Major New Requirement for All Federal Contractors

GUEST COMMENTARY

All federal contractors must soon certify they neither sell nor use certain telecommunications equipment, components or services from five or more companies in the People’s Republic of China.

All contractors providing any product or service to any federal agency will be impacted starting on August 13, 2020, by Section 889 of the 2019 National Defense Authorization Act (Public Law 115-232, hereinafter “Sec. 889”). This initially prohibited agencies from purchasing or using covered telecommunications equipment or services, and will now require federal contractors to make a new representation that they do not use covered equipment—whether or not that equipment is used in the performance of a federal contract.  Any contractor could potentially be excluded (debarred) from federal contracts if the company makes an inaccurate representation about its use of equipment and services from the banned Chinese companies.

What’s involved?
Telecommunications equipment or services produced or provided by Huawei Technologies Co., or ZTE Co., as well as video surveillance products or telecommunications equipment and services produced or provided by Hytera Communications Co., Hangzhou Hikvision Digital Technology Co., or Dahua Technology Co. The prohibition also extends to the subsidiaries and affiliates of those companies, and Sec. 889(f)(3)(D) authorizes the Secretary of Defense, in consultation with the Director of National Intelligence and the FBI, to add to this list of companies and affiliates.

How did this sneak up on us so fast?
Sec. 889 became law on August 13, 2018, and had two phases. The first phase only covered telecommunications equipment and services supplied directly to the federal agencies. The second phase, coming in a few weeks, covers equipment or services used by federal contractors whether or not they use the covered equipment or services for federal or non-federal activities.

Awareness amongst the information technology industries was pretty much immediate for phase one. Only gradually and lately has the rest of the defense industrial base (DIB) realized that it applies to all contractors and all federal entities. This is partly due to the ambiguities and lack of definitions in the statute, the complexity of the new interim rule, and its potentially vast scope of applicability. Also, the Department of Defense (DOD) itself had urged a delay in the implementation of phase two, so many assumed that DOD’s request would be honored. The bad news is that, at the time of this publication, it appears that neither Congress nor the Trump Administration are sympathetic to the DOD and industry requests for a delay.

What’s the big challenge right now?
The whole DIB had been anxious to study and comment on the implementing rule published jointly by the DOD, General Services Administration (GSA), and the National Aeronautics and Space Administration (NASA), hoping it would resolve ambiguities in the new law. However, an interim rule did not get published until July 14, 2020, a mere 29 days before the statutory effective date of August 13, 2020, and the rule added even more ambiguities.

Major rules like this routinely get 90 days or more to gather public comment and analysis from affected parties. This feedback informs the regulators on how to perfect the final rule before compliance goes into effect, a process that routinely takes six months or longer for the regulators. Thirty days is not enough time for any industry in the DIB to digest the new interim rule, let alone to offer constructive recommendations to the rule writers. This leaves no time at all for the rule writers to receive and incorporate the best ideas from industry commenters and issue the final binding rule.

The primary intent of this article is to provide an alert about the serious challenge to all transportation industries, and carriers of all modes, supporting the DOD. For more information on the rule itself, you can look at the phase one rule in the Federal Acquisition Regulation (52.204-25) here: Phase 1 Rule, and the interim rule for phase two here: Phase 2 Interim Rule.

A recent article from the Wiley law firm provides additional legal analysis of the statute and the rules. In addition, the Office of the Under Secretary of Defense for Acquistion and Sustainment Industry Policy recently provided the DOD Implementation Memo for Implementation of the Section 889(a)(1)(B) Prohibition on Contracting with Entities Using Certain Telecommunications and Video Surveillance Services or Equipment. The purpose of this memorandum is to facilitate implementation of interim FAR rule 2019-009.

Why did Congress do this?
Congress’s objective for passing Sec. 889 was to force federal contractors to reduce potential national security risks when buying and using telecommunications equipment and services from certain Chinese companies. The DIB views the objective of the statute to be the protection of sensitive and proprietary information that is processed through “covered gear,” the lingo used by the DIB when referring to the prohibited equipment and services. US Senator Marco Rubio (R-FL) adds additional justifications ( here, pS5539+ ) in his statement on the Senate floor August 1, 2018, criticizing Chinese cyber espionage, and forced transfer of technologies, all aimed at China becoming, “…the world’s most dominant power.”

How do I know if I have “Covered Telecommunications Equipment”?
You probably don’t know for sure. You cannot look at an XYZ brand of computer or video camera used in your business and divine whether it or its internal components (even its wee bits) are produced by prohibited suppliers. The prohibited companies’ names may not appear on most of their products or literature. If a banned company only supplies a “substantial or essential component” to another manufacturer, and the latter is not on the list of banned companies, then that finished product may also be prohibited. But how are you, the end-user, to know?

For example, if you have XYZ brand security cameras monitoring your facilities, XYZ may have bought the primary camera components from Hytera, Hangzhou Hikvision, or Dahua. In practical terms, the doctrine of the fruit of the poisonous tree may apply. Because you, in fact, “use” covered gear, you must replace it with compliant gear and report it to the contracting officer or stop doing business with the federal government.

