August 19, 2019

August 19, 2019

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Effective Immediately! – FAR Amended to Include Prohibition on Chinese Telecommunications Equipment and Services in Government Contracts

In accordance with Section 889(a)(1)(A) of the 2019 National Defense Authorization Act (Pub. L. No. 115-232) (the “2019 NDAA”), which required imposition of broad restrictions on procurements involving certain Chinese telecommunications hardware manufacturers such as Huawei Technologies Co. and ZTE Corp within one year, the FAR Council has released an interim rule implementing these restrictions. Today, the FAR Council released Federal Acquisition Circular 2019-05 (84 Fed. Reg. 40,216), creating a new FAR Subpart 4.21, as well as two new contract clauses, FAR 52.204-24 and 52.204-25, all of which are effective August 13, 2019. These restrictions apply not only to prime contractors, but also to all subcontractors and throughout the supply chain. Government contractors need to know that these new requirements are effective immediately and that opportunities for waivers are very limited.

Section 889(a)(1)(A) of the 2019 NDAA prohibits agencies from procuring “any equipment, system, or service that uses covered telecommunications equipment or services as a substantial or essential component of any system.” We have previously discussed these restrictions here and here. (Note: Section 889(a)(1)(B), which is the subject of a separate FAR Case, FAR Case 2019-009, more broadly prohibits agencies from entering into contracts with “an entity that uses any equipment, system, or services that uses covered telecommunications equipment or services as a substantial or essential component of any system…” The 2019 NDAA provides this prohibition will take effect next year – two years after enactment of the 2019 NDAA. This FAR Case is still under consideration.)

The interim rule creates a new FAR Subpart 4.21, Prohibition on Contracting for Certain Telecommunications and Video Surveillance Services or Equipment, and also creates two new corresponding contract clauses:

  • FAR 52.204-24, Representation Regarding Certain Telecommunications and Video Surveillance Services or Equipment
    • Contractors must submit a representation with their offer identifying any “covered telecommunications equipment or services” that will be provided under the contract. Note this is a defined term that specifically includes Huawei and ZTE, but (as described below) also includes other named and unnamed Chinese technology companies. The FAR Council contemplates that the 52.204-24 certification will eventually be included in the annual representations made in the System for Award Management (SAM), so only contractors with affirmative responses will need to provide offer-specific information.
    • If a contractor checks that they “will not” provide covered telecommunications equipment or services, then the contractor is done. But contractors should make sure this is an accurate representation.
    • If a contractor checks that it “will” provide covered telecommunications equipment or services, the contractor must identify all such equipment or services and describe its proposed use under the contract. This ostensibly is to be used by the government agency to make a determination regarding whether use of the identified equipment or services rises to the level of “substantial” or “essential.” And, of course, if the hardware is truly essential, then the government may be able to invoke a limited one-time waiver. Justifying this waiver is a very high hurdle, but “will not” is likely the only answer that the government will accept at the end of the day.
  • FAR 52.204-25, Prohibition on Contracting for Certain Telecommunications and Video Surveillance Services or Equipment
    • Contractors are prohibited from providing 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, unless an exception or waiver applies.
    • The clause includes a reporting requirement in the event the contractor discovers use of covered equipment or services during performance. Reports are to be made within one business day from the date of discovery. A follow-up report is required within 10 business days of the first report with additional information on the contractor’s mitigation actions.
    • The clause is to be flowed down in all subcontracts. In fact, the FAR Council has also updated FAR 52.244-6 and FAR 52.212-5(e), which includes the list of “mandatory” flowdowns for commercial item subcontracts. This means that – effective immediately – prime contractors should be updating their subcontracts to include this latest flowdown requirement.

These two clauses are to be included in all solicitations (including solicitations that have already been issued, but which anticipate an award date after August 13, 2019). Furthermore, agencies are to modify IDIQ contracts to include the clauses for future orders. Acquisitions below the micro-purchase threshold (currently $10,000) (FAR 13.301(j)), commercial item acquisitions, and COTS procurements are not exempt. Long story short – but also unsurprisingly – everything that the government buys will include this restriction.

