Interim Rule Issued To Implement 2019 NDAA Prohibition On The Use Of Covered Telecommunication And Video Surveillance Equipment Or Services Produced By Certain Chinese Companies

Morrison & Foerster LLP

On July 14, 2020, the Federal Acquisition Regulation (“FAR”) Council published a long-awaited interim rule (the “Interim Rule”) implementing the second prong of Section 889 of the 2019 National Defense Authorization Act (“NDAA”). The Interim Rule prohibits federal agencies from awarding contracts to or renewing contracts with companies that use telecommunications or surveillance equipment or services from five Chinese companies specified in the NDAA, including Huawei and ZTE. The rule will take effect on August 13, 2020.

Section 889’s prohibition on contractors’ use of covered Chinese telecommunications equipment and services has been the subject of much apprehension and speculation since August 2018 when the provision passed as part of the 2019 NDAA. The anxiety of the procurement community reached a fever pitch as months passed and the statutory deadline for implementation approached without proposed implementing regulations. Industry and the Department of Defense recognized that, without a thoughtful rulemaking process, Section 889 could have, in the words of Under Secretary of Defense for Acquisition and Sustainment Ellen Lord, “unintended consequences.” Absent further clarification, a plain reading of Section 889 could cause contractors large and small, defense-focused or not, to be excluded from the Government’s industrial base because they are unable or unwilling to assume the potentially limitless compliance burden a broad but plain reading of Section 889 imposes. 

As discussed further below, although contractors now have less than a month to digest and implement the Interim Rule, it does include helpful definitions, provisions, and guidance to address some (but not all) of the concerns about the scope of Section 889. Further, the rule is not yet final, and the FAR Council has indicated that it will seriously consider all comments in developing the final rule.

Background

Section 889 of the 2019 NDAA reflects a congressional mandate to address national security concerns related to the integration of Chinese telecommunications technology in the U.S. Government supply chain.

In general, Section 889 prohibits the Government and government contractors from procuring or using certain “covered telecommunication equipment or services” that are produced or provided by Huawei Technologies Company, ZTE Corporation, Hytera Communications Corporation, Hangzhou Hikvision Digital Technology Company, or Dahua Technology Company, and their subsidiaries or affiliates, as a “substantial or essential component of any system, or as critical technology as part of any system.” There are two prongs under Section 889: Section 889(a)(1)(A) (hereinafter “Part A”) and Section 889(a)(1)(B) (hereinafter “Part B”).

Part A prohibits the Government from procuring or obtaining, or extending or renewing a contract to procure or obtain “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.” Section 889(a)(1)(A). Part A took effect on August 13, 2019, and required contracting officers to include certain clauses in contracts and solicitations after that date. See 84 Fed. Reg. 40,216 (Aug. 13, 2019); 84 Fed. Reg. 68,314 (Dec. 13, 2019). The rule implementing Part A was discussed in our earlier client alert, available here.

Part B is a broader prohibition barring the Government from entering, 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.” Section 889(a)(1)(B) (emphasis added).

Contractors Will Have to Certify Whether They “Use” Covered Equipment or Services

The Government implemented Part A in the FAR by, among other things, adding a certification requirement at FAR 52.204-24. The Interim Rule modifies the representation in FAR 52.204-24 to incorporate Part B’s prohibition on use as follows:

(d) Representations.

The Offeror represents that—

(1) It [ ] will, [ ] will not provide covered telecommunications equipment or services to the Government in the performance of any contract, subcontract or other contractual instrument resulting from this solicitation. The Offeror shall provide the additional disclosure information required at paragraph (e)(1) if the Offeror responds “will” in paragraph (d)(1); and

(2) After conducting a reasonable inquiry, for purposes of this representation, the Offeror represents that—

It [ ] does, [ ] does not use covered telecommunications equipment or services, or use any equipment, system, or service that uses covered telecommunications equipment or services. The Offeror shall provide the additional disclosure information required at paragraph (e)(2) if the Offeror responds “does” in paragraph (d)(2). (emphasis added).

