Earlier today, the FAR Council issued a final rule revising the FAR definition of “commercial item.” The final rule effectively splits the prior definition of “commercial item” into separate definitions for “commercial product” and “commercial service,” without making substantive changes to the existing definitions. The final rule also replaces references to “commercial items” throughout the FAR with corresponding references to “commercial products,” “commercial services,” or both, as appropriate.
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M&A and Section 889: Due Diligence and Integration Considerations
(This article was originally published in Law360 and has been modified for this blog.)
Companies in a range of industries that contract with the U.S. Government—including aerospace, defense, healthcare, technology, and energy—are actively working to assess whether or not their information technology systems comply with significant new restrictions that will take effect on August 13, 2020. These new restrictions prohibit the use of certain Chinese telecommunications equipment and services, and a failure to comply can have dramatic consequences for these companies. The new restrictions also will have an immediate impact on mergers and acquisitions involving a company that does—or hopes to do—business with the Federal government. In this article, we highlight some key considerations for M&A practitioners relating to these restrictions.
Background
On July 14, 2020, the U.S. Government’s Federal Acquisition Regulatory Council (“FAR Council”) published an interim rule to implement Section 889(a)(1)(B) of the John S. McCain National Defense Authorization Act for Fiscal Year 2019 (“FY19 NDAA”).[1] When the new rule takes effect on August 13, it will prohibit the Department of Defense and all other executive branch agencies from contracting—or extending or renewing a contract—with an “entity” that “uses” “covered telecommunications equipment or services as a substantial or essential part of any system.” The restrictions cover broad categories of equipment and services produced and provided by certain Chinese companies—namely Huawei, ZTE, Hytera, Hangzhou Hikvision, Dahua, and their affiliates.[2]
The new rule will be applicable to all contracts with the U.S. Government, including those for commercial item services and commercially available-off-the-shelf products.[3] Companies with a single one of these contracts will soon have an ongoing obligation to report any new discovery of its internal “use” of certain covered telecommunications equipment and services to the Government within one business day with a report of how the use will be mitigated ten business days later.[4] Further, although companies can seek to obtain a waiver on a contract-by-contract basis from agencies, these waivers must be granted by the head of the agency, and may only extend until August 13, 2022 at the latest.[5]
The new rule is the second part of a two-stage implementation of Section 889’s restrictions on covered telecommunications equipment and services in Government contracting. It builds on an earlier rule that implemented Section 889(a)(1)(A) of the FY19 NDAA on August 13, 2019 by prohibiting an executive branch agency from acquiring certain covered telecommunications equipment or services that is a substantial or essential part of any system.[6]
The new rule is expansive in scope, and its effects will be felt far beyond the traditional defense industrial base. Thus, mergers and acquisitions practitioners are well advised to become familiar with the rule and consider how it might impact any future transaction where an acquisition target does at least some business with the Government or has aspirations to do so in the future.
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Defense Contractors Say Section 3610 and Other Contractor Support Measures Require Relief
It goes without saying that the COVID-19 pandemic has significantly affected the Department of Defense (“DoD”) and the defense industrial base. And while Congress has taken steps to mitigate these impacts, the sheer scale of the pandemic’s effects pose a continuing challenge to both DoD and its contractors. Now a group of major defense contractors has submitted a pair of joint letters to the Pentagon and OMB highlighting the need for further action and the risk to the defense industrial base if such actions are not taken.
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Targeting DoD’s Reliance on Russian Energy
At the end of last month, the Department of Defense (“DoD”) issued a class deviation to implement Section 2821 of the National Defense Authorization Act for Fiscal Year 2020 (“FY20 NDAA”), which seeks to reduce dependence on Russian energy by prohibiting the acquisition of energy sourced from inside Russia for DoD’s main operating bases in
DoD Releases Draft Section 3610 Reimbursement Guidance
Last week, DoD released a draft of its much-anticipated guidance implementing Section 3610 of the CARES Act, which authorizes the government to reimburse qualifying contractors for the costs of providing certain paid leave to employees as a result of the COVID-19 pandemic. DoD previously published a collection of memoranda, Q&A documents, and a class deviation addressing Section 3610 reimbursement, but the new draft guidance (“Guidance”), which includes a “reimbursement checklist” and accompanying instructions, provides significantly more detail regarding the process for requesting and substantiating claims for reimbursement under the statute.
A number of open questions remain pending the issuance of final guidance, as discussed below, but the contours of DoD’s Section 3610 process are becoming increasingly clear. Contractors interested in pursuing recovery under the statute should start preparing now to satisfy these emerging rules and requirements.
