In light of recent reports documenting a significant increase in counterfeit parts across the supply chain, the Department of Defense and the Federal Acquisition Regulatory Council have recently issued a number of rules ostensibly seeking to mitigate the growing threat counterfeit items pose.
In actuality, however, the proposed rules expand obligations for defense and other government contracting manufacturers and suppliers well beyond mere counterfeit issues. While the Department of Defense final rule only applies to Department of Defense contracts and solely concerns counterfeit issues with electronic parts, the Federal Acquisition Regulatory Council’s proposed rule would cover all federal supply contracts and concerns both counterfeit and nonconformance issues related to any type of end item.
On May 6, 2014, the Department of Defense published its first final rule amending the Defense Federal Acquisition Regulation Supplement in partial implementation of Section 818 of the National Defense Authorization Act for Fiscal Year 2012. Several weeks later, on June 10, 2014, the Federal Acquisition Regulatory Council issued a proposed rule seeking to amend the Federal Acquisition Regulation in partial implementation of Section 818 of the National Defense Authorization Act for Fiscal Year 2012. While these two rules are linked in some respects, the Federal Acquisition Regulatory Council’s proposed rule is much broader in scope and application than the Department of Defense’s final rule. In short, the proposed rule seeks to reduce the risk of counterfeit and nonconforming items by building on the existing contractor inspection system requirements and adding a requirement for contractors to report to the Government-Industry Data Exchange Program (GIDEP) database a “counterfeit item,” a “suspect counterfeit item,” or an item that contains a “major nonconformance” or “critical nonconformance” that is a common item and constitutes a quality escape that has resulted in the release of like nonconforming items to more than one customer. The rule also requires contractors and subcontractors to screen reports in the GIDEP database to avoid the use and delivery of reported items.
Applicability and Definitions
The proposed rule broadly applies to any Federal Acquisition Regulation-covered agency and all contractors and subcontractors at any tier providing supplies to the government, including commercial item and small business vendors. The proposed rule provides definitions for the following five key terms:
Common item: an item that has multiple applications versus a single or
peculiar application. Common items include, for example, raw or processed
materials, parts, components, subassemblies and finished assemblies that are
commonly available products (such as non developmental items, off-the-shelf
items, National Stock Number items or commercial catalog items).
Counterfeit item: an unlawful or unauthorized reproduction, substitution or
alteration that has been knowingly mismarked, misidentified or otherwise
misrepresented to be an authentic, unmodified item from the original
manufacturer or a source with the express written authority of the original
manufacturer or design activity, including an authorized aftermarket
manufacturer. Unlawful or unauthorized substitution includes used items
represented as new or the false identification of grade, serial number, lot
number, date code or performance characteristics.
Design activity: an organization, government or contractor that has
responsibility for the design and configuration of an item, including the
preparation or maintenance of design documents. Design activity could be the
original organization or an organization to which design responsibility has
Quality escape: a situation in which a supplier’s internal quality control
system fails to identify and contain a nonconforming condition.
Suspect counterfeit item: an item for which credible evidence (including but
not limited to visual inspection or testing) provides reasonable doubt that the
item is authentic.
The proposed rule does not suggest any changes to the definitions of “critical nonconformance” or “major nonconformance” currently provided under FAR Section 46.101.
Summary of Key Obligations and Requirements
Under the proposed rule, a contractor would be subject to two broad reporting requirements. First, contractors would have to provide a written report to (GIDEP) within 60 days of becoming aware that a common item purchased by or for the contractor for delivery to or for the government is counterfeit, is suspected to be counterfeit or contains a major or critical nonconformance and constitutes a quality escape that has resulted in the release of like nonconforming items to more than one customer. Second, contractors would have to provide a written report to the contracting officer within 30 days of becoming aware of any end item, component, subassembly, part or material contained in supplies purchased by the contractor for delivery to or for the government is counterfeit or is suspected to be counterfeit.
In addition to these two reporting requirements, contractors would be required to screen reports in the (GIDEP) database to avoid the use and delivery of items that are counterfeit, suspected to be counterfeit or contain a major or critical nonconformance. Contractors would also be required to retain all counterfeit or suspect counterfeit items until the contracting officer provides disposition instructions.
The public comment period for the proposed rule ended on September 10, 2014. Given the breadth and significant impact of the proposed rule, the Federal Acquisition Regulatory Council will likely spend some time reviewing the comments and considering revisions to the proposed rule. Of particular concern is that the proposed rule, unlike the Department of Defense final rule, does not protect contractors and subcontractors from civil liability that may arise from good-faith compliance with the mandatory reporting requirements. Further, the proposed rule fails to address how manufacturers/vendors/suppliers can challenge an incorrect report and what minimal steps contractors and subcontractors must take in order to properly incorporate the GIDEP screen into their procurement process.
However the Federal Acquisition Regulatory Council ultimately addresses these issues, the newly expanded reporting and screening requirements will have a significant impact on the government contracting community as a whole. Moreover, how the Federal Acquisition Regulatory Council ultimately implements this rule will be a good indicator of what the Department of Defense will likely do in terms of interpreting and expanding its rules concerning counterfeit and nonconforming parts. And if you think lawyers will be monitoring GIDEP for opportunities to file product liability lawsuits or False Claims Act fraud claims, you are probably correct.
Steven R. Campbell is a senior associate in the Construction & Government Contracts Group at Alston & Bird LLP, a national full-service law firm. Jeffrey A. Belkin is a former Department of Justice trial lawyer and leads the Government Contracts practice at Alston & Bird.