United States: New Rule Implementing NDAA Prohibition: U.S. Agencies Cannot Enter Contracts That Use Chinese Telecom Technology

The latest in a string of U.S. government (USG) actions restricting the use of Chinese technology in the U.S. supply chain is an interim rule issued by the Department of Defense (DoD), General Services Administration (GSA), and National Aeronautics and Space Administration (NASA) implementing the first phase of Section 889 of the FY2019 National Defense Authorization Act (NDAA). This rule, which goes into effect on August 13, 2019, prohibits federal agencies from buying "covered telecommunications equipment or services as a substantial or essential component of any system, or as critical technology as part of any system" from designated Chinese entities, including Huawei Technologies Company Ltd. (Huawei) and ZTE Corporation (ZTE), and several providers of video surveillance equipment and services. We detail this proscription below and summarize how the rule shifts the compliance burden to government contractors.

Key Takeaways:

1. The interim rule applies immediately to new solicitations as well as to procurements pending award. The rule is essentially immediate—at least, as of August 13, 2019—when Section 889(a)(1)(A) of the NDAA takes effect. However, because this is an interim rule, interested parties may still submit comments, which the agencies may consider before releasing a "final" rule. Notably, the prohibition applies not just to solicitations issued on or after August 13, but also to existing solicitations where the award will occur on or after August 13.

2. The rule applies to commercial item acquisitions and even acquisitions below the simplified acquisition threshold. Commercial item acquisitions, including government purchases of commercially available off-the-shelf (COTS) items, and contracts with dollar amounts below the simplified acquisition threshold are exempt from many compliance‑related requirements, but not from this rule.

3. The rule requires a representation from the contractor at award and imposes a significant reporting requirement during performance. If you identify prohibited equipment or services during performance, you have one business day to report it.

4. Contractors must flow down the prohibition and requirements to subcontractors, even commercial item vendors.

5. The rule adopts in full the NDAA's definitions of "covered telecommunications equipment" and CFIUS's definition of "critical technology." The interim rule recycles the definition of "critical technologies" in the regulations implementing certain portions of the Foreign Investment Risk Review Modernization Act, which expanded the national security review authority of the Committee on Foreign Investment in the United States (CFIUS). In addition to the export control-based prongs of the definition, "critical technologies" includes "emerging and foundational technologies," which are to be designated via an interagency notice and comment process led by the Commerce Department and new regulations to be issued on or before February 2020, but which may be issued sooner.

6. More regulation is coming. A broader prohibition under Section 889 of the NDAA prohibits government agencies from entering contracts with entities that use covered equipment, services, or technology. This prohibition is effective August 13, 2020, subject to forthcoming regulations.

A Prohibition Grounded in National Security Concerns

Unlike other initiatives driven by the Administration's trade policy, this interim rule implements a congressional mandate to address national security concerns related to the integration of Chinese telecommunications technology in the USG supply chain. In contrast to the timing of Huawei's designation on the Commerce Department's Entity List, which suggested tactical pressure applied to China during deteriorating tariff negotiations, the NDAA established the timing. Congress enacted Section 889 in response to the threat of Chinese government espionage and surveillance against U.S. entities. At a February 2018 Senate Intelligence Committee hearing, the heads of six U.S. intelligence agencies warned that private citizens should not use products or services from Huawei or ZTE based on security concerns about companies "beholden to foreign governments."

Section 889 prohibits U.S. government agencies from:

1. Procuring or renewing a contract for 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"; or

2. Entering into or renewing a contract with any entity that uses any such equipment, system, or service as a "substantial or essential components of any system, or as critical technology as part of any system."

The interim rule implements the first prong of Section 889. The rule adopts Section 889's definition of "Covered telecommunications equipment," which includes:

  • Telecommunications equipment produced by Huawei or ZTE and their affiliates;
  • Video surveillance and telecommunications equipment produced by Hytera Communications Corporation (Hytera), Hangzhou Hikvision Digital Technology Company (Hikvision), Zhejiang Dahua Technology Co., Ltd. (Dahua), or their affiliates for the purpose of public safety, security of government facilities, physical security surveillance of critical infrastructure, and other national security purposes;
  • Telecommunications or video surveillance services provided by any of these entities or using any such equipment; and
  • 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 Chinese government.

