Final Rule Expands Reporting Requirements for Counterfeit Parts and Nonconforming Items Delivered to the Federal Government

Litigation Alert
11.26.2019

Covered federal contractors and subcontractors now have 60 days to report to the Government-Industry Data Exchange Program (GIDEP) when they identify certain counterfeit parts, suspect counterfeit parts, or nonconformances in the supplies they deliver to or for the U.S. government. This final rule, which updates the Federal Acquisition Regulation (FAR) effective November 22, is a dramatic expansion of the mandatory GIDEP reporting requirements for counterfeit and nonconforming items, which previously applied to Department of Defense (DoD) contractors and counterfeit electronic parts only. Though the new rule ostensibly expands GIDEP reporting to a greater number of federal agencies, its scope is subject to several significant limitations. Therefore, all federal contractors and subcontractors should carefully review the final rule to determine its applicability to their operations and, if necessary, update their internal procedures for identifying and reporting counterfeit and nonconforming items to the GIDEP. 

Background

Pursuant to Section 818 of the National Defense Authorization Act (NDAA) for fiscal year 2012, DoD, the General Services Administration (GSA), and the National Aeronautics and Space Administration (NASA) published a rule in June 2014 that required covered DoD contractors and subcontractors to report to the GIDEP counterfeit or suspect counterfeit electronic parts purchased by or for DoD. This reporting requirement is set forth in DFARS 252.246-7007, Contractor Counterfeit Electronic Part Detection and Avoidance System (Aug. 2016). The GIDEP is a cooperative program through which government and industry share technical information that, among other purposes, helps improve the integrity of supply chains supporting the federal government's high value, mission critical defense, space, or critical infrastructure systems. In recent years, the GIDEP has been utilized by contractors to report and successfully remove from the supply chain counterfeit parts that otherwise could have jeopardized important government systems, including:

  • Faulty rivets that could have caused military aircraft failure in flight.
  • Counterfeit electronic parts that would have caused a $100M failure of a satellite in orbit.
  • Counterfeit bolts securing overhead gantry cranes in a Government industrial facility. Counterfeit raw stock materials (aluminum, steel, and titanium) supplied over a decade and used in structural applications across defense and civil systems and infrastructure.
  • Uncertified electronic connectors that shut down large parts of the defense and space industrial base production for six months.

See 84 Fed. Reg. 64,680, 64,681–682. According to the recently-issued final rule, requiring GIDEP reporting beyond electronic parts for DoD was necessary "because the problem of counterfeit and nonconforming parts extends far beyond electronic parts and can impact the mission of all Government agencies, such as NASA and the Department of Energy, and mission critical systems such as avionics, satellites, space flight systems, and nuclear facilities." See 84 Fed. Reg. at 64,682. There also was recognition, however, that a blanket expansion of the reporting requirements would increase costs significantly and, in many cases, yield only marginal benefits. For this reason, the applicability of the "final rule is significantly descoped" to focus primarily on supplies that require higher-level quality standards or are determined to be "critical items." See id

The New FAR Rule

The final rule requires a new FAR clause—FAR 52.246-26, Reporting Nonconforming Items (Dec. 2019) — to be included in solicitations and contracts for: 

  1. An acquisition by any agency, including DoD, of: (i) any items that are subject to higher-level quality standards under FAR 52.246-11, Higher-Level Contract Quality Requirement; and (ii) any items that the contracting officer determines to be "critical items," defined as those that may result in hazardous or unsafe conditions or which could compromise vital agency missions if they fail. 
  2. Any DoD acquisition above the simplified acquisition threshold ($250,000) of electronic parts or end items, or materials containing electronic parts, whether or not covered by paragraph (1) above. 
  3. The acquisition of services, if the contractor will furnish, as part of the service, any items covered by paragraphs (1) and (2) above. 

See 84 Fed. Reg. at 64,694–695. FAR 52.246-26 does not apply to solicitations or contracts for (a) commercial items (including Commercial-Off-The-Shelf (COTS) items) that are procured using FAR Part 12 procedures; or (b) medical devices that are subject to the Food and Drug Administration reporting requirements at 21 C.F.R. § 903. See id. at 64,695. Prime contractors and higher-tier subcontractors must "flow down" FAR 52.246-26 to subcontracts using the same criteria and exceptions. See id. at 64,695–696.

