July 13, 2020

Rule Banning Chinese Telecommunications Equipment is Released

Holland & Knight Government Contracts Blog
Eric S. Crusius | Gordon Griffin | Christian B. Nagel | Ronald A. Oleynik | Kelsey M. Hayes | Jason Klitenic
Government Contracts Blog

The U.S. Department of Defense (DoD), General Services Administration (GSA) and National Aeronautics and Space Administration (NASA) released a prepublication version of an interim final rule that will bar contractors from receiving federal contract awards if they use certain Chinese telecommunications equipment or services (absent a waiver). The interim final rule, which amends FAR 52.204-24 and 52.204-25, largely adopts the ban written in Section 889 of the John S. McCain National Defense Authorization Act (NDAA) for Fiscal Year 2019. The rule's impact is severe: The prohibition includes equipment used by contractors anywhere in their processes, even if not part of an item sold to the government, and requires contractors to remove covered equipment. For numerous companies, compliance with the rule will result in a significant amount of retrofitting. In fact, the Federal Acquisition Regulatory (FAR) Council estimates that the cost of compliance for companies in the first year will be $11 billion.

As defined in the statute, the prohibited technology includes:

[T]elecommunications equipment and services produced or provided by Huawei Technologies Company or ZTE Corporation (or any subsidiary or affiliate of those entities) and certain video surveillance products or telecommunications equipment and services produced or provided by Hytera Communications Corporation, Hangzhou Hikvision Digital Technology Company, or Dahua Technology Company (or any subsidiary or affiliate of those entities).

The NDAA also bans the offending technology when it is "a substantial or essential component of any system, or as critical technology as part of any system." That means contractors will need to determine whether products labeled under other corporate names contain technology from the named Chinese companies and whether those products are "a substantial or essential component of any system, or as critical technology as part of any system."

The rule is broad and will also implicate a wide range of contracts.

  • Contracts of all values will be subject to this rule, including contracts below the micro-purchase threshold.
  • Contracts for all types of products, including commercial-off-the-shelf (COTS) products, will be subject to this rule.
  • Small businesses are not exempt from the requirements of this rule.
  • In its initial form, the interim rule applies only to the entity which is the prime contractor, but beginning no later than August 2021, the FAR Council is considering amending the rule to add domestic affiliates, parents and subsidiaries of the offeror.

A wide swath of companies – both foreign and domestic – will be impacted by this rule. In order to comply, companies will need to quickly assess their use of the offending technology and develop mitigation plans. Recognizing the broad impact of this new rule, the FAR Council published a compliance guide within the rule itself. Among its guidance, the FAR Council recommends that contractors utilize corporate enterprise tracking to determine the use of the impacted equipment or services, as well as education of entities' purchasing departments.

While the rule includes a waiver process, it is burdensome, is on a contract by contract basis and requires that contracting agencies consult with the Office of the Director of National Intelligence, among other steps. Additionally, the rule includes several exceptions from coverage, but these exceptions are narrow and largely tailored to protect the use of third-party internet service providers.

The rule will be effective Aug. 13, 2020, and the new and revised FAR provisions and clauses will be included in solicitations issued on or after that date. The interim rule also requires existing contracts to be modified to include the new requirements at the time of option exercise or other contract extension. The public will have the opportunity to comment, and such comments will be evaluated to determine whether any post-implementation alterations are necessary in a final rule.

Holland & Knight is continuing to review this rule and will release a more comprehensive analysis in the coming days. In the meantime, if you have any questions, please feel free to reach out to your Holland & Knight attorney.

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