FY 2023 NDAA Muddies the Water on Whether Chinese Semiconductor Ban Will Apply to Contractors

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Robyn N. Burrows 

Last month, we wrote about a proposed amendment to the FY 2023 National Defense Authorization Act (“NDAA”) that would prohibit contractors from selling certain Chinese semiconductor technologies to federal agencies and from using these same covered products and services. This measure was added through Section 5949 of the NDAA.

On December 6, the House passed a compromise version of the NDAA, which appears to scale back the semiconductor ban by applying it only to federal sales of covered products and services, without also banning contractors from using them. However, the explanatory statement accompanying the NDAA suggests contractors (including their affiliates and subsidiaries) may ultimately be prohibited from using covered semiconductor technologies—which would raise a host of compliance and implementation concerns.

Compromise Version of NDAA Limits Semiconductor Ban to Federal Sales

Section 5949 bans semiconductor products and services from Semiconductor Manufacturing International Corporation, ChangXin Memory Technologies, and Yangtze Memory Technologies Corp., plus their subsidiaries and affiliates. This ban was modeled after the supply chain restrictions from Section 889, which prohibit contractors from selling and using covered telecommunications and video surveillance equipment from five Chinese telecom companies.

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Senate Majority Leader Schumer Proposes Section 889 Expansion

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Robyn N. Burrows and Merle M. DeLancey, Jr. 

On October 18, 2022, Senate Majority Leader Chuck Schumer (D-NY) issued a press release signaling a potentially significant expansion of Section 889 through a proposed amendment to the 2023 National Defense Authorization Act (“NDAA”). Schumer’s proposal is aimed at extending the telecommunications supply chain prohibitions in Section 889 to the semiconductor manufacturing industry.

Section 889 currently prohibits contractors from providing the federal government or using any products or services that incorporate “covered telecommunications equipment or services” from five Chinese telecom companies and their affiliates and subsidiaries: (1) Huawei Technologies Company, (2) ZTE Corporation, (3) Hytera Communications Corporation, (4) Hangzhou Hikvision Digital Technology Company, and (5) Dahua Technology Company.

Schumer’s 2023 NDAA amendment would expand Section 889 by banning semiconductor products like microchips from the following three Chinese entities: (1) Semiconductor Manufacturing International Corporation (“SMIC”), (2) ChangXin Memory Technologies (“CXMT”), and (3) Yangtze Memory Technologies Corp. (“YMTC”). Schumer noted that these companies have known links to the Chinese state security and intelligence apparatuses. The amendment is aimed at filling a gap in federal procurement restrictions that currently do not include semiconductor technology and services, creating a vulnerability for cyberattacks and data privacy. The amendment would not take effect until three years after the NDAA’s enactment, or until 2025.

Although we do not yet know whether Schumer’s amendment will be incorporated into the final NDAA bill, contractors should nevertheless begin evaluating their supply chains to identify any semiconductor products from any of the three named Chinese manufacturers. Schumer’s amendment signals a continually expansive interpretation and enforcement of Section 889, which may be reflected in the final rulemaking for Section 889. The current FAR docket anticipates a final rule in December 2022, although these deadlines continue to be moving targets.

How to Manage a Potential Whistleblower

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Dominique L. Casimir, Jennifer A. Short, and Michael Joseph Montalbano 

Jennifer A. Short headshot image

The federal False Claims Act (“FCA”) is one of the United States’ most effective tools to detect and prevent fraud against the Government. One reason the FCA is so effective is that it encourages the employees of an organization to come forward as claimants and receive a share of any financial recovery to the Government. Recognizing the central role of these whistleblowers in the FCA’s enforcement scheme, Congress included an anti-retaliation provision in the statute that protects them when they report suspected fraudulent conduct. Under the FCA’s anti-retaliation provision, employees, contractors, or agents can sue for damages on their own behalf if they are “discharged, demoted, suspended, threatened, harassed, or in any other manner discriminated against in the terms and conditions of employment because of lawful acts done” in connection with a reported FCA violation. 31 U.S.C. § 3730(h)(1). Likewise, nearly every state also affords some degree of whistleblower protection, either statutorily or in the common law.

