Extracted from Law360
On Aug. 13, Part B of Section 889(a)(1) of the National Defense Authorization Act for fiscal year 2019, took effect. It is anticipated that complying with the new rules will cost government contractors billions of dollars in the first year alone — with limited guidance available and the rule still in interim form.
While Part B does not directly bar companies from using certain Chinese telecommunications equipment or services, it accomplishes that goal by prohibiting federal prime contractors from continuing to do so while bidding on or entering into government contracts, or extending current contracts or accepting new orders under certain existing contracts, without a waiver.
In effect, government contractors must now begin replacing their use of certain Chinese telecommunications equipment or services as a condition of continuing to do business with the federal government — whether that use is in the performance of a federal government contract or completely unrelated to government contracts.
Section 889, a prohibition on certain telecommunications and video surveillance services or equipment, addresses the concern that U.S. foreign adversaries are using increasingly sophisticated methods to erode U.S. economic and military superiority by accessing critical infrastructure and stealing sensitive information.
To curb this and related threats, Congress put in place two prohibitions related to so-called covered telecommunications equipment or services, which generally include telecommunications or video surveillance equipment and services produced by Huawei Technologies Co. Ltd., ZTE Corp., Hytera Communications Corp., Hangzhou Hikvision Digital Technology Co. Ltd. and Dahua Technology Co. Ltd., or any of their subsidiaries or affiliates, or by an entity "owned or controlled by, or otherwise connected to, the government of [The People's Republic of China]."
The first prohibition in Section 889(a)(1)(A) (referred to as Part A), became effective on Aug. 13, 2019, and prohibited the federal government from directly buying covered telecom. The second prohibition, Part B, which went into effect Aug. 13, prohibits the federal government from entering into a contract with an entity that "uses" covered telecom.
Congress tried delaying implementation of Part B by way of amendments to the 2021 NDAA, including Senate Amendment 2193 and House Rules Committee Amendment 445, which would have extended the Part B implementation date to Aug. 13, 2021, and Jan. 1, 2022, respectively. However, neither of those amendments passed in time.
As a result of NDAA Section 889, the Federal Acquisition Regulation now includes: (1) a representation provision, in FAR 52.204-24; (2) a system for award management representation provision in FAR 52.204-26; and (3) a reporting clause, in FAR 52.204-25.
The representation provisions require a contractor to check its systems with a so-called reasonable inquiry and represent whether it will provide covered telecom to the government or use covered telecom, regardless of whether that use is in performance of a federal contract.
The reporting clauses also require contractors to notify the government if they discover use of covered telecom during contract performance.
On July 10, approximately one month before Section 889 Part B went into effect, the Federal Acquisition Regulatory Council released the long-awaited interim rule to implement Section 889 Part B.
Despite industry requests to narrow the rule considerably, as well as U.S. Department of Defense acquisition head Ellen Lord's significant concerns, voiced a month earlier, the interim rule closely follows the statute, leaving the definitions of critical words like "use" and "covered technology" unchanged. It also continues to apply to all federal contracts and prime contractors no matter their size.
Although public comments on the interim rule will be accepted until Sept. 14, it went into effect on Aug. 13. Many government contractors are scrambling to figure out what they can and should do to become compliant as soon as practicable. While the interim rule does not offer any guaranteed relief from its requirements, it does recognize that full compliance could not be achieved by Aug. 13.
As a result, the interim rule contemplates a ramp-up period, during which contractors determine through a reasonable inquiry — not a full-blown audit — whether they use covered telecom and adopt a "robust, risk-based compliance approach" focused on phasing out any covered telecom, starting with the equipment used in connection with government contracts that presents the highest risk.
Additionally, the interim rule provides a process to obtain two different types of waivers, which many contractors will likely seek. The primary waiver process allows the head of an executive agency to grant a one-time waiver from Section 889 Part B, on a case-by-case basis, that will expire no later than Aug. 13, 2022.
The interim rule notes that obtaining this waiver may take at least a few weeks. The waivers will be agency-specific since issuance is based on the agency's judgment concerning particular uses of covered telecom. One agency's grant of a waiver will not necessarily indicate whether a waiver is warranted in a different procurement with a separate agency.
So, while a waiver is certainly an available option, there is no guarantee that one will be granted or, if granted, that it will be for the full two-year period, or that there will be sufficient time for a contractor to obtain a waiver to meet the agency's needs.
A separate waiver is available from the director of national intelligence, but it presents a considerably higher standard to obtain and the application process is opaque.
Government guidance on NDAA Section 889 Part B has continued to trickle out, and on July 23, the DOD issued a memorandum to facilitate implementation of the interim rule. However, the DOD memorandum mostly reorganized information from the interim rule in a form targeting contracting officers. It falls short of providing government contractors with much-needed guidance on the onerous compliance requirements of Section 889 Part B.
The most helpful guidance to date came on July 30, when the U.S. General Services Administration's Office of Small Business Utilization hosted a webinar on the implementation of the interim rule. The GSA later made the presentation slides from this webinar available to attendees.
