On October 7, 2022, the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”) issued sweeping new export controls under the Export Administration Regulations (“EAR”) aiming to cut off support for China’s advanced computing and supercomputing capabilities, with the new controls targeting specified chips, chipmaking equipment, and related services.
The BIS rule, which runs over 100 pages, is the most significant expansion of semiconductor-related export controls in recent memory, if not the history of the EAR, and marks a decisive inflection point in the U.S. strategic competition with China. Companies in the semiconductor industry should gauge their exposure to China-related risk, which could be present in oblique and non-obvious ways, and service providers to the industry should assess their risk exposure in light of the rule’s provisions regarding U.S. person “support” for restricted activities.
On August 15, 2022, the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) issued an interim final rule imposing new export controls relating to certain semiconductor technology.
Specifically, the rule establishes a requirement under the Export Administration Regulations (EAR) to obtain a license from BIS before exporting to certain destinations the following materials and technologies:
Substrates of gallium oxide and diamond (ultra-wide bandgap semiconductors); and
Electronic Computer Aided Design (ECAD) software for the development of integrated circuits with Gate All-Around Field Effect Transistor (GAAFET) structures.
The control for the specified substrates is effective Aug. 15, 2022, while the control for the ECAD/GAAFET software is effective Oct. 14, 2022, with a comment period for industry that ran through Sept. 14, 2022.
The rulemaking follows public reports in July 2022 indicating that BIS had sent letters to chipmaking equipment manufacturers directing them not to export to China equipment capable of fabricating chips at 14 nanometers and below.
In an important decision for preserving contractor data rights, the Court of Federal Claims recently confirmed that “technical data” has a limited scope and, per the DFARS, includes only information “of a scientific or technical nature.” Raytheon Co. v. United States, No. 19-883C, 2022 WL 2353085 (Fed. Cl. June 15, 2022).
Pursuant to DFARS 252.227-7013, if any data is identified as “technical data” the Government may be able to assert licensing rights in a contractor’s noncommercial technical data. See DFARS 252.227-7013(b). In contrast, for any data identified as proprietary non-technical data, the Government cannot assert any licensing rights in the proprietary non-technical data.
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As the federal government prepares to roll out infrastructure grants and contracts in amounts not seen since the New Deal and the defense industrial base (“DIB”) gears up to support billions in new spending to support Ukraine, a new Department of Defense (“DoD”) report raises serious concerns about the state of competition within the DIB. The report recently released by the Office of the Under Secretary of Defense for Acquisition and Sustainment analyzes the state of competition within the DIB and concluded that it can be summarized in one word: poor. The report discusses the causes for the lack of competition and makes recommendations for improving the solicitation process to increase competition, inspire innovation, reduce prices, and improve quality.
Foremost among the causes for the lack of competition identified by the report is consolidation of the DIB. Of 51 aerospace and defense prime contractors in the 1990s only five exist today. Although the report failed to find significant correlation between this consolidation and increased pricing, the consolidation raises additional concerns for DoD, such as national security, mission risk, and strategic technology innovation. The report notes that “having only a single source or a small number of sources for a defense need can pose mission risk and, particularly in cases where the existing dominant supplier or suppliers are influenced by an adversary nation, pose significant national security risks.” The report recommends that when a merger is likely to harm one of these interests, DoD work closely with the Federal Trade Commission and Department of Justice to take structural or behavioral measures deemed necessary, up to and including blocking the merger.
President-elect Biden plans to nominate California Attorney General Xavier Becerra to serve as Secretary of the U.S. Department of Health and Human Services (“DHHS”). The current Administration has frustrated the pharmaceutical industry with numerous Executive Orders and proposed rules and regulations trying to impact drug pricing. DHHS’s interim final rule implementing a Most Favored Nations Model (i.e., an international pricing index) for reimbursement of certain Medicare Part B drugs is the most recent example.
Numerous pundits suggested that pharmaceutical companies manufacturing vaccines and other drugs to respond to the COVID-19 pandemic waited until after the November election to announce their progress. The rationale was that the companies would prefer working with a Biden Administration rather than suffer through four more years of acrimony with the Trump Administration. The Becerra announcement, however, could indicate the pharmaceutical industry is not yet out of the woods. Continue reading “What Could a DHHS Secretary Becerra Mean for the Pharmaceutical Industry?”
When the Department of Defense (“DOD”) procures defense items that require substantial investment to design, test, and manufacture, it often seeks to acquire, along with these products, the contractor’s technical data package (“TDP”) used to build the product. Complete TDPs can facilitate effective competition—perhaps by neutralizing an otherwise daunting incumbent’s advantage—when the products are up for rebid a few years later. But in seeking TDPs—and rights in technical data and computer software (collectively “data”) generally—the DOD is prohibited from requiring a contractor, as a condition of obtaining a contract, to relinquish greater rights in data deliverables than the DOD is otherwise entitled to obtain based on who funded the development of the data. See DOD Federal Acquisition Regulation Supplement (“DFARS”) 227.7103-1(c), 227.7203-1(c).