As part of the new FAR Subpart 4.21, Prohibition on Contracting for Certain Telecommunications and Video Surveillance Services or Equipment, the interim rule also includes several key definitions in FAR 4.2101:

  • “Covered telecommunications equipment or services” means:
    • (1) Telecommunications equipment produced by Huawei Technologies Company or ZTE Corporation (or any subsidiary or affiliate of such entities);
    • (2) For the purpose of public safety, security of Government facilities, physical security surveillance of critical infrastructure, and other national security purposes, video surveillance and telecommunications equipment produced by Hytera Communications Corporation, Hangzhou Hikvision Digital Technology Company, or Dahua Technology Company (or any subsidiary or affiliate of such entities)
    • (3) Telecommunications or video surveillance services provided by such entities or using such equipment; or
    • (4) Telecommunications or video surveillance equipment or services produced or provided by an entity that the Secretary of Defense, in consultation with the Director of National Intelligence or the Director of the Federal Bureau of Investigation, reasonably believes to be an entity owned or controlled by, or otherwise connected to, the government of a covered foreign country.
    • (Note this allows either the Secretary of Defense, with the Director of National Intelligence, OR the FBI Director to make a determination that certain telecommunications equipment or services may not be used because they come from an entity that is connected to China. So this interim rule easily could be expanded by the stroke of a pen without further notice or comment.)
  • “Covered foreign country” means The People’s Republic of China.
  • “Substantial or essential component” means “any component necessary for the proper function or performance of a piece of equipment, system, or service.”
  • The definition of “critical technology” is taken from the Foreign Investment Risk Review Modernization Act (FIRRMA), which identifies, inter alia: (1) defense articles or defense services included on the Munitions List in the International Traffic in Arms Regulations (ITAR); (2) items on the Commerce Control List set forth in the Export Administration Regulations (EAR); (3) and certain nuclear equipment and technology.

One-time waivers for up to two years may be granted by the head of an executive agency or the Director of National Intelligence. But, at the risk of stating the obvious, these waivers will be granted only in the most extreme circumstances, and they will not be issued lightly.

Comments may be submitted within 60 days of publication in the Federal Register, and will be considered before the final rule is released. But, given the statutory mandate and the follow-on Executive Order, do not be surprised if these interim rules change very little. If you choose to provide comments, be aware that these restrictions are effective immediately, are being imposed broadly, and will be applied at all levels of the supply chain as a mandatory flowdown clause.

Copyright © 2019, Sheppard Mullin Richter & Hampton LLP.

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About this Author

Townsend Bourne, Government Affairs Attorney, Sheppard Mullin Law FIrm
Associate

Ms. Bourne's practice focuses on Government Contracts law and litigation. Her experience includes complex litigation in connection with the False Claims Act, bid protest actions both challenging and defending agency decisions on contract awards before the Government Accountability Office and Court of Federal Claims, claims litigation before the Armed Services Board of Contract Appeals and the Civilian Board of Contract Appeals, investigating and preparing contractor claims, and conducting internal investigations. 

Ms. Bourne advises clients on a...

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David Gallacher, Attorney, litigation, administrative, and counseling issues
Associate

David Gallacher is a partner in the Government Contracts, Investigations & International Trade Practice Group in the firm's Washington, D.C. office.

Areas of Practice

Mr. Gallacher's professional experience involves a wide variety of litigation, administrative, and counseling issues related to federal procurement laws. His experience is extensive and includes complex litigation in federal court under the qui tam provisions of the False Claims Act, claims disputes before the Boards of Contract Appeals and bid protest actions. He regularly counsels both domestic and foreign companies on issues relating to compliance with government regulations including, among other things, subcontract administration, country of origin requirements under the Buy American and Trade Agreements Acts, export controls, commercial item exceptions, merger and acquisition due diligence, cost accounting, suspension and debarment, and small business requirements. He also regularly conducts compliance reviews and internal investigations to assist companies ensure that they are in full compliance with the law.

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Jonathan E. Meyer, Sheppard Mullin, International Trade Lawyer, Encryption Technology Attorney
Partner

Jon Meyer is a partner in the Government Contracts, Investigations & International Trade Practice Group in the firm's Washington, D.C. office.

Mr. Meyer was most recently Deputy General Counsel at the United States Department of Homeland Security, where he advised the Secretary, Deputy Secretary, General Counsel, Chief of Staff and other senior leaders on law and policy issues, such as cyber security, airline security, high technology, drones, immigration reform, encryption, and intelligence law. He also oversaw all litigation at DHS,...

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