The modified representation now addresses compliance with both Parts A and B of Section 889.  

Offerors can make this representation annually in the System for Award Management; it does not have to be made with each offer. Further disclosures are required if the offeror checks “will” or “does” in the certification. A representation that the contractor does use covered equipment or services also will be deemed a request for a waiver of Section 889’s prohibition. The waiver requirements and process are discussed further below. 

The Interim Rule warns that “failure to submit an accurate representation to the Government constitutes a breach of contract that can lead to cancellation, termination, and financial consequences. 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.”

Applicability and Timing

In addition to the substantive provisions of the Interim Rule, it is important to note the following key facts:

  • Effective date: August 13, 2020
  • Applies to:                 
    • Solicitations and contracts where award will occur on or after August 13, 2020
    • Orders under IDIQ contracts placed on or after August 13, 2020
    • Options or modifications to contracts or orders issued on or after August 13, 2020 that extend the period of performance
    • Commercial items and acquisitions below the simplified acquisition threshold
    • Public comment due date: September 14, 2020

The Interim Rule Clarifies Important Aspects of Part B of Section 889, but Questions and Concerns Remain

The Government’s delay in issuing a rule implementing Part B left the scope of the prohibition ambiguous and impeded contractors’ efforts to become compliant. As explained below, the Interim Rule provides some clarity and may even offer relief to contractors, but questions and concerns remain. 

Part B’s Certification Applies to the “Offeror”

The requirement to certify as to whether a contractor uses covered telecommunications equipment or services only applies to the “offeror.” The supplemental information accompanying the Interim Rule states, “the term offeror will continue to refer to only the entity that executes the contract.” However, the Government also says it is considering expanding the scope in the final rule to include the “offeror and any affiliates, parents, and subsidiaries of the offeror that are domestic concerns[.]” Even if expanded, however, it will not apply to affiliates that are not domestic concerns.

Offerors Can Certify After a “Reasonable Inquiry”

One of the principal concerns about Section 889 was the extent to which contractors would be expected to plumb the depth and breadth of their complex supply chains. The Government tried to address Part B’s compliance burden by limiting the offeror’s duty to scrutinize its supply chain to a “reasonable inquiry.” Specifically, an offeror may represent that it does not use covered equipment or services “if a reasonable inquiry by the entity does not reveal or identify any such use.” 

The Interim Rule defines a reasonable inquiry as “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 that excludes the need to include an internal or third‑party audit.”

“Use” Is Not Limited to the Performance of a Government Contract

Although the Interim Rule does not define the term “use,” the rule makes it clear that the prohibition on the “use” of covered equipment and services is not limited to use in connection with performance of a government contract. The rule expressly states, “the prohibition applies to the use of covered telecommunications equipment or services, regardless of whether that use is in performance of work under a Federal contract.” (emphasis added).

Part B’s Certification Requirement Does Not Flow Down to Subcontractors

The Interim Rule clarifies that the certification requirement as to use of covered equipment and services does not need to be flowed down to subcontractors. The Government’s rationale is that the statute applies to entities with which agencies enter into contracts, and the Government does not directly contract with subcontractors. This is good news for contractors, but, as described below, prime contractors still will need to ensure that their subcontractors and suppliers do not supply unallowable components as part of telecommunications equipment or provide services using covered telecommunications equipment or services.

The Interim Rule Does Not Modify Terms Previously Defined, but Introduces a Few New Definitions

The Interim Rule does not alter the current regulatory definitions of terms previously defined, such as “covered telecommunications equipment or services,” but it introduces new definitions for “reasonable inquiry” (discussed above), “backhaul,” “interconnection arrangements,” and “roaming,” to clarify the circumstances when an exception to the prohibition applies.

Waiver Process

Although Part B provides for the possibility of a waiver, the waiver process is complex. One‑time waivers will be granted on a case-by-case basis and will expire no later than August 13, 2022. Because a waiver is based on an agency’s judgment concerning particular uses of covered equipment or services, a waiver granted by one agency does not necessarily mean that a waiver is warranted in a different procurement with another agency. Furthermore, even if a contractor is granted a waiver with respect to the particular use of a covered telecommunications equipment or services, the contractor will still be required to report any additional use of covered telecommunications equipment or services discovered or identified during contract performance. In other words, any waiver will apply narrowly.

