Effective August 13, 2020, an Interim Rule jointly issued by the Department of Defense (DoD), the General Services Administration (GSA), and the National Aeronautics and Space Administration (NASA) that amends the Federal Acquisition Regulation (FAR) and implements Section 889(a)(1)(B) of the FY 2019 NDAA, that will apply to all organizations making an offer for a federal contract, including medical device manufacturers, pharmaceutical manufacturers, and healthcare providers. The Interim Rule bars certain technology, including telecommunications and video surveillance products, equipment and services, manufactured or provided by specific list of companies and/or their subsidiaries.

IN DEPTH

Key Takeaways

1. Medical device and pharmaceutical manufacturers (including manufacturers of covered outpatient drugs that participate in the Medicaid Drug Rebate Program), as well as healthcare providers should be aware of an upcoming compliance obligation.

2. A new Interim Rule applies broadly to any entity making an offer for a federal contract, not just those operating in the telecommunications space (including commercial items) as soon as August 13, 2020.

   • The Interim Rule includes contracts with the Department of Veterans Affairs as well as the Defense Health Agency/TRICARE

3. The Interim Rule bars certain technology (including Huawei, ZTE and all subsidiaries and affiliates of these entities, as well as others) as a substantial or essential component of any system, or as critical technology as part of any system (not just those used in contract performance).

   • The Interim Rule requires covered entities to conduct “a reasonable inquiry,” which may include training, changes to policies and procedures, and possible disclosure/remedial action.

   • The US government is considering expanding the certification requirement to extend to “affiliates, parents, and subsidiaries of the offeror that are domestic concerns”

Background

In 2018, Congress passed, and President Trump signed into law, the John S. McCain National Defense Authorization Act (NDAA) for Fiscal Year 2019 (P.L. 115-232) (FY 2019 NDAA), which includes a provision (Sec. 889 (a)(1)(B)) prohibiting federal agencies from entering into a contract (or extending or renewing a contract) with entities that use any equipment, system, or service that uses certain covered telecommunications equipment or services as a substantial or essential component of any system, or as critical technology as part of any system.

On July 14, 2020, the Federal Register officially published an interim rule (Interim Rule) jointly issued by the Department of Defense (DoD), the General Services Administration (GSA), and the National Aeronautics and Space Administration (NASA) that amends the Federal Acquisition Regulation (FAR) and implements Section 889(a)(1)(B) of the FY 2019 NDAA.

The rule will go into effect on August 13, 2020—new solicitations as well as contracts awarded after this date will require compliance.

Which Telecommunication Equipment and Services Are Covered?

The Interim Rule applies to “covered telecommunications equipment or services” as defined in FAR subpart 4.2101, which includes:

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

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.

The statute is not limited to contracting with entities that use end products produced by these companies, but also extends to the use of any equipment or services as a substantial or essential component of any system, or as critical technology as part of any system.

“Critical technology,” as defined in FAR subpart 4.2101, means:

1. Defense articles or defense services included on the United States Munitions List set forth in the International Traffic in Arms Regulations under subchapter M of chapter I of title 22, Code of Federal Regulations

2. Items included on the Commerce Control List set forth in Supplement No. 1 to part 774 of the Export Administration Regulations under subchapter C of chapter VII of title 15, Code of Federal Regulations, and controlled under either of the following:

   • Pursuant to multilateral regimes, including for reasons relating to national security, chemical and biological weapons proliferation, nuclear nonproliferation, or missile technology

   • For reasons relating to regional stability or surreptitious listening

3. Specially designed and prepared nuclear equipment, parts and components, materials, software, and technology covered by part 810 of title 10, Code of Federal Regulations (relating to assistance to foreign atomic energy activities)

4. Nuclear facilities, equipment and material covered by part 110 of title 10, Code of Federal Regulations (relating to export and import of nuclear equipment and material)

5. Select agents and toxins covered by part 331 of title 7, Code of Federal Regulations, part 121 of title 9 of such Code, or part 73 of title 42 of such Code

6. Emerging and foundational technologies controlled pursuant to section 1758 of the Export Control Reform Act of 2018 (50 U.S.C. 4817).

