and suppliers providing services and/or goods in support of a government prime contract also are prohibited from using the covered equipment or services in performing their respective contracts. FAR 52.204-25.