Offerors seeking a waiver will need to provide:

1. A compelling justification for the additional time to implement the requirements under 889(a)(1)(B), for consideration by the head of the executive agency in determining whether to grant a waiver;

2. A full and complete laydown of the presences of covered telecommunications or video surveillance equipment or services in the entity’s supply chain; and

3. A phase-out plan to eliminate covered telecommunications equipment or services from the entity’s systems.

The Interim Rule states that, “[g]iven the extent of information necessary for requesting a waiver, the FAR Council anticipates that any waiver would likely take at least a few weeks to obtain.” Further, the rule says, “where mission needs do not permit time to obtain a waiver, agencies may reasonably choose not to initiate one and to move forward and make award to an offeror that does not require a waiver.” These factors would seem to put offerors that need a waiver at a major competitive disadvantage.

Uncertainty Regarding the Scope of the Rule as Applied to Subcontractors and Suppliers

As noted above, the Interim Rule does not require prime contractors to flow down the prohibition and certification to subcontractors. However, the extent to which a prime contractor is required or expected to inquire into its suppliers or subcontractors’ use of covered equipment or services is not clear. In describing a compliant tracking process, the Government states:

The entity must determine through a reasonable inquiry whether the entity itself uses ‘covered telecommunications’ equipment or services as a substantial or essential component of any system, or as critical technology as part of any system. This includes examining relationships with any subcontractor or supplier for which the prime contractor has a Federal contract and uses the supplier or subcontractor’s ‘covered telecommunications’ equipment or services as a substantial or essential component of any system. (emphasis added).  

This commentary to the Interim Rule indicates that the duty to examine the relationship is limited to subcontractors or suppliers the prime contractor engages under prime contracts (i.e., not suppliers or subcontractors for commercial project). It is less clear whether the inquiry is limited to just equipment or services from the subcontractors/suppliers that the prime contractor uses or is more broadly applied to the subcontractors/suppliers’ systems more generally. The best interpretation may be that the rule imposes a need to ensure that subcontractors and suppliers do not supply unallowable components as part of telecommunications equipment provided to the prime or provide services using covered telecommunications equipment or services. As a practical matter, this likely will result in primes and higher tier contractors requiring representations from their subcontractors that they are in compliance.

Adopting a Compliance Plan

The Interim Rule helpfully includes steps contractors will need to take to comply with the prohibition, including:

  • Becoming familiar with the new rule;
  • Establishing corporate enterprise tracking, including internal tracking of equipment, systems, and services;
  • Educating the entity’s employees to ensure they are familiar with the company’s compliance plan; and
  • Assessing the cost of removing and replacing covered telecommunications equipment or services and creating a phase-out plan, if necessary.

The Government emphasizes in the commentary accompanying the rule that “[a]dopting a robust, risk-based compliance approach will help reduce the likelihood of noncompliance.”

During the first year of implementation of the rule, the FAR Council expects contractors and subcontractors to develop compliance plans and to educate themselves and the supply chain. If any covered equipment is discovered during contract performance, the Government should be told. The Interim Rule implies the Government will be lenient during initial implementation so long as the contractor is taking steps towards compliance. Although Government enforcement authorities may appreciate the complexity the rule imposes on industry, it is unclear whether this understanding on the part of agencies will limit qui tam plaintiffs’ ability to seize upon the rule’s ambiguities and uncertainties to assert claims under the civil False Claims Act. 

Conclusion

The Interim Rule provides some welcome clarification to contractors, but it leaves major questions unanswered. Contractors should act quickly to assess the impact of the rule on their operations and to adopt and implement a thorough compliance plan. Companies should also consider submitting comments on the Interim Rule to help shape the final rule.

Victoria Dalcourt Angle, an Associate in Morrison & Foerster’s Government Contracts + Public Procurement group, contributed to the writing of this client alert.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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