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August 20, 2019

Interim Rule Bans Use of Huawei, ZTE and Other Chinese Companies Effective Immediately


Last week, the Department of Defense (DoD), General Services Administration (GSA) and National Aeronautics and Space Administration (NASA) issued an interim rule prohibiting federal agencies from procuring telecommunications and video surveillance equipment and services from five Chinese companies (with the potential for additional companies to be added to the list of proscribed suppliers): Huawei Technologies Company (Huawei), ZTE Corporation (ZTE), Dahua Technology Company, Hytera Communications Corporation, and Hangzhou Hikvision Digital Technology Company.

This interim rule revises the Federal Acquisition Regulation (FAR) to implement Section 889(a)(1)(A) of the John S. McCain National Defense Authorization Act for Fiscal Year 2019 (FY 2019 NDAA), and reflects the culmination of numerous efforts by the US government to eliminate a perceived threat to the supply chain and national security by the named companies.

The interim rule, which went into effect on August 13, 2019, and without prior opportunity to comment due to what the government described as "urgent and compelling reasons," articulates important definitions for two terms in the FAR prohibition and imposes significant requirements on industry, including that offerors affirmatively represent whether any of the covered equipment or services will be used in providing goods or services to the government, even if the use of such equipment is not prohibited by the rule.

Procurement Prohibition

The prohibition implemented in the interim rule was first articulated in Section 889(a)(1)(A) of the FY 2019 NDAA, which banned federal agencies from procuring "covered telecommunications equipment or services" as a "substantial or essential component" of any system, or as "critical technology" as part of any system. Congress defined "covered telecommunications equipment or services" to include telecommunications equipment or services provided by Huawei and ZTE (including their subsidiaries and affiliates) as well as certain video surveillance equipment and services provided by three other Chinese companies.

To interpret the scope of the prohibition, the interim rule defines two terms that are used in the relevant FAR provision.

First, the rule adopts the definition of "critical technology" set forth in a Committee on Foreign Investment in the United States amendment that was also passed in the FY 2019 NDAA as the Foreign Investment Risk Review Modernization Act (FIRRMA). The FIRRMA definition generally includes the following: (1) defense articles or defense services included on the US Munitions List; (2) items included on the Commerce Control List; (3) specially designed and prepared nuclear equipment, parts, components, materials, software, and technology related to foreign atomic energy activities; (4) nuclear facilities, equipment or material; (5) select agents or toxins; (6) and emerging and foundational technologies pursuant to the Export Control Reform Act of 2018. DoD, GSA and NASA recognized that this definition is likely overbroad to include, for instance, select agents or toxins. Nevertheless, the agencies reasoned that adopting the FIRRMA definition will ensure consistency of application across provisions related to national security.

The interim rule then defines a "substantial or essential component" as "any component necessary for the proper function or performance of a piece of equipment, system, or service." Given the lack of guidance on what constitutes a component "necessary" for "proper function or performance," the government will likely read this definition broadly—characterizing most, if not all, covered equipment or services as a "substantial or essential component" of the system at issue and thereby subject to the prohibition, without reaching the question of whether it constitutes a "critical technology" as defined in the FIRRMA.

Application of the Ban

The interim rule effectuates the Section 889(a)(1)(A) prohibition by requiring that federal agencies include FAR 52.204-24, Representation Regarding Certain Telecommunications and Video Surveillance Services or Equipment, and FAR 52.204-25, Prohibition on Contracting for Certain Telecommunications and Video Surveillance Services or Equipment, in solicitations and contracts issued on or after August 13, 2019. Contractors, in turn, are required to flow down certain requirements to their subcontractors.

Notably, the interim rule extends application of the prohibition to procurements at or below the simplified acquisition threshold and acquisitions of commercial items, including commercially available off-the-shelf items, because of what DoD, GSA and NASA characterized as an "unacceptable level of risk for the Government." Pending procurements and certain existing contracts will also be impacted. A contract awarded after August 13, 2019 must include the relevant FAR provision, even if the solicitation (and proposals in response to that solicitation) did not contemplate the ban. Existing indefinite delivery contracts must also be revised to include the prohibition prior to the award of any future task or delivery orders.

Offeror Representation

The interim rule imposes several requirements on contractors. First, an offeror must submit the following representation with each proposal:

The Offeror represents that—It [ ] will, [ ] will not provide covered telecommunications equipment or services to the Government in the performance of any contract, subcontract or other contractual instrument resulting from this solicitation.

Importantly, this representation is broader than the prohibition itself. It is not limited to use of "covered telecommunications equipment or services" that qualify as a "substantial or essential component" of any system, or as "critical technology" as part of any system. The offeror must identify any use of covered equipment or services during contract performance, and then explain why its reported use "would be permissible under the prohibition." This expansive requirement affords the government insight into the contractor's judgment as to whether the definitions set forth in the interim rule are met, and thereby puts the government in the position of ultimately determining whether the contractor's use of covered equipment or services is or is not prohibited.

In an effort to reduce the information collection burden, DoD, GSA and NASA are updating the System for Award Management to allow offerors to represent annually whether they sell "covered telecommunications equipment or services" to the government. Offerors who answer affirmatively on the annual assessment will be required to provide offer-by-offer representations for contracts and task or delivery orders under indefinite delivery contracts.

Reporting Requirement

The interim rule also imposes a reporting requirement on contractors throughout performance. Contractors are required to report any prohibited equipment, systems, or services discovered during contract performance "[w]ithin one business day from the date of such identification or notification" and "[w]ithin 10 business days of submitting the information," must provide any information available regarding the contractor's mitigation actions. The contractor must also "describe the efforts it undertook to prevent use or submission of covered telecommunications equipment or services" in the first place as well as how those efforts will be augmented in the future. The contractor must flow down this reporting requirement to its subcontractors as well.

Exceptions and Waiver

There are only two stated exceptions to the prohibition on use of "covered telecommunications equipment and services." The FAR prohibition does not apply to contractors providing (1) "[a] service that connects to the facilities of a third-party, such as backhaul, roaming, or interconnection arrangements" and (2) "[t]elecommunications 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." As noted above, even if a contractor believes that its use of covered equipment or services falls under one of these exceptions, the contractor is still required by the FAR to report the use and explain why it meets one of these exceptions.

The interim rule also authorizes the head of an executive agency to grant a one-time waiver through August 13, 2021 to a "Government entity," e.g., a requirements or contracting office, that demonstrates a "compelling justification for the additional time to implement the requirements." The Director of National Intelligence may also provide a waiver "if the Director determines the waiver is in the national security interests of the United States."

More Forthcoming

In addition to the prohibition in Section 889(a)(1)(A), the FY 2019 NDAA set forth additional requirements further expanding the scope of the ban on "covered telecommunications equipment or services."

First, the prohibition in Section 889(b)(1) expands the Section 889(a)(1)(A) prohibition to loan and grant funds. Section 889(a)(1)(B) then prohibits federal agencies from entering into a contract (or extending or renewing an existing contract) with any 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 a critical technology as part of any system." It remains to be seen whether the latter prohibition will require contractors that wish to continue working with the US government to eliminate use of covered equipment or services provided by named companies like Huawei and ZTE, beyond that which supports their performance of government contracts.

These additional prohibitions require separate rulemakings and will likely take effect on August 13, 2020. In the meantime, interested parties may submit comments regarding the Section 889(a)(1)(A) interim rule on or before October 15, 2019, to be considered during formation of the final iteration.

© Arnold & Porter Kaye Scholer LLP 2019 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.