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A New Normal for Foreign Military Sales? Total Sales for FY 2019 Nearly Matches FY 2018
On October 15, 2019, the Defense Security Cooperation Agency (DSCA) announced that foreign arm sales for Fiscal Year (FY) 2019 totaled $55.4 billion.
This amount nearly matches the total from FY 2018 of $55.7 billion, continuing the significant increase in foreign arm sales under the Trump Administration and potentially signaling that the enormous 33 percent
Another Executive Order on Buying American, and This One Has Teeth
(This article was originally published in Law360 and has been modified for this blog.)
On July 15, 2019, President Trump issued an Executive Order on Maximizing Use of American-Made Goods, Products, and Materials. The EO directs the FAR Council to “consider” amending the Federal Acquisition Regulation’s provisions governing the implementation of the Buy American Act. This EO is the Trump administration’s latest – and most concrete – step toward enhancing domestic sourcing preferences and restricting foreign sources of supply for federal customers. And if implemented, the change promises to have dramatic implications for government contractors and their supply chains.
Continue Reading Another Executive Order on Buying American, and This One Has Teeth
Congress Braces for a Fight Over Executive Authority Under the Arms Export Control Act
On May 23, 2019, multiple news outlets reported that the White House was considering an emergency declaration to permit arms shipments to Saudi Arabia without Congressional approval. These reports were met with sharp criticism by multiple legislators. These recent developments shine a spotlight on the contours of the Congressional notice and approval mechanisms set forth in the Arms Export Control Act (AECA).
AECA (22 U.S.C. § 2751 et seq.) is the authorizing statute for the Foreign Military Sales (FMS) program. AECA and the implementing guidance from the Defense Security Cooperation Agency (DSCA) set forth the procedures for the development of a transaction under the FMS program, referred to as an FMS case.
Once an FMS case has been negotiated between the U.S. Government and the foreign government purchaser, the White House is required submit a formal notification to the Speaker of the House of Representatives, the House Committee on Foreign Affairs, and the Senate Committee on Foreign Relations (although this requirement is subject to country- and defense article-specific dollar value thresholds). Congress then has 30 days (or 15 days for certain proposed sales to a NATO county, Australia, Japan, South Korea, Israel, or New Zealand) to enact a joint resolution opposing the sale. Unless a joint resolution is passed within the time period, Congress is considered to have consented to the sale.
Proposed Rule Offers Foreign Military Sales as a Potential Pathway to Commerciality
Earlier this month, the FAR Council issued a proposed rule to expand the definition of “commercial item” under the Federal Acquisition Regulation (FAR) to include certain items sold in substantial quantities to foreign governments. This new rule implements section 847 of the National Defense Authorization Act (NDAA) for FY 2018 (Pub. L. 115-91), and has the potential to extend commercial item status to defense articles that have been sold to foreign militaries, including sales under the Foreign Military Financing program.
Ensuring the commercial item status of products and services has long been a key point of federal contracting compliance for many businesses, as commercial item contracts typically avoid many of the more burdensome provisions imposed by the FAR. While the term “commercial item” is often generalized to refer to items offered for sale to the general public for non-governmental purposes, the definition of “commercial item” under FAR 2.101 includes certain items used for governmental purposes and sold in substantial quantities to multiple state and local governments. See FAR 2.101. This provision permitted products like protective equipment used by police and fire departments to be deemed commercial items.
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Inspector General Audit of the FMS Program Underway
Last month, the Department of Defense Inspector General announced that it was undertaking an audit of the Foreign Military Sales (FMS) Agreement Development Process. The audit will assess how the Defense Security Cooperation Agency (DSCA), Military Departments, and other organizations coordinate foreign government requirements for defense articles and services and whether DoD maximizes the results of the FMS agreement development process.
The audit is in response to a congressional reporting requirement included in the House Report to the National Defense Authorization Act for Fiscal Year 2019. The House Report noted Congressional concern that the FMS process is “slow, cumbersome, and overly complicated,” and that the acquisition decisions supporting the FMS process are “stovepiped,” leading to an FMS program that is “not coordinated holistically across [DoD] to prioritize resources and effort in support of U.S. national security objectives and the defense industrial base.” Consequently, Congress directed DoD to conduct this audit of the FMS program and submit a final report to Congress. The tone and language of the House Report indicates that Congress is seeking to streamline the process for all stakeholders, including the U.S. military, foreign partners, and industry. The House Report specifically calls out precision guided munitions as a focal point for additional foreign military sales that may mitigate risk to the U.S. industrial base.
Continue Reading Inspector General Audit of the FMS Program Underway