When applicable, FAR 52.246-26 will require covered contractors and subcontractors to:

  1. Screen GIDEP reports as part of the contractor's inspection system or quality control program. The ultimate purpose of this screening requirement is to help contractors and subcontractors avoid: (a) the use and delivery of counterfeit or suspected counterfeit items,1 or (b) the delivery of items that contain a "major or critical nonconformance,"2 on government programs. 
  2. Provide written notification to the contracting officer within 60 days of "becoming aware or having reason to suspect" — through inspection, testing or other measures — that 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 suspect counterfeit. 
  3. Retain counterfeit or suspect counterfeit items in its possession until the contracting officer provides disposition instructions.
  4. Report to GIDEP within 60 days of "becoming aware or having reason to suspect" — through inspection, testing, or other measures — that any end item, component, subassembly, part, or material contained in supplies purchased by the contractor for delivery to or for the government is: (i) counterfeit or suspect counterfeit; or (ii) a "common item"3 that has a major or critical nonconformance. 

See id. The GIDEP reporting requirements do not apply if: (a) the contractor is a "foreign corporation or partnership that does not have an office, place of business, or fiscal paying agent in the United States"; (b) the contractor is aware of an ongoing criminal investigation regarding the item; or (c) for nonconforming items (other than counterfeit or suspect counterfeit items), the contractor can confirm where the defect was generated and that the item has not been released to more than one customer. See id

Takeaways

While there are many takeaways from the recently-issued final rule, a few stand out. 

First, though narrowly tailored on its face, the new final rule will require many U.S. contractors and subcontractors to comply with GIDEP reporting requirements for the first time. It also will require many DoD contractors and subcontractors to expand their GIDEP reporting beyond electronic parts currently covered by DFARS 252.246-7007, Contractor Counterfeit Electronic Part Detection and Avoidance System (Aug. 2016). As a consequence, all contractors and subcontractors that may be subject to FAR 52.246-26, Reporting Nonconforming Items (Dec. 2019), should take steps in the coming weeks to: (a) determine whether and to what extent the new reporting requirements will apply to their operations; and (b) begin implementing any necessary updates to their internal procedures for identifying and reporting counterfeit, suspected counterfeit, and nonconforming items covered by the new rule. 

Second, in developing or revising internal reporting procedures, contractors and subcontractors should take note that they must notify the contracting officer and/or report to the GIDEP within 60 days of "becoming aware or having reason to suspect . . . through inspection, testing, record review, or notification from another source (e.g., seller, customer, third party) that an item purchased by the contractor" for delivery to or for the government is counterfeit, suspect counterfeit, or nonconforming within the meaning of FAR 52.246-26. See 84 Fed. Reg. at 64,686 ("The 60-day period begins when the contractor first becomes aware or has reason to suspect . . .") (emphasis added). Given the complexity of many contractors' operations and supply chains, understanding the types of events that can trigger the 60-day reporting period will be critical to ensuring compliance. Among other measures, covered contractors and subcontractors should consider how best to incentivize lower-level employees to promptly report known or suspected items that may fall under the requirements of FAR 52.246-26. 

Third, when making reports to the GIDEP, contractors and subcontractors should be aware that FAR 52.246-26 prohibits the disclosure of: (a) trade secrets or confidential commercial or financial information protected under the Trade Secrets Act (19 U.S.C. § 1905); or (b) any other information prohibited from disclosure by statute or regulation. See 84 Fed. Reg. at 64,695. At the same time, the final rule's so-called "safe harbor" from civil liability applies only to reports by DoD contractors and subcontractors regarding electronic parts. See id. Accordingly, contractors and subcontractors should work closely with in-house or outside legal counsel to ensure that their GIDEP reports do not contain prohibited information (e.g., belonging to a supplier) that could expose their company to civil liability. 


For more information, please contact:

Alejandro L. Sarria, asarria@milchev.com, 202-626-5822

Jason N. Workmaster, jworkmaster@milchev.com, 202-626-5893

Abigail T. Stokes, astokes@milchev.com, 202-626-5944

Marcus A.R. Childress, mchildress@milchev.com, 202-626-5917

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1"Counterfeit item" is "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 current 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." A "suspect counterfeit item" is "an item for which credible evidence (including but not limited to, visual inspection or testing) provides reasonable doubt that the item is authentic."  
2A "major nonconformance" is defined as "a nonconformance, other than critical, that is likely to result in failure of the supplies or services, or to materially reduce the usability of the supplies or services for their intended purpose." A "critical nonconformance" is defined as "a nonconformance that is likely to result in hazardous or unsafe conditions for individuals using, maintaining, or depending upon the supplies or services; or is likely to prevent performance of a vital agency mission."
3A "common item" is "an item that has multiple applications versus a single or peculiar application."  


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