FAR Council Publishes Interim Rule on Section 889 Part B Increasing Prohibitions on Contracting with Companies Using Certain Chinese Telecommunications Equipment and Services

Government Contracts & International Trade Update

Date: August 07, 2020

Key Notes:

  • The interim final rule to implement Part B of Section 889 of the FY2019 NDAA prohibits the federal government from entering into, renewing, or extending contracts with contractors that use certain telecommunications equipment or services from specific Chinese companies, as well as their subsidiaries and affiliates, regardless of whether there is a nexus between such use and the contractor’s performance of government contracts.
  • As of August 13, 2020, modified FAR 52.204-24 and -25 clauses must be included in solicitations and contracts to incorporate this prohibition.
  • Companies must understand the requirements, prohibitions and other aspects of these clauses, and adopt compliance policies and procedures to ensure they do not make misrepresentations, or submit false claims when proposing for, or performing, federal contracts and subcontracts.

Background

On July 14, 2020, the Federal Acquisition Regulatory (FAR) Council issued an interim final rule to implement Section 889(a)(1)(B) of the National Defense Authorization Act (NDAA) for fiscal year 2019 (FY2019). The new interim final rule (“Part B”) is the second part of a two-stage implementation of Section 889’s restrictions on covered telecommunications equipment and services in government contracting. The first stage was two earlier interim rules that implemented Section 889(a)(1)(A) of the FY2019 NDAA (“Part A”) as of August 13, 2019, by prohibiting an executive branch agency from acquiring certain covered telecommunications equipment or services that are a substantial or essential part of any system.

Effective August 13, 2020, the Part B interim final rule will prohibit federal executive agencies from contracting (or extending or renewing a contract) with an entity that uses “covered telecommunications equipment or services” as a substantial or essential component or as critical technology as part of any system, regardless of whether there is a nexus between such use and the contractor’s performance of government contracts, unless an exception applies or a waiver is granted. The restrictions cover broad categories of equipment and services produced and provided by certain Chinese companies, namely: (1) Huawei Technologies Company Ltd., (2) ZTE Corporation, (3) Hytera Communications Corporation, (4) Dahua Technology Company Ltd., and (5) Hikvision Digital Technology Company Ltd., and their affiliates.

Applicability

The interim final rule amends FAR 52.204-24 to 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,” unless an exception applies or a waiver is granted.

As currently written, the Part B interim final rule only applies to legal entities that submit proposals and make representations (i.e., prime contractors). Subsidiaries and affiliates of prime contractors are still relevant to the extent that they are providing products or services used by the prime contractor. However, the interim final rule does note that the FAR Council is considering whether the final rule should apply to the offeror and any domestic affiliates, parents, and subsidiaries, and the interim final rule specifically requests public comment on this issue. This potential expansion of the interim final rule would take effect no later than August 13, 2021.

The interim final rule’s prohibition will be applicable to all contracts with the U.S. government, including those for commercial item services and commercially available off‑the-shelf (COTS) products. Additionally, contracting officers (COs) are required to modify existing indefinite delivery, indefinite quantity (IDIQ) contracts to include the modified FAR clauses for future orders, prior to placing any future orders. A company with one of these contracts will soon have an ongoing obligation to report the discovery of its use of certain covered telecommunications equipment and services to the government within one business day, with a report of how the use will be mitigated due 10 business days later.

Requirements

Given the Part B interim final rule’s expansive scope, some key considerations are highlighted and discussed below:

Exceptions. The prohibition does not apply to telecommunications equipment that cannot route or redirect user data traffic, or permit visibility into user data. This exception is not included in the related DFARS clauses that implement the Section 889 prohibitions within the Department of Defense (DoD), leaving open the question of whether this exception will apply to DoD procurements that are subject to those clauses.

Most importantly, the Section 889(a)(1)(B) requirements do not include an exception for contractors using third-party services such as backhaul, roaming, or interconnection arrangements at this time. While Section 889 Part A allows that the government may purchase services that use covered telecommunications equipment for these third‑party services, under Part B contractors would have to represent that their networks do include covered telecommunications services in the event they relied on such systems or services themselves. The FAR Council explicitly identified this lack of an exception for these offerors. Therefore, the government may not contract with an entity using covered telecommunications equipment or services for any of these backhaul or roaming services, unless a waiver is granted.

Representation in System for Award Management. The Part B interim final rule states that the FAR Council intends to issue a subsequent rulemaking that allows a contractor to represent in the System for Award Management (SAM) that it “does” or “does not” use the banned technologies, after making a “reasonable inquiry” (discussed below). Until this change occurs, representations must be made in each offer.

Additional Information and Explanation Requirement. Prior to the award of a government contract or order, any offeror that previously reported that it “does” use any such banned technologies will be required to furnish additional information regarding such use and an explanation with its proposal. The type of information that must be provided will vary, depending on whether it relates to equipment, to services related to item maintenance, or services not associated with item maintenance. See FAR 52.204-24(e)(2). The CO will then determine if such use renders the offeror ineligible for award, or if a waiver should be granted (see the discussion of waivers below).

“Reasonable Inquiry” Analysis. As noted above, prior to representing in its proposal or in SAM that it does or does not use any of the prohibited equipment or services, the contractor must make a “reasonable inquiry” into such use. Under the Part B interim final rule, this 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.” Prime contractors should interpret this standard to include an inquiry into their subcontractors’ or suppliers’ use of telecommunications equipment or services in their provision of services to their primes.