The interim rule also includes one new definition by defining "substantial or essential component" somewhat circularly as "any component necessary for the proper function or performance of a piece of equipment, system, or service."

Notably, Section 889 does not prevent agencies from (1) contracting with an entity for services that connect to the facilities of a third party (such as backhaul, roaming, or interconnection arrangements) or (2) using "telecommunications equipment that cannot route or redirect user data traffic or permit visibility into any user data or packets that such equipment transmits or otherwise handles." Section 889 also does not require USG agencies to terminate existing contracts as of the effective date of each provision, but it does prohibit agencies from extending or renewing such contracts.

Practical Implications for All Contractors and Subcontractors

The interim rule implements Section 889 by making several revisions to the Federal Acquisition Regulation (FAR). Specifically, the rule:

  • Incorporates the statute's prohibitions and definitions under FAR Part 4; and
  • Modifies FAR Parts 12, 13, and 39 to require contracting officers to adhere to the prohibitions in acquisitions of commercial items, acquisitions below the simplified acquisition threshold, and acquisitions of information technology, respectively.

The interim rule also adds two solicitation provisions and contract clauses under FAR Part 52. The first clause—FAR 52.204-24—requires the offeror to represent whether or not it will provide covered telecommunications equipment or services in the performance of the contract. In the event the offeror represents that it will provide covered equipment or services, the clause requires a detailed disclosure of: (i) the brand, model, and item description; (ii) the proposed use of the equipment or service, including relevant factors about whether the use is permissible under the prohibition; (iii) the entity providing any covered service; and (iv) the entity that produced any covered equipment.

The interim rule states that DoD, GSA, and NASA are working to update the online System for Award Management (SAM) to allows contractors to represent annually whether they sell covered equipment or services. Only contractors that provide an affirmative representation in SAM will be required to provide offer-by-offer disclosures in their proposals for contracts or task orders. This option is not available yet, so contractors should expect to see the representation incorporated into solicitations starting August 13.

The second clause—FAR 52.204-25—incorporates Section 889's prohibitions and definitions into the contract and also imposes a significant reporting requirement on the contractor. The reporting requirement obligates the contractor to report through DIBNet if it identifies any activity prohibited by the rule during contract performance. Contractors must do so within onebusiness day of identifying the activity, and then follow up within 10 business days with any additional information about mitigation actions undertaken or recommended.

The new clauses will be incorporated into solicitations, contracts, and orders as follows:

  • All solicitations for contracts or task orders issued on or after August 13, 2019;
  • All solicitations for contracts or task orders issued before August 13, 2019, where award is not made prior to August 13, 2019;
  • Indefinite delivery/indefinite quantity (IDIQ) contracts will include the new clauses prior to placing new orders; and
  • Existing contracts and task orders will include the clauses if or when the instrument is modified to extend the period of performance (including option exercises).

The new clauses must be flowed down to subcontractors, even commercial item vendors.

Future Restrictions Will Restrict Contractors' "Use" of Covered Technology

On August 13, 2020, the prohibition's scope will expand again. Section 889(a)(1)(B) of the NDAA will take effect, prohibiting USG agencies from entering into contracts with entities that use covered technology. A legislative proposal from the White House Office of Management and Budget (OMB) to amend Section 889 to delay the effective date has not been adopted.

The contractor's "use" of such equipment, systems, or services would presumably need to be in connection with the contractor's performance of a federal government contract. After all, Section 889's language requires that the equipment be used as "substantial or essential components of any system, or as critical technology as part of any system." This interpretation would also dovetail with Section 889's overall purpose of protecting U.S. government data from foreign exploitation.

Nor are the restrictions on using Huawei and ZTE technology and services limited to the NDAA. By October 14, 2019, the Secretary of Commerce must issue new restrictions implementing the May Executive Order declaring a national emergency over the influx of telecommunications technology developed by "foreign adversaries" and entities controlled by them. Implementing regulations will identify covered entities and transactions, almost certainly targeting entities like Huawei and ZTE.

Madeline Magnuson, a Summer Associate in Morrison & Foerster LLP's Washington, D.C. office, contributed to this alert and is not admitted to the bar.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions