On July 14, 2020, the Federal Acquisition Regulatory (FAR) Council published an interim rule in the Federal Register, implementing restrictions aimed at preventing telecommunications and surveillance technologies manufactured by leading Chinese companies from playing any role in the federal supply chain. The interim rule has its statutory roots in Section 889(a)(1)(B) of the John S. McCain National Defense Authorization Act for Fiscal Year 2019 (Pub. L. 115-232), and becomes effective Aug. 13, 2020.
Under these sweeping prohibitions, federal agencies are barred from contracting for products or services with companies that have any business operations using prohibited telecommunications equipment that is manufactured or sold by specified Chinese companies. To that end, Section 889 and the interim rule present federal contractors with a stark choice — stop using covered Chinese telecommunications equipment, or stop doing business with the U.S. government.
Coverage and Scope of the Interim Rule
Section 889 specifically prohibits the federal government from entering into, extending, or renewing contracts with any entity that “uses any equipment, system, or service that uses covered telecommunication equipment or services as a substantial or essential component of any system, or as critical technology as part of any system.” Under the interim rule’s definition, these “covered” technologies include telecommunications equipment and services produced or provided by Huawei Technologies Company or ZTE Corporation (or any subsidiary or affiliate of those entities), and certain video surveillance products or telecommunications equipment and services produced or provided by Hytera Communications Corporation, Hangzhou Hikvision Digital Technology Company, or Dahua Technology Company (or any subsidiary or affiliate of those entities). To that end, the interim rule, through a revision to FAR 52.204-24 (Representation Regarding Certain Telecommunications and Video Surveillance Services and Equipment), prohibits federal agencies from entering into any prime contract (including a commercial item contract or contract below the Simplified Acquisition Threshold) with companies that use covered equipment in their business operations.
Under the interim rule, the revised FAR 52.204-24 must be included in solicitations issued on or after Aug. 13, 2020, as well as in solicitations issued before Aug. 13, 2020, but where the award occurs on or after Aug. 13, 2020. The interim rule also requires contracting officers to modify existing indefinite delivery contracts to include the revised FAR clause for future orders, pursuant to FAR 1.108(d). Finally, the interim rule provides that the FAR Council “is in the process of making updates to SAM requiring offerors to represent whether they use covered telecommunications equipment or services, or use any equipment, system, or service that uses covered telecommunications equipment or services within the meaning of [the interim rule].”
Timeline and Waiver Process
The interim rule implements the Aug. 13, 2020, compliance deadline set forth in Section 889(a)(1)(B), unless an exception applies or a waiver is granted. The waiver process will be administered at the agency level, and waivers will be granted only on a case-by-case basis. Waivers granted under this interim rule must expire no later than Aug. 13, 2022. The potential waiver process outlined in the interim rule requires multiple levels of government review, including participation by the Federal Acquisition Security Council and consultation with the Office of the Director of National Intelligence. The FAR Council has stated the minimum processing time for waiver applications will likely be several weeks, which puts a premium on prompt action by contractors wishing to seek waivers prior to the Aug. 13, 2020, initial compliance deadline.
Compliance Obligations for Contractors
The interim rule requires that contractors and offerors represent that they have conducted a reasonable inquiry into whether the entity uses covered telecommunications or video equipment or services. The interim rule defines a “reasonable inquiry” as one that is “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.” However, the interim rule expressly provides that a reasonable inquiry “need not include an internal or third-party audit.” This inquiry must cover business operations at all levels and across all business lines, because the Section 889 prohibition is not limited to covered telecommunications equipment used in connection with performance of a federal contract. Even if covered telecommunications equipment is used strictly in a contractor’s commercial operations, that usage would still leave the contractor unable to accurately certify compliance with the interim rule.
The interim rule does not itself apply to subcontractors, and prime contractors do not need to flow the required FAR clauses down to subcontractors. That said, under the “reasonable inquiry” analysis, prime federal government contractors must review their entire supply chain, including subcontractors of any tier and their suppliers down to the lowest level.
Final Rule and Rulemaking
The interim rule requests public comment on the potential impact of the rule on federal government contractors. Among other things, the FAR Council specifically noted that it would be considering extending the “use” prohibition and related representation to an offeror’s affiliates, parents, and subsidiaries that are domestic concerns, and specifically requested feedback regarding the impact of such a change. Comments on the interim rule are due Sept. 14, 2020.
Drawing on its more than 100 years of combined government contracting experience, McGuireWoods’ government contracts team helps clients implement and negotiate waivers to complex government contracting compliance obligations, including through contract modifications, requests for equitable adjustment, and claims associated with retroactive incorporation of regulatory requirements. McGuireWoods’ government contracts group is part of the firm’s Government Investigations & White Collar Litigation Department, a 2020 Law360 Practice Group of the Year, and is well-prepared to defend clients in potential future challenges and proceedings of this nature. Please contact the authors if you have any questions about Section 889 or the interim rule and its potential impact on your business.