Given the “reasonable inquiry” standard imposed under the Part B rule, subcontractors and service providers should analyze any relationship between their services to prime contractors and covered telecommunications equipment (to the extent the subcontractor or supplier has not already done so for its Section 889(a)(1)(A) compliance). The rule does state that this “reasonable inquiry” assessment does not require a contractor to complete an internal or third‑party audit.

No Definition of “Use.” Neither Section 889(a)(1)(B) nor the Part B interim final rule define what “use” of prohibited equipment or services by a contractor means, and this term is not defined elsewhere in the FAR. Therefore, there is currently no “bright line” test or interpretation for what constitutes “use,” and even applying its standard or ordinary dictionary meaning, prime contractors will be required to exercise sound business judgment in analyzing and determining whether such “use” falls within the Part B prohibition. The prudent contractor will focus on compliant reporting and effective communication within the supply chain.

No Mandatory Flowdown Requirement to Subcontractors. Unlike the two Part A interim final rules, the Part B interim final rule prohibition against the use of covered telecommunications equipment and services applies only to the entity submitting the proposal, and there is no explicit requirement to flow this prohibition down in the entity’s subcontracts. However, as noted above, to ensure compliance with the rule’s requirements, the offering entity should consider including as part of its diligence required by FAR 52.204-24 an inquiry regarding any covered equipment, covered services in products, or services that its subcontractors and suppliers would provide.

Waivers. As noted above, if an offeror represents that it “does” use prohibited equipment or services and is not subject to an exception, then the agency must seek, before issuing a waiver: (1) a compelling justification from the offeror for the additional time to implement Section 889(a)(1)(B)’s requirements, (2) a full and complete laydown of the presences of covered telecommunications or video surveillance equipment or services in the offeror’s supply chain, and (3) a phase-out plan to eliminate covered telecommunications equipment and services from the offeror’s systems.

At this time, federal agencies may grant a one-time waiver from the Part B requirements that will expire no later than August 13, 2022. While waivers are not transferable between agencies or contracts at this time, agencies may create waivers that are broadly applicable at least within the agency. As the representations offerors make are entity-wide, offerors may be able to use the same justification for multiple waiver requests.

Compliance Plans. Submission of an inaccurate representation may constitute a breach of a government contract and can lead to cancellation, termination, allegations of a violation of the civil False Claims Act, along with other contract and financial consequences. Additionally, although the Part B interim final rule currently applies only on an offer-by-offer basis, the FAR Council is expected to make changes to SAM and to FAR 52.204-26 to allow contractors to provide an annual representation regarding the Part B prohibition in SAM (similar to that allowed for Part A representations). Once the annual representation opportunity is made available, it is likely that only offerors providing an affirmative response would be required to provide offer-by-offer representations.

For the above reasons, the FAR Council recommends that contractors develop and implement compliance plans, which should include at least the following:

  1. an understanding of the Section 889 requirements;
  2. a reasonable inquiry to identify any covered equipment within or affecting the entity’s infrastructure, systems, or services, including shared technology and services as well as an examination of subcontractor and supplier relationships – this will likely need to occur when a supplier or subcontractor is first used, when significant changes occur within the entity, and annually after the initial inquiry;
  3. training of sourcing personnel to ensure their awareness of the Section 889 prohibitions and requirements as well as the requirements of the compliance plan;
  4. procedures for replacing any covered telecommunications equipment or services once identified;
  5. a plan for updating previously provided representations, and for providing notification to the CO if any covered telecommunications equipment or services are identified; and
  6. a plan for requesting any necessary waivers.
Conclusion

Although Section 889(a)(1)(B) prohibitions on the use of certain covered telecommunications equipment and services may be straightforward in concept, the new regulations raise considerable concerns that extend well beyond agency-specific contracts or even federal contracts more broadly. These restrictions will require contractors to undertake and complete assessments and make changes in their day-to-day business operations. While the Part B interim final rule applies only to federal executive agency contracts, Section 889(a)(1)(B) also applies to federal loans and grants and, thus, contractors should watch for new rules to be issued by the Office of Management and Budget to implement the Part B prohibition for federal loans and grants.

Companies that are not federal prime contractors also should begin to review their own supply chains and operations in anticipation of questions from their customers as to their provision of equipment or services that include covered telecommunications equipment or services.

Additionally, because many unresolved issues in the implementation of the Section 889(a)(1)(B) prohibition in the Part B interim final rule (e.g., the definition of “use”) remain, companies should engage in reasonable practices while monitoring any changes to the rules, or additional new rules with new or changed requirements, either from Congress or from the FAR Council.

Our team is on standby to help with any questions companies may have, and we will provide updates as any developments occur.

FOR MORE INFORMATION

Please contact any of the below Thompson Hine attorneys for additional information, including any updates, and other steps your business may need to take:

Tom Mason
202.263.4168
Thomas.Mason@ThompsonHine.com

David M. Schwartz
202.263.4170
David.Schwartz@ThompsonHine.com

Francesca M.S. Guerrero
202.973.2774
Francesca.Guerroro@ThompsonHine.com

Francis E. (Chip) Purcell, Jr.
202.263.4118
Chip.Purcell@ThompsonHine.com

Ray McCann
202.263.4152
Ray.McCann@ThompsonHine.com

Mona Adabi
202.263.4147
Mona.Adabi@ThompsonHine.com

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