DoD Granted Temporary Waiver on Phase 2 of Federal Contracting Ban; Commerce Dpt. Broadens Export Control Restrictions Concerning Huawei

We recently wrote about “Phase 2” of the federal contract mandate, effective August 13, 2020, that prohibits federal prime contractors from using equipment, systems, or services provided by certain Chinese entities “as a substantial or essential component” of any of the federal contractor’s systems, or as a “critical technology” of any of the federal contractor’s systems. As explained in the prior Client Alert, the Phase 2 mandate represents a significant expansion of the preceding restriction, both required by the John S. McCain National Defense Authorization Act for Fiscal Year 2019, Pub. Law 115-232, Section 889 (“Section 889”). Since the publication of our prior Client Alert, the Director of National Intelligence (“DNI”) granted the U.S. Department of Defense (“DoD”) a temporary limited waiver from compliance with the Phase 2 restriction until at least September 30, 2020, thereby providing DoD contractors additional time to become compliant with the new Phase 2 requirements. This Client Alert provides details on the extent of this limited waiver, as well as other recent federal restrictions on products from certain Chinese entities.

Background

Section 889, entitled Prohibition of Certain Telecommunications and Video Surveillance Services or Equipment, imposed broad prohibitions against federal agencies acquiring, financing, or dealing with firms that use certain telecommunications and video surveillance equipment produced by, or telecommunications and video surveillance services provided by, five Chinese companies: Huawei Technologies Company (“Huawei”), ZTE Corporation, Hytera Communications Corporation, Hangzhou Hikvision Digital Technology Company, or Dahua Technology Company (collectively “Chinese firms”). Phase 2 of the Section 889 restrictions went into effect on August 13, 2020 and prohibits all federal agencies from entering into new contracts or extending an existing contract with a prime contractor that uses the equipment, system, or services of the Chinese firms as a “substantial or essential component” or “critical technology,” and it applies even when that use is not related to performance of a federal government contract or work. While an interim Federal Acquisition Regulation (“FAR”) rule, effective August 13, 2020, implemented Phase 2 of the Section 889 restrictions, the FAR provisions were ambiguous in key respects, leaving many contractors, and their federal agencies, confused about how to comply with the Phase 2 restrictions.

To its credit, DoD recognized this confusion and the dilemma facing its contractors, and sought a temporary waiver of the Phase 2 requirements. On August 12, 2020, the DNI granted the request of the DoD Under Secretary for Acquisition and Sustainment for a temporary limited waiver of the prohibitions in Section 889 for the DoD. Section 889 provided the DNI the authority to grant a waiver to the head of an agency of the Section 889 restrictions if the waiver is in the United States’ national security interests. The temporary waiver granted to DoD will be in effect until September 30, 2020 and may be extended if it is later determined that extending the waiver is in the country’s national security interests.

The DNI found that granting such a waiver for DoD is in the United States’ national security interest because it would permit DoD to continue to execute procurement actions providing supplies, equipment, services, food, clothing, transportation, care, and support necessary to execute the DoD mission. The waiver is limited because it applies only to products and services considered low risk to national security, such as food, clothing maintenance services, and non-electronic construction materials, but does not apply to major weapons systems or any support activity related to them. Additionally, this waiver applies only to DoD agencies, although other agencies could request a similar waiver.

Impact of the DoD Waiver

While the DoD waiver is in effect, contractors submitting proposals to DoD agencies for new contracts for low risk products and services likely will not be required to make representations concerning their use of equipment and services provided by the Chinese firms other than as used to perform federal contracts. Offerors should consider whether the August 2020 versions of FAR 52.204-24 and 52.204-25 (i.e., the Phase 2 versions) are included in DoD solicitations they are pursuing to determine whether the Phase 2 Section 889 restrictions will apply to the contract. If they are, then offerors should ask the DoD soliciting agency whether the procurement is eligible for the DoD wavier. On the other hand, if the pre-August 2020 versions of those clauses are included, that would suggest the agency has determined the procurement is covered by the waiver, and offerors prospective subcontractors and suppliers will not need to comply with Phase 2 of the Section 889 restrictions for that contract while the waiver is in effect. 

Additionally, DoD agencies exercising option periods or otherwise extending existing contracts for certain low risk products and services should not require such a representation before the contract can be extended. If the Section 889 waiver does not apply to a DoD contract, meaning the Section 889 Phase 2 restrictions do apply, DoD would require a representation regarding the prime contractor’s use of the Chinese firms’ equipment or services prior to extending the contract or exercising an option period.

Recent Restrictions on Exports to Huawei and its Affiliates

In another action directed specifically at Huawei and its affiliates, on August 20, 2020, the U.S. Department of Commerce, Bureau of Industry and Security (“BIS”) issued new export control rules that restrict Huawei and its non-U.S. affiliates from using U.S. technology and software to design and manufacture its semiconductors abroad. Previously, in 2019, BIS added Huawei and 114 of its non-U.S. affiliates to the BIS’ Entity List of foreign persons, businesses, and organizations that are subject to specific license requirements for the export, reexport, and/or transfer of specified items. In May 2020, the BIS issued a rule restricting Huawei and its affiliates’ acquisition of semiconductors that are the direct product of certain U.S. software and technology. 

The new BIS rules expand the prohibition on exporting U.S. software and technology to Huawei and its affiliates by precluding two types of transactions: (1) where U.S. software or technology is the basis for a foreign-produced item that will be incorporated into or will be used in the “production” or “development” of any “part,” “component,” or “equipment” produced, purchased, or ordered by any Huawei entity on the Entity List; or (2) when any Huawei entity on the Entity List is a party to such a transaction, such as a “purchaser,” “intermediate consignee,” “ultimate consignee,” or “end-user.” The BIS also added 38 new Huawei-affiliated entities to the Entity List, expanding the universe of entities to which the Huawei-related restrictions apply.

To discuss how the DoD waiver of Section 889 requirements or the Huawei export restrictions could impact your business, contact David Ralston ([email protected]) or Julia Di Vito ([email protected]) in Foley’s Washington, D.C. office.