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November 9, 2022: “Legal and DoJ Matters”

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Blank Rome partner Justin A. Chiarodo will serve as a panelist at Federal Publications Seminars and Capital Edge Consulting’s 2022 Government Contract Accounting and Regulatory Update, being held November 9 and 10, 2022, in Arlington, Virginia.

Justin’s session, “Legal and DoJ Matters,” will take place Wednesday, November 9, from 8:30 to 10:00 a.m., and the panel will cover settlement and judgments from recent civil fraud and false claims, penalty assessments, and emerging issues.

For more details, visit our website.

DoD Section 889 Telecommunications Prohibition Waiver Expires

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Merle M. DeLancey Jr. 

Effective October 1, 2022, Department of Defense (“DoD”) contractors must comply with Part B of Section 889 of the FY 2019 National Defense Authorization Act (“NDAA”). The approximately two-year long Part B waiver granted to the Director of National Intelligence expired October 1. DoD contractors cannot seek a DoD agency-level waiver as DoD cannot grant waivers under the statute. Thus, as with other agencies, DoD is prohibited from entering into, extending, or renewing contracts with contractors who use covered telecommunications or video surveillance equipment and services from certain Chinese companies in any part of their business.

Compliance with Part A of Section 889 was straightforward. Part A prohibited contractors from selling covered technology to the federal agencies. Comparatively, compliance with Part B is much more complicated. Part B requires a contractor to certify that it does not use “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.” The prohibition applies to all contracts at any dollar value. “Covered telecommunications equipment or services” is defined as equipment, services and/or video surveillance products from Huawei Technologies Company, Hangzhou Hikvision Digital Technology Company, Hytera Communications Company, Dahua Technology Company, ZTE Corporation, or any entity controlled by the People’s Republic of China.

For more information regarding Part B compliance, see our prior posts For Part B of Section 889, Is Compliance by August 13, 2020, Realistic? and Five Steps to Take to Prepare for Part B of the Section 889 Ban.

Partial Settlement and Allocation of Damages Liability under the False Claims Act (“FCA”)

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Jennifer A. ShortBridget Mayer Briggs, and Tjasse L. Fritz ●

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Bridget Mayer Briggs headshot image
Tjasse L. Fritz headshot image

On August 30, 2022, the D.C. Circuit Court of Appeals brought renewed attention to the conundrum of False Claims Act (“FCA”) damages by applying a pro tanto allocation rule to a partially settled case. In United States v. Honeywell International Inc., No. 21-5179, 2022 WL 3723020 (D.C. Cir. Aug. 30, 2022), the court reasoned that, because the government had already recovered its full alleged damages through co-defendants’ settlements, it could not seek additional damages from the remaining defendant, regardless of that defendant’s alleged misconduct.

The FCA’s Treble Damages Provision

Under the FCA, 31 USC § 3729-3733, “any person” found to have violated the statute:

is liable to the United States Government for a civil penalty of not less than $5,000 and not more than $10,000, as adjusted … plus 3 times the amount of damages which the Government sustains because of the act of that person.

In United States ex rel. Marcus v. Hess, 317 U.S. 537 (1943), the Supreme Court described “damages which the Government sustains because of the act of that person” as the amount the government would have paid for the fraudulent goods or services had it known the relevant facts. The Court further rationalized that allowing damages to be multiplied per the statute was consistent with the common law tradition of civil punitive damages. In the 80 years since Marcus, courts have continued to grapple with the nature and calculation of FCA damages: whether they are punitive or compensatory; whether they are sufficiently predictable to encourage settlement; and whether they serve as a sufficient deterrent for wrongful conduct.

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Polansky and the Future of FCA Qui Tam Prosecution

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Jennifer A. ShortTjasse L. Fritz, and Bridget Mayer Briggs

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Tjasse L. Fritz headshot image
Bridget Mayer Briggs headshot image

In its upcoming term, the U.S. Supreme Court is poised to address the issue of whether the United States can seek to dismiss a whistleblower’s False Claims Act (“FCA”) lawsuit after it has elected not to participate in the case. And, if it can seek dismissal, what standard should apply?