“Substantial or essential component,” as defined in FAR subpart 4.2101, means “any component necessary for the proper function or performance of a piece of equipment, system, or service.”

To Whom Does the Interim Rule Apply?

The Interim Rule applies to almost all entities making an offer for a prime federal contract, not just those operating in the telecommunications space, including contracts below the simplified acquisition threshold (micro-purchases) and commercial items contracts—putting many organizations that operate a small portion of their activities related to federal procurement at significant potential risk.

Of particular concern are those organizations that operate principally in non-federal procurement activity but are nonetheless dependent on federal contracts for a material portion of revenues, such as healthcare and life sciences organizations.

For covered entities, the Interim Rule’s prohibition covers any equipment, system or service that 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, regardless of whether that usage is in performance of work under a federal contract.

In accordance with the statutory language of Sec. 889(a)(1)(B), the Interim Rule’s prohibition does not, however, flow down to subcontractors as a regulatory obligation, because the prime contractor is the only “entity” that a federal agency “enters into a contract with.” Nevertheless, a prime contractor may be held responsible for the incorporation of covered telecommunications equipment or services by a subcontractor in support of a federal prime contract and should consider whether “a reasonable inquiry” (as discussed below) requires consideration of subcontractors.

As part of the finalization process for the Interim Rule, the FAR Council is considering expanding “the scope to require that the prohibition at 52.204-24(b)(2) and 52.204-25(b)(2) applies to the offeror and any affiliates, parents, and subsidiaries of the offeror that are domestic concerns, and expand the representation at 52.204-24(d)(2) so that the offeror represents on behalf of itself and any affiliates, parents, and subsidiaries of the offeror that are domestic concerns, as to whether they use covered telecommunications equipment or services.”

If the definition of a contractor covered by the requirement is broadly interpreted, a large number of contractors will have to immediately begin conducting “reasonable inquiries,” implement compliance policies, conduct appropriate training, implement tracking programs for future technology purchases, and undertake remedial action as needed in order to meet the deadline with regard to all of its systems, whether or not related to performance of a federal contract.

Comments regarding the Interim Rule may be submitted through September 14, 2020.

Key Action Items for Federal Contractors (including Healthcare/Life Sciences Organizations)

1. Prepare for Affirmative Representation of Compliance with Prime Contract Offers

   • The Interim Rule will require that all contractors/offerors represent with each offer for a covered contract, after conducting “a reasonable inquiry,” whether covered telecommunications equipment or services are used by the contractor/offeror. The System for Award Management (SAM) will be updated to allow offerors to make the representation annually, and contractors will be required to alert the government if use of covered telecommunications equipment or services is discovered during contract performance.

2. Conduct a “Reasonable Inquiry”

   • The Interim Rule adds new definitions, including for “reasonable inquiry,” which 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.”

   • A reasonable inquiry will vary by organization, but the Interim Rule explains that it includes “examining relationships with any subcontractor or supplier for which the prime contact 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,” and is “designed to uncover any information in the [contractor’s] possession—primarily documentation or other records—about the identity of the producer or provider of covered telecommunications equipment or services used by the [contractor].”
     Every covered entity will be required to conduct a reasonable inquiry as defined by the organization’s circumstances, which may be conducted under legal privilege in certain circumstances.

3. Review, Disclose and Mitigate

   • If a contractor represents that it does use covered telecommunications equipment or services, the disclosing contractor will be required to provide additional detailed information, including the entity that produced the equipment, a description of the equipment offered, and an explanation of the proposed use of the equipment and any factors relevant to determining if such use would be permissible under the Interim Rule’s prohibition. With respect to services, the contractor will be required to provide a description of the services offered or, if not associated with maintenance, the product service code of the service and an explanation of the proposed use of the services and any factors relevant to determining if such use would be permissible under the Interim Rule’s prohibition.

   • In some cases, agency contracting officers will be permitted to grant, on a case-by-case basis, one-time waivers that will expire no later than August 13, 2022. In addition, the Director of National Intelligence (DNI) may also provide a separate waiver if the director determines that doing so is in the national security interests of the United States. Even when a waiver is granted, continued monitoring is still required—the contractor will still be required to report any additional uses discovered or identified during contract performance in accordance with 52.204-25(d), which requires reports to be made within one business day.