If you happen to be a government contractor and are contemplating additions to your Summer reading list, consider adding the FAR Council’s May 3, 2024 advanced notice of proposed rulemaking (“ANPR”) to the mix. The ANPR, which was issued in furtherance of implementing Section 5949 of the FY 2023 National Defense Authorization Act (“NDAA”), contemplates various forthcoming changes to the FAR, all of which focus on banning agencies from purchasing certain products or services that contain or otherwise utilize semiconductors that are produced, designed, or provided by three Chinese entities and their subsidiaries, affiliates, or successors: Semiconductor Manufacturing International Corporation (“SMIC”), ChangXin Memory Technologies (“CXMT”), and Yangtze Memory Technologies Corp. (“YMTC”). In addition, the FAR will likely be amended to prohibit the acquisition of semiconductor products or services from any entity that is owned, controlled by, or otherwise connected to China, North Korea, Iran, Russia and any other “foreign country of concern” – a designation to be determined by the Secretary of Defense or the Secretary of Commerce, in consultation with the Director of National Intelligence or the Director of the Federal Bureau of Investigation.
Key Definitions
- Covered Entities: any entity that designs a semiconductor using technology and/or software originating in the United States and which purchases covered semiconductor products or services from SMIC (including its subsidiaries, affiliates, and/or successors) or China, Russia, Iran, North Korea and/or any other foreign country of concern designated by the Secretary of Commerce or Defense.
- Covered Semiconductor Product or Services: a semiconductor, a product incorporating a semiconductor, or a service that utilizes such a product that is designed, produced, or provided by SMIC, YMTC, CXMT (inclusive of subsidiaries, affiliates, and/or successors) and/or any foreign country of concern.
- National Security System: defined to include a telecommunications or information system operated by the Federal government and which involves intelligence activities, cryptologic activities relating to national security, command and control of military forces, equipment that is an integral part of a weapon or weapons system, or which is otherwise critical to the direct fulfillment of military or intelligence missions.
Contractor Compliance Requirements
- Given the central role that semiconductors play in national security systems and the omnipresence of semiconductors in electronic products and services provided to the Government, the ANPR envisions that contractors will be required to “conduct a reasonable inquiry” to detect and avoid the use or inclusion of covered semiconductor products or services in their supply chains. Importantly, the ANPR provides that contractors should be able to “reasonably rely” on the certifications of compliance from covered entities and relevant subcontractors in the supply chain. Although the ANPR notes that “formal reviews” or “independent third-party audits” are not required as part of the reasonable inquiry process, the ANPR makes clear that “other mechanisms of diligence review” may be required, depending on the facts and circumstances of each case.
- The FAR Council is also contemplating requiring offerors to identify – at a granular level – the provenance of the supply chain for semiconductor components for each electronic product provided to the Government. In particular, contractors may be required to identify (i) vendors and facilities responsible for the design, fabrication, assembly, packaging, and test of the product, and (ii) manufacturer and distributor codes used for the product.
- The ANPR notes that the FAR Council is planning to promulgate a contract clause that requires contractors to certify, after appropriate due diligence, that covered semiconductor products or services will not be used in contract performance. The clause is slated to be included in all contracts (regardless of their nature and value) and is expected to be flown down to subcontractors at every level.
- A contractor that discovers a covered semiconductor product or service is expected to disclose such discovery to its direct customers and must also notify appropriate Federal authorities within 60 days of learning or suspecting that a covered product or service has been purchased for use by the Government. In addition, contractors may be required to incur rework/corrective action costs to remedy the use or inclusion of any covered semiconductor product or service at no expense to the Government (i.e., the remedial costs will not be allowable).
The Path Forward
Comments on the ANPR are due by July 2, 2024 and the prohibitions contemplated by the ANPR are not slated to take effect until December 23, 2027. We can all rest assured that there will be significant regulatory activity during these intervening months – including the likely promulgation of a proposed rule, the adoption of the final rule, and resulting FAR modifications. One thing that is clear, however, is that contractors of virtually all stripes should pay careful attention to the inbound compliance burdens and supply chain surveillance requirements contemplated by the ANPR. As in life, the best way to stay ahead of the curve in the world of federal procurement is to plan and prepare. We’ll keep you updated as events unfold.
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