Prohibitions on Use of Some Chinese Telecommunications Equipment by Government Contractors Effective August 13, 2020

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Section 889(a)(1)(B) of the John S. McCain National Defense Authorization Act (NDAA) for Fiscal Year 2019—prohibiting government agencies and government contractors they work with from using certain covered telecommunications equipment or services from China—goes into effect on August 13, 2020. The FAR Council issued an interim rule implementing Section 889(a)(1)(B) by making a number of changes to 48 CFR Parts 1, 4, 13, 39, and 52. While the interim rule will be effective as of August 13, comments to the interim rule are not due until September 14, 2020. It is likely that there may be changes and further developments in the final rule. Section 889(a)(1)(B) will have varying impacts on all government contractors in terms of their ability to comply with this prohibition and to bid for and maintain their contract.

Section 889(a)(1)(B) prohibits executive agencies from entering into, 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. “Covered telecommunications equipment or services” means:

  1. telecommunications equipment produced by Huawei Technologies Company or ZTE Corporation or their subsidiaries or affiliates;
  2. some video surveillance and telecommunications equipment produced by Hytera Communications Corporation, Hangzhou Hikvision Digital Technology Company, or Dahua Technology Company or their subsidiaries or affiliates; and
  3. telecommunications or video surveillance services provided by those entities or using such equipment.

While Section 889(a)(1)(A) prohibits federal contractors from providing prohibited equipment to the federal government since August 13, 2019, the new rule prohibits “use” by prime federal contractors. For the new rule, it is irrelevant whether the prohibited equipment has anything to do with government work—the prohibition is on any use by a government contractor. GSA has indicated that the prohibitions apply across the board in all sectors and all systems used by government contractors. The FAR Council anticipated that the new rule will have significant compliance costs that will result in many businesses exiting the federal market place.

It is not clear how deep the concept of “use” goes. Currently, “use” does not appear to apply to use by any affiliates, parents, and subsidiaries of the offeror. However, the FAR Council is considering expanding the required representation at 52.204-24(d)(2) so that the offeror would represent on behalf of itself as well as any affiliates, parents, and subsidiaries of the offeror that are domestic concerns. It is also not clear how telework and home offices might bear on an offeror’s “use.” For example, if an employee uses personal, prohibited equipment to check company email, does this constitute “use” by the contractor? Hopefully, such concerns will be addressed and additional guidance included in the FAR Council’s final rule.

The new rules will require offerors for federal contracts to submit a representation that it has conducted a “reasonable inquiry” and that covered telecommunications equipment are or are not used by the offeror. A “reasonable inquiry” is defined 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.”

The new rules do not flow down to subcontractors. However, because the prohibition is on “use” by federal prime contractors, a prime contractor cannot represent that it does not “use” prohibited equipment if it relies upon such equipment through one or more subcontractors. Thus, while prime contractors are wholly prohibited from using covered telecommunications equipment and services, subcontractors are effectively prohibited from using such equipment in any subcontracts with federal contractors. To be clear, even if the subcontract with the federal contractor has nothing to do with the federal contractor’s government business, a subcontractor using prohibited equipment in support of the subcontract, would prevent the federal contractor from representing that it does not use such equipment. Federal contractors will need to consider how to ensure that their subcontractors do not use prohibited equipment to avoid falling afoul of Section 889(a)(1)(B), and thereby breaching their government contracts.

In order to be prepared to comply with the new rules, federal 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. 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. Once discovered, prohibited equipment and services must be replaced and federal contractors will need to develop a phase-out plan for such equipment.

Even if a contractor cannot become compliant by August 13, 2020, it is possible to obtain a temporary waiver from the procuring agency. The head of any agency may grant a one-time, case-by-case waiver that will expire no later than August 13, 2022. After that, no further agency waivers are possible and the agency will be prohibited from entering into or extending contracts with the contractor who represented they are using prohibited equipment or services.

Section 889(a)(1)(B) is likely to have some impact on essentially every government contractor, if only in forcing each to conduct a reasonable inquiry into whether prohibited equipment and services are in its supply chain.

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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