The webinar confirmed the GSA's position that Section 889 Part B applies to every sector and all systems a government contractor uses, no matter what it makes or sells. Critically, Section 889 Part B impacts contractors' use of covered telecom whether performing work under a government contract or completely unrelated to government contracts.
The GSA also clarified that while the representation provision of a government contractor's use of covered telecom does not flow down to subcontractors, an offeror must be careful in making its representation because use is not limited to covered telecom owned by the offeror.
For example, if an offeror is using covered equipment, whether that use is via a supplier or subcontractor, and whether that use is entirely separate from a government contract, the offeror must still include that use in its representation.
On the other hand, if an offeror's subcontractor uses covered telecom, but that covered telecom is not at all used by the offeror, the offeror does not have to include that use in its representation. Importantly, the GSA acknowledged that it is still an open question whether mere sale of covered telecom constitutes a so-called use prohibited by Section 889 Part B.
The GSA also provided some additional guidance on Section 889 Part B waivers. The GSA clarified that only the waiver by the director of national intelligence is a true waiver, and thus obtaining such a waiver will be subject to a very high bar.
In contrast, the agency-specific waivers permitted under Section 889 Part B are really just a method to delay a contractor's full implementation for up to two years. Therefore, any agency waivers that are granted will be on a one-time basis for each contractor with the understanding that the contractor will use the extension to become fully compliant at the end of the extra time allowed by the waiver.
Unfortunately, the GSA did not provide meaningful guidance on whether a government contractor's employees' use of covered telecom at home would constitute impermissible use under Section 889 Part B. This question has taken on new importance with pandemic work-from-home arrangements now prevalent as employees adjust to continued office closures.
Instead, the GSA tasked contractors with performing a reasonable inquiry into whether employee use can be considered use by the offeror, and then contractors should make the required representations accordingly.
Similarly, the GSA advised that many of the questions raised should be submitted as public comments to the interim rule — which will be accepted until Sept. 14 — so the Federal Acquisition Regulatory Council can consider them in crafting a final rule.
Contractors had been looking forward to a previously scheduled Aug. 12 GSA webinar — featuring a panel of leaders from the GSA's business lines — to provide additional guidance, but that webinar has been rescheduled to Sept. 10. Interested parties were surprised that the GSA did not explain this postponement — particularly to a date that is three weeks after the Aug. 13 effective date of NDAA Section 889 Part B.
While NDAA Section 889 Part B went into effect on Aug. 13, many contractors are still unsure how best to comply with the broad prohibition against the use of covered telecom, or how best to take advantage of the waiver processes. Contractors and their compliance teams continue to debate how much time and resources should be spent complying with the interim rule, and how far down the supply chain to investigate.
While an internal or third-party audit is not strictly required, the interim rule provides no further guidance on what a reasonable inquiry would look like short of an internal audit, so contractors will need to fashion an approach tailored for their business.
Additionally, although the required representation does not apply to affiliates or subsidiaries at this time, and the prohibition will not flow down to subcontractors and vendors, a contractor will still have a representation obligation if the contractor discovers that it uses covered telecom by way of an affiliate, subsidiary, subcontractor or vendor.
Accordingly, government contractors who have not already done so should begin to develop the robust, risk-based compliance approach that the interim rule contemplates. Such an approach should include the following steps:
Read and understand the rule and necessary actions for compliance;
Determine through a reasonable inquiry, including examining relationships with subcontractors and suppliers, into whether the contractor uses covered telecom as a substantial or essential component of any system, or as critical technology as part of any system;
Educate and train procurement/purchasing personnel to ensure awareness of the contractor's compliance plan;
Implement procedures for replacing any covered telecom;
Provide representation to the government whether the contractor uses covered telecom and alert the government if use is discovered during contract performance; and
If a waiver will be requested, develop a plan to phase out existing covered telecom, and provide that phase-out plan and the "complete laydown of the presence of the covered telecommunications equipment or services" as part of the waiver request.
Finally, government contractors should take care to ensure that any representations they make to the government about their Section 889 Part B compliance, including under FAR 52.204-24, are accurate. Failure to submit an accurate representation can constitute a breach of contract and can lead to contract termination or other financial consequences, including False Claims Act liability.
 NDAA Section 889(f)(3), available at https://www.congress.gov/115/plaws/publ232/PLAW-115publ232.pdf.
 NDAA Section 889(a)(1)(A): "The head of an executive agency may not … procure or obtain or extend or renew a contract to procure or obtain 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."
 NDAA Section 889(a)(1)(B): "The head of an executive agency may not … enter into a contract (or extend or renew a contract) with an entity that uses 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.
 Another FAR rule to update the SAM representation provision is anticipated after a technological update to SAM.
 "Reasonable inquiry" means an inquiry designed to uncover any information in the entity's possession about the identity of the producer or provider of covered telecommunications equipment or services used by the entity. An internal or third-party audit is not required. See 85 FR 42667, available at https://www.govinfo.gov/content/pkg/FR-2020-07-14/pdf/2020-15293.pdf.
 FAR 52.204-24(d)(1).
 FAR 52.204-24(d)(2).
 FAR 52.204-25(d)(1).
 85 FR 42665.
 85 FR 42665.
 85 FR 42674.
 85 FR 42669.