Modern trucking as an example, and undoubtedly the entire supply chain, has vast quantities of electronic devices and systems to facilitate business processes, manage fleets, monitor trucks’ mechanical status and location, and report those conditions automatically from the highway to fleet and operations managers. These systems are indispensable to providing freight-moving service. If any of these devices contain prohibited gear, there is theoretically a federal case to be made against the contractor under Sec. 889 that, starting August 13, 2020, using such equipment disqualifies your company from federal contracting if you don’t accurately report your use of the covered gear to the federal contracting agencies.

Virtually every customer, whether commercial or federal, wants in-transit visibility (ITV) tracking. This is achieved by trucks reporting their positions through the cellular system, which processes the signal through vast networks of telecommunications equipment. However…

Telecommunication systems in 12 States use gear prohibited by Sec. 889
As it turns out, telecommunications companies in AL, CO, ID, KS, KY, MT, NE, ND, SD, TN, UT, and WY use prohibited telecommunications gear to process cellular signals and provide internet service. Arguably, any truck moving federal freight to, from, or through these 12 states would transmit their signals through covered gear, theoretically violating Sec. 889.

Additionally, any company headquartered in or with facilities or employees working in these states would rely on cellular service and Internet connectivity to conduct business. This cannot be achieved without their signals passing through the covered gear, and given the significant ambiguity in Sec. 889 and the regulations, a case could conceivably be made that this routine activity violates the requirement under Sec. 889 everywhere in these 12 states.

Is there any good news?
Yes. First, DOD and some members of Congress recognize the unfairness and impracticality of implementing phase two of Sec. 889 with no time for preparation, and there are efforts to obtain a delay in either the yearly National Defense Authorization Act or the COVID-19 stimulus package. Whether any of these congressional efforts will come fast enough or whether the Trump Administration will take some action to delay the implementation of phase two is unknown at this time.

The other bit of good news is that there are some “holes” in Sec. 889 that would make immediate enforcement against contractors a dubious proposition for DOD and the Justice Department. The first hole is that a contractor only has to make a “reasonable inquiry” about the use of covered gear and there is no requirement to do a full internal or external audit. Take surveillance cameras as an example. If a contractor reviews the available documentation they have about the covered gear and does not see the names of the banned Chinese companies, then the contractor has made a “reasonable inquiry.” If somewhere inside the camera there are banned company components, it would be very difficult for an agency to threaten to debar a contractor in this case and, if they did try, a federal judge might be sympathetic to the contractor.

A second hole is that the components in the covered gear manufactured by the banned Chinese companies might not be viewed as “essential” for the function or performance of the gear. For example, the cell or ITV tracking services might use some banned Chinese company components. But would a federal judge really uphold a debarment against a trucking company because those Chinese components are “essential” for the cell or ITV tracking services, and the trucking company has no choice but to use those services?

A third hole is that trucking companies participating in the Defense Freight Transportation Services (DFTS) contract with Crowley should be viewed as subcontractors for the DFTS program. The Sec. 889 second phase does NOT require subcontractors to make a representation about using banned Chinese companies’ covered gear. Unfortunately, most trucking companies have direct contracts with DOD outside of DFTS and might be forced by DOD to make the phase two representation about covered gear.

Conclusion: The sword of Damocles hangs over federal contractors
About 2500 years ago, Dionysius II was the wealthy but brutal tyrant of the Sicilian city of Syracuse, which won him myriad enemies. Damocles went to visit Dionysius, greeting him with flattery and sophistry, as was the custom of the day. Damocles implied that Dionysius, “had it made,” and that Dionysius’ life could not be better. Dionysius was annoyed at that, but treated Damocles to a lavish meal, with servants attending to his every whim. But there was a catch. Above Damocles’ seat, Dionysius hung Damocles’ heavy sword from a mere strand of horsehair, making the point that, even when things look well and prosperous, serious threats may be hanging over your head. Thus is federal contracting under Sec. 889.

It doesn’t need to be this way
A Chamber of Commerce coalition of more than 70 DIB representatives has been working tirelessly to make the case in Congress that more time is needed to iron out the details into a workable solution. This would enable federal contractors to continue producing their quality products and services to federal agencies without the sword of debarment dangling over their heads. To join the coalition in order to track its developments and support Sec. 889 improvements, email Matt Eggers at MEggers@USChamber.com.

How do we fix this?
Our Chinese adversaries have the advantage of wisdom garnered over millennia. In the allegory of Damocles, so do we. Let’s rise to the challenges being posed to US national security and US intellectual property. As American citizens and companies comprising the DIB, we are deeply committed to Sec. 889 objectives. But what is greatly needed is a commitment from agencies, industries, lawmakers and rule writers to collaborate up front on how best to achieve these vital objectives, so we don’t find ourselves scrambling to comply with obscurely drafted requirements that cannot and should not be enforced against contractors sustaining federal agencies.

There is vast room for improvement with the Sec. 889 phase two rule. NDTA’s education program is flexible and ideally suited to foster collaboration among parties actively supporting the DOD transportation missions and those seeking to understand and improve the Sec. 889 Phase 2 rule. More broadly, we may take a lesson from Sec. 889 that we have a great need to improve the processes by which federal agencies and contractors initiate and process changes to federal policies, whether small (MFTURP) or large (Sec. 889).

By Bill Wanamaker, American Trucking Association, and Buzz Bailey, Bailey FedK Consultants

 

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of the NDTA.