On June 21, 2022, the Court agreed to consider the matter of United States ex rel. Polansky v. Executive Health Resources, Inc. (Case No. 19-3810). In his cert petition, the whistleblower presses the theory that after the United States declines to intervene in an FCA qui tam case, it lacks any authority to dismiss the action. At a minimum, the petitioner argues that the Court should resolve a long-standing split among the Circuit Courts regarding the standard that applies to such a motion—a split that has splintered even further in response to an uptick in such motions since 2018.

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June 28, 2022: “Emerging Issues and Trends in Government Investigations and Fraud Enforcement”

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Jennifer A. Short headshot image

Blank Rome partners Jennifer A. Short and Justin A. Chiarodo, chair of the firm’s Government Contracts practice group, will serve as presenters for the CLE/CPD online webinar, Emerging Issues and Trends in Government Investigations and Fraud Enforcement, hosted by the Association of Corporate Counsel’s National Capital Region (“ACC NCR”) on Tuesday, June 28, 2022, from 12:30 to 2:00 p.m. EDT.

For more details, visit our website.

Beyond DOJ’s Blockbuster Year in FCA Recoveries, Whistleblower Activity and Investigations Continue

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Elizabeth N. Jochum and Jennifer A. Short

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The attention-grabbing headline from the Department of Justice’s (“DOJ”) annually released statistics on False Claims Act (“FCA”) settlements and judgments is that the government recovered more than $5.6 billion from FCA cases in fiscal year (“FY”) 2021. While this is the second largest annual recovery in FCA history and the largest since 2014, procurement fraud cases represented a substantially smaller percentage of the total recoveries than in years past. Healthcare resolutions dominated, accounting for more than five billion of the $5.6 billion in settlements and judgments. In previous years, healthcare matters have accounted for closer to two-thirds of the total recoveries, making last year’s outsized healthcare figure—driven by the blockbuster opioid settlements of late 2020[1]—an outlier.

Beyond the top-line dollar figures, the report shows that FCA activity continues at a healthy, if not fully robust, pace. The COVID-19 pandemic continues to impact qui tam filings; the number of new whistleblower suits dropped to 598 in FY 2021, a ten-year low. The number of DOJ-initiated matters remains higher than the near-term average, particularly in healthcare, but also in Department of Defense (“DOD”)-related cases. Contractors, healthcare providers, and others—especially those who received federal funding through pandemic aid programs—can anticipate that FCA investigations and resolutions will play out over the next several years.

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Expect GSA to More Closely Scrutinize Trade Agreements Act Compliance

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Merle M. DeLancey Jr.

On January 21, 2022, the General Services Administration (“GSA”) Office of Inspector General (“OIG”) informed the Federal Acquisition Service (“FAS”) that ongoing monitoring by the OIG found that the FAS failed to properly monitor the sale of products for compliance with the Trade Agreements Act (“TAA”) during the COVID-19 response. Previously, in April 2020, GSA relaxed compliance with the TAA for a limited number of Federal Supply Classes (“FSCs”) to aid the government’s response to the COVID-19 pandemic. The applicable FSCs included those covering N95 masks, cleaners and disinfectants, disposable gloves, and hand sanitizers. After several extensions, the TAA exception policy expired on April 30, 2021.

The OIG identified two deficiencies in FAS’ implementation of the TAA exception policy. First, the OIG found that FAS failed to properly track the addition of non-compliant products to contracts. As a result, after expiration of the exception policy, there was no effective way for GSA to remove the non-compliant products from contracts. Second, the OIG found that GSA improperly permitted the addition of non-compliant products to GSA contracts. For example, some products that were added were unrelated to the government’s response to the pandemic; some products were added to GSA contracts prior to the effective date of the TAA exception policy; and, remarkably, in one case, a product was added to a contract that identified North Korea as its country of origin.

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