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.
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.
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.
About two months have passed since the August 13, 2020, effective date of Part B of Section 889 of the FY 2019 National Defense Authorization Act. Part B, sometimes referred to as the Chinese telecommunications equipment ban, broadly prohibits the federal government from contracting with entities that use certain Chinese telecommunications (including video surveillance) equipment and services.
After the FAR Council published its July 10, 2020, Interim Rule, contractors, large and small, spent countless hours working to be able to certify compliance by August 13. This deadline was critical because the Interim Rule said that absent such a certification, a contractor was ineligible for future contract awards. That is, government agencies were prohibited from renewing or extending existing contracts with contractors unable to certify Part B compliance. Indeed, agencies were prohibited from issuing an order under an existing contract to a contractor that failed to certify compliance.
A very Happy New Year to our GovCon Navigator readers! Further expanding recent supply chain restrictions across federal procurement, the Department of Defense (“DoD”) issued an interim rule prohibiting DoD from procuring equipment or services from certain Chinese entities (and possibly Russian) if used to carry out DoD nuclear deterrence or homeland defense missions. The rule builds on the Section 889 supply chain restrictions we previously covered in a prior blog post.
What should contractors do now given the interim rule is already in effect? Contractors should first evaluate their existing contract portfolios for covered missions and take immediate steps to eliminate all covered products from their supply chain (and find alternate sources of supply). If the rule might impact contract performance, you should be prepared to address this with the appropriate counterparty. And given the requirement for compliance certifications that mirror Section 889, contractors should also harmonize monitoring and compliance with their existing supply chain compliance programs. Among other things, this should address the requirement to obtain compliance certifications from downstream subcontractors and suppliers.
As part of a recent wave of supply chain requirements, Section 889 of the 2019 National Defense Authorization Act (“NDAA”) imposed major new limitations on the use of certain Chinese telecommunications products and services in federal procurement, and recent implementing regulations mandate a range of compliance actions relating to the ban. This blog post provides practical guidance on the new rules and five compliance tips.
Ban against Procuring “Covered Telecommunications Equipment or Services”
The Department of Defense (“DoD”), General Services Administration (“GSA”), and National Aeronautics and Space Administration (“NASA”) recently released an interim rule implementing the first part of Section 889. This ban, which became effective August 13, 2019, sweeps broadly by prohibiting agencies from procuring the following “covered telecommunications equipment or services”:
Telecommunications equipment produced by Huawei and ZTE Corporation;
Video surveillance and telecommunications equipment used for public safety, surveillance of “critical infrastructure,” or national security purposes and produced by Hytera Communications Corporation, Hangzhou Hikvision Digital Technology Company, or Dahua Technology Company;
Telecommunications or video surveillance services provided by such entities for any purpose; or
Telecommunications or video surveillance equipment produced or provided by an entity that the Secretary of Defense determines is owned or controlled by, or otherwise connected to, the government of the People’s Republic of China.
Over the past several months, there has been a confluence of congressional and agency actions that will have a significant impact on Federal Supply Schedule (“FSS”) contract holders. These changes are so significant that they will likely cause companies with FSS contracts to question whether having an FSS makes sense. These changes could also cause companies to restructure the segments of their companies that are responsible for selling to the federal government.
Order Level Materials
In late January 2018, the General Services Administration (“GSA”) issued its Order Level Materials (“OLM”) final rule. This rule allows agencies to purchase supplies or services in direct support of a task or delivery order placed against FSS contract or Blanket Purchase Agreement (“BPA”). OLMs are subject to special ordering procedures. SeeGSAR 552.238-82. For example, the OLMs cannot have been known when an FSS contract or BPA was awarded. OLMs (excluding travel) cannot exceed 33.33 percent of the total value of the applicable task or delivery order. Whether an FSS holder is required to obtain competitive quotes for an OLM order depends upon the value of the order and the FSS holder’s purchasing system. Continue reading “Do Federal Supply Schedule Contracts Still Have Value?”