August 12, 2019

Interim Rule Banning Huawei and Other Chinese Companies Released

Holland & Knight Government Contracts Blog
Eric S. Crusius | Mary Beth Bosco

On Wednesday, August 7, DoD, GSA, and NASA released an interim rule that will have the effect of largely banning products and services from Huawei Technologies Company, ZTE Corporation, Hytera Communications Corporation, Hangzhou Hikvision Digital Technology Company and Dahua Technology Company from being purchased by federal government end users. The interim rule, which is implementing part of Section 889 of the 2019 National Defense Authorization Act (NDAA), is scheduled to take effect tomorrow, August 13, 2019, and results in two new FAR clauses: 52.204-24 and -25.1 Our previous blog discussing Section 889 can be found here.2 The impact of the rule is far-ranging because it will apply to all types of procurements and all businesses without regard to size and will also require regular certifications from all contractors (at least initially) seeking contracts with the federal government.

Section 889 of the 2019 NDAA

The interim rule follows the 2019 NDAA. As discussed in our previous blog, Section 889(A)(1)(a) provides that agencies 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." Notably, the ban is not absolute because it only covers situations where the banned equipment/services is a "substantial or essential component" of any system or as "critical technology" as part of any system.

  • The Interim Rule defines a "substantial or essential component" as one that "means any component necessary for the proper function or performance of a piece of equipment, system, or service." See FAR § 4.2102.
  • The definition of "critical technology" covers a wide swath of products, but is more specific and includes items: (i) covered by the International Traffic in Arms Regulations; (ii) included in the Commerce Control List (under certain circumstances); (iii) nuclear equipment covered by 10 CFR parts 110 and 810; (iv) "select" agents and toxins; and (v) "emerging and foundational technologies controlled pursuant to section 1758 of the Export Control Reform Act of 2018." Id.

The ITAR Munitions List and Commerce Control List are themselves broad and will mean that the definition of "critical technology" will impact contractors across different industries. This, coupled with the fact that it also includes ordinary components that are "substantial" or "essential" to an end product, means that all contractors will need to pay attention to this rule.

What the Interim Rule Requires

Like Section 889, the Interim Rule prohibits the sale of covered products or services to the federal government. Unlike the Kaspersky ban, however, there is no general prohibition on the use of covered products in a company's supply chain so long as a covered product is not furnished to the federal government as part of a deliverable.

Besides prohibiting the use of certain products, contractors will have to make a regular representation and disclosure to the Government until a dedicated section on SAM.gov is developed.

Companies and Procurements Impacted by the Interim Rule

Even with this administration's tilt towards deregulation, the Government determined that the interim rule was important enough to make it applicable to businesses of all sizes, as-well-as commercial off-the-shelf ("COTS") and commercial purchases. Also, even though this rule was developed from a provision in the NDAA, it will apply to civilian agencies.

Moreover, starting tomorrow, the clauses will be required in all new solicitations or in contracts that have not been awarded. In addition, contracting agencies will be required to insert the new clauses in every indefinite delivery contract so future orders will be covered, and into every contract when the length of performance is extended (including when an option is exercised). Within a year, these FAR clauses will be ubiquitous across the federal government.

Compliance Challenges and a Look Ahead

Contractors will need to quickly examine their supply chains to ensure no covered products or services are delivered to the federal government. If a contractor determines that covered products/services are scheduled to be delivered to the federal government after the effective date of these FAR clauses, the contractor should seek alternative sources and inform the Government of a potential delay.

Second, even if covered products and services will not be delivered to the federal government, contractors should look at the supply chain and examine if such products and services are present. This will ensure that covered products and services are not mistakenly delivered and aid contractors if such a requirement becomes more stringent (like the Kaspersky ban).

Looking ahead, the staying power of this interim rule will depend on the comments received by the FAR Council, the ongoing geopolitical currents, and the outcome of the lawsuit filed by Huawei. Should this rule be finalized, expect it to remain, and for enforcement to be vigorous. Failure to comply with this rule could result in contract termination or False Claims allegations under an implied certification theory.

Notes

1Following the enactment of Section 889, Huawei filed a lawsuit in the Eastern District of Texas seeking to invalidate it. While Huawei did not seek preliminary relief that could have suspended the rulemaking process, the parties will argue pretrial motions on September 19, 2019 seeking judgments in their favor.

2The NDAA, which was enacted on August 13, 2018, required this provision to be effective within one year.

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