Notwithstanding this prohibition, the DOD frequently obtains greater data rights than it is entitled to based on actual funding of the development—i.e., limited rights (development privately funded), government purpose rights (mixed funding), and unlimited rights (development funded by the government). How does this happen?
Bid protests challenging DOD attempts to extract greater rights in data than it is entitled as a condition for contract award have been rare. In Sikorsky Aircraft Corporation, B-416027 (May 22, 2018), the protester complained that the Air Force sought a minimum of government purpose rights in software regardless of funding source (i.e., even if the software had been funded exclusively at private expense). While the argument made sense on the merits, it was untimely filed, and the U.S. Government Accountability Office refused to consider the argument even though it could have done so based on the “significant issue” exception to its timeliness rules. The protest still had an impact, however. Subsequent to the protest, the Air Force clarified its intent and disclaimed any intent to insist upon government purpose rights as a minimum.
The Air Force’s walk-back of its Request for Proposal language—which did seem to communicate an insistence upon at least government purpose rights—apparently reflected the Air Force’s recognition that such insistence was unlawful. And perhaps, as a practical matter, the Air Force recognized that there are ways to incentivize offerors to provide greater data rights than they are otherwise required to—without making such provisions an express condition for award.
An incentivizing technique used frequently by DOD procurement offices in recent years is making optional the provision of a robust TDP. This may include the government’s right to provide the data to the contractor’s competitors in future procurements even where the source of development funding would not normally grant the government such authority. In such procurements, an offeror can choose whether to offer a TDP with greater data rights than that to which the government would otherwise be entitled. An offeror who chooses not to offer such a package would still be considered eligible for award—if this was not the case, the DOD would be violating the DFARS by making award eligibility conditional upon providing greater rights than that to which the DOD is entitled. But an offeror who does offer greater rights than those to which the DOD would otherwise be entitled would receive additional credit in the evaluation.
Evaluation credit typically takes the form of an adjustment to the offeror’s evaluated price. For example, the solicitation may provide that, to the extent an offeror proposes to provide a “perfect” TDP, giving the DOD maximum flexibility to provide the TDP to the offeror’s competitors, the offeror’s proposed price will be adjusted downward for purposes of evaluation by a significant amount, such as $100,000 or more. TDPs that are less than optimal but that still provide some value to the DOD would be a assigned a more modest credit. Offerors who choose not to offer TDPs receive no price evaluation credit.
If you are scratching your head, wondering whether an offeror who chooses not to offer an optional TDP effectively takes itself out of the running for a realistic chance of award, that is understandable. And if that possibility means that, as practical matter, optional TDPs really are not optional—or are optional only for companies that want to compete in significant DOD procurements with no real chance of winning—an argument can be made that such evaluation scheme is at odds with the DFARS, and defeats the purpose of the underlying regulation. This issue has not been addressed in any published protests.
Deciding whether to voluntarily grant greater TDP rights is a weighty decision that concerns interests beyond the immediate competition. Contractors evaluating whether and how to respond to DOD requests for more extensive data rights, particularly in the competitive procurement context, must consider:
How will providing such rights impact the contractor’s overall business?
To the extent such impacts may be adverse, do the potential upsides of winning the contract make up for this?
If not, can the solicitation be challenged as unlawfully conditioning contract award eligibility on provision of data rights to which the DOD is not entitled?
If the answer to question three is yes, the contractor must be proactive and, to avoid the fate of Sikorsky, raise any protest challenging the solicitation prior to the deadline for receipt of proposals.
Buy American and hire American. The concept is easy, but the implementation can be far more complicated, particularly in the current government contracting world where waivers to those requirements have become common. In an attempt to strengthen the commitment to buying American and hiring American, on January 26, 2018, a bipartisan group of ten Senators sent a letter to President Trump urging him to “keep the promises” that he had made in April 2017 to buy American and hire American. The letter follows Senators Rob Portman (R-OH), Sherrod Brown (D-OH), Lindsey Graham (R-SC), and Chris Murphy’s (D-CT) introduction of the bipartisan BuyAmerican.gov Act of 2018 on January 9, 2018. This new legislation seems to be an effort to codify President Trump’s April 18, 2017, Buy American and Hire American Executive Order (the Executive Order), and slow what the BuyAmerican.gov Act Press Release calls the “excessive number of waivers” to the Buy American laws. Since President Trump signed the Executive Order, much has been written about the potential effects of that Executive Order. However, the potential impacts on government contractors who maintain or store data relating to their performance of federal government contracts have been largely disregarded. Continue reading “Buy American, Hire American: Will It Impact a Government Contractor’s Ability to Store Data Offshore?”
The National Defense Authorization Act (“NDAA”) for Fiscal Year 2018 was signed into law on December 12, 2017, and authorizes a topline national defense budget of $700 billion. While the 2018 NDAA makes a number of changes to Department of Defense (“DOD”) policy and programs, in this article we explain five major changes to acquisition policy and how they will impact the way companies do business with DOD. Continue reading “New Year’s Resolutions: Top 5 Consequential Changes in